This prospectus is filed
pursuant to Rule 424(b)(3)
and related to Registgration
Statement No. 333-64375
[Logo]
State Financial Services Corporation
10708 W. Janesville Road
Hales Corners, Wisconsin 53130
Michael J. Falbo
President and Chief Executive Officer
October 5, 1998
Dear Shareholder:
We are pleased to enclose materials relating to a Special Meeting of
Shareholders of State Financial Services Corporation ("SFSC") to be held
at 2:00 p.m. (local time), on November 5, 1998, at Tuckaway Country Club,
6901 W. Drexel Ave., Franklin, Wisconsin.
The primary purpose of the Special Meeting is (i) to consider and
vote on an Agreement and Plan of Merger (the "Merger Agreement"), dated as
of June 1, 1998, between SFSC and Home Bancorp of Elgin, Inc., a Delaware
corporation ("HBE"), relating to the proposed merger of HBE with and into
SFSC (the "Merger"), as well as the issuance of shares of SFSC Common
Stock in accordance with the Merger Agreement, (ii) to consider and vote
on a proposal to increase the number of shares of common stock that SFSC
is authorized to issue from 10,000,000 shares to 25,000,000 shares and
(iii) to consider such other matters as may properly come before the
Special Meeting. Without the increase in the number of authorized shares,
SFSC may not have a sufficient number of authorized shares to complete the
Merger. The proposal to increase the number of authorized shares of
common stock may be necessary to ensure that SFSC will have sufficient
authorized but unissued shares to complete the Merger, as well as to
provide SFSC with the flexibility to issue shares in the future when the
need arises without the delay of having to obtain shareholder approval to
authorize the issuance if not otherwise required.
The financial services industry continues to undergo change and is
becoming increasingly competitive. This new environment, driven in part
by regulatory changes, has and will continue to alter the way in which our
industry does business. Your Board of Directors believes that the
proposed combination of SFSC and HBE will result in a combined business
that will be well-positioned to compete in this new environment.
Under the terms of the Merger Agreement and upon consummation of the
Merger, each issued share of HBE common stock, $.01 par value, other than
shares owned by HBE as treasury stock, shares owned by the Home Bancorp of
Elgin, Inc. 1997 Recognition and Retention Plan and not allocated to
participants thereunder and shares owned by SFSC, will be converted into
the right to receive shares of SFSC common stock, $.10 par value ("SFSC
Common Stock"), based on the exchange ratio specified in the Merger
Agreement, plus cash in lieu of any fractional shares. The applicable
exchange ratio is dependent upon the market value of SFSC Common Stock
prior to the consummation of the Merger, as described in greater detail in
the accompanying Joint Proxy Statement/Prospectus.
Your shares of SFSC Common Stock will not be affected by the Merger,
and you will NOT need to exchange your SFSC stock certificates. Following
consummation of the Merger, each share of SFSC Common Stock will remain
outstanding as one share of the surviving corporation, which will continue
to conduct business under the name State Financial Services Corporation.
Your Board has received a written opinion from its financial advisor,
EVEREN Securities, Inc. dated July 14, 1998, which was confirmed in a
written opinion dated the date of the attached Joint Proxy
Statement/Prospectus, that, as of such date, and based upon the
assumptions made, matters considered and limits of review as set forth in
such opinion, the consideration to be paid by SFSC in connection with the
Merger is fair, from a financial point of view, to SFSC and its
shareholders.
The Merger Agreement and the transactions contemplated thereby are
described in greater detail in the accompanying Notice and Joint Proxy
Statement/Prospectus and its various attachments. I encourage you to read
these materials carefully.
The Board of Directors of SFSC has unanimously approved the Merger
Agreement as being in the best interests of SFSC and its shareholders and
recommends that holders of SFSC Common Stock vote in favor of the Merger
and the proposal to increase the authorized number of shares of SFSC
Common Stock. In making these recommendations, the Board of Directors has
considered numerous factors, including, but not limited to, the structure
of the proposed Merger and the recent results of operations and financial
position of SFSC and HBE.
Whether or not you plan to attend the Special Meeting, holders of
SFSC Common Stock are asked to please fill out, sign, and date the
enclosed proxy card, and return it promptly in the accompanying envelope,
which requires no postage if mailed in the United States. If you later
find that you may be present at the Special Meeting or for any other
reason desire to revoke your proxy, you may do so at any time before it is
voted.
Sincerely,
/s/ Michael J. Falbo
Michael J. Falbo
President and Chief Executive Officer
<PAGE>
[Logo]
STATE FINANCIAL SERVICES CORPORATION
10708 W. Janesville Road
Hales Corners, Wisconsin 53130
________________________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held November 5, 1998
________________________________________
To the Shareholders of State Financial Services Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders
(the "Special Meeting") of State Financial Services Corporation, a
Wisconsin corporation ("SFSC"), will be held on November 5, 1998, at
2:00 p.m., local time, at Tuckaway Country Club, 6901 W. Drexel Ave.,
Franklin, Wisconsin, for the following purposes, all of which are more
fully described in the accompanying Joint Proxy Statement/Prospectus:
1. To consider and vote upon the approval and adoption of the
Agreement and Plan of Merger (together with a related Plan of Merger, the
"Merger Agreement"), dated as of June 1, 1998, between SFSC and Home
Bancorp of Elgin, Inc., a copy of which is attached as Annex A to the
accompanying Joint Proxy Statement/Prospectus, and the transactions
contemplated thereby, including, among other things, the issuance of
shares of common stock of SFSC pursuant to the terms of the Merger
Agreement.
2. To consider and vote on a proposal to approve an amendment to
the Amended and Restated Articles of Incorporation of SFSC to increase the
authorized number of shares of common stock of SFSC from 10,000,000 to
25,000,000.
3. To consider such other matters as may properly come before the
Special Meeting or any adjournments or postponements thereof, including
proposals to adjourn the Special Meeting to permit the further
solicitation of proxies by the Board of Directors of SFSC in the event
that there are not sufficient votes to approve the proposals described
above at the time of the Special Meeting; provided, however, that no proxy
which is voted against either of the proposals described above will be
voted in favor of an adjournment to solicit further proxies.
The approval of proposals 1 and 2 is a condition to the consummation
of the transactions contemplated by the Merger Agreement. If approved by
shareholders, the amendment increasing the number of authorized shares of
SFSC common stock will take effect only if the Merger is consummated.
The close of business on September 11, 1998 has been fixed as the
record date for the determination of shareholders entitled to notice of,
and to vote at, the Special Meeting and any adjournment or postponement
thereof. The Merger and the proposed amendment to SFSC's Amended and
Restated Articles of Incorporation are more fully described in the
accompanying Joint Proxy Statement/Prospectus and the Annexes thereto,
which should be read carefully by all shareholders.
By Order of the Board of Directors,
State Financial Services Corporation
/s/ Michael J. Falbo
Hales Corners, Wisconsin Michael J. Falbo
October 5, 1998 President and Chief Executive Officer
YOUR VOTE IS IMPORTANT NO MATTER HOW LARGE OR SMALL YOUR HOLDINGS MAY
BE. TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE DATE THE
ENCLOSED PROXY, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS, SIGN EXACTLY
AS YOUR NAME APPEARS THEREON AND RETURN IT IMMEDIATELY IN THE SELF-
ADDRESSED ENVELOPE ENCLOSED.
<PAGE>
[Logo]
HOME BANCORP OF ELGIN, INC.
16 North Spring Street
Elgin, Illinois 60120
(847) 742-3800
October 5, 1998
Dear Shareholder:
We are pleased to enclose your Notice of Special Meeting and Joint
Proxy Statement/Prospectus for a Special Meeting of Shareholders of Home
Bancorp of Elgin, Inc. ("HBE") to be held on November 5, 1998 at
2:00 p.m., Central Standard Time, at 16 North Spring Street, Elgin,
Illinois.
At the Special Meeting you will be asked to consider and vote on a
proposed merger of HBE with and into State Financial Services Corporation
("SFSC"), a Wisconsin corporation and a registered bank holding company
(the "Merger").
In the Merger, you will receive a certain number of shares of common
stock of SFSC for each share of HBE Common Stock held by you ("Exchange
Ratio") and cash in lieu of any fractional share of SFSC common stock
which you otherwise would be entitled to receive. As more fully discussed
in the attached Joint Proxy Statement/Prospectus, the Exchange Ratio
generally decreases as the market value of SFSC Common Stock increases.
SFSC common stock is listed and traded on the Nasdaq National Market
System under the symbol "SFSW". The closing price of SFSC common stock in
composite trading on September 23, 1998, was $16.75 per share.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED MERGER
AND RECOMMENDS A VOTE "FOR" THE MERGER. The Board reached this decision
after careful consideration of a number of factors. The enclosed Joint
Proxy Statement/Prospectus contains more detailed information concerning
the Board's decision and the proposed transaction (including the method
for determining the Exchange Ratio). We urge you to consider it
carefully.
Approval of the Merger requires the affirmative vote of the holders
of a majority of the shares of HBE common stock outstanding and entitled
to vote thereon. Accordingly, proxies marked "Abstain" or shares that are
not voted will have the same effect as votes against the Merger. We urge
you to take the time to consider this important matter and vote now.
In order to make sure that your vote is represented, indicate your
vote on the enclosed proxy form, date and sign it, and return it in the
enclosed envelope. If you attend the meeting in person, you may revoke
your proxy at the meeting and vote in person. You should not send in
certificates for your shares of HBE Common Stock at this time.
On behalf of the Board of Directors of HBE, I thank you for your
support and urge you to vote for approval of the Merger.
Sincerely,
/s/ George L. Perucco
George L. Perucco
President and Chief Executive Officer
<PAGE>
[Logo]
HOME BANCORP OF ELGIN, INC.
16 North Spring Street
Elgin, Illinois 60120
(847) 742-3800
___________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 5, 1998
___________________________
NOTICE IS HEREBY GIVEN that the Special Meeting of Shareholders (the
"Special Meeting") of Home Bancorp of Elgin, Inc. (the "HBE") will be held
on November 5, 1998 at 16 North Spring Street, Elgin, Illinois 60120, at
2:00 p.m., Central Time, for the following purposes:
1. To consider and vote upon the approval of an Agreement and Plan
of Merger ("Agreement") between State Financial Services
Corporation ("SFSC"), a bank holding company organized under
Wisconsin law and the Company, a copy of which is included as
Annex A to the accompanying Proxy Statement/Prospectus and
incorporated by reference herein, pursuant to which (i) the
Company will be merged with and into SFSC ("Merger"); and
(ii) each outstanding share of common stock of the Company, par
value $.01 per share, would be converted into a number of shares
of common stock of SFSC, par value $.10 per share, determined by
accordance with the terms of the Agreement, and cash in lieu of
any fractional share of common stock of SFSC; and
2. To consider such other matters as may properly come before the
Special Meeting or any adjournment or postponement thereof. HBE
is not aware of any other business that may properly come before
the Special Meeting.
The Board of Directors has fixed September 11, 1998 as the record
date for the determination of shareholders entitled to notice of and to
vote at the Special Meeting and any adjournment or postponement thereof.
Only shareholders of record at the close of business on such date will be
entitled to notice of and to vote at the Special Meeting and any
adjournment or postponement thereof.
By Order of the Board of
Directors,
/s/ Kathleen A. Schroeder
Kathleen A. Schroeder
Vice President and Secretary
Elgin, Illinois
October 5, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER OF SHARES YOU
OWN. THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND MARK THE ENCLOSED
PROXY CARD PROMPTLY AND RETURN IT IN THE ENCLOSED ENVELOPE. RETURNING THE
PROXY CARD WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE
SPECIAL MEETING.
<PAGE>
JOINT PROXY STATEMENT
Special Meeting of Shareholders Special Meeting of Shareholders
of of
STATE FINANCIAL SERVICES HOME BANCORP OF ELGIN, INC.
CORPORATION 16 North Spring Street
10708 W. Janesville Road Elgin, Illinois 60120
Hales Corners, Wisconsin 53130 (847) 742-3800
(414) 425-1600
____________________________________
PROSPECTUS OF
State Financial Services Corporation
____________________________________
This Joint Proxy Statement/Prospectus is being furnished to the
shareholders of State Financial Services Corporation, a Wisconsin
corporation ("SFSC"), and to the shareholders of Home Bancorp of Elgin,
Inc., a Delaware corporation ("HBE"), in connection with the solicitation
of proxies of common shareholders of SFSC by the Board of Directors of
SFSC and of common shareholders of HBE by the Board of Directors of HBE,
in each case for use at the respective special meetings of such
shareholders to be held on November 5, 1998, at Tuckaway Country Club,
6901 W. Drexel Ave., Franklin, Wisconsin, commencing at 2:00 p.m., local
time, and any adjournments or postponements thereof (the "SFSC Special
Meeting") in the case of SFSC, and to be held on November 5, 1998 at
16 North Spring Street, Elgin, Illinois, commencing at 2:00 p.m., local
time, and any adjournments or postponements thereof (the "HBE Special
Meeting") in the case of HBE. At the SFSC Special Meeting, holders of
SFSC common stock, $.10 par value ("SFSC Common Stock"), will consider and
vote upon (i) the approval and adoption of an Agreement and Plan of Merger
(together with a related Plan of Merger, the "Merger Agreement"), dated as
of June 1, 1998, among SFSC and HBE, which provides for, among other
things, the merger of HBE with and into SFSC (the "Merger"), and the
transactions contemplated thereby, including the issuance of additional
shares of SFSC Common Stock pursuant to the Merger Agreement, and (ii) the
proposal to amend SFSC's Amended and Restated Articles of Incorporation to
increase the authorized number of shares of SFSC Common Stock from
10,000,000 shares to 25,000,000 shares.
At the HBE Special Meeting, holders of HBE common stock, $.01 par
value ("HBE Common Stock"), will consider and vote upon the approval and
adoption of the Merger Agreement and the transactions contemplated
thereby.
Under the Merger Agreement, each issued and outstanding share of HBE
Common Stock (except as otherwise provided therein) will be converted into
the right to receive shares of SFSC Common Stock as described herein. For
a more complete description of the Merger Agreement and the terms of the
Merger, see "THE MERGER."
This Joint Proxy Statement/Prospectus also constitutes a prospectus
of SFSC with respect to the shares of SFSC Common Stock to be issued in in
connection with the Merger.
__________________
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY.
__________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
__________________
This Joint Proxy Statement/Prospectus and accompanying forms of proxy
are first being mailed to shareholders of SFSC and HBE on or about
October 5, 1998.
The date of this Joint Proxy Statement/Prospectus is September 30, 1998.
__________________
<PAGE>
AVAILABLE INFORMATION
SFSC and HBE are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith, file reports, proxy statements and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can
be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at the following Regional Offices of the Commission: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material may
also be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants
that file electronically with the Commission. The address of such Web
site is http://www.sec.gov.
This Joint Proxy Statement/Prospectus does not contain all of
the information set forth in the Registration Statement on Form S-4 and
exhibits thereto (the "Registration Statement") covering the securities
offered hereby which SFSC has filed with the Commission, certain portions
of which have been omitted pursuant to the rules and regulations of the
Commission, and to which portions reference is hereby made for further
information with respect to SFSC and the securities offered hereby. The
Registration Statement is available for inspection and copying as set
forth above. Statements contained in this Joint Proxy Statement/
Prospectus or in any document incorporated by reference in this Joint
Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such
reference.
All information concerning SFSC included in this Joint Proxy
Statement/Prospectus has been furnished by SFSC, and all information
concerning HBE included in this Joint Proxy Statement/Prospectus has been
furnished by HBE.
No person is authorized to give any information or make any
representation not contained in this Joint Proxy Statement/Prospectus and,
if given or made, the information or representation should not be relied
upon as having been authorized by SFSC or HBE. This Joint Proxy
Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to purchase the securities offered hereby, or the
solicitation of a proxy, in any jurisdiction to or from any person to whom
it is unlawful to make such offer or solicitation of an offer or proxy in
such jurisdiction. Neither the delivery of this Joint Proxy Statement/
Prospectus nor any distribution of the securities to which this Joint
Proxy Statement/Prospectus relates shall, under any circumstances, create
any implication that there has been no change in the affairs of SFSC or
HBE since the date of this Joint Proxy Statement/Prospectus.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Joint Proxy Statement/Prospectus incorporates documents by
reference which are not presented herein or delivered herewith. Copies of
such documents, excluding exhibits unless specifically incorporated
herein, are available to any person, including any beneficial owner, to
whom this Joint Proxy Statement/Prospectus is delivered, upon written or
oral request, without charge, in the case of documents relating to SFSC,
directed to Michael A. Reindl, Vice President, Controller and Chief
Financial Officer, State Financial Services Corporation, 10708 W.
Janesville Road, Hales Corners, Wisconsin 53130 (telephone number
(414) 425-1600), and in the case of documents relating to HBE, directed to
David G. Towe, Vice President Investor Relations, Home Bancorp of Elgin,
Inc., 16 North Spring Street, Elgin, Illinois (telephone number
(847) 742-3800).
The following documents filed with the Commission by SFSC (File
No. 0-18166) or HBE (File No. 0-28696) pursuant to the Exchange Act are
incorporated herein by reference:
(a) SFSC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
(b) SFSC's Quarterly Reports on Form 10-Q for the quarters
ended March 31 and June 30, 1998.
(c) SFSC's Current Reports on Form 8-K dated January 14, March
13 and June 2, 1998.
(d) HBE's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
(d) HBE's Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1998.
(e) HBE's Current Report on Form 8-K dated June 15, 1998 and as
amended on June 17, 1998.
The information relating to SFSC and HBE contained in this Joint
Proxy Statement/Prospectus does not purport to be comprehensive and should
be read together with the information in the documents incorporated by
reference herein.
All documents filed by SFSC and HBE pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the SFSC and HBE Special Meetings will be deemed to be
incorporated by reference into this Joint Proxy Statement/Prospectus and
to be a part hereof from the date of filing of the documents.
Any statement contained in a document incorporated by reference
herein or deemed to be incorporated herein by reference shall be deemed to
be modified or superseded for purposes hereof to the extent that a
statement contained herein (or in any subsequently filed document which
also is, or is deemed to be, incorporated by reference herein) modifies or
supersedes such statement. Any statement so modified or superseded shall
not be deemed to constitute a part hereof except as so modified or
superseded.
<PAGE>
FORWARD-LOOKING STATEMENTS
Cautionary Statement for Purposes of the Private Litigation
Reform Act of 1995.
This Joint Proxy Statement/Prospectus (including information
incorporated by reference herein), information included in, or
incorporated by reference from future filings by SFSC or HBE with the
Commission, and information contained in written material, press releases
and oral statements issued or made by or on behalf of SFSC or HBE contain,
or may contain, certain "forward-looking statements" including statements
concerning plans, objectives and future events or performance, and other
statements which are other than statements of historical fact. Forward-
looking statements specifically include footnotes 9 and 11 to the
Unaudited Pro Forma Financial Information and also include information
concerning possible or assumed future results of operations of SFSC and
HBE set forth under "THE MERGER-Reasons for the Merger" and "THE MERGER-
Opinions of Financial Advisors" and those preceded by, followed by or that
include the words "believes," "expects," "anticipates" or similar
expressions. For those statements, SFSC and HBE claim the protection of
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. It should be understood
that the following important factors, in addition to those discussed
elsewhere in this document and in the documents incorporated by reference,
could affect the future results of SFSC and HBE, and could cause those
results to differ materially from those expressed in such forward-looking
statements. Factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, but
are not limited to, the following: (i) failure to fully realize or to
realize within the expected time frame expected cost savings from the
Merger; (ii) lower than expected income or revenues following the Merger,
or higher than expected operating costs; (iii) a significant increase in
competitive pressure in the banking and financial services industry; (iv)
business disruption related to the Merger (both before and after
completion); (v) greater than expected costs or difficulties related to
the integration of the management of SFSC and HBE; (vi) litigation costs
and delays caused by litigation; (vii) higher than anticipated costs in
completing the Merger; (viii) unanticipated regulatory delays or
constraints or changes in the proposed transaction required by regulatory
authorities; (ix) reduction in interest margins due to changes in the
interest rate environment; (x) poorer than expected general economic
conditions, including acquisition and growth opportunities, either
nationally or in the states in which the combined company will be doing
business; (xi) legislation or regulatory changes which adversely affect
the businesses in which the combined company would be engaged; and (xii)
other unanticipated occurrences which may delay the consummation of the
Merger, increase the costs related to the Merger or decrease the expected
financial benefits of the Merger.
<PAGE>
State Financial Services Corporation
Home Bancorp of Elgin, Inc.
Joint Proxy Statement/Prospectus
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . i
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . i
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
State Financial Services Corporation . . . . . . . . . . . . . . 1
Home Bancorp of Elgin, Inc. . . . . . . . . . . . . . . . . . . 1
The Special Meetings . . . . . . . . . . . . . . . . . . . . . . 2
Votes Required . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reasons for the Merger; Recommendation of the Boards of
Directors . . . . . . . . . . . . . . . . . . . . . . . . . 2
Background of the Merger . . . . . . . . . . . . . . . . . . . . 3
Proposed Merger . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Conditions to the Merger . . . . . . . . . . . . . . . . . 5
Exchange of Stock Certificates . . . . . . . . . . . . . . 5
Waivers and Amendments to the Merger Agreement . . . . . . 6
Termination . . . . . . . . . . . . . . . . . . . . . . . . 6
Reimbursement of Expenses . . . . . . . . . . . . . . . . . 6
Indemnification . . . . . . . . . . . . . . . . . . . . . . 6
Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . 7
Interests of Certain Persons in the Mergers . . . . . . . . . . 7
Opinions of Financial Advisors . . . . . . . . . . . . . . . . . 7
No Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . 8
Certain Federal Income Tax Consequences of the Merger . . . . . 8
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . 8
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . 8
Dividends on SFSC Common Stock and HBE Common Stock . . . . . . 8
Markets and Market Prices . . . . . . . . . . . . . . . . . . . 9
Comparative Book Values, Dividends and Earnings Per Common
Share . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Comparative Market Prices and Dividends . . . . . . . . . . . . 11
Selected Historical and Pro Forma Data . . . . . . . . . . . . . 12
SPECIAL MEETINGS INFORMATION . . . . . . . . . . . . . . . . . . . . 14
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Date, Place and Times . . . . . . . . . . . . . . . . . . . . . 14
Record Dates; Votes Required and Revocation of Proxies . . . . . 14
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . 16
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Background of the Merger . . . . . . . . . . . . . . . . . . . . 17
Reasons for the Merger; Recommendation of Boards of Directors . 19
Opinions of Financial Advisors . . . . . . . . . . . . . . . . . 21
Interests of Certain Persons in the Merger . . . . . . . . . . . 27
Certain Federal Income Tax Consequences . . . . . . . . . . . . 28
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . 29
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . 29
Listing on The Nasdaq Stock Market . . . . . . . . . . . . . . . 30
Federal Securities Law Consequences . . . . . . . . . . . . . . 30
No Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . 30
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 31
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Consummation of the Merger . . . . . . . . . . . . . . . . . . . 31
Representations and Warranties . . . . . . . . . . . . . . . . . 34
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . 34
Board of Directors and Officers Following Consummation of the
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 35
Conduct Inconsistent with the Merger Agreement . . . . . . . . . 36
Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . 37
Conditions to Each Party's Obligation to Effect the Merger . . . 38
Termination, Amendment and Waiver . . . . . . . . . . . . . . . 39
Reimbursement of Expenses . . . . . . . . . . . . . . . . . . . 40
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 40
THE STOCK OPTION AGREEMENT . . . . . . . . . . . . . . . . . . . . . 40
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Exercise of Option . . . . . . . . . . . . . . . . . . . . . . . 41
Expiration of the Option . . . . . . . . . . . . . . . . . . . . 42
Repurchase Right . . . . . . . . . . . . . . . . . . . . . . . . 42
Registration Rights . . . . . . . . . . . . . . . . . . . . . . 42
Right of First Refusal for Registered Sale . . . . . . . . . . . 43
Anti-Takeover Effect of the Stock Option Agreement . . . . . . . 43
AMENDMENT TO SFSC AMENDED AND RESTATED ARTICLES OF INCORPORATION . . 43
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . 45
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 49
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION . . . . . . . 49
COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF SFSC COMMON STOCK AND HBE
COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Merger, Consolidation and Sales of Assets . . . . . . . . . . . 60
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 61
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Amendments to Charters . . . . . . . . . . . . . . . . . . . . . 61
Amendments to By-laws . . . . . . . . . . . . . . . . . . . . . 62
Cumulative Voting . . . . . . . . . . . . . . . . . . . . . . . 62
Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . 62
DESCRIPTION OF SFSC CAPITAL STOCK . . . . . . . . . . . . . . . . . . 64
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 65
Certain Statutory Provisions . . . . . . . . . . . . . . . . . . 65
STATE FINANCIAL SERVICES CORPORATION . . . . . . . . . . . . . . . . 65
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Incorporation of Certain Information by Reference . . . . . . . 66
Management's Discussion and Analysis of SFSC's Results of
Operations and Financial Position . . . . . . . . . . . . . 66
At and for the Six Months Ended June 30, 1998 Compared to the Six
Months Ended June 30, 1997 . . . . . . . . . . . . . . . . . . . . 66
At and for the Period Ended December 31, 1997 . . . . . . . . . . . . 72
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Income Statement Analysis . . . . . . . . . . . . . . . . . . . 72
Home Bancorp of Elgin, Inc. . . . . . . . . . . . . . . . . . . . . . 92
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Incorporation of Certain Information by Reference . . . . . . . 92
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . 93
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . F-1
Annex A Agreement and Plan of Merger . . . . . . . . . . . . . . . A-1
Annex B Stock Option Agreement between SFSC and HBE . . . . . . . . B-1
Annex C Opinion of EVEREN Securities, Inc. . . . . . . . . . . . . C-1
Annex D Opinion of Hovde Financial, Inc. . . . . . . . . . . . . . D-1
Annex E Proposed Amendment to the Amended and Restated
Articles of Incorporation of SFSC . . . . . . . . . . . . . E-1
<PAGE>
SUMMARY
The following is a brief summary of certain information with respect
to matters to be considered at the Special Meetings. As used in this
Joint Proxy Statement/Prospectus, the terms "SFSC" and "HBE" refer to such
corporations, and, except where the context otherwise requires, such
entities and their respective subsidiaries. This summary is not intended
to be complete and is qualified in its entirety by reference to the more
detailed information contained elsewhere in this Joint Proxy Statement/
Prospectus, including the annexes hereto, and the documents incorporated
in this Joint Proxy Statement/Prospectus by reference. Shareholders are
urged to review carefully this entire Joint Proxy Statement/Prospectus.
State Financial Services Corporation
State Financial Services Corporation, a Wisconsin corporation
("SFSC"), is a multi-bank holding company with three subsidiary banks,
State Financial Bank in Wisconsin ("SFB"), SFB-Waterford ("SFB-
Waterford"), and State Financial Bank-Illinois (formerly Richmond Bank)
("Richmond," and together with SFB and SFB-Waterford sometimes
collectively referred to as the "Banks"). SFSC acquired Richmond on
December 31, 1997 for a cash purchase price of approximately
$10.8 million. The Banks operate a total of 11 full-service offices
located in southeastern Wisconsin (including the Milwaukee metropolitan
area) and northeastern Illinois.
At June 30, 1998, SFSC had assets of $417.9 million, net loans of
$258.7 million, total deposits of $363.0 million and shareholders' equity
of $39.8 million.
On September 8, 1998, SFSC completed the acquisition of Lokken,
Chesnut & Cape, Incorporated ("Lokken"), an asset management firm
headquartered in LaCrosse, Wisconsin, in a stock transaction accounted for
as a purchase. Lokken is a financial and estate planning and investment
management firm with discretionary assets of approximately $95 million
under management. Lokken is now a wholly-owned subsidiary of SFSC. As a
result of the acquisition, the former stockholders of Lokken received, in
total, 141,551 shares of SFSC Common Stock which includes contingent
consideration.
The principal executive office of SFSC is located at 10708 West
Janesville Road, Hales Corners, Wisconsin 53130, and its telephone number
is (414) 425-1600.
Home Bancorp of Elgin, Inc.
Home Bancorp of Elgin, Inc. ("HBE") was incorporated in June of 1996
under the laws of Delaware, with the express purpose to serve as the
holding company for Home Federal Savings and Loan Association of Elgin
(the "Association"), a federally charted savings and loan association. On
September 26, 1996, the Association completed its conversion from mutual
to stock form and became a wholly-owned subsidiary of HBE.
The Association was founded in 1883 and is one of the area's oldest
savings institutions. The Association is a community-oriented institution
focusing on developing long-term deposit relationships with customers in
the area northwest of Chicago and providing residential mortgage lending
to the same area. The Association's principal business consists of
attracting deposits from the public and investing those deposits, along
with funds generated from operations, primarily in loans secured by
mortgages on one- to four-family residences. At June 30, 1998, HBE had
total assets of $367.7 million, which included net loans of
$319.9 million. The Association operates from its executive offices in
Elgin, Illinois and four other full service facilities located in
Bartlett, Crystal Lake, Roselle and South Elgin, Illinois.
The principal executive office of HBE is located at 16 North Spring
Street, Elgin, Illinois 60120, and its telephone number is (847) 742-3800.
The Special Meetings
SFSC. The SFSC Special Meeting will be held at Tuckaway Country
Club, 6901 W. Drexel Ave., Franklin, Wisconsin, on November 5, 1998, at
2:00 p.m., local time. The close of business on September 11, 1998 is the
record date (the "SFSC Record Date") for determining the shareholders of
record of SFSC entitled to notice of and to vote at the SFSC Special
Meeting and any postponement or adjournment thereof. The purpose of the
SFSC Special Meeting is (i) to consider and vote upon the approval and
adoption of the Merger Agreement and the transactions contemplated
thereby, including, among other things, the issuance of shares of SFSC
Common Stock pursuant to the terms of the Merger Agreement, (ii) to
consider and vote upon a proposal to approve an amendment to the SFSC
Amended and Restated Articles of Incorporation to increase the authorized
number of shares of SFSC Common Stock from 10,000,000 shares to 25,000,000
shares (the "Charter Amendment"), and (iii) to consider such other matters
that may come before the SFSC Special Meeting. For additional information
relating to the SFSC Special Meeting, see "SPECIAL MEETINGS INFORMATION."
HBE. The HBE Special Meeting will be held at 16 North Spring Street,
Elgin, Illinois, on November 5, 1998, at 2:00 p.m., local time. The close
of business on September 11, 1998 is the record date (the "HBE Record
Date") for determining the shareholders of record of HBE entitled to
notice of and to vote at the HBE Special Meeting and any postponement or
adjournment thereof. The purpose of the HBE Special Meeting is (i) to
consider and vote upon a proposal to approve the Merger Agreement and the
transactions contemplated thereby and (ii) to consider such other matters
that may come before the HBE Special Meeting. For additional information
relating to the HBE Special Meeting, see "SPECIAL MEETINGS INFORMATION."
Votes Required
SFSC. The Wisconsin Business Corporation Law (the "WBCL") requires
that the Merger Agreement be approved by the affirmative vote of a
majority of the outstanding shares of SFSC Common Stock entitled to vote
at the SFSC Special Meeting. The affirmative vote of the holders of a
majority of the shares of SFSC Common Stock represented and voted at the
SFSC Special Meeting (assuming a quorum is present) is required to approve
the Charter Amendment. The Merger will not be effected unless the Charter
Amendment receives the required shareholder approval. As of the SFSC
Record Date, there were 4,004,372 outstanding shares of SFSC Common Stock,
each of which is entitled to one vote. As of the SFSC Record Date,
directors and executive officers of SFSC held or exercised voting control
over approximately 26.23% of the outstanding shares of SFSC Common Stock
entitled to vote on the Merger. See "SPECIAL MEETINGS INFORMATION--Record
Dates; Votes Required and Revocation of Proxies."
HBE. The Delaware General Corporation Law (the "DGCL") requires that
the Merger Agreement be approved by the affirmative vote of holders of a
majority of the outstanding shares of HBE Common Stock entitled to vote at
the HBE Special Meeting. As of the HBE Record Date, there were 6,658,799
outstanding shares of HBE Common Stock, each of which is entitled to one
vote. As of the HBE Record Date, directors and executive officers of HBE
held or exercised voting control over approximately 14.9% of the
outstanding shares of HBE Common Stock entitled to vote on the Merger
(including 472,484 shares held by the HBE ESOP and not allocated to
participants thereunder). See "SPECIAL MEETINGS INFORMATION--Record
Dates; Votes Required and Revocation of Proxies."
Reasons for the Merger; Recommendation of the Boards of Directors
SFSC. The Board of Directors of SFSC (the "SFSC Board") unanimously
recommends that holders of SFSC Common Stock vote FOR approval of the
Merger Agreement and the transactions contemplated thereby and FOR the
Charter Amendment. The SFSC Board, after consideration of the terms and
conditions of the Merger Agreement and other factors deemed relevant by
the SFSC Board, believes that the terms of the Merger Agreement are fair
and that the Merger is in the best interests of SFSC and its shareholders.
See "THE MERGER--Reasons for the Merger; Recommendation of Boards of
Directors"; and "--Background of the Merger."
HBE. The Board of Directors of HBE (the "HBE Board") unanimously
recommends that holders of HBE Common Stock vote FOR approval of the
Merger Agreement and the transactions contemplated thereby. The HBE
Board, after consideration of the terms and conditions of the Merger
Agreement and other factors deemed relevant by the HBE Board, believes
that the terms of the Merger Agreement are fair and that the Merger is in
the best interests of HBE and its shareholders. See "THE MERGER--Reasons
for the Merger; Recommendation of Boards of Directors"; and "--Background
of the Merger."
Background of the Merger
For a description of the background of the Merger, see "THE
MERGER--Background of the Merger."
Proposed Merger
General. Under the terms of the Merger Agreement, HBE will, upon the
later of (a) the time of filing of Articles of Merger with the Wisconsin
Department of Financial Institutions, (b) the time of filing a Certificate
of Merger with the Delaware Secretary of State and (c) the effective date
and time of the Merger as set forth in such Articles of Merger and
Certificate of Merger (the later of (a), (b) and (c) above being the
"Effective Time") in accordance with the terms of the Merger Agreement,
merge with and into SFSC, with the combined entity conducting business
under the name State Financial Services Corporation. Pursuant to the
Merger Agreement, each issued and outstanding share of HBE Common Stock
immediately prior to the Effective Time (other than shares canceled
pursuant to the Merger Agreement) will be converted into the right to
receive the number of shares of SFSC Common Stock equal to the exchange
ratio (the "Exchange Ratio") to be determined based on the Market Value of
SFSC Common Stock (as defined below) on the Decision Date (as defined
below) as follows:
Market Value of SFSC Common Stock Exchange Ratio
Less than or equal to $21.125 . . . . . . . . . 0.86
Greater than $21.125 and less than or equal to
$22.625 . . . . . . . . . . . . . . . . . . . 0.857143
Greater than $22.625 and less than or equal to
$30.00 . . . . . . . . . . . . . . . . . . . the quotient obtained
by dividing $19.50 by
the Market Value of
SFSC Common Stock
Greater than $30.00 and less than or equal to
$31.375 . . . . . . . . . . . . . . . . . . . 0.65
Greater than $31.375 . . . . . . . . . . . . . 0.64
The "Market Value of SFSC Common Stock," on any date, will be equal
to the average closing sale price of SFSC Common Stock as reported on The
Nasdaq Stock Market for the twenty (20) consecutive trading days
immediately preceding the five (5) business days immediately preceding
such date.
If the Market Value of SFSC Common Stock on the Decision Date is less
than $20.00, HBE may notify SFSC in writing, which must be received by
SFSC within three business days after the Decision Date, that it is not
willing to close on the basis of the Exchange Ratio set forth above. If
HBE fails to give notice by such time, it shall be deemed to have agreed
to close on the basis of the Exchange Ratio set forth above. Upon receipt
of such notice, SFSC may elect (i) to close on the basis of an Exchange
Ratio equal to the quotient obtained by dividing $17.25 by the Market
Value of SFSC Common Stock on the Decision Date (the "Optional Exchange
Ratio"), or (ii) to require closing on the basis of the Exchange Ratio set
forth above, in any case by notice in writing, which must be received by
HBE within three business days after SFSC's receipt of such notice from
HBE. If SFSC fails to make such election, it shall be deemed to have
agreed to close on the basis of the Optional Exchange Ratio. If SFSC
elects clause (ii) above, then HBE may elect to terminate the Merger
Agreement by notice in writing, which must be received by SFSC within
three business days after HBE's receipt of such notice from SFSC. If HBE
fails to give notice of termination by such time, it shall be deemed to
have agreed to close on the basis of the Exchange Ratio set forth above.
The term "Decision Date" means the first business day on which the
last of the following events shall have occurred: (i) receipt of all
necessary state and federal regulatory approvals and the expiration of all
required waiting periods relating to the Merger, (ii) approval of the
transactions contemplated by the Merger Agreement by the shareholders of
HBE, (iii) approval of the transactions contemplated by the Merger
Agreement by the shareholders of SFSC, and (iv) the date, after the last
to occur of subsections (i) through (iii) above but not more than thirty
(30) days thereafter, on which the Market Value of SFSC Common Stock is
greater than or equal to $20.00.
During the period following the execution of the Merger Agreement and
preceding the mailing of this Joint Proxy Statement/Prospectus, there has
been substantial volatility in U.S. and foreign stock markets. On several
recent days, SFSC Common Stock traded below $20.00 on The Nasdaq Stock
Market. For example, the last reported sale prices of the SFSC Common
Stock on The Nasdaq Stock Market on September 16, September 17 and
September 18, 1998 were $16.25, $16.00 and $16.00, respectively. The
following are examples of the outcomes that could result if the Market
Value of SFSC Common Stock is below $20.00 on the Decision Date and the
HBE Board of Directors gives notice that HBE is not willing to close on
the basis of the Exchange Ratio set forth above. Under these
circumstances, the following may occur in accordance with the Merger
Agreement:
The SFSC Board of Directors elects the Optional Exchange
Ratio. If, following shareholder approval of the Merger
Agreement, the SFSC Board of Directors elects to close using the
Optional Exchange Ratio, which would not require any further
action of the SFSC shareholders, the Merger would proceed
(assuming all other relevant conditions to closing were
satisfied). The Optional Exchange Ratio would be 0.932432,
1.014706 and 1.112903 if the Market Value of SFSC Common Stock
is $18.50, $17.00 and $15.50, respectively, which would in each
instance represent a value of $17.25 per each share of HBE
Common Stock.
The SFSC Board of Directors elects the Exchange Ratio. In
lieu of electing the Optional Exchange Ratio, the SFSC Board of
Directors may elect to require closing on the basis of the
Exchange Ratio. In that event, the HBE Board of Directors may,
without any further action of the HBE shareholders, elect to (i)
close on the basis of the Exchange Ratio or (ii) terminate the
Merger Agreement. As a result of terminating the Merger
Agreement, the HBE shareholders would continue to hold HBE
Common Stock.
The rights of both SFSC and HBE pursuant to the foregoing provisions
are subject to the Market Value of SFSC Common Stock on the Decision Date.
As a result, the actual value that SFSC would pay and HBE shareholders
would receive in the Merger and whether HBE would have the right to
terminate the Merger Agreement will not be known until shortly before the
scheduled closing date of the Merger. It is currently anticipated that,
if approved by SFSC and HBE shareholders, the Merger will be completed in
the fourth calendar quarter of 1998 or the first calendar quarter of 1999.
The SFSC Board has not considered what action, if any, it might take
under the Merger Agreement in the event that the SFSC shareholders approve
the Merger Agreement at the SFSC Special Meeting, the Market Value of SFSC
Common Stock is less than $20.00 on the Decision Date and the HBE Board
informs SFSC that it is unwilling to close on the basis of the Exchange
Ratio. In such case, the SFSC Board is likely to consult with its legal
and financial advisors regarding whether to elect the Optional Exchange
Ratio or remain with the Exchange Ratio as set forth above. Shareholders
of SFSC should note that the fairness opinion obtained by the SFSC Board
and included as Annex C to this Joint Proxy Statement/Prospectus does not
express an opinion as to the fairness of the Merger, from a financial
point of view, to SFSC in the event that SFSC elects the Optional Exchange
Ratio. In the event that the SFSC Board were to consider electing the
Optional Exchange Ratio, it is anticipated that, as a condition precedent
thereto, the SFSC Board would require a fairness opinion with respect to
the Optional Exchange Ratio. No assurance can be given that such a
fairness opinion would be rendered by SFSC's financial advisor if the
opinion were so requested. In addition, in determining whether or not to
elect the Optional Exchange Ratio, the SFSC Board of Directors would
consider many of the same factors it considered in determining to approve
and adopt the Merger Agreement in the first instance. In particular, the
SFSC Board of Directors would analyze, among other factors, the
relationship of the consideration to be paid in the Merger to the market
price and book value and earnings per share of HBE and the financial terms
of certain other recent business combinations in the banking industry.
The HBE Board has not considered what action, if any, it might take
under the Merger Agreement in the event that the Market Value of SFSC
Common Stock is less than $20.00 on the Decision Date. In such case, the
HBE Board of Directors is likely to consult its financial and legal
advisors to determine whether or not to notify SFSC of its unwillingness
to close on the basis of the Exchange Ratio and whether or not to exercise
HBE's right to terminate the Merger Agreement if SFSC does not elect the
Optional Exchange Ratio. Shareholders of HBE should note that the
fairness opinion obtained by the HBE Board and included as Annex D to this
Joint Proxy Statement/Prospectus does not express an opinion as to the
fairness of the Merger, from a financial point of view, in the event that
the Market Value of SFSC Common Stock is below $20.00 per share on the
Decision Date and the Merger is consummated based on the Exchange Ratio.
In the event that Market Value of SFSC Common Stock is less than $20.00 on
the Decision Date and the HBE Board were to consider electing the Exchange
Ratio, it is anticipated that, as a condition precedent thereto, the HBE
Board would require a fairness opinion with respect to such election. No
assurance can be given that such a fairness opinion would be rendered by
HBE's financial advisor if the opinion were so requested. In making a
determination on the foregoing matters, the HBE Board of Directors would
consider many of the same factors that it considered in determining
whether to approve and adopt the Merger Agreement. In particular, the HBE
Board of Directors would analyze, among other factors, whether the then
current consideration to be received in the Merger would deliver more
value to HBE shareholders than the value that could be expected in the
event HBE were to continue as an independent company. In addition, it
would consider whether, in light of market and other industry conditions
at the time of such determination, the Exchange Ratio remains fair from a
financial point of view to the holders of shares of HBE Common Stock.
Each outstanding option granted by HBE under the Home Bancorp of
Elgin, Inc. 1997 Stock Option Plan will be converted into the right to
purchase that number of shares of SFSC Common Stock equal to the product
(rounded up to the nearest whole number) of the number of shares of HBE
Common Stock subject to the original option and the Exchange Ratio, at a
price per share equal to the per share exercise price of the original HBE
option, divided by the Exchange Ratio. See "THE MERGER AGREEMENT--
Consummation of the Merger."
Conditions to the Merger. The respective obligations of SFSC and HBE
to consummate the Merger are subject to the satisfaction of certain
conditions, including: the approval of the Merger Agreement by the
shareholders of SFSC and HBE; the receipt of all necessary regulatory
approvals; the absence of any injunction that prevents the consummation of
the Merger; the accuracy of the representations and warranties of the
other party set forth in the Merger Agreement as of the date for the
closing of the Merger (the "Closing Date"); the performance by the other
party in all material respects, or waiver, of all obligations required to
be performed under the Merger Agreement and the stock option agreement
entered into by and between SFSC and HBE in connection with the execution
of the Merger Agreement (the "Stock Option Agreement"); the lack of any
event or circumstance occurring since the date of the Merger Agreement
which may reasonably be expected to have a material adverse effect on the
parties; the receipt of opinions of counsel and various third-party
consents in a form satisfactory to the respective parties; the receipt of
legal opinions that the Merger will qualify as a tax-free reorganization;
the receipt by each of SFSC and HBE of a letter from their respective
independent accountants that the Merger is expected to be accounted for as
a pooling-of-interests under generally accepted accounting principles; the
receipt by SFSC of a letter from affiliates of HBE with respect to
transactions in securities of SFSC; and the effectiveness of the
Registration Statement. See "THE MERGER AGREEMENT--Conditions to Each
Party's Obligation to Effect the Merger."
Exchange of Stock Certificates. At or prior to the Effective Time,
SFSC shall deposit with a bank, trust company or other entity reasonably
acceptable to HBE (the "Exchange Agent") certificates representing the
shares of SFSC Common Stock to be issued in accordance with the terms of
the Merger Agreement ("SFSC Common Stock Certificates") for exchange in
accordance with the Merger Agreement, and cash in lieu of any fractional
shares of SFSC Common Stock.
As soon as practicable after the Effective Time, and in no event
later than ten business days thereafter, SFSC will cause the Exchange
Agent to mail to each holder of certificates representing one or more
shares of HBE Common Stock converted into the right to receive shares of
SFSC Common Stock pursuant to the Merger Agreement ("HBE Common Stock
Certificates") a letter of transmittal and instructions for use in
effecting the surrender of the HBE Common Stock Certificates in exchange
for SFSC Common Stock Certificates and any cash in lieu of fractional
shares. Upon proper surrender of an HBE Common Stock Certificate for
exchange and cancellation to the Exchange Agent, together with such
properly completed letter of transmittal, the holder of such HBE Common
Stock Certificate shall be entitled to receive in exchange therefor, as
applicable, (i) an SFSC Common Stock Certificate representing that number
of whole shares of SFSC Common Stock to which such holder of HBE Common
Stock is entitled pursuant to the terms of the Merger Agreement and (ii)
cash in lieu of fractional shares. Persons who hold SFSC Common Stock
prior to the Merger will not need to exchange their existing certificates
representing shares of SFSC Common Stock for new stock certificates. See
"THE MERGER AGREEMENT--Consummation of the Merger."
Waivers and Amendments to the Merger Agreement. SFSC and HBE may
amend, modify or waive in writing the terms and conditions of the Merger
Agreement; provided, however, that no amendment may be made after the
approval of the Merger Agreement at the SFSC and HBE Special Meetings that
changes in any manner adverse to the shareholders of SFSC or HBE the
consideration to be provided such shareholders pursuant to the Merger.
Pursuant to the terms of the Merger Agreement, the consummation of the
Merger is conditioned upon the receipt by both parties of a letter stating
that the Merger is expected to be accounted for as a pooling-of-interests
under generally accepted accounting principles and a legal opinion that
the Merger will qualify as a tax-free reorganization under Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"). In the event
that SFSC and HBE amend or modify the Merger Agreement by waiving this
requirement, SFSC and HBE will resolicit shareholders for approval of such
amended or modified agreement. See "THE MERGER AGREEMENT--Termination,
Amendment and Waiver."
Termination. The Merger Agreement may be terminated under certain
circumstances, including (i) by mutual consent of the parties; (ii) by
either party if the Merger is not consummated by January 31, 1999; (iii)
by either party if either of SFSC's or HBE's shareholders vote against the
Merger or if any state or federal law or court order prohibits the Merger;
(iv) by the non-breaching party if there exist breaches of any
representations or warranties contained in the Merger Agreement or in the
Stock Option Agreement which breaches, individually or in the aggregate,
would result in a material adverse effect on the breaching party and which
are not cured within thirty (30) days after notice; (v) by the non-
breaching party if there occurs a material breach of any covenant or
agreement in the Merger Agreement or in the Stock Option Agreement which
is not cured within thirty (30) days after notice; (vi) by either party if
the Board of Directors of the other party shall withdraw or adversely
modify its recommendation of the Merger or shall approve or recommend any
competing transaction; or (vii) by HBE in the event that the Market Value
of SFSC Common Stock at the time for the Merger is less than $20 per share
and SFSC does not elect the Optional Exchange Ratio. See "THE MERGER
AGREEMENT--Termination, Amendment and Waiver."
Reimbursement of Expenses. The Merger Agreement provides that if a
breach described in clause (iv) or (v) of the previous paragraph occurs,
then, if such breach is not willful, the non-breaching party will be
entitled to reimbursement of its out-of-pocket expenses, not to exceed
$350,000. In the event of a willful breach, the non-breaching party will
be entitled to its out-of-pocket expenses (which shall not be limited to
$350,000) and any remedies it may have at law or in equity. See "THE
MERGER AGREEMENT--Reimbursement of Expenses"; and "--Other Expenses."
Indemnification. The Merger Agreement provides that, in the event of
any threatened or actual claim or proceeding against an officer, director
or employee of SFSC or HBE which is based on the fact that such person is
or was an officer, director or employee of SFSC, HBE or the Association,
or based on the Merger Agreement, the Stock Option Agreement and the
transactions contemplated thereby, SFSC and HBE will use reasonable
efforts to respond to and defend such actions on behalf of the officer,
director or employee. The Merger Agreement also provides that SFSC as the
surviving corporation will indemnify and hold harmless any such
indemnified party against certain losses incurred by the indemnified party
in connection with certain lawsuits and other actions against such person,
and will use reasonable efforts to obtain directors' and officers'
liability insurance for the officers and directors of SFSC. Subject to
certain limitations, such insurance will either provide coverage for three
years from the Effective Time or will substitute policies of at least the
same coverage and amounts and containing terms and conditions not less
advantageous than the policies previously maintained by SFSC and HBE. See
"THE MERGER AGREEMENT--Indemnification."
Stock Option Agreement
In connection with the execution and delivery of the Merger
Agreement, SFSC and HBE entered into the Stock Option Agreement pursuant
to which HBE granted SFSC an irrevocable option (the "Option") to
purchase, under certain circumstances, authorized but unissued shares of
HBE Common Stock (representing up to 19.9% of the outstanding shares of
HBE Common Stock) at an exercise price of $17.00 per share. A copy of the
Stock Option Agreement is attached as Annex B to this Joint Proxy
Statement/Prospectus. The Option is only exercisable upon the occurrence
of certain triggering and exercise events generally relating to competing
transactions for control of HBE. None of such events has occurred as of
the date of this Joint Proxy Statement Prospectus. The exercise of the
Option and the effectiveness of selected provisions of the Stock Option
Agreement is subject to certain conditions described in the Stock Option
Agreement. See "THE STOCK OPTION AGREEMENT. In lieu of exercising the
Option, SFSC can require HBE to make a cash payment in an amount equal to
the product of (a) the excess of the per share value of the highest
competing transaction, or, if greater, the highest closing price for HBE
Common Stock during the six month period preceding the cash election, over
$17.00, and (b) the number of shares of HBE Common Stock for which the
Option may then be exercised. The Option also grants SFSC certain
registration rights with respect to, and grants HBE a right of first
refusal with respect to, any HBE Common Stock acquired upon exercise of
the Option. The Stock Option Agreement is intended to increase the
likelihood that the Merger will be consummated in accordance with the
terms of the Merger Agreement and may have the effect of discouraging
competing offers. See "THE STOCK OPTION AGREEMENT."
Interests of Certain Persons in the Mergers
The Directors of SFSC immediately prior to the Effective Time will
continue as the directors of SFSC as the surviving corporation in the
Merger, each to hold office in accordance with the charter and bylaws of
SFSC. The officers of SFSC immediately prior to the Effective Time will
continue as the officers of SFSC as the surviving corporation of the
Merger, in each case until their respective successors are duly elected or
appointed. Additionally, George L. Perucco, the President and Chief
Executive Officer of HBE and the Association, and Lyle N. Dolan, Executive
Vice President and Treasurer of HBE and the Association, will terminate
their employment agreements with the HBE and the Association and receive
the full payments provided for thereunder. In addition, Mr. Perucco will
enter into a consulting agreement with SFSC. See "THE MERGER AGREEMENT--
Consummation of the Merger," and "THE MERGER--Interests of Certain Persons
in the Merger."
Opinions of Financial Advisors
SFSC. EVEREN Securities, Inc. ("EVEREN") delivered to the SFSC Board
its written opinion dated the date of this Joint Proxy Statement/
Prospectus that, as of such date, and based upon the assumptions made,
matters considered and limits of review as set forth in such opinion, the
consideration being paid by SFSC in the Merger is fair, from a financial
point of view, to SFSC and its shareholders. The written opinion of
EVEREN is attached hereto as Annex C and is incorporated herein by
reference. Holders of shares of SFSC Common Stock are urged to read such
opinion in its entirety. For a description of the assumptions made and
matters considered by EVEREN, see "THE MERGER--Opinions of Financial
Advisors" and Annex C.
HBE. Hovde Financial, Inc. ("Hovde") delivered to the HBE Board its
written opinion dated June 1, 1998, which was confirmed in a written
opinion dated the date of this Joint Proxy Statement/Prospectus that as of
such date, and based upon the matters considered as set forth in such
opinion, the Exchange Ratio is fair, from a financial point of view, to
the HBE shareholders. The written opinion of Hovde dated the date of this
Joint Proxy Statement/Prospectus is attached hereto as Annex D and is
incorporated herein by reference. Holders of shares of HBE Common Stock
are urged to read such opinion in its entirety. For a description of the
assumptions made and matters considered by Hovde, see "THE MERGER--
Opinions of Financial Advisors" and Annex D.
No Appraisal Rights
Holders of shares of SFSC Common Stock and HBE Common Stock will not
have dissenters' rights in connection with the Merger. See "THE MERGER-No
Appraisal Rights."
Certain Federal Income Tax Consequences of the Merger
SFSC's obligation to effect the Merger is conditioned on the delivery
of an opinion to SFSC from Foley & Lardner, counsel for SFSC, and HBE's
obligation to effect the Merger is conditioned upon the delivery to HBE of
an opinion from Thacher Proffitt & Wood, counsel for HBE, both dated as of
the Closing Date, based upon certain customary representations and
assumptions set forth therein, that, for federal income tax purposes, the
Merger constitutes a tax-free reorganization within the meaning of Section
368(a)(1)(A) and related sections of the Code.
Provided that there shall have been no adverse changes in applicable
law or facts prior to the Effective Time, in general: (i) no gain or loss
will be recognized by SFSC or HBE pursuant to the Merger; (ii) no gain or
loss (except with respect to fractional shares) will be recognized by
holders of HBE Common Stock upon the exchange of their HBE Common Stock
pursuant to the Merger; and (iii) no gain or loss will be recognized by
shareholders of SFSC upon consummation of the Merger. See "THE
MERGER--Certain Federal Income Tax Consequences."
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR AS TO THE TAX
CONSEQUENCES OF THE MERGER APPLICABLE TO THEIR INDIVIDUAL CIRCUMSTANCES
UNDER FEDERAL, STATE, LOCAL OR ANY OTHER APPLICABLE LAW.
Accounting Treatment
The Merger will be accounted for as a pooling-of-interests pursuant
to generally accepted accounting principles. It is a condition to the
Merger that each of SFSC and HBE shall have received letters, dated as of
the Effective Time, from Ernst & Young LLP, and KPMG Peat Marwick LLP,
respectively, regarding those firm's concurrence with SFSC's management
and HBE's management concurring respectively, as to the appropriateness of
pooling of interests accounting for the Merger under Accounting Principles
Board No. 16 if closed and consummated in accordance with the Merger
Agreement.
Regulatory Approvals
The Merger is subject to the approval of the Federal Reserve Board
under Section 4 of the Federal Bank Holding Company Act of 1956, as
amended (the "BHCA"). See "THE MERGER--Regulatory Approvals." SFSC
received approval from the Federal Reserve Bank of Chicago pursuant to a
letter dated August 19, 1998.
Dividends on SFSC Common Stock and HBE Common Stock
The Merger Agreement provides that each of SFSC and HBE shall
coordinate with the other the declaration of any dividends and the record
dates and payment dates relating thereto, it being the intention of the
parties that holders of SFSC Common Stock or HBE Common Stock shall not
receive two dividends, or fail to receive one dividend, for any quarter
with respect to their shares of SFSC Common Stock and/or HBE Common Stock
and any shares of SFSC Common Stock any holder of HBE Common Stock
receives in exchange therefor in the Merger. The dividend policy of SFSC
following the Merger will be subject to evaluation from time to time by
the SFSC Board based on SFSC's results of operations, financial condition,
capital requirements and other relevant conditions, including regulatory
considerations.
Markets and Market Prices
The following table sets forth the last sale prices per share of SFSC
Common Stock and HBE Common Stock as reported on The Nasdaq Stock Market
on June 1, 1998, the last trading day preceding public announcement of the
Merger, and September 29, 1998, the latest practicable trading day before
the printing of this Joint Proxy Statement/Prospectus.
SFSC HBE
Common Common
Stock Stock
Market Value Per Share at:
June 1, 1998 $24.50 $17.125
September 29, 1998 $17.25 $13.50
Based on the Exchange Ratio, the minimum and maximum numbers of
shares of SFSC Common Stock issuable pursuant to the Merger (assuming that
the Market Value of SFSC Common Stock is above $20.00 per share or that
the Optional Exchange Ratio is not implemented and that no HBE Options are
exercised from the HBE Record Date to the Effective Time) will be
4,261,631 and 5,726,567, respectively. The following table provides
examples of the varying Exchange Ratios based upon differing Market Values
of SFSC Common Stock:
Market Value Equivalent Price
of SFSC Per Share of
Common Stock (1) Exchange Ratio(1) HBE Common Stock (2)
Less than or equal to 0.86 Less than or equal to
$21.125 $18.1675
Greater than $21.125 and 0.857143 Greater than $18.1063 and
less than or equal to less than or equal to
$22.625 $19.3929
Greater than $22.625 and The quotient Such quotient multiplied
less than or equal to obtained by by the applicable Market
$30.00 dividing $19.50 by Value of SFSC Common
the Market Value of Stock
SFSC Common Stock
Greater than $30.00 and 0.65 Greater than $19.50 and
less than or equal to less than or equal to
$31.375 $20.3938
Greater than $31.375 0.64 Greater than $20.3938
(1) Unless the Market Value of SFSC Common Stock is less than $20.00, the
Exchange Ratio will be between 0.64 and 0.86. In the event that the
Market Value of SFSC Common Stock is less than $20.00, the Exchange
Ratio or the Optional Exchange Ratio may be selected or the Merger
Agreement may be terminated. See "THE MERGER AGREEMENT."
(2) Based on the Market Value of SFSC Common Stock.
No assurance can be given as to the market prices of SFSC Common
Stock or HBE Common Stock at any time before the Merger becomes effective
or as to the market price of SFSC Common Stock at any time thereafter.
Shareholders of SFSC and HBE are urged to obtain current market quotations
for SFSC Common Stock and HBE Common Stock.
Comparative Book Values, Dividends and Earnings Per Common Share
The following tables present selected comparative per common share
data for SFSC Common Stock for the years ended December 31, 1997, 1996 and
1995 and the six months ended June 30, 1998, and HBE Common Stock for the
years ended December 31, 1997, 1996 and 1995 and the six months ended
June 30, 1998 and on both a historical and pro forma basis giving effect
to the Merger. The pro forma information has been prepared on the basis
of accounting for the Merger as a pooling-of-interests. The information
is derived from the consolidated historical financial statements of SFSC
and HBE, including the related notes thereto, included or incorporated by
reference in this Joint Proxy Statement/Prospectus. This information
should be read in conjunction with such historical financial statements
and the related notes thereto. See "INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE" and "INDEX TO SFSC FINANCIAL STATEMENTS."
This information is not necessarily indicative of the results of the
future operations of the combined entity or the actual results that would
have occurred had the Merger been consummated prior to the periods
indicated.
SFSC Common Stock
At or For the At or For the Year
Six Months Ended December 31
Ended 1997 1996 1995
June 30, 1998
(unaudited)
Historical:
Net income $0.58 $1.14 $1.05 $0.93
Cash dividends
declared 0.24 0.40 0.33 0.28
Book value 10.23 9.96
Pro forma combined:
Net income(1) 0.35 0.65 0.48 0.61
Cash dividends
declared(2) 0.24 0.40 0.33 0.28
Book value 14.33 13.81
HBE Common Stock
At or For the At or For the Year
Six Months Ended December 31
Ended 1997 1996 1995
June 30, 1998
(Unaudited)
Historical:
Net income $0.19 $0.45 $0.10 $NA(4)
Cash dividends
declared 0.20 0.30 0 NA
Book value 14.00 13.89
Equivalent pro forma
combined:(3)
Net income 0.30 0.55 0.41 0.52
Cash dividends
declared 0.20 0.34 0.28 0.24
Book value 12.15 11.71
____________________
(1) Pro forma net income was computed assuming 3,819,060, 3,826,671,
3,809,043 and 3,511,108 fully diluted shares of SFSC outstanding for
the periods ended June 30, 1998, December 31, 1997, 1996 and 1995,
respectively.
(2) Based on historical dividends of SFSC.
(3) If the Market Value of SFSC Common Stock is between $22.625 and
$30.00, the Exchange Ratio will be the quotient resulting from
dividing the Market Value of SFSC Common Stock into $19.50. The pro
forma equivalent per share data for HBE has been computed by
multiplying the pro forma combined per share information by 0.847826,
which represents an Exchange Ratio assuming that the Market Value of
SFSC Common Stock is $23.00.
(4) Per share information for the year ended December 31, 1995 cannot be
computed because HBE did not issue stock until September 26, 1996.
Earnings per share for the year ended December 31, 1996 were
calculated as if HBE's initial public offering had taken place on
January 1, 1996.
Comparative Market Prices and Dividends
The SFSC Common Stock is traded on The Nasdaq Stock Market under the
symbol "SFSW." As of September 11, 1998, there were approximately 730
shareholders of record of SFSC Common Stock.
The HBE Common Stock is traded on The Nasdaq Stock Market under the
symbol "HBEI." It has been traded under this symbol since its principal
subsidiary, the Association, converted to stock form in 1996. As of
September 11, 1998, there were approximately 906 shareholders of
record of HBE Common Stock.
The following table includes quarterly information on the high and
low last sale prices of and cash dividends paid on the SFSC Common Stock
and HBE Common Stock for the periods indicated.
<TABLE>
<CAPTION>
SFSC HBE(1)
Cash Cash
Dividends Dividends
Quarter per Share per Share
Ended High Low (Declared) High Low (Declared)
<S> <C> <C> <C> <C> <C> <C>
1996
First Quarter $10.73 $9.26 $0.083 - - -
Second Quarter 12.15 10.24 0.083 - - -
Third Quarter 13.19 11.81 0.083 $12.125(2) $11.25(2) -
Fourth Quarter 13.89 12.68 0.083 13.50 11.75 -
1997
First Quarter $16.04 $13.14 $0.100 $15.75 $12.875 -
Second Quarter 18.13 14.79 0.100 16.50 14.125 $0.10
Third Quarter 19.17 16.46 0.100 19.50 16.125 0.10
Fourth Quarter 23.23 19.17 0.100 18.75 15.875 0.10
1998
First Quarter $29.50 $25.75 $0.12 $19.125 $16.75 $0.10
Second Quarter 26.00 20.94 0.12 18.688 15.063 0.10
Third Quarter
(through September 23,
1998) 23.31 15.50 0.12 15.938 11.688 -
_______________
(1) The HBE Common began trading on The Nasdaq Stock Market on
September 26, 1996.
(2) Represents the period from September 26, 1996 to September 30,
1996.
</TABLE>
As of June 1, 1998, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the last reported
sale price per share of SFSC Common Stock and HBE Common Stock was $24.50
and $17.125, respectively. Assuming the Merger had occurred on such date,
the equivalent market value per share of HBE Common Stock, calculated by
multiplying the closing sale price of SFSC Common Stock by the Exchange
Ratio, assuming exercise of all outstanding options to purchase HBE Common
Stock, would have been $20.77.
Shareholders are advised to obtain current market quotations for SFSC
Common Stock and HBE Common Stock. No assurance can be given as to the
market price of SFSC Common Stock or HBE Common Stock prior to the
Effective Time or the market price or liquidity for SFSC Common Stock
after the Effective Time.
Selected Historical and Pro Forma Data
The summary below sets forth selected historical and other data and
selected unaudited pro forma financial data. The financial data should be
read in conjunction with the historical consolidated financial statements
and related notes thereto of SFSC and HBE and in conjunction with the
unaudited pro forma combined financial statements and related notes
thereto of SFSC as the surviving corporation in the Merger included
elsewhere in this Joint Proxy Statement/Prospectus. See "INDEX TO SFSC
AND HBE FINANCIAL STATEMENTS" and "UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION."
Selected Historical Financial and Other Data
The selected historical financial data (dollars in thousands) of each
of SFSC and HBE for the last five fiscal years and for the interim periods
set forth below have been derived from the "SELECTED FINANCIAL DATA"
included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
State Financial Services Corporation
At or For the
Six Months Ended At or For the Year
June 30, Ended December 31,
(unaudited)
1998 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $417,919 $305,936 $421,278 $301,999 $286,050 $226,144 $226,638
Loans, net of unearned
discount 258,740 207,925 267,819 201,671 185,754 143,813 130,254
Investment Securities
held to maturity 16,848 25,789 20,997 31,302 44,226 34,901 60,637
Deposit accounts 362,992 260,611 367,492 254,657 246,218 197,401 199,768
Long-term debt 900 932 5,300 962 1,062 115 228
Shareholders' equity 39,808 37,380 38,548 35,527 32,381 26,169 24,756
Interest income 15,634 11,920 24,714 22,876 19,782 15,701 14,820
Interest expense 7,136 4,581 9,522 8,752 7,336 4,773 4,853
Provision for loan losses 285 165 330 210 190 120 147
Other income 2,824 1,602 3,376 3,060 2,481 2,438 2,234
Other expenses 7,683 5,587 11,193 10,512 9,460 8,956 8,437
Provision for income taxes 1,128 1,090 2,159 2,003 1,579 1,010 876
Net income 2,227 2,100 4,374 4,006 3,279 2,807 2,275
<CAPTION>
Home Bancorp of Elgin, Inc.
At or For the
Six Months Ended At or For the Year
June 30, Ended December 31,
(unaudited)
1998 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $367,656 $352,577 $352,595 $356,335 $304,520 $306,956 $334,390
Loans receivable - Net 319,925 279,866 298,661 261,306 267,153 271,040 302,335
Investment Securities
held to maturity 3,026 36,607 - 53,786 5,948 5,918 -
Deposit accounts 267,291 249,086 248,218 251,795 259,972 267,938 293,932
Borrowed funds - 5,000 5,000 - 4,000 - 7,000
Shareholders' equity 96,012 94,122 95,215 99,881 36,683 34,319 30,293
Interest income 13,023 12,441 25,029 23,059 22,925 24,669 27,652
Interest expense 5,622 5,181 10,550 10,881 10,850 10,484 11,791
Provision for loan losses 60 60 120 120 180 240 240
Noninterest income 514 723 1,288 1,221 1,150 3,154 2,388
Noninterest expenses 5,892 5,296 11,003 12,221 9,069 9,624 10,402
Income tax expense 761 1,019 1,802 417 1,612 3,117 2,998
Net income 1,202 1,608 2,843 642 2,364 4,358 4,261
<CAPTION>
Selected Unaudited Pro Forma Financial Data
($ in thousands except per share data)
For the Six
Months Ended
June 30 For the Year Ended December 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Income Statement
Interest Income . . . . . $28,657 $55,473 $45,483 $42,288
Net Interest Income . . . 15,899 31,308 25,850 24,102
Provision for Loan
Losses . . . . . . . . 345 1,090 330 370
Other Income . . . . . . . 3,338 6,269 4,281 3,631
Other Expense . . . . . . 13,575 26,434 22,733 18,529
Income (loss) before income
taxes . . . . . . . . . 5,317 10,053 7,068 8,834
Per Share
Basic earnings per share . 0.36 0.65 0.49 0.61
Diluted earnings per share 0.35 0.65 0.48 0.61
Balance Sheet
Loans-Net . . . . . . . . $578,666
Assets . . . . . . . . . . 788,840
Deposits . . . . . . . . . 630,283
Shareholder's Equity . . . 139,085
Weighted Average Shares
Basic weighted average
shares outstanding . . . 9,591,923 9,596,238 9,582,242 9,289,591
Diluted weighted average
shares outstanding . . . 9,723,507 9,639,196 9,621,568 9,323,633
</TABLE>
SPECIAL MEETINGS INFORMATION
General
This Joint Proxy Statement/Prospectus is being furnished to the
shareholders of SFSC and to the shareholders of HBE in connection with the
solicitation of proxies of common shareholders of SFSC by the SFSC Board
and of common shareholders of HBE by the HBE Board, to be voted at the
Special Meeting of holders of SFSC Common Stock and at the Special Meeting
of holders of HBE Common Stock, respectively, which are to be held on
November 5, 1998.
The purpose of the SFSC Special Meeting and of the solicitation of
proxies by the SFSC Board is (i) to consider and vote upon the approval
and adoption of the Merger Agreement and the transactions contemplated
thereby, including, among other things, the issuance of shares of SFSC
Common Stock pursuant to the terms of the Merger Agreement, (ii) to
consider and vote upon a proposal to approve an amendment to the SFSC
Amended and Restated Articles of Incorporation of SFSC to increase the
authorized number of shares of SFSC Common Stock from 10,000,000 shares to
25,000,000 shares, and (iii) to consider such other matters as may
properly come before the SFSC Special Meeting or any adjournments or
postponements thereof, including proposals to adjourn the SFSC Special
Meeting to permit the further solicitation of proxies by the SFSC Board in
the event that there are not sufficient votes to approve the proposals
described in subparagraphs (i) and (ii) above at the time of the SFSC
Special Meeting; provided, however, that no proxy which is voted against
either or both of the proposals described in subparagraphs (i) and (ii)
above will be voted in favor of an adjournment to solicit further proxies.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of
SFSC Common Stock is accompanied by a form of proxy for use at the SFSC
Special Meeting.
The purpose of the HBE Special Meeting and of the solicitation of
proxies by the HBE Board is (i) to consider and vote upon a proposal to
approve the Merger Agreement and the transactions contemplated thereby and
(ii) to consider such other matters as may properly come before the HBE
Special Meeting or any adjournments or postponements thereof, including
proposals to adjourn the HBE Special Meeting to permit the further
solicitation of proxies by the HBE Board in the event that there are not
sufficient votes to approve the proposal described in subparagraph (i)
above at the time of the HBE Special Meeting; provided, however, that no
proxy which is voted against the proposal described in subparagraph (i)
above will be voted in favor of an adjournment to solicit further proxies.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of
HBE Common Stock is accompanied by a form of proxy for use at the HBE
Special Meeting.
Date, Place and Times
The SFSC Special Meeting will be held at Tuckaway Country Club, 6901
W. Drexel Ave., Franklin, Wisconsin, on November 5, 1998, at 2:00 p.m.
(local time).
The HBE Special Meeting will be held at 16 North Spring Street,
Elgin, Illinois, on November 5, 1998, at 2:00 p.m. (local time).
Record Dates; Votes Required and Revocation of Proxies
SFSC. The close of business on September 11, 1998, has been fixed by
the SFSC Board as the SFSC Record Date for the determination of
shareholders entitled to notice of, and to vote at, the SFSC Special
Meeting. On that date there were outstanding and entitled to vote
4,004,372 shares of SFSC Common Stock, of which 1,059,557 (26.23%) were
held by, or subject to the voting control of, directors or executive
officers of SFSC. Neither HBE nor any of their directors or executive
officers own any shares of SFSC Common Stock.
Each outstanding share of SFSC Common Stock entitles the record
holder thereof to one vote on all matters to be acted upon at the SFSC
Special Meeting. The presence, in person or by proxy, of at least a
majority of the total number of outstanding shares of SFSC Common Stock
entitled to vote at the SFSC Special Meeting is necessary to constitute a
quorum at the SFSC Special Meeting. Under the WBCL, the affirmative vote
of at least a majority of the total number of outstanding shares of SFSC
Common Stock entitled to vote at the SFSC Special Meeting is required to
approve and adopt the Merger Agreement. The affirmative vote of the
holders of a majority of the shares of SFSC Common Stock represented and
voted at the SFSC Special Meeting is required to approve the Charter
Amendment. If an executed proxy card is returned and the shareholder has
abstained from voting on any matter, the shares represented by such proxy
will be considered present at the meeting for purposes of determining a
quorum and for purposes of calculating the vote, but will not be
considered to have been voted in favor of such matter. If an executed
proxy is returned by a broker holding shares in street name which
indicates that the broker does not have discretionary authority as to
certain shares to vote on one or more matters, such shares will be
considered present at the meeting for purposes of determining a quorum,
but will not be considered to be represented at the meeting for purposes
of calculating the vote with respect to such matter. As a result,
abstentions and broker non-votes will have the same effect as a vote
against the Merger Agreement but will have no impact on the vote to
approve the Charter Amendment. If the accompanying proxy card is properly
executed and returned to SFSC in time to be voted at the SFSC Special
Meeting, the shares represented thereby will be voted in accordance with
the instructions marked thereon. Executed but unmarked proxies will be
voted (i) FOR approval and adoption of the Merger Agreement and the
transactions contemplated thereby, (ii) FOR the Charter Amendment, and
(iii) FOR any proposal to adjourn the SFSC Special Meeting if necessary to
permit further solicitation of proxies. Any proxy given pursuant to this
solicitation may be revoked by the person giving it at any time before the
proxy is voted by filing an instrument revoking it or by filing a duly
executed proxy bearing a later date with the Secretary of SFSC prior to
the SFSC Special Meeting. Attendance at the SFSC Special Meeting will not
in and of itself constitute a revocation of a proxy. However, a
shareholder who attends the SFSC Special Meeting and votes in person will
be deemed to have revoked his or her previously delivered proxy.
The SFSC Board does not know of any matters other than those
described in the notice of the SFSC Special Meeting that are to come
before the SFSC Special Meeting. If any other matters are properly
brought before the SFSC Special Meeting, one or both of the persons named
in the proxy card will vote the shares represented by such proxy upon such
matters as determined in their best judgment.
HBE. The close of business on September 11, 1998, has been fixed by
the HBE Board as the HBE Record Date for the determination of shareholders
entitled to notice of, and to vote at, the HBE Special Meeting. On that
date there were outstanding and entitled to vote 6,658,799 shares of HBE
Common Stock, of which 991,601 (14.9%) were held by, or subject to the
voting control of, directors and executive officers of HBE (including
472,484 shares held by the HBE ESOP and not allocated to participants
thereunder). Neither SFSC nor any of its directors or executive officers
owns any shares of HBE Common Stock.
Each outstanding share of HBE Common Stock entitles the record holder
thereof to one vote on all matters to be acted upon at the HBE Special
Meeting. The presence, in person or by proxy, of at least a majority of
the total number of outstanding shares of HBE Common Stock entitled to
vote at the HBE Special Meeting is necessary to constitute a quorum at the
HBE Special Meeting. Under the DGCL, the affirmative vote of at least a
majority of the total number of outstanding shares of HBE Common Stock
entitled to vote at the HBE Special Meeting is required to approve and
adopt the Merger Agreement. If an executed proxy card is returned and the
shareholder has abstained from voting on any matter, the shares
represented by such proxy will be considered present at the meeting for
purposes of determining a quorum and for purposes of calculating the vote,
but will not be considered to have been voted in favor of such matter. If
an executed proxy is returned by a broker holding shares in street name
which indicates that the broker does not have discretionary authority as
to certain shares to vote on one or more matters, such shares will be
considered present at the meeting for purposes of determining a quorum,
but will not be considered to be represented at the meeting for purposes
of calculating the vote with respect to such matter. As a result,
abstentions and broker non-votes will have the same effect as votes cast
against the Merger Agreement. If the accompanying proxy card is properly
executed and returned to HBE in time to be voted at the HBE Special
Meeting, the shares represented thereby will be voted in accordance with
the instructions marked thereon. Executed but unmarked proxies will be
voted FOR approval and adoption of the Merger Agreement and FOR any
proposal to adjourn the HBE Special Meeting if necessary to permit further
solicitation of proxies. Any proxy given pursuant to this solicitation
may be revoked by the person giving it at any time before the proxy is
voted by filing an instrument revoking it or by filing a duly executed
proxy bearing a later date with the Secretary of HBE prior to or at the
HBE Special Meeting. Attendance at the HBE Special Meeting will not in
and of itself constitute a revocation of a proxy. However, a shareholder
who attends the HBE Special Meeting and votes in person will be deemed to
have revoked his or her previously delivered proxy.
The HBE Board does not know of any matters other than those described
in the notice of the HBE Special Meeting that are to come before the HBE
Special Meeting. If any other matters are properly brought before the HBE
Special Meeting, one or more of the persons named in the proxy card will
vote the shares represented by such proxy upon such matters as determined
in their best judgment.
Solicitation of Proxies
SFSC. In addition to solicitation by mail, directors, officers, and
employees of SFSC, who will not be specifically compensated for such
services, may solicit proxies from the shareholders of SFSC, personally or
by telephone or telegram or other forms of communication. Brokerage
houses, nominees, fiduciaries, and other custodians will be requested to
forward soliciting materials to beneficial owners and will be reimbursed
for their reasonable expenses incurred in sending proxy material to
beneficial owners. SFSC will bear its own expenses in connection with the
solicitation of proxies for the SFSC Special Meeting, except that HBE has
agreed to share equally in the expense of printing this Joint Proxy
Statement/Prospectus and the expense of all Commission and other
regulatory filing fees incurred in connection therewith. See "THE MERGER
AGREEMENT--Other Expenses."
HOLDERS OF SFSC COMMON STOCK ARE REQUESTED TO COMPLETE, DATE, AND
SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO SFSC IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
HBE. In addition to solicitation by mail, directors, officers, and
employees of HBE, who will not be specifically compensated for such
services, may solicit proxies from the shareholders of HBE, personally or
by telephone or telegram or other forms of communication. Brokerage
houses, nominees, fiduciaries, and other custodians will be requested to
forward soliciting materials to beneficial owners and will be reimbursed
for their reasonable expenses incurred in sending proxy material to
beneficial owners. In addition, HBE has engaged MacKenzie Partners, Inc.
to assist it in distributing proxy materials and contacting record and
beneficial holders of HBE Common Stock. HBE will pay to MacKenzie
Partners, Inc. a fee of $4,000 plus the reimbursement of out-of-pocket
expenses for its services. HBE will bear its own expenses in connection
with the solicitation of proxies for the HBE Special Meeting, except that
SFSC has agreed to share equally in the expense of printing this Joint
Proxy Statement/Prospectus and the expense of all Commission and other
regulatory filing fees incurred in connection therewith. See "THE MERGER
AGREEMENT--Other Expenses."
HOLDERS OF HBE COMMON STOCK ARE REQUESTED TO COMPLETE, DATE, AND SIGN
THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO HBE IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
THE MERGER
Background of the Merger
Since the Association's conversion to stock form in 1996, management
of HBE has focused its principal attention on increasing HBE's core
business of originating single family mortgages and offering a full range
of retail deposit and loan services through five full-service branch
offices. In order to enhance shareholder value, the HBE Board has taken
various initiatives during the past two years, including paying regular
cash dividends and instituting a stock repurchase program.
The HBE Board has also periodically evaluated HBE's corporate
strategy in view of its capital position and market conditions, including
the economic and regulatory environment, the consolidation process in the
depository institution industry and the sharp increase in the number of
acquisitions of thrifts, including the prices paid in such acquisitions.
In September 1997, the HBE Board met with Hovde at its regular
meeting to explore various strategic options available to HBE including
(i) HBE's prospects as an independent financial institution pursuing
internal expansion, (ii) HBE's strategic opportunities for external growth
through selected acquisitions, and (iii) an analysis of potential
acquirers of HBE and a range of values if HBE were to be acquired.
Subsequently, Hovde commenced a due diligence review of HBE's financial
condition and its results of operations and evaluated HBE's prospects as
an independent financial institution; HBE's strategic opportunities for
external growth through selective acquisitions and the feasibility of a
sale of HBE, including an indication of the reasonable range of values.
These matters were thoroughly studied and reviewed by Hovde and senior
management of HBE, which reported their findings to the HBE Board on
October 16, 1997.
On October 16, 1997, the HBE Board met with Hovde and its legal
counsel to evaluate strategic options of remaining independent or pursuing
a possible affiliation with another financial institution. By resolution,
the HBE Board determined that HBE would pursue potential merger
opportunities, as well as continuing to explore other strategic options
and appointed Hovde as the financial advisor to HBE to review its
strategic options. HBE formally executed an engagement letter with Hovde
on December 2, 1997.
At the October 16, 1997 meeting, the HBE Board also authorized Hovde
to prepare a memorandum for review by a number of interested parties (the
"Executive Memorandum") containing selected public and non-public data
regarding HBE. After finalizing a list of potential contacts proposed,
Hovde contacted the interested parties regarding the Executive Memorandum
in late October and November, 1997. Thereafter, interested financial
institutions executed confidentiality agreements and reviewed the
Executive Memorandum.
On December 4, 1997, Hovde met with the HBE Board to advise them of
the status of the strategic option review and process. No merger
agreement resulted from the process at that date. Hovde then continued
its strategic option review for HBE, including the option of remaining
independent and the possibility of doing a tax-free return of capital to
HBE shareholders.
During the period from December 4, 1997 to March 1, 1998, the
management of SFSC and other parties who had expressed an interest in a
potential business combination with HBE were contacted by Hovde. During
the last several years, SFSC management has continually monitored the
increasingly competitive nature of the financial services industry as that
industry experienced significant consolidation. SFSC had been active in
the acquisition market, completing its most recent bank transaction with
the acquisition of Richmond in December 1997.
Following the initial contact with respect to HBE, representatives of
SFSC and Hovde met to discuss on a preliminary basis a possible
combination of SFSC and HBE. Hovde provided SFSC with the Executive
Memorandum to assist SFSC in determining whether to explore a business
combination. SFSC subsequently held internal meetings to analyze the data
provided by Hovde.
Thereafter, Hovde again contacted the potential acquirers to which
the Executive Memorandum had been sent. Based on the information in the
Executive Memorandum, two financial institutions headquartered in the
Midwest (one of which was SFSC) delivered preliminary indications of
interest in a business combination with HBE.
During the next three weeks, SFSC requested and reviewed additional
due diligence items relating to HBE and its internal operations. On April
3, 1998, representatives of SFSC met with representatives of HBE and Hovde
to discuss in greater detail the potential benefits of a business
combination between SFSC and HBE and the resulting SFSC business plan.
On April 6, 1998, the HBE's Board held a meeting to review HBE's
strategic alternatives, including the possibility of pursuing one or more
of the two expressions of interest it had received, both of which involved
a stock for stock transaction. The HBE Board thoroughly reviewed data
prepared by Hovde with respect to HBE, selected thrift acquisitions, the
terms of the two expressions of interest, financial and other data
regarding the two interested financial institutions and other matters. To
assist HBE Board's review, Hovde specifically analyzed: the nominal value
of the two expressions of interest; and the implied price-to-book and
price-to-earnings ratios for current and prospective periods and the
financial implications of such acquisitions on future earnings per share,
dividends per share and the book value per share compared to HBE on a
stand-alone basis. Hovde also presented to the HBE Board selected
material with respect to such institutions, including a liquidity analysis
and price and volume data with respect to securities of the two
institutions expressing interest in a transaction. At the conclusion of
the meeting, the HBE Board requested that Hovde continue to refine
expressions of interest from the two parties.
After thorough consideration of the analysis and advice of Hovde with
respect to various financial factors, the HBE Board authorized management
and the advisors to explore aggressively the expression of interest from
SFSC in light of various factors which, taken together, weighed in favor
of SFSC when compared to the other expression of interest. These factors
included: the higher implied value of the SFSC expression of interest;
SFSC's established acquisition program; the better downside risk
protection available in the SFSC offer prior to closing because of the
floating exchange ratio and two-tiered collar; and the potential that the
combined company, if integration and future operations were handled
properly, may trade at a significant premium to its peers in the future.
In addition, SFSC had revised its offer prior to the April 6, 1998
meeting, which revised offer provided more downside protection to HBE than
SFSC's first offer.
Following the HBE Board meeting on April 6, additional due diligence
was performed by both HBE and SFSC and their respective accountants and
legal counsel related to the proposed transaction.
On April 28, 1998, the SFSC Board held its regular meeting. The SFSC
Board received presentations on and discussed the status of the
negotiations, due diligence and other issues related to the proposed
transaction with HBE. The SFSC Board also reviewed HBE's historical
financial performance and other information relating to the proposed
business combination. At the conclusion of the meeting, the SFSC Board
authorized management to proceed with the consideration of a business
combination with HBE.
On May 5, 1998, SFSC presented HBE with a comprehensive merger
proposal and proposed form of merger agreement and stock option agreement.
On May 14, 1998, representatives of SFSC and HBE met to discuss the
proposal and the forms of agreement.
On May 21, 1998, the HBE Board, upon receiving reports from Hovde,
its legal counsel and its independent accountants on the results of on-
site due diligence performed at SFSC, confirmed its intention to proceed
and authorized its advisors to negotiate a merger agreement.
Over the next two weeks the parties made progress on the negotiations
regarding the terms of the Merger Agreement and the Stock Option
Agreement. The representatives and advisers for both parties met and
spoke on numerous occasions throughout this period discussing the
transaction and the related documentation and negotiating the terms of the
definitive agreements, including the exchange ratio and the provisions
associated therewith, representations and warranties, conditions to
closing, termination provisions and the terms of the Stock Option
Agreement.
On June 1, 1998, the SFSC Board met to consider and vote upon the
proposed business combination with HBE and the proposed form of Merger
Agreement and Stock Option Agreement. The SFSC Board reviewed with
counsel the various terms of the proposed Merger and Stock Option
Agreements, including the requirement that SFSC receive a fairness opinion
regarding the consideration it would pay in the Merger as a condition
precedent to its obligation to consummate the Merger. Legal counsel to
SFSC also reviewed with the directors their fiduciary obligations relative
to approval of the proposed business combination. In addition, management
of SFSC reviewed with the SFSC Board its analysis with respect to the
transaction. The members of the SFSC Board discussed the presentations
they had received at this and other meetings of the SFSC Board and, upon
conclusion, unanimously approved the Merger Agreement and the Stock Option
Agreement and authorized their execution.
On that same day, the HBE Board held another meeting with its
financial and legal advisors to review the acquisition documents, as well
as the financial terms and other proposed terms and conditions. As
financial advisor, Hovde again analyzed the financial factors related to
the Merger in detail and rendered its opinion that the proposed merger
consideration was fair, from a financial point of view, to the HBE
shareholders. A copy of this opinion is attached hereto as Annex D. The
HBE Board thoroughly reviewed the Merger Agreement and the Stock Option
Agreement with its advisors. The HBE Board unanimously approved the terms
of the Merger Agreement and Stock Option Agreement as being in the best
interests of HBE and its shareholders and authorized their execution.
The Merger Agreement and the Stock Option Agreement were executed on
June 2, 1998, and the parties thereafter issued a press release announcing
the transaction.
Subsequent to the public announcement of the transaction, SFSC
retained EVEREN to render a fairness opinion with respect to the Merger.
The delivery of such opinion is a condition precedent to SFSC's obligation
to complete the Merger. On July 14, 1998, EVEREN made a presentation to
the SFSC Board summarizing the financial analyses it had conducted in
connection with the fairness opinion and subsequently rendered such
opinion orally to the SFSC Board. In connection with this Joint Proxy
Statement/Prospectus, EVEREN confirmed its fairness opinion in writing, a
copy of which written opinion is attached hereto as Annex C.
Subsequent to the execution of the Merger Agreement and the public
announcement of the transaction, HBE received a letter from an HBE
shareholder forwarding a non-binding letter from another financial
institution expressing an interest in acquiring HBE for shares of the
common stock of such financial institution for an aggregate value of
$155 million. The Board of Directors of HBE determined that HBE was
not in a position to engage in discussions regarding a business
combination with such financial institution for the following
reasons: (i) HBE had entered into a binding merger agreement with SFSC;
(ii) such solicitation was received after HBE had completed its bid
process with its financial advisor pursuant to which it solicited
bids from potential acquirers; and (iii) uncertainty as to such financial
institution's ability to consummate a potential business combination with
HBE under the terms set forth in the letter.
Reasons for the Merger; Recommendation of Boards of Directors
SFSC. The SFSC Board has concluded that the Merger would be in the
best interests of SFSC and its shareholders. In reaching this
determination, the SFSC Board considered many factors including those that
follow:
(i) The Merger meets SFSC's strategic objectives of maintaining
and strengthening a locally owned and operated community-oriented
financial institution.
(ii) The Merger will create a significantly larger financial
institution that will have capabilities to offer a wider array of
financial products and services than currently available through
SFSC. For instance, SFSC's current customers will have access to the
products and services offered by HBE and, conversely, HBE will offer
its products and services to SFSC's customers. Moreover, the
combined resources of the two companies will improve the efficiencies
associated with the development of new products and services to be
offered by SFSC.
(iii) SFSC will have immediate access to the Northeastern
Illinois market which is currently served by SFSC on a limited basis.
Accordingly, SFSC will have the added advantage of offering the new
mix of products and services referred to in paragraph (ii) above
across a larger geographic area and customer base then SFSC has
currently.
(iv) The similarities between the operations of SFSC and HBE
will result in cost savings and more efficient utilization of
resources and technology thereby offering economies of scale not
currently available to SFSC.
(v) The size and capital structure of SFSC following the Merger
will provide greater opportunities and flexibility in responding to
the rapidly changing industry for financial service providers.
(vi) The asset size, capital position, management strength and
market position of SFSC will enable the combined company to remain
competitive and take advantage of current and emerging opportunities
for growth and profitability.
(vii) The opinion of EVEREN that the consideration to be
paid by SFSC in the Merger is fair, from a financial point of view,
to SFSC and its shareholders.
Numerous factors were considered by the SFSC Board in approving the terms
of the Merger. These factors included information concerning the
financial structure, results of operations, and prospects of SFSC and HBE;
the capital adequacy of the resulting entity; the composition of the
businesses of the two organizations; the overall compatibility of the
employees of the organizations; the outlook for the organizations in the
rapidly changing financial services industry; the potential annual pre-tax
cost savings for the combined company to be realized by the consolidation
of personnel, more efficient use of technology and reduced marketing and
other expenses; the historical and current market prices of each company's
stock and certain other bank and savings and loan holding companies whose
securities are publicly traded, the relationship of the consideration to
be paid in the Merger to such market prices and the book value and
earnings per share of HBE and the financial terms of certain other recent
business combinations in the banking industry.
The SFSC Board believes that the expansion of SFSC's customer base
and assets in Northeastern Illinois through the Merger will enable it to
realize certain economies of scale, to provide a wider and improved array
of financial services to its customers and to achieve added flexibility in
dealing with the region's changing competitive environment. The SFSC
Board also believes that the combined companies will provide SFSC's
shareholders with increased liquidity for their shares when compared to
the liquidity of SFSC's shares prior to the Merger and as a result will be
more attractive to investors. Additionally, the SFSC Board believes that
the Merger will provide the combined company with the market position and
financial resources it needs to meet the competitive challenge arising
from changes in the banking industry.
FOR THE REASONS SET FORTH ABOVE, THE SFSC BOARD UNANIMOUSLY
RECOMMENDS THAT HOLDERS OF SFSC COMMON STOCK VOTE TO APPROVE THE MERGER
AGREEMENT.
HBE. The terms of the Merger Agreement, including the Merger
consideration, were the result of arm's-length negotiations between HBE
and SFSC and the their respective representatives. HBE consulted with its
own financial advisor and legal counsel during the course of negotiations.
The HBE Board believes that the Merger is fair to and is in the best
interest of shareholders of HBE. In reaching a conclusion to approve the
Merger, the HBE Board considered a number of factors which, taken in
totality, led to a determination by the HBE Board that the Merger is in
the best interests of HBE and its shareholders. The HBE Board did not
assign any relative or specific weights to the factors considered. Among
other things, the HBE Board considered the following:
(i) the premium presented by the consideration offered to HBE's
shareholders in relation to the book value per share of HBE Common Stock;
(ii) the multiple represented by the consideration offered to HBE's
shareholders in relation to per share book value and historical and
projected earnings when compared to national and regional industry
averages;
(iii) the financial terms of other recent business combinations
in the thrift industry and a comparison of the financial terms of the
Merger to such other transactions;
(iv) the fact that Hovde communicated with a number of qualified and
capable banking organizations and that numerous of those organizations
executed confidentiality agreements and reviewed information relating to
HBE;
(v) the opinion of Hovde that the Merger consideration is fair from
a financial point of view to HBE's shareholders (see "The Merger-Opinion
of Financial Advisor");
(vi) the fact that holders of HBE Common Stock who retain their
shares of SFSC Common Stock following the Merger will have greater
potential to continue to receive dividends after the Merger;
(vii) the tax-free nature of the consideration to be received by
HBE's shareholders (see "The Merger-Certain Federal Income Tax
Consequences");
(viii) management's knowledge of SFSC, the potential appreciation
of SFSC Common Stock, the research coverage of SFSC Common Stock by
industry analysts and the established acquisition program of SFSC;
(ix) the financial condition, results of operations, current business
and expansion opportunities and constraints and prospects of future
performance and earnings of HBE on a stand-alone basis including the costs
of maintaining and expanding its branch network and upgrading services and
increasing market share in light of advances in technology;
(x) the current and prospective economic and regulatory environment
and the burdens and constraints affecting financial institutions such as
HBE, potential increased regulatory burdens and the constantly changing
competitive environment in which banking services are now marketed in the
areas served by HBE and SFSC;
(xi) the potential financial condition, results of operations,
expansion opportunities and prospects of future performance and earnings
of HBE and SFSC on a combined basis;
(xii) the probable impact of the Merger on customers and the
communities served by HBE and SFSC's willingness to retain specific HBE
officers and employees and provide certain benefits to officers and
employees of HBE;
(xiii) the willingness of SFSC to retain HBE as a separate thrift
subsidiary in light of pending legislation to modernize the financial
services industry;
(xiv) the potential for expansion of products and services that
may be offered to customers of HBE and SFSC on a combined basis, while
remaining a community-oriented financial institution; and
(xv) the HBE Board's review with Hovde and HBE's legal advisors of
the provisions of the Merger Agreement.
FOR THE REASONS SET FORTH ABOVE, THE HBE BOARD UNANIMOUSLY RECOMMENDS
THAT HOLDERS OF HBE COMMON STOCK VOTE TO APPROVE THE MERGER AGREEMENT.
Opinions of Financial Advisors
SFSC's Financial Advisor. EVEREN has delivered its written opinion
to the SFSC Board that, as of the date of this Joint Proxy
Statement/Prospectus, the consideration to be paid by SFSC to HBE pursuant
to the Merger is fair, from a financial point of view, to SFSC and its
shareholders, however, the fairness opinion does not express an opinion
with respect to the Optional Exchange Ratio. EVEREN's written opinion
essentially confirms its oral opinion provided to SFSC's Board of
Directors on July 14, 1998.
THE FULL TEXT OF THE OPINION OF EVEREN DATED AS OF THE DATE OF THIS
JOINT PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED, AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS. SFSC'S SHAREHOLDERS ARE
URGED TO READ EVEREN'S OPINION IN ITS ENTIRETY. EVEREN'S OPINION IS
DIRECTED TO THE SFSC BOARD ONLY AND IS DIRECTED ONLY TO THE CONSIDERATION
TO BE PAID BY SFSC FOR HBE AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SFSC SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SFSC
SPECIAL MEETING. THIS SUMMARY OF EVEREN'S OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with its opinion, EVEREN, among other things:
(i) reviewed the Merger Agreement; (ii) reviewed drafts of this Joint
Proxy Statement/Prospectus; (iii) reviewed such publicly available
information concerning the Company and HBE that it believed to be relevant
to its analysis, including, without limitation, the Forms 10-K for the
years ended December 31, 1997 and 1996, quarterly reports on Form 10-Q for
the periods ended March 31, 1998 and September 30, 1997 and recent press
releases for HBE; (iv) reviewed financial and operating information with
respect to the business, operations and prospects of SFSC and HBE
furnished to EVEREN by SFSC and HBE; (v) reviewed financial information
including internal pre-Merger and pro forma projections prepared by SFSC;
(vi) reviewed the trading history of the SFSC Common Stock and the HBE
Common Stock and a comparison of that trading history with those of other
companies that EVEREN deemed relevant; (vii) compared the financial terms
of the Merger with the financial terms of certain other recent
transactions that EVEREN deemed relevant; (viii) conducted discussions
with the management of SFSC and concerning their respective businesses,
operations, assets, liabilities, financial conditions and prospects, and
the potential cost savings, operating synergies, revenue enhancements, and
strategic benefits expected to result from a combination of the businesses
of SFSC and HBE; and (ix) examined such other studies, analyses, inquiries
and investigations as EVEREN deemed appropriate. EVEREN also took into
account general economic, market, and financial conditions as well as its
experience in other transactions, its knowledge of the commercial banking
industry, and its experience in securities valuation.
EVEREN relied without independent verification upon the accuracy and
completeness of the foregoing financial and other information reviewed by
it for purposes of its opinion. EVEREN also assumed that there has been
no material change in SFSC's and HBE's assets, financial condition,
results of operations, business, or prospects since the date of the last
financial statements made available to it for SFSC and HBE, respectively.
In addition, EVEREN did not make an independent evaluation, appraisal, or
physical inspection of the assets or individual properties of HBE, nor was
EVEREN furnished with such appraisals. Further, EVEREN's opinion is based
on economic, monetary, and market conditions existing as of the date of
this Joint Proxy Statement/Prospectus. No limitations were imposed by
SFSC upon EVEREN on the scope of its investigation nor were any specific
instructions given to EVEREN in connection with its fairness opinion.
EVEREN was retained by SFSC on the basis of the firm's reputation,
experience, and familiarity with the commercial banking and thrift
industries and with merger and acquisition transactions. As part of its
investment banking services, EVEREN is regularly engaged in the valuation
of businesses and their securities in connection with merger and
acquisition transactions, public offerings, private placements,
recapitalizations, and other purposes.
Pursuant to its agreement with EVEREN for the fairness opinion given
by it in connection with the Merger, SFSC has paid EVEREN $250,000 for its
services.
For the purposes of its opinion, EVEREN believes it is independent of
SFSC. Other than its services to SFSC in connection with its fairness
opinion, the services of EVEREN's predecessor, Principal Financial
Securities, to SFSC in 1996 and 1997 in connection with SFSC's evaluation
of potential acquisitions, and its underwriting of 993,600 shares (as
adjusted pursuant to stock splits in 1996, 1997 and 1998) of SFSC's common
stock as a member of the selling group in connection with SFSC's
864,000-share (as adjusted pursuant to stock splits in 1996, 1997 and
1998) initial public offering completed in April, 1993, EVEREN has
provided no other professional services to either SFSC or HBE.
Summary of Financial Analyses
The following is a summary of the principal matters considered and
financial analyses utilized by EVEREN in connection with providing its
written opinion dated July 14, 1998 (which was confirmed in a written
opinion dated the date of this Joint Proxy Statement/Prospectus) to SFSC's
Board of Directors but does not purport to be a complete description of
the analyses performed by EVEREN. EVEREN reviewed the following matters
and financial analyses with SFSC's Board of Directors on July 14, 1998.
Purchase Price Analysis. Based upon the closing price of SFSC's
Common Stock on July 6, 1998 which was $23.31, the Exchange Ratio of 0.837
shares of SFSC Common Stock for each share of HBE, represented a per share
value of $19.50 and a total value of $133.7 million to be received by HBE
shareholders. Based on this implied transaction value, EVEREN calculated
the price-to-earnings, price-to-book, price-to-tangible book, and
price-to-adjusted book (wherein book value is adjusted to reflect equity
of assets of 7%, as an amount equal to 7% of assets is considered an
adjusted capitalization level, with capitalization above the 7% ratio
considered over-capitalization) in the Merger. The implied transaction
value per share yielded a price-to-earnings multiple of 54.3x (based on
HBE's last twelve month net income for the quarter ending March 31, 1998),
a price-to-book value multiple of 1.397x, a price-to-tangible book
multiple of 1.397x, and a price-to-adjusted book value multiple of 2.473x.
Comparable Company Analysis. Using publicly available information
EVEREN compared the financial performance and stock market performance of
HBE with a group of selected publicly traded companies within the thrift
industry (the "Peer Group"). The Peer Group includes companies of similar
asset size and geographic location as that of HBE: Midwest thrifts with
total asset size of between $250 million and $1 billion. The ratios of
this Comparable Company Peer Group were as follows: the price-to-earnings
multiple was 26.9x, the price-to-book ratio was 170.2%, the
price-to-tangible book ratio was 176.9%, and the price-to-adjusted book
ratio was 194.0%. These ratios for the Comparable Company Peer Group are
based on public financial statements, and closing stock market prices as
of July 6, 1998.
Because of the inherent differences in the businesses, operations,
financial conditions and prospects of SFSC, HBE and the companies included
in the Peer Group, EVEREN believes that a purely quantitative comparable
company analysis would not be particularly meaningful in the context of
the Merger. EVEREN believes that the appropriate use of a comparable
company analysis in this instance involves qualitative judgments
concerning the differences between HBE and the companies included.
Comparable Merger Transaction Analysis. Using publicly available
information, EVEREN reviewed certain financial terms, including the
historical price-to-earnings ratio, the price-to-book ratio, the
price-to-tangible ratio, and the price-to-adjusted book ratio of certain
thrift merger and acquisition transactions. EVEREN reviewed eight
categories of mergers and acquisitions: (i) completed transaction of
thrifts located throughout the United States with total asset size of
between $250 million and $1 billion, for the period of approximately the
past two years; (ii) completed transaction of thrifts located in the
Midwest, for the period of approximately the past two years;
(iii) completed transactions of thrifts located in the Midwest with total
asset size of between $250 million and $1 billion, for the period of
approximately the past two years; (iv) pending transactions of thrifts
located throughout the United States with total asset size of between
$250 million and $1 billion; (v) pending transactions of thrifts located
in the Midwest; (vi) pending transactions of thrifts located in the
Midwest with total asset size of between $250 million and $1 billion;
(vii) transactions completed within the past year of thrifts with capital
levels exceeding 10%, and with total asset size of between $250 million
and $1 billion, located throughout the United States; and
(viii) transactions completed within the past year of thrifts with capital
levels exceeding 10% located in the Midwest. EVEREN calculated, reviewed
and compared average financial data and ratios for each category using
information as of the most recently available date. The analysis
indicated that: (i) in the Completed National Thrift category, the
price-to-earnings multiple was 23.8x, the price-to-book value ratio was
183.6%, the price-to-tangible book ratio was 191.4%, and the
price-to-adjusted book ratio was 221.7%; (ii) in the Completed Midwest
Thrift category, the price-to-earnings multiple was 25.8x, the
price-to-book ratio was 196.2%, the price-to-tangible book ratio was
201.1%, and the price-to-adjusted book ratio was 239.6%; (iii) in the
Completed Midwest Thrift of Comparable Asset Size category, the
price-to-earnings multiple was 22.9x, the price-to-book ratio was 176.2%,
the price-to-tangible book ratio was 179.2%, and the price-to-adjusted
book ratio was 222.1%; (iv) in the Pending National Thrift category, the
price-to-earnings multiple was 23.6x, the price-to-book ratio was 233.2%,
the price-to-tangible book ratio was 236.0%, and the price-to-adjusted
book ratio was 284.4%; (v) in the Pending Midwest Thrift category, the
price-to-earnings multiple was 26.1x, the price-to-book ratio was 219.0%,
the price-to-tangible book ratio was 226.5%, and the price-to-adjusted
book ratio was 254.0%; (vi) in the Pending Midwest Thrift of Comparable
Asset Size category, the price-to-earnings multiple was 30.9x, the
price-to-book ratio was 241.1%, the price-to-tangible book ratio was
252.1%, and the price-to-adjusted book ratio was 285.1%; (vii) in the
Completed National Over-Capitalized thrift category, the price-to-earnings
multiple was 21.6x, the price-to-book value ratio was 193.2%, the
price-to-tangible book ratio was 201.8%, and the price-to-adjusted book
ratio was 282.5%; (viii) in the Completed Midwest Over-Capitalized Thrift
category, the price-to-earnings multiple was 25.4x, the price-to-book
ratio was 152.6%, the price-to-tangible book ratio was 154.4%, and the
price-to-adjusted book ratio was 199.2.
Because the reasons for and circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent
differences in the businesses, operations, financial condition and
prospects of SFSC and HBE and the companies in the various categories
reviewed, EVEREN believed that a purely quantitative comparable merger
transaction analysis would not be particularly meaningful in the context
of the Merger. EVEREN believed that the appropriate use of a comparable
merger transaction analysis would involve qualitative judgments concerning
the differences between the characteristics of these transactions and the
Merger which would affect the acquisition values of the acquired companies
and HBE.
Contribution Analysis. EVEREN analyzed the respective contributions
of SFSC and HBE to the combined company's pro forma balance sheet as of
the 12-month period ending March 31, 1998 and for the year ending
December 31, 1997, and pro forma historic net income for the 12-month
period ended March 31, 1998 and for the year ending December 31, 1997,
without giving effect to any cost savings or revenue enhancements
resulting from the Merger. This analysis showed that for the 12-months
ending March 31, 1998, HBE and SFSC's contributions, and ownership,
respectively, would have been as follows: For the 12 months ending
March 31, 1998, HBE would have contributed 42.6% to total assets, 53.4% to
total loans, 71.0% to total equity and 24.8% to net income. For the year
ending December 31, 1997, HBE would have contributed 40.3% to total
assets, 52.8% to total loans, 71.2% to total equity and 28.0% to net
income. Based on the Exchange Ratio as of July 6, 1998, HBE's ownership
would have equaled 59.8%.
Pro Forma Merger Analysis. EVEREN analyzed the impact of the Merger
on SFSC's estimated earnings per share based on the most recent estimates
for the 1998 earnings of SFSC published by First Call Earning Estimates,
and assumed a 10% growth rate of 1999. In connection with this analysis,
SFSC management provided EVEREN with projections for cost savings and
earning enhancements from the Merger, which projections were incorporated
in EVEREN's analysis. Identified near-term items include the following:
cost savings potential from personnel reductions, change of control
provisions of the HBE ESOP and termination of the RRP, and cuts in support
services, marketing, professional services, and holding company expenses.
Earnings enhancement considerations include fee income generation from
overdraft fees, ATM surcharges, and investment income. Areas which SFSC
has identified as sources of continuous improvement include the following
on-going items: interest margin improvements as HBE moves into commercial
lending and deposits and consumer lending, and non-interest income
generation from sales of insurance and brokerage products and merchant
services, service charges, and loan servicing. Based on these projections
and assumptions, EVEREN concluded that the Merger would result in 7%
dilution to SFSC's earnings per share in the first year of the merger,
1999, and start being accretive to SFSC's earnings per share in 2000.
Discounted Cash Flow Analysis. EVEREN discounted three years of
projected net income of HBE and an estimated terminal value for HBE Common
Stock. EVEREN used discount rates of between 11.0% and 13.0% for yearly
net income. EVEREN derived an estimated range of terminal values by
applying multiples ranging from 15 to 17 times estimated year-end 2000
income. These rates of value were chosen to reflect different assumptions
regarding the required rates of return of holders or prospective buyers of
HBE Common Stock. In connection with this analysis, HBE provided EVEREN
with net income projections. This analysis, and its underlying
assumptions, yielded a range of values for HBE Common Stock as follows:
$47.5 million and $55.0 million in aggregate.
EVEREN also discounted three years of projected net income of HBE,
taking into account the cost savings and earnings enhancements which SFSC
management has projected for HBE. Using the same discount factors of
between 11% and 13% and the same terminal value multiples ranging from 15x
to 17x, the yielded range of values for HBE is as follows: $130.3 million
and $151.4 million in aggregate.
Summary of Selected Other Considerations. In arriving at its
opinion, EVEREN also considered a number of qualitative factors and
attributes distinct to HBE, including, but not limited to, the market
potential and HBE's position in markets, its equity levels, deposit
composition, asset quality, as well as the cost savings and earnings
enhancements identified by SFSC management. EVEREN also considered a
number of qualitative factors which might result from the Merger including
SFSC's broadened geographic presence, its position as the 7th largest bank
holding company in Wisconsin, an entity with 4 charters (3 banks,
1 thrift), and 16 offices. EVEREN also reviewed SFSC's enhanced lending
capabilities, the combined entity's capabilities in brokerage, insurance,
mortgage products, and its full compliment of financial services for
commercial and retain. EVEREN also considered SFSC's successful record of
acquisition integration.
The foregoing is a summary of the principal financial analyses
performed by EVEREN but does not purport to be a complete description of
the analyses performed by EVEREN. The preparation of a fairness opinion
is a complex process and is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the analyses or of
the summary set forth above, without considering the analysis as a whole,
could create an incomplete view of the processes underlying EVEREN's
opinion. In arriving at its fairness determination, EVEREN considered the
results of all of such analyses. No specific Comparative Company Peer
Group institution is identical to HBE, and no selected category of merger
and acquisition transaction is identical to the Merger. Accordingly,
EVEREN indicated to SFSC's Board that analyses of the results described
above are not mathematical, but rather involve complex considerations and
judgments concerning differences in operating and financial
characteristics. The above analyses do not purport to be appraisals nor
do they necessarily reflect the prices at which HBE or its securities
actually may be sold.
HBE's Financial Advisor. Pursuant to the terms of an engagement
letter dated as of December 2, 1997, HBE retained Hovde as its sole and
exclusive financial advisor to for the purpose of analyzing HBE's
strategic options, particularly with regard to the merger or sale of HBE,
identifying prospective acquirers which satisfy HBE's objectives,
initiating preliminary discussions on a confidential basis, and if HBE
decided to proceed with a proposed merger or sale, soliciting preliminary
proposals. Hovde is a nationally recognized financial advisory and
investment banking firm which specializes in providing these services to
commercial bank and thrift institutions. Hovde is experienced in the
independent valuation of securities in connection with negotiated
underwriting, subscription and community offerings, private placements,
merger and acquisition transactions and recapitalizations. The HBE Board
selected Hovde to serve as its financial advisor based upon Hovde's
qualifications, experience and reputation, as well as Hovde's familiarity
with HBE's business and market area.
Upon the consummation of the Merger, HBE will pay Hovde 1.25% of the
consideration received by the HBE shareholders pursuant to the Merger.
Fifteen percent (15%) of this fee (or .1875% of the consideration) was due
upon the signing of the Merger Agreement. HBE has also agreed to
indemnify Hovde against certain liabilities, including liabilities under
the federal securities laws, and to reimburse Hovde for certain out-of-
pocket expenses in connection with its services as financial advisor with
respect to the Merger not to exceed $10,000, without the prior consent of
HBE.
Representatives of Hovde attended the special meeting of the HBE
Board on June 1, 1998 at which the HBE Board considered and approved the
Merger Agreement. At the June 1, 1998 meeting, Hovde rendered its written
opinion to the HBE Board that, as of such date, the Merger was fair to the
HBE shareholders from a financial point of view. The opinion given by
HBE's financial advisor does not express an opinion regarding the fairness
of the Merger in the event that the Market Value of SFSC Common Stock is
below $20.00 per share on the Decision Date and the Merger is consummated
based on the Exchange Ratio. Hovde's opinion was reconfirmed in writing
as of the date of this Joint Proxy Statement/Prospectus.
The full text of Hovde's written opinion dated as of June 1, 1998 and
as reconfirmed in writing as of the date of this Joint Proxy
Statement/Prospectus, sets forth assumptions made, matters considered and
limitations on the review undertaken by Hovde, and is attached as Appendix
D to this Joint Proxy Statement/Prospectus and is incorporated by
reference. Hovde's opinion is directed only to the Merger Agreement and
does not constitute a recommendation to any HBE shareholder as to how such
shareholder should vote at the HBE Special Meeting or as to any other
matter. The summary of the Hovde fairness opinion set forth in this Joint
Proxy Statement/Prospectus is qualified in its entirety by reference to
the full text of such opinion.
In connection with rendering its opinion, Hovde reviewed and analyzed
material bearing upon the financial and operating conditions of HBE and
SFSC and material prepared in connection with the Merger, including the
following: (a) the Plan of Merger; (b) certain historically publicly
available information concerning HBE and SFSC; (c) the terms of recent
merger and acquisition transactions involving thrifts and thrift holding
companies that they considered relevant; (d) historical market prices and
trading volumes for SFSC Common Stock; and (e) financial and other
information provided to them by the management of HBE and SFSC. Hovde
also met with members of senior management of SFSC and HBE for the purpose
of reviewing the future prospects of HBE and SFSC. Hovde also evaluated
the pro forma ownership of SFSC Common Stock by HBE's shareholders
relative to the pro forma contributions of HBE's assets, liabilities,
equity and earnings to SFSC as the surviving corporation and conducted
such other studies, analyses and examinations as it deemed appropriate.
Hovde also took into account its assessment of general economic, market
and financial conditions and their experience in other transactions, as
well as its knowledge of the banking industry and their general experience
in securities valuations. Hovde's opinion was necessarily based upon
conditions as they existed and could be evaluated on the date thereof and
the information made available to Hovde through the date hereof.
In conducting its review and arriving at its opinion, Hovde relied
upon and assumed the accuracy and completeness of the financial and other
information and representations contained in the materials provided to
them by HBE and SFSC and in the discussions with HBE and SFSC management.
Hovde did not independently verify and relied upon and assumed that the
aggregate allowances for loan losses set forth in the balance sheets of
HBE and SFSC at March 31, 1998 were adequate to cover such losses. Hovde
did not make or obtain any evaluations or appraisals of the assets,
liabilities or prospects of HBE or SFSC.
In connection with rendering its opinion to the HBE Board, Hovde
performed a variety of financial analyses. All material valuation
methodologies considered by Hovde in connection with the preparation of
its opinion is summarized below. The summary of the analyses performed by
Hovde in this regard as set forth herein does not purport to be a complete
description of such analyses. Hovde believes that its analyses and the
summary set for must be considered as a whole and that selecting portions
of such analyses and the factors considered therein, without considering
all factors and analyses, could create an incomplete view of the analyses
and process underlying its opinions. The preparation of a fairness
opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analysis or summary description.
In performing its analyses, Hovde made numerous assumptions with
respect to industry performance, business and economic conditions, and
other matters, any of which are beyond the control of HBE or SFSC. Such
analyses were prepared solely as part of Hovde's analysis of the fairness
of the Merger to HBE shareholders from a financial point of view. No
company or transaction utilized in Hovde's analyses was identical to HBE
or SFSC or the Merger. Accordingly, such analyses are not based solely on
arithmetic calculations; rather, they involve complex considerations and
judgments concerning differences in financial and operating
characteristics of the relevant companies, the timing of the relevant
transactions and prospective buyer interest, as well as other factors that
could effect the public trading values of the company or companies to
which they are being compared. Estimates contained in Hovde's analyses
are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. In addition, estimates of values of companies do not purport to
be appraisals or necessarily reflect the prices at which companies or
their securities actually may be sold. Furthermore, as described
previously, Hovde's opinion is just one of many factors taken into
consideration by the HBE Board.
The following is a brief summary of the analyses performed by Hovde
in connection with its opinion:
Comparable Merger & Acquisition Transactions - Nationwide and
Midwest. Hovde performed an analysis of certain comparable and nationwide
financial institution acquisition transactions based on the acquisition
price relative to stated book value, stated tangible book value, twelve
months earnings per share and the premium over tangible book value in
relation to core deposits. The analysis included a review and comparison
of select thrift merger and acquisition transactions nationwide with
seller's tangible equity to assets greater than 15% and total assets
between $50 million and $600 million of deal announced since January 1,
1997 and select thrift merger and acquisition transactions in the Midwest
with a total deal value greater than $20 million and tangible equity to
assets greater than 11% since January 1, 1997.
Discounted Cash Flow for HBE. Hovde prepared a five year forecast
for HBE assuming no acquisitions, including a balance sheet summary,
income statement summary and a discounted cash flow analysis based on
certain assumptions. Hovde also calculated the net present value per
share and the total net present value of HBE based on varying ranges of
discount rates and terminal value multiples.
Relative Contribution Analysis for HBE and SFSC and Financial
Implications of SFSC's Offer. Hovde analyzed the relative contribution of
HBE to certain balance sheet and income statement items, including total
assets, deposits and net income of the combined company. In addition,
Hovde considered the financial implications of the Merger on the financial
condition of the combined company, based on certain estimates by Hovde and
the management of HBE, as well as evaluation of other financial data
available at the time performed.
Comparative Shareholder Rates of Return. Hovde performed an analysis
of the comparative rates of shareholder return on the following scenarios,
based on certain estimates and assumptions: (i) if HBE remained
independent; (ii) if HBE merged with an acquirer in 2002; and (iii) if HBE
merged on June 1, 1998 with SFSC in a 100% stock transaction and SFSC
merged with an acquirer in 2002. Based on the assumptions and estimates,
the analysis revealed that the highest annual rate of return on a
shareholder's investment would be item (iii) described above, the merger
of HBE with and into SFSC and if SFSC mergers with an acquirer in 2002.
THE FULL TEXT OF THE OPINION OF HOVDE DATED AS OF THE DATE OF THIS
JOINT PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED, AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
ANNEX D TO THIS JOINT PROXY STATEMENT/PROSPECTUS. HBE'S SHAREHOLDERS ARE
URGED TO READ HOVDE'S OPINION IN ITS ENTIRETY. HOVDE'S OPINION IS
DIRECTED TO THE HBE BOARD ONLY AND IS DIRECTED ONLY TO THE CONSIDERATION
TO BE PAID TO THE HBE SHAREHOLDERS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HBE SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE AT THE HBE SPECIAL MEETING. THIS SUMMARY OF HOVDE'S OPINION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
Interests of Certain Persons in the Merger
Assuming that the Merger is consummated, the directors of SFSC
immediately prior to the Effective Time will be the directors of SFSC (as
the surviving corporation in the Merger) at the Effective Time, each to
hold office in accordance with the Amended and Restated Articles of
Incorporation and By-Laws of SFSC. The officers of SFSC immediately prior
to the Effective Time will be the officers of SFSC (as the surviving
corporation in the Merger) at the Effective Time, in each case until their
respective successors are duly elected and qualified.
In addition, at the Effective Time, George L. Perucco, President and
Chief Executive Officer of HBE and the Association, and Lyle N. Dolan,
Executive Vice President and Treasurer of HBE and the Association (Mr.
Perucco and Mr. Dolan are collectively referred to as the "Senior
Executives") will terminate their employment agreements with HBE and the
Association (the "Employment Agreements") and receive the full payments
provided for thereunder as described below. Currently, Mr. Perucco has a
three-year Employment Agreement and Mr. Dolan has a two-year Employment
Agreement.
Upon their termination of employment following consummation of the
Merger, each Senior Executive will be entitled to a lump sum cash payment
in an amount equal to the present value of the remaining base salary and
bonus payments due to the Senior Executive and the additional
contributions or benefits that would have been earned under any employee
benefit plans of HBE or the Association during the remaining terms of his
Employment Agreement and payments that would have been made under any
employee benefit or incentive compensation plan during the remaining term
of the Employment Agreement. At August 31, 1998, the base salaries of
Messrs. Perucco and Dolan were $232,171 and $145,749, respectively. In
addition, each Senior Executive will be entitled to continued life, health
and disability insurance coverage for the remaining term of his Employment
Agreement. Any unvested stock options and unvested restricted stock
awards held by Messrs. Perucco and Dolan under the Home Bancorp of Elgin,
Inc. 1997 Stock Option Plan (the "HBE Option Plan") and the 1997
Recognition and Retention Plan (the "HBE RRP") will become fully vested
upon approval of the Merger by the shareholders of HBE. Any unvested
stock options and unvested restricted stock awards held by any other
executive officers and directors of HBE would also become fully vested as
of such date.
Cash and benefits paid to the Senior Executives under the Employment
Agreements together with payments under other benefit plans following
consummation of the Merger may constitute an "excess parachute" payment
under Section 280G of the Code, resulting in the imposition of a 20%
excise tax on the recipient and the denial of the deduction for such
excess amounts to SFSC. The Employment Agreements include a provision
indemnifying each Senior Executive on an after-tax basis for any "golden
parachute" excise taxes.
Pursuant to the Merger Agreement, Mr. Perucco will enter into a
consulting agreement with SFSC to become effective at the Effective Time.
Pursuant to the consulting agreement, Mr. Perucco will receive a
consulting fee of $75,000 per annum for providing consulting services to
SFSC. The consulting agreement will have a one-year term, and may be
renewed annually thereafter with the written consent of both parties.
For a discussion of indemnification rights and related insurance
matters applicable to the executive officers and directors of SFSC and
HBE, see "THE MERGER AGREEMENT--Indemnification."
Certain Federal Income Tax Consequences
General. The following is a summary description of the material
federal income tax consequences of the Merger and summarizes the
respective opinions of counsel to SFSC and HBE. The opinions summarized
below are filed as exhibits to the Registration Statement. This summary
is not a complete description of all of the consequences of the Merger
and, in particular, may not address federal income tax considerations that
may affect the treatment of a shareholder that, at the Effective Time, is
not a U.S. person or is a tax-exempt entity or an individual who acquired
HBE Common Stock pursuant to an employee stock option or otherwise as
compensation. In addition, no information is provided with respect to the
tax consequences of the Merger under foreign, state or local laws. The
discussion is based on the Code as in effect on the date of this Joint
Proxy Statement/Prospectus, without consideration of the particular facts
or circumstances of any shareholder. Consequently, shareholders are
advised to consult their own tax advisor as to the specific tax
consequences to them of the Merger.
The Merger. The SFSC obligation to effect the Merger is conditioned
on the delivery of an opinion to SFSC from Foley & Lardner, its counsel,
dated as of the Closing Date, based upon certain customary representations
and assumptions set forth therein, that, for federal income tax purposes,
the Merger constitutes a tax-free reorganization within the meaning of
Section 368(a)(1)(A) of the Code. The HBE obligation to effect the Merger
is conditioned on the delivery of an opinion to HBE from Thacher Proffitt
& Wood, its counsel, dated as of the Closing Date, based upon certain
customary representations and assumptions set forth therein, that, for
federal income tax purposes, the Merger constitutes a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Code.
Rulings will not be sought from the Internal Revenue Service
regarding the Merger, and the Internal Revenue Service may disagree with
the conclusions expressed in the opinions of counsel referred to above.
Based on the foregoing, the following is a summary of the material
federal income tax consequences of the Merger:
(i) SFSC and HBE will each be a party to a reorganization
within the meaning of Section 368(b) of the Code;
(ii) No gain or loss will be recognized by SFSC or HBE pursuant
to the Merger;
(iii) No gain or loss will be recognized by the holders of
HBE Common Stock upon the exchange of their HBE Common Stock for SFSC
Common Stock pursuant to the Merger, except that a holder of HBE
Common Stock that receives cash in lieu of a fractional share
interest in SFSC Common Stock will recognize gain or loss equal to
the difference between the cash received and the tax basis allocated
to the fractional share interest. Any gain or loss recognized by a
holder will constitute capital gain or loss if such holder's HBE
Common Stock with respect to which gain or loss is recognized is held
as a capital asset at the Effective Time;
(iv) The tax basis of the SFSC Common Stock received by a holder
of HBE Common Stock will be the same as such holder's tax basis in
the HBE Common Stock that was exchanged pursuant to the Merger
reduced by the tax basis allocable to any fractional share interest
in SFSC Common Stock with respect to which cash is being received;
(v) The holding period of the SFSC Common Stock received in the
Merger will include the holder's holding period with respect to the
HBE Common Stock that was exchanged pursuant to the Merger provided
that such stock was held as a capital asset at the Effective Time;
and
(vi) No gain or loss will be recognized by a shareholder of SFSC
upon consummation of the Merger.
Accounting Treatment
The Merger will be accounted for as a pooling-of-interests
transaction in accordance with generally accepted accounting principles.
Under such accounting method, holders of HBE Common Stock will be deemed
to have combined their existing voting common stock interest with that of
holders of SFSC Common Stock. Accordingly, the book value of the assets,
liabilities and shareholders' equity of HBE will be carried over to the
consolidated balance sheet of SFSC and no goodwill will be created.
It is expected that the Merger will be accounted for as a pooling-of-
interests pursuant to generally accepted accounting principles. It is a
condition to the Merger that each of SFSC and HBE shall have received
letters, dated as of the Effective Time, from Ernst & Young LLP, and
KPMG Peat Marwick LLP, respectively, regarding those firms' concurrence
with SFSC's Management and HBE's Management concurring respective, as to
the appropriateness of pooling of interests accounting for the Merger
under Accounting Principles Board No. 16 if closed and consummated in
accordance with the Merger Agreement.
The unaudited pro forma combined financial information contained in
this Joint Proxy Statement/Prospectus has been prepared using the "pooling
of interests" accounting method to account for the Merger.
Regulatory Approvals
The Merger is subject to the approval of the Federal Reserve Board
under Section 4(c)(8) of the BHCA. SFSC filed the necessary
notice/application with the Federal Reserve Bank of Chicago ("Federal
Reserve Bank") on July 15, 1998. SFSC received approval from the Federal
Reserve Bank pursuant to a letter dated August 19, 1998.
There can be no assurance that the Department of Justice or the
Federal Trade Commission will not challenge the Merger or, if such a
challenge is made, as to the result thereof. The Merger may not be
consummated later than three months after the date of Federal Reserve
Board approval unless the Federal Reserve Board extends such three-month
period.
SFSC's right to exercise its options under the Stock Option Agreement
is subject to the prior approval of the Federal Reserve Board, to the
extent that the exercise of its options would result in SFSC's owning more
than 5% of the outstanding shares of HBE Common Stock. In considering
whether to approve SFSC's right to exercise its option, the Federal
Reserve Board would generally consider whether the transaction can be
expected to produce benefits to the public.
Listing on The Nasdaq Stock Market
SFSC Common Stock is currently traded on The Nasdaq Stock Market and
it is anticipated that such stock will continue to be traded thereon
immediately following consummation of the Merger. Pursuant to the Merger
Agreement, SFSC has agreed to use all reasonable efforts to cause the
shares of SFSC Common Stock to be issued in the Merger to be listed on The
Nasdaq Stock Market.
Federal Securities Law Consequences
All shares of SFSC Common Stock received or held by HBE shareholders
in connection with the Merger will be freely transferable under the
federal securities laws, except that shares of SFSC Common Stock received
or held by persons who are deemed to be "affiliates" (as such term is
defined under the Securities Act of 1933, as amended (the "Securities
Act")) of HBE prior to the Merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated
under the Securities Act (or Rule 144 in the case of such persons who
become affiliates of SFSC) or as otherwise permitted under the Securities
Act. Persons who may be deemed to be affiliates of SFSC or HBE generally
include individuals or entities that control, are controlled by, or are
under common control with, such party and may include certain officers and
directors of such party as well as principal shareholders of such party.
The Merger Agreement requires HBE to cause each of its affiliates to
execute a written agreement to the effect that such person will not offer
or sell or otherwise dispose of any shares of SFSC Common Stock issued to
such person in or pursuant to the Merger in violation of the Securities
Act or the rules and regulations promulgated by the Commission thereunder.
No Appraisal Rights
Under the DGCL, a shareholder of a corporation is generally entitled
to receive payment of the fair value of such shareholder's stock if such
shareholder dissents from a proposed merger or share exchange or a sale or
exchange of all or substantially all of the property and assets of the
corporation. However, dissenters' rights are not available to holders of
shares which are registered on a national securities exchange or quoted on
The Nasdaq Stock Market on the record date fixed to determine shareholders
entitled to notice of the meeting at which shareholders are to vote on the
proposed corporate action. Shares of HBE Common Stock were listed on The
Nasdaq Stock Market on the HBE Record Date. Accordingly, holders of HBE
Common Stock will not have dissenters' rights in connection with the
Merger. Similarly, under the WBCL, holders of SFSC Common Stock will not
have dissenters' rights in connection with the Merger.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, which is attached as Annex A hereto and is incorporated herein
by reference. This summary is qualified in its entirety by reference to
the Merger Agreement.
The Merger
The Merger Agreement provides that, following the approval of the
Merger Agreement by the shareholders of SFSC and HBE, and the satisfaction
or waiver of the other conditions to the Merger, including obtaining the
requisite regulatory approvals, the Merger will be effected. The closing
of the Merger will be completed on a date and place to be specified by the
parties which will be no later than the first business day in the calendar
month immediately following the month in which the last of the conditions
precedent to the Merger is satisfied or waived or such other time as the
parties may mutually agree. The Merger will be effective as of the
Effective Time.
Consummation of the Merger
Upon consummation of the Merger:
- Each share of HBE Common Stock issued immediately prior to
the Effective Time, other than shares of HBE Common Stock
that are owned by HBE as treasury stock, owned by the HBE
RRP and not allocated to participants thereunder or owned
by SFSC, will be converted into the right to receive the
number of shares of SFSC Common Stock equal to the Exchange
Ratio to be determined based on the Market Value of SFSC
Common Stock on the Decision Date as follows:
Market Value Exchange Ratio
Less than or equal to $21.125 . . . . . 0.86
Greater than $21.125 and less than or
equal to $22.625 . . . . . . . . . . . 0.857143
Greater than $22.625 and less than or
equal to $30.00 . . . . . . . . . . . the quotient obtained by
dividing $19.50 by the
Market Value of SFSC
Common Stock
Greater than $30.00 and less than or
equal to $31.375 . . . . . . . . . . . 0.65
Greater than $31.375 . . . . . . . . . 0.64
If the Market Value of SFSC Common Stock on the Decision Date is less
than $20.00, HBE may notify SFSC in writing, which must be received by
SFSC within three business days after the Decision Date, that it is not
willing to close on the basis of the Exchange Ratio set forth above. If
HBE fails to give notice by such time, it shall be deemed to have agreed
to close on the basis of the Exchange Ratio set forth above. Upon receipt
of such notice, SFSC may elect (i) to close on the basis of the Optional
Exchange Ratio or (ii) to require closing on the basis of the Exchange
Ratio set forth above, in any case by notice in writing, which must be
received by HBE within three business days after SFSC's receipt of such
notice from HBE. If SFSC fails to make such election, it shall be deemed
to have agreed to close on the basis of the Optional Exchange Ratio. If
SFSC elects clause (ii) above, then HBE may elect to terminate the Merger
Agreement by notice in writing, which must be received by SFSC within
three business days after HBE's receipt of such notice from SFSC. If HBE
fails to give notice of termination by such time, it shall be deemed to
have agreed to close on the basis of the Exchange Ratio set forth above.
During the period following the execution of the Merger Agreement and
preceding the mailing of this Joint Proxy Statement/Prospectus, there has
been substantial volatility in U.S. and foreign stock markets. On several
recent days, SFSC Common Stock traded below $20.00 on The Nasdaq Stock
Market. For example, the last reported sale prices of the SFSC Common
Stock on The Nasdaq Stock Market on September 16, September 17 and
September 18, 1998 were $16.25, $16.00 and $16.00, respectively. The
following are examples of the outcomes that could result if the Market
Value of SFSC Common Stock is below $20.00 on the Decision Date and the
HBE Board of Directors gives notice that HBE is not willing to close on
the basis of the Exchange Ratio set forth above. Under these
circumstances, the following may occur in accordance with the Merger
Agreement:
The SFSC Board of Directors elects the Optional Exchange
Ratio. If, following shareholder approval of the Merger
Agreement, the SFSC Board of Directors elects to close using the
Optional Exchange Ratio, which would not require any further
action of the SFSC shareholders, the Merger would proceed
(assuming all other relevant conditions to closing were
satisfied). The Optional Exchange Ratio would be 0.932432,
1.014706 and 1.112903 if the Market Value of SFSC Common Stock
is $18.50, $17.00 and $15.50, respectively, which would in each
instance represent a value of $17.25 per each share of HBE
Common Stock.
The SFSC Board of Directors elects the Exchange Ratio. In
lieu of electing the Optional Exchange Ratio, the SFSC Board of
Directors may elect to require closing on the basis of the
Exchange Ratio. In that event, the HBE Board of Directors may,
without any further action of the HBE shareholders, elect to (i)
close on the basis of the Exchange Ratio or (ii) terminate the
Merger Agreement. As a result of terminating the Merger
Agreement, the HBE shareholders would continue to hold HBE
Common Stock.
The rights of both SFSC and HBE pursuant to the foregoing provisions
are subject to the Market Value of SFSC Common Stock on the Decision Date.
As a result, the actual value that SFSC would pay and HBE shareholders
would receive in the Merger and whether HBE would have the right to
terminate the Merger Agreement will not be known until shortly before the
scheduled closing date of the Merger. It is currently anticipated that,
if approved by SFSC and HBE shareholders, the Merger will be completed in
the fourth calendar quarter of 1998 or the first calendar quarter of 1999.
The SFSC Board has not considered what action, if any, it might take
under the Merger Agreement in the event that the SFSC shareholders approve
the Merger Agreement at the SFSC Special Meeting, the Market Value of SFSC
Common Stock is less than $20.00 on the Decision Date and the HBE Board
informs SFSC that it is unwilling to close on the basis of the Exchange
Ratio. In such case, the SFSC Board is likely to consult with its legal
and financial advisors regarding whether to elect the Optional Exchange
Ratio or remain with the Exchange Ratio as set forth above. Shareholders
of SFSC should note that the fairness opinion obtained by the SFSC Board
and included as Annex C to this Joint Proxy Statement/Prospectus does not
express an opinion as to fairness of the Merger, from a financial point of
view, to SFSC in the event that SFSC elects the Optional Exchange Ratio.
In the event that the SFSC Board were to consider electing the Optional
Exchange Ratio, it is anticipated that, as a condition precedent thereto,
the SFSC Board would require a fairness opinion with respect to the
Optional Exchange Ratio. No assurance can be given that such a fairness
opinion would be rendered by SFSC's financial advisor if the opinion were
so requested. In addition, in determining whether or not to elect the
Optional Exchange Ratio, the SFSC Board of Directors would consider many
of the same factors it considered in determining to approve and adopt the
Merger Agreement in the first instance. In particular, the SFSC Board of
Directors would analyze, among other factors, the relationship of the
consideration to be paid in the Merger to the market price and book value
and earnings per share of HBE and the financial terms of certain other
recent business combinations in the banking industry.
The HBE Board has not considered what action, if any, it might take
under the Merger Agreement in the event that the Market Value of SFSC
Common Stock is less than $20.00 on the Decision Date. In such case, the
HBE Board of Directors is likely to consult its financial and legal
advisors to determine whether or not to notify SFSC of its unwillingness
to close on the basis of the Exchange Ratio and whether or not to exercise
HBE's right to terminate the Merger Agreement if SFSC does not elect the
Optional Exchange Ratio. Shareholders of HBE should note that the
fairness opinion obtained by the HBE Board and included as Annex D to this
Joint Proxy Statement/Prospectus does not express an opinion as to the
fairness of the Merger, from a financial point of view, in the event that
the Market Value of SFSC Common Stock is below $20.00 per share on the
Decision Date and the Merger is consummated based on the Exchange Ratio.
In the event that Market Value of SFSC Common Stock is less than $20.00 on
the Decision Date and the HBE Board were to consider electing the Exchange
Ratio, it is anticipated that, as a condition precedent thereto, the HBE
Board would require a fairness opinion with respect to such election. No
assurance can be given that such a fairness opinion would be rendered by
HBE's financial advisor if the opinion were so requested. In making a
determination on the foregoing matters, the HBE Board of Directors would
consider many of the same factors that it considered in determining
whether to approve and adopt the Merger Agreement. In particular, the HBE
Board of Directors would analyze, among other factors, whether the then
current consideration to be received in the Merger would deliver more
value to HBE shareholders than the value that could be expected in the
event HBE were to continue as an independent company. In addition, it
would consider whether, in light of market and other industry conditions
at the time of such determination, the Exchange Ratio remains fair from a
financial point of view to the holders of shares of HBE Common Stock.
- Each HBE Common Stock Certificate (previously representing
shares of HBE Common Stock) will represent only the right
to receive that number of shares of SFSC Common Stock and
cash in lieu of fractional shares into which the shares of
HBE Common Stock previously represented by such HBE Common
Stock Certificate will have been converted pursuant to the
Merger Agreement.
- Shares of HBE Common Stock owned by HBE as treasury stock,
owned by the HBE RRP and not allocated to participants
thereunder or owned by SFSC will be canceled and no
consideration will be paid therefor.
- All of the shares of HBE Common Stock converted into the
right to receive SFSC Common Stock pursuant to the Merger
Agreement will no longer be outstanding and shall
automatically be canceled and cease to exist.
- HBE Common Stock Certificates will be exchanged for SFSC
Common Stock Certificates representing whole shares of SFSC
Common Stock and cash in lieu of fractional shares issued
in consideration therefor upon the surrender of such HBE
Common Stock Certificates without any interest thereon.
- Each share of SFSC Common Stock issued and outstanding
immediately prior to the Effective Time shall remain issued
and outstanding and shall not be affected by the Merger.
- Each option granted by HBE under the terms of the HBE
Option Plan to purchase shares of HBE Common Stock which is
outstanding and unexercised immediately prior to the
Effective Time ("HBE Options") will be converted into an
option to purchase that number of shares of SFSC Common
Stock equal to the product of the number of shares of HBE
Common Stock subject to the original option and the
Exchange Ratio. Any fractional shares of SFSC Common Stock
resulting from converting HBE Options will be rounded up to
the nearest whole share. The exercise price per share of
SFSC Common Stock will be equal to the exercise price per
share of HBE Common Stock under the original option divided
by the Exchange Ratio.
- The directors and officers of SFSC immediately prior to the
Effective Time will continue as the directors of SFSC as
the surviving corporation in the Merger following the
Effective Time.
At or prior to the Effective Time, SFSC will deposit (i) SFSC Common
Stock Certificates and (ii) cash in payment of any fractional shares of
SFSC Common Stock with the Exchange Agent for exchange for HBE Common
Stock in accordance with the Merger Agreement. As soon as practicable
after the Effective Time, and in no event later than ten business days
thereafter, the Exchange Agent will mail to each holder of record of one
or more HBE Common Stock Certificates a letter of transmittal and
instructions for use in effecting the surrender of the HBE Common Stock
Certificates in exchange for SFSC Common Stock Certificates and any cash
in lieu of fractional shares.
Upon proper surrender of an HBE Common Stock Certificate for exchange
and cancellation to the Exchange Agent, together with a completed letter
of transmittal, the holder of such HBE Common Stock Certificate will be
entitled to receive in exchange therefor, (i) a SFSC Common Stock
Certificate representing that number of whole shares of SFSC Common Stock
to which such holder of HBE Common Stock shall have become entitled
pursuant to the provisions of the Merger Agreement, and (ii) a check
representing the amount of any cash in lieu of fractional shares that such
holder has the right to receive. The HBE Common Stock Certificate will
then be canceled. No interest will be paid or accrued on any cash in lieu
of fractional shares payable to holders of HBE Common Stock Certificates.
No dividend or distribution with respect to SFSC Common Stock shall
be payable on or with respect to any fractional share, and fractional
share interests will not entitle the owner to vote or to exercise any
other rights of a shareholder of SFSC.
HOLDERS OF HBE COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES
UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. SHAREHOLDERS OF SFSC NEED NOT
EXCHANGE THEIR CERTIFICATES.
Representations and Warranties
The Merger Agreement contains customary representations and
warranties by each of SFSC and HBE relating to, among other things, (a)
their respective organizations, the organization of their respective
subsidiaries and similar corporate matters; (b) their respective capital
structures; (c) authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters; (d) required
regulatory approvals; (e) their compliance with applicable laws and
agreements; (f) reports and financial statements filed with the Commission
and the accuracy of information contained therein; (g) absence of any
broker's or finder's fees incurred in connection with the Merger; (h) the
absence of material adverse effects on their respective businesses; (i)
the absence of material suits, claims or proceedings, and other litigation
issues; (j) tax matters; (k) retirement and other employee benefit plans
and matters relating to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"); (l) labor matters; (m) freedom from
contractual commitments which would have material adverse effects on the
respective businesses; (n) compliance with all applicable environmental
laws, possession of all material environmental, health, and safety permits
and other environmental issues; (o) the shareholder vote required in
connection with the Merger Agreement and the transactions contemplated
thereby (as set forth in this Joint Proxy Statement/Prospectus) being the
only vote required; and (p) the absence of ownership of each other's
stock, other than as provided in the Merger Agreement.
Certain Covenants
Pursuant to the Merger Agreement, each of SFSC and HBE has agreed
that, during the period from the date of the Merger Agreement until the
Effective Time, except as permitted by the Merger Agreement (including the
disclosure schedules thereto) or the Stock Option Agreement, or as
otherwise consented to in writing by the other party, it will (and will
cause its subsidiaries to), subject to certain exceptions specified
therein, among other things: (a) carry on its business in good faith and
in the ordinary course consistent with prior practice; (b) use reasonable
efforts to maintain the services of key employees; (c) take no action
which would adversely effect or delay the performance of any covenants or
agreements under the Merger Agreement; (d) not incur any indebtedness,
assume or guarantee the obligations of another, or make any loan or
advance other than in the usual course of business; (e) not adjust or
reclassify any capital stock; (f) not declare or pay any dividends on or
make other distributions in respect of any of its capital stock, other
than regular quarterly cash dividends at a rate not in excess of $0.12 on
SFSC Common Stock and $0.10 on HBE Common Stock; (g) not adjust, split,
combine or reclassify any capital stock; (h) not directly or indirectly
redeem, purchase or otherwise acquire any shares of capital stock or any
securities or obligations convertible into or exchangeable for any shares
of its capital stock (i) not grant any stock appreciation rights or grant
any rights to acquire any shares of its capital stock; (j) not issue any
additional shares of capital stock except pursuant to stock options
outstanding on the date of the Merger Agreement or the Stock Option
Agreement; (k) not sell, encumber or otherwise dispose of any of its
assets to any entity other than a subsidiary, or cancel or release any
indebtedness or any claims, except in the ordinary course of business or
pursuant to agreements in force at the date of the Merger Agreement; (l)
not make any material investment out of the ordinary course of business
either by purchase of stock or securities, contributions to capital,
property transfers, or purchase of any property or assets of any other
individual, corporation or other entity other than a subsidiary thereof or
any existing joint venture to which HBE or SFSC is a party; (m) refrain
from entering into or terminating any material contract or agreement, or
making any change in any of its material leases or contracts, other than
renewals of contracts and leases without material adverse changes of
terms; (n) not increase in any manner the compensation or fringe benefits
of any of their respective employees or pay any pension or retirement
allowance not required by any existing plan or agreement to any such
employees or become a party to, amend or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement or
employment agreement with or for the benefit of any employee; (o) not
grant, amend or modify in any material respect any stock option, stock
awards or other stock based compensation, except as contemplated in the
Merger Agreement; (p) not pay, discharge or satisfy any material claims,
liabilities or obligations (whether absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business consistent with past
practice (which includes the payment of final and unappealable judgments)
or in accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated financial
statements (or the notes thereto) of such party included in such party's
reports filed with the Commission, or incurred in the ordinary course of
business consistent with past practice; (q) not take any action that would
prevent or impede the Merger from qualifying as a reorganization within
the meaning of Section 368 of the Code; provided, however, that this
limitation shall not affect the ability of SFSC to exercise its rights
under the Stock Option Agreement; (r) not amend its articles of
incorporation (other than, in the case of SFSC, to increase the amount of
its authorized common stock) or bylaws; (s) not restructure or materially
change investment securities portfolios or gap positions, through
purchases, sales, or otherwise, or the manner in which the portfolios are
classified or reported; (t) refrain from taking any action that may result
in any of the representations and warranties set forth in the Merger
Agreement being or becoming untrue in any material respect at any time
prior to the Effective Time, or in any of the conditions to the Merger set
forth in the Merger Agreement not being satisfied or in a violation of any
provision of the Merger Agreement or the Stock Option Agreement, except,
in every case, as may be required by applicable law; (u) cooperate with
each other in filing all the necessary documentation, in effecting all
applications, notices, petitions and filings, and in obtaining all
permits, consents, approvals and authorizations of all third parties and
governmental entities which are necessary or advisable to consummate the
transactions contemplated by the Merger Agreement; and (v) afford to the
officers, employees, accountants, counsel and other representatives of the
other party, access to each other's properties, books, contracts,
commitments and records, and make available to the other party (i) a copy
of each report, schedule, registration statement and other document filed
or received pursuant to the requirements of federal securities laws or
federal or state banking laws, and (ii) all other information concerning
business, properties and personnel as each party may reasonably request.
Board of Directors and Officers Following Consummation of the Merger
The Directors of SFSC immediately prior to the Effective Time shall
continue as the directors of SFSC as the surviving corporation in the
Merger, each to hold office in accordance with the Amended and Restated
Articles of Incorporation and Bylaws of SFSC. The officers of SFSC
immediately prior to the Effective Time shall continue as the officers of
SFSC following the Effective Time, in each case until their respective
successors are duly elected or appointed.
Indemnification
The Merger Agreement provides that, in the event of any threatened or
actual claim, action, suit, proceeding or investigation (a "Claim") in
which a director or officer or employee of SFSC, any subsidiary of SFSC,
HBE or the Association (the "Indemnified Parties", and each individual
director, officer or employee, an "Indemnified Party"), is, or is
threatened to be, made a party based in whole or in part on (i) the fact
that he or she is or was a director, officer or employee of any of the
Indemnified Parties, or (ii) the Merger Agreement, the Stock Option
Agreement or any of the transactions contemplated thereby, the parties
thereto have agreed to cooperate and use reasonable efforts to defend
against and respond to such actions on behalf of the Indemnified Party.
After the Effective Time, SFSC, as the surviving corporation in the
Merger, will indemnify each Indemnified Party against any losses,
liabilities, costs or expenses in connection with any such threatened or
actual Claim, action, suit, proceeding or investigation, and the
Indemnified Party may retain counsel, but SFSC reserves the right to
assume the defense of any such action and upon such assumption SFSC shall
not be liable to any Indemnified Party for any legal expenses of other
counsel or any other expenses subsequently incurred by any Indemnified
Party in connection with the defense thereof. SFSC shall not be liable
for any settlement effected without its prior written consent. SFSC will
have no obligation to any Indemnified Party when and if a court of
competent jurisdiction ultimately determines, and such determination has
become final and nonappealable, that indemnification of such Indemnified
Party in the manner contemplated in the Merger Agreement is prohibited by
applicable law.
The Merger Agreement further provides that SFSC's indemnification
obligations described above shall continue in full force and effect for a
period of five years from the Effective Time (or the period of the
applicable statute of limitations, if longer); provided, however, that all
rights to indemnification in respect of any Claim asserted or made within
such period shall continue until the final disposition of such Claim.
In addition, the Merger Agreement provides that SFSC, as the
surviving corporation in the Merger, shall use reasonable efforts (i) to
obtain, after the Effective Time, directors' and officers' liability
insurance coverage for the officers and directors of SFSC as the surviving
corporation, to the extent that the same is economically practicable, and
(ii) either (A) to cause the individuals serving as officers and directors
of SFSC, HBE or the subsidiaries of SFSC or HBE immediately prior to the
Effective Time to be covered for a period of three years from the
Effective Time by the directors' and officers' liability insurance
policies maintained by SFSC as the surviving corporation, or (B) to
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are not less advantageous than the
policies previously maintained by SFSC and HBE, respectively, with respect
to acts or omissions occurring prior to the Effective Time which were
committed by such officers and directors in their capacity as such;
provided, however, that in no event shall SFSC as the surviving
corporation be required to expend per year an amount in excess of 200% of
the premium for such insurance paid by SFSC during its 1997 fiscal year
(the "Insurance Amount") to maintain or procure insurance coverage
pursuant to clause (ii) of this sentence, and provided further that if
SFSC is unable to maintain or obtain the insurance called for by clause
(ii) of this sentence, SFSC shall use reasonable efforts to obtain as much
comparable insurance as available for the Insurance Amount.
In the event that subsequent to the Effective Time SFSC or any of its
successors or assigns consolidates with or merges into any other person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or transfers or conveys all or substantially all
of its properties and assets to any person, then proper provision shall be
made so that the successors and assigns of SFSC assume the indemnification
obligations set forth above.
Conduct Inconsistent with the Merger Agreement
Pursuant to the Merger Agreement, HBE has agreed that it will not (i)
solicit, encourage or authorize any individual, corporation or other
entity to solicit from any third party any inquiries or proposals relating
to the disposition of its business or assets, or the acquisition of its
capital stock, or the merger of it or the Association with any corporation
or other entity other than as provided by the Merger Agreement, or (ii)
negotiate with any other person for any such transaction wherein the
business, assets or capital stock of it or the Association would be
acquired, directly or indirectly, by any party other than as provided by
the Merger Agreement, except pursuant to written direction from any
regulatory authority or upon the receipt of an unsolicited offer from a
third party where the Board of Directors of HBE reasonably believes, upon
the written opinion of counsel, that its fiduciary duties require it to
enter into discussions with such party. HBE has agreed to promptly notify
SFSC of all of the relevant details relating to all inquiries and
proposals which it may receive relating to any proposed disposition of its
business or assets, or the acquisition of its capital stock, or the merger
of it or the Association with any corporation or other entity other than
as provided by the Merger Agreement and shall keep SFSC informed of the
status and details of any such inquiry or proposal, and shall give SFSC
five days' advance notice of any agreement to be entered into with, or any
information to be supplied to, any person making such inquiry or proposal,
provided that nothing contained in the Merger Agreement shall prohibit HBE
from disclosing to its shareholders a position contemplated by the
Exchange Act with respect to a tender offer for HBE Common Stock.
Employee Matters
Pursuant to the Merger Agreement, SFSC will assume and honor the
written terms and conditions of the existing written employment agreements
and employee retention agreements with officers and employees of HBE and
the Association. The consummation of the transactions contemplated by the
Merger Agreement will trigger the "change in control" provisions in these
agreements and may require payments to be made thereunder. SFSC will
honor the terms of these agreements and has agreed to make all payments to
the respective officers and employees, as and when required thereunder.
George L. Perucco and Lyle N. Dolan will terminate their employment with
HBE and the Association as of the Effective Time and will be paid in full
all amounts due under their respective Employment Agreements on that date.
At the Effective Time, SFSC will enter into a separate consulting
agreement with George L. Perucco. Any un-vested stock options and un-
vested restricted stock awards held by Messrs. Perucco and Dolan (and any
other executive officers and directors of HBE granted such awards under
the HBE Option Plan and the HBE RRP) will become vested upon approval of
the Merger by the shareholders of HBE. Pursuant to the consulting
agreement, Mr. Perucco will receive an annual salary of $75,000 for
providing consulting services to SFSC and its affiliates. The term of the
consulting agreement will be one year beginning on the Closing Date, and
may be renewed annually thereafter with the written consent of SFSC and
Mr. Perucco.
The Merger will not interrupt the employment of employees of the
Association (hereinafter each an "HBE Employee"). SFSC has agreed to
assume and honor the terms and conditions of the Severance Pay Plan of
Home Federal Savings and Loan Association of Elgin ("HBE Severance Plan").
SFSC also agrees that, in connection with reviewing applicants for
employment positions, it shall give any HBE Employee who is terminated
within three (3) months after the Effective Time the same priority
consideration with respect to hiring that is given to SFSC employees for
such positions in accordance with any formal or informal policies of SFSC
for a period of three (3) months from such date of termination.
Under the terms of the Merger Agreement, SFSC will assume sponsorship
of the HBE ESOP as the successor employer to HBE. Prior to the date on
which a "change in control" (as such term is defined in the HBE ESOP,
hereinafter "ESOP Change in Control") occurs, the HBE ESOP will be amended
(i) to eliminate the right of each participant who has not had a
termination of participation to receive a supplemental benefit payment
directly from HBE in the event that the application of Section 415 of the
Code limits the total amount of benefits otherwise allocable to such
participant upon an ESOP Change in Control; (ii) to eliminate Section 14.4
which states that the HBE ESOP shall be terminated and all amounts shall
be distributed upon an ESOP Change in Control; (iii) to amend Article XIV
of the HBE ESOP to provide for the allocation of excess assets remaining
after its outstanding loan is satisfied to be made to the HBE ESOP
participants and beneficiaries in the same manner as earnings received by
the HBE ESOP on investments allocated to participants' accounts are
allocated; and (iv) to adopt any other amendments to the HBE ESOP that are
deemed necessary to accomplish all of the foregoing and the final
allocation of all the HBE ESOP's remaining assets to all of the HBE ESOP's
participants and their beneficiaries. Upon the advice of the parties'
certified public accountants, the Merger Agreement provided for the HBE
ESOP to be amended in these respects for purposes of preserving the
Merger's eligibility for pooling-of-interests accounting treatment.
Following the Effective Time, and subject to receipt of a favorable
determination from the Internal Revenue Service that the Merger does not
adversely affect qualification of the merged plan, the HBE ESOP will be
merged into the State Financial Services Corporation 401(k) Savings Plan
(the "SFSC 401(k) Savings Plan"). In the event that it is determined, to
the satisfaction of HBE and SFSC, that the HBE ESOP is not an "affiliate"
within the meaning of Rule 145 of the Securities Act, the HBE ESOP Trustee
will be permitted to sell unallocated shares of HBE Common Stock held in
its suspense account at any time and all such times as the Trustee shall
deem to be prudent on or after the date the ESOP Change in Control has
occurred in order to repay the HBE ESOP's outstanding loan. In the event
that the HBE ESOP or the trust which forms part thereof is determined to
be an affiliate of HBE within the meaning of Rule 145 promulgated by the
Commission under the Securities Act, no provision of Article XIV of the
HBE ESOP shall be interpreted to require the sale of shares of HBE Common
Stock held by the trust during the period beginning thirty (30) days prior
to the Effective Time and ending immediately after the release by SFSC of
financial results covering at least thirty (30) days of post-Merger
combined operations by means of filing a Form 10-Q, 10-K or 8-K under the
Securities Act of 1934, as amended, the issuance of a quarterly earnings
report, or any other public issuance which satisfies the requirements of
Accounting Series Release 135, as amended by Staff Accounting Bulletins
Nos. 65 and 76. Effective as of the Effective Time, SFSC and HBE agree
that former participants in the HBE ESOP shall be treated as new hires for
purposes of the State Financial Services Corporation Employee Stock
Ownership Plan (the "SFSC ESOP").
At the Effective Time, each HBE Employee shall immediately become
eligible to participate in the SFSC Services Corporation and Subsidiaries
Money Purchase Plan ("Pension Plan"). SFSC will give each HBE Employee
full credit for prior service with HBE or the Association for purposes of
eligibility to participate under the Pension Plan. HBE employees will be
treated as new hires for vesting purposes under the Pension Plan. SFSC
agrees to take, prior to the Effective Time, all actions necessary to
cause amendments to be made to the Pension Plan in order to give effect to
the preceding sentences.
At the Effective Time, SFSC will give each HBE Employee full credit
for prior service with HBE or the Association for purposes of eligibility
to participate and vesting in the SFSC 401(k) Savings Plan and the 401(k)
Savings Plan will provide for the Effective Time to be a special entry
date for HBE employees. SFSC has agreed to take all actions necessary to
make these amendments to its 401(k) Savings Plan.
At the Effective Time, each HBE Employee shall immediately become
eligible to participate in all employee welfare benefit plans and other
fringe benefits programs offered or maintained by SFSC on the same terms
and conditions that SFSC may make available to officers and employees of
the Banks, including, without limitation, any health, life, long-term
disability, short-term disability, severance, vacation or paid time off
programs (the "SFSC Welfare Plans"). Any expenses incurred by an HBE
Employee under the HBE or an Association employee welfare benefit plans
(such as deductibles or co-payments), shall be counted for all purposes
under the SFSC Welfare Plans. SFSC shall provide insurance coverage (for
which SFSC or any subsidiary of SFSC may act as the self-insurer) for pre-
existing medical conditions (to the extent such condition is currently
covered under the HBE plan, and such condition would be covered under
SFSC's plan if it were not pre-existing), subject to deductibles and/or
copayment provisions generally applicable to such coverage.
At the Effective Time, SFSC shall assume all of the obligations under
the HBE RRP and HBE Option Plan, and all shares of HBE Common Stock owned
by the HBE RRP, which have not been awarded, shall be canceled at the
Effective Time.
Conditions to Each Party's Obligation to Effect the Merger
The respective obligations of SFSC and HBE to effect the Merger are
subject to the following conditions: (a) the approval of the Merger
Agreement and the transactions contemplated thereby by the shareholders of
SFSC and HBE; (b) no order, injunction or decree issued by any court or
agency of competent jurisdiction shall be in effect that prevents
consummation of the Merger or the transactions contemplated thereby;
(c) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act of 1933 and shall not be the
subject of a stop order suspending such effectiveness; (d) the receipt of
all material governmental authorizations, consents, orders or regulatory
approvals required to consummate the transactions contemplated by the
Merger Agreement, and the expiration of all statutory waiting periods in
respect thereof; (e) the receipt by each of SFSC and HBE of opinions from
their counsel stating that the Merger will qualify as a tax free
reorganization under Section 368(a)(1)(A) of the Code; (f) the performance
in all material respects of all obligations of the other party required to
be performed under the Merger Agreement and the Stock Option Agreement;
(g) the accuracy of the representations and warranties of the other party
set forth in the Merger Agreement as of the date of the Merger Agreement
and as of the Closing Date (except as would not reasonably be likely to
result in a material adverse effect as defined in the Merger Agreement);
(h) there having been no material adverse effects on the business, assets,
financial condition, results of operations or prospects of the other party
and its subsidiaries taken as a whole; (i) the receipt by SFSC and HBE of
certain material third-party consents; (j) the receipt by each of SFSC and
HBE of fairness opinions to the effect that the consideration to be
received in the Merger is fair from a financial point of view; (k) the
receipt by each of SFSC and HBE of comfort letters covering matters
customary to transactions such as the Merger; (l) the receipt by SFSC of
letter agreements relating to trading in securities of SFSC (substantially
of the form attached as an exhibit to the Merger Agreement), duly executed
by each affiliate of HBE; and (m) of the receipt by each of SFSC and HBE
of letters, dated as of the Effective Time, from Ernst & Young LLP and
KPMG Peat Marwick LLP regarding the appropriateness of pooling of
interests accounting for the Merger under Accounting Principles Board
Opinion No. 16 if closed and consummated in accordance with the Merger
Agreement.
At any time prior to the Effective Time, to the extent permitted by
applicable law, the conditions to the obligations of each of SFSC or HBE
to consummate the Merger may be waived in writing by such party. Any
determination to waive a condition would depend upon the facts and
circumstances existing at the time of such waiver and would be made by the
waiving party's Board of Directors, exercising its fiduciary duties to its
shareholders. No shareholder approval will be required or sought for any
such waiver; a shareholder's approval of the Merger Agreement constitutes
approval of such waivers as may be granted by the SFSC Board or the HBE
Board, as the case may be.
Termination, Amendment and Waiver
The Merger Agreement may be terminated prior to the Effective Time
(a) at any time by mutual consent of the parties; (b) at any time, whether
before or after approval of the matters presented in connection with the
Merger by the shareholders of SFSC or HBE, by either party if (i) any
governmental entity which must grant a regulatory approval in order for
the transactions contemplated by the Merger Agreement to be consummated
has denied approval of the Merger and such denial has become final and
nonappealable or has advised the parties of its unwillingness to grant
such an approval on terms reasonably acceptable to the parties, or (ii)
any governmental entity of competent jurisdiction shall have issued a
final nonappealable order permanently enjoining or otherwise prohibiting
the consummation of the transactions contemplated by the Merger Agreement;
(c) by either party if the Merger has not been consummated on or before
January 31, 1999, unless the failure of the closing to occur by such date
is due to the failure of the party seeking termination to perform or
observe the covenants and agreements made in the Merger Agreement; (d) by
either party if the required shareholder vote for approval of the Merger
Agreement and transactions contemplated thereby has not been obtained; (e)
by either party seeking termination upon written notice to the other party
to the Merger Agreement if (i) there exists any breach of the
representations and warranties of the other party to the Merger Agreement
made in the Merger Agreement (and pursuant to any breach of HBE's
representations and warranties in the Stock Option Agreement) which would
have a material adverse effect on the business of such other party to the
Merger Agreement, and such breach is not remedied within thirty days after
receipt by the other party to the Merger Agreement of notice in writing
from the party seeking termination, specifying the nature of such breaches
and requesting that they be remedied, (ii) such other party to the Merger
Agreement shall have failed to perform and comply with, in all material
respects, its agreements and covenants under the Merger Agreement (and in
the case of HBE, under the Stock Option Agreement) and such failure to
perform or comply shall not have been remedied within thirty days after
receipt by such other party of notice in writing from the party seeking
termination, specifying the nature of such failure and requesting that it
be remedied, or (iii) the Board of Directors of such other party to the
Merger Agreement (A) fails to reaffirm such approval or recommendation
upon request of the party seeking termination or (B) approves or
recommends any Business Combination involving such other party other than
the Merger; (f) by SFSC upon written notice to HBE, if the Board of
Directors of HBE withdraws of modifies in any manner adverse to SFSC its
approval or recommendation of the Merger Agreement; and (g) by HBE under
certain circumstances and subject to certain conditions in the event the
Market Value of the SFSC Common Stock, as of the Decision Date, is less
than $20.00 per share and SFSC elects to require closing based upon an
Exchange Ratio of .86 pursuant to the Merger Agreement.
In the event of termination of the Merger Agreement by SFSC or HBE as
provided above, there shall be no liability on the part of either SFSC or
HBE or their respective officers or directors under the Merger Agreement,
except that each party is (i) obligated to hold all information furnished
by or on behalf of the other party in confidence and to return all
documents obtained in the course of negotiations, (ii) jointly responsible
for bearing the costs of filing fees paid to the Commission or other
regulatory agency in connection with the Merger as well as the printing
and mailing of the Joint Proxy Statement/Prospectus, and (iii) liable for
any termination fees pursuant to the terms of the Merger Agreement.
The Merger Agreement may be amended by action of the SFSC Board or
HBE Board at any time before or after the approval of the matters
presented in connection with the Merger by the shareholders of SFSC or
HBE. However, following approval by shareholders of the transactions
contemplated by the Merger Agreement, no amendment which changes the
amount or form of the consideration delivered pursuant to the Merger
Agreement may be effected without further shareholder approval. Pursuant
to the terms of the Merger Agreement, the consummation of the Merger is
conditioned upon the receipt by both parties of legal opinions that the
Merger will qualify as a tax-free reorganization under Section 368 of the
Code. In the event that SFSC and HBE amend or modify the terms of the
Merger Agreement by waiving this requirement, SFSC and HBE will resolicit
shareholders for approval of such amended or modified agreement.
Additionally, either party may extend the time for performance of any
of the obligations of the other party or waive any inaccuracies in
representations and warranties or compliance with any agreements or
conditions contained in the Merger Agreement. However, following approval
by shareholders of the transactions contemplated by the Merger Agreement,
no waiver which reduces or changes the form of consideration to be
delivered pursuant to the Merger Agreement may be effected without further
shareholder approval.
Reimbursement of Expenses
The Merger Agreement provides that if it is terminated as a result of
breaches of any representations or warranties contained in the Merger
Agreement as of the date thereof, or of agreements and covenants contained
in the Stock Option Agreement pursuant to the provisions of the Merger
Agreement described in clauses (f)(i) and (f)(ii) under "--Termination,
Amendment and Waiver" above, then if such breach is not willful, the non-
breaching party is entitled to reimbursement of its documented out-of-
pocket expenses, not to exceed $350,000. In the event of a willful
breach, the non-breaching party will be entitled to out-of-pocket expenses
and fees (which shall not be limited to $350,000) and any remedies it may
have at law or in equity.
The Merger Agreement further provides that all termination fees
constitute liquidated damages and not a penalty and, if one party should
fail to pay any termination fee due, the defaulting party shall pay the
cost and expenses in connection with any action taken to collect payment,
together with interest on the amount of any unpaid termination fee.
Other Expenses
SFSC and HBE have agreed to share equally in the expense of printing
this Joint Proxy Statement/Prospectus and the expense of all Commission
and other regulatory filing fees incurred in connection therewith. Except
as provided in the preceding sentence and in the section entitled "--
Termination Fees," the Merger Agreement provides, in general, that SFSC
and HBE will pay their own expenses in connection with the Merger and the
transactions contemplated thereby, including fees and expenses of their
own accountants and counsel. For information with respect to financial
advisory fees incurred in connection with the Merger, see "THE MERGER--
Opinions of Financial Advisors."
THE STOCK OPTION AGREEMENT
The following is a brief summary of the terms of the Stock Option
Agreement, a copy of which is attached as Annex B and is incorporated
herein by reference. Such summary is qualified in its entirety by
reference to the Stock Option Agreement. The Stock Option Agreement is
intended to increase the likelihood that the Merger will be consummated in
accordance with the terms of the Merger Agreement. Consequently, certain
aspects of the Stock Option Agreement may have the effect of discouraging
persons who might now or prior to the Effective Time be interested in
acquiring all or a significant interest in, or otherwise effecting a
business combination with, HBE from considering or proposing such a
transaction, even if such persons were prepared to offer to pay
consideration to shareholders of HBE which had a higher value than the
shares of SFSC Common Stock to be received in the Merger.
General
Concurrently with the Merger Agreement, SFSC and HBE entered into the
Stock Option Agreement. Pursuant to the Option Agreement, SFSC has the
right, under certain circumstances, to purchase up to 1,371,159 (the
"Option Shares") shares of HBE Common Stock (subject to adjustments for
certain dilutive events), but in no event in excess of 19.9% of the issued
outstanding shares of HBE Common Stock at an exercise price of $17.00 per
share (the "Option").
The Option may be exercised by the SFSC, in whole or in part, upon
the occurrence of certain triggering and exercise events generally
relating to competing transactions for control of HBE. None of such
events has occurred as of the date of this Joint Proxy
Statement/Prospectus. Upon the giving by SFSC to HBE of written notice
specifying the number of shares it wishes to purchase, along with the
required consideration to be tendered for the Option Shares, SFSC shall be
deemed to be the holder of record of the Option Shares issuable upon the
exercise, notwithstanding that the stock transfer books of HBE shall then
be closed or that certificates representing such Option Shares shall not
then be actually delivered to HBE.
Exercise of Option
The Option may be exercised by SFSC, in whole or in part, within
three months after the occurrence of both an "Initial Triggering Event"
and a "Subsequent Triggering Event", if such events have occurred prior to
an "Exercise Termination Event," (ii) SFSC is not in material breach of
any of its representations, warranties, covenants or agreements contained
in the Merger Agreement or the Stock Option Agreement which, in the case
of the Merger Agreement, would entitle HBE to terminate the Merger
Agreement pursuant to Section 8.1(e)(i) and (ii) thereof. The Stock
Option Agreement terminates automatically upon the termination of the
Merger Agreement by HBE pursuant to Section 8.1(e) thereof as a result of
a material breach by SFSC of its covenants or agreements contained in the
Merger Agreement or pursuant to Section 8.1(g) thereof.
For purposes of the Option, an "Initial Triggering Event" is defined
as any of the following events or transactions: (a) HBE, or any
subsidiary of HBE, without prior written consent of SFSC, enters into an
agreement with any person other than SFSC or any subsidiary of SFSC
("person" as used in the Stock Option Agreement has the meaning defined in
the Exchange Act and the rules and regulations thereunder) to engage in,
or the HBE Board shall have recommended that the holders of HBE Common
Stock approve or accept, (each an "Acquisition transaction") (i) a merger
(except for the merger) or consolidation, or any similar transaction,
involving HBE or the Association, (ii) a purchase, lease or other
disposition of 15% or more of the consolidated assets, net revenues or net
income or HBE or (iii) an issuance, sale or other disposition (including
by way of merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the voting power of HBE or the
Association; (b) any person, other than SFSC or any subsidiary of SFSC,
acquires beneficial ownership ("beneficial ownership" as used in the Stock
Option Agreement has the meaning defined in the Exchange Act and the rules
and regulations thereunder) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under the Exchange Act) is
formed which beneficially owns or has the right to acquire beneficial
ownership of, 20% or more of the then outstanding shares of HBE Common
Stock (other than shares held in accounts relating to HBE employee benefit
plans); (c) (i) the holders of HBE Common Stock vote and fail to approve
the Merger Agreement at the HBE Special Meeting, (ii) the HBE Special
Meeting, in violation of the Merger Agreement, is not held, or (iii) the
HBE Special Meeting is canceled prior to the termination of the Merger
Agreement, if, in any event, prior to the HBE Special Meeting (or if such
meeting was not held or was canceled, prior to the termination of the
Merger Agreement), it is publicly announced that any person (other than
SFSC or a subsidiary of SFSC) made, or disclosed an intention to make, a
proposal to engage in an Acquisition Transaction; (d) the HBE Board
withdraws or modifies its recommendation that the holders of HBE Common
Stock approve the transactions contemplated by the Merger Agreement, or
HBE or any subsidiary of HBE authorizes an agreement to engage in an
Acquisition Transaction with any person other than HBE or a subsidiary of
SFSC; (e) any person other than or a subsidiary of SFSC makes a publicly-
announced proposal to HBE or the holders of SFSC Common Stock to engage in
an Acquisition Transaction; (f) any person other than SFSC or any
subsidiary of SFSC commences (as such term is defined in Rule 17d-2 under
the Exchange Act), or files with the Commission a registration statement
under the Exchange Act or tender offer materials with respect to, a
potential exchange offer or tender offer to purchase any shares of HBE
Common Stock such that, upon consummation of such offer, such person or a
group of which such person is a member would acquire beneficial ownership
of 20% or more of the then outstanding shares of HBE Common Stock; (g) HBE
willfully breaches any covenant or obligation contained in the Merger
Agreement in anticipation of an in order to facilitate engaging in an
Acquisition Transaction, and following such breach SFSC would be entitled
to terminate the Merger Agreement; and (h) any person other than HBE or
any subsidiary of SFSC files an application or notice with the Board of
Governors of the Federal Reserve System OTS or other federal or state bank
regulatory or antitrust authority, which application or notice has been
accepted for processing, for approval to engage in an Acquisition
Transaction.
For purposes of the Option, a subsequent "Triggering Event" is
defined as either of the following: (a) the acquisition by any person of
beneficial ownership of 30% or more of the then outstanding HBE Common
Stock or (b) the occurrence of an Initial Triggering Event of the type
specified in subsection (a) of the preceding paragraph, except that the
percentage referred to in clause (iii) of subsection (a) is 30%.
Expiration of the Option
The Option expires upon any of the following (each an "Exercise
Termination Event"): (a) the Effective Time; (b) termination of the Merger
Agreement if such termination occurs prior to the occurrence of an Initial
Triggering Event except (i) a termination by SFSC due to a material breach
by HBE of any of its representations, warranties, covenants or agreements
contained in the Merger Agreement or a failure to make, withdrawal or
modification of the recommendation of the HBE Board that the holders of
HBE Common Stock approve the transactions contemplated by the Merger
Agreement, (ii) a termination by HBE or SFSC of the Merger Agreement due
to the failure of the holders of HBE Common Stock to approve the
consummation of the Merger if prior to, or within three months after, the
HBE Special Meeting it is announced that any person (other than SFSC or a
subsidiary of SFSC) made, or disclosed an intention to make, a proposal to
engage in an Acquisition Transaction (each of (i) and (ii), above, is
referred to as a "Listed Termination"), or (c) the passage of twelve
months after termination of the Merger Agreement if such termination
follows the occurrence of an Initial Triggering Event or is a Listed
Termination.
Closing for the purchase of HBE Common Stock pursuant to the exercise
of the Option is subject to all required regulatory approvals. The
periods for exercising certain exercise, registration and repurchase
rights under the Stock Option Agreement shall be extended to the extent
necessary to allow the parties to obtain all regulatory approvals for the
exercise of such rights and the expiration of all applicable statutory
waiting periods.
Repurchase Right
At any time after the occurrence of a Repurchase Event (as defined
below), at the request of SFSC, delivered prior to an Exercise Termination
Event, HBE shall repurchase either (i) the Option from SFSC at a price
equal to the amount by which (A) the market/offer price (as defined below)
exceeds (B) $17.00, multiplied by the number of shares for which the
option may then be exercised, or (ii) a number (designated by SFSC) of the
Option Shares at a price equal to the market/offer price multiplied by the
number of Option Shares so designated. The term "market/offer price" used
in the Stock Option Agreement means the highest of (i) the price per share
of HBE Common Stock at which a tender or exchange offer therefor has been
made, (ii) the price per share of Common Stock to be paid by any third
party pursuant to an agreement with HBE, (iii) the highest closing price
for shares of HBE Common Stock within the six-month period immediately
preceding the date SFSC gives notice of the required repurchase of the
Option or Option Shares, the case may be, or (iv) in the event of a sale
of all or any substantial part of HBE's assets or deposits, the sum of the
net price paid in such sale for such assets or deposits and the current
market value of the remaining net assets of HBE as determined by a
nationally recognized investment banking firm, divided by the number of
shares of HBE Common Stock outstanding at the time of such sale.
Registration Rights
SFSC has the right within twelve months of a Subsequent Triggering
Event that occurs prior to an Exercise Termination Event to require HBE to
prepare and file one registration statement under the Securities Act for
the shares of HBE Common Stock issued or issuable upon exercise of the
Option and to use its best efforts to qualify the shares under any
applicable state securities laws if necessary for SFSC to be able to sell
the shares (such rights being SFSC's "Registration Rights").
Right of First Refusal for Registered Sale
In the event SFSC proposes to sell Option Shares pursuant to a
registration statement under the Securities Act, HBE has the right, at any
time within three business days after HBE receives notice from SFSC of the
exercise of SFSC's Registration Rights (the "Registration Notice") to
purchase such Option Shares at a cash price equal to the product of (i)
the number of shares to be so purchased by HBE, and (ii) the Fair Market
Value (as defined below) of such a share. The term "Fair Market Value"
means the average of the daily closing sales price of a share of HBE
Common Stock on the Nasdaq Stock Market during the five trading days prior
to the date on which the Registration Notice is received by HBE.
Anti-Takeover Effect of the Stock Option Agreement
Certain aspects of the Stock Option Agreement may have the effect of
discouraging persons who might now or prior to the Effective Time be
interested in acquiring all of or a significant interest in HBE from
considering or proposing such an acquisition even if such person were
prepared to pay a higher price per share for HBE Common Stock than the
price per share implicit in the Exchange Ratio. The Option granted to
SFSC under the Stock Option Agreement is intended to increase the
likelihood that the Merger will be consummated in accordance with the
terms of the Merger Agreement. Certain attempts to acquire HBE or an
interest in HBE would cause the Option to become exercisable as described
above, and would trigger SFSC's right to receive any premium offered to
holders of HBE Common Stock. This right would significantly increase the
cost of a proposed transaction to a potential acquiror as compared to the
cost it would incur had the Stock Option Agreement not been entered into.
Such increased cost might discourage a potential acquiror from considering
or proposing an acquisition or might result in a potential acquiror
proposing to pay a lower per share price to acquire HBE than it might
otherwise propose to pay. Finally, exercise of the Option would increase
the ability of SFSC to obtain the approval of the holders of HBE Common
Stock to consummate the merger and adversely affect the ability of a third
party to obtain the approval of such holders to consummate an alternative
transaction.
AMENDMENT TO SFSC AMENDED AND RESTATED
ARTICLES OF INCORPORATION
The information contained in this joint Proxy Statement/Prospectus
with respect to the Charter Amendment is qualified in its entirety by
reference to the text of the Charter Amendment attached hereto as Annex E
and incorporated herein by reference.
Pursuant to the terms of the Merger Agreement, SFSC shareholders are
being asked to consider and approve the Charter Amendment, which would
amend SFSC's Amended and Restated Articles of Incorporation to increase
the number of shares of SFSC Common Stock authorized for issuance from
10,000,000 to 25,000,000.
The SFSC Board unanimously recommends a vote FOR approval of the SFSC
Charter Amendment. Approval of the SFSC Charter Amendment is a condition
to consummation of the Merger. If approved by SFSC shareholders, the
Charter Amendment will not become effective until immediately prior to the
Effective Time. If, after SFSC shareholders approval of the Charter
Amendment, the Merger is not consummated, SFSC will not file the Charter
Amendment with the Wisconsin Department of Financial Institutions and the
Charter Amendment will therefore not become effective.
As of the SFSC Record Date, of the 10,000,000 shares of SFSC Common
Stock presently authorized, 4,004,372 shares were issued and outstanding,
and 425,000 shares of SFSC Common Stock were reserved for issuance under
the State Financial Services Corporation 1998 Stock Incentive Plan. If
the Merger is consummated, up to 5,726,567 additional shares of SFSC
Common Stock will be issued to former holders of HBE Common Stock
(assuming that the Exchange Ratio does not exceed .86 and no options are
exercised). Additional shares of SFSC Common Stock will be issuable to
holders of employee stock options to purchase HBE Common Stock that are
outstanding at the Effective Time, which options will be converted into
options to acquire shares of SFSC Common Stock in connection with the
consummation of the Merger. The additional 15,000,000 authorized shares
of SFSC Common Stock may be issued for any proper corporate purpose
approved by the SFSC Board. Without the Charter Amendment, SFSC may not
have a sufficient number of authorized shares to complete the Merger. The
availability of additional authorized shares will also enable the SFSC
Board to act with flexibility when and as the need arises to issue
additional shares in the future without the delays necessitated by having
to obtain a shareholder vote. Among the reasons for issuing additional
shares would be to increase SFSC's capital through sales of SFSC Common
Stock, to engage in other types of capital transactions, to implement a
shareholder rights plan, to undertake acquisitions, and to satisfy
contractual commitments, including pursuant to employee stock options.
The SFSC Board has not proposed the increase in the amount of authorized
SFSC Common Stock with the intention of discouraging tender offers or
takeover attempts of SFSC. However, the availability of additional
authorized shares for issuance could render more difficult or discourage a
merger, tender offer, proxy contest or other attempt to obtain control of
SFSC, which may adversely affect the ability of SFSC shareholders to
obtain a premium for their shares of SFSC Common Stock and, accordingly,
have a negative effect on the price of SFSC Common Stock.
SFSC management regularly reviews a range of possible financing
transactions, including the issuance of SFSC Common Stock. Except for (i)
shares to be issued in connection with the Merger and (ii) shares issued
in connection with the benefit plans mentioned above, SFSC has no present
intention of issuing or selling SFSC Common Stock for any purpose, but may
do so if market and other conditions should indicate that such a course of
action were advisable. Under the Merger Agreement, SFSC has agreed from
the date of the Merger Agreement through the Effective Time or earlier
termination of the Merger Agreement, not to issue, without the consent of
HBE, any additional shares of SFSC Common Stock except pursuant to the
exercise of stock options outstanding as of the date of the Merger
Agreement.
If the Charter Amendment is approved, the SFSC Board generally may
issue such additional authorized shares of SFSC Common Stock without
further shareholder approval. In some instances, shareholders approval
for the issuance of additional shares may be required by law or by the
requirements of The Nasdaq Stock Market, on which the SFSC Common Stock is
listed, or the obtaining of such approvals may be otherwise necessary or
desirable. Except in such cases, it is not anticipated that further
shareholder authorization will be solicited. Holders of SFSC Common Stock
are not entitled to preemptive rights to subscribe for or purchase any
part of any new or additional issue of SFSC Common Stock or securities
convertible into SFSC Common Stock.
The affirmative vote of the holders of a majority of the shares of
SFSC Common Stock represented and voted at the SFSC Special Meeting
(assuming a quorum is present) is required to approve the Charter
Amendment. Any shares of SFSC Common Stock not voted with respect to the
Charter Amendment (whether as a result of broker non-votes, abstentions or
otherwise) will have no impact on the vote.
THE SFSC BOARD RECOMMENDS A VOTE "FOR" THE CHARTER AMENDMENT AND
URGES EACH SFSC SHAREHOLDER TO VOTE "FOR" SUCH AMENDMENT. UNLESS MARKED
TO THE CONTRARY, THE SHARES OF SFSC COMMON STOCK REPRESENTED BY PROPERLY
EXECUTED PROXIES RECEIVED PRIOR TO OR AT THE SFSC SPECIAL MEETING AND NOT
REVOKED WILL BE VOTED "FOR" THE CHARTER AMENDMENT.
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
State Financial Services Corporation
At or For the Six Months
Ended June 30, At or For the Year Ended December 31,(1)
(unaudited)
1998 1997 1997 1996 1995 1994 1993
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data
Total assets . . . . . . . . . $417,919 $305,936 $421,278 $301,999 $286,050 $226,144 $226,638
Loans, net of unearned
discount . . . . . . . . . . . 258,740 207,925 267,819 201,671 185,754 143,813 130,254
Allowance for loan losses . . . 3,371 2,670 3,306 2,608 2,711 1,983 2,084
Deposit accounts . . . . . . . 362,992 260,611 367,492 254,657 246,218 197,401 199,768
Long-term debt . . . . . . . . 900 932 5,300 962 1,062 115 228
Shareholders' equity . . . . . 39,808 37,380 38,548 35,527 32,381 26,169 24,756
<CAPTION>
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data
Interest income(2) . . . . . . $16,014 $12,156 $24,714 $22,876 $19,782 $15,701 $14,820
Interest expense . . . . . . . 7,136 4,582 9,522 8,752 7,336 4,773 4,853
Net interest income . . . . . . 8,878 7,574 15,192 14,124 12,446 10,928 9,967
Provision for loan losses . . . 285 165 330 210 190 120 147
Net interest income after
provision for loan losses . . 8,593 7,409 14,862 13,914 12,256 10,808 9,820
Non-interest income . . . . . . 2,824 1,602 3,376 3,060 2,481 2,438 2,234
Non-interest expenses . . . . . 7,683 5,587 11,193 10,512 9,460 8,956 8,437
Income before provision for
income taxes . . . . . . . . 3,734 3,424 7,045 6,462 5,277 4,290 3,617
Provision for income taxes . . 1,128 1,090 2,159 2,003 1,579 1,010 876
Less taxable equivalent
adjustment . . . . . . . . . . 379 234 512 453 419 473 466
Net Income . . . . . . . . . . $2,227 $2,100 $4,374 $4,006 $3,279 $2,807 $2,275
====== ====== ====== ====== ====== ====== ======
Selected Financial Ratios and
Other Data
Financial and Regulatory Ratios
Asset growth . . . . . . . . . (0.80)% 1.57% 39.50% 5.58% 26.49% (0.22)% 11.40%
Return on average assets(3) . . 1.08% 1.40% 1.42% 1.38% 1.32% 1.27% 1.09%
Return on average equity(3) . . 11.42% 11.64% 11.84% 11.78% 11.22% 11.02% 10.33%
Dividend payout ratio . . . . . 41.10% 36.54% 34.73% 31.46% 29.50% 29.12% 31.78%
Tier 1 risk-based capital ratio 11.39% 16.60% 10.79% 16.26% 16.06% 17.10% 16.62%
Leverage ratio . . . . . . . . 7.70% 11.80% 9.58% 11.45% 10.95% 11.75% 10.79%
Allowance for loan losses to
non-performing loans . . . . . 137.44% 115.64% 129.29% 108.62% 195.32% 150.68% 92.79%
Non-performing assets to total
assets . . . . . . . . . . . . 0.59% 0.75% 0.69% 0.91% 0.65% 0.68% 0.95%
Net charge-offs to average
loans(3) . . . . . . . . . . . 0.17% 0.10% 0.15% 0.16% 0.12% 0.16% 0.09%
Per Share Data(4)
Basic earnings per share . . . $0.59 $0.55 $1.16 $1.06 $0.94 $0.83 $0.73
Diluted earnings per share . . 0.58 0.54 1.14 1.05 0.93 0.82 0.72
Cash dividends declared . . . . 0.24 0.20 0.40 0.33 0.28 0.24 0.23
Book value . . . . . . . . . . 10.23 9.66 9.96 9.26 8.49 7.63 7.24
(1) Amounts include balances of Richmond Bancorp, Inc. and its subsidiaries, Richmond Bank and Richmond Financial Services,
Inc. since the effective date of these acquisitions by SFSC on December 31, 1997. Amounts include balances and results
of operations of State Financial Bank - Waterford since the effective date of its acquisition by SFSC on August 24, 1995
and State Financial Bank's 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 SFSC's historical experience, is used in the
conversion of tax-exempt interest income to a taxable-equivalent basis.
(3) Annualized for interim periods.
(4) 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 1998; 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, 1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HOME BANCORP OF ELGIN, INC.
At or For the Six
Months
Ended June 30, At or For the Year Ended December 31,
1998 1997 1997 1996 1995 1994 1993
(Unaudited) (Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data
Total assets . . . . . . . . . . $367,656 $352,577 $352,595 $356,335 $304,520 $306,956 $334,390
Loans receivable held to
maturity, net(1) . . . . . . . . 319,925 279,866 298,661 261,306 267,153 271,040 302,335
Investment securities held to
maturity . . . . . . . . . . . . 3,026 36,607 - 53,786 5,948 5,918 -
Deposits . . . . . . . . . . . . 267,291 249,086 248,218 251,795 259,972 267,938 293,932
Borrowed funds . . . . . . . . . - 5,000 5,000 - 4,000 - 7,000
Stockholders' equity . . . . . . 96,012 94,122 95,215 99,881 36,683 34,319 30,293
Selected Operating Data
Interest income . . . . . . . . . $13,023 $12,441 $25,029 $23,059 $22,925 $24,669 $27,652
Interest expense . . . . . . . . 5,622 5,181 10,550 10,881 10,850 10,484 11,791
Net interest income . . . . . . . 7,401 7,260 14,479 12,178 12,075 14,185 15,861
Provision for loan losses . . . . 60 60 120 120 180 240 240
Net interest income after
provision for loan losses . . 7,341 7,200 14,359 12,058 11,895 13,945 15,621
Non-interest income . . . . . . . 514 723 1,288 1,221 1,150 3,154 2,388
Non-interest expense . . . . . . 5,892 5,296 11,003 12,221 9,069 9,624 10,402
Income before income taxes . . . 1,963 2,627 4,645 1,059 3,976 7,475 7,607
Provision for income taxes . . . 761 1,019 1,802 417 1,612 3,117 2,998
------ ------ ------ ------ ------ ------ ------
Net income before cumulative
effect of change in
accounting principle . . . . . 1,202 1,608 2,843 642 2,364 4,358 4,609
Cumulative effect of change in
accounting principle(2) . . . - - - - - - 348
------ ------ ------ ------ ------ ------ ------
Net income . . . . . . . . . . . $ 1,202 $ 1,608 $ 2,843 $ 642 $ 2,364 $ 4,358 $ 4,261
====== ====== ====== ====== ====== ====== ======
<CAPTION>
HOME BANCORP. OF ELGIN, INC.
At or For the Six At or For the Year Ended December 31,
Months Ended June 30,
(unaudited)
1998 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data
Basic earnings per share(3)(4) . $0.19 $0.25 $0.45 $0.10 N/A N/A N/A
Diluted earnings per share(3)(4) 0.19 0.25 0.44 0.10 N/A N/A N/A
Selected Financial Ratios and
Other Data(5)
Return on average assets(6)(7)(8) 0.65% 0.90% 0.80% 0.20% 0.78% 1.33% 1.22%
Return on average equity(6)(7)(8) 2.52% 3.23% 2.93% 1.11% 6.53% 13.45% 15.26%
Average equity to average assets 25.96% 27.87% 27.32% 18.07% 11.93% 9.84% 7.99%
Equity to total assets at end of
period . . . . . . . . . . . . 26.11% 26.70% 27.00% 28.03% 12.05% 11.18% 8.96%
Book value per share(4) . . . . . $14.00 $13.73 $13.89 $14.25 N/A N/A N/A
Total non-performing loans(9) . . $816 $1.214 $963 $937 $916 $986 $1,642
Non-performing loans to total
loans . . . . . . . . . . . . . 0.25% 0.43% 0.32% 0.36% 0.34% 0.36% 0.54%
Non-performing assets to total
assets . . . . . . . . . . . . 0.28% 0.41% 0.35% 0.42% 0.46% 0.49% 0.62%
Allowance for loan losses to:
Non-performing loans . . . . . 137.47% 82.75% 110.51% 100.85% 90.17% 65.82% 24.91%
Total loans (10) . . . . . . . 0.35% 0.36% 0.36% 0.36% 0.31% 0.24% 0.14%
_____________________________
(1) Loans receivable, net, represents gross loans less net deferred loan fees, loans in process and allowance for loan
losses.
(2) Pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), on January
1, 1993, the Association changed prospectively from the deferred method to the liability method of accounting for income
taxes. The effect of the adoption of this standard is reflected in the financial statements as the cumulative effect of
change in accounting principle.
(3) For the year ended December 31, 1996, earnings per share was calculated as if HBE's initial public offering had taken
place on January 1, 1996.
(4) Per share information for the years ended December 31, 1995, 1994, and 1993 cannot be computed, because HBE did not issue
stock until September 26, 1996.
(5) With the exception of end-of-period ratios, all ratios are based on average monthly balances during the indicated
periods. Asset Quality Ratios and Capital Ratios are end-of-period ratios.
(6) Annualized for interim periods.
(7) Includes one-time charge of $1,759,000 ($1,077,000 net of tax effects) associated with the recapitalization of the
Savings Association Insurance Fund (the "SAIF") and a loss on curtailment of pension plan of $837,000 ($512,000 net of
tax effects) for the year ended December 31, 1996. Excluding the SAIF recapitalization charge an the loss on curtailment
of the pension plan, the return on average assets and average equity would have been 0.70% and 3.85%, respectively, for
the year ended December 31, 1996. Likewise, the ratio of noninterest expense to average assets would have been 3.00% for
the year ended December 31, 1996.
(8) Includes gain on sale of branches. Return on average assets excluding the gain on sale of branches would have been 1.03%
and 1.08% in 1994 and 1993, respectively. Return on average equity excluding the gain on sale of branches would have
been 10.42% and 13.48% in 1994 and 1993, respectively.
(9) Non-performing loans consist of non-accrual loans, the Company did not have any loans that were 90 days or more past due
and still accruing at any of the dates presented.
(10) Total loans represents gross loans less deferred loan fees and loans in process.
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
STATE FINANCIAL SERVICES CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited Pro Forma Financial Information and footnotes
thereto are presented to show the impact on the historical financial
position and results of operations of SFSC pursuant to the Merger.
As a result of the Merger, HBE shareholders will receive the shares
pursuant to the Exchange Ratio. The Exchange Ratio will result from the
Market Value of SFSC Common Stock. The Exchange Ratio is fixed at 0.86 if
the Market Value of SFSC Common Stock is less than or equal to $21.125,
fixed at 0.857143 if the Market Value of SFSC Common Stock is greater than
$21.125 and less than or equal to $22.625, fixed at 0.65 if the Market
Value of SFSC Common Stock is greater than $30.00 and less than or equal
to $31.375, and fixed at 0.64 if the Market Value of SFSC Common Stock is
greater than $31.375. If the Market Value of SFSC Common Stock is between
$22.625 and $30.00, the Exchange Ratio will be the quotient resulting from
dividing the Market Value of SFSC Common Stock into the $19.50 value per
share assigned to HBE's Common Stock. For purposes of the Pro Forma
Unaudited Financial information presented herein, the Market Value of SFSC
Common Stock is assumed to be $23.00, resulting in an exchange ratio of
0.847826 shares of SFSC Common Stock in exchange for each share of HBE
Common Stock. Footnotes 9 and 11 of the Notes to Unaudited Pro Forma
Financial Information provide additional pro forma financial information
assuming that the Market Value of SFSC Common Stock is less than $20.00 on
the Decision Date.
The unaudited Pro Forma Consolidated Balance Sheet reflects the
historical position of SFSC and HBE at June 30, 1998 with pro forma merger
adjustments based on the assumption that the Merger was effective June 30,
1998. The pro forma adjustments are based on the pooling of interests
method of accounting as described in the accompanying notes. The
unaudited Pro Forma Consolidated Statements of Income assumes that the
Merger was consummated on January 1 of the earliest indicated period.
The unaudited pro forma earnings do not reflect any potential
earnings enhancements or cost reductions which are expected to result from
the consolidation SFSC's and HBE's operations and are not necessarily
indicative of the results expected of the future combined operations. No
assurances can be given with respect to the ultimate level of earnings
enhancements or cost reductions to be realized.
The following information should be read in conjunction with and is
qualified in its entirety by the consolidated financial statements and
accompanying notes of SFSC and HBE included or incorporated by reference
herein. Interim results of SFSC and HBE for the six months ended June 30,
1998 are not necessarily indicative of results of operations or the
combined financial position that would have resulted had the Merger been
consummated at the beginning of the period indicated.
The unaudited Pro Forma Financial Information is intended for
information purposes and is not necessarily indicative of the future
financial position or future operating results of the combined company or
of the financial position or operating results of the combined company
that would have actually occurred had the Merger been in effect as of the
date or for the period presented.
<TABLE>
STATE FINANCIAL SERVICES CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, 1998
(in thousands)
<CAPTION>
As Reported
SFSC Home Pro Forma Pro Forma
ASSETS Historical Historical Adjustments Consolidated
<S> <C> <C> <C> <C>
Cash and due from banks $22,126 $4,768 $ 185 (5) $27,079
Interest bearing deposits with
other banks & other short-
term investments 5,551 30,400 35,951
Federal funds sold 7,600 0 7,600
Investment securities - held-
to-maturity 16,848 3,026 19,874
Investment securities -
available-for-sale 85,232 0 85,232
Loans, net 258,741 319,925 578,666
Premises and equipment 6,571 6,910 13,481
Accrued Interest receivable 3,150 1,554 4,704
Other assets 12,100 1,073 3,080 (1) 16,253
------- ------- -------- --------
Total assets $ 417,919 $ 367,656 $ 3,265 $ 788,840
======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Total deposits 362,992 267,291 630,283
Notes payable 900 0 900
Federal funds purchased 150 0 150
Federal Home Loan Bank
advances 0 0 0
Securities sold under
agreements to repurchase 9,826 0 9,826
Advance payments by borrowers
for taxes and insurance 0 2,378 2,378
Accrued interest payable and
other liabilities 4,243 1,975 6,218
------- ------- ------- -------
Total liabilities 378,111 271,644 0 649,755
Shareholders' equity
Common stock 389 70 511 (7)(8) 970
Additional paid-in capital 29,147 68,670 1,517 (6) 99,334
Retained earnings 11,099 37,926 (9,417) (1) 39,608
Treasury stock (2,470) 2,470 (2) 0
Net unrealized holding gain on
securities available-for-sale 556 n/a 556
Unearned Recognition and
Retention Plan n/a (3,449) 3,449 (4) 0
Unearned ESOP shares (1,383) (4,735) 4,735 (3) (1,383)
------- ------- -------- -------
Total Shareholders' equity 39,808 96,012 3,265 139,085
------- ------- -------- -------
Total liabilities and
stockholders' equity $ 417,919 $ 367,656 $ 3,265 $ 788,840
======= ======= ======== =======
</TABLE>
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION
AND HOME BANCORP OF ELGIN, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share and weighted average share data)
<CAPTION>
For the
Six Months
Ended For the Year
June 30, 1998 1997 Ended 1996 1995
<S> <C> <C> <C> <C>
Interest Income:
Loans 24,121 46,648 39,139 37,613
Investment securities
Taxable 2,283 6,119 4,063 2,902
Tax-exempt 629 839 759 689
FHLB of Chicago stock 90 179 187 202
Federal funds sold & other
short-term investments 1,534 1,688 1,335 882
------- ------- ------- -------
Total Interest Income 28,657 55,473 45,483 42,288
Interest expense:
Deposits 12,442 23,155 19,204 17,803
Notes payable and
other borrowings 316 1,010 429 383
------- ------- ------- -------
Total interest expense 12,758 24,165 19,633 18,186
------- ------- ------- -------
Net interest income 15,899 31,308 25,850 24,102
Provision for loan losses 345 1,090 330 370
------- ------- ------- -------
Net interest income after
provision for loan losses 15,554 30,218 25,520 23,732
Other income:
Service charges on
deposits accounts 1,098 2,368 2,168 2,121
Merchant services 600 1,141 1,033 715
Other 1,640 2,760 1,080 795
------- ------- ------- -------
3,338 6,269 4,281 3,631
Other expenses:
Salaries and employee
benefits 6,615 12,249 9,607 8,032
Occupancy 2,027 4,319 3,616 3,414
Data processing 958 1,852 1,599 1,494
Legal and professional 588 754 398 442
Merchant services 460 917 871 620
Regulatory agency
assessments 155 274 2,543 938
Advertising 455 855 745 532
Costs related to acquisition - 305 - -
Other 2,317 4,909 3,354 3,057
------- ------- ------- -------
13,575 26,434 22,733 18,529
------- ------- ------- -------
Income (loss) before income
taxes 5,317 10,053 7,068 8,834
Income taxes 1,888 3,819 2,420 3,191
------- ------- ------- -------
Net income (loss) 3,429 6,234 4,648 5,643
======= ======= ======= =======
Basic earnings per share (9) $0.36 $0.65 $0.49 $0.61
Diluted earnings per share (9) $0.35 $0.64 $0.48 $0.61
Basic weighted average shares
outstanding (9) 9,591,923 9,596,238 9,582,242 9,289,591
Diluted weighted average
shares outstanding (9) 9,723,507 9,731,118 9,621,568 9,323,633
See notes to Unaudited Pro Forma Financial Information
</TABLE>
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION
AND HOME BANCORP OF ELGIN, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the six months ended June 30, 1998
(in thousands except per share and weighted average share data)
As Reported Pro Forma Pro Forma
SFSC Home Adjustments Consolidated
<S> <C> <C> <C> <C>
Interest income:
Loans $12,376 $ 11,745 $ $ 24,121
Investment securities
Taxable 2,280 3 2,283
Tax-exempt 629 0 629
FHLB of Chicago stock 0 90 90
Federal funds sold & other
short-term investments 349 1,185 1,534
------- ------- -------- -------
Total interest income 15,634 13,023 0 28,657
Interest expense:
Deposits 6,836 5,606 12,442
Notes payable and other
borrowings 300 16 316
------- ------- --------- -------
Total interest expense 7,136 5,622 0 12,758
------- ------- --------- -------
Net interest income 8,498 7,401 0 15,899
Provision for loan losses 285 60 345
------- ------- -------- -------
Net interest income after
provision for loan losses 8,213 7,341 0 15,554
Other income:
Service charges on deposit
accounts 613 485 1,098
Merchant services 600 0 600
Other 1,611 29 1,640
------- -------- --------- --------
2,824 514 0 3,338
Other expenses:
Salaries and employee
benefits 3,546 3,069 6,615
Occupancy 1,228 799 2,027
Data processing 498 460 958
Legal and professional 280 308 588
Merchant services 460 0 460
Regulatory agency
assessments 36 119 155
Advertising 232 223 455
Other 1,403 914 2,317
------- ------- --------- --------
7,683 5,892 0 13,575
------- ------- --------- --------
Income (loss) before income
taxes 3,354 1,963 0 5,317
Income taxes 1,127 761 0 1,888
------- ------- -------- -------
Net income (loss) $ 2,227 $ 1,202 $ 0 $ 3,429
======= ======= ======== =======
Basic earnings per share (9) $0.59 $0.19 $0.36
Diluted earnings per share
(9) $0.58 $0.19 $0.35
Basic weighted average shares
outstanding (9) 3,779,398 6,381,164 9,591,923
Diluted weighted average
shares outstanding (9) 3,819,060 6,489,584 9,723,507
</TABLE>
See Notes to Unaudited Pro Form Financial Information
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION
RICHMOND BANCORP, INC.
AND HOME BANCORP OF ELGIN, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the year Ended December 31, 1997
(in thousands except per share and weighted average share data)
<CAPTION>
SFSC
As Reported
Pro Forma SFSC & Pro Forma Richmond &
SFSC Richmond Adjustments Richmond Home Adjustments Home
<S> <C> <C> <C> <C> <C>
Interest income:
Loans $ 19,869 $ 5,048 $ 24,917 $ 21,731 $ 46,648
Investment securities
Taxable 3,346 1,542 (420)(10d) 4,468 1,651 6,119
Tax-exempt 839 0 839 0 839
FHLB of Chicago stock 0 0 0 179 179
Federal funds sold &
other short-term
investments 148 72 220 1,468 1,688
------- ------- ------- -------- -------- --------- --------
Total interest income 24,202 6,662 (420) 30,444 25,029 0 55,473
Interest expense:
Deposits 9,078 3,702 12,780 10,375 23,155
Notes payable and other
borrowings 444 113 279(10c) 836 174 1,010
------- ------- ------- -------- --------- --------- --------
Total interest expense 9,522 3,815 279 13,616 10,549 0 24,165
------- ------- ------- -------- --------- --------- --------
Net interest income 14,680 2,847 (699) 16,828 14,480 0 31,308
Provision for loan losses 330 640 970 120 1,090
------- ------- ------- -------- --------- --------- --------
Net interest income after
provision for loan
losses 14,350 2,207 (699) 15,858 14,360 0 30,218
Other income:
Service charges on
deposit accounts 1,032 334 1,366 1,002 2,368
Merchant services 1,141 0 1,141 0 1,141
Other 1,203 1,271 2,474 286 2,760
--------- -------- --------- -------- -------- --------- --------
3,376 1,605 0 4,981 1,288 0 6,269
Other expenses:
Salaries and employee
benefits 4,874 1,838 6,712 5,537 12,249
Occupancy 2,106 593 12(10b) 2,711 1,608 4,319
Data processing 783 153 936 916 1,852
Legal and professional 295 0 295 459 754
Merchant services 917 n/a 917 0 917
Regulatory agency
assessments 38 20 58 216 274
Advertising 366 49 415 440 855
Costs related to
acquisition 305 305 305
Other 1,814 851 417(10a) 3,082 1,827 0 4,909
-------- ------- -------- -------- --------- --------- --------
11,193 3,809 429 15,431 11,003 0 26,434
Income (loss) before
income taxes 6,533 3 (1,128) 5,408 4,645 0 10,053
Income taxes 2,159 27 (169)(10e) 2,017 1,802 0 3,819
-------- -------- --------- -------- --------- --------- ---------
Net income (loss) $ 4,374 $ (24) $ (959) 3,391 $ 2,843 6,234
======== ======== ========= ======== ========= ========= =========
Basic earnings per share
(9) $1.16 $0.90 $0.45 $0.65
Diluted earnings per
share (9) $1.14 $0.88 $0.44 $0.64
Basic weighted average
shares outstanding (9) 3,783,713 3,783,713 6,382,052 9,596,238
Diluted weighted average
shares outstanding (9) 3,826,671 3,826,671 6,433,336 9,639,196
</TABLE>
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION
AND HOME BANCORP OF ELGIN, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the year Ended December 31, 1996
(in thousands except per share and weighted average share data)
<CAPTION>
As Reported Pro Forma Pro Forma
SFSC Home Adjustments Consolidated
<S> <C> <C> <C> <C>
Interest income:
Loans $ 18,147 $ 20,992 $ $ 39,139
Investment securities
Taxable 3,271 792 4,063
Tax-exempt 759 0 759
FHLB of Chicago stock 0 187 187
Federal funds sold & other
short-term investments 246 1,089 1,335
-------- -------- --------- --------
Total interest income 22,423 23,060 0 45,483
Interest expense:
Deposits 8,360 10,844 19,204
Notes payable and other
borrowings 392 37 429
------- -------- -------- --------
Total interest expense 8,752 10,881 0 19,633
------- -------- -------- --------
Net interest income 13,671 12,179 0 25,850
Provision for loan losses 210 120 330
------- -------- -------- --------
Net interest income after
provision for loan losses 13,461 12,059 0 25,520
Other income:
Service charges on deposit
accounts 992 1,176 2,168
Merchant services 1,033 0 1,033
Other 1,035 45 1,080
-------- --------- --------- --------
3,060 1,221 0 4,281
Other expenses:
Salaries and employee
benefits 4,450 5,157 9,607
Occupancy 2,059 1,557 3,616
Data processing 653 946 1,599
Legal and professional 287 111 398
Merchant services 871 0 871
Regulatory agency assessments 102 2,441 2,543
Advertising 305 440 745
Other 1,785 1,569 3,354
-------- -------- --------- --------
10,512 12,221 0 22,733
-------- ------- -------- -------
Income (loss) before income
taxes 6,009 1,059 0 7,068
Income taxes 2,003 417 0 2,420
-------- ------- -------- ---------
Net income (loss) $ 4,006 $ 642 $ 0 $ 4,648
======== ======= ======== =========
Basic earnings per share (9) $1.06 $0.10 $0.49
Diluted earnings per share (9) $1.05 $0.10 $0.48
Basic weighted average shares
outstanding (9) 3,769,717 6,448,655 9,582,242
Diluted weighted average shares
outstanding (9) 3,809,043 6,448,655 9,621,568
</TABLE>
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION
AND HOME BANCORP OF ELGIN, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the year Ended December 31, 1995
(in thousands except per share and weighted average share data)
<CAPTION>
As Reported Pro Forma Pro Forma
SFSC Home Adjustments Consolidated
<S> <C> <C> <C> <C>
Interest income:
Loans $ 15,833 $ 21,780 $ $ 37,613
Investment securities
Taxable 2,527 375 2,902
Tax-exempt 689 0 689
FHLB of Chicago stock 0 202 202
Federal funds sold & other
short-term investments 314 568 882
------- ------- --------- -------
Total interest income 19,363 22,925 0 42,288
Interest expense:
Deposits 7,030 10,773 17,803
Notes payable and other
borrowings 306 77 383
------- ------- --------- -------
Total interest expense 7,338 10,850 0 18,186
------- ------- --------- -------
Net interest income 12,027 12,075 0 24,102
Provision for loan losses 190 180 370
------- ------- --------- -------
Net interest income after
provision for loan losses 11,837 11,895 0 23,732
Other income:
Service charges on deposit
accounts 992 1,129 2,121
Merchant services 715 0 715
Other 774 21 795
------- ------- --------- -------
2,481 1,150 0 3,631
Other expenses:
Salaries and employee benefits 4,101 3,931 8,032
Occupancy 1,806 1,608 3,414
Data processing 544 950 1,494
Legal and professional 327 115 442
Merchant services 620 0 620
Regulatory agency assessments 229 709 938
Advertising 161 371 532
Other 1,672 1,385 3,057
------- ------- --------- -------
9,460 9,069 0 18,529
------- ------- --------- -------
Income (loss) before income
taxes 4,858 3,976 0 8,834
Income taxes 1,579 1,612 0 3,191
------- ------- --------- -------
Net income (loss) $ 3,279 $ 2,364 $ 0 $ 5,643
======= ======= ========= =======
Basic earnings per share (9) $0.94 n/a $0.61
Diluted earnings per share (9) $0.93 n/a $0.61
Basic weighted average shares
outstanding (9) 3,477,066 n/a 9,289,591
Diluted weighted average shares
outstanding (9) 3,511,108 n/a 9,323,633
</TABLE>
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
State Financial Services Corporation
Home Bancorp of Elgin, Inc.
Notes to Unaudited Pro Forma Financial Information
Notes to Pro Forma Unaudited Consolidated Balance Sheets
(dollars in thousands except per share data)
(1) Net change to retained earnings
Legal, accounting, professional fees $(2,450)
ESOP termination (4,498)
RRP termination (3,449)
Severance (2,100)
-------
Total estimated transaction expenses (12,497)
Tax benefit on ESOP & RRP
termination & severance payouts
As Tax
Stated Deductible
ESOP termination $4,498 $2,307
RRP termination 3,449 3,449
Severance 2,100 2,100
------ ------
Total 10,047 7,856
Tax benefit @ 39.21% 3,080
Recorded as a deferred tax asset
------
Net decrease in retained earnings $(9,417)
======
Pro forma shareholders' equity includes total estimated transaction
expenses of $12,497, $9,417 net of tax. Since the estimated charge is
nonrecurring, it has not been reflected in the pro forma condensed
consolidated statement of income and related per share calculations.
(2) Retirement of Treasury Stock to Additional paid-in capital
(3) ESOP Termination
ESOP loan balance $4,735
Unissued ESOP shares 473,500
ESOP value per share $19.50
Cash generated from ESOP
loan repayment 4,735
Shares sold to repay ESOP
($4,735,000/$19.50) 242,821
-------
Shares to be allocated to ESOP
participants 230,679
Benefit Expense @ $19.50
per share $ 4,498
(4) Termination of Recognition and Retention Plan ("RRP")
(5) Cash usage for legal, accounting,
professional fees $(2,450)
Cash used for severance agreements (2,100)
Cash received from repayment of ESOP Debt 4,735
------
Net cash received $ 185
======
(6) Net change to Additional
paid-in capital
Increase related to final ESOP
allocation $ 4,498
Issuance of New SFSC Common Stock (511)
Decrease related to Treasury Stock
retirement (2,470)
$ 1,517
======
(7) Calculation of Exchange Ratio assuming
the market value of SFSC Common Stock is
$23.00 per share.
Shares of HBE Outstanding 7,009,250
Treasury Shares (153,451)
---------
Net HBE shares outstanding 6,855,799
Market value of SFSC $23.00
Exchange Ratio 0.847826
# of SFSC shares issued 5,812,525
SFSC par value $0.10
(8) Change in Common Stock Eliminate HBE
Common Stock $(70)
Issuance of New SFSC Common Stock 581
-----
$ 511
=====
(9) The pro forma weighted average shares outstanding are computed using
SFSC's historical weighted average basic and diluted shares
outstanding for the applicable period presented plus 5,812,525
additional SFSC shares issued in the merger (assumes SFSC market
value is $23.00 per share resulting in an exchange ratio of
0.847825). The pro forma earnings per share set forth on the
unaudited Pro Forma Statements of Income are computed using the pro
forma weighted average shares calculated pursuant to the
aforementioned equation.
The following sets forth the pro forma earnings per share at the
indicated exchange ratios based upon the Exchange Ratio defined in
the Merger Agreement and 7,009,250 shares of HBE outstanding as of
June 30, 1998.
HBE shares outstanding 7,009,250
Treasury Shares (153,451)
---------
Net HBE shares outstanding 6,855,799
SFSC basic wtd. avg. shares o/s 3,783,713
SFSC diluted wtd. avg. shares o/s 3,826,671
Pro forma net income 1997 6,234
Price for HBE Common Stock $19.50
HBE unexercised options outstanding 108,420
Exchange ratio 0.847826
Pro forma unexercised options related to HBE 91,921
<TABLE>
<CAPTION>
1997 Pro
# of SFSC 1997 Pro Forma Forma Diluted
Exchange Shares Basic Wtd. Pro Forma Wtd. Avg. Pro Forma
SFSC Market Value Ratio Issued Avg. Shares Basic EPS Shares Diluted EPS
<S> <C> <C> <C> <C> <C> <C>
<or=$21.125 0.860000 5,895,987 9,679,700 $0.64 9,801,710 $0.64
>$21.125 & < or = $22.625 0.857143 5,876,400 9,660,113 0.65 9,781,861 0.64
$22.63 0.861840 5,908,604 9,692,317 0.64 9,814,497 0.64
22.75 0.857143 5,876,399 9,660,112 0.65 9,761,860 0.64
23.00 0.847826 5,812,525 9,596,238 0.65 9,717,130 0.64
23.50 0.829787 5,688,854 9,472,567 0.65 9,591,801 0.65
24.00 0.812500 5,570,337 9,354,050 0.67 9,471,694 0.66
24.50 0.795918 5,456,656 9,240,369 0.67 9,358,489 0.67
25.00 0.780000 5,347,523 9,131,236 0.68 9,245,893 0.67
25.50 0.764706 5,242,670 9,028,383 0.69 9,139,634 0.68
26.00 0.750000 5,141,849 8,925,562 0.70 9,037,461 0.69
26.50 0.735849 5,044,833 8,828,546 0.71 8,939,144 0.70
27.00 0.722222 4,951,410 8,735,123 0.71 8,844,489 0.70
27.50 0.709091 4,881,385 8,645,098 0.72 8,753,238 0.71
28.00 0.696429 4,774,574 8,558,287 0.73 8,685,282 0.72
28.50 0.684211 4,690,810 8,474,523 0.74 8,580,374 0.73
29.00 0.672414 4,509,934 8,393,647 0.74 8,498,414 0.73
29.50 0.661017 4,531,799 8,315,512 0.75 8,419,232 0.74
30.00 0.650000 4,456,269 8,239,982 0.76 8,342,689 0.75
>$30.00 & < or=$31.375 0.660000 4,456,269 8,239,982 0.76 8,342,689 0.75
>$31.375 0.640000 4,387,711 8,171,424 0.76 8,273,212 0.75
</TABLE>
If the Market Value of SFSC Common Stock is below $20.00 on the Decision
Date, the following sets forth the protocol to determine the exchange
ratio which will be used in the transaction.
<TABLE>
<CAPTION>
If Notice is NOT
When notice must be given or NOT timely
Action given If Notice timely given given
<S> <C> <C> <C>
1. HBE may notify SFC in writing that Within 3 business days SFSC can elect from the Close using a 0.86
it is not willing to close on the after the Decision Date. two options set forth Exchange Ratio
basis of the Exchange Ratio set in Action 2 below.
forth in Section 1.4(b)(i) of the
Merger Agreement.
2. SFSC can elect from the following
options if HBE properly gives
notice under Action 1 above.
(i) To close on the basis of an Within 3 business days Close using the Close using the
Exchange Ratio equal to the after SFSC's receipt of Optional Exchange Ratio Optional Exchange
quotient obtained by dividing HBE's notice given in Ratio
$17.25 by the Market Value of Action 1.
SFSC Common Stock on the
Decision Date (the "Optional
Exchange Ratio") or
(ii) to close on the basis of a Within 3 business days HBE can elect from the Close using the
0.86 Exchange Ratio after SFSC's receipt of two options set forth Optional Exchange
HBE's notice given in in Action 3 below. Ratio
Action 1.
3. HBE can elect from the following
options if SFSC properly gives
notice under Action 2(ii) above.
(i) HBE can agree to close at the Within 3 business days Closing using a 0.86 Close using a 0.86
0.86 Exchange Ratio after HBE's receipt of Exchange Ratio Exchange Ratio
SFSC's notice given in
Action 2(ii).
(ii) HBE can elect to terminate the Within 3 business days Merger Agreement is Close using a 0.86
Merger Agreement. after HBE's receipt of terminated. Exchange Ratio
SFSC's notice given in
Action 2(ii).
</TABLE>
Please see the Merger Agreement for further details.
In the event that SFSC elects the Optional Exchange Ratio under Section
1.4(e)(ii), the following sets forth the pro forma earnings per share at
the indicated Optional Exchange Ratios based upon valuing HBE Common Stock
at $17.25 per share and 7,009,250 shares of HBE Common Stock outstanding
as of June 30, 1998. The presentation of this date is for informational
purposes only and is not meant to indicate which option under Section 1.4
of the Merger Agreement SFSC expects to elect in the event the Market
Value of SFSC Common Stock is below $20.00 on the Decision Date.
<TABLE>
<CAPTION>
1997 Pro Forma 1997 Pro Forma
SFSC Market # of SFSC Basic Wtd. Avg. Pro Forma Diluted Wtd. Pro Forma
Value Exchange Ratio Shares Issued Shares Basic EPS Avg. Shares Diluted EPS
<S> <C> <C> <C> <C> <C> <C>
$15.00 1.150000 7,884,169 11,667,882 $0.53 11,816,549 $0.53
15.50 1.112903 7,629,841 11,413,554 0.55 11,558,811 0.54
16.00 1.078125 7,391,408 11,175,121 0.56 11,317,182 0.55
16.50 1.045455 7,167,426 10,951,139 0.57 11,090,197 0.56
17.00 1.014706 6,956,620 10,740,333 0.58 10,876,564 0.57
17.50 0.985714 6,757,859 10,541,572 0.59 10,675,138 0.58
18.00 0.958333 6,570,141 10,353,854 0.60 10,484,903 0.59
18.50 0.932432 6,392,569 10,176,282 0.61 10,304,951 0.60
19.00 0.907895 6,224,344 10,008,057 0.62 10,134,470 0.62
19.50 0.884615 6,064,745 9,848,458 0.63 9,972,731 0.63
20.00 0.860000 5,895,987 9,679,700 0.64 9,801,710 0.64
</TABLE>
(10) For purposes of determining the pro forma effect of the Richmond
acquisition on SFSC's Consolidated Statement of Income, the
following pro forma adjustments have been made as if the
acquisition had occurred as of January 1, 1997.
For the year
ended December
31, 1997
(a) Amortization of cost in excess of net assets $417
acquired--Richmond (15 years straight line)
(b) Depreciation on Building FMV Adjustment--Richmond 12
(31.5 years straight line)
(c) Interest expense on notes payable for one year $3,90 279
0 million at 7.18% APR
(d) Foregone Interest Income on investment securities 420
liquidated to finance acquisition for one year
$6,996 @ average annual investment yield of 6.00%
(e) Pro forma income tax benefit (169)
(11) The following sets forth certain enhancements and/or cost
reductions which State and Home reasonably expect to result upon
completion of the merger. The table presents the pro forma
earnings per share which result from combining these anticipated
earnings enhancement/cost reductions with the historical
combined operating results of State and Home.
Improvement in rate of return on short term
investments $500
Enhancements from changes to service charges,
overdrafts and ATM charges 600
Identified operational cost savings have been
estimated at $3,275 annually due to reduction in
costs associated with personnel, employee benefits,
occupancy, marketing, professional fees, and data
processing 3,275
Estimated income tax benefit on earnings enhancements
and cost savings at a 39.21% effective tax rate. 1,715
------
Total annual projected earnings enhancements 2,660
------
Pro forma net income as presented 6,234
Pro forma net income included expected earnings
enhancements $8,894
<TABLE>
<CAPTION>
1997 Pro
1997 Pro Forma Forma
Exchange # of SFSC Basic Wtd. Pro Forma Diluted Wtd. Pro Forma
SFSC Market Value Ratio Shares Issued Avg. Shares Basic EPS Avg. Shares Diluted EPS
<S> <C> <C> <C> <C> <C> <C>
<or=$21.125 0.860000 5,895,987 9,679,700 $0.92 9,801,710 $0.91
>$21.125 & < or = $22.625 0.857143 5,876,400 9,660,113 0.92 9,781,861 0.91
$22.63 0.861840 5,908,604 9,692,317 0.92 9,814,497 0.91
22.75 0.857143 5,876,399 9,660,112 0.92 9,781,860 0.91
23.00 0.847826 5,812,525 9,596,238 0.93 9,717,130 0.92
23.50 0.829787 5,688,854 9,472,567 0.94 9,591,801 0.93
24.00 0.812500 5,570,337 9,354,050 0.95 9,471,894 0.94
24.50 0.795918 5,456,656 9,240,369 0.96 9,356,489 0.95
25.00 0.780000 5,347,523 9,131,236 0.97 9,245,896 0.96
25.50 0.764706 5,242,670 9,028,383 0.99 9,139,634 0.97
26.00 0.750000 5,141,849 8,925,562 1.00 9,034,461 0.98
26.50 0.735849 5,044,833 8,828,546 1.01 8,939,144 0.99
27.00 0.722222 4,951,410 8,735,123 1.02 8,844,469 1.01
27.50 0.709091 4,881,385 8,645,098 1.03 8,753,236 1.02
28.00 0.696429 4,774,574 8,558,287 1.04 8,665,262 1.03
28.50 0.684211 4,690,810 8,474,523 1.05 8,580,374 1.04
29.00 0.672414 4,609,934 8,393,647 1.06 8,498,414 1.05
29.50 0.661017 4,531,799 8,315,512 1.07 8,419,232 1.06
30.00 0.650000 4,456,269 8,239,982 1.08 8,342,689 1.07
>$30.00 & < or=$31.375 0.650000 4,456,269 8,239,982 1.08 8,342,689 1.07
>$31.375 0.640000 4,387,711 8,171,424 1.09 8,273,212 1.07
</TABLE>
In the event that SFSC elects the Optional Exchange Ratio under Section
1.4(e)(ii) of the Merger Agreement, the following sets forth the pro forma
earnings per share at the indicated Optional Exchange Ratios based upon
valuing HBE Common Stock at $17.25 per share and 7,009,250 shares of HBE
Common Stock outstanding as of June 30, 1998. The presentation of this
date is for informational purposes only and is not meant to indicate which
option under Section 1.4 of the Merger Agreement SFSC expects to elect in
the event that the Market Value of SFSC Common Stock is below $20.00 on
the Decision Date.
<TABLE>
<CAPTION>
1997 Pro
1997 Pro Forma Forma
SFSC Market Exchange # of SFSC Basic Wtd. Avg. Pro Forma Diluted Wtd. Pro Forma
Value Ratio Shares Issued Shares Basic EPS Avg. Shares Diluted EPS
<S> <C> <C> <C> <C> <C> <C>
$15.00 1.150000 7,884,169 11,667,882 $0.76 11,816,549 $0.75
15.50 1.112903 7,629,841 11,413,554 0.78 11,558,811 0.77
16.00 1.078125 7,391,408 11,175,121 0.80 11,317,182 0.79
16.50 1.045455 7,187,426 10,951,139 0.81 11,090,197 0.80
17.00 1.014706 6,956,620 10,740,333 0.83 10,876,564 0.82
17.50 0.985714 6,757,859 10,541,572 0.84 10,675,138 0.83
18.00 0.958333 6,570,141 10,353,854 0.86 10,484,903 0.85
18.50 0.932432 6,392,569 10,176,282 0.87 10,304,951 0.86
19.00 0.907895 6,224,344 10,008,057 0.89 10,134,470 0.88
19.50 0.884615 6,064,745 9,848,458 0.90 9,972,731 0.89
20.00 0.860000 5,895,987 9,679,700 0.92 9,801,710 0.91
</TABLE>
<PAGE>
COMPARISON OF THE RIGHTS OF SHAREHOLDERS
OF SFSC COMMON STOCK AND HBE COMMON STOCK
The rights of holders of SFSC Common Stock and Preferred Stock are
currently governed by Wisconsin law, SFSC's Amended and Restated Articles
of Incorporation (the "SFSC Charter"), and SFSC's Amended and Restated
Bylaws. The rights of holders of HBE Common Stock and Preferred Stock are
currently governed by Delaware law, HBE's Certificate of Incorporation
(the "HBE Charter") and Bylaws. The Wisconsin and Delaware corporation
laws differ in many respects as do the respective charters and bylaws of
SFSC and HBE.
Upon consummation of the Merger, holders of HBE Common Stock will
become holders of SFSC Common Stock and, as such, all of their rights will
be governed by SFSC Charter, SFSC's Amended and Restated Bylaws and
Wisconsin law. Set forth below is a summary of certain material
differences between the rights of holders of SFSC Common Stock and the
rights of holders of HBE Common Stock.
Merger, Consolidation and Sales of Assets
The DGCL and WBCL each require shareholder approval (except for
certain mergers between a parent company and its 90% owned subsidiary) by
the shareholder of each corporation that is party to a plan of merger and
the selling corporation for the sale by the corporation of substantially
all its assets if not in the usual or regular course of business. (The
DGCL does not refer to the usual or regular course of business). The WBCL
further provides for a shareholder vote of the corporation whose shares
will be acquired in a statutory share exchange. The DGCL and WBCL each
require a shareholder vote to approve the dissolution of a corporation.
The DGCL provides that the vote required to approve a plan of merger,
sale of substantially all the assets or dissolution is a majority of the
outstanding stock of the corporation entitled to vote thereon. Under the
WBCL, unless a higher voting requirement is imposed by the articles of
incorporation or the bylaws adopted under authority granted by the
articles of incorporation, the vote required to approve a plan of merger,
statutory share exchange, sale of substantially all assets not in the
ordinary course of business or dissolution is a majority of the voting
power of all shares entitled to vote of each corporation whose
shareholders have a right to vote; approval of a plan of merger or
statutory share exchange and a sale of substantially all assets or
dissolution also may require the affirmative vote of one or more classes
or series of stock pursuant to the WBCL.
The WBCL does not require the vote of the shareholders of a surviving
corporation in a merger if (i) the corporation's articles of incorporation
will not be amended in the transaction (except for amendments permitted to
be made by the board without a shareholder vote under the WBCL), (ii)
shareholders of the corporation immediately before the effective date of
the transaction will hold the same number of shares with identical rights
immediately after the effective date, (iii) the number of shares entitled
to vote immediately after the merger (plus shares issuable upon certain
conversions or pursuant to certain rights) does not exceed by more than
20% the number of shares entitled to vote immediately before the
transaction, and (iv) the number of participating shares of the
corporation (outstanding shares of the corporation that entitle their
holders to participate, without limitation, in distributions by the
corporation) immediately after the merger, plus the number of
participating shares of the corporation issuable on the conversion of, or
on the exercise of rights to purchase, securities issued in the
transaction, will not exceed by more than 20% the number of participating
shares of the corporation immediately before the transaction. The DGCL
similarly does not require a shareholder vote of the shareholders of a
surviving corporation to a merger if (i) the agreement of merger does not
amend in any respect the surviving corporation's certificate, (ii) each
share of stock outstanding immediately prior to the merger is identical to
outstanding or treasury shares following the merger, and (iii) no shares
of stock (and no securities convertible into shares of stock) are to be
issued pursuant to the merger or the number of shares issued (or the
securities convertible into shares of stock) does not exceed 20% of the
number of shares outstanding immediately prior to the merger.
The HBE Charter and By-laws and the SFSC Charter and By-laws do not
require a greater vote than is statutorily required.
Preferred Stock
The SFSC Charter and the HBE Charter authorize the issuance of up to
100,000 and 3,000,000 shares of preferred stock, respectively, from time
to time in one or more series, without any action on the part of
shareholders, and authorize the respective Boards to determine the
designation of each series, the number of shares to be issued, dividend
rates, redemption provisions, liquidation preferences and such other
provisions and rights as the Boards of Directors may deem advisable.
Dividends fixed by the Boards of Directors could be in preference to
dividends on any other classes of the companies' stock. The preferred
dividends may or may not be cumulative. The preferred stock may also be
entitled to a preference upon dissolution or liquidation if the Boards of
Directors so designate. Currently, there is no preferred stock of SFSC or
HBE designated or issued.
Directors
HBE. The HBE Board is divided into three separate classes, with the
directors in each class serving for staggered three-year terms. All the
directors of HBE are elected by a plurality of the votes cast by each
class of shares entitled to vote at a meeting of shareholders present and
entitled to vote in the election, provided that a quorum is present at the
meeting. Pursuant to the HBE Bylaws, the number of directors is fixed at
a minimum of five and a maximum of fifteen members, with a minimum of two
directors who are not officers, employees or have some other relationship
that might interfere with the exercise of independent judgment. No more
than two directors may be officers or employees of HBE or its
subsidiaries. Each director must be at least eighteen years of age.
SFSC. The SFSC Board is divided into three separate classes, with
the directors in each class serving for staggered three-year terms. Under
the SFSC Charter and the Amended and Restated Bylaws, the number of
directors is set by the Board of Directors and may be no less than five.
At each annual meeting of SFSC's shareholders, the successors to the class
of directors whose term expires at the time of such meeting are elected by
a majority of the votes case, provided that a quorum is present. No
person over the age of seventy-two is eligible to be elected director
unless such person was a member of the SFSC Board prior to November 9,
1989. SFSC's Bylaws provide for the removal of a member of the Board of
Directors with or without cause by the holders of a majority of shares
entitled to vote for the election of a director at a special meeting
called for the purpose of removal.
Amendments to Charters
HBE. Delaware law requires that a proposed charter amendment be
approved by a majority of the shares entitled to vote on the proposed
amendment, as well as a majority of the outstanding stock entitled to vote
on such amendment as a class. The HBE Charter requires that, in addition
to any vote required under applicable law, any change to the HBE Charter
must also be approved by the HBE Board and by a majority vote of holders
of capital stock entitled to vote on such a change. Any change relating
to sections of the HBE Charter dealing with (a) limitations on beneficial
ownership, (b) the composition and procedures of HBE Board, (c) action by
shareholders without a meeting, (d) amendments to the HBE Bylaws, and
(e) amendments to the indemnification procedures of HBE, must be approved
by the holders of two-thirds of eligible voting shares. If the change is
proposed by an "Interested Stockholder" (as defined in the HBE Charter),
then a majority vote of all shares not held by the Interested Stockholder
or an affiliate thereof is needed to make such an amendment.
SFSC. The WBCL provides that the board of directors may propose
amendments to a corporation's articles of incorporation. Under the WBCL,
unless the articles of incorporation, bylaws adopted under authority
granted in the articles, the board (if the board is proposing the
amendment) or the WBCL requires a greater vote or vote by voting groups,
an amendment to the charter of a Wisconsin corporation may be approved by
a majority of the votes cast by every voting group entitled to vote on the
amendment. In addition, the WBCL requires that certain amendments must be
approved by a separate vote of a class or series of stock if, among other
things, the amendment would adversely affect the rights or preferences of
such shares. The SFSC Charter and Amended and Restated By-laws do not
require a higher vote for amendment of the SFSC Charter than is
statutorily prescribed.
Amendments to By-laws
HBE. Under the DGCL, the power to adopt, amend or repeal the bylaws
is vested in the shareholders entitled to vote, unless the certificate of
incorporation confers the power to adopt, amend or repeal the bylaws upon
the directors. The HBE Charter provides that the By-laws may be altered
or repealed and new by-laws adopted by the HBE Board as well as by a vote
of the shareholders of HBE. The HBE shareholders may, however, alter,
amend, rescind or repeal any such action by the HBE Board with a majority
vote or, where required by Delaware law or the HBE Charter or the Bylaws,
a supermajority vote.
SFSC. Under the WBCL, unless reserved by the articles of
incorporation to the shareholders, the power to adopt, amend or repeal the
bylaws is subject to the power of the shareholders to adopt, amend, or
repeal bylaws adopted, amended or repealed by the directors. SFSC's
Amended and Restated Bylaws may be amended or repealed by the SFSC Board,
unless the SFSC Charter provides otherwise. The shareholders also are
empowered to adopt, amend or repeal the bylaws. SFSC's Amended and
Restated Bylaws may be amended by the SFSC Board only if approved by two-
thirds of the directors present at any meeting. The directors may not
repeal or amend any bylaw adopted by the shareholders if the bylaw
specifically prohibits such repeal or amendment. The SFSC Amended and
Restated Bylaws also permit implied amendments. When any action authorized
by the shareholders or the SFSC Board is inconsistent with the Bylaws then
in effect, but would have carried the requisite authorization of the
shareholders or directors to amend the Bylaws in this manner, the Bylaws
are considered temporarily amended for the specific purpose of the
authorized action.
Cumulative Voting
Neither the SFSC Charter nor the HBE Charter provides for cumulative
voting rights.
Preemptive Rights
Although both the DGCL and the WBCL permit the designation of
preemptive rights in a corporation's charter, neither the SFSC Charter nor
the HBE Charter provides holders of common stock preemptive rights to
acquire any securities of SFSC or HBE, respectively.
Interested Director Transactions
The DGCL and WBCL each provide that contracts or transactions in
which one or more of the corporation's directors have an interest
("Interested Contracts or Transactions") are not void or voidable solely
because of such interest or because such director was present at the
directors' or shareholders' meeting where such contracts or transactions
were approved, provided certain conditions are met. Interested Contracts
or Transactions may be approved by a majority vote of the disinterested
directors or by vote of disinterested shareholders if the material facts
of the contracts or transactions and the director's interest in such
contracts or transactions are fully disclosed and a vote is taken in good
faith. Furthermore, Interested Contracts or Transactions may be approved
if such contracts or transactions are shown to be fair and reasonable to
the corporation at the time they are authorized, approved or ratified by
the board of directors or shareholders and separate disinterested
shareholder or disinterested director approval is not required.
Indemnification of Directors and Officers
The WBCL provides for mandatory indemnification of a director or
officer against certain liabilities and expenses if the director or
officer was a party to a proceeding because of his or her status as such:
(a) to the extent such director or officer is successful on the merits or
otherwise in the defense of the proceeding; and (b) in proceedings in
which the director or officer is not successful in the defense thereof,
unless it is determined that the liability was incurred because the
director or officer breached or failed to perform a duty that he or she
owes to the corporation and the breach or failure to perform constitutes:
(i) a willful failure to deal fairly with the corporation or its
shareholders in connection with a matter in which the director or officer
has a material conflict of interest; (ii) a violation of criminal law,
unless the director or officer had reasonable cause to believe that his or
her conduct was lawful or no reasonable cause to believe that his or her
conduct was unlawful; (iii) a transaction from which the director or
officer derived an improper personal profit; or (iv) willful misconduct.
Indemnification under the WBCL is not required if the director or officer
has previously received indemnification from any person, including the
corporation, in connection with the same proceeding. The WBCL provides
that a corporation's articles of incorporation may limit its obligation to
indemnify directors and officers. The WBCL specifically states that it is
the public policy of Wisconsin to require or permit indemnification in
connection with a proceeding involving securities regulation, as described
therein, to the extent otherwise required or permitted under the WBCL.
The DGCL provides that a director or officer shall be indemnified
against expenses (including attorneys' fees) actually and reasonably
incurred to the extent such director or officer has been successful on the
merits or otherwise in any action brought against such director or officer
because of his or her status as such. With respect to a third-party
action, the DGCL provides that a corporation may indemnify a director or
officer against liability if such director or officer (a) acted in good
faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation and (b) with respect to
any criminal action, had no reasonable cause to believe his or her conduct
was unlawful. With respect to claims brought against a director or
officer by or in the right of the corporation, such director or officer
may be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him or her except that no indemnification shall
be made in respect to any claim as to which such director or officer was
adjudged to be liable to the corporation unless and only to the extent
that the Delaware Chancery Court determines otherwise.
Limited Liability of Directors
The DGCL and WBCL each provides for the limitation or elimination of
the personal liability of a company's directors to the company or its
shareholders for monetary damages for a breach of a director's fiduciary
duty. This immunity is automatic under Wisconsin law, but must be
provided for in the certificate of incorporation under Delaware law. In
any case, directors cannot be immunized in certain instances including:
(i) breach of the duty of loyalty; (ii) acts or omissions not in good
faith that involve intentional misconduct or a knowing violation of law;
(iii) unlawful distributions; and (iv) transactions in which the director
received an improper personal benefit. Other limitations specific to each
state also exist.
Takeover Defense Provisions
Section 203 of the DGCL (the "Delaware Business Combination Statute")
applies to certain business combinations involving a corporation and
certain of its stockholders. The Delaware Business Combination Statute
prevents a corporation from engaging in any "business combination"
(defined to include a variety of transactions, including the sale of
assets, mergers and most related party transactions) with an "interested
stockholder" (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) for three years following the date
such stockholder became an interested stockholder, unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the business combination or the transaction in which
the interested stockholder became an interested stockholder, or (ii) upon
consummation of the transaction which resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also
officers of the corporation and by certain employee stock ownership
plans), or (iii) following the transaction in which such person became an
interested stockholder, the business combination is approved by the board
of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder.
Section 180.1150 of the WBCL provides that the voting power of shares
of public Wisconsin corporations, such as SFSC, held by any person or
persons acting as a group that hold in excess of 20% of the voting power
for the election of directors is limited to 10% of the full voting power
of those shares. This restriction does not apply to shares acquired
directly from SFSC or in certain specified transactions or shares for
which full voting power has been restored pursuant to a vote of
shareholders.
Sections 180.1140 to 180.1144 (the "Wisconsin Business Combination
Statute") of the WBCL contain certain limitations and special voting
provisions applicable to "business combinations" between a Wisconsin
corporation and an "interested shareholder." The term "business
combination" is defined for purposes of the Wisconsin Business Combination
Statute to include a merger or share exchange, sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets equal to at
least 5% of the market value of the stock or assets of a corporation or
10% of its earning power, issuance of stock or rights to purchase stock
with a market value equal to at least 5% of the outstanding stock,
adoption of a plan of liquidation and certain other transactions involving
an "interested shareholder." An "interested shareholder" is defined as a
person who beneficially owns, directly or indirectly, 10% of the voting
power of the outstanding voting stock of a corporation or who is an
affiliate or associate of the corporation and beneficially owned 10% of
the voting power of the then outstanding voting stock within the last
three years. The Wisconsin Business Combination Statute prohibits a
corporation from engaging in a business combination (other than a business
combination of a type specifically excluded from the coverage of the
statute) with an interested shareholder for a period of three years
following the date such person becomes an interested shareholder, unless
the Board of Directors approved the business combination or the
acquisition of the stock that resulted in a person becoming an interested
shareholder before such acquisition. Business combinations after the
three-year period following the stock acquisition date are permitted only
if (i) the Board of Directors approved the acquisition of the stock prior
to the acquisition date; (ii) the business combination is approved by a
majority of the outstanding voting stock not beneficially owned by the
interested shareholder; or (iii) the consideration to be received by
shareholders meets certain requirements of the Wisconsin Business
Combination Statute with respect to form and amount.
Sections 180.1130 to 180.1133 of the WBCL provide that certain
"business combinations" not meeting certain fair price standards must be
approved by a vote of at least 80% of the votes entitled to be cast by all
shareholders and by two-thirds of the votes entitled to be cast by
shareholders other than a "significant shareholder" who is a party to the
transaction. The term "business combination" is defined, for purposes of
Sections 180.1130 to 180.1133 of the WBCL, to include, subject to certain
exceptions, a merger or consolidation of the corporation (or any
subsidiary thereof) with, or the sale or other disposition of
substantially all of the assets of the corporation to, any significant
shareholder or affiliate thereof. "Significant shareholder" is defined
generally to include a person that is the beneficial owner of 10% or more
of the voting power of the corporation.
Sections 180.1134 of the WBCL (the "Wisconsin Defensive Action
Restrictions") provides that, in addition to the vote otherwise required
by law or the articles of incorporation of an issuing public corporation,
the approval of the holders of a majority of the shares entitled to vote
is required before such corporation can take certain action while a
takeover offer is being made or after a takeover offer has been publicly
announced and before it is concluded. Under the Wisconsin Defensive
Action Restrictions, shareholder approval is required for the corporation
to (i) acquire more than 5% of its outstanding voting shares at a price
above the market price from any individual or organization that owns more
than 3% of the outstanding voting shares and has held such shares for less
than two years, unless a similar offer is made to acquire all voting
shares; or (ii) sell or option assets of the corporation that amount to at
least 10% of the market value of the corporation, unless the corporation
has at least three independent directors or a majority of the independent
directors vote not to have the provision apply to the corporation. The
restrictions described in clause (i) above may have the effect of
deterring a shareholder from acquiring shares of SFSC with the goal of
seeking to have SFSC repurchase such shares at a premium over the market
price.
DESCRIPTION OF SFSC CAPITAL STOCK
SFSC's capital stock currently consists of 10,000,000 shares of
Common Stock, having a par value of $0.10 per share, and 100,000 shares of
Preferred Stock, par value $1.00 per share. In the event the Charter
Amendment is approved by the SFSC shareholders at the SFSC Special
Meeting, the number of authorized shares of SFSC Common Stock will be
increased to 25,000,000. See "Amendment to SFSC Amended and Restated
Articles of Incorporation." At September 11, 1998, 4,004,372 shares of
SFSC Common Stock and zero shares of SFSC Preferred Stock were issued and
outstanding. Shares of SFSC Common Stock owned by the SFSC ESOP are held
in the name of an independent trustee. As of June 30, 1998, 120,055 shares
had been allocated to SFSC ESOP participants and 97,524 shares remained
unallocated. SFSC has no other classes of Common Stock. The description
below is a summary of and is qualified in its entirety by the provisions
of SFSC's Amended and Restated Articles of Incorporation as adopted on
April 20, 1993 and currently in effect, and the Amended and Restated
Bylaws dated January 27, 1998, which are currently in effect.
Common Stock
Subject to provisions of the WBCL described below, holders of SFSC
Common Stock are entitled to one vote for each share held on all matters
submitted to a vote of shareholders and do not have cumulative voting
rights. Shareholders casting a plurality of votes of the shareholders
entitled to vote in an election of directors may elect all of the
directors standing for election. Holders of SFSC Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by
the SFSC Board out of funds legally available therefor, subject to any
preferential dividend rights of Preferred Stock that may be issued at such
future times or times. Upon the liquidation, dissolution or winding up of
SFSC, the holders of SFSC Common Stock are entitled to receive ratably the
net assets of SFSC after the payment of all debts and other liabilities
and subject to the prior rights of Preferred Stock that may be outstanding
at such time. Holders of SFSC Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of
SFSC Common Stock are fully paid and nonassessable (subject to
Section 180.0622(2)(b) of the WBCL). The rights, preferences and
privileges of holders of SFSC Common Stock are subject to the rights of
the holders of shares of any series of Preferred Stock which SFSC may
designate and issue in the future.
Preferred Stock
The SFSC Charter provides that the SFSC Board has the authority,
without further action by the shareholders, to issue up to 100,000 shares
of Preferred Stock in one or more series and to fix the designations,
powers, preferences, privileges, and relative participating, optional or
special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences, any or all of which may
be greater than the rights of the SFSC Common Stock. The SFSC Board,
without shareholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power
and other rights of the holders of SFSC Common Stock. Preferred Stock
could thus be issued quickly with terms calculated to delay or prevent a
change in control of SFSC or make removal of management more difficult.
Additionally, the issuance of Preferred Stock may have the effect of
decreasing the market price of the SFSC Common Stock, and may adversely
affect the voting and other rights of the holders of SFSC Common Stock.
SFSC has no present plans to issue any shares of Preferred Stock.
Certain Statutory Provisions
For a summary of certain takeover defense provisions under the WBCL
see "COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF SFSC COMMON STOCK AND
HBE COMMON STOCK - Takeover Defense Provisions."
STATE FINANCIAL SERVICES CORPORATION
General
SFSC is a multi-bank holding company with three subsidiary banks,
SFB, SFB-Waterford and Richmond. SFSC acquired Richmond on December 31,
1997 for a cash purchase price of approximately $10.8 million. Certain
historical financial statements of Richmond are included in this Joint
Proxy Statement/Prospectus. See "INDEX TO FINANCIAL STATEMENTS." The
Banks operate a total of 11 full-service offices located in southeastern
Wisconsin (including the Milwaukee metropolitan area) and northeastern
Illinois.
At June 30, 1998, SFSC had assets of $417.9 million, net loans of
$258.7 million, total deposits of $363.0 million and shareholders' equity
of $39.8 million.
On September 9, 1998, SFSC completed the acquisition of Lokken, an
asset management firm headquartered in LaCrosse, Wisconsin, in a stock
transaction accounted for as a purchase. Lokken is a financial and
estate planning and investment management firm with discretionary assets
of approximately $95 million under management. Lokken is now a wholly-
owned subsidiary of SFSC. As a result of the acquisition, the former
stockholders of Lokken received, in total, 141,551 shares of SFSC
Common Stock which includes contingent consideration.
The principal executive office of SFSC is located at 10708 West
Janesville Road, Hales Corners, Wisconsin 53130, telephone
(414) 425-1600.
Incorporation of Certain Information by Reference
Additional information concerning SFSC, including certain financial
information, information regarding voting securities of SFSC and principal
holders thereof, and information concerning directors and executive
officers of SFSC, is included in SFSC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, and the other documents filed by SFSC
with the Commission under the Exchange Act. See "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE."
Management's Discussion and Analysis of SFSC's Results of Operations and
Financial Position
At and for the Six Months Ended June 30, 1998
Compared to the Six Months Ended June 30, 1997
General For the six months ended June 30, 1998, SFSC reported net
income of $2,227,000, an increase of $127,000 or 6.1% from the $2,100,000
reported for the six months ended June 30, 1997. Improvements in net
interest income and non-interest income, partially offset by increased
non-interest expenses and loan loss provisions, were the primary reasons
SFSC showed improved operating performance through the first six months of
1998.
Changes in Financial Condition. At June 30, 1998, total assets were
$417,919,000 compared to $421,278,000 at December 31, 1997. For the
quarter ended June 30, 1998, total deposits decreased $4,500,000. SFSC
historically experiences deposit contraction in the first half of the year
as local business and municipalities deploy built-up cash reserves into
their respective operating cycles or deploy deposit funds in repurchase
agreements with SFSC. Other significant uses of funds during the first
six months of 1998 consisted of $7,015,000 in net investment securities
purchases, the repayment of $4,400,000 in notes payable resulting from the
Richmond acquisition, the payment of $915,000 in cash dividends, and the
purchase of $124,000 in fixed assets. Funding sources came from a
$5,488,000 contraction in loans during the first six months of 1998 mainly
due to mortgage loan sales at Richmond and softer loan demand at SFSC's
Wisconsin banking operations. Additional funding sources came from
$4,976,000 in repurchase agreement proceeds, $3,503,000 in cash and cash
equivalents contraction, $2,557,000 in net cash from operating activities,
$184,000 in proceeds from exercised stock options, $150,000 in fed funds
purchased, and $97,000 in ESOP loan repayments.
Asset Quality. At June 30, 1998, non-performing assets were
$2,458,000, a decrease of $453,000 from March 31, 1998. Other real estate
decreased $449,000 due to the sale of two properties during second quarter
1998. The remaining $4,000 decline in total non-performing assets was the
result of net reductions in the level of non-performing loans during the
quarter. As a result of the decrease in the level of other real estate,
total non-performing assets as a percentage of total assets declined to
0.59% at June 30, 1998 from 0.69% at March 31, 1998. As a percentage of
total loans outstanding, the level of non-performing loans increased
slightly to 0.94% at June 30, 1998 from 0.93% at March 31, 1998 due to a
decline in the balance of loans outstanding at June 30.
At June 30, 1998, available information would suggest that additional
loans totaling approximately $900,000 would likely be included as
nonaccrual, past due or restructured during the second quarter of 1998.
The following table summarizes non-performing assets on the dates
indicated (dollars in thousands).
<TABLE>
<CAPTION>
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
1998 1998 1997 1997 1997
<S> <C> <C> <C> <C> <C>
Nonaccrual loans . . . . . . . . $ 2,335 $ 2,389 $ 2,537 $ 1,981 $ 2,285
Accruing loans past due 90 days or 118 68 20 27 34
more Restructured loans . . . . 0 0 0 0 0
------- ------- ------- ------- -------
Total non-performing and
restructured loans . . . . . . . 2,453 2,457 2,557 2,008 2,319
------- ------- ------- ------- -------
Other real estate owned . . 5 454 334 15 0
------- ------- ------- ------- -------
Total non-performing assets $ 2,458 $ 2,911 $ 2,891 $ 2,023 $ 2,319
======= ======= ======= ======= =======
Ratios:
Non-performing loans to total
loans . . . . . . . . . 0.94 0.93 0.95 0.95 1.10
Allowance to non-performing
loans . . . . . . . . . 137.44 135.81 129.29 134.86 115.14
Non-performing assets to total
assets . . . . . . . . 0.59 0.69 0.69 0.65 0.76
======= ======== ======== ====== ======
</TABLE>
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 income accrued in the
current year is reversed and interest income accrued in the prior year is
charged to the allowance for loan losses. With the exception of credit
cards, SFSC does not recognize income on loans past due 90 days or more.
Allowance for Loan Losses. 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 June 30,
1998, the Allowance was $3,371,000, an increase of $65,000 from the
balance at December 31, 1997. This increase was due to loan loss
provisions exceeding net charge-offs through the first six months of 1998.
The determination of Allowance adequacy is determined quarterly based
upon an evaluation of SFSC'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 loans, the
Allowance was 1.29% at June 30, 1998 compared to 1.23% at December 31,
1997. Based upon its analyses, management considers the Allowance
adequate to recognize the risk inherent in SFSC's loan portfolio at June
30, 1998.
The following table sets forth an analysis of SFSC's Allowance and
actual loss experience for the periods indicated (dollars in thousands):
Six months Year ended
ended Dec. 31,
June 30, 1998 1997
Balance at beginning of period $ 3,306 $ 2,608
Charge-offs: 123
Commercial . . . . . . . . 53 40
Real estate . . . . . . . 30 71
Installment . . . . . . . 234 146
Other . . . . . . . . . . 57
------ ------
Total charge-offs . . . . 374 380
------ ------
Recoveries:
Commercial . . . . . . . . 54 8
Real estate . . . . . . . 48 29
Installment . . . . . . . 37 16
Other . . . . . . . . . . 15 17
------ ------
Total recoveries . . . . . 154 70
------ ------
Net charge-offs . . . . . . . 220 310
Balance of acquired allowance
at date of acquisition . . . 0 678
Additions charged to
operations . . . . . . . . . 285 330
------- -------
Balance at end of period $ 3,371 $ 3,306
======= =======
Ratios:
Net charge-offs to
average loans
outstanding 1 . . . . 0.17% 0.15%
Net charge-offs to total
allowance 1 . . . . . 13.05 9.38
Allowance to period end
loans outstanding . . 1.29 1.23
======= ======
1. Annualized
Net Interest Income. The following table sets forth average
balances, related interest income and expenses, and effective interest
yields and rates for the six months ended June 30, 1998 and June 30, 1997
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
Average Yield/ Average Yield/
Balance Interest Rate 4 Balance Interest Rate 4
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans 1,2,3 . . . . . . . . . . . . $ 264,349 12,433 9.48% $ 208,846 $ 9,848 9.51%
Taxable investment securities . . . 75,152 2,280 6.12 56,591 1,720 6.13
Tax-exempt investment securities 3 27,420 952 7.00 15,397 575 7.53
Federal funds sold . . . . . . . . 12,605 349 5.58 467 13 5.48
------- ------- ----- ------- ------- -----
Total interest-earning assets . . . . 379,526 16,014 8.51 281,301 12,156 8.71
Non-interest-earning assets:
Cash and due from banks . . . . . . 15,737 11,554
Premises and equipment, net . . . . 6,665 4,619
Other assets . . . . . . . . . . . 15,299 7,225
Less: Allowance for loan losses . . . (3,336) (2,636)
------- -------
TOTAL $ 413,891 $ 302,063
======= = =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts . . . . . . . . . . . $ 39,066 497 2.57% $ 23,575 215 1.84%
Money market accounts . . . . . . . 89,808 2,096 4.71 64,843 1,455 4.52
Savings deposits . . . . . . . . . 43,420 601 2.79 38,545 530 2.77
Time deposits . . . . . . . . . . . 124,005 3,642 5.92 73,673 2,058 5.63
Notes payable . . . . . . . . . . . 1,115 44 7.96 935 32 6.90
Federal funds purchased . . . . . . 90 3 5.79 3,546 102 5.80
Securities sold under
agreement to repurchase . . . . . 9,587 253 5.32 7,293 190 5.25
------- ------ ------ ------- ------- ------
Total interest-bearing liabilities . 307,091 7,136 4.69 212,410 4,582 4.35
------- ------ ------ ------- ------- ------
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . 63,262 51,303
Other . . . . . . . . . . . . . . . 4,210 1,867
------- -------
Total liabilities . . . . . . . . . . 374,563 265,580
------- -------
Stockholders' equity . . . . . . . . 39,328 36,483
------- -------
TOTAL . . . . . . . . . . . . . . . . $ 413,891 $ 302,063
======= =======
Net interest earning and interest
rate spread . . . . . . . . . . . . $ 8,878 3.82% $ 7,574 4.36%
======= ====== ======= ======
Net yield on interest-earning assets 4.72% 5.43%
====== ======
1. For the purposes 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.
4. Annualized
</TABLE>
SFSC reported taxable-equivalent net interest income of $8,878,000
for the six months ended June 30, 1998, an increase of $1,304,000 or 17.2%
from the $7,574,000 reported for the six months ended June 30, 1997. The
Richmond acquisition accounted for $1,492,000 of this increase. Exclusive
of Richmond, taxable-equivalent net interest income decreased $188,000 or
2.5% between the first six months of 1997 and 1998. The decline was due
to reduced loan yields resulting from intense pricing competition and
increased funding costs resulting mainly from a greater percentage of
SFSC's funding sources in higher costing money market and time deposits in
1998 compared to 1997. As a result of the aforementioned changes, SFSC's
taxable-equivalent yield on interest-earning assets (net interest margin)
narrowed to 4.72% for the six months ended June 30, 1998 from 5.43% for
the comparable period in 1997. Exclusive of Richmond and its
comparatively lower net interest margin, SFSC's net interest margin
through the first six months of 1998 was 5.01%.
Year-to-date, total taxable-equivalent interest income improved
$3,858,000 a 31.7% increase. Richmond added $3,332,000 with the remaining
$526,000 increase the result of increased interest income resulting from
volume increases in loans and tax-exempt investment securities at SFSC's
Wisconsin operations over the preceding twelve months. The tax-equivalent
yield on interest-earning assets declined to 8.51% in 1998 from 8.71% in
1997. The inclusion of Richmond, and its proportionately lower
concentration of average interest-earning assets in loans (60.5% for
Richmond compared with 72.7% for SFSC's Wisconsin banks), and intense loan
pricing competition in SFSC's Wisconsin markets were the main reasons for
the yield decline. Exclusive of Richmond, the tax-equivalent on
interest-earning assets was 8.61% for the first six months of 1998 as the
loan yield contracted to 9.37% for the six months ended June 30, 1998 from
9.51% for the comparable 1997 period and the percentage of SFSC's average
Wisconsin interest-earning assets in outstanding loans shrunk to 72.7% in
1998 from 74.2% in 1997. Offsetting this yield contraction was a
$15,762,000 increase in the volume of average interest-earning assets
outstanding in Wisconsin, mainly in tax-exempt investment securities,
federal funds sold, and loans.
SFSC's funding costs increased $2,554,000 in the first six months of
1998 compared to the first half of 1997. The inclusion of Richmond added
$1,840,000 in interest expense with the remaining $714,000 increase due to
increased cost of funds in Wisconsin. Compared to the first six months of
1997, cost of funds increased overall and exclusive of Richmond. For the
first six months of 1998, costs of funds were 4.69% overall and 4.54%
exclusive of Richmond, compared to 4.35% for the first six months of 1997.
Comparatively Richmond had a higher funding cost as evidenced by its year-
to-date rate on interest-bearing liabilities of 5.22%. This higher cost
was due mainly due to Richmon's previously aggressive time deposit
pricing. Funding costs at SFSC's Wisconsin operations increased mainly
due to a greater percentage of its growth in average interest-bearing
liabilities coming in higher costing money market accounts and time
deposits resulting in a larger percentage of its funding souces
concentrated in these categories in 1998 compared to 1997. For the six
months ended June 30, 1998, average money market accounts and time
deposits comprised 71.2% of SFSC's average Wisconsin interest-bearing
liabiilities comared to 65.2% for the first six months of 1997.
Provision for Loan Losses. The provision for loan losses increased
$120,000 through the first six months of 1998 as compared to the first six
months of 1997. The inclusion of Richmond in SFSC's consolidated
operating performance accounted for all of this increase.
Other Income. Year-to-date total other income increased $1,222,000
or 76.3% in 1998 over 1997. Richmond accounted for $553,000 of this
increase. Exclusive of Richmond, total other income improved $669,000 or
41.8% between the first half of 1998 and 1997. Investment securities
gains combined with increases in gains from mortgage origination sales,
ATM fees, merchant services, investment securities commissions, and other
real estate sales to offset declines in services charges and building rent
to produce the 1998 improvement, exclusive of Richmond. The following
comparisons discuss changes in SFSC's total other income exclusive of the
additional impacts resultting from the Richmond acquisition. SFSC
reported $399,000 of investment securities gains due to the sale of
marketable equity securities with a book value of approximately $521,000.
Gains from mortgage origination sales increased $113,000 due to continued
development of State Financial Mortgage Company and an increase in the
amount of mortgage refinancings during the first half of 1998. ATM fees
increased $106,000 in the first six months of 1998 as SFSC began charging
noncustomers for ATM usage in November 1997. Merchant services income
improved $32,000 mainly due to volume increases at State Financial Bank
and State Financial Bank - Waterford. Investment services commissions
grew $37,000 due to continued development of this product line. Other
real estate gains increased $38,000 mainly due to the sale of one property
at State Financial Bank in the first quarter. Service charge income
declined $44,000 mainly due to reduced revenue from business services
charges as customers have increased their compensating balances and a
reduced volume of fees from checks returned for insufficient funds.
Building rent decreased $26,000 due to a reduction in space occupied at
SFSC's Greenfield office which was previously subleased to an outside
tenant.
Other Expenses. For the six months ended June 30, 1998, total other
expenses increased $2,096,000 or 37.5% as compared to the same period in
1997. The inclusion of Richmond accounted for $1,784,000 of this
increase. Exclusive of Richmond, total other expenses increased $312,000
5.6% in the first six months over 1998 over the first six months of 1997.
Salaries and employee benefits increased $1,092,000 in total and $263,000
exclusive of Richmond mainly due to annual salary adjustments, the
additional staff related to State Financial Bank - Waterford's new
Burlington location which opened in May 1997, and increases in health
insurance costs related to premium increases and a greater percentage of
employees electing this benefit in 1998 as compared to 1997. Occupancy
and equipment expenes increased $209,000 in total, of which Richmond
comprised $236,000 of the increase. Absent Richmond, occupancy and
equipment expenses declined $27,000 as SFSC incurred less rent expense as
a result of reduced space occupied at its Greenfield office. Data
processing expenses increased $130,000 in total and $50,000 exclusive of
Richmond due to rate increases from SFSC's service provider, volume
increases mainly related to the opening of the new Burlington office,
costs associated with providing additional computer based delivery
products, and volume increases in electronic funds transfer products,
primarily debit cards. Legal and professional fees increased $100,000 all
of which was related to including Richmond in SFSC's consoldated operating
results. Advertising expense increased $41,000 due to the inclusion of
Richmond ($34,000) and an increased marketing budget in Wisconsin.
Goodwill amortization increased $210,000 due to the additional noncash
expense resulting from the Richmond acquisition. Other expenses increased
$315,000 in total and $29,000 exclusive of Richmond mainly due to
increased expenses for office supplies and bad check charge-offs.
Income Taxes. Income taxes for the six months ended June 30, 1998
increased $38,000 compared to the six months ended June 30, 1997. The
increase in income tax expense was mainly the result of a $165,000
increase in income before income taxes, adjusted for tax-exempt interest
income and goodwill amortization which are excluded in the calculation of
SFSC's consolidated income tax expense.
Liquidity. Liquidity management involves the ability to meet the
cash flow requirement of customers who may be either depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will
be available to meet their credit needs. Liquid assets (including cash
deposits with banks, and federal funds sold) are maintained to meet
customers needs. SFSC had liquid assets of $35,277,000 and $38,780,000 at
June 30, 1998 and December 31, 1997, respectively.
Capital Resources. There are certain regulatory constraints which
affect SFSC's level of capital. The following table sets forth these
requirements and SFSC's capital levels and ratios at June 30, 1998,
including the Tier 1 leverage ratio, the risk-based capital ratios based
upon Tier 1 capital, and total risk-based capital:
<TABLE>
<CAPTION>
Regulatory Regulatory
Minimum Well-capitalized
Actual Requirement Requirement
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Tier 1 leverage $31,606 7.7% $16,411 4.0% $20,514 5.0%
Tier 1 risk-based capital 31,606 11.4% 11,102 4.0% 16,653 6.0%
Risk-based capital 34,978 12.6% 22,203 8.0% 27,754 10.0%
</TABLE>
SFSC is pursuing a policy of continued asset growth which requires
the maintenance of appropriate ratios of capital to assets. The existing
capital levels allow for additional asset growth without further capital
injection. It is SFSC's desire to maintain its capital position at or in
excess of the "well-capitalized" definition. SFSC seeks to obtain
additional capital growth through earnings retention and a conservative
dividend policy.
At and for the Period Ended December 31, 1997
General The following discussion is intended as a review of the
significant factors affecting SFSC's financial condition and results of
operations as of and for the year ended December 31, 1997, 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 Joint
Proxy Statement/Prospectus.
On December 31, 1997, SFSC completed its cash acquisition of
Richmond. Application of purchase accounting requires the inclusion of
Richmond's operating results in SFSC's Consolidated Statements of Income
from the date of acquisition. Because the acquisition was consummated on
December 31, 1997, no operating results for Richmond are included in
SFSC's Consolidated Statements of Income and related schedules in
Management's Discussion and Analysis of Financial Condition and Results of
Operations for any years presented herein.
On August 24, 1995, SFSC acquired SFB-Waterford . Accounted for as
a purchase, SFB-Waterford's operating results are included in SFSC's
consolidated results from the date of acquisition. Accordingly, SFSC's
Consolidated Statements of Income, and related schedules in Management's
Discussion and Analysis of Financial Condition and Results of Operations
include SFB-Waterford's results for the full year in 1997 and 1996 and
from August 24 through December 31 in 1995.
In August 1993 SFSC 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
operating results associated with this acquisition are included in SFSC's
results for the full year in 1997, 1996, 1995, and 1994 and from the date
of acquisition in 1993.
SFSC's Balance Sheet Analysis in Management's Discussion and
Analysis of Financial Condition and Results of Operations include Richmond
at December 31, 1997; SFB-Waterford at December 31, 1997, 1996 and 1995;
and the Waukesha Office at December 31, for all years presented. Any
balance sheet information presented for years prior to 1997 does not
include amounts for Richmond, and prior to 1995 does not include figures
for SFB-Waterford. Balance sheet information for the Waukesha Office is
included in SFSC's consolidated figures for all years presented herein.
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 SFSC's effectiveness in managing its interest rate
sensitivity. For the year ended December 31, 1997, taxable-equivalent net
interest income increased $1,068,000 (7.6%) to $15,192,000. Changes in
the volume of outstanding interest-earning assets and interest-bearing
liabilities accounted for $1,122,000 of the 1997 improvement in taxable-
equivalent net interest income, offset by a reduction of $54,000 resulting
mainly from increases in short-term funding costs during the year.
Volume changes most fundamentally impacted the components of SFSC's
consolidated taxable-equivalent net interest income in 1997. Total
interest income increased $1,838,000 in 1997 due to a $17,280,000 (6.5%)
increase in the volume of total outstanding interest-earning assets
resulting from internal growth and a greater percentage of interest-
earning assets in loans, historically SFSC's highest yielding asset
category. As a result of this volume increase, total interest income
improved $1,716,000 for the year ended December 31, 1997. Changes in
interest rates contributed an additional $122,000 to the improvement in
SFSC's 1997 taxable-equivalent total interest income. Upward repricing of
maturing investments and a greater mix of these investments in U.S.
Agencies and Mortgage Backed Securities improved the yield on taxable
investment securities to 6.15% in 1997 from 5.89% in 1996. The combined
impact of these changes resulted in an improvement in SFSC's taxable-
equivalent yield on interest-earning assets to 8.67% in 1997 from 8.54% in
1996.
Minimizing the yield improvement was an increase in SFSC's overall
cost of funds of 4.41% in 1997 from 4.27% in 1996. The increased funding
cost resulted mainly from relative increases in short-term interest rates
in 1997 and a greater percentage of interest-bearing liabilities in higher
cost categories, specifically money market accounts and time deposits, in
1997 as compared to 1996. Due to a general increase in short-term
interest rates, the cost of NOW and money market accounts rose to 3.94% in
1997 from 3.72% in 1996. Virtually all of which was due to increased
volume and rates paid on SFSC's money market products resulting from
continued balance growth in SFSC's Money Market Index Account and general
increases during 1997 in the index rate (the seven day compound yield
published in IBC's weekly Money Fund Report) used to price this product.
For the year ended December 31, 1997, average NOW and money market
accounts increased $8,028,000 in average outstanding balances and
represented 43.1% of SFSC's average interest-bearing liabilities compared
to 41.5% in 1996. Although time deposit funding costs remained consistent
between 1996 and 1997, a greater percentage of SFSC's funding came from
this higher cost source in 1997 (35.6%) as compared to 1996 (34.5%) and
was an additional reason for the general increase in SFSC's cost of funds
during the year.
SFSC's net yield on interest-earning assets (net interest margin)
improved to 5.33% for the year ended December 31, 1997 as a result of the
aforementioned changes.
For the year ended December 31, 1996, taxable-equivalent net interest
income increased $1,678,000 (13.5%) compared to the year ended
December 31, 1995. The increase was primarily due to a greater percentage
of SFSC's interest-earning assets deployed in loans, the full year
inclusion of SFB-Waterford's results in SFSC's consolidated operating
performance, and internal growth.
The following table sets forth average balances, related interest
income and expense, and effective interest yields and rates for the years
ended December 31, 1997, 1996, and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
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 $ 210,704 $ 19,948 9.47% $ 192,113 $ 18,209 9.48% 163,909 $ 15,897 9.70%
Taxable investment
securities 54,376 3,346 6.15 55,553 3,271 5.89 44,722 2,527 5.65
Tax-exempt investment
securities 3 17,354 1,272 7.33 15,535 1,150 7.40 14,735 1,044 7.09
Federal funds sold 2,714 148 5.45 4,667 246 5.27 5,502 314 5.71
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-earning
assets 285,148 24,714 8.67 267,868 22,876 8.54 228,868 19,782 8.64
------- ------ ----- ------- ------ ----- ------- ------ -----
Non-interest-earning
assets:
Cash and due from banks 13,596 12,694 12,179
Premises and equipment,
net 4,726 4,940 4,541
Other assets 7,118 6,380 4,187
Less allowance for loan
losses (2,662) (2,745) (2,278)
------- ------- -------
TOTAL $ 307,926 $ 289,137 247,497
======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW and money market
accounts $ 93,058 $ 3,669 3.94% $ 85,030 $ 3,161 3.72% $ 66,520 $ 2,562 3.85%
Savings deposits 37,924 1,048 2.76 42,043 1,169 2.78 42,790 1,184 2.77
Time deposits 76,843 4,361 5.68 70,733 4,030 5.70 58,322 3,283 5.63
Notes payable 679 46 6.77 1,033 70 6.78 314 20 6.37
Mortgage payable 0 0 0.00 0 0 0.00 66 7 10.61
Federal funds purchased 1,822 105 5.76 379 22 5.80 427 28 6.56
Securities sold under
agreement to
repurchase 5,560 293 5.27 5,737 300 5.23 4,490 252 5.61
------- ------ ----- ------- ------- ----- ------- ------ ------
Total interest-bearing
liabilities 215,886 9,522 4.41 204,955 8,752 4.27 172,929 7,336 4.24
------- ------ ----- ------- ------- ----- ------- ------ ------
Non-interest-bearing
liabilities:
Demand deposits 52,885 48,469 43,555
Other 2,208 1,713 1,781
------- ------- -------
Total liabilities 270,979 255,137 218,265
------- ------- -------
Shareholders' equity 36,947 34,000 29,232
------- ------- -------
TOTAL $ 307,926 $ 289,137 $ 247,497
======= ======= =======
Net interest earning and
interest rate spread $ 15,192 4.26% $ 14,124 4.27% $ 12,446 4.40%
======= ===== ======= ====== ======= ======
Net yield on interest-
earning assets 5.33% 5.27% 5.44%
===== ===== =====
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.
</TABLE>
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>
1997 Compared to 1996 1996 Compared to 1995
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 $ 1,758 $ (19) $ 1,739 $ 2,680 $ (368) $ 2,312
Taxable investment securities (69) 144 75 633 111 744
Tax-exempt investment securities 2 133 (11) 122 59 47 106
Federal funds sold (106) 8 (98) (45) (23) (68)
------ ----- ----- ----- ----- -----
Total interest-earning assets 1,716 122 1,838 3,327 (233) 3,094
Interest paid on:
NOW and money market accounts 312 196 508 687 89 598
Savings deposits (113) (8) (121) (19) 4 (15)
Time deposits 345 (14) 331 706 41 747
Notes payable, mortgage payable,
federal funds purchased and
securities sold under agreement to
repurchase 50 2 52 103 (17) 86
----- ---- ---- ----- ----- -----
Total interest-bearing liabilities 594 176 770 1,477 (61) 1,416
===== = ===== ===== ===== ===== =====
Net interest income $ 1,122 $ (54) $ 1,068 $ 1,850 $ (172) $ 1,678
===== ====== ===== ===== ===== =====
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.
</TABLE>
Provision for Loan Losses. The provision for loan losses charged to
earnings results from a quarterly analysis of SFSC'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 SFSC's internal loan review officer.
SFSC'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 $330,000, $210,000,
and $190,000, for the years ended December 31, 1997, 1996, and 1995,
respectively. SFSC increased its provision for loan losses $120,000 for
the year ended December 31, 1997 compared to the year ended December 31,
1996 to recognize the general growth in SFSC's loan portfolio. The
increased provisions in 1996 were the result of the full year inclusion of
SFB-Waterford's results in SFSC's consolidated operating performance.
Other Income. In 1997, other income increased $316,000 (10.3%).
State Financial Mortgage Company commenced operation at the beginning of
1997. The concentration of efforts and marketing of this new subsidiary
accounted for approximately $149,000 of this increase. The remainder of
the 1997 increase in other income was due to improvements at the Banks
during 1997. Other income increased $579,000 (23.3%) in 1996 as compared
to 1995. The full year inclusion of SFB-Waterford's results accounts for
approximately $102,000 of this increase with the remainder due to
improvements at SFB during 1996. The composition of other income is shown
in the following table (dollars in thousands).
Years ended December 31,
1997 1996 1995
Service charges on deposit
accounts $ 1,032 $ 992 $ 992
Merchant services 1,141 1,033 715
Building rent 310 284 223
ATM service charges 242 195 205
Gains on mortgage origination
sales 225 76 19
Investment securities losses (1) 0 0
Other 427 480 327
----- ----- ------
Total other income $ 3,376 $3,060 $ 2,481
===== ===== =====
For the year ended December 31, 1997, service charges on deposit
accounts increased $40,000 (4.0%) compared to 1996, the majority of which
was due to increased volume in charges assessed on checks returned for
insufficient funds. Service charges on deposit accounts for the year ended
December 31, 1996 were unchanged in total as compared to the year ended
December 31, 1995. Excluding the impact of SFB-Waterford's full year
inclusion in SFSC's 1996 consolidated results, service charge income
decreased $28,000 (2.8%) mainly due to reduced personal service charge
income during the year.
Merchant services are the fees SFSC charges businesses for processing
credit card payments. Income in this category increased $108,000 (10.5%)
in 1997 and $318,000 (44.5%) in 1996. The increase in 1997 was due to
volume increases and rate adjustments during the year. In 1996, SFSC
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.
Building rent income increased $26,000 (9.2%) in 1997 compared to
1996 mainly due to a full year inclusion of the rental property acquired
in May 1996. Building rent income increased $61,000 (27.4%) in 1996 due
to SFSC's May 1996 acquisition of an additional rental property.
ATM service charges are the fees received from other institutions
resulting from their customers' usage of SFSC's automated teller machines.
In addition, SFSC began charging terminal usage fees to non-customers in
November 1997. For the year ended December 31, 1997 ATM service charges
increased $47,000 (24.1%). Of this increase of $29,000 was due to the new
terminal usage fees. The remaining $18,000 of the increase was due to
increased transaction volume from the addition of four new ATM's to SFSC's
network. ATM service charges decreased $10,000 in 1996 compared to 1995
due to reduced usage of SFSC's machines in the year.
Gains on mortgage origination sales increased $149,000 (196.1%) in
1997 compared to 1996 due to the first full year of operation of SFSC's
new subsidiary State Financial Mortgage Company.
During 1997 SFSC incurred a small loss on the sale of two investment
securities to help fund the acquisition of Richmond Bancorp Inc. SFSC
incurred no gains or losses from investment security sales in 1996 or
1995.
Other income decreased $53,000 (11.0%) in 1997 and increased $153,000
(46.8%) in 1996. The decrease in other income for 1997 was mainly due to
the combination of the decreases in the recognition of accumulated
dividends on corporate owned life insurance ($16,000), investment service
commissions ($28,000), gains from other real estate sales ($44,000), and
an increase in exchange and commission ($37,000). The full year inclusion
of SFB-Waterford's results accounted for approximately $61,000 of SFSC's
1996 increase in other income. The remainder was mainly due to volume
increases in investment services commissions ($56,000) and the
recognition of accumulated dividends on corporate owned life insurance
($31,000), and gains from other real estate sales ($20,000).
Other Expense. Other expense increased $681,000 (6.5%) for the year
ended December 31, 1997 and $1,052,000 (11.1%) for the year ended
December 31, 1996. The inclusion of SFB-Waterford's new Burlington
office, which opened in May 1997, accounted for $232,000 of the increase
in other expense and State Financial Mortgage Company, which began
operation in January 1997, accounted for $122,000 of the increase. The
full year inclusion of SFB-Waterford's results accounted for approximately
$638,000 of the 1996 increase in other expense. The major components of
other expense are detailed in the following table (dollars in thousands).
Years ended
December 31,
1997 1996 1995
Salaries and employee benefits $ 4,874 $ 4,450 $ 4,101
Occupancy and equipment 2,105 2,059 1,805
Data processing 783 653 544
Legal and professional 295 287 327
Merchant services 917 871 620
ATM 205 203 194
Advertising 366 305 161
Other 1,648 1,684 1,708
------ ----- ------
Total other expense $ 11,193 $ 10,512 $ 9,460
====== ===== ======
Salaries and employee benefits increased $424,000 (9.5%) in 1997. Of
this increase, $74,000 relates to the inclusion of Burlington's results
since May 1997, $104,000 relates to State Financial Mortgage Company's
results since January 1997, and $43,000 relates to increased costs
associated with SFSC's July 1997 acquisition of additional unallocated
shares for the State Financial Services Corporation Employee Stock Option
Plan (the "SFSC ESOP") as well as, a contribution to the plan in 1997
mainly due to SFB-Waterford's first year of inclusion in the SFSC ESOP.
Exclusive of Burlington, State Financial Mortgage Company, and the SFSC
ESOP, salaries and employee benefits increased $246,000 (4.5%). The
remaining increase is primarily due to salary adjustments during the year,
increased medical insurance premiums and an increase of participants, and
increased management incentives awards. Salaries and employee benefits
increased $349,000 (14.1%) in 1996. The full year inclusion of SFB-
Waterford in SFSC's 1996 results accounted for $241,000 of this increase.
Absent SFB-Waterford, salaries and employee benefits increased $108,000
(2.6%) primarily due to salary adjustments during the year, a greater
number of employees eligible for pension benefits, and increases in the
amounts awarded as management incentives.
Occupancy and equipment expense increased $46,000 (2.2%) in 1997.
The net increase was mainly due to Burlington's results since May 1997 of
$141,000 and a decrease in depreciation expense of $119,000. Exclusive of
Burlington, occupancy and equipment expense decreased $95,000 (4.6%) which
was mainly due to a decrease in depreciation expense offset by increases
in real estate tax, rent, and service contracts. Exclusive of Burlington
depreciation expense decreased $163,000 (18.3%) in 1997 as SFSC incurred
approximately $159,000 less in depreciation expense in the fourth quarter
1997 as compared to the fourth quarter 1996. Occupancy and equipment
expense increased $254,000 (14.1%) in 1996. Of this increase, $68,000 was
due to the full year inclusion of SFB-Waterford's results in 1996.
Exclusive of SFB-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 SFSC'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 SFSC's Glendale
location. Real estate taxes decreased $27,000 due to Wisconsin's property
tax reform in 1996 which resulted in reduced assessments on SFSC's real
estate properties.
Data processing expense increased $130,000 (19.9%) in 1997 and
increased $109,000 (20.0%) in 1996. The increase in 1997 is mainly due to
rate adjustments from SFSC's service provider, additional costs incurred
related to converting ATM cards to debit cards, and additional costs
related to the introduction of PC Banking products. In April 1996, SFB-
Waterford converted its former in-house data processing system to SFSC's
data services provider to enhance the Bank's data processing capabilities.
SFSC's increased data processing expense incurred in 1996 was primarily
due to SFB-Waterford's additional expense related to out-sourcing this
service.
Legal and professional fees increased $8,000 (2.8%) in 1997, mainly
due to increased accounting fees for SFSC's expansion over the past
several years. Legal and professional fees decreased $40,000 (12.2%) in
1996 as SFSC 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.
Merchant services expense results from providing SFSC's business
customers the ability to accept credit cards in payment for goods and
services. The $46,000 (5.3%) increase in 1997 and the $251,000 (40.5%)
increase in 1996 was the result of growth in SFSC's customer base in this
product line and rate adjustments enacted by SFSC's service provider
during each year.
ATM expense are fees charged by SFSC's service provider for SFSC's
customers use of automated teller machines that are not owned by SFSC.
For the year ended December 31, 1997 ATM expense increased $2,000 (1%)
compared to the year ended December 31, 1996. ATM expense increased
$9,000 (4.6%) in 1996 compared to 1995. The increases in both years are
due to increased volume and increased rates by the service provider.
Advertising expense increased $61,000 (20.0%) in 1997 mainly due to
increased television advertising to enhance SFB's name recognition and
promotions related to opening the Burlington office. Advertising expense
increased $144,000 (89.4%) in 1996 due to the additional marketing expense
associated with SFB-Waterford and increased media advertising at SFB,
mainly to promote home equity lines of credit and certificates of deposit.
Other expense decreased $36,000 (2.1%) in 1997. Exclusive of
Burlington and State Financial Mortgage Company other expense decreased
$66,000 (3.9%). The decrease is mainly due to a one-time expense of
approximately $59,000 included in the third quarter 1996 which is related
to additional FDIC insurance assessments in resolution of the agency's
funding of the Savings Association Insurance Fund. The decrease for 1997
was also primarily due to decreased costs for correspondent bank service
fees. Other expense decreased $24,000 in 1996. However, exclusive of the
full year inclusion of SFB-Waterford's expense in 1996's results, other
expense decreased $20,000 due to lower office supply costs during the
year.
Income Tax. SFSC's consolidated income tax rate varies from
statutory rates principally due to interest income from tax-exempt
securities and loans. SFSC recorded provisions for income tax of
$2,159,000, $2,003,000, and $1,579,000, in 1997, 1996, and 1995,
respectively. Income tax expense increased $156,000 in 1997 due to a
$525,000 increase in SFSC's pretax income. For the year ended
December 31, 1996, Income tax expense increased $424,000 due to a
$1,150,000 increase in SFSC's income before income tax. SFSC's effective
tax rate for 1997 was 33.0% compared to 33.3% for 1996. SFSC's lower
effective tax rate in 1997 was primarily due to a proportionately greater
percentage of pretax income derived from tax-exempt sources in 1997 versus
1996.
Net Income and Dividends. For the years ended December 31, 1997,
1996, and 1995, SFSC reported net income of $4,374,000, $4,006,000, and
$3,279,000, respectively. The improvements in SFSC's net income in 1997
represent an improvement in the overall operating results of SFSC as
measured by the return on average assets and return on average equity. In
1997, SFSC reported a return on average assets of 1.42% compared to 1.39%
in 1996. Return on average equity for 1997 was 11.84% compared to 11.78%
in 1996. For the years ended December 31, 1997, 1996, and 1995, SFSC paid
aggregate dividends of $1,519,000, $1,260,000, and $967,000. Dividends
increased in both 1997 and 1996 due to a 20% increase in SFSC's cash
dividend rate in each respective year.
Balance Sheet Analysis. The composition of assets and liabilities
are generally the result of strategic management decisions influenced by
market forces. At December 31, 1997 and 1996, SFSC reported total assets
of $421,278,000 and $301,999,000 respectively. Of the $119,279,000
increase in total assets between 1997 and 1996, $93,413,000 was due to the
Richmond acquisition. Exclusive of Richmond, SFSC's total assets
increased $26,643,000 (8.8%) in 1997 due to internal growth and the
opening of SFB-Waterford's new Burlington office in May, 1997. The
$15,949,000 (5.6%) increase in total assets between 1996 and 1995 was due
to internal growth at SFB and SFB-Waterford over the preceding twelve
months.
Lending Activities. SFSC's largest single asset category continues
to be loans. SFSC's gross loans, as a percentage of total deposits, were
72.9% at December 31, 1997 compared to 79.2% at December 31, 1996. The
following table shows SFSC's loan portfolio composition on the dates
indicated (dollars in thousands).
At December 31,
1997 1996 1995 1994 1993
[S] [C] [C] [C] [C] [C]
Commercial $ 56,030 $ 44,088 $ 46,323 $ 39,231 $ 39,375
Real Estate 162,736 114,395 105,139 75,909 62,896
Installment 36,817 30,046 21,997 19,157 17,055
Other 12,236 13,142 12,295 11,516 10,928
-------- -------- -------- -------- --------
Total Loans $ 267,819 $ 201,671 $ 185,754 $ 145,813 $ 130,254
======== ======== ======== ======== ========
Total loans outstanding increased $66,148,000 (32.8%) in 1997 due to
the Richmond acquisition and internal loan growth over the preceding
twelve months. The Richmond acquisition accounted for $51,019,000 of
SFSC's 1997 loan growth. Internally, loans grew $15,129,000 (7.5%) due to
continued loan demand at SFB and SFB-Waterford.
Real estate loans continue to represent the largest category of
SFSC's loan portfolio. In 1997, real estate loans grew $48,341,000
(42.3%) and increased to 60.8% of SFSC's gross loan portfolio at
December 31, 1997 compared to 57.6% at December 31, 1996. The Richmond
acquisition accounted for $36,874,000 of SFSC's 1997 growth in real estate
loans. Approximately 59.6% of Richmond's real estate loans are secured by
mortgages on 1-4 family residential properties and 32.0% are secured by
commercial real estate.
The remaining $11,467,000 increase in real estate loans was due to
internal growth at SFB and SFB-Waterford during the year. Approximately,
88.7% of this increase was from growth in commercial real estate loans,
including loans for construction and land development. SFSC'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 SFSC's primary market areas
subject to a maximum 75% loan to value ratio pursuant to its loan policy.
Loans for construction and land development are generally secured by the
property under construction or development up to a maximum loan to value
of 75% of estimated cost or appraisal value of the completed project
whichever is less. SFSC further monitors construction and land
development credits by disbursing draws under the credit commitment upon
satisfactory title company inspections of construction progress and
evidence of proper lien waivers. The borrower's creditworthiness and the
economic feasibility and cash flow abilities of the project are
fundamental concerns in SFSC's commercial real estate and
construction/land development lending. Loans secured by commercial
property, whether existing or under construction, and land development
are generally larger in size and involve greater risks than residential
mortgage loans because payments on loans secured by commercial property
are dependent upon the successful operation and management of these
properties, businesses, or developments. As a result, the value of
properties securing such loans are likely to be subject to the local real
estate market and general economic conditions, including movements in
interest rates. SFSC 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. SFSC generally writes
construction and land development loans on terms up to a maximum of 24
months and requires the borrower to make defined principal reductions at
stated intervals during that term. SFSC additionally attempts to have
construction credits further supported by end mortgage commitments
wherever possible. SFSC will generally reserve credit extensions for land
development projects for experienced, strong borrowers with adequate
outside liquidity to support the project in the event the actual project
performance is slower than projection.
The remaining real estate loan growth during 1997 was the result of
increases in residential real estate from both first mortgage loans on
owner occupied and multi-family properties 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.
SFSC's real estate loans, like all of SFSC'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 SFSC 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, 1997.
Commercial real estate 37.88 %
1-4 family first liens on residential real estate 33.45
Multifamily residential 8.05
1-4 family junior liens on residential real estate
(including home equity lines of credit) 13.14
Construction, land development, and farmland 7.48
Commercial loans increased $11,942,000 (27.1%) in 1997. The Richmond
acquisition accounted for $9,806,000 of this increase. The remaining
increase of $2,136,000 represented internal commercial loan growth of 4.8%
at SFB and SFB-Waterford during the year. At December 31, 1997,
commercial loans comprised 20.9% of SFSC's total loan portfolio compared
to 21.9% at December 31, 1996. Commercial loans are also underwritten
according to SFSC'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, SFSC
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. SFSC'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 $6,771,000 (22.5%) in 1997. The Richmond
acquisition represented $4,019,000 of this increase. The remaining
increase of $2,752,000 was the mainly the result of further increases in
indirect auto loans due to the addition of two local dealerships to SFSC's
loan referral network. SFSC'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, 1997,
installment loans comprised 13.7% of SFSC's loan portfolio versus 14.9% at
December 31, 1996.
Other loans decreased $906,000 (6.9%) in 1997 even though the
Richmond acquisition added $320,000 to SFSC's other loan portfolio. Net
of Richmond, the $1,226,000 decrease in other loans at SFB and SFB-
Waterford was primarily due to lower outstanding balances under personal
credit lines, including credit cards.
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, 1997 (dollars in
thousands). Also provided are the amounts due after one year classified
according to the sensitivity to changes in interest rates.
After One After
Within But Within Five
One Year Five Years Years Total
Commercial $ 33,805 $ 20,701 $ 1,650 $ 56,156
Real estate 33,425 52,099 3,516 89,040
------- ------- ------ -------
$ 67,230 $ 72,800 $ 5,166 $ 145,196
======= ======= ====== =======
Loans maturing
after one year
with:
Fixed interest
rates $ 64,137 $ 1,946
Variable interest
rates 8,663 3,220
------- -----
$ 72,800 $ 5,166
======= =====
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. SFSC 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, 1997, the Allowance
was $3,306,000, an increase of $698,000 from the balance at December 31,
1996. The inclusion of Richmond's allowance at December 31, 1997
represented $678,000 of this increase. The remainder was the result of
loan loss provisions exceeding net charge-offs by $20,000 during the year.
The determination of Allowance adequacy is based upon a quarterly
evaluation of SFSC'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 1.23% at the end of 1997 compared to 1.29% at the end of
1996. Based on its analyses, management considers the Allowance adequate
to recognize the risk inherent in the consolidated loan portfolio at
December 31, 1997.
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,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $ 2,608 $ 2,711 $ 1,983 $ 2,084 $ 2,051
Charge-offs:
Commercial 123 122 70 115 102
Real estate 40 100 82 59 32
Installment 71 46 82 68 30
Other 146 117 75 38 65
----- ----- ----- ----- -----
Total charge-offs 380 385 309 280 229
----- ----- ----- ----- -----
Recoveries:
Commercial 8 19 58 18 31
Real estate 29 2 12 0 36
Installment 16 26 34 24 29
Other 17 25 9 17 19
----- ----- ----- ----- -----
Total recoveries 70 72 113 59 115
----- ----- ----- ----- -----
Net charge-offs 310 313 196 221 114
Balance of acquired
allowance at 678 0 734 0 0
date of acquisition 330 210 190 120 147
Additions charged to
operations ----- ----- ----- ----- -----
Balance at end of period $ 3,306 $ 2,608 $ 2,711 $ 1,983 $ 2,084
===== ===== ===== ===== =====
Ratios:
Net charge-offs to
average loans
outstanding 0.15 % 0.16 % 0.12 % 0.16 % 0.09 %
Net charge-offs to
total allowance 9.38 12.00 7.23 11.14 5.47
Allowance to year end
loans outstanding 1.23 1.29 1.46 1.36 1.60
===== ===== ===== ===== =====
</TABLE>
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, SFSC 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>
At or for the years ended
December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 2,537 $ 2,363 $ 1,386 $ 1,311 $ 2,100
Accruing loans past due 90 2
days or more 20 38 0 5 31
Restructured loans 0 0 0 0
------ ------ ------ ------ ------
Total non-performing and
restructured loans 2,557 2,401 1,388 1,316 2,131
------ ------ ------ ------ ------
Other real estate owned 334 345 460 219 28
------ ------ ------ ------ ------
Total non-performing assets $ 2,891 $ 2,746 $ 1,848 $ 1,535 $ 2,159
====== ====== ====== ====== ======
Ratios:
Non-performing loans to total
loans 0.95% 1.19% 075% 0.90% 1.64%
Allowance to non-performing loans 129.29 108.62 195.32 150.68 97.79
Non-performing assets to total
assets 0.69 0.91 0.65 0.68 0.95
Interest income that would have
been recorded on nonaccrual
loans under original terms $ 215 $ 241 $ 207 $ 229 $ 244
Interest income recorded during the
period on nonaccrual loans 102 116 100 89 182
</TABLE>
Effective January 1, 1995, SFSC adopted Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment
of a Loan" ("Statement No. 114"). Under the new standard, the 1997, 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,
1997, SFSC identified approximately $470,000 in loans which are considered
impaired. These loans are included as part of the nonaccrual loans set
forth in the table above and represent 0.17% of SFSC'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, 1997, 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. Debt securities that SFSC has both the
positive intent and ability to hold to maturity are carried at amortized
cost. Debt securities that SFSC 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. The company
has no assets classified as trading. See note 4 to the Consolidated
Financial Statements for more information.
Total investment securities outstanding at December 31, 1997
increased $24,926,000, including $25,678,000 in investment securities
acquired with Richmond. Net of the Richmond acquisition, total investment
securities decreased $752,000, the net effect of growth in the Banks
investment portfolios of $2,533,000 offset by $3,285,000 in matured or
sold securities in SFSC's investment portfolio to provide funding for the
Richmond acquisition. The increase in the Banks' investment portfolios
was mainly due to reinvestment of their respective portfolios' cash flow
in longer term investment securities, primarily obligations of states and
political subdivisions, to enhance the overall yield on interest-earning
assets.
The following table presents the combined amortized cost of SFSC's
held-to-maturity and available-for-sale investment securities on the dates
indicated (dollars in thousands).
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies $ 46,731 $ 34,018 $ 27,389
Obligations of states and
political subdivisions 25,922 15,015 16,337
Mortgage-related securities 17,242 16,753 17,281
Other securities 4,014 3,197 2,250
------- ------- -------
TOTAL $93,909 $ 68,983 $ 63,257
======= ======= =======
</TABLE>
The composition of SFSC's investment securities has been influenced
by the general market conditions prevalent during 1997 as well as the
incorporation of Richmond's portfolio. U.S. Treasury securities and
obligations of U.S. government agencies ("Treasuries/Agencies") increased
$12,713,000 in 1997. The Richmond acquisition added $22,136,000. Net of
Richmond, Treasuries/Agencies decreased $9,423,000 in 1997 due to SFSC's
decision to shift investments to obligations of states and political
subdivisions to enhance the portfolio's yield and to fund the Richmond
acquisition ($2,992,000). At December 31, 1997, Treasury/Agencies
comprised 49.8% of SFSC's investment portfolio compared to 49.3% at
December 31, 1996.
Obligations of states and political subdivisions increased
$10,907,000 at December 31, 1997 compared to December 31, 1996. The
Richmond acquisition accounted for $3,408,000 of this increase with the
remainder due to SFSC reinvesting Treasuries/Agencies maturities in
municipal investments to enhance its portfolio yield. At December 31,
1997, obligations of states and political subdivisions accounted for 27.6%
of SFSC's investment portfolio compared to 21.8% at December 31, 1996.
During 1997, balances in mortgage-related securities increased
$489,000 as maturing Treasuries/Agencies were reinvested in this category
to enhance the yield on SFSC's total investment portfolio. SFSC'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, SFSC purchases only the
conservative early trances 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, 1997, the remaining average life of SFSC's mortgage-related
securities was slightly less than three years. Due to the short remaining
assumed maturities of these investments and its historical experience with
these investments, management does not consider SFSC to be exposed to
significant interest rate risk or recoverability related to these
investments. At December 31, 1997, mortgage-related securities accounted
for 18.4% of SFSC's investment portfolio compared to 24.3% at
December 31, 1996.
Other securities increased $817,000 in 1997, mainly due to SFSC's
purchase of marketable equity securities. At December 31, 1997, other
securities represented 4.3% of SFSC's investment portfolio compared to
4.6% at December 31, 1997.
The maturities and weighted-average yield of SFSC's investment
securities at December 31, 1997 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>
U.S. Treasury securities
and obligations of U.S.
government agencies $10,036 6.24% $35,195 6.05% $1,500 6.92% $0 0.00%
Obligations of states and
political subdivisions 6,775 6.42 6,015 7.29 11,321 7.00 1,811 8.68
Mortgage-related securities 948 5.60 16,295 6.76 0 0.00 0 0.00
Other securities 1,913 3.38 1,600 6.66 501 6.24 0 0.00
------- ------ ------- ------ ------- ------ ------ -------
TOTAL $19,672 6.00% $59,105 6.39% $13,322 6.96% $1,811 8.68%
======= ====== ======= ====== ======= ====== ====== =======
</TABLE>
At December 31, 1997, SFSC had $211,000 in net unrealized gains on
its held-to-maturity securities and $1,342,000 in net unrealized gains on
its available-for-sale securities. The majority of the unrealized gain on
SFSC's available-for-sale securities was the result of price appreciation
on marketable equity securities acquired at the beginning of 1997.
Unrealized gains and losses resulting from marketable equity securities
are impacted by the current market price quoted for the underlying
security in relation to the price at which the security was acquired by
SFSC. Unrealized gains and losses on investment securities are the result
of changes in market interest rates and the relationship of SFSC's
investments to those rates for comparable maturities. Unrealized gains
generally result from the interest rates on SFSC's portfolio of investment
securities exceeding market rates for comparable maturities. Conversely,
unrealized losses generally result from the interest rates on SFSC's
portfolio of investment securities falling below market rates for
comparable maturities. If material, unrealized losses could negatively
impact SFSC'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. SFSC does
not consider its investment portfolios exposed to material adverse impact
to future operating performance resulting from market interest rate
fluctuations.
Deposits. Deposits are SFSC'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, 1997, total
average deposits increased $14,435,000 (5.9%) due to internal deposit
growth at SFB and SFB-Waterford. As the Richmond acquisition was
consummated on December 31, 1997, no averages for Richmond are included in
any average deposit information presented herein.
The following table sets forth the average amount of and the average
rate paid by SFSC on deposits by deposit category (dollars in thousands).
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 52,885 0.00 % $48,469 0.00 % $ 43,555 0.00 %
NOW and money market deposits 93,058 3.94 85,030 3.72 66,520 3.85
Savings 37,924 2.76 42,043 2.78 42,790 2.77
Time deposits 76,843 5.68 70,733 5.70 58,322 5.63
-------- ----- -------- ----- -------- -----
TOTAL $260,710 3.48 % $246,275 3.39 % $211,187 3.33 %
======== ===== ======== ===== ======== =====
</TABLE>
The largest categorical growth in SFSC's deposits continues in NOW
and money market deposits. For the year ended December 31, 1997, average
NOW and money market deposits increased $8,028,000 (9.4%). The increase
was mainly due to increases in money market balances related to the
continued popularity of SFSC's Money Market Index Account. At
December 31, 1997, average NOW and money market balances are SFSC's
largest deposit category, representing 35.7% of average total deposits
compared to 34.5% at December 31, 1996.
Average time deposit balances increased $6,110,000 (8.6%) for the
year ended December 31, 1997 compared to the year ended December 31, 1996
due to internal growth at the Banks in certificates of deposit and
certificates of deposit greater than $100,000. During 1997, SFSC
purchased jumbo time deposits through the State of Wisconsin which
averaged approximately $3,250,000 in outstanding balances for the year.
The remaining average time deposit increase during 1997 was the result of
the Company's aggressive marketing effort in this product line during
1996 and 1997. At December 31, 1997, average time deposits represent
29.5% of average total deposits compared to 28.7% at December 31, 1996.
For the year ended December 31, 1997, average non-interest bearing
demand deposits increased $4,416,000 (9.1%), 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, 1997, non-interest bearing demand deposits represent 20.3%
of SFSC's average deposit portfolio compared to 19.7% at December 31,
1996.
During 1997, average savings balances decreased $4,119,000 (9.8%) due
to the declining popularity of this deposit instrument given customers'
desire for more attractive interest rates which SFSC offers in money
market and time deposits accounts. SFSC believes the Money Market Index
Account and the competitive time deposit rates offered during 1996 and
1997 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 SFSC. Average savings balances represent
14.5% of average total deposits at December 31, 1997 compared to 17.1% at
December 31, 1996.
On a period end comparison basis, total deposits increased to
$367,492,000 at December 31, 1997 from $254,656,000 at December 31, 1996.
The Richmond acquisition added $79,922,000 to SFSC's consolidated total
deposits with the remaining $32,914,000 increase the result of internal
growth at SFB and SFB-Waterford during the course of 1997. Richmond's
funding costs are comparatively higher than SFSC's historical experience.
For the year ended December 31, 1997, Richmond's cost of interest-bearing
liabilities was 4.73% compared to SFSC's 4.26% for the comparable period.
Accordingly, SFSC expects its cost of interest-bearing liabilities to
increase and its net interest margin to decrease in 1998 with the
inclusion of Richmond, and its higher funding expense, in its consolidated
operating results.
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1997 are summarized as
follows (dollars in thousands).
3 month or less $13,701
Over 3 through 6 months 10,265
Over 6 through 12 months 3,728
Over 12 months 5,400
-------
TOTAL $33,093
=======
Approximately 7.9% of SFSC's total assets at December 31, 1997 were
supported by time deposits with balances in excess of $100,000 as compared
to 3.2% at December 31, 1996. SFSC'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 dependence exhibited by
its peers.
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.
SFSC'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.
SFSC's primary investment activity is loan origination. For the year
ended December 31, 1997 SFSC generated $15,439,000 in new loan
originations exclusive of the Richmond acquisition. Funding for the 1997
loan increase came from deposit growth during the year. The remaining
deposit growth in 1997 combined with cash provided by operating activities
and increases in securities sold under agreements to repurchase were used
to reduce federal fund borrowing, purchase of additional shares for SFSC's
ESOP, pay dividends, payoff the installment notes payable incurred in 1995
with the SFB-Waterford acquisition, and purchase fixed assets. These
sources additionally were used to fund the $722,000 net increase in net
investment securities during 1997. Constricting the 1997 net investment
security increase were $3,285,000 in maturities or sales used to provide
funding for the Richmond acquisition. The remainder of the Richmond
acquisition was funded through $3,900,000 in notes payable advances and
$3,711,000 in cash and cash equivalent contractions at State Financial
Services Corporation.
New loan originations for the year ended December 31, 1996 amounted
to $16,230,000. 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.
Cash and cash equivalents are generally SFSC's most liquid assets.
SFSC's level of operating, financing, and investing activities during a
given period impact the resultant level of cash and cash equivalents
reported. SFSC had liquid assets of $38,780,000 and $21,281,000 as of
December 31, 1997 and 1996, 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 SFSC's interest-earning assets and interest-bearing
liabilities for three different independent and cumulative time intervals
as of December 31, 1997 (dollars in millions). Non-maturing 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 SFSC's net interest income as the actual repricing experience of
certain assets and liabilities, such as loan prepayments and deposit
withdrawals, is beyond SFSC's control. As a result, certain assets and
liabilities may reprice at intervals different from the maturities assumed
in the following table given the general movement in interest rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates.
<TABLE>
<CAPTION>
Total
0-30 31-90 91-365 0-365
Days Days Days Days
<S> <C> <C> <C> <C>
ASSETS
Loans
Fixed $ 13.8 $ 8.7 $ 44.8 $ 67.3
Variable 69.0 0.0 0.0 69.0
Investments 2.5 1.3 16.0 19.8
Federal funds 11.3 0.0 0.0 11.3
----- ----- ----- -----
Total $ 96.6 $ 10.0 $ 60.8 $ 167.4
===== ===== ===== =====
LIABILITIES
Savings & NOW deposits $ 8.4 $ 16.8 $ 25.1 $ 50.3
Time deposits 18.2 25.1 56.6 99.8
Money market deposits 9.0 18.0 27.1 54.1
Other interest-bearing
liabilities 0.4 0.0 5.3 5.8
----- ----- ----- -----
Total $ 36.0 $ 59.9 $ 114.1 $ 210.0
===== ===== ===== =====
Interest sensitivity gap $ 60.6 $ (49.9) $ (53.3) $ (42.6)
Cumulative gap 60.6 10.7 (42.6) % (42.6)
Cumulative gap as a
percentage of total
earning assets 16.3 % 2.9 % (11.5) (11.5) %
===== ===== ===== =====
</TABLE>
At December 31, 1997, interest-sensitive assets and interest-
sensitive liabilities subject to repricing within one year, as a
percentage of total assets were 39.7% and 41.3%, 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 above demonstrates
SFSC is liability-sensitive at December 31, 1997, which would normally
indicate that SFSC's net interest margin would improve if rates decreased
and deteriorate if interest rates increased.
Capital Resources. Total shareholders' equity increased $3,021,000
in 1997, $3,146,000 in 1996, and $6,212,000 in 1995. The increases in
1997 and 1996 were mainly due to net earnings retention, augmented by the
tax effected improvement in net unrealized holding gains on securities
available-for-sale in each respective year. The 1995 increase was the
result of the additional stock issued to complete the SFB-Waterford
acquisition, net earnings retention, and reductions in the tax effected
net unrealized holding losses on securities available-for-sale. The
following table illustrates historical internal growth trends for the
years indicated.
Years ended December 31,
1997 1996 1995
Return on assets 1.42 % 1.38 % 1.32 %
Return on equity 11.84 11.78 11.22
Earnings retained 65.27 68.54 70.50
Dividend payout ratio 34.73 31.46 29.50
Average equity to average assets 11.97 11.72 11.78
Asset growth 39.50 5.58 26.49
SFSC 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. SFSC's dividend policy considers
shareholders' desire for current income and SFSC's need to provide
internal capital growth through earnings retention. The percentage of
1997 and 1996 earnings paid out in the form of dividends increased as SFSC
increased its quarterly dividend rate 20% in the first quarter of each
respective year. Dividends paid by the Banks to SFSC are used primarily
to fund shareholders' dividends and for additional working capital.
There are certain regulatory constraints which affect SFSC's capital
levels. See Note 9 and Note 12 to the consolidated financial statements
for additional explanation of these regulatory constraints.
Impact of Inflation and Changing Prices. SFSC's Consolidated
Financial Statements have been prepared in conformity with generally
accepted accounting principles which require the measurement of financial
position and operating results in terms of historical dollars without
consideration of changes in the relative purchasing power of money over
time impacted by inflation. The impact of inflation is reflected in the
company's other expenses which tend to rise during periods of general
inflation. The majority of SFSC'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 SFSC's
performance than do the general levels of inflation. Management believes
the most significant impact on SFSC'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 SFSC's net interest margin.
Impact of Year 2000.
Some of SFSC's older computers and computer programs utilized by
SFSC's third party data processors were written using two digits rather
than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, or
engage in similar normal business activities. SFSC utilizes a third party
for a significant portion of its data processing.
SFSC has completed an assessment and has replaced or is in the
processing of replacing portions of its hardware and software and is
monitoring the progress of its third party processors to ensure they have
made similar modifications or replacements so that its computer systems
will function properly with respect to dates in the year 2000 and
thereafter. Based upon information currently available, SFSC has
estimated that the cost for such modifications or replacements will be
approximately $100,000 which it does not consider to be material. These
costs of modifications will be expensed as incurred and costs for
replacement of old software will be capitalized in accordance with SFSC's
normal policies and practices.
SFSC is monitoring the progress of its third party data processor.
The third party processors' and SFSC's internal efforts related to this
project and related testing are estimated to be completed not later than
March 31, 1999, which is prior to any anticipated impact on its operating
systems. SFSC believes that with modifications to existing hardware and
software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However,
if such modifications and conversions are not made, or are not completed
timely, the Year 2000 Issue could materially impact SFSC's operations.
SFSC is also dependent on other third parties to correct interface
systems for Year 2000 Issues. SFSC is monitoring the progress of these
third parties' computer and modification plans. There is no guarantee
that the systems of the third party data processor or the other systems of
other companies on which SFSC's systems rely will be timely converted and
would not have an adverse effect on SFSC's systems. At this time, SFSC is
not aware of any circumstances which would prevent its third party vendors
from being Year 2000 compliant
SFSC currently relies on two unrelated third parties to provide
primary data processing support for its computer service, one which
supports State Financial Bank in Wisconsin and State Financial Bank -
Waterford, the other which supports State Financial Bank in Illinois.
Additionally, HBE uses a third unrelated third party to provide data
processing support for its computer service. As part of the Merger
integration, SFSC has formed a Data Processing Committee (the "DPC"),
consisting of members for each of SFSC's existing subsidiary banks and HBE
to select one third party processor to service all of SFSC's banks. The
DPC will request proposals from the data providers serving State Financial
Bank in Wisconsin and HBE to service SFSC's entire banking operation. In
addition to analyzing each service providers proposal, the DPC will
research the benefits associated with each service providers' system
including, but not limited to, system capabilities, each of use, Year 2000
preparedness, and product support and innovation to determine the entity
to recommend to provide data processing support to the resulting
organization post-effectiveness of the Merger. The DPC expects to
complete its cost analysis and product due diligence in the fourth quarter
of 1998 and expects to implement the necessary resulting system
conversions in 1999.
The costs of the project and the date on which SFSC believes it will
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ from those anticipated.
Specific factors which might cause such differences include, but are not
limited to, the availability and cost of personnel trained in the area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
Pending Accounting Changes.
Pending accounting changes for 1998 are set forth in detail as Note 1
to the Notes to the Consolidated Financial Statements contained herein.
Quantitative and Qualitative Disclosures About Market Risk
SFSC's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of SFSC's transactions are denominated
in U.S. currency with no specific foreign exchange exposure. SFSC has a
limited number of agricultural loans and accordingly has no significant
exposure to changes in commodity prices. Any impacts that changes in
foreign exchange rates and commodity prices would have on interest rates
are assumed to be insignificant.
Interest rate risk ("IRR") is the exposure of a banking
organization's financial condition to adverse movements in interest rates.
Accepting this risk can be an important source of profitability and
shareholder value, however excessive levels of IRR can significantly
impact SFSC's earnings and capital base. Accordingly, effective risk
management that maintains IRR at prudent levels is essential to SFSC's
safety and soundness.
Evaluating a financial institution's exposure to interest rate
changes includes assessing both the adequacy of the management process
used to monitor and control IRR and the organization's quantitative
exposure level. When assessing the IRR management process, SFSC seeks to
ensure that appropriate policies, procedures, management information
systems, and internal controls are in place to maintain IRR at prudent
levels with consistency and continuity. Evaluating the quantitative level
of IRR exposure requires SFSC to assess the existing and potential future
effects of changes in interest rates on its consolidated financial
condition, including capital adequacy, earnings, liquidity, and where
appropriate, asset quality.
The Federal Reserve Board, together with the Office of the
Comptroller of the Currency and the FDIC, adopted a Joint Agency Policy
Statement on IRR, effective June 26, 1996. The policy statement provides
guidance to examiners and bankers on sound practices for managing IRR,
which forms the basis for an ongoing evaluation of the adequacy of IRR
management at institutions under their respective supervision. The policy
statement also outlines fundamental elements of sound management that have
been identified in prior Federal Reserve guidance and discusses the
importance of these elements in the context of managing IRR.
Specifically, the guidance emphasizes the need for active board of
director and senior management oversight and a comprehensive risk
management process which effectively identifies, measures, end controls
IRR.
Financial institutions derive their income primarily form the excess
of interest collected over interest paid. The rates of interest an
institution earns on its assets and owes on its liabilities generally are
established contractually for a period of time. since market interest
rates change over time, an institution is exposed to lower profit margins
(or losses) if it cannot adapt to interest rate changes. For example,
assume that an institution's assets carry intermediate or long-term fixed
rates and that those assets are funded with short-term liabilities. If
market interest rates rise by the time that the short-term liabilities
must be refinanced, the increase in the institution's interest expense on
its liabilities may not be sufficiently offset if assets continue to earn
at the contractual long-term fixed rates. Accordingly, an institution's
profits could decrease on existing assets because the institution will
either have lower net interest income or, possibly, higher net interest
expense. Similar risks exist when assets are subject to contractual
interest rate ceilings, or rate sensitive assets are funded by longer-term
fixed-rate liabilities in a decreasing rate environment.
An institution might use various techniques to minimize IRR. One
approach used by SFSC is to periodically analyze its assets and
liabilities and make future financing and investment decisions based on
payment streams, interest rates, contractual maturities, and estimate
sensitivity to actual or potential market interest rate changes. Such
activities fall under the broad definition of asset/liability management.
SFSC's primary asset/liability management technique is the measurement of
its asset/liability gap which is defined as the difference between the
cash flow amounts of interest-sensitive assets and liabilities that will
be refinanced or repriced over a given time period. For example, if the
asset amount to be repriced exceeds the corresponding liability amount
subject to repricing for a given day, month, year, or longer period, the
institution is in an asset-sensitive gap position. In this situation, net
interest income would increase if market interest rates rose and
conversely decrease if market interest rates fell. Alternatively, if more
liabilities than assets will reprice, the institution is in a liability-
sensitive position. Accordingly, net interest income would decline when
rates rose and improve when rates fell. Also, these examples assume that
interest rate changes for assets and liabilities are of the same
magnitude, whereas actual interest rate changes generally differ in
magnitude for assets and liabilities.
Several ways an institution can manage IRR include selling existing
assets or repaying certain liabilities; matching repricing periods for new
assets and liabilities for example by, shortening terms of new loans or
investments; and hedging existing assets, liabilities, or anticipated
transactions. An institution might also invest in more complex financial
instruments intended to hedge or otherwise change IRR. Interest rate
swaps, futures contracts, options and futures, and other such derivative
financial instruments are often used for this purpose. Because these
instruments are sensitive to interest rate changes, they require
management expertise to be effective. SFSC has not purchased derivative
financial instruments in the past and does not presently intend to
purchase such instruments.
Financial institutions are also subject to prepayment risk in falling
interest rate environments. For example, mortgage loans and other
financial assets may be prepaid by a debtor so that the debtor may refund
its obligations at new, lower interest rates. Prepayments of assets
carrying higher rates reduce SFSC's interest income and overall asset
yields. Certain portions of an institution's liabilities may be short-
term or due on demand, while most of its assets may be invested in long-
term loans or investments. Accordingly, SFSC seeks to have in place
sources of Cash to meet short-term demands. These funds can be obtained
by increasing deposits, borrowing, or selling assets. Also, Federal Home
Loan Bank advances and short-term borrows provide additional sources of
liquidity for SFSC.
The following table sets forth information about SFSC's financial
instruments that are sensitive to changes in interest rates as of December
31, 1997. SFSC had no derivative financial instruments, or trading
portfolio, as of that date. The expected maturity date values for loans,
receivable, mortgage backed securities, and investment securities were
calculated adjusting the underlying instrument's contractual maturity date
for prepayment expectations. Expected maturity date values for interest-
bearing core deposits were not based upon estimates of the period over
which the deposits would be outstanding, but rather the opportunity for
repricing. Similarly, with respect to its variable rate instruments, SFSC
believes that repricing dates, as opposed to maturity dates are more
relevant in analyzing the value of such instruments and are reported as
such in the following table. SFSC borrows are also reported based on
conversion or repricing dates.
<TABLE>
Quantitative Disclosures of Market Risk
<CAPTION>
Fair Value
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $64,483 $49,636 $43,523 $15,312 $16,652 $11,135 $200,741 $201,815
Average interest rate 9.19% 6.07% 9.35% 9.27% 8.88% 7.44% 9.08%
Variable interest rate loans $42,654 $5,605 $3,747 $2,069 $3,323 $9,681 $67,079 $67,079
Average interest rate 9.62% 9.52% 9.65% 9.56% 9.37% 9.37% 9.56%
Fixed interest rate securities $19,672 $10,069 $17,231 $23,867 $8,110 $14,960 $93,909 $95,463
Average interest rate 6.00% 6.47% 6.41% 6.20% 6.64% 7.09% 6.40%
Rate sensitive liabilities:
Savings & interest-bearing $173,614 $--- $--- $--- $--- $1--- $173,614 $173,614
checking 3.60% --- --- --- --- --- 3.60%
Average interest rate
Time deposits $93,041 $18,537 $6,408 $1,395 $5,327 $--- $124,708 $125,285
Average interest rate 5.70% 6.49% 6.47% 7.50% 7.19% --- 5.94%
Variable interest
rate borrows $10,150 $--- $--- $--- $--- $--- $10,150 $10,150
Average interest rate 5.50% --- --- --- --- --- 5.50%
</TABLE>
HOME BANCORP OF ELGIN, INC.
General
HBE was incorporated in June 1996 under Delaware law, with the
express purpose to serve as a holding company for the Association. On
September 26, 1997, the Association completed its conversion from mutual
stock form and became a wholly-owned subsidiary of HBE.
HBE's principal business activity consists of the ownership of the
Association. HBE also invests in short-term investment grade marketable
securities and other liquid investments. HBE has no significant
liabilities (other than those of the Association). HBE neither owns or
leases any property but instead uses the premises and equipment of the
Association. At the present time, HBE does not employ any persons other
than certain officers of the Association who do not receive any extra
compensation as officers of HBE. HBE utilizes the support staff of the
Association from time to time, as needed.
The Association was founded in 1883 and is one of the area's oldest
savings institutions. The Association is a community-oriented institution
focusing on developing long-term deposit relationships with customers in
the area northwest of Chicago and providing residential mortgage lending
to the same area. The Association's principal business consists of
attracting deposits from the public and investing those deposits, along
with funds generated from operations, primarily in loans secured by
mortgages on one-to-four family residences. At June 30, 1998, HBE had
total assets of $367.7 million, which included net loans of
$319.9 million. The Association operates from its executive offices in
Elgin, Illinois and four other full service facilities located in
Bartlett, Crystal Lake, Roselle and South Elgin, Illinois.
The principal executive office of HBE is located at 16 North Spring
Street, Elgin, Illinois 60120 telephone (847) 742-3800.
Incorporation of Certain Information by Reference
Additional information concerning HBE, including certain financial
information, information regarding voting securities of HBE and principal
holders thereof, and information concerning directors and executive
officers of HBE, is included in HBE's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and the other documents filed by HBE
with the Commission under the Exchange Act. See "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE."
LEGAL MATTERS
Foley & Lardner, Milwaukee, Wisconsin, will pass upon the legality of
the shares of SFSC Common Stock to be issued in the Merger.
EXPERTS
The consolidated financial statements of SFSC at December 31, 1997
and 1996, and for each of the years in the three-year period ended
December 31, 1997, appearing in this Joint Proxy Statement/Prospectus have
been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts
in auditing and accounting.
The consolidated financial statements of HBE at December 31, 1997 and
1996, and for each of the years in the three-year period ended
December 31, 1997, have been incorporated herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts
in accounting and auditing.
The consolidated financial statements of Richmond as of December 31,
1997 and for the year ended December 31, 1997, appearing in this Joint
Proxy Statement/Prospectus have been audited by McGladrey & Pullen, LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon
the authority of such firm as experts in auditing and accounting.
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, SFSC shareholders may
present proper proposals for inclusion in SFSC's proxy statement and for
consideration at the next annual meeting of its shareholders by submitting
their proposals to SFSC in a timely manner. As noted in SFSC's proxy
statement relating to the 1998 annual meeting of SFSC shareholders, in
order to be so included for the 1999 annual meeting, shareholder proposals
must have been received by SFSC no later than November 14, 1998. In
addition, a shareholder who otherwise intends to present business at the
1999 annual meeting must comply with the requirements set forth in SFSC's
Bylaws. Among other things, to bring business before an annual meeting, a
shareholder must give written notice thereof to the Secretary of SFSC in
advance of the meeting and in compliance with the terms and within the
time period specified in the Bylaws.
Pursuant to Rule 14a-8 under the Exchange Act, HBE shareholders may
present proper proposals for inclusion in HBE's proxy statement and for
consideration at the next annual meeting of its shareholders by submitting
their proposals to HBE in a timely manner. As noted in HBE's proxy
statement relating to the 1998 annual meeting of HBE's shareholders, in
order to be so included for the 1999 annual meeting shareholder proposals
must have been received by HBE no later than November 12, 1998.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
STATE FINANCIAL SERVICES CORPORATION
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . F-3
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-8
Consolidated Balance Sheets as of June 30, 1998 and December 31,
1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-32
Consolidated Statements of Income for the six months ended
June 30, 1998 and 1997 (unaudited) . . . . . . . . . . . . . . F-33
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited) . . . . . . . . . . . . . . F-34
Notes to Consolidated Financial Statements (unaudited) . . . . . . F-35
RICHMOND BANCORP, INC. AND SUBSIDIARIES
Report of McGladrey & Pullen, LLP, Independent Auditors . . . . . . . F-37
Consolidated Balance Sheet as of December 31, 1997 . . . . . . . . F-38
Consolidated Statement of Income for the year ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . F-39
Consolidated Statement of Stockholders' Equity for the
year ended December 31, 1997 . . . . . . . . . . . . . . . . . F-40
Consolidated Statement of Cash Flows for the year ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . F-41
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-43
<PAGE>
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, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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
did not audit the consolidated balance sheet of Richmond Bancorp, Inc., a
wholly owned subsidiary acquired at December 31, 1997, which statements
reflect total assets of $93,434,000 as of December 31, 1997. That
financial statement was audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to balance sheet
data included for Richmond Bancorp, Inc., is based solely on the report of
other auditors.
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
and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and, as to the balance sheet at
December 31, 1997, the report of other auditors, the financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of the Company at December 31, 1997 and
1996, and the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
January 16, 1998
<PAGE>
State Financial Services Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
1997 1996
Assets
Cash and due from banks $ 27,506,201 $ 15,581,811
Federal funds sold 11,273,835 2,599,107
Other short-term investments - 3,100,000
----------- -----------
Cash and cash equivalents 38,780,036 21,280,918
Investment securities:
Held-to-maturity (fair value of
$21,208,412-1997 and
$31,541,364-1996) 20,997,095 31,302,232
Available-for-sale (at fair value) 74,254,433 37,776,116
Loans (net of allowance for loan losses
of $3,306,168-1997 and $2,607,579-
1996) 264,513,049 199,063,121
Premises and equipment 6,914,446 4,691,988
Accrued interest receivable 2,943,801 2,095,839
Other assets 12,875,193 5,789,258
----------- -----------
$421,278,053 $301,999,472
=========== ===========
Liabilities and shareholders' equity
Deposits:
Demand $ 69,170,535 $ 55,109,370
Savings 83,759,867 61,847,490
Money market 89,853,817 68,393,363
Time deposits in excess of $100,000 32,137,325 10,171,806
Other time deposits 92,570,345 59,134,517
----------- -----------
Total deposits 367,491,889 254,656,546
Notes payable 5,300,000 961,844
Securities sold under agreement to
repurchase 4,850,160 2,400,160
Federal funds purchased - 5,600,000
Accrued expenses and other liabilities 3,213,441 1,860,054
Accrued interest payable 1,874,197 994,324
----------- -----------
Total liabilities 382,729,687 266,472,928
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-
3,872,554 shares in 1997 and
3,198,253 shares in 1996 387,256 319,825
Additional paid-in capital 28,964,328 28,687,633
Retained earnings 9,787,620 6,932,623
Net unrealized holding gain on
securities available-for-sale 888,649 62,728
Unearned ESOP shares (1,479,487) (476,265)
----------- -----------
Total shareholders' equity 38,548,366 35,526,544
----------- -----------
$421,278,053 $301,999,472
=========== ===========
See accompanying notes.
<PAGE>
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Income
Year ended December 31
1997 1996 1995
Interest income:
Loans $19,868,408 $18,146,633 $15,833,190
Investment securities:
Taxable 3,346,071 3,271,152 2,526,579
Tax-exempt 839,358 758,689 689,423
Federal funds sold and other
short-term investments 148,152 246,412 314,111
---------- ---------- ----------
Total interest income 24,201,989 22,422,886 19,363,303
Interest expense:
Deposits 9,077,699 8,359,780 7,029,954
Notes payable and other
borrowings 444,272 392,332 306,188
---------- ---------- ----------
Total interest expense 9,521,971 8,752,112 7,336,142
---------- ---------- ----------
Net interest income 14,680,018 13,670,774 12,027,161
Provision for loan losses 330,000 210,000 190,000
---------- ---------- ----------
Net interest income after
provision for loan losses 14,350,018 13,460,774 11,837,161
Other income:
Service charges on deposit
accounts 1,031,974 991,708 992,218
ATM service charges 242,373 195,414 204,694
Gain on sale of loans 225,108 76,314 -
Merchant services 1,140,763 1,032,587 715,137
Building rent 310,014 284,456 222,567
Investment securities losses,
net (649) - -
Other 426,396 479,189 346,305
---------- ---------- ----------
3,375,979 3,059,668 2,480,921
Other expenses:
Salaries and employee benefits 4,873,833 4,450,391 4,100,998
Net occupancy expense 957,477 816,368 770,545
Equipment rentals, depreciation
and maintenance 1,148,148 1,242,855 1,034,867
Data processing 782,504 653,244 544,499
Legal and professional 295,454 287,209 326,555
ATM fees 204,547 202,534 193,546
Merchant services 917,216 871,237 619,952
Advertising 365,937 305,195 160,546
Other 1,647,717 1,682,738 1,708,147
---------- ---------- ----------
11,192,833 10,511,771 9,459,655
Income before income taxes 6,533,164 6,008,671 4,858,427
Income taxes 2,159,000 2,003,000 1,579,000
---------- ---------- ----------
Net income $ 4,374,164 $ 4,005,671 $ 3,279,427
========== ========== ==========
Basic earnings per share $ 1.16 $ 1.06 $ 0.94
Diluted earnings per share $ 1.14 $ 1.05 $ 0.93
====== ====== ======
See accompanying notes.
<PAGE>
<TABLE>
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
<CAPTION>
Unrealized
Holding Gain
Common Paid-in Retained (Loss) on Unearned
Stock Capital Earnings Securities ESOP Shares Total
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $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 21,487 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
ESOP shares earned - - - - 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 - - (2,260,272) - - (1,260,272)
Change in fair value of
investments - net of tax
effect of $91,255 - - - 177,085 - 177,085
ESOP shares earned - - - - 48,628 48,628
Six-for-five stock split 53,304 (53,304) - - - -
------- ---------- ---------- -------- ------- ----------
Balances at December 31,1996 319,825 28,587,633 6,932,623 62,728 (476,265) 35,526,544
Net income - - 4,374,164 - - 4,374,164
Issuance of 28,875 shares
under the 1990 stock
plans 2,888 341,238 - - - 344,126
Cash dividends - - (1,519,167) - - (1,519,167)
Change in fair value of
investments, net of tax
effect of $421,000 - - - 825,921 - 825,921
Net increase in earned
ESOP shares - - - - (1,003,222) (1,003,222)
Six-for-five stock split 64,543 (64,543) - - - -
------- ---------- --------- ------- ---------- ----------
Balances at December 31,
1997 $387,256 $28,964,328 $9,787,620 $888,649 $(1,479,487) $38,548,366
======= ========== ========= ======= ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1997 1996 1995
Operating activities
Net income $4,374,164 $4,005,671 $3,279,427
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 330,000 210,000 190,000
Provision for depreciation 772,822 891,847 594,884
Amortization of investment
securities premiums and
accretion of discounts,
net 30,163 163,558 100,748
Amortization of goodwill 151,426 155,765 64,148
Amortization of branch
acquisition premium 49,442 29,665 29,665
Deferred income tax
provision (65,000) (80,000) (108,000)
Increase in interest
receivable (179,896) (49,413) (371,613)
Increase (decrease) in
interest payable 197,406 (206,328) 434,212
Realized investment
securities losses 649 - -
Other 101,341 (1,552,301) (47,171)
---------- ---------- ----------
Net cash provided by
operating activities 5,762,517 3,568,464 4,166,300
Investing activities
Proceeds from maturity or
principal payments of
held-to-maturity invest-
ment securities 10,220,000 14,417,000 17,302,800
Purchases of held-to-
maturity investment
securities - (1,652,888) (17,023,829)
Purchases of securities
available-for-sale (27,550,247) (28,578,265) (1,688,561)
Maturities and sales of
securities
available-for-sale 18,051,857 9,924,286 7,118,938
Net increase in loans
before business
acquisitions (15,439,498) (16,230,315) (14,968,956)
Net purchases of premises
and equipment (863,547) (686,764) (372,144)
Business acquisitions, net of
cash and cash equivalents
acquired of $7,673,036 and
$24,433,534 in 1997 and
1995:
Loans (50,340,430) - (24,433,534)
Investment securities
held-to-maturity - - (9,686,714)
Investment securities
available-for-sale (25,627,465) - (839,402)
Premises and equipment (2,131,733) - (685,461)
Goodwill (6,258,137) - (1,446,346)
Deposits 79,921,649 - 33,044,661
Notes payable 1,400,000 - -
Other, net (156,310) - (226,958)
---------- ---------- ----------
Net cash used by investing
activities (18,773,861) (22,806,946) (13,905,506)
See accompanying notes.
<PAGE>
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1997 1996 1995
Financing activities
Net increase in deposits before
business acquisitions $32,913,694 $ 8,438,713 $15,772,008
Repayment of notes payable (961,844) (100,000) (115,364)
Proceeds of notes payable 3,900,000 - 1,061,844
Net (increase) decrease in
guaranteed ESOP obligation (1,003,222) 48,628 42,489
Net change in securities sold
under agreements to
repurchase 2,450,000 (900,000) 3,000,160
Cash dividends (1,519,167) (1,260,272) (967,478)
Proceeds (repayments) of
federal funds purchased (5,600,000) 5,600,000 -
Shares issued in acquisition - - 3,202,228
Issuance of common stock under
Dividend Reinvestment Plan 204,818 - -
Proceeds from exercise of stock
options 126,183 174,409 64,371
---------- ---------- ----------
Net cash provided by financing
activities 30,510,462 12,001,478 22,060,258
---------- ---------- ----------
Increase (decrease) in cash and
cash equivalents 17,499,118 (7,237,004) 12,321,052
Cash and cash equivalents at
beginning of year 21,280,918 28,517,922 16,196,870
---------- ---------- ----------
Cash and cash equivalents at
end of year $38,780,036 $21,280,918 $28,517,922
========== ========== ==========
Supplementary information:
Interest paid $ 9,324,565 $ 8,958,440 $ 6,901,930
Income taxes paid 2,264,251 2,360,975 1,719,247
Non-cash transactions -
Issuance of
common stock under
1990 Stock Plans, net 13,125 - (2,912)
See accompanying notes.
<PAGE>
State Financial Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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, State
Financial Bank - Waterford (acquired August 24, 1995) and Richmond
Bancorp, Inc. (acquired December 31, 1997) and its wholly owned
subsidiaries, Richmond Bank and Richmond Financial Services, Inc.
(Richmond) (collectively, the Banks) provide a full range of financial
services to customers through their branch locations in Milwaukee,
Waukesha and Racine counties in Wisconsin and McHenry and Lake counties in
Illinois. The Banks are subject to competition from other financial
institutions and are also subject to the regulations of certain federal,
State of Wisconsin and State of Illinois agencies and undergo periodic
examinations by those regulatory authorities.
Consolidation
The consolidated financial statements include the accounts of the parent
company and its subsidiaries from the date of acquisition (see Note 2).
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.
Share Data
Share data and per share information has been restated for all periods to
give effect to the January 28, 1997 six-for-five stock split and the
January 27, 1998 six-for-five stock split.
Investment Securities
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 shareholders' 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 unpaid
interest accrued in the prior year is charged to the allowance for loan
losses. Management may elect to continue the accrual of interest when the
loan is in the process of collection and the fair value of collateral is
sufficient to cover the principal balance and accrued interest. Interest
received on nonaccrual loans is either applied against principal or
reported as interest income according to management's judgment regarding
the collectibility of principal. Generally, loans are restored to accrual
status when the obligation is brought current, has performed in accordance
with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is
no longer in doubt.
Loan Fees and Related Costs
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amounts are amortized as an adjustment of
the related loan'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 and Northeastern Illinois. 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 15 years.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding less unearned ESOP shares.
Diluted earnings per share is computed by dividing net income by the
weighted average common shares outstanding less unallocated ESOP shares
plus the assumed conversion of all potentially dilutive securities.
The denominators for the earnings per share amounts are as follows:
1997 1996 1995
Basic:
Weighted average number of
shares outstanding 3,863,271 3,830,188 3,550,440
Less: weighted average
number of unearned ESOP
shares (79,558) (60,471) (73,374)
--------- --------- ---------
Denominator for basic
earnings per share 3,783,713 3,769,717 3,477,066
========= ========= =========
Fully diluted:
Denominator for basic
earnings per share 3,783,713 3,769,717 3,477,066
Add: assumed conversion of
stock options using the
treasury stock method 42,958 39,326 34,042
---------- ---------- ----------
Denominator for fully
diluted earnings per
share 3,826,671 3,809,043 3,511,108
=========== ========== ==========
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income tax assets and liabilities are adjusted regularly to amounts
estimated to be receivable or payable based on current tax law and the
Company's tax status. Valuation allowances are established for deferred
tax assets for amounts for which it is more likely than not that they will
be realized.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded for stock
options only to the extent that the current market price of the underlying
stock exceeded the exercise price on the date of grant. On January 1,
1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair value based method defined in SFAS No. 123 had been
applied. The Company elected to continue to apply the provisions of APB
Opinion No. 25 because the alternative requires use of option valuation
models that were not developed for use in valuing employee stock options
similar to the Company's. The fair value of the stock options granted was
not material for the years ended December 31, 1997 and 1996.
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.
Accounting Changes
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," as of January 1,
1997, which provides new 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. There was no material impact on the financial
statements of the Company.
Pending Accounting Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes new rules for the reporting and display of comprehensive
income and its components; however, adoption in 1998 will have no impact
on the Company's net income or shareholders' equity. Statement No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which currently are reported in shareholders' equity, to be
included in other comprehensive income and the disclosure of total
comprehensive income.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement No. 131
establishes standards for the reporting of financial information from
operating segments in annual and interim financial statements. This
statement requires that financial information be reported on the basis
that it is reported internally for evaluating segment performance and
deciding how to allocate resources to segments. Because this statement
only addresses how supplemental financial information is disclosed in
annual and interim reports, the adoption will have no impact on the
Company's net income or shareholders' equity. Statement No. 131 will
become effective in 1998.
2. Acquisitions
On December 31, 1997, the Company completed its acquisition of Richmond
Bancorp, Inc., (Bancorp) Richmond, Illinois. The Company purchased the
outstanding common stock of Bancorp for $10,787,495 in cash. In connection
with the acquisition, the Company borrowed $3,900,000 on its line of
credit and assumed $1,400,000 of Bancorp's outstanding debt. The
acquisition was recorded using purchase accounting. Application of
purchase accounting requires the inclusion of Richmond's operating results
in the consolidated statements of income from the date of acquisition.
Because the acquisition was consummated on December 31, 1997, no operating
results for Richmond are included in the Company's consolidated statements
of income for any year presented herein.
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 acquisition costs of $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. The operating results of Bancshares are included in
the consolidated statements of income from the date of acquisition.
On a pro forma basis, total income, net income, basic earnings per share
and fully diluted earnings per share for the years ended December 31, 1997
and 1966, after giving effect to the acquisition of Richmond as if it
occurred on January 1, 1996, are as follows:
Year ended December 31
1997 1996
Total income $35,425,000 $35,015,000
Net income 3,696,000 3,821,000
Basic earnings per share 0.98 1.01
Fully diluted earnings per share 0.97 1.00
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, 1997, was approximately $2,251,000.
4. Investment Securities
The amortized cost and estimated fair values of investments in debt
securities follow:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Held-to-Maturity
December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
agencies $11,850,447 $ 88,835 $(5,672) $11,933,610
Obligations of state and political
subdivisions 8,646,648 129,717 (823) 8,775,542
Other securities 500,000 4,720 (5,460) 499,260
---------- ------- ------- ----------
$20,997,095 $223,272 $(11,955) $21,208,412
========== ======= ======= ==========
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 state 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
========== ======= ======= ==========
Available-for-Sale
December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
agencies $34,880,814 $ 167,423 $(61,131) $34,987,106
Obligations of state and political
subdivisions 17,275,223 183,048 (7,286) 17,450,985
Mortgage-related securities 17,242,183 158,676 (15,178) 17,385,681
Other securities 3,514,100 916,561 - 4,430,661
---------- --------- ------- ----------
$72,912,320 $1,425,708 $(83,595) $74,254,433
========== ========= ======= ==========
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-related 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
========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1997, 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.
Estimated
Amortized Cost Fair Value
Held-to-Maturity
Due in one year or less $10,036,815 $10,075,355
Due after one year through five
years 8,499,749 8,561,057
Due after five years through ten
years 1,468,150 1,527,889
Due after ten years 992,381 1,044,111
---------- ----------
$20,997,095 $21,208,412
========== ==========
Estimated
Amortized Cost Fair Value
Available-for-Sale
Due in one year or less $ 9,635,062 $10,440,420
Due after one year through five
years 50,604,983 50,914,462
Due after five years through ten
years 11,853,882 12,049,389
Due after ten years 818,393 850,162
---------- ----------
$72,912,320 $74,254,433
========== ==========
The Company's investments in mortgage-related securities have been
allocated to the various maturity categories based on expected maturities
using current prepayment estimates.
Proceeds from sales of investments in debt and marketable equity
available-for-sale securities were $980,565 and $829,805 during 1997 and
1995, respectively. Gross losses of $649 and no gains were realized on the
1997 sales. No gain or loss was realized on the 1995 sales. No investment
securities were sold during 1996.
At December 31, 1997 and 1996, investment securities with a carrying value
of $29,981,479 and $12,912,811, respectively, were pledged as collateral
to secure public deposits and for other purposes.
5. Loans
A summary of loans outstanding at December 31, 1997 and 1996, follows:
1997 1996
Commercial $ 56,029,636 $ 44,088,070
Consumer 36,817,427 30,046,232
Real estate mortgage 162,735,834 114,394,696
Other 12,236,320 13,141,702
----------- -----------
$267,819,217 $201,670,700
=========== ===========
6. Allowance for Loan Losses
Changes in the allowance for loan losses for the three years ended
December 31, 1997 are as follows:
1997 1996 1995
Balance at beginning of year $2,607,579 $2,711,362 $1,982,941
Allowance from acquired 678,235 - 734,577
bank
Provision for loan losses 330,000 210,000 190,000
Charge-offs (380,279) (384,802) (308,994)
Recoveries 70,633 71,019 112,838
--------- --------- ---------
Net charge-offs (309,646) (313,783) (196,156)
--------- --------- ---------
Balance at end of year $3,306,168 $2,607,579 $2,711,362
========= ========= =========
Total nonaccrual loans were $2,537,000 and $2,363,000 at December 31, 1997
and 1996, 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, 1997 and 1996 to such related parties were
approximately $8,868,000 and $4,982,000, respectively. During 1997,
approximately $6,321,000 of new loans were made and repayments totaled
approximately $2,435,000. 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, 1997 and 1996, is as
follows:
1997 1996
Buildings $ 6,260,971 $ 4,320,075
Furniture and equipment 5,106,733 5,050,246
Leasehold improvements 2,315,889 1,620,192
---------- ----------
13,683,593 10,990,513
Less accumulated depreciation 7,736,023 7,168,150
---------- ----------
5,947,570 3,822,363
Land 966,876 869,625
---------- ----------
$ 6,914,446 $ 4,691,988
========== ==========
9. Notes Payable
The Company has a $10,000,000 line of credit available through April 30,
1998, at 90-day LIBOR plus 1.35% (5.93% at December 31, 1997). As of
December 31, 1997, $3,900,000 is outstanding on the line. No amount was
outstanding on the line at December 31, 1996.
The Company also has a revolving credit agreement which is collateralized
by the common stock of Richmond Bank and bears interest at 360-day LIBOR
plus 2% (7.88% at December 31, 1997). At December 31, 1997, borrowings
under this agreement were $1,400,000 and total borrowings may not exceed
$2,000,000. This loan has been paid and the revolving credit agreement
terminated on January 14, 1998.
Notes payable at December 31, 1996, consist of notes payable to
shareholders of the former Waterford Bancshares, which were paid September
19, 1997. These notes were issued as part of the Company's acquisition of
Waterford.
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 $145,007 in 1997, $130,698 in 1996 and $112,493
in 1995. Plan assets are invested in a diversified portfolio of high
quality debt and equity investments.
The Company also has an Employees' Stock Ownership Plan (ESOP) for the
benefit of employees meeting certain minimum age and service requirements.
Company contributions to the ESOP trust, which was established to fund the
plan, are made on a discretionary basis and are expensed to operations in
the year accrued ($112,763 in 1997, $70,157 in 1996 and $69,957 in 1995).
The number of shares released to participants is determined based on the
annual contribution amount plus any dividends paid on unearned shares
divided by the market price of the stock at the contribution date.
The activity in the number of unearned ESOP shares follows:
1997 1996 1995
Balance at beginning of year 50,954 60,472 73,375
Shares committed to be released (13,430) (9,518) (12,903)
Additional shares purchased 60,000 - -
------- ------- -------
Balance at end of year 97,524 50,954 60,472
======= ======= =======
At December 31, 1997, the fair value of unearned ESOP shares is
$2,184,534.
The cost of the unearned ESOP shares has been shown as a reduction of
shareholders' equity.
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:
1997 1996 1995
Current:
Federal $1,905,000 $1,763,000 $1,434,000
State 319,000 320,000 253,000
--------- --------- ---------
2,224,000 2,083,000 1,687,000
--------- --------- ---------
Deferred (credit):
Federal (58,000) (42,000) (85,000)
State (7,000) (38,000) (23,000)
--------- --------- ---------
(65,000) (80,000) (108,000)
--------- --------- ---------
$2,159,000 $2,003,000 $1,579,000
========= ========= =========
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, 1997 and 1996, are as follows:
1997 1996
Deferred tax assets:
Allowance for loan losses $ 907,000 $ 680,000
Federal net operating loss
carryforward 207,000 212,000
State net operating loss carryforward 315,000 267,000
Accumulated depreciation 260,000 104,000
Other 323,000 427,000
--------- ---------
2,012,000 1,690,000
Valuation allowance for deferred tax
assets (518,000) (479,000)
--------- ---------
Net deferred tax assets 1,494,000 1,211,000
Deferred tax liabilities:
Unrealized gain on investment
securities 453,000 32,000
Net deferred tax liabilities - other 48,000 246,000
Purchase accounting adjustments 330,000 236,000
--------- ---------
Total deferred tax liabilities 831,000 514,000
--------- ---------
Net deferred tax assets $ 663,000 $ 697,000
========= =========
The income tax expense differs from that computed at the federal statutory
corporate tax rate as follows:
1997 1996 1995
Income before income taxes $6,533,164 $6,008,671 $4,858,497
========= ========= =========
Income tax expense at the
federal statutory
rate of 34% $2,221,276 $2,042,948 $1,651,889
Increase (decrease) resulting
from:
Tax-exempt interest income (322,000) (280,000) (263,000)
State income taxes, net of
federal income tax benefit 205,000 196,000 164,000
Increase (decrease) in
valuation allowance
for deferred tax assets 39,000 (20,000) (22,000)
Other 15,724 64,052 48,111
--------- --------- ---------
$2,159,000 $2,003,000 $1,579,000
========= ========= =========
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $527,000 and state net operating loss
carryforwards of approximately $5,590,000. The federal net operating loss
carryforwards and $527,000 of state net operating loss carryforwards are
subject to an annual limitation of approximately $100,000 and are
available to reduce future tax expense through the year ending December
31, 2009. The remaining state net operating loss carryforwards expire in
years 1999 through 2011.
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, 1997, the Banks had net retained earnings of
$4,655,000, 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,
1997, the maximum amount available for transfer from the Banks to the
Company in the form of loans approximated 10% 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, 1997 were $31,954,000 and $714,000,
respectively. All such arrangements expire in 1998. Loan commitments and
standby letters of credit were $32,536,000 and $990,000, respectively, at
December 31, 1996.
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 $526,500, $421,000 and $382,000, in 1997, 1996 and 1995,
respectively.
Future minimum payments for the years indicated under noncancellable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1997:
1998 $ 441,000
1999 441,000
2000 449,000
2001 416,000
2002 429,000
Thereafter 2,429,000
---------
$4,605,000
=========
Minimum rentals for 1998 include $106,000 (1999 and 2000 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.
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, 1997, that the Company and subsidiary Banks
meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from state
regulators 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.
The Company and subsidiary Banks' actual, minimum and well capitalized
capital amounts and ratios are also presented in the table (dollars in
thousands).
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Adequaces Purposes Action Provisions Actual
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital
(to Risk Weighted Assets):
Consolidated $22,047 8.0% $27,559 10.0% $33,034 12.0%
State Financial Bank 15,278 8.0 19,098 10.0 24,686 12.9
State Financial Bank-Waterford 2,477 8.0 3,097 10.0 4,110 13.3%
Richmond Bank 4,193 8.0 5,241 10.0 6,576 12.5
Tier I Capital (to Risk
Weighted Assets):
Consolidated 11,024 4.0 16,535 6.0 29,728 10.8
State Financial Bank 7,639 4.0 11,459 6.0 22,596 11.8
State Financial Bank-Waterford 1,239 4.0 1,858 6.0 3,721 12.0
Richmond Bank 2,096 4.0 3,145 6.0 5,921 11.3
Tier I Capital (to Average
Assets):
Consolidated 12,424 4.0 15,530 5.0 29,728 9.6
State Financial Bank 10,608 4.0 13,260 5.0 22,596 8.5
State Financial Bank-Waterford 1,865 4.0 2,332 5.0 3,721 8.0
Richmond Bank 3,218 4.0 4,022 5.0 5,921 7.4
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Adequaces Purposes Action Provisions Actual
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 $16,527 8.0% $20,659 10.0% $36,170 17.5%
State Financial Bank 14,155 8.0 17,693 10.0 24,074 13.6
State Financial Bank- Waterford 1,930 8.0 2,412 10.0 3,949 16.4
Tier I Capital (to Risk Weighted
Assets):
Consolidated 8,264 4.0 12,396 6.0 33,586 16.3
State Financial Bank 7,077 4.0 10,616 6.0 22,032 12.5
State Financial Bank- Waterford 965 4.0 1,447 6.0 3,644 15.1
Tier I Capital (to Average
Assets):
Consolidated 11,731 4.0 17,664 5.0 33,586 11.5
State Financial Bank 9,826 4.0 12,282 5.0 22,032 9.0
State Financial Bank- Waterford 1,574 4.0 1,968 5.0 3,644 9.3
</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 365,502 shares of its common
stock as of December 31, 1997, 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:
<TABLE>
<CAPTION>
Number of Shares Number Total
of Restricted of Stock Number
Stock Price Options Price of Shares
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 17,591 $5.07 - $8.11 119,376 $3.85 - $8.11 136,967
Granted - - 2,246 9.26 2,246
Vested restricted stock (6,068) 5.07 - 8.11 - - (6,068)
Exercised - - (12,542) 5.07 - 6.76 (12,542)
Canceled (360) 8.11 (784) 5.07 - 7.52 (1,144)
------ ------------- ------- ------------ -------
Balance at December 31, 1995 11,163 5.07 - 8.11 108,296 3.85 - 9.26 119,459
Granted - - 8,165 9.55 - 13.03 8,165
Vested restricted stock (2,074) 6.87 - 7.52 - - (2,074)
Exercised - - (23,420) 3.85 - 8.11 (23,420)
Canceled - - (726) 5.07 - 6.87 (726)
------ ------------ ------- ------------- -------
Balance at December 31, 1996 9,089 5.07 - 8.11 92,315 3.85 - 13.03 101,404
Granted 600 21.87 6,067 14.15 - 21.87 6,667
Vested restricted stock (7,517) 5.07 - 8.11 - - (7,517)
Exercised - - (20,113) 4.22 - 8.11 (20,113)
Canceled - - (1,555) 5.07 - 8.25 (1,555)
------ ------------- ------- ------------- ------
Balance at December 31, 1997 2,172 $5.07 - $21.87 76,714 $3.85 - $21.87 78,886
====== ============= ======= ============= ======
</TABLE>
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.
Securities Sold Under Agreement to Repurchase and Federal Funds Purchased
The carrying amounts of securities sold under agreement to repurchase and
federal funds purchased approximate their fair value.
Accrued Interest Receivable and Payable
The carrying amounts reported in the balance sheet for accrued interest
receivable and payable approximate their fair values.
Notes Payable
The carrying values of the Company's notes payable approximate fair value.
Off-Balance-Sheet Instruments
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and generally require payment of a fee. As a consequence, the
estimated fair value of the commitments is approximately equal to the
related fee received, which is nominal.
The carrying amounts and fair values of the Company's financial
instruments consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and due from banks $27,506,201 $27,506,201 $15,581,811 $15,581,811
Federal funds sold 11,273,835 11,273,835 2,599,107 2,599,107
Other short-term
investments - - 3,100,000 3,100,000
Investment securities 95,251,528 95,462,845 69,078,348 69,317,480
Accrued interest receivable 2,943,801 2,943,801 2,095,839 2,095,839
Loans 267,819,217 268,894,443 201,670,700 202,070,469
Deposits 367,491,889 350,905,378 254,656,546 254,852,560
Securities sold under
agreement to repurchase 4,850,160 4,850,160 2,400,160 2,400,160
Federal funds purchased - - 5,600,000 5,600,000
Notes payable 5,300,000 5,300,000 961,844 961,844
Accrued interest payable 1,874,197 1,874,197 994,324 994,324
</TABLE>
18. State Financial Services Corporation (Parent Company Only) Financial
Information
Financial statements of the Company at December 31, 1997 and 1996 and for
the three years ended December 31, 1997, follow:
BALANCE SHEETS
December 31
1997 1996
Assets
Cash and due from banks $990,627 $881,891
Other short-term investments - 3,100,000
---------- ----------
Cash and cash equivalents 990,627 3,981,891
Investments:
Available-for-sale 2,017,988 3,167,050
Held-to-maturity - 1,263,176
Investment in State Financial Bank 23,157,881 22,422,023
Investment in State Financial Bank -
Waterford 5,153,146 5,187,407
Investment in State Financial Mortgage
Company 167,295 1,000
Investment in Richmond Bancorp 10,865,462 -
Recoverable income taxes 678,345 718,761
Other assets 581,649 553,797
---------- ----------
Total assets $43,612,393 $37,295,105
========== ==========
Liabilities
Accrued expenses and other liabilities $1,164,027 $806,717
Note payable 3,900,000 961,844
Shareholders' equity
Common stock 387,256 319,825
Additional paid-in capital 28,964,328 28,687,633
Retained earnings 9,787,620 6,932,623
Unrealized loss on securities 888,649 62,728
available-for-sale
Unearned ESOP shares (1,479,487) (476,265)
---------- ----------
Total shareholders' equity 38,548,366 35,526,544
---------- ----------
Total liabilities and shareholders'
equity $43,612,393 $37,295,105
========== ==========
STATEMENTS OF INCOME
Year ended December 31
1997 1996 1995
Income:
Dividends $4,225,000 $ 5,400,000 $2,250,000
Interest 438,648 389,194 336,693
Management fees 781,870 753,851 681,313
Other 36,260 32,578 28
--------- --------- ---------
5,481,778 6,575,623 3,268,034
Expenses:
Interest 120,283 111,542 68,243
Other 1,649,283 1,464,300 1,313,680
--------- -------- ---------
1,769,566 1,575,842 1,381,923
--------- --------- ---------
Income before income tax
credit and equity in
undistributed net
income of subsidiary
Banks 3,712,212 4,999,781 1,886,111
Income tax credit 165,957 124,489 110,515
--------- --------- ---------
3,878,169 5,124,270 1,996,626
Equity in undistributed
net income (excess of
net income of subsidiary
Banks over dividends) 495,995 (1,118,599) 1,282,801
--------- --------- ---------
Net income $4,374,164 $ 4,005,671 $3,279,427
========= ========= =========
STATEMENTS OF CASH FLOWS
Year ended December 31
1997 1996 1995
Operating activities
Net income $ 4,374,164 $ 4,005,671 $ 3,279,427
Adjustments to reconcile net
income to net cash provided
by operating activities:
Excess (equity) in
undistributed income (495,995) 1,118,599 (1,282,801)
Deferred income taxes 192,890 (3,324) 2,000
Other (671,332) (169,629) (96,976)
Increase in fair market value
of securities available for
sale at subsidiaries 454,024 25,743 -
--------- --------- ---------
Net cash provided by operating
activities 3,853,751 4,977,060 1,901,650
Investing activities
Increase in other assets (24,463) (33,276) (104,358)
Purchase of investment
securities (395,548) (3,808,860) (3,626,904)
Maturities of investment
securities 3,680,565 1,650,000 6,049,000
Acquisition of/additional
investment in subsidiaries (10,865,462) (1,000) (6,702,316)
---------- ---------- ----------
Net cash used by investing
activities (7,604,908) (2,193,136) (4,384,578)
Financing activities
Proceeds (repayment) of notes
payable 2,938,156 (100,000) 1,061,844
Net (increase) decrease in
guaranteed ESOP obligation (1,003,222) 48,628 42,489
Cash dividends (1,519,167) (1,260,271) (967,478)
Costs associated with
acquisition - - (119,677)
Issuance of common stock in
acquisition - - 3,321,905
Proceeds from exercise of
stock options 344,126 174,408 64,371
Cancellation of restricted
stock - - (2,912)
---------- ---------- ----------
Net cash provided (used) by
financing activities 759,893 (1,137,235) 3,400,542
---------- ---------- ----------
Increase (decrease) in cash
and cash equivalents (2,991,264) 1,646,689 917,614
Cash and cash equivalents at
beginning of year 3,981,891 2,335,202 1,417,588
---------- ---------- ----------
Cash and cash equivalents at
end of year $ 990,627 $ 3,981,891 $ 2,335,202
========== ========== ==========
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31,
June 30, 1998 1997
ASSETS
Cash and due from banks $22,125,840 $27,506,201
Federal funds sold 5,551,433 11,273,835
Other short-term investments 7,600,000 -0-
---------- ----------
Cash and cash equivalents 35,277,273 38,780,036
Investment securities
Held-to-maturity (fair value
$20,499,000 - June 30, 1998
and $21,208,000 - December 31,
1997) 16,848,229 20,997,095
Available for sale (at fair value) 85,231,732 74,254,433
Loans (net of allowance for loan
losses of $3,371,435-1998 and
$3,306,168-1997) 258,740,498 264,513,049
Premises and equipment 6,570,964 6,914,446
Accrued interest receivable 3,150,306 2,943,801
Other assets 12,100,141 12,875,193
----------- -----------
TOTAL ASSETS $417,919,143 $421,278,053
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 68,244,177 69,170,535
Savings 85,019,978 83,759,867
Money market 91,153,441 89,853,817
Other time 118,574,467 124,707,670
----------- -----------
TOTAL DEPOSITS 362,992,063 367,491,889
Notes payable 900,000 5,300,000
Securities sold under agreements to
repurchase 9,826,139 4,850,160
Federal funds purchased 150,000 -0-
Accrued expenses and other
liabilities 2,615,638 3,213,441
Accrued interest payable 1,627,278 1,874,197
----------- -----------
TOTAL LIABILITIES 378,111,118 382,729,687
Stockholders' equity:
Preferred stock, $1 par value;
authorized--100,000 shares;
issued and outstanding--none
Common stock, $0.10 par value;
authorized--10,000,000 shares
issued and outstanding--3,890,084
shares in 1998 and 3,872,553 in
1997 389,008 387,256
Capital surplus 29,147,048 28,964,328
Net unrealized holding gain on
securities available for sale 555,497 888,649
Retained earnings 11,099,105 9,787,620
Less: Guaranteed ESOP obligation (1,382,633) (1,479,487)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 39,808,025 38,548,366
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $417,919,143 $421,278,053
=========== ===========
See notes to unaudited consolidated financial statements.
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Six months ended June 30,
1998 1997
INTEREST INCOME:
Loans, including fees $ 12,375,916 $9,808,208
Investment securities
Taxable 2,280,457 1,720,140
Tax-exempt 628,445 379,390
Federal funds sold 348,880 12,683
---------- ----------
TOTAL INTEREST INCOME 15,633,698 11,920,421
INTEREST EXPENSE:
Deposits 6,836,217 4,257,729
Notes payable and other
borrowings 299,547 323,329
---------- ----------
TOTAL INTEREST EXPENSE 7,135,764 4,581,058
---------- ----------
NET INTEREST INCOME 8,497,934 7,339,363
Provision for loan losses 285,000 165,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,212,934 7,174,363
OTHER INCOME:
Service charges on deposit
accounts 612,944 512,727
Merchant service fees 599,549 558,905
Building rent 142,228 155,093
ATM fees 235,377 95,329
Gains on sale of loans 375,894 80,615
Investment security gains 407,189 -0-
Other 450,807 199,418
---------- ----------
TOTAL OTHER INCOME 2,823,988 1,602,087
OTHER EXPENSES:
Salaries and employee benefits 3,545,627 2,453,926
Net occupancy expense 486,180 483,404
Equipment rentals, depreciation
and maintenance 741,779 535,716
Data processing 498,170 368,303
Legal and professional 280,170 180,213
Merchant service charges 459,679 461,126
ATM charges 98,967 97,991
Advertising 231,663 190,175
Goodwill amortization 285,440 75,713
Other 1,054,843 740,292
---------- ----------
TOTAL OTHER EXPENSES 7,682,518 5,586,859
INCOME BEFORE INCOME
TAXES 3,354,404 3,189,591
Income taxes 1,127,598 1,090,059
---------- ----------
NET INCOME $ 2,226,806 $ 2,099,532
========== ==========
Basic earnings per common share $ 0.59 $ 0.55
Diluted earnings per common share 0.58 0.54
Dividends per common share 0.24 0.20
Weighted average common shares
outstanding
Basic 3,779,398 3,805,236
Diluted 3,819,060 3,859,241
See notes to unaudited consolidated financial statements.
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
1998 1997
OPERATING ACTIVITIES
Net income $2,226,806 $2,099,532
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses 285,000 165,000
Provision for depreciation 467,423 339,725
Amortization of investment security
premiums and accretion of
discounts-net 97,854 30,404
Amortization of goodwill 285,440 75,713
Amortization of branch acquisition
premium -0- 14,833
Decrease in interest receivable (206,505) (94,298)
Increase (decrease) in interest payable (246,919) 151,215
Realized investment security gains-net (407,189) 151,215
Other 54,973 (207,394)
--------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,556,883 2,574,730
INVESTING ACTIVITIES
Purchase of Investment securities -0- -0-
Maturities of investment securities 4,130,000 5,460,000
Purchases of securities available for
sale (29,624,009) (13,615,318)
Maturities of securities available for
sale 18,478,593 6,576,946
Net decrease (increase) in loans 5,487,551 (9,027,367)
Purchases of premises and equipment (123,941) (279,903)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (1,651,806) (10,885,642)
FINANCING ACTIVITIES
Decrease in deposits (4,499,826) 5,954,635
Decrease in notes payable (4,400,000) (30,000)
Decrease in guaranteed ESOP obligation 96,854 65,528
Net proceeds from securities sold
under agreement to repurchase 4,975,979 2,300,000
Net proceeds from federal funds
purchased 150,000 (5,350,000)
Cash dividends (915,320) (767,110)
Issuance of common stock under
Dividend Reinvestment Plan -0- 204,818
Proceeds from exercise of stock
options 184,473 94,190
---------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES (4,407,840) 2,472,061
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (3,502,763) (5,838,851)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 38,780,036 21,280,918
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $35,277,273 $15,442,067
========== ==========
Supplemental information:
Interest paid $7,382,683 $4,429,843
Income taxes paid 1,170,000 1,201,000
See notes to unaudited consolidated financial statements.
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of State Financial Services Corporation (the "Company") and its
subsidiaries - State Financial Bank (Wisconsin), State Financial Bank -
Waterford ("Waterford"), State Financial Mortgage Company, and Richmond
Bancorp, Inc. ("Bancorp"). State Financial Bank also includes the
accounts of its wholly owned subsidiaries, Hales Corners Development
Corporation and Hales Corners Investment Corporation. Waterford also
includes the accounts of its wholly owned subsidiary, Waterford Investment
Corporation. Bancorp also includes the accounts of its wholly owned
subsidiaries, State Financial Bank (Illinois, "Richmond") and State
Financial Investments, Inc. Richmond also includes the accounts of its
wholly owned subsidiary, State Financial Insurance Agency. All
significant intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three and six month period ending June 30, 1998
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report to stockholders for the year ended December 31,
1997.
NOTE B--ACQUISITIONS
On December 31, 1997, the Company completed its acquisition of Bancorp
located in Richmond, Illinois. The Company purchased the outstanding
common stock of Bancorp for $10,787,000 in cash. In connection with the
acquisition, the Company borrowed $3,900,000 on its line of credit and
assumed $1,400,000 of Bancorp's outstanding debt. At June 30, 1998, the
amount of debt outstanding from the Bancorp acquisition had been reduced
to $900,000. The acquisition was recorded using purchase accounting.
Application of purchase accounting requires the inclusion of Bancorp's
operating results in the consolidated statements of income from the date
of acquisition. Accordingly, Bancorp's operating results are included in
the Company's consolidated statements of income for the three and six
months ended June 30, 1998 and Bancorp's financial condition is included
in the Company's consolidated balance sheets dated June 30, 1998 and
December 31, 1997. No operating results or financial condition of Bancorp
is included in the Company's consolidated statements of income for the
three and six months ended June 30, 1997.
On a pro form basis, total income, net income, basic and fully diluted
earnings per share for the three and six months ended June 30, 1997, after
giving effect to the acquisition of Bancorp as if it had occurred on
January 1, 1997 are as follows:
For the three For the six
months ended months ended
June 30, June 30,
1997 1997
Total income $8,753,962 $17,434,909
Net income 1,091,633 1,917,188
Basic earnings per share $0.29 $0.50
Diluted earnings per share $0.28 $0.50
NOTE C--PENDING ACQUISITION
On June 1, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Home Bancorp of Elgin, Inc., ("Home"), Elgin,
Illinois. Home is the parent thrift holding company of Home Federal
Savings, a thrift institution which operates five offices in Elgin, South
Elgin, Bartlett, Roselle, and Crystal Lake, Illinois. The merger will be
treated as a tax-free exchange under the pooling-of-interests accounting
method.
Pursuant to the Agreement, the exchange ratio in the transaction is
subject to certain caps and will be based on the Company's average closing
price for the twenty consecutive trading days prior to closing based on
the following schedule:
The Comany's
Average Share Price Exchange Ratio
$20.00 - $21.125 Fixed at 0.86
$21.126 - $22.625 Fixed at 0.857143
$22.626 - $30.00 Floating based upon Home value of $19.50
$30.01 - $31.375 Fixed at 0.65
Greater than $31.375 Fixed at 0.64
In the event the Company's average share price is below $20.00, the
Company can elect to close the transaction at the 0.86 exchange ratio or
an exchange ratio assigning $17.25 as the value of Home's shares, subject
to Home's acceptance. Home has also granted the Company an option to
acquire up to 19.9% of its common stock.
The Company estimates that it will take a $12 million pre-tax
restructring charge at closing related to the acquistion.
At June 30, 1998, Home had total assets of $367.7 million. Home's shares
are traded on the Nasdaq National Market under the symbol "HBEI".
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Richmond Bancorp, Inc. and Subsidiaries
Richmond, Illinois
We have audited the accompanying consolidated balance sheet of Richmond
Bancorp, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Richmond Bancorp, Inc. and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Schaumburg, Illinois
February 16, 1998
<PAGE>
RICHMOND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Postacquisition
ASSETS December 31, 1997
Cash and due from banks $ 2,808,036
Securities available for sale 25,593,616
Federal funds sold 4,865,000
Loans held for sale 1,327,526
Loans, net of allowance for loan losses of
$678,235 49,046,753
Premises and equipment 2,131,733
Accrued interest receivable 668,066
Intangible assets 6,248,332
Other assets 744,747
----------
$ 93,433,809
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 8,486,655
Interest bearing 71,434,994
----------
79,921,649
Note payable 1,400,000
Accrued interest 682,467
Other liabilities 564,231
----------
82,568,347
----------
Stockholders' Equity
Common stock; $1 par value, authorized
and issued 1,000 shares 1,000
Additional paid-in capital 10,895,101
Unrealized loss on securities available
for sale, net of taxes of $20,426 (30,639)
----------
10,865,462
----------
$ 93,433,809
==========
See Notes to Consolidated Financial Statements.
<PAGE>
RICHMOND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Preacquisition
Year Ended
December 31, 1997
Interest income on:
Loans $ 5,048,205
Securities available for sale 1,542,140
Federal funds sold 72,067
----------
Total interest income 6,662,412
----------
Interest expense on:
Deposits 3,702,426
Note payable 113,061
----------
Total interest expense 3,815,487
----------
Net Interest Income 2,846,925
Provisions for loan losses 639,500
----------
Net Interest Income After Provision
for Loan Losses 2,207,425
----------
Other income:
Service charges and other fees 334,395
Commission revenue 343,258
Fees from sale of loans 718,746
Securities gains 3,687
Other 204,545
----------
1,604,631
----------
Other expenses:
Salaries and employee benefits 1,837,779
Occupancy expense 592,704
Costs related to sale 305,160
Other 1,072,693
----------
3,808,336
----------
Income Before Income Taxes 3,720
----------
Income taxes 27,359
----------
Net (Loss) $ (23,639)
==========
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
RICHMOND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<CAPTION>
Unrealized Gain
(Loss) on
Additional Securities
Paid-in Retained Available for
Common Stock Capital Earnings Sale, Net Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $1,000 $483,990 $4,008,757 $(213,998) $4,279,758
Net (loss) - - (23,639) - (23,639)
Cash dividends - - (162,723) - (162,723)
Net change in unrealized
gains and losses on
securities available
for sale, net - - - 183,350 183,350
------ ---------- ---------- --------- ----------
Balance, December 31, 1997,
preacquisition 1,000 483,900 3,822,395 (30,639) 4,276,746
Postacquisition transaction:
Effect of pushdown
accounting in relation
to purchase of Richmond
Bancorp, Inc. - 10,411,111 (3,822,395) - 6,588,716
------ ---------- ----------- --------- ----------
Balance, December 31, 1997,
postacquisition $1,000 $10,895,101 $ - $(30,639) $10,865,462
====== ========== =========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
RICHMOND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Preacquisition
Year Ended
December 31, 1997
Cash Flows From Operating Activities
Net (loss) $ (23, 639)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation 301,930
Amortization, net 252,119
Provision for loan losses 639,500
Deferred income taxes (112,528)
Securities/gains, net (3,687)
Proceeds from sales of loans held for
sale 52,115,915
Originations of loans held for sale (51,211,140)
(Increase) decrease in:
Accrued interest payable 93,902
Cash value of life insurance (53,147)
Other assets (403,055)
Accrued interest receivable (24,027)
Other liabilities (189,812)
----------
Net Cash Provided by Operating Activities 1,382,331
----------
Cash Flows From Investing Activities
Proceeds from sale of securities available
for sale 8,256,173
Proceeds from maturities of securities
available for sale 4,750,000
Purchase of securities available for sale (15,047,502)
Increase in Federal funds sold (190,000)
Loans originations, net (4,368,266)
Purchase of premises and equipment (101,473)
Proceeds from sale of cash value of life
insurance 1,321,720
----------
Net Cash (used in) Investing Activities (5,379,348)
----------
Cash Flows From Financing Activities
Net increase (decrease) in:
Interest-bearing deposits 3,156,435
Noninterest bearing deposits (387,745)
Cash dividends (162,723)
----------
Net Cash Provided by Financing Activities 2,605,967
----------
(Decrease) in cash and due from banks (1,391,050)
Cash and due from banks:
Beginning 4,199,086
----------
Ending $ 2,808,036
==========
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest paid to depositors $ 3,608,524
Interest paid on note payable 128,200
Income taxes 71,216
Preacquisition Supplemental Schedule of Noncash
Investing and Financing
Activities
Net change in unrealized (losses) on
securities available for sale, net of
related income taxes of $(122,235) $ 183,350
Postacquisition Supplemental Schedule of
Noncash Investing Activities
Net effect of pushdown accounting in
relation to purchase of
Richmond Bancorp, Inc. and Richmond
Financial Services, Inc.
Write-up of premises to fair market
value $ 491,351
Goodwill 6,248,332
Deferred tax liability provided for write-
up of premises to fair market value 150,967
Additional paid-in capital 6,588,716
See Notes to Consolidated Financial Statements
<PAGE>
RICHMOND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Nature of Business, Purchase of Richmond Bancorp, Inc. and
Richmond Financial Services, Inc. and Significant Accounting
Policies
Nature of business: Richmond Bancorp, Inc., through one of its
subsidiaries, Richmond Bank, provides a full range of financial services
to its customers located throughout northeastern Illinois and southeastern
Wisconsin. The other subsidiary of Richmond Bancorp, Inc., Richmond
Financial Services, Inc. provides financial products and services to a
similar customer base. Richmond Bank's subsidiary, State Financial
Insurance Agency provides insurance services.
Principles of consolidation: The accompanying consolidated financial
statements include the consolidated financial statements of Richmond
Bancorp, Inc. (Bancorp) and its wholly owned subsidiaries, Richmond
Financial Services, Inc. (Financial) and Richmond Bank (Bank). The
financial statements of the bank's wholly owned subsidiary, State
Financial Insurance Agency (State) are also included. Collectively, the
above are referred to as Company. All significant intercompany balances
and transactions have been eliminated in the consolidation.
Basis of presentation: On December 31, 1997, State Financial Services
Corporation purchased the stock of Richmond Bancorp, Inc. and Richmond
Financial Services, Inc. for $10,787,495. An additional $108,606 of
acquisition costs were incurred in relation to the purchase. The purchase
price and resulting new accounting basis of the assets acquired was
pushed-down to the acquired entity, with the net effect on the financial
statements of Richmond Bancorp, Inc. being the write-up of the premises to
its fair value, the recognition of a deferred tax liability for the
portion of the write-up relating to the building and the recognition of
intangible assets representing the excess of the total acquisition cost
over the fair value of the net assets acquired of $6,248,332 which will be
amortized over 15 years by the straight-line method.
Subsequent to the purchase, Richmond Financial Services, Inc. was merged
into Richmond Bancorp, Inc. The assets and liabilities of the insurance
services portion of Richmond Financial Services, Inc. were transferred to
a newly formed subsidiary of Richmond Bank, State Financial Insurance
Agency. This reorganization among entities under common control has been
accounted for under historical cost in a manner similar to a pooling of
interests and accordingly the results of operations for the year ended
December 31, 1997, includes both entities.
This change in ownership occurred as of December 31, 1997. The financial
statements captioned preacquisition include those when Bancorp was owned
by prior stockholders and the financial statement captioned
postacquisition presents Bancorp after it was acquired by State Financial
Services Corporation.
Accounting estimates: The accounting and reporting policies of the Company
conform to generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. Significant
estimates which are particularly susceptible to change in a short period
of time include the determination of allowance for loan losses.
Securities available for sale: Securities classified as available for sale
are those debt securities that the Company intends to hold for an
indefinite period of time, but not necessarily to maturity. Any decision
to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates,
changes in the maturity mix of the Bank's assets and liabilities,
liquidity needs, regulatory capital considerations and other similar
factors.
Securities available for sale are reported at fair value with unrealized
gains or losses reported as a separate component of stockholders' equity,
net of the related deferred tax effect. The amortization of premiums and
accretion of discounts, computed by the interest method over their
contractual lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings. Declines in the fair value of
individual securities classified as available for sale below their
amortized cost that are determined to be other than temporary result in
write-downs of the individual securities to their fair value with the
resulting write-downs included in current earnings as realized losses.
Loans and allowance for loan losses: Loans that management has the intent
and ability to hold for the foreseeable future or until maturity or payoff
are stated at the amount of unpaid principal, reduced by unearned discount
and fees and an allowance for loan losses. Interest on loans is accrued
over the term of the loan based on the amount of principal outstanding.
For impaired loans accrual of interest is discontinued on a loan when
management believes, after considering collection efforts and other
factors, that the borrower's financial condition is such that collection
of interest is doubtful. Interest income is subsequently recognized only
to the extent cash payments are received and the principal is considered
fully collectible.
Unearned interest on discounted loans is amortized to income over the life
of the loans using the interest method. Loan origination and commitment
fees are deferred and amortized as an adjustment of the related loan's
yield. All associated costs are expensed as incurred since any amounts
computed on a deferral basis would not be materially different from that
resulting from the present basis. The Bank is generally amortizing these
amounts over the contractual life of the loan. Fees related to standby
letters of credit are recognized when received.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that collectibility of the principal
is unlikely. The allowance is an amount that management believes will be
adequate to absorb estimated losses on existing loans, based on an
evaluation of the collectibility of loans and prior loss experience. This
evaluation also takes into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans, and current economic conditions that may affect
the borrower's ability to pay. While management uses the best information
available to make its evaluation, future adjustments to the allowance may
be necessary if there are significant changes in economic conditions. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Banks' allowance for loan losses, and may
require the Banks to make additions to the allowance based on their
judgment about information available to them at the time of their
examinations.
Commercial loans less than $100,000, residential real estate mortgages,
home equity loans and installment loans are considered small balance
homogenous loan pools and as such are not evaluated for purposes of
impairment. All other loans are specifically evaluated for impairment.
Loans are considered impaired when, based on current information and
events, it is probable that the Bank will not be able to collect all
amounts due according to the contractual terms of the loan agreement. The
impairment is measured based on the present value of expected future cash
flows, or alternatively, the observable market price of the loans or the
fair value of the collateral. However, for those loans that are
collateral-dependent and for which management has determined foreclosure
is probable, the measure of impairment of those loans is to be based on
the fair value of the collateral. The amount of impairment, if any, and
any subsequent changes are included in the allowance for loan losses.
Loans held for sale: Loans held for sale are those loans the Bank has the
intent to sell in the foreseeable future. They are carried at the lower of
aggregate cost or market value. Gains and losses on sales of loans are
recognized at settlement dates and are determined by the difference
between the sales proceeds and the carrying value of the loans. All sales
are made without recourse.
Premises and equipment: Premises and equipment are stated at cost.
Depreciation is computed principally by accelerated methods for furniture
and equipment and by the straight-line method for premises based on their
estimated useful lives.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
Presentation of cash flows: For purposes of reporting cash flows, cash and
due from banks includes cash on hand and amounts due from banks (including
cash items in process of clearing). Cash flows from loans originated by
the Bank and deposits are reported net.
Revenue recognition: Revenue from insurance policies is recognized when
the policy goes into effect, the premium due under the policy can be
reasonably estimated and the premium is billable to the client. Revenue
from the sale of financial products and services is recognized upon
execution of the sale and fulfillment of services.
Fair value of financial instruments: The Company's assets and liabilities
including financial instruments, were adjusted to fair value upon the
recognition of the push-down bases of accounting. There are no significant
differences between carrying value and fair value of the Company's
financial instruments.
Accounting for transfers and servicing of financial assets and
extinguishment of liabilities: Financial Accounting Standards Board
Statement No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities (FAS 125) distinguishes transfers
of financial assets that are sales from transfers that are secured
borrowings. A transfer of financial assets in which the transferor
surrenders control over those assets is accounted for as a sale to the
extent that consideration other than beneficial interest in the
transferred assets is received in exchange. FAS 125 also established
standards on the initial recognition and measurement of servicing assets
and other retained interests and servicing liabilities, and their
subsequent measurement.
FAS 125 requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their
obligation to return them in certain circumstances in which the secured
party has taken control of those assets. In addition, FAS 125 requires
that a liability be derecognized only if the debtor is relieved of its
obligation through payment to the creditor or by being legally released
from being the primary obligor under the liability either judicially or by
the creditor.
FAS 125 was effective for transactions occurring after December 31, 1996,
except for transactions relating to secured borrowings and collateral for
which the effective date is December 31, 1997. On January 1, 1997, the
Company adopted FAS 125 except for as it relates to transactions involving
secured borrowings and collateral. The effect of adoption of this
Statement was not material. The Company also believes the adoption of FAS
125 for transactions relating to secured borrowings and collateral will
not have a material impact on its consolidated financial statements.
Comprehensive income: The Financial Accounting Standards Board has issued
Statement No. 130, Reporting Comprehensive Income, that the Company will
be required to adopt for its year ended December 31, 1998. This
pronouncement is not expected to have a significant impact on the
Company's financial statements. The Statement establishes standards for
the reporting and presentation of comprehensive income and its components.
The Statement requires that items recognized as components of
comprehensive income be reported in a financial statement. The Statement
also requires that a company classify items of other comprehensive income
by their nature in a financial statement, and display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a statement of
financial position. Comprehensive income at the Company currently consists
of unrealized gains and losses on securities available for sale.
NOTE 2. Securities
Amortized cost and fair values of securities available for sale as of
December 31, 1997, are summarized below:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U.S. Government
corporations and agencies $22,236,310 $ 3,026 $ (57,305) $22,182,103
State and political
subdivisions 3,408,371 7,331 (4,117) 3,411,535
---------- -------- ---------- ----------
$25,644,681 $ 10,357 $ (61,422) $25,593,616
========== ======== =========== ==========
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1997, by contractual maturity are shown below.
Amortized Fair
Cost Value
Due in one year or less $ 100,000 $ 100,000
Due after one year through
five years 20,636,310 20,579,688
Due after five years through
ten years 4,808,371 4,813,370
Due after ten years 100,000 100,558
---------- ----------
$ 25,644,681 $ 25,593,616
========== ==========
Gross realized gains and losses from the sale of securities available for
sale for the year ended December 31, 1997, are as follows:
Realized gains $ 7,243
Realized losses (3,556)
--------
Securities gains, net $ 3,687
========
Securities with a carrying amount of $16,697,000 at December 31, 1997,
were pledged as collateral on public deposits and for other purposes as
required or permitted by law.
NOTE 3. Loans
The composition of net loans as of December 31, 1997, is as follows:
Loans:
Commercial $ 9,978,996
Commercial real estate 11,998,991
Agricultural real estate 144,001
Residential real estate 23,437,988
Consumer installment 5,337,283
----------
50,897,259
Less:
Unearned discount 1,019,955
Deferred loan fees 152,316
----------
Loans, net of unearned income 49,724,988
Allowance for loan losses 678,235
----------
Loans, net $ 49,046,753
==========
The Bank grants commercial, consumer, and residential loans to customers
throughout northeastern Illinois and southeastern Wisconsin. Collateral
requirements are established based on credit risk of each loan as assessed
by management. The loans are expected to be repaid from cash flow of the
borrowers.
Changes in the allowance for loan losses for the year ended December 31,
1997, are as follows:
Balance, beginning $ 462,392
Provision charged to operating expense 639,500
Recoveries of amounts charged off 99,620
Amounts charged off (523,277)
---------
Balance, ending $ 678,235
=========
Impaired loan information as of and for the year ended
December 31, 1997, is as follows:
Impaired loans for which an allowance has been
provided $ 805,413
Impaired loans for which no allowance has been
provided -
---------
Total loans determined to be impaired $ 805,413
=========
Allowance provided for impaired loans, included
in the allowance for loan losses $ 40,271
=========
Average recorded investment in impaired loans $ 1,043,807
Interest income recognized from impaired loans 27,118
Cash basis interest income recognized from
impaired loans 20,118
NOTE 4. Premises and Equipment
Premises and equipment as of December 31, 1997, consist of:
Land $ 200,000
Building and improvements 1,398,355
Furniture and fixtures 257,719
Leasehold improvements 275,659
----------
$ 2,131,733
==========
NOTE 5. Deposits
The composition of deposits at December 31, 1997, is as follows:
Demand deposits, noninterest bearing $ 8,486,655
NOW and money market accounts 18,824,883
Savings deposits 7,659,235
Time certificates, $100,000 or more 17,384,626
Other time certificates 27,566,250
----------
$ 79,921,649
==========
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
Year ending December 31:
1998 $ 29,329,899
1999 4,630,469
2000 5,296,907
2001 500,156
2002 667,513
Thereafter 4,525,932
----------
$ 44,950,876
==========
NOTE 6. Note Payable
The Bancorp has a revolving credit agreement which is collateralized by
all outstanding stock of the Bank and bears interest at the LIBOR rate
plus 2% (average LIBOR rate was 5.9% at December 31, 1997). At December
31, 1997, borrowings under this agreement were $1,400,000 and total
borrowings may not exceed $1,800,000.
The loan agreement with the lending institution requires the Bank to
maintain a minimum level of loan loss allowance, Tier I capital and
nonperforming loans. In addition, the Bancorp is restricted from
declaring or paying a dividend except for tax dividends to stockholders.
NOTE 7. Income Taxes
On January 1, 1997, Bancorp and Bank, with the consent of its
stockholders, elected to be taxed under sections of federal and state
income tax, which provide that in lieu of corporation income taxes, the
stockholders will separately account for their pro rata shares of the
Company's income, deductions, losses and credits. As a result of the
election, the deferred tax asset was charged to expense. During 1996,
Financial made the same election. Therefore, these statements do not
include any provision for corporation income taxes on earnings from
January 1, 1997 to December 30, 1997.
On December 29, 1997, the Company's stockholders terminated this election
effective December 30, 1997. As a result of the December 29, 1997
termination, on December 30, 1997, the Company recorded a net deferred tax
asset of $328,413, by a credit to income tax expense, for temporary
differences between the financial reporting and the income tax basis of
deferred salaries, unearned loan fees, property and equipment and the
allowance for loan loss.
Deferred income taxes at December 31, 1997, consist of the following:
Deferred tax assets:
Allowance for loan losses $ 218,643
Deferred loan fees 59,006
State net operating loss carryforward 23,260
Leasehold improvements 27,504
Net unrealized loss on securities available
for sale 20,426
----------
348,839
Deferred tax liabilities, land,
building and improvements 150,967
----------
Net deferred tax assets $ 197,872
==========
No valuation allowance was deemed necessary.
The net deferred tax assets are included in the
accompanying balance sheets as other assets.
Income tax expense for the year ended December
31, 1997, consist of the following:
Write-off of deferred tax asset related to S
Corporation election $ 215,885
Reinstatement of deferred tax asset related to
termination of S Corporation status (328,413)
Current tax expense based upon two days
earnings 139,887
---------
$ 27,359
=========
Current income tax expense is higher than expected due to the $321,720
taxable gain on sale of cash value of life insurance (see Note 12).
NOTE 8. Employee Benefit Plan
Prior to January 1, 1997, the Company had a noncontributory profit sharing
plan which included a 401(k) provision allowing for employee tax-deferred
contributions. Effective January 1, 1997, the plan was amended to include
a company contribution feature. The Company contributes an amount equal to
100% of the employee's deferral up to $6,000 or 3% of the employee's
compensation. The plan covers all full-time employees who have completed
two years of service unless the individual was enrolled prior to January
1, 1997. Contributions of $27,104 were made for the year ended December
31, 1997.
NOTE 9. Commitments and Contingencies
Financial instruments with off-balance-sheet risk:
The Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the
balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as they do for on-balance-sheet
instruments. A summary of the Bank's commitments is as follows:
Commitments to extend credit $ 7,083,613
Standby letters of credit 885,775
----------
$ 7,969,386
==========
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. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the party. Collateral held
varies, but may include accounts receivable, inventory, securities,
property and equipment, residential real estate and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. Collateral held varies as specified above and is required in
instances which the Bank deems necessary. At December 31, 1997, all of
the standby letters of credit were collateralized.
Financial instruments with concentration of credit risk:
Substantially all of the Bank's loans, commitments to extend credit, and
standby letters of credit have been granted to customers in the Bank's
market area. The Bank does not extend credit to any single borrower or
group of related borrowers in excess of their legal lending limit.
Management considers the portfolio to be well diversified.
NOTE 10. Restrictions on Retained Earnings and Regulatory Matters
Under current banking law, there are limitations on the amount of
dividends that can be paid by the Bank to its holding company without
obtaining prior approval from applicable regulatory agencies. However, the
availability of dividends may be further limited because of the need to
maintain capital ratios satisfactory to applicable regulatory agencies.
The Bank is subject to various regulatory capital requirements
administered by the 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 Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's 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 Bank 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 the Bank meets all
capital adequacy requirements to which it is subject as of December 31,
1997.
As of December 31, 1997, the most recent notification from the regulatory
authorities categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
The Bank's actual capital ratios are also presented in the table.
To be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
Ratio Ratio(a) Ratio(a)
As of December 31, 1997
Total Capital (to Risk-
Weighted Assets) 12.5% 8.0% 10.0%
Tier I Capital (to Risk-
Weighted Assets) 11.3% 4.0% 6.0%
Tier I Capital (to Average
Assets) 7.4% 4.0% 5.0%
(a) The rates provided are minimums under the regulations.
NOTE 11. Related Party Transactions and Lease Commitments
Loans to officers, directors, former stockholders, their immediate
families and related corporations were made in the ordinary course of
business by the Bank. In the opinion of management, these loans are made
on substantially the same terms, including rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and
did not involve more than the normal risk of collectibility or present
unfavorable features. As of December 31, 1997, these loans aggregated
$823,446.
The Bank reimburses a former affiliate for salaries and other operating
expenses directly related to the Bank. At December 31, 1997, the Bank had
a payable to its former affiliate of $41,413. Total expenses for the year
ended December 31, 1997, were $46,693.
The Bank has an operating lease agreement for the rental of the
Libertyville branch from a former affiliate. This lease requires an annual
rental of $30,478 plus a proportionate share of property taxes and
maintenance. The lease expires June 2003. The total minimum rental
commitment at December 31, 1997, under this lease is $380,531 which is due
as follows:
During each of the next five years $ 30,478
During the remaining term of the lease 14,795
NOTE 12. Sale of Cash Value of Life Insurance
Richmond Bank sold the cash value of life insurance policies to the former
owners at December 31, 1997. The sales price approximated the carrying
value of the policies of $1,321,720; however, the sale resulted in taxable
income of $321,720.
<PAGE>
Annex A
AGREEMENT AND PLAN OF MERGER
BETWEEN
STATE FINANCIAL SERVICES CORPORATION
AND
HOME BANCORP OF ELGIN, INC.
June 1, 1998
<PAGE>
TABLE OF CONTENTS
AGREEMENT AND PLAN OF MERGER
Page
ARTICLE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
I.1 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . 1
I.2 Effective Time. . . . . . . . . . . . . . . . . . . . . . . 1
I.3 Effects of the Merger. . . . . . . . . . . . . . . . . . . 2
I.4 Conversion of HBE Common Stock; Treatment of
SFS Common Stock . . . . . . . . . . . . . . . . . . . . . 2
I.5 Stock Options. . . . . . . . . . . . . . . . . . . . . . . 4
I.6 Articles of Incorporation. . . . . . . . . . . . . . . . . 5
I.7 By-Laws. . . . . . . . . . . . . . . . . . . . . . . . . . 5
I.8 Tax Consequences. . . . . . . . . . . . . . . . . . . . . . 5
I.9 Board of Directors and Officers of the
Surviving Corporation. . . . . . . . . . . . . . . . . . . 5
I.10 Adjustments for Dilution and Other Matters. . . . . . . . . 6
I.11 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
II.1 SFS to Make Shares Available. . . . . . . . . . . . . . . . 6
II.2 Exchange of Certificates. . . . . . . . . . . . . . . . . . 6
ARTICLE III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
III.1 . Corporate Organization . . . . . . . . . . . . . . . . 9
III.2 . Capitalization . . . . . . . . . . . . . . . . . . . . 9
III.3 . Authority; No Violation. . . . . . . . . . . . . . . . 10
III.4 . Consents and Approvals. . . . . . . . . . . . . . . . 11
III.5 . Reports. . . . . . . . . . . . . . . . . . . . . . . . 11
III.6 . Financial Statements. . . . . . . . . . . . . . . . . 11
III.7 . Broker's Fees. . . . . . . . . . . . . . . . . . . . . 12
III.8 . Absence of Certain Changes or Events. . . . . . . . . 12
III.9 . Legal Proceedings. . . . . . . . . . . . . . . . . . . 13
III.10 . Taxes and Tax Returns. . . . . . . . . . . . . . . . . 13
III.11 . Employees. . . . . . . . . . . . . . . . . . . . . . . 14
III.12 . SEC Reports. . . . . . . . . . . . . . . . . . . . . . 15
III.13 . Compliance with Applicable Law. . . . . . . . . . . . 15
III.14 . Certain Contracts. . . . . . . . . . . . . . . . . . . 15
III.15 . Agreements with Regulatory Agencies. . . . . . . . . . 16
III.16 . Other Activities of HBE and the HBE Bank. . . . . . . 17
III.17 . Investment Securities. . . . . . . . . . . . . . . . . 17
III.18 . Undisclosed Liabilities. . . . . . . . . . . . . . . . 17
III.19 . Insurance. . . . . . . . . . . . . . . . . . . . . . . 17
III.20 . Loan Loss Reserves. . . . . . . . . . . . . . . . . . 17
III.21 . Environmental Liability. . . . . . . . . . . . . . . . 18
III.22 . Approval Delays. . . . . . . . . . . . . . . . . . . . 18
III.23 . Vote Required. . . . . . . . . . . . . . . . . . . . . 18
III.24 . Ownership of SFS Common Stock. . . . . . . . . . . . . 18
III.25 . Tax Matters and Pooling. . . . . . . . . . . . . . . . 18
III.26 . Saleability of Mortgage Loans in Secondary Market. . . 18
ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
IV.1 Corporate Organization. . . . . . . . . . . . . . . . . . . 18
IV.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . 19
IV.3 Authority; No Violation. . . . . . . . . . . . . . . . . . 20
IV.4 Consents and Approvals. . . . . . . . . . . . . . . . . . . 21
IV.5 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . 21
IV.6 Financial Statements. . . . . . . . . . . . . . . . . . . . 22
IV.7 Broker's Fees. . . . . . . . . . . . . . . . . . . . . . . 22
IV.8 Absence of Certain Changes or Events. . . . . . . . . . . . 22
IV.9 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 23
IV.10 . Taxes and Tax Returns. . . . . . . . . . . . . . . . . 23
IV.11 . Employees. . . . . . . . . . . . . . . . . . . . . . . 24
IV.12 . SEC Reports. . . . . . . . . . . . . . . . . . . . . . 25
IV.13 . Compliance with Applicable Law. . . . . . . . . . . . 25
IV.14 . Certain Contracts. . . . . . . . . . . . . . . . . . . 25
IV.15 . Agreements with Regulatory Agencies. . . . . . . . . . 26
IV.16 . Other Activities of SFS and its SFS Subsidiaries. . . 27
IV.17 . Investment Securities. . . . . . . . . . . . . . . . . 27
IV.18 . Undisclosed Liabilities. . . . . . . . . . . . . . . . 27
IV.19 . Insurance. . . . . . . . . . . . . . . . . . . . . . . 27
IV.20 . Loan Loss Reserves. . . . . . . . . . . . . . . . . . 27
IV.21 . Environmental Liability. . . . . . . . . . . . . . . . 28
IV.22 . Approval Delays. . . . . . . . . . . . . . . . . . . . 28
IV.23 . Vote Required. . . . . . . . . . . . . . . . . . . . . 28
IV.24 . Ownership of HBE Common Stock. . . . . . . . . . . . . 28
IV.25 . Tax Matters and Pooling. . . . . . . . . . . . . . . . 28
ARTICLE V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
V.1 Conduct of Businesses Prior to the Effective Time. . . . . 28
V.2 Forbearances. . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
VI.1 Regulatory Matters; Cooperation with Respect to Filing . . 31
VI.2 Access to Information; Due Diligence. . . . . . . . . . . . 32
VI.3 Shareholders' Approvals. . . . . . . . . . . . . . . . . . 33
VI.4 Legal Conditions to Merger. . . . . . . . . . . . . . . . . 34
VI.5 Listing of Shares. . . . . . . . . . . . . . . . . . . . . 34
VI.6 Indemnification; Directors' and Officers' Insurance. . . . 34
VI.7 Additional Agreements. . . . . . . . . . . . . . . . . . . 36
VI.8 Advice of Changes. . . . . . . . . . . . . . . . . . . . . 36
VI.9 No Conduct Inconsistent with this Agreement. . . . . . . . 36
VI.10 Employee Matters. . . . . . . . . . . . . . . . . . . . . 37
VI.11 Tax Treatment and Pooling. . . . . . . . . . . . . . . . 39
VI.12 Dividends. . . . . . . . . . . . . . . . . . . . . . . . 39
VI.13 Rule 145 Affiliates. . . . . . . . . . . . . . . . . . . 40
VI.14 Disclosure Schedules. . . . . . . . . . . . . . . . . . . 40
VI.15 Filing and Other Fees. . . . . . . . . . . . . . . . . . 40
ARTICLE VII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
VII.1 Conditions to Each Party's Obligation To
Effect the Merger. . . . . . . . . . . . . . . . . . . . 40
VII.2 Conditions to Obligations of HBE. . . . . . . . . . . . . 42
(a) Representations and Warranties. . . . . . . . . . . . 42
(b) Performance of Obligations of SFS. . . . . . . . . . . 42
(c) No Material Adverse Change. . . . . . . . . . . . . . 42
(d) Opinion of Counsel to SFS. . . . . . . . . . . . . . . 42
(e) Comfort Letters. . . . . . . . . . . . . . . . . . . . 42
(f) Fairness Opinion. . . . . . . . . . . . . . . . . . . 42
VII.3 Conditions to Obligations of SFS. . . . . . . . . . . 42
(a) Representations and Warranties. . . . . . . . . . . . 43
(b) Performance of Obligations of HBE. . . . . . . . . . . 43
(c) No Material Adverse Change. . . . . . . . . . . . . . 43
(d) Opinion of Counsel to HBE. . . . . . . . . . . . . . . 43
(e) Comfort Letters. . . . . . . . . . . . . . . . . . . . 43
(f) Fairness Opinion. . . . . . . . . . . . . . . . . . . 43
(g) Affiliate Agreements. . . . . . . . . . . . . . . . . 43
ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
VIII.1 Termination. . . . . . . . . . . . . . . . . . . . . . 44
VIII.2 Effect of Termination. . . . . . . . . . . . . . . . . 45
VIII.3 Remedies and Expenses Upon Breach or Willful
Breach. . . . . . . . . . . . . . . . . . . . . . . . 46
VIII.4 Amendment. . . . . . . . . . . . . . . . . . . . . . . 46
VIII.5 Extension; Waiver. . . . . . . . . . . . . . . . . . . 46
ARTICLE IX . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
IX.1 Non-survival of Representations, Warranties and
Agreements. . . . . . . . . . . . . . . . . . . . . . . . 47
IX.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 47
IX.3 Interpretation; Definitions. . . . . . . . . . . . . . . . 48
IX.4 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 49
IX.5 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 49
IX.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . 49
IX.7 Severability. . . . . . . . . . . . . . . . . . . . . . . . 49
IX.8 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . 49
IX.9 Assignment; Third Party Beneficiaries. . . . . . . . . . . 49
IX.10 Enforcement. . . . . . . . . . . . . . . . . . . . . . 49
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
June 1, 1998, by and between State Financial Services Corporation, a
Wisconsin corporation ("SFS"), and Home Bancorp of Elgin, Inc., a Delaware
corporation ("HBE").
WHEREAS, the Boards of Directors of SFS and HBE have determined
that it is in the best interests of their respective corporations and
their shareholders to consummate a merger in which HBE will merge with and
into SFS (the "Merger"), so that SFS is the resulting corporation
(hereinafter sometimes called the "Surviving Corporation") in the Merger;
WHEREAS, as a condition to, and immediately after the execution
of this Agreement, SFS and HBE are entering into a Stock Option Agreement
(the "HBE Stock Option Agreement"), attached hereto as Exhibit A; and
WHEREAS, the parties desire to make certain representations,
warranties and agreements in connection with, and to prescribe certain
conditions, to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
Subject to the terms and conditions of this Agreement and the
Plan of Merger, a copy of which is attached hereto substantially in the
form of Exhibit B (the "Plan of Merger"), in accordance with the Wisconsin
Business Corporation Law (the "WBCL") and the Delaware General Corporation
Law, at the Effective Time (as defined in Section 1.2), HBE shall merge
with and into SFS, and SFS shall survive the Merger and shall continue its
corporate existence under the laws of the State of Wisconsin. Upon
consummation of the Merger, the separate corporate existence of HBE shall
terminate and the name of the Surviving Corporation shall be "State
Financial Services Corporation."
The parties agree that HBE and SFS will execute a Plan of Merger
substantially in the form attached hereto as Exhibit B which provides for
the terms of the Merger and the mode of carrying same into effect.
1.2 Effective Time.
The Merger shall become effective upon the later of (a) the
time of filing of Articles of Merger with the Department of Financial
Institutions of the State of Wisconsin (the "Wisconsin Department"), (b)
the time of filing a Certificate of Merger with the Secretary of State of
the State of Delaware and (c) the effective date and time of the Merger as
set forth in such Certificate of Merger and Articles of Merger. The
parties shall each use reasonable efforts to cause Articles of Merger and
a Certificate of Merger to be filed on the Closing Date (as defined in
Section 1.11). The term "Effective Time" shall be the date and time when
the Merger becomes effective, in accordance with this Section 1.2.
1.3 Effects of the Merger. At and after the Effective Time, the
Merger shall have the effects set forth in Section 180.1106 of the WBCL
and Section 252 of the Delaware General Corporation law.
1.4 Conversion of HBE Common Stock; Treatment of SFS Common Stock
(a) At the Effective Time, subject to Section 2.2, by virtue of the
Merger and without any action on the part of HBE, or the holder
of any securities of HBE, each share of the common stock, $.01
par value, of HBE (the "HBE Common Stock") issued and
outstanding immediately prior to the Effective Time (other than
shares canceled pursuant to Section 1.4(c)) shall be converted
into the right to receive the number of shares of the common
stock, par value $.10 per share, of SFS (the "SFS Common Stock")
equal to the Exchange Ratio determined as set forth in
subparagraph (b) below (the "Exchange Ratio").
(b) If the Market Value of SFS Common Stock (as defined below) on
the Decision Date is as set forth below, then the Exchange Ratio
shall be as indicated:
Market Value Exchange Ratio
(i) less than or equal to $21.125 (i) .86
(ii) greater than $21.125 and less (ii) .857143
than or equal to $22.625
(iii) greater than $22.625 and less (iii) the quotient obtained by
than or equal to $30.00 dividing $19.50 by the
Market Value of SFS
Common Stock
(iv) greater than $30.00 and less (iv) .65
than or equal to $31.375
(v) greater than $31.375 (v) .64
(c) For purposes of this Agreement the "Market Value of SFS Common
Stock," on any date, will be equal to the average closing sale
price of SFS Common Stock as reported on the Nasdaq National Market
System ("NASDAQ-NMS") for the twenty (20) consecutive trading days
immediately preceding the five (5) business days immediately
preceding such date.
(d) The term "Decision Date" shall mean the first business day on which
the last of the following events shall have occurred: (i) receipt
of all necessary state and federal regulatory approvals and the
expiration of all required waiting periods, (ii) approval of the
transactions contemplated by this Agreement by the shareholders of
HBE, (iii) approval of the transactions contemplated by this
Agreement by the shareholders of SFS, and (iv) the date, after the
last to occur of subsections (i) through (iii) above but not more
than thirty (30) days thereafter, on which the Market Value of SFS
Common Stock is greater than or equal to $20.00.
(e) If the Market Value of SFS Common Stock on the Decision Date is
less than $20.00, HBE may notify SFS in writing, which must be
received by SFS within three business days after the Decision Date,
that it is not willing to close on the basis of the Exchange Ratio
set forth in Section l.4(b)(i) above. If HBE fails to give such
notice by such time, it shall be deemed to have agreed to close on
the basis of the Exchange Ratio set forth in Section l.4(b)(i)
above. Upon receipt of such notice, SFS may elect (i) to close on
the basis of an Exchange Ratio equal to the quotient obtained by
dividing $17.25 by the Market Value of SFS Common Stock on the
Decision Date (the "Optional Exchange Ratio"), or (ii) to require
closing on the basis of the Exchange Rate set forth in Section
l.4(b)(i) above, in any case by notice in writing, which must be
received by HBE within three business days after SFS's receipt of
such notice from HBE. If SFS fails to make such election, it shall
be deemed to have agreed to close on the basis of the Optional
Exchange Ratio. If SFS elects clause (ii) above, then HBE may elect
to terminate this Agreement by notice in writing, which must be
received by SFS within three business days after HBE's receipt of
such notice from SFS. If HBE fails to give such notice of
termination by such time, it shall be deemed to have agreed to
close on the basis of the Exchange Ratio set forth in Section
l.4(b)(i) above.
(f) All of the shares of HBE Common Stock converted into SFS Common
Stock pursuant to this Article I shall no longer be outstanding and
shall automatically be canceled and shall cease to exist as of the
Effective Time, and each certificate (each an "HBE Common Stock
Certificate") previously representing any such shares of HBE Common
Stock shall thereafter represent only the right to receive (i) a
certificate representing the number of whole shares of SFS Common
Stock (each a "SFS Common Stock Certificate") and (ii) cash in lieu
of fractional shares into which the shares of HBE Common Stock
previously represented by such HBE Common Stock Certificate have
been converted pursuant to this Section 1.4, Section 2.2 and the
Plan of Merger. HBE Common Stock Certificates previously
representing shares of HBE Common Stock shall be exchanged for SFS
Common Stock Certificates representing whole shares of SFS Common
Stock and cash in lieu of fractional shares issued in consideration
therefor upon the surrender of such HBE Common Stock Certificates
in accordance with Section 2.2, without any interest thereon.
(g) At the Effective Time, all shares of HBE Common Stock that are
owned by HBE as treasury stock, owned by the HBE RRP (as defined
herein) and not allocated to participants thereunder or owned by
SFS, if any, shall be canceled and shall cease to exist, and no
stock of SFS or other consideration shall be delivered in exchange
therefor.
(h) At and after the Effective Time, each share of SFS Common Stock
issued and outstanding immediately prior to the Effective Time
shall remain an issued and outstanding share of common stock of the
Surviving Corporation and shall not be affected by the Merger.
1.5 Stock Options.
(a) At the Effective Time, each option granted by HBE under the terms
of the Home Bancorp of Elgin, Inc. 1997 Stock Option Plan (the
"HBE Option Plan") to purchase shares of HBE Common Stock which is
outstanding and unexercised immediately prior thereto shall cease
to represent a right to acquire shares of HBE Common Stock and
shall be converted automatically into an option to purchase shares
of SFS Common Stock in an amount and at an exercise price
determined pursuant to paragraph (c) of this Section 1.5 (the
"Converted Option"), subject to the terms of the HBE Option Plan
and the agreements evidencing grants of such options thereunder.
(b) From and after the Effective Time, SFS shall assume any and all
obligations of HBE under the HBE Option Plan, and the HBE Option
Plan shall remain in effect.
(c) (i) The number of shares of SFS Common Stock to be subject to each
Converted Option shall be equal to the product of the number of
shares of HBE Common Stock subject to the original option and the
"HBE Exchange Ratio" (as defined below), provided that any
fractional shares of SFS Common Stock resulting from such
multiplication shall be rounded up to the nearest whole share; and
(ii) the exercise price per share of SFS Common Stock under the
Converted Option shall be equal to the exercise price per share of
HBE Common Stock under the original option divided by the HBE
Exchange Ratio, provided that such exercise price shall be rounded
down to the nearest whole cent. The term "HBE Exchange Ratio"
shall mean whichever of the Exchange Ratio or the Optional Exchange
Ratio is implemented at the Effective Time for the exchange of HBE
Common Stock in accordance with Section 1.4 hereof.
Notwithstanding the provisions of Section 1.5(c)(i) and (ii) above,
each Converted Option which is intended to be an "incentive stock
option" shall be adjusted as required by Section 424 of the
Internal Revenue Code of 1986 ("Code"), and the regulations
promulgated thereunder, so as not to constitute a modification,
extension or renewal of the Converted Option within the meaning of
Section 424(h) of the Code, and all Converted Options shall be
adjusted, if necessary so as not to impair the eligibility of the
Merger for "pooling-of-interests" accounting treatment. SFS and
HBE agree to take all steps necessary to effect the foregoing
provisions of this Section 1.5(c).
(d) Promptly after the execution of this Agreement, HBE shall take such
action, which shall be reasonably satisfactory to SFS, as HBE may
deem necessary in order that each Converted Option shall be, at the
Effective Time, assumed by SFS and shall from and after the
Effective Time no longer entitle the holder thereof to purchase
shares of HBE Common Stock but shall be converted into and shall
become by virtue of the Merger, automatically and without any
action on the part of the holder thereof, a stock option to
purchase such number of shares of SFS Common Stock at such exercise
price as determined pursuant to paragraph (c) of this Section 1.5.
(e) As soon as practicable after the Effective Time, SFS shall deliver
to each participant in the HBE Option Plan an appropriate notice
setting forth such participant's rights pursuant thereto; the
Converted Options shall remain subject to the terms of the HBE
Option Plan and shall continue in effect after the Effective Time
on the same terms and conditions as those in effect prior to the
Effective Time, including without limitation, the duration thereof,
subject to the adjustments required by Section 1.5(c) hereof, after
giving effect to the Merger. The foregoing provisions are intended
to be for the benefit of, and shall be enforceable by, each party
to, or beneficiary of, the foregoing agreements or arrangements,
and his or her representatives.
(f) SFS shall reserve shares to be issued upon the exercise of
Converted Options prior to the Effective Time. As soon as
practicable after the Effective Time, and in any event no more than
ten (10) days after the Effective Time, SFS shall file a
registration statement on Form S-8 or S-3, as the case may be, (or
other successor or appropriate forms) with respect to the shares of
SFS Common Stock subject to the Converted Options and SFS shall use
its best efforts to maintain the current status of the prospectus
or prospectuses contained therein for so long as such Converted
Options remain outstanding. The foregoing provisions are intended
to be for the benefit of, and shall be enforceable by, each party
to, or beneficiary of, the foregoing agreements or arrangements,
and his or her representatives.
1.6 Articles of Incorporation. The Articles of Incorporation of
SFS in effect as of the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation after the Merger until
thereafter amended in accordance with applicable law.
1.7 By-Laws. The By-Laws of SFS in effect as of the Effective
Time, shall be the By-Laws of the Surviving Corporation after the Merger
until thereafter amended in accordance with applicable law.
1.8 Tax Consequences. It is intended that the Merger shall
constitute a reorganization within the meaning of Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the "Code"), and that this
Agreement and the Plan of Merger shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code.
1.9 Board of Directors and Officers of the Surviving Corporation.
The directors of SFS immediately prior to the Effective Time shall be the
directors of the Surviving Corporation at the Effective Time, each to hold
office in accordance with the Articles of Incorporation and By-Laws of the
Surviving Corporation. The officers of SFS immediately prior to the
Effective Time shall be the officers of the Surviving Corporation at the
Effective Time, in each case until their respective successors are duly
elected or appointed.
1.10 Adjustments for Dilution and Other Matters. If prior to
the Effective Time, (i) HBE shall declare a stock dividend or distribution
upon or subdivide, split up, reclassify or combine the HBE Common Stock,
or declare a dividend or make a distribution on HBE Common Stock in any
security convertible into HBE Common Stock, or (ii) SFS shall declare a
stock dividend or distribution upon or subdivide, split up, reclassify or
combine the SFS Common Stock or declare a dividend or make a distribution
on SFS Common Stock in any security convertible into SFS Common Stock,
appropriate adjustment or adjustments will be made to the Exchange Ratio
(and, if applicable, the Optional Exchange Ratio) and the method for
calculating the Exchange Ratio as set forth in Section I.4 hereof.
1.11 Closing. Subject to the terms and conditions of this
Agreement and the Plan of Merger, including but not limited to the
provisions of Article VII of this Agreement, the closing of the Merger
(the "Closing") will take place at 10:00 a.m. Central Time on a date and
at a place to be specified by the parties, which shall be no later than
the first business day in the calendar month immediately following the
month in which the last of the conditions precedent to the Merger set
forth in Article VII hereof is satisfied or waived, or at such other time,
date and place as HBE and SFS shall mutually agree (the "Closing Date").
ARTICLE II
CONVERSION OF SHARES
II.1 SFS to Make Shares Available. At or prior to the Effective
Time, SFS shall deposit, or shall cause to be deposited, with a bank,
trust company or other entity reasonably acceptable to HBE, which may be
an affiliate of SFS, (the "Exchange Agent"), for the benefit of the
holders of HBE Common Stock Certificates, for exchange in accordance with
this Article II, SFS Common Stock Certificates and cash in lieu of any
fractional shares of SFS Common Stock (such cash and SFS Common Stock
Certificates, together with any dividends or distributions with respect
thereto paid after the Effective Time, being hereinafter referred to as
the "Conversion Fund") to be issued pursuant to Section 1.4 and paid
pursuant to Section 2.2(a) in exchange for outstanding shares of HBE
Common Stock.
II.2 Exchange of Certificates.
(A) As soon as practicable after the Effective Time, and in no event
later than ten (10) business days thereafter, the Surviving
Corporation shall cause the Exchange Agent to mail to each holder
of record of one or more HBE Common Stock Certificates a letter of
transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the HBE Common Stock Certificates
shall pass, only upon delivery of the HBE Common Stock Certificates
to the Exchange Agent) and instructions for use in effecting the
surrender of the HBE Common Stock Certificates in exchange for SFS
Common Stock Certificates and any cash in lieu of fractional shares
into which the shares of HBE Common Stock represented by such HBE
Common Stock Certificate or Certificates shall have been converted
pursuant to this Agreement and the Plan of Merger. Upon proper
surrender of an HBE Common Stock Certificate for exchange and
cancellation to the Exchange Agent, together with such properly
completed letter of transmittal, duly executed, the holder of such
HBE Common Stock Certificate shall be entitled to receive in
exchange therefor, as applicable, (i) a SFS Common Stock
Certificate representing that number of whole shares of SFS Common
Stock to which such holder of HBE Common Stock shall have become
entitled pursuant to the provisions of Section 1.4 hereof, and (ii)
a check representing the amount of any cash in lieu of fractional
shares that such holder has the right to receive in respect of such
HBE Common Stock Certificate, and the HBE Common Stock Certificate
so surrendered shall forthwith be canceled. No interest will be
paid or accrued on any cash in lieu of fractional shares payable to
holders of HBE Common Stock Certificates.
(b) If any SFS Common Stock Certificate is to be issued in a name other
than that in which the HBE Common Stock Certificate surrendered in
exchange therefor is registered, it shall be a condition of the
issuance thereof that the HBE Common Stock Certificate so
surrendered shall be properly endorsed (or accompanied by an
appropriate instrument of transfer) and otherwise in proper form
for transfer, and that the person requesting such exchange shall
pay to the Exchange Agent in advance any transfer or other taxes
required by reason of the issuance of an SFS Common Stock
Certificate in any name other than that of the registered holder
of the HBE Common Stock Certificate surrendered, or required for
any other reason, or shall establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
(c) After the Effective Time, there shall be no transfers on the stock
transfer books of HBE of the shares of HBE Common Stock which were
issued and outstanding immediately prior to the Effective Time.
If, after the Effective Time, HBE Common Stock Certificates are
presented for transfer to the Exchange Agent, they shall be
canceled and exchanged for SFS Common Stock Certificates
representing shares of SFS Common Stock as provided in this Article
II.
(d) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of SFS Common
Stock shall be issued upon the surrender for exchange of HBE Common
Stock Certificates, no dividend or distribution with respect to SFS
Common Stock shall be payable on or with respect to any fractional
share, and such fractional share interests shall not entitle the
owner thereof to vote or to any other rights of a shareholder of
the Surviving Corporation. In lieu of the issuance of any such
fractional share, the Surviving Corporation shall pay to each
former shareholder of HBE who otherwise would be entitled to
receive such fractional share an amount in cash determined by
multiplying (i) the Market Value of SFS Common Stock on the
Decision Date by (ii) the fraction of a share (rounded to the
nearest tenth when expressed as an Arabic number) of SFS Common
Stock to which such holder would otherwise be entitled to receive
pursuant to Section 1.4.
(e) Any portion of the Conversion Fund that remains unclaimed by the
shareholders of HBE for twelve (12) months after the Effective Time
shall be paid to the Surviving Corporation. Any shareholders of
HBE who have not theretofore complied with this Article II shall
thereafter look only to the Surviving Corporation for the issuance
of certificates representing shares of SFS Common Stock and the
payment of cash in lieu of any fractional shares and any unpaid
dividends and distributions on the SFS Common Stock deliverable in
respect of each share of HBE Common Stock such shareholder holds as
determined pursuant to this Agreement and the Plan of Merger, in
each case, without any interest thereon. Notwithstanding the
foregoing, none of SFS, HBE, the Exchange Agent or any other person
shall be liable to any former holder of shares of HBE Common Stock,
for any amount delivered in good faith to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(f) In the event any HBE Common Stock Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact
by the person claiming such HBE Common Stock Certificate to be
lost, stolen or destroyed and, if reasonably required by the
Surviving Corporation, the posting by such person of a bond in such
amount as the Exchange Agent may determine is reasonably necessary
as indemnity against any claim that may be made against it with
respect to such HBE Common Stock Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed HBE
Common Stock Certificate an SFS Common Stock Certificate
representing the shares of SFS Common Stock and any cash in lieu of
fractional shares deliverable in respect thereof pursuant to this
Agreement and the Plan of Merger.
(g) In the case of any shareholder of HBE who did not vote for or
consent to the Merger and who demands appraisal as provided in
Section 262 of the Delaware General Corporation Law, each share of
HBE Common Stock held by such shareholder will be converted into
the right to receive the value of the share as provided in such
statute. At the Closing Date, the holders of HBE Common Stock will
cease to have any rights with respect to such stock other than the
rights to receive SFS Common Stock, cash in lieu of fractional
shares or the value of the stock as herein provided or as provided
by law.
(h) No transfer taxes shall be payable by any shareholders of HBE in
respect of the issuance of certificates for SFS Common Stock and no
expenses shall be imposed on any shareholder of HBE in connection
with the conversion of shares of HBE Common Stock into shares of
SFS Common Stock and the delivery of such shares to the former
holder of HBE Common Stock entitled thereto, except that, if any
certificate for shares of SFS Common Stock is to be issued in a
name other than that in which a certificate or certificates for
shares of HBE Common Stock surrendered shall have been registered,
it shall be a condition to such issuance that the person requesting
such issuance shall pay to SFS any transfer taxes payable by reason
thereof or of any prior transfer of such surrendered certificate or
certificates or establish to the reasonable satisfaction of the
Exchange Agent that such taxes have been paid or are not payable.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HBE
HBE hereby represents and warrants to SFS as follows:
III.1 Corporate Organization
(a) HBE is a corporation duly organized and validly existing under the
laws of the State of Delaware. HBE has the corporate power and
authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly
licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or
location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure
to be so licensed or qualified would not have a Material Adverse
Effect (as defined in Section IX.3 below) on HBE. HBE is duly
registered as a savings and loan holding company under the Home
Owners' Loan Act ("HOLA"). True and complete copies of the
Articles of Incorporation and By-Laws of HBE, as in effect as of
the date of this Agreement, have previously been made available by
HBE to SFS.
(b) As of the date of this Agreement, HBE has, as its sole direct or
indirect Subsidiary, Home Federal Savings and Loan Association of
Elgin ("HBE Bank"), a federally-chartered savings and loan
association. Except as set forth on Schedule 3.1(b) of the
disclosure schedules to this Agreement prepared and delivered by
HBE (the "HBE Disclosure Schedules"), HBE does not own any voting
stock or equity securities of any bank, corporation, partnership,
limited liability company, or other organization, whether
incorporated or unincorporated, other than the HBE Bank.
(c) Except as set forth in Schedule 3.1(c), the HBE Bank (i) is duly
organized and validly existing as a corporation under the laws of
its jurisdiction of organization, (ii) is duly qualified to do
business and in good standing in all jurisdictions (whether
federal, state, local or foreign) where its ownership or leasing of
property or the conduct of its business requires it to be so
qualified and in which the failure to be so qualified would have a
Material Adverse Effect on HBE, and (iii) has all requisite
corporate power and authority to own or lease its properties and
assets and to carry on its business as now conducted. Except as
set forth in Schedule 3.1(c) of the HBE Disclosure Schedules, the
HBE Bank does not own any voting stock or equity securities of any
bank, corporation, partnership, limited liability company, or other
organization, whether incorporated or unincorporated.
(d) The minute books of HBE and of the HBE Bank have been made
available to SFS and accurately reflect in all material respects
all corporate meetings held or actions taken since January 1, 1994
by the shareholders and Boards of Directors of HBE and the HBE
Bank, respectively (including committees of the Boards of Directors
of HBE and the HBE Bank).
III.2 Capitalization
(a) The authorized capital stock of HBE consists of 12,000,000 shares
of HBE Common Stock, $.01 par value per share, of which, as of May
28, 1998, 6,855,799 shares were issued and outstanding (which
number excludes six (6) shares of HBE Common Stock held by the Home
Bancorp of Elgin, Inc. 1997 Recognition and Retention Plan (the
"HBE RRP") which have not been awarded to participants thereunder)
and 3,000,000 shares of preferred stock, $.01 par value, of which,
as of May 28, 1998, none were issued and outstanding. As of May
28, 1998, 153,451 shares of HBE Common Stock were held in treasury.
All of the issued and outstanding shares of HBE Common Stock have
been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. Except for the HBE
Stock Option Agreement and as set forth on Schedule 3.2(a) of the
HBE Disclosure Schedules, HBE does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the purchase or issuance of
any shares of HBE Common Stock or any other equity securities of
HBE or any securities representing the right to purchase or
otherwise receive any shares of the capital stock of HBE. No
shares of HBE Common Stock have been reserved for issuance, other
than the shares of HBE Common Stock reserved for issuance under the
HBE Stock Option Agreement and HBE Option Plan. Since May 28,
1998, HBE has not issued any shares of its capital stock or any
securities convertible into or exercisable for any shares of its
capital stock except upon exercise of stock options pursuant to the
HBE Option Plan outstanding as of May 28, 1998 and except with
respect to the HBE Stock Option Agreement.
(b) HBE owns, directly or indirectly, all of the issued and outstanding
shares of capital stock of the HBE Bank, free and clear of any
liens, pledges, charges, encumbrances and interests whatsoever
("Liens"). All of the shares of capital stock of the HBE Bank are
duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. The HBE Bank is not
bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase
or issuance of any shares of capital stock or any other equity
security of the HBE Bank or any securities representing the right
to purchase or otherwise receive any shares of capital stock or any
other equity security of the HBE Bank.
III.3 Authority; No Violation. HBE has full corporate power and
authority to execute and deliver each of this Agreement, the Plan of
Merger and the HBE Stock Option Agreement and, subject to shareholder and
regulatory approvals, to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement, the Plan of
Merger and the HBE Stock Option Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of HBE. The Board of Directors of HBE
has directed that this Agreement and the Plan of Merger and the
transactions contemplated hereby and thereby be submitted to HBE's
shareholders for approval at a meeting of such shareholders and, except
for the adoption of this Agreement and the Plan of Merger by the
affirmative vote of the holders of a majority of the outstanding shares of
HBE Common Stock, no other corporate proceedings on the part of HBE are
necessary to approve this Agreement, the Plan of Merger and the HBE Stock
Option Agreement and to consummate the transactions contemplated hereby
and thereby. This Agreement and the HBE Stock Option Agreement have been
duly and validly executed and delivered by HBE and (assuming due
authorization, execution and delivery by SFS) constitute valid and binding
obligations of HBE, enforceable against HBE in accordance with their
respective terms. Furthermore, the Plan of Merger, when executed and
delivered by HBE and (assuming due authorization, execution and delivery
by SFS), shall constitute a valid and binding obligation of HBE,
enforceable against HBE in accordance with its terms.
III.4 Consents and Approvals. No consents or approvals of or
filings or registrations with any court, administrative agency or
commission or other governmental authority or instrumentality (each a
"Governmental Entity") or with any third party are necessary in connection
with the execution and delivery by HBE of this Agreement, the Plan of
Merger and the HBE Stock Option Agreement and the consummation by HBE of
the Merger and the other transactions contemplated hereby and thereby
except for (a) the filing by SFS of an application with the Federal
Reserve Board under The Bank Holding Company Act and the approval of such
application (the "Federal Reserve Application"), (b) the filing with the
Securities and Exchange Commission (the "SEC") of a joint proxy statement
in definitive form relating to the meetings of HBE's and SFS's
shareholders to be held in connection with this Agreement and the Plan of
Merger and the transactions contemplated hereby and thereby (the "Joint
Proxy Statement") and the registration statement on Form S-4 (the "S-4")
in which such Joint Proxy Statement will be included as a prospectus, (c)
the filing of Articles of Merger with the Wisconsin Department under the
WBCL and the filing of a Certificate of Merger with the Secretary of State
of the State of Delaware, (d) such filings and approvals as are required
to be made or obtained under the securities or "Blue Sky" laws of various
states in connection with the issuance of the shares of SFS Common Stock
pursuant to this Agreement and the Plan of Merger, (e) the approval of
this Agreement and the Plan of Merger by the requisite vote of the
shareholders of HBE and SFS, and (f) any necessary filings with the Office
of Thrift Supervision or any state regulatory agencies.
III.5 Reports. HBE and each of the HBE Bank have timely filed
all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file
since January 1, 1994 with (i) the OTS, (ii) the Federal Deposit Insurance
Corporation (the "FDIC"), (iii) any state regulatory authority (each a
"State Regulator"), (iv) the SEC, and (v) any self-regulatory organization
("SRO") with jurisdiction over any of the activities of HBE or the HBE
Bank (collectively "Regulatory Agencies"), and all other reports and
statements required to be filed by them since January 1, 1994, including,
without limitation, any report or statement required to be filed pursuant
to the laws, rules or regulations of the United States, any state, or any
Regulatory Agency, and have paid all fees and assessments due and payable
in connection therewith, except where the failure to file such report,
registration or statement or to pay such fees and assessments, either
individually or in the aggregate, will not have a Material Adverse Effect
on HBE. Except for normal examinations conducted by a Regulatory Agency
in the regular course of the business of HBE and the HBE Bank, no
Regulatory Agency has initiated any proceeding or, to the best knowledge
of HBE, investigation into the business or operations of HBE or the HBE
Bank since January 1, 1994. There is no unresolved written violation,
written criticism, or written exception by any Regulatory Agency with
respect to any report or statement relating to any examinations of HBE or
the HBE Bank, which is likely, either individually or in the aggregate, to
have a Material Adverse Effect on HBE.
III.6 Financial Statements. HBE has previously made available to
SFS copies of (a) the consolidated statements of financial condition of
HBE and the HBE Bank as of December 31, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for
the fiscal years ended December 31, 1996 and 1997, inclusive, as reported
in HBE's Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (the "HBE Form 10-K") filed with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in each case
accompanied by the audit report of KPMG Peat Marwick LLP, independent
public accountants with respect to HBE, and (b) the unaudited consolidated
statements of financial condition of HBE and the HBE Bank as of March 31,
1998, and the related unaudited consolidated statements of income,
stockholders' equity and cash flows for the three-month period then ended
as reported in HBE's Quarterly Report on Form 10-Q for the period ended
March 31, 1998 filed with the SEC under the Exchange Act (the "HBE First
Quarter 10-Q"). The December 31, 1997 consolidated statements of
financial condition of HBE (including the related notes, where applicable)
fairly present the consolidated financial position of HBE and the HBE Bank
as of the dates thereof, and the other financial statements referred to in
this Section 3.6 or included in the HBE Reports (including the related
notes, where applicable) fairly present the results of the consolidated
operations and stockholders' equity and consolidated financial position of
HBE and the HBE Bank for the respective fiscal periods or as of the
respective dates therein set forth, subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount;
each of such statements (including the related notes, where applicable)
comply in all material respects with applicable accounting requirements
and with the published rules and regulations of the SEC with respect
thereto; and each of such statements (including the related notes, where
applicable) has been prepared in all material respects in accordance with
generally accepted accounting principles ("GAAP") consistently applied
during the periods involved, except, in each case, as indicated in such
statements or in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q.
III.7 Broker's Fees. Other than HBE's arrangement with Hovde
Financial, Inc. to serve as a financial advisor to HBE in connection with
the Merger and related transactions contemplated by this Agreement and the
Plan of Merger, neither HBE nor the HBE Bank nor any of their respective
officers or directors has employed any financial advisor, broker or finder
or incurred any liability for any financial advisory fees, broker's fees,
commissions or finder's fees in connection with the Merger or related
transactions contemplated by this Agreement and the Plan of Merger.
III.8 Absence of Certain Changes or Events.
(a) Except as publicly disclosed in the HBE Reports (as defined in
Section 3.12) filed prior to the date hereof or as set forth in
Schedule 3.8(a), since December 31, 1997, (i) HBE and the HBE Bank
taken as a whole have not incurred any material liability, except
in the ordinary course of their respective businesses, and (ii) no
event has occurred which has had, individually or in the aggregate,
a Material Adverse Effect on HBE or will have a Material Adverse
Effect on HBE.
(b) Except as publicly disclosed in the HBE Reports filed prior to the
date hereof, since December 31, 1997, HBE and the HBE Bank have
conducted their respective businesses in all material respects in
the ordinary and usual course.
III.9 Legal Proceedings.
(a) Except as set forth in Schedule 3.9, there are no pending or, to
the best of HBE's knowledge, threatened, legal, administrative,
arbitration or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against HBE or the HBE
Bank or challenging the validity or propriety of the transactions
contemplated by this Agreement, the Plan of Merger or the HBE Stock
Option Agreement.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction (other than regulatory restrictions that apply to
similarly situated savings and loan holding companies or savings
associations) imposed upon HBE, the HBE Bank or the assets of HBE
or the HBE Bank.
III.10 Taxes and Tax Returns.
(a) Each of HBE and the HBE Bank has duly filed all federal, state,
county, foreign and, to the best of HBE's knowledge, local
information returns and tax returns required to be filed by it (all
such returns being accurate and complete in all material respects)
and has duly paid or made provisions for the payment of all Taxes
(as defined in Section 3.10(b)) and other governmental charges
which have been incurred or are due or claimed to be due from it by
federal, state, county, foreign or local taxing authorities on or
prior to the date of this Agreement (including, without limitation,
if and to the extent applicable, those due in respect of its
properties, income, business, capital stock, deposits, franchises,
licenses, sales and payrolls) other than Taxes or other charges
which are not yet delinquent or are being contested in good faith
and have not been finally determined. The income tax returns of
HBE and the HBE Bank remain open for the applicable statutory time
periods and any deficiencies, penalties or assessments have been
paid or provided for in HBE's consolidated financial statements.
There are no material disputes pending with respect to, or claims
asserted for, Taxes or assessments upon HBE or the HBE Bank for
which HBE does not have adequate reserves, nor has HBE or the HBE
Bank given any currently effective waivers extending the statutory
period of limitation applicable to any federal, state, county,
foreign or local income tax return for any period. In addition,
(i) proper and accurate amounts have been withheld by HBE and the
HBE Bank from their employees for all prior periods in compliance
in all material respects with the tax withholding provisions of
applicable federal, state, foreign and local laws, except where
failure to do so would not have a Material Adverse Effect on HBE,
(ii) federal, state, foreign, county and local returns which are
accurate and complete in all material respects have been filed by
HBE and the HBE Bank for all periods for which returns were due
with respect to income tax withholding, Social Security and
unemployment taxes, (iii) the amounts shown on such federal, state,
foreign, local or county returns to be due and payable have been
paid in full or adequate provision therefor has been included by
HBE in its consolidated financial statements as of December 31,
1997, and (iv) there are no Tax liens upon any property or assets
of HBE or the HBE Bank except liens for current taxes not yet due.
Except as set forth in Schedule 3.10(a), neither HBE nor the HBE
Bank has been required to include in income any adjustment pursuant
to Section 481 of the Code by reason of a voluntary change in
accounting method initiated by HBE or the HBE Bank, and the
Internal Revenue Service (the "IRS") has not initiated or proposed
any such adjustment or change in accounting method. Except as set
forth in the financial statements described in Section 3.6, neither
HBE nor the HBE Bank has entered into a transaction which is being
accounted for as an installment obligation under Section 453 of the
Code.
(b) As used in this Agreement, the term "Tax" or "Taxes" means all
federal, state, county, local, and foreign income, excise, gross
receipts, gross income, ad valorem, profits, gains, property,
capital, sales, transfer, use, payroll, employment, severance,
withholding, duties, intangibles, franchise, backup withholding,
and other taxes, charges, levies or like assessments together with
all penalties and additions to tax and interest thereon.
III.11 Employees.
(a) Schedule 3.11(a) of the HBE Disclosure Schedules sets forth a true
and complete list of each employee benefit plan, arrangement,
commitment, agreement or understanding that is maintained as of the
date of this Agreement (the "HBE Benefit Plans") (i) by HBE or the
HBE Bank or (ii) by any trade or business, whether or not
incorporated which (A) is under "common control," as described in
Section 414(c) of the Code, with HBE, (B) is a member of a
"controlled group," as defined in Section 414(b) of the Code, or
(C) is a member of an "affiliated service group," as defined in
Section 414(m) of the Code, which includes HBE (an "HBE ERISA
Affiliate"), all of which together with HBE would be deemed a
"single employer" within the meaning of Section 4001 of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA").
(b) HBE has heretofore delivered to SFS true and complete copies of
each of the HBE Benefit Plans and certain related documents,
including, but not limited to, (i) the Annual Report Form 5500 for
such HBE Benefit Plan (if applicable) for each of the last two
years, and (ii) the most recent determination letter from the IRS
(if applicable) for such HBE Benefit Plan.
(c) (i) Each of the HBE Benefit Plans has been operated and
administered in all material respects with applicable laws,
including, but not limited to, ERISA and the Code, (ii) each of the
HBE Benefit Plans intended to be "qualified" within the meaning of
Section 401(a) of the Code has been operated and administered in
all material respects with the requirements of Section 401(a) of
the Code, (iii) except as provided in Schedule 3.11(a), no HBE
Benefit Plan provides benefits, including, without limitation,
death or medical benefits (whether or not insured), with respect to
current or former employees of HBE, the HBE Bank or any HBE ERISA
Affiliate beyond their retirement or other termination of service,
other than (A) coverage mandated by applicable law, (B) death
benefits, disability benefits or retirement benefits under any
"employee pension plan" (as such term is defined in Section 3(2) of
ERISA), (C) deferred compensation benefits accrued as liabilities
on the books of HBE, the HBE Bank or the HBE ERISA Affiliates, or
(D) benefits the full cost of which is borne by the current or
former employee (or his beneficiary), (iv) except as set forth in
Schedule 3.11(a), neither HBE, the HBE Bank nor any HBE ERISA
Affiliate maintains or has ever maintained a plan subject to Title
IV of ERISA, (v) neither HBE, the HBE Bank nor any HBE ERISA
Affiliate contributes to or has ever contributed to a
"Multiemployer" pension plan (as such term is defined in Section
3(37) of ERISA, (vi) all contributions or other amounts payable by
HBE or the HBE Bank as of the Effective Time with respect to each
HBE Benefit Plan in respect of current or prior plan years have
been paid or accrued in accordance with GAAP and Section 412 of the
Code, (vii) neither HBE, the HBE Bank nor any HBE ERISA Affiliate
has engaged in a transaction in connection with which HBE, the HBE
Bank or any HBE ERISA Affiliate reasonably could be subject to
either a material civil penalty assessed pursuant to Section 409 or
502(i) of ERISA or a material tax imposed pursuant to Sections 4975
or 4976 of the Code, and (viii) to the best knowledge of HBE, there
are no pending, threatened or anticipated claims (other than
routine claims for benefits) by, on behalf of or against any of the
HBE Benefit Plans or any trusts related thereto which are, in the
reasonable judgment of HBE, likely, either individually or in the
aggregate, to have a Material Adverse Effect on HBE.
III.12 SEC Reports. HBE and the HBE Bank has made available to
SFS an accurate and complete copy of each (a) final registration
statement, prospectus, report, schedule and definitive proxy statement
filed since December 31, 1995 by HBE with the SEC pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange
Act (collectively, "HBE Reports"), and (b) communication mailed by HBE to
its shareholders since December 31, 1995. None of the HBE Reports or such
communications to shareholders, as of their respective dates, contained
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances in which they were made,
not misleading. Since December 31, 1995, HBE has timely filed all HBE
Reports and other documents required to be filed by it under the
Securities Act and the Exchange Act, and, as of their respective dates,
all HBE Reports complied in all material respects with the published rules
and regulations of the SEC with respect thereto.
III.13 Compliance with Applicable Law. HBE and the HBE Bank hold
all licenses, franchises, permits and authorizations necessary for the
lawful conduct of their respective businesses under and pursuant to all,
and have complied with and are not in default under any, applicable laws,
statutes, orders, rules, regulations, policies and/or guidelines of any
Governmental Entity relating to HBE or the HBE Bank, except where the
failure to hold such license, franchise, permit or authorization or such
noncompliance or default would not, individually or in the aggregate, have
a Material Adverse Effect on HBE.
III.14 Certain Contracts.
(a) Except as set forth in Schedule 3.14(a) of the HBE Disclosure
Schedules, neither HBE nor the HBE Bank is a party to or bound by:
(i) any contract, arrangement, commitment or understanding
(whether written or oral) with respect to the employment or
compensation of any directors, officers or employees;
(ii) any contract, arrangement, commitment or understanding
(whether written or oral) which, upon the consummation of the
transactions contemplated by this Agreement or the Plan of
Merger will (either alone or upon the occurrence of any
additional acts or events) result in any payment (including,
without limitation, severance, unemployment compensation,
golden parachute or otherwise) becoming due from HBE, SFS,
the Surviving Corporation, or any of their respective
Subsidiaries to any officer, director or employee thereof or
to the trustee under any "rabbi trust" or similar
arrangement;
(iii) any contract, arrangement, commitment or understanding
(whether written or oral) which materially restricts the
conduct of any line of business by HBE; or
(iv) any contract, arrangement, commitment or understanding
(whether written or oral), including any stock option plan,
stock appreciation rights plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be
increased or be required to be paid, or the vesting of the
benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the
Plan of Merger, or the value of any of the benefits of which
will be calculated on the basis of any of the transactions
contemplated by this Agreement or the Plan of Merger.
HBE has previously made available to SFS true and correct copies of
all employment and deferred compensation arrangements which are in
writing and to which HBE or the HBE Bank is a party. Each
contract, arrangement, commitment or understanding of the type
described in this Section 3.14(a), is referred to herein as an "HBE
Contract," and neither HBE nor the HBE Bank knows of, or has
received notice of, any violation of any HBE Contract by any of the
other parties thereto, which, individually or in the aggregate,
would have a Material Adverse Effect on HBE.
(b) (i) Each HBE Contract is valid and binding on HBE or the HBE Bank,
as the case may be, and is in full force and effect, (ii) each of
HBE and the HBE Bank has performed all obligations required to be
performed by it to date under each HBE Contract to which it is a
party, except where such noncompliance, individually or in the
aggregate, would not have a Material Adverse Effect on HBE, and
(iii) no event or condition exists which constitutes or, after
notice or lapse of time or both, would constitute, a default on the
part of HBE or the HBE Bank under any such HBE Contract, except
where any such default, individually or in the aggregate, would not
have a Material Adverse Effect on HBE.
III.15 Agreements with Regulatory Agencies. Neither HBE nor the
HBE Bank is subject to any cease-and-desist or other order issued by, or
is a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or, is subject to any order or directive by, except as set
forth in Schedule 3.15 or has been Since December 31, 1995, a recipient of
any supervisory letter from, or since December 31, 1995, has adopted any
board resolutions at the request of any Regulatory Agency or other
Governmental Entity that currently restricts the conduct of its business
or that relates to its capital adequacy, compliance with laws, its credit
policies, its management or its business (each, whether or not set forth
in the HBE Disclosure Schedules, an "HBE Regulatory Agreement"), nor has
HBE or the HBE Bank been advised since December 31, 1995 by any Regulatory
Agency or other Governmental Entity that it is considering issuing or
requesting any such HBE Regulatory Agreement.
III.16 Other Activities of HBE and the HBE Bank. Neither HBE nor
the HBE Bank that is neither a savings association, a savings association
operating subsidiary or a savings association service corporation directly
or indirectly engages in any activity prohibited by the OTS. Without
limiting the generality of the foregoing, no equity investment of HBE or
the HBE Bank that is neither a savings association, a savings association
operating subsidiary nor a savings association service corporation is
prohibited by the OTS.
III.17 Investment Securities. Each of HBE and the HBE Bank has
good and marketable title to all securities held by it (except securities
sold under repurchase agreements or held in any fiduciary or agency
capacity), free and clear of any Lien, except to the extent such
securities are pledged in the ordinary course of business consistent with
prudent banking practices to secure obligations of HBE or the HBE Bank.
Such securities are valued on the books of HBE and the HBE Bank in
accordance with GAAP.
III.18 Undisclosed Liabilities. Except for those liabilities
that are fully reflected or reserved against on the consolidated statement
of financial condition of HBE included in the HBE First Quarter 10-Q,
liabilities disclosed in Schedule 3.18 of the HBE Disclosure Schedules,
and liabilities incurred in the course of business consistent with past
practice since March 31, 1998, neither HBE nor the HBE Bank has incurred
any liability of any nature whatsoever (whether absolute, accrued,
contingent or otherwise and whether due or to become due) that, either
alone or when combined with all similar liabilities, has had, or could
reasonably be expected to have, a Material Adverse Effect on HBE.
III.19 Insurance. Schedule 3.19 of the HBE Disclosure Schedules
describes all policies of insurance in which HBE or the HBE Bank is named
as an insured party or which otherwise relate to or cover any assets or
properties of HBE or the HBE Bank. Each of such policies is in full force
and effect, and the coverage provided under such properties complies with
the requirements of any contracts binding on HBE or the HBE Bank relating
to such assets or properties. Except as set forth in Schedule 3.19 of the
HBE Disclosure Schedules, neither HBE nor the HBE Bank has received any
notice of cancellation or termination with respect to any material
insurance policy of HBE or the HBE Bank.
III.20 Loan Loss Reserves. The reserve for possible loan losses
shown on the March 31, 1998 call report filed for the HBE Bank is adequate
in all material respects under the requirements of GAAP to provide for
possible losses, net of recoveries relating to loans previously charged
off, on loans outstanding as of March 31, 1998. The aggregate loan
balances of the HBE Bank at such date in excess of such reserves are, to
the best knowledge and belief of HBE, collectible in accordance with their
terms.
III.21 Environmental Liability. Except as set forth in Schedule
3.21, there are no legal, administrative, arbitration or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of
any nature pending or, to the best of HBE's knowledge, threatened against
HBE seeking to impose, or that could reasonably result in the imposition,
on HBE of any liability or obligation arising under common law or under
any local, state, federal or foreign environmental statute, regulation or
ordinance including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA")
which, insofar as reasonably can be foreseen, could have a Material
Adverse Effect on HBE.
Except as set forth in Schedule 3.21, to the best of HBE's
knowledge, there is no reasonable basis for any proceeding, claim, action
or governmental investigation that would impose any such liability or
obligation which, insofar as reasonably can be foreseen, could have a
Material Adverse Effect on HBE. HBE is not subject to any agreement,
order, judgment, decree, letter or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any such
liability or obligation which, insofar as reasonably can be foreseen,
could have a Material Adverse Effect on HBE.
III.22 Approval Delays. HBE knows of no reason why any of the
Requisite Regulatory Approvals (as defined in Section 7.1(b)) should be
denied or unduly delayed.
III.23 Vote Required. The approval by the holders of a majority
of the votes entitled to be cast by all holders of HBE Common Stock to
approve the Merger is the only vote of the holders of any class or series
of the capital stock of HBE required for any of the transactions
contemplated by this Agreement, the Plan of Merger and the HBE Stock
Option Agreement.
III.24 Ownership of SFS Common Stock. Except as set forth in
Schedule 3.24 of the HBE Disclosure Schedules, HBE does not "beneficially
own" (as such term is defined for purposes of Section 13(d) of the
Exchange Act) any shares of SFS Common Stock.
III.25 Tax Matters and Pooling. Neither HBE nor, to the best of
HBE's knowledge, any of its affiliates has through the date of this
Agreement taken or agreed to take any action that would prevent the Merger
from qualifying as (i) a reorganization under Section 368(a)(1)(A) of the
Code or (ii) for pooling-of-interests accounting treatment under GAAP.
III.26 Saleability of Mortgage Loans in Secondary Market. Except
for the loans identified on Schedule 3.26, as a general matter, to the
best of HBE's knowledge and belief, a substantial portion of the loans in
the HBE Bank's portfolio of residential, owner-occupied mortgage loans
substantially conform to secondary market underwriting standards and,
accordingly, are saleable in the secondary market.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SFS
SFS hereby represents and warrants to HBE as follows:
IV.1 Corporate Organization.
(a) SFS is a corporation duly organized and validly existing under the
laws of the State of Wisconsin. SFS has the corporate power and
authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly
licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or
location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure
to be so licensed or qualified would not have a Material Adverse
Effect on SFS. SFS is duly registered as a bank holding company
under The Bank Holding Company Act of 1956. True and complete
copies of the Articles of Incorporation and By-Laws of SFS, as in
effect as of the date of this Agreement, have previously been made
available by SFS to HBE.
(b) As of the date of this Agreement, SFS has, as its sole direct or
indirect subsidiaries, State Financial Bank, a Wisconsin-chartered
bank, State Financial Bank, an Illinois-chartered bank, State
Financial Bank-Waterford, a Wisconsin-chartered bank (collectively,
the "SFS Banks" and each an "SFS Bank"), Hales Corners Development
Corporation, a Wisconsin corporation, Hales Corners Investment
Corporation, a Nevada corporation, Waterford Investment
Corporation, a Nevada corporation, State Financial Mortgage
Company, a Wisconsin corporation, Richmond Bancorp, Inc., an
Illinois corporation, State Financial Insurance Agency, a Wisconsin
corporation, and Richmond Financial Services, Inc., a Florida
corporation (collectively with the SFS Banks, the "SFS
Subsidiaries" and each an "SFS Subsidiary"). Except as set forth
on Schedule 4.1(b) of the disclosure schedules to this Agreement
prepared and delivered by SFS (the "SFS Disclosure Schedules"), SFS
does not own any voting stock or equity securities of any bank,
corporation, partnership, limited liability company, or other
organization, whether incorporated or unincorporated, other than
the SFS Subsidiaries.
(c) Each SFS Subsidiary (i) is duly organized and validly existing as a
corporation under the laws of its jurisdiction of organization,
(ii) is duly qualified to do business and in good standing in all
jurisdictions (whether federal, state, local or foreign) where its
ownership or leasing of property or the conduct of its business
requires it to be so qualified and in which the failure to be so
qualified would have a Material Adverse Effect on SFS, and (iii)
has all requisite corporate power and authority to own or lease its
properties and assets and to carry on its business as now
conducted. Except as set forth in Schedule 4.1(c) of the SFS
Disclosure Schedules, none of the SFS Subsidiaries owns any voting
stock or equity securities of any bank, corporation, partnership,
limited liability company, or other organization, whether
incorporated or unincorporated.
(d) The minute books of SFS and of each of the SFS Subsidiaries have
been made available to HBE and accurately reflect in all material
respects all corporate meetings held or actions taken since January
1, 1994 by the shareholders and Boards of Directors of SFS and each
SFS Subsidiary, respectively (including committees of the Boards of
Directors of SFS and the SFS Subsidiaries).
IV.2 Capitalization.
(a) The authorized capital stock of SFS consists of 10,000,000 shares
of common stock, $.10 par value per share, of which, as of May 28,
1998, 3,882,195 shares were issued and outstanding and 100,000
shares of preferred stock, $1.00 par value per share, of which, as
of May 28, 1998, none were issued and outstanding. As of May 28,
1998, no shares of SFS Common Stock were held in treasury. All of
the issued and outstanding shares of SFS Common Stock have been
duly authorized and validly issued and are fully paid,
nonassessable (except as otherwise provided by Section
180.0622(2)(b) of the WBCL) and free of preemptive rights. Except
as set forth on Schedule 4.2(a) of the SFS Disclosure Schedules,
SFS does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares
of SFS Common Stock or any other equity securities of SFS or any
securities representing the right to purchase or otherwise receive
any shares of the capital stock of SFS. No shares of SFS Common
Stock have been reserved for issuance, other than the shares of SFS
Common Stock reserved for issuance under the SFS 1990 Directors
Stock Option Plan, the SFS 1990 Stock Option/Stock Appreciation
Right and Restricted Stock Plan for Key Officers and Employees and
the SFS 1998 Stock Incentive Plan (the "SFS Option Plan"). Since
May 28, 1998, SFS has not issued any shares of its capital stock or
any securities convertible into or exercisable for any shares of
its capital stock except upon exercise of stock options pursuant to
the SFS Option Plan outstanding as of May 28, 1998.
(b) SFS owns, directly or indirectly, all of the issued and outstanding
shares of capital stock of each of the SFS Subsidiaries, free and
clear of any Liens. All of the shares of capital stock of each SFS
Subsidiary are duly authorized and validly issued and are fully
paid, nonassessable (except as otherwise provided by Section
180.0622(2)(b) of the WBCL) and free of preemptive rights. No SFS
Subsidiary has or is bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of
capital stock or any other equity security of such SFS Subsidiary
or any securities representing the right to purchase or otherwise
receive any shares of capital stock or any other equity security of
such SFS Subsidiary.
IV.3 Authority; No Violation. SFS has full corporate power and
authority to execute and deliver each of this Agreement, the Plan of
Merger and the HBE Stock Option Agreement, subject to shareholder and
regulatory approvals, and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement, the
Plan of Merger and the HBE Stock Option Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly and
validly approved by the Board of Directors of SFS. The Board of Directors
of SFS has directed that this Agreement and the Plan of Merger and the
transactions contemplated hereby and thereby be submitted to SFS's
shareholders for approval at a meeting of such shareholders and, except
for the adoption of this Agreement and the Plan of Merger and the
transactions contemplated hereby and thereby by the affirmative vote of
the holders of a majority of the outstanding shares of SFS Common Stock,
no other corporate proceedings on the part of SFS are necessary to approve
this Agreement, the Plan of Merger and the HBE Stock Option Agreement and
to consummate the transactions contemplated hereby and thereby. This
Agreement and the HBE Stock Option Agreement have been duly and validly
executed and delivered by SFS and (assuming due authorization, execution
and delivery by HBE) constitute valid and binding obligations of SFS,
enforceable against SFS in accordance with their respective terms.
Furthermore, the Plan of Merger, when executed and delivered by SFS and
(assuming due authorization, execution and delivery by HBE), shall
constitute a valid and binding obligation of SFS, enforceable against SFS
in accordance with its terms.
IV.4 Consents and Approvals. No consents or approvals of or
filings or registrations with any Governmental Entity or with any third
party are necessary in connection with the execution and delivery by SFS
of this Agreement, the Plan of Merger and the HBE Stock Option Agreement
and the consummation by SFS of the Merger and the other transactions
contemplated hereby and thereby except for (a) the filing by SFS of an
application with The Federal Reserve under The Bank Holding Company Act
and the approval of the Federal Reserve Application, (b) the filing with
the SEC of the Joint Proxy Statement in definitive form relating to the
meetings of HBE's and SFS's shareholders to be held in connection with
this Agreement and the Plan of Merger and the transactions contemplated
hereby and thereby and the S-4 in which such Joint Proxy Statement will be
included as a prospectus, (c) the filing of Articles of Merger with the
Wisconsin Department under the WBCL and the filing of a Certificate of
Merger with the Secretary of State of the State of Delaware, (d) such
filings and approvals as are required to be made or obtained under the
securities or "Blue Sky" laws of various states in connection with the
issuance of the shares of SFS Common Stock pursuant to this Agreement and
the Plan of Merger, (e) the approval of this Agreement and Plan of Merger
by the requisite vote of the shareholders of SFS and HBE, and (f) any
necessary filings with the Office of Thrift Supervision or any state
regulatory agencies.
IV.5 Reports. SFS and each of the SFS Subsidiaries have timely
filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were
required to file since January 1, 1994 with the Regulatory Agencies, and
all other reports and statements required to be filed by them since
January 1, 1994, including, without limitation, any report or statement
required to be filed pursuant to the laws, rules or regulations of the
United States, any state, or any Regulatory Agency, and have paid all fees
and assessments due and payable in connection therewith, except where the
failure to file such report, registration or statement or to pay such fees
and assessments, either individually or in the aggregate, will not have a
Material Adverse Effect on SFS. Except for normal examinations conducted
by a Regulatory Agency in the regular course of the business of SFS or the
SFS Subsidiaries, no Regulatory Agency has initiated any proceeding or, to
the best knowledge of SFS, investigation into the business or operations
of SFS or any of the SFS Subsidiaries since January 1, 1994. There is no
unresolved written violation, written criticism, or written exception by
any Regulatory Agency with respect to any report or statement relating to
any examinations of SFS or any of the SFS Subsidiaries, which is likely,
either individually or in the aggregate, to have a Material Adverse Effect
on SFS.
IV.6 Financial Statements. SFS has previously made available to
HBE copies of (a) the consolidated statements of financial condition of
SFS and the SFS Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income, shareholders' equity and cash
flows for the fiscal years ended December 31, 1995, 1996 and 1997,
inclusive, as reported in SFS's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "SFS Form 10-K") filed with the SEC
under the Exchange Act, in each case accompanied by the audit report of
Ernst & Young LLP, independent public accountants with respect to SFS, and
(b) the unaudited consolidated statements of financial condition of SFS
and the SFS Subsidiaries as of March 31, 1998, and the related unaudited
consolidated statements of income, shareholders' equity and cash flows for
the three-month period then ended as reported in SFS's Quarterly Report on
Form 10-Q for the period ended March 31, 1998 filed with the SEC under the
Exchange Act (the "SFS First Quarter 10-Q"). The December 31, 1997
consolidated statements of financial condition of SFS (including the
related notes, where applicable) fairly present the consolidated financial
position of SFS and the SFS Subsidiaries as of the dates thereof, and the
other financial statements referred to in this Section 4.6 or included in
the SFS Reports (including the related notes, where applicable) fairly
present the results of the consolidated operations and shareholders'
equity and consolidated financial position of SFS and the SFS Subsidiaries
for the respective fiscal periods or as of the respective dates therein
set forth, subject, in the case of the unaudited statements, to recurring
audit adjustments normal in nature and amount; each of such statements
(including the related notes, where applicable) comply in all material
respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto; and each of such
statements (including the related notes, where applicable) has been
prepared in all material respects in accordance with GAAP consistently
applied during the periods involved, except, in each case, as indicated in
such statements or in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q.
IV.6 Broker's Fees. Other than SFS's arrangement with Everen
Securities to serve as a financial advisor to SFS in connection with the
Merger and related transactions contemplated by this Agreement and the
Plan of Merger, neither SFS nor any SFS Subsidiary nor any of their
respective officers or directors has employed any financial advisor,
broker or finder or incurred any liability for any financial advisory
fees, broker's fees, commissions or finder's fees in connection with the
Merger or related transactions contemplated by this Agreement and the Plan
of Merger.
IV.7 Absence of Certain Changes or Events.
(a) Except as publicly disclosed in the SFS Reports (as defined in
Section 4.12) filed prior to the date hereof or as set forth in
Schedule 4.8(a), since December 31, 1997, (i) SFS and the SFS
Subsidiaries taken as a whole have not incurred any material
liability, except in the ordinary course of their businesses, and
(ii) no event has occurred which has had, individually or in the
aggregate, a Material Adverse Effect on SFS or will have a Material
Adverse Effect on SFS.
(b) Except as publicly disclosed in the SFS Reports filed prior to the
date hereof, since December 31, 1997, SFS and each SFS Subsidiary
have carried on their respective businesses in all material
respects in the ordinary and usual course.
IV.9 Legal Proceedings
(a) Except as set forth in Schedule 4.9, there are no pending or, to
the best of SFS's knowledge, threatened, legal, administrative,
arbitration or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against SFS or any of
the SFS Subsidiaries or challenging the validity or propriety of
the transactions contemplated by this Agreement, the Plan of Merger
or the HBE Stock Option Agreement.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction (other than regulatory restrictions that apply to
similarly situated bank holding companies or banks) imposed upon
SFS, any of the SFS Subsidiaries or the assets of SFS or any of the
SFS Subsidiaries.
IV.10 Taxes and Tax Returns. Each of SFS and the SFS Subsidiaries
has duly filed all federal, state, county, foreign and, to the best of
SFS's knowledge, local information returns and tax returns required to be
filed by it on or prior to the date hereof (all such returns being
accurate and complete in all material respects) and has duly paid or made
provisions for the payment of all Taxes and other governmental charges
which have been incurred or are due or claimed to be due from it by
federal, state, county, foreign or local taxing authorities on or prior to
the date of this Agreement (including, without limitation, if and to the
extent applicable, those due in respect of its properties, income,
business, capital stock, deposits, franchises, licenses, sales and
payrolls) other than Taxes or other charges which are not yet delinquent
or are being contested in good faith and have not been finally determined.
The income tax returns of SFS and the SFS Subsidiaries remain open for the
applicable statutory time periods and any deficiencies, penalties or
assessments have been paid or provided for in SFS's consolidated financial
statements. There are no material disputes pending with respect to, or
claims asserted for, Taxes or assessments upon SFS or any of the SFS
Subsidiaries for which SFS does not have adequate reserves, nor has SFS or
any of the SFS Subsidiaries given any currently effective waivers
extending the statutory period of limitation applicable to any federal,
state, county, foreign or local income tax return for any period. In
addition, (i) proper and accurate amounts have been withheld by SFS and
each of the SFS Subsidiaries from their employees for all prior periods in
compliance in all material respects with the tax withholding provisions of
applicable federal, state, foreign and local laws, except where failure to
do so would not have a Material Adverse Effect on SFS, (ii) federal,
state, foreign, county and local returns which are accurate and complete
in all material respects have been filed by SFS and each of the SFS
Subsidiaries for all periods for which returns were due with respect to
income tax withholding, Social Security and unemployment taxes, (iii) the
amounts shown on such federal, state, foreign, local or county returns to
be due and payable have been paid in full or adequate provision therefor
has been included by SFS in its consolidated financial statements as of
December 31, 1997, and (iv) there are no Tax liens upon any property or
assets of SFS or any of the SFS Subsidiaries except liens for current
taxes not yet due. Except as set forth in Schedule 4.10(a), neither SFS
nor any of the SFS Subsidiaries has been required to include in income any
adjustment pursuant to Section 481 of the Code by reason of a voluntary
change in accounting method initiated by SFS or any of the SFS
Subsidiaries, and the IRS has not initiated or proposed any such
adjustment or change in accounting method. Except as set forth in the
financial statements described in Section 4.6, neither SFS nor any of the
SFS Subsidiaries has entered into a transaction which is being accounted
for as an installment obligation under Section 453 of the Code.
IV.11 Employees.
(a) Schedule 4.11 of the SFS Disclosure Schedules sets forth a true and
complete list of each employee benefit plan, arrangement,
commitment, agreement or understanding that is maintained as of the
date of this Agreement (the "SFS Benefit Plans") (i) by SFS or any
of the SFS Subsidiaries or (ii) by any trade or business, whether
or not incorporated, which (A) is under "common control," as
described in Section 414(c) of the Code, with SFS, (B) is a member
of a "controlled group," as defined in Section 414(b) of the Code,
or (C) is a member of an "affiliated service group," as defined in
Section 414(m) of the Code which includes SFS (an "SFS ERISA
Affiliate"), all of which together with SFS would be deemed a
"single employer" within the meaning of Section 4001 of ERISA.
(b) SFS has heretofore delivered to HBE true and complete copies of the
SFS Benefit Plans and certain related documents, including, but not
limited to, (i) the Annual Report Form 5500 for such SFS Benefit
Plan (if applicable) for each of the last two years, and (ii) the
most recent determination letter from the IRS (if applicable) for
such SFS Benefit Plan.
(c) Each of the SFS Benefit Plans has been operated and administered in
all material respects with applicable laws, including, but not
limited to, ERISA and the Code, (ii) each of the SFS Benefit Plans
intended to be "qualified" within the meaning of Section 401(a) of
the Code has been operated and administered in all material
respects with the requirements of Section 401(a) of the Code, (iii)
no SFS Benefit Plan provides benefits, including, without
limitation, death or medical benefits (whether or not insured),
with respect to current or former employees of SFS, the SFS
Subsidiaries or any SFS ERISA Affiliate beyond their retirement or
other termination of service, other than (A) coverage mandated by
applicable law, (B) death benefits, disability benefits or
retirement benefits under any "employee pension plan" (as such term
is defined in Section 3(2) of ERISA), (C) deferred compensation
benefits accrued as liabilities on the books of SFS, the SFS
Subsidiaries or the SFS ERISA Affiliates, or (D) benefits the full
cost of which is borne by the current or former employee (or his
beneficiary), (iv) neither SFS, the SFS Subsidiaries nor any SFS
ERISA Affiliate maintains or has ever maintained a plan subject to
Title IV of ERISA, (v) neither SFS, the SFS Subsidiaries nor any
SFS ERISA Affiliate contributes to or has ever contributed to a
"Multiemployer" pension plan (as such term is defined in Section
3(37) of ERISA, (vi) all contributions or other amounts payable by
SFS or the SFS Subsidiaries as of the Effective Time with respect
to each SFS Benefit Plan in respect of current or prior plan years
have been paid or accrued in accordance with GAAP and Section 412
of the Code, (vii) neither SFS, the SFS Subsidiaries nor any SFS
ERISA Affiliate has engaged in a transaction in connection with
which SFS, the SFS Subsidiaries or any ERISA Affiliate reasonably
could be subject to either a material civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a material tax
imposed pursuant to Sections 4975 or 4976 of the Code, and (viii)
to the best knowledge of SFS, there are no pending, threatened or
anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the SFS Benefit Plans or any trusts
related thereto which are, in the reasonable judgment of SFS,
likely, either individually or in the aggregate, to have a Material
Adverse Effect on SFS.
(d) There are no current employment agreements, employee retention
agreements or change in control agreements, contracts or
arrangements between SFS (or any SFS Subsidiary) and any director,
officer or employee of SFS (or any SFS Subsidiary) and any
director, officer or employee of SFS (or any SFS Subsidiary)
containing terms that would provide for the accelerated vesting and
payment by SFS (or the SFS Subsidiary, as applicable) of
compensation and benefits to any such director, officer or employee
as a result of either (i) the approval of this Agreement by a
majority of the shareholders of SFS or (ii) the consummation to the
transactions contemplated by this Agreement.
IV.12 SEC Reports. SFS and each of the SFS Subsidiaries has made
available to HBE an accurate and complete copy of each (a) final
registration statement, prospectus, report, schedule and definitive proxy
statement filed since December 31, 1995 by SFS with the SEC pursuant to
the Securities Act or the Exchange Act (collectively, the "SFS Reports"),
and (b) communication mailed by SFS to its shareholders since December 31,
1995. None of the SFS Reports or such communications to shareholders, as
of their respective dates, contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading. Since December 31,
1995, SFS has timely filed all SFS Reports and other documents required to
be filed by it under the Securities Act and the Exchange Act, and, as of
their respective dates, all SFS Reports complied in all material respects
with the published rules and regulations of the SEC with respect thereto.
IV.13 Compliance with Applicable Law. SFS and each of the SFS
Subsidiaries hold all licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses under and
pursuant to all, and have complied with and are not in default under any,
applicable laws, statutes, orders, rules, regulations, policies and/or
guidelines of any Governmental Entity relating to SFS or any of the SFS
Subsidiaries, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or default would not,
individually or in the aggregate, have a Material Adverse Effect on SFS.
IV.14 Certain Contracts.
(a) Except as set forth in Schedule 4.14(a) of the SFS Disclosure
Schedules, neither SFS nor any of the SFS Subsidiaries is a party
to or bound by:
(i) any contract, arrangement, commitment or understanding
(whether written or oral) with respect to the employment or
compensation of any directors, officers or employees;
(ii) any contract, arrangement, commitment or understanding
(whether written or oral) which, upon the consummation of the
transactions contemplated by this Agreement or the Plan of
Merger will (either alone or upon the occurrence of any
additional acts or events) result in any payment (including,
without limitation, severance, unemployment compensation,
golden parachute or otherwise) becoming due from HBE, SFS,
the Surviving Corporation, or any of their respective
Subsidiaries to any officer, director or employee thereof or
to the trustee under any "rabbi trust" or similar
arrangement;
(iii) any contract, arrangement, commitment or understanding
(whether written or oral) which materially restricts the
conduct of any line of business by SFS; or
(iv) any contract, arrangement, commitment or understanding
(whether written or oral), including any stock option plan,
stock appreciation rights plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be
increased or be required to be paid, or the vesting of the
benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the
Plan of Merger, or the value of any of the benefits of which
will be calculated on the basis of any of the transactions
contemplated by this Agreement or the Plan of Merger.
SFS has previously made available to HBE true and correct copies of
all employment and deferred compensation arrangements which are in
writing and to which SFS or an SFS Subsidiary is a party. Each
contract, arrangement, commitment or understanding of the type
described in this Section 4.14(a), is referred to herein as an "SFS
Contract," and neither SFS nor any of the SFS Subsidiaries knows
of, or has received notice of, any violation of any SFS Contract by
any of the other parties thereto, which, individually or in the
aggregate, would have a Material Adverse Effect on SFS.
(b) (i) each SFS Contract is valid and binding on SFS or the applicable
SFS Subsidiary, as the case may be, and is in full force and
effect, (ii) SFS and each of the SFS Subsidiaries has performed all
obligations required to be performed by it to date under each SFS
Contract to which it is a party, except where such noncompliance,
individually or in the aggregate, would not have a Material Adverse
Effect on SFS, and (iii) no event or condition exists which
constitutes or, after notice or lapse of time or both, would
constitute, a default on the part of SFS or any of the SFS
Subsidiaries under any such SFS Contract, except where any such
default, individually or in the aggregate, would not have a
Material Adverse Effect on SFS.
IV.15 Agreements with Regulatory Agencies. Neither SFS nor any of
the SFS Subsidiaries is subject to any cease-and-desist or other order
issued by, or (except as set forth in Schedule 4.15 of the SFS Disclosure
Schedules) is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter
or similar undertaking to, or is subject to any order or directive by, or
has been since December 31, 1995, a recipient of any supervisory letter
from, or since December 31, 1995, has adopted any board resolutions at the
request of any Regulatory Agency or other Governmental Entity that
currently restricts the conduct of its business or that relates to its
capital adequacy, compliance with laws, its credit policies, its
management or its business (each, whether or not set forth in the SFS
Disclosure Schedules, a "SFS Regulatory Agreement") nor has SFS or any of
the SFS Subsidiaries been advised since December 31, 1995 by any
Regulatory Agency or other Governmental Entity that it is considering
issuing or requesting any such SFS Regulatory Agreement.
IV.16 Other Activities of SFS and its SFS Subsidiaries. Neither
SFS nor any of the SFS Subsidiaries that is neither a bank, bank operating
subsidiary or a bank service corporation directly or indirectly engages in
any activity prohibited by the Federal Reserve. Without limiting the
generality of the foregoing, no equity investment of SFS or any SFS
Subsidiary that is neither a bank, a bank operating subsidiary nor a bank
service corporation is prohibited by the Federal Reserve.
IV.17 Investment Securities. Each of SFS and the SFS Subsidiaries
has good and marketable title to all securities held by it (except
securities sold under repurchase agreements or held in any fiduciary or
agency capacity), free and clear of any Lien, except to the extent such
securities are pledged in the ordinary course of business consistent with
prudent banking practices to secure obligations of SFS or any of the SFS
Subsidiaries. Such securities are valued on the books of SFS and the SFS
Subsidiaries in accordance with GAAP.
IV.18 Undisclosed Liabilities. Except for those liabilities that
are fully reflected or reserved against on the consolidated statement of
financial condition of SFS included in the SFS First Quarter 10-Q,
liabilities disclosed in Schedule 4.18 of the SFS Disclosure Schedules,
and liabilities incurred in the ordinary course of business consistent
with past practice since March 31, 1998, neither SFS nor any of the SFS
Subsidiaries has incurred any liability of any nature whatsoever (whether
absolute, accrued, contingent or otherwise and whether due or to become
due) that, either alone or when combined with all similar liabilities, has
had, or could reasonably be expected to have, a Material Adverse Effect on
SFS.
IV.19 Insurance. Schedule 4.19 of the SFS Disclosure Schedules
describes all policies of insurance in which SFS or any of the SFS
Subsidiaries is named as an insured party or which otherwise relate to or
cover any assets or properties of SFS or any of the SFS Subsidiaries.
Each of such policies is in full force and effect, and the coverage
provided under such properties complies with the requirements of any
contracts binding on SFS or any of the SFS Subsidiaries relating to such
assets or properties. Except as set forth in Schedule 4.19 of the SFS
Disclosure Schedules, neither SFS nor any of the SFS Subsidiaries has
received any notice of cancellation or termination with respect to any
material insurance policy of SFS or any of the SFS Subsidiaries.
IV.20 Loan Loss Reserves. The reserve for possible loan losses
shown on the March 31, 1998 call report filed for each SFS Bank is
adequate in all material respects under the requirements of GAAP to
provide for possible losses, net of recoveries relating to loans
previously charged off, on loans outstanding as of March 31, 1998. The
aggregate loan balances of each SFS Bank at such date in excess of such
reserves of each SFS Bank are, to the best knowledge and belief of SFS,
collectible in accordance with their terms.
IV.21 Environmental Liability. Except as set forth in Schedule
4.21, there are no legal, administrative, arbitration or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of
any nature pending or, to the best of SFS's knowledge, threatened against
SFS seeking to impose, or that could reasonably result in the imposition,
on SFS of any liability or obligation arising under common law or under
any local, state, federal or foreign environmental statute, regulation or
ordinance including, without limitation, CERCLA which, insofar as
reasonably can be foreseen, could have a Material Adverse Effect on SFS.
Except as set forth in Schedule 4.21, to the best of SFS's knowledge,
there is no reasonable basis for any such proceeding, claim, action or
governmental investigation that would impose any such liability or
obligation which, insofar as reasonably can be foreseen, could have a
Material Adverse Effect on SFS. SFS is not subject to any agreement,
order, judgment, decree, letter or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any such
liability or obligation which, insofar as reasonably can be foreseen,
could have a Material Adverse Effect on SFS.
IV.22 Approval Delays. SFS knows of no reason why any of the
Requisite Regulatory Approvals (as defined in Section 7.1(b)) should be
denied or unduly delayed.
IV.23 Vote Required. The approval by the holders of a majority of
the votes entitled to be cast by all holders of SFS Common Stock to
approve the Merger (including the issuance of shares of SFS Common Stock
in connection therewith) is the only vote of the holders of any class or
series of the capital stock of SFS required for any of the transactions
contemplated by this Agreement, the Plan of Merger and the HBE Stock
Option Agreement.
IV.24 Ownership of HBE Common Stock. Except as set forth in
Schedule 4.24 of the SFS Disclosure Schedules and except pursuant to the
terms of the HBE Stock Option Agreement, SFS does not "beneficially own"
(as such term is defined for purposes of Section 13(d) of the Exchange
Act) any shares of HBE Common Stock.
IV.25 Tax Matters and Pooling.
Neither SFS nor, to SFS's knowledge, any of its affiliates has
through the date of this Agreement taken or agreed to take any action that
would prevent the Merger from qualifying (i) as a reorganization under
Section 368(a)(1)(A) of the Code or (ii) for pooling-of-interests
accounting treatment under GAAP.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
V.1 Conduct of Businesses Prior to the Effective Time. During
the period from the date of this Agreement to the Effective Time, except
as expressly contemplated or permitted by this Agreement and the Plan of
Merger (including the HBE Disclosure Schedules and the SFS Disclosure
Schedules), each of SFS and HBE shall, and shall cause the SFS
Subsidiaries and the HBE Bank , respectively, to (a) conduct its business
in good faith in the usual, regular and ordinary course consistent with
past practice, (b) use reasonable efforts to maintain and preserve intact
its business organization, employees and advantageous business
relationships and retain the services of its key officers and key
employees, and (c) take no action which would adversely affect or delay
the ability of either SFS or HBE to obtain any necessary approvals of any
Regulatory Agency or other governmental authority required for the
transactions contemplated hereby or to perform its covenants and
agreements under this Agreement, the Plan of Merger or the HBE Stock
Option Agreement.
V.2 Forbearances. During the period from the date of this
Agreement to the Effective Time, except as set forth in the HBE Disclosure
Schedules or the SFS Disclosure Schedules, as the case may be, and, except
as expressly contemplated or permitted by this Agreement, the Plan of
Merger or the HBE Stock Option Agreement, neither SFS nor HBE shall, nor
shall SFS or HBE permit the SFS Subsidiaries or the HBE Bank, respectively
to, without the prior written consent of the other:
(a) other than in the ordinary course of business consistent with past
practice, (i) incur any indebtedness for borrowed money (other than
pursuant to existing lines of credit or short-term indebtedness
incurred in the ordinary course of business consistent with past
practice, indebtedness of HBE to the HBE Bank or of the HBE Bank to
HBE, or indebtedness of SFS to any of the SFS Subsidiaries or of
any of the SFS Subsidiaries to SFS, it being understood and agreed
that incurrence of indebtedness in the ordinary course of business
shall include, without limitation, the creation of deposit
liabilities, purchases of Federal funds, Federal Home Loan Bank
borrowings, sales of certificates of deposit and entering into
repurchase agreements), (ii) assume, guarantee, endorse or
otherwise as an accommodation become responsible for the
obligations of any other individual, corporation or other entity;
or (iii) make any loan or advance;
(b) (i) adjust, split, combine or reclassify any capital stock, (ii)
make, declare or pay any dividend or make any other distribution
on, any shares of its capital stock or any securities or
obligations convertible into or exchangeable for any shares of its
capital stock (except (A) in the case of SFS, for regular quarterly
cash dividends at a rate not in excess of $0.12 per share of SFS
Common Stock, and (B) in the case of HBE, for regular quarterly
cash dividends at a rate not in excess of $0.10 per share of HBE
Common Stock); (iii) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock or any securities or
obligations convertible into or exchangeable for any shares of its
capital stock; (iv) grant any stock appreciation rights or grant
any individual, corporation or other entity any right to acquire
any shares of its capital stock, or (v) issue any additional shares
of capital stock (except pursuant to (A) the exercise of stock
options outstanding as of the date of this Agreement, or (B) the
HBE Stock Option Agreement);
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of
its properties or assets to any individual, corporation or other
entity other than a Subsidiary, or cancel, release or assign any
indebtedness to any such person or any claims held by any such
person, except in the ordinary course of business consistent with
past practice or pursuant to contracts or agreements in force at
the date of this Agreement;
(d) except for transactions in the ordinary course of business
consistent with past practice or pursuant to contracts or
agreements in force at the date of this Agreement, make any
material investment either by purchase of stock or securities,
contributions to capital, property transfers, or purchase of any
property or assets of any other individual, corporation or other
entity other than a Subsidiary thereof or any existing joint
venture to which HBE or SFS is a party;
(e) except for transactions in the ordinary course of business
consistent with past practice, enter into or terminate any material
contract or agreement, or make any change in any of its material
leases or contracts, other than renewals of contracts and leases
without material adverse changes of terms;
(f) other than in the ordinary course of business consistent with past
practice, or as required by law, increase in any manner the
compensation or fringe benefits of any of its employees, or pay any
pension or retirement allowance not required by any existing plan
or agreement to any such employees or become a party to, amend or
commit itself to any pension, retirement, profit-sharing or welfare
benefit plan or agreement or employment agreement with or for the
benefit of any employee;
(g) grant, amend or modify in any material respect any stock option,
stock awards or other stock based compensation, except as
contemplated in Section 1.5(c) hereof;
(h) pay, discharge or satisfy any material claims, liabilities or
obligations (whether absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business consistent with
past practice (which includes the payment of final and unappealable
judgments) or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most
recent consolidated financial statements (or the notes thereto) of
such party included in such party's reports filed with the SEC, or
incurred in the ordinary course of business consistent with past
practice;
(i) take any action that would prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368 of
the Code; provided, however, that nothing contained herein shall
limit the ability of HBE or SFS to exercise its rights under the
HBE Stock Option Agreement;
(j) amend its articles of incorporation (other than, in the case of
SFS, to increase the amount of its authorized common stock) or its
bylaws;
(k) other than in prior consultation with the other party to this
Agreement, restructure or materially change its investment
securities portfolio or its gap position, through purchases, sales,
or otherwise, or the manner in which the portfolio is classified or
reported;
(l) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in
this Agreement being or becoming untrue in any material respect at
any time prior to the Effective Time, or in any of the conditions
to the Merger set forth in Article VII not being satisfied or in a
violation of any provision of this Agreement, the Plan of Merger or
the HBE Stock Option Agreement, except, in every case, as may be
required by applicable law; or
(m) agree to, or make any commitment to, take any of the actions
prohibited by this Section 5.2.
ARTICLE VI
ADDITIONAL AGREEMENTS
VI.1 Regulatory Matters; Cooperation with Respect to Filing
(a) (i) SFS shall promptly prepare and file with the SEC the Joint
Proxy Statement in preliminary form; (ii) SFS shall promptly
prepare and file an application with the Federal Reserve and any
necessary state applications, for approval to consummate the
transactions contemplated by this Agreement, the Plan of Merger
and, to the extent required, the HBE Stock Option Agreement. Each
of SFS and HBE shall use all reasonable efforts to have the S-4, in
which the Joint Proxy Statement will be included as a prospectus,
declared effective under the Securities Act as promptly as
practicable after such filing and to mail or deliver the Joint
Proxy Statement to their respective shareholders. SFS shall also
use all reasonable efforts to obtain all necessary state securities
law or "Blue Sky" permits and approvals required to carry out the
transactions contemplated by this Agreement and the Plan of Merger,
and HBE shall furnish all information concerning HBE and the
holders of the HBE Common Stock as may be reasonably requested by
SFS in connection with any such action.
(b) The parties hereto shall cooperate with each other and shall each
use reasonable efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and
filings, to obtain as promptly as practicable all permits,
consents, approvals and authorizations of all third parties and
Governmental Entities which are necessary or advisable to
consummate the transactions contemplated by this Agreement and the
Plan of Merger (including, without limitation, the Merger), and to
comply with the terms and conditions of all such permits, consents,
approvals and authorizations of all such Governmental Entities.
SFS and HBE shall have the right to review in advance, and, to the
extent practicable, each will consult the other on, in each case
subject to applicable laws relating to the exchange of information,
all the information relating to SFS or HBE, as the case may be, and
the SFS Subsidiaries and the HBE Bank, respectively, which appears
in any filing made with, or written materials submitted to, any
third party or any Governmental Entity in connection with the
transactions contemplated by this Agreement and the Plan of Merger.
In exercising the foregoing right, each of the parties hereto shall
act reasonably and as promptly as practicable. The parties hereto
agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of
all third parties and Governmental Entities necessary or advisable
to consummate the transactions contemplated by this Agreement and
the Plan of Merger, and each party will keep the other apprised of
the status of matters relating to completion of the transactions
contemplated herein.
(c) SFS and HBE shall, upon request, furnish each other with all
information concerning themselves, and the SFS Subsidiaries and the
HBE Bank, respectively, directors, officers and shareholders and
such other matters as may be reasonably necessary or advisable in
connection with the Joint Proxy Statement, the S-4 or any other
statement, filing, notice or application made by or on behalf of
SFS or HBE or the SFS Subsidiaries and the HBE Bank, as the case
may be, to any Governmental Entity in connection with the Merger
and the other transactions contemplated by this Agreement and the
Plan of Merger. SFS covenants and agrees that none of the
information which is furnished by SFS for inclusion, or which is
included, in the S-4, the Joint Proxy Statement or any other
statement, filing, notice or application made by or on behalf of
SFS or HBE or the SFS Subsidiaries or the HBE Bank, as the case may
be, to any Governmental Entity in connection with the Merger and
the other transactions contemplated by this Agreement and the Plan
of Merger will, at the respective times such documents are filed
and, in the case of the S-4, when it becomes effective and, with
respect to the Joint Proxy Statement, when mailed or at the time of
the meetings of the shareholders of SFS and HBE, be false or
misleading with respect to any material fact or shall omit to state
any material fact necessary in order to make the statements
therein, in light of the circumstances in which they were made, not
misleading. HBE covenants and agrees that none of the information
which is furnished by HBE for inclusion, or which is included, in
the S-4, the Joint Proxy Statement or any other statement, filing,
notice or application made by or on behalf of SFS or HBE or the SFS
Subsidiaries or the HBE Bank, as the case may be, to any
Governmental Entity in connection with the Merger and the other
transactions contemplated by this Agreement and the Plan of Merger
will, at the respective times such documents are filed and, in the
case of the S-4, when it becomes effective and, with respect to the
Joint Proxy Statement, when mailed or at the time of the meetings
of the shareholders of SFS and HBE, be false or misleading with
respect to any material fact or shall omit to state any material
fact necessary in order to make the statements therein, in light of
the circumstances in which they were made, not misleading.
Notwithstanding the foregoing, SFS shall have no responsibility for
the truth or accuracy of any information with respect to HBE or the
HBE Bank included in the S-4, the Joint Proxy Statement, or any
other statement, filing, notice or application filed with any
Governmental Entity in connection with the Merger and the other
transactions contemplated by this Agreement and the Plan of Merger,
and HBE shall have no responsibility for the truth or accuracy of
any information with respect to SFS or the SFS Subsidiaries
included in the S-4, the Joint Proxy Statement, or any other
statement, filing, notice or application filed with any
Governmental Entity in connection with the Merger and the other
transactions contemplated by this Agreement and the Plan of Merger.
(d) SFS and HBE shall promptly advise one another upon receiving any
communication from any Governmental Entity whose consent or
approval is required for consummation of the transactions
contemplated by this Agreement and the Plan of Merger which causes
such party to believe that there is a reasonable likelihood that
any Requisite Regulatory Approval will not be obtained or that the
receipt of any such approval will be materially delayed.
VI.2 Access to Information; Due Diligence.
(a) Upon reasonable notice and subject to applicable laws relating to
the exchange of information, each of SFS and HBE shall, and shall
cause the SFS Subsidiaries and the HBE Bank, respectively, to,
afford to the officers, employees, accountants, counsel and other
representatives of the other party, access, during normal business
hours during the period prior to the Effective Time, to all its
properties, books, contracts, commitments and records and, during
such period, each of SFS and HBE shall, and shall cause the SFS
Subsidiaries and the HBE Bank, respectively, to, make available to
the other party (i) a copy of each report, schedule, registration
statement and other document filed or received by it during such
period pursuant to the requirements of federal securities laws or
federal or state banking laws, and (ii) all other information
concerning its business, properties and personnel as such party may
reasonably request. Neither SFS, HBE, the SFS Subsidiaries nor the
HBE Bank shall be required to provide access to or to disclose
information where such access or disclosure would (A) violate or
prejudice the rights of SFS's or HBE's, as the case may be,
customers or contravene any law, rule, regulation, order, judgment,
decree, fiduciary duty or binding agreement entered into prior to
the date of this Agreement, or (B) impair any attorney-client
privilege of the disclosing party. The parties hereto will make
appropriate substitute disclosure arrangements under circumstances
in which the restrictions of the preceding sentence apply.
(b) Each of SFS and HBE shall hold all information furnished by or on
behalf of the other party or the SFS Subsidiaries or the HBE Bank,
as the case may be, or their representatives pursuant to Section
6.2(a) in confidence and shall return all documents containing any
information concerning the properties, business and assets of each
other party that may have been obtained in the course of
negotiations or examination of the affairs of each other party
either prior or subsequent to the execution of this Agreement
(other than such information as shall be in the public domain or
otherwise ascertainable from public or outside sources) and shall
destroy any information, analyses or the like derived from such
confidential information. Each of SFS and HBE shall use such
information solely for the purpose of conducting business, legal
and financial reviews of the other party and for such other
purposes as may be related to this Agreement and the Plan of
Merger.
(c) No investigation by either of the parties or their respective
representatives shall affect the representations and warranties of
the other set forth herein. Without limitation of the foregoing,
each party shall promptly notify the other party of any information
obtained by such party during the course of any due diligence
conducted by such party or its representatives in accordance with
this Section 6.2 which is materially inconsistent with any
representation or warranty made by the other party under this
Agreement; provided, however, that either party's failure to
provide such notice to the other party shall not, in turn, be
deemed to constitute a material breach of such party's obligations
under this Agreement and the Plan of Merger.
VI.3 Shareholders' Approvals. Each of SFS and HBE shall call a
meeting of its shareholders to be held as soon as reasonably practicable
for the purpose of voting upon this Agreement and the Plan of Merger (and,
in the case of SFS, the issuance of shares of SFS Common Stock in the
Merger and the reserve of shares of SFS Common Stock for the HBE Option
Plan), and each shall use all reasonable efforts to obtain shareholder
approval of this Agreement, the Plan of Merger and the Merger.
VI.4 Legal Conditions to Merger. Each of SFS and HBE shall, and
shall cause the SFS Subsidiaries and the HBE Bank, respectively, to use
reasonable efforts (a) to take, or cause to be taken, all actions
necessary, proper or advisable to comply promptly with all legal
requirements which may be imposed on such party with respect to the Merger
and, subject to the conditions set forth in Article VII hereof, to
consummate the transactions contemplated by this Agreement and the Plan
of Merger and (b) to obtain (and to cooperate with the other party to
obtain) any consent, authorization, order or approval of, or any exemption
by, any Governmental Entity and any other third party which is required to
be obtained by SFS, the SFS Subsidiaries, HBE or the HBE Bank in
connection with the Merger and the other transactions contemplated by this
Agreement, the Plan of Merger and the HBE Stock Option Agreement.
VI.5 Listing of Shares. SFS shall use all reasonable efforts to
cause the shares of SFS Common Stock issuable in the Merger to be approved
for listing on the NASDAQ-NMS.
VI.6 Indemnification; Directors' and Officers' Insurance.
(a) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or
administrative, including, without limitation, any such claim,
action, suit, proceeding or investigation in which any individual
who is now, or has been at any time prior to the date of this
Agreement, or who becomes prior to the Effective Time, a director
or officer or employee of SFS, the SFS Subsidiaries, HBE or the HBE
Bank (the "Indemnified Parties"), is, or is threatened to be, made
a party based in whole or in part on, or arising in whole or in
part out of, or pertaining to (i) the fact that he or she is or was
a director, officer or employee of SFS, the SFS Subsidiaries, HBE
or the HBE Bank or any of their respective predecessors, or (ii)
this Agreement, the Plan of Merger or the HBE Stock Option
Agreement or any of the transactions contemplated hereby or
thereby, whether in any case asserted or arising before or after
the Effective Time, the parties hereto agree to cooperate and use
reasonable efforts to defend against and respond thereto. It is
understood and agreed that after the Effective Time, the Surviving
Corporation shall indemnify and hold harmless, as and to the
fullest extent permitted by law, each such Indemnified Party
against any losses, claims, damages, liabilities, costs, expenses
(including reasonable attorney's fees and expenses in advance of
the final disposition of any claim, suit, proceeding or
investigation incurred by each Indemnified Party to the fullest
extent permitted by law, including the full scope of
indemnification available to officers and directors of federally
chartered thrift institutions with respect to HBE, upon receipt of
any undertaking required by applicable law), judgments, fines and
amounts paid in settlement in connection with any such threatened
or actual claim, action, suit, proceeding or investigation, and in
the event of any such threatened or actual claim, action, suit,
proceeding or investigation (whether asserted or arising before or
after the Effective Time), the Indemnified Parties may retain
counsel reasonably satisfactory to them after consultation with the
Surviving Corporation; provided, however, that (A) the Surviving
Corporation shall have the right to assume the defense thereof and
upon such assumption the Surviving Corporation shall not be liable
to any Indemnified Party for any legal expenses of other counsel or
any other expenses subsequently incurred by any Indemnified Party
in connection with the defense thereof, except that if the
Surviving Corporation elects not to assume such defense or counsel
for the Indemnified Parties reasonably advises the Indemnified
Parties that there are issues which raise conflicts of interest
between the Surviving Corporation and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to
them after consultation with the Surviving Corporation, and the
Surviving Corporation shall pay the reasonable fees and expenses of
such counsel for the Indemnified Parties, (B) the Surviving
Corporation shall be obligated pursuant to this paragraph to pay
for only one firm of counsel for all Indemnified Parties, unless an
Indemnified Party shall have reasonably concluded, based on the
advice of counsel, that there is a material conflict of interest
between the interests of such Indemnified Party and the interests
of one or more other Indemnified Parties and that the interests of
such Indemnified Party will not be adequately represented unless
separate counsel is retained, in which case, the Surviving
Corporation shall be obligated to pay such separate counsel, (C)
the Surviving Corporation shall not be liable for any settlement
effected without its prior written consent (which consent shall not
be unreasonably withheld) and (D) the Surviving Corporation shall
have no obligation hereunder to any Indemnified Party when and if a
court of competent jurisdiction shall ultimately determine, and
such determination shall have become final and nonappealable, that
indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law. Any
Indemnified Party wishing to claim Indemnification under this
Section 6.6, upon learning of any such claim, action, suit,
proceeding or investigation, shall notify the Surviving Corporation
thereof, provided that the failure to so notify shall not affect
the obligations of the Surviving Corporation under this Section 6.6
except to the extent such failure to notify materially prejudices
the Surviving Corporation. The Surviving Corporation's obligations
under this Section 6.6 shall continue in full force and effect for
a period of five years from the Effective Time (or the period of
the applicable statute of limitations, if longer); provided,
however, that all rights to indemnification in respect of any claim
(a "Claim") asserted or made within such period shall continue
until the final disposition of such Claim.
(b) The Surviving Corporation shall use reasonable efforts (i) to
obtain, after the Effective Time, directors' and officers'
liability insurance coverage for the officers and directors of the
Surviving Corporation, to the extent that the same is economically
practicable, and (ii) either (A) to cause the individuals serving
as officers and directors of SFS, the SFS Subsidiaries, HBE or the
HBE Bank immediately prior to the Effective Time to be covered for
a period of three years from the Effective Time by the directors'
and officers' liability insurance policies maintained by the
Surviving Corporation, or to (B) substitute therefor policies of at
least the same coverage and amounts containing terms and conditions
which are not less advantageous than the policies previously
maintained by SFS and HBE, respectively, with respect to acts or
omissions occurring prior to the Effective Time which were
committed by such officers and directors in their capacity as such;
provided, however, that in no event shall the Surviving Corporation
be required to expend per year an amount in excess of 200% of the
premium for such insurance paid by SFS during its 1997 fiscal year
(the "Insurance Amount") to maintain or procure insurance coverage
pursuant to clause (ii) of this sentence, and provided further that
if the Surviving Corporation is unable to maintain or obtain the
insurance called for by clause (ii) of this sentence, the Surviving
Corporation shall use reasonable efforts to obtain as much
comparable insurance as available for the Insurance Amount.
(c) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of
such consolidation or merger, or (ii) transfers or conveys all or
substantially all of its properties and assets to any person, then,
and in each such case, to the extent necessary, proper provision
shall be made so that the successors and assigns of the Surviving
Corporation assume the obligations set forth in this Section 6.6.
(d) The provisions of this Section 6.6 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and
his or her heirs and representatives.
VI.7 Additional Agreements. In case at any time after the
Effective Time any further action is necessary or desirable to carry out
the purposes of this Agreement, the Plan of Merger or the HBE Stock Option
Agreement or to vest SFS with full title to all properties, assets,
rights, approvals, immunities and franchises of any of the parties to the
Merger, the proper officers and directors of each party to this Agreement
shall take, or cause the proper officers and directors of the SFS
Subsidiaries or the HBE Bank to take, as the case may be, all such
necessary action as may be reasonably requested by SFS.
VI.8 Advice of Changes. Between the date hereof and the Effective
Time, SFS and HBE shall promptly provide notice to the other party of any
change or event having a Material Adverse Effect on it or which it
believes would or would be reasonably likely to cause or constitute a
material breach of any of its representations, warranties or covenants
contained herein.
VI.9 No Conduct Inconsistent with this Agreement.
(a) HBE shall not from the date hereof through the Effective Time or
the termination of this Agreement:
(i) solicit, encourage or authorize any individual, corporation
or other entity to solicit from any third party any inquires
or proposals relating to the disposition of its business or
assets, or the acquisition of its capital stock, or the
merger of it or the HBE Bank, respectively, with any
corporation or other entity other than as provided by this
Agreement except pursuant to a written direction from a
regulatory authority; or
(ii) negotiate with or entertain any proposals from any other
person for any such transaction wherein the business, assets
or capital stock of it or the HBE Bank, respectively, would
be acquired, directly or indirectly, by any party other than
as provided by this Agreement, except pursuant to a written
direction from any regulatory authority or upon the receipt
of an unsolicited offer from a third party where the Board of
Directors of HBE reasonably believes, upon the written
opinion of counsel, that its fiduciary duties require it to
enter into discussions with such party. HBE shall promptly
notify SFS of all of the relevant details relating to all
inquiries and proposals which it may receive relating to any
proposed disposition of its business or assets, or the
acquisition of its capital stock, or the merger of it or the
HBE Bank, respectively, with any corporation or other entity
other than as provided by this Agreement and shall keep SFS
informed of the status and details of any such inquiry or
proposal, and shall give SFS five days' advance notice of any
agreement to be entered into with, or any information to be
supplied to, any person making such inquiry or proposal; or
(b) Nothing contained herein shall prohibit HBE from disclosing to its
shareholders a position contemplated by Rule 14e-2(a) under the
Exchange Act with respect to a tender offer for HBE Common Stock,
or satisfying any other applicable disclosure obligations under the
federal securities laws.
VI.10 Employee Matters.
(a) At the Effective Time, SFS shall assume and honor the written terms
and conditions of the existing written employment agreements and
employee retention agreements ("HBE Employment Contracts") with
officers and employees of HBE and HBE Bank that are included in the
HBE Disclosure Schedules. SFS acknowledges that the consummation
of the transactions contemplated by this Agreement shall trigger
the "change in control" provisions in the HBE Employment Contracts
and may require payments to be made thereunder. SFS agrees to
honor the terms of these Employment Contracts and agrees to make
all payments, as and when required thereunder. SFS acknowledges
that George L. Perucco and Lyle N. Dolan will terminate employment
with HBE and HBE Bank as of the Effective Time and will be paid in
full all amounts due under their respective HBE Employment
Contracts on that date. At the Effective Time, SFS shall enter
into a consulting agreement with George L. Perucco attached hereto
as Exhibit C. The provisions of the foregoing Section are intended
to be for the benefit of, and shall be enforceable by, each party
to, or beneficiary of, the foregoing HBE Employment Contracts, and
his or her representatives.
(b) The Merger shall not effect any interruption in the employment of
employees of HBE Bank (hereinafter each an "HBE Employee"). SFS
agrees to assume and honor the terms and conditions of the
Severance Pay Plan of Home Federal Savings and Loan Association of
Elgin ("HBE Severance Plan") included in the HBE Disclosure
Schedules. SFS also agrees that, in connection with reviewing
applicants for employment positions, it shall give any HBE Employee
who is terminated within three (3) months after the Effective Time,
the same priority consideration with respect to hiring, that is
given to SFS employees for such positions in accordance with any
formal or informal policies of SFS for a period of three (3) months
from such date of termination. The foregoing provisions are
intended to be for the benefit of, and shall be enforceable by,
each party to, or beneficiary of, the foregoing agreements and
arrangements, and his or her representatives.
(c) Effective as of the Effective Time, SFS shall assume sponsorship of
the HBE ESOP as the successor employer to HBE. Prior to the date
on which a "change in control" (as such term is defined in the HBE
ESOP, hereinafter "ESOP Change in Control") occurs, the HBE ESOP
will be amended (i) to eliminate Section 14.3(b); (ii) to eliminate
Section 14.4; (iii) to amend Article XIV of the HBE ESOP to provide
for the allocation of excess assets remaining after its outstanding
loan is satisfied to be made to the HBE ESOP participants and
beneficiaries in the same manner as earnings received by the ESOP
on investments allocated to participants' accounts are allocated;
and (iv) to adopt any other amendments to the HBE ESOP that are
deemed necessary to accomplish all of the foregoing and the final
allocation of all the HBE ESOP's remaining assets to all of the
ESOP's participants and their beneficiaries. Following the
Effective Time, and subject to receipt of a favorable determination
from the Internal Revenue Service that the merger does not
adversely affect qualification of the merged plan, the HBE ESOP
will be merged into the SFS 401k Savings Plan. In the event that
between the date of the execution of this Agreement and the
Effective Time, it is determined, to the satisfaction of HBE and
SFS, that the HBE ESOP is not an "affiliate" within the meaning of
Rule 145 of the Securities Act of 1933, as amended ("Securities
Act"), the HBE ESOP Trustee shall be permitted to sell unallocated
shares of HBE Common Stock held in its suspense account at any time
and all such times as the Trustee shall deem to be prudent on or
after the date the ESOP Change in Control has occurred in order to
repay the HBE ESOP's outstanding loan. In the event that the HBE
ESOP or the trust which forms part thereof is determined to be an
affiliate of HBE within the meaning of Rule 145 promulgated by the
Securities and Exchange Commission under the Securities Act, no
provision of Article XIV of the HBE ESOP shall be interpreted to
require the sale of shares of HBE Common Stock held by the trust
during the period beginning thirty (30) days prior to the Effective
Time and ending immediately after the release by SFS of financial
results covering at least thirty (30) days of post-Merger combined
operations by means of filing a Form 10-Q, 10-K or 8-K under the
Securities Act of 1934, as amended, the issuance of a quarterly
earnings report, or any other public issuance which satisfies the
requirements of Accounting Series Release 135, as amended by Staff
Accounting Bulletins Nos. 65 and 76. Effective as of the Effective
Time, SFS and HBE agree that former participants in the HBE ESOP
shall be treated as new hires for purposes of the State Financial
Services Corporation Employee Stock Ownership Plan. The foregoing
provisions are intended to be for the benefit of, and shall be
enforceable by, each party to, or beneficiary of, the foregoing
agreements and arrangements, and his or her representatives.
(d) At the Effective Time, each HBE Employee shall immediately become
eligible to participate in the State Financial Services Corporation
and Subsidiaries Money Purchase Plan (the "Pension Plan"). The
Surviving Corporation will give each HBE Employee full credit for
prior service with HBE or the HBE Bank for purposes of eligibility
to participate under the Pension Plan. HBE employees will be
treated as new hires for vesting purposes under the Pension Plan.
SFS agrees to take, prior to the Effective Time, all actions
necessary to cause amendments to be made to the Plan in order to
give effect to the preceding sentences. The foregoing provisions
are intended to be for the benefit of, and shall be enforceable by,
each party to, or beneficiary of, the foregoing agreements and
arrangements, and his or her representatives.
(e) At the Effective Time, the Surviving Corporation will give each HBE
Employee full credit for prior service with HBE or the HBE Bank for
purposes of eligibility to participate and vesting in the State
Financial Service Corporation 401(k) Savings Plan and the Effective
Time will be a special entry date thereunder for HBE employees.
SFS agrees to take, prior to the Effective Time, all actions
necessary to cause amendments to be made to the Plan in order to
give effect to the preceding sentences. The foregoing provisions
are intended to be for the benefit of, and shall be enforceable by,
each party to, or beneficiary of, the foregoing agreements and
arrangements, and his or her representatives.
(f) At the Effective Time, each HBE Employee shall immediately become
eligible to participate in all employee welfare benefit plans and
other fringe benefits programs offered or maintained by the
Surviving Corporation on the same terms and conditions that the
Surviving Corporation may make available to officers and employees
of the SFS Banks, including, without limitation, any health, life,
long-term disability, short-term disability, severance, vacation or
paid time off programs (the "SFS Welfare Plans"). Any expenses
incurred by an HBE Employee under the HBE or an HBE Bank employee
welfare benefit plans (such as deductibles or co-payments), shall
be counted for all purposes under the SFS Welfare Plans. SFS Bank
shall provide insurance coverage (for which SFS or SFS Bank may act
as the self-insurer) for pre-existing medical conditions (to the
extent such condition is currently covered under the HBE plan, and
such condition would be covered under SFS Bank's plan if it were no
pre-existing), subject to deductibles and/or copayment provisions
generally applicable to such coverage. The foregoing provisions
are intended to be for the benefit of, and shall be enforceable by,
each party to, or beneficiary of, the foregoing agreements and
arrangements, and his or her representatives.
(g) At the Effective Time, SFS shall assume all of the obligations
under the HBE RRP and HBE Option Plan, and all shares of HBE Common
Stock owned by the HBE RRP, which have not been awarded, shall be
canceled at or prior to the Effective Time.
VI.11 Tax Treatment and Pooling. Each of HBE and SFS will use its
reasonable best efforts to cause the Merger to qualify for pooling-of-
interests accounting treatment and as a reorganization under Section
368(a)(1)(A) of the Code.
VI.12 Dividends. After the date of this Agreement, each of SFS and
HBE shall coordinate with the other the declaration of any dividends in
respect of SFS Common Stock and HBE Common Stock and the record dates and
payment dates relating thereto, it being the intention of the parties
hereto that holders of SFS Common Stock or HBE Common Stock shall not
receive two dividends, or fail to receive one dividend, for any quarter
with respect to their shares of SFS Common Stock and/or HBE Common Stock
and any shares of common stock of the Surviving Corporation any holder of
HBE Common Stock receives in exchange therefor in the Merger.
VI.13 Rule 145 Affiliates. Within 30 days before the Closing Date,
HBE shall identify in a letter to SFS all persons who are, and to HBE's
knowledge who will be at the Closing Date, "affiliates" of HBE as such
term is used in Rule 145 under the Securities Act. HBE shall use all
reasonable efforts to cause its affiliates (including any person who may
be deemed to have become an affiliate after the date of the letter
referred to in the prior sentence) to deliver to SFS on or prior to the
Closing Date a written agreement substantially in the form attached hereto
as Exhibit F.
VI.14 Disclosure Schedules. On the date hereof,
(a) SFS has delivered to HBE the SFS Disclosure Schedules, accompanied
by a certificate signed by the Chief Financial officer of SFS
stating the SFS Disclosure Schedules are being delivered pursuant
to this Section 6.14.
(b) HBE has delivered to SFS the HBE Disclosure Schedules, accompanied
by a certificate signed by the Chief Financial Officer of HBE
stating the HBE Disclosure Schedules are being delivered pursuant
to this Section 6.14.
VI.15 Filing and Other Fees. All filing and other fees paid to the
SEC, the Federal Reserve, the OTS or any State Regulatory Agency in
connection with the Merger and the transactions contemplated by this
Agreement and the costs and expenses of printing and mailing the Joint
Proxy Statement shall be borne equally by SFS and HBE.
ARTICLE VII
CONDITIONS PRECEDENT
VII.1 Conditions to Each Party's Obligation To Effect the Merger.
The respective obligation of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Shareholder Approval. This Agreement, the Plan of Merger and the
transactions contemplated hereby and thereby shall have been
approved and adopted by the respective requisite affirmative votes
of the holders of HBE Common Stock and SFS Common Stock entitled to
vote thereon.
(b) Other Approvals. All regulatory approvals required to consummate
the transactions contemplated hereby shall have been obtained, on
terms and conditions reasonably satisfactory to each of HBE and
SFS, and shall remain in full force and effect and all statutory
waiting periods in respect thereof shall have expired (all such
approvals and the expiration of all such waiting periods being
referred to herein as the "Requisite Regulatory Approvals").
(c) Registration Statements. The S-4 shall have become effective under
the Securities Act and no stop order suspending the effectiveness
of the S-4 shall have been issued and no proceedings for that
purpose shall have been initiated or, to the knowledge of SFS or
HBE, threatened by the SEC.
(d) No Injunctions or Restraints; Illegality. No order, injunction or
decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition (an "Injunction") preventing
the consummation of the Merger or any of the other transactions
contemplated by this Agreement or the Plan of Merger shall be in
effect. No statute, rule, regulation, order, injunction or decree
shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits, materially restricts or makes
illegal consummation of the Merger.
(e) Federal Tax Opinion. HBE and SFS shall each have received an
opinion of their respective counsel, in form and substance
reasonably satisfactory to each, dated as of the Effective Time,
substantially to the effect that on the basis of the facts,
representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the Effective Time,
the merger will constitute for federal income tax purposes a
reorganization under Section 368(a)(1)(A) of the Code and that
accordingly:
(i) No gain or loss will be recognized by HBE or SFS as a result
of the Merger;
(ii) Except to the extent of any cash received in lieu of a
fractional share interest in SFS Common Stock, no gain or
loss will be recognized by the shareholders of HBE who
exchange their HBE Common Stock for SFS Common Stock pursuant
to the Merger;
(iii) The aggregate tax basis of SFS Common Stock received by
shareholders who exchange their HBE Common Stock for SFS
Common Stock in the Merger will be the same as the aggregate
tax basis of HBE Common Stock surrendered pursuant to the
Merger, reduced by any amount allocable to a fractional share
interest for which cash is received and increased by any gain
recognized on the exchange; and
(iv) The holding period of SFS Common Stock received by each
shareholder in the Merger will include the holding period of
HBE Common Stock exchanged therefor, provided that such
shareholder held such HBE Common Stock as a capital asset on
the date of the Merger.
Such opinion may be based on, in addition to the review of such
matters of fact and law as such counsel consider appropriate, (i)
representations made at the request of such counsel by HBE and
SFS, or either of them and (ii) certificates provided at the
request of such counsel by officers of HBE, SFS and other
appropriate persons.
(f) Pooling of Interests. HBE shall have received a letter of HBE's
independent accountants, dated as of the Effective Time, stating
that HBE is an entity that qualifies for pooling-of-interests
accounting treatment pursuant to GAAP. SFS shall also have
received a letter of SFS's independent accountants, dated the
Effective Time, stating that the transactions effective pursuant to
this Agreement will qualify as a pooling-of-interests pursuant to
GAAP.
VII.2 Conditions to Obligations of HBE. The obligation of HBE to
effect the Merger is also subject to the satisfaction, or waiver by HBE,
at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of SFS set forth in this Agreement shall be true and correct (i) on
and as of the date hereof and (ii) on and as of the Closing Date with
the same effect as though such representations and warranties had been
made on and as of the Closing Date (except for representations and
warranties that expressly speak only as of a specific date or time
other than the date hereof or the Closing Date which need only be true
and correct as of such date or time) except in each of cases (i) and
(ii) for such failures of representations or warranties to be true and
correct (without regard to any materiality qualifications contained
therein) which, individually or in the aggregate do not, and insofar
as reasonably can be foreseen, would not, result in an SFS Material
Adverse Effect. HBE shall have received a certificate signed on
behalf of SFS by the Chief Executive Officer and Chief Financial
Officer of SFS to the foregoing effect.
(b) Performance of Obligations of SFS. SFS shall have performed in all
material respects all obligations required to be performed by it
under this Agreement, the Plan of Merger and the HBE Stock Option
Agreement at or prior to the Closing Date, and HBE shall have
received a certificate signed on behalf of SFS by the Chief
Executive Officer and Chief Financial Officer of SFS to such
effect.
(c) No Material Adverse Change. Since the date of this Agreement, (i)
no event shall have occurred which has had a Material Adverse
Effect on SFS, and (ii) no condition (other than general economic
or competitive conditions generally affecting bank holding
companies and banks of a size or in locations comparable to those
of SFS or the SFS Subsidiaries), event, circumstances, fact or
other occurrence shall have occurred that may reasonably be
expected to have or result in such a Material Adverse Effect on
SFS.
(d) Opinion of Counsel to SFS. HBE shall have received from Foley &
Lardner, counsel to SFS, an opinion, dated the Closing Date, in
substantially the form of Exhibit L.
(e) Comfort Letters. HBE shall have received from Ernst & Young
"comfort letters" dated the date of mailing of the Joint Proxy
Statement and the Closing Date, covering matters customary to
transactions such as the Merger and in form and substance
reasonably satisfactory to HBE.
(f) Fairness Opinion. HBE shall have received from Hovde Financial,
Inc., a fairness opinion, dated the date of mailing of the Joint
Proxy Statement and in form and substance reasonably satisfactory
to HBE, to the effect that the consideration to be received in the
Merger by the shareholders of HBE is fair, from a financial point
of view, to the shareholders of HBE.
VII.3 Conditions to Obligations of SFS. The obligation of SFS to
effect the Merger is also subject to the satisfaction, or waiver by SFS,
at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of HBE set forth in this Agreement shall be true and correct (i) on
and as of the date hereof and (ii) on and as of the Closing Date
with the same effect as though such representations and warranties
had been made on and as of the Closing Date (except for
representations and warranties that expressly speak only as of a
specific date or time other than the date hereof or the Closing
Date which need only be true and correct as of such date or time)
except in each of cases (i) and (ii) for such failures of
representations or warranties to be true and correct (without
regard to any materiality qualifications contained therein) which,
individually or in the aggregate do not, and insofar as reasonably
can be foreseen, would not, result in an HBE Material Adverse
Effect. SFS shall have received a certificate signed on behalf of
HBE by the Chief Executive Officer and Chief Financial Officer of
HBE to the foregoing effect.
(b) Performance of Obligations of HBE. HBE shall have performed in all
material respects all obligations required to be performed by it
under this Agreement, the Plan of Merger and the HBE Stock Option
Agreement at or prior to the Closing Date, and SFS shall have
received a certificate signed on behalf of HBE by the Chief
Executive Officer and Chief Financial Officer of HBE to such
effect.
(c) No Material Adverse Change. Since the date of this Agreement, (i)
no event shall have occurred which has had a Material Adverse
Effect on HBE, and (ii) no condition (other than general economic
or competitive conditions generally affecting savings and loan
holding companies and savings associations of a size or in
locations comparable to those of HBE or the HBE Bank), event,
circumstances, fact or other occurrence shall have occurred that
may reasonably be expected to have or result in such a Material
Adverse Effect on HBE.
(d) Opinion of Counsel to HBE. SFS shall have received from Thacher,
Proffitt & Wood, counsel to HBE, an opinion, dated the Closing
Date, in substantially the form of Exhibit M.
(e) Comfort Letters. SFS and HBE shall have received from KPMG Peat
Marwick LLP "comfort letters" dated the date of mailing of the
Joint Proxy Statement and the Closing Date, covering matters
customary to transactions such as the Merger and in form and
substance reasonably satisfactory to SFS and HBE.
(f) Fairness Opinion. SFS shall have received from Everen Securities
(or another recognized investment banking firm) a fairness opinion,
dated the date of mailing of the Joint Proxy Statement and in form
and substance reasonably satisfactory to SFS, to the effect that
the consideration received by SFS shareholders pursuant to the
Merger is fair, from a financial point of view, to the shareholders
of SFS.
(g) Affiliate Agreements. SFS shall have received Affiliate
Agreements, duly executed by each affiliate of HBE, substantially
in the form of Exhibit F.
ARTICLE VIII
TERMINATION, EXPENSES AND AMENDMENT
VIII.1 Termination. This Agreement may be terminated prior to
the Effective Time:
(a) at any time, whether before or after approval of the matters
presented in connection with the Merger by the shareholders of SFS
or HBE, by written agreement between SFS and HBE, if the Board of
Directors of each so determines;
(b) at any time, whether before or after approval of the matters
presented in connection with the Merger by the shareholders of SFS
or HBE, by either the Board of Directors of SFS or the Board of
Directors of HBE if (i) any Governmental Entity which must grant a
Requisite Regulatory Approval (A) has denied approval of the Merger
and such denial has become final and nonappealable or (B) has
advised the parties of its unwillingness to grant such a Requisite
Regulatory Approval on terms and conditions reasonably acceptable
to the parties, notwithstanding the parties' fulfillment of their
obligations to take reasonable efforts to obtain such Requisite
Regulatory Approval, or (ii) any Governmental Entity of competent
jurisdiction shall have issued a final nonappealable order
permanently enjoining or otherwise prohibiting the consummation of
the transactions contemplated by this Agreement;
(c) by either the Board of Directors of SFS or the Board of Directors
of HBE if the Merger shall not have been consummated on or before
January 31, 1999, unless the failure of the Closing to occur by
such date shall be due to the failure of the party seeking to
terminate this Agreement to perform or observe the covenants and
agreements of such party set forth herein;
(d) by either SFS or HBE if any approval of the shareholders of SFS or
HBE required for the consummation of the Merger shall not have been
obtained by reason of the failure to obtain the required vote at a
duly held meeting of shareholders or at any adjournment or
postponement thereof;
(e) by HBE, by written notice to SFS, if
(i) there exists any breach or breaches of the representations
and warranties of SFS made herein, which breaches,
individually or in the aggregate have or, insofar as
reasonably can be foreseen, would have, a SFS Material
Adverse Effect, and such breaches shall not have been
remedied within thirty (30) days after receipt by SFS of
notice in writing from HBE, specifying the nature of such
breaches and requesting that they be remedied;
(ii) SFS shall have failed to perform and comply with, in all
material respects, its agreements and covenants hereunder and
such failure to perform or comply shall not have been
remedied within thirty (30) days after receipt by SFS of
notice in writing from HBE, specifying the nature of such
failure and requesting that it be remedied; or
(iii) the Board of Directors of SFS or any committee thereof:
(A) shall fail to reaffirm such approval or recommendation
upon HBE's request,
(B) shall approve or recommend any Business Combination
involving SFS other than the Merger or any tender
offer or share exchange for shares of capital stock of
SFS, in each case, by or involving a party other than
HBE or any of its affiliates or
(C) shall resolve to take any of the actions specified in
clause (A) or (B); or
(f) by SFS, by written notice to HBE, if
(i) there exists any breach or breaches of the representations
and warranties of HBE made herein or in the HBE Stock Option
Agreement which breaches, individually or in the aggregate
have, or insofar as reasonably can be foreseen, would have,
an HBE Material Adverse Effect and such breaches shall not
have been remedied within thirty (30) days after receipt by
HBE of notice in writing from SFS, specifying the nature of
such breaches and requesting that they be remedied;
(ii) HBE shall have failed to perform and comply with, in all
material respects, its agreements and covenants hereunder or
under the HBE Stock Option Agreement and such failure to
perform or comply shall not have been remedied within thirty
(30) days after receipt by HBE of notice in writing from SFS,
specifying the nature of such failure and requesting that it
be remedied; or
(iii) the Board of Directors of HBE or any committee thereof:
(A) shall withdraw or modify in any manner adverse to SFS
its approval or recommendation of this Agreement or
the Merger,
(B) shall fail to reaffirm such approval or recommendation
upon SFS's request,
(C) shall approve or recommend any Business Combination
involving HBE other than the Merger involving HBE or
any tender offer or share exchange for shares of
capital stock of HBE, in each case, by or involving a
party other than SFS or any of its affiliates or
(D) shall resolve to take any of the actions specified in
clause (A), (B) or (C).
(g) by HBE, pursuant and subject to Section I.4(e) in the event that
the Market Value of SFS Common Stock, as of the Decision Date, is
less than $20.00 per share.
VIII.2 Effect of Termination. Subject to Section 8.3, in the
event of termination of this Agreement by HBE or SFS pursuant to Section
8.1 there shall be no liability on the part of either HBE or SFS or their
respective officers or directors hereunder, except that Section 6.2(b),
Section 6.15, Section 8.2 and Section 8.3 shall survive the termination.
VIII.3 Remedies and Expenses Upon Breach or Willful Breach.
(a) Remedies. If this Agreement is terminated at such time that this
Agreement is terminable pursuant to one (but not both) of (A)
Section 8.1(e)(i) or (ii), or (B) Section 8.1(f)(i) or (ii) then
the breaching party shall promptly (but no later than five (5)
business days after receipt of notice from the non-breaching party)
pay to the non-breaching party in cash an amount equal to all
documented out-of-pocket expenses and fees incurred by the non-
breaching party (including, without limitation, fees and expenses
payable to all legal, accounting, financial, public relations and
other professional advisors arising out of, in connection with or
related to the Merger or the transactions contemplated by this
Agreement) not in excess of $350,000; provided, however, that, if
this Agreement is terminated by a party as a result of a willful
breach by the other party, the non-breaching party may pursue any
remedies available to it at law or in equity and shall, in addition
to its documented out-of-pocket expenses and fees (which shall be
paid as specified above and shall not be limited to $350,000), be
entitled to recover such additional amounts as such non-breaching
party may be entitled to receive at law or in equity.
(b) Expenses. If one party fails to promptly pay to any other party
any amount due hereunder, the defaulting party shall pay the costs
and expenses (including legal fees and expenses) in connection with
any action, including the filing of any lawsuit or other legal
action, taken to collect payment, together with interest on the
amount of any unpaid fee at the publicly announced prime rate as
published in the Wall Street Journal (Midwest Edition) from the
date such fee was required to be paid.
VIII.4 Amendment. Subject to compliance with applicable law,
this Agreement may be amended by the parties hereto, by action taken or
authorized by their respective Boards of Directors, at any time before or
after approval of the matters presented in connection with the Merger by
the shareholders of SFS or HBE; provided, however, that after any approval
of the transactions contemplated by this Agreement by the respective
shareholders of SFS or HBE, there may not be, without further approval of
such shareholders, any amendment of this Agreement which changes the
amount or the form of the consideration to be delivered to the holders of
HBE Common Stock hereunder other than as contemplated by this Agreement.
This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
VIII.5 Extension; Waiver. At any time prior to the Effective
Time, the parties hereto, by action taken or authorized by their
respective Board of Directors, may, to the extent legally allowed, (a)
extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document
delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions contained herein; provided, however, that after
any approval of the transactions contemplated by this Agreement by the
respective shareholders of SFS or HBE, there may not be, without further
approval of such shareholders, any extension or waiver of this Agreement
or any portion thereof which reduces the amount or changes the form of the
consideration to be delivered to the holders of HBE Common Stock hereunder
other than as contemplated by this Agreement. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
ARTICLE IX
GENERAL PROVISIONS
IX.1 Non-survival of Representations, Warranties and Agreements.
None of the representations, warranties, covenants and agreements in this
Agreement or the Plan of Merger (or in any instrument delivered pursuant
to this Agreement, which shall terminate in accordance with its terms)
shall survive the Effective Time, except for those covenants and
agreements contained herein and therein which by their terms apply in
whole or in part after the Effective Time. Without by implication
limiting the foregoing, none of the directors or officers of the parties
hereto shall have any liability for any of the representations,
warranties, covenants and agreements contained herein.
IX.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (with confirmation), mailed by registered or certified mail
(return receipt requested) or delivered by an express courier (with
confirmation) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to HBE, to:
Home Bancorp of Elgin, Inc.
16 North Spring Street
Elgin, Illinois 60120-5569
Attention: George L. Perucco
Telephone: (847) 742-3800
Telecopier: (847) 742-0793
with a copy to:
Thacher Proffitt & Wood
1500 K Street, NW Suite 200
Washington, D.C. 20005
Attention: V. Gerard Comizio, Esq.
Matthew Dyckman, Esq.
Telephone: (202) 347-8400
Telecopier: (202) 347-6238
and
(b) if to SFS, to:
State Financial Services Corporation
10708 W. Janesville Road
Hales Corners, WI 53130
Attn: Michael J. Falbo
Telephone: (414) 425-1600
Telecopier: (414) 425-8939
with a copy to:
Foley & Lardner
Firstar Center
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5367
Attention: Ulice Payne, Jr.
Rodney H. Dow
Telephone: (414) 271-2400
Telecopier: (414) 297-4900
IX.3 Interpretation; Definitions. When a reference is made in
this Agreement to Sections, Exhibits or Schedules, such reference shall be
to a section of or exhibit or schedule to this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation." No
provision of this Agreement shall be construed to require HBE, the HBE
Bank, SFS or the SFS Subsidiaries or affiliates to take any action which
would violate any applicable law, rule or regulation. As used in this
Agreement, the term "Material Adverse Effect" means, with respect to HBE
or SFS, as the case may be, a material adverse effect (i) on the business,
assets, properties, results of operations, financial condition, or
(insofar as they can reasonably be foreseen) prospects of such party and
its Subsidiaries, taken as a whole or (ii) on the consummation of the
Merger; provided, however, that the following shall not constitute or
contribute to a Material Adverse Effect: (i) changes in the financial
condition, business, or results of operations of a person resulting
directly or indirectly from (1) changes attributable to or resulting from
changes in general economic conditions affecting banks, savings
institutions or their holding companies generally, including changes in
the prevailing level of interest rates (provided that HBE is in
substantial compliance with its Interest Rate Risk Management Policy as
disclosed to SFS prior to the date of this Agreement, as the same may be
revised thereafter with SFS's concurrence), or (2) changes in state and
federal regulations or legislation affection Wisconsin or Illinois banks;
or (ii) matters related to changes in federal, state or local tax status,
characteristics, or attributes or the ability to use such attributes.
Notwithstanding the above, fees and expenses reasonably related to this
transaction (such as any additional insurance coverages, employment and
consulting services, legal, accounting, and investment banking fees and
expenses, and severance and retention provisions) shall not be included in
any determination of a Material Adverse Effect. The word "Subsidiary"
when used with respect to any party means any bank, corporation,
partnership, limited liability company, or other organization, whether
incorporated or unincorporated, which is consolidated with such party for
financial reporting purposes.
IX.4 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
IX.5 Entire Agreement. This Agreement (including the documents
and the instruments referred to herein) constitutes the entire agreement
and supersedes all prior agreements and understandings, both written and
oral, among the parties hereto with respect to the subject matter hereof.
IX.6 Governing Law. This Agreement and the exhibits attached
hereto shall be governed and construed in accordance with the laws of the
State of Wisconsin, without regard to any applicable conflicts of law.
IX.7 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to
be unenforceable, the provision shall be interpreted to be only so broad
as is enforceable.
IX.8 Publicity. Except as otherwise required by applicable law or
the rules of The Nasdaq Stock Market, neither HBE nor SFS shall, nor shall
HBE or SFS permit the HBE Bank or the SFS Subsidiaries, respectively, to
issue or cause the publication of any press release or other public
announcement with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement without the
consent of the other party, which consent shall not be unreasonably
withheld.
IX.9 Assignment; Third Party Beneficiaries. Neither this
Agreement nor any of the rights, interests or obligations of the parties
under this Agreement shall be assigned by any of the parties hereto
(whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. Except as
otherwise specifically provided in this Section 9.9 and in Section 6.6,
Section 1.5 and Section 7.10, this Agreement (including the documents and
instruments referred to herein) is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
IX.10 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in
addition to any other remedy to which they are entitled at law or in
equity.
IN WITNESS WHEREOF, SFS and HBE have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of
the date first above written.
STATE FINANCIAL SERVICES CORPORATION
By /s/ Michael J. Falbo
Michael J. Falbo
President and CEO
HOME BANCORP OF ELGIN, INC.
By /s/ George L. Perucco
George L. Perucco
President and CEO
<PAGE>
Exhibit B to the
Agreement and Plan
of Merger
Plan of Merger
Between
State Financial Services Corporation
and
Home Bancorp of Elgin, Inc.
PLAN OF MERGER (this "Plan"), dated as of __________________,
1998, by and between State Financial Services Corporation, a Wisconsin
corporation ("SFS"), and Home Bancorp of Elgin, Inc., a Delaware
corporation ("HBE").
WHEREAS, the Boards of Directors of SFS and HBE have determined
that it is in the best interests of their respective corporations and
their shareholders to consummate a merger in which HBE will merge with and
into SFS (the "Merger"), so that SFS is the resulting corporation
(hereinafter sometimes called the "Surviving Corporation") in the Merger;
WHEREAS, SFS and HBE have entered into an Agreement and Plan of
Merger, dated June 1, 1998 (the "Agreement"), which sets forth the
terms of the Merger;
WHEREAS, this Plan provides for the terms and conditions of the
Merger and the mode for carrying the Merger into effect.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
agree as follows:
ARTICLE I. THE MERGER
I.1 The Merger. Subject to the terms and conditions of
the Agreement and this Plan, and in accordance with the Wisconsin Business
Corporation Law (the "WBCL"), the Delaware General Corporation Law (the
"DGCL") and respective regulations thereunder, and applicable federal laws
and regulations, at the Effective Time (as defined in Section 1.2), HBE
shall merge with and into SFS, and SFS shall survive the Merger and shall
continue its corporate existence under the laws of the State of Wisconsin.
Upon consummation of the Merger, the separate corporate existence of HBE
shall terminate and the name of the Surviving Corporation shall be "State
Financial Services Corporation."
I.2 Effective Time. The Merger shall become effective
upon the later of (a) the time of filing of Articles of Merger with the
Department of Financial Institutions of the State of Wisconsin (the
"Wisconsin Department"), (b) the time of filing a Certificate of Merger
with the Secretary of State of the State of Delaware, and (c) the
effective date and time of the Merger as set forth in such Articles of
Merger and Certificate of Merger. The parties shall each use reasonable
efforts to cause the Articles of Merger and the Certificate of Merger to
be filed on the Closing Date (as defined in Section 1.9). The term
"Effective Time" shall be the date and time when the Merger becomes
effective, in accordance with this Section 1.2.
I.3 Effects of the Merger. At and after the Effective
Time, the Merger shall have the effects set forth in Section 180.1106 of
the WBCL and Section 252 of the DGCL. On the Effective Time, the separate
existence of HBE shall cease and all of the property (and, personal and
mixed), rights, powers, duties and obligations of HBE shall be deemed to
be transferred to and vested in SFS, without further act, as provided by
applicable laws and regulations.
I.4 Conversion of HBE Common Stock; Treatment of SFS
Common Stock.
(a) At the Effective Time, subject to Section 2.2, by
virtue of the Merger and without any action on the part of HBE, or the
holder of any securities of HBE, each share of the common stock, $0.01 par
value, of HBE (the "HBE Common Stock") issued and outstanding immediately
prior to the Effective Time (other than shares canceled pursuant to
Section 1.4(c)) shall be converted into an amount of the common stock, par
value $0.10 per share, of SFS (the "SFS Common Stock") equal to one share
multiplied by the Exchange Ratio as set forth in Section 1.4 of the
Agreement.
(b) All of the shares of HBE Common Stock converted into
SFS Common Stock pursuant to this Article I shall no longer be outstanding
and shall automatically be canceled and shall cease to exist as of the
Effective Time, and each certificate (each an "HBE Common Stock
Certificate") previously representing any such shares of HBE Common Stock
shall thereafter represent only the right to receive (i) a certificate
representing the number of whole shares of SFS Common Stock (each an SFS
Common Stock Certificate and (ii) cash in lieu of fractional shares into
which the shares of HBE Common Stock previously represented by such HBE
Common Stock Certificate have been converted pursuant to this Section 1.4
and Section 2.2. HBE Common Stock Certificates previously representing
shares of HBE Common Stock shall be exchanged for SFS Common Stock
Certificates representing whole shares of SFS Common Stock and cash in
lieu of fractional shares issued in consideration therefor upon the
surrender of such HBE Common Stock Certificates in accordance with Section
2.2, without any interest thereon.
(c) At the Effective Time, all shares of HBE Common Stock
that are owned by HBE as treasury stock, if any, shall be canceled and
shall cease to exist, and no stock of SFS or other consideration shall be
delivered in exchange therefor.
(d) At and after the Effective Time, each share of SFS
Common Stock issued and outstanding immediately prior to the Effective
Time shall remain an issued and outstanding share of common stock of the
Surviving Corporation and shall not be affected by the Merger.
I.5 Articles of Incorporation. The Articles of
Incorporation of SFS in effect as of the Effective Time shall be the
Articles of Incorporation of the Surviving Corporation after the Merger
until thereafter amended in accordance with applicable law.
I.6 By-Laws. The By-Laws of SFS in effect as of the
Effective Time shall be the By-Laws of the Surviving Corporation after the
Merger until thereafter amended in accordance with applicable law.
I.7 Tax Consequences. It is intended that the Merger
shall constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the Code),
and that the Agreement and this Plan shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code.
I.8 Board of Directors of the Surviving Corporation From
and after the Effective Time, the Board of Directors of SFS immediately
prior to the Effective Time shall be the Board of Directors of the
Surviving Corporation, each to hold office in accordance with the Articles
of Incorporation and By-laws of the Surviving Corporation, and the
officers of SFS shall be the officers of the Surviving Corporation, each
to hold office in accordance with the Articles of Incorporation and By-
laws of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed.
I.9 Closing. Subject to the terms and conditions of the
Agreement and this Plan, the closing of the Merger (the "Closing") will
take place at 10:00 a.m. Central Time on a date and at a place to be
specified by the parties, which shall be no later than the first business
day in the calendar month immediately following the month in which the
last of the conditions precedent to the Merger set forth in Article VII of
the Agreement is satisfied or waived, or at such other time, date and
place as HBE and SFS shall mutually agree (the "Closing Date").
I.10 Liquidation Account. As of the Effective Time, SFS
will automatically expressly assume and maintain Home Federal Savings and
Loans Association's liquidation account for the benefit of eligible
account holders in the same basis as it existed immediately prior to the
Effective Time.
ARTICLE II. CONVERSION OF SHARES
II.1 SFS to Make Shares Available. At or prior to the
Effective Time, SFS shall deposit, or shall cause to be deposited, with a
bank, trust company or other entity reasonably acceptable to HBE, which
may be an affiliate of SFS (the "Exchange Agent"), for the benefit of the
holders of HBE Common Stock Certificates, for exchange in accordance with
this Article II, SFS Common Stock Certificates and cash in lieu of any
fractional shares of SFS Common Stock (such cash and SFS Common Stock
Certificates, together with any dividends or distributions with respect
thereto paid after the Effective Time, being hereinafter referred to as
the "Conversion Fund") to be issued pursuant to Section 1.4 and paid
pursuant to Section 2.2(a) in exchange for outstanding shares of HBE
Common Stock.
II.2 Exchange of Certificates.
(a) As soon as practicable after the Effective Time, and
in no event later than ten (10) business days thereafter, the Surviving
Corporation shall cause the Exchange Agent to mail to each holder of
record of one or more HBE Common Stock Certificates a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the HBE Common Stock Certificates shall pass, only
upon delivery of the HBE Common Stock Certificates to the Exchange Agent)
and instructions for use in effecting the surrender of the HBE Common
Stock Certificates in exchange for SFS Common Stock Certificates and any
cash in lieu of fractional shares into which the shares of HBE Common
Stock represented by such HBE Common Stock Certificate or Certificates
shall have been converted pursuant to the Agreement and this Plan. Upon
proper surrender of an HBE Common Stock Certificate for exchange and
cancellation to the Exchange Agent, together with such properly completed
letter of transmittal, duly executed, the holder of such HBE Common Stock
Certificate shall be entitled to receive in exchange therefor, as
applicable, (i) an SFS Common Stock Certificate representing that number
of whole shares of SFS Common Stock to which such holder of HBE Common
Stock shall have become entitled pursuant to the provisions of Section 1.4
hereof, and (ii) a check representing the amount of any cash in lieu of
fractional shares that such holder has the right to receive in respect of
such HBE Common Stock Certificate, and the HBE Common Stock Certificate so
surrendered shall forthwith be canceled. No interest will be paid or
accrued on any cash in lieu of fractional shares payable to holders of HBE
Common Stock Certificates.
(b) If any SFS Common Stock Certificate is to be issued in
a name other than that in which the HBE Common Stock Certificate
surrendered in exchange therefor is registered, it shall be a condition of
the issuance thereof that the HBE Common Stock Certificate so surrendered
shall be properly endorsed (or accompanied by an appropriate instrument of
transfer) and otherwise in proper form for transfer, and that the person
requesting such exchange shall pay to the Exchange Agent in advance any
transfer or other taxes required by reason of the issuance of an SFS
Common Stock Certificate in any name other than that of the registered
holder of the HBE Common Stock Certificate surrendered, or required for
any other reason, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(c) After the Effective Time, there shall be no transfers
on the stock transfer books of HBE of the shares of HBE Common Stock which
were issued and outstanding immediately prior to the Effective Time. If,
after the Effective Time, HBE Common Stock Certificates are presented for
transfer to the Exchange Agent, they shall be canceled and exchanged for
SFS Common Stock Certificates representing shares of SFS Common Stock as
provided in this Article II.
(d) Notwithstanding anything to the contrary contained
herein, no certificates or scrip representing fractional shares of SFS
Common Stock shall be issued upon the surrender for exchange of HBE Common
Stock Certificates, no dividend or distribution with respect to SFS Common
Stock shall be payable on or with respect to any fractional share, and
such fractional share interests shall not entitle the owner thereof to
vote or to any other rights of a shareholder of the Surviving Corporation.
In lieu of the issuance of any such fractional share, the Surviving
Corporation shall pay to each former shareholder of HBE who otherwise
would be entitled to receive such fractional share an amount in cash
determined by multiplying (i) the Market Value of SFS Common Stock on the
Decision Date by (ii) the fraction of a share (rounded to the nearest
tenth when expressed as an Arabic number) of SFS Common Stock to which
such holder would otherwise be entitled to receive pursuant to Section
1.4.
(e) Any portion of the Conversion Fund that remains
unclaimed by the shareholders of HBE for twelve (12) months after the
Effective Time shall be paid to the Surviving Corporation. Any
shareholders of HBE who have not theretofore complied with this Article II
shall thereafter look only to the Surviving Corporation for the issuance
of certificates representing shares of SFS Common Stock and the payment of
cash in lieu of any fractional shares and any unpaid dividends and
distributions on the SFS Common Stock deliverable in respect of each share
of HBE Common Stock such shareholder holds as determined pursuant to the
Agreement and this Plan, in each case, without any interest thereon.
Notwithstanding the foregoing, none of SFS, HBE, the Exchange Agent or any
other person shall be liable to any former holder of shares of HBE Common
Stock, for any amount delivered in good faith to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(f) In the event any HBE Common Stock Certificate shall
have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such HBE Common Stock Certificate to be
lost, stolen or destroyed and, if reasonably required by the Surviving
Corporation, the posting by such person of a bond in such amount as the
Exchange Agent may determine is reasonably necessary as indemnity against
any claim that may be made against it with respect to such HBE Common
Stock Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate an SFS Common Stock Certificate
representing the shares of SFS Common Stock and any cash in lieu of
fractional shares deliverable in respect thereof pursuant to the Agreement
and this Plan.
(g) In the case of any shareholder of HBE who did not vote
for or consent to the Merger and who demands appraisal as provided in
Section 262 of the DGCL, each share of HBE Common Stock held by such
shareholder will be converted into the right to receive the value of the
share as provided in such statute. At the Closing Date, the holders of
HBE Common Stock will cease to have any rights with respect to such stock
other than the rights to receive SFS Common Stock, cash in lieu of
fractional shares or the value of the stock as herein provided or as
provided by law.
ARTICLE III. SHAREHOLDER APPROVALS
III.1 Each of SFS and HBE shall call a meeting of its
shareholders to be held as soon as reasonably practicable for the purpose
of voting upon the Agreement and this Plan (and, in the case of SFS, the
issuance of shares of SFS Common Stock in the Merger), and, subject to the
terms and conditions of the Agreement and this Plan, each of SFS and HBE
shall use reasonable efforts to cause such meetings to occur on the same
date and each shall use all reasonable efforts to obtain shareholder
approval of the Agreement, this Plan and the Merger.
ARTICLE IV. GENERAL PROVISIONS
IV.1 Termination. Prior to the Effective Time, notwith-
standing anything herein to the contrary, in the event the Agreement shall
have been terminated pursuant to Section VIII.1 thereof, this Plan shall
automatically terminate.
IV.2 Counterparts. This Plan may be executed in
counterparts, all of which shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
IV.3 Governing Law. This Plan shall be governed and
construed in accordance with the laws of the State of Wisconsin, without
regard to any applicable conflicts of law.
IV.4 Amendment. Subject to compliance with applicable law,
this Agreement may be amended by the parties hereto, by action taken or
authorized by their respective Boards of Directors, at any time before or
after approval of the matters presented in connection with the Merger by
the shareholders of SFS or HBE, provided, however, that after any approval
of the transactions contemplated by this Plan by the respective
shareholders of SFS or HBE, there may not be, without further approval of
such shareholders, any amendment of this Plan which changes the amount or
the form of the consideration to be delivered to the holders of HBE Common
Stock hereunder other than as contemplated by the Agreement and this Plan.
This Plan may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
IV.5 Extensions; Waivers. Each party, by a written
instrument signed by a duly authorized officer, may extend the time for
the performance of any of the obligations or other acts of the other party
hereto and may waive compliance with any of the covenants, or performance
of any of the obligations, of the other party contained in this Plan of
Merger.
IN WITNESS WHEREOF, SFS and HBE have caused this Plan to be
executed by their respective officers thereunto duly authorized as of the
date first above written.
STATE FINANCIAL SERVICES CORPORATION HOME BANCORP OF ELGIN, INC.
By: By:
Name: Name:
Title: Title:
<PAGE>
Annex B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated June 1, 1998, between State
Financial Services Corporation, a Wisconsin corporation ("Grantee"), and
Home Bancorp of Elgin, Inc., a Delaware corporation ("Issuer").
WITNESSETH:
WHEREAS, Grantee and Issuer have entered into an Agreement and
Plan of Merger (the "Merger Agreement");
WHEREAS, as a condition and an inducement to Grantee's entering
into the Merger Agreement, Issuer is granting Grantee the Option (as
hereinafter defined); and
WHEREAS, the Board of Directors of Issuer has approved the grant
of the Option and the Merger Agreement:
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms
hereof, up to an aggregate of 1,371,159 (as adjusted or set forth in
Sections 1(b) and 5(b) hereof) fully paid and nonassessable shares of the
common stock, par value $0.01 per share, of Issuer ("Issuer Common Stock")
at a price per share of $17.00 (the "Option Price"); provided, however,
that in the event Issuer issues or agrees to issue any shares of Issuer
Common Stock (other than shares of Issuer Common Stock issued pursuant to
stock options granted pursuant to any director or employee benefit or
stock option plan prior to the date hereof) at a price less than $17.00
(as adjusted pursuant to subsection (b) of Section 5 hereof), the Option
Price shall be equal to such lesser price; provided, further, that in no
event shall the number of shares for which this Option is exercisable
exceed 19.9% of the issued and outstanding shares of Issuer Common Stock.
The number of shares of Issuer Common Stock that may be received upon the
exercise of the Option at Option Price are subject to adjustment as herein
set forth.
(b) In the event that any additional shares of Issuer Common
Stock are issued or otherwise become outstanding after the date of this
Agreement (other than pursuant to this Agreement and other than pursuant
to an event described in Section 5(a) hereof), the number of shares of
Issuer Common Stock subject to the Option shall be increased so that,
after such issuance, such number together with any shares of Issuer Common
Stock previously issued pursuant hereto, equals 19.9% of the number of
shares of Issuer Common Stock then issued and outstanding without giving
effect to any shares subject or issued pursuant to the Option. Nothing
contained in this Section 1(b) or elsewhere in this Agreement shall be
deemed to authorize Issuer to issue shares of Issuer Common Stock in
breach of any provision of the Merger Agreement.
2. (a) Grantee may exercise the Option, in whole or part if, but
only if, both an Initial Triggering Event (as hereinafter defined) and a
Subsequent Triggering Event (as hereinafter defined) shall have occurred
prior to the occurrence of an Exercise Termination Event (as hereinafter
defined); provided, however, that Grantee shall have sent the written
notice of such exercise (as provided in subsection (e) of this Section 2)
within three (3) months following such Subsequent Triggering Event (or
such later period as provided in Section 10 hereof). Each of the following
shall be an Exercise Termination Event: (i) the Effective Time of the
Merger; (ii) termination of the Merger Agreement in accordance with the
provisions thereof if such termination occurs prior to the occurrence of
an Initial Triggering Event except a termination by Grantee pursuant to
Section 8.l(f) of the Merger Agreement, or by Grantee or Issuer pursuant
to Section 8.1(d) of the Merger Agreement if prior to or within three
months after, the duly held meeting of the shareholders of the Issuer at
which the required vote to approve the Merger was not obtained it shall
have been publicly announced or disclosed that any person (other than
Grantee or any Grantee Subsidiary (as defined below)) shall have made, or
disclosed an intention to make, a proposal to engage in an Acquisition
Transaction (as defined below) (each, a "Listed Termination"); or (iii)
the passage of twelve (12) months (or such longer period as provided in
Section 10) after termination of the Merger Agreement if such termination
follows the occurrence of an Initial Triggering Event or is a Listed
Termination. Notwithstanding anything to the contrary contained herein,
(i) the Option may not be exercised at any time when Grantee shall be in
material breach of any of its representations, warranties, covenants or
agreements contained in this Agreement or in the Merger Agreement such
that, in the case of the Merger Agreement, Issuer shall be entitled to
terminate the Merger Agreement pursuant to Section 8.l(e)(i) and (ii)
thereof and (ii) this Agreement shall automatically terminate upon the
proper termination of the Merger Agreement by Issuer either pursuant to
Section 8.l(e) thereof as a result of the material breach by Grantee of
its covenants or agreements contained in the Merger Agreement or pursuant
to Section 8.l(g) thereof. Notwithstanding the occurrence of an exercise
Termination Event, Grantee shall be entitled to purchase those shares of
Issuer Common stock with respect to which it has exercised the Option in
accordance with the terms hereof prior to the Exercise Termination event.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring on or after the date hereof:
(i) Issuer or any subsidiary of Issuer (an "Issuer
Subsidiary"), without having received Grantee's prior
written consent, shall have entered into an agreement to
engage in an Acquisition Transaction (as hereinafter
defined) with any person (the term "person" for purposes of
this Agreement having the meaning assigned thereto in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange
Act of 1934, as amended (the "1934 Act"), and the rules and
regulations thereunder) other than Grantee or any of the
subsidiaries of Grantee (each a "Grantee Subsidiary") or
the Board of Directors of Issuer (the "Issuer Board") shall
have recommended that the shareholders of Issuer approve or
accept any Acquisition Transaction other than the Merger
(as defined in the Merger Agreement). For purposes of this
Agreement, "Acquisition Transaction" shall mean either (x)
a merger or consolidation, or any similar transaction,
involving Issuer or Home Federal Savings and Loan
Association of Elgin (other than internal mergers,
consolidations or similar transactions involving solely
Issuer and/or one or more existing wholly-owned Issuer
Subsidiaries, provided, that any such transaction is not
entered into in violation of the terms of the Merger
Agreement), (y) a purchase, lease or other disposition of
15% or more of the consolidated assets, net revenues or net
income of Issuer (on a consolidated basis), or (z) an
issuance, sale or other disposition (including by way of
merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the voting power of
Issuer or Home Federal Savings and Loan Association of
Elgin (notwithstanding the foregoing, the beneficial
ownership by any current stockholders of Issuer of greater
than 10% of voting stock of Issuer as of the date of this
Agreement shall not constitute an Initial Triggering
Event);
(ii) Any person (other than Grantee or any Grantee Subsidiary)
shall have acquired beneficial ownership (as such term is
defined in Rule I 3d-3 under the 1934 Act) or the right to
acquire beneficial ownership of, or any "group" (as such
term is defined under the 1934 Act) shall have been formed
which beneficially owns or has the right to acquire
beneficial ownership of, 20% or more of the then
outstanding shares of Issuer Common Stock (other than
shares held in accounts related to Issuer's employee
benefit plans);
(iii) The shareholders of Issuer shall have voted and failed to
approve the Merger Agreement and the Merger at a meeting
which has been held for that purpose, or such meeting, in
violation of the Merger Agreement, shall not have been
held, or such meeting shall have been cancelled prior to
termination of the Merger Agreement if, in any event, prior
to such meeting (or if such meeting shall not have been
held or shall have been cancelled, prior to the termination
of the Merger Agreement), it shall have been publicly
announced or disclosed that any person (other than Grantee
or any Grantee Subsidiary) shall have made, or disclosed an
intention to make, a proposal to engage in an Acquisition
Transaction;
(iv) The Board of Directors of the Issuer shall have withdrawn
or modified (or publicly announced its intention to
withdraw or modify), in any manner adverse in any respect
to Grantee, its recommendation that the shareholders of
Issuer approve the transactions contemplated by the Merger
Agreement, or Issuer or any Issuer Subsidiary shall have
authorized, recommended, proposed (or publicly announced
its intention to authorize, recommend or propose) an
agreement to engage in an Acquisition Transaction with any
person other than Grantee or a Grantee Subsidiary;
(v) Any person other than Grantee or any Grantee Subsidiary
shall have made a proposal to Issuer or its shareholders to
engage in an Acquisition Transaction and such proposal
shall have been publicly announced;
(vi) Any person other than Grantee or any Grantee Subsidiary
shall have commenced (as such term is defined in Rule 17d-2
under the 1934 Act), or shall have filed with the SEC a
registration statement under the 1934 Act or tender offer
materials with respect to, a potential exchange offer or
tender offer to purchase any shares of Issuer Common Stock
such that, upon consummation of such offer, such person or
a "group" (as such term is defined under the 1934 Act) of
which such person is a member, would acquire beneficial
ownership (as such term is defined in Rule 13d-3 of the
1934 Act), or the right to acquire beneficial ownership, of
20% or more of the then outstanding shares of Issuer Common
Stock:
(vii) Issuer shall have willfully breached any covenant or
obligation contained in the Merger Agreement in
anticipation of and in order to facilitate engaging in an
Acquisition Transaction, and following such breach Grantee
would be entitle to terminate the Merger Agreement (whether
immediately or after the giving of notice or passage of
time or both); or
(viii) Any person other than Grantee or any Grantee Subsidiary
shall have filed an application or notice with the Board of
Governors of the Federal Reserve System (the "Federal
Reserve Board"), the Office of Thrift Supervision ("OTS"),
or other federal or state bank regulatory or antitrust
authority, which application or notice has been accepted
for processing. for approval to engage in an Acquisition
Transaction.
(c) The term "Subsequent Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person (other than Grantee or any
Grantee Subsidiary) of beneficial ownership of 30% or more
of the then outstanding shares of Issuer Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
clause (i) of subsection (b) of this Section 2, except that
the percentage referred to in clause (z) of the second
sentence thereof shall be 30%.
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering Event
(together, a "Triggering Event") to the extent that such Triggering Event
is known to the Issuer, it being understood that the giving of such notice
by Issuer shall not be a condition to the right of Grantee to exercise the
Option.
(e) In the event Grantee is entitled to and wishes to exercise
the Option (or any portion thereof), it shall send to Issuer a written
notice (the date of which being herein referred to as the "Notice Date")
specifying (i) the total number of shares it will purchase pursuant to
such exercise and (ii) a place and date not earlier than three business
days nor later than 30 business days from the Notice Date for the closing
of such purchase (the "Closing Date"); provided, that if the closing of
the purchase and sale pursuant to the Option cannot be consummated by
reason of any applicable judgment, decree, order, law or regulation, the
period of time that otherwise would run pursuant to this sentence shall
run instead from the date on which such restriction or consummation has
expired or been terminated; and, provided, further, without limiting the
foregoing, that if prior notification to or approval of the Federal
Reserve Board, OTS or any other regulatory or antitrust authority is
required in connection with such purchase, Grantee shall promptly file the
required notice or application for approval, shall promptly notify Issuer
of such filing (and the Issuer shall fully cooperate with Grantee in the
filing of any notice or application and the obtaining of any such
approval), and shall expeditiously process the same. and the period of
time that otherwise would run pursuant to this sentence shall run instead
from the date on which any required notification periods have expired or
been terminated or such approvals have been obtained, and in either event,
any requisite waiting period or periods shall have passed. Any exercise of
the Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section
2, Grantee shall (i) pay to Issuer the aggregate purchase price for the
shares of Issuer Common Stock purchased pursuant to the exercise of the
Option in immediately available funds by wire transfer to a bank account
designated by Issuer and (ii) present and surrender this Agreement to
Issuer at its principal executive offices; provided, however, that the
failure or refusal of the Issuer to designate such a bank account or
accept surrender of this Agreement shall not preclude Grantee from
exercising the Option.
(g) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (f) of this Section
2, Issuer shall deliver to Grantee a certificate or certificates
representing the number of shares of Issuer Common Stock purchased by
Grantee and, if the Option should be exercised in part only, a new Option
evidencing the rights of Grantee thereof to purchase the balance of the
shares purchasable hereunder.
(h) Certificates for lssuer Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. AS AMENDED, OR ANY
STATE SECURITIES LAWS OR BLUE SKY LAWS, AND MAY BE REOFFERED OR
SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO
ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCK
OPTION AGREEMENT DATED JUNE 1, 1998, A COPY OF WHICH MAY BE
OBTAINED FROM THE ISSUER UPON REQUEST."
It is understood and agreed that: (i) the reference to the
resale restrictions of the Securities Act of 1933, as amended (the "1933
Act"), in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if Grantee shall have delivered to
Issuer a copy of a letter from the staff of the SEC. or an opinion of
counsel, in form and substance reasonably satisfactory to Issuer, to the
effect that such legend is not required for purposes of the 1993 Act; (ii)
the reference to the provisions of this Agreement in the above legend
shall be removed by delivery of substitute certificate(s) without such
reference if the shares have been sold or transferred in compliance with
the provisions of this Agreement and under circumstances that do not
require the retention of such reference in the opinion of counsel to
Grantee, which opinion shall be reasonably satisfactory to Issuer; and
(iii) the legend shall be removed in its entirety if the conditions in the
preceding clauses (i) and (ii) are both satisfied. In addition, such
certificates shall bear any other legend as may be required by law.
(i) Upon the giving by Grantee to Issuer of the written notice
of exercise of the Option provided for under subsection (e) of this
Section 2 and the tender of the applicable purchase price in immediately
available funds, the Issuer shall deliver to Grantee a certificate or
certificates in definitive form representing the shares of Issuer Common
Stock issued upon such exercise, which shares shall be free and clear of
all liens, claims, charges and encumbrances of any kind whatsoever, and
Grantee shall be deemed to be the holder of record of such shares,
notwithstanding that the stock transfer books of Issuer shall then be
closed. Issuer shall pay its out-of-pocket expenses payable in connection
with the preparation, issue and delivery of stock certificates under this
Section 2 in the name of Grantee or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain,
free from preemptive tights, sufficient authorized but unissued or
treasury shares of Issuer Common Stock so that the Option may be exercised
without additional authorization of Issuer Common Stock after giving
effect to all other options, warrants, convertible securities and other
rights to purchase Issuer Common Stock; (ii) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution or
sale of assets, or by any other voluntary act, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Issuer; (iii) promptly
to take all action as may from time to time be required (including (x)
complying with all applicable premerger notification, reporting and
waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (y) in the event, under any state
or federal banking law, prior approval of or notice to the Federal Reserve
Board, OTS or to any state or other federal regulatory authority is
necessary before the Option may be exercised, cooperating fully with
Grantee in preparing such applications or notices and providing such
information to the Federal Reserve Board, OTS or such state or other
federal regulatory authority as they may require) in order to permit
Grantee to exercise the Option and Issuer duly and effectively to issue
shares of Issuer Common Stock pursuant hereto; and (iv) promptly to take
all action provided herein to protect the rights of Grantee against
dilution.
4. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Grantee, upon presentation
and surrender of this Agreement at the principal office of Issuer, for
other Agreements providing for Options of different denominations
entitling Grantee to purchase, on the same terms and subject to the same
conditions as are set forth therein, in the aggregate the same number of
shares of Issuer Common Stock purchasable hereunder. The terms "Agreement"
and "Option" as used herein include any Agreements and related Options for
which this Agreement (and the Option granted hereby) may be exchanged.
Upon receipt by Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification,
and upon surrender and cancellation of this Agreement, if mutilated,
Issuer will execute and deliver a new Agreement of like tenor and date.
Any such new Agreement executed and delivered shall constitute an
additional contractual obligation on the part of Issuer, whether or not
the Agreement so lost, stolen, destroyed mutilated shall at any time be
enforceable by anyone.
5. In addition to the adjustment in the number of shares of
Issuer Common Stock that are purchasable upon exercise of the Option
pursuant to Section 1 of this Agreement, the number of shares of Issuer
Common stock purchasable upon the exercise of the Option and the Option
Price shall be subject to adjustment from time to time as provided in this
Section 5.
(a) In the event of any change in, or distributions (other than
the payment of cash dividends in the ordinary course consistent with past
practice) in respect of, the Issuer Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations,
subdivisions, conversions, exchanges of shares or the like, the type and
number of shares of Issuer Common Stock purchasable upon exercise hereof
shall be appropriately adjusted and proper provision shall be made so
that, in the event that any additional shares of Issuer Common Stock are
to be issued or otherwise become outstanding as a result of any such
change (other than pursuant to an exercise of the Option), the number of
shares of Issuer Common Stock that remain subject to the Option shall be
increased so that, after such issuance and together with shares of Issuer
Common Stock previously issued pursuant to the exercise of the Option (as
adjusted on account of any of the foregoing changes in the Issuer Common
Stock), it equals 19.9% of the number of shares of Issuer Common Stock
then issued and outstanding.
(b) Whenever the number of shares of Issuer Common Stock purchasable
upon exercise hereof is adjusted as provided in this Section 5, the Option
Price shall be adjusted by multiplying the Option Price by a fraction, the
numerator of which shall be equal to the number of shares of Issuer Common
Stock purchasable prior to the adjustment and the denominator of which
shall be equal to the number of shares of Issuer Common Stock purchasable
after the adjustment.
6. (a) Upon the occurrence of a Subsequent Triggering Event that
occurs prior to an Exercise Termination Event Grantee may, within twelve
(12) months (or such later period as provided in Section 10) of such
Subsequent Triggering Event, by written notice (the "Registration Notice")
to Issuer request Issuer to register under the 1933 Act all or any part of
the shares of capital stock of Issuer acquired by Grantee pursuant to this
Agreement beneficially owned by Grantee (the "Registrable Securities").
(b) Issuer shall thereupon have the option exercisable by written
notice delivered to Grantee within three (3) business days after the
receipt of the Registration Notice, irrevocably to agree to purchase all
or any part of the Registrable Securities proposed to be so sold for cash
at a price equal to the product of (i) the number of Registrable
Securities to be so purchased by the Issuer and (ii) the Fair Market Value
(as defined below) of a share of such Registrable Securities. As used
herein, the "Fair Market Value" of any share of Registrable Securities
shall be the average of the daily closing sales price for a share of
Issuer Common Stock on the Nasdaq National Market during the five (5)
trading days prior to the date on which the Registration Notice for such
share is received by Issuer.
(c) Any purchase of Registrable Securities by Issuer under
Section 6(b) shall take place at a closing to be held at the principal
executive offices of Issuer or at the offices of its counsel at any
reasonable date and time designated by Issuer in such notice with ten (10)
business days after delivery of such notice, and payment of the purchase
price for the shares to be so purchase shall be made by delivery at the
time of such closing in immediately available funds.
(d) If Issuer does not elect to exercise its option pursuant to
this Section 6 with respect to all Registrable Securities, it shall use
its best efforts to effect, as promptly as practicable, and keep current
the registration under the 1933 Act of the unpurchased Registrable
Securities proposed to be sold. Issuer will use its reasonable best
efforts to cause such registration statement promptly to become effective
and then to remain effective for such period not in excess of 120 days
from the day such registration statement first becomes effective or such
shorter time as may be reasonably necessary to effect the sale or other
disposition of the Registrable Securities; provided, however, that
(i) Grantee shall not be entitled to demand more than one (1)
effective registration statements hereunder, and
(ii) Issuer will not be required to file any such registration
statement during any period of time (not to exceed 90 days
after such request in the case of clauses (A) and (B) below
or 120 days in the case of clause (C) below) when
(A) Issuer is in possession of material non-public
information which it reasonably believes would be
detrimental to be disclosed at such time and, in the
opinion of counsel to Issuer, such information would
be required to be disclosed if a registration
statement were filed at that time;
(B) Issuer is required under the 1933 Act to include
audited financial statements for any period in such
registration statement and such financial statements
are not yet available for inclusion in such
registration statement; or
(C) Issuer determines, in its reasonable judgment, that
such registration would interfere with any financing,
acquisition or other material transaction involving
Issuer or any of its affiliates.
(e) Issuer shall use its reasonable best efforts to cause any
Registrable Securities registered pursuant to this Section 6 to be
qualified for sale under the securities or "blue sky" laws of such
jurisdictions as Grantee may reasonably request and shall continue such
registration or qualification in effect in such jurisdiction; provided,
however, that Issuer shall not be required to qualify to do business in,
or consent to general service of process in, any jurisdiction by reason of
this provision.
(f) The registration rights set forth in this Section 6 are
subject to the condition that Grantee shall provide Issuer with such
information with respect to the Registrable securities, the plans for the
distribution thereof, and such other information with respect to such
holder as, in the reasonable judgment of counsel for Issuer, is necessary
to enable Issuer to include in such registration statement all material
facts required to be disclosed with respect to a registration thereunder.
(g) A registration effected under this Section 6 shall be
effected at Issuer's expense, except for underwriting discounts and
commissions, broker's fees and the fees and the expenses of counsel and
other advisors to Grantee.
(h) In connection with any registration effected under this
Section 6, the parties agree
(i) to indemnify each other in the customary manner, and
(ii) to take all reasonable further actions which shall be
reasonably necessary to effect such registration and
sale.
(i) If Issuer Common Stock or any other securities to be acquired
upon exercise of the Option are then listed on the Nasdaq National Market
or a national securities exchange, Issuer, upon the request of Grantee,
will promptly file an application to list the shares of Issuer Common
Stock or other securities to be acquired upon exercise of the Option on
the Nasdaq National Market or a national securities exchange, as the case
may be, and will its best efforts to obtain approval of such listing as
soon as practicable.
7. (a) At any time after the occurrence of a Repurchase Event (as
defined below), (i) at the request of Grantee, delivered prior to an
Exercise Termination Event (or such later period as provided in Section
10), Issuer (or any successor thereto) shall repurchase the Option from
Grantee at a price (the "Option Repurchase Price") equal to the amount by
which (A) the market/offer price (as defined below) exceeds (B) the Option
Price, multiplied by the number of shares for which this Option may then
be exercised and (ii) at the request of Grantee delivered prior to an
Exercise Termination Event (or such later period as provided in Section
10), Issuer (or any successor thereto) shall repurchase such number of the
Option Shares from Grantee as Grantee shall designate at a price (the
"Option Share Repurchase Price") equal to the market/offer price
multiplied by the number of Option Shares so designated. The term
"market/offer price" shall mean the highest of (i) the price per share of
Issuer Common Stock at which a tender or exchange offer therefor has been
made, (ii) the price per share of Issuer Common Stock to be paid by any
third party pursuant to an agreement with Issuer, (iii) the highest
closing price for shares of Issuer Common Stock within the six-month
period immediately preceding the date Grantee gives notice of the required
repurchase of this Option or Grantee gives notice of the required
repurchase of Option Shares, as the case may be, or (iv) in the event of a
sale of all or any substantial part of Issuer's assets or deposits, the
sum of the net price paid in such sale for such assets or deposits and the
current market value of the remaining net assets of Issuer as determined
by a nationally recognized investment banking firm selected by Grantee and
reasonably acceptable to Issuer, divided by the number of shares of Issuer
Common Stock of Issuer outstanding at the time of such sale. In
determining the market/offer price, the value of consideration other than
cash shall be determined by a nationally recognized investment banking
firm selected by Grantee and reasonably acceptable to Issuer.
(b) Grantee may exercise its right to require Issuer to repurchase
the Option and any Option Shares pursuant to this Section 7 by
surrendering for such purpose to Issuer, at its principal office, a copy
of this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that Grantee elects to
require Issuer to repurchase this Option and/or the Option Shares in
accordance with the provisions of this Section 7. As promptly as
practicable, and in any event within five business days after the
surrender of the Option and/or certificates representing Option Shares and
the receipt of such notice or notices relating thereto, Issuer shall
deliver or cause to be delivered to Grantee the Option Repurchase Price
and/or to Grantee the Option Share Repurchase Price therefor or the
portion thereof that Issuer is not then prohibited under applicable law
and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law
or regulation, or as a consequence of administrative policy, from
repurchasing the Option and/or the Option Shares in full, Issuer shall
immediately so notify Grantee and thereafter deliver or cause to be
delivered, from time to time, to Grantee the portion of the Option
Repurchase Price and the Option Share Repurchase Price, respectively, that
it is no longer prohibited from delivering, within five business days
after the date on which Issuer is no longer so prohibited; provided,
however, that if Issuer at any time after delivery of a notice of
repurchase pursuant to paragraph (b) of this Section 7 is prohibited under
applicable law or regulation, or as a consequence of administrative
policy, from delivering to Grantee the Option Repurchase Price and the
Option Share Repurchase Price in full (and Issuer hereby undertakes to use
its reasonable best efforts to obtain all required regulatory and legal
approvals and to file any required notices as promptly as practicable in
order to accomplish such repurchase), Grantee may revoke its notice of
repurchase of the Option and/or the Option Shares whether in whole or to
the extent of the prohibition, whereupon, in the latter case, Issuer shall
promptly (i) deliver to Grantee that portion of the Option Repurchase
Price and/or the Option Shares Repurchase Price that Issuer is not
prohibited from delivering; and (ii) deliver to Grantee either (A) a new
Agreement evidencing the right of Grantee to purchase that number of
shares of Issuer Common Stock obtained by multiplying the number of shares
of Issuer Common Stock for which the surrendered Agreement was exercisable
at the time of delivery of the notice of repurchase by a fraction, the
numerator of which is the Option Repurchase Price less the portion thereof
theretofore delivered to Grantee and the denominator of which is the
Option Repurchase Price, and/or (B) a certificate for the Option Shares it
is then so prohibited from repurchasing. If an Exercise Termination Event
shall have occurred prior to the date of the notice by Issuer described in
the first sentence of this subsection (c), or shall be scheduled to occur
at any time before the expiration of a period ending on the thirtieth day
after such date. Grantee shall nonetheless have the right to exercise the
Option until the expiration of such 30-day period.
(d) For purposes of this Section 7, a "Repurchase Event" shall be
deemed to have occurred upon the occurrence of any of the following events
or transactions after the date hereof:
(i) the acquisition by any person (other than Grantee or any
Grantee Subsidiary) of beneficial ownership of 50% or more
of the then outstanding Issuer Common Stock; or
(ii) the consummation of any Acquisition Transaction described
in Section 2(b)(i) hereof, except that the percentage
referred to in clause (z) shall be 50%.
8. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement (i) to consolidate with or merge into
any person. ("other than Grantee or a Grantee Subsidiary), or engage in a
plan of exchange with any person (other than Grantee or a Grantee
Subsidiary) and Issuer shall not be the continuing or surviving
corporation of such consolidation or merger or the acquirer in such plan
of exchange, (ii) to permit any person, other than Grantee or a Grantee
Subsidiary, to merge into Issuer or be acquired by Issuer in a plan of
exchange and Issuer shall be the continuing or surviving or acquiring
corporation, but, in connection with such merger or plan of exchange, the
then outstanding shares of Issuer Common Stock shall be changed into or
exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Issuer Common Stock shall
after such merger or plan or exchange represent less than 50% of the
outstanding shares and share equivalents of the merged or acquiring
company, or (iii) to sell or otherwise transfer all or a substantial part
of its or an Issuer Subsidiary's assets or deposits to any person, other
than Grantee or a Grantee Subsidiary, then, and in each such case, the
agreement governing such transaction shall make proper provision so that
the Option shall, upon the consummation of any such transaction and upon
the terms and conditions set forth herein, be converted into, or exchanged
for, an option (the "Substitute Option"), at the election of Grantee, of
either (x) the Acquiring Corporation (as hereinafter defined) or (y) any
person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving person of a consolidation or merger with Issuer
(if other than Issuer), (ii) the acquiring person in a plan
of exchange in which Issuer is acquired, (iii) the Issuer
in a merger or plan of exchange in which Issuer is the
continuing or surviving or acquiring person. and (iv) the
transferee of all or a substantial part of Issuer's assets
or deposits (or the assets or deposits of the Issuer
Subsidiary).
(ii) "Substitute Common Stock" shall mean the common stock
issued by the issuer of the Substitute Option upon exercise
of the Substitute Option.
(iii) "Assigned Value" shall mean the market/offer price, as
defined in Section 7.
(iv) "Average Price" shall mean the average closing price of a
share of the Substitute Common Stock for one year
immediately preceding the consolidation, merger or sale
referred to in Section 8(a), but in no event higher than
the closing price of the shares of Substitute Common Stock
on the day preceding such consolidation, merger or sale;
provided, that if Issuer is the issuer of the Substitute
Option, the Average Price shall be computed with respect to
a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by
such person. as Grantee may elect.
(v) "Person" as used in this Agreement shall have the meaning
specified in Sections 3(a)(9) and 13(d)(3) of the Exchange
Act.
(c) The Substitute Option shall have the same terms as the
Option: provided, that the exercise price therefor and number of shares
subject thereto shall be as set forth in this Section 8; provided,
further, that the Substitute Option shall be exercisable immediately upon
issuance without the occurrence of a Triggering Event; and provided,
further, that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option. such terms shall be as similar as
possible and in no event less advantageous to Grantee. The issuer of the
Substitute Option shall also enter into an agreement with Grantee in
substantially the same form as this Agreement (subject to the variations
described in the foregoing provisos), which agreement shall be applicable
to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value
multiplied by the number of shares of Issuer Common Stock for which the
Option was exercisable immediately prior to the event described in the
first sentence of Section 8(a), divided by the Average Price, rounded up
to the nearest whole share. The exercise price of the Substitute Option
per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number
of shares of Issuer Common Stock for which the Option was exercisable
immediately prior to the event described in the first sentence of Section
8(a) and the denominator of which shall be the number of shares of
Substitute Common Stock for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs,
shall the Substitute Option be exercisable for more than 19.9% of the
shares of Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be
exercisable for more than 19.9% of the shares of Substitute Common Stock
outstanding prior to exercise but for this Section 8(e), the issuer of the
Substitute Option (the "Substitute Option Issuer") shall make a cash
payment to Grantee equal to the excess of (i) the value of the Substitute
Option without giving effect to the limitation in this Section 8(e) over
(ii) the value of the Substitute Option after giving effect to the
limitation in this Section 8(e). This difference in value shall be
determined by a nationally recognized investment banking firm selected by
Grantee.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any
person that controls the Acquiring Corporation assume in writing all the
obligations of Issuer hereunder and take all other actions that may be
necessary so that the provisions of this Section 8 are given full force
and effect (including, without limitation, any action that may be
necessary so that the holders of the other shares of common stock issued
by Substitute Option Issuer are not entitled to exercise any rights by
reason of the issuance of exercise of the Substitute Option and the shares
of Substitute Common Stock are otherwise in no way distinguishable from or
have lesser economic value than other share of common stock issued by
Substitute Option Issuer (other than any diminution in value resulting
from the fact that the shares of Substitute Common Stock are restricted
securities, as defined in Rule 144 under the 1934 Act or any successor
provision)).
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the Substitute Option Issuer shall repurchase
the Substitute Option from the Substitute Option Holder at a price (the
"Substitute Option Repurchase Price") equal to the amount by which (i) the
Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise
price of the Substitute Option, multiplied by the number of shares of
Substitute Common Stock for which the Substitute Option may then be
exercised, and at the request of the owner (the "Substitute Share Owner")
of shares of Substitute Common Stock (the "Substitute Shares"), the
Substitute Option Issuer shall repurchase the Substitute Shares at a price
(the "Substitute Share Repurchase Price") equal to the Highest Closing
Price multiplied by the number of Substitute Shares so designated. The
term "Highest Closing Price" shall mean the highest closing price for
shares of Substitute Common Stock within the six-month period immediately
preceding the date the Substitute Option Holder gives notice of the
required repurchase of the Substitute Option or the Substitute Share Owner
gives notice of the required repurchase of the Substitute Shares, as
applicable.
(b) The Substitute Option Holder and Substitute Share Owner, as the
case may be, may exercise its respective rights to require the Substitute
Option Issuer to repurchase the Substitute Option and the Substitute
Shares pursuant to this Section 9 by surrendering for such purpose to the
Substitute Option Issuer, at its principal office, the agreement for such
Substitute Option (or, in the absence of such an agreement, a copy of this
Agreement) and/or certificates for Substitute Shares accompanied by a
written notice or notices stating that the Substitute Option Holder or the
Substitute Share Owner, as the case may be, elects to require the
Substitute Option Issuer to repurchase the Substitute Option and/or the
Substitute Shares in accordance with the provisions of this Section 9. As
promptly as practicable and in any event within five business days after
the surrender of the Substitute Option and/or certificates representing
Substitute Shares and the receipt of such notice or notices relating
thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase
Price and/or to the Substitute Share Owner the Substitute Share Repurchase
Price therefor or the portion thereof which the Substitute Option Issuer
is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that the Substitute Option Issuer is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from repurchasing the Substitute Option and/or the Substitute
Shares in part or in full, the Substitute Option Issuer shall immediately
so notify the Substitute Option Holder and/or the Substitute Share Owner
and thereafter deliver or cause to be delivered, from time to time, to the
Substitute Option Holder and/or the Substitute Share Owner, as
appropriate, the portion of the Substitute Option Repurchase Price and/or
the Substitute Share Repurchase Price, respectively, which it is no longer
prohibited from delivering, within five (5) business days after the date
on which the Substitute Option Issuer is no longer so prohibited;
provided, however, that if the Substitute Option Issuer is at any time
after delivery of a notice of repurchase pursuant to subsection (b) of
this Section 9 prohibited under applicable law or regulation, or as a
consequence of administrative policy, from delivering to the Substitute
Option Holder and/or the Substitute Share Owner, as appropriate, the
Substitute Option Repurchase Price and the Substitute Share Repurchase
Price, respectively, in full (and the Substitute Option Issuer shall use
its reasonable best efforts to receive all required regulatory and legal
approvals as promptly as practicable in order to accomplish such
repurchase), the Substitute Option Holder and/or Substitute Share Owner
may revoke its notice of repurchase of the Substitute Option or the
Substitute Shares either in whole or to the extent of prohibition.
whereupon, in the latter case, the Substitute Option Issuer shall promptly
(i) deliver to the Substitute Option Holder or Substitute Share Owner, as
appropriate, that portion of the Substitute Option Repurchase Price or the
Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A)
to the Substitute Option Holder, a new Substitute Option evidencing the
right of the Substitute Option Holder to purchase that number of shares of
the Substitute Common Stock obtained by multiplying the number of shares
of the Substitute Common Stock for which the surrendered Substitute Option
was exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Substitute Option Repurchase Price
less the portion thereof theretofore delivered to the Substitute Option
Holder and the denominator of which is the Substitute Option Repurchase
Price, and/or (B) to the Substitute Share Owner, a certificate for the
Substitute Option Shares it is then so prohibited from repurchasing. If an
Exercise Termination Event shall have occurred prior to the date of the
notice by the Substitute Option Issuer described in the first sentence of
this subsection (c), or shall be scheduled to occur at any time before the
expiration of a period ending on the thirtieth day after such date, the
Substitute Option Holder shall nevertheless have the right to exercise the
Substitute Option until the expiration of such 30-day period.
10. The 30-day, 3-month, 6-month, or 12-month periods for
exercise of certain rights under Sections 2, 6, 7 and 9 shall be extended:
(i) to the extent necessary to obtain all regulatory approvals for the
exercise of such rights (for so long as Grantee. Substitute Option Holder
or Substitute Share owner, as the case may be, is using commercially
reasonable efforts to obtain such regulatory approvals), and for the
expiration of all statutory waiting periods; and (ii) to the extent
necessary to avoid liability under Section 16(b) of the 1934 Act by reason
of such exercise.
11. (a) Issuer hereby represents and warrants to Grantee as
follows:
(i) Issuer has full corporate power and authority to execute
and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly
authorized by the Issuer Board prior to the date hereof and
no other corporate proceedings on the part of the Issuer
are necessary to authorize this Agreement or to consummate
the transactions so contemplated. This Agreement has been
duly and validly executed and delivered by Issuer.
(ii) Issuer has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all
times from the date hereof through the termination of this
Agreement in accordance with its terms will have reserved
for issuance upon the exercise of the Option, that number
of shares of Issuer Common Stock equal to the maximum
number of shares of Issuer Common Stock at any time and
from time to time issuable hereunder, and all such shares,
upon issuance pursuant thereto, will be duly authorized,
validly issued, fully paid, nonassessable, and will be
delivered free and clear of all claims, liens, encumbrance
and security interests and not subject to any preemptive
rights.
(b) Grantee hereby represents and warrants to Issuer as follows:
(i) Grantee has corporate power and authority to execute and
deliver this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement by
Grantee and the performance of its obligations hereunder by
Grantee have been duly and validly authorized by the Board
of Directors of Grantee and no other corporate proceedings
on the part of grantee are necessary to authorize this
Agreement or for Grantee to perform its obligations
hereunder. This Agreement has been duly and validly
executed and delivered by Grantee.
c. Any Option Shares acquired upon exercise of this Option by
Grantee will be acquired for Grantee's own account and for
investment purposes only. This Option is not being, and any
Option Shares or other securities acquired by Grantee upon
exercise of the Option will not be, acquired with a view to
the public distribution thereof and will not be transferred
or otherwise disposed of except in a transaction registered
or exempt from registration under the 1933 Act.
12. Neither of the parties hereto may assign any of its rights
or obligations under this Agreement or the Option created hereunder to any
other person, without the express written consent of the other party.
Certificates representing shares sold in a registered public offering
pursuant to Section 9 shall not be required to bear the legend set forth
in Section 2(h).
13. Each of Grantee and Issuer will use its reasonable best
efforts to make all filings with, and to obtain consents of. all third
parties and governmental authorities necessary to the consummation of the
transactions contemplated by this Agreement, including, without
limitation, applying to the Federal Reserve Board and OTS for approval to
acquire the shares issuable hereunder, but Grantee shall not be obligated
to apply to state banking authorities for approval to acquire the shares
of Issuer Common Stock issuable hereunder until such time, if ever, as it
deems appropriate to do so.
14. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto
and that the obligations of the parties hereto shall be enforceable by
either party hereto through injunctive or other equitable relief, this
being in addition to any other remedy to which they are entitled at law or
in equity. In connection therewith both parties waive the posing of any
bond or similar requirement.
15. If any term, provision, covenant or restriction contained
in this Agreement is held by a court or a federal or state regulatory
agency of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions and covenants and restrictions
contained in this Agreement shall remain in full force and effect, and
shall in no way be affected, impaired or invalidated. If for any reason
such court or regulatory agency determines that Grantee is not permitted
to acquire, or Issuer is not permitted to repurchase pursuant to Section
7, the full number of shares of Issuer Common Stock provided in Section
1(a) hereof (as adjusted pursuant to Section 1(b) or Section 5 hereof), it
is the express intention of Issuer to allow Grantee to acquire or to
require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
16. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by fax, telecopy, or by registered or certified mail
(postage prepaid, return receipt requested) at the respective addresses of
the parties set forth in the Merger Agreement.
17. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin, without regard to the
conflict of law principles thereof.
18. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
19. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or
on its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.
20. Except as otherwise expressly provided herein or in the
Merger Agreement, this Agreement contains the entire agreement between the
parties with respect to the transactions contemplated hereunder and
supersedes all prior arrangements or understandings with respect thereof,
written or oral. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and permitted assignees. Nothing in this Agreement, expressed
or implied, is intended to confer upon any party, other than the parties
hereto, and their respective successors except as assignees, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
21. Each party shall execute and deliver such other documents
and instruments and take such further action that may be necessary in
order to consummate the transactions contemplated hereby.
22. Capitalized terms used in this Agreement and not defined
herein shall have the meanings assigned thereto in the Merger Agreement.
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the date first above written.
HOME BANCORP OF ELGIN, INC.
By: /s/ George L. Perucco
George L. Perucco
President and Chief Executive Officer
STATE FINANCIAL SERVICES CORPORATION
By: /s/ Michael J. Falbo
Michael J. Falbo
President and Chief Executive Officer
<PAGE>
ANNEX C
[EVEREN Letterhead]
September 30, 1998
Board of Directors
State Financial Services Corporation
10708 W. Janesville Road
Hales Corners, Wisconsin 53130-0467
Members of the Board:
We understand that State Financial Services Corporation ("State Financial"
or the "Company") and Home Bancorp of Elgin, Inc. ("Home Bancorp") have
entered into an Agreement and Plan of Merger, dated as of June 1, 1998,
pursuant to which Home Bancorp will be merged with and into State
Financial, which will be the surviving entity (the "Merger"). We
understand that each outstanding share of common stock, $0.01 par value
per share, of Home Bancorp, will be converted into the right to receive
shares of the common stock of State Financial, equal to an exchange ratio
(the "Exchange Ratio") to be determined based on the Market Value of State
Financial common stock. The Market Value of State Financial common stock,
on any date, will be equal to the average closing sale price of State
Financial common stock as reported to the Nasdaq National Market System
for the twenty consecutive trading days immediately preceding the five
business days immediately preceding such date. The Exchange Ratio will be
determined as follows: if the Market Value is: (a) less than or equal to
$21.125, the Exchange Ratio will be 0.86; (b) greater than $21.125 and
less than equal or equal to $22.625, the Exchange Ratio will be 0.857143;
(c) greater than $22.625 and less than or equal to $22.625, the Exchange
Ratio will be the quotient obtained by dividing $19.50 by the Market Value
of State Financial common stock; (d) greater than $30.00 and less than or
equal to $31.375, the Exchange Ratio will be 0.65; and (e) greater than
$31.375, the Exchange Ratio will be 0.64.
We also understand if the Market Value is less than $20.00, State
Financial has the option to close at $17.25 per Home Bancorp share, or a
fixed 0.86 Exchange Ratio. Furthermore, Home Bancorp can elect to close
or walk-away.
You have requested our opinion as to whether the consideration to be paid
by the Company in connection with the Merger with Home Bancorp is fair,
from a financial point of view, to the Company and its shareholders.
For the purposes of the opinion set forth herein, we have, among other
things,
(i) reviewed the Definitive Agreement and the specific terms of the
Merger;
(ii) reviewed such publicly available information concerning the Company
and Home Bancorp that we believe to be relevant to our analysis,
including, without limitation, the Forms 10-K for the years ended
December 31, 1997, December 31, 1996 and December 31, 1995, quarterly
reports on Form 10-Q for the periods ended March 31, 1997,
September 30, 1996 and June 30, 1996 and recent press releases for
the Company and Home Bancorp;
(iii) reviewed financial and operating information with respect to the
business, operations and prospects of the Company and Home
Bancorp furnished to us by the Company and Home Bancorp;
(iv) reviewed financial information including internal pre-Merger and
pro forma projections prepared by the Company;
(v) reviewed a trading history of the common stock of the Company and
Home Bancorp and a comparison of that trading history with those of
other companies that we deemed relevant;
(vi) compared the financial terms of the Merger with the financial terms
of certain other recent transactions that we deemed relevant;
(vii) conducted discussions with the management of the Company and of
Home Bancorp concerning their respective businesses, operations,
assets, liabilities, financial conditions and prospects, and the
potential cost savings, operating synergies, revenue
enhancements, and strategic benefits expected to result from a
combination of the businesses of the Company and of Home
Bancorp;
(viii) conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon, without
independent verification, the accuracy, completeness and fairness of the
financial and other information provided to us and oral statements made to
us, and have further relied upon the assurances of management of the
Company that they are unaware of any facts that would make the information
provided to us to be incomplete or misleading for the purposes of this
opinion. With respect to the financial projections of State Financial and
Home Bancorp, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of
the Company, as to the future financial performance of the Company and
Home Bancorp including, without limitation, with respect to projected cost
savings, operating synergies, revenue enhancements expected to result from
a combination of the businesses of State Financial and Home Bancorp and
that the Company and Home Bancorp would perform, and that the combined
entity will perform, substantially in accordance with such projections.
Upon advice of the Company we have assumed that the Merger will qualify
for pooling accounting treatment.
Our opinion is necessarily based on the economic, market, and other
conditions in effect on, and the information made available to us as of,
the date hereof. In arriving at our opinion, we have not performed any
independent appraisal of the financial condition of the Company. In
addition, we are not experts in the valuation of loan portfolios or
allowances for loan and real estate owned losses and we have assumed that
the allowances for loan and real estate owned losses provided by the
Company and used by us in our analysis and in arriving at our opinion are
in the aggregate adequate to cover all such losses.
We have acted as financial advisor to the Board of Directors of the
Company in connection with this opinion and will receive a fee for our
services. In addition, the Company has agreed to indemnify us for certain
liabilities that may arise out of the rendering of this opinion. In the
ordinary course of our business, we actively trade the equity securities
of the Company for our own account and for the accounts of our customers,
and, accordingly, may at any time hold a long or short position in such
securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Merger. This opinion is not intended to be and does
not constitute a recommendation to the Board of Directors as to the
advisability of the Merger. This opinion is not intended to be and does
not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Merger. This opinion
relates solely to the question of fairness to the shareholders of the
Company, from a financial point of view, of the consideration to be paid
in the Merger with Home Bancorp. The Company will not furnish this
opinion or any other material prepared by EVEREN Securities, Inc.
("EVEREN") to any other person or persons (other than to appropriate
regulatory authorities or as required by law) or use or refer to this
opinion for any other purpose without the prior written approval of
EVEREN, which approval shall not be unreasonably withheld.
Based on the foregoing, we are of the opinion that as of the date hereof
the consideration to be paid by the Company pursuant to the Agreement is
fair, from a financial point of view, to the Company's shareholders.
Very truly yours,
/s/ EVEREN Securities, Inc.
EVEREN Securities, Inc.
<PAGE>
ANNEX D
[Hovde Letterhead]
September 30, 1998
Board of Directors
Home Bancorp of Elgin, Inc.
16 North Spring Street
Elgin, IL 60120
Members of the Board:
Home Bancorp of Elgin, Inc. ("Home Bancorp"), a Delaware corporation,
and State Financial Services Corporation ("State Financial"), a Wisconsin
corporation, have entered into an Agreement and Plan of Merger ("Plan of
Merger") dated June 1, 1998, pursuant to which Home Bancorp will be merged
with and into State Financial (the "Merger"). As is set forth in the Plan
of Merger, at the effective time of the Merger each of the outstanding
shares of Home Bancorp common stock ("Home Bancorp Common Stock") will be
exchanged for that number of State Financial common stock ("State
Financial Common Stock") equal to the Exchange Ratio determined as set
forth in Section 1.4(b) of the Plan of Merger (the "Exchange Ratio") and
subject to certain adjustments and limitations as set forth in Section
1.4(e) of the Plan of Merger. In connection therewith, you have requested
our opinion as to the fairness, from a financial point of view, of the
Plan of Merger to the shareholders of Home Bancorp.
Hovde Financial, Inc. ("Hovde") specializes in providing investment
banking and financial advisory services to commercial bank and thrift
institutions. Our principals are experienced in the independent valuation
of securities in connection with negotiated underwritings, subscription
and community offerings, private placements, merger and acquisition
transactions and recapitalizations. We are familiar with Home Bancorp,
having acted as its financial advisor in connection with, and having
participated in the negotiations leading to, the Plan of Merger.
We were retained by Home Bancorp to act as its exclusive financial
advisor with respect to a review of Home Bancorp's strategic alternatives
and the possible sale, merger, consolidation, or other business
combination, in one or a series of transactions, involving all or a
substantial amount of the business, securities or assets of Home Bancorp.
We will receive compensation from Home Bancorp in connection with our
services, a significant portion of which is contingent upon the
consummation of the Merger. At your direction, we solicited the interest
of third parties regarding a possible business combination with Home
Bancorp. The Plan of Merger is the result of this solicitation.
During the course of our engagement, we reviewed and analyzed
material bearing upon the financial and operating conditions of Home
Bancorp and State Financial and material prepared in connection with the
proposed transaction, including the following: the Plan of Merger;
certain historical publicly available information concerning Home Bancorp
and State Financial; the terms of recent merger and acquisition
transactions involving thrifts and thrift holding companies that we
considered relevant; historical market prices and trading volumes for
State Financial Common Stock; and financial and other information provided
to us by the managements of Home Bancorp and State Financial.
In addition, we have conducted meetings with members of the senior
management of Home Bancorp and State Financial for the purpose of
reviewing the future prospects of Home Bancorp and State Financial. We
also evaluated the pro forma ownership of state Financial Common Stock by
Home Bancorp's shareholders relative to the pro forma contribution of Home
Bancorp's assets, liabilities, equity and earnings to the pro forma
company, and conducted such other studies, analyses and examinations as we
deemed appropriate. We also took into account our assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our knowledge of the banking industry and our
general experience in securities valuations.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the materials provided to us
by Home Bancorp and State Financial and in the discussions with Home
Bancorp and State Financial management. We did not independently verify
and have relied on and assumed that the aggregate allowances for loan
losses set forth in the balance sheets of each of Home Bancorp and State
Financial at March 31, 1998 were adequate to cover such losses and
complied fully with applicable law, regulatory policy and sound banking
practices as of the date of such financial statements. We were not
retained to and did not conduct a physical inspection of any of the
properties or facilities of Home Bancorp or State Financial, nor did we
make any independent evaluation or appraisal of the assets, liabilities or
prospects of Home Bancorp or State Financial, nor were we furnished with
any such evaluation or appraisal, and we were not retained to and did not
review any individual credit files.
We have assumed that the Merger is, and will be, in compliance with
all laws and regulations that are applicable to Home Bancorp and State
Financial. In rendering this opinion, we have been advised by Home
Bancorp and State Financial and we have assumed that there are no factors
that would impede any necessary regulatory or governmental approval for
the Merger and we have further assumed that in the course of obtaining the
necessary regulatory and governmental approvals, no restriction will be
imposed on State Financial or the surviving corporation that would have a
material adverse effect on State Financial or the contemplated benefits of
the Merger. We have also assumed that there would not occur any change in
the applicable law or regulation that would cause a material adverse
change in the prospects or operations of State Financial or the surviving
corporation after the Merger.
Our opinion is based solely upon the information available to us and
the economic market and other circumstances as they exist as of the date
hereof. Events occurring and information that becomes available after the
date hereof could materially affect the assumptions and analyses used in
preparing this opinion. We have not undertaken to reaffirm or revise this
opinion or otherwise comment upon any events occurring or information that
becomes available after the date hereof.
We are not expressing any opinion herein as to the prices at which
shares of State Financial Common Stock issued in the Merger may trade if
and when they are issued or at any future time, nor does our opinion
constitute a recommendation to any holder of Home Bancorp Common Stock as
to how such holder should vote with respect to the Plan of Merger at any
meeting of holders of Home Bancorp Common Stock.
This letter is solely for the information of the Board of Directors
of Home Bancorp and is not to be used, circulated, quoted or otherwise
referred to for any other purpose, nor is it to be filed with, included in
or referred to in whole or in part in any registration statement, proxy
statement or any other document, except in each case in accordance with
our prior written consent which shall not be unreasonably withheld;
provided, however, that we hereby consent to the inclusion and reference
to this letter in any registration statement, proxy statement, information
statement or tender offer document to be delivered to the holders of Home
Bancorp Common Stock in connection with the Merger if and only if this
letter is quoted in full or attached as an exhibit to such document and
this letter has not been withdrawn prior to the date of such document.
Subject to the foregoing and provided the Market Value of State
Financial Common Stock as of the Decision Date (as defined in the Plan
of Merger) is either greather than $20.00 per share or, if not, the
optional Exchange Ratio (as defined in Section 1.4(e) of the Plan of
Merger) is utilitzed, based on our experience as investment bankers, our
activities and assumptions as described above, and other factors we have
deemed relevant, we are of the opinion as of the date hereof that the
Plan of Merger is fair, from a financial point of view, to the
shareholders of Home Bancorp.
Sincerely,
/s/ Hovde Financial, Inc.
HOVDE FINANCIAL, INC.
<PAGE>
ANNEX E
PROPOSED AMENDMENT TO THE AMENDED AND RESTATED ARTICLES
OF INCORPORATION OF STATE FINANCIAL SERVICES CORPORATION
The proposed amendment reflecting the Charter Amendment is
in bold face. The deletion caused by the Charter Amendment is indicated
by overstriking. For EDGAR purposes only, deletions are between barckets.
_________________________
ARTICLE IV. Capital Stock
4.1 Number of Shares and Classes. The aggregate number of shares of
capital stock which Corporation shall have authority to issue is as
follows:
(a) Common Stock. [10,000,000] 25,000,000 shares of Common
Stock, having a par value of $0.10 per share.
