<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997 [Fee required]
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from
to
Commission File Number 0-18166
STATE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1489983
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130
(Address and zip code of principal executive offices)
(414) 425-1600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10
par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for shorter
periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No ______
-
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 20, 1998 was approximately $73,236,030, based on the
following assumptions: (1) the market value of the Common Stock of $26.125 per
share which was equal to the closing price on the Nasdaq Stock Market on March
20, 1998; and (2) 2,803,293 shares of Common Stock held by nonaffiliates as of
March 20, 1998.
Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.
As of March 20, 1998, there were 3,872,743 shares of the Registrant's
$0.10 par value Common Stock issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II incorporate certain information by reference from
Registrant's Annual Report to Shareholders for the fiscal year ended
December 31, 1997, (the "Annual Report") which is filed as an Exhibit to
this Report.
Part III incorporates information by reference from Registrant's
definitive Proxy Statement relating to Registrant's 1997 Annual Meeting
of Shareholders (the "Proxy Statement") which is filed as an Exhibit to
this Report.
The Exhibits incorporate certain exhibits by reference from (1)
Registrant's Form S-1 Registration Statement filed under the Securities
Act of 1933, Registration No. 33-31517, dated October 11, 1989 and the
following amendments to said Registration Statement: Amendment No. 1
dated December 6, 1989 and Amendment No. 2 dated March 16, 1990; (2)
Amendment No. 3 to Registrant's S-4 Registration Statement filed under
the Securities Act of 1933, Registration No. 33-46280, dated May 3, 1992;
(3) Registrant's report on Form 8-K dated June 19, 1992 filed under the
Securities Exchange Act of 1934; (4) Amendment No. 2 to Registrant's S-4
Registration Statement filed under the Securities Act of 1933,
Registration No. 33-59665, dated July 18, 1995; (5) Registrant's report
on Form 8-k dated January 14, 1998 filed under the Securities Exchange
Act of 1934; and (6) Registrant's Annual Report on Form 10-K filed under
the Securities Exchange Act of 1934 for the years ended December 31,
1992, 1993, 1994, 1995, and 1996.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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INDEX
<TABLE>
<CAPTION>
PART I Page
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<S> <C> <C>
Item 1. BUSINESS 1
Item 2. PROPERTIES 6
Item 3. LEGAL PROCEEDINGS 7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 8
Item 6. SELECTED FINANCIAL DATA 8
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION RESULTS OF OPERATIONS 8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 8
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 8
PART III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 9
Item 11. EXECUTIVE COMPENSATION 10
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 10
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 10
PART IV
---------------------------------------------------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 11
SIGNATURES Signature Page
EXHIBITS FILED AS PART OF FORM 10-K Exhibit Index
</TABLE>
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PART I
State Financial Services Corporation, together with its consolidated
subsidiaries is hereinafter referred to as the "Company", "SFSC", or
"Registrant". SFSC is a bank holding company which owns State Financial Bank
("SFB"), State Financial Bank - Waterford ("SFB - Waterford"), and Richmond
Bank ("Richmond") (collectively referred to as the "Banks"). SFB is the entity
resulting from the merger in June 1994 of the Company's previous four banks,
State Bank, Hales Corners ("State Bank"); University National Bank
("University"); Edgewood Bank ("Edgewood"); and Eastbrook State Bank
("Eastbrook") into State Bank's charter. In 1995, SFSC acquired all of the
outstanding common stock of the former Waterford Bancshares, Inc., the parent
bank holding company of Waterford Bank, in exchange for a combination of the
Company's common stock, cash and installment notes. Waterford Bancshares, Inc.
was subsequently dissolved. Waterford Bank was renamed State Financial Bank -
Waterford and is operated as a separate banking subsidiary of the Company. In
1997, SFSC acquired all of the outstanding common stock of Richmond Bancorp,
Inc., the parent holding company of Richmond Bank and Richmond Financial
Services, Inc. in exchange for cash.
ITEM 1. BUSINESS.
GENERAL
SFSC is a Wisconsin corporation headquartered in Hales Corners, Wisconsin.
The Company is a bank holding company which owns and operates State Financial
Bank with seven full-service locations, State Financial Bank - Waterford, and
Richmond Bank, each with two full-service office locations. Four of SFB's
offices, Hales Corners, Greenfield, Glendale, and Milwaukee are located in
Milwaukee County, Wisconsin, the most populous county in the state. Three of
SFB's offices; Brookfield, Muskego, and Waukesha are located in Waukesha
County, Wisconsin which is immediately west of Milwaukee County. In addition,
SFB also operates a loan production office providing lending outlets to
Milwaukee's central city. SFB - Waterford has offices in Waterford and
Burlington, each of which are located in Racine County, Wisconsin. Richmond
Bank has offices in Richmond, Illinois which is located in McHenry County, and
Libertyville, Illinois which is located in Lake County. The Company was
organized in 1984 to become a holding company for the former State Bank. In
1985, State Financial completed its first bank acquisition by purchasing the
former University, located on the northeast side of Milwaukee. The acquisition
of the former Edgewood in Greenfield, Wisconsin was completed in 1987. In 1988,
the former University acquired the deposit liabilities and various fixed assets
of the branch facility of a competing savings institution located at 2650 North
Downer Avenue in Milwaukee. This was the first acquisition of a thrift facility
by a bank in Wisconsin. In 1990, State Financial acquired 4.9% of the former
Eastbrook, a newly chartered bank located in Brookfield, Wisconsin. State
Financial acquired the remaining capital stock of the former Eastbrook in 1992.
In 1993, the former Eastbrook acquired the deposit liabilities and various
fixed assets of the branch facility of a competing savings institution located
at 400 E. Broadway in Waukesha, Wisconsin. SFB also operates a limited service
loan production office serving Milwaukee's central city to provide easier
access to the SFB's lending products. In 1995, SFSC acquired all of the
outstanding common stock of the former Waterford Bancshares, Inc., the parent
bank holding company of Waterford Bank, in exchange for a combination of the
Company's common stock, cash and installment notes. The Company operates SFB -
Waterford as a separate banking subsidiary. In 1997, SFSC completed its cash
acquisition of Richmond Bancorp, Inc., the parent holding company of Richmond
Bank and Richmond Financial Services, Inc.
FORWARD-LOOKING STATEMENTS
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the
forward-looking statements. Factors which could cause such a variance to occur
include, but are not limited to, changes in interest rates, levels of consumer
bankruptcies, customer loan and deposit preferences, and other general economic
conditions.
BUSINESS STRATEGY. SFSC is strongly committed to community banking and
places a high degree of emphasis on developing full service banking
relationships with its business and retail customers. To capitalize on
management's knowledge of its immediate market, each office is operated with
substantial independence, supported by centralized administrative and
operational functions to promote efficiency while permitting the management
responsible for each office the flexibility to concentrate on customer service
and business development in its own unique market area. To be an effective
community bank, SFSC believes the decision-making process must stem primarily
from the Banks in their credit decisions and array of products. SFSC believes
the empowerment of the day-to-day decision making to the individual office
locations remains critical to its success as an effective community banking
organization.
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The Banks seeks to develop and enhance full-service banking relationships
through a systematic calling program directed at both existing customers and
referral sources from its customer base, attorneys, accountants and business
people. The officers and employees of the Banks are actively involved in a
variety of civic, charitable and community organizations both as an additional
referral source and as a service to their respective communities.
PRODUCTS AND SERVICES. Through the Banks, SFSC provides a broad range of
services to individual and commercial customers. These services include
accepting demand, savings and time deposits, including regular checking
accounts, NOW accounts, money market account, certificates of deposit,
individual retirement accounts and club accounts. The Company also offers a
variety of annuity and insurance products through the Banks' in-house
securities representatives and through two new subsidiaries resulting from the
acquisition of Richmond Bancorp, Inc. - Richmond Financial Services, Inc. and
State Financial Insurance Agency. The Banks' lending products include secured
and unsecured commercial, mortgage, construction and consumer term loans on
both a fixed and variable rate basis. Historically, the terms on these loans
range from one month to five years and are retained in the Banks's portfolio.
The Banks also provide lines of credit to commercial accounts and to
individuals through home equity and credit card plans. Through its subsidiary
State Financial Mortgage Company, SFSC also originates residential real estate
loans in the form of adjustable and long-term fixed rate first mortgages,
selling these originations in the secondary mortgage market service released.
COMPETITION AND MARKET ENVIRONMENT. SFB's offices are located in the
Milwaukee and Waukesha, Wisconsin metropolitan areas and experience substantial
competition from other financial institutions including savings banks, credit
unions, non-bank lenders, and consumer finance companies, many of which are
substantially larger than the SFB. There are numerous financial institutions
within a short distance of each of SFB's offices. SFB - Waterford's offices are
located in the towns of Waterford and Burlington, Wisconsin and experience
substantial competition from other financial institutions including other
banks, savings banks, credit unions, and consumer finance companies located in
their respective and surrounding communities. Richmond's offices are located in
Richmond and Libertyville, Illinois and experience substantial competition from
other financial institutions including other banks, savings banks, credit
unions, and consumer finance companies located in their respective and
surrounding communities. The Banks compete for deposits principally by offering
depositors a variety of deposit programs, convenient office locations, banking
hours, 24 hour account access through telephone and personal computer delivery
systems, and other services. The Banks compete for loan originations primarily
through the interest rates and loan fees they charge, the efficiency and
quality of services they provide borrowers, and the variety of their products.
Factors affecting competition include the general and local economic conditions
and current interest rate levels. Management believes that continued changes in
the local banking industry, including mergers and consolidations involving both
commercial and thrift institutions, have resulted in a decrease in the level of
competition for small to medium sized business customers in the Banks' market
areas.
EMPLOYEES. At December 31, 1997, the Company and the Banks employed 131
full-time and 62 part-time employees. The Company considers its relationships
with its employees to be good. Each employee who meets the eligibility
requirements is entitled to participate in the employee benefit plans of the
Company and the Banks, which include plans for group life, accidental death and
dismemberment, medical, dental, and long-term disability income insurances;
pension, 401(k), and an Employee Stock Ownership Plan ("ESOP"). Further
information regarding executive compensation and the Company's benefit plans is
incorporated by reference from the Company's definitive Proxy Statement. See
Item 11 of this Form 10-K.
THE BANKS AND OTHER SUBSIDIARIES
At December 31, 1997, the SFB (consolidated with its subsidiaries; see
"SFB - Other Subsidiaries") had total assets of $274.0 million, net loans of
$181.5 million, total deposits of $243.0 million, stockholders' equity of $23.2
million, net income of $4.3 million, and return on average assets of 1.66%. At
December 31, 1997, SFB Waterford (consolidated with its subsidiary; see "SFB -
Waterford - Other Subsidiaries") had total assets of $51.2 million, net loans
of $32.7 million, total deposits of $45.7 million, stockholders' equity of $5.2
million, net income of $0.4 million, and annualized return on average assets of
0.87%. At December 31, 1997, Richmond Bancorp, Inc. (consolidated with its
subsidiary; see "Richmond Bancorp, Inc. - Other Subsidiaries") had total assets
of $93.4 million, net loans of $50.3 million, total deposits of $79.9 million,
and stockholders' equity of $10.9 million. No net income is included in the
Company's consolidated operating results for the year ended December 31, 1997
as the purchase acquisition of Richmond was consummated on December 31, 1997.
STATE FINANCIAL BANK. State Financial Bank was organized as a state
banking association under the laws of the State of Wisconsin in 1910 under the
name State Bank, Hales Corners. In June 1994, the bank's name was changed to
State Financial Bank in connection with the merger of the Company's banks into
the former State Bank's charter. SFB conducts business through seven
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full-service offices located in Milwaukee and Waukesha Counties and a loan
production office located in Milwaukee's central city. SFB is engaged in the
general commercial and consumer banking business and provides full-service
banking to individuals and businesses including the acceptance of deposits to
demand, time, and savings accounts and the servicing of such accounts;
commercial, consumer, and mortgage lending; and such other banking services as
are usual and customary for commercial banks. SFB also sells annuities,
insurance products, and other investments through two in-house representatives.
At December 31, 1997, SFB, consolidated with its subsidiaries, comprised 65.3%
of SFSC's consolidated total assets. The following table sets forth SFB's
full-service and loan production office locations.
STATE FINANCIAL BANK OFFICE LOCATIONS
<TABLE>
<CAPTION>
Year Acquired by
Community Address Year Originated State Financial
- --------- ------- --------------- ----------------
<S> <C> <C> <C>
Hales Corners 10708 West Janesville Road 1910 (1)
Muskego S76 W17655 Janesville Road 1968 (1)
Milwaukee 2650 North Downer Avenue 1971 1985
Milwaukee (2) 2460 North 6th Street 1994 (1)
Greenfield 4811 South 76th Street 1978 1987
Glendale 7020 North Port Washington Road 1990 (1)
Brookfield 12600 West North Avenue 1990 1992
Waukesha 400 East Broadway 1977 1993
</TABLE>
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(1) Organized de novo by SFB or a predecessor thereof.
(2) Loan Production Office
SFB OTHER SUBSIDIARIES. SFB has two wholly owned subsidiary corporations
which are consolidated into its operations. Hales Corners Investment
Corporation is a subsidiary created to manage the majority of SFB's investment
portfolio to enhance the overall return on SFB's investment securities. Hales
Corners Development Corporation is a subsidiary which owns the real estate
related to the Hales Corners and Muskego offices, eight commercial and
residential rental properties located adjacent to the Hales Corners office and
vacant land in New Berlin held as a potential branch site.
STATE FINANCIAL BANK - WATERFORD. State Financial Bank - Waterford was
organized as a state banking association under the laws of the State of
Wisconsin in 1906 under the name Waterford Bank. SFSC acquired the common stock
of the former Waterford Bank's parent holding company, Waterford Bancshares,
Inc. in exchange for a combination of the Company's common stock, cash, and
installment notes. Waterford Bancshares, Inc. was subsequently dissolved.
Following the acquisition, the Company changed Waterford Bank's name to State
Financial Bank - Waterford to connect the bank's identity to SFSC. SFB -
Waterford is engaged in the general commercial and consumer banking business
and provides full-service banking to individuals and businesses including the
acceptance of deposits to demand, time, and savings accounts and the servicing
of such accounts; commercial, consumer, and mortgage lending; and such other
banking services as are usual and customary for commercial banks. SFB -
Waterford also sells annuities, insurance products, and other investments
through two in-house representatives. At December 31, 1997, SFB- Waterford,
consolidated with its subsidiary, comprised 12.1% of SFSC's consolidated total
assets. The following table sets forth SFB - Waterford's full-service office
locations.
STATE FINANCIAL BANK - WATERFORD OFFICE LOCATIONS
<TABLE>
<CAPTION>
Year Acquired by
Community Address Year Originated State Financial
- --------- ------- --------------- ----------------
<S> <C> <C> <C>
Waterford 217 North Milwaukee Street 1906 1995
Burlington 1050 Milwaukee Avenue 1997 (1)
</TABLE>
- ------------
(1) Organized de novo by SFB - Waterford.
SFB - WATERFORD OTHER SUBSIDIARY. SFB - Waterford has a wholly owned
subsidiary, Waterford Investment Corporation, formed in 1995 to manage the
majority of SFB - Waterford's investment portfolio to enhance the overall
return on the bank's investment securities.
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STATE FINANCIAL MORTGAGE COMPANY. In December, 1996, the Company formed a
new wholly owned subsidiary corporation, State Financial Mortgage Company
("SFMC"). SFMC was formed to expand the origination of secondary market real
estate mortgages on behalf of the Company and the Banks. SFMC commenced
operation effective January 1, 1997.
RICHMOND BANK. Richmond was organized as a state banking association under
the laws of the State of Illinois in 1920. In 1997, SFSC acquired the common
stock of Richmond's parent bank holding company, Richmond Bancorp, Inc. in
exchange for cash. Post-acquisition, Richmond Bancorp, Inc. operates as a
wholly-owned subsidiary of the Company and is the parent owner of Richmond and
Richmond Financial Services, Inc. Richmond is engaged in the general commercial
and consumer banking business and provides full-service banking to individuals
and businesses including the acceptance of deposits to demand, time, and
savings accounts and the servicing of such accounts; commercial, consumer, and
mortgage lending; and such other banking services as are usual and customary
for commercial banks. Richmond also sells annuities through Richmond Financial
Services, Inc., another subsidiary of Richmond Bancorp, Inc., and insurance
products through its subsidiary State Financial Insurance Agency (see "Richmond
- - Other Subsidiary and Affiliated Organization"). At December 31, 1997,
Richmond consolidated with its parent holding company Richmond Bancorp, Inc.,
its affiliate Richmond Financial Services, Inc., and its subsidiary State
Financial Insurance Agency, comprised 22.2% of SFSC's consolidated total
assets. The following table sets forth Richmond's full-service office
locations.
RICHMOND BANK OFFICE LOCATIONS
<TABLE>
<CAPTION>
Year Acquired by
Community Address Year Originated State Financial
- --------- ------- --------------- ----------------
<S> <C> <C> <C>
Richmond 10910 Main Street 1920 1997
Libertyville 1509 North Milwaukee Avenue 1992 1997
</TABLE>
RICHMOND BANK - AFFILIATED ORGANIZATION AND OTHER SUBSIDIARY. Richmond has
an affiliated organization, Richmond Financial Services, Inc. which provides a
variety of brokerage services including the sale of annuities, stocks, bonds,
and other investment products to its customer base and customers of Richmond.
Prior to its acquisition by SFSC, Richmond Financial Services, Inc. also
engaged in the sale of numerous lines of insurance products to individuals and
businesses. Concurrent with the acquisition, Richmond formed State Financial
Insurance Agency as a wholly owned subsidiary to assume the insurance
activities previously operated under Richmond Financial Services, Inc.
SUPERVISION AND REGULATION
Bank holding companies and financial institutions are highly regulated at
both the federal and state level. Numerous statutes affect the business of SFSC
and the Banks. As a bank holding company, SFSC's business activities are
regulated by the Federal Reserve Board ("FRB") under the Bank Holding Company
Act of 1956 (the "Act") which imposes various requirements and restrictions on
its operations. As part of the this supervision, SFSC files periodic reports
with and is subject to periodic examination by the FRB. The Act requires the
FRB's prior approval before SFSC may acquire direct or indirect ownership or
control of more than five percent of the voting shares of any bank or bank
holding company. The Act limits the activities of SFSC and its banking and
nonbanking subsidiaries to the business of banking and activities closely
related or incidental to banking.
SFB and SFB - Waterford are state, non-member banks, chartered in
Wisconsin and as such are supervised and examined by the Wisconsin Department
of Financial Institutions Division of Banking and the Federal Deposit Insurance
Corporation ("FDIC"). Richmond is a state, non-member bank chartered in
Illinois and as such is supervised and examined by the Illinois Department of
Banking and the FDIC. Additionally, the Banks' deposits are insured by the FDIC
and are subject to the provisions of the Federal Deposit Insurance Act.
In recent years Congress has enacted significant legislation which has
substantially changed the federal deposit insurance system and the regulatory
environment in which depository institutions and their holding companies
operate. The enforcement powers of the federal regulatory agencies responsible
for supervisory authority over SFSC and the Banks have significantly increased
as a result of legislation such as the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), the Comprehensive Thrift and Bank Fraud
Prosecution and Taxpayer Recovery Act of 1990 and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). Certain parts of such
legislation, most notably those which increase deposit insurance assessments,
authorize further increases to recapitalize the Bank Insurance Fund and the
Savings Association Insurance Funds which affect the cost of doing business for
depository institutions and their holding companies. FIRREA also provides that
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all commonly controlled FDIC insured depository institutions may be held liable
for any loss incurred by the FDIC resulting from a failure of, or any
assistance given by the FDIC, to any commonly controlled institutions. Federal
regulatory agencies have implemented provisions of FDICIA with respect to
taking prompt corrective action when a depository institution's capital fails
to meet certain defined levels. FDICIA established five capital categories
ranging from "critically undercapitalized" to "well capitalized." A depository
institution's failure to maintain a capital level within the top two categories
will result in specific actions from the federal regulatory agencies. These
actions could include the inability to pay dividends, restriction of new
business activity, prohibiting bank acquisitions, asset growth limitations and
other restrictions on a case by case basis. Additionally, FDICIA implemented a
risk related assessment system for FDIC insurance premiums based, among other
things, on the depository institution's capital adequacy. At December 31, 1997,
SFSC and the Banks each met the "well-capitalized" definition of capital
adequacy.
The Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Efficiency Act") contains provisions which amended the Bank Holding
Company Act to allow an adequately-capitalized and adequately-managed bank
holding company to acquire a bank located in another state. Effective June 1,
1997, the Efficiency Act will also allow interstate branching.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the FRB as it attempts to control the money
supply and credit availability in order to influence economic activity.
Monetary policy changes have previously had a significant effect on operating
results of financial institutions and are expected to have such an effect in
the future. No prediction can be made as to possible future changes in interest
rates, deposit levels, and loan demand, or their effect on the business and
earnings of SFSC and the Banks.
CROSS REFERENCE TO ANNUAL REPORT
Certain information required by Industry Guide 3 is included in the
Management's Discussion and Analysis included with the Annual Report and is
incorporated herein by reference per the following schedule.
<TABLE>
<CAPTION>
Annual Report
Guide 3 Heading Annual Report Heading Page Number
- --------------- --------------------- -------------
<S> <C> <C> <C>
I Distribution of Assets, Income Statement Analysis 8
Liabilities and Stockholders'
Equity; Interest Rates and
Interest Differential
II Investment Portfolio Investment Activities 17
III Loan Portfolio Lending Activities 14
IV Summary of Loan Loss Experience Risk Elements in the Loan Portfolio 16
V Deposits Deposits 19
VI Return on Equity and Assets Selected Consolidated Financial Data 6 and 21
and Capital Resources
</TABLE>
The following schedule of projected loan losses by category for the period
January 1, 1998 through December 31, 1998, required by Industry Guide 3 is not
included in Management's Discussion and Analysis in the Annual Report (dollars
in thousands).
<TABLE>
<CAPTION>
Charge-offs Recoveries Net
----------- ---------- -----
<S> <C> <C> <C>
Commercial $125 $ 9 $116
Installment 235 58 177
Real estate 125 11 114
Other 73 10 63
---- --- ----
TOTAL $558 $88 $470
==== === ====
</TABLE>
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are
denominated in U.S. currency with no specific foreign exchange exposure. The
Company 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 the Company's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company'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, the Company 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 the
Company 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, and 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 the Company 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. The Company'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
on 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
6
<PAGE> 10
be effective. The Company 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 the Company'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,
the Company 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 the Company.
The following table sets forth information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997. The Company 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, the Company 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. Company borrows are also reported based on conversion or
repricing dates.
QUANTITATIVE DISCLOSURES OF MARKET RISK
<TABLE>
<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 --- --- --- --- --- 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>
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
7
<PAGE> 11
ITEM 2. PROPERTIES
The following table sets forth the locations of the Company's full-service
banking offices.
<TABLE>
<CAPTION>
Office Address Sq. Feet Owned/Leased Lease Expires
- ------------------- -------------------------- -------- ------------ --------------
<S> <C> <C> <C> <C>
Hales Corners (1,2) 10708 W. Janesville Road 37,000 Owned n/a
Muskego (1) S76 W17655 Janesville Road 2,680 Owned n/a
Milwaukee 2650 N. Downer Avenue 3,000 Leased 2000
Milwaukee (3) 2460 North 6th Street 100 Leased month to month
Greenfield (4) 4811 S. 76th Street 9,000 Leased 2007
7020 N. Port Washington
Glendale (5) Road 7,500 Leased 2010
Brookfield 12600 W. North Avenue 4,800 Owned n/a
Waukesha 400 E. Broadway 3,300 Owned n/a
Waterford 217 N. Milwaukee Street 10,100 Owned n/a
Burlington 1050 Milwaukee Avenue 6,300 Leased 2006
Richmond (6) 10910 Main Street 16,030 Owned n/a
Libertyville (7) 1509 N. Milwaukee Avenue 2,690 Leased 2006
</TABLE>
1. Property is owned by SFB's wholly owned subsidiary, Hales Corners
Development Corporation.
2. SFB subleases approximately 4,300 square feet of its space in Hales
Corners to outside third parties.
3. Loan production office.
4. SFB leases this property from Edgewood Plaza Joint Venture. See "Item 1.
Election of Directors--Certain Transactions and Other Relationships with
Management Principal Shareholders" in the Company's Proxy Statement for
further information.
5. SFB subleases approximately 1,200 square feet of its space in Glendale to
a third party.
6. Richmond leases approximately 2,400 square feet of its space to outside
third parties.
7. Richmond leases this property from Upland Farms, an entity owned by a
director of Richmond, Charles F. Wonderlic.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and the Banks are party to legal
proceedings arising out of their general lending activities and other
operations. However, there are no pending legal proceedings to which the
Company or the Banks are a party, or to which their property is subject, which,
if determined adversely to the Company, would individually or in the aggregate
have a material adverse effect on its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
8
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information contained under the caption "Investor Information"
beginning on the inside back cover of the Annual Report is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Selected Consolidated
Financial Data" appearing on page 4 of the Annual Report is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained under this caption beginning on page 5 of the
Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements beginning on page 21 of the Annual
Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
9
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The information contained under the caption "Item 1. Election
of Directors--Directors" in the Proxy Statement is incorporated herein by
reference.
EXECUTIVE OFFICERS. Information is provided below with respect to the
executive officers of SFSC who are not directors. Each executive officer is
elected annually by the Board of Directors and serves for one year or until
his/her successor is appointed.
<TABLE>
<CAPTION>
PRINCIPAL POSITION
NAME AGE POSITIONS HELD HELD SINCE
- ---- --- ---------------------------------------------------- ------------------
<S> <C> <C> <C>
John B. Beckwith 44 President, SFB; Senior Vice President of SFSC 1994
Philip F. Hudson 66 Senior Vice President of SFSC 1998
Daniel L. Westrope 48 Chairman of the Board and CEO, Richmond; Senior Vice 1988
President, SFSC
Thomas M. Lilly 38 President, SFBW 1998
Michael A. Reindl 38 Senior Vice President, Controller, and Chief 1995
Financial Officer; Secretary/Treasurer of SFSC; and
Secretary of SFB
</TABLE>
JOHN B. BECKWITH has been President of SFB since January, 1998 and is
responsible for the bank's overall operation and performance. From June 1994 to
December 1997, Mr. Beckwith was President of SFB's South Unit responsible for
the operation and performance of SFB's offices located in Hales Corners,
Muskego, and Greenfield, Wisconsin. From June 1991 to June 1994, Mr. Beckwith
was President and Chief Executive Officer of SBHC (currently SFB's Hales
Corners and Muskego offices). Mr. Beckwith was a director of SBHC from June
1991 to June 1994. Since June 1994, he has served as a director of SFB. Prior
to June 1991, he had been Executive Vice President of SBHC since he joined the
Company in 1990. Mr. Beckwith has also served as Senior Vice President of SFSC
since November, 1997.
PHILIP F. HUDSON is Senior Vice President of SFSC responsible for
strategic operational and acquisition activities of the Company and the Banks.
From June, 1994 through December, 1997, Mr. Hudson was President of SFB's North
Unit responsible for the operation and performance of SFB's offices located in
Milwaukee, Glendale, Brookfield, and Waukesha, Wisconsin. From 1990 to 1994,
Mr. Hudson was President and Chief Executive Officer of the Company's then
separate subsidiary bank, UNB (currently SFB's Milwaukee and Glendale offices).
Mr. Hudson previously served as UNB's President and Chief Executive Officer
from 1975 to 1987. Mr. Hudson was a director of the former UNB from 1975 to
1987 and from 1990 to 1994. He has served as a director of SFB since June 1994
and as a director of Richmond since January, 1998.
DANIEL L. WESTROPE joined the Company in February, 1998 as Chairman of the
Board and Chief Executive Officer of Richmond Bank and is responsible for the
bank's overall operation and performance. Mr. Westrope is also a Senior Vice
President of SFSC providing input into the Company's investment banking
activities. Prior to joining the Company, Mr. Westrope was employed as an
investment banker with Principal Financial Securities, Inc., Chicago, Illinois
(now known as Everen Securities, Inc.) from 1995 through February, 1998, and as
an investment banker and research analyst with Howe Barnes Investments, Inc.,
Chicago, Illinois from 1994 to 1995. Prior to 1994, Mr. Westrope was an officer
of the Federal Reserve Bank of Chicago.
THOMAS M. LILLY has been President and Chief Executive Officer and a
director of SFBW since January, 1998. From June 1994 through December 1997, Mr.
Lilly served as Senior Vice President of SFB. Mr. Lilly joined the Company in
1985, serving in a variety of lending and management capacities at SFB's Hales
Corners and Greenfield offices. Mr. Lilly has also served as President of
SFSC's wholly-owned subsidiary, State Financial Mortgage Company since its
inception in December, 1996.
10
<PAGE> 14
MICHAEL A. REINDL has served as the Company's Senior Vice President,
Controller, and Chief Financial Officer since November 1995. In January 1997,
Mr. Reindl was also named Secretary/Treasurer of SFSC and Secretary of SFB.
From June 1993 through November 1997, Mr. Reindl was Vice President,
Controller, and Chief Financial Officer of SFSC. From August 1990 through June
1993, Mr. Reindl was Vice President and Controller of SFSC. Mr. Reindl joined
the Company in 1984.
PART 11. EXECUTIVE COMPENSATION
The information contained under the caption "Item 1. Election of
Directors--Compensation of Executive Officers" in the Proxy Statement is
incorporated herein by reference.
PART 12. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND BENEFICIAL
OWNERS
The information contained under the caption "Item 1. Election of
Directors--Security Ownership of Management and Certain Beneficial Owners" in
the Proxy Statement is incorporated herein by reference.
PART 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Item 1. Election of
Directors--Certain Transactions and Other Relationships with Management and
Principal Shareholders" in the Proxy Statement is incorporated herein by
reference.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
11
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed:
1. Financial Statements. The following Consolidated Financial
Statements of the Company and subsidiaries, included in the Annual
Report of the Registrant to its shareholders for the year ended
December 31, 1997, are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
Annual Report
Page #
-------------
<S> <C>
Report of independent auditors 23
Consolidated balance sheets --
December 31, 1997 and 1996 24
Consolidated statements of income --
Years ended December 31, 1997, 1996, and 1995 25
Consolidated statements of stockholders' equity --
Years ended December 31, 1997, 1996, and 1995 26
Consolidated statements of cash flows --
Years ended December 31, 1997, 1996, and 1995 27
Notes to Consolidated Financial Statements 28
</TABLE>
2. Financial Statement Schedules. Schedules to the Consolidated
Financial Statements required by Article 9 of Regulation S-X are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
3. Exhibits. See Exhibit Index, included as the last pages of
this report, which is incorporated herein by reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the fourth
quarter of the fiscal year under this report. The Company filed a
report on Form 8-K on January 14, 1998 and Amendment No. 1 thereto
on March 13, 1998 in regards to its acquisition of Richmond
Bancorp, Inc. and its subsidiaries.
(c) Exhibits:
See Exhibit Index, which is filed with this Form 10-K following the
signature page and is incorporated herein by reference.
(d) Financial Statement Schedules:
None.
12
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
<TABLE>
<S> <C>
By: /s/ Michael J. Falbo
----------------------------------------------------------
Michael J. Falbo, President and Chief Executive Officer
Date: March 23, 1998
</TABLE>
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. The Registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PRINCIPAL EXECUTIVE OFFICERS
<TABLE>
<S> <C> <C>
/s/ Jerome J. Holz Chairman of the Board and Vice
- ------------------ President March 23, 1998
Jerome J. Holz
/s/ Michael J. Falbo
- -------------------- President and Chief Executive Officer March 23, 1998
Michael J. Falbo
/s/ Michael A. Reindl Senior Vice President, Controller,
- --------------------- and Chief Financial Officer March 23, 1998
Michael A. Reindl
DIRECTORS
/s/ Jerome J. Holz
- ------------------ Director March 23, 1998
Jerome J. Holz
/s/ Michael J. Falbo
- -------------------- Director March 23, 1998
Michael J. Falbo
/s/ Richard A. Horn
- ------------------- Director March 23, 1998
Richard A. Horn
/s/ Barbara E. Holz-Weis
- ------------------------ Director March 23, 1998
Barbara E. Holz-Weis
/s/ Robert R. Spitzer
- --------------------- Director March 23, 1998
Robert R. Spitzer
/s/ David M. Stamm
- ------------------ Director March 23, 1998
David M. Stamm
</TABLE>
signature page
<PAGE> 17
STATE FINANCIAL SERVICES CORPORATION
----------------------
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED December 31, 1997
NOTE: To maintain a set of exhibit reference numbers consistent with
Registrant's prior filings under the Securities Act of 1933 and the
Securities Act of 1934, Registrant has intentionally omitted exhibit
reference numbers which pertain to exhibits which are no applicable or in
effect. Except as specifically noted below, all of the exhibits identified
are filed herewith.
<TABLE>
<S> <C>
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of the Registrant as Amended and Restated
effective April 21, 1993. (7)
3.2 Bylaws of Registrant, as amended and restated effective January 27,
1998.
10.1 Lease between SFB (formerly State Bank, Hales Corners) and Hales
Corners Development Corporation (10708 West Janesville Road, Hales
Corners, Wisconsin). (2)
10.2 Lease between SFB (formerly State Bank, Hales Corners) and Hales
Corners Development Corporation (S76 W17655 Janesville Road, Muskego,
Wisconsin). (3)
10.3 Lease between SFB (formerly Edgewood Bank) and Edgewood Plaza Joint
Venture (4811 South 76th Street, Greenfield, Wisconsin). (3)
10.6 Lease between SFB (formerly University National Bank) and Northeast
Corporate Center (7020 North Port Washington Road, Milwaukee,
Wisconsin). (3)
10.7 Deferred Compensation Agreement between Registrant and Jerome J. Holz
dated December 6, 1980. (3)
10.10 Employee Stock Ownership Plan and Employee Stock Ownership Trust
Agreement. (4)
10.13 Lease between SFB (formerly University National Bank) and Downer
Investments (2650 North Downer Avenue, Milwaukee, Wisconsin) (5)
10.14 Agreement and Plan of Reorganization between Registrant and Eastbrook
State Bank, dated January 22, 1992, as amended and restated. (6)
10.15 Branch Purchase and Assumption Agreement between Eastbrook State Bank
and North Shore Bank, FSB, dated December 29, 1992. (1)
10.16 Agreement and Plan of Merger By and Among Registrant, WBAC, Inc., and
Waterford Bancshares, Inc. dated April 12, 1995. (8)
10.17 Lease between SFB-Waterford and Mangold Investments, LLP (1050 North
Milwaukee Avenue, Burlington, Wisconsin)(11)
10.18 Agreement and Plan of Merger By and Among Registrant, RBI, Inc. and
Richmond Bancorp, Inc. (10)
10.19 Lease between Richmond and Upland Farms (1509 North Milwaukee Avenue,
Libertyville, Illinois).
13 Registrant's Annual Report to security holders for the fiscal year
ended December 31, 1997.
21 Subsidiaries of Registrant.
</TABLE>
<PAGE> 18
<TABLE>
<S> <C>
23 Consent of Ernst & Young LLP.
23.1 Opinion of McGladrey & Pullen, LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for the year ended December 31, 1996
27.3 Restated Financial Data Schedule for the year ended December 31, 1995
99.1 State Financial Services Corporation 1990 Stock Option/Stock
Appreciation Rights and Restricted Stock Plan for Key Officers and
Employees, as amended on March 10, 1993. (1)
99.2 State Financial Services Corporation 1990 Director Stock Option Plan,
as amended March 10, 1993. (1)
99.3 State Financial Services Corporation Supplemental Executive Retirement
Plan for Michael J. Falbo effective November 22, 1994. (9)
99.4 Registrant's Proxy Statement relating to its Annual Meeting of
Shareholders to be held on April 23, 1997.
99.5 State Financial Services Corporation 1998 Stock Incentive Plan
(1) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1992.
(2) Incorporated by reference from Registrant's registration statement on
Form S-1, Registration Number 33-31517 (the "Form S-1") (dated October
11, 1989).
(3) Incorporated by reference from Amendment No. 1 to the Form S-1 (dated
December 6, 1989).
(4) Incorporated by reference from Amendment No.2 to the Form S-1 (dated
March 6, 1989).
(5) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1991.
(6) Incorporated by reference from Exhibit 2.1 to Amendment No. 3 to
Registrant's registration statement on Form S-4, Registration Number
33-46280, dated May 3, 1992.
(7) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1993.
(8) Incorporated by reference from Amendment No. 2 to the Form S-4 (dated
July 18, 1995).
(9) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1994.
(10) Incorporated by reference from Registrant's Report on Form 8-K (dated
January 14, 1998).
(11) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1996.
</TABLE>
The issuer, State Financial Services Corporation, will furnish a copy
of any exhibit described above upon request and upon reimbursement to the
issuer of its reasonable expenses of furnishing such exhibit, which shall be
limited to a photocopying charge of $0.25 per page and, if mailed to the
requesting party, the cost of first-class postage.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND
RESTATED
BYLAWS OF
STATE FINANCIAL SERVICES CORPORATION
(A WISCONSIN CORPORATION)
AMENDED AND RESTATED ON JANUARY 27, 1998
<PAGE> 2
ARTICLE 1. OFFICES
1.01 Principal and Business Offices. The corporation may have such
principal and other business offices, either within or without the State of
Wisconsin, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
1.02 Registered Office. The registered office of the corporation
required by the Wisconsin Business Corporation Law to be maintained in the State
of Wisconsin may, but need not, be identical to the corporation's principal
office in the State of Wisconsin, and the address of the registered office may
be changed from time to time by the Board of Directors. The business office of
the registered agent of the corporation shall be identical to such registered
office.
ARTICLE 2. SHAREHOLDERS
2.01. Annual Meeting. The annual meeting of the shareholders shall be
held in April or May of each year at such time and date as may be fixed by or
under the authority of the Board of Directors, for the purpose of electing
directors and for the transaction of such other business as may come before the
meeting. If the election of directors is not held on the day designated herein,
or fixed as herein provided, for any annual meeting of the shareholders, or at
any adjournment thereof, the Board of Directors shall cause the election to be
held at a meeting of the shareholders as soon thereafter as may be convenient.
At an annual meeting of the shareholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) otherwise brought before the meeting by or at the
direction of the Board of Directors, or (c) brought before the meeting by a
shareholder pursuant to this By-Law.
Only persons who are nominated in accordance with the procedures
set forth in this By-Law shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of shareholders by or at the direction of the Board of
Directors or by any shareholder of the corporation entitled to vote for the
election of directors at the meeting who complies with the procedures set forth
in this By-Law.
For business to be properly brought before an annual meeting by a
shareholder, and for nominations by shareholders for the election of directors,
the shareholder must have given timely notice thereof in writing to the
Secretary of the corporation. All notices given pursuant to this section shall
be in writing and must be received by the Secretary of the corporation not later
than ninety days prior to the anniversary date of the annual meeting of
shareholders in the immediately preceding year. All such notices shall include
(i) a representation that the person sending the notice is a shareholder of
record and will remain such through the record date for the meeting, (ii) the
name and address, as they appear on the corporation's books, of such
shareholder, (iii) the class and number of the corporation's shares which are
owned beneficially and of record by such shareholder, and (iv) a representation
that such shareholder intends to appear in person or by proxy at such meeting to
make the nomination or move the consideration of other business set forth in the
notice. Notice as to proposals with respect to any business to be brought before
the meeting other than election of directors shall also set forth the text of
the proposal and may set forth any statement in support thereof that the
shareholder wishes to bring to the attention of the corporation, and shall
specify any material interest of such shareholder in such business. Notice as to
nominations shall set forth the name(s) of the nominee(s), address(e's) of each,
a description of all arrangements or understandings between the shareholder and
each nominee and any person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made by the shareholder, the
written consent of each nominee to serve as a director if so elected and such
other information as would be required to be included in a proxy statement
soliciting proxies for the election of the nominee(s) of such shareholder.
Nothing in these By-Laws shall require the corporation to include in any notice,
proxy statement or other mailing to shareholders any information regarding
nominees or proposals made by shareholders except as otherwise required by law.
The chairman of the meeting shall refuse to acknowledge the
nomination of any person or the consideration of any business not made in
compliance with the foregoing procedures.
2
<PAGE> 3
2.02. Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
the Chairman of the Board, the President or a majority of the Board of
Directors. If and as required by the Wisconsin Business Corporation Law, a
special meeting shall be called upon written demand describing one or more
purposes for which it is to be held by holders of shares with at least 10% of
the votes entitled to be cast on any issue proposed to be considered at the
meeting. The purpose or purposes of any special meeting shall be described in
the notice required by section 2.04 of these By-Laws.
2.03. Place of Meeting. The Board of Directors may designate any place,
either inside or outside the State of Wisconsin, as the place of meeting for any
annual meeting or any special meeting. If no designation is made, the place of
meeting shall be the principal office of the corporation but any meeting may be
adjourned to reconvene at any place designated by vote of a majority of the
shares represented thereat.
2.04. Notices to Shareholders.
(a) Required Notice. Written notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than 10 days nor
more than 60 days before the date of the meeting (unless a different time is
provided by law or the Articles of Incorporation), by or at the direction of the
Chairman of the Board, if there is one, the President or the Secretary, to each
shareholder entitled to vote at such meeting or, for the fundamental
transactions described in subsections (e)(1) to (4) below (for which the
Wisconsin Business Corporation Law requires that notice be given to shareholders
not entitled to vote), to all shareholders. If mailed, such notice is effective
when deposited in the United States mail, and shall be addressed to the
shareholder's address shown in the current record of shareholders of the
corporation, with postage thereon prepaid. At least 20 days' notice shall be
provided if the purpose, or one of the purposes, of the meeting is to consider a
plan of merger or share exchange for which shareholder approval is required by
law, or the sale, lease, exchange or other disposition of all or substantially
all of the corporation's property, with or without good will, otherwise than in
the usual and regular course of business.
(b) Adjourned Meeting. Except as provided in the next
sentence, if any shareholder meeting is adjourned to a different date, time, or
place, notice need not be given of the new date, time, and place, if the new
date, time, and place is announced at the meeting before adjournment. If a new
record date for the adjourned meeting is or must be fixed, then notice must be
given pursuant to the requirements of paragraph (a) of this section 2.04, to
those persons who are shareholders as of the new record date.
(c) Waiver of Notice. A shareholder may waive any notice
required by the Wisconsin Business Corporation Law, the Articles of
Incorporation or these By-Laws before or after the date and time stated in the
notice. The waiver shall be in writing and signed by the shareholder entitled to
the notice, shall contain the same information that would have been required in
the notice under the Wisconsin Business Corporation Law except that the time and
place of meeting need not be stated, and shall be delivered to the corporation
for inclusion in the corporate records.
A shareholder's attendance at a meeting, in person or by
proxy, waives objection to both of the following:
(i) Lack of notice or defective notice of the meeting,
unless the shareholder at the beginning of the meeting or promptly upon arrival
objects to holding the meeting or transacting business at the meeting.
(ii) Consideration of a particular matter at the meeting
that is not within the purpose described in the meeting notice, unless the
shareholder objects to considering the matter when it is presented.
(d) Contents of Notice. The notice of each special shareholder
meeting shall include a description of the purpose or purposes for which the
meeting is called. Except as otherwise provided in these By-Laws, in the
Articles of Incorporation, or in the Wisconsin Business Corporation Law, the
notice of an annual shareholder meeting need not include a description of the
purpose or purposes for which the meeting is called.
(e) Fundamental Transactions. If a purpose of any shareholder
meeting is to consider either: (1) a
3
<PAGE> 4
proposed amendment to the Articles of Incorporation (including any restated
articles); (2) a plan of merger or share exchange for which shareholder approval
is required by law; (3) the sale, lease, exchange or other disposition of all or
substantially all of the corporation's property, with or without good will,
otherwise than in the usual and regular course of business; (4) the dissolution
of the corporation; or (5) the removal of a director, the notice must so state
and in cases (1), (2) and (3) above must be accompanied by, respectively, a copy
or summary of the: (1) proposed articles of amendment or a copy of the restated
articles that identifies any amendment or other change; (2) proposed plan of
merger or share exchange; or (3) proposed transaction for disposition of all or
substantially all of the corporation's property. If the proposed corporate
action creates dissenters' rights, the notice must state that shareholders and
beneficial shareholders are or may be entitled to assert dissenters' rights, and
must be accompanied by a copy of sections 180.1301 to 180.1331 of the Wisconsin
Business Corporation Law.
2.05. Fixing of Record Date. The Board of Directors may fix in advance
a date as the record date for any determination of shareholders entitled to
notice of a shareholders' meeting, to demand a special meeting, to vote, or to
take any other action, such date in any case to be not more than 70 days prior
to the meeting or action requiring such determination of shareholders, and may
fix the record date for determining shareholders entitled to a share dividend or
distribution. If no record date is fixed for the determination of shareholders
entitled to demand a shareholder meeting or to notice of or to vote at a meeting
of shareholders, (a) the close of business on the day before the corporation
receives the first written demand for a shareholder meeting, or (b) the close of
business on the day before the first notice of the meeting is mailed or
otherwise delivered to shareholders, as the case may be, shall be the record
date for the determination of shareholders. If no record date is fixed for the
determination of shareholders entitled to receive a share dividend or
distribution (other than a distribution involving a purchase, redemption or
other acquisition of the corporation's shares), the close of business on the day
on which the resolution of the Board of Directors is adopted declaring the
dividend or distribution shall be the record date. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall be applied to any adjournment
thereof unless the Board of Directors fixes a new record date and except as
otherwise required by law. A new record date must be set if a meeting is
adjourned to a date more than 120 days after the date fixed for the original
meeting.
In order that the corporation may determine the shareholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. Any shareholder of record seeking to have the shareholders authorize
or take corporate action by written consent shall, by written notice to the
Secretary, request the Board of Directors to fix the record date. The Board of
Directors shall promptly, but in all events within ten days after the date on
which such a request is received, adopt a resolution fixing the record date. If
no record date has been fixed by the Board of Directors within ten (10) days of
the date on which such a request is received, the record date for determining
shareholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by
applicable law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
corporation by delivery to its registered office in the State of Wisconsin, its
principal place of business, or any officer or agent of the corporation having
custody of the book in which proceedings of meetings of shareholders are
recorded. Delivery made to the corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by applicable law, the record date for determining
shareholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the date on which the Board of
Directors adopts a resolution taking such prior action.
2.06. Shareholder List. The officer or agent having charge of the stock
transfer books for shares of the corporation shall, before each meeting of
shareholders, make a complete record of the shareholders entitled to notice of
such meeting, arranged by class or series of shares and showing the address of
and the number of shares held by each shareholder. The shareholder list shall be
available at the meeting and may be inspected by any shareholder or his or her
agent or attorney at any time during the meeting or any adjournment. Any
shareholder or his or her agent or attorney may inspect the shareholder list
beginning two business days after the notice of the meeting is given and
continuing to the date of the meeting, at the corporation's principal office or
at a place identified in the meeting notice in the city where the meeting will
be held and, subject to section 180.1602(2)(b) 3 to 5 of the Wisconsin Business
Corporation Law, may copy the list, during regular business hours and at his or
her expense, during the period that it is available for inspection
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hereunder. The original stock transfer books and nominee certificates on file
with the corporation (if any) shall be prima facie evidence as to who are the
shareholders entitled to inspect the shareholder list or to vote at any meeting
of shareholders. Failure to comply with the requirements of this section shall
not affect the validity of any action taken at such meeting .
2.07. Quorum. Except as otherwise provided in the Articles of
Incorporation or in the Wisconsin Business Corporation Law, a majority of the
votes entitled to be cast by shares entitled to vote as a separate voting group
on a matter, represented in person or by proxy, shall constitute a quorum of
that voting group for action on that matter at a meeting of shareholders. Once a
share is represented for any purpose at a meeting, other than for the purpose of
objecting to holding the meeting or transacting business at the meeting, it is
considered present for purposes of determining whether a quorum exists for the
remainder of the meeting and for any adjournment of that meeting unless a new
record date is or must be set for that meeting.
2.08. Conduct of Meetings. The Chairman of the Board or, in his or her
absence, the President, and, in the President's absence, any officer or director
chosen by the shareholders present or represented by proxy shall call the
meeting of the shareholders to order and shall act as Chairman of the meeting,
and the Secretary shall act as secretary of all meetings of the shareholders,
but, in the absence of the Secretary, the presiding officer may appoint any
other person to act as secretary of the meeting.
2.09. Proxies. At all meetings of shareholders, a shareholder entitled
to vote may vote in person or by proxy appointed in writing by the shareholder
or by his or her duly authorized attorney-in-fact. All proxy appointment forms
shall be filed with the Secretary or other officer or agent of the corporation
authorized to tabulate votes before or at the time of the meeting. Unless the
appointment form conspicuously states that it is irrevocable and the appointment
is coupled with an interest, a proxy appointment may be revoked at any time. The
presence of a shareholder who has filed a proxy appointment shall not of itself
constitute a revocation. No proxy appointment shall be valid after eleven months
from the date of its execution, unless otherwise expressly provided in the
appointment form. The Board of Directors shall have the power and authority to
make rules that are not inconsistent with the Wisconsin Business Corporation Law
as to the validity and sufficiency of proxy appointments.
2.10. Voting of Shares. Each outstanding share shall be entitled to one
vote on each matter submitted to a vote at a meeting of shareholders, except to
the extent that the voting rights of the shares are enlarged, limited or denied
by the Articles of Incorporation or the Wisconsin Business Corporation Law.
Shares owned directly or indirectly by another corporation are not entitled to
vote if this corporation owns, directly or indirectly, sufficient shares to
elect a majority of the directors of such other corporation. However, the prior
sentence shall not limit the power of the corporation to vote any shares,
including its own shares, held by it in a fiduciary capacity.
ARTICLE 3. BOARD OF DIRECTORS
3.01 General Powers and Number. The business and affairs of the
corporation shall be managed by its Board of Directors. The number of directors
of the corporation shall be fixed from time to time by the directors of the
Corporation but shall in no event be less than five (5). The directors shall be
divided into three classes, each class to consist of approximately one-third of
the directors. Initially the first class shall consist of two (2) directors, the
second class shall consist of two (2) directors and the third class shall
consist of one (1) director. The term of office of those of the first class
shall expire at the annual meeting next ensuing after their election and of the
second class one year thereafter and of the third class two years thereafter,
and in all cases, until their respective successors shall have been elected and
qualified. At the annual meetings following the initial election of directors by
classes, the successors to the class of directors whose term expires in that
year shall be elected for a term of three (3) years to succeed those whose terms
expire, so that the term of office of one class of directors shall expire in
each year, but, subject to the provisions of the Bylaws of the Corporation, each
director shall hold office for the term for which he is elected and until his
successor is elected and qualified or until his death or until he shall resign
or shall have been removed in the manner hereinafter provided.
3.02 Tenure and Qualifications. Each director shall hold office until
the next annual meeting of shareholders and until his successor shall have been
elected, or until his prior death, resignation or removal. A director may be
removed from office with or without cause by affirmative vote of a majority of
the outstanding shares entitled to vote for the
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election of such director taken at a meeting of shareholders called for that
purpose. A director may resign at any time be delivering written resignation to
the Board of Directors, the Chairman of the Board, or the corporation by U.S.
mail, private mail carrier, teletype, telegram, facsimile communication or
personal delivery. Such resignation shall be effective upon delivery of such
notice. Directors need not by residents of the State of Wisconsin or
shareholders of the corporation. No person shall be eligible for election or
appointment to the Board of Directors who is more than 72 years of age. The age
limitation contained in the immediately preceding sentence shall not apply to
any person who was a member of the Board of Directors on or prior to November 9,
1989.
3.03 Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than these Bylaws immediately after the
annual meeting of shareholders and each adjourned session thereof. The place of
such regular meeting shall be the same as the place of the meeting of
shareholders that precedes it or such other suitable place as may be announced
at such meeting of shareholders. The Board of Directors may provide by
resolution the time and place, either within or without the State of Wisconsin,
for the holding of additional regular meetings without notice other than such
resolution.
3.04 Special Meetings. Special meetings of the Board of Directors may
be called by or at the request of the President, Secretary or any two directors.
The President or Secretary calling any special meeting of the Board of Directors
may fix any place, either within or without the State of Wisconsin, as the place
for holding any special meeting of the Board of Directors called by them and, if
no other place is fixed, the place of meeting shall be the principal office of
the corporation in the State of Wisconsin.
3.05 Telephonic and Other Meetings. Any regular or special meeting of
the Board of Directors may be held by use of any means of communication by which
all participating directors may simultaneously hear each other during the
meeting or by which all communication during the meeting is immediately
transmitted to each participating director and each participating director is
able immediately to send messages to all other participating directors. All
participating directors shall be informed that a meeting is taking place at
which official business may be transacted. A director participating in a meeting
by any means described in this Section 3.05 is deemed to be present in person at
the meeting. The corporation shall, from time to time as it deems necessary to
maintain the integrity of such telephonic or other meetings, assign passwords or
security codes to each director for purposes of verifying the director's
identity prior to any vote of directors.
3.06 Notice; Waiver. Notice of each meeting of the Board of Directors
(unless otherwise provided in or pursuant to Section 3.04) shall be given by
written notice given personally or by U.S. mail or private mail carrier,
teletype, telegram or facsimile communication to each director at his business
address or at such other address as such director shall have designated in a
writing filed with the Secretary, in each case not less than 48 hours if given
by U.S. mail or private mail carrier and not less than 24 hours if given by
teletype, telegraph, facsimile or personal delivery. Whenever any notice
whatever is required to be given to any director of the corporation under the
Articles of Incorporation, Bylaws or any provision of law, a waiver thereof in
writing, signed at any time whether before or after the time of meeting by the
director entitled to such notice. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting and objects thereat to the transaction of any business because
the meeting is not lawfully called or convened. Neither the business to be
transacted at nor the purposes of any regular or special meeting of the Board of
Directors need be specified in the notice or waiver of notice of such meeting.
3.07 Quorum. Except as otherwise provided by law, the Articles of
Incorporation or these Bylaws, a majority of the number of directors then in
office shall constitute a quorum for the transaction of business at any meeting
of the Board of Directors, but a majority of the directors present (though less
than such quorum) may adjourn the meeting from time to time without further
notice.
3.08 Manner of Acting. The act of the majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors, unless otherwise required by law, the Articles of Incorporation or
these Bylaws.
3.09 Conduct of Meetings. The Chairman of the Board, ir if the Board of
Directors determines not to elect
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a Chairman of the board, or in his absence, the President, or in his absence, a
Vice President, if any, in the order provided under Section 4.06, or in his
absence, any director chosen by the directors present, shall call meetings of
the Board of Directors to order and shall act as Chairman of the meeting. The
Secretary of the corporation shall act as secretary of all meetings of the Board
of Directors but, in the absence of the Secretary, the presiding officer may
appoint any Assistant Secretary, director or other person present to act as
secretary of the meeting.
3.10 Vacancies. Any vacancy occurring in the Board of Directors,
including a vacancy created by an increase in the number of directors, may be
filled until the next succeeding annual election by shareholders, the Board of
Directors or, if the directors remaining in office constitute fewer than a
quorum of the board, the directors by the affirmative vote of a majority of all
of the directors then in office.
3.11 Compensation. The Board of Directors, by affirmative vote of a
majority of the directors then in office, and regardless of any personal
interest of any of its members, may establish reasonable compensation for all
directors for services to the corporation as directors, officers or otherwise or
may delegate such authority to an appropriate committee. The Board of Directors
also shall have authority to provide for or to delegate authority to an
appropriate committee to provide for reasonable pension, disability or death
benefits and other benefits or payments to directors, officers and employees and
to their estates, families, dependents or beneficiaries on account of prior
services rendered by such directors, officers and employees of the corporation.
3.12 Presumption of Assent. A director of the corporation who is
present and is announced as present at a meeting of the Board of Directors or a
committee thereof of which he is a member at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
the director objects at the beginning of the meeting or promptly upon his
arrival to the holding of the meeting or the transacting of business at the
meeting, or unless his dissent or abstention shall be entered in the minutes of
the meeting or unless he shall deliver written dissent to such action to the
presiding officer of the meeting before the adjournment thereof or unless he
shall forward such dissent by certified mail to the corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
3.13 Committees. The Board of Directors by resolution adopted by the
affirmative vote of a majority of the number of directors then in office may
designate one or more committees, each committee to consist of two or more
directors elected by the Board of Directors that, to the extent provided in said
resolution as initially adopted and as thereafter supplemented or amended by
further resolution adopted by a like vote, shall have and may exercise, when the
Board of Directors is not in session, the powers of the Board of Directors in
the management of the business and affairs of the corporation, except for taking
action to authorize a distribution; approve or propose to shareholders action
that is required to be approved by shareholders by law; fill vacancies on the
Board of Directors; amend the Articles of Incorporation; adopt amend or repeal
Bylaws, approve a plan of merger not requiring shareholder approval; authorize
or approve reacquisition of shares, except according to a formula or method
prescribed by the Board of Directors; or authorize or approve the issuance or
sale or contract for sale of shares, or determine the designation and relative
rights, preferences and limitations of a class or series of shares, except that
the Board of Directors may authorize a committee or a senior executive officer
of the corporation to do so within the limits prescribed by the Board of
Directors. The Board of Directors may elect one or more of its members as
alternate members of any such committee who may take the place of any absent
member or members at any meeting of such committee, upon request by the
President or the chairman of such meeting. Each such committee shall fix its own
rules governing the conduct of its activities and shall make such reports to the
Board of Directors on its activities as the Board of Directors may request.
The Board of Directors shall establish a standing Audit Committee,
Compensation Committee and Nominating Committee. The Board of Directors shall,
by resolution, designate the power, duties and authority of each of these
committees.
The Board of Directors can, by resolution, adopt the duties and
authority of the Audit Committee, the Compensation Committee and the Nominating
Committee as set forth on Exhibit A, Exhibit B and Exhibit C, respectively
following these Bylaws.
3.14 Unanimous Consent Without Meeting. Any action required or
permitted by the Articles of
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Incorporation, Bylaws or any provision of law to be taken by the Board of
Directors at a meeting or by resolution may be taken without a meeting if a
consent in writing setting forth the action so taken shall be signed by all of
the directors then in office.
ARTICLE 4. OFFICERS
4.01 Number. The principal officers of the corporation shall be elected
by the Board of Directors pursuant to Section 4.02. They shall include a
President and a Secretary, and may include, among such other offices as the
Board of Directors deems appropriate, a Chairman of the Board, a number of Vice
Presidents, and a Treasurer. Such other officers and assistant officers as may
be deemed necessary may be elected by the Board of Directors or, if authorized
by the Board of Directors, by a duly appointed officer of the corporation. Any
two or more officers may be held by the same person. The President shall be the
Chief Executive Officer and a Director of the Corporation.
4.02 Election and Term of Office. The officers of the corporation shall
be elected annually by the Board of Directors at the first meeting of the Board
of Directors held after each annual meeting of the shareholders. If the election
of officers shall not be held at such meeting, such election shall be held as
soon thereafter as conveniently may be held. Each officer shall hold office
until his successor shall be duly elected or until his prior death, resignation
or removal. The president shall be the chief Executive Officer and a Director of
the corporation.
4.03 Resignation and Removal. An officer may resign at any time by
delivering written notice to the corporation. The resignation is effective when
the notice is delivered, unless the notice specifies a later effective date and
the corporation accepts the later effective date. If a resignation is effective
at a later date, the Board of Directors may fill the pending vacancy before the
effective date if the Board of Directors provides that the successor may not
take office until the effective date. The Board of Directors may remove any
officer and, unless restricted by the Board of Directors, an officer may remove
any officer or assistant officer appointed by him under authority of the Board
of Directors at any time with or without cause and notwithstanding the contract
rights, if any, of the officer so removed.
4.04 Vacancies. A vacancy in any principal office because of death,
resignation, removal, disqualification or otherwise shall be filled by the Board
of Directors for the unexpired portion of the term.
4.05 President. The President shall be the principal executive officer
of the corporation and, subject to the control of the Board of Directors, shall
in general supervise all of the business and affairs of the corporation. He
shall, when present, preside at all meetings of the shareholders and shall
preside at all meetings of the Board of Directors unless the Board shall elect a
Chairman of the Board of Directors. He shall have authority, subject to such
rules as may be prescribed by the Board of Directors, to appoint such agents and
employees of the corporation as he shall deem necessary, to prescribe their
powers, duties and compensation, and to delegate authority to them. Such agents
and employees shall hold office at the discretion of the President. He shall
have authority to sign, execute and acknowledge, on behalf of the corporation,
leases, reports and all other documents or instruments necessary or proper to be
executed in the course of the corporation's regular business, or that shall be
authorized by resolution of the Board of Directors; and, except as otherwise
provided by law or the Board of Directors, he may authorize any Vice President
or other officer or agent of the corporation to sign, execute and acknowledge
such documents or instruments in his place and stead. In general, he shall
perform all duties incident to the office of President and such other duties as
may be prescribed by the Board of Directors from time to time.
4.06 Vice Presidents. If such positions are elected to be filled by the
Board of Directors, the Vice Presidents of the corporation in order of rank
shall be Executive Vice President, if any, and Vice President. Each Vice
President shall have the authority and duties and shall perform the functions
specified by the Board of Directors. In the absence of the President or in the
event of his death, inability or refusal to act, or for any reason it shall be
impractical for the President to act personally, his power shall be assumed and
his duties discharged by the Executive Vice President first, and then by the
senior Vice President available. Any Vice President may, with the Secretary or
Assistant Secretary, sign certificates for shares of the corporation and shall
perform such other duties and have such authority as from time to time may be
delegated or assigned to him by the President or by the Board of Directors. The
execution of any instrument of the corporation by any Vice President shall be
conclusive evidence as to third parties of his authority to act in the stead of
the President.
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4.07 Secretary. The Secretary shall: (a) keep the minutes of the
meetings of the shareholders and of the Board of Directors in one or more books
provided for the purpose; (b) see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law; (c) be custodian of
the corporate records and of the seal of the corporation and see that the seal
of the corporation is affixed to all documents the execution of which on behalf
of the corporation under its seal is duly authorized (if provided for by the
Board of Directors, see Section 8.01); (d) keep or arrange for the keeping of a
register furnished to the Secretary by such shareholder; (e) with the President,
or a Vice President, sign certificates for shares of the corporation, the
issuance of which shall have been authorized by resolution of the Board of
Directors; (f) have general charge of the stock transfer books of the
corporation; and (g) in general perform all duties incident to the office of
Secretary and such other duties and exercise such authority as from time to time
may be delegated or assigned to him by the President or by the Board of
Directors.
4.08 Treasurer. If such position is elected to be filled by the Board
of Directors, the Treasurer shall: (a) have charge and custody of and be
responsible for all funds and securities of the corporation; (b) receive and
give receipts for monies due and payable to the corporation from any source
whatsoever and deposit all such monies in the name of the corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with the provisions of Section 5.04; and (c) in general perform all duties
incident to the office of Treasurer and such other duties and exercise such
authority as from time to time may be delegated or assigned to him by the
President or by the Board of Directors. If required by the Board of Directors,
the Treasurer shall give a bond for the faithful discharge of his duties in such
sum and with such surety or sureties as the Board of Directors shall determine.
4.09 Assistant Secretaries and Assistant Treasurers. There shall be
such number of Assistant Secretaries and Assistant Treasurers as the Board of
Directors may from time to time authorize. The Assistant Secretaries may sign
with the President or a Vice President certificates for shares of the
corporation, the issuance of which shall have been authorized by a resolution of
the Board of Directors. The Assistant Treasurers shall respectively, if required
by the Board of Directors, give bonds for the faithful discharge of their duties
in such sums and with such sureties as the Board of Directors shall determine.
The Assistant Secretaries and Assistant Treasurers, in general, shall perform
such duties and have such authority as shall from time to time be delegated or
assigned to them by the Secretary or the Treasurer, respectively, or by the
President or the Board of Directors.
4.10 Chairman of the Board. The Chairman of the Board of Directors (if
such offices is designated and filled pursuant to Section 4.01) shall, with the
President, have general active management of the business of the corporation. He
shall, if present, preside over all meetings of the shareholders and directors.
He shall form time to time report to the Board of Directors on all matters
within his knowledge that the interests of the corporation may require to be
brought to the attention of the Board of Directors. He may execute and deliver
in the name of the corporation any deeds, mortgages, bonds, contracts or other
instruments pertaining to the business of the corporation, and in general shall
perform all duties usually incident to the office of the Chairman of the Board
and such other duties, as may from time to time be assigned to him by the Board
of Directors.
4.11 Other Assistants and Acting Officers. The Board of Directors shall
have the power to elect or to authorize a duly elected officer of the
corporation to appoint any person to act as assistant to any officer, or as
agent for the corporation in his stead, or to perform the duties of such officer
whenever for any reason it is impracticable for such officer to act personally,
and such assistant or acting officer or other agent so appointed by the Board of
Directors or duly elected officer of the corporation so authorized shall have
the power to perform all the duties of the office to which he is so appointed to
be assistant, or as to which he is so appointed to act, except as such power may
be otherwise defined or restricted by the Board of Directors.
4.12 Salaries. The salaries of the principal officers shall be fixed
from time to time by the Board of Directors or by a duly authorized committee
thereof, and no officer shall be prevented from receiving such salary by reason
of the fact that he is also a director of the corporation.
ARTICLE 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS:
SPECIAL CORPORATE ACTS
5.01 Contracts. The Board of Directors may authorize any officer, agent
or agents to enter into any contract
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or execute or deliver any instrument in the name of and on behalf of the
corporation, and such authorization may be general or confined to specific
instances. In the absence of other designation, all deeds, mortgages and
instruments of assignment or pledge made by the corporation shall be executed in
the name of the corporation by the President or one of the Vice Presidents and
by the Secretary, or an Assistant Secretary, the Treasurer or an Assistant
Treasurer; and, when necessary or required, the Secretary or an Assistant
Secretary, the Treasurer or an Assistant Treasurer; and, when necessary or
required, the Secretary or Assistant Secretary shall affix the corporate seal,
if any, thereto. When so executed, no other party to such instrument or any
third party shall be required to make any inquiry into the authority of the
signing officer or officers.
5.02 Loans. No indebtedness for borrowed money shall be contracted on
behalf of the corporation and no evidences of such indebtedness shall be issued
in its name unless authorized by or under the authority of a resolution of the
Board of Directors. Such authorization may be general or confined to specific
instances.
5.03 Checks, Drafts, etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer, officers, agent or agents of
the corporation and in such manner from time to time be determined by or under
the authority of a resolution of the Board of Directors.
5.04 Deposits. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as may be selected by or under the
authority of a resolution of the Board of Directors.
5.05 Voting of Securities Owned by This Corporation. Subject always to
the specific directions of the Board of Directors, (a) any shares of other
securities issued by any other corporation and owned or controlled by this
corporation may be voted at any meeting of security holders of such other
corporation bu the President of this corporation if he be present or in his
absence, by any Vice President of this corporation who may be present; and (b)
whenever, in the judgement of the President or, in his absence, any Vice
President, it is desirable for this corporation to execute a proxy or consent,
it shall be executed in the name of this corporation, without necessity of any
authorization by the Board of Directors, affixation of corporate seal or
countersignature of attestation by another officer. Any person or persons
designated in the manner above stated as the proxy or proxies of this
corporation shall have full right, power and authority to vote the shares of
such other corporation owned by this corporation the same as such shares or
other securities might be voted by this corporation.
ARTICLE 6. CERTIFICATES FOR SHARES AND THEIR TRANSFERS
6.01 Certificates for Shares. Certificates representing shares of the
corporation shall be in such form, consistent with law, as shall be determined
by the Board of Directors. Such certificates shall be signed by the President or
a Vice President and by the Secretary or an Assistant Secretary. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the corporation. All certificates surrendered to the
corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and canceled, except as provided in Section 6.06.
6.02 Facsimile Signatures and Seal. The seal of the corporation, if
provided for by the Board of Directors, on any certificates for shares may be a
facsimile. The signatures of the President or Vice President and the Secretary
or Assistant Secretary upon a certificate may be facsimiles.
6.03 Signature by Former Officers. In case any officer who has signed
or whose facsimile signature has been placed upon any certificate for shares
shall have ceased to be such officer before such certificate is issued, it may
issued by the corporation with the same effect as if he were such officer at the
date of its issue.
6.04 Transfer of Shares. Prior to due presentment of a certificate for
shares for registration of transfer, the corporation may treat the registered
owner of such shares as the person exclusively entitled to vote, to receive
notifications and otherwise to exercise all of the rights and powers of an
owner. Where a certificate for shares is presented to the
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corporation with a request to register for transfer, the corporation shall not
be liable to the owner of any other person suffering loss as a result of such
registration of transfer if there were on or with the certificate the necessary
endorsements and the corporation had no duty to inquire into adverse claims or
has discharged any such duty. The corporation may require reasonable assurance
that said endorsements are genuine and effective and in compliance with such
other regulations as may be prescribed under the authority of the Board of
Directors.
6.05 Lost, Destroyed or Stolen Certificates. Where an owner claims that
his certificates for shares has been lost, destroyed or wrongfully taken, a new
certificate shall be issued I place thereof if the owner so requests before the
corporation has notice that such shares have been acquired by a bona fide
purchases and, upon requires of the President or the Board of Directors, files
with the corporation a sufficient indemnity bond and satisfies such other
reasonable requirements as the Board of Directors may prescribe.
6.06 Consideration for Shares. The shares of the corporation may be
issued for such consideration as shall be fixed from time to time by the Board
of Directors, provided that any shares having a par value shall not be issued
for a consideration less than the par value thereof, if any. The Board of
Directors may authorize shares to be issued for consideration consisting of any
tangible or intangible property or benefit to the corporation, including cash,
promissory notes, services performed, contracts for services to be performed or
other securities of the corporation. Before the corporation issues shares, the
Board of Directors shall determine that the consideration received or to be
received for the shares to be issued is adequate. The Board of Directors'
determination is conclusive insofar as the adequacy of consideration for the
issuance of shares relates to whether the shares are validly issued, fully paid
and nonassessable. When the corporation receives the consideration for which the
Board of Directors authorized the issuance of shares, the shares issued for that
consideration are fully paid and nonassessable. The corporation may place in
escrow shares issued for a contract for future services or benefits or a
promissory note, or make other arrangements to restrict the transfer of the
shares, and make credit distributions in respect of the shares against their
purchase price, until the services are performed, the benefits are received or
the note is paid. If the services are not performed, the benefits are not
received or the note is not paid, the corporation may cancel, in whole or in
part, the shares escrowed or restricted and the distributions credited.
6.07 Stock Regulations. The Board of Directors shall have the power and
authority to make all such further rules and regulations not inconsistent with
the Wisconsin Statutes and federal securities laws as it may deem expedient
representing shares of the corporation.
ARTICLE 7. OFFICERS AND DIRECTORS; LIABILITY AND INDEMNITY;
TRANSACTIONS WITH CORPORATION
7.01 Definitions Applicable to indemnification and Insurance
Provisions.
(a) "Director, Officer, Employee or Agent" means any of the
following:
(1) A natural person who is or was a director, officer,
employee or agent of the Corporation.
(2) A natural person who, while a director, officer,
employee or agent of the Corporation, is or was serving either pursuant to the
Corporation's specific request or as a result of the nature of such person's
duties to the Corporation as a director, officer, partner, trustee, member of
any governing or decision making committee, employee or agent of another
corporation or foreign corporation, partnership, joint venture, trust or other
enterprise.
(3) A natural person who, while a director, officer,
employee or agent of the Corporation, is or was serving an employee benefit plan
because his or her duties to the Corporation also impose duties on, or otherwise
involve services by, the person to the plan or to participants in or
beneficiaries of the plan.
(4) Unless the context requires otherwise, the estate or
personal representative of a director, officer, employee or agent.
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(b) "Liability" includes the obligation to pay a judgement,
settlement, penalty, assessment, forfeiture or fine, including an excise tax
assessed with respect to an employee benefit plan, and reasonable expenses.
(c) "Party" includes a natural person who was or is, or who is
threatened to be made, a named defendant or respondent in a proceeding.
7.02 Mandatory Indemnification.
(a) The Corporation shall indemnify a director, officer,
employee or agent to the extent he or she has been successful on the merits or
otherwise in the defense of any threatened, pending or completed civil,
criminal, administrative or investigative action, suit, arbitration or other
proceeding, whether formal or informal, including but not limited to any act or
failure to act alleged or determined to have been negligent, or to have violated
the Employee Retirement Income Security Act of 1974, which involves the right of
the Corporation or by any other person or entity (a "Proceeding"), for all
reasonable fees, costs, charges, disbursements, attorney fees and any other
expenses incurred in connection with the Proceeding (the "Expenses") if such
person was a party because he or she is a director, officer, employee or agent.
Indemnification under this subsection (a) shall be made within ten (10) days of
receipt of a written demand for indemnification.
(b) In cases not included under subsection (a), the
Corporation shall indemnify a director, officer, employee or agent against
Liability and Expenses incurred by such person in a proceeding to which such
person was a party because he or she is a director, officer, employee or agent,
unless it shall have been proven by final judicial adjudication that such person
breached or failed to perform a duty owed to the Corporation with constitutes:
(1) A willful failure to deal fairly with the Corporation
or its shareholders in connection with a matter in which the director, officer,
employee or agent has a material conflict of interest;
(2) A violation of criminal law, unless the director,
officer, employee or agent had reasonable cause to believe his or her conduct
was lawful or no reasonable cause to believe his or her conduct was unlawful;
(3) A transaction from which the director, officer,
employee or agent derived an improper personal profit; or
(4) Willful misconduct.
Indemnification required under this subsection (b) shall be
made within thirty (30) days of receipt of a written demand for indemnification.
7.03 Determination That Indemnification Is Proper.
(a) Unless provided otherwise by a written agreement between
the director, officer, employee or agent and the Corporation, determination of
whether indemnification is required under Section 2 shall be made by one of the
following means selected by the director, officer, employee or agent seeking
indemnification:
(1) By a majority vote of a quorum of the Board of
Directors consisting of directors not at the time Parties to the same or related
Proceedings. If a quorum of disinterested directors cannot be obtained, by
majority vote of a committee duly appointed by the Board of Directors and
consisting solely of two or more directors not at the time Parties to the same
or related Proceedings may participate in the designation of members of the
committee;
(2) By independent legal counsel selected by a quorum of
the Board of Directors or its committee in the manner prescribed in subsection
(1) or, if unable to obtain such a quorum or committee, by a majority vote of
the full Board of Directors including directors who are Parties to the same or
related Proceedings;
(3) By a panel of three arbitrators consisting of one
arbitrator selected by those directors
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entitled under subsection (2) to select independent counsel, one arbitrator
selected by the director, officer, employee or agent seeking indemnification and
one arbitrator selected by the two arbitrators previously selected;
(4) By an affirmative vote of a majority of the
outstanding shares. Shares owned by, or voted under the control of, persons who
are at the time Parties to the same or related Proceedings, whether as
plaintiffs or defendants or in any other capacity, may not be voted in making
the determination; or
(5) By court order.
(b) The termination of a Proceeding by judgement, order,
settlement or conviction, or upon a plea of no contest or an equivalent plea,
does not, by itself, create a presumption that indemnification of the director,
officer, employee or agent is not required under this section.
(c) A director, officer, employee or agent who seeks
indemnification under this section shall make a written request to the
Corporation. As a further precondition to any right to receive indemnification,
the writing shall contain a declaration that the Corporation shall have the
right to exercise all rights and remedies available to such director, officer,
employee or agent against any such other person, corporation, foreign
corporation, partnership, joint venture, trust or other enterprise, arising out
of, or related to, the Proceeding which resulted in the Liability and Expense
for which such director, officer, employee or agent is seeking indemnification,
and that the director, officer, employee or agent is hereby deemed to have
assigned to the Coporatoin all such rights and remedies.
(d) Indemnification under this section is not required to the
extent the director, officer, employee or agent has previously received
indemnification or allowance of expenses from any person or entity, including
the Corporation, in connection with the same Proceeding.
(e) Upon written request by a director, officer, employee or
agent who is a Party to a Proceeding, the Corporation shall pay or reimburse his
or her reasonable expenses incurred if the director, officer, employee or agent
provides the Corporation with the following:
(1) A written affirmation of his or her good faith belief
that he or she has not breached or failed to perform his or her duties to the
Corporation ; and
(2) A written undertaking, executed personally or on his
or her behalf, to repay the allowance without interest to the extent that it is
ultimately determined by court order that indemnification under Section 7.02(b)
is prohibited.
(f) The right to indemnification under this Article may only
be reduced by a subsequent vote of not less than two-thirds of the Corporation's
outstanding capital stock entitled to vote such matters. Any reduction in the
right to indemnification may only be prospective from the date of such vote.
7.04 Insurance. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is a director, officer,
employee or agent against any Liability asserted against or incurred by the
individual in any such capacity or arising out of his status as such,
regardless of whether the Corporation is required or authorized to indemnify or
allow expenses to the individual under this section.
7.05 Intent. It is the intent of the Corporation to provide
indemnification to and for its directors, officers, employees or agents to the
fullest extent allowed by Wisconsin Business Corporation Law, and this Bylaw
shall be liberally construed in order to fulfill this intent.
7.06 Severability . If this Article or any portion thereof is
invalidated on any ground by any court of competent jurisdiction, the
Corporation shall indemnify the director, officer, employee or agent as to
Expenses, judgements, fines and amounts paid in settlement with respect to any
Proceeding to the full extent permitted by any applicable portion of this
Article that is not invalidated or by any other applicable law.
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ARTICLE 8. SEAL
8.01 Seal. The Board of Directors may provide for a corporate seal,
which shall be circular in form and shall have inscribed thereon the name of the
corporation, the state of incorporation and the words, "Corporate Seal."
Notwithstanding the preceding sentence, the Corporation shall not be required to
have corporate seal.
ARTICLE 9. FISCAL YEAR
9.01 Fiscal Year. The fiscal year of the Corporation shall begin on
January 1 and end on December 31 each year.
ARTICLE 10. DIVIDENDS
10.01 Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Articles of Incorporation and all applicable
federal and state laws and regulations may be declared by the Board of Directors
at any regular or special meeting, pursuant to law. Dividends may be paid in
cash, in property, or in shares of the capital stock, subject to the provisions
of the Articles of Incorporation.
ARTICLE 11. AMENDMENTS
11.01 By Shareholders. These Bylaws may be altered, amended or repealed
and new Bylaws may be adopted by the shareholders by affirmative vote of not
less than a majority of shares present or represented at any annual or special
meeting of shareholders at which a quorum is in attendance.
11.02 By Directors. These Bylaws may be altered, amended or repealed an
new Bylaws may be adopted by the Board of Directors by affirmative vote of
two-thirds (2/3) of the number of directors present at any meeting at which a
quorum is in attendance, but no Bylaw adopted by the shareholders shall be
amended or repealed by the Board of Directors if the Bylaw so adopted so
provides.
11.03 Implied Amendments. Any action taken or authorized by the
shareholders or by the Board of Directors that would be inconsistent with the
Bylaws then in effect but is taken or authorized by affirmative vote of not less
than the number of shares or the number of directors required to amend the
Bylaws so that the Bylaws would be consistent with such action shall be given
the same effect as though the Bylaws had been temporarily amended or suspended
so far, but only so far, as is necessary to permit the specific action so taken
or authorized.
APPROVED:
/s/ Michael A. Reindl
---------------------------
Secretary
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AUDIT COMMITTEE RESPONSIBILITIES
EXHIBIT A
STATE FINANCIAL SERVICES CORPORATION
SUMMARY OF AUDIT COMMITTEE RESPONSIBILITIES
1. Primary Functions and Responsibilities. The Audit Committee is
established to assist in monitoring the independence of the Corporation's
outside auditors and thereby promote objectivity in the Corporation's financial
reporting. The Audit Committee shall serve as the liaison between the
Corporation's outside auditors and its Board of Directors. The Audit Committee
shall have responsibility for the following primary functions:
(a) To recommend the particular outside accounting firm to be
employed by the Corporation as its independent auditors, approve their
compensation and review and approve their discharge of duties;
(b) To consult with the outside auditors with regard to the audit
scope and plan of audit;
(c) To review, in consultation with the outside auditors, their
report of audit, or proposed report of audit, and the accompanying management
letter, if any.
(d) To consult with the outside auditors periodically, as the Audit
Committee deems appropriate, outside the presence of the Corporation's
management, with regard to the adequacy of the Corporation's internal controls.
In performing the foregoing functions, the Audit Committee should
review in particular any areas where the Corporation's management and its
outside auditors disagree and the manner in which such disagreements were
resolved. The Audit Committee should determine whether the outside auditors were
generally satisfied with the audit and bring to the attention of the
Corporation's Board of Directors any problems identified during the course of
the audit.
2. Special Functions and Responsibilities. In addition to the above
primary functions of the Audit Committee, the Audit Committee also shall be
responsible for the following functions:
(a) To conduct special investigations regarding the Corporation's
financial matters.
(b) To confirm and ensure the independence of the internal audit
department, if any, and the independent accountant, including a review of
management consulting services and related fees provided by the independent
accountant.
(c) To review and update the Audit Committee's charter annually.
(d) To inquire of management and the independent accountant about
significant risks or exposures and assess the steps management has taken to
minimize such risk to the Corporation.
(e) To review with management and the independent accountant at the
completion of the annual examination:
(i) The Corporation's annual financial statements and related
footnotes.
(ii) The independent accountant's audit of the financial
statements and their report thereon.
(iii) Any significant changes required in the independent
accountant's audit plan.
(iv) Any serious difficulties or disputes with management
encountered during the course of the audit.
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AUDIT COMMITTEE RESPONSIBILITIES
(v) Other matters related to the conduct of the audit which are
to be communicated to the Audit Committee under generally accepted auditing
standards.
(f) To consider and review with management:
(i) Any difficulties encountered in the course of audits,
including any restrictions on the scope of work or access to required
information.
(ii) Any changes required in the planned scope of the audit
plan.
(iii) The adequacy of the Corporation's internal controls,
including computerized information system controls and security.
(g) To review legal and regulatory matters that may have a material
effect on the financial statements, related Corporation compliance policies and
programs and reports received from regulators.
(h) To report Audit Committee actions to the Board of Directors with
such recommendations as the Audit Committee may deem appropriate.
(i) The Audit Committee will perform such other functions as
assigned by law, the Corporation's Articles of Incorporation or By-Laws, or the
Board of Directors.
3. Relationship With the Board of Directors. The Board of Directors
shall review annually the scope of responsibilities of the Audit Committee and
the effectiveness with which the Audit Committee has carried out its
responsibilities during the foregoing year. The Audit Committee shall report to
the Board of Directors and shall have such power and authority as is necessary
for it to fulfill its responsibilities. The Audit Committee shall perform such
functions and retain such authority until otherwise provided by the Board of
Directors or unless any such matter is specifically approved by the Board of
Directors. The Chief Financial Officer of the Corporation shall be responsible
for providing all information requested by the Audit Committee to perform its
duties as set forth herein.
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EXHIBIT B
COMPENSATION COMMITTEE
POWERS AND RESPONSIBILITIES OF THE COMPENSATION COMMITTEE
1. Primary Functions, Powers and Responsibilities.
(a) Primary Functions. To the extent not otherwise provided in
the applicable Plan documents or the Corporation's By-Laws, the members of the
Compensation Committee shall be fiduciaries for the Plans and shall have
authority to and shall: (i) have authority to and shall be responsible for the
claims administration of the Plans; (ii) conduct the business and activities of
the Plans in accordance with the provisions of the Plan documents and these
ByLaws; and (iii) determine the annual base salary and other remuneration for
the officers of the Corporation, including the granting of any options or other
awards pursuant to any incentive plans adopted by the Corporation.
(b). Powers. The Compensation Committee shall have such powers
as may be necessary to discharge their responsibilities in administering benefit
claims under the Plans, and shall also determine the annual base salary and
other remuneration of the officers of the Corporation. The Compensation
Committee shall have full and complete authority and control over the Plans
unless such authority or control is allocated or delegated otherwise. Any
determination made by the Compensation Committee in the exercise of these powers
shall be binding upon all persons. The Compensation Committee shall have full
and complete authority and control over the determination of entitlement to
compensation under the Plans.
(c) Responsibilities. In connection with their operation and
administration of the Plans, unless the following responsibilities are allocated
or delegated otherwise, the Compensation Committee shall:
(i) Determine the right of any person to a benefit. In the
exercise of this responsibility, the Compensation Committee shall provide every
applicant whose application for benefit is denied wholly or partially with a
written notice setting forth the reason or reasons for the denial and any
additional information required by applicable law. Further, the Compensation
Committee shall adopt a written appeal procedure which shall provide a claimant
with a reasonable opportunity to appeal a full or partial denial of a benefit
application.
(ii) Maintain books of account, records and other data as
may be necessary for the proper administration and operation of the Plans, and a
record of all transactions, meetings and the actions taken at meetings or by
informal action of the Compensation Committee, including minutes of all
Compensation Committee meetings. A copy of the minutes of the Compensation
Committee meetings shall be retained as a record of the Plans. All of said
books, records and data shall be available at the office of the Compensation
Committee during business hours for inspection by authorized representatives of
the Corporation.
(iii) Prepare, execute, file and retain a copy for the
Plans' records of all reports required by law or deemed by them to be necessary
or appropriate for the proper administration of the Plans.
2. Special Powers. In addition to such powers as are conferred by law
or as set forth elsewhere, the powers of the Compensation Committee in
connection with their managing and controlling claims under the Plans shall
include, but shall not be limited to, the following:
(a) Engage Experts. To employ suitable agents, advisors and counsel
as they may deem necessary and advisable for the efficient operation and
administration of benefit claims under the Plans and to employ one or more
persons to render advice with regard to any responsibility or power of the
Compensation Committee. The cost of such services and other administrative
expenses shall be paid by the Plans, to the extent permitted by applicable law.
(b) Post-Plan Termination. To continue to have and to exercise after
the termination of the Plans, and until final distribution of all assets, all of
the powers, discretions, rights and duties conferred or imposed upon the
Compensation Committee hereunder, or by law.
(c) Plan Participants. To determine, from time to time, who shall be
participants; the nature, type
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COMPENSATION COMMITTEE RESPONSIBILITIES
and character of the compensation to be provided under the Plans and the medium
by which such Compensation shall be provided.
(d) Interpret Plan Documents. To construe and interpret the
Plan documents.
(e) Receive Information. To receive from the Corporation or
the participants or their beneficiaries or dependents such information as shall
be necessary for the proper administration of the Plans.
(f) Administration Reports. To furnish the Corporation, upon
request, such reports with respect to the administration of the Plans as are
reasonable and appropriate.
(g) Establish Procedures. To prescribe procedures to be
followed by any persons in applying for any compensation under the Plans, and to
designate the forms or documents, evidence and such other information as the
Compensation Committee may reasonably deem necessary, desirable or convenient to
support an application for Compensation under the Plans.
(h) Establish Eligibility Standards. To adopt such By-Laws,
rules, regulations, actuarial tables, forms and procedures from time to time as
they deem advisable and appropriate in the proper determination of eligibility
for Compensation under the Plans, provided the same are consistent with the
terms of the Plan documents and the By-Laws.
(i) Purchase Insurance. To the extent such as is consistent
with the provisions of the Employee Retirement Income Security Act of 1974
("ERISA") section 410(b), to purchase out of the assets of the Plans insurance
for the benefit of the Plans and/or the protection of the Compensation Committee
against any losses by reason of errors or omissions or breach of fiduciary duty.
(j) Enter Into Contracts. To enter into any and all contracts and
agreements for carrying out the terms of the Plans; for the determination of
eligibility for compensation under the Plans; to do all acts as they, in their
discretion, may deem necessary or advisable; and such contracts and agreements
and acts shall be binding and conclusive on the parties hereto and on the
participants involved.
(k) General Discretion. To do all acts, whether or not expressly
authorized herein, which the Compensation Committee may deem necessary or proper
in connection with the Plans, although the power to do such acts is not
specifically set forth herein.
Notwithstanding any provisions set forth in this Paragraph 2 to the
contrary, the Compensation Committee shall exercise any power in any manner
which is consistent with the applicable provisions of Title I ERISA.
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EXHIBIT C
NOMINATING COMMITTEE
POWERS AND RESPONSIBILITIES OF THE NOMINATING COMMITTEE
Primary Functions and Responsibilities. The Nominating
Committee is established to provide a slate of candidates to fill new seats on
the Board of Directors or vacancies that occur from time to time and a slate of
candidates for the Board of Directors to be recommended for election by the
shareholders of the Corporation. The Nominating Committee shall report its
nominations to the Board of Directors not less than 90 days prior to the date of
the annual shareholder meeting and not less than 30 days prior to the date of
the meeting of the Board of Directors at which the nomination of candidates is
scheduled to be addressed.
<PAGE> 1
EXHIBIT 10.19
OFFICE LEASE
This Lease is made and executed by and between Upland Farms, hereinafter
referred to as Lessor, and Richmond Bank, hereinafter referred to as Lessee.
This Lease formalizes the Lessors forgiveness of historical CPI increases from
July 31, 1993 through July 31, 1996 as previously agreed by both the Lessee and
Lessor. The new rate is deemed competitive and a reduction of previously agreed
rates and is fixed for the remaining six years of the original ten year term,
extending the terms of this contract for an additional four years.
1. DESCRIPTION OF PREMISES. Lessor leases to Lessee the premises located at
1509 North Milwaukee Avenue, Libertyville, Illinois, depicted on the plat
attached hereto and made a part hereof, consisting of approximately 2,690
square feet, which represents eleven (11%) percent of the total rentable
square footage in said building.
2. TERM. The term of this Lease is ten years beginning August 1, 1996 and
ending on July 31, 2006.
3. BASE RENT.
I. Lessee agrees to pay Lessor at the rate of $11.33 per sq. ft. on
2,690 square feet of office space and for the base rent the sum of
$91,432.98 for the term of the lease, in equal monthly
installments of $2,539.80.
4. ADDITIONAL RENT.
A. TAXES. The Lessee shall pay his proportionate share of the real estate
taxes. Said adjustment shall be made after tax bills are received from
the County Collector. In any year that the Lessee shall occupy the
premises for less than a full year, the Lessee shall pay his prorata
portion of the taxes based upon the last ascertainable tax bill. Lessee
shall also pay his proportionate share of any special taxes or levies
assessed against said property. Said taxes shall be paid monthly with
each rent payment.
B. COMMON AREA MAINTENANCE. In addition, Lessee shall pay as additional
rent Lessee's proportionate share of the common area maintenance
assessed against the property on which the premises are located during
the lease term. Common area maintenance expenses shall include but not
be limited to those expenses incurred for the maintenance and repair of
the structure; parking area; heating and air-conditioning units; fire,
extended coverage and general liability insurance; scavenger service;
snow removal service; landscaping; utilities and other like expenses.
The Lessee's portion of the estimated common area maintenance expense
shall be paid monthly with each rent payment.
C. PRO RATA EXPENSES. Lessee's pro rata expenses shall be determined as
the percentage that the number of square feet in the leased premises
bears to the total rentable square feet in the building.
5. REPAIR AND MAINTENANCE. Lessee has examined the premises and acknowledges
that the premises are in good order and repair. Lessee, at his expense,
shall maintain and keep the premises, including, without limitation,
windows, doors, store front and interior walls, in good repair. Lessee
shall also maintain lighting, heating, air-conditioning and plumbing
fixtures and apparatus. Lessee shall commit no act of waste and shall take
good care of the premises and the fixtures and appurtenances therein and
shall, in the use of the occupancy and premises, conform to all laws,
orders and regulations of the federal, state and municipal governments or
any of their departments.
All improvements made by Lessee to the premises which are attached to the
premises so that they cannot be removed without material injury to the
premises shall become the property of the Lessor upon installation. Not
later than the
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last day of the term, Lessee shall, at Lessee's expense, unless otherwise
agreed to by Lessor, remove all of Lessee's personal property and those
improvements made by Lessee which have not become the property of Lessor,
including trade fixtures, cabinets, movable paneling, partitions and the
like; repair all injury done by or in connection with the installation or
removal of such property and improvements; surrender the premises in as
good condition as they were at the beginning of the term; reasonable wear,
damage by fire, the elements, casualty, or other cause not due to the
misuse or neglect by Lessee, Lessee's agents, employees, visitors or
licensees excepted. All property of Lessee remaining on the premises after
the last day of the term of this Lease shall be conclusively deemed
abandoned and may be removed by Lessor and Lessee shall reimburse Lessor
for the cost of removal.
6. CONDITIONS OF LESSOR'S LIABILITY. The Lessor shall not be liable for any
damage occasioned by failure to keep the premises in repair, and shall not
be liable for any damage done or occasioned by or from plumbing, gas,
water, steam, or other pipes, sewerage, or the bursting, leaking or running
from any cistern, tank, wash stand, water closet or waste pipe in, above,
upon or about the premises, nor for damage occasioned by water, snow or
ice, being upon or coming through the roof, trap door or otherwise, nor for
any damage arising from acts or neglect by owners or occupants of adjacent
or contiguous property.
7. ALTERATIONS, ADDITIONS OR IMPROVEMENTS. Lessee shall not, without first
obtaining the written consent of Lessor, make any alterations, additions or
improvements in, to, or on and about the premises.
8. INSURANCE. Lessee shall procure and maintain in force during the term of
this Lease and any extension thereof, at his expense, public liability
insurance in companies approved by Lessor, adequate to protect against
liability for damage claims through public use of or arising out of
accidents occurring in or around the leased premises, in a minimum amount
of $500,000.00 for each person injured, $1,000,000.00 for any one accident,
and $100,000.00 for property damage. Such insurance policies shall provide
coverage for Lessor's contingent liability on such claims or losses. The
policies shall be delivered to Lessor for keeping. Lessee agrees to obtain
a written obligation from the Insurers to notify Lessor in writing at least
thirty (30) days prior to cancellation or renewal of such policies. Lessee
agrees that if such insurance policies are not kept in force during the
entire term of this Lease and any extension thereof, Lessor may procure the
necessary insurance and pay the premium therefor, and that such premium
shall be repaid to Lessor as an additional rent installment for the month
following the date on which such premiums are paid.
9. NO USE THAT INCREASES INSURANCE RISK. Lessee shall not use the premises in
any manner, even in his use for the purpose for which the premises are
leased, that will increase risks covered by insurance on the building where
the premises are located so as to increase the rate of insurance on the
premises or to cause cancellation of any insurance policy covering the
building. Lessee further agrees not to keep on the premises, or permit to
be kept, used or sold thereon, anything prohibited by the policy of fire
insurance covering the premises. Lessor shall comply, at his own expense,
with all requirements of insurers necessary to keep in force the fire and
public liability insurance covering the premises and building.
10. DAMAGES TO BUILDING. If the building is damaged by fire or any other cause,
and if the premises shall not be reasonably usable for the purposes for
which they are leased hereunder, then Lessee may no later than the 30th day
following the damage give Lessor notice of election to terminate this
lease. In the event of election, this lease shall be deemed to terminate on
the date of the occurrence causing such damage. Lessee shall surrender
possession of the premises within a reasonable time thereafter and the
rent, and any additional rent, shall be apportioned as of the date of
surrender. Any rent paid for any period beyond such date shall be repaid to
the Lessee.
If Lessor does not elect to terminate this lease, Lessor shall restore the
building and the premises with reasonable promptness, subject to delays
beyond Lessor's control and the delays in the making of insurance
adjustments between Lessor and his insurance carrier, and Lessee shall have
no right to terminate this Lease except as herein provided. Lessor need not
restore fixtures and improvements owned by Lessee. In any case in which the
use of the premises is affected by any damage to the building, there shall
be either an abatement or an equitable reduction in rent depending on the
period for which and the extent to which the premises are not reasonably
usable for the purposes for which they are leased hereunder. If the damage
results from the fault of Lessee, or Lessee's agents, employees, visitors
or licensees, Lessee shall not be entitled to any abatement or reduction of
rent except to the extent, if any, that Lessor receives the proceeds of
rent insurance in lieu of such rent.
2
<PAGE> 3
11. EMINENT DOMAIN. If the premises or any part therein, or any other part of
the building materially affecting Lessee's use of the premises, shall be
taken by eminent domain, this lease shall terminate on the date when title
vests pursuant to such taking. The rent, and any additional rent, shall be
apportioned as of the termination date, and any rent paid for any period
beyond that date shall be repaid to Lessee. Lessee shall not be entitled to
any part of the award for such taking or any payment in lieu thereof, but
Lessee may file a claim for any taking of fixtures and improvements owned
by Lessee and for moving expenses.
12. DEFAULT OF TENANTS.
A. LATE PAYMENT. A late payment charge to cover administrative expenses of
10% of the monthly rental including additional rental will be assessed
if the rent payment is not received by the 5th of the month.
B. If Lessee defaults in the payment of rent, or any additional rent, or
defaults in the performance of any of the other covenants or conditions
hereof, Lessor may give Lessee notice of such default and if Lessee
does not cure any rent, or additional rent default within five (5)
days, or other default within ten (10) days after the giving of such
notice, then Lessor may terminate this lease. On the date specified in
such notice the term of this Lease shall terminate and Lessee shall
then quit and surrender the premises to Lessor but Lessee shall remain
liable as hereinafter provided.
C. Lessee shall pay upon demand all Lessor's costs, charges and expenses,
including fees of attorneys, agents and others retained by Lessor,
incurred in enforcing any of the obligations of Lessee under this Lease
or in any litigation, negotiation or transaction in which Lessor shall,
without Lessor's fault, become involved through or on account of this
Lease.
13. SECURITY DEPOSIT. Lessee shall pay a security deposit to Lessor in the sum
of $2539.80 as security for its obligations under this Lease, including
without limitation the surrender of possession of the premises to Lessor as
herein provided. If Lessor applies any part of the deposit to cure any
default of Lessee, Lessee shall on demand deposit with Lessor the amount so
applied so that Lessor shall have the full deposit on hand at all times
during the term of this Lease.
14. ASSIGNMENT OR SUBLEASE. Lessee shall not without first obtaining the
written consent of Lessor assign, mortgage, pledge or encumber this lease,
in whole or in part, or sublet the premises or any part thereof. This
covenant shall be binding on the legal representatives of Lessee, and on
every person to whom Lessee's interest under this lease passes by operation
of law, but it shall not apply to an assignment or subletting to the parent
or subsidiary of a corporate Lessee or to a transfer of the leasehold
interest occasioned by a consolidation or merger involving such Lessee.
15. UTILITIES. Lessor shall provide or cause to be provided separate meters for
gas, water and electricity for the leased premises and all such utilities
for the leased premises shall be billed to and paid directly by Lessee. In
the event of the failure of Lessee to pay said utility bills, Lessor shall
have the right to pay the same.
16. PARKING. Lessee, shall have the non exclusive right to use the parking
spaces provided at said building. Employees and licensees of Lessee shall
park in the farthest spaces, thus providing convenient parking
accommodations for the clients of this office building. No trucks belonging
to Lessee, to suppliers of Lessee, or to delivery agents of Lessee shall be
permitted to remain parked in the parking area at any time.
17. SIGNS. Lessee shall be entitled to place identification signs on the
monument sign located on the premises to be used in conjunction with other
tenants of the building. All signs shall be in conformance with the Village
of Libertyville Sign Ordinance and shall be subject to the written approval
of Lessor. Lessee further agrees not to place any signs in windows, or so
the signs are visible from the exterior without Lessor's written consent
and Lessee agrees to remove signs, displays, advertisements or decorations
that it has placed on the premises which in Lessor's opinion are offensive
or otherwise objectionable. If Lessee fails to remove such signs, displays,
advertisements or decorations within two (2) days after receiving written
notice from Lessor to remove the same, Lessor reserves the right to enter
premises and remove them at Lessee's expense.
3
<PAGE> 4
18. SURRENDER OF PREMISES AND HOLDOVER. Lessee agrees to accept the premises on
possession as being in a good state of repair and in sanitary condition.
Lessee shall surrender the premises at the end of the lease term if the
lease is not renewed in the same condition as when he took possession,
allowing for reasonable use and wear, and damage by acts of God, including
fire and storms. Lessee shall remove all business signs or symbols placed
on the premises by him before redelivery of the premises to Lessor and
shall restore the portion of the premises on which they were placed in the
same condition as before their placement. If Lessor fails to surrender
possession as required, such holding over shall constitute a tenancy at
sufferance at a rent of $200.00 per day for each day Lessee remains in
possession.
19. SUBORDINATION TO MORTGAGE. This Lease is subordinate at all times to the
lien of existing and future mortgages on the leased property. Although no
instrument or act on the part of the Lessee shall be necessary to
effectuate such subordination, the Lessee will nevertheless, execute and
deliver such further instruments subordinating this Lease to the lien of
any such mortgages as may be desired by the mortgagee, provided, however,
that any future mortgages shall not provide for payments in excess of the
amount of the rent required to be paid by the Lessee under the terms of
this Lease. Lessor shall have the right if Lessee defaults in said payments
to make said payments and deduct the amount from the rental payments.
20. ESTOPPEL CERTIFICATE. Lessee shall within ten (10) days after each written
request from Lessor, execute and deliver an estoppel letter with respect to
this Lease in form and substance satisfactory to Lessor signed by an
officer or partner of Lessee. Lessee's failure to deliver such statement
within said ten (10) day period shall be conclusive upon Lessee that this
lease is in full force and effect, without modification.
21. INTEREST ON DEFAULT. All amounts owing to Lessor under this Lease for which
the date of payment is not expressly fixed, shall be paid within ten (10)
days after the date Lessor renders appropriate statements of account.
Lessee shall pay Lessor interest on any delinquent rent or other sums owing
under this Lease at a rate equal to eighteen percent (18%) per annum from
the date due until paid.
22. NOTICES. All notices and approvals to be given by one party to the other
party under this Lease shall be given in writing, mailed or delivered as
follows:
Lessor: Upland Farms, Inc.
1509 North Milwaukee Avenue
Libertyville, Illinois 60048
Lessee: Richmond Bank
1509 North Milwaukee Avenue
Libertyville, Illinois 60048
4
<PAGE> 5
Notices shall be delivered by hand or by United States certified mail, postage
prepaid, return receipt requested. Notices shall be considered to have been
given upon personal delivery to the addressee or upon posting in the United
States mails as required herein.
In Witness our signatures this 1st day August of 1996.
LESSOR: LESSEE:
Upland Farms, Inc. Richmond Bank
c/o Charles F. Wonderlic c/o Charles F. Wonderlic
1509 North Milwaukee Avenue 1509 North Milwaukee Avenue
Libertyville, Illinois 60048 Libertyville, Illinois 60048
By: /s/ Charles F. Wonderlic By: /s/ Charles F. Wonderlic
The undersigned in consideration of the Lessor entering into the lease with the
Corporation does hereby personally guarantee the performance of all of the terms
and covenants contained in said lease including the payment of costs and
attorney's fees in the event of default.
By: /s/ Melida Torres By: /s/ Ronald B. Clonts
5
<PAGE> 1
EXHIBIT 13
Profile
The Company
State Financial Services Corporation is a Wisconsin Corporation
headquartered in Hales Corners, Wisconsin. State Financial Services Corporation
(the "Company") is a three-bank holding company operating State Financial Bank,
State Financial Bank-Waterford and Richmond Bank with eleven offices among them
throughout Southeastern Wisconsin and Northeastern Illinois. In addition, The
Company operates State Financial Mortgage Company, Richmond Financial Services
Inc. and State Financial Insurance Agency.
The Employees
The Company and its member banks remain focused on community banking with
the "people" who make up the organization our guiding philosophy. Focusing on
people includes our employees, our customers and you our shareholders.
Financial Performance
At December 31, 1997, State Financial Services Corporation reported total
assets of $421.2 million, total loans of $267.8 million and total stockholder
equity of $38.5 million. The Company's stock is traded on the Nasdaq National
Market System under the symbol SFSW.
Corporate Philosophy
The Company provides a full range of financial service products. We see
our opportunities as a community bank becoming stronger as consumer's search
for banks intent on keeping the person in personalized service. In an industry
where technology is such a critical partner in our success we remain focused on
Putting People First.
Table of Contents
<TABLE>
<S> <C> <C>
Financial Highlights.............................. Page 1
Letter to Shareholders............................ Page 2
Selected Consolidated Financial Data ............. Page 6
Management's Discussion and Analysis of Financial. Page 7
Condition and Results of Operations
Report of Management ............................. Page 23
Report of Independent Auditors ................... Page 23
Consolidated Balance Sheets ...................... Page 24
Consolidated Statements of Income................. Page 25
Consolidated Statements of Stockholders Equity.... Page 26
Consolidated Statements of Cash Flow ............. Page 27
Notes to Consolidated Financial Statements ....... Page 28
Investor Information ............................. Page 40
Directors and Officers............................ Page Inside Back Cover
</TABLE>
<PAGE> 2
FINANCIAL HIGHLIGHTS State Financial Services Corporation
<TABLE>
<CAPTION>
1997 1996 % Change
-------- -------- --------
<S> <C> <C> <C>
Operating Results
Net income $ 4,374 $ 4,006 9.18
Return on average assets 1.42 1.39 2.15
Return on average equity 11.84 11.78 0.5
Net interest margin 5.33 5.27 1.13
Per Share Information
Earnings $ 1.16 $ 1.07 8.41
Dividends 0.4 0.33 20
Book value at year end 9.96 9.26 7.55
Market value at year end 22.4 13.89 61.26
Financial Condition
Total assets $421,278 $301,999 39.49
Net loans 267,819 201,671 32.79
Total deposits 367,492 254,657 44.3
Shareholders' equity 38,548 35,527 8.5
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
[BAR GRAPH]
EARNINGS AND DIVIDENDS PER SHARE
1993 1994 1995 1996 1997
DIVIDENDS $ 0.23 $ 0.24 $ 0.28 $ 0.33 $ 0.40
EPS $ 1.09 $ 0.88 $ 1.00 $ 1.13 $ 1.28
[BAR GRAPH]
TOTAL ASSETS
1993 1994 1995 1996 1997
$226,638 $226,144 $286,050 $301,999 $421,278
[BAR GRAPH]
TOTAL DEPOSITS
1993 1994 1995 1996 1997
$199,768 $197,401 $246,218 $254,657 $367,492
[BAR GRAPH]
MARKET VALUE SHARE
1993 1994 1995 1996 1997
$ 7.68 $ 8.39 $ 9.98 $ 13.89 $ 22.40
[BAR GRAPH]
GROSS LOANS
1993 1994 1995 1996 1997
$130,254 $143,813 $185,754 $201,671 $267,819
[BAR GRAPH]
NET INCOME
1993 1994 1995 1996 1997
$ 2,275 $ 2,807 $ 3,279 $ 4,006 $ 4,374
</TABLE>
<PAGE> 3
A LETTER TO OUR SHAREHOLDERS
To Our Fellow Shareholders:
1997 proved to be another positive year for State Financial Services
Corporation. Our financial performance again exceeded the successes of last
year and we share your enthusiasm for the market appreciation in our stock and
increases in shareholder value.
External growth contributed to our success with the opening of the
Burlington office in May and the acquisition of Richmond Bank in December. Both
of these important steps helped in our strides toward achieving two long range
goals of growth through new locations for our current banks and acquisition.
These new markets enable our corporation to expand the number of communities we
serve while allowing us to continue our focus in community banking.
We could point to many reasons for our success. Proper planning, hard work
and a strong market have all been important factors. However, we believe our
slogan as stated on the front cover really says it all, people have made us
what we are today. Our achievements are rewarding, but the people that make up
State Financial Services Corporation, and the banks we operate, give us the
most pride.
WE PUT PEOPLE FIRST, is a slogan with varying meanings for all of us at
State Financial Services Corporation. As should be the case, our customers
always come first. In an age when technology can enhance the types of products
we provide and increase response time, we work hard to ensure personalized
customer service is not sacrificed. You, our investors, are very important as
well. Your long term vision, financial support and willingness to stay the
course has proven beneficial.
For the purpose of this annual report, we'd like to focus on the people in
the lobbies, behind the scenes and who answer the telephones. Without the
support and dedication of the employees at each of our offices we would not
continue to grow in the manner we have enjoyed and would not be able to make
the commitments to the community that we are privileged to serve.
Our staff invests hundreds of volunteer hours in the community. They march
in various parades on the Fourth of July and Christmas, host booths at trade
shows, help those less fortunate during the holidays and serve on a variety of
civic and charitable organizations. This year's annual report is dedicated to
those individuals that make this all possible, our employees.
2
<PAGE> 4
We are also very fortunate to benefit from an unusually loyal and tenured
staff that most businesses don't see today. Therefore, we have established a
twenty-five-year club to recognize the service of those currently employed and
others who have since retired. A picture of those individuals can be found in
the back of this report.
In 1997, we also realized the full impact of State Financial Mortgage
Company. The growth in secondary mortgage loans has contributed in a very
productive way to non-interest income.
In addition, emphasis on expanding electronic payment systems with a
reevaluation of our TYME Card service and a mass issue of our Access Card have
all helped gain efficiencies in these areas. At the same time, we're
continually looking for ways our customers can improve their banking
relationship with us; for that reason, we have joined a network of banks
offering surcharge free TYME transactions to our customers at 150 ATM locations
throughout the state.
The numbers in this annual report speak for themselves. A few of the
highlights include record earnings of $4,374,000, total assets in excess of
$420 million, return on average assets of 1.42% and a return on average equity
of 11.84%.
We look forward to 1998 as we develop even further the opportunities in
our newest offices as well as our established locations. We maintain a long
term perspective as we move ahead and appreciate your support as we continue to
build toward the future.
Cordially,
<TABLE>
<S> <C>
/s/ J.J. Holz /s/ Michael J. Falbo
J.J. Holz Michael J. Falbo
Chairman of the Board President and Chief Executive Officer
</TABLE>
3
<PAGE> 5
WE PUT PEOPLE FIRST
"WE PUT PEOPLE FIRST." This is more than a slogan to all of us at State
Financial Services Corporation. In a time when technology can easily lose sight
of the human side of our business, putting people first is the guiding
principle of operation that State Financial Services Corporation and its member
banks have embraced for many years.
It Begins with an Exceptional Staff
"When I started at the bank, I was just out of high school and single"
said Diane Zwicke, now a member of the 25-year club. "When I married and began
to have children everyone at the bank really worked with me." They wanted to
make sure I was able to balance my career and my family life. She went on to
say, "This really is like my second family, I've had many different
responsibilities and have enjoyed all the opportunities I've been given."
"I believe that we live the motto of 'putting people first'" says Marcy
Schneider, Assistant Vice President and Personal Banking Officer in Glendale.
"The focus has to be the customer and their feelings. Hopefully, we provide an
atmosphere where the customers can speak their minds and be heard. We want to
serve them. Our banks will succeed because our employees believe and act true
to the phrase "people first," Schneider said.
Clearly, making all customers welcome, acknowledging and appreciating
their business is an integral part of the success of State Financial Services
Corporation. Without the enduring support and confidence of you, our customers
and shareholders, our success would not be so evident.
Working behind the scenes, Sue Dailey of the Account Information Center
communicates with customers via telephone. "Being a small bank we have more
contact with the customers and treat them as people, not account numbers" said
Dailey.
Returning from an extended illness Dailey received a call from a customer.
"She was so happy to know I was back and well." Dailey said. "I was surprised
by her reaction. I apparently helped her at onetime, although I don't remember
the specifics, she did remember and appreciated the manner in which I helped
her." Dailey continued, "her genuine concern over my well being was surprising
and gratifying. Working with our customers and meeting their needs is what
makes our jobs most rewarding."
4
<PAGE> 6
Sue Dubs, President of Richmond Bank, is among the newest members of the
State Financial Family. "The merger of our two banks is good for both
institutions, the philosophies are the same. Richmond has been a community bank
for over 75 years. We'll be able to build on a strong foundation with new
opportunities to serve our community and our customers while continuing to put
people first," Dubs said.
Over the years many people have joined the banks of State Financial
Services Corporation. In the back of this 1997 Annual Report, you will see
pictured members of our 25-year club. We are very proud of them for the service
they have provided our customers and the examples they set for our staff. They
set the pace for the slogan "Putting People First."
Proud to be Involved with the Community
Our team of employees volunteer hundreds of hours each year in the
community. Although we've grown in size over the past few years, we've
maintained our focus on the communities we're privileged to serve. Whether its
marching in various parades, collecting teddy bears for local law enforcement
officers to calm traumatized children or helping those less fortunate, our
staff is genuinely committed to making the communities we serve the best they
can be.
In Waterford, Fran Morrical, the bank's Cashier, is pleased to be involved
in the activities of her local community. "I love dealing with people and
helping them in whatever manner they need" said Morrical. "We are very
community-minded. The bank supports parades in Waterford and Burlington. We
donate to special projects at area schools and help civic organizations."
"Is this good for business? Sure," says Morrical, "but more importantly it
is good for the community. State Financial is a very caring organization. The
Company cares about its employees and the customers that bank with us. What
more can you ask for?" Morrical concluded.
Across a wide variety of communities in Southern Wisconsin and Northern
Illinois, State Financial Services Corporation is proud of our track record and
on-going commitment in the neighborhoods we serve. In addition to our
involvement, we encourage others to do the same through the Volunteer Touch
program with the Volunteer Center of Greater Milwaukee.
Putting people first is more than a slogan to write on paper. It is the
philosophy carried out by 200 dedicated individuals who work hard each day at
all State Financial locations.
5
<PAGE> 7
MANAGEMENT'S DISCUSSION
Selected Consolidated Financial Data
The following table sets forth selected financial data of State Financial
Services Corporation (hereinafter referred to as the"Company") and its
subsidiaries on a consolidated basis for the last five years (dollars in
thousands, except per share data):
<TABLE>
As of or for the years ended December 31,1
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Condensed Income Statement:
Total interest income (taxable
equivalent)2 $ 24,714 $ 22,876 $ 19,782 $15,701 $14,820
Total interest expense 9,522 8,752 7,336 4,773 4,853
-------- -------- -------- ------- ------
Net interest income 15,192 14,124 12,446 10,928 9,967
Provision for loan losses 330 210 190 120 147
Other income 3,376 3,060 2,481 2,438 2,234
Other expense 11,193 10,512 9,460 8,956 8,437
-------- -------- -------- ------- ------
Income before income tax 7,045 6,462 5,277 4,290 3,617
Income tax 2,159 2,003 1,579 1,010 876
Less taxable equivalent adjustment 512 453 419 473 466
-------- -------- -------- ------- ------
Net income $4,374 $4,006 $ 3,279 $2,807 $2,275
-------- -------- -------- ------- ------
Per share data3:
Net income $1.16 $1.06 $ 0.94 $0.83 $0.73
Cash dividends declared 0.4 0.33 0.28 0.24 0.23
Book value 9.96 9.26 8.49 7.63 7.24
Balance sheet totals (at period end):
Total assets 421,278 301,999 286,050 226,144 226,638
Loans, net of unearned discount 267,819 201,671 185,754 143,813 130,254
Allowance for loan losses 3,306 2,608 2,711 1,983 2,084
Deposits 367,492 254,657 246,218 197,401 199,768
Long-term debt 5,300 962 1,062 115 228
Shareholders' equity 38,548 35,527 32,381 26,169 24,756
Financial and Regulatory Ratios:
Asset growth 39.50% 5.58% 26.49% -0.22% 11.40%
Return on average assets 1.42 1.38 1.32 1.27 1.09
Return on average equity 11.84 11.78 11.22 11.02 10.33
Dividend payout ratio 34.73 31.46 29.5 29.12 31.78
Tier 1 risk-based capital ratio 10.79 16.26 16.06 17.6 16.62
Leverage ratio 9.58 11.45 10.95 11.75 10.79
Allowance for loan losses 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
Net charge-offs to average loans 0.15 0.16 0.12 0.16 0.09
</TABLE>
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 the Company on December 31, 1997. Amounts
include balances and results of operations of State Financial Bank -
Waterford since the effective date of its acquisition by the Company on
August 24, 1995 and 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 the Company's historical experience, is used in
the conversion of tax-exempt interest income to a taxable-equivalent
basis.
3. All per share information presented in this report has been retroactively
restated to give effect to the 6- for-5 stock split declared in January
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.
6
<PAGE> 8
Selected Quarterly Financial Data
The following table sets forth certain unaudited income and expense data
on a quarterly basis for the periods indicated (dollars in thousands, except
per share data).
<TABLE>
1997 1996
--------------------------------- ---------------------------------
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $6,232 $6,050 $5,992 $5,928 $5,745 $5,585 $5,598 $5,495
Interest expense 2,517 2,424 2,342 2,239 2,178 2,188 2,170 2,216
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 3,715 3,626 3,650 3,689 3,567 3,397 3,428 3,279
Provision for loan losses 83 83 82 82 52 53 52 53
Other income 897 885 843 751 800 814 769 677
Other expense 2,802 2,812 2,810 2,769 2,647 2,700 2,625 2,540
------ ------ ------ ------ ------ ------ ------ ------
Income before income tax 1,727 1,616 1,601 1,589 1,668 1,458 1,520 1,363
Income tax 522 547 546 544 539 489 517 458
------ ------ ------ ------ ------ ------ ------ ------
Net income $1,205 $1,069 $1,055 $1,045 $1,129 $ 969 $1,003 $ 905
------ ------ ------ ------ ------ ------ ------ ------
Net income per share $ 0.32 $ 0.28 $ 0.28 $ 0.28 $ 0.30 $ 0.26 $ 0.27 $ 0.24
Dividends per share 0.1 0.1 0.1 0.1 0.083 0.083 0.083 0.083
</TABLE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The following discussion is intended as a review of the significant
factors affecting the Company's financial condition and results of operations
as of and for the year ended December 31, 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 annual report.
On December 31, 1997, the Company completed its cash acquisition of
Richmond Bancorp, Inc. and its subsidiaries, Richmond Bank and Richmond
Financial Services, Inc. (collectively referred to as "Richmond"). Application
of purchase accounting requires the inclusion of Richmond's operating results
in the Company'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 the Company'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, the Company acquired State Financial Bank -Waterford
("Waterford"). Accounted for as a purchase, Waterford's operating results are
included in the Company's consolidated results from the date of acquisition.
Accordingly, the Company's Consolidated Statements of Income, and related
schedules in Management's Discussion and Analysis of Financial Condition and
Results of Operations include Waterford's results for the full year in 1997 and
1996 and from August 24 through December 31 in 1995.
In August 1993, the Company acquired the deposits and certain fixed assets
of a competing financial institution's Waukesha office in a transaction
accounted for as a purchase (the "Waukesha Office"). Accordingly, the operating
results associated with this acquisition are included in the Company's results
for the full year in 1997, 1996, 1995, and 1994 and from the date of
acquisition in 1993.
The Company's Balance Sheet Analysis in Management's Discussion and
analysis of Financial Condition and Results of Operations include Richmond at
December 31, 1997; 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 Waterford. Balance
sheet information for the Waukesha Office is included in the Company's
consolidated figures for all years presented herein.
7
<PAGE> 9
MANAGEMENT'S DISCUSSION
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income equals the difference between interest earned on
assets and the interest paid on liabilities and is a measurement of the
Company's effectiveness in managing its interest rate sensitivity. For the year
ended December 31, 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 the Company'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 the Company'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 the Company'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 the Company'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 the Company'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 the
Company's money market products resulting from continued balance growth in the
Company'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 the Company'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 the Company'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 the Company's cost of funds during the year.
The Company'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 the Company's
interest-earning assets deployed in loans, the full year inclusion of
Waterford's results in the Company's consolidated operating performance, and
internal growth.
8
<PAGE> 10
[BAR GRAPH]
NET INTEREST MARGIN
1995 1996 1997
5.44% 5.27% 5.33%
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 317,354 1,272 7.33 15,535 1,150 7.4 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 5.7 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 0 0 0 66 7 10.61
Federal funds purchased 1,822 105 5.76 379 22 5.8 427 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%
==== ==== ====
</TABLE>
1. For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
2. Interest earned on loans includes loan fees (which are not material in
amount) and interest income, which has been received from borrowers whose
loans were removed from nonaccrual during the period indicated.
3. Taxable-equivalent adjustments are made in calculating interest income and
yields using a 34% rate for all years presented.
9
<PAGE> 11
MANAGEMENT'S DISCUSSION
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:
Loans1,2 $1,758 ($19) $1,739 $2,680 ($368) $2,312
Taxable investment securities -69 144 75 633 111 744
Tax-exempt investment securities2 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
====== ====== ====== ====== ====== ======
</TABLE>
1. Interest earned on loans includes loan fees (which are not material in
amount) and interest income, which has been received from borrowers whose
loans were removed from nonaccrual during the period indicated.
2. Taxable-equivalent adjustments are made in calculating interest income and
yields using a 34% rate for all years presented.
Provision for Loan Losses
The provision for loan losses charged to earnings results from a quarterly
analysis of the Company's loan portfolio, including the amount of net
charge-offs incurred during the period, collateral value, the remaining balance
in the allowance, and management's analysis of risk inherent in the portfolio.
Management's risk analysis incorporates loan classifications assigned by
lending personnel and as the result of examinations conducted by the Company's
internal loan review officer. The Company's lending personnel and internal loan
review officer review all significant nonhomogeneous loans for adverse
situations that may affect the borrower's ability to repay. If it appears
probable that the borrower will be unable to make scheduled principal and
interest payments, an allowance is established based on the difference between
the carrying value and the anticipated cash flows discounted at the loan's
initial effective interest rate or the fair value of the collateral for
collateral dependent loans. For homogeneous loans, the allowance is based on
the loan classification and historical loss experience for each classification.
The provisions for loan losses were $330,000, $210,000, and $190,000, for the
years ended December 31, 1997, 1996, and 1995, respectively. The Company
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 the Company's loan portfolio. The increased provisions in 1996 were
the result of the full year inclusion of Waterford's results in the Company's
consolidated operating performance.
10
<PAGE> 12
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
Waterford's results accounts for approximately $102,000 of this increase with
the remainder due to improvements at State Financial Bank during 1996. The
composition of other income is shown in the following table (dollars in
thousands).
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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 Waterford's full year inclusion in the Company's 1996
consolidated results, service charge income decreased $28,000 (2.8%) mainly due
to reduced personal service charge income during the year.
Merchant services are the fees the Company 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, the Company
added several new, high volume customers to its merchant services program and
additionally adjusted rates on its existing customer base which resulted in the
increase in 1996 merchant services income.
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 the
Company'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 the Company's automated teller
machines. In addition, the Company 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 $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 the
Company's network. ATM service charges decreased $10,000 in 1996 compared to
1995 due to reduced usage of the Company'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 the Company's new
subsidiary State Financial Mortgage Company.
During 1997, the Company incurred a small loss on the sale of two
investment securities to help fund the acquisition of Richmond Bancorp Inc. The
Company 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 Waterford's
results accounted for approximately $61,000 of the Company's 1996 increase in
other income. The remainder was mainly due to volume increases in investment
services commissions ($56,000) and the recognition of accumulated dividends on
corporate owned life insurance ($31,000), and gains from other real estate
sales ($20,000).
11
<PAGE> 13
MANAGEMENT'S DISCUSSION
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 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 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).
<TABLE>
Years ended December 31,
----------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
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
======= ======= ======
</TABLE>
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 the
Company's July 1997 acquisition of additional unallocated shares for its ESOP,
as well as, a contribution to the plan in 1997 mainly due to Waterford's first
year of inclusion in the ESOP. Exclusive of Burlington, State Financial
Mortgage Company, and the 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
Waterford in the Company's 1996 results accounted for $241,000 of this
increase. Absent 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 the Company 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 Waterford's results in 1996. Exclusive of Waterford, occupancy and equipment
expense increased $186,000 (10.3%) mainly due to additional expense for
depreciation and rent, offset by reduced, real estate tax expense during 1996.
Depreciation expense increased $175,000 due to the Company's 1996 installation
of upgraded computer equipment and a voice response unit offering customers 24
hour access to account information and from the May 1996 purchase of an
additional rental property. Rent expense increased $38,000 due to adjustments
in the amount of rent expense accrued on the Company's Glendale location. Real
estate taxes decreased $27,000 due to Wisconsin's property tax reform in 1996
which resulted in reduced assessments on the Company's real estate properties.
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 the Company'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, Waterford converted its
former in-house data processing system to the Company's data services provider
to enhance the Bank's data processing capabilities. The Company's increased
data processing expense incurred in 1996 was primarily due to Waterford's
additional expense related to out-sourcing this service.
12
<PAGE> 14
Legal and professional fees increased $8,000 (2.8%) in 1997 mainly due to
increased accounting fees for the Company's expansion over the past several
years. Legal and professional fees decreased $40,000 (12.2%) in 1996 as the
Company benefitted from the reimbursement of legal fees incurred in the
collection of several nonperforming loans and lower expense incurred for
accounting services during the year.
Merchant services expense results from providing the Company'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 the Company's customer base in this product line
and rate adjustments enacted by the Company's service provider during each
year.
ATM expense are fees charged by the Company's service provider for the
Company's customers use of automated teller machines that are not owned by the
Company. 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 State Financial Bank'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 Waterford and increased media advertising at
State Financial Bank, 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 Waterford's
expense in 1996's results, other expense decreased $20,000 due to lower office
supply costs during the year.
Income Tax
The Company's consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities and loans. The
Company recorded provisions for income tax of $2,159,000, $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 the Company's pretax income. For
the year ended December 31, 1996, income tax expense increased $424,000 due to
a $1,150,000 increase in the Company's income before income tax. The Company's
effective tax rate for 1997 was 33.0% compared to 33.3% for 1996. The Company'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, the Company
reported net income of $4,374,000, $4,006,000, and $3,279,000, respectively.
The improvements in the Company's net income in 1997 represent an improvement
in the overall operating results of the Company as measured by the return on
average assets and return on average equity. In 1997, the Company reported a
return on average assets of 1.42% compared to 1.38% 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, the Company 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 the Company's cash dividend rate in each respective
year.
[BAR GRAPH]
RETURN ON ASSETS
1995 1996 1997
1.32% 1.38% 1.42%
[BAR GRAPH]
RETURN ON EQUITY
1995 1996 1997
11.22% 11.78% 11.84%
13
<PAGE> 15
MANAGEMENT'S DISCUSSION
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, the Company 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, the Company's total assets increased $26,643,000 (8.8%) in 1997 due
to internal growth and the opening of State Financial Bank - 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 State Financial Bank and
State Financial Bank - Waterford over the preceding twelve months.
Lending Activities
The Company's largest single asset category continues to be loans. The
Company's gross loans, as a percentage of total deposits, were 72.9% at
December 31, 1997 compared to 79.2% at December 31, 1996. The following table
shows the Company's loan portfolio composition on the dates indicated (dollars
in thousands).
<TABLE>
<CAPTION>
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
======== ======== ======== ======== ========
</TABLE>
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 the Company's 1997 loan
growth. Internally, loans grew $15,129,000 (7.5%) due to continued loan demand
at State Financial Bank and State Financial Bank-Waterford.
Real estate loans continue to represent the largest category of the
Company's loan portfolio. In 1997, real estate loans grew $48,341,000 (42.3%)
and increased to 60.8% of the Company'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 the Company'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 State Financial Bank and State Financial Bank - 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. The Company's commercial real estate loans are generally secured
by owner occupied, improved property such as office buildings, warehouses,
small manufacturing operations, and retail facilities located in the Company's
primary market areas subject to a maximum 75% loan to value ratio pursuant to
its loan policy. Loans for construction and land development are generally
secured by the property under construction or development up to a maximum loan
to value of 75% of estimated cost or appraisal value of the completed project
whichever is less. The Company further monitors construction and land
development credits by disbursing draws under the credit commitment upon
satisfactory title company inspections of construction progress and evidence of
proper lien waivers. The borrower's credit-worthiness and the economic
feasibility and cash flow abilities of the project are fundamental concerns in
the Company's commercial real estate and construction/land development lending.
Loans secured by commercial property, whether existing or under construction,
and land development are generally larger in size and involve greater risks
than residential mortgage loans because payments on loans secured by commercial
property are dependent upon the successful operation and management of these
properties, businesses, or developments. As a result, the value of properties
securing such loans are likely to be subject to the local real estate market
and general economic conditions, including movements in interest rates. The
Company generally writes commercial real estate loans for maturities up to five
years although the total amortization period may be as long as twenty years,
amortized monthly. The Company generally writes construction and land
development loans on terms up to a maximum of 24 months and requires the
borrower to make defined principal reductions at stated intervals during that
term. The Company additionally attempts to have construction credits further
supported by end mortgage commitments wherever possible. The Company will
generally 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.
[BAR GRAPH]
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
1995 1996 1997
<S> <C> <C> <C>
MORTGAGE $105,139 $114,395 $162,736
INSTALLMENT $ 21,997 $ 30,046 $ 36,817
COMMERCIAL $ 46,323 $ 44,088 $ 56,030
OTHER $ 12,295 $ 13,142 $ 12,236
</TABLE>
The remaining real estate loan growth during 1997 were 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.
The Company's real estate loans, like all of the Company's loans, are
underwritten according to its written loan policy. The loan policy sets forth
the term, debt service capacity, credit extension, and loan to value guidelines
which the Company considers acceptable to recognize the level of risk
associated with each specific loan category. The table on the following page
sets forth the percentage composition of the real estate loan portfolio as of
December 31, 1997.
14
<PAGE> 16
<TABLE>
<S> <C>
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
</TABLE>
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 State
Financial Bank and State Financial Bank - Waterford during the year. At
December 31, 1997, commercial loans comprised 20.9% of the Company's total loan
portfolio compared to 21.9% at December 31, 1996. Commercial loans are also
underwritten according to the Company's loan policy which sets forth the amount
of credit which can be extended based upon the borrower's cash flow, debt
service capacity, and discounted collateral value. Commercial loans are
typically made on the basis of the borrower's ability to make repayment from
the cash flow of the business. As a result, the availability of funds for the
repayment of commercial loans may be dependent on the success of the business
itself, which, in turn, is likely to be dependent upon the general economic
environment. In recognition of this risk, the Company emphasizes capacity to
repay the loan, adequacy of the borrower's capital, an evaluation of the
industry conditions affecting the borrower, and current credit file
documentation. The Company's commercial loans are typically secured by the
borrower's business assets such as, inventory, accounts receivable, fixtures,
and equipment. Generally, commercial loans carry the personal guaranties of the
principals.
Installment loans increased $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 mainly the result of further increases in indirect auto loans
due to the addition of two local dealerships to the Company's loan referral
network. The Company's indirect auto loan underwriting continues to emphasize
the purchase of the highest quality loan contracts to minimize risk of loss in
this lending activity. At December 31, 1997, installment loans comprised 13.7%
of the Company'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 the Company's other loan portfolio. Net of
Richmond, the $1,226,000 decrease in other loans at State Financial Bank and
State Financial Bank - 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.
<TABLE>
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
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
======= ======
</TABLE>
Risk Elements in the Loan Portfolio
Certain risks are inherent in the lending function. These risks include a
borrower's subsequent inability to pay, insufficient collateral coverage, and
changes in interest rates. The Company attempts to reduce these risks by
adherence to a written set of loan policies and procedures. Included in these
policies and procedures are underwriting practices covering debt-service
coverage, loan-to-value ratios, and loan term. Evidence of a specific repayment
source is required on each credit extension, with documentation of the
borrower's repayment capacity. Generally, this repayment source is the
borrower's cash flow, which must demonstrate the ability to service the debt
based upon historical results and conservative projections of future
performance.
Management maintains the allowance for loan losses (the"Allowance") at a
level considered adequate to provide for future loan losses. The Allowance is
increased by provisions charged to earnings, and is reduced by charge-offs, net
of recoveries. At December 31, 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 the Company's loan portfolio by the internal loan review officer
and management. These evaluations consider a variety of factors,including, but
not limited to, general economic conditions, loan portfolio size
and composition, previous loss experience, the borrower's financial condition,
collateral adequacy, the level of non-performing loans, and management's
estimation of future losses. As a percentage of total loans, the allowance was
1.23% at the end of 1997 compared to 1.29% at the end of 1996. Based on its
analysis, management considers the Allowance adequate to recognize the risk
inherent in the consolidated loan portfolio at December 31, 1997.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION
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>
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 date of acquisition 678 0 734 0 0
Additions charged to operations 330 210 190 120 147
------ ------ ------ ------ ------
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 7.23 11.14 5.47
Allowance to year end loans outstanding 1.23 1.29 1.46 1.36 1.60
</TABLE>
[BAR GRAPH]
NON-PERFORMING ASSETS TO TOTAL ASSETS
1993 1994 1995 1996 1997
0.95% 0.68% 0.65% 0.91% 0.69%
[BAR GRAPH]
NET CHARGE-OFFS TO AVERAGE LOANS OUTSTANDING
1993 1994 1995 1996 1997
0.09% 0.16% 0.12% 0.16% 0.15%
[BAR GRAPH]
ALLOWANCE TO YEAR END LOANS OUTSTANDING
1993 1994 1995 1996 1997
1.60% 1.36% 1.46% 1.29% 1.23%
When in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on nonaccrual status. At the time
a loan is classified as nonaccrual, interest previously credited to income in
the current year is reversed and interest income accrued in the prior year is
charged to the Allowance. With the exception of credit cards, the Company does
not recognize income on loans past due 90 days or more.
16
<PAGE> 18
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 days or more 20 38 2 5 31
Restructured loans 0 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% 0.75% 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, the Company adopted Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a
Loan" ("Statement No. 114"). Under the new standard, the 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, the Company 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 the Company's gross loan portfolio. Based upon the analysis of the
underlying collateral value of these loans and the low percentage of these
loans in relation to the gross loan portfolio, management believes the
allowance is adequately funded to provide for the inherent risk associated with
these loans.
At December 31, 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 the Company has both the positive intent and ability
to hold to maturity are carried at amortized cost. Debt securities that the
Company does not have either the positive intent and/or the ability to hold to
maturity and all marketable equity securities must be classified as
available-for-sale or trading and carried at their respective fair market
value. Unrealized holding gains and losses on securities classified as
available-for-sale, net of related tax effects, are carried as a component of
shareholders' equity. 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 the Parent
Company'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 the Company'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>
<TABLE>
<CAPTION>
[BAR GRAPH]
INVESTMENT PORTFOLIO COMPOSITION
1995 1996 1997
<S> <C> <C> <C>
US TREASURIES & AGENCIES $27,389 $34,018 $46,731
MORTGAGE BACKED $17,281 $16,753 $17,242
MUNICIPAL $16,337 $15,015 $25,922
OTHER $ 2,250 $ 3,197 $ 4,014
</TABLE>
17
<PAGE> 19
MANAGEMENT'S DISCUSSION
The composition of the Company'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 the Company'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 the
Company'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 the Company
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 the Company'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 the Company's total investment portfolio. The Company's
mortgage-related securities represent balances outstanding on fixed-rate
collateralized-mortgage obligations ("CMO's") supported by one-to-four family
residential mortgage securities issued by the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
To avoid exposure to prepayments, wide market value fluctuations, and
recoverability, the Company purchases only the conservative early 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 the Company's
mortgage-related securities was slightly less than three years. Due to the
short remaining assumed maturities of these investments and its historical
experience with these investments, management does not consider the Company to
be exposed to significant interest rate risk or recoverability related to these
investments. At December 31, 1997, mortgage-related securities accounted for
18.4% of the Company's investment portfolio compared to 24.3% at December 31,
1996.
Other securities increased $817,000 in 1997 mainly due to the Company's
purchase of marketable equity securities. At December 31, 1997, other
securities represented 4.3% of the Company's investment portfolio compared to
4.6% at December 31, 1997.
The maturities and weighted-average yield of the Company'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> <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 1,811 8.68
Mortgage-related securities 948 5.6 16,295 6.76 0 0 0 0
Other securities 1,913 3.38 1,600 6.66 501 6.24 0 0
------- ------- ------- ------
TOTAL $19,672 6.00% $59,105 6.39% $13,322 6.96% $1,811 8.68%
======= ======= ======= ======
</TABLE>
At December 31, 1997, the Company 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 the
Company'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 the Company. Unrealized gains and
losses on investment securities are the result of changes in market interest
rates and the relationship of the Company's investments to those rates for
comparable maturities. Unrealized gains generally result from the interest
rates on the Company's portfolio of investment securities exceeding market
rates for comparable maturities. Conversely, unrealized losses generally result
from the interest rates on the Company's portfolio of investment securities
falling below market rates for comparable maturities. If material, unrealized
losses could negatively impact the Company's future performance as earnings
from these investments would be less than alternative investments currently
available and may not provide as wide a spread between earnings and funding
costs. The Company does not consider its investment portfolios exposed to
material adverse impact to future operating performance resulting from market
interest rate fluctuations.
18
<PAGE> 20
Deposits
Deposits are the Company's principal funding source. Deposit inflows and
outflows are significantly influenced by general interest rates, money market
conditions, market competition, and the overall condition of the economy. For
the year ended December 31, 1997, total average deposits increased $14,435,000
(5.9%) due to internal deposit growth at State Financial Bank and State
Financial Bank - 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 the Company 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% $ 48,46 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 5.7 58,322 5.63
-------- -------- --------
TOTAL $260,710 3.48% $246,275 3.39% $211,187 3.33%
======== ======== ========
</TABLE>
The largest categorical growth in the Company'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 the Company's Money Market Index Account. At December 31, 1997, average NOW
and money market balances are the Company'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, the Company 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 the Company'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 the Company offers in money market and
time deposits accounts. The Company 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
the Company. Average savings balances represent 14.5% of average total deposits
at December 31, 1997 compared to 17.1% at December 31, 1996.
<TABLE>
<CAPTION>
[BAR GRAPH]
AVERAGE DEPOSIT PORTFOLIO COMPOSITION
1995 1996 1997
<S> <C> <C> <C>
NOW & MONEY MARKET $66,520 $85,030 $93,058
TIME $58,322 $70,733 $76,843
DEMAND $43,555 $48,469 $42,043
SAVINGS $42,790 $42,043 $37,924
</TABLE>
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 the Company's consolidated total deposits with
the remaining $32,914,000 increase the result of internal growth at State
Financial Bank and State Financial Bank - Waterford during the course of 1997.
Richmond's funding costs are comparatively higher than the Company's historical
experience. For the year ended December 31, 1997, Richmond's cost of
interest-bearing liabilities was 4.73% compared to the Company's 4.26% for the
comparable period. Accordingly, the Company 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 below and to
the right (dollars in thousands).
<TABLE>
<S> <C>
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
=======
</TABLE>
Approximately 7.9% of the Company'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. The Company's dependence on large balance time
deposits to fund its asset base has historically been approximately one third
to one half of the large liability funding dependence exhibited by its peers.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION
Liquidity
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest-sensitive
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of depositors and borrowers.
The Company's primary funding sources are deposits, loan principal
repayments, and maturities of loans and investment securities. Contractual
maturities and amortization of loans and investments are a predictable funding
source, whereas deposit flows and loan prepayments are impacted by market
interest rates, economic conditions, and competition.
The Company's primary investment activity is loan origination. For the
year ended December 31, 1997 the Company 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 the Company's ESOP, pay dividends,
payoff the installment notes payable incurred in 1995 with the 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 the Company's most liquid assets.
The Company's level of operating, financing, and investing activities during a
given period impact the resultant level of cash and cash equivalents reported.
The Company had liquid assets of $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 the Company'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 the Company's net interest income as the actual repricing experience of
certain assets and liabilities, such as loan prepayments and deposit
withdrawals, is beyond the Company's control. As a result, certain assets and
liabilities may reprice at intervals different from the maturities assumed in
the table on the following page 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.
20
<PAGE> 22
<TABLE>
<CAPTION> Total
0-30 31-90 91-365 0-365
Days Days Days Days
------ ------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Loans
Fixed $13.80 $ 8.70 $ 44.80 $ 67.30
Variable 69 0 0 69
Investments 2.5 1.3 16 19.8
Federal funds 11.3 0 0 11.3
------ ------- -------- --------
Total $96.60 $ 10.00 $ 60.80 $ 167.40
====== ======= ======== ========
LIABILITIES
Savings & NOW deposits $ 8.40 $ 16.80 $ 25.10 $ 50.30
Time deposits 18.2 25.1 56.6 99.8
Money market deposits 9.0 18 27.1 54.1
Other interest-bearing
liabilities 0.4 0 5.3 5.8
------ ------- -------- --------
Total $36.00 $ 59.90 $ 114.10 $ 210.00
====== ======= ======== ========
Interest sensitivity gap $60.60 ($49.90) ($53.30) ($42.60)
Cumulative gap 60.6 10.7 -42.6 -42.6
Cumulative gap as a
percentage of total
earning assets 16.30% 2.90% -11.50% -11.50%
</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 the Company is liability-sensitive at December 31,
1997 which would normally indicate that the Company'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 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.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1997 1996 1995
<S> <C> <C> <C>
Return on assets 1.42% 1.38% 1.32%
Return on equity 11.84 11.78 11.22
Earnings retained 65.27 68.54 70.5
Dividend payout ratio 34.73 31.46 29.5
Average equity to average assets 11.97 11.72 11.78
Asset growth 39.5 5.58 26.49
</TABLE>
The Company is pursuing a policy of continued asset growth. In order to
maintain appropriate ratios of equity to total assets, a corresponding level of
capital growth must be achieved. Historically, capital growth has come
primarily from internal sources through increased earnings and a conservative
dividend policy. The Company's dividend policy considers shareholders' desire
for current income and the Company's need to provide internal capital growth
through earnings retention. The percentage of 1997 and 1996 earnings paid out
in the form of dividends increased as the Company increased its quarterly
dividend rate 20% in the first quarter of each respective year. Dividends paid
by the Banks to the Company are used primarily to fund shareholders' dividends
and for additional working capital.
There are certain regulatory constraints which affect the Company's
capital levels. See Note 9 and Note 12 to the consolidated financial statements
for additional explanation of these regulatory constraints.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION
Impact of Inflation and Changing Prices
The Company's Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of changes in the relative purchasing power of
money over time impacted by inflation. The impact of inflation is reflected in
the company's other expenses which tend to rise during periods of general
inflation. The majority of the Company's assets and liabilities are monetary in
nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Consequently, interest rates have a greater impact on the Company's performance
than do the general levels of inflation. Management believes the most
significant impact on the Company's financial results is its ability to react
to interest rate changes and endeavors to maintain an essentially balanced
position between interest sensitive assets and liabilities in order to protect
against wide fluctuations in the Company's net interest margin.
Impact of Year 2000
Some of the Company's older computer programs and computer programs
utilized by the Company's third party data processor 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. The Company utilizes a third party for a
significant portion of its data processing.
The Company has completed an assessment and will have to modify or replace
portions of its software and ensure that its third party processor has 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, the Company has estimated that the cost
for such modifications or replacements will not be material. These costs of
modifications will be expensed as incurred and costs for replacement of old
software will be capitalized in accordance with the Company's normal policies
and practices.
The Company is monitoring the progress of its third party data processor
and both the third party processor and the Company'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. The Company believes that with modifications to existing 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 the Company's operations.
The Company is also dependent on other third parties to correct interface
systems for Year 2000 Issues. The Company 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 the Company's systems rely will be timely converted and
would not have an adverse effect on the Company's systems. At this time, the
Company is not aware of any circumstances which would prevent its third party
vendors from being Year 2000 compliant.
The costs of the project and the date on which the Company 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.
Forward Looking Statements
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the
forward-looking statements. Factors which could cause such a variance to occur
include, but are not limited to, changes in interest rates, levels of consumer
bankruptcies, customer loan and deposit preferences, and other general economic
conditions.
22
<PAGE> 24
REPORT OF MANAGEMENT AND INDEPENDENT AUDITORS
Report of Management
The management of State Financial Services Corporation is responsible for
the preparation and integrity of the Consolidated Financial Statements and
other financial information included in this Annual Report. The financial
statements have been prepared in accordance with generally accepted accounting
principles and include amounts that are based upon informed judgements and
estimates by management. The other financial information in this Annual Report
is consistent with the financial statements.
The Company maintains a system of internal accounting controls. Management
believes that the internal accounting controls provide reasonable assurance
that transactions are executed and recorded in accordance with Company policy
and procedures and that the accounting records may be relied on as a basis for
preparation of the financial statements and other financial information.
The Company's independent auditors were engaged to perform an audit of the
Consolidated Financial Statements, and the auditor's report expresses their
opinion as to the fair presentation of the consolidated financial statements in
conformity with generally accepted accounting principles.
The Audit Committee of the Board of Directors, comprised of directors who
are not employees of the Company, meets periodically with management, the
internal auditors, and the independent auditors to discuss the adequacy of the
internal accounting controls. Both the independent auditors and the internal
auditors have full and free access to the Audit Committee.
<TABLE>
<S> <C>
/s/ Michael J. Falbo /s/ Michael A. Reindl
Michael J. Falbo Michael A. Reindl
</TABLE>
President and Chief Executive Officer Senior Vice President, Controller, and
Chief Financial Officer
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
State Financial Services Corporation
We have audited the accompanying consolidated balance sheets of State
Financial Services Corporation and subsidiaries (the Company) as of December
31, 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
January 16, 1998
23
<PAGE> 25
FINANCIAL STATEMENTS
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
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--997 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
============ ============
</TABLE>
24
<PAGE> 26
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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 0
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
=========== =========== ===========
</TABLE>
25
<PAGE> 27
FINANCIAL STATEMENTS, (Continued)
Consolidated Statements of Shareholders' Equity
<TABLE>
<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 - - -1,260,272 - - -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 28,687,633 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>
26
<PAGE> 28
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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 investment 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 $2,427,440 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
</TABLE>
27
<PAGE> 29
FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)
<TABLE>
Year ended December 31
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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 16,196,87
----------- ----------- -----------
Cash and cash equivalents at end of year $38,780,036 $21,280,918 $ 28,517,92
----------- ----------- -----------
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)
</TABLE>
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 are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are carried at amortized cost.
48
<PAGE> 30
1. ACCOUNTING POLICIES (continued)
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 managements 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:
<TABLE>
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. ACCOUNTING POLICIES (continued)
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, follows on the next page:
30
<PAGE> 32
2. ACQUISITIONS, (continued)
<TABLE>
Year Ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
Total income $35,015,000 $35,425,000
Net income 3,821,000 3,696,000
Basis earnings per share 0.98 1.01
Fully diluted earnings per share 0.97 1.00
</TABLE>
3. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Banks are required to maintain reserve balances with the Federal
Reserve Bank. The average amount of reserve balances for the year ended
December 31, 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
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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>
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
4. INVESTMENT SECURITIES, (CONTINUED)
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
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
------------------------- ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Value
Due in one year or less $10,036,815 $10,075,355 $ 9,635,062 $10,440,420
Due after one year through five years 8,499,749 8,561,057 50,604,983 50,914,462
Due after five years through ten years 1,468,150 1,527,889 11,853,882 12,049,389
Due after ten years 992,381 1,044,111 818,393 850,162
----------- ----------- ----------- -----------
$20,997,095 $21,208,412 $72,912,320 $74,254,433
=========== =========== =========== ===========
</TABLE>
The Company's investments in mortgage-related securities have been
allocated to the various maturity categories based on expected maturities using
current prepayment estimates.
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:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three years ended
December 31, 1997 are as follows:
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $2,607,579 $2,711,362 $1,982,941
Allowance from acquired bank 678,235 - 734,577
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
========== ========== ==========
</TABLE>
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.
32
<PAGE> 34
8. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1997 and 1996, is as
follows:
<TABLE>
1997 1996
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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 participant's total eligible
compensation plus an additional 2% of the participant's 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:
<TABLE>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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.
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return basis
and remit to the Company amounts determined to be currently payable or realize
the benefit they would be entitled to on such a basis. The Company and
subsidiaries file separate state income tax returns.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities of December 31, 1997 and
1996, are as follows:
<TABLE>
1997 1996
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
The income tax expense differs from that computed at the federal statutory
corporate tax rate are as follows :
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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.
34
<PAGE> 36
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 managements 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 noncancelable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1997:
<TABLE>
<S> <C>
1998 $ 441,000
1999 441,000
2000 449,000
2001 416,000
2002 429,000
Thereafter 2,429,000
----------
$4,605,000
==========
</TABLE>
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 on the following page) 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.
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. REGULATORY CAPITAL (continued)
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 Under
For Capital Prompt Corrective
Adequacy 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 24,686 12.9
State Financial Bank--Waterford 2,477 8.0 3,097 10 4,110 13.3%
Richmond Bank 4,193 8.0 5,241 10 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
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 24,074 13.6
State Financial Bank--Waterford 1,930 8.0 2,412 10 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 14,664 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.
36
<PAGE> 38
16. STOCK PLANS AND OPTIONS (continued)
A summary of restricted stock and stock option transactions follows:
<TABLE>
<CAPTION>
Number of
Shares of Number Total
Restricted of Stock Number
Stock Price Options Price of Shares
----------- ------------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 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 analysis, 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.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 367,491,889 350,905,378 254,656,564 254,852,560
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
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
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, Inc. 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
available-for-sale 888,649 62,728
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
=========== ===========
</TABLE>
38
<PAGE> 40
18. STATE FINANCIAL SERVICE CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (continued)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
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
=========== ========== ==========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
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
=========== ========== ==========
</TABLE>
39
<PAGE> 41
INVESTOR INFORMATION
The Stock Split
As of January 27, 1998, there were 3,227,127 shares of Common Stock
outstanding. On January 27, 1998, the Company declared a 6-for-5 stock split to
be issued on February 28, 1998 to shareholders of record as of February 14,
1998 (the "Stock Split"). Upon the issuance of the additional shares resulting
from the Stock Split, there will be 3,872,553 shares of common stock issued and
outstanding (subject to minor adjustment for the issuance of cash in lieu of
fractional shares). Unless otherwise indicated, information contained in this
Annual Report gives effect to the Stock Split.
Market Price and Dividends for Common Stock
At March 13, 1998, there were approximately 704 shareholders of record and
650 estimated additional beneficial shareholders for an approximate total of
1,354 shareholders of the Company's Common Stock.
Holders of Common Stock are entitled to receive dividends as may be
declared by the Company's Board of Directors and paid from time to time out of
funds legally available therefore. The Company's ability to pay dividends
depends upon its subsidiary Banks' ability to pay dividends which is regulated
by banking statutes. The declaration of dividends by the Company is
discretionary and will depend on operating results, financial condition,
regulatory limitations, tax considerations, and other factors. See Note 12 to
the Consolidated Financial Statements for information concerning restrictions
on the payment of dividends. Although the Company has regularly paid dividends
since its inception in 1984, there can be no assurance that such dividends will
be paid in the future.
The table on the right sets forth the historical market price of and
dividends declared with respect to Common Stock since January 1, 1996. All
figures have been restated to give effect to the 6- for-5 stock splits declared
in January 1998 and January 1997 as if each had occurred as of January 1, 1996.
<TABLE>
Price Cash
Quarter Ended High Low Dividend
- ------------- ------ ------ --------
<S> <C> <C> <C>
March 31, 1996 $10.73 $ 9.26 $0.083
June 30, 1996 12.15 10.24 0.083
September 30, 1996 13.19 11.81 0.083
December 31, 1996 13.89 12.68 0.083
March 31, 1997 $16.04 $13.14 $0.100
June 30, 1997 18.13 14.79 0.100
September 30, 1997 19.17 16.46 0.100
December 31, 1997 23.23 19.17 0.100
</TABLE>
Stock Listing
State Financial Services Corporation's Common Stock is traded on the
Nasdaq National Market tier of the Nasdaq Stock Market ("Nasdaq") under the
symbol "SFSW." Nasdaq is a highly-regulated electronic securities market
comprised of competing Market Makers whose trading is supported by a
communications network linking them to quotation dissemination, trade
reporting, and order execution systems. This market also provides specialized
automation services for screen-based negotiations of transactions, on-line
comparison of transactions, and a range of informational services tailored to
the needs of the securities industry, investors, and issuers. Nasdaq is
operated by The Nasdaq Stock Market, Inc., a wholly-owned subsidiary of the
National Association of Securities Dealers, Inc.
The Company's stock appears in the Wall Street Journal, the Milwaukee
Journal/Sentinel, and other publications usually as State Financial.
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment Plan (the "DRP") for the benefit
of all shareholders. The DRP is administered by Firstar Trust Company. Under
the DRP, registered shareholders of the Company can elect to have their
dividends reinvested to purchase additional shares of the Company's Common
Stock. To receive information on the DRP, please contact Michael A. Reindl,
Senior Vice President, Controller, and Chief Financial Officer, State Financial
Services Corporation, 10708 West Janesville Road, Hales Corners, Wisconsin
53130, or call (414) 425-1600.
Form 10-K
The Company's annual report on Form 10-K for the year ended December 31,
1997 as filed with the Securities and Exchange Commission is available upon
request without charge to shareholders of record. Please contact Michael A.
Reindl, Senior Vice President, Controller, and Chief Financial Officer, State
Financial Services Corporation, 10708 West Janesville Road, Hales Corners,
Wisconsin 53130, or call (414) 425-1600.
Annual Meeting
The annual meeting of shareholders of State Financial Services Corporation
will be held at 4:00 P.M. (CDT) on Wednesday, May 13, 1998 at Tuckaway Country
Club, 6901 West Drexel Avenue, Franklin, Wisconsin.
Financial Information
Michael A. Reindl, Senior Vice President, Controller, and Chief Financial
Officer - State Financial Services Corporation 10708 West Janesville Road,
Hales Corners, Wisconsin 53130 (414) 425-1600
Transfer Agent
Firstar Trust Company - Investor Services - 615 East Michigan Avenue,
Milwaukee, WI 53202 (800) 637-7549 (414) 276-3737
40
<PAGE> 42
DIRECTORS AND OFFICERS
STATE FINANCIAL SERVICES CORPORATION
Directors
Jerome J. Holz - Chairman of the Board and President, Holz Motors, Inc.;
Chairman of the Board, State Financial Services Corporation
Michael J. Falbo - President and Chief Executive Officer,
State Financial Services Corporation
Richard A. Horn - President, Horn Brothers, Inc.
Barbara E. Holz-Weis - Owner, Barb's Green House Florist
David M. Stamm - President, George Webb Corporation
Robert R. Spitzer - President Emeritus, Milwaukee School of Engineering
Officers
Jerome J. Holz - Chairman of the Board and Vice President
Michael J. Falbo - President and Chief Executive Officer
John B. Beckwith - Senior Vice President
Philip F. Hudson - Senior Vice President
Michael A. Reindl - Senior Vice President, Controller and Chief
Financial Officer; Secretary/Treasurer
Daniel L. Westrope - Senior Vice President
Donna M. Bembenek - Vice President and Director of Marketing
Annette F. Esteves - Assistant Vice President and Assistant Controller
James J. Bartoszek - Compliance Officer
Beth J. Bahr - Human Resources Officer
Donald J. Buechler - Loan Review Officer
Melanie M. Murphy - Auditor
STATE FINANCIAL BANK
<TABLE>
<S> <C>
Directors Officers
Bruce Arbit Gerilyn J. Arndt
John B. Beckwith, President James J. Bartoszek
Michael J. Falbo, Vice Chairman & CEO John B. Beckwith
Michael Green David J. Byrge
Jerome J. Holz, Chairman of the Board Kathleen A. Eusebio
Richard A. Horn Michael J. Falbo
Judith Holz-Stathas Debra K. Fiedler
Barbara E. Holz-Weis Barbara J. Gifford
Philip F. Hudson, Joyce M. Goodman
Roger H. Kriete Robert L. Hoepfner
Peyton A. Muehlmeier Jerome J. Holz
Salvatore Sendik Robert W. Kaiser
Robert R. Spitzer Lucy C. Korbitz
David M. Stamm Diana Y. Le Blanc
Barbara A. Marx
Directors Emeritus Mark J. Ranum
Gordon Banerian John R. Rinderle
Dr. Charles Wilson Marcy L. Schneider
Cyril Zvonar Rose A. Shebesta
Jack J. Spoerl
State Financial Bank Office Locations Jeryl M. Sturino
Kathleen R. Wambold
Brookfield (414) 789-9003
Glendale (414) 351-7400 Deposits in State Financial Bank, State
Greenfield (414) 281-2500 Financial Bank-Waterford, and Richmond
Hales Corners (414) 425-1600 Bank are FDIC insured up to $100,000.
Milwaukee/University (414) 961-5800
Muskego (414) 679-2800
Waukesha (414) 544-1750
</TABLE>
<TABLE>
<S> <C>
STATE FINANCIAL BANK -
WATERFORD Richmond Bank Office Locations
Directors Richmond (815) 678-2461
Oliver DeHart, Chairman of the Board Libertyville (847) 680-1077
Michael J. Falbo
Jerome J. Holz RICHMOND FINANCIAL
Frances M. Koukol SERVICES INC.
Thomas M. Lilly, President and CEO
Gary Schildt Directors
Robert R. Spitzer John B. Beckwith, President
Susan J. Dubs
Director Emeritus Gary R. Dunham
Charles M. Noll Michael J. Falbo
Daniel L. Westrope
Officers
Cherly A. Hess Officers
Kenneth J. Jaeger Gary R. Dunham (847) 587-4710
Frances M. Koukol John B. Beckwith
Thomas M. Lilly Susan J. Dubs
Frances M. Morrical Linda Greenfield (414) 425-1600
Beverly Luther (414) 351-7400
State Financial Bank -
Waterford Office Locations STATE FINANCIAL
INSURANCE AGENCY
Waterford (414) 534-3151
Burlington (414) 763-9955 Directors
John B. Beckwith
Susan J. Dubs
RICHMOND BANK Michael J. Falbo
Directors Craig E. Johnson
Susan J. Dubs, President Daniel L. Westrope
Ronald S. Erdmann
Michael J. Falbo Officers
Jerome J. Holz John B. Beckwith, President
Daniel L. Westrope, Chairman of the Susan J. Dubs
Board and CEO Craig E. Johnson (815) 678-1450
Charles F. Wonderlic
STATE FINANCIAL
Officers MORTGAGE COMPANY
Linda L. August Directors
Gregory N. Beierwaltes John B. Beckwith
Bobbie Callese Michael J. Falbo
Susan J. Dubs Philip F. Hudson
Steven L. Finzel Thomas M. Lilly, President
Robert L. Grammar Michael A. Reindl
Sara D. McCormack
William A. Meath
Linda L. Palmer Officers
Roy W. Pitner Jr. Thomas M. Lilly
Donna M. Purdom Michael A. Reindl
David E. Spinner James L. Wucherer (414) 425-1600
Daniel L. Westrope
</TABLE>
A Note of Gratitude & Special Acknowledgment
to Dr. Robert Spitzer
A NOTE OF GRATITUDE & SPECIAL ACKNOWLEDGMENT TO DR. ROBERT SPITZER
As we review the performance of State Financial Services Corporation, it seems
appropriate to thank the members of our Board of Directors for their hard work
and keen business sense which has contributed in large part to our success. A
special acknowledgment and debt of gratitude to Dr. Robert R. Spitzer who will
be retiring from the Board of State Financial Services Corporation effective
with this year's annual shareholder meeting. Bob will continue his service to
our company by serving as a director of State Financial Bank - Waterford. His
loyalty to our company and dedication to our success has been and will continue
to be a valuable asset.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF STATE FINANCIAL SERVICES CORPORATION
<TABLE>
<CAPTION>
SUBSIDIARY NAME STATE OF INCORPORATION
- ----------------------------- ----------------------
<S> <C>
State Financial Bank Wisconsin
Hales Corners Development Corporation (1) Wisconsin
Hales Corners Investment Corporation (1) Nevada
State Financial Bank - Waterford Wisconsin
Waterford Investment Corporation (2) Nevada
State Financial Mortgage Company Wisconsin
Richmond Bancorp, Inc. Illinois
Richmond Bank (3) Illinois
State Financial Insurance Agency (4) Wisconsin
Richmond Financial Services, Inc. (3) Florida
</TABLE>
(1) Subsidiary of State Financial Bank
(2) Subsidiary of State Financial Bank - Waterford
(3) Subsidiary of Richmond Bancorp, Inc.
(4) Subsidiary of Richmond Bank
<PAGE> 1
EXHIBIT 23
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of State Financial Services Corporation of our report dated January
16, 1998, included in the 1997 Annual Report to the shareholders of State
Financial Services Corporation.
/s/ Ernst & Young, LLP
Milwaukee, Wisconsin
March 26, 1998
9
<PAGE> 1
EXHIBIT 23.1
OPINION OF MCGLADREY & PULLEN, LLP
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 those 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 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 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
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 27,506,201
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,273,835
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,254,433
<INVESTMENTS-CARRYING> 20,997,095
<INVESTMENTS-MARKET> 21,208,412
<LOANS> 267,819,217
<ALLOWANCE> 3,306,168
<TOTAL-ASSETS> 421,278,053
<DEPOSITS> 367,491,889
<SHORT-TERM> 4,850,160
<LIABILITIES-OTHER> 5,087,638
<LONG-TERM> 5,300,000
0
0
<COMMON> 387,256
<OTHER-SE> 38,161,110
<TOTAL-LIABILITIES-AND-EQUITY> 421,278,053
<INTEREST-LOAN> 19,868,408
<INTEREST-INVEST> 4,185,429
<INTEREST-OTHER> 148,152
<INTEREST-TOTAL> 24,201,989
<INTEREST-DEPOSIT> 9,077,699
<INTEREST-EXPENSE> 9,521,971
<INTEREST-INCOME-NET> 14,680,018
<LOAN-LOSSES> 330,000
<SECURITIES-GAINS> (649)
<EXPENSE-OTHER> 11,192,833
<INCOME-PRETAX> 6,533,164
<INCOME-PRE-EXTRAORDINARY> 4,374,164
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,374,164
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 5.33
<LOANS-NON> 2,537,000
<LOANS-PAST> 20,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,607,579
<CHARGE-OFFS> 380,279
<RECOVERIES> 70,633
<ALLOWANCE-CLOSE> 3,306,168<F1>
<ALLOWANCE-DOMESTIC> 3,306,168
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>The allowance for loan losses increased $678,235 in fourth quarter 1997 due to
the inclusion of the acquired allowance related to the Company's acquisition of
Richmond Bancorp, Inc.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,581,811
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,599,107
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,776,116
<INVESTMENTS-CARRYING> 31,302,232
<INVESTMENTS-MARKET> 31,541,364
<LOANS> 201,670,700
<ALLOWANCE> 2,607,579
<TOTAL-ASSETS> 301,221,897
<DEPOSITS> 254,656,546
<SHORT-TERM> 8,000,160
<LIABILITIES-OTHER> 2,076,803
<LONG-TERM> 961,844
0
0
<COMMON> 319,825
<OTHER-SE> 35,206,719
<TOTAL-LIABILITIES-AND-EQUITY> 301,221,897
<INTEREST-LOAN> 18,146,633
<INTEREST-INVEST> 4,029,841
<INTEREST-OTHER> 246,412
<INTEREST-TOTAL> 22,422,886
<INTEREST-DEPOSIT> 8,359,780
<INTEREST-EXPENSE> 8,752,112
<INTEREST-INCOME-NET> 13,670,774
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,511,771
<INCOME-PRETAX> 6,008,671
<INCOME-PRE-EXTRAORDINARY> 4,005,671
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,005,671
<EPS-PRIMARY> $1.06
<EPS-DILUTED> $1.05
<YIELD-ACTUAL> 5.27
<LOANS-NON> 2,363,000
<LOANS-PAST> 38,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,711,362
<CHARGE-OFFS> 384,802
<RECOVERIES> 71,019
<ALLOWANCE-CLOSE> 2,607,579
<ALLOWANCE-DOMESTIC> 2,607,579
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,107,613
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,540,309
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,857,758
<INVESTMENTS-CARRYING> 44,225,970
<INVESTMENTS-MARKET> 44,683,716
<LOANS> 185,754,168
<ALLOWANCE> 2,711,362
<TOTAL-ASSETS> 285,037,201
<DEPOSITS> 246,217,833
<SHORT-TERM> 3,300,160
<LIABILITIES-OTHER> 2,076,341
<LONG-TERM> 1,061,844
0
0
<COMMON> 264,912
<OTHER-SE> 32,116,111
<TOTAL-LIABILITIES-AND-EQUITY> 285,037,201
<INTEREST-LOAN> 15,833,190
<INTEREST-INVEST> 3,216,002
<INTEREST-OTHER> 314,111
<INTEREST-TOTAL> 19,363,303
<INTEREST-DEPOSIT> 7,029,954
<INTEREST-EXPENSE> 7,336,142
<INTEREST-INCOME-NET> 12,027,161
<LOAN-LOSSES> 190,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,459,655
<INCOME-PRETAX> 4,858,427
<INCOME-PRE-EXTRAORDINARY> 3,279,427
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,279,427
<EPS-PRIMARY> $0.94
<EPS-DILUTED> $0.93
<YIELD-ACTUAL> 5.44
<LOANS-NON> 1,386,000
<LOANS-PAST> 2,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 614,000
<ALLOWANCE-OPEN> 1,982,941
<CHARGE-OFFS> 308,994
<RECOVERIES> 112,838
<ALLOWANCE-CLOSE> 2,711,362<F1>
<ALLOWANCE-DOMESTIC> 2,711,362
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Allowance for loan losses increased $734,577 in third quarter 1995 due to
the inclusion of the acquired allowance related to the Company's acquisition of
the former Waterford Bancshares, Inc.
</FN>
</TABLE>
<PAGE> 1
[STATE FINANCIAL SERVICES CORPORATION LETTERHEAD]
`
EXHIBIT 99.4
STATE FINANCIAL
SERVICES CORPORATION
April 3, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of
Shareholders of State Financial Services Corporation. The 1998 Annual Meeting
will be held at 4:00 P.M. Central Time on Wednesday, May 13, 1998 at Tuckaway
Country Club, 6901 West Drexel Avenue, Franklin, Wisconsin.
Information about the meeting, including a description of the matters
on which the shareholders will act, is contained in the attached Notice of
Annual Meeting and Proxy Statement. Directors and officers of State Financial
Services Corporation as well as a representative from Ernst & Young LLP, the
Company's independent auditors, will be present at the meeting to respond to any
questions that shareholders may have.
WE ENCOURAGE YOU TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU PLAN
TO ATTEND, WE ASK THAT YOU COMPLETE, SIGN, AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT IN THE ENVELOPE PROVIDED SO THAT YOUR VOTE CAN BE COUNTED AT THE
MEETING.
On behalf of the Board of Directors and the employees of State
Financial Services Corporation, I wish to extend my gratitude for your continued
support of our organization.
Sincerely,
/s/ Michael J. Falbo
Michael J. Falbo
President and Chief Executive Officer
<PAGE> 2
STATE FINANCIAL SERVICES CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 13, 1998
TO THE SHAREHOLDERS OF STATE FINANCIAL SERVICES CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of State
Financial Services Corporation ("SFSC" or the "Company") will be held on May 13,
1998, at 4:00 P.M., Central Time, at Tuckaway Country Club, 6901 West Drexel
Avenue, Franklin, Wisconsin for the following purposes:
1. To elect two directors for three-year terms expiring in 2001;
2. To ratify the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1998;
3. To consider and vote upon the proposal to adopt the State
Financial Services Corporation 1998 Stock Incentive Plan; and
4. To transact any other business that may properly come before
the meeting.
These items are more fully described in the Proxy Statement which
accompanies this Notice.
Shareholders of record at the close of business on March 27, 1998 will
be entitled to vote at the meeting and any adjournment thereof.
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE MEETING.
SHARE-HOLDERS WHO DO NOT EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON ARE
REQUESTED TO SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. IF
YOU LATER FIND THAT YOU MAY BE PRESENT AT THE MEETING OR FOR ANY OTHER REASON
DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED.
By Order of the Board of Directors
/s/ Michael J. Falbo
MICHAEL J. FALBO,
President and Chief Executive Officer
April 3, 1998
1
<PAGE> 3
STATE FINANCIAL SERVICES CORPORATION
10708 WEST JANESVILLE ROAD
HALES CORNERS, WISCONSIN 53130
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MAY 13, 1998
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of State
Financial Services Corporation ("SFSC" or the "Company") in connection with the
solicitation of proxies by the Board of Directors of SFSC for use at the Annual
Meeting of Shareholders of SFSC to be held at 4:00 P.M. Central Time on May 13,
1998 at Tuckaway Country Club, 6901 West Drexel Avenue, Franklin, Wisconsin (the
"Meeting"), or any adjournment thereof.
PURPOSES OF THE MEETING. At the Meeting, shareholders will consider and
vote upon three matters: (1) the election of two directors for three year terms
expiring in 2001; (2) the proposal to ratify the appointment of Ernst & Young
LLP as independent auditors for the fiscal year ending December 31, 1998; and
(3) the proposal to adopt the State Financial Services Corporation 1998 Stock
Incentive Plan.
PROXY SOLICITATION. The cost of soliciting proxies will be borne by the
Company. The Company expects to solicit proxies primarily by mail. Proxies may
also be solicited personally and by telephone by members of management of the
Company. It is not anticipated that anyone will be specially engaged to solicit
proxies or the special compensation will be paid for that purpose. The Company
will reimburse brokers and other nominees who hold Common Stock in their names
and solicit proxies from the beneficial owners for out-of-pocket and reasonable
expenses. Proxy Statements and Proxies will be mailed to shareholders beginning
on approximately April 3, 1998.
QUORUM AND VOTING INFORMATION. As of March 27, 1998, the record date for
the Meeting, there were issued and outstanding 3,872,743 shares of the Company's
Common Stock, each of which is entitled to one vote per share. At the Meeting, a
quorum will exist with respect to each matter to be voted upon if a majority of
the votes entitled to be cast thereon is represented in person or by proxy. The
vote necessary to approve the proposals is described under the specific
proposals. In addition, shareholders should be aware that no matter to be acted
upon at the Meeting is dependent upon the approval of any other matter. Only
shareholders of record at the close of business on March 27, 1998 are entitled
to notice of and to vote at the Meeting or at any adjournment thereof.
PROXIES AND REVOCATION OF PROXIES. A Proxy in the accompanying form,
which is properly executed, duly returned to the Company and not revoked, will
be voted in accordance with instructions contained therein. In the event that
any matter which is not described in this Proxy Statement properly comes before
the Meeting, the accompanying form of Proxy authorizes the persons appointed as
proxies thereby ("Proxyholders") to vote on such matter in their sole
discretion. At the present time, management knows of no other matters which are
to come before the Meeting. See "Item 4. Other Matters." If no instructions are
given with respect to any particular proposal referred to herein, a Proxy will
be voted in favor of such matter and on such other business or matters that may
properly come before the Meeting in accordance with the best judgement of the
Proxyholders. A shareholder giving a Proxy may revoke it at any time before it
is voted by filing with the Secretary of the Company a written notice of
revocation, by delivering to the Company a duly executed proxy bearing a later
date, or by attending the Meeting and voting in person.
STOCK SPLIT. On January 27, 1998, the Company declared a 6 for 5 stock
split (the "Stock Split") to be issued on February 28, 1998 to shareholders of
record as of the close of business on February 14, 1998. The effect of the Stock
Split is that a shareholder will receive a certificate for one additional share
for every five shares of the Company's Common Stock owned by the shareholder as
of the record date of the Stock Split. Fractional shares will not be issued.
Cash will be delivered in lieu of fractional shares in an amount based upon the
market price of the Company's Common Stock on February 14, 1998. Certain
information contained in the Company's Annual Report to Shareholders delivered
herewith (see "Annual Report" below) and all per share information set forth in
this Proxy Statement has been restated to give effect to the Stock Split.
2
<PAGE> 4
SHAREHOLDER PROPOSALS. There are no shareholder proposals on the agenda
for the Meeting. In order to be considered for inclusion in the agenda for the
1999 Annual Meeting, a shareholder proposal must be received by the Company no
later than November 14, 1998. Shareholder proposals should be sent to the
Company's principal offices by certified mail, return receipt requested, and
should be addressed to the Secretary of the Company.
ANNUAL REPORT. The Company's Annual Report to Shareholders, including
audited financial statements for the year ended December 31, 1997, although not
a part of this Proxy Statement, is delivered herewith.
ITEM 1. ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS AND THE NOMINEES. The Board of Directors of the
Company currently consists of six persons, divided into three classes, each
consisting of two directors elected to serve three year terms. The Board of
Directors is recommending that two individuals, Michael J. Falbo and Ulice
Payne, Jr., be elected to director positions at the Meeting, each for a term
expiring on the date of the Company's annual meeting to be held in 2001 or until
their respective successors are duly elected. Mr. Falbo is currently a director
of SFSC. Mr. Payne is a first time nominee to serve as a director of SFSC. Mr.
Payne is being nominated to fill the vacancy resulting from the retirement of
Mr. Robert R. Spitzer from the Company's Board of Directors which will become
effective at the Meeting. Mr. Spitzer has served as a director of SFSC since
1990 and will continue to serve as a director of State Financial Bank and State
Financial Bank - Waterford.
VOTING INFORMATION. Unless otherwise directed, the shares represented by
all properly executed Proxies will be voted by the Proxyholders "FOR" the
election of Messrs. Falbo and Payne. Management does not expect that either Mr.
Falbo or Mr. Payne will be unable to serve as a director, but if that should
occur for any reason prior to the Meeting, the Proxyholders reserve the right to
vote for another person of their choice. Directors are elected by a "plurality"
of the votes cast (assuming a quorum is present). This means that the number of
nominees corresponding to the number of seats on a board of directors to be
filled at a shareholders' meeting who receive the highest number of votes will
be elected. In the case of the Meeting, the two nominees who receive the highest
number of votes for their election as directors will be the persons elected to
the two director positions to be filled at the Meeting. Consequently, any shares
not voted on this matter (whether by abstention, broker nonvote or otherwise)
will have no effect on the election of directors, except to the extent the
failure to vote for an individual results in that individual not receiving a
sufficient number of votes to be elected.
DIRECTORS. The following sets forth, with respect to the nominees and
each director who will continue to serve after the date of the Meeting, his/her
name, age, principal occupation for the last five years, the year in which
he/she first became a director of the Company or a predecessor thereof, the year
in which his/her current term as director will expire, and directorships in
other publicly traded business corporations. SFSC is a bank holding company
which owns State Financial Bank ("SFB"), State Financial Bank Waterford
("SFBW"), and Richmond Bank (collectively referred to as the "Banks"). With the
exception of Mr. Payne, each of the directors of the Company is also a director
of SFB. Messrs. Holz and Falbo are also directors of SFBW and Richmond.
<TABLE>
<CAPTION>
DIRECTOR CURRENT
NAME AGE POSITIONS HELD WITH THE COMPANY SINCE TERM EXPIRES(1)
- ---- --- ------------------------------- ---------- ---------------
<S> <C> <C> <C> <C>
Jerome J. Holz 70 Chairman of the Board and Vice President of SFSC; 1984 1999
Chairman of the Board of SFB; Director of SFBW
and Richmond
Michael J. Falbo 48 President, Chief Executive Officer, and Director of 1984 1998
SFSC; Vice Chairman and Chief Executive Officer
of SFB; Director of SFBW and Richmond.
Richard A. Horn 73 Director of SFSC and SFB 1984 2000
Ulice Payne, Jr. 42 (2) (2) n/a
David M. Stamm 49 Director of SFSC and SFB 1993 1999
Barbara E. Holz-Weis 42 Director of SFSC and SFB 1993 2000
</TABLE>
- --------------
(1) On the date of the annual shareholders' meeting to be held in the year
indicated.
(2) Nominated to serve as a director for the first time at the Company's 1998
Annual Meeting of Shareholders.
3
<PAGE> 5
JEROME J. HOLZ serves as Chairman of the Board and Vice President of
SFSC. In these capacities, he consults on a regular basis with management of
SFSC and the Banks concerning matters of strategic planning, business
development, and company policies. Mr. Holz is also Chairman of the Board of
State Financial Bank. He has been a director of SFSC since its organization in
1984 , a director of SFB since 1960, a director of SFBW since August, 1995, and
a director of Richmond since January, 1998. Mr Holz is Chairman of the Board and
President of Holz Motors, Inc., an automobile dealership with locations in Hales
Corners and Watertown, Wisconsin.
MICHAEL J. FALBO has been President and Chief Executive Officer of SFSC
since 1984. Mr. Falbo is Vice Chairman and Chief Executive Officer of SFB. Mr.
Falbo has been a director of SFSC since its organization in 1984, a director of
SFB since 1983, a director of SFBW since August, 1995, and a director of
Richmond Bank since January, 1998.
RICHARD A. HORN is President of Horn Bros., Inc., a retail feed, seed,
and fertilizer firm located in Muskego, Wisconsin. Mr. Horn has been a director
of SFSC since 1984 and a director of SFB since 1971. Mr. Horn serves on the
Compensation Committee and is Chairman of the Audit Committee.
ULICE PAYNE, JR. has been a partner with the law firm of Foley & Lardner,
Milwaukee, Wisconsin since February 1998, practicing in the firm's securities
and international law practice groups. From 1990 through 1998, Mr. Payne was a
partner with the Milwaukee, Wisconsin law firm of Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, S.C. Prior to 1990, Mr. Payne was a partner with the
Milwaukee, Wisconsin law firm of Whyte Hirschboeck (now known as Whyte
Hirschboeck & Dudek) and served as the Wisconsin Commissioner of Securities.
DAVID M. STAMM is President of the George Webb Corporation, a franchise
restaurant operation with locations in southeastern Wisconsin. Mr. Stamm has
been a director of SFSC since 1993 and of SFB since 1992. Mr. Stamm serves on
the Compensation Committee and the Audit Committee.
BARBARA E. HOLZ-WEIS is the owner of Barb's Greenhouse Florist, a retail
full-service flower shop in Hales Corners, Wisconsin. Mrs. Holz-Weis has been a
director of SFSC since 1993 and of SFB since 1981. Mrs. Holz-Weis serves on the
Compensation Committee and the Audit Committee. Mrs. Holz-Weis is the daughter
of Mr. Holz.
BOARD COMMITTEES. The Board of Directors has the following committees:
COMPENSATION COMMITTEE. The Compensation Committee determines the annual
base salary and other remuneration for the officers of the Company and the
Banks. The Compensation Committee also acts as fiduciaries for the Company's
Money Purchase Pension Plan and Employee Stock Ownership Plan (collectively the
"Plans") and is responsible for conducting the business and activities of the
Plans in accordance with the provisions of the Plans' documents and the
Company's By-Laws. The Compensation Committee consists of the Board of Directors
acting as a committee of the whole. a member of the Compensation Committee who
is also a member of management must abstain from voting on any matters
pertaining directly to them, including but not limited to, review of their
respective salary, bonus, option grants, or incentive awards. The Compensation
Committee met one time during 1997.
STOCK OPTION COMMITTEE. The Stock Option Committee administers the
Company's equity incentive plans. The Stock Option Committee consists of Messrs.
Horn (Chairman), Sptizer and Stamm and Mrs. Holz-Weis and met one time during
1997.
AUDIT COMMITTEE. The Audit Committee is established to assist in
monitoring the independence of the Company's outside auditors and thereby
promote objectivity in the Company's financial reports. The Audit Committee
serves as the liaison between the Company's outside auditors and its Board of
Directors. The Audit Committee's responsibilities include, but are not limited
to, the selecting or recommending the selection of the Company's independent
auditors, reviewing the adequacy of internal controls, consulting with the
outside auditors in regards to the audit scope and plan of audit, and reviewing
with the outside auditors their report of audit including the accompanying
management letter. The Audit Committee is comprised of Messrs. Horn and Stamm
and Mrs. Holz-Weis. The Audit Committee met one time during 1997.
NOMINATING COMMITTEE. The Nominating Committee was established in
January, 1998 to provide a slate of candidates to fill new seats on the Board of
Directors or vacancies that occur from time to time and a slate of candidates
for the Board of Directors to be recommended for election by the shareholders of
the Company. The Nominating Committee consists of the Company's Board of
Directors acting as a committee of the whole with any committee member
abstaining from voting with respect to their respective nomination. The
Nominating Committee will consider persons recommended by shareholders to become
nominees. Recommendations for consideration by the Nominating Committee should
be sent the Secretary of the Company in writing together with the appropriate
biographical information concerning each proposed nominee.
4
<PAGE> 6
COMPENSATION OF DIRECTORS. The Company has established a policy that no
employee of SFSC or the Banks may receive director fees for serving on the
Boards of Directors of the Company or the Banks. Accordingly, Messrs. Holz,
Falbo, Beckwith, and Hudson, who are employees of SFSC, SFB, SFBW, and/or
Richmond and who also serve as directors of SFB, SFBW, and/or Richmond did not
receive any director fees in connection with their respective director positions
for services rendered in that capacity in 1997.
DIRECTORS FEES.
SFSC Directors. Directors of the Company (other than Messrs. Holz and
Falbo) are paid a quarterly retainer of $1,562.50 and $1,562.50 for each regular
quarterly Board meeting attended. During 1997, the Board met four times. Each of
the directors attended at least 75% of the meetings of the Board of Directors
and all meetings of the committees on which each director served.
SFB Directors. In 1997, directors of SFB (other than Messrs. Holz, Falbo,
Beckwith, and Hudson) were paid a quarterly retainer of $400 per quarter, $200
for each quarterly Board meeting attended, and $100 for each Committee meeting
attended.
SFBW Directors. In 1997, directors of SFBW (other than Messrs. Holz and
Falbo, and Lilly) were paid a quarterly retainer of $400, $200 for each monthly
Board meeting attended, and $100 for each Committee meeting attended.
Richmond Directors. In 1997, directors of Richmond (other than Messrs.
Holz, Falbo, Westrope and Mrs. Dubs) were paid $200 for each monthly Board
meeting attended.
DIRECTOR STOCK OPTIONS. The 1990 Director Stock Option Plan (the
"Director SOP") was established for the benefit of directors of SFSC and SFB.
Employees of the Company and SFB who also serve as directors of the Company
and/or SFB are not eligible to participate in the Director SOP as they
participate in the 1990 Stock Option/Stock Appreciation Rights and Restricted
Stock Plan for Key Officers and Employees (the "Officer SOP"). The Director SOP
provides for the granting of Non-Qualified Stock Options ("NSOs") to purchase
shares of the Company's Common Stock and is administered by the Stock Option
Committee of the Board of Directors. Under the Director SOP, the option price
must be equal to the fair market value of the shares on the date of grant.
Options will expire no later than ten years after the date of grant.
Each new director of the Company is granted 4,147 options upon his or her
initial election, and an additional 2,073 options upon his or her first
reelection to the Company's Board of Directors. Each person who is elected to a
Bank Board of Directors for the first time will receive 2,073 options upon his
or her initial election, and an additional 1,036 options upon his or her first
reelection.
In 1997, 2,073 options were granted under the Director SOP to Robert R.
Spitzer, a current director of the Company, in regards to his first election to
the Board of Directors of SFBW.
The Director SOP will be terminated, except as to outstanding options, if
the 1998 Stock Incentive Plan is approved by the shareholders at the Meeting.
DIRECTORS OF OTHER SUBSIDIARIES. During 1997, Messrs. Falbo, Beckwith,
Hudson, Lilly, and Reindl also served as directors of State Financial Mortgage
Company, a wholly-owned subsidiary of SFSC. Messrs. Holz, Falbo, Beckwith, and
Reindl also served as directors of Hales Corners Development Corporation, a
wholly-owned subsidiary of SFB. Messrs. Falbo and Reindl also served as
directors of Hales Corners Investment Corporation and Waterford Investment
Corporation, each a wholly-owned Nevada-chartered subsidiary of SFB and SFBW,
respectively. No directors fees were paid to any of these individuals in regards
to their service on the aforementioned respective Boards of Directors.
COMPENSATION OF EXECUTIVE OFFICERS.
SUMMARY COMPENSATION INFORMATION. The table on the following page sets
forth the annual and long-term compensation for the Company's Chief Executive
Officer and the other executive officers of the Company and the Banks whose
total salaries and bonuses exceeded $100,000 in 1997, as well as the respective
compensation paid to each individual during the Company's last three fiscal
years. The persons named in the table are sometimes referred to herein as the
"Named Executive Officers."
5
<PAGE> 7
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER COMPENSATION
------------------------ -------------------------------------------
MONEY SUPPLEMENTAL
PURCHASE EXECUTIVE
ESOP PENSION PLAN RETIREMENT
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS CONTRIBUTION CONTRIBUTIONS PLAN
($) ($) (1) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Michael J. Falbo 1997 280,000 132,000 14,988 9,200 30,000
President and CEO - State 1996 250,000 120,000 6,405 8,600 24,000
Financial Services Corporation 1995 225,000 100,000 7,676 8,600 19,200
Jerome J. Holz 1997 210,000 125,000 14,988 9,200 -0-
Chairman of the Board - State 1996 210,000 125,000 6,394 8,600 -0-
Financial Services Corporation 1995 190,000 90,000 7,676 8,600 -0-
John B. Beckwith 1997 119,000 40,000 14,426 8,840 -0-
President - State Financial Bank 1996 110,000 35,000 5,922 8,000 -0-
1995 103,000 30,000 6,551 7,280 -0-
Philip F. Hudson 1997 137,000 27,500 14,941 9,170 -0-
Senior Vice President - State 1996 128,000 22,500 6,152 8,330 -0-
Financial Services Corporation 1995 121,000 17,500 6,832 7,610 -0-
Michael A. Reindl 1997 83,000 22,000 9,368 5,600 -0-
Senior Vice President, Controller 1996 73,000 17,000 3,604 4,700 -0-
and Chief Financial Officer - 1995 66,000 12,000 3,919 4,160 -0-
State Financial Services
Corporation
</TABLE>
(1) For Messrs. Falbo, Beckwith, Hudson, and Reindl, the amount represents the
bonus earned in the respective year but paid in the following year. For
Mr. Holz, the bonus was earned and paid in the respective year.
MONEY PURCHASE PENSION PLAN. The Board of Directors of SFSC has adopted
the State Financial Services Corporation and Subsidiaries Money Purchase Plan
("Pension Plan") for the benefit of certain employees of SFSC and its
subsidiaries. The Pension Plan is a tax qualified defined contribution plan
pursuant to which SFSC's contributions are fixed based upon the compensation of
each participant. For each participant, SFSC's contribution to the Pension Plan
is an amount equal to four percent (4%) of the participant's total compensation
and an additional two percent (2%) of the participant's compensation in excess
of $20,000. The amounts contributed by the Company for each Named Executive
Officer during 1997 are included in the Summary Compensation Table.
A participant's account balance becomes 20% vested after completion of
two years of service. Thereafter, a participant's account balance vests 20% each
year until the participant becomes 100% vested after six years of service. A
participant becomes 100% vested in his account balance in the event of death,
disability, or retirement. Normal retirement age under the Pension Plan is 65.
Upon retirement, a participant's account balance may be distributed to him/her
pursuant to his/her election of one of a number of alternative methods of
distribution.
STOCK OPTIONS. The Company has in effect the Officer SOP pursuant to
which options to purchase Common Stock may be granted to officers of the Company
and its subsidiares. No options were granted to the Named Executive Officers
under the Officer SOP in 1997. The Officer SOP will be terminated, except as to
outstanding awards, if the 1998 Stock Incentive Plan is approved by the
shareholders at the Meeting.
6
<PAGE> 8
The following table summarizes options exercised during 1997 and presents
the value of unexercised options held by the Named Executive Officers at
December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1997 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES VALUE UNDERLYING UNEXERCISED OPTIONS AT
NAME ACQUIRED REALIZED OPTIONS AT FISCAL YEAR FISCAL YEAR
- ---- ON EXERCISE (#) ($) (1) END (#) (2) END ($) (2) (3)
--------------- ------- ----------- ---------------
<S> <C> <C> <C> <C>
Michael J. Falbo 4,717 $51,771 3,370 $58,392
Jerome J. Holz 4,629 38,707 2,592 44,917
John B. Beckwith 1,452 15,488 1,037 17,967
Philip F. Hudson 1,244 12,848 3,266 52,988
Michael A. Reindl 653 6,963 -0- -0-
</TABLE>
(1) Values are calculated by subtracting the exercise price from the fair
market value of the stock on the date of exercise.
(2) All options are exercisable at December 31, 1997.
(3) The dollar values are calculated by determining the difference between the
market value of the underlying Common Stock at December 31, 1997 and the
exercise price of the options.
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
DEFERRED COMPENSATION AGREEMENT. SFB has a Deferred Compensation
Agreement dated December 9, 1980 with Jerome J. Holz pursuant to which SFB is
obligated to pay Mr. Holz $1,000 per month for 120 months following termination
of his employment. Payments will commence upon Mr. Holz's voluntary termination,
his involuntary termination for reasons other than cause (as defined in the
agreement), or upon his death or permanent disability. In the event that Mr.
Holz dies before receiving all payments, the balance of the payments will be
made to Mr. Holz's designated beneficiary or heirs. SFB's obligations under this
plan are insured.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In 1994, the Board of Directors
of SFSC adopted the Supplemental Executive Retirement Plan ("Supplemental Plan")
to supplement the benefits received by Mr. Falbo under the Company's qualified
retirement plans. Due to restrictions imposed by the Internal Revenue Service,
SFSC cannot contribute the same percentage of compensation on behalf of Mr.
Falbo that it can contribute on behalf of other employees. As a result, SFSC
makes a limited contribution to its qualified retirement plans on Mr. Falbo's
behalf. Mr. Falbo's right to participate in the Supplemental Plan was effective
with the adoption of the Supplemental Plan. His right to participate in the
Supplemental Plan ceases at the earlier of his termination of employment or the
date the Supplemental Plan is terminated by SFSC.
Pursuant to the Supplemental Plan, SFSC contributes on behalf of Mr.
Falbo an amount equal to 12% of his compensation in excess of the compensation
limits stated under the Internal Revenue Code of 1986 section 401(a)(17) for
that year. Interest on the contributions made to Mr. Falbo's account is credited
annually at a rate equal to the annual interest earnings for the Pension Plan.
Benefits under the Supplemental Plan will begin to be made to Mr. Falbo
at the termination of his employment or his retirement. The form in which
benefits are paid to Mr. Falbo is determined by his age at the time of his
termination or retirement. If Mr. Falbo's employment terminates on or after the
date he attains age 65, benefits will be paid beginning the month following his
termination or retirement and monthly thereafter until the final payment is made
in the month he attains age 80. If Mr. Falbo terminates employment on or after
age 55, but before age 65, SFSC will begin paying Mr. Falbo's accumulated
benefits in monthly installments beginning the first month following his
termination and monthly thereafter until the final payment is made in the month
he attains age 65. If Mr. Falbo dies after termination but before receipt of all
benefits under the plan, the remaining benefits will be paid in installments to
his spouse over the remaining term of the plan, as applicable. In the event Mr.
Falbo dies without a spouse or his widow dies before completion of the
installment payments, the unpaid benefits will be paid to his or, if applicable,
his widow's estate in a lump sum. If Mr. Falbo terminates employment prior to
age 55, SFSC will pay the amount credited on his behalf under the plan as a lump
sum. Mr. Falbo's benefits under the Supplemental Plan will be fully and
completely forfeited in the event he is terminated for cause.
If Mr. Falbo dies before age 65 and before beginning to receive benefits
under the Supplemental Plan, his surviving spouse, or if there is no surviving
spouse his estate, shall be entitled to a lump sum benefit equal to the greater
of one million dollars or the amount credited on Mr. Falbo's behalf under the
Supplemental Plan. The Company's obligations under this plan are insured.
7
<PAGE> 9
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION. The Company's Board
of Directors in its entirety functions as the Compensation Committee. The
Compensation Committee is responsible for all aspects of the compensation
package offered to the executive officers of the Company and the Banks, other
than the awards under the Company's equity-based incentive compensation plans,
which are determined by the Company's Stock Option Committee. The Compensation
Committee meets annually to consider the executive officers' compensation levels
and bonus awards. Directors who are also executive officers of the Company
(Messrs. Falbo and Holz) do not participate in discussions regarding their
respective compensation. The following is a joint report of the Compensation
Committee and the Stock Option Committee.
The Company's executive compensation policies are intended to attract and
retain competent management with a balance of short and long term considerations
and to provide incentives to individuals based upon the Company's financial
performance, growth, and the attainment of certain goals. The Board of Directors
believes this compensation philosophy is critical to the Company's long-term
success.
The compensation package offered to the executive officers of the Company
and the Banks consists of a mix of salary, incentive bonus awards, awards of
stock options and awards of restricted stock as well as benefits under several
employee benefit plans offered by the Company to all employees meeting certain
eligibility requirements as defined by each respective employee benefit plan.
The additional employee benefits include the Pension Plan, ESOP, 401(k) Plan,
and medical/dental insurance coverage.
In setting and adjusting the executive salaries, including the salaries
of the Chief Executive Officer and the named executive officers, it is the
policy of the Compensation Committee to review the base salaries paid or
proposed to be paid by the Company and the Banks with the salaries offered by
financial institutions that are comparable in size to the Company or the
respective Bank. To determine the specific salary range for each executive
officer, the Company utilizes formal financial surveys available from
independent banking associations and consulting organizations which detail
salary ranges for each applicable executive officer position in banks of
comparable asset size This comparison group, since it includes non-public
entities, is not identical to the peer group of companies referred to in the
section titled "Performance Information."
In addition to base salary, the Compensation Committee seeks to provide a
substantial portion of each executive officer's total compensation through bonus
incentives which provide awards based on or tied to the performance of the
Company and the Banks and the applicable executive officers' contribution
thereto. The purpose of these bonus incentives is to more closely align
executive compensation to the annual and long-term financial performance of the
Company and the Banks and to reward key employees for the achievement of certain
goals.
Collectively, the Compensation Committee reviews the comparable
statistical salary information for the Chairman of the Board and the Chief
Executive Officer to determine the compensation levels and bonuses for these
executive officer positions. Messrs. Falbo and Holz are excluded from the
discussions pertaining to their respective salaries and bonuses. For the
remaining executive officers of the Company and the Banks, the Chief Executive
Officer reviews the comparable statistical salary information for each
applicable position and makes specific recommendations for salary adjustments
and bonus awards to the Compensation Committee for their approval. Each of these
recommendations for 1997 were approved by the Compensation Committee as
presented.
The Compensation Committee considered the following factors in making its
executive compensation decisions, including recommended salary increases and
bonus awards, for 1997; (1) the Company's short-term and long-term financial
performance (including an evaluation of the Company's net income, earnings per
share, increases in loans and deposits, return on average assets, return on
average equity, and market performance of the Company's Common Stock); (2) in
regards to each individual executive officer, the financial performance of the
particular area of the Company for which the applicable officer is responsible,
including whether or not that area of the Company achieved its performance
objectives in 1997; (3) an evaluation of the executive's overall job
performance; (4) the compensation levels of executive officers in similar
positions with similar companies; (5) the executive's length of service with the
Company; and (6) other information (such as cost of living increases) and
subjective factors which the Company deems appropriate in the case of a
particular executive. The Compensation Committee subjectively analyzes these
factors, and certain factors may weigh more heavily than others with regard to
an individual executive officer. The Compensation Committee determines the base
salary and bonuses of the Chief Executive Officer and the Chairman of the Board
based on their review of similar competitive compensation data and performance
related criteria. Messrs. Falbo and Holz do not participate in the discussions
regarding their respective compensation levels or bonus awards. With respect to
Mr. Falbo in particular, the Compensation Committee also took into account the
Company's sustained financial performance under his leadership in addition to
the aforementioned criteria, in the determination of his recommended salary
level and awarded bonus.
The executive compensation package of the Company and the Banks also
includes stock option grants. Options granted under the Officer SOP have a per
share exercise price of 100% of the fair market value of a share of Common Stock
on the date of grant, and,
8
<PAGE> 10
accordingly, the value of the option will be dependent upon the future market
value of the Common Stock. The granting of options under the Officer SOP is
administered by the Stock Option Committee, which recommends awards to the
Compensation Committee. It is the policy of the Compensation Committee that
options should provide a long-term incentive and align the interest of
management with the interest of the Company's shareholders. During fiscal 1997,
no new options were granted to executive officers.
In addition to stock option awards, awards of restricted stock may also
be made under the Officer SOP. Awards of restricted stock are based upon the
same factors as those described in the preceding paragraph and generally vest
over a seven year period from the date of award. Similar to stock options,
awards of restricted stock serve to provide long-term incentive for recipients
and tie compensation to Company and Bank performance as reflected in the market
price of the Company's Common Stock. Grants of restricted stock are made on a
highly selective basis to executive officers. From time to time, current
executives may receive grants of restricted stock to recognize corporate
successes and individual contributions. The Stock Option Committee decides
appropriate award amounts based on the circumstances of the situation. No
restricted stock was awarded to the Named Executive Officers during fiscal 1997.
Under Section 162(m) of the Internal Revenue Code (the "Code"), the tax
deduction by corporate taxpayers, such as the Company, is limited with respect
to the compensation of certain executive officers unless such compensation is
based upon performance objectives meeting certain regulatory criteria or is
otherwise excluded from the limitation. The Compensation Committee and the Stock
Option Committee currently intend to qualify compensation paid to the Company's
executive officers for deductibility by the Company under Section 162(m) of the
Code.
<TABLE>
<CAPTION>
State Financial Services Corporation State Financial Services Corporation
Compensation Committee Stock Option Committee
<S> <C> <C> <C>
Michael J. Falbo Richard A. Horn Richard A. Horn (Chairman) Robert R. Spitzer
Jerome J. Holz Robert R. Spitzer Barbara E. Holz-Weis David M. Stamm
Barabara E. Holz-Weis David M. Stamm
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. As indicated
above, Michael J. Falbo, President and Chief Executive Officer of the Company,
and Jerome J. Holz, the Company's Chairman of the Board, serve as members of the
Personnel Committee. Messrs. Falbo and Holz do not participate in the Personnel
Committee's discussions regarding the determination of their respective salaries
or bonus awards. Ulice Payne, Jr. a nominee of the Board of Directors for
election at the Meeting, is a partner in the law firm of Foley & Lardner,
Milwaukee, Wisconsin, which has served as legal counsel to the Company since
February 1998.
PERFORMANCE GRAPH. The following graph shows the cumulative total return
on the Company's Common Stock compared to the returns of the Nasdaq Stock Market
Index for U.S. Companies and the Nasdaq Bank Stock Index. The values in the
graph show the relative performance of a $100 investment made on December 31,
1992 in the Company's Common Stock and in each of the indices. The total return
information presented in the graph assumes the reinvestment of dividends.
Graph depicting the performance returns of the Company's Common Stock to
the returns of the Nasdaq Stock Market and the Nasdaq Bank Stock Index
for the period 1992 - 1997 using the following information.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Nasdaq Stock Market 100 115 112 159 195 240
Nasdaq Bank Index 100 114 114 169 223 373
State Financial Services Corporation 100 113 132 161 229 377
</TABLE>
9
<PAGE> 11
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth, as of
March 27, 1998, for the director-nominees, directors continuing in office, the
Named Executive Officers (see "Compensation of Executive Officers"), and all
directors and executive officers as a group, the number of shares of Common
Stock, stock options, and shares of restricted stock beneficially owned and the
percentage of such shares to the total number of shares outstanding. Except as
indicated in the footnotes, all of the persons listed below have sole voting and
investment power over the shares of Common Stock identified as beneficially
owned.
<TABLE>
<CAPTION>
SUBJECT TO PERCENT OF
DIRECTLY OR STOCK RESTRICTED SHARES
NAME INDIRECTLY (1) OPTIONS (2) STOCK (3) TOTAL OUTSTANDING (4)
- ---- -------------- ----------- --------- ----- ---------------
<S> <C> <C> <C> <C> <C>
Jerome J. Holz 659,163 2,592 -0- 661,755 17.1%
Richard A. Horn (5) 70,795 6,842 -0- 77,638 2.0
Robert R. Spitzer (5) 13,098 4,147 -0- 17,245 *
David M. Stamm (5) 13,494 8,916 -0- 22,410 *
Barbara E. Holz-Weis (5) 57,859 7,932 -0- 65,791 1.7
Michael J. Falbo 65,722 3,370 -0- 69,092 1.7
John B. Beckwith 15,764 1,037 -0- 16,801 *
Philip F. Hudson 12,870 3,266 -0- 16,136 *
Michael A. Reindl 14,143 0 -0- 14,143 *
All Directors and Executive Officers
as a group (12 persons) including
the above-named individuals (5) 1,029,701 38,539 1,210 1,069,450 27.3%
</TABLE>
- --------------
(1) Includes shares owned directly by each individual and the group, as well
as shares owned indirectly (for example as trustee of a trust); also
includes for those individuals who were Participants in the ESOP that
number of shares of Common Stock which were allocated to such
individual's ESOP account as of March 27, 1998, and with respect to which
that individual has voting rights under the provisions of the ESOP.
(2) Shares subject to stock options which are currently exercisable or
exercisable within 60 days of March 27, 1998.
(3) Held by the Secretary of SFSC on behalf of the above-named individuals as
participants in the Officer SOP.
(4) Assumes, for each individual owning options and for the group, the
exercise of that number of options which are currently exercisable or
which will become exercisable within 60 days of March 27, 1998, are
included in the total number of shares. Asterisk denotes less than 1%
ownership.
(5) Messrs. Horn, Spitzer, Stamm, and Holz-Weis are members of the
Administrative Board of the ESOP ("ESOP Board"). As of March 27, 1998,
217,579 shares were held for the ESOP by the independent ESOP trustee, of
which 120,055 had been allocated to ESOP participants' accounts and
97,524 remained unallocated. The ESOP provides that the independent ESOP
trustee must vote shares allocated to a participant's account in
accordance with the direction of the participant. The ESOP Board directs
voting by the independent Trustee, and may also direct the disposition of
unallocated shares. The ESOP Board does not have the power to vote or
direct the vote, or to dispose of or direct the disposition of, shares
which have been allocated to participants' accounts. To avoid
duplication, the individual totals reported in the above table for
Messrs. Horn, Spitzer, and Stamm, and Mrs. Holz-Weis do not reflect the
97,524 unallocated shares of which they are deemed to share beneficial
ownership as members of the ESOP Board; however, the total for all
directors and executive officers as a group does include the 97,524
unallocated shares. If the 97,524 unallocated shares deemed to be
beneficially owned (as a result of such shared voting and dispositive
power) by Messrs. Horn, Spitzer, and Stamm, and Mrs Holz-Weis as members
of the ESOP Board are included in each of their individual totals, the
resulting total numbers of shares and the percentages of Common Stock
beneficially owned by each of them on an individual basis would be as
follows: Richard A. Horn, 175,162 shares (4.5% of the total shares
outstanding) ; Robert R. Spitzer, 114,769 shares (3.0% of the total
shares outstanding); David M. Stamm, 119,934 shares (3.1% of the total
shares outstanding); and Barbara E. Holz-Weis, 163,315 shares (4.2% of
the total shares outstanding).
BENEFICIAL OWNERS. The only persons or entities known to SFSC to
beneficially own more than 5% of the outstanding shares of Common Stock as of
March 27, 1998, are the following:
<TABLE>
<CAPTION>
NAME AND BUSINESS ADDRESS NUMBER OF SHARES PERCENT OF CLASS
- ------------------------- ---------------- --------------
<S> <C> <C>
Jerome J. Holz 661,755 (1) 17.1%
10708 West Janesville Road
Hales Corners, WI 53130
State Financial Services Corporation 217,579 5.6%
Employee Stock Ownership Plan
10708 W. Janesville Road
Hales Corners, WI 53130
John Hancock Advisers, Inc. 224,664 5.8%
101 Huntington Avenue
Boston, MA 02199
- --------------------------------------
</TABLE>
(1) Includes 2,592 shares subject to currently exercisable options and
options exercisable within 60 of March 27, 1998.
10
<PAGE> 12
CERTAIN TRANSACTIONS AND OTHER RELATIONSHIPS WITH MANAGEMENT AND
PRINCIPAL SHAREHOLDERS
INDEBTEDNESS OF MANAGEMENT. Some of the executive officers and directors
of SFSC are, and have been during the preceding three fiscal years, customers of
SFB, and some of the officers and directors of SFB are direct or indirect owners
of 10% or more of corporations which are, or have been in the past, customers of
SFB. As such customers, they have had transactions in the ordinary course of
business (including interest rates and collateral on loans) as those prevailing
at the time for comparable transactions with nonaffiliated persons. In the
opinion of management of SFSC, none of the transactions involved more than the
normal risk of collectability or presented any other unfavorable features. At
December 31, 1997, SFB had $8,868,000 in loans outstanding to the directors and
executive officers of SFSC, which amount represented 23% of total shareholders'
equity at that date. A substantial portion of these outstanding loans were
commercial loans from SFB to Holz Motors, Inc., which is owned by Jerome J.
Holz, who is Chairman of the Board and Vice President of SFSC, and Holz Motors'
affiliated entities; to Horn Bros., Inc., of which Richard A. Horn, a director
of SFSC, is President; and to George Webb Corporation, of which David M. Stamm,
a director of SFSC, is President.
EDGEWOOD PLAZA. SFB leases approximately 4,100 square feet of floor space
in Edgewood Plaza, an office building located at 4811 South 76th Street,
Greenfield, Wisconsin, pursuant to the terms of a lease agreement dated December
20, 1982, and amended June 14, 1993, between SFB and Edgewood Plaza Joint
Venture. Edgewood Plaza Joint Venture is a Wisconsin general partnership that
includes as partners Jerome J. Holz and Richard A. Horn who are directors of
SFSC. The term of the lease will end December 27, 2007. The rent includes a base
rent of approximately $108,000 per year, plus additional rent equal to increases
in operating expenses over those incurred during the base year of 1983.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Under Section
16(a) of the Exchange Act, the Company's directors and executive officers, and
any persons holding greater than 10% of the Company's outstanding Common Stock
are required to report to the Securities and Exchange Commission their initial
ownership of the Company's Common Stock (including stock options) and subsequent
changes thereto. Specific due dates have been established for the filing of
these reports with the Securities and Exchange Commission. The Company is
required to disclose in this Proxy Statement any failure in 1997 to file such
reports by the specific due dates. Based solely on its review of the copies of
such forms received by it, or written representations from certain persons that
no such forms were required for those persons, the Company believes that during
the year ended December 31, 1997, its officers, directors, and greater than 10%
shareholders complied with the filing requirements of Section 16 (a) of the
Exchange Act.
ITEM 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Ernst & Young LLP as
independent auditors to audit the books, records, and accounts of the Company
and its subsidiaries for the year ending December 31, 1998, and proposes that
the shareholders ratify such appointment. Ernst & Young LLP acted as independent
auditors for the year ended December 31, 1997. A representative of Ernst & Young
LLP is expected to attend the Meeting, will have the opportunity to make a
statement, and will be available to respond to appropriate questions.
The vote necessary to ratify the appointment of independent auditors is
governed by Section 180.0725(3) of the Wisconsin Business Corporation Law, which
provides that a matter will be approved if a quorum is present and the number of
votes cast in favor of the matter exceed the number of votes cast in opposition
thereto. Accordingly, a shareholder will be deemed "present" at the Meeting by
proxy because the shareholder has returned a proxy (even if the proxy card
contains no instructions as to voting with respect to the ratification of the
appointment of independent auditors, abstains from voting thereon, or
constitutes a broker "non-vote" with respect thereto). However, unless the
shareholder votes "for" or "against" the ratification of the appointment of
independent auditors, the shareholder's vote will not be counted.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR
THE FISCAL YEAR ENDING DECEMBER 31, 1998.
11
<PAGE> 13
ITEM 3. 1998 STOCK INCENTIVE PLAN
The following summary of the Company's 1998 Stock Incentive Plan (the
"Plan") is qualified in its entirety by reference to the full text of the Plan.
GENERAL. The Plan was established primarily to provide a means for the
Company to attract and retain the services of competent officers, directors and
consultants and motivate high levels of performance by providing them with an
opportunity to acquire an equity interest in the Company. The Plan provides for
awards of stock options and restricted stock.
The Company currently has in effect the 1990 Stock Option/Stock
Appreciation Rights and Restricted Stock Plan for Key Officers and Employees
(the "Officer Plan") and the 1990 Director Stock Option Plan (the "Director
Plan"). As of January 27, 1998, a total of 152,047 and 19,247 shares of Common
Stock were available for awards under the Officer Plan and Director Plan,
respectively. To allow for additional equity based compensation awards to be
made by the Company, the Board adopted the Plan on January 27, 1998, subject to
shareholder approval at the Meeting.
AVAILABLE SHARES. Up to 425,000 shares of Common Stock will be available
for awards under the Plan, subject to adjustment in the event of any stock
dividend or split, recapitalization, reclassification, or other similar
corporate change which affects the total number of shares outstanding. If any
shares of Common Stock subject to awards granted under the Plan are forfeited or
if an award otherwise terminates, expires or is cancelled prior to the delivery
of all of the shares issuable thereunder, such shares will be available for the
granting of new awards under the Plan. Also, if shares of Common Stock are used
to pay the option price of an award or any related withholding taxes, only the
net number of shares actually issued pursuant to the award will be counted
against the maximum number of shares available under the Plan.
ADMINISTRATION. The Plan will be administered by a committee of the Board
of Directors (the "Committee") consisting of not less than two directors who
qualify as "non-employee directors" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and "outside
directors" within the meaning of Section 162(m)(4)(C) of the Internal Revenue
Code (the "Code"). Any awards made to directors who are members of the Committee
must be approved by the Board and not by the Committee. If at any time the
Committee is not in existence, the Board will administer the Plan. Subject to
certain limitations, the Board may delegate the Committee's administrative
authority under the Plan to another committee of the Board or one or more senior
officers of the Company. References in this summary to the Committee also refer
to the Board, as appropriate.
Among other functions, the Committee has the authority to establish rules
for the administration of the Plan; to determine the officers of the Company to
whom awards will be granted; to determine the types of awards to be granted and
the number of shares covered by such awards; and to set the terms and conditions
of such awards. The terms of awards may differ from participant to participant.
The Committee may consider the recommendations of the Chief Executive Officer
with regard to awards to be granted under the Plan.
ELIGIBILITY. Officers and directors of the Company or any subsidiary are
eligible to participate in the Plan, as well as certain consultants who provide
services to the Company. Participants may be selected from among those officers,
directors and consultants recommended for participation by the Chief Executive
Officer, and who, in the opinion of the Committee are in a position to
contribute materially to the Company's growth, development and financial
success. Approximately 47 officers and 14 directors are currently eligible for
consideration to receive awards under the Plan.
EFFECTIVE DATE. The Plan will become effective on the date it is approved
by the shareholders of the Company, which is expected to occur on the date of
the Meeting, May 13, 1998.
STOCK OPTIONS. Options granted under the Plan may be either incentive
stock options meeting the requirements of Section 422 of the Code ("ISOs") or
nonstatutory stock options ("NSOs"). The maximum number of shares that may be
covered by options granted to any individual employee is 42,500 during any
single fiscal year; provided, however, that the fair market value (determined on
the date of grant) of all shares of Common Stock with respect to which ISOs are
exercisable for the first time by a participant during any calendar year may not
exceed $100,000.
EXERCISE PRICE. The exercise price per share of ISOs granted under the
Plan may not be less than the Fair Market Value of a share of Common Stock on
the date of grant (110% in the case of more than 10% shareholders). The exercise
price per share of NSOs granted under the Plan will be determined by the
Committee. There will be no consideration received by the Company from a
participant in exchange for the original grant of an option.
12
<PAGE> 14
TERM. The term of any option will be as determined by the Committee,
provided that the term of an ISO may not exceed ten years from the date of grant
(five years in the case of a more than 10% shareholder).
WHEN EXERCISABLE. Options will become exercisable at such times and be
subject to such restrictions as determined by the Committee.
MANNER OF EXERCISE. Options may be exercised by payment as follows:
(a) in cash;
(b) by tendering shares of Common Stock having a fair market
value at the time of exercise equal to the total option
price;
(c) by any combination of (a) and (b) above; or
(d) by delivery of an executed irrevocable exercise form
together with instructions to a third party to sell or
margin a sufficient portion of the stock and deliver the
proceeds to the Company to pay the option price.
SECTION 422. All ISOs granted under the Plan will also be required to
comply with all other terms of Section 422 of the Code.
ADJUSTMENT OF OUTSTANDING AWARDS. In the event of any stock dividend or
split, recapitalization, reclassification or other similar corporate change
which affects the total number of shares outstanding, the Committee shall make
an appropriate adjustment to change the number of options or the stated option
price, or both, under each outstanding award.
TRANSFERABILITY. Options may not be sold or otherwise transferred other
than by will or pursuant to the laws of descent and distribution, and all
Options granted to a participant under the Plan are exercisable during the
participant's lifetime only by the participant.
FORFEITURE. Except as otherwise determined by the Committee, options
generally will be subject to the following termination provisions:
(1) in the case of death, options may be exercised until 12
months after the date of death;
(2) in the case of termination for reasons other than death or
cause, options may be exercised until 3 months after
the date of termination; and
(3) in the case of termination for cause, options will be
forfeited.
Notwithstanding the foregoing, in all cases an option will not be
exercisable after its expiration date.
ACQUISITIONS. In the event of an "Acquisition" of the Company (generally
an acquisition of more than 50% of its outstanding stock or substantially all of
the Company's assets), the Company may cancel each outstanding option in
exchange for a cash payment to the optionee equal to the difference between the
estimated price per share of Common Stock to be paid in the transaction and the
option exercise price.
SUBSTITUTE OPTIONS. Unless otherwise determined by the Committee, if the
Company at any time should be the surviving corporation through merger or
consolidation, substitute options will be granted so as to preserve the economic
benefits to the optionees.
OTHER TRANSACTIONS. Generally, if the Company is not the surviving
corporation in a merger or consolidation or there is a dissolution or
liquidation of the Company, outstanding options may be replaced with new options
or become immediately exercisable in full, as determined by the Committee.
RESTRICTED STOCK. Shares of restricted stock may be granted to officers
and directors under the Plan, subject to such restrictions as the Committee may
impose. The restrictions imposed on the shares may lapse separately or in
combination at such time or times, or in such installments or otherwise, as the
Committee may deem appropriate. The Committee may condition the lapse of such
restrictions on the passage of time, the attainment of specified performance
goals or otherwise. Such conditions may differ from participant to participant.
FORFEITURE. Except as otherwise determined by the Committee, upon
termination of a participant's employment for any reason during the applicable
restriction period, all shares of restricted stock still subject to restriction
will be forfeited.
13
<PAGE> 15
VOTING AND DIVIDENDS. Prior to the lapse of the applicable restrictions,
shares of restricted stock are entitled to vote and receive dividends and other
distribution on the same basis as all other shares of outstanding Common Stock.
LIMITS OF TRANSFERABILITY. No restricted stock, other than restricted
stock on which the restrictions have lapsed, may be assigned, sold, transferred
or encumbered by any participant, except as otherwise provided by the Committee.
AMENDMENT, MODIFICATION AND TERMINATION. The Board may at any time amend,
alter, suspend, discontinue or terminate the Plan (subject to shareholder
approval if required by or deemed by the Board to be desirable under applicable
law, regulations or exchange listing requirements). Termination of the Plan will
not affect the rights of participants with respect to awards previously granted
to them, and all unexpired awards will continue in force and effect after
termination of the Plan, except as they may lapse or be terminated by their own
terms and conditions.
WITHHOLDING. The Company is entitled to withhold the amount of any tax
attributable to any amount payable or shares of Common Stock deliverable under
the Plan after giving a participant reasonable advance notice, and the Company
may defer making any such payment or delivery if any such tax may be pending,
unless and until indemnified to its satisfaction. A participant may elect to pay
all or a portion of such withholding taxes, by electing to (i) have the Company
withhold shares of Common Stock; (ii) tender back shares of Common Stock
received in connection with an award; or (iii) deliver other previously owned
shares of Common Stock, in each case having a fair market value equal to the
amount to be withheld.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
STOCK OPTIONS. The grant of an NSO under the Plan will create no income
tax consequences to the participant or the Company. A participant who is granted
an NSO will generally recognize ordinary income at the time the NSO is exercised
in an amount equal to the excess of the fair market value of the Common Stock at
such time over the exercise price. The Company will be entitled to a deduction
in the same amount and at the same time as ordinary income is recognized by the
participant. A subsequent disposition of the Common Stock by the participant
will give rise to capital gain or loss to the extent the amount realized from
the sale differs from the tax basis. This capital gain or loss will be a
long-term gain or loss if the Common Stock has been held for the required
holding period under the Code.
In general, a participant will recognize no income or gain as a result of
the grant or exercise of an ISO (except that the alternative minimum tax may
apply). Except as described below, when a participant sells or otherwise
disposes of stock acquired upon the exercise of an ISO the participant will
recognize long-term capital gain or loss in the amount of the difference between
the amount realized upon sale and the exercise price, provided that the Common
Stock is held by the participant for the requisite "holding periods", and no
deduction will be allowed to the Company. The holding periods are two years from
the grant date and one year from the exercise date of the ISO. As a general
rule, if the participant fails to hold the shares of Common Stock acquired
pursuant to the exercise of an ISO for at least two years from the date of grant
of the ISO and one year from the date of exercise (a "Disqualifying
Disposition"), the participant will recognize ordinary income at the time of the
disposition equal to the lesser of (a) the gain realized on the Disqualifying
Disposition; or (b) the excess of the fair market value of the shares of Common
Stock on the date of exercise over the exercise price. In the event of a
Disqualifying Disposition, the Company will be entitled to a deduction in the
same amount and at the same time as ordinary income is recognized by the
participant. Any gain or loss realized by the participant over the fair market
value at the time of exercise of the ISO will be treated as a capital gain or
loss. This capital gain or loss will be a long-term or short-term capital gain,
depending on how long the shares of Common Stock were held by the participant
prior to sale or other disposition.
RESTRICTED STOCK. A participant will not recognize income at the time an
award of restricted stock is made under the Plan, unless the participant makes
the election, within 30 days after the date of the award of restricted stock, to
recognize ordinary income as of the date of the award in an amount equal to the
fair market value of such restricted stock on the date of the award. A
participant does not elect to have the award taxed as ordinary income within 30
days after date of the award of restricted stock will recognize ordinary income
at the time the restrictions on the stock lapse. The ordinary income recognized
will be in an amount equal to the fair market value of the restricted stock at
such time. The Company will be entitled to a corresponding deduction in the same
amount and at the same time as the participant recognizes income. Any otherwise
taxable disposition of the restricted stock after the time the restrictions
lapse will result in capital gain or loss (long-term or short-term depending on
the length of time the restricted stock is held after the time the restrictions
lapse). Dividends paid in cash and received by a participant prior to the time
the restrictions lapse will constitute ordinary income to the participant in the
year paid. Any dividends paid in Common Stock will be treated as an award of
additional restricted stock subject to the tax treatment described herein.
14
<PAGE> 16
FUTURE AWARDS. No awards have been made to date under the Plan. The
Company cannot currently determine the awards that may be granted in the future
to employees and directors under the Plan. Such determinations will be made from
time to time by the Committee or Board as appropriate. During 1997, certain
awards were granted to executive officers and directors under the Officer Plan
and Director Plan. No stock options or shares of restricted stock were granted
to the executive officers during 1997 under the Officer Plan. During 1997,
options to purchase a total of 1,920 shares were granted to all other officers
as a group under the Officer Plan at an average exercise price of $21.88. During
1997 an aggregate of 600 shares of restricted stock were granted to all other
officers as a group under the Officer Plan. Stock options granted under the
Director Plan during 1997 are disclosed under the caption "Director Stock
Options."
On March 18, 1998, the last reported sales price per share of the Common
Stock on the Nasdaq Stock Market was $26.75.
VOTE REQUIRED. The vote necessary to approve the Plan is governed by
Section 180.0725(3) of the Wisconsin Business Corporation Law, which provides
that a matter will be approved if a quorum is present and the number of votes
cast in favor of the matter exceed the number of votes cast in opposition
thereto. Accordingly, a shareholder will be deemed "present" at the Meeting by
proxy because the shareholder has returned a proxy (even if the proxy card
contains no instructions as to voting with respect to the ratification of the
appointment of independent auditors, abstains from voting thereon, or
constitutes a broker "non-vote" with respect thereto). However, unless the
shareholder votes "for" or "against" the adoption of the Plan, the shareholder's
vote will not be counted.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ADOPTION
OF THE STATE FINANCIAL SERVICES CORPORATION 1998 STOCK INCENTIVE PLAN.
ITEM 4. OTHER MATTERS
The matters referred to in the foregoing Notice of Meeting and Proxy
Statement are, as far as the Board of Directors knows, the only matters which
will be presented for consideration at the Meeting. If any other matters
properly come before the Meeting, the Proxyholders named in the accompanying
Proxy will vote on them in accordance with their best judgement exercising the
authority conferred thereby.
By Order of the Board of Directors
/s/ Michael J. Falbo
MICHAEL J. FALBO,
President and Chief Executive Officer
April 3, 1998
15
<PAGE> 1
EXHIBIT 99.5
STATE FINANCIAL SERVICES CORPORATION
1998 STOCK INCENTIVE PLAN
Article 1. Establishment and Purpose
1.1 Establishment. State Financial Services Corporation, a Wisconsin
corporation (the "Company"), hereby establishes a stock option plan for
Participants and others providing services to the Company, as described herein,
which shall be known as the State Financial Services Corporation 1998 Stock
Incentive Plan (the "Plan"). It is intended that certain of the options issued
pursuant to the Plan to Participants of the Company may constitute incentive
stock options within the meaning of section 422 of the Internal Revenue Code,
and that other options issued pursuant to the Plan shall constitute nonstatutory
options.
1.2 Purpose. The purpose of the Plan is to provide a means for the
Company to attract and retain competent personnel and to provide to
participating directors, officers and other key Participants long term
incentives for high levels of performance by providing them with a means to
acquire a proprietary interest in the Company's success.
Article II. Definitions
2.1 Definitions. For purposes of this Plan, the following terms shall be
defined as follows:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means the definition of Cause in Optionee's employment
agreement, if any, with the Company. If no such employment
agreement or definition in such agreement exists, Cause means
(i) breach by Optionee of any covenant not to compete or
confidentiality agreement with the Company, (ii) failure by
Optionee to substantially perform his duties to the reasonable
satisfaction of the Board, (iii) serious misconduct by
Optionee which is demonstrably and substantially injurious to
the Company, (iv) fraud or dishonesty by Optionee with respect
to the Company, (v) material misrepresentation by Optionee to
a stockholder or director of the Company or (vi) acts of
negligence by Optionee in performance of Optionee's duties
that are substantially injurious to the Company. The Board, by
majority vote, shall make the determination of whether Cause
exists.
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
(d) "Commission" means the Securities and Exchange Commission or
any successor agency.
(e) "Committee" means the Committee provided for by Article IV
hereof, which may be created at the discretion of the Board.
(f) "Company" means State Financial Services Corporation, a
Wisconsin corporation. When applicable in the context, "the
Company" also means each direct and indirect subsidiary of
State Financial Services Corporation.
(g) "Consultant" means any person or entity, including an officer
or director of the Company who provides services (other than
as an Employee) to the Company and includes a Qualified
Director, as defined below.
(h) "Date of Exercise" means the date the Company receives notice,
by an Optionee, of the exercise of an Option pursuant to
section 8.1 of this Plan. Such notice shall indicate the
number of shares of Stock the Optionee intends to purchase
upon exercise of an Option.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.
(j) "Fair Market Value" means the fair market value of Stock upon
which an Option is granted under this Plan, as determined by
the Board. If the Stock is traded on an over-the-counter
securities market or national securities exchange, "Fair
Market Value" shall mean an amount equal to the average of the
highest and lowest reported sales prices of the Stock reported
on such over-the-counter market or such national securities
exchange on the applicable
1
<PAGE> 2
date or, if no sales of Stock have been reported for that
date, on the next preceding date for which sales were
reported.
(k) "Incentive Stock Option" means an Option granted under this
Plan which is intended to qualify as an "incentive stock
option" within the meaning of section 422 of the Code.
(l) "IRS" means the Internal Revenue Service, or any successor
agency.
(m) "Nonstatutory Option" means an Option granted under this Plan
which is not intended to qualify as an incentive stock option
within the meaning of section 422 of the Code. Nonstatutory
Options may be granted at such times and subject to such
restrictions as the Board shall determine without conforming
to the statutory rules of section 422 of the Code applicable
to incentive stock options.
(n) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the option price for a specified
period of time. For purposes of this Plan, an Option may be an
Incentive Stock Option or a Nonstatutory Option.
(o) "Optionee" means a Participant or Consultant holding an Option
or Restricted Stock under the Plan.
(p) "Parent Corporation" shall have the meaning set forth in
section 424(e) of the Code with the Company being treated as
the employer corporation for purposes of this definition.
(q) "Participant" means any officer or director of the Company or
any direct or indirect subsidiary of the Company.
(r) "Qualified Director" means a director who is both (a) a
"Non-Employee Director" within the meaning of Rule 16b-3 under
the Exchange Act, or any successor definition adopted by the
Commission, and (b) an "Outside Director" under section 162(m)
of the Code and the regulations promulgated thereunder, or any
successor definition adopted by the IRS.
(s) "Restricted Stock" means an award under Article XI.
(t) "Rule 16b-3" means Rule 16b-3, as promulgated by the
Commission under Section 16(b) of the Exchange Act, as amended
from time to time.
(u) "Significant Stockholder" means an individual who, within the
meaning of section 422(b)(6) of the Code, owns stock
possessing more than ten percent of the total combined voting
power of all classes of stock of the Company. In determining
whether an individual is a Significant Stockholder, an
individual shall be treated as owning stock owned by certain
relatives of the individual and certain stock owned by
corporations in which the individual is a partner, and estates
or trusts of which the individual is a beneficiary, all as
provided in section 424(d) of the Code.
(v) "Stock" means the Common Stock, par value $.10 per share, of
the Company.
2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine terminology when used in this Plan also shall include the feminine
gender and the definition of any term herein in the singular shall also include
the plural.
Article III. Eligibility and Participation.
3.1 Eligibility and Participation. All Participants are eligible to
participate in this Plan and receive Incentive Stock Options, Nonstatutory
Options and/or Restricted Stock. All Consultants are eligible to participate in
this Plan and receive Nonstatutory Options hereunder. Optionees in the Plan
shall be selected by the Board from among those Participants and Consultants
who, in the opinion of the Board, are in a position to contribute materially to
the Company's continued growth and development and to its long-term financial
success.
Article IV. Administration.
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4.1 Administration. The Plan shall be administered by a committee (the
"Committee") selected by the Board, consisting of two or more members of the
Board. The members of the Committee may be directors who are eligible to receive
Options under the Plan, but Options may be granted to such persons only be
action of the full Board and not by action of the Committee. In the event that
the full Board grants Options to a director, the Plan shall be administered by
the Board with respect to such Options. If at any time the Committee shall not
be in existence, the Board shall administer the Plan. To the extent that the
Board administers the Plan, all references to the Committee hereing shall
include the Board. To the extent permitted by applicable law, the Board may
delegate to another committee of the Board or to one or more senior officers of
the Company any or all of the authority and responsiblitiy of the Committee iwht
respect to the Plan, other than with respect to Optionees who are subject to
Section 16 of the Exchange Act. To the extent that the board has delegated to
such other committee or one or more officers the authority and responsibility of
the Committee, all references to the Committee herein shall include such other
committee or one or more officers.
Subject to the express provisions of the Plan, the Committee shall
have complete authority to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to provide for conditions and
assurances deemed necessary or advisable to protect the interests of the
Company, and to make all other determinations necessary or advisable for the
administration of the Plan. Subject to the express provisions of the Plan, the
Committee shal also have complete authority to determine the types of awards and
the number of shares covered by the awards and the terms, conditions,
restrictions and other provisions of such awards. Determinations,
interpretations or other actions made or taken by the Committee pursuant to the
provisions of the Plan shall be final, binding and conclusive for all purposes
and upon all persons.
To the extent that the Board administers the Plan, the Board shll
have all of the enumerated powers of the Committee. No member of the Board or
the Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option or Restricted Stock granted under it.
The Board may from time to time remove members from, or add members
to, the Committee. The Board may terminate the Committee at any time. Vacancies
on the Committee, howsoever caused, shall be filled by the Board. The Committee
shall select one of its members as Chairman and shall hold meetings at such
times and places as the Chairman may determine. A majority of the Committee at
which a quorum is present, or acts reduced to or approved in writing by all of
the member of the Committee, shall be the valid acts of the Committee. A quorum
shall consist of two-thirds (2/3) of the members of the Committee.
4.2 Special Provisions for Grants to Officers or Directors. Rule
16b-3 provides that the grant of a stock option or share of stock to a director
or officer of a company subject to the Exchange Act will be exempt from the
provisions of Section 16(b) of the Exchange Act if the conditions set forth in
Rule 16b-3 are satisfied. Unless otherwise specified by the Board, grants of
Options or Restricted Stock hereunder to individuals who are officers or
directors of the Company for purposes of Section 16(b) of the Exchange Act shall
be made in a manner that satisfies the conditions of Rule 16b-3.
Article V. Stock Subject to the Plan.
5.1 Number. The total number of shares of Stock hereby made available
and reserved for issuance under the Plan shall be 425,000, of which not more
than 425,000 shares of Stock may be issued as Options intended to be Incentive
Stock Options. The maximum number of shares of Stock that may be covered by
Options granted to any one Participant under the Plan shall be 42,500 during any
single fiscal year. The aggregate number of shares of Stock available under this
Plan shall be subject to adjustment as provided in section 5.3. The total number
of shares of Stock may be authorized but unissued shares of Stock, or shares
acquired by purchase as directed by the Board from time to time in its
discretion, to be used for issuance as Restricted Stock or upon exercise of
Options granted hereunder.
5.2 Unused Stock; Payment with Stock. If an Option shall expire or
terminate for any reason without having been exercised in full, the unpurchased
shares of Stock subject thereto shall (unless the Plan shall have terminated)
become available for other Options under the Plan and if any shares of Stock
that are subject to any Restricted Stock award are forfeited, such shares again
shall be available for distribution in connection with awards under this Plan.
In addition, upon the full or partial payment of any option price by the
transfer to the Company of shares of Stock pursuant to section 7.7, upon
satisfaction of tax withholding obligations with shares of Stock pursuant to
section 15.1 or any other payment made or benefit realized under this Plan by
the transfer or relinquishment of shares of Stock, only the net number of shares
of Stock actually issued or transferred by the Company, after subtracting the
number of shares of Stock so transferred or relinquished, will be charged
against the maximum share limitation set forth in section 5.1 above.
5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification or other similar corporate change, the
aggregate number of shares of Stock set forth
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in section 5.1 shall be appropriately adjusted by the Board, whose determination
shall be conclusive; provided, however, that fractional shares shall be rounded
to the nearest whole share. In any such case, the number and kind of shares that
are subject to any Option (including any Option outstanding after termination of
employment) and the Option price per share shall be proportionately and
appropriately adjusted without any change in the aggregate Option price to be
paid therefor upon exercise of the Option.
Article VI. Duration of the Plan.
6.1 Duration of the Plan. The Plan shall be in effect for ten years
from the date of its approval by the Company's stockholders. Any Options or
Restricted Stock outstanding at the end of such period shall remain in effect in
accordance with their terms. The Plan shall terminate before the end of such
period if all Stock subject to the Plan has been purchased pursuant to the
exercise of Options granted under the Plan or issued as shares of Restricted
Stock no longer subject to risk of forfeiture.
Article VII. Terms of Stock Options.
7.1 Grant of Options. Subject to section 5.1, Options may be granted to
Participants or Consultants at any time and from time to time as determined by
the Board; provided, however, that Consultants may receive only Nonstatutory
Options and may not receive Incentive Stock Options. The Board shall have
complete discretion in determining the number of Options granted to each
Optionee. In making such determinations, the Board may take into account the
nature of services rendered by such employee or Consultant, their present and
potential contributions to the Company, and such other factors as the Board in
its discretion shall deem relevant. The Board shall also determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Option.
In the cases of Incentive Stock Options, the total Fair Market
Value (determined at the date of grant) of shares of Stock with respect to which
Incentive Stock Options are exercisable for the first time by the Optionee
during any calendar year under all plans of the Company under which incentive
stock options may be granted (and all such plans of any Parent Corporation and
any subsidiary corporations of the Company) shall not exceed $100,000.
(Hereinafter, this requirement is sometimes referred to as the "$100,000
Limitation.")
Nothing in this Article VII of the Plan shall be deemed to prevent
the grant of Options permitting exercise in excess of the maximums established
by the preceding paragraph where such excess amount is treated as a Nonstatutory
Option.
7.2 No Tandem Options. Where an Option granted under this Plan is
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under section 422 of the Code. If an Incentive Stock
Option at any time would be deemed a tandem stock option with the meaning of the
regulations under section 422 of the Code, the Incentive Stock Option shall be
treated as a Nonstatutory Option.
7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise
Specified. As determined by the Board on the date of grant, each Option shall be
evidenced by an Option agreement (the "Option Agreement") that includes the
nontransferability provisions required by section 11.2 hereof and specifies:
whether the Option is an Incentive Stock Option or a Nonstatutory Option; the
Option price; the duration of the Option; the number of shares of Stock to which
the Option applies; any vesting or exercisability restrictions which the Board
may impose; in the case of an Incentive Stock Option, a provision implementing
the $100,000 Limitation; and any other terms and conditions as shall be
determined by the Board at the time of grant of the Option.
All Option Agreements shall incorporate the provisions of this
Plan by reference, with certain provisions to apply depending upon whether the
Option Agreement applies to an Incentive Stock Option or to a Nonstatutory
Option.
7.4 Option Price. No Incentive Stock Option granted pursuant to this
Plan shall have an Option price that is less than the Fair Market Value of Stock
on the date the Option is granted. Incentive Stock Options granted to
Significant Stockholders shall have an Option price of not less than 110 percent
of the Fair Market Value of Stock on the date of grant. The Option price for
Nonstatutory Options shall be established by the Board.
7.5 Term of Options. Each Option shall expire at such time as the Board
shall determine when it is granted, provided, however, that no Option shall be
exercisable later than the tenth anniversary date of its grant. Incentive Stock
Options granted to significant stockholders will be exercisable over not more
than five years after the date of grant, unless otherwise provided by the Code.
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7.6 Exercise of Options. Options granted under this Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for all
Optionees.
7.7 Payment.
(a) Payment for all shares of Stock shall be made at the time
that an Option, or any part thereof, is exercised, and no shares shall be issued
until full payment therefor has been made (except that, in the case of an
exercise described in Section 7.7 (b), payment may be made as soon as
practicable after the exercise). Such payment may be made in cash, outstanding
shares of Stock, in combinations thereof, or any other method of payment
approved by the Board; provided, however, that (I) the deposit of any
withholding tax shall be made in accordance with applicable law and (ii) that
such shares of Stock used to pay the exercise price have been held by the
Participant for at least six months prior to the exercise date. If shares of
Stock are being used in part or full payment for the shares to be acquired upon
exercise of the Option, such shares shall be valued for the purpose of such
exchange as of the date of exercise of the Option at the Fair Market Value of
the shares. Any certificates evidencing shares of Stock used to pay the purchase
price shall be accompanied by stock powers duly endorsed in blank by the
registered holder of the certificate (with signatures thereon guaranteed). In
the event the certificates tendered by the holder in such payment cover more
shares than are required for such payment, the certificate shall also be
accompanied by instructions from the holder to the Company's transfer agent with
regard to the disposition of the balance of the shares covered thereby.
(b) The Board may permit an Optionee to pay the exercise price
of an Option by authorizing a third party to sell shares of Stock (or a
sufficient portion of the shares) acquired upon exercise of the Option and remit
to the Company a sufficient portion of the sales proceeds to pay the entire
exercise price and any tax withholding resulting from such exercise.
Article VIII. Written Notice, Issuance of Stock Certificates, Stockholder
Privilege.
8.1 Written Notice. An Optionee wishing to exercise an Option shall
give written notice to the Company, in the form and manner prescribed by the
Board. Full payment for the Options exercised, except as provided in section 7.7
above, must accompany the written notice.
8.2 Issuance of Stock Certificate. As soon as practicable after the
receipt of written notice and payment, the Company shall deliver to the Optionee
or to a nominee of the Optionee a certificate or certificates for the requisite
number of shares of Stock.
8.3 Privileges of a Stockholder. An Optionee or any other person
entitled to exercise an Option under this Plan shall not have stockholder
privileges with respect to any Stock covered by the Option until the date of
issuance of a stock certificate for such Stock.
Article IX. Termination of Employment or Services.
Except as otherwise expressly specified by the Board, all
Options granted under this Plan shall be subject to the following termination
provisions.
9.1 Death. If an Optionee's employment in the case of an Employee, or
provision of services as a Consultant in the case of a Consultant, terminates by
reason of death, the Option may thereafter be exercised at any time prior to the
expiration date of the Option or within 12 months after the date of such death,
whichever period is the shorter, by the person or persons entitled to do so
under the Optionee's will or, if the Optionee shall fail to make a testamentary
disposition of an Option or shall die intestate, the Optionee's legal
representative or representatives. The Option shall be exercisable only to the
extent that such Option was exercisable as of the date of death.
9.2 Termination Other Than for Cause or Due to Death. In the event of
an Optionee's termination of employment in the case of an Employee, or
termination of the provision of services as a Consultant in the case of a
Consultant, other than for Cause or by reason of death, the Optionee may
exercise such portion of his Option as was exercisable by him at the date of
such termination (the "Termination Date") at any time within three months of the
Termination Date; provided, however, that where the Optionee is an Employee, and
is terminated due to disability within the meaning of Code section 22(e)(3) or
any successor provision, he may exercise such portion of his Option as was
exercisable by him on his Termination Date within one year of his Termination
Date. In any event, the Option cannot be exercised after the expiration of the
original term of the Option. Options not exercised within the applicable period
specified above shall terminate.
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In the case of an Employee, a change of duties or position
within the Company, if any, shall not be considered a termination of employment
for purposes of this Plan. The Option Agreements may contain such provisions as
the Board shall approve with respect to the effect of approved leaves of absence
upon termination of employment.
9.3 Termination for Cause. In the event of an Optionee's termination of
employment in the case of an Employee, or termination of the provision of
services as a Consultant in the case of a Consultant, which termination is by
the Company for Cause, any Option or Options held by him under the Plan, to the
extent not exercised before such termination, shall forthwith terminate.
Article X. Rights of Optionees
10.1 Service. Nothing in this Plan shall interfere with or limit in any
way the right of the Company to terminate any Employee's employment, or any
Consultant's services, at any time, nor confer upon any Employee any right to
continue in the employ of the Company, or upon any Consultant any right to
continue to provide services to the Company.
10.2 Nontransferability. Options granted under this Plan shall be
nontransferable by the Optionee, other than by will or the laws of descent and
distribution, and shall be exercisable during the Optionee's lifetime only by
the Optionee.
Article XI. Restricted Stock
11.1 Administration. Shares of Restricted Stock may be issued either
alone or in addition to other awards granted under the Plan. The Committee shall
determine the Participants to whom and the time or times at which grants of
Restricted Stock will be made, the number of shares to be awarded, the time or
times within which such awards may be subject to forfeiture and any other terms
and conditions of the awards, in addition to those contained in Section 11.3.
The Committee may condition the grant of Restricted Stock upon
the attainment of specified performance goals or such other factors or criteria
as the Committee shall determine. The provisions of Restricted Stock awards need
not be the same with respect to each recipient.
11.2 Awards and Certificates. Each Participant receiving a Restricted
Stock award shall be issued a certificate in respect of such shares of
Restricted Stock. Such certificate shall be registered in the name of such
Participant and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, substantially in the
following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the State Financial Services Corporation 1998 Stock Incentive
Plan. Copies of such Plan and Agreement are on file at the offices of State
Financial Services Corporation, 10708 West Janesville Road, Hales Corners,
Wisconsin 53130."
The Committee may require that the certificates evidencing such
shares be held in custody by the Company until the restrictions thereon shall
have lapsed and that, as a condition of any Restricted Stock award, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Stock covered by such award.
11.3 Terms and Conditions. Shares of Restricted Stock shall be subject
to the following terms and, conditions:
(a) Subject to the provisions of the Plan and the Restricted
Stock Agreement referred to in Section 11.3(f), during a period set by the
Committee, commencing with the date of such award (the "Restriction Period"),
the Participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock. Within these limits, the
Committee may provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions, in whole or in part, based on service,
performance and such other factors or criteria as the Committee may determine.
(b) Except as provided in this paragraph (b), and Section
11.3(a), the Participant shall have, with respect to the shares of Restricted
Stock, all of the rights of a stockholder of the Company, including the right to
vote the shares and the right to receive any dividends, unless otherwise
determined by the Committee and other distributions made with respect to those
shares while they are so held. If any such dividends or distributions are paid
in shares of Stock, the shares will be subject to the same restrictions on
transferability as the shares of Restricted Stock with respect to which they
were paid.
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(c) Except to the extent otherwise provided in the applicable
Restricted Stock Agreement and Sections 11.3(a) and (d), upon termination of a
Participant's employment for any reason during the Restriction Period, all
shares still subject to restriction shall be forfeited by the Participant.
(d) In the event of hardship or other special circumstances of a
Participant whose employment is involuntarily terminated (other than for cause),
the Committee may waive in whole or in part any or all remaining restrictions
with respect to such Participant's shares of Restricted Stock.
(e) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction Period,
unlegended certificates for such shares shall be delivered to the Participant.
(f) Each award shall be confirmed by, and be subject to the terms
of, a Restricted Stock Agreement.
Article XII. Amendment, Modification
and Termination of the Plan
12.1 Amendment, Modification, and Termination of the Plan. The Board
may at any time amend, alter, suspend, discontinue or terminate the Plan;
provided, however, that stockholder approval of any amendment of the Plan shall
be obtained if otherwise required by (a) the Code or any rules promulgated
thereunder (in order to allow incentive stock options to be granted under the
Plan or the enable the Company to comply with the provisions of ss. 162(m) of
the Code so that the Company can deduct compensation in excess of limitations
set forth therein), or (b) the listing requirements of the principal securities
exchange or market on which the Stock is then traded (in order to maintain the
listing or quotation of the Stock thereon). To the extent permitted by
applicable law, the Committee may also amend the Plan, provided that any such
amendments shall be reported to the Board.
No amendment, modification or termination of the Plan shall in any
manner adversely affect any outstanding Option or share of Restricted Stock
under the Plan without the consent of the Optionee holding the Option or share
of Restricted Stock.
12.2 Waiver of Conditions. The Committee may, in whole or in part,
waive any conditions or other restrictions with respect to any award granted
under the Plan.
Article XIII. Acquisition, Merger and Liquidation
13.1 Acquisition. Notwithstanding anything herein to contrary, in the
event that an Acquisition (as defined below) occurs with respect to the Company,
the Company shall have the option, but not the obligation, to cancel Options
outstanding as of the effective date of Acquisition, whether or not such Options
are then exercisable, in return for payment to the Optionees for each Option of
an amount equal to a reasonable, good faith estimate of an amount (hereinafter
the "Spread") equal to the difference between the net amount per share payable
in the Acquisition, or as a result of the Acquisition, less the exercise price
per share of the Option. In estimating the Spread, appropriate adjustments to
give effect to the existence of the Options shall be made, such as deeming the
Options to have been exercised, with the Company receiving the exercise price
payable thereunder, and treating the shares receivable upon exercise of the
Options as being outstanding in determining the net amount per share. For
purposes of this section, an "Acquisition" shall mean any transaction in which
substantially all of the Company's assets are acquired or in which a controlling
amount of the Company's outstanding shares are acquired, in each case by a
single person or entity or an affiliated group of persons and/or entities. For
purposes of this section a controlling amount shall mean more than 50% of the
issued and outstanding shares of stock of the Company. The Company shall have
such an option regardless of how the Acquisition is effectuated, whether by
direct purchase, through a merger or similar corporate transaction, or
otherwise. In cases where the acquisition consists of the acquisition of assets
of the Company, the net amount per share shall be calculated on the basis of the
net amount receivable with respect to shares upon a distribution and liquidation
by the Company after giving effect to expenses and charges, including but not
limited to taxes, payable by the Company before the liquidation can be
completed.
Where the Company does not exercise its option under this
section 13.1, the remaining provisions of this Article XIII shall apply, to the
extent applicable.
13.2 Merger or Consolidation. Subject to section 13.1 and to any
required action by the stockholders, if the Company shall be the surviving
corporation in any merger or consolidation, any Option granted hereunder shall
pertain to and apply to the securities to which a holder of the number of shares
of Stock subject to the Option would have been entitled in such merger or
consolidation.
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13.3 Other Transactions. Subject to section 13.1, dissolution or a
liquidation of the Company or a merger and consolidation in which the Company is
not the surviving corporation shall cause every Option outstanding hereunder to
terminate as of the effective date of the dissolution, liquidation, merger or
consolidation. However, the Optionee either (I) shall be offered a firm
commitment whereby the resulting or surviving corporation in a merger or
consolidation will tender to the Optionee an option (the "Substitute Option") to
purchase its shares on terms and conditions both as to number of shares and
otherwise, which will substantially preserve to the Optionee the rights and
benefits of the Option outstanding hereunder granted by the Company, or (ii)
shall have the right immediately prior to such dissolution, liquidation, merger,
or consolidation to exercise any unexercised Options whether or not then
exercisable, subject to the provisions of this Plan. The Board shall have
absolute and uncontrolled discretion to determine whether the Optionee has been
offered a firm commitment and whether the tendered Substitute Option will
substantially preserve to the Optionee the rights and benefits of the Option
outstanding hereunder. In any event, any Substitute Option for an Incentive
Stock Option shall comply with the requirements of the Code.
Article XIV. Securities Registration
14.1 Securities Registration. In the event that the Company shall deem
it necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to qualify
any such Options or Stock under the Securities Act of 1933, as amended, or any
other statute, then the Optionee shall cooperate with the Company and take such
action as is necessary to permit registration or qualification of such Options
or Stock.
Unless the Company has determined that the following
representation is unnecessary, each person exercising an Option under the Plan
or receiving shares of Restricted Stock may be required by the Company, as a
condition to the issuance of the shares of Restricted Stock or shares pursuant
to exercise of the Option, to make a representation in writing that he will
comply with all securities laws applicable to the sale of such shares and such
other restrictions as the Company may deem appropriate. The Company may also
require that the certificates representing such shares contain legends
reflecting the foregoing.
Article XV. Tax Withholding
15.1 Tax Withholding. Whenever shares of Stock are to be issued in
satisfaction of Options exercised under this Plan, the Company shall have the
power to require the recipient of the Stock to remit to the Company an amount
sufficient to satisfy federal, state and local withholding tax requirements.
Unless otherwise determined by the Board, withholding obligations may be settled
with Stock, including Stock that is part of the award that gives rise to the
withholding requirement. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements, and the Company, its subsidiaries
and affiliates shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment otherwise due to the participant.
Article XVI. Indemnification
16.1 Indemnification. To the extent permitted by law, each person who
is or shall have been a member of the Board shall be indemnified and held
harmless by the Company against and from any loss, cost, liability, or expense
that may be imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may be a party
or in which he may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of judgment in any such action, suit or proceeding against him, provided he
shall give the Company an opportunity, at its own expense, to handle and defend
it on his own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's articles of incorporation or bylaws, as a matter of
law, or otherwise, or any power that the Company may have to indemnify them or
hold them harmless.
Article XVII. Requirements of Law
17.1 Requirements of Law. The granting of Restricted Stock and Options
and the issuance of shares of Stock upon the exercise of an Option shall be
subject to all applicable laws, rules, and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may be required.
17.2 Governing Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the state of Wisconsin.
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Article XVIII. Compliance with Code
18.1 Compliance with Code. Incentive Stock Options granted hereunder
are intended to qualify as "incentive stock options" under Code section 422. If
any provision of this Plan is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with Incentive Stock
Options granted under this Plan being treated as incentive stock options under
the Code. Options granted hereunder to any person who is a "covered employee"
under Code section 162(m) at any time when the Company is subject to Code
section 162(m) are intended to qualify as performance-based compensation within
the meaning of Code section 162(m)(4)(C). If any provision of this Plan is
susceptible to more than one interpretation, such interpretation shall be given
thereto as is consistent with Options granted under this Plan to such "covered
Participants" being treated as performance-based compensation under Code section
162(m).
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