<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996 [Fee required]
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required] 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
--------- ----------
(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.
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
--- ---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 12, 1997 was approximately $45,699,711, based on the
following assumptions: (1) the market value of the Common Stock of $19.25 per
share which was equal to the closing price on the Nasdaq Stock Market on March
12, 1997; and (2) 2,374,011 shares of Common Stock held by nonaffiliates as of
March 12, 1997.
Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.
As of March 12, 1997, there were 3,204,445 shares of the Registrant's
$0.10 par value Common Stock issued and outstanding.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II incorporate certain information by reference from
Registrant's Annual Report to Shareholders for the fiscal year ended
December 31, 1996, (the "Annual Report") which is filed as an Exhibit to
this Report.
Part III incorporates information by reference from Registrant's
definitive Proxy Statement relating to Registrant's 1997 Annual Meeting of
Shareholders (the "Proxy Statement") which is filed as an Exhibit to this
Report.
The Exhibits incorporate certain exhibits by reference from (1)
Registrant's Form S-1 Registration Statement filed under the Securities
Act of 1933, Registration No. 33-31517, dated October 11, 1989 and the
following amendments to said Registration Statement: Amendment No. 1
dated December 6, 1989 and Amendment No. 2 dated March 16, 1990; (2)
Amendment No. 3 to Registrant's S-4 Registration Statement filed under the
Securities Act of 1933, Registration No. 33-46280, dated May 3, 1992; (3)
Registrant's report on Form 8-K dated June 19, 1992 filed under the
Securities Exchange Act of 1934; (4) Amendment No. 2 to Registrant's S-4
Registration Statement filed under the Securities Act of 1933,
Registration No. 33-59665, dated July 18, 1995; and (6) Registrant's
Annual Report on Form 10-K filed under the Securities Exchange Act of
1934 for the years ended December 31, 1991, 1992, 1993, 1994, and 1995.
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. [X]
<PAGE> 3
INDEX
PART I Page
------ ----
Item 1. BUSINESS 1
Item 2. PROPERTIES 5
Item 3. LEGAL PROCEEDINGS 6
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND 7
RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA 7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 7
FINANCIAL CONDITION RESULTS OF OPERATIONS
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 7
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 7
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 8
Item 11. EXECUTIVE COMPENSATION 8
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 8
AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 8
PART IV
-------
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 9
REPORTS ON FORM 8-K
SIGNATURES Signature Page
EXHIBITS FILED AS PART OF FORM 10-K Exhibit Index
<PAGE> 4
PART I
State Financial Services Corporation, together with its consolidated
subsidiaries is hereinafter referred to as the "Company", "SFSC", or
"Registrant". SFSC is a bank holding company which owns State Financial Bank
("SFB") and State Financial Bank - Waterford ("SFB - Waterford") (collectively
referred to as the "Banks"). SFB is the entity resulting from the merger in
June 1994 of the Company's previous four banks, State Bank, Hales Corners
("State Bank"); University National Bank ("University"); Edgewood Bank
("Edgewood"); and Eastbrook State Bank ("Eastbrook") into State Bank's charter.
In 1995, SFSC acquired all of the outstanding common stock of the former
Waterford Bancshares, Inc., the parent bank holding company of Waterford Bank,
in exchange for a combination of the Company's common stock, cash and
installment notes. Waterford Bancshares, Inc. was subsequently dissolved.
Waterford Bank was renamed State Financial Bank - Waterford and is operated as
a separate banking subsidiary of the Company.
ITEM 1. BUSINESS.
GENERAL
SFSC is a Wisconsin corporation headquartered in Hales Corners, Wisconsin.
The Company is a bank holding company which owns and operates State Financial
Bank with seven full-service locations and State Financial Bank - Waterford.
Four of SFB's offices, Hales Corners, Greenfield, Glendale, and Milwaukee are
located in Milwaukee County, Wisconsin, the most populous county in the state.
Three of SFB's offices; Brookfield, Muskego, and Waukesha are located in
Waukesha County, Wisconsin which is immediately west of Milwaukee County. In
addition, SFB also operates a loan production office providing lending outlets
to Milwaukee's central city. Waterford is located in northwestern Racine
County, Wisconsin which is immediately south of Milwaukee County. The Company
was organized in 1984 to become a holding company for the former State Bank.
In 1985, State Financial completed its first bank acquisition by purchasing the
former University, located on the northeast side of Milwaukee. The acquisition
of the former Edgewood in Greenfield, Wisconsin was completed in 1987. In
1988, the former University acquired the deposit liabilities and various fixed
assets of the branch facility of a competing savings institution located at
2650 North Downer Avenue in Milwaukee. This was the first acquisition of a
thrift facility by a bank in Wisconsin. In 1990, State Financial acquired 4.9%
of the former Eastbrook, a newly chartered bank located in Brookfield,
Wisconsin. State Financial acquired the remaining capital stock of the former
Eastbrook in 1992. In 1993, the former Eastbrook acquired the deposit
liabilities and various fixed assets of the branch facility of a competing
savings institution located at 400 E. Broadway in Waukesha, Wisconsin. SFB
also operates a limited service loan production office serving Milwaukee's
central city to provide easier access to the SFB's lending products. In 1995,
SFSC acquired all of the outstanding common stock of the former Waterford
Bancshares, Inc., the parent bank holding company of Waterford Bank, in
exchange for a combination of the Company's common stock, cash and installment
notes. The Company operates SFB - Waterford as a separate banking subsidiary.
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the
forward-looking statements. Factors which could cause such a variance to occur
include, but are not limited to, changes in interest rates, levels of consumer
bankruptcies, customer loan and deposit preferences, and other general economic
conditions.
BUSINESS STRATEGY. SFSC is strongly committed to community banking and
places a high degree of emphasis on developing full service banking
relationships with its business and retail customers. To capitalize on
management's knowledge of its immediate market, each office is operated 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 own unique market area. To be an effective
community bank, SFSC believes the decision-making process must stem primarily
from the Banks in their credit decisions and 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 Banks seeks to develop and enhance full-service banking relationships
through a systematic calling program directed at both existing customers and
referral sources from its customer base, attorneys, accountants and business
people. The officers and employees of the Banks 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.
1
<PAGE> 5
PRODUCTS AND SERVICES. Through the Banks, 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 account, certificates of deposit,
individual retirement accounts and club accounts. The Banks also offers a
variety of annuity and insurance products through its in-house securities
representative. The Banks'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 Banks's portfolio. The Banks also
provide lines of credit to commercial accounts and to individuals through home
equity and credit card plans. The Company also originates residential real
estate loans in the form of adjustable rate, fifteen and thirty year fixed rate
first mortgages, selling these originations in the secondary mortgage market
service released.
COMPETITION AND MARKET ENVIRONMENT. SFB's' offices are located in the
Milwaukee and Waukesha metropolitan areas and experience substantial
competition from other financial institutions including savings banks, credit
unions, non-bank lenders, and consumer finance companies, many of which are
substantially larger than the SFB. Within a short distance of SFB, there are
numerous other financial institutions. SFB - Waterford's office is located in
the town of Waterford and experiences substantial competition from other
financial institutions including other banks, savings banks, and consumer
finance companies located in Waterford and surrounding communities. The Banks
compete for deposits principally by offering depositors a variety of deposit
programs, convenient office locations, banking hours, 24 hour account access
through telephone and personal computer delivery systems, and other services.
The Banks compete for loan originations primarily through the interest rates
and loan fees they charge, the efficiency and quality of services they provide
borrowers, and the variety of their products. Factors affecting competition
include the general and local economic conditions and current interest rate
levels. Management believes that recent changes in the local banking industry,
including mergers and consolidations involving both commercial and thrift
institutions, have resulted in a decrease in the level of competition for small
to medium sized business customers in the Banks' market areas.
EMPLOYEES. At December 31, 1996, the Company and the Banks employed 87
full-time and 60 part-time employees. The Company considers its relationships
with its employees to be excellent. Each employee who meets the eligibility
requirements is entitled to participate in the employee benefit plans of the
Company and the Banks, which include plans for group life, accidental death and
dismemberment, medical, dental, and long-term disability income insurances;
pension, 401(k), and an Employee Stock Ownership Plan ("ESOP"). Further
information regarding executive compensation and the Company's benefit plans is
incorporated by reference from the Company's definitive Proxy Statement. See
Item 11 of this Form 10-K.
THE BANKS AND OTHER SUBSIDIARIES
At December 31, 1996, the SFB (consolidated with its subsidiaries; see
"SFB - Other Subsidiaries") had total assets of $249.4 million, net loans of
$172.4 million, total deposits of $217.1 million, stockholders' equity of $22.4
million, net income of $3.9 million, and return on average assets of 1.61%. At
December 31, 1996, SFB Waterford (consolidated with its subsidiary; see "SFB -
Waterford - Other Subsidiaries") had total assets of $43.1 million, net loans
of $26.7 million, total deposits of $37.7 million, stockholders' equity of $5.2
million, net income of $0.4 million, and annualized return on average assets of
1.04%.
STATE FINANCIAL BANK. State Financial Bank was organized as a state
banking association under the laws of the State of Wisconsin in 1910 under the
name State Bank, Hales Corners. In June 1994, the bank's name was changed to
State Financial Bank in connection with the merger of the Company's banks into
State Bank's charter. SFB conducts business through seven full-service offices
located in Milwaukee and Waukesha Counties and a loan production office located
in Milwaukee's central city. SFB 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. SFB also sells annuities, insurance products, and other
investments through two in-house representatives. At December 31, 1996, SFB,
consolidated with its subsidiaries, comprised 82.8% of SFSC's consolidated
total assets. The following table sets forth SFB's full-service and loan
production office locations.
2
<PAGE> 6
STATE FINANCIAL BANK OFFICE LOCATIONS
<TABLE>
<CAPTION>
Year Acquired by
Community Address Year Originated State Financial
--------- ------- --------------- ---------------
<S> <C> <C> <C>
Hales Corners 10708 West Janesville Road 1910 (1)
Muskego S76 W17655 Janesville Road 1968 (1)
Milwaukee 2650 North Downer Avenue 1971 1985
Milwaukee (2) 2460 North 6th Street 1994 (1)
Greenfield 4811 South 76th Street 1978 1987
Glendale 7020 North Port Washington Road 1990 (1)
Brookfield 12600 West North Avenue 1990 1992
Waukesha 400 East Broadway 1977 1993
</TABLE>
- -----------
(1) Organized de novo by SFB or a predecessor thereof.
(2) Loan Production Office
SFB Other Subsidiaries. SFB has two wholly owned subsidiary
corporations which are consolidated into its operations. Hales Corners
Investment Corporation is a subsidiary created to manage the majority of SFB's
investment portfolio to enhance the overall return on SFB's investment
securities. Hales Corners Development Corporation is a subsidiary which owns
the real estate related to the Hales Corners and Muskego offices, eight
commercial and residential rental properties located adjacent to the Hales
Corners office and vacant land in New Berlin held as a potential branch site.
State Financial Bank - Waterford. State Financial Bank - Waterford
was organized as a state banking association under the laws of the State of
Wisconsin in 1906 under the name Waterford Bank. SFSC acquired the common
stock of the former Waterford Bank's parent holding company, Waterford
Bancshares, Inc. in exchange for a combination of the Company's common stock,
cash, and installment notes. Waterford Bancshares, Inc. was subsequently
dissolved. Following the acquisition, the Company changed Waterford Bank's
name to State Financial Bank - Waterford to connect the bank's identity to
SFSC. SFB - Waterford operates as a separate banking subsidiary of SFSC from
its principal office located at 217 North Milwaukee Street, Waterford,
Wisconsin and has received regulatory approval to open a full-service branch
facilty at 1050 Milwaukee Avenue, Burlington, Wisconsin which is expected to
commence operation in May, 1997. SFB - Waterford is engaged in general
commercial and consumer banking, 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. At December 31, 1996, SFB -
Waterford, consolidated with its subsidiary, comprised 14.3% of SFSC's
consolidated total assets.
SFB - Waterford Other Subsidiary. SFB - Waterford has a wholly owned
subsidiary, Waterford Investment Corporation, formed in 1995 to manage the
majority of SFB - Waterford's investment portfolio to enhance the overall
return on the bank's investment securities.
State Financial Mortgage Company. In December, 1996, the Company
formed a new wholly owned subsidiary corporation, State Financial Mortgage
Company ("SFMC"). SFMC was formed to expand the origination of secondary
market real estate mortgages on behalf of the Company and the Banks. SFMC
commenced operation effective January 1, 1997.
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 Banks. 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 (the "Act") which imposes various requirements and restrictions on
its operations. As part of the 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.
3
<PAGE> 7
The Banks are state, non-member banks, and as such are supervised and
examined by the Wisconsin Department of Financial Institutions Division of
Banking and the Federal Deposit Insurance Corporation ("FDIC"). Additionally,
the Banks are insured by the FDIC and are subject to the provisions of the
Federal Deposit Insurance 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 Banks 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,
1996, SFSC and the Banks each met the "well-capitalized" definition of capital
adequacy.
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. Effective June 1,
1997, the Efficiency Act will also allow interstate branching.
In addition to the impact of regulation, commercial banks 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 Banks.
CROSS REFERENCE TO ANNUAL REPORT
Certain information required by Industry Guide 3 is included in the
Management's Discussion and Analysis included with the Annual Report and is
incorporated herein by reference per the following schedule.
<TABLE>
<CAPTION>
Annual Report
Guide 3 Heading Annual Report Heading Page Number
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
I Distribution of Assets, Liabilities Income Statement Analysis 6
and Stockholders' Equity; Interest
Rates and Interest Differential
II Investment Portfolio Investment Activities 15
III Loan Portfolio Lending Activities 12
IV Summary of Loan Loss Experience Risk Elements in the Loan Portfolio 13
V Deposits Deposits 17
VI Return on Equity and Assets Income Statement Analysis and 11 and 19
Capital Resources
</TABLE>
4
<PAGE> 8
The following schedule of projected loan losses by category for the
period January 1, 1997 through December 31, 1997, required by Industry Guide 3
is not included in Management's Discussion and Analysis in the Annual Report
(dollars in thousands).
<TABLE>
<CAPTION>
Charge-offs Recoveries Net
----------- ---------- ---------
<S> <C> <C> <C>
Commercial $ 107 $ 7 $ 100
Installment 49 18 31
Real estate 95 32 63
Other 92 14 78
------------------------------------------
TOTAL $ 343 $ 71 $ 272
</TABLE>
ITEM 2. PROPERTIES
The following table sets forth the locations of the Company's full-service
banking offices.
<TABLE>
<CAPTION>
Office Address Sq. Feet Owned/Leased Lease Expires
------ ------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Hales Corners (1) 10708 W. Janesville Road 37,000 Owned n/a
Muskego (1) S76 W17655 Janesville Road 2,680 Owned n/a
Milwaukee 2650 N. Downer Avenue 3,000 Leased 2000
Milwaukee (2) 2460 North 6th Street 100 Leased month to month
Greenfield (3) 4811 S. 76th Street 9,000 Leased 2007
Glendale (4) 7020 N. Port Washington Road 7,500 Leased 2010
Brookfield 12600 W. North Avenue 4,800 Owned n/a
Waukesha 400 E. Broadway 3,300 Owned n/a
Waterford 217 N. Milwaukee Street 10,100 Owned n/a
Burlington (5) 1050 Milwaukee Avenue 6,300 Leased 2006
</TABLE>
1. Property is owned by SFB's wholly owned subsidiary, Hales Corners
Development Corporation.
2. Loan production office.
3. SFB leases this property from Edgewood Plaza Joint Venture. See "Item
1. Election of Directors--Certain Transactions and Other
Relationships with Management Principal Shareholders" in the Company's
Proxy Statement for further information. SFB subleases approximately
2,500 square feet of the floor space of Edgewood Plaza under a lease
which expires on December 27, 1997. In 1993, SFB executed an
extension of its lease with Edgewood Plaza which extends the SFB's
lease through December, 2007. Under the terms of this extension, SFB
will lease approximately 4,100 square feet of the floor space of
Edgewood Plaza.
4. SFB subleases approximately 1,200 square feet of its space in Glendale
to a third party.
5. Approved branch facility of SFB - Waterford expected to open in May,
1997.
5
<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and the Banks 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 Banks 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
6
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information contained under the caption "Investor Information"
beginning on the inside back cover of the Annual Report is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Selected Consolidated
Financial Data" appearing on page 4 of the Annual Report is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained under this caption beginning on page 5 of
the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements beginning on page 21 of the
Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
7
<PAGE> 11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICER OF THE REGISTRANT
The information contained under the captions "Item 1. Election of
Directors--Directors" and "Executive Officers" in the Proxy Statement is
incorporated herein by reference.
PART 11. EXECUTIVE COMPENSATION
The information contained under the caption "Item 1. Election of
Directors--Compensation of Executive Officers" in the Proxy Statement is
incorporated herein by reference.
PART 12. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND
BENEFICIAL OWNERS
The information contained under the caption "Item 1. Election of
Directors--Security Ownership of Management and Certain Beneficial Owners" in
the Proxy Statement is incorporated herein by reference.
PART 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Item 1. Election of
Directors--Certain Transactions and Other Relationships with Management and
Principal Shareholders" in the Proxy Statement is incorporated herein by
reference.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
8
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) Documents filed:
1. Financial Statements. The following Consolidated Financial
Statements of the Company and subsidiaries, included in the
Annual Report of the Registrant to its shareholders for the
year ended December 31, 1996, are incorporated by reference in
Item 8:
Annual Report
Page #
-------------
Report of independent auditors 20
Consolidated balance sheets --
December 31, 1996 and 1995 21
Consolidated statements of income --
Years ended December 31, 1996, 1995, and 1994 22
Consolidated statements of stockholders' equity --
Years ended December 31, 1996, 1995, and 1994 23
Consolidated statements of cash flows --
Years ended December 31, 1996, 1995, and 1994 24
Notes to Consolidated Financial Statements 25
2. Financial Statement Schedules. Schedules to the Consolidated
Financial Statements required by Article 9 of Regulation S-X
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
3. Exhibits. See Exhibit Index, included as the last pages of
this report, which is incorporated herein by reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the
fourth quarter of the fiscal year under this report.
(c) Exhibits:
See Exhibit Index, which is filed with this Form 10-K
following the signature page and is incorporated herein by
reference.
(d) Financial Statement Schedules:
None.
9
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
By: /s/ Michael J. Falbo
-------------------------------------------------------------
Michael J. Falbo, President and Chief Executive Officer
Date: March 13, 1997
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated. The
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRINCIPAL EXECUTIVE OFFICERS
/s/ Jerome J. Holz
------------------------ Chairman of the Board and Vice March 13, 1997
Jerome J. Holz President
/s/ Michael J. Falbo
------------------------ President and Chief Executive Officer March 13, 1997
Michael J. Falbo
/s/ Michael A. Reindl Senior Vice President, Controller, and
------------------------ Chief Financial Officer March 13, 1997
Michael A. Reindl
DIRECTORS
/s/ Jerome J. Holz
------------------------ Director March 13, 1997
Jerome J. Holz
/s/ Michael J. Falbo
------------------------ Director March 13, 1997
Michael J. Falbo
/s/ Richard A. Horn
------------------------ Director March 13, 1997
Richard A. Horn
/s/ Barbara E. Holz-Weis
------------------------ Director March 13, 1997
Barbara E. Holz-Weis
/s/ Robert R. Spitzer
------------------------ Director March 13, 1997
Robert R. Spitzer
/s/ David M. Stamm
------------------------ Director March 13, 1997
David M. Stamm
signature page
<PAGE> 14
STATE FINANCIAL SERVICES CORPORATION
-----------------------------------------------
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED December 31, 1996
NOTE: To maintain a set of exhibit reference numbers consistent with
Registrant's prior filings under the Securities Act of 1933 and the
Securities Act of 1934, Registrant has intentionally omitted exhibit
reference numbers which pertain to exhibits which are no applicable or
in effect. Except as specifically noted below, all of the exhibits
identified are filed herewith.
Exhibit
Number Description
3.1 Articles of Incorporation of the Registrant as Amended and
Restated effective April 21, 1993. (7)
3.2 Bylaws of Registrant, as amended and restated effective
February 24, 1993. (1)
10.1 Lease between SFB (formerly State Bank, Hales Corners)
and Hales Corners Development Corporation (10708 West
Janesville Road, Hales Corners, Wisconsin). (2)
10.2 Lease between SFB (formerly State Bank, Hales Corners)
and Hales Corners Development Corporation (S76 W17655
Janesville Road, Muskego, Wisconsin). (3)
10.3 Lease between SFB (formerly Edgewood Bank) and Edgewood Plaza
Joint Venture (4811 South 76th Street, Greenfield, Wisconsin).
(3)
10.6 Lease between SFB (formerly University National Bank) and
Northeast Corporate Center (7020 North Port Washington Road,
Milwaukee, Wisconsin). (3)
10.7 Deferred Compensation Agreement between Registrant and
Jerome J. Holz dated December 6, 1980. (3)
10.10 Employee Stock Ownership Plan and Employee Stock Ownership Trust
Agreement. (4)
10.13 Lease between SFB (formerly University National Bank) and
Downer Investments (2650 North Downer Avenue, Milwaukee,
Wisconsin) (5)
10.14 Agreement and Plan of Reorganization between Registrant and
Eastbrook State Bank, dated January 22, 1992, as amended and
restated. (6)
10.15 Branch Purchase and Assumption Agreement between Eastbrook
State Bank and North Shore Bank, FSB, dated December 29, 1992.
(1)
10.16 Agreement and Plan of Merger By and Among Registrant, WBAC,
Inc., and Waterford Bancshares, Inc. dated April 12, 1995. (8)
10.17 Lease between SFB-Waterford and Mangold Investments, LLP
(1050 North Milwaukee Avenue, Burlington, Wisconsin)
13 Registrant's Annual Report to security holders for the fiscal
year ended December 31, 1996.
22 Subsidiaries of Registrant.
24 Consent of Ernst & Young LLP.
<PAGE> 15
27 Financial Data Schedule
99.1 State Financial Services Corporation 1990 Stock
Option/Stock Appreciation Rights and Restricted Stock Plan
for Key Officers and Employees, as amended on March 10, 1993.
(1)
99.2 State Financial Services Corporation 1990 Director Stock
Option Plan, as amended March 10, 1993. (1)
99.3 State Financial Services Corporation Supplemental Executive
Retirement Plan for Michael J. Falbo effective November 22,
1994. (9)
99.4 Registrant's Proxy Statement relating to its Annual Meeting
of Shareholders to be held on April 23, 1997.
(1) Incorporated by reference from Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1992.
(2) Incorporated by reference from Registrant's registration
statement on Form S-1, Registration Number 33-31517 (the "Form
S-1") (dated October 11, 1989).
(3) Incorporated by reference from Amendment No. 1 to the Form S-1
(dated December 6, 1989).
(4) Incorporated by reference from Amendment No.2 to the Form S-1
(dated March 6, 1989).
(5) Incorporated by reference from Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1991.
(6) Incorporated by reference from Exhibit 2.1 to Amendment No. 3
to Registrant's registration statement on Form S-4,
Registration Number 33-46280, dated May 3, 1992.
(7) Incorporated by reference from Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1993.
(8) Incorporated by reference from Amendment No. 2 to the Form S-4
(dated July 18, 1995).
(9) Incorporated by reference from Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1994.
The issuer, State Financial Services Corporation, will furnish a copy
of any exhibit described above upon request and upon reimbursement to the
issuer of its reasonable expenses of furnishing such exhibit, which shall be
limited to a photocopying charge of $0.25 per page and, if mailed to the
requesting party, the cost of first-class postage.
<PAGE> 1
EXHIBIT 10.17
LEASE AGREEMENT
This Lease, made by and between MANGOLD INVESTMENTS, LLP ("Lessor")
and STATE FINANCIAL BANK - WATERFORD, a Wisconsin corporation ("Lessee").
RECITALS:
A. Lessor is the record title owner of a parcel of real estate
situated in the City of Burlington, Racine County, Wisconsin (the "Property"),
more particularly described on Exhibit A attached hereto; and
B. There is situated on the Property a building (the "Building")
and other improvements which Lessor is remodeling and refurbishing into
separate rental units as described on the plot plan attached hereto as Exhibit
B and made a part hereof.
AGREEMENT
NOW, THEREFORE, Lessor, for and in consideration of the rents to be
paid by Lessee and the conditions, provisions, reservations and stipulations
hereinafter contained, does hereby lease to Lessee and Lessee hereby takes from
Lessor those certain premises shown as Units 1 and 2 on the plot plan attached
hereto as Exhibit B together with drive-up facilities substantially as shown on
the plan prepared by Torke, Wirth, Pujara, Ltd., dated November 18, 1996,
attached hereto as Exhibit C and more particularly referred to herein
(hereinafter the "Premises") on the terms and conditions hereinafter set forth:
1. Lessor's Work and Construction. Upon complete execution of
this Lease Agreement by Lessor and Lessee ("the Lease Date"), Lessor, at
Lessor's sole cost and expense, shall proceed forthwith and with reasonable
diligence to perform such work and construction as is set forth on Exhibit D
attached hereto and made a part hereof; which work shall be completed no later
than February 15, 1997 so as to allow Lessee possession, except for sidewalks
(Item 4 on Exhibit D) which will be installed as weather permits in spring
1997.
2. Lessee's Work and Construction. With the exception of the
work items specifically enumerated as Lessor's work and construction, Lessee
shall, at its own cost and expense, perform all work and supply all
installations and fully equip the Premises with trade fixtures, furniture,
furnishings, fixtures and any equipment or other items of personal property
necessary for the completion of the Premises and the proper operation of
Lessee's business, including the drive-up facilities. Lessee shall not install
any equipment other than trade fixtures, equipment and personal property
without first obtaining Lessor's written approval of the contractor, the plans
and the specifications therefor, which approval shall not be unreasonably
withheld, conditioned, or delayed. However, if the Lessor fails to approve
Lessee's initial plans as presented to Lessor no later than December 31, 1996,
Lessee may thereupon terminate this Lease Agreement by written notice to
Lessor. The approval by Lessor of such plans and specifications shall not
constitute the assumption of any liability on the part of Lessor for their
accuracy or their conformity with building code requirements and Lessee shall
be solely responsible for such plans.
3. Term. The term of this Lease shall be for ten (10) years
("Lease Term"), commencing on January 1, 1997, ("Commencement Date"), and
ending on December 31, 2006 ("Expiration Date").
4. Possession of Premises. Lessor shall deliver possession of
the Premises to Lessee on the Commencement Date.
A. Delay on Possession. If Lessor cannot deliver
possession of the Premises to Lessee on Commencement Date, Lessor shall not be
subject to any liability, nor shall such failure affect the validity of this
Lease
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of the obligations of Lessee, but Lessee shall not be obligated to pay rent
until possession of the Premises is tendered; provided that the Lease Term
shall remain as listed in paragraph 3 above, with the Commencement Date being
the date Lessee takes possession and the Expiration Date being extended
accordingly.
B. Early Possession. If Lessee occupies the Premises
before the Commencement Date, such occupancy shall be subject to all provisions
hereof, such occupancy shall not advance the Expiration Date.
C. Holding Over. Any holding over after the expiration
of the Term with the consent of the Lessor shall be construed to be a tenancy
from month-to-month and shall be on the terms and conditions herein specified
so far as applicable.
5. Lessee's Option to Renew and Extend.
A. First Renewal Period. If Lessee, by a notice in
writing to Lessor at least six (6) months prior to the Expiration Date shall
have so elected, and if Lessee is not on such date in default under any of its
obligations hereunder, then and at the expiration of the term hereby granted,
this Lease shall be renewed and extended for a further term of five (5) years
commencing on the first day after the Expiration Date on the same terms and
conditions as herein provided (except for Base Rent and this option to renew
and extend).
B. Second Renewal Period. If this Lease shall have been
renewed and extended for such first renewal and extension period and if Lessee,
by a notice in writing served upon Lessor at least nine (6) months before the
Expiration Date of the first extended term shall have so elected, and if Lessee
is not on such date in default in any of its obligations hereunder, then and at
the expiration of such first renewal and extension period, this Lease shall be
again renewed and extended for a further term of five (5) years commencing on
the first day after the Expiration Date of the first extended term on the same
terms and conditions as herein provided (except for Base Rent and this option
to renew and extend).
C. Additional Lease Period/Right of First Refusal. If this
Lease shall have been renewed and extended for such second renewal and
extension period and if Lessee, by a notice in writing served upon
Lessor at least six months before the expiration date of the second
extended term shall express a desire to extend the lease term and if
Lessee is not on such date in default in any of its obligations
hereunder, the parties shall attempt to negotiate an extension of the
lease term on such terms and conditions as they may mutually agree.
If the parties are unable to reach agreement on the terms and
conditions for extension of the lease term and should Lessor elect to
lease the Premises to a third party, Lessor shall notify Lessee in
writing of the lease terms and conditions for which Lessor proposes to
lease the Premises after the expiration of the second renewal period.
After receipt of such notice, Lessee shall have fifteen days in which
to notify Lessor in writing of Lessee's desire to lease the Premises
for such rental and on such terms. If Lessee does not so notify
Lessor, Lessor may lease the Premises to any other third party on such
terms and on such rental.
6. Base Rent. Lessee shall pay to Lessor as base rent for the
interior premises consisting of 6264.5 square feet the sum of $5,220.42 per
month, for the first five (5) years of the Lease term and thereafter the sum of
$5,742.46 per month. In addition, Lessee shall pay as base rent for the
exterior of the Premises, consisting of approximately 1,100 square feet under
the canopy to be constructed by Lessee, the sum of $458.33 per month for the
first five (5) years of the Lease term and $504.17 per month thereafter.
Payments of the full amount of monthly rent shall commence on January 1, 1997
and shall continue on the first day of each month thereafter throughout the
balance of the term. In the event the drive-in improvements to be installed by
Lessee extend to areas beyond those areas which are situated directly under the
canopy to be constructed by Lessee, the rent for the exterior of the Premises
shall be increased to take into account the additional area occupied by such
improvements based upon $5.00 per square foot per year for the first five years
of the lease term and $5.50 per square foot per year thereafter. Likewise, if
the canopy and those improvements occupy less than 1,100 square feet, exterior
rent shall be adjusted accordingly.
A. Place of Payment. All payments of rent shall be made
to Lessor in care of:
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Mangold Investments, LLP
1050 Milwaukee Avenue
Burlington, WI 53105
or at such other place as Lessor may designate in writing.
B. Interest/Late Payment Charge. Lessee acknowledges
that late payment by Lessee to Lessor of rent or other sums due under
this Lease Agreement will cause Lessor to incur costs not contemplated
by this Lease Agreement, the exact amount of which would be extremely
difficult and impractical to ascertain. Such costs include, but are
not limited to, processing and accounting charges and late charges
that may be imposed on Lessor by the terms of any mortgage covering
the Leased Premises. In the event Lessee should fail to pay any
installment of rent or any other sum due under this Lease Agreement
within ten (10) days after such sum is due, Lessee shall pay to
Lessor, as additional rent, a late charge equal to $100.00. Waiver of
the late charge with respect to any installment or sum shall not be
deemed to constitute a waiver with respect to any subsequent
installment or sum so due. In the event any amount so due is
delinquent for a period in excess of thirty (30) days, an additional
late charge at the rate of 12 percent per annum on the amount so
overdue shall be paid to Lessor for the period of delinquency in
excess of thirty (30) days.
7. Adjustment to Base Rent. Commencing with the eighth year of
the Lease Term and every two (2) years thereafter during the Initial or
Extended Lease Term, the base rent shall be adjusted for the next two (2) Lease
years to reflect any increase in the cost of living, using the United States
Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All
Urban Consumers, Small Metropolitan Areas (North Central Region), All Items and
shall be applied in the following manner: The index for November 1 before the
new Lease year in which the adjustment is to be made shall be determined which
is herein called the "New Year Index" and the index for November 1, 2001 shall
be determined which is herein called the "Base Year Index" and the new rental
shall be that amount determined by multiplying the base rental (5,742.46 +
504.17 or as adjusted under paragraph 6 hereof) by the New Year Index and
dividing the product thus obtained by the Base Year Index, but in no event
shall the rental for any Lease year be less than the rental for the previous
Lease year and in no event, shall the percentage increase in the cost of living
computation exceed two and one-half percent (2 1/2%) for any one-year period.
Should the said Consumer Price Index be terminated, then a mutually agreeable
price index or method of computing the increase in the cost of living shall be
applied.
8. Additional Rent. In addition to the base rent required
herein, Lessee shall pay as additional monthly rent to Lessor at the same place
and as payment of base rent Lessee's proportionate share of the following:
-- Electric, gas, water, sewer and other utility charges for
common areas which are not separately metered to various
tenants on the Premises.
-- Real property taxes and general and special assessments levied
and assessed against the property.
-- Premiums for property insurance and public liability insurance
to be maintained by Lessor.
-- Common area and maintenance charges, including all sums
expended by Lessor for maintenance and operation of the common
areas of the Property. Costs for normal maintenance and
operation of the common areas shall include, but not be
limited to the following: ice and snow removal, trash pick up
and removal, maintenance and cleaning of building exterior and
entry vestibules, repairs to building improvements (excepting
costs of capital improvements to the building, depreciation,
charges, interest and principal payments on the mortgage, if
any, and expenditures for which Lessor has been reimbursed)
costs of maintenance of the "common" free-standing signs and
other costs necessary in Lessor's judgment for the maintenance
of the common areas and the building.
A. Computation of Pro Rata Share. For purposes of this
Lease, Lessee's pro rata share shall be equal to 37.83 percent.
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B. Pro Ration for Partial Year. Any costs or changes
that cover a period not within the term of this Lease shall be
prorated.
C. Initial Additional Rent. The initial monthly
additional rent for all items included in this paragraph 8 shall be
$1,305.10.
D. Adjustment of Additional Rent. Within sixty (60)
days after the end of each calendar year, Lessor shall furnish Lessee
with a statement of the actual amount of Lessee's proportionate share
of such costs and expenses for such period. If the total amount due
from Lessee for the year on the statement exceeds the aggregate of all
amounts previously paid to Lessor during the calendar year as
additional rent, Lessee shall pay to lessor the difference between the
amount paid by Lessee and the actual amount due within sixty (60) days
after the furnishing of each such statement. If the total amount paid
by Lessee under this paragraph for any such calendar year shall exceed
the actual amount due from Lessee for any such calendar year, the
excess shall be credited against the next installment or installments
of rent due from Lessee to Lessor. The amount of additional rent to
be paid by Lessee to Lessor shall be adjusted annually based upon a
statement from the property manager setting forth the estimated costs
and charges to be incurred by Lessor, upon which the additional rent
is based for the next succeeding calendar year (subject to review by
Lessee of all documentation of Lessor upon which sum computation of
additional rent is based).
E. Nonpayment. In the event of nonpayment of all or any
portion of such additional rent, Lessor shall have the same rights and
remedies as provided in this Lease agreement for failure of Lessor to
pay rent.
9. Use. The Premises shall be used and occupied only as a
banking facility and for no other purpose without Lessor's prior written
consent. Lessee shall not use or allow the use of the Premises for the sale of
products or the conduct of business customarily carried on by Mangold
Insurance, Inc. as a general insurance agent. Notwithstanding this provision,
Lessee shall have the right to use the Premises for the sale of its current
product line including annuities, long-term care insurance, credit life,
accident and health insurance, life insurance and disability insurance.
A. Compliance with Building Rules and Regulations.
Lessor shall have the right to create and amend rules and regulations
which would apply to all building tenants, necessary or desirable to
insure the safety, care and cleanliness of the building and parking
areas and the preservation of order and parking rules and regulations.
Any rules and regulations shall be set forth in writing and shall be
given to Lessee, who shall thereafter comply with and conform to the
same; provided that no such rules and regulations shall interfere with
normal business operations of Lessee.
B. Exclusivity. As long as the Lessee occupies space
under the terms of this Lease or any renewal or extension thereof or
under any written modification thereof, Lessor shall not permit or
rent to any other tenant providing banking services including, but not
limited to savings and loans or credit unions.
10. Utilities. Commencing on January 1, 1997, Lessee shall pay
all charges for gas, electric current, water and sewer attributable to the
lease space.
11. Repairs, Maintenance, Alterations, Improvements and Fixtures.
A. Maintenance by Lessor. Lessor, at Lessor's sole
cost, shall keep and maintain the foundations, exterior walls, roof
and structural portions of the walls of the Premises in good condition
and repair, except for repairs thereto as may be required by reason of
the acts or negligence of Lessee, its employees, agents, invitees,
licenses and contractors. Lessor shall keep and maintain in good
condition and repair all portions of the building not leased and
demised to tenants thereof, and, subject to Lessee payment of expenses
as additional rent. Lessor shall be responsible for any HVAC
maintenance or repair in excess of the Lessee's obligations provided
in paragraph B.
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B. Maintenance by Lessee. Lessee shall at all times
keep and maintain the interior of the Premises, including all
partitions, doors, glass, floor coverings, fixtures, HVAC, equipment
and appurtenances whether installed or owned by Lessor or Lessee,
including drive-up facilities in good order, condition and repair and
shall do such periodic painting, decorating and cleaning of the
interior of the Premises as may be reasonably required by Lessor,
except that the Lessee shall not be obligated to pay more than
$1,000.00 per year for HVAC maintenance and repair.
C. Alterations and Improvements. Lessee shall not make,
nor permit to be made, alterations or improvements to the Premises,
unless Lessee obtains the written consent of Lessor which shall not be
unreasonably withheld. If Lessor permits Lessee to make any
alterations or improvements, Lessee shall make the same with
requirements the Lessor considers necessary or desirable. Lessee
shall promptly repair any damage to the Premises caused by any such
alterations or improvements. Any alterations or improvements to the
Premises, except movable office furniture and equipment and trade
fixtures, shall become a part of the realty and the property of Lessor
and shall not be removed by Lessee except as hereinafter set forth.
D. Notice of Defects. Lessee shall immediately give
Lessor written notice of defect or need for repairs, after which
Lessor shall have reasonable opportunity to repair same or cure such
defect. Lessor liability with respect to any defects, repairs, or
maintenance for which Lessor is responsible under any of the
provisions of this Lease shall be limited to the costs of such
repairs or maintenance or the curing of such defect.
Nothing herein shall be construed to limit the liability of either party for
damages resulting from such party's negligence or willful misconduct.
12. Signage. The parties acknowledge the Premises are part of an
integrated and uniform commercial center and that control of exterior signs by
Lessor on the Property is essential to maintain uniformity and aesthetic value
in the Property.
A. Lessor's Obligation. The parties acknowledge that
Lessor will provide a "common" free-standing sign area to include time
and temperature which will identify the Property and all Building
tenants, with each Building tenant receiving exposure thereon
consistent with its pro rata share obligation for payment of
additional rent hereunder. The Lessee shall pay the sum of $2,300.00
toward the cost of the time and temperature signage plus the cost of
Lessee's sign face. The cost of maintenance of the entire sign shall
be shared in the same manner as set forth in the provisions of this
Lease Agreement for additional rent.
B. Lessee's Signs. Lessee may not erect and maintain
any signs on the exterior of the Premises without the advance, written
consent of Lessor, which consent shall not be unreasonably withheld,
conditioned, or delayed. Such signage must be in accordance with
Lessor's specifications and contracted through a sign contractor
approved in advance by Lessor. Installation of all door and window
signage shall be subject to Lessor's advance, written approval.
13. Lessor's Insurance. Lessor shall carry insurance covering the
building and other improvements as Lessor reasonably determines from time to
time. Coverages and amounts shall be reasonably determined by Lessor, based on
coverages carried by prudent owners of comparable buildings in the vicinity.
At all times, Lessor will carry and maintain insurance coverage as follows:
A. Property Coverage. Lessor shall carry all-risk
property insurance covering the building, its equipment and parking
areas in an amount not less than the full insurable replacement value
sufficient to cover repair or replacement of the damaged property
without deduction for depreciation.
B. Liability Insurance. Lessor shall at all times carry
comprehensive public
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liability insurance and property damage insurance against claims on
account of bodily injury, personal injury, property damage and
completed operations upon or about or relating to the exterior of the
building and parking areas (with limits of at least $1 million per
bodily injury [including death] and property damage liability).
14. Lessee's Insurance; Indemnity.
A. Property Insurance. Lessee shall be responsible, at
its own expense, for obtaining property insurance for all contents
located in the Premises, together with coverage for any fixtures,
equipment, or work done by Lessee in the Premises, and it is
understood that the insurance carried by Lessor does not cover the
risk of loss or damage to Lessee's property, equipment, improvements,
fixtures, or loss of income.
B. Liability Insurance. Lessee shall in force and
effect comprehensive public liability insurance in insurance companies
approved by Lessor (with a rating of A or greater by A.M. Best)
insuring and naming Lessor, Lessee and any other parties reasonably
designated by Lessor against injury to property, persons, or loss of
life arising out of the use or occupancy of the Premises, with limits
of at least $1 million per bodily injury (including death) and
property damage liability. Such policy of insurance shall contain
provisions preventing its cancellation, discontinuance, or alteration
without at least thirty (30) days prior written notice to Lessor.
C. Workmen's Compensation. Lessee shall maintain
worker's compensation and employer's liability insurance as required
by the State of Wisconsin.
D. Umbrella Liability Coverage. Lessee shall be
responsible, at its own expense, and shall keep in full force and
effect a comprehensive "umbrella" policy of liability insurance in an
insurance company approved by Lessor (with a rating of A by A.M. Best)
against injury to property, persons, or loss of life arising out of
use or occupancy of the Premises with limits of at least $5 million
for each occurrence and $5 million in aggregate, with a self-insured
retention no greater than $10,000.00. Coverage must be in excess of
all other required insurance coverages hereunder. Such policy of
insurance shall contain provisions preventing its cancellation,
discontinuance, or alteration without at least thirty (30) days prior
written notice to Lessor.
E. Waiver of Subrogation. Lessor and Lessee hereby
release each other and each other's employees, agents, customers and
invitees from any and all liability for any loss, damage, or injury to
person or property occurring in, on or to the Premises, improvements
to the building of which the Premises are a part, or personal property
within the building, by reason of fire or other casualty which are
covered by applicable standard fire and extended coverage and
insurance policies. Because the provisions of this paragraph will
preclude the assignment of any claim mentioned herein by way of
subrogation or otherwise to an insurance company or any other persons,
each party to this Lease shall give to each insurance company which
has issued to its policies of fire and extended coverage and insurance
notice of the terms of the mutual releases contained in this
paragraph, and have such insurance policy properly endorse, if
necessary, to prevent the invalidation of insurance coverages by
reason of the mutual releases contained in this paragraph.
F. Certificate of Insurance Coverage. Prior to
commencement of the Lease Term, Lessee shall furnish the other party
with a certificate evidencing the insurance coverage required
hereunder.
G. Failure to Comply. If Lessee fails to comply with
the aforesaid insurance requirements, the other party may obtain such
insurance and keep the same in force and effect and the party failing
to comply shall pay the other party the cost thereof, on demand.
H. Indemnification of Lessor. Lessee shall indemnify
and hold harmless Lessor from and against all claims arising from
Lessee's use of the Premises, or from the conduct of Lessee's
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business or from any activity, work, or things done, permitted or
suffered by Lessee in or about the Premises and shall further
indemnify and hold Lessor harmless from and against any and all claims
arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this
Lease, or arising from any intentional tort or negligence of the
Lessee, or any of Lessee's agents, contractors, or employees, and
against all costs, attorney fees, expenses and liabilities incurred in
the defense of any such claim or any action or proceeding brought
thereon.
I. Indemnification of Lessee. Lessor shall indemnify
and hold harmless Lessee against any and all claims arising from any
negligent, willful, or intentional conduct by Lessor, its employees,
agents, or contractors, with regard to its acts, or inaction in the
performance of Lessor's obligations under the terms of this Lease or
arising from any negligent or intentional tort of Lessor, or any of
Lessor's agents, contractors or employees and against all costs,
attorney fees, expenses and liabilities incurred in the defense of any
such claim or any action or proceeding brought thereon.
15. Access to Premises.
A. Right to Enter. Lessor and its agents shall, upon
notice of not less than 24 hours (except in the event of an emergency
when such notice is impractical), have the right to enter accompanied
by an officer of the Lessee any part of the Premises at all reasonable
times for the purposes of examining the same, showing the same to
prospective purchasers, mortgagees, or lessees and for making such
repairs, alterations, or improvements to the Premises as Lessor may
deem necessary or desirable. Lessor and its agents may enter the
Premises by any means of a master key or otherwise. Lessor shall
incur no liability to Lessee for such entry, nor shall entry
constitute an eviction or termination of this Lease, nor entitle
Lessee to any abatement of rent therefor.
B. Notice of Vacate and Joint Inspection before
Termination Date. Lessee shall give written notice to Lessor at least
thirty (30) days prior to vacating the Premises at the end of the
Lease Term and shall arrange to meet with Lessor for a joint
inspection of the Premises prior to vacating. In the event of
Lessee's failure to give such notice or arrange such joint inspection,
Lessor's inspection at or after Lessee's vacating the Premises shall
be conclusively deemed correct for purposes of determining Lessee's
responsibility for repairs and restoration.
16. Personal Property and other Taxes. Lessee shall pay before
delinquent all taxes, assessments, fees, or charges ("taxes"), including any
sales, gross income, rental, business occupation or other taxes, imposed upon
Lessee's business operation in the Premises and any taxes imposed upon Lessee's
trade fixtures, leasehold improvements, or personal property located within the
Premises. In the event any taxes are charged to the Lessor, Lessee shall
reimburse Lessor for the same as additional rent. Lessee shall have the right
to contest in good faith any such tax and to defer payment, if required, until
after Lessee's liability therefor is finally determined.
17. Damage or Destruction. The following provisions shall relate
to damage or destruction of the Premises.
A. Use of Partially Damaged Premises. In the event of
partial damage or destruction of the Premises, Lessee shall continue
to utilize the Premises for the operation of its business to the
extent that it may be practicable to do so from the standpoint of good
business as determined by Lessee.
B. Right to Terminate on Destruction of Premises where
Damage Exceeds Two-Thirds of Reconstruction Cost. Either
party to this Lease Agreement shall have the right to
terminate this Lease Agreement if, during the last twenty-four
(24) months of the term of this Lease Agreement, the Building
of which the Premises are a part are damaged to an extent
exceeding two-thirds of the then reconstruction cost of the
Building as a whole; provided that, in such an event,
termination of this Lease Agreement shall be effected by
written notice to that effect to the other party delivered
within forty-five (45) days of the happening of the casualty
causing the damage.
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C. Repairs by Lessor. If the Premises shall, either
prior to the beginning of or during the term of this Lease Agreement,
be damaged or destroyed by fire or any other cause whatsoever beyond
Lessee's control, Lessor, except as otherwise specifically provided in
this Lease Agreement shall, immediately and diligently proceed to
repair or build the Premises, including any additions or improvements
made by Lessor or by Lessee with Lessor's consent, on the same plan
and design as existed immediately before the damage or destruction
occurred, subject to such delays as may be reasonably attributable to
governmental restrictions or failure to obtain materials or labor, or
other causes whether similar or dissimilar, beyond the control of
Lessor. Materials used in repair shall be nearly as like original
materials as may then be reasonably procured in regular channels of
supply.
D. Excusable Delay. Whenever a strike, act of God, or
cause beyond the power of the party affected to control caused delay,
the period of delay so caused shall be added to the period limited in
this Lease for the completion of such work, reconstruction or
replacement.
E. Reduction of Rent During Repairs. In the event
Lessee continues to conduct business during the making of repairs, the
base monthly rental will be equitably reduced in the proportion that
the unusable part of the Premises bears to the whole of the Premises.
F. No Rent if Premises Unoccupied. No rental shall be
payable while the Premises are wholly unoccupied pending the repair of
casualty or damage.
G. Repair or Replacement of Fixtures. Lessee shall, as
soon as reasonably possible, replace or repair Lessee's improvements
and fixtures in the Premises that may be damaged or destroyed by fire
or any other cause whatsoever.
H. Lessor's Obligation for Lessee's Repairs. If Lessor
is obligated to or elects to repair or restore as provided in this
Lease Agreement, Lessor shall be obligated to make repair or
restoration only of those portions of the Premises that were
originally provided at Lessor's expense, and the repair and
restoration of items not provided at Lessor's expense shall be the
obligation of Lessee. If Lessor receives proceeds in excess of the
current cost to replace those original Lessee improvements, then the
excess proceeds will be applied to the replacement of additional
improvements provided by Lessee in addition to Lessor's original
improvements.
I. Release and Liability. Upon any termination of this
Lease Agreement under any of the provisions in this section, the
parties shall be released without further obligation to the other as
of the termination date, provided Lessee shall remain liable to Lessor
for items that have accrued as of the termination date and are then
unpaid.
18. Condemnation. In the case all of the Premises, the Building
in which the Premises are located, or the common areas, or such part thereof as
shall substantially interfere with Lessee's use and occupancy thereof, shall be
taken for any public or quasi-public purpose by any lawful power or authority
by exercise of the right of appropriation, condemnation, or eminent domain, or
sold to prevent such taking, either party shall have the right to terminate
this Lease Agreement effective as of the date possession is required to be
surrendered to the taking authority. Except as otherwise provided herein,
Lessee shall not assert any claim against Lessor or the taking authority for
any compensation because of such taking, and Lessor shall be entitled to
receive the entire amount of any award with deduction for any estate or
interest of Lessee.
A. Partial Taking. In the event the amount of property and the
type of estate taken shall not substantially interfere with the
conduct of Lessee's business, and Lessor determines Lessor is
economically able to restore the Premises, the Building in which the
Premises are located, or the common areas to an operating condition
comparable to that which existed prior to the taking, Lessor shall be
entitled to the entire amount of the award without deduction for any
estate or interest of Lessee. In that event, Lessor shall restore the
Premises to substantially their same condition prior to the taking,
and proportionate allowance shall
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be made to Lessee for the rent corresponding to the time during which
and to the part of the Premises of which Lessee shall be so deprived
on account of the taking and restoration.
B. Taking of Lessee's Property. Nothing contained in this
section shall be deemed to give Lessor any interest in any award made
to Lessee for the taking of personal property and fixtures belonging
to Lessee, or for moving or other costs which shall not diminish the
award to Lessor or for any relocation benefits available to Lessee by
state, federal, or any other law.
19. Lessee's Defaults and Remedies.
A. Lessee's Monetary Defaults. The occurrence of any
one or more of the following events shall constitute a material
monetary default in breach of this Lease Agreement by Lessee: Failure
by Lessee, Lessee's agent or bank to make any payment required under
this Lease Agreement as and when due, where such failure shall
continue for a period of ten (10) days after receipt of written notice
from Lessor.
B. Lessee's Non-Monetary Defaults. The occurrence of
any one of the following events shall constitute a non-monetary
default in breach of this Lease Agreement by Lessee: Failure by Lessee
to observe or to perform any of the covenants, conditions, or
provisions of this Lease Agreement, other than the making of any
payment, where Lessee shall not commence to cure for a period of
thirty (30) days after notice of such failure from Lessor or such
additional period of time as is reasonably necessary to cure such
failure, provided Lessee diligently prosecutes such cure; or vacation
or abandonment of the Premises. (Vacation and abandonment includes
any complete absence of Lessee from the Premises for thirty (30)
business days or longer.)
C. Remedies. In the event of any material monetary
default by Lessee, or any non-monetary default in effect for thirty
(30) calendar days, in addition to any other remedies available to
Lessor at law or in equity, Lessor shall have the immediate option to
terminate this Lease Agreement and all rights of Lessee under this
Lease Agreement. In the event that Lessor shall so elect to terminate
this Lease Agreement, then Lessor may recover from Lessee:
(1) Any unpaid rent that was due and owing at the
time of termination;
(2) The unpaid rent that would have been earned
from the date of termination until the time of the award, less
the amount of such rental loss that Lessee proves could
reasonably have been avoided; and
(3) From time to time, the monthly rental then
due from the time of the award less the amount of such rental
lost.
D. Re-entry and Removal of Lessee's Property. In the
event of any such default by Lessee, Lessor shall also have the right,
adhering to applicable legal processes, with or without terminating
this Lease Agreement, to re-enter the Premises and remove all persons
and property from the Premises. Such property may be removed and
stored in a public warehouse or elsewhere at the cost of or on the
account of Lessee. No re-entry or taking of the Premises by Lessor
pursuant to this section shall be construed as an election to
terminate this Lease Agreement unless Lessor gives Lessee written
notice of such intention or unless the termination of this Lease
Agreement is decreed by a court of competent jurisdiction.
E. Reletting Premises. In the event of any such default
by Lessee, Lessor shall also have the right and obligation, adhering
to applicable legal processes, with or without terminating this Lease
Agreement, to re-enter the Premises and to use its best efforts to
relet them, and Lessee agrees to pay Lessor the cost of recovering
possession of the Premises, the expense of reletting, and any other
reasonable costs or damages arising out of Lessee's default.
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20. Remedies Cumulative. All rights, options and remedies of
Lessor and Lessee contained in this Lease Agreement shall be construed and held
to be cumulative, and no one of them shall be exclusive of the other. Either
party shall have the right to pursue any one or all of such remedies or any
other remedy or relief that may be provided by law, whether or not stated in
this Lease Agreement.
21. No Waiver. No waiver of any default of Lessee under this
Lease Agreement shall be implied from any acceptance by Lessor of any rent or
other payments due under this Lease Agreement or any omission by Lessor to take
any action on account of such default if such default persists or is repeated,
and no express waiver shall effect a default other than as specified in the
waiver. The consent or approval of either party to an act by the other party
shall not be deemed to waive or render unnecessary either party's consent or
approval of any subsequent similar act by the other party.
22. Cure by Lessor. Lessor or any mortgagee, at any time after
Lessee commits a default, and after having provided notice of said default to
Lessee except in case of emergency wherein the notice requirement shall be
waived, and after expiration of the applicable cure period, may cure the
default at the cost of Lessee. If Lessor or any mortgagee at any time, by
reason of Lessee's default, pays any sum or does any act that requires the
payment of any sum, the sum paid by Lessor or any mortgagee at the time the sum
is paid shall be due immediately from Lessee to Lessor or the mortgagee, and if
paid at a date later than thirty (30) days shall bear interest at the rate of
12 percent per annum from the date the sum is paid by Lessor or the mortgagee
until Lessor or the mortgagee is reimbursed by Lessee. The sum, together with
interest, shall be deemed to be additional rent.
23. Lessor's Default. Lessee shall notify Lessor promptly of any
default not by its nature necessarily known to Lessor.
A. Lessor's Right to Cure Default. Lessor shall not be
in default under this Lease Agreement unless Lessor fails to perform
its obligation within ten (10) days after notice by Lessee specifying
where Lessor has failed to perform. If the nature of Lessor's
obligation is such that more than ten (10) days are required to
perform, Lessor shall not be in default if Lessor commences
performance within ten (10) days of Lessee's notice and thereafter
pursues performance with due diligence.
B. Damages and Remedy. Except as otherwise provided
herein, Lessee's sole remedy for Lessor's default shall be a cause of
action for damages. If there are any repairs that are the obligation
of Lessor, and Lessor exceeds the time period allowed in paragraph A
of this section, then Lessee may, if it chooses, elect to perform the
repair, then bill the cost of such repair to Lessor.
C. Lessee's Right to Cure Default. If Lessor fails to
discharge fully any of its obligations imposed by a mortgage that is
superior to this Lease, or Lessor fails to pay any real estate taxes
and assessments affecting the Premises or Lessor fails to make any
repairs that this Lease or any law requires it to make, then Lessee
may, but will not be required to, discharge those obligations, or pay
those taxes and assessments, or make those repairs, as the case may
be. If it does, all amounts expended in doing so and all costs
incurred in doing so along with 12 percent interest per annum from the
date of Lessee's payment shall be payable by Lessor upon demand. If
Lessor fails to make payment, in addition to any other rights Lessee
may have, it will have the right to offset the amount of repayment
against rent and other charges under this Lease.
24. Assignment and Succession. Lessor has approved of the
proposed sublease of a portion of the Premises provided that the use of the
subtenant is acceptable to Lessor. Lessee shall not otherwise assign, let, or
sublet this Lease Agreement or the Premises, or any part of the Premises, or in
any way transfer or hypothecate any of its interest in this Lease Agreement or
the Premises without first obtaining the written consent of Lessor, which will
not be unreasonably withheld, conditioned, or delayed. Lessor's consent shall
be conditioned upon Lessor's approval of the economic viability of the proposed
assignee or sublessee and Lessor's determination that the proposed use of the
Premises by the assignee or sublessee is consistent with the uses in the
Property. Notwithstanding all other provisions of this Lease Agreement, Lessee
may at any time and without Lessor's consent, assign all or part of this Lease,
or sublease all or part of the Premises, upon notification to Lessor, to: any
entity that has the power to direct Lessee's management and operation; or any
entity whose management and operation is controlled by the Lessee; or any
entity a majority of whose voting stock
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is owned by Lessee; or any entity in which or with which Lessee, its successors
or assigns, is merged or consolidated, in accordance with applicable statutory
provisions for merger or consolidation of entities, so long as the liabilities
of the entities participating in such merger or consolidation are assumed by
the entity surviving such merger or created by such consolidation; or any
entity acquiring this Lease and a substantial portion of Lessee's assets; or
any corporate successor to a successor entity becoming such by either of the
methods described above, so long as on the completion of such merger,
consolidation, acquisition, or assumption, the successor has a net worth no
less than Lessee's net worth immediately prior to such merger, consolidation,
acquisition. Information to be provided Lessor hereunder shall not include any
information which is not generally made available to the public or to the
shareholders of Lessee.
A. Lessee's Primary Responsibilities. Subject to the
provisions above, this Lease Agreement shall be binding upon and inure
to the benefit of the parties, their heirs and successors and assigns.
However, Lessee shall remain primarily responsible for any and all
obligations, liabilities and responsibilities of Lessee under this
Lease Agreement after any subletting or hypothecation, or an
assignment unless the same has been consented to or provided for as
set forth above.
B. Payment of Lessor Costs. Lessee agrees to reimburse
Lessor for Lessor's reasonable attorney fees and related costs
incurred in connection with the processing, review, and/or
documentation of any requested transfer, assignment, subletting, or
hypothecation of this Lease Agreement or of Lessee's interest in and
to the demised premises.
25. Estoppel Certificate-Lessor. Within ten (10) days after
request by Lessor, Lessee agrees to deliver, at Lessor's sole expense, in
recordable form, a certificate to any proposed mortgage or purchaser, or to the
Lessor, certifying (if such be the case) that this Lease Agreement is in full
force and effect and that to the knowledge of Lessee, there are no defenses or
offsets thereto, or stating those claimed by Lessee. Any such statement may be
conclusively relied upon by any prospective mortgagee or purchaser of the
property of which the Premises are a part.
26. Estoppel Certificate-Lessee. Within ten (10) days after
request by Lessee, Lessor agrees to deliver, at Lessee's sole expense, in
recordable form, a certificate to any proposed mortgagee, lender or purchaser,
or to the Lessee, certifying (if such be the case) that this Lease Agreement is
in full force and effect and that to the knowledge of Lessor, there are no
defaults or unpaid rents, or stating those claimed by Lessor. Any such
statement may be conclusively relied upon by any prospective mortgagee, lender
or purchaser conducting business with the Lessee.
27. Subordination. This Lease Agreement, at Lessor's option,
shall be subordinate to any mortgage or other hypothecation for security now or
hereafter placed upon the real property of which the Premises are a part, and
to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. In spite
of such subordination, Lessee's right to quiet possession of the Premises shall
not be disturbed if Lessee is not in default and so long as Lessee shall pay
the rent and observe and perform all of the provisions of this Lease Agreement,
unless this Lease Agreement is otherwise terminated pursuant to its terms. If
any holder of such mortgage or other hypothecation for security shall elect to
have this Lease Agreement prior to its lien and shall give written notice to
that effect to Lessee, this Lease Agreement shall be deemed prior to such
mortgage or other hypothecation for security, whether this Lease Agreement is
dated prior or subsequent to such mortgage or other hypothecation for security,
or the date of recording such instrument. Lessor shall be obligated to obtain
a nondisturbance agreement from any present or future mortgagee or purchaser in
favor of Lessee and failure of the Lessor to do so shall be considered a Lessor
default and notwithstanding other provisions, shall allow Lessee to terminate
this Lease.
A. Additional Documents. Lessee also agrees to execute
any documents required to effectuate such subordination or make this
Lease Agreement prior to the lien of any mortgage, or other
hypothecation for security, as the case may be, provided that Lessor
shall bear all costs, legal and otherwise associated with the review
and execution of said documents. Failing to so do within fifteen (15)
days after written demand shall make, constitute and irrevocably
appoint Lessor as Lessee's attorney-in-fact and in Lessee's name,
place and stead to so act.
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B. Foreclosure. Upon a foreclosure of any mortgage or
execution of any deed in lieu of foreclosure, or declaration of
Lessor's default under any hypothecation for security and demand by
Lessor's successor, Lessee shall attorn to and recognize such
successor as Lessor under this Lease Agreement, provided that such
successor shall execute a non-disturbance agreement in favor of
Lessee.
28. No Additional Leases to Financial Institutions. Provided the
Lessee is not in default hereunder, during the lease term, Lessor shall not
allow any other portion of the property of which the Premises are a part to be
used in the business of a bank, savings and loan association, savings bank,
credit union, mortgage bank, or loan agency.
29. Right of First Refusal to Purchase. Should Lessor, during the
lease term, or any extension thereof, elect to sell the property of which the
Premises are a part, Lessee shall have the right of first refusal to meet any
bona fide offer of sale on the same terms and conditions of such offer. Upon
Lessor's failure to meet such bona fide offer within fifteen (15) days after
notice thereof from Lessor, Lessor shall be free to sell the property in
accordance with the terms and conditions of the then current offer. In the
event such sale does not close within one hundred twenty (120) days of the date
of such notice to Lessee, the right of first refusal shall be reinstated and an
additional notice to Lessee shall be required before Lessor shall be allowed to
complete the sale on the same terms and conditions.
30. Notices. All notices under this Lease Agreement shall be in
writing and shall be effective two (2) days after mailing by certified mail,
return receipt requested, or when delivered personally to Lessor or Lessee at
their addresses set forth below, or to such other addresses as may be
designated by notice.
31. Entire Agreement. This Lease Agreement shall constitute the
entire agreement between the parties. Any prior understanding or
representation or any kind preceding the date of this Lease Agreement shall not
be binding upon either party except to the extent incorporated in this Lease
Agreement.
32. Modification of Agreement. Any modification of this Lease
Agreement or additional obligation assumed by either party in connection with
this Agreement shall be binding only if evidenced in a writing signed by each
party or an authorized representative of each party.
33. Attorney Fees. In the event that any action is filed in
relation to this Lease Agreement, the unsuccessful party in the action shall
pay to the successful party, in addition to all sums that either party may be
called on to pay, a reasonable sum for the successful party's attorney fees.
34. Hold-Over Tenancy. If (without execution of a new Lease
Agreement or written extension) Lessee shall hold over after the expiration of
the term of this Lease Agreement, Lessee shall be deemed to be occupying the
Premises as a tenant from month-to-month, which tenancy may be terminated as
provided by law. During such tenancy, Lessee agrees to be bound by all of the
terms, covenants and conditions specified in this Lease Agreement, insofar as
applicable.
35. Rules and Regulations. Lessee shall faithfully observe and
comply with the "Rules and Regulations" that apply to all Property tenants and
all reasonable and nondiscriminatory modifications to such rules and
regulations from time to time put into effect by Lessor. These rules and
regulations are imposed for the cleanliness, good appearance, proper
maintenance and good order and reasonable use of the Premises and the Building
in which the Premises are located by all tenants and their clients, customers,
patients, employees and business invitees. Lessor shall not be responsible or
liable to Lessee for violation or nonperformance of any of the rules and
regulations by any other tenant or occupant of the Building in which the
Premises are located.
36. Governing Law. It is agreed that this Lease Agreement shall
be governed by, construed and enforced in accordance with the laws of the State
of Wisconsin.
37. Paragraph Headings. The titles to the paragraphs of this
Lease Agreement are solely for the convenience of the parties and shall not be
used to explain, modify, simplify, or aid in the interpretation of the
provisions of this Lease Agreement.
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38. Time of the Essence. It is specifically declared and agreed
that time is of the essence of this Lease Agreement.
39. Effect of Partial Invalidity. The invalidity of any part of
this Agreement will not and shall not be deemed to affect the validity of any
other part. In the event that any provision of this Agreement is held to be
invalid, the parties agree that the remaining provisions shall be deemed to be
in full force and effect as if they had been executed by both parties
subsequent to the expungement of the invalid provision.
40. Lessor Waivers. Lessor agrees to execute within ten (10)
working days of Lessee's request a "Landlord's Waiver", relating to personal
property and removable trade fixtures, as prepared by the Lessee's bank.
41. Recording. Neither Lessor nor Lessee shall record this Lease
Agreement without the written consent of the other, which consent shall not be
unreasonably withheld, conditioned, or delayed. Either party may record a
short form memorandum or abridgement of the Lease Agreement and shall furnish
the other party with a copy of such recorded instrument.
42. Redelivery. Upon termination, Lessee shall surrender the
Premises in good order and condition excepting normal wear and tear. Lessee
shall remove from Premises any and all equipment, furniture and other personal
property. Lessee may, at its option, remove at the termination of this Lease
or any extension thereof, any trade fixtures used by it in the business of
Lessee on the Premises; provided that in the case of such removal, Lessee shall
cause the Premises to be restored to the condition in which they were prior to
such installation by Lessee. Lessee shall not remove any alterations,
additions, or leasehold improvements, or any building equipment installed by
Lessor or necessary to the operation of the building.
43. Riders. Site plans, exhibits and riders, if any, signed by
Lessor Lessee, and affixed to this instrument, are a part of this Lease
Agreement.
44. Corporate Authority. Each of the persons executing this Lease
Agreement on behalf of Lessee covenants and warrants that Lessee is a duly
authorized and existing corporation, Lessee has and is or will be prior to
commencement, qualified to do business in the state of Wisconsin; the
corporation has full right and authority to enter into this Lease Agreement;
and each person signing on behalf of the corporation was authorized to do so.
45. Parties Bound. Each and every provision of this Lease
Agreement shall bind and inure to the benefit of the parties hereto and their
legal representatives. The term "legal representatives" is used in this Lease
Agreement in its broadcast possible meaning and includes in addition to
executors and administrators, every person, partnership, corporation, or
association succeeding to the interest or to any part of the interest in or to
this Lease Agreement or in or to the Premises, of either Lessor or Lessee,
whether the succession results from the act of a party in interest, occurs by
operation of the law, or is the effect of the operation of law together with
the act of such party. Each and every agreement and condition of this Lease by
Lessee to be performed shall be binding on all assignees, subtenants,
concessionaires, or licensees of Lessee.
46. Counterparts. This Lease Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, each party to the Lease Agreement has caused it to
be executed by one duly authorized to be effective on the date last signed by a
party hereto.
LESSOR:
MANGOLD INVESTMENTS, LLP
Dated: 12-16-96 By: /s/ James A. Mangold, Jr.
------------------- -------------------------------
By: /s/ Barbar Mangold
-------------------------------
Address:
1050 S. Milwaukee Avenue, Suite 100
Burlington, WI 53105
LESSEE:
STATE FINANCIAL BANK-WATERFORD
Dated: 12-16-96 By: /s/ Jeryl M. Sturino
------------------- -------------------------------
Title: President and CEO
----------------------------
Attest: /s/ Frances M. Morrical
---------------------------
Title: Cashier
---------------------------
Address:
217 N. Milwaukee Street
---------------------------
Waterford, WI 53130
---------------------------
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EXHIBIT A TO LEASE AGREEMENT
MADE BY AND BETWEEN MANGOLD INVESTMENTS, LLP ("Lessor") and
STATE FINANCIAL BANK - WATERFORD ("Lessee")
Part of the Northwest 1/4 of Section 28, Township 3 North, Range 19 East, City
of Burlington, Racine County, Wisconsin and more particularly described as
follows: Commence at the West 1/4 corner of Section 28, run thence North 89
degrees 45' 22" East 45.27 feet to the Easterly right-of-way line of State Trunk
Highway 38 and 83; thence North 38 degrees 16' 43" East along said right-of-way
line 217.00 feet to the point of beginning of the following described parcel;
thence continue North 38 degrees 16' 43" East along said right-of-way line
309.00 feet; thence South 51 degrees 43' 17" East 250.00 feet; thence South 38
degrees 16' 43" West 309.00 feet; thence North 51 degrees 43' 17" West 250.00
feet to the point of beginning.
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EXHIBIT B TO LEASE AGREEMENT
MADE BY AND BETWEEN MANGOLD INVESTMENTS, LLP ("Lessor") and
STATE FINANCIAL BANK - WATERFORD ("Lessee")
Building layout of property located at 1050 North Milwaukee Avenue,
Burlington, Wisconsin prepared by Stelling & Associates Architects, Ltd. 181
West Chestnut Street, Burlington, Wisconsin 53105, telephone (414) 763-8725.
16
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EXHIBIT C TO LEASE AGREEMENT
MADE BY AND BETWEEN MANGOLD INVESTMENTS, LLP ("Lessor") and
STATE FINANCIAL BANK - WATERFORD ("Lessee")
Graphic drawing of proposed drive-up facility for State Financial Bank
- - Waterford to be located 1050 North Milwaukee Avenue, Burlington, Wisconsin.
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EXHIBIT D TO LEASE AGREEMENT
MADE BY AND BETWEEN MANGOLD INVESTMENTS, LLP ("Lessor") and
STATE FINANCIAL BANK - WATERFORD ("Lessee")
The Premises shall be provided by Lessor to Lessee in "as is"
condition except for the work provided herein which shall be Lessor's work and
shall be provided at not cost to Lessee, except as provided herein.
Notwithstanding any provision hereof to the contrary, all costs and expenses of
construction of the drive-in banking facility and property improvements made as
a result of the location of such drive-in banking facility to be incorporated
into the building on the property shall be paid by Lessee. Lessor's work shall
include the following:
1. Roof. All materials related to the roof except cutting and
patching as required for Lessee's additional mechanical equipment or
improvements shall be the responsibility of Lessor. Any such cutting and
patching shall be done by Lessor's contractor for quality control, but paid for
by Lessee.
2. Exterior Building Facade. All exterior building walls and the
exterior facade of the building, including exterior windows and doors, shall be
constructed and installed by Lessor. Lessor shall cause to be installed an
exterior window in the area formerly occupied by a doorway to the "bakery" area
and proposed as a rental unit to be sublet by Lessee.
3. Vestibule Construction. Lessor shall be responsible for
construction of the vestibule serving the Premises on the south side of the
Property, including the exterior and interior entrance doors. Lessor shall
have no responsibility for construction of the vestibule serving the Premises
on the east side of the Building except for the installation of the exterior
doors. All other costs of construction of such vestibule, including entrance
doors and windows from the vestibule to the Premises shall be paid by Lessee.
4. Sidewalks. Lessor shall provide sidewalks adjacent to the
building on the property as shown on the plot plan.
5. Walls. Lessor shall remove the interior partition wall in the
area formerly used for a "bakery" in the area to be sublet by Lessee to a
sublessee. Lessor shall finish all exterior building walls with metal studs,
insulation, vapor barrier and drywall. Lessor shall also install the partition
wall for the east side of the Premises and shall install such partition walls
as are necessary to construct a uni-sex bathroom for the Premises. Such
partition walls shall be drywalled and ready for paint.
6. Floor. Lessor shall provide concrete floors ready for floor
covering.
7. Ceiling. Lessor shall provide ceiling open to interior beams
and roof with Lessee to pay all costs of installation of insulation and a drop
ceiling.
8. Plumbing. Lessor shall provide rough-in plumbing for two
unisex bathrooms (one for premises to be occupied by Lessee and one for
premises to be occupied by sublessee of Lessee); provided that Lessee shall
reimburse Lessor for One Thousand Two Hundred Fifty Dollars ($1,250.00), being
the cost of rough-in plumbing of bathroom in area to be sublet.
9. Electrical. Lessor shall furnish and provide 200-amp service
to Premises, with all costs of electrical distribution and outlets to be paid
by Lessee. Lessor shall install an extra electrical service for the benefit of
the area to be sublet by Lessee and Lessee shall reimburse Lessor for the
actual cost of installation of such second service.
10. Heating, Ventilating and Air Conditioning. Lessor shall
furnish two roof-top HVAC units with working controls. Tenant shall pay all
costs of all duct work, grills and other distribution costs from the installed
units.
11. Parking Lot Improvements. Lessor shall complete all parking
lot improvements; provided that Lessee shall contribute to Lessor an amount to
offset the costs of special curbing and other parking lot improvements required
for Lessee's drive-in bank facility and other special bank use.
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12. Other. Lessor shall have no other obligation to improve and
fixture the Premises for Lessee's use.
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EXHIBIT 13
SFSW
PROFILE
THE COMPANY
State Financial Services Corporation (the "Company"), is a Wisconsin corporation
with origins dating back to 1910. Based in Hales Corners, the Company is a bank
holding company operating two community banks and a mortgage company serving
Southeastern Wisconsin. State Financial Bank ("SFB") serves Milwaukee and
Waukesha Counties with seven full-service offices and one loan production
office. State Financial Bank-Waterford ("Waterford") currently operates one
office in Racine County and has received regulatory approval to open a new
full-service office in Burlington, expected to open in May 1997. In 1996 the
Company formed State Financial Mortgage Company to service all our markets in
Southeastern Wisconsin.
THE EMPLOYEES
The Company benefits from a strong employee base with impressive tenure among
our staff. We believe the length of employment by our staff is a positive
reflection on the type of company we have and the service we provide.
FINANCIAL PERFORMANCE
The Company had a record-setting year in 1996 with earnings exceeding the $4
million mark for the first time in the Company's history. At $4,006,000,
earnings reflect a 22% increase over 1995. We also achieved a first in total
assets at $301,222,000. The Company's common stock trades on the Nasdaq
National Market tier of the Nasdaq Stock Market under the trading symbol
"SFSW." For the year ended December 31, 1996 the overall market return on our
stock was 42%.
CORPORATE PHILOSOPHY
The Company's philosophy is to operate a successful community bank, meeting the
needs of our area with a wide range of quality products and services. While
growth is important, continued safety and soundness are critical elements that
will not be compromised. Our goals for the Company will be accomplished
effectively and efficiently in order to deliver the fair and equitable return
our shareholders have come to expect. It is with the investment and loyalty of
our shareholders that we are able to carve a niche as a community bank, a role
we see growing in the years to come. We'll continue to use our community
banking tradition as the cornerstone which directs our vision for the future.
TABLE OF CONTENTS
Financial Highlights .................................................... 1
A Letter to All Shareholders ............................................ 2
Selected Consolidated Financial Data .................................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 5
Report of Management .................................................... 20
Report of Independent Auditors .......................................... 20
Consolidated Balance Sheets ............................................. 21
Consolidated Statements of Income ....................................... 22
Consolidated Statements of Stockholders Equity .......................... 23
Consolidated Statements of Cash Flow .................................... 24
Notes to Consolidated Financial Statements .............................. 25
Directors and Officers .................................................. 36
Investor Information ...................... inside back cover and back cover
<PAGE> 2
FINANCIAL HIGHLIGHTS
[LOGO]
STATE
FINANCIAL
SERVICES
CORPORATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------
1996 1995 % Change
- ---------------------------------------------------------
<S> <C> <C> <C>
Operating Results
- ---------------------------------------------------------
Net income $ 4,006 $ 3,279 22.17
Return on average assets 1.39% 1.33% 4.51
Return on average equity 11.78% 11.22% 4.99
Net interest margin 5.27% 5.44% (3.13)
- ---------------------------------------------------------
Per Share Information
- ---------------------------------------------------------
Earnings $ 1.28 $ 1.13 13.27
Dividends .40 .33 21.12
Book value at year end 11.11 10.19 9.03
Market value at year end 16.67 11.98 39.15
- ---------------------------------------------------------
Financial Condition
- ---------------------------------------------------------
Total assets $301,222 $285,037 5.68
Net loans 199,063 183,043 8.75
Total deposits 254,657 246,218 3.43
Shareholders' equity 35,527 32,381 9.72
- ---------------------------------------------------------
$'s in thousands except per share data
</TABLE>
[BAR GRAPH]
EARNINGS & DIVIDENDS PER SHARE
1992 1993 1994 1995 1996
DIVIDENDS $0.23 $.028 $0.29 $0.33 $0.40
EPS $1.09 $0.88 $1.00 $1.13 $1.28
[BAR GRAPH]
MARKET VALUE PER SHARE
1992 1993 1994 1995 1996
$8.11 $8.86 $10.07 $11.98 $16.67
AT DECEMBER 31 OF EACH YEAR
[BAR GRAPH]
TOTAL ASSETS
1992 1993 1994 1995 1996
$202,977 $226,124 $225,175 $285,037 $301,222
DOLLARS IN THOUSANDS
[BAR GRAPH]
GROSS LOANS
1992 1993 1994 1995 1996
$119,930 $130,254 $143,813 $185,754 $201,671
DOLLARS IN THOUSANDS
[BAR GRAPH]
TOTAL DEPOSITS
1992 1993 1994 1995 1996
$182,297 $199,768 $197,401 $246,218 $254,657
DOLLARS IN THOUSANDS
[BAR GRAPH]
NET INCOME
1992 1993 1994 1995 1996
$2,083 $2,275 $2,807 $3,279 $4,006
DOLLARS IN THOUSANDS
-1-
<PAGE> 3
SFSW
A LETTER TO ALL SHAREHOLDERS
[LOGO]
STATE FINANCIAL
SERVICES CORPORATION
DEAR SHAREHOLDERS:
"A journey without a map may be completed but not as effectively and quickly as
with proper planning." This quotation from our Long Range Plan sums up very
concisely the success we've enjoyed during 1996. With careful planning and a
responsive marketplace we have achieved new goals in 1996 while charting a
course for the years to come. It is with pride we present to you, our
shareholders, this Annual Report.
ACCOMPLISHING NEW GOALS
In 1996 we reported net record earnings of $4,006,000, a 22% increase over
1995. Our 1996 earnings are the first to reflect the full year results of our
newest banking subsidiary State Financial Bank-Waterford. Total assets
exceeded $300 million for the first time in the Company's history completing
the year at $301,222,000. These two important achievements, record earnings
and growth in assets are due to the hard work and efforts of all employees in
the organization. We are very pleased to report a return on average assets of
1.39%, a return on average equity of 11.78% and earnings per share of $1.28, a
13.3% increase over a year ago. Equally satisfying is our overall stock market
performance in 1996 with a 42% increase in shareholder value. This market
recognition of our consistent performance is very gratifying.
REACHING NEW HEIGHTS
1996 was a year of solid performance and strategic planning to position our
Company for the years to come. In 1996 we built onto our foundation a new Long
Range Plan which will guide us past the year 2000. We established a new
subsidiary, State Financial Mortgage Company, finalized plans for a branch of
State Financial Bank-Waterford in Burlington, and made a commitment to
technological advances with a new PC based teller system and initiated plans to
launch PC Banking in 1997.
MAKING NEW PLANS
"Future Course," our newly developed five year plan, focuses on priorities
determined after extensive interviews with the Board of Directors and officers
of State Financial Services Corporation, State Financial Bank, and State
Financial Bank-Waterford. In addition, all employees were invited to
participate in the process by completing an internal survey. We understand our
Company is constantly evolving as is the financial service industry. While our
Long Range Plan details our goals and strategies, we have the ability to modify
the plan as market conditions change and other opportunities present
themselves. Any modifications deemed necessary will be embraced with
enthusiasm and viewed as new paths on our map as we chart our course toward the
future.
-2-
<PAGE> 4
A LETTER TO ALL SHAREHOLDERS
[LOGO]
STATE
FINANCIAL
SERVICES
CORPORATION
EMBRACING NEW ADDITIONS
This year we were pleased to establish our newest subsidiary, State Financial
Mortgage Company. This new area has the potential to provide new sources of non
interest income while also providing a source for attracting new bank
customers. This is an area which has already contributed to loan growth for
our Company and is poised to perform very well.
We strive to build our Company through internal and external methods. The
announcement in 1996 of our new branch office of State Financial Bank-Waterford
in Burlington is part of our external goal to establish new offices which
complement our current locations. We are very enthusiastic about our move into
Burlington, expected to open in May 1997. The opportunity this market presents
for our style of traditional hometown banking is one which we believe will be
welcomed in the community.
WELCOMING NEW TECHNOLOGIES
The way in which we service our customers continues to change as demands from
the marketplace dictate. Technological enhancements provide options for our
customers to transact business in a variety of ways. In 1996 we made important
improvements with a more efficient PC teller system and a commitment to PC
Banking. We look to these products as enhancements to the personal service we
already provide. This gives our customers the choice as to how they would like
to be helped each day, whether in person, through our 24-hour telephone line,
or via computer. We've established these delivery systems to remain
competitive and help customers who are limited on time.
LOOKING BACK TOWARD NEW GROWTH
By looking back and remembering what has helped build our successful
organization, we are able to pave our "Future Course." This past year was very
gratifying, filled with opportunities taken and lessons learned. We know you
share our pleasure in the Company's financial performance. We began 1997 on a
positive note, declaring a 6 for 5 split on our common stock. In conjunction
with the stock split, we also announced that our quarterly cash dividend would
remain at $0.12 per share on a post-split basis, effectively increasing our
quarterly cash dividend rate by 20%. Our record 1996 earnings have allowed us
to increase the cash return to you, our shareholders, for the eighth
consecutive year.
We remain committed to the relationships we enjoy with our customers. We
appreciate the hard work of our employees, the direction provided by our
management team and Board of Directors, and the continued support of you, our
shareholders. Thank you.
Sincerely,
/s/ J.J. Holz /s/ Michael J. Falbo
J.J. Holz Michael J. Falbo
Chairman of the Board President and Chief Executive Officer
-3-
<PAGE> 5
STATE FINANCIAL SERVICES CORPORATION
SELECTED CONSOLIDATED 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):
<TABLE>
<CAPTION>
As of or for the years ended December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Total interest income (taxable equivalent)(2) $ 22,876 $ 19,782 $ 15,701 $ 14,820 $ 14,871
Total interest expense 8,752 7,336 4,773 4,853 5,972
- ------------------------------------------------------------------------------------------------------------
Net interest income 14,124 12,446 10,928 9,967 8,899
Provision for loan losses 210 190 120 147 133
Other income 3,060 2,481 2,438 2,234 2,045
Other expense 10,512 9,460 8,956 8,437 7,767
- ------------------------------------------------------------------------------------------------------------
Income before income tax 6,462 5,277 4,290 3,617 3,044
Income tax 2,003 1,579 1,010 876 562
Less taxable equivalent adjustment 453 419 473 466 399
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,006 $ 3,279 $ 2,807 $ 2,275 $ 2,083
- ------------------------------------------------------------------------------------------------------------
PER SHARE DATA(3):
Net income $ 1.28 $ 1.13 $ 1.00 $ 0.88 $ 1.09
Cash dividends declared 0.40 0.33 0.29 0.28 0.23
Book value 11.11 10.19 9.15 8.69 8.25
BALANCE SHEET TOTALS (AT PERIOD END):
Total assets 301,222 285,037 225,175 226,124 202,977
Loans, net of unearned discount 201,671 185,754 143,813 130,254 119,930
Allowance for loan losses 2,608 2,711 1,983 2,084 2,051
Deposits 254,657 246,218 197,401 199,768 182,297
Long-term debt 962 1,062 115 228 2,905
Shareholders' equity 35,527 32,381 26,169 24,756 16,593
FINANCIAL AND REGULATORY RATIOS:
Asset growth 5.68% 26.58% (0.42)% 11.40% 13.24%
Return on average assets 1.39 1.33 1.27 1.09 1.10
Return on average equity 11.78 11.22 11.02 10.33 13.90
Dividend payout ratio 31.46 29.50 29.12 31.78 24.22
Tier 1 risk-based capital ratio 16.26 16.06 17.60 16.62 11.70
Leverage ratio 11.45 10.95 11.75 10.79 8.31
Allowance for loan losses to
non-performing loans 108.62 195.32 150.68 97.79 111.89
Non-performing assets to total assets 0.91 0.65 0.68 0.95 1.14
Net charge-offs to average loans 0.16 0.12 0.16 0.09 0.32
- ------------------------------------------------------------------------------------------------------------
</TABLE>
1. Amounts include balances and results of operations of State Financial
Bank - Waterford since the effective date of its acquisition by the
Company on August 24, 1995, and the former Eastbrook State Bank since the
effective date of its acquisition by the Company on July 16, 1992, and the
acquisition of customer deposits and fixed assets in August 1993. See
Note 2 to the Consolidated Financial Statements.
2. 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.
3. All per share information presented in this report has been retroactively
restated to give effect to the 6 for 5 stock split, declared in January
1997; the 20% stock dividend, declared in January 1996, and the 20% stock
dividend, declared in March 1993, as if each had occurred as of
January 1, 1992.
-4-
<PAGE> 6
MANAGEMENT'S DISCUSSION
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):
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------------
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $5,745 $5,585 $5,598 $5,495 $5,513 $5,010 $4,506 $4,334
Interest expense 2,178 2,188 2,170 2,216 2,211 1,969 1,695 1,461
Net interest income 3,567 3,397 3,428 3,279 3,302 3,041 2,811 2,873
Provision for loan losses 52 53 52 53 52 48 45 45
Other income 800 814 769 677 625 655 605 596
Other expense 2,647 2,700 2,625 2,540 2,467 2,348 2,303 2,342
- --------------------------------------------------------------------------------------------------------------
Income before income tax 1,668 1,458 1,520 1,363 1,408 1,300 1,068 1,082
Income tax 539 489 517 458 440 437 354 348
- --------------------------------------------------------------------------------------------------------------
Net income $1,129 $ 969 $1,003 $ 905 $ 968 $ 863 $ 714 $ 734
- --------------------------------------------------------------------------------------------------------------
Net income per share $ 0.36 $ 0.31 $ 0.32 $ 0.29 $ 0.31 $ 0.30 $ 0.26 $ 0.26
Dividends per share 0.10 0.10 0.10 0.10 0.083 0.083 0.083 0.075
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1996, 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 August 24, 1995, the Company acquired State Financial Bank - Waterford
("Waterford"). On July 16, 1992, the Company acquired the former Eastbrook
State Bank ("Eastbrook"). As purchase accounting was used for both
acquisitions, the results of Waterford and Eastbrook are included in the
Company's results from their respective acquisition dates. Accordingly, the
Company's Consolidated Statements of Income, and related schedules in
Management's Discussion and Analysis of Financial Condition and Results of
Operations include Waterford's results for the full year in 1996 and from
August 24 through December 31 in 1995. Eastbrook's results are included for
the full years 1996, 1995, 1994, and 1993. Operating results presented for the
year ended December 31, 1992 include Eastbrook's results from July 16 through
December 31.
In August 1993 the Company acquired the deposits and certain fixed assets of a
competing financial institution's Waukesha office in a transaction accounted
for as a purchase (the "Waukesha Office"). Accordingly, the financial results
associated with this acquisition are included in the Company's results for the
full year in 1996, 1995, and 1994 and from the date of acquisition in 1993.
The Company's Balance Sheet Analysis in Management's Discussion and Analysis
of Financial Condition and Results of Operations include Waterford at December
31, 1996 and 1995; the Waukesha Office at December 31, 1996, 1995, 1994, and
1993; and Eastbrook for all years presented. Any balance sheet information
presented for years prior to 1995 does not include figures for Waterford. Any
balance sheet information presented for years prior to 1993 does not include
figures from the Waukesha Office.
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the
forward-looking statements. Factors which could cause such a variance to occur
include, but are not limited to, changes in interest rates, levels of consumer
bankruptcies, customer loan and deposit preferences, and other general economic
conditions.
-5-
<PAGE> 7
STATE FINANCIAL SERVICES CORPORATION
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. In 1996, the
Company's taxable-equivalent net interest income was additionally impacted by
the full year inclusion of Waterford's results in the Company's consolidated
operating performance. For the year ended December 31, 1996,
taxable-equivalent net interest income increased $1,678,000 (13.5%) to
$14,124,000. Changes in the volume of outstanding interest-earning assets and
interest-bearing liabilities accounted for $1,850,000 of the 1996 improvement
in taxable-equivalent net interest income, offset by a reduction of $172,000
resulting from interest rate changes during the year.
Volume changes most fundamentally impacted the components of the Company's
consolidated taxable-equivalent net interest income in 1996. Total interest
income increased $3,094,000 in 1996 due to a $39,000,000 (17.0%) increase in
the volume of outstanding interest-earning assets. This was the combined
result of the full year inclusion of Waterford's results in the Company's
consolidated 1996 operating performance ($22,023,000) and internal growth
during the year ($16,977,000). As a result of this volume increase, total
interest income improved $3,327,000 for the year ended December 31, 1996.
Changes in the Company's 1996 total interest income resulting from interest
rate changes offset the volume improvements by $233,000 primarily due to
maturing loans repricing at slightly lower rates during the year. The
combination of loan repricing and the full year incorporation of Waterford's
somewhat lower yielding loan portfolio to the Company's asset mix resulted in
the overall loan portfolio yield declining to 9.48% in 1996 from 9.70% in 1995.
Improvements in the yield from taxable and tax-exempt investment securities
mostly offset the loan yield decline as maturing investment securities upwardly
repriced and the Company benefitted from Waterford's slightly higher yielding
investment portfolio. The combined impact of these changes resulted in a
reduction in the Company's total yield on interest-earning assets to 8.54% in
1996 from 8.64% in 1995.
The Company's overall cost of funds remained relatively stable in 1996 at 4.27%
compared to 4.24% for the year ended December 31, 1995. Funding costs remained
stable mainly due to a changing mix in the composition of interest-bearing
liabilities and reduced costs on NOW and money market accounts. Due to a
general decline in short-term interest rates, the cost of NOW and money market
accounts fell to 3.72% in 1996 from 3.85% in 1995. Augmenting this categorical
cost improvement was continued balance growth in this deposit area due to the
continued popularity of the Company's Money Market Index Account. For the year
ended December 31, 1996, average NOW and money market accounts increased
$18,510,000 in average outstanding balances and represent 41.5% of the
Company's average interest-bearing liabilities compared to 38.5% in 1995.
Costs for time deposits increased to 5.70% in 1996 from 5.63% in 1995
primarily due to intense pricing competition in this deposit product during
1995 and 1996.
Although slightly lower than 1995, the Company's net yield on interest-earning
assets (net interest margin) remain strong at 5.27% for the year ended December
31, 1996. The reduction in 1996's net interest margin was mainly the result of
the full-year inclusion of Waterford's proportionately lower margin in the
Company's consolidated results combined with the impact of the above-referenced
composition changes to the Company's interest-earning assets and
interest-bearing liabilities.
For the year ended December 31, 1995, taxable-equivalent net interest income
increased $1,518,000 (13.9%) compared to the year ended December 31, 1994. The
increase was primarily due to a greater percentage of the Company's
interest-earning assets deployed in loans and the acquisition of Waterford in
August 1995.
[BAR GRAPH]
NET INTEREST MARGIN
1994 1995 1996
5.39% 5.44% 5.27%
-6-
<PAGE> 8
MANAGEMENT'S DISCUSSION
The following table sets forth average balances, related interest income and
expense, and effective interest yields and rates for the years ended December
31, 1996, 1995, and 1994 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1),(2),(3) $192,113 $18,209 9.48% $163,909 $15,897 9.70% $136,236 $12,153 8.92%
Taxable investment securities 55,553 3,271 5.89 44,722 2,527 5.65 42,519 2,126 5.00
Tax-exempt investment securities(3) 15,535 1,150 7.40 14,735 1,044 7.09 18,211 1,196 6.57
Federal funds sold 4,667 246 5.27 5,502 314 5.71 5,612 226 4.03
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 267,868 22,876 8.54 228,868 19,782 8.64 202,578 15,701 7.75
- --------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets:
Cash and due from banks 12,694 12,179 12,948
Premises and equipment, net 4,940 4,541 4,604
Other assets 6,380 4,187 3,129
Less allowance for loan losses (2,745) (2,278) (2,073)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL $289,137 $247,497 $221,186
================================================================================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts $ 85,030 $ 3,161 3.72% $ 66,520 $ 2,562 3.85% $ 52,963 $ 1,303 2.46%
Savings deposits 42,043 1,169 2.78 42,790 1,184 2.77 51,871 1,314 2.53
Time deposits 70,733 4,030 5.70 58,322 3,283 5.63 48,509 2,134 4.40
Notes payable 1,033 70 6.78 314 20 6.37 0 0 0.00
Mortgage payable 0 0 0.00 66 7 10.61 176 17 9.66
Federal funds purchased 379 22 5.80 427 28 6.56 0 0 0.00
Securities sold under
agreement to repurchase 5,737 300 5.23 4,490 252 5.61 102 5 4.90
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 204,955 8,752 4.27 172,929 7,336 4.24 153,621 4,773 3.11
- --------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits 48,469 43,555 40,852
Other 1,713 1,781 1,246
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 255,137 218,265 195,719
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 34,000 29,232 25,467
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL $289,137 $247,497 $221,186
================================================================================================================================
Net interest earning and
interest rate spread $14,124 4.27% $12,446 4.40% $10,928 4.64%
================================================================================================================================
Net yield on
interest-earning assets 5.27% 5.44% 5.39%
================================================================================================================================
</TABLE>
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) and interest income, which has been received from borrowers whose
loans were removed from nonaccrual during the period indicated.
3. Taxable-equivalent adjustments are made in calculating interest income
and yields using a 34% rate for all years presented.
-7-
<PAGE> 9
STATE FINANCIAL SERVICES CORPORATION
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 have been allocated
proportionately to change due to volume and change due to rate.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase/(Decrease) Due to Increase/(Decrease) Due to
- ----------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans(1),(2) $2,680 $(368) $2,312 $2,617 $1,127 $3,744
Taxable investment securities 633 111 744 114 287 401
Tax-exempt investment securities(2) 59 47 106 (241) 89 (152)
Federal funds sold (45) (23) (68) (4) 92 88
- ----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,327 (233) 3,094 2,486 1,595 4,081
Interest paid on:
NOW and money market accounts 687 (89) 598 393 866 1,259
Savings deposits (19) 4 (15) (245) 116 (129)
Time deposits 706 41 747 482 666 1,148
Notes payable, mortgage payable,
federal funds purchased and securities
sold under agreement to repurchase 103 (17) 86 293 (8) 285
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,477 (61) 1,416 923 1,640 2,563
================================================================================================================
Net interest income $1,850 $(172) $1,678 $1,563 $ (45) $1,518
================================================================================================================
</TABLE>
1. Interest earned on loans includes loan fees (which are not material in
amount) and interest income, which has been received from borrowers whose
loans were removed from nonaccrual during the period indicated.
2. Taxable-equivalent adjustments are made in calculating interest income
and yields using a 34% rate for all years presented.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to earnings results from a quarterly
analysis of the Company's loan portfolio, including the amount of net
charge-offs incurred during the period, collateral value, the remaining balance
in the allowance, and management's analysis of risk inherent in the portfolio.
Management's risk analysis incorporates loan classifications assigned by
lending personnel and as the result of examinations conducted by the Company's
internal loan review officer. The Company's lending personnel and internal
loan review officer review all significant nonhomogeneous loans for adverse
situations that may affect the borrower's ability to repay. If it appears
probable that the borrower will be unable to make scheduled principal and
interest payments, an allowance is established based on the difference between
the carrying value and the anticipated cash flows discounted at the loan's
initial effective interest rate or the fair value of the collateral for
collateral dependent loans. For homogeneous loans, the allowance is based on
the loan classification and historical loss experience for each classification.
The provisions for loan losses were $210,000, $190,000, and $120,000 for the
years ended December 31, 1996, 1995, and 1994, respectively. The increased
provisions in 1996 were the result of the full year inclusion of Waterford's
results in the Company's consolidated operating performance. The increased
provisions in 1995 were the result of increased provisions at SFB ($60,000) to
reflect the general increase in the level of loans outstanding and the
Waterford acquisition and the inclusion of its provisions ($10,000) from the
acquisition date.
-8-
<PAGE> 10
MANAGEMENT'S DISCUSSION
OTHER INCOME
In 1996, other income increased $579,000 (23.3%). The full year inclusion of
Waterford's results accounts for approximately $102,000 of this increase with
the remainder due to improvements at State Financial Bank during 1996. Other
income increased $43,000 (1.8%) in 1995 as compared to 1994, $29,000 of which
was due to the Waterford acquisition. The composition of other income is shown
in the following table (dollars in thousands).
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 992 $ 992 $1,068
Merchant services 1,033 715 607
Building rent 284 223 240
ATM service charges 195 205 215
Investment securities losses 0 0 (10)
Other 556 346 318
-----------------------------------------------------------------
Total other income $3,060 $2,481 $2,438
=================================================================
</TABLE>
For the year ended December 31, 1996, service charges on deposit accounts were
unchanged in total as compared to the year ended December 31, 1995. Excluding
the impact of Waterford's full year inclusion in the Company's 1996
consolidated results, service charge income decreased $28,000 (2.8%) mainly due
to reduced personal service charge income during the year. Income from service
charges on deposit accounts decreased $76,000 (7.1%) in 1995 due to declines in
business and personal service charge income and decreased volume in the amount
of checks returned for insufficient funds and the resultant fees therefrom.
Merchant services are the fees the Company charges businesses for processing
credit card payments. Income in this category increased $318,000 (44.5%) in
1996 and $108,000 (17.8%) in 1995. In 1996, the Company added several new,
high volume customers to its merchant services program and additionally
adjusted rates on its existing customer base which resulted in the increase in
1996 merchant services income. The increase in 1995 was due to volume
increases and rate adjustments during the year.
Building rent income increased $61,000 (27.4%) in 1996 due to the Company's May
1996 acquisition of an additional rental property. Building rent income
decreased $17,000 (7.1%) in 1995 due to the Company's assumption in August 1995
of additional office space previously leased to outside tenants.
ATM service charges are the fees received from other institutions resulting
from their customers' usage of the Company's automated teller machines. ATM
service charges decreased $10,000 in 1996 and 1995 due to reduced usage of the
Company's machines in each year.
The Company incurred no gains or losses from investment security sales in 1996
or 1995. The Company sold one available-for-sale investment security during
1994 at a loss of $10,000 in order to deploy the proceeds from the sale in
alternative investments yielding a higher return.
Other income increased $210,000 (60.7%) in 1996 and $28,000 (8.8%) in 1995.
The full year inclusion of Waterford's results accounted for approximately
$61,000 of the Company's 1996 increase in other income. The remainder was
mainly due to volume increases in investment services commissions ($56,000),
sales of secondary market mortgages on a service released basis ($53,000), the
recognition of accumulated dividends on corporate owned life insurance
($31,000), and gains from other real estate sales ($18,000). The 1995 increase
in other income was mainly the result of the Company's entry into the
origination and sale of secondary market mortgages on a service released basis
and increased investment services commissions.
-9-
<PAGE> 11
STATE FINANCIAL SERVICES CORPORATION
OTHER EXPENSE
Other expense increased $1,052,000 (11.1%) for the year ended December 31, 1996
and $504,000 (5.6%) for the year ended December 31, 1995. The full year
inclusion of Waterford's results accounted for approximately $638,000 of the
1996 increase in other expense. In 1995, the inclusion of Waterford's results
from the acquisition date accounted for approximately $422,000 of the other
expense increase. The major components of other expense are detailed in the
table at right (dollars in thousands).
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 4,450 $4,101 $3,633
Occupancy and equipment 2,059 1,805 1,715
Data Processing 653 544 609
Legal and professional 287 327 289
Merchant services 871 620 519
Regulatory agency assessments 102 229 443
Advertising 305 161 202
Other 1,785 1,673 1,546
-------------------------------------------------------------------
Total other expense $10,512 $9,460 $8,956
===================================================================
</TABLE>
Salaries and employee benefits increased $349,000 (8.5%) in 1996. The full
year inclusion of Waterford in the Company's 1996 results accounted for
$241,000 of this increase. Exclusive of Waterford, salaries and employee
benefits increased $108,000 (2.6%) primarily due to salary adjustments during
the year and increases in the amounts awarded as management incentives. In
1995, salaries and employee benefits increased $468,000 (12.9%). Of this
increase, $128,000 relates to the inclusion of Waterford's results in 1995.
Absent Waterford, salaries and employee benefits increased $340,000 (9.4%) in
1995 due to normal salary adjustments, a greater number of employees eligible
for pension benefits, increased medical insurance premiums, and increases in
the amounts awarded as management incentives.
Occupancy and equipment expense increased $254,000 (14.1%) in 1996. Of this
increase, $68,000 was due to the full year inclusion of Waterford's results in
1996. Exclusive of Waterford, occupancy and equipment expense increased
$186,000 (10.3%) mainly due to additional expense for depreciation and rent,
offset by reduced real estate tax expense during 1996. Depreciation expense
increased $175,000 due to the Company's 1996 installation of upgraded computer
equipment and a voice response unit offering customers 24 hour access to
account information and from the May 1996 purchase of an additional rental
property. Rent expense increased $38,000 due to adjustments in the amount of
rent expense accrued on the Company's Glendale location. Real estate taxes
decreased $27,000 due to Wisconsin's property tax reform in 1996 which resulted
in reduced assessments on the Company's real estate properties. In 1995
occupancy and equipment expense increased $90,000 (5.2%). The Waterford
acquisition added $126,000 in occupancy and equipment expense. The resultant
decline of $36,000 in comparable occupancy and equipment expense was due to
reduced costs for personal property tax, utilities, and equipment repairs in
1995.
Data processing expense increased $109,000 (20.0%) in 1996 and decreased
$65,000 (10.7%) in 1995. In April 1996, Waterford converted its former
in-house data processing system to the Company's data services provider to
enhance the bank's data processing capabilities. The Company's increased data
processing expense incurred in 1996 was primarily due to Waterford's additional
expense related to outsourcing this service. The decline in 1995 data
processing expense resulted from the Company's renegotiation of its contract
with its service provider in midyear 1994.
Legal and professional fees decreased $40,000 (12.2%) in 1996 as the Company
benefitted from the reimbursement of legal fees incurred in the collection of
several nonperforming loans and lower expense incurred for accounting services
during the year. In 1995, legal and professional fees increased $38,000
(13.1%) mainly due to inclusion of Waterford's results post acquisition.
Merchant services expense results from providing the Company's business
customers the ability to accept credit cards in payment for goods and services.
The $251,000 (40.5%) increase in 1996 and the $101,000 (19.5%) increase in
1995 was the result of growth in the Company's customer base in this product
line and rate adjustments enacted by the Company's service provider during each
year. These increases are consistent with the increases in merchant services
income included in other income in 1996 and 1995.
Regulatory agency assessments represent the premiums paid for FDIC insurance of
the Company's deposits. Effective June 1995, the FDIC reduced its assessment
rate for deposit insurance resulting in reduced expense of $127,000 in 1996 and
$214,000 in 1995. The reduction in the Company's 1996 regulatory agency
assessment would have been greater but for a special FDIC insurance assessment
in third quarter 1996 to recapitalize the Savings Association Insurance Fund
("SAIF"). The Company was subject to this assessment by virtue of its 1993
acquisition of its Waukesha office, the deposits of which being insured under
the SAIF. The Company's portion of the special assessment was $58,500.
Advertising expense increased $144,000 (89.4%) in 1996 due to the additional
marketing expense associated with Waterford and increased media advertising at
State Financial Bank, mainly to promote home equity lines of credit and
certificates of deposit. For the year ended December 31, 1995, advertising
expense decreased $41,000 (20.3%) due to the Company's reduced reliance on
external media advertising during the year.
Other expense increased $112,000 in 1996. However, exclusive of the full year
inclusion of Waterford's expense in 1996's results, other expense decreased
$20,000 due to lower office supply costs during the year. In 1995, other
expense increased $127,000 all of which was mainly due to the inclusion of
Waterford's expense in the Company's consolidated results.
-10-
<PAGE> 12
MANAGEMENT'S DISCUSSION
INCOME TAX
The Company's consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities and loans. The
Company recorded provisions for income tax of $2,003,000, $1,579,000, and
$1,010,000, in 1996, 1995, and 1994, respectively. Income tax expense
increased $424,000 in 1996 due to a $1,150,000 increase in the Company's income
before income tax resulting in an effective tax rate of 33.3% for the year ended
December 31, 1996 compared to 32.5% for the year ended December 31, 1995. The
Company's increased effective tax rate was primarily due to a proportionately
lower percentage of pretax income derived from tax-exempt sources in 1996 versus
1995. The $569,000 increase in income tax expense in 1995 was due to a
$1,042,000 increase in the Company's income before income tax and the fact that
the Company did not realize the level of tax loss carry forward benefit in 1995
as it did in 1994. In 1995, the Company realized approximately $38,000 of tax
loss carry forward benefis to offset current tax expense compared to
approximately $170,000 in 1994. Exclusive of these benefits, the Company's
effective tax rate was 33.3% in 1995 compared to 30.9% in 1994.
NET INCOME AND DIVIDENDS
For the years ended December 31, 1996, 1995, and 1994, the Company reported net
income of $4,006,000, $3,279,000, and $2,807,000, respectively. The
improvements in the Company's net income in 1996 represent an improvement in the
overall operating results of the Company as measured by the return on average
assets and return on average equity. In 1996, the Company reported a return on
average assets of 1.39% compared to 1.33% in 1995. Return on average equity for
1996 was 11.78% compared to 11.22% in 1995. For the years ended December 31,
1996, 1995, and 1994, the Company paid aggregate dividends of $1,260,000,
$967,000, and $818,000. In 1996, dividends increased primarily due to a $0.07
increase in the annual dividend rate per share and the full year impact of the
additional outstanding shares issued in the Waterford acquisition. Dividends
increased in 1995 due to a $0.04 per share increase in the dividend rate and a
greater number of average shares outstanding in 1995 compared to 1994 due to the
additional shares issued in the Waterford acquisition.
[BAR GRAPH]
RETURN ON ASSETS
1994 1995 1996
1.27% 1.33% 1.39%
[BAR GRAPH]
RETURN ON EQUITY
1994 1995 1996
11.02% 11.22% 11.78%
[BAR GRAPH]
EARNINGS & DIVIDENDS PER SHARE
1992 1993 1994 1995 1996
DIVIDENDS $0.23 $0.28 $0.29 $0.33 $0.40
EPS $1.09 $0.88 $1.00 $1.13 $1.28
-11-
<PAGE> 13
STATE FINANCIAL SERVICES CORPORATION
BALANCE SHEET ANALYSIS
The composition of assets and liabilities are generally the result of strategic
management decisions influenced by market forces. At December 31, 1996 and
1995, the Company reported total assets of $301,222,000 and $285,037,000
respectively. The $16,185,000 (5.9%) increase in total assets between 1996 and
1995 was all due to internal growth at State Financial Bank and State Financial
Bank - Waterford over the preceding twelve months. Of the $59,862,000 increase
in total assets between 1995 and 1994, $40,500,000 was due to the Waterford
acquisition with the remainder due to internal growth at State Financial Bank
throughout the year and growth at Waterford since the acquisition date.
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 79.2% at
December 31, 1996 compared to 75.4% at December 31, 1995. The following table
shows the Company's loan portfolio composition on the dates indicated (dollars
in thousands).
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 44,088 $ 46,323 $ 39,231 $ 39,375 $ 37,438
Real Estate 114,395 105,139 75,909 62,896 54,979
Installment 30,046 21,997 19,157 17,055 16,730
Other 13,142 12,295 11,516 10,928 10,783
-------------------------------------------------------------
Total Loans $201,671 $185,754 $145,813 $130,254 $119,930
-------------------------------------------------------------
</TABLE>
Total loans outstanding at the end of 1996 increased $15,917,000 (8.6%) due to
continued strong loan demand at the Banks during the year. Real estate loans
continue to represent the largest category of the Company's loan portfolio. In
1996, real estate loans increased $9,256,000 (8.8%) and comprised 56.7% of the
Company's gross loan portfolio at December 31, 1996 compared to 56.6% at
December 31, 1995. Approximately 66.6% of the 1996 real estate loan growth
was in loans secured by commercial real estate due to strong loan demand during
1996. The Company's commercial real estate loans are 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. 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 lending. Loans secured by commercial
property are generally larger 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 or
businesses. As a result, properties securing such loans are likely to be
subject to the local real estate market and general economic conditions. 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.
[BAR GRAPH]
LOAN PORTFOLIO COMPOSITION
<TABLE>
1994 1995 1996
<S> <C> <C> <C>
MORTGAGE 75,909 105,139 114,395
COMMERCIAL 39,231 46,323 44,088
INSTALLMENT 19,157 21,997 30,046
OTHER 11,516 12,295 13,142
</TABLE>
The remaining real estate loan increase at State Financial Bank was the result
of increases in residential real estate from both first mortgage loans written
on balloon notes (generally up to three year maturities with amortization
periods up to twenty-five years) and additional balances outstanding on home
equity credit lines due to continued marketing emphasis in these product lines.
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, 1996.
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Commercial real estate 39.77
1-4 family first liens on residential real estate 35.88
Multifamily residential 9.80
1-4 family junior liens on residential real estate
(including home equity lines of credit) 10.97
Construction, land development, and farmland 3.58
- ----------------------------------------------------------------------
</TABLE>
<PAGE> 14
MANAGEMENT'S DISCUSSION
Commercial loans decreased $2,235,000 (4.8%) due to intense pricing competition
for this type of loan in the Company's market area. At December 31, 1996,
commercial loans comprised 21.9% of the Company's total loan portfolio compared
to 24.9% at December 31, 1995. Commercial loans are also 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 $8,049,000 (36.6%) mainly due to further increases
of indirect auto loans resulting from increased volume and the addition of three
local dealerships to the Company's loan referral network. The Company's indirect
auto loan underwriting continues to emphasize the purchase of the highest
quality loan contracts to minimize risk of loss in this lending activity. At
December 31, 1996, installment loans comprised 14.9% of the Company's loan
portfolio versus 11.8% at December 31, 1995.
Other loans increased $847,000 (6.9%) primarily due to increases in municipal
loans outstanding at State Financial Bank.
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, 1996 (dollars in thousands). Also
provided are the amounts due after one year classified according to the
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $25,534 $16,721 $2,344 $ 44,649
Real estate 24,142 37,955 1,390 63,487
- -------------------------------------------------------------------------------
$49,676 $54,726 $3,734 $108,136
===============================================================================
Loans maturing after one year with:
Fixed interest rates $45,549 $1,521
Variable interest rates 9,177 3,213
- -------------------------------------------------------------------------------
$54,726 $3,734
===============================================================================
</TABLE>
RISK ELEMENTS IN THE LOAN PORTFOLIO
Certain risks are inherent in the lending function. These risks include 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 future loan losses. The Allowance is
increased by provisions charged to earnings, and is reduced by charge-offs, net
of recoveries. At December 31, 1996, the Allowance was $2,608,000, a decrease
of $103,000 from the balance at December 31, 1995 as the amount of net
charge-offs exceeded loan loss provisions charged to earnings during the year.
The determination of Allowance adequacy is based upon a quarterly evaluation
of the Company's loan portfolio by the internal loan review officer and
management. These evaluations consider a variety of factors, including, but
not limited to, general economic conditions, loan portfolio size and
composition, previous loss experience, the borrower's financial condition,
collateral adequacy, the level of non-performing loans, and management's
estimation of future losses. As a percentage of total loans, the allowance was
1.3% at the end of 1996 compared to 1.5% at the end of 1995. Based on its
analyses, management considers the Allowance adequate to recognize the risk
inherent in the consolidated loan portfolio at December 31, 1996.
-13-
<PAGE> 15
STATE FINANCIAL SERVICES CORPORATION
The balance of the Allowance and actual loan loss experience for the last five
years is summarized in the following table (dollars in thousands).
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,711 $1,983 $2,084 $2,051 $1,990
Charge-offs:
Commercial 122 70 115 102 209
Real estate 100 82 59 32 108
Installment 46 82 68 30 78
Other 117 75 38 65 124
- -------------------------------------------------------------------------------------
Total charge-offs 385 309 280 229 519
- -------------------------------------------------------------------------------------
Recoveries:
Commercial 19 58 18 31 59
Real estate 2 12 0 36 24
Installment 26 34 24 29 53
Other 25 9 17 19 9
- -------------------------------------------------------------------------------------
Total recoveries 72 113 59 115 145
- -------------------------------------------------------------------------------------
Net charge-offs 313 196 221 114 374
Balance of acquired allowance at
date of acquisition 0 734 0 0 302
Additions charged to operations 210 190 120 147 133
- -------------------------------------------------------------------------------------
Balance at end of period $2,608 $2,711 $1,983 $2,084 $2,051
=====================================================================================
Ratios:
Net charge-offs to average loans outstanding 0.16% 0.12% 0.16% 0.09% 0.32%
Net charge-offs to total allowance 12.00 7.23 11.14 5.47 18.24
Allowance to year end loans outstanding 1.29 1.46 1.36 1.60 1.71
=====================================================================================
</TABLE>
[BAR GRAPH]
NON-PERFORMING ASSETS TO TOTAL ASSETS
1992 1993 1994 1995 1996
1.14% 0.95% 0.68% 0.65% 0.91%
[BAR GRAPH]
NET CHARGE-OFFS TO AVERAGE LOANS OUTSTANDING
1992 1993 1994 1995 1996
0.32% 0.09% 0.16% 0.12% 0.16%
[BAR GRAPH]
ALLOWANCE TO YEAR END LOANS OUTSTANDING
1992 1993 1994 1995 1996
1.71% 1.60% 1.36% 1.46% 1.29%
-14-
<PAGE> 16
MANAGEMENT'S DISCUSSION
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 previously credited to income in
the current year is reversed and interest income accrued in the prior year is
charged to the Allowance. With the exception of credit cards, the Company 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).
<TABLE>
<CAPTION>
Years ended December 31,
- ---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 2,363 $ 1,386 $ 1,311 $2,100 $ 1,818
Accruing loans past due 90 days or more 38 2 5 31 15
Restructured loans 0 0 0 0 0
- ---------------------------------------------------------------------------------------------
Total non-performing and restructured loans 2,401 1,388 1,316 2,131 1,833
- ---------------------------------------------------------------------------------------------
Other real estate owned 345 460 219 28 481
- ---------------------------------------------------------------------------------------------
Total non-performing assets $ 2,746 $ 1,848 $ 1,535 $2,159 $ 2,314
=============================================================================================
Ratios:
Non-performing loans to total loans 1.19% 0.75% 0.90% 1.64% 1.53%
Allowance to non-performing loans 108.62 195.32 150.68 97.79 111.89
Non-performing assets to total assets 0.91 0.65 0.68 0.95 1.14
Interest income that would have been recorded
under original terms $ 241 $ 207 $ 229 $ 244 $ 173
Interest income recorded during the period 116 100 89 182 203
- ---------------------------------------------------------------------------------------------
</TABLE>
Effective January 1, 1995, the Company adopted Financial Accounting Standards
Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan"
("Statement No. 114"). Under the new standard, the 1996 and 1995 allowance for
loan losses related to loans that are identified for evaluation in accordance
with Statement No. 114 is primarily based on the fair value of the collateral
for certain collateral dependent loans. For certain noncollateral dependent
loans, the Allowance is established based on the expected cash flows discounted
at the loan's initial effective interest rate. Prior to 1995, the allowance
for loan losses related to these loans was based on undiscounted cash flows or
the fair value of the collateral for collateral dependent loans. At December
31, 1996, the Company identified approximately $2,218,000 in loans which are
considered impaired. These loans are included as part of the nonaccrual loans
set forth in the table above and represent 1.1% of the Company's gross loan
portfolio. Based upon the analysis 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 adequately funded to provide
for the inherent risk associated with these loans.
At December 31, 1996, there were no loans to borrowers where available
information would indicate that such loans were likely to later be included as
nonaccrual, impaired (as defined in SFAS No. 114), past due, or restructured.
INVESTMENT ACTIVITIES
Investment securities comprise the second largest component of the Company's
earning assets. In 1994, the Company adopted FASB 115, "Accounting for
Certain Investments in Debt and Equity Securities." In conformity with FASB
115, debt securities that the Company has both the positive intent and ability
to hold to maturity are carried at amortized cost. Debt securities that the
Company does not have either the positive intent and/or the ability to hold to
maturity and all marketable equity securities must be classified as
available-for-sale or trading 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. See note 4 to the Consolidated Financial Statements for
more information.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $34,018 $27,389 $22,950
Obligations of states and
political subdivision 15,015 16,337 14,575
Mortgage-related securities 16,753 17,281 20,015
Other securities 3,197 2,250 1,001
----------------------------------------------------------------------
TOTAL $69,983 $63,257 $58,541
======================================================================
</TABLE>
Total investment securities outstanding at December 31, 1996 increased
$5,726,000 as the Company invested cash and cash equivalents in longer term
investment securities to enhance the overall yield on interest-earning assets.
The table on the left 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).
-15-
<PAGE> 17
STATE FINANCIAL SERVICES CORPORATION
[BAR GRAPH]
INVESTMENT PORTFOLIO COMPOSITION
<TABLE>
1994 1995 1996
<S> <C> <C> <C>
US Treasuries & Agencies 22,950 27,389 34,018
Mortgage Backed 20,015 17,281 16,753
Municipal 14,575 16,337 15,015
Other 1,001 2,250 3,197
</TABLE>
The composition of the Company's investment securities has been influenced by
the general market conditions prevalent during 1996. U.S. Treasury securities
and obligations of U.S. government agencies increased $6,629,000 in 1996. At
December 31, 1996, U.S. Treasury securities and obligations of U.S. Government
agencies comprise 49.3% of the Company's investment portfolio compared to 43.3%
at December 31, 1995.
During 1996, balances in mortgage-related securities decreased $528,000 due to
principal pay downs received during the year exceeding dollars reinvested in
this investment category. 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 traunches of the respective CMO's. 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,
1996, the remaining average life of the Company's mortgage-related securities
was approximately two 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,
1996, mortgage-related securities accounted for 24.3% of the Company's
investment portfolio compared to 27.3% at December 31, 1995.
Obligations of states and political subdivisions decreased $1,322,000 at
December 31, 1996 compared to December 31, 1995 due to net maturities in the
Company's portfolio and the use of these net proceeds to fund loan growth. At
December 31, 1996, obligations of states and political subdivisions accounted
for 21.8% of the Company's investment portfolio compared to 25.8% at December
31, 1995.
The maturities and weighted-average yield of the Company's investment
securities at December 31, 1996 are presented in the following table (dollars
in thousands). Taxable-equivalent adjustments (using a 34% rate) have been
made in calculating the yields on obligations of states and political
subdivisions.
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies $ 7,925 6.03% $24,118 6.35% $1,975 6.66% $ 0 0.00
Obligations of states and
political subdivisions 4,101 6.76 7,140 7.10 1,641 8.21 2,133 9.00
Mortgage-related securities 8,228 5.24 8,525 6.85 0 0.00 0 0.00
Other securities 2,597 4.49 0 0 600 6.61 0 0.00
- -----------------------------------------------------------------------------------------
TOTAL $22,851 5.70 $39,783 6.59 $4,216 7.25 $2,133 9.00
- -----------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, the Company had $239,000 in net unrealized gains on its
held-to-maturity securities and $95,000 in net unrealized gains on its
available-for-sale securities. 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 portfolios exposed to material adverse
impact to future operating performance resulting from market interest rate
fluctuations.
<PAGE> 18
MANAGEMENT'S DISCUSSION
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, 1996, total average deposits increased $35,088,000
(16.6%). Approximately $21,083,000 of this increase was due to the full year
inclusion of Waterford's average deposits in 1996. The remaining average
deposit increase of $14,005,000 (6.6%) was due to average deposit growth at the
Banks during 1996.
The following table sets forth the average amount of and the average rate paid
by the Company on deposits by deposit category
(dollars in thousands).
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 48,469 0.00 $ 43,555 0.00 $ 40,852 0.00
NOW and money market deposits 85,030 3.72 66,520 3.85 52,963 2.46
Savings 42,043 2.78 42,790 2.77 51,871 2.53
Time deposits 70,733 5.70 58,322 5.63 48,509 4.40
- -------------------------------------------------------------------------------------------------------
TOTAL $246,275 3.39 $211,187 3.33 $194,195 2.45
=======================================================================================================
</TABLE>
The largest categorical growth in the Company's deposits continues in NOW and
money market deposits. For the year ended December 31, 1996, average NOW and
money market deposits increased $18,510,000 (27.8%). Approximately $5,479,000
of this increase was due to the full year inclusion of Waterford's deposits in
1996. The remaining increase of $13,031,000 (19.6%) was mainly due to
increases in money market balances related to the continued popularity of the
Company's Money Market Index Account introduced at State Financial Bank in
October 1994 and at State Financial Bank - Waterford in September 1995. At
December 31, 1996, average NOW and money market balances are the Company's
largest deposit category, representing 34.5% of average total deposits compared
to 31.5% at December 31, 1995.
[BAR GRAPH]
<TABLE>
1994 1995 1996
<S> <C> <C> <C>
NOW & MONEY MARKET 52,963 66,520 85,030
TIME 48,509 58,322 70,733
DEMAND 40,852 43,555 48,469
SAVINGS 51,871 42,790 42,043
</TABLE>
Average time deposit balances increased $12,411,000 (21.3%) for the year ended
December 31, 1996 compared to the year ended December 31, 1995. The full year
inclusion of Waterford accounted for approximately $8,344,000 of the Company's
1996 average time deposit growth. The remaining growth of $4,067,000 (7.0%)
in average time deposits was due to internal growth at State Financial Bank.
The general increase in market interest rates offered on time deposit products
in midyear 1995 and the Company's aggressive marketing effort in this product
line during 1995 and 1996 resulted in the attraction of additional time
deposits. The combination of these factors resulted in the average time
deposit growth during 1996. At December 31, 1996, average time deposits
represent 28.7% of average total deposits compared to 27.6% at December 31,
1995.
For the year ended December 31, 1996, average non-interest bearing demand
deposits increased $4,914,000 (11.3%) in total and $2,809,000 (6.4%) exclusive
of the full year inclusion of Waterford's average. This increase was the
combined result of increased average balances from existing customers and
cultivation of additional business account relationships at the Banks during
the year. At December 31, 1996, non-interest bearing demand deposits represent
19.7% of the Company's average deposit portfolio compared to 20.6% at December
31, 1995.
During 1996, average savings balances decreased $747,000 (1.7%) in total and
$5,901,000 (13.8%) exclusive of the full year inclusion of Waterford's average
savings balances. Due to the general increase in market interest rates on
deposits in 1995 and 1996, depositors continued to transfer savings balances
into accounts yielding a higher return, primarily money market accounts and
time deposits. The Company believes the Money Market Index Account and the
competitive time deposit rates offered during 1995 and 1996 on special nine and
eighteen month term certificates of deposit were instrumental in retaining the
majority of the savings balance decline in other deposit categories with the
Company. Average savings balances represent 17.1% of average total deposits at
December 31, 1996 compared to 20.3% at December 31, 1995.
--------------------------------
3 months or less $4,136
Over 3 through 6 months 2,118
Over 6 through 12 months 1,198
Over 12 months 2,347
--------------------------------
TOTAL $9,799
--------------------------------
Maturities of time certificates of deposit and other time deposits with
balances in excess of $100,000 or more outstanding at December 31,1996 are
summarized in the table at the left (dollars in thousands).
Approximately 3.3% of the Company's total assets at December 31, 1996 are
supported by time deposits with balances in excess of $100,000 as compared to
3.4% at December 31, 1995. The Company's dependence on large balance time
deposits to fund its asset base has historically been approximately one third
to one half of the large liability funding depend-ence exhibited by its peer
group.
<PAGE> 19
STATE FINANCIAL SERVICES CORPORATION
Liquidity
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest-sensitive
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of depositors and borrowers.
The Company's primary funding sources are deposits, loan principal repayments,
and maturities of loans and investment securities. Contractual maturities and
amortization of loans and investments are a predictable funding source, whereas
deposit flows and loan prepayments are impacted by market interest rates,
economic conditions, and competition.
For the year ended December 31, 1996, the Company's financing activities
provided net cash of $12,001,000 mainly due to $8,439,000 of deposit growth
generated from the Banks' business development and marketing efforts and
$5,600,000 of proceeds from federal funds purchased. For the year ended
December 31, 1995, financing activities provided net cash of $22,060,000,
primarily from deposit growth of $15,772,000 due to increased marketing
efforts, the issuance of $3,202,000 in common stock and $1,062,000 in
installment notes to consummate the Waterford acquisition, and proceeds from
securities sold under repurchase agreements of $3,000,000 to accommodate local
municipalities.
The Company's primary investment activity is loan origination. For the years
ended December 31, 1996 and December 31, 1995, the Company generated
$16,230,000 and $14,969,000 in new loan originations, respectively. Funding
for 1996's loan growth came primarily from cash provided by financing
activities and contraction in cash and cash equivalents. Additionally, in 1996
contractions in cash and cash equivalents and cash provided by operating
activities was used to fund net investment securities purchases and the
acquisition of an additional rental property. For the year ended December 31,
1995, loan originations were funded by maturing investment securities and cash
provided by financing activities resulting from deposit growth. Additionally,
investing activities for the year ended December 31, 1995 included the net
effect of the Waterford acquisition ($4,271,000) financed by the issuance of
common stock and installment notes as previously discussed.
Cash and cash equivalents are generally the Company's most liquid assets. The
Company's level of operating, financing, and investing activities during a
given period impact the resultant level of cash and cash equivalents reported.
The Company had liquid assets of $21,281,000 and $28,518,000 as of December 31,
1996 and 1995, respectively. Liquid assets in excess of necessary cash
reserves are generally invested in short-term investments such as federal funds
sold and commercial paper.
Interest Rate Sensitivity
Interest rate risk is an inherent part of the banking business as financial
institutions gather deposits and borrow other funds to finance earning assets.
Interest rate risk results when repricing of rates paid on deposits and other
borrowing does not coincide with the repricing of interest-earning assets.
Interest rate sensitivity management seeks to avoid fluctuating net interest
margins and to enhance consistent growth of net interest income through periods
of changing interest rates. The following table shows the estimated maturity
and repricing structure of the Company's interest-earning assets and
interest-bearing liabilities for three different independent and cumulative
time intervals as of December 31, 1996 (dollars in millions). Nonmaturing
deposit categories, including savings, NOW, and money market deposits are
assumed to reprice along the following schedule - 10% within 0-30 days, 20%
within 31-90 days, and 30% within 91 days to one year. Assumptions regarding
prepayment and withdrawal rates are based upon industry experience and
management believes such assumptions to be reasonable. The table does not
necessarily indicate the impact general interest rate movements may have on the
Company's net interest income as the actual repricing experience of certain
assets and liabilities, such as loan prepayments and deposit withdrawals, is
beyond the Company's control. As a result, certain assets and liabilities may
reprice at intervals different from the maturities assumed in the table on the
left given the general movement in interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates.
At December 31, 1996, interest-sensitive assets and interest-sensitive
liabilities subject to repricing within one year, as a percentage of total
assets were 40.6% and 39.0%, respectively. Variable rate and maturing fixed
rate loans are the primary interest-sensitive assets repricing within one year.
On the funding side of the balance sheet, liabilities subject to repricing
within one year are fairly evenly distributed among all deposit categories.
The table at left demonstrates the Company is asset-sensitive at December 31,
1996, which would normally indicate that the Company's net interest margin
would improve if rates increased and deteriorate if interest rates decreased.
<TABLE>
<CAPTION>
Total
0-30 31-90 91-365 0-365
Days Days Days Days
--------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Loans
Fixed $ 9.6 $ 7.3 $ 35.7 $ 52.6
Variable 53.4 0.0 0.0 53.4
Investment 5.2 3.6 17.8 26.6
Federal funds 2.6 0.0 0.0 2.6
---------------------------------------------------------------
Total $70.8 $ 10.9 $ 53.5 $135.2
===============================================================
LIABILITIES
Savings & NOW deposits $ 6.2 $ 12.4 $ 18.6 $ 37.2
Time deposits 4.2 11.6 23.4 39.2
Money market deposits 6.8 13.7 20.5 41.0
Other interest-bearing
liabilities 0.8 1.6 2.4 4.8
---------------------------------------------------------------
Total $18.0 $ 39.3 $ 64.9 $122.2
===============================================================
Interest sensitivity gap $52.8 $(28.4) $(11.4) $ 13.0
Cumulative gap 52.8 24.4 13.0 13.0
Cumulative gap as a
percentage of total
earning assets 19.3% 8.9% 4.7% 4.7%
===============================================================
</TABLE>
-18-
<PAGE> 20
MANAGEMENT'S DISCUSSION
Capital Resources
Total shareholders' equity increased $3,146,000 in 1996, $6,212,000 in 1995,
and $1,413,000 in 1994. The increase in 1996 was mainly due to net earnings
retention, augmented by the tax effected improvement in net unrealized holding
gains on securities available-for-sale as of December 31, 1996. The 1995
increase was the result of the additional stock issued to complete the
Waterford acquisition, net earnings retention, and reductions in the tax
effected net unrealized holding losses on securities available-for-sale. The
increase in 1994 was mainly due to net earnings retention, reduced by the tax
effected net unrealized holding losses on securities available-for-sale as of
December 31, 1994. The following table illustrates historical internal growth
trends for the years indicated.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets 1.4% 1.3% 1.3%
Return on equity 11.8 11.2 11.0
Earnings retained 68.5 70.5 70.9
Dividend payout ratio 31.5 29.5 29.1
Average equity to average assets 11.8 11.8 11.5
Asset growth 5.7 26.6 (0.4)
==================================================================
</TABLE>
The Company is pursuing a policy of continued asset growth. In order to
maintain appropriate ratios of equity to total assets, a corresponding level of
capital growth must be achieved. Historically, capital growth has come
primarily from internal sources through increased earnings and a conservative
dividend policy. In addition, capital during 1995 increased as the result of
stock issued in the acquisition of Waterford. The Company's dividend policy
considers shareholders' desire for current income and the Company's need to
provide internal capital growth through earnings retention. The percentage of
1996 earnings paid out in the form of dividends increased as the Company
increased its quarterly dividend rate 20% in the first quarter of 1996. The
percentage of 1995 earnings paid out in the form of dividends remained
relatively consistent with 1994. Dividends paid by the Banks to the Company
are used primarily to fund shareholders' dividends and for additional working
capital.
There are certain regulatory constraints which affect the Company's capital
levels. See Note 12 and Note 15 to the consolidated financial statements for
additional explanation of these regulatory constraints.
Impact of Inflation and Changing Prices
The Company's Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of changes in the relative purchasing power of
money over time impacted by inflation. The impact of inflation is reflected in
the Company's other expense which tend to rise during periods of general
inflation. The majority of the Company's assets and liabilities are monetary
in nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Consequently, interest rates have a greater impact on the Company's performance
than do the general levels of inflation. Management believes the most
significant impact on the Company's financial results is its ability to react
to interest rate changes and endeavors to maintain an essentially balanced
position between interest sensitive assets and liabilities in order to protect
against wide fluctuations in the Company's net interest margin.
Pending Accounting Changes
Pending accounting changes for 1997 are set forth in detail as Note 1 to the
Notes to the Consolidated Financial Statements contained herein.
-19-
<PAGE> 21
STATE FINANCIAL SERVICES CORPORATION
REPORT OF MANAGEMENT
The management of State Financial Services Corporation is responsible for the
preparation and integrity of the Consolidated Financial Statements and other
financial information included in this Annual Report. The financial statements
have been prepared in accordance with generally accepted accounting principles
and include amounts that are based upon informed judgements and estimates by
management. The other financial information in this Annual Report is
consistent with the financial statements.
The Company maintains a system of internal accounting controls. Management
believes that the internal accounting controls provide reasonable assurance
that transactions are executed and recorded in accordance with Company policy
and procedures and that the accounting records may be relied on as a basis for
preparation of the financial statements and other financial information.
The Company's independent auditors were engaged to perform an audit of the
Consolidated Financial Statements, and the auditor's report expresses their
opinion as to the fair presentation of the consolidated financial statements in
conformity with generally accepted accounting principles.
The Audit Committee of the Board of Directors, comprised of directors who are
not employees of the Company, meets periodically with management, the internal
auditors, and the independent auditors to discuss the adequacy of the internal
accounting controls. Both the independent auditors and the internal auditors
have full and free access to the Audit Committee.
/s/ Michael J. Falbo
Michael J. Falbo
President and Chief Executive Officer
/s/ Michael A. Reindl
Michael A. Reindl
Senior Vice President, Controller, and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors and Shareholders
State Financial Services Corporation
We have audited the accompanying consolidated balance sheets of State Financial
Services Corporation and subsidiaries (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1996 and 1995, and the consolidated results of their operations
and cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
January 17, 1997
-20-
<PAGE> 22
FINANCIAL STATEMENTS
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 15,581,811 $ 16,107,613
Federal funds sold 2,599,107 6,540,309
Other short-term investments 3,100,000 5,870,000
------------- -------------
Cash and cash equivalents 21,280,918 28,517,922
Investment securities:
Held-to-maturity (fair value of $31,541,364--1996 and
$44,683,716--1995) 31,302,232 44,225,970
Available-for-sale (at fair value) 37,776,116 18,857,758
Loans (net of allowance for loan losses of $2,607,579--
1996 and $2,711,362--1995) 199,063,121 183,042,806
Premises and equipment 4,691,988 4,897,071
Accrued interest receivable 2,095,839 2,046,426
Other assets 5,011,683 3,449,248
------------- -------------
$ 301,221,897 $ 285,037,201
============= =============
Liabilities and shareholders' equity
Deposits:
Demand $ 55,109,370 $ 52,173,476
Savings 61,847,490 65,470,981
Money market 68,393,363 57,475,605
Time deposits in excess of $100,000 9,799,067 9,829,863
Other time deposits 59,507,256 61,267,908
------------- -------------
Total deposits 254,656,546 246,217,833
Notes payable 961,844 1,061,844
Securities sold under agreement to repurchase 2,400,160 3,300,160
Federal funds purchased 5,600,000 -
Accrued expenses and other liabilities 1,082,479 875,689
Accrued interest payable 994,324 1,200,652
------------- -------------
Total liabilities 265,695,353 252,656,178
Shareholders' equity:
Preferred stock, $1 par value; authorized--100,000 shares;
issued and outstanding--none
Common stock, $.10 par value; authorized--10,000,000
shares; issued and outstanding--3,198,253 shares in
1996 and 2,649,119 shares in 1995 319,825 264,912
Additional paid-in capital 28,687,633 28,568,137
Retained earnings 6,932,623 4,187,224
Net unrealized holding gain (loss) on securities available-for-sale 62,728 (114,357)
Guaranteed ESOP obligation (476,265) (524,893)
------------- -------------
Total shareholders' equity 35,526,544 32,381,023
------------- -------------
$ 301,221,897 $ 285,037,201
============= =============
</TABLE>
See accompanying notes
-21-
<PAGE> 23
STATE FINANCIAL SERVICES CORPORATION
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $18,146,633 $15,833,190 $12,086,365
Investment securities:
Taxable 3,271,152 2,526,579 2,125,903
Tax-exempt 758,689 689,423 789,312
Federal funds sold 246,412 314,111 226,224
----------- ----------- -----------
Total interest income 22,422,886 19,363,303 15,227,804
Interest expense:
Deposits 8,359,780 7,029,954 4,750,979
Notes payable and other borrowings 392,332 306,188 21,702
----------- ----------- -----------
Total interest expense 8,752,112 7,336,142 4,772,681
----------- ----------- -----------
Net interest income 13,670,774 12,027,161 10,455,123
Provision for loan losses 210,000 190,000 120,000
----------- ----------- -----------
Net interest income after provision for loan losses 13,460,774 11,837,161 10,335,123
Other income:
Service charges on deposit accounts 991,708 992,218 1,067,748
ATM service charges 195,414 204,694 214,920
Merchant services 1,032,587 715,137 607,545
Building rent 284,456 222,567 239,600
Investment securities losses, net - - (10,290)
Other 555,503 346,305 318,483
----------- ----------- -----------
3,059,668 2,480,921 2,438,006
Other expenses:
Salaries and employee benefits 4,450,391 4,100,998 3,633,297
Net occupancy expense 816,368 770,545 782,805
Equipment rentals, depreciation and maintenance 1,242,855 1,034,867 932,452
Data processing 653,244 544,499 609,349
Legal and professional 287,209 326,555 289,357
ATM fees 202,534 193,546 210,465
Merchant services 871,237 619,952 519,063
Regulatory agency assessments 101,725 228,768 442,884
Postage and courier 234,990 220,020 186,937
Office supplies 178,415 193,479 222,179
Advertising 305,195 160,546 202,095
Other 1,167,608 1,065,880 925,297
----------- ----------- -----------
10,511,771 9,459,655 8,956,180
----------- ----------- -----------
Income before income taxes 6,008,671 4,858,427 3,816,949
Income taxes 2,003,000 1,579,000 1,010,000
----------- ----------- -----------
Net income $ 4,005,671 $ 3,279,427 $ 2,806,949
=========== =========== ===========
Net income per common and common equivalent share$ $ 1.28 $ 1.13 $ 1.00
=========== =========== ===========
</TABLE>
See accompanying notes
-22-
<PAGE> 24
FINANCIAL STATEMENTS
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Shareholders' Equity
<TABLE>
<CAPTION>
Unrealized
Holding
Gain (Loss) Guaranteed
Common Paid-in Retained on ESOP
Stock Capital Earnings Securities Obligation Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $197,755 $17,946,330 $ 7,226,099 $ - $ (614,507) $24,755,677
Net income - - 2,806,949 - - 2,806,949
Issuance of 8,130 shares
under the 1990 Stock Plans 813 84,197 - - - 85,010
Cash dividends - - (817,506) - (817,506)
Investments fair value
adjustment - net of tax
effect of $363,872 - - - (708,361) - (708,361)
Reduction of guaranteed
ESOP obligation - - - - 47,125 47,125
-------- ----------- ----------- -------- ---------- -----------
Balances at December 31, 1994 198,568 18,030,527 9,215,542 (708,361) (567,382) 26,168,894
Net income - - 3,279,427 - - 3,279,427
Issuance of 214,871 shares
in acquisition 1,487 3,180,741 - - - 3,202,228
Issuance of 7,258 shares
under the 1990 Stock Plans 726 63,645 - - - 64,371
Cancellation of 208 shares
under the 1990 Stock Plans (21) (2,891) - - - (2,912)
Cash dividends - - (967,478) - - (967,478)
Change in fair value of
investments - net of tax
effect of $304,960 - - - 594,004 - 594,004
Reduction of guaranteed
ESOP obligation - - - - 42,489 42,489
Issuance of 441,520 shares
for 20% stock dividend 44,152 7,296,115 (7,340,267) - - -
-------- ----------- ----------- -------- ---------- -----------
Balances at December 31, 1995 264,912 28,568,137 4,187,224 (114,357) (524,893) 32,381,023
Net income $ - $ - $ 4,005,671 $ - $ - $ 4,005,671
Issuance of 16,262 shares
under the 1990 stock plans 1,609 172,800 - - - 174,409
Cash dividends - - (1,260,272) - - (1,260,272)
Change in fair value of
investments, net of tax effect
of $91,255 - - - 177,085 - 177,085
Reduction of guaranteed ESOP
obligation - - - - 48,628 48,628
Six-for-five stock split 53,304 (53,304) - - - -
-------- ----------- ----------- -------- ---------- -----------
Balances at December 31, 1996 $319,825 $28,687,633 $ 6,932,623 $ 62,728 $ (476,265) $35,526,544
======== =========== =========== ======== ========== ===========
</TABLE>
See accompanying notes
-23-
<PAGE> 25
STATE FINANCIAL SERVICES CORPORATION
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 4,005,671 $ 3,279,427 $ 2,806,949
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 210,000 190,000 120,000
Provision for depreciation 891,847 594,884 616,576
Amortization of investment securities
premiums and accretion of discounts, net 163,558 100,748 165,908
Amortization of goodwill 155,765 64,148 29,711
Deferred income tax provision (80,000) (108,000) (92,000)
Amortization of branch acquisition premium 29,665 29,665 29,665
Increase in interest receivable (49,413) (371,613) (171,909)
Increase (decrease) in interest payable (206,328) 434,212 49,243
Realized investment securities losses - - 10,290
Other (1,552,301) (47,171) 13,184
------------- ------------ -------------
Net cash provided by operating activities 3,568,464 4,166,300 3,577,617
Investing activities
Proceeds from sales, maturity or principal
payments of held-to-maturity investment securities 14,417,000 17,302,800 12,412,091
Purchases of held-to-maturity investment securities (1,652,888) (17,023,829) (13,874,294)
Purchases of securities available-for-sale (28,578,265) (1,688,561) (9,078,694)
Maturities and sales of securities available-for-sale 9,924,286 7,118,938 12,460,795
Net increase in loans before business acquisitions (16,230,315 (14,968,956) (15,780,632)
Net purchases of premises and equipment (686,764) (372,144) (325,057)
Business acquisitions, net of cash and cash
equivalents acquired of $2,427,440:
Loans - (24,433,534) -
Investment securities held-to-maturity - (9,686,714) -
Investment securities available-for-sale - (839,402) -
Premises and equipment - (685,461) -
Goodwill - (1,446,346) -
Deposits - 33,044,661 -
Other, net - (226,958) -
------------- ------------ -------------
Net cash used by investing activities (22,806,946) (13,905,506) (14,185,791)
</TABLE>
See accompanying notes
-24-
<PAGE> 26
FINANCIAL STATEMENTS AND NOTES
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows (continued)
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Financing activities
Net increase (decrease) in deposits before
business acquisitions $ 8,438,713 $ 15,772,008 $ (2,367,243)
Repayment of notes payable (100,000) (115,364) (112,515)
Proceeds of notes payable - 1,061,844 -
Net decrease in guaranteed ESOP obligation 48,628 42,489 47,125
Net change in securities sold under
agreements to repurchase (900,000) 3,000,160 300,000
Cash dividends (1,260,272) (967,478) (817,506)
Proceeds from federal funds purchased 5,600,000 - -
Issuance of common stock in acquisition - 3,202,228 -
Proceeds from exercise of stock options 174,409 64,371 76,610
------------- ------------- -------------
Net cash provided (used) by financing activities 12,001,478 22,060,258 (2,873,529)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (7,237,004) 12,321,052 (13,481,703)
Cash and cash equivalents at beginning of year 28,517,922 16,196,870 29,678,573
------------- ------------- -------------
Cash and cash equivalents at end of year $ 21,280,918 $ 28,517,922 $ 16,196,870
============= ============= =============
Supplementary information:
Interest paid $ 8,958,440 $ 6,901,930 $ 4,701,736
Income taxes paid 2,360,975 1,719,247 1,017,276
Non-cash transactions:
Investment securities transferred to
available-for-sale portfolio - - 27,059,267
Issuance of common stock under
1990 Stock Plans, net - (2,912) 8,400
</TABLE>
See accompanying notes
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
1. ACCOUNTING POLICIES
The accounting policies followed by State Financial Services Corporation (the
Company) and the methods of applying those principles which materially affect
the determination of its financial position, cash flows or results of
operations are summarized below.
ORGANIZATION
The Company and its wholly owned subsidiaries, State Financial Bank and State
Financial Bank - Waterford (acquired August 24, 1995) (collectively, the Banks)
provide a full range of financial services to customers through their branch
locations in Milwaukee, Waukesha and Racine counties in Wisconsin. The Banks
are subject to competition from other financial institutions and are also
subject to the regulations of certain federal and State of Wisconsin agencies
and undergo periodic examinations by those regulatory authorities.
CONSOLIDATION
The consolidated financial statements include the accounts of the parent
company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans.
<PAGE> 27
STATE FINANCIAL SERVICES CORPORATION
1. ACCOUNTING POLICIES (CONTINUED)
SHARE DATA
Share data and per share information has been restated for all periods to give
effect to the January 23, 1996 20% stock dividend and the January 28, 1997
six-for-five stock split.
INVESTMENT SECURITIES
As of January 1, 1994, the Company changed its method of accounting for
investments. Securities are classified as held-to-maturity, trading or
available-for-sale. As of January 1, 1994, management determines the
appropriate classification of securities at the time of purchase. The balance
of shareholders' equity as of January 1, 1994, was decreased by $33,518 (net of
$17,267 in deferred income taxes) to reflect the net unrealized holding losses
on securities classified as available-for-sale previously carried at amortized
cost or lower of cost or market.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are carried at amortized cost.
Debt securities that the Company does not have a positive intent and ability to
hold to maturity and equity securities are classified as available-for-sale and
are carried at estimated fair value, with unrealized gains and losses, net of
tax, reported as a separate component of equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-related securities, over the
estimated life of the security. Such amortization is calculated using the
level-yield method, adjusted for prepayments, and is included in interest
income from investments. Realized gains and losses, and declines in value
judged to be other than temporary are included in net securities gains and
losses. The cost of securities is based on the specific identification method.
INTEREST ON LOANS
Interest income on loans is accrued and credited to operations based on the
principal amount outstanding. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest
and/or when, in the opinion of management, full collection is unlikely. When
interest accruals are discontinued, unpaid interest credited to income in the
current year is reversed and interest accrued in the prior year is charged to
the allowance for loan losses. Management may elect to continue the accrual of
interest when the loan is in the process of collection and the fair value of
collateral is sufficient to cover the principal balance and accrued interest.
Interest received on nonaccrual loans is either applied against principal or
reported as interest income according to management's judgment regarding the
collectibility of principal. Generally, loans are restored to accrual status
when the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
LOAN FEES AND RELATED COSTS
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amounts are amortized as an adjustment of the related
loan's yield. The Company is generally amortizing these amounts using the
level-yield method over the contractual life of the related loans. Fees related
to stand-by letters of credit are recognized over the commitment period.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio; past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio; adverse situations that may
affect the borrower's ability to repay; the estimated value of any underlying
collateral and other relevant factors. The allowance is increased by provisions
charged to earnings and reduced by charge-offs, net of recoveries.
A substantial portion of the Banks' loans are to customers located in
Southeastern Wisconsin. Accordingly, the ultimate collectibility of a
substantial portion of the Banks' loan portfolio is susceptible to changes in
market conditions in that area.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation. The provision for depreciation is computed using both
accelerated and straight-line methods over the estimated useful lives of the
respective assets.
GOODWILL
Goodwill is amortized on a straight-line basis over 14 years.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average common and common
equivalent (if dilutive) shares outstanding. The weighted average number of
shares used was 3,141,368 in 1996, 2,897,555 in 1995 and 2,794,402 in 1994.
-26-
<PAGE> 28
FINANCIAL STATEMENTS AND NOTES
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income tax assets and liabilities are adjusted regularly to amounts estimated
to be receivable or payable based on current tax law and the Company's tax
status.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash and due
from banks and investment securities with maturities of three months or less at
the time of acquisition as cash and cash equivalents.
Pending Accounting Changes
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which is effective for
transfers occurring after December 31, 1996. This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on a consistent application of the
financial-components approach that focuses on control. The FASB subsequently
issued SFAS No. 127 in December 1996, which provided for the deferral of the
effective date of certain provisions of SFAS No. 125. Management believes that
the effect of adopting these statements will not be material to the Company's
financial condition or results of operations.
2. Acquisition of Waterford Bancshares, Inc.
On August 24, 1995, the Company completed its acquisition of Waterford
Bancshares, Inc. (Bancshares). Bancshares was the parent bank holding company
of Waterford Bank, Waterford, Wisconsin. In connection with the acquisition,
the Company issued 257,845 shares of its common stock with a value of
$3,322,000 (net of acquisitions costs to date totaling $120,000), $1,061,844 in
two-year installment notes, and $2,260,401 in cash in exchange for the
outstanding common stock of Bancshares. The acquisition was recorded using
purchase accounting.
On a pro forma basis, net income and net income per common and common
equivalent share for the year ended December 31, 1995 and 1994, after giving
effect to the Bancshares' acquisition as if it occurred on January 1, 1994, are
as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994
---------------------------
<S> <C> <C>
Total income $22,402,091 $20,498,537
Net income 3,354,652 2,660,428
Net income per common
and common equivalent share 1.08 .86
</TABLE>
3. Restrictions on Cash and Due From Bank Accounts
The Banks are required to maintain reserve balances with the Federal Reserve
Bank. The average amount of reserve balances for the year ended December 31,
1996, was approximately $1,895,000.
4. Investment Securities
The amortized cost and estimated fair values of investments in debt securities
follow:
<TABLE>
<CAPTION>
Held-to-Maturity Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996:
U.S. Treasury securities
and obligations of U.S.
government agencies $18,782,342 $168,205 $ (32,507) $18,918,040
Obligations of states and
political subdivisions 12,019,890 123,750 (19,386) 12,124,254
Other securities 500,000 5,270 (6,200) 499,070
-------------------------------------------------------------
$31,302,232 $297,225 $ (58,093) $31,541,364
=============================================================
December 31, 1996:
U.S. Treasury securities
and obligations of U.S.
government agencies $27,388,783 $436,277 $ (12,887) $27,812,173
Obligations of states and
political subdivisions 16,337,187 130,967 (51,251) 16,416,903
Other securities 500,000 5,750 (51,110) 454,640
-------------------------------------------------------------
$44,225,970 $572,994 $(115,248) $44,683,716
==============================================================
</TABLE>
-27-
<PAGE> 29
STATE FINANCIAL SERVICES CORPORATION
4. Investment Securities (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale
December 31, 1996:
U.S. Treasury securities
and obligations of U.S.
government agencies $15,235,544 $ 94,402 $ (22,992) $15,306,954
Obligations of state
and political subdivisions 2,995,581 23,714 (2,944) 3,016,351
Mortgage-backed
securities 16,752,765 47,756 (56,783) 16,743,738
Other securities 2,697,185 11,888 - 2,709,073
------------------------------------------------
$37,681,075 $177,760 $ (82,719) $37,776,116
================================================
December 31, 1995:
Mortgage-backed
securities $17,281,336 $ 2,771 $(176,040) $17,108,067
Other securities 1,749,691 - - 1,749,691
------------------------------------------------
$19,031,027 $ 2,771 $(176,040) $18,857,758
================================================
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers or issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Held-to-Maturity Amortized Cost Fair Value
---------------------------
<S> <C> <C>
Due in one year or less $ 9,944,475 $ 9,971,028
Due after one year through five years 18,696,368 18,815,702
Due after five years through ten years 1,261,495 1,291,435
Due after ten years 1,399,894 1,463,199
------------------------
$31,302,232 $31,541,364
========================
<CAPTION>
Estimated
Available-for-Sale Amortized Cost Fair Value
---------------------------
<S> <C> <C>
Due in one year or less $12,906,336 $12,875,989
Due after one year through five years 21,087,061 21,136,336
Due after five years through ten years 2,954,567 3,016,352
Due after ten years 733,111 747,439
------------------------
$37,681,075 $37,776,116
========================
</TABLE>
The Company's investments in mortgage-related securities have been allocated to
the various maturity categories based on expected maturities using current
prepayment estimates.
In 1996, there were no sales of investments. Proceeds from sales of investments
in debt and marketable equity available-for-sale securities during 1995 and
1994 were $829,805 and $4,475,035, respectively. No gain or loss was realized
on the 1995 sales. Gross losses of $10,290 and no gains were realized on the
1994 sales.
At December 31, 1996 and 1995, investment securities with a carrying value of
$12,912,811 and $12,164,239, respectively, were pledged as collateral to secure
public deposits and for other purposes.
5. Loans
A summary of loans outstanding at December 31, 1996 and 1995, follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------
<S> <C> <C>
Commercial $ 44,088,070 $ 46,322,568
Consumer 30,046,232 21,997,489
Real estate mortgage 114,464,755 105,139,120
Other 13,041,643 12,294,991
--------------------------------------
$201,670,700 $185,754,168
======================================
</TABLE>
-28-
<PAGE> 30
FINANCIAL STATEMENTS AND NOTES
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for three years ended December 31, 1996
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $2,711,362 $1,982,941 $2,084,467
Allowance from acquired bank - 734,577 -
Provision for loan losses 210,000 190,000 120,000
Charge-offs (384,802) (308,994) (280,856)
Recoveries 71,019 112,838 59,330
------------------------------------------------
Net charge-offs (313,783) (196,156) (221,526)
------------------------------------------------
Balance at end of year $2,607,579 $2,711,362 $1,982,941
================================================
</TABLE>
Total nonaccrual loans were $2,363,000 and $1,386,000 at December 31, 1996 and
1995, respectively.
7. LOANS TO RELATED PARTIES
In the ordinary course of business, loans are granted to related parties, which
include bank officers, principal shareholders, directors and entities in which
such persons are principal shareholders. Loans outstanding at December 31, 1996
and 1995 to such related parties were approximately $4,982,000 and $5,841,000,
respectively. During 1996, approximately $2,363,000 of new loans were made and
repayments totaled approximately $3,222,000. Loans to related parties were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated persons
and do not involve more than the normal risk of collectibility.
8. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1996 and 1995, is as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------
<S> <C> <C>
Buildings $ 4,320,075 $ 4,328,973
Furniture and equipment 5,050,246 4,483,867
Leasehold improvements 1,620,192 1,565,679
------------------------------
10,990,513 10,378,519
Less accumulated depreciation 7,168,150 6,351,073
------------------------------
3,822,363 4,027,446
Land 869,625 869,625
------------------------------
$ 4,691,988 $ 4,897,071
==============================
</TABLE>
9. NOTES PAYABLE
Notes payable at December 31, 1996 and 1995, consist of notes payable to
shareholders of the former Waterford Bancshares, due on September 19, 1997.
These notes were issued as part of the Company's acquisition of Waterford.
The Company has a $1,000,000 line of credit available through April 30, 1997,
at the prime rate (8.25% at December 31, 1996). As of December 31, 1996, no
amounts are outstanding on the line.
10. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory money purchase pension plan covering
substantially all employees who meet certain minimum age and service
requirements. Annual contributions are fixed based on compensation of
participants. The Company's contribution to the pension plan for each
participant is an amount equal to 4% of the participants' total eligible
compensation plus an additional 2% of the participants eligible compensation in
excess of $20,000. The Company's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes. Company
contributions are made annually at the discretion of the board of directors and
amounted to $130,698 in 1996, $112,493 in 1995 and $94,320 in 1994. Plan assets
are invested in a diversified portfolio of high quality debt and equity
investments.
In 1990, the Company formed an Employees' Stock Ownership Plan (ESOP) for the
benefit of employees meeting certain minimum age and service requirements.
Company contributions to the ESOP trust, which was established to fund the
plan, are made on a discretionary basis and are expensed to operations in the
year accrued ($70,157 in 1996, $69,957 in 1995 and $65,196 in 1994). The number
of shares released to participants is determined based on the annual
contribution amount plus any dividends paid on unallocated shares divided by
the market price of the stock at the contribution date. The activity in the
number of unearned ESOP shares follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------
<S> <C> <C> <C>
Balance at beginning of year 50,393 61,146 70,336
Shares committed to be released (7,931) (10,753) (9,190)
-----------------------
Balance at end of year 42,462 50,393 61,146
=======================
</TABLE>
At December 31, 1996, the fair value of unearned ESOP shares is $707,842.
The cost of the unearned ESOP shares has been shown as a reduction of
shareholders' equity.
-29-
<PAGE> 31
STATE FINANCIAL SERVICES CORPORATION
11. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
The subsidiaries provide for income taxes on a separate-return basis and remit
to the Company amounts determined to be currently payable or realize the
benefit they would be entitled to on such a basis. The Company and subsidiaries
file separate state income tax returns.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,763,000 $1,434,000 $1,024,000
State 320,000 253,000 78,000
------------------------------------------
2,083,000 1,687,000 1,102,000
==========================================
Deferred (credit):
Federal (42,000) (85,000) (74,000)
State (38,000) (23,000) (18,000)
------------------------------------------
(80,000) (108,000) (92,000)
------------------------------------------
$2,003,000 $1,579,000 $1,010,000
==========================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities of December 31, 1996 and
1995, are illustrated at right:
<TABLE>
<CAPTION>
1996 1995
----------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 680,000 $ 720,000
Federal net operating loss carryforward 212,000 245,000
State net operating loss carryforward 267,000 254,000
Unrealized loss on investment securities - 59,000
Accumulated depreciation 104,000 178,000
Other 427,000 189,000
----------------------
1,690,000 1,645,000
Valuation allowance for deferred tax assets (479,000) (499,000)
----------------------
Net deferred tax assets 1,211,000 1,146,000
Deferred tax liabilities:
Unrealized gain on investment securities 32,000 -
Net deferred tax liabilities - other 246,000 138,000
Purchase accounting adjustments 236,000 300,000
----------------------
Net deferred tax liabilities 514,000 438,000
----------------------
Net deferred tax assets $ 697,000 $ 708,000
======================
</TABLE>
The income tax expense differs from that computed at the federal statutory
corporate tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Income before income taxes $6,008,671 $4,858,497 $3,816,986
============================================
Income tax expense at the federal
statutory rate of 34% $2,042,948 $1,651,889 $1,297,775
Increase (decrease) resulting from:
Tax-exempt interest income (280,000) (263,000) (302,000)
State income taxes, net of federal
income tax benefit 196,000 164,000 111,000
Decrease in valuation allowance
for deferred tax assets (20,000) (22,000) (170,000)
Other 64,052 48,111 73,225
--------------------------------------------
$2,003,000 $1,579,000 $1,010,000
============================================
</TABLE>
At December 31, 1996, the Company had federal net operating loss carry-forwards
of approximately $624,000 and state net operating loss carryforwards of
approximately $5,123,000. These carryforwards which are subject to an annual
limitation of approximately $100,000 are available to reduce future tax expense
through the year ending December 31, 2009.
-30-
<PAGE> 32
FINANCIAL STATEMENTS AND NOTES
12. RESTRICTIONS ON SUBSIDIARIES' DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Company from its assets, which are mainly provided by
dividends from the Banks. However, certain restrictions exist regarding the
ability of the Banks to transfer funds to the Company in the form of cash
dividends, loans or advances. Approval of the regulatory authorities is
required to pay dividends in excess of certain levels of the Banks' retained
earnings.
As of December 31, 1996, the Banks had net retained earnings of $4,282,000,
which are available for distribution to the Company as dividends without prior
regulatory approval.
Under Federal Reserve Bank regulations, the Banks are limited as to the amount
they may loan to their affiliates, including the Company, unless such loans are
collateralized by specified obligations. At December 31, 1996, the maximum
amount available for transfer from the Banks to the Company in the form of
loans approximated 8% of the Banks' consolidated net worth.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Loan commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments on
behalf of customers when certain specified future events occur. Both
arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Company's normal credit
policies. Collateral is obtained based on management's credit assessment of the
customer.
The Company's maximum exposure to credit loss for loan commitments (unfunded
loans and unused lines of credit) and standby letters of credit outstanding at
December 31, 1996 were $32,536,000 and $990,000, respectively. All such
arrangements expire in 1997. Loan commitments and standby letters of credit
were $29,058,000 and $1,147,000, respectively, at December 31, 1995.
14. LEASES
The Company rents space for banking facilities under operating leases. Certain
leases include renewal options and provide for the payment of building
operating expenses and additional rentals based on adjustments due to
inflation. Rent expense under operating leases totaled approximately $421,000,
$382,000 and $416,000, in 1996, 1995 and 1994, respectively.
Future minimum payments under noncancellable operating leases with initial
terms of one year or more consisted of the following at December 31, 1996:
1997 $ 393,000
1998 342,000
1999 342,000
2000 351,000
2001 311,000
Thereafter 2,343,000
-----------
$ 4,082,000
===========
Minimum rentals for 1997 include $156,000 (1998 and 1999 include $106,000) per
year relative to space used by the Banks which is leased from a partnership,
two partners of which are also directors of the Company. Minimum payments have
not been reduced by minimum sublease payments of $38,025 due in the future
under non-cancellable subleases.
15. REGULATORY CAPITAL
The Company and subsidiary Banks are subject to various regulatory capital
requirements administered by state and federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company and subsidiary Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and subsidiary Banks must meet specific
capital guidelines that involve quantitative measures of the Company and
subsidiary Banks' assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company and subsidiary
Banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and subsidiary Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that the Company and subsidiary Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the State of
Wisconsin Department of Financial Institutions categorized the Company and
subsidiary Banks as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Company and
subsidiary Banks must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions' category.
-31-
<PAGE> 33
STATE FINANCIAL SERVICES CORPORATION
15. REGULATORY CAPITAL (CONTINUED)
The Company and subsidiary Banks' actual capital amounts and ratios are also
presented in the following table (dollars in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted
Assets):
Consolidated $36,170 17.5% $16,527 8.0% $20,659 10.0%
State Financial Bank 24,074 13.6% 14,155 8.0% 17,693 10.0%
State Financial Bank-
Waterford 3,949 16.4% 1,930 8.0% 2,412 10.0%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated 33,586 16.3% 8,264 4.0% 12,396 6.0%
State Financial Bank 22,032 12.5% 7,077 4.0% 10,616 6.0%
State Financial Bank-
Waterford 3,644 15.1% 965 4.0% 1,447 6.0%
Tier I Capital
(to Average Assets):
Consolidated 33,586 11.5% 11,731 4.0% 14,664 5.0%
State Financial Bank 22,032 9.0% 9,826 4.0% 12,282 5.0%
State Financial Bank-
Waterford 3,644 9.3% 1,574 4.0% 1,968 5.0%
As of December 31, 1995:
Total Capital
(to Risk Weighted
Assets):
Consolidated $33,076 17.3% $15,281 8.0% $19,101 10.0%
State Financial Bank 23,510 14.2% 13,204 8.0% 16,506 10.0%
State Financial Bank-
Waterford 5,645 24.1% 1,876 8.0% 2,345 10.0%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated 30,684 16.1% 7,641 4.0% 11,461 6.0%
State Financial Bank 21,514 13.0% 6,602 4.0% 9,903 6.0%
State Financial Bank-
Waterford 5,347 22.8% 938 4.0% 1,407 6.0%
Tier I Capital
(to Average Assets):
Consolidated 30,684 11.0% 11,212 4.0% 14,015 5.0%
State Financial Bank 21,514 9.1% 9,443 4.0% 11,804 5.0%
State Financial Bank-
Waterford 5,347 13.6% 1,574 4.0% 1,968 5.0%
</TABLE>
16. STOCK PLANS AND OPTIONS
The Company's board of directors adopted the 1990 Stock Option/Stock
Appreciation Rights and Restricted Stock Plan for Key Officers and Employees,
and the 1990 Director Stock Option Plan, (collectively, the 1990 Stock Plans).
The Company has reserved 304,585 shares of its common stock as of December 31,
1996, for the exercise of options and issuance of shares under the 1990 Stock
Plans. Options are exercisable at a price equal to the fair market value of the
shares at the time of the grant. Options must be exercised within ten years
after grant.
A summary of restricted stock and stock option transactions follows, as
restated, to give effect to the January 23, 1996, stock dividend and the
January 28, 1997 six-for-five stock split.
-32-
<PAGE> 34
FINANCIAL STATEMENTS AND NOTES
16. STOCK PLANS AND OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
Number of
Shares of Number Total
Restricted of Stock Number
Stock Price Options Price of Shares
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 14,227 $6.08 - $9.02 92,006 $4.63 - $9.02 106,233
Granted 864 9.73 18,749 9.73 19,613
Vested restricted stock (432) 8.25 - - (432)
Exercised - - (10,843) 4.63 - 6.08 (10,843)
Canceled - - (432) 4.63 - 6.08 (432)
-----------------------------------------------------------------
Balance at December 31, 1994 14,659 6.08 - 9.73 99,480 4.63 - 9.73 114,139
Granted - - 1,872 1.11 1,872
Vested restricted stock (5,057) 6.08 - 9.73 - - (5,057)
Exercised - - (10,452) 6.08 - 8.11 (10,452)
Canceled (300) 9.73 (653) 6.08 - 9.02 (953)
-----------------------------------------------------------------
Balance at December 31, 1995 9,302 6.08 - 9.73 90,247 4.63 - 11.11 99,549
Granted - - 6,804 11.46 - 15.63 6,804
Vested restricted stock (1,728) 8.25 - 9.02 - - (1,728)
Exercised - - (19,517) 4.63 - 9.72 (19,517)
Canceled - - (605) 6.08 - 8.25 (605)
-----------------------------------------------------------------
Balance at December 31, 1996 7,574 $6.08 - $9.73 76,929 $4.63 - $15.63 84,503
=================================================================
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative accounting
provided for under SFAS No. 123, "Accounting for Stock Based Compensation"
requires use of option valuation models that were not developed for use in
valuing employee stock options similar to the Company's. Under APB 25, when the
exercise price of a stock option equals or exceeds the current market price
when the option is granted, no compensation expense is recognized.
The effect on pro forma net income as if the Company accounted for the stock
options under SFAS No. 123 for stock options granted in 1995 and 1996 was not
material.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value
follows. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Certain financial instruments and all
nonfinancial instruments are excluded from the following disclosures.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The Company does not routinely measure the market value of financial
instruments, because such measurements represent point-in-time estimates of
value. It is not the intent of the Company to liquidate and therefore realize
the difference between market value and carrying value and, even if it were,
there is no assurance that the estimated market values could be realized. Thus,
the information presented is not particularly relevant to predicting the
Company's future earnings or cash flows.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD AND OTHER SHORT-TERM INVESTMENTS
The carrying amounts reported in the balance sheet for cash, federal funds sold
and other short-term investments approximate those assets' fair values.
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices, where
available.
LOANS RECEIVABLE
For variable-rate mortgage loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for commercial real estate loans and fixed rate mortgage,
consumer and other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
DEPOSITS
The fair values disclosed for interest and noninterest checking accounts,
savings accounts and money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
The fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
of the outstanding certificates of deposit.
-33-
<PAGE> 35
STATE FINANCIAL SERVICES CORPORATION
17. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amounts reported in the balance sheet for accrued interest
receivable and payable approximate their fair values.
NOTES PAYABLE
The carrying values of the Company's notes payable approximate fair value.
OFF-BALANCE-SHEET INSTRUMENTS
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and
generally require payment of a fee. As a consequence, the estimated fair value
of the commitments is approximately equal to the related fee received, which is
nominal.
The carrying amounts and fair values of the Company's financial instruments
consist of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 15,581,811 $ 15,581,811 $ 16,107,613 $ 16,107,613
Federal funds sold 2,599,107 2,599,107 6,540,309 6,540,309
Other short-term investments 3,100,000 3,100,000 5,870,000 5,870,000
Investment securities 68,983,307 69,317,480 63,256,997 63,541,474
Accrued interest receivable 2,095,839 2,095,839 2,046,426 2,046,426
Loans 201,670,700 202,070,469 185,754,168 185,918,182
Deposits 254,656,546 254,852,560 246,217,833 246,539,940
Notes payable 961,844 961,844 1,061,844 1,061,844
Accrued interest payable 994,324 994,324 1,200,652 1,200,652
</TABLE>
18. STATE FINANCIAL SERVICES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Financial statements of the Company at December 31, 1996 and 1995 and for the
three years ended December 31, 1996, follow:
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31
1996 1995
------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 881,891 $ 835,202
Other short-term investments 3,100,000 1,500,000
------------------------
Cash and cash equivalents 3,981,891 2,335,202
Investments:
Available-for-sale 3,167,050 -
Held-to-maturity 1,263,176 2,277,587
Investment in State Financial Bank 22,422,023 21,799,499
Investment in State Financial Bank - Waterford 5,187,407 6,777,188
Investment in
State Financial Mortgage Company 1,000 -
Recoverable income taxes 718,761 500,741
Other assets 553,797 319,213
------------------------
Total assets $37,295,105 $34,009,430
========================
LIABILITIES
Accrued expenses and other liabilities $ 806,717 $ 566,563
Note payable 961,844 1,061,844
SHAREHOLDERS' EQUITY
Common stock 319,825 264,912
Additional paid-in capital 28,687,633 28,568,137
Retained earnings 6,932,623 4,187,224
Unrealized loss on securities available-for-sale 62,728 (114,357)
Less guaranteed ESOP obligation (476,265) (524,893)
------------------------
Total shareholders' equity 35,526,544 32,381,023
------------------------
Total liabilities and shareholders' equity $37,295,105 $34,009,430
========================
</TABLE>
-34-
<PAGE> 36
FINANCIAL STATEMENTS AND NOTES
18. STATE FINANCIAL SERVICES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year ended December 31
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Income:
Dividends $5,400,000 $2,250,000 $2,050,000
Interest 389,194 336,693 198,618
Management fees 753,851 681,313 662,226
Other 32,578 28 11,171
----------------------------------------
6,575,623 3,268,034 2,922,015
Expenses:
Interest 111,542 68,243 41,726
Other 1,464,300 1,313,680 1,263,808
----------------------------------------
1,575,842 1,381,923 1,305,534
----------------------------------------
Income before income tax credit and
equity in undistributed net income
of subsidiary banks 4,999,781 1,886,111 1,616,481
Income tax credit 124,489 110,515 149,714
----------------------------------------
5,124,270 1,996,626 1,766,195
Equity in undistributed net income
(excess of net income of subsidiary
banks over dividends) (1,118,599) 1,282,801 1,040,754
----------------------------------------
Net income $4,005,671 $3,279,427 $2,806,949
========================================
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended December 31
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $4,005,671 $3,279,427 $2,806,949
Adjustments to reconcile net income to net
cash provided by operating activities:
Excess (equity) in undistributed income 1,118,599 (1,282,801) (1,040,754)
Deferred income taxes (3,324) 2,000 17,883
Other (222,696) (96,976) 175,622
----------------------------------------
Net cash provided by operating activities 4,898,250 1,901,650 1,959,700
Investing activities
Decrease (increase) in other assets 31,464 (104,358) 18,932
Purchase of investment securities (3,794,790) (3,626,904) (4,839,263)
Maturities of investment securities 1,650,000 6,049,000 4,417,667
Acquisition of/additional investment in
subsidiaries (1,000) (6,702,316) -
----------------------------------------
Net cash used by investing activities (2,114,326) (4,384,578) (402,664)
Financing activities
Proceeds (repayment) of notes payable (100,000) 1,061,844 -
Net decrease in guaranteed ESOP obligation 48,628 42,489 47,125
Cash dividends (1,260,271) (967,478) (817,506)
Costs associated with acquisition - (119,677) -
Issuance of common stock in acquisition - 3,321,905 -
Proceeds from exercise of stock options 174,408 64,371 76,610
Issuance (cancellation) of restricted stock - (2,912) 8,400
Net cash provided (used) by financing
activities (1,137,235) 3,400,542 (685,371)
----------------------------------------
Increase in cash and cash equivalents 1,646,689 917,614 871,665
Cash and cash equivalents at beginning of year 2,335,202 1,417,588 545,923
----------------------------------------
Cash and cash equivalents at end of year $3,981,891 $2,335,202 $1,417,588
========================================
</TABLE>
-35-
<PAGE> 37
STATE FINANCIAL SERVICES CORPORATION
DIRECTORS AND OFFICERS
STATE FINANCIAL SERVICES CORPORATION
Directors
Jerome J. Holz - Chairman of the Board and President,
Holz Motors, Inc.; Chairman of the Board, State
Financial Services Corporation
Michael J. Falbo - President and Chief Executive Officer,
State Financial Services Corporation
Richard A. Horn - President, Horn Brothers, Inc.
Barbara E. Holz-Weis - Owner, Barb's Green House Florist
David M. Stamm - President, George Webb Corporation
Robert R. Spitzer - President Emeritus, Milwaukee
School of Engineering
Officers
Jerome J. Holz - Chairman of the Board and Vice President
Michael J. Falbo - President and Chief Executive Officer
John B. Beckwith - Senior Vice President
Philip F. Hudson - Senior Vice President
Michael A. Reindl - Senior Vice President, Controller and Chief
Financial Officer; Secretary/Treasurer
Donna M. Bembenek - Vice President and Director of Marketing
Barbara J. Smith - Assistant Vice President
Annette F. Esteves - Assistant Vice President and Assistant
Controller
James J. Bartoszek - Compliance Officer
Donald J. Buechler - Loan Review Officer
Melanie M. Murphy - Auditor
STATE FINANCIAL BANK
Directors
Bruce Arbit Judith Holz-Stathas
John B. Beckwith, Barbara E. Holz-Weis
President - South Unit Philip F. Hudson,
Michael J. Falbo, President - North Unit
Vice Chairman & CEO Roger H. Kriete
Michael Green Peyton A. Muehlmeier
Jerome J. Holz, Salvatore Sendik
Chairman of the Board Robert R. Spitzer
Richard A. Horn David M. Stamm
Directors Emeritus
Gordon Banerian
Dr. Charles Wilson
Cyril Zvonar
Officers
Gerilyn J. Arndt Robert W. Kaiser
James J. Bartoszek Ronald I Kaminsky
John B. Beckwith Lucy C. Korbitz
David J. Byrge Diana Le Blanc
Kathleen A. Eusebio Thomas M. Lilly
Michael J. Falbo Barbara A. Marx
Barbara J. Gifford John R. Rinderle
Joyce M. Goodman Marcy L. Schneider
Robert L. Hoepfner Rose A. Shebesta
Jerome J. Holz Carol A. Sommer
Philip F. Hudson Jack J. Spoerl
David P. Johnson Kathleen R. Wambold
STATE FINANCIAL BANK OFFICE LOCATIONS
Brookfield (414) 789-9003
Glendale (414) 351-7400
Greenfield (414) 281-2500
Hales Corners (414) 425-1600
Milwaukee/University (414) 961-5800
Muskego (414) 679-2800
Waukesha (414) 544-1750
State Financial Bank - Waterford
Directors
Oliver DeHart Jeryl M. Sturino
Chairman of the Board President and CEO
Michael J. Falbo Gary Schildt
Jerome J. Holz Robert R. Spitzer
Frances M. Koukol
Director Emeritus
Charles M. Noll
Officers
Dawn M. Brossard Douglas L. Short
Frances M. Koukol Jeryl M. Sturino
Frances M. Morrical
Telephone (414) 534-3151
Deposits in State Financial Bank and State Financial Bank - Waterford are FDIC
insured up to $ 100,000.
State Financial Mortgage Company
Directors
Thomas M. Lilly Michael J. Falbo
President Michael A. Reindl
John B. Beckwith Philip F. Hudson
Officers
Thomas M. Lilly Michael A. Reindl
James L. Wucherer
Telephone (414) 425-1600
-36-
<PAGE> 38
INVESTOR INFORMATION
THE STOCK SPLIT
As of January 28, 1997, there were 2,665,211 shares of Common Stock
outstanding. On January 28, 1997, the Company declared a 6 for 5 stock split
to be issued on February 28, 1997 to shareholders of record as of February 14,
1997 (the "Stock Split"). Upon the issuance of the additional shares resulting
from the Stock Split, there will be 3,198,253 shares of common stock issued and
outstanding (subject to minor adjustment for the issuance of cash in lieu of
fractional shares). Unless otherwise indicated, information contained in this
Annual Report gives effect to the Stock Split.
MARKET PRICE AND DIVIDENDS FOR COMMON STOCK
At March 1, 1997, there were approximately 739 shareholders of record and 600
estimated additional beneficial shareholders for an approximate total of 1,339
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 the receipt of dividends from the Banks. The Banks' ability to pay
dividends 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
Note 12 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, 1995. All figures have
been restated to give effect to Stock Split and the January, 1996 20% Stock
Dividend as if each had occurred as of January 1, 1995.
<TABLE>
<CAPTION>
PRICE CASH
QUARTER ENDED HIGH LOW DIVIDEND
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 1995 $10.42 $ 9.38 $0.077
June 30, 1995 10.59 9.73 0.083
September 30, 1995 11.98 10.07 0.083
December 31, 1995 12.68 11.11 0.083
March 31, 1996 $12.88 $11.11 $0.100
June 30, 1996 14.58 12.29 0.100
September 30, 1996 15.83 14.17 0.100
December 31, 1996 16.67 15.21 0.100
================================================================================
</TABLE>
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.
DIVIDEND REINVESTMENT PLAN
The Company has a Dividend Reinvestment Plan (the "DRP") for the benefit of all
shareholders. The DRP is administered by Firstar Trust Company. 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, Controller, and Chief Financial Officer, 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, 1996
as filed with the Securities and Exchange Commission is available upon request
without charge to shareholders of record. Please contact Michael A. Reindl,
Senior Vice President, Controller, and Chief Financial Officer, 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, April 23, 1997 at Tuckaway Country
Club, 6901 West Drexel Avenue, Franklin, Wisconsin.
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF SFSC SERVICES CORPORATION
SUBSIDIARY NAME STATE OF INCORPORATION
- --------------- ----------------------
State Financial Bank Wisconsin
Hales Corners Development Corporation (1) Wisconsin
Hales Corners Investment Corporation (1) Nevada
State Financial Bank - Waterford Wisconsin
Waterford Investment Corporation (2) Nevada
State Financial Mortgage Company Wisconsin
- ---------------------------------------------------------------------------
(1) Subsidiary of State Financial Bank
(2) Subsidiary of State Financial Bank - Waterford
<PAGE> 1
EXHIBIT 24
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of State Financial Services Corporation of our report dated January
17, 1997, included in the 1996 Annual Report to the shareholders of State
Financial Services Corporation.
/s/ Ernst & Young, LLP
Milwaukee, Wisconsin
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,581,811
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,599,107
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,776,116
<INVESTMENTS-CARRYING> 31,302,232
<INVESTMENTS-MARKET> 31,541,364
<LOANS> 201,670,700
<ALLOWANCE> 2,607,579
<TOTAL-ASSETS> 301,221,897
<DEPOSITS> 254,656,546
<SHORT-TERM> 8,000,160
<LIABILITIES-OTHER> 2,076,803
<LONG-TERM> 961,844
0
0
<COMMON> 319,825
<OTHER-SE> 35,206,719
<TOTAL-LIABILITIES-AND-EQUITY> 301,221,897
<INTEREST-LOAN> 18,146,633
<INTEREST-INVEST> 4,029,841
<INTEREST-OTHER> 246,412
<INTEREST-TOTAL> 22,422,886
<INTEREST-DEPOSIT> 8,359,780
<INTEREST-EXPENSE> 8,752,112
<INTEREST-INCOME-NET> 13,670,774
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,511,771
<INCOME-PRETAX> 6,008,671
<INCOME-PRE-EXTRAORDINARY> 4,005,671
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,005,671
<EPS-PRIMARY> $1.28
<EPS-DILUTED> $1.28
<YIELD-ACTUAL> 5.27
<LOANS-NON> 2,363,000
<LOANS-PAST> 38,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,711,362
<CHARGE-OFFS> 384,802
<RECOVERIES> 71,019
<ALLOWANCE-CLOSE> 2,607,579
<ALLOWANCE-DOMESTIC> 2,607,579
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.4
STATE FINANCIAL
SERVICES CORPORATION
March 14, 1997
Dear Shareholder:
You are cordially invited to attend the 1997 Annual Meeting of the
Shareholders of State Financial Services Corporation. The 1997 Annual Meeting
will be held at 4:00 P.M. Central Time on Wednesday, April 23, 1997 at Tuckaway
Country Club, 6901 West Drexel Avenue, Franklin, Wisconsin.
Information about the meeting, including a description of the matters
on which the shareholders will act, is contained in the attached Notice of
Annual Meeting and Proxy Statement. Directors and officers of State Financial
Services Corporation as well as a representative from Ernst & Young LLP, the
Company's independent auditors, will be present at the meeting to respond to
any questions that shareholders may have.
WE ENCOURAGE YOU TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU
PLAN TO ATTEND, WE ASK THAT YOU COMPLETE, SIGN, AND DATE THE ENCLOSED PROXY
CARD AND RETURN IT IN THE ENVELOPE PROVIDED SO THAT YOUR VOTE CAN BE COUNTED AT
THE MEETING.
On behalf of the Board of Directors and the employees of State
Financial Services Corporation, I wish to extend my gratitude for your
continued support of our organization.
Sincerely,
/s/ Michael J. Falbo
Michael J. Falbo
President and Chief Executive Officer
10708 WEST JANESVILLE ROAD - HALES CORNERS, WISCONSIN 53130 - (414) 425-1600
<PAGE> 2
STATE FINANCIAL SERVICES CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 23, 1997
TO THE SHAREHOLDERS OF STATE FINANCIAL SERVICES CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of State
Financial Services Corporation ("SFSC" or the "Company") will be held on April
23, 1997, at 4:00 P.M., Central Time, at Tuckaway Country Club, 6901 West
Drexel Avenue, Franklin, Wisconsin for the following purposes:
1. To elect two directors for three-year terms expiring in 2000;
2. To ratify the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1997; and
3. To transact any other business that may properly come before
the meeting.
These items are more fully described in the Proxy Statement which
accompanies this Notice.
Shareholders of record at the close of business on March 7, 1997 will
be entitled to vote at the meeting and any adjournment thereof.
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE MEETING.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON ARE
REQUESTED TO SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
IF YOU LATER FIND THAT YOU MAY BE PRESENT AT THE MEETING OR FOR ANY OTHER
REASON DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS
VOTED.
By Order of the Board of Directors
/s/ Michael J. Falbo
MICHAEL J. FALBO,
President and Chief Executive Officer
March 14, 1997
1
<PAGE> 3
STATE FINANCIAL SERVICES CORPORATION
10708 WEST JANESVILLE ROAD
HALES CORNERS, WISCONSIN 53130
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 23, 1997
________________________
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of State
Financial Services Corporation ("SFSC" or the "Company") in connection with the
solicitation of proxies by the Board of Directors of SFSC for use at the Annual
Meeting of the shareholders of SFSC to be held at 4:00 P.M. Central Time on
April 23, 1997 at Tuckaway Country Club, 6901 West Drexel Avenue, Franklin,
Wisconsin (the "Meeting"), or any adjournment thereof.
PURPOSES OF THE MEETING. At the Meeting, shareholders will consider
and vote upon two matters: (1) the election of two directors for three year
terms expiring in 2000; (2) the proposal to ratify the appointment of Ernst &
Young LLP as independent auditors for the fiscal year ending December 31, 1997.
PROXY SOLICITATION. The cost of soliciting proxies will be borne by
the Company. The Company expects to solicit proxies primarily by mail.
Proxies may also be solicited personally and by telephone by members of
management of the Company. Proxy Statements and Proxies will be mailed to
shareholders on approximately March 14, 1997.
QUORUM AND VOTING INFORMATION. As of March 7, 1997, the record date
for the Meeting, there were issued and outstanding 3,204,445 shares of the
Company's Common Stock. At the Meeting, a quorum will exist with respect to
each matter to be voted upon if a majority of the votes entitled to be cast
thereon is represented in person or by proxy. The vote necessary to elect the
directors nominated or to approve the proposals to be acted upon is described
in detail under the specific proposals. See "Item 1. Election of Directors
- -- Voting Information." In addition, shareholders should be aware that no
matter to be acted upon at the Meeting is dependent upon the approval of any
other matter. Only shareholders of record at the close of business on March 7,
1997 are entitled to vote at the Meeting or at any adjournment thereof.
PROXIES AND REVOCATION OF PROXIES. A Proxy in the accompanying form,
which is properly executed, duly returned to the Company and not revoked, will
be voted in accordance with instructions contained therein. In the event that
any matter which is not described in this Proxy Statement properly comes before
the Meeting, the accompanying form of Proxy authorizes the persons appointed as
proxies thereby ("Proxyholders") to vote on such matter in their sole
discretion. At the present time, management knows of no other matters which
are to come before the Meeting. See "Item 3. Other Matters." If no
instructions are given with respect to any particular matter to be acted upon,
a Proxy will be voted in favor of such matter. Each such Proxy granted may be
revoked at any time before it is voted by filing with the Secretary of the
Company a written notice of revocation, by delivering to the Company a duly
executed proxy bearing a later date, or by attending the Meeting and voting in
person.
STOCK SPLIT. On January 28, 1997, the Company declared a 6 for 5
stock split (the "Stock Split") to be issued on February 28, 1997 to
shareholders of record as of the close of business on February 14, 1997. The
effect of the Stock Split is that a shareholder will receive a certificate for
one additional share for every five shares of the Company's Common Stock owned
by the shareholder as of the record date of the Stock Split. Fractional shares
will not be issued. Cash will be delivered in lieu of fractional shares in an
amount based upon the market price of the Company's Common Stock on February
14, 1997. Certain information contained in the Company's Annual Report to
Shareholders delivered herewith (see "Annual Report" below) and all per share
information set forth in this Proxy Statement has been restated to give effect
to the Stock Split.
2
<PAGE> 4
SHAREHOLDER PROPOSALS. There are no shareholder proposals on the
agenda for the Meeting. In order to be considered for inclusion in the agenda
for the 1998 Annual Meeting, a shareholder proposal must be received by the
Company no later than November 21, 1997. Shareholder proposals should be sent
to the Company's principal offices by certified mail, return receipt requested,
and should be addressed to the Secretary of the Company.
ANNUAL REPORT. The Company's Annual Report to Shareholders, including
audited financial statements for the year ended December 31, 1996, although not
a part of this Proxy Statement, is delivered herewith.
ITEM 1. ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS AND THE NOMINEES. The Board of Directors of
the Company currently consists of six persons, divided into three classes, each
consisting of two directors elected to serve three year terms. The Board of
Directors is recommending that two individuals, Richard A. Horn and Barbara E.
Holz-Weis, be elected to directors positions at the Meeting, each for a term
expiring on the date of the Company's annual meeting to be held in 2000 or
until their respective successors are duly elected. Mr. Horn and Mrs.
Holz-Weis have previously served as directors. See "Directors" below for
further information.
VOTING INFORMATION. Unless otherwise directed, the shares represented
by all properly executed Proxies will be voted by the Proxyholders "FOR" the
election of Mr. Horn and Mrs. Holz-Weis. Management does not expect that
either Mr. Horn or Mrs. Holz-Weis will be unable to serve as director, but if
that should occur for any reason prior to the Meeting, the Proxyholders reserve
the right to vote for another person of their choice. The vote necessary to
elect the directors nominated is governed by Section 180.0728(1) of the
Wisconsin Business Corporation Law, which provides that directors are elected
by "plurality" of the votes cast. This means that the number of nominees
corresponding to the number of seats on a board of directors to be filled at a
shareholders' meeting who receive the highest number of votes shall be elected.
In the case of the Meeting, the two nominees who receive the highest number of
votes for their election as directors will be the persons elected to the two
director positions to be filled at the Meeting. See "Introduction -- Quorum
and Voting Information."
DIRECTORS. The following sets forth, with respect to the nominees and
each director who will continue to serve after the date of the Meeting, his/her
name, age, principal occupation for the last five years, the year in which
he/she first became a director of the Company or a predecessor thereof, the
year in which his/her current term as director will expire, and directorships
in other publicly traded business corporations. SFSC is a bank holding company
which owns State Financial Bank ("SFB") and State Financial Bank - Waterford
("SFBW") (collectively referred to as the "Banks"). SFB is the entity
resulting from the consolidation in June, 1994 of SFSC's four previously
separate banks [State Bank, Hales Corners ("SBHC"), University National Bank
("UNB"), Edgewood Bank ("EB"), and Eastbrook State Bank ("ESB")] into SBHC's
charter. References to SFB prior to June, 1994 are synonymous to SBHC prior to
the consolidation of the banks. In 1984, SFSC was formed as the parent holding
company of the former SBHC. SFSC acquired UNB in 1985, EB in 1987, and ESB in
1992. SFSC acquired SFBW in 1995 and continues to operate it as a separate
banking subsidiary. Each of the directors of the Company is also a director of
SFB. Messrs. Holz, Falbo, and Spitzer are also directors of SFBW.
<TABLE>
<CAPTION>
DIRECTOR CURRENT
NAME AGE POSITIONS HELD SINCE TERM EXPIRES*
- ---- --- -------------- --------- -------------
<S> <C> <C> <C> <C>
Jerome J. Holz 69 Chairman of the Board and Vice President of SFSC; 1984 1999
Chairman of the Board of SFB; Director of SFBW
Michael J. Falbo 47 President, Chief Executive Officer, and Director of 1984 1998
SFSC; Vice Chairman and Chief Executive Officer
of SFB; Director of SFBW.
Richard A. Horn 72 Director of SFSC and SFB 1984 1997
Robert R. Spitzer 74 Director of SFSC, SFB, and SFBW 1990 1998
David M. Stamm 48 Director of SFSC and SFB 1993 1999
Barbara E. Holz-Weis 41 Director of SFSC and SFB 1993 1997
- -------------------------------------------
</TABLE>
* On the date of the annual shareholders' meeting to be held in the year
indicated.
3
<PAGE> 5
JEROME J. HOLZ serves as Chairman of the Board and Vice President of
SFSC. In these capacities, he consults on a regular basis with management of
SFSC and the Banks concerning matters of strategic planning, business
development, and company policies. Mr. Holz is also Chairman of the Board of
State Financial Bank. He has been a director of SFSC since its organization in
1984 , a director of SFB since 1960, and a director of SFBW since August, 1995.
Mr Holz is Chairman of the Board and President of Holz Motors, Inc., an
automobile dealership with locations in Hales Corners and Watertown, Wisconsin.
MICHAEL J. FALBO has been President and Chief Executive Officer of
SFSC since 1984. Mr. Falbo is Vice Chairman and Chief Executive Officer of
SFB. Mr. Falbo has been a director of SFSC since its organization in 1984, a
director of SFB since 1983, and a director of SFBW since August, 1995.
RICHARD A. HORN is President of Horn Bros., Inc., a retail feed, seed,
and fertilizer firm located in Muskego, Wisconsin. Mr. Horn has been a
director of SFSC since 1984 and a director of SFB since 1971. Mr. Horn serves
on the Stock Option and Audit Committees and is also a member of the
Administrative Board of the Company's Employee Stock Ownership Plan ("ESOP").
ROBERT R. SPITZER is the retired President of the Milwaukee School of
Engineering, Milwaukee, Wisconsin. Mr. Spitzer has been a director of SFSC and
of SFB since 1990 and a director of SFBW since January 1997. Mr. Spitzer is
also a director of Kikkoman Foods, Incorporated. Mr. Spitzer serves on the
Stock Option and Audit Committees and is also a member of the Administrative
Board of the Company's ESOP.
DAVID M. STAMM is President of the George Webb Corporation, a
franchise restaurant operation with locations in southeastern Wisconsin. Mr.
Stamm has been a director of SFSC since 1993 and of SFB since 1992. Mr. Stamm
serves on the Stock Option Committee and is a member of the Administrative
Board of the Company's ESOP.
BARBARA E. HOLZ-WEIS is the owner of Barb's Greenhouse Florist, a
retail full-service flower shop in Hales Corners, Wisconsin. Mrs. Holz-Weis
has been a director of SFSC since 1993 and of SFB since 1981. Mrs. Holz-Weis
serves on the Stock Option Committee and is also a member of the Administrative
Board of the Company's ESOP. Mrs. Holz-Weis is the daughter of Mr. Holz.
BOARD COMMITTEES. The Board of Directors has the following
committees:
STOCK OPTION COMMITTEE. The Stock Option Committee administers the
Company's Stock Option Plans, including the exercise of discretionary authority
concerning the granting of options and Restricted Stock under the 1990 Stock
Option/Stock Appreciation Rights and Restricted Stock Plan for Key Officer and
Employees (the "Officer "SOP"). See "Compensation of Executive Officers --
Stock Options." The Stock Option Committee is comprised of Messrs. Horn,
Spitzer, and Stamm, and Mrs. Holz-Weis. The Stock Option committee met one
time during 1996.
AUDIT COMMITTEE. The Audit Committee reviews the reports of
independent auditors, selects or recommends the selection of independent
auditors, reviews the adequacy of internal controls of the Company and reviews
any related-party transactions. The Audit Committee is comprised of Messrs.
Horn and Spitzer. The Audit Committee met one time during 1996.
OTHER COMMITTEES. The Company has no nominating or similar committee
of the Board of Directors and has no established procedure for the
consideration of nominees recommended by shareholders. Certain other
functions, such as the establishment of compensation policies and the
determination of executive officer compensation, are performed by the Board of
Directors acting as a committee of the whole.
4
<PAGE> 6
EXECUTIVE OFFICERS. Information is provided below with respect to the
executive officers of SFSC who are not directors. Each executive officer is
elected annually by the Board of Directors and serves for one year or until
his/her successor is appointed.
<TABLE>
<CAPTION>
PRINCIPAL POSITION
NAME AGE POSITIONS HELD HELD SINCE
- ---- --- -------------- ----------
<S> <C> <C> <C>
John B. Beckwith 43 President, State Financial Bank South Unit; Senior Vice 1994
President of SFSC
Philip F. Hudson 64 President, State Financial Bank North Unit; Senior Vice 1994
President of SFSC
Jeryl M. Sturino 37 President, State Financial Bank -Waterford 1995
Michael A. Reindl 37 Senior Vice President, Controller, and Chief 1995
Financial Officer; Secretary/Treasurer of SFSC; and
Secretary of SFB
</TABLE>
JOHN B. BECKWITH has been President of the South Unit of State
Financial Bank since June, 1994 and Senior Vice President of SFSC since
November, 1996. In his primary capacity as South Unit President, Mr. Beckwith
is responsible for the operation and performance of SFB's offices located in
Hales Corners, Muskego, and Greenfield, Wisconsin. From June 1991 to June
1994, Mr. Beckwith was President and Chief Executive Officer of SBHC (currently
SFB's Hales Corners and Muskego offices). Mr. Beckwith was a director of SBHC
from June 1991 to June 1994. Since June 1994, he has served as a director of
SFB. Prior to June 1991, he had been Executive Vice President of SBHC since he
joined the Company in 1990.
PHILIP F. HUDSON has been President of the North Unit of State
Financial Bank since June, 1994 and Senior Vice President of SFSC since
November, 1996. In his primary capacity as North Unit President, Mr. Hudson is
responsible for the operation and performance of SFB's offices located in
Milwaukee, Glendale, Brookfield, and Waukesha, Wisconsin. Mr. Hudson rejoined
the Company in 1990 as President and Chief Executive Officer of the Company's
then separate subsidiary bank, UNB (currently SFB's Milwaukee and Glendale
offices) and served in that capacity through June, 1994. Mr. Hudson previously
served as UNB's President and Chief Executive Officer from 1975 to 1987. Mr.
Hudson was a director of the former UNB from 1975 to 1987 and from 1990 to
1994. He has served as a director of SFB since June 1994.
JERYL M. STURINO has been President and Chief Executive Officer and a
director of SFBW since September 1995. From June 1994 through September 1995,
Mrs. Sturino served as Senior Vice President and Senior Loan Officer of SFB.
Mrs. Sturino joined the Company in 1988 as a Commercial Loan Officer for SFB
(then known as SBHC). Mrs. Sturino was promoted to Vice President in November
1990, and served in that capacity until June 1994 when she was promoted to
Senior Vice President of SFB.
MICHAEL A. REINDL has served as the Company's Senior Vice President,
Controller, and Chief Financial Officer since November 1995. In January 1997,
Mr. Reindl was also named Secretary/Treasurer of SFSC and Secretary of SFB.
From June 1993 through November 1996, Mr. Reindl was Vice President,
Controller, and Chief Financial Officer of SFSC. From August 1990 through June
1993, Mr. Reindl was Vice President and Controller of SFSC. Mr. Reindl joined
the Company in 1984.
COMPENSATION OF DIRECTORS. The Company has established a policy that
no employee of SFSC or the Banks may receive director fees for serving on the
Boards of Directors of the Company or the Banks. Accordingly, Messrs. Holz,
Falbo, Beckwith, and Hudson, and Mrs. Sturino, who are employees of SFSC, SFB,
and/or SFBW and who also serve as directors of SFB and/or SFBW, did not receive
any director fees in connection with their respective director positions for
services rendered in that capacity in 1996.
DIRECTORS FEES.
SFSC Directors. Directors of the Company (other than Messrs. Holz and
Falbo) are paid a quarterly retainer of $1,562.50 and $1,562.50 for each
regular quarterly Board meeting attended. During 1996, the Board met 4 times.
Each of the directors attended at least 75% of the meetings of the Board of
Directors and all meetings of the committees on which each director served.
5
<PAGE> 7
SFB Directors. In 1996, directors of SFB (other than Messrs. Holz,
Falbo, Beckwith, and Hudson) were paid a quarterly retainer of $300 per
quarter, $150 for each quarterly Board meeting attended, $150 for each monthly
Executive Committee meeting attended, and $100 for each Committee meeting
attended.
SFBW Directors. In 1996, directors of SFBW (other than Messrs. Holz
and Falbo, and Mrs. Sturino) were paid a quarterly retainer of $300 and $150
for each monthly Board meeting attended.
DIRECTOR STOCK OPTIONS. The 1990 Director Stock Option Plan (the
"Director SOP") was established for the benefit of directors of SFSC and SFB.
Employees of the Company and SFB who also serve as directors of the Company
and/or SFB are not eligible to participate in the Director SOP as they
participate in the 1990 Stock Option/Stock Appreciation Rights and Restricted
Stock Plan for Key Officers and Employees (the "Officer SOP"). The Director
SOP provides for the granting of Non-Qualified Stock Options ("NSOs") to
purchase shares of the Company's Common Stock and is administered by the Stock
Option Committee of the Board of Directors. Under the Director SOP, the option
price must be equal to the fair market value of the shares on the date of
grant.
Each new director of the Company is granted 3,456 options upon his or
her initial election, and an additional 1,728 options upon his or her first
reelection to the Company's Board of Directors. Each person who is elected to
a Bank Board of Directors for the first time will receive 1,728 options upon
his or her initial election, and an additional 864 options upon his or her
first reelection.
Options will expire no later than ten years after the date of grant.
An optionee does not recognize any taxable income at the time an NSO is
granted, nor will the Company be entitled to a tax deduction at that time. If
an NSO is exercised, the optionee must recognize an amount of ordinary income
equal to the fair market value of the shares purchased (as of the date of
exercise) minus the exercise price. The Company is then entitled to a tax
deduction equal to the amount of ordinary income recognized by the optionee.
The optionee's basis in the shares acquired upon the exercise of an NSO is
equal to the fair market value at the time of exercise. Upon a subsequent sale
or other disposition of the shares in a taxable transaction, the optionee will
have a capital gain (or loss) equal to the difference between his or her basis
and the sale proceeds.
No options were granted under the Director SOP to SFSC directors
during 1996. The following table presents the value of unexercised options
held by the Company's directors at December 31, 1996 who are not also Named
Executive Officers, (as defined below).
DIRECTOR OPTIONS EXERCISED AND VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES IN-THE-MONEY
SHARES VALUE UNDERLYING UNEXERCISED OPTIONS AT
ACQUIRED REALIZED OPTIONS AT FISCAL YEAR FISCAL YEAR
NAME ON EXERCISE (#) ($) (1) END (#) (2) END ($) (2) (3)
---- --------------- ------- ----------------------- ---------------
<S> <C> <C> <C> <C>
Richard A. Horn 2,938 $31,017 5,702 $58,482
Robert R. Spitzer 432 3,636 1,728 14,544
David M. Stamm 346 2,909 7,430 53,618
Barbara E. Holz-Weis 734 7,777 6,610 50,645
</TABLE>
- ----------------
(1) Values are calculated by subtracting the exercise price from
the fair market value of the stock as of December 31, 1996
($16.67).
(2) All options are exercisable at December 31, 1996.
(3) The dollar values are calculated by determining the difference
between the market value of the underlying Common Stock at
December 31, 1996 and the exercise price of the options.
DIRECTORS OF OTHER SUBSIDIARIES. During 1996, Messrs. Holz, Falbo,
Horn, Spitzer, Stamm, Beckwith, and Hudson, and Mrs. Holz-Weis also served as
directors of Hales Corners Development Corporation, a wholly-owned subsidiary
of SFB, but received no directors fees for serving on that Board. Messrs.
Falbo and Reindl are directors of Hales Corners Investment Corporation and
Waterford Investment Corporation, each a wholly-owned Nevada-chartered
subsidiary of SFB and SFBW, respectively, but received no directors fees during
1996 for serving on those Boards.
6
<PAGE> 8
COMPENSATION OF EXECUTIVE OFFICERS.
SUMMARY COMPENSATION INFORMATION. The following table sets forth the
annual and long-term compensation for the Company's Chief Executive Officer and
the other executive officers of the Company and the Banks whose total salaries
and bonuses exceeded $100,000 in 1996, as well as the respective compensation
paid to each individual during the Company's last three fiscal years. The
persons named in the table are sometimes referred to herein as the "Named
Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------
LONG TERM
COMPENSATION ALL OTHER
SALARY BONUS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (1) ($) (3) ($) (4)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael J. Falbo 1996 250,000 120,000 -0- 39,005
President and CEO - State 1995 225,000 100,000 10,500 35,476
Financial Services Corporation 1994 205,000 85,000 -0- 32,964
- --------------------------------------------------------------------------------------------------------------------
Jerome J. Holz 1996 210,000 125,000 -0- 14,994
Chairman of the Board - State 1995 190,000 90,000 10,500 16,276
Financial Services Corporation 1994 174,000 75,000 -0- 17,063
- --------------------------------------------------------------------------------------------------------------------
John B. Beckwith 1996 110,000 35,000 -0- 13,922
President - State Financial Bank 1995 103,000 30,000 5,250 13,831
South Unit 1994 96,000 25,000 -0- 12,181
- --------------------------------------------------------------------------------------------------------------------
Philip F. Hudson 1996 128,000 22,500 10,500 14,482
President - State Financial Bank 1995 121,000 17,500 3,500 14,442
North Unit 1994 114,000 12,500 3,500 12,679
</TABLE>
(1) For Messrs. Falbo, Beckwith, and Hudson, the amount represents
the bonus earned in the respective year but paid in the
following year. For Mr. Holz, the bonus was earned and paid in
the respective year.
(2) Represents value of the award on the date of grant based on
the fair market value of the Company's common stock as of that
date.
(3) Represents vesting of restricted shares previously granted
under the Officer SOP.
(4) All Other Annual Compensation consists of contributions to the
ESOP and the Pension Plan made on behalf of the Named Executive
Officers by the Company. The amounts reported for Mr. Falbo
also include the contributions made to the Supplemental
Executive Retirement Plan in each respective year.
EMPLOYEE STOCK OWNERSHIP PLAN. In 1990, SFSC adopted an Employee Stock
Ownership Plan ("ESOP") for the benefit of certain employees of SFSC and its
subsidiaries. SFSC shareholders approved the ESOP in 1990. The ESOP covers
substantially all employees of SFSC and its subsidiaries who have attained age
21 and have completed at least one year of service. Contributions to the ESOP
are made in amounts established in the discretion of the Company's Board of
Directors. Amounts contributed are intended to be sufficient to amortize any
loans to the ESOP. Shares of the Company's Common Stock will be allocated to
the accounts of participants during each plan year, generally in accordance
with the amounts contributed by SFSC and SFB. An ESOP participant's interest
in the ESOP will be paid on the participant's death, disability, retirement, or
termination of employment. Each participant becomes vested in 20% of his/her
account balance after two years of service and an additional 20% of the account
balance vests each subsequent year of service until the participant becomes
fully vested after six years. Past service is recognized for vesting purposes.
The ESOP holds 129,444 shares of Common Stock. These shares are held in
the name of an independent trustee. Messrs. Horn, Spitzer, and Stamm, and Mrs.
Holz-Weis are members of the Administrative Board of the ESOP ("ESOP Board").
As of March 7, 1997, of the 129,444 shares held for the ESOP by the
independent ESOP trustee, 86,982 had been allocated to ESOP participants'
accounts and 42,462 remained unallocated. The ESOP provides that the
independent trustee must vote shares allocated to a participants' account in
accordance with the direction of the participant. The ESOP Board directs
voting by the independent trustee, and may also direct the disposition of
unallocated shares. The ESOP Board does not have the power to vote or direct
the vote, or to dispose of or direct the disposition of, shares which have been
allocated to participants' accounts. See "Security Ownership of Management and
Certain Beneficial Owners."
7
<PAGE> 9
The ESOP may acquire additional shares of Common Stock through purchases
of outstanding shares on the open market or directly from SFSC. The timing and
amount of future purchases and borrowings will be affected by various factors,
including regulatory policies, the market price of Common Stock, prevailing
interest rates, and the number of participating subsidiaries. No additional
shares were purchased by the ESOP in 1996.
MONEY PURCHASE PENSION PLAN. The Board of Directors of SFSC has adopted
the State Financial Services Corporation and Subsidiaries Money Purchase Plan
("Pension Plan") for the benefit of certain employees of SFSC and its
subsidiaries. The Pension Plan is a tax qualified defined contribution plan
pursuant to which SFSC's contributions are fixed based upon the compensation of
each participant. For each participant, SFSC's contribution to the Pension
Plan is an amount equal to four percent (4%) of the participant's total
compensation and an additional two percent (2%) of the participant's
compensation in excess of $20,000. The Pension Plan may also accept rollover
contributions from employees. Messrs. Holz, Falbo, and Reindl are trustees of
the Pension Plan.
A participant's account balance becomes 20% vested after completion of
two years of service. Thereafter, a participant's account balance vests 20%
each year until the participant becomes 100% vested after six years of service.
A participant becomes 100% vested in his account balance in the event of death,
disability, or retirement. Normal retirement age under the Pension Plan is 65.
Upon retirement, a participant's account balance may be distributed to him/her
pursuant to his/her election of one of a number of alternative methods of
distribution.
401(K) PLAN. SFSC and the Banks also have a Section 401(k) profit
sharing plan ("401(k) Plan"). All employees who are at least 21 years old are
eligible to participate. Participants can defer between 2% and 15% of their
compensation. Participants may also contribute up to an additional 10% of
their compensation on a nontax-deferred basis. Contributions may be invested
at the participant's discretion in one of several different funds which have
been selected by an administrative committee which includes Messrs. Falbo, and
Reindl. Amounts accumulated are payable upon termination of an employee's
employment, at the normal retirement age, upon death or permanent disability,
pursuant to a variety of payment options. There are no employer contributions
to the 401(k) Plan.
DEFERRED COMPENSATION AGREEMENT. SFB has a Deferred Compensation
Agreement dated December 9, 1980 with Jerome J. Holz pursuant to which SFB is
obligated to pay Mr. Holz $1,000 per month for 120 months following termination
of his employment. Payments will commence upon Mr. Holz's voluntary
termination, his involuntary termination for reasons other than cause (as
defined in the agreement), or upon his death or permanent disability. In the
event that Mr. Holz dies before receiving all payments, the balance of the
payments will be made to Mr. Holz's designated beneficiary or heirs. SFB's
obligations under this plan are insured.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In 1994, the Board of Directors
of SFSC adopted the Supplemental Executive Retirement Plan ("Supplemental
Plan") to supplement the benefits received by Mr. Falbo under the Company's
qualified retirement plans. Due to restrictions imposed by the Internal
Revenue Service, SFSC cannot contribute the same percentage of compensation on
behalf of Mr. Falbo that it can contribute on behalf of other employees. As a
result, SFSC makes a limited contribution to its qualified retirement plans on
Mr. Falbo's behalf. Mr. Falbo's right to participate in the Supplemental Plan
was effective with the adoption of the Supplemental Plan. His right to
participate in the Supplemental Plan ceases at the earlier of his termination
of employment or the date the Supplemental Plan is terminated by SFSC.
Pursuant to the Supplemental Plan, SFSC contributes on behalf of Mr.
Falbo an amount equal to 12% of his compensation in excess of the compensation
limits stated under the Internal Revenue Code of 1986 section 401(a)(17) for
that year. Interest on the contributions made to Mr. Falbo's account is
credited annually at a rate equal to the annual interest earnings for the
Pension Plan.
Benefits under the Supplemental Plan will begin to be made to Mr. Falbo
at the termination of his employment or his retirement. The form in which
benefits are paid to Mr. Falbo is determined by his age at the time of his
termination or retirement. If Mr. Falbo's employment terminates on or after
the date he attains age 65, benefits will be paid beginning the month following
his termination or retirement and monthly thereafter until the final payment is
made in the month he attains age 80. If Mr. Falbo terminates employment on or
after age 55, but before age 65, SFSC will begin paying Mr. Falbo's accumulated
benefits in monthly installments beginning the first month following his
termination and monthly thereafter until the final payment is made in the
month he attains age 65. If Mr. Falbo dies after termination but before
receipt of all benefits under the plan, the remaining benefits will be paid in
installments to his spouse over the remaining term of the plan, as applicable.
In the event Mr. Falbo dies without a spouse or his widow dies before
completion of the installment payments, the unpaid benefits will be paid to his
or, if applicable, his widow's estate in a lump sum. If Mr. Falbo terminates
employment prior to age 55, SFSC will pay the amount credited on his behalf
under the plan as a lump sum. Mr. Falbo's benefits under the Supplemental Plan
will be fully and completely forfeited in the event he is terminated for cause.
8
<PAGE> 10
If Mr. Falbo dies before age 65 and before beginning to receive benefits
under the Supplemental Plan, his surviving spouse, or if there is no surviving
spouse his estate, shall be entitled to a lump sum benefit equal to the greater
of one million dollars or the amount credited on Mr. Falbo's behalf under the
Supplemental Plan. The Company's obligations under this plan are insured.
STOCK OPTIONS. The Officer SOP was established for the benefit of key
salaried employees of the Company and any subsidiary thereof, including SFB.
The Officer SOP is administered by the Stock Option Committee of the Board of
Directors. The Officer SOP provides for the granting of incentive stock
options ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code, NSOs, stock appreciation rights ("SARs"), and Restricted Stock as
described below. The Stock Option Committee will also determine the number of
shares of Common Stock subject to options, the option price and the time or
times when each option will first become exercisable, in whole or in part.
The Stock Option Committee may grant SARs and Restricted Stock to key
salaried employees and may determine whether such grant shall be considered an
alternative right to an option under the Officer SOP. The grant of a SAR
entitles the holder to receive cash in an amount equivalent to the difference
between the fair market value of the Common Stock on the day of exercise and
the price established on the date of the granting of the SAR. The grant of
Restricted Stock entitles the holder to all of the rights of stock ownership,
including the right to vote and receive dividends, subject to a risk of
forfeiture if the holder's employment is terminated within a certain period of
time under specified circumstances. All restrictions on Restricted Stock lapse
upon a "change in control" of SFSC, as defined in the Officer SOP.
The exercise price of ISOs granted under the Officer SOP will not be
less than 100% of the fair market value of the shares on the date of grant of
the option. For NSOs, the option price shall not be less than 85% of the fair
market value of the shares on the grant date. The maximum option term is ten
years for ISOs. The Board of Directors may amend the Officer SOP or
discontinue it, but may not take action to alter any previously granted option.
Further, the shareholders must approve any amendment to the Officer SOP that
would increase the number of options available, decrease the option price,
extend the term of the Officer SOP, or extend the period within which to
exercise options.
The following table summarizes options exercised during 1996 and
presents the value of unexercised options held by the Named Executive Officers
at December 31, 1996. No stock options, SARs, or Restricted Stock were granted
to the Named Executive Officers under the Officer SOP in 1996.
OFFICER OPTIONS EXERCISED AND VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES IN-THE-MONEY
SHARES VALUE UNDERLYING UNEXERCISED OPTIONS AT
ACQUIRED REALIZED OPTIONS AT FISCAL YEAR FISCAL YEAR
NAME ON EXERCISE (#) ($) (1) END (#) (2) END ($) (2) (3)
---- --------------- ------- ----------- ---------------
<S> <C> <C> <C> <C>
Michael J. Falbo -0- -0- 6,739 $71,379
Jerome J. Holz -0- -0- 5,184 54,907
John B. Beckwith -0- -0- 2,074 21,963
Philip F. Hudson 389 4,473 3,758 34,075
- --------------------------------------------
</TABLE>
(1) Values are calculated by subtracting the exercise price from
the fair market value of the stock as of December 31, 1996
($16.67).
(2) All options are exercisable at December 31, 1996.
(3) The dollar values are calculated by determining the difference
between the market value of the underlying Common Stock at
December 31, 1996 and the exercise price of the options.
9
<PAGE> 11
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
The Company's Board of Directors in its entirety functions as the
Personnel and Compensation Committee (the "Personnel Committee"). The
Personnel Committee is responsible for all aspects of the compensation package
offered to the executive officers of the Company and the Banks, other than the
awards under the Officer SOP which are determined by the Company's Stock Option
Committee. The Personnel Committee meets annually to consider the executive
officers' compensation levels and bonus awards. Directors who are also
executive officers of the Company (Messrs. Falbo and Holz) do not participate
in discussions regarding their respective compensation.
The Company's executive compensation policies are intended to attract
and retain competent management with a balance of short and long term
considerations and to provide incentives to individuals based upon the
Company's financial performance, growth, and the attainment of certain goals.
The Board of Directors believes this compensation philosophy is critical to the
Company's long-term success.
The compensation package offered to the executive officers of the
Company and the Banks consists of a mix of salary, incentive bonus awards,
awards of stock options and awards of restricted stock as well as benefits
under several employee benefit plans offered by the Company to all employees
meeting certain eligibility requirements as defined by each respective employee
benefit plan. The additional employee benefits include the Pension Plan, ESOP,
401(k) Plan, and medical/dental insurance coverage.
In setting and adjusting the executive salaries, including the salaries
of the Chief Executive Officer and the named executive officers, it is the
policy of the Personnel Committee to review the base salaries paid or proposed
to be paid by the Company and the Banks with the salaries offered by financial
institutions that are comparable in size to the Company or the respective Bank.
To determine the specific salary range for each executive officer, the Company
utilizes formal financial surveys available from independent banking
associations and consulting organizations which detail salary ranges for each
applicable executive officer position in banks of comparable asset size This
comparison group, since it includes non-public entities, is not identical to
the peer group of companies referred to in the section titled "Performance
Information."
In addition to base salary, the Personnel Committee seeks to provide a
substantial portion of each executive officer's total compensation through
bonus incentives which provide awards based on or tied to the performance of
the Company and the Banks and the applicable executive officers' contribution
thereto. The purpose of these bonus incentives is to more closely align
executive compensation to the annual and long-term financial performance of the
Company and the Banks and to reward key employees for the achievement of
certain goals.
Collectively, the Personnel Committee reviews the comparable statistical
salary information for the Chairman of the Board and the Chief Executive
Officer to determine the compensation levels and bonuses for these executive
officer positions. Messrs. Falbo and Holz are excluded from the discussions
pertaining to their respective salaries and bonuses. For the remaining
executive officers of the Company and the Banks, the Chief Executive Officer
reviews the comparable statistical salary information for each applicable
position and makes specific recommendations for salary adjustments and bonus
awards to the Personnel Committee for their approval. Each of these
recommendations for 1996 were approved by the Personnel Committee as presented.
The Personnel Committee considered the following factors in making its
executive compensation decisions, including recommended salary increases and
bonus awards, for 1996; (1) the Company's short-term and long-term financial
performance (including an evaluation of the Company's net income, earnings per
share, increases in loans and deposits, return on average assets, return on
average equity, and market performance of the Company's Common Stock); (2) in
regards to each individual executive officer, the financial performance of the
particular area of the Company for which the applicable officer is responsible,
including whether or not that area of the Company achieved its performance
objectives in 1996; (3) an evaluation of the executive's overall job
performance; (4) the compensation levels of executive officers in similar
positions with similar companies; (5) the executive's length of service with
the Company; and (6) other information (such as cost of living increases) and
subjective factors which the Company deems appropriate in the case of a
particular executive. The Personnel Committee subjectively analyzes these
factors, and certain factors may weigh more heavily than others with regard to
an individual executive officer. The Personnel Committee determines the base
salary and bonuses of the Chief Executive Officer and the Chairman of the Board
based on their review of similar competitive compensation data and performance
related criteria. Messrs. Falbo and Holz do not participate in the discussions
regarding their respective compensation levels or bonus awards. With respect
to Mr. Falbo in particular, the Personnel Committee also took into account the
Company's sustained financial performance under his leadership in addition to
the aforementioned criteria, in the determination of his recommended salary
level and awarded bonus.
10
<PAGE> 12
The executive compensation package of the Company and the Banks also
includes stock option grants. Options granted under the Officer SOP have a per
share exercise price of 100% of the fair market value of a share of Common
Stock on the date of grant, and, accordingly, the value of the option will be
dependent upon the future market value of the Common Stock. The granting of
options under the Officer SOP is administered by the Stock Option Committee,
which recommends awards to the Personnel Committee. It is the policy of the
Personnel Committee that options should provide a long-term incentive and align
the interest of management with the interest of the Company's shareholders.
During fiscal 1996, no new options were granted to executive officers.
In addition to stock option awards, awards of restricted stock may also
be made under the Officer SOP. Awards of restricted stock are based upon the
same factors as those described in the preceding paragraph and generally vest
over a seven year period from the date of award. Similar to stock options,
awards of restricted stock serve to provide long-term incentive for recipients
and tie compensation to Company and Bank performance as reflected in the market
price of the Company's Common Stock. No restricted stock was awarded during
fiscal 1996.
State Financial Services Corporation
Personnel Committee
Richard A. Horn Barbara E. Holz-Weis Robert R. Spitzer
Michael J. Falbo Jerome J. Holz David M. Stamm
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As indicated above, Michael J. Falbo, President and Chief Executive
Officer of the Company, and Jerome J. Holz, the Company's Chairman of the
Board, serve as members of the Personnel Committee. Messrs. Falbo and Holz do
not participate in the Personnel Committee's discussions regarding the
determination of their respective salaries or bonus awards.
PERFORMANCE GRAPH
The following graph shows the cumulative total return on the Company's
Common Stock compared to the returns of the Nasdaq Stock Market Index for U.S.
Companies and the Nasdaq Bank Stock Index. The values in the graph show the
relative performance of a $100 investment made on December 31, 1991 in the
Company's Common Stock and in each of the indices. The total return
information presented in the graph assumes the reinvestment of dividends.
Graph depicting the performance of the returns on the Company's Common
Stock to the returns of the Nasdaq Stock Market and the Nasdaq Bank
Stock Index for the period 1991 - 1996.
<TABLE>
<CAPTION>
PERFORMANCE GRAPH
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Nasdaq Stock Market 100 116 134 131 185 227
Nasdaq Bank Index 100 146 166 165 246 326
State Financial 100 120 135 158 194 276
</TABLE>
11
<PAGE> 13
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth, as of
March 7, 1997, for the director-nominees, directors continuing in office, the
Named Executive Officers (see "Compensation of Executive Officers"), and all
directors and executive officers as a group, the number of shares of Common
Stock, stock options, and shares of restricted stock beneficially owned and the
percentage of such shares to the total number of shares outstanding.
<TABLE>
<CAPTION>
SUBJECT TO PERCENT OF
DIRECTLY OR STOCK RESTRICTED SHARES
NAME INDIRECTLY (1) OPTIONS (2) STOCK (3) TOTAL OUTSTANDING (4)
- ---- -------------- ----------- ---------- ----- --------------
<S> <C> <C> <C> <C> <C>
Jerome J. Holz 532,301 5,184 1,728 539,213 16.8%
Richard A. Horn (5) 58,998 5,702 -0- 64,700 2.0
Robert R. Spitzer (5) 10,788 1,728 -0- 12,516 *
David M. Stamm (5) 11,008 7,430 -0- 18,438 *
Barbara E. Holz-Weis (5) 47,878 6,610 -0- 54,488 1.7
Michael J. Falbo 46,442 6,739 2,592 55,773 1.7
John B. Beckwith 9,898 2,074 1,296 13,268 *
Philip F. Hudson 8,824 3,758 -0- 12,583 *
All Directors and Executive Officers
as a group (10 persons) including
the above-named individuals (5) 781,829 41,866 6,739 830,434 25.6%
</TABLE>
- -------------------
(1) Includes shares owned directly by each individual and the
group, as well as shares owned indirectly (for example as
trustee of a trust); also includes for those individuals who
were Participants in the ESOP that number of shares of Common
Stock which were allocated to such individual's ESOP account as
of March 7, 1997, and with respect to which that individual has
voting rights under the provisions of the ESOP.
(2) Shares subject to stock options which have not yet been
exercised but which are exercisable within 60 days of March 7,
1997.
(3) Held by the Secretary of SFSC on behalf of the above-named
individuals as participants in the Officer SOP.
(4) Percentage of total number of shares of Common Stock
outstanding. Assumes, for each individual owning options and
for the group, the exercise of that number of options which are
currently exercisable or which will become exercisable within
60 days of March 7, 1997, are included in the total number of
shares. Asterisk denotes less than 1% ownership.
(5) Messrs. Horn, Spitzer, Stamm, and Holz-Weis are members of the
Administrative Board of the ESOP ("ESOP Board"). As of March
7, 1997, 129,444 shares were held for the ESOP by the
independent ESOP trustee, of which 86,982 had been allocated to
ESOP participants' accounts and 42,462 remained unallocated.
The ESOP provides that the independent ESOP trustee must vote
shares allocated to a participant's account in accordance with
the direction of the participant. The ESOP Board directs
voting by the independent Trustee, and may also direct the
disposition of unallocated shares. The ESOP Board does not
have the power to vote or direct the vote, or to dispose of or
direct the disposition of, shares which have been allocated to
participants' accounts. To avoid duplication, the individual
totals reported in the above table for Messrs. Horn, Spitzer,
and Stamm, and Mrs. Holz-Weis do not reflect the 42,462
unallocated shares of which they are deemed to share beneficial
ownership as members of the ESOP Board; however, the total for
all directors and executive officers as a group does include
the 42,462 unallocated shares. If the 42,462 unallocated
shares deemed to be beneficially owned (as a result of such
shared voting and dispositive power) by Messrs. Horn, Spitzer,
and Stamm, and Mrs Holz-Weis as members of the ESOP Board are
included in each of their individual totals, the resulting
total numbers of shares and the percentages of Common Stock
beneficially owned by each of them on an individual basis would
be as follows: Richard A. Horn, 107,162 shares (3.3% of the
total shares outstanding) ; Robert R. Spitzer, 54,978 shares
(1.7% of the total shares outstanding); David M. Stamm, 60,901
shares (1.9% of the total shares outstanding); and Barbara E.
Holz-Weis, 96,949 shares (3.0% of the total shares
outstanding).
BENEFICIAL OWNERS. The only person known to SFSC to be the "beneficial
owner" (defined in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934) of more than 5% of the outstanding shares of Common Stock as of March
7, 1997, is the following:
NUMBER OF PERCENT OF
NAME AND BUSINESS ADDRESS SHARES CLASS
- ------------------------- ------ -----
Jerome J. Holz 539,213 16.8%
10708 West Janesville Road
Hales Corners, WI 53130
12
<PAGE> 14
CERTAIN TRANSACTIONS AND OTHER RELATIONSHIPS WITH MANAGEMENT AND
PRINCIPAL SHAREHOLDERS
INDEBTEDNESS OF MANAGEMENT. Some of the executive officers and
directors of SFSC are, and have been during the preceding three fiscal years,
customers of SFB, and some of the officers and directors of SFB are direct or
indirect owners of 10% or more of corporations which are, or have been in the
past, customers of SFB. As such customers, they have had transactions in the
ordinary course of business (including interest rates and collateral on loans)
as those prevailing at the time for comparable transactions with nonaffiliated
persons. In the opinion of management of SFSC, none of the transactions
involved more than the normal risk of collectability or presented any other
unfavorable features. At December 31, 1996, SFB had $4,982,000 in loans
outstanding to the directors and executive officers of SFSC, which amount
represented 14.0% of total shareholders' equity at that date. A substantial
portion of these outstanding loans were commercial loans from SFB to Holz
Motors, Inc., which is owned by Jerome J. Holz, who is Chairman of the Board
and Vice President of SFSC, and Holz Motors' affiliated entities; to Horn
Bros., Inc., of which Richard A. Horn, a director of SFSC, is President; and to
George Webb Corporation, of which David M. Stamm, a director of SFSC, is
President.
EDGEWOOD PLAZA. SFB leases approximately 8,900 square feet of floor
space in Edgewood Plaza, an office building located at 4811 South 76th Street,
Greenfield, Wisconsin, pursuant to the terms of a lease agreement dated
December 20, 1982, and amended June 14, 1993, between SFB and Edgewood Plaza
Joint Venture. Edgewood Plaza Joint Venture is a Wisconsin general partnership
that includes as partners Jerome J. Holz and Richard A. Horn who are directors
of SFSC. The term of the lease will end December 27, 1997. The rent includes
a base rent of approximately $156,000 per year, plus additional rent equal to
increases in operating expenses over those incurred during the base year of
1983. The base rent may be adjusted every three years by an amount equal to
25% of the base rent multiplied by increases in the Consumer Price Index during
the preceding period. Currently, the total rent payable is approximately
$214,000 per year. SFB subleases space to another occupant of Edgewood Plaza.
The sublease covers approximately 2,535 square feet of the floor space of
Edgewood Plaza under a lease which expires on December 27, 1997. Under the
terms of this sublease, SFB receives annual rent of approximately $48,400. In
1993, Edgewood executed an extension of its lease with Edgewood Plaza which
extends Edgewood's lease through December, 2007. Under the terms of this
extension, SFB will lease approximately 4,100 square feet of floor space from
Edgewood Plaza.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Exchange Act, the Company's directors and
executive officers, and any persons holding greater than 10% of the Company's
outstanding Common Stock are required to report to the Securities and Exchange
Commission their initial ownership of the Company's Common Stock and subsequent
changes thereto. Specific due dates have been established for the filing of
these reports with Securities and Exchange Commission. The Company is required
to disclose in this Proxy Statement any failure in 1996 to file such reports by
the specific due dates. Based solely on its review of the copies of such forms
received by it, or written representations from certain persons that no such
forms were required for those persons, the Company believes that during the
year ended December 31, 1996, its officers, directors, and greater than 10%
shareholders complied with the filing requirements of Section 16 (a) of the
Exchange Act.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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<PAGE> 15
ITEM 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Ernst & Young LLP as
independent auditors to audit the books, records, and accounts of the Company
and its subsidiaries for the year ending December 31, 1997, and proposes that
the shareholders ratify such appointment. Ernst & Young LLP acted as
independent auditors for the year ended December 31, 1996. A representative of
Ernst & Young LLP is expected to attend the Meeting, will have the opportunity
to make a statement, and will be available to respond to appropriate questions.
The vote necessary to ratify the appointment of independent auditors is
governed by Section 180.0725(3) of the Wisconsin Business Corporation Law,
which provides that a matter will be approved if a quorum is present an the
number of votes cast in favor of the matter exceed the number of votes cast in
opposition thereto. Accordingly, a shareholder will be deemed "present" at the
Meeting by proxy because the shareholder has returned a proxy (even if the
proxy card contains no instructions as to voting with respect to the
ratification of the appointment of independent auditors, abstains from voting
thereon, or constitutes a broker "non-vote" with respect thereto). However,
unless the shareholder votes "for" or "against" the ratification of the
appointment of independent auditors, the shareholder's vote will not be
counted. See "Introduction -- Quorum and Voting Information."
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
ITEM 3. OTHER MATTERS
The matters referred to in the foregoing Notice of Meeting and Proxy
Statement are, as far as the Board of Directors knows, the only matters which
will be presented for consideration at the Meeting. If any other matters
properly come before the Meeting, the Proxyholders named in the accompanying
Proxy will vote on them in accordance with their best judgement exercising the
authority conferred thereby.
By Order of the Board of Directors
/s/ Michael J. Falbo
MICHAEL J. FALBO,
President and Chief Executive Officer
March 14, 1997
14
