SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to _________
Commission File Number 0-18166
STATE FINANCIAL SERVICES CORPORATION
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(Exact name of registrant as specified in its charter)
WISCONSIN 39-1489983
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130
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(Address and zip code of principal executive offices)
(414) 425-1600
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(Registrant's telephone number, including area code)
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, $0.10 par value.
Preferred Share Purchase Rights.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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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]
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant as of March 17, 2000 was approximately
$74,187,014, based on the following assumptions: (1) the market value of the
Common Stock of $10.63 per share which was equal to the closing price on the
Nasdaq Stock Market on March 17, 2000; and (2) 6,979,023 shares of Common Stock
held by nonaffiliates as of March 17, 2000. As of March 17, 2000, there were
8,587,289 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II incorporate certain information by reference from portions of the
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1999, (the "Annual Report"), which are filed as an Exhibit to this Report.
Part III incorporates information by reference from Registrant's definitive
Proxy Statement relating to Registrant's 2000 Annual Meeting of Shareholders
(the "Proxy Statement").
<PAGE>
INDEX
PART I
Page
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Item 1. BUSINESS 1
Item 2. PROPERTIES 8
Item 3. LEGAL PROCEEDINGS 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND 10
RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 10
ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 12
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 13
Item 11. EXECUTIVE COMPENSATION 14
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 14
AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 14
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 14
REPORTS ON FORM 8-K
<PAGE>
SIGNATURES Signature Page
EXHIBITS FILED AS PART OF FORM 10-K Exhibit Index
<PAGE>
PART I
ITEM 1. BUSINESS.
General
State Financial Services Corporation, together with its consolidated
subsidiaries is hereinafter referred to as the "Company", "SFSC", or
"Registrant". SFSC is a Wisconsin corporation organized in 1984 as a bank
holding company headquartered in Hales Corners, Wisconsin. SFSC owns State
Financial Bank (Wisconsin) ("SFB"), State Financial Bank - Waterford ("SFB -
Waterford"), State Financial Bank (Illinois) ("Richmond"), Home Federal Savings
and Loan Association of Elgin ("Home"), and Bank of Northern Illinois,
N.A.("BNI") (collectively referred to as the "Banks"). The Company also operates
State Financial Mortgage Company ("SFMC"), which originates fixed and variable
rate mortgages to sell in the secondary market, and Lokken, Chesnut & Cape
("LCC"), an asset management and financial planning company. 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 for cash all of the outstanding common stock
of Richmond Bancorp, Inc., the parent holding company of Richmond and State
Financial Investments, Inc. ("SFI@ formerly known as Richmond Financial
Services, Inc.). In 1998, the Company acquired LCC in exchange for the Company's
common stock. Effective December 15, 1998, Home Bancorp of Elgin, Inc. ("HBE"),
the parent holding company of Home, was merged with and into the Company (the
AMerger"). The Merger was consummated in accordance with the terms of an
Agreement and Plan of Merger dated June 2, 1998 (the AMerger Agreement"),
between the Company and HBE. Matters with respect to the Merger were approved by
the shareholders of the Company and HBE at special meetings of shareholders of
such companies held on November 5, 1998. In 1999, the Company acquired all of
the outstanding common stock of First Waukegan Corporation, the parent holding
company of BNI, in exchange for cash.
SFB has eight full-service locations, SFB- Waterford has three
full-service office locations, Richmond has two full-service office locations,
Home has five full-service office locations, and BNI has five 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. Four of SFB's offices; Brookfield, Muskego, and the two
Waukesha offices 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 and an office in Elkhorn which is located in Walworth County,
Wisconsin. Richmond has offices in Richmond, Illinois which is located in
McHenry County, and Libertyville, Illinois which is located in Lake County. Home
has offices in Elgin, South Elgin, and Bartlett, Illinois, which are located in
Kane County; Roselle, Illinois, which is located in Cook County; and Crystal
Lake, Illinois, which is located in McHenry County. BNI has three offices in
Waukegan, Gurnee and Libertyville, Illinois, which is located in Lake County and
two offices in Glenview, Illinois, which is located in Cook County.
Forward-Looking Statements
Certain matters discussed herein are "forward-looking statement"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context will include
words such as the Company "believes," anticipates," "expects" or "estimates" or
words of similar meaning. Similarly, statements that describe the Company's
future plans, objectives, targets or goals are also forward-looking statements.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those anticipated as
of the date of this report. Such factors include, but are not limited to, the
following: changes in interest rates; levels of consumer bankruptcies; customer
loan and deposit preferences; the ability of SFSC to effect its business
strategy; unanticipated issues associated with the ongoing deregulation of the
banking industry; and general economic conditions. Shareholders, potential
investors and other readers are urged to consider these factors in evaluating
the forward-looking statements and are cautioned not to place undue reliance on
such forward-looking statement. The forward-looking statements included herein
are only made as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
<PAGE>
Business Strategy. SFSC is strongly committed to community banking and
places a high degree of emphasis on developing full service banking and
financial services relationships with its business and retail customers. To
capitalize on management's knowledge of its immediate market, SFSC operates each
of its offices with substantial independence, supported by centralized
administrative and operational functions to promote efficiency while permitting
the management responsible for each office the flexibility to concentrate on
customer service and business development in its market area. To be an effective
community bank, SFSC believes the decision-making process must stem primarily
from the Banks with respect to their credit decisions and array of products.
SFSC believes the empowerment of the day-to-day decision making to the
individual office locations remains critical to its success as an effective
community banking organization.
The Banks seek to develop and enhance full-service banking
relationships through a systematic calling program directed at both existing
customers and referral sources from their customer base, attorneys, accountants
and business people. The officers and employees of the 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 accounts, 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 indirect subsidiaries of SFSC, namely, SFI and
State Financial Insurance Agency ("SFIA"). The Bank's lending products include
secured and unsecured commercial, mortgage, construction and consumer term loans
on both a fixed and variable rate basis. Historically, the terms on these loans
range from one month to five years and are retained in the respective bank's
portfolio. The Banks provide lines of credit to commercial accounts and to
individuals through home equity products. The Banks also offer various trust
services through BNI's trust operation.
Prior to the Merger, Home's lending products were exclusively
one-to-four family residential owner-occupied mortgage loans, offering both
fixed and adjustable rates. Commencing with the Merger, the Company began
diversifying Home's lending products into commercial and consumer loans similar
to those offered at the other Banks. Home and the Company hired two experienced
commercial lenders from the Elgin and Crystal Lake communities to develop Home's
commercial lending activities. On the consumer side, Home and the Company hired
an experienced retail lender to head up the entire retail loan and deposit
operation at Home.
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. These services are provided
through SFSC's subsidiary SFMC and through Home and BNI's mortgage operation.
Through its LCC subsidiary, the Company provides asset management and
financial planning services to its customers and markets.
The Company's acquisition efforts over the preceding two years have
focused on expanding its community banking network and adding complimentary
financial services such as insurance, asset management, and trust services to
its product line. The Company entered these ancillary financial product lines as
part of its strategic objective to capitalize on these growing segments of the
financial services industry. The Company believes this strategy is essential if
it is to continue to effectively compete in the era of financial deregulation.
The Company's goal is to build a large share of this business which is currently
being provided to its banking customers by unaffiliated providers and to attract
new customer relationships by providing a comprehensive source of financial
services delivered in the community banking tradition of attention to
personalized service and individual attention.
Competition and Market Environment. Each of the Banks' offices
experience substantial competition from other financial institutions, including
other banks, savings banks, credit unions, mortgage banking companies consumer
finance companies, mutual funds, and other financial service providers located
in their respective and surrounding communities. The Banks compete for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations and banking hours, 24-hour account access through telephone and
personal computer delivery systems, and other services. The 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
<PAGE>
mergers and consolidations involving both commercial and thrift institutions,
have resulted in a reduction in the level of competition for small to medium
sized business customers in the Banks' market areas, as well as a reduction in
the level of service provided to both retail and commercial customers. The
Company and the Banks also compete for customers by emphasizing the personalized
service and individualized attention each provides to both retail and commercial
customers. The Company markets itself as a full-service provider of financial
products and services, as well as offering related financial products such as
retail and commercial property and casualty insurance, asset management and
financial planning, and brokerage activities through its other subsidiaries and
representatives. Management considers its reputation for customer service as its
major competitive advantage in attracting and retaining customers in its market
areas. The Company also believes that it benefits from its community
orientation, as well as its established deposit base and level of core deposits.
Employees. At December 31, 1999, the Company and the Banks employed
327 full-time and 125 part-time employees. The Company considers its
relationships with its employees to be good.
The Banks and Other Subsidiaries
At or for the year ended December 31, 1999, the SFB (consolidated with
its subsidiaries) had total assets of $305.3 million, net loans of $214.6
million, total deposits of $270.8 million, stockholders' equity of $22.9
million, net income of $4.5 million, and a return on average assets of 1.53%. At
or for the year ended December 31, 1999, SFB - Waterford (consolidated with its
subsidiary) had total assets of $58.2 million, net loans of $40.7 million, total
deposits of $51.4 million, stockholders' equity of $5.1 million, net income of
$0.5 million, and a return on average assets of 0.81%. At or for the year ended
December 31, 1999, Richmond Bancorp, Inc. (consolidated with its subsidiaries)
had total assets of $79.2 million, net loans of $2.7 million, total deposits of
$60.6 million, stockholders' equity of $11.9 million, a net loss of $0.01
million and a return on average assets of (0.01%). At or for the year ended
December 31, 1999, Home had total assets of $411.2 million, net loans of $359.7
million, total deposits of $280.2 million, stockholders equity of $64.8 million,
a net income of $2.8 million, and a return on average assets of 0.70%. At or for
the year ended December 31, 1999, BNI had total assets of $228.2 million, net
loans of $84.5 million, total deposits of $185.7 million, stockholders' equity
of $32.7 million, net income of $0.3 million, and a return on average assets of
0.27%.
State Financial Bank. 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, life insurance products, and other
investments through three in-house representatives. SFB also offers property,
casualty and life insurance products through SFIA. At December 31, 1999, SFB,
consolidated with its subsidiaries, comprised 28.0% of SFSC's consolidated total
assets. The following table sets forth SFB's full-service and loan production
office locations:
Year
Acquired by
Year State
Community Address Originated Financial
- - --------- ------- ---------- -----------
Hales Corners, WI 10708 West Janesville Road 1910 (1)
Muskego, WI S76 W17655 Janesville Road 1968 (1)
Milwaukee, WI 2650 North Downer Avenue 1971 1985
Milwaukee, WI (2) 2460 North 6th Street 1994 (1)
Greenfield, WI 4811 South 76th Street 1978 1987
Glendale, WI 7020 North Port Washington Road 1990 (1)
Brookfield, WI 12600 West North Avenue 1990 1992
Waukesha, WI 400 East Broadway 1977 1993
Waukesha, WI 1700 Coral Drive 2000 (1)
- - ---------------------------
(1) Organized de novo by SFB or a predecessor thereof.
(2) Loan Production Office
SFB has two wholly owned subsidiaries which are consolidated into its
operations. Hales Corners Investment Corporation is a subsidiary created to
manage the majority of SFB's investment portfolio with the objective of
enhancing the overall return on SFB's investment securities. Hales Corners
Development Corporation ("HCDC") is a subsidiary which owns the real estate
related
<PAGE>
to the Hales Corners and Muskego offices, and eight commercial and residential
rental properties located adjacent to the Hales Corners office. In 1999, HCDC
completed its sale of vacant land in New Berlin to a competing financial
institution. In February, 1999, HCDC accepted an Offer to Purchase from a local
developer on the eight commercial and residential rental properties located
adjacent to SFB's Hales Corners office, subject to the satisfaction of several
contingencies. The developer expects to level the various properties and
construct various retail outlets anchored by a newly constructed major food
store. HCDC expects the sale of these properties to be completed in 2000.
State Financial Bank - Waterford. 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, life insurance products, and other investments through three in-house
representatives. SFB-Waterford also offers property, casualty and life insurance
products through SFIA. At December 31, 1999, SFB- Waterford, consolidated with
its subsidiary, comprised 5.3% of SFSC's consolidated total assets. The
following table sets forth SFB - Waterford's full-service office locations:
Year
Acquired by
Year State
Community Address Originated Financial
- - --------- ------- ---------- -----------
Waterford, WI 217 North Milwaukee Street 1906 1995
Burlington, WI 1050 Milwaukee Avenue 1997 (1)
Elkhorn, WI 850 North Wisconsin Street 1999 (1)
- - ---------------------------
(1) Organized de novo by SFB - Waterford.
SFB - Waterford has a wholly owned subsidiary, Waterford Investment
Corporation, which was formed in 1995 to manage the majority of SFB -
Waterford's investment portfolio with the objective of enhancing the overall
return on the bank's investment securities.
State Financial Bank (Illinois). 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 an in
house representative and insurance products through its subsidiary SFIA. At
December 31, 1999, Richmond consolidated with its parent holding company
Richmond Bancorp, Inc., its affiliate SFI, and its subsidiary SFIA, comprised
7.3% of SFSC's consolidated total assets. The following table sets forth
Richmond's full-service office locations:
Year
Acquired by
Year State
Community Address Originated Financial
- - --------- ------- ---------- -----------
Richmond, IL 10910 Main Street 1920 1997
Libertyville, IL 1509 North Milwaukee Avenue 1992 1997
SFI 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. Effective December 31, 1999, SFI was merged into Richmond
and the services formerly provided by SFI are now conducted by Richmond through
one in-house representative. Prior to its acquisition by SFSC, SFI also engaged
in the sale of numerous lines of insurance products to individuals and
businesses. Concurrent with the acquisition, Richmond formed SFIA as a
wholly-owned subsidiary to assume the insurance activities previously operated
under SFI. Through SFIA, the Company markets retail and commercial property and
casualty insurance to all of the Banks' customers.
Home Federal Savings & Loan Association of Elgin. Home 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 and thrifts. Home also sells
annuities, life insurance products, and other investments through three in-house
representatives. Home also offers property, casualty and life insurance products
through SFIA. Prior to the Merger, Home's lending activities consisted almost
entirely of loans secured by mortgages on one-to-four family
<PAGE>
residences. Following the Merger, Home and the Company have strategically
refocused Home's business activities to mirror those provided by the Company's
other Banks. At December 31, 1999, Home comprised 37.7% of SFSC's consolidated
total assets. The following table sets forth Home's full-service office
locations:
Year
Acquired by
Year State
Community Address Originated Financial
- - --------- ------- ---------- -----------
Elgin, IL 16 North Spring Street 1883 1998
Bartlett, IL 200 Bartlett Avenue 1979 1998
Crystal Lake, IL 180 Virginia Street 1974 1998
Roselle, IL 56 East Irving Park Road 1975 1998
South Elgin, IL 300 North McLean Blvd. 1996 1998
- - ---------------------------
Bank of Northern Illinois, N. A. BNI 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. BNI operates a trust department and also sells
annuities, life insurance products and other investments through an in-house
representative. BNI also sells property, casualty and life insurance through
SFIA. At December 31, 1999, BNI comprised 20.9% of SFSC's consolidated total
assets. The following table sets forth BNI's full-service office locations:
Year
Acquired by
Year State
Community Address Originated Financial
- - --------- ------- ---------- -----------
Waukegan, IL 1 S. Genessee 1852 1999
Gurnee, IL 1313 North Delany 1987 1999
Glenview, IL 1301 Waukegan Road 1960 1999
Glenview, IL 1441 Waukegan Road 1968 1999
Libertyville, IL 929 North Milwaukee Ave 1993 1999
- - ---------------------------
BNI has a wholly-owned subsidiary, State Financial Funding Corporation
("SFFC"), which was formed in 2000 to manage certain real estate assets held by
BNI's previous subsidiary, State Financial Real Estate Investment Corporation
("SFREIC"). Previously a subsidiary of BNI, SFREIC became a wholly-owned
subsidiary of SFFC upon SFFC's formation. SFREIC was formed in 1999 to manage
certain real estate loans and investment securities to enhance the overall
return derived from these assets.
State Financial Mortgage Company. SFMC was formed to expand the
origination of secondary market real estate mortgages on behalf of the Company
and the Banks. BNI also operates a secondary mortgage origination division,
which assumed the operations of SFMC effective January 1, 2000.
Lokken, Chesnut & Cape. LCC is engaged in asset management and
financial planning for commercial and individual customers. LCC also acts as an
investment advisor to qualified retirement plans such as 401(k)'s and pension
plans. LCC markets its services in and around its La Crosse, Wisconsin
headquarters, as well as throughout all of the Company's 23 banking locations.
At December 31, 1999, LCC comprised 0.2% of SFSC's consolidated total assets.
Pending Charter Consolidation. The Company has announced its intention
to consolidate the charters of SFB, SFB-Waterford, Richmond, Home and BNI into a
single national commercial banking charter. The Company expects to realize a
variety of operational efficiencies as a result of the charter consolidation
while continuing to provide the high level or personalized service and
responsiveness each of the Bank's customers have always enjoyed. The charter
consolidation is subject to certain regulatory approvals and is currently
expected to be completed by the beginning of forth quarter 2000.
<PAGE>
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 as amended (the AAct"), 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 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. Home is a federally chartered
thrift and as such is supervised and examined by the Office of Thrift
Supervision ("OTS"). BNI is a nationally chartered bank regulated by the Office
of the Comptroller of the Currency ("OCC"). Additionally, the Banks' deposits
are insured by the FDIC and are subject to the provisions of the Federal Deposit
Insurance Act. LCC is a registered investment advisor and is regulated by the
Securities and Exchange Commission.
The Company's Common Stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Accordingly, the Company is subject to the periodic reporting, proxy
solicitation and tender offer rules, insider trading restrictions and other
requirements under the Exchange Act.
In recent years Congress has enacted significant legislation which has
substantially changed the federal deposit insurance system and the regulatory
environment in which depository institutions and their holding companies
operate. The enforcement powers of the federal regulatory agencies responsible
for supervisory authority over SFSC and the Banks have significantly increased
as a result of legislation such as the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), the Comprehensive Thrift and Bank Fraud
Prosecution and Taxpayer Recovery Act of 1990 and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). Certain parts of such
legislation, most notably those which increase deposit insurance assessments,
authorize further increases to recapitalize the Bank Insurance Fund and the
Savings Association Insurance Funds which affect the cost of doing business for
depository institutions and their holding companies. FIRREA also provides that
all commonly controlled FDIC insured depository institutions may be held liable
for any loss incurred by the FDIC resulting from a failure of, or any assistance
given by the FDIC, to any commonly controlled institutions. Federal regulatory
agencies have implemented provisions of FDICIA with respect to taking prompt
corrective action when a depository institution's capital fails to meet certain
defined levels. FDICIA established five capital categories ranging from
Acritically undercapitalized@ to Awell 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, 1999, SFSC and the
Banks each met the Awell-capitalized@ definition of capital adequacy.
As a result of many of such regulatory changes, the nature of the
banking industry in general has changed dramatically in recent years as
increasing competition and a trend toward deregulation have caused the
traditional distinctions among different types of financial institutions to be
obscured. Further changes along these lines could permit other financially
oriented businesses to offer expanded services, thereby creating greater
competition for the SFSC and the Banks with respect to services currently
offered or which may in the future be offered by those entities. Proposals for
new legislation or rule making affecting the financial services industry are
continuously being advanced and considered at both the national and state
levels.
The Gramm-Leach-Bliley Act or Financial Services Modernization Act of
1999 (the "GLB Act") significantly changes financial services regulation by
expanding permissible nonbanking activities of bank holding companies and
removing barriers
<PAGE>
to affiliations among banks, insurance companies, securities firms and other
financial services entities. These new activities can be conducted through a
holding company structure or, subject to certain limitations, through a
financial subsidiary of a bank. The GLB Act also establishes a system of federal
and state regulation based on functional regulation, meaning the primary
regulatory oversight for a particular activity will generally reside with the
federal or state regulator designated as having the principal responsibility for
that activity. Banking is to be supervised by banking regulators, insurance by
state insurance regulators and securities activities by the SEC and state
insurance regulators. The GLB Act also establishes a minimum federal standard of
financial privacy by, among other provisions, requiring banks to adopt and
disclose privacy policies with respect to customer information and prohibiting
the disclosure of certain types of customer information to third parties not
affiliated with the bank unless the customer has been given an opportunity to
block that type of disclosure. The GLB Act also requires the disclose of
agreements reached with community groups that relate to the Community
Reinvestment Act, and contains various other provisions designed to improve the
delivery of financial services to consumers while maintaining an appropriate
level of safety in the financial services industry.
The GLB Act repeals the anti-affiliation provision of the
Glass-Steagall Act and revises the Act to permit qualifying holding companies,
called "financial holding companies," to engage in, or to affiliate with
companies engaged in, a full range of financial activities including banking,
insurance activities (including insurance underwriting and portfolio investing),
securities activities, merchant banking and additional activities that are
"financial in nature," incidental to financial activities or, in certain
circumstances, complementary to financial activities. A bank holding company's
subsidiary banks must be "well-capitalized" and "well-managed" and have at lease
a "satisfactory" Community Reinvestment Act rating for the bank holding company
to elect status as a financial holding company. The Company has not elected to
become a financial holding company.
The Company expects that the new affiliations and activities permitted
financial services organizations may over time change the nature of its
competition. At present, however, it is not possible to predict the full nature
and effect of the changes that may occur.
The activities and operations of banks are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and the
antitrust laws. The Community Reinvestment Act includes provisions under which
the federal bank regulatory agencies must consider, in connection with
applications for certain required approvals, including applications to acquire
control of a bank or holding company or to establish a branch, the records of
regulated financial institutions in satisfying their continuing and affirmative
obligations to help meet the credit needs of their local communities, including
those of low and moderate-income borrowers.
The Riegel-Neal Interstate Banking and Branching Efficiency Act of
1994 (the AEfficiency 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 also allowed interstate branching.
In addition to the impact of regulation, commercial banks and thrifts
are affected significantly by the actions of the FRB as it attempts to control
the money supply and credit availability in order to influence economic
activity. Monetary policy changes have previously had a significant effect on
operating results of financial institutions and are expected to have such an
effect in the future. No prediction can be made as to possible future changes in
interest rates, deposit levels, and loan demand, or their effect on the business
and earnings of SFSC and the Banks.
<PAGE>
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 pursuant to the following schedule.
<TABLE>
Annual Report
<CAPTION>
Guide 3 Heading Annual Report Heading Page Number
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
I Distribution of Assets, Liabilities Income Statement Analysis 6,7,8, and 9
and Stockholders' Equity; Interest
Rates and Interest Differential
II Investment Portfolio Investment Activities 17
III Loan Portfolio Lending Activities 13
IV Summary of Loan Loss Experience Risk Elements in the Loan Portfolio 14
V Deposits Deposits 18
VI Return on Equity and Assets Selected Consolidated Financial Data 5 and 23
and Capital Resources
VII Short-Term Borrowings Liquidity 19
</TABLE>
The following schedule of projected loan losses by category for the
period January 1, 2000 through December 31, 2000, required by Industry Guide 3
is not included in Management's Discussion and Analysis in the Annual Report
(dollars in thousands).
Charge-offs Recoveries Net
----------- ---------- ---
Commercial $ 665 $ 57 $ 608
Installment 340 76 264
Real estate 150 10 140
Other 20 4 16
----------- ---------- ----------
TOTAL $ 1,175 $ 147 $ 1,028
ITEM 2. PROPERTIES
The following table sets forth the locations of the Company's banking
offices.
<TABLE>
<CAPTION>
Office Address Sq. Feet Owned/Leased Lease Expires
<S> <C> <C> <C> <C>
Hales Corners, WI (1,2) 10708 W. Janesville Road 37,000 Owned n/a
Muskego, WI (1) S76 W17655 Janesville Road 2,680 Owned n/a
Milwaukee, WI 2650 N. Downer Avenue 3,000 Leased 2000
Milwaukee, WI (3) 2460 N. 6th Street 100 Leased month to month
Greenfield, WI (4) 4811 S. 76th Street 9,000 Leased 2007
Glendale, WI (5) 7020 N. Port Washington Road 7,500 Leased 2010
Brookfield, WI 12600 W. North Avenue 4,800 Owned n/a
Waukesha, WI 400 E. Broadway 3,300 Owned n/a
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Office Address Sq. Feet Owned/Leased Lease Expires
<S> <C> <C> <C> <C>
Waukesha, WI (9) 1700 Coral Ave 8,836 Owned n/a
Waterford, WI 217 N. Milwaukee Street 10,100 Owned n/a
La Crosse, WI 201 Main Street 2,205 Leased 2004
Burlington, WI 1050 Milwaukee Avenue 6,300 Leased 2006
Elkhorn, WI (7) 850 North Wisconsin Street 9,200 Owned n/a
Richmond, IL (6) 10910 Main Street 16,030 Owned n/a
Libertyville, IL (8) 1509 N. Milwaukee Avenue 2,690 Leased 2006
Elgin, IL 16 N. Spring Street 34,169 Owned n/a
South Elgin, IL 300 N. McLean Blvd. 5,200 Owned n/a
Bartlett, IL 200 Bartlett Avenue 5,418 Owned n/a
Crystal Lake, IL 180 Virginia Street 8,268 Owned n/a
Roselle, IL 56 E. Irving Park Road 3,800 Owned n/a
Waukegan, IL 1 S. Genessee 21,000 Owned n/a
Gurnee, IL 1313 North Delany 15,000 Owned n/a
Glenview, IL 1301 Waukegan Road 7,500 Owned n/a
Glenview, IL 1441 Waukegan Road 2,500 Leased 2005
Libertyville, IL 929 North Milwaukee Avenue 4,200 Owned n/a
1. Property is owned by SFB's wholly owned subsidiary, Hales Corners Development Corporation.
2. SFB subleases approximately 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. SFB-Waterford occupies approximately 3,000 square feet and is attempting to lease the remaining 6,200
square feet to outside tenants.
8. Richmond leases this property from Upland Farms, an entity owned by a director of Richmond, Charles F.
Wonderlic.
9. SFB occupies approximately 4,036 square feet and is attempting to lease the remaining 4,800 square feet
to outside tenants.
</TABLE>
<PAGE>
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
None.
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 5 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 6 of
the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 impact 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
<PAGE>
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 from 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 be
effective. The Company has not purchased derivative financial instruments in the
past.
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 refinance 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
<PAGE>
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, 1999. 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
borrowings are also reported based on conversion or repricing dates.
Quantitative Disclosures of Market Risk
<TABLE>
<CAPTION>
- - --------------------------- ------------ ----------- ----------- ----------- ----------- ------------ ------------ ------------
Fair Value
Maturity Date 2000 2001 2002 2003 2004 Thereafter Total 12/31/99
- - --------------------------- ------------ ----------- ----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate
loans $102,985,878 $69,995,450 $69,646,437 $45,978,326 $52,312,343 $241,656,569 $582,575,003 $569,841,186
Average interest rate 8.49% 8.30% 8.30% 7.87% 7.71% 7.13% 7.75%
Variable interest rate
loans $67,527,271 $10,382,085 $10,973,351 $5,621,762 $7,547,153 $64,474,474 $166,526,096 $166,526,096
Average interest rate 8.94% 8.86% 8.72% 8.60% 8.47% 8.12% 8.57%
Fixed interest rate
securities $18,018,300 $30,741,113 $24,384,150 $32,515,803 $21,582,587 $94,084,751 $221,326,704 $221,968,305
Average interest rate 5.56% 6.37% 6.69% 6.64% 6.78% 6.79% 6.60%
- - --------------------------- ------------ ----------- ----------- ----------- ----------- ------------ ------------ ------------
Rate sensitive liabilities:
Savings & interest-
bearing checking $429,487,470 --- --- --- --- --- $429,487,470 $429,487,470
Average interest rate 2.98% --- --- --- --- --- 2.98%
Time deposits $217,046,896 $45,433,144 $13,743,498 $13,489,443 $10,163,319 0 $299,876,300 $255,462,420
Average interest rate 5.24% 5.45% 5.81% 5.98% 6.21% 0.00% 5.36%
Variable interest rate
borrows $129,592,418 --- --- --- --- --- $129,592,418 $129,592,418
Average interest rate --- --- --- --- --- 7.47%
- - --------------------------- ------------ ----------- ----------- ----------- ----------- ------------ ------------ ------------
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements beginning on page 23 of the
Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors. The information contained under the captions "Proposal
No.1. Election of Directors--Directors" and "Miscellaneous Section 16(a)
Beneficial Ownership Reporting Compliance" 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 46 President, SFB; Senior Vice President of SFSC 1994
Philip F. Hudson 67 Chairman of the Board and CEO, Richmond; Vice Chairman, 1999
BNI; Senior Vice President of SFSC
Daniel L. Westrope 50 President and CEO, Home; Richmond; Senior Vice 1998
President, SFSC
Michael A. Reindl 40 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. Mr. Beckwith has
also served as Senior Vice President of SFSC since November, 1997. From 1994 to
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. Mr. Beckwith has served as a director of SFB, or a
predecessor thereof since 1991 and a director of SFMC since 1997. Mr. Beckwith
joined the Company in 1990.
Philip F. Hudson has been Chairman and CEO of Richmond since January
1999 and Vice Chairman of BNI since its acquisition by the Company in June 1999.
In these capacities, responsible for the operation and performance of each
respective institution. Mr. Hudson has also served as Senior Vice President of
SFSC since November 1997. From 1994 to 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. Mr. Hudson
joined the Company in 1985 when SFSC acquired the former University National
Bank in Milwaukee, Wisconsin, continuing with the Company through 1987 and
rejoining the Company in 1990. Mr. Hudson has served as a director of SFB or a
predecessor thereof from 1985 through 1987 and again since 1990. He has also
served as a director of Richmond since 1998 and BNI since June 1999.
Daniel L. Westrope has been President and Chief Executive Officer of
Home since December, 1998. From February, 1998 to December 1998, Mr. Westrope
was Chairman of the Board and Chief Executive Officer of Richmond, 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 First Union 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. Mr. Westrope has been a director
of Richmond since 1998, a director of Home since December 1998, and a director
of LCC since September, 1998.
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 1995, 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 has been a director of LCC
since September, 1998. Mr. Reindl joined the Company in 1984.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the captions "Proposal No.1. Election
of Directors, Compensation of Directors" and "Compensation of Executive
Officers" in the Proxy Statement is incorporated herein by reference; provided,
however, that the information under the subheading "Board of Directors Report on
Executive Compensation" and "Performance Graph" shall not be deemed to be
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND BENEFICIAL
OWNERS
The information contained under the caption "Proposal 1. Election of
Directors--Security Ownership of Management and Certain Beneficial Owners" in
the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Proposal 1. Election of
Directors--Certain Transactions and Other Relationships with Management and
Principal Shareholders" in the Proxy Statement is incorporated herein by
reference.
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, 1999, are incorporated by reference in Item 8:
Annual
Report
Page #
Report of independent auditors 22
Consolidated balance sheets --
December 31, 1999 and 1998 23
Consolidated statements of income --
Years ended December 31, 1999, 1998, and 1997 24
Consolidated statements of stockholders' equity --
Years ended December 31, 1999, 1998, and 1997 25
Consolidated statements of cash flows --
Years ended December 31, 1999, 1998, and 1997 26
<PAGE>
Notes to Consolidated Financial Statements* 27
*Note 20 in the Company's Notes to Consolidated Financial
Statements presents Segment Information for the Company's
significant reporting segments. For the year ended December 31,
1998, the information contained under the heading "Home Federal
Savings and Loan Association of Elgin" contains the consolidated
results of Home and its former parent holding company Home
Bancorp of Elgin, Inc,.
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:
None.
(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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
By: /s/ Michael J. Falbo
---------------------------------
Michael J. Falbo, President
and Chief Executive Officer
Date: March 29, 2000
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.
Principal Executive and Financial Officers
/s/ Jerome J. Holz Chairman of the Board
- - --------------------- and Vice President March 29, 2000
Jerome J. Holz
/s/ Michael J. Falbo President and Chief
- - --------------------- Executive Officer March 29, 2000
Michael J. Falbo
/s/ Michael A. Reindl Senior Vice President, Controller,
- - --------------------- and Chief Financial Officer March 29, 2000
Michael A. Reindl
Directors
/s/ Jerome J. Holz Director March 29, 2000
- - ---------------------
Jerome J. Holz
/s/ Michael J. Falbo Director March 29, 2000
- - ---------------------
Michael J. Falbo
/s/ Richard A. Horn Director March 29, 2000
- - ---------------------
Richard A. Horn
/s/ Thomas S. Rakow Director March 29, 2000
- - ---------------------
Thomas S. Rakow
/s/ Ulice Payne, Jr. Director March 29, 2000
- - ---------------------
Ulice Payne, Jr.
/s/ David M. Stamm Director March 29, 2000
- - ---------------------
David M. Stamm
/s/ Barbara E. Weis Director March 29, 2000
- - ---------------------
Barbara E. Weis
signature page
<PAGE>
STATE FINANCIAL SERVICES CORPORATION
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED December 31, 1999
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 not applicable
or in effect. Except as specifically noted below, all of the exhibits
identified are filed herewith.
Exhibit
Number Description
- - ------- -----------
2.1 Agreement and Plan of Merger, dated as of June 1, 1998, by and between
Registrant and Home Bancorp of Elgin, Inc. (12)
2.2 Agreement and Plan of Reorganization between Registrant and Eastbrook
State Bank, dated January 22, 1992, as amended and restated. (6)
2.3 Branch Purchase and Assumption Agreement between Eastbrook State Bank
and North Shore Bank, FSB, dated December 29, 1992. (1)
2.4 Agreement and Plan of Merger By and Among Registrant, WBAC, Inc., and
Waterford Bancshares, Inc. dated April 12, 1995. (7)
2.5 Agreement and Plan of Merger By and Among Registrant, RBI, Inc. and
Richmond Bancorp, Inc. (9)
2.6 Agreement and Plan of Merger By and Among Registrant, FWC Acquisition
Corp., and First Waukegan Corporation dated March 12, 1999. (14)
3.1 Articles of Amendment to the Amended and Restated Articles of
Incorporation.
3.2 Amended and Restated Articles of Incorporation of the Registrant as
amended.
3.3 Bylaws of Registrant, as amended and restated effective January 27,
1998. (11)
4.1 Form of Rights Agreement between State Financial Services Corporation
and Firstar Bank, N.A. dated July 27, 1999. (15)
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)
10.4 Lease between SFB (formerly University National Bank) and Northeast
Corporate Center (7020 North Port Washington Road, Milwaukee,
Wisconsin). (3)
10.5 Deferred Compensation Agreement between Registrant and Jerome J. Holz
dated December 6, 1980. (3)
10.6 Employee Stock Ownership Plan and Employee Stock Ownership Trust
Agreement. (4)
10.7 Lease between SFB (formerly University National Bank) and Downer
Investments (2650 North Downer Avenue, Milwaukee, Wisconsin) (5)
10.8 Lease between SFB-Waterford and Mangold Investments, LLP (1050 North
Milwaukee Avenue, Burlington, Wisconsin). (10)
10.9 Lease between Richmond and Upland Farms (1509 North Milwaukee Avenue,
Libertyville, Illinois). (11)
10.10 Consulting Agreement by and among, Registrant and George L. Perucco.
(12)
10.11 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)
10.12 State Financial Services Corporation 1990 Director Stock Option Plan,
as amended March 10, 1993. (1)
10.13 State Financial Services Corporation Supplemental Executive Retirement
Plan for Michael J. Falbo effective November 22, 1994. (8)
<PAGE>
10.14 State Financial Services Corporation 1998 Stock Incentive Plan, as
amended.
10.15 Executive Employment and Consulting Agreement between State Financial
Services Corporation and Jerome J. Holz.
10.16 Form of Key Executive Employment and Severance Agreement between State
Financial Services Corporation and each of Michael J. Falbo, Michael
A. Reindl and Daniel L. Westrope.
10.17 Form of Key Executive Employment and Severance Agreement between State
Financial Services Corporation and each of John B. Beckwith, Jeryl M
Sturino, Donna M. Bembenek, Thomas A. Lilly and Susan J. Dubs.
13.1 Portions of Registrant's Annual Report to security holders for the
fiscal year ended December 31, 1999.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Independent Auditor's Report of KPMG, LLP.
23.3 Independent Auditor's Report of KPMG, LLP.
27.1 Financial Data Schedule.
- - --------------------------------------------------------------------------------
(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, dated October 11, 1989.
(3) Incorporated by reference from Amendment No. 1 to the registration
statement on Form S-1, dated December 6, 1989.
(4) Incorporated by reference from Amendment No. 2 to the registration
statement on 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 Amendment No. 2 to the Registrant's
registration statement on Form S-4, Registration Number 33-59665,
dated July 18, 1995.
(8) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1994.
(9) Incorporated by reference from Registrant's Report on Form 8-K, dated
January 14, 1998.
(10) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1996.
(11) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1997.
(12) Incorporated by reference from Registrant's registration statement on
Form S-4, Registration Number 33-64375, dated September 25, 1998. (13)
Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1998. (14) Incorporated by
reference from Registrant's Report on Form 8-K for the fiscal year
ended March 12, 1999. (15) Incorporated by reference from Registrant's
Report on Form 8-K, dated July 27, 1999.
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.
ARTICLES OF AMENDMENT
relating to
CLASS A PREFERRED STOCK
of
STATE FINANCIAL SERVICES CORPORATION
-----------------------------------------------------
Pursuant to Sections 180.0602 and 180.1002 of the
Wisconsin Business Corporation Law
-----------------------------------------------------
I, Michael A. Reindl, Senior Vice President and Secretary of State
Financial Services Corporation, a corporation organized and existing under the
Wisconsin Business Corporation Law (the "Corporation"), in accordance with the
provisions of Sections 180.0602 and 180.1002 hereof, DO HEREBY CERTIFY THAT:
A. Pursuant to the authority conferred upon the Board of Directors by
the Amended and Restated Articles of Incorporation of the Corporation and in
accordance with Sections 180.0602 and 180.1002 of the Wisconsin Business
Corporation Law, the Board of Directors of the Corporation adopted a resolution
on July 27, 1999, creating a series of shares of Class A Preferred Stock, $1.00
par value, of the Corporation, designated as Class A Preferred Stock.
B. Said resolution of the Board of Directors of the Corporation
creating the series designated as Class A Preferred Stock, provides that said
series shall have such designation and number of shares and such preferences,
limitations and relative rights as are set forth in the paragraph below, which
paragraph shall constitute Paragraph 4.4 of Article IV of the Corporation's
Amended and Restated Articles of Incorporation:
4.4 Class A Preferred Stock.
(a) Designation and Amount. There is hereby created a series
of Class A Preferred Stock which shall be designated as "Class A Preferred
Stock" (the "Class A Preferred Stock"); the number of shares constituting
such series shall be Twenty-Five Thousand (25,000). Such number of shares
may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Class A
Preferred Stock to a number less than the number of shares then outstanding
plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation into Class A Preferred
Stock.
(b) Dividends and Distributions.
(i) The holders of shares of Class A Preferred Stock
in preference to the holders of Common Stock of the Corporation and of
any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds
<PAGE>
legally available for that purpose, quarterly dividends payable in
cash on the first business days of January, April, July and October in
each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a
share of Class A Preferred Stock in an amount per share (rounded to
the nearest cent) equal to the greater of (a) $10.00 or (b) subject to
the provision for adjustment hereinafter set forth, 1,000 times the
aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all noncash dividends
or other distributions, other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Payment Date, since the first
issuance of any share or fraction of a share of Class A Preferred
Stock. In the event the Corporation shall at any time after July 27,
1999 (the "Rights Declaration Date") (a) declare any dividend on
Common Stock payable in shares of Common Stock, (b) subdivide the
outstanding Common Stock, or (c) combine the outstanding Common Stock
into a smaller number of shares, then in each such case the amount to
which holders of shares of Class A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock that
are outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(ii) The Corporation shall declare a dividend or
distribution on the Class A Preferred Stock as provided in paragraph
(i) above immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $10.00 per share on the Class A
Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(iii) Dividends shall begin to accrue and be cumulative
on outstanding shares of Class A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares
of Class A Preferred Stock unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is
a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Class A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Class A Preferred Stock in an amount less than
the total amount of such
-2-
<PAGE>
dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Class A Preferred Stock
entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
(c) Voting Rights. The holders of shares of Class A
Preferred Stock shall have the following voting rights:
(i) Subject to the provision for adjustment
hereinafter set forth, each share of Class A Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to
a vote of the shareholders of the Corporation. In the event the
Corporation shall at any time declare or pay any dividend on Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the number of votes per share to
which holders of shares of Class A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which is the number of shares of
Common Stock that are outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(ii) Except as otherwise provided herein, in any other
resolution of the Board of Directors creating a series of Preferred
Stock or any similar stock, or by law, the holders of shares of Class
A Preferred Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(iii) Except as set forth herein, holders of Class A
Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any
corporate action.
(d) Certain Restrictions.
(i) Whenever quarterly dividends or other dividends or
distributions payable on the Class A Preferred Stock as provided in
subparagraph (b) are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares
-3-
<PAGE>
of Class A Preferred Stock outstanding shall have been paid in full,
the Corporation shall not:
(1) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Class A Preferred Stock;
(2) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up)
with the Class A Preferred Stock except dividends paid ratably on
the Class A Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(3) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with
the Class A Preferred Stock provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any such
parity stock in exchange for shares of any stock of the
Corporation ranking junior to or on a parity with (both as to
dividends or upon dissolution, liquidation or winding up) the
Class A Preferred Stock; or
(4) purchase or otherwise acquire for
consideration any shares of Class A Preferred Stock or any shares
of stock ranking on a parity with the Class A Preferred Stock
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(ii) The Corporation shall not permit any corporation
of which an amount of voting securities sufficient to elect at least a
majority of the directors of such corporation is beneficially owned,
directly or indirectly, by the Corporation or otherwise controlled by
the Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (i) of this subparagraph (d), purchase or otherwise acquire
such shares at such time and in such manner.
-4-
<PAGE>
(e) Reacquired Shares. Any shares of Class A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock, par value $1.00 per share, to be created by resolution or
resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
(f) Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution
shall be made (1) to the holders of shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the
Class A Preferred Stock unless, prior thereto, the holders of shares of
Class A Preferred Stock shall have received $1,000 per share, plus an
amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, provided that the
holders of shares of Class A Preferred Stock shall be entitled to receive
an aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Class A Preferred
Stock except distributions made ratably on the Class A Preferred Stock and
all other such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution
or winding up. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the aggregate amount to
which holders of shares of Class A Preferred Stock were entitled
immediately prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(g) Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property,
then in any such case the shares of Class A Preferred Stock shall at the
same time be similarly exchanged or changed in an amount per share (subject
to the provision for adjustment hereinafter set forth) equal to 1,000 times
the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share
of Common Stock is changed or exchanged. In the event the Corporation shall
at any time after the Rights Declaration Date (1) declare any dividend on
Common Stock payable in shares of Common Stock, (2) subdivide the
outstanding Common Stock, or (3) combine the outstanding Common Stock into
a smaller number of shares, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of
Class A Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
that are outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
-5-
<PAGE>
(h) No Redemption. The shares of Class A Preferred Stock
shall not be redeemable.
(i) Fractional Shares. Class A Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all
other rights of holders of Class A Preferred Stock.
* * *
C. None of the shares of Class A Preferred Stock have been issued as
of the date hereof.
D. The amendment creating the Class A Preferred Stock was adopted by
the Board of Directors of the Corporation in accordance with Section 180.1002 of
the Wisconsin Business Corporation Law and shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed and subscribed these
Articles of Amendment on behalf of the Corporation and does affirm the foregoing
as true this 27th day of July, 1999.
By: /s/ Michael A. Reindl
------------------------------------------
Michael A. Reindl, Senior Vice President,
Controller and Chief Financial Officer
- - --------------------
This instrument was drafted by, and should be returned to, Gerry L.
Williams of the firm of Foley & Lardner, 777 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202.
-6-
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
STATE FINANCIAL SERVICES CORPORATION
These Amended and Restated Articles of Incorporation supersede and take
the place of the heretofore existing Amended and Restated Articles of
Incorporation and any amendments thereto.
ARTICLE I. NAME
The name of the Corporation is State Financial Services Corporation.
ARTICLE II. PURPOSES
The Corporation is organized under the Wisconsin Business Corporation
Law. The purposes for which this Corporation is organized are to engage in any
lawful activity within the purposes for which corporations may be organized
under the Wisconsin business Corporation Law, provided, however, that the
Corporation shall not engage in any activities prohibited by the United States
Bank Holding Company Act of 1956, as amended.
ARTICLE III. DURATION
The period of existence shall be perpetual.
ARTICLE IV. CAPITAL STOCK
4.1 Number of Shares and Classes. The aggregate number of shares of
capital stock which the Corporation shall have authority to issue is as follows:
(a) Common Stock. 25,000,000 shares of Common Stock, having a
par value of $0.10 per share.
(b) Preferred Stock. 100,000 shares of Preferred Stock, having a
par value of $1.00 per share.
4.2 Rights of Common Stock. The rights and preferences of shares of
Common Stock are as follows:
(a) Voting. Each share of Common Stock shall be entitled to one
vote on all matters to be voted on by Shareholders. Except as is otherwise
required by Wisconsin Business Corporation Law in effect at the time of any
vote, there shall be no class voting of Common Stock and Preferred Stock as
separate classes.
(b) Dividends. The Board of Directors, in its discretion, may
declare and authorize payment of cash dividends on the Common Stock as such
times as it deems appropriate. The Corporation may issue any type of share
dividend. Shares of Common Stock
<PAGE>
may be distributed as a share dividend to holders of preferred stock and holders
of Common Stock may receive a share dividend in the form of Preferred Stock.
(c) Issuing Public Corporation. The Corporation is an Issuing
Public Corporation within the meaning of the Wisconsin Business Corporation Law
and, except as set forth below, intends that the voting restrictions of
Wisconsin Statutes ss. 180.1150, as amended from time to time, shall apply to
the Corporation. Notwithstanding the foregoing, Wisconsin Statutes ss. 180.1150
shall not apply to any shares of Common Stock held by a person who was a holder
of twenty percent (20%) or more of any class of the outstanding Common Stock of
the Corporation immediately before the filing of these Amended and Restated
Articles of Incorporation.
(d) No Other Class. There is no other class of common stock of
the corporation.
(e) Other. The board of directors may, from time to time, prior
to the issuance of shares, establish a series of Common Stock, having such
preferences and rights as it may deem reasonably necessary to achieve or
facilitate the accomplishment of lawful corporate business or financial
objectives, and may take such other action as allowed in Wis. Stat. ss.
180.0602(1) as amended from time to time.
4.3 Preferred Stock. The Preferred Stock may be issued from time to
time in one or more series with such designations, preferences and other rights,
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issuance of such
series and adopted by the Board of Directors pursuant to the authority hereby
given as provided by the Wisconsin Business Corporation Law ss. 180.0602(1) and
not inconsistent with the provisions hereof. Without limiting the authority
granted to the Board of Directors in this subsection, each series shall have
such (a) rate of dividends; (b) price, terms and conditions pursuant to which
shares may be redeemed; (c) amount payable upon shares in the event of voluntary
or involuntary liquidation; (d) sinking fund provisions for the redemption or
purchases of shares; (e) terms and conditions on which shares may be converted,
if the shares of any series are issued with the privilege of conversion; and (f)
voting rights, if any, as shall be stated or expressed in the resolution or
resolutions of the Board of Directors providing for issuance thereof.
4.4 Class A Preferred Stock.
(a) Designation and Amount. There is hereby created a series of
Class A Preferred Stock which shall be designated as "Class A Preferred Stock"
(the "Class A Preferred Stock"); the number of shares constituting such series
shall be Twenty-Five Thousand (25,000). Such number of shares may be increased
or decreased by resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of Class A Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or warrants or
-2-
<PAGE>
upon the conversion of any outstanding securities issued by the Corporation into
Class A Preferred Stock.
(b) Dividends and Distributions.
(i) The holders of shares of Class A Preferred Stock in
preference to the holders of Common Stock of the Corporation and of any
other junior stock, shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for that purpose,
quarterly dividends payable in cash on the first business days of January,
April, July and October in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Class A Preferred Stock in an amount per share
(rounded to the nearest cent) equal to the greater of (a) $10.00 or (b)
subject to the provision for adjustment hereinafter set forth, 1,000 times
the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all noncash dividends or
other distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Payment Date, since the first issuance of any share or
fraction of a share of Class A Preferred Stock. In the event the
Corporation shall at any time after July 27, 1999 (the "Rights Declaration
Date") (a) declare any dividend on Common Stock payable in shares of Common
Stock, (b) subdivide the outstanding Common Stock, or (c) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the amount to which holders of shares of Class A Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock that are
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(ii) The Corporation shall declare a dividend or
distribution on the Class A Preferred Stock as provided in paragraph (i)
above immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $10.00 per share on the Class A Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(iii) Dividends shall begin to accrue and be cumulative on
outstanding shares of Class A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Class A
Preferred Stock unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in
-3-
<PAGE>
which case dividends on such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of
holders of shares of Class A Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Class A
Preferred Stock in an amount less than the total amount of such dividends
at the time accrued and payable on such shares shall be allocated pro rata
on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of
holders of shares of Class A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be no
more than 30 days prior to the date fixed for the payment thereof.
(c) Voting Rights. The holders of shares of Class A Preferred
Stock shall have the following voting rights:
(i) Subject to the provision for adjustment hereinafter
set forth, each share of Class A Preferred Stock shall entitle the holder
thereof to 1,000 votes on all matters submitted to a vote of the
shareholders of the Corporation. In the event the Corporation shall at any
time declare or pay any dividend on Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the number
of votes per share to which holders of shares of Class A Preferred Stock
were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number
of shares of Common Stock that are outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(ii) Except as otherwise provided herein, in any other
resolution of the Board of Directors creating a series of Preferred Stock
or any similar stock, or by law, the holders of shares of Class A Preferred
Stock and the holders of shares of Common Stock shall vote together as one
class on all matters submitted to a vote of shareholders of the
Corporation.
(iii) Except as set forth herein, holders of Class A
Preferred Stock shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for taking any corporate
action.
(d) Certain Restrictions.
(i) Whenever quarterly dividends or other dividends or
distributions payable on the Class A Preferred Stock as provided in
subparagraph (b) are in arrears,
-4-
<PAGE>
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Class A Preferred Stock outstanding
shall have been paid in full, the Corporation shall not:
(1) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Class
A Preferred Stock;
(2) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Class A Preferred Stock except dividends paid ratably on the Class A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(3) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Class A Preferred Stock provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Corporation ranking junior
to or on a parity with (both as to dividends or upon dissolution,
liquidation or winding up) the Class A Preferred Stock; or
(4) purchase or otherwise acquire for consideration
any shares of Class A Preferred Stock or any shares of stock ranking
on a parity with the Class A Preferred Stock except in accordance with
a purchase offer made in writing or by publication (as determined by
the Board of Directors) to all holders of such shares upon such terms
as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(ii) The Corporation shall not permit any corporation of
which an amount of voting securities sufficient to elect at least a
majority of the directors of such corporation is beneficially owned,
directly or indirectly, by the Corporation or otherwise controlled by the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(i) of this subparagraph (d), purchase or otherwise acquire such shares at
such time and in such manner.
-5-
<PAGE>
(e) Reacquired Shares. Any shares of Class A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock,
par value $1.00 per share, to be created by resolution or resolutions of the
Board of Directors, subject to the conditions and restrictions on issuance set
forth herein.
(f) Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Class A
Preferred Stock unless, prior thereto, the holders of shares of Class A
Preferred Stock shall have received $1,000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Class A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Class A Preferred Stock except distributions made ratably on the Class A
Preferred Stock and all other such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Class A Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(g) Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Class A Preferred Stock shall at the same time be similarly exchanged or changed
in an amount per share (subject to the provision for adjustment hereinafter set
forth) equal to 1,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the Rights Declaration Date (1) declare any
dividend on Common Stock payable in shares of Common Stock, (2) subdivide the
outstanding Common Stock, or (3) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Class A
Preferred Stock shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock that are outstanding
immediately after such
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event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(h) No Redemption. The shares of Class A Preferred Stock shall
not be redeemable.
(i) Fractional Shares. Class A Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Class A Preferred Stock.
ARTICLE V. PRE-EMPTIVE RIGHTS
No holders of any stock of the corporation shall have any pre-emptive
or other subscription, purchase or conversion rights of any kind, nature or
description whatsoever with respect to any unissued stock or of any additional
stock issued by reason of any increase of the authorized Capital Stock of this
Corporation, or bonds, certificates or indebtedness, debentures or other
securities whether or not convertible into stock of the Corporation.
ARTICLE VI. REGISTERED AGENT
The name of the registered agent is Michael J. Falbo whose registered
office is located at 10708 West Janesville Road, Hales Corners, Wisconsin
(Milwaukee County), 53130.
ARTICLE VII. DIRECTORS
The number of directors constituting the Board of Directors of the
Corporation shall be fixed from time to time by the Bylaws of the corporation,
provided, however, that such number shall not be less than five. The Board of
Directors of the corporation shall be divided into three (3) classes. The terms
of office of the Class A directors shall expire at the first annual meeting
after their election, the term of office of Class B directors shall expire at
the second annual meeting after their election and that of the Class C directors
shall expire at the third annual meeting after their election. At each annual
meeting after classification of the Board of Directors, the class of directors
whose term expires at the time of such election shall be elected to hold office
until the third succeeding annual meeting. The number of directors in each class
shall be fixed from time to time in the Bylaws.
ARTICLE VIII. AMENDMENTS
These Articles may be amended in any manner allowed by law at the time
of amendment.
STATE FINANCIAL SERVICES CORPORATION
1998 STOCK INCENTIVE PLAN
As Amended
Article I. Establishment and Purpose
1.1 Establishment. State Financial Services Corporation, a Wisconsin
corporation (the "Company"), hereby establishes a stock plan for officers,
directors and others providing services to the Company, as described herein,
which shall be known as the State Financial Services Corporation 1998 Stock
Incentive Plan, as amended (the "Plan"). It is intended that certain of the
options issued pursuant to the Plan 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 Consultants 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 Participant's
employment agreement, if any, with the Company. If no such employment agreement
or definition in such agreement exists, Cause means (i) breach by Participant of
any covenant not to compete or confidentiality agreement with the Company, (ii)
failure by Participant to substantially perform his duties to the reasonable
satisfaction of the Board, (iii) serious misconduct by Participant which is
demonstrably and substantially injurious to the Company, (iv) fraud or
dishonesty by Participant with respect to the Company, (v) material
misrepresentation by Participant to a stockholder or director of the Company or
(vi) acts of negligence by Participant in performance of Participant'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.
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(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 who provides
services to the Company (other than as an employee).
(h) "Date of Exercise" means the date the Company receives
notice, by a Participant, 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
Participant 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, as
determined by the Committee. 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 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) "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.
(p) "Participant" means any officer, director or Consultant of
the Company or any direct or indirect subsidiary of the Company to whom an award
has been granted hereunder.
(q) "Qualified Director" means a director who is both (i) a
"Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act,
or any successor definition adopted by the Commission, and (ii) an "Outside
Director" under section 162(m) of the Code and the regulations promulgated
thereunder, or any successor definition adopted by the IRS.
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(r) "Restricted Stock" means an award under Article XI.
(s) "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.
(t) "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.
(u) "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 officers and directors (other
than Qualified Directors) are eligible to participate in this Plan and receive
Incentive Stock Options, Nonstatutory Options and/or Restricted Stock. All
Consultants and Qualified Directors are eligible to participate in this Plan and
receive Nonstatutory Options hereunder. Subject to section 4.1, Participants in
the Plan shall be selected by the Committee from among those eligible
individuals who, in the opinion of the Committee, 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
4.1 Administration. The Plan shall be administered by the Committee
selected by the Board, consisting of two or more members of the Board who are
Qualified Directors. 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 by 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
herein 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 responsibility of the
Committee with respect to the Plan, other than with respect to Participants who
are
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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 shall also have complete authority to select eligible individuals to
receive awards hereunder, 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
shall 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 members 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 Committee, 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 750,000, of which not more
than 750,000 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 75,000 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
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acquired by purchase as directed by the Committee 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 in section 5.1 shall be
appropriately adjusted by the Committee 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 sections 3.1 and 5.1, Options may be
granted to eligible individuals at any time and from time to time as determined
by the Committee; provided, however, that Consultants and Qualified Directors
may receive only Nonstatutory Options and may not receive Incentive Stock
Options. The Committee shall have complete discretion in determining the number
of Options granted to each Participant. In making such determinations, the
Committee may take into account the nature of services rendered by such eligible
individual, their present and potential contributions to the Company, and such
other factors as the Committee in its discretion shall deem relevant. The
Committee shall also determine whether an Option is to be an Incentive Stock
Option or a Nonstatutory Option.
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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 Participant
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 Participant'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 Committee 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 10.2 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
Committee 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 Committee 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 Committee.
7.5 Term of Options. Each Option shall expire at such time as the
Committee 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 Committee shall in each instance approve, which need not be the same for all
Participants.
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 Committee; 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 Committee may permit a Participant 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. A Participant wishing to exercise an Option shall
give written notice to the Company, in the form and manner prescribed by the
Committee. 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
Participant or to a nominee of the Participant a certificate or certificates for
the requisite number of shares of Stock.
8.3 Privileges of a Stockholder. A Participant 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.
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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 a Participant's employment or provision of services
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 Participant's will or, if the Participant shall fail
to make a testamentary disposition of an Option or shall die intestate, the
Participant'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
a Participant's termination of employment or termination of the provision of
services, other than for Cause or by reason of death, the Participant 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 Participant 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.
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
Committee 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 a Participant's
termination of employment or termination of the provision of services, 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 Participants
10.1 Service. Nothing in this Plan shall interfere with or limit in
any way the right of the Company to terminate any individual's employment or
services at any time, nor confer upon any employee any right to continue in the
employ of the Company, or upon any Consultant or director any right to continue
to provide services to the Company.
10.2 Nontransferability. Options granted under this Plan shall be
nontransferable by the Participant, other than by will or the laws of descent
and distribution, and shall be exercisable during the Participant's lifetime
only by the Participant.
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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. Subject to section
3.1, the Committee shall determine the eligible individuals 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, as amended. 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
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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.
(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 Participant 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 Participants for each Option
of an amount equal to a reasonable, good faith estimate of an
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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.
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 Participant either (a) shall be offered a firm
commitment whereby the resulting or surviving corporation in a merger or
consolidation will tender to the Participant 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 Participant the rights and
benefits of the Option outstanding hereunder granted by the Company, or (b)
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 Committee shall have
absolute and uncontrolled discretion to determine whether the Participant has
been offered a firm commitment and whether the tendered Substitute Option will
substantially preserve to the Participant 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.
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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 Participant 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, or upon the lapse of the
Restriction Period with respect to shares of Restricted Stock, 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 or Committee 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.
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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.
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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EXECUTIVE EMPLOYMENT AND CONSULTING AGREEMENT
THIS AGREEMENT is made as of the 31st day of December, 1999, by and
between State Financial Services Corporation, a Wisconsin corporation ("SFSC"),
and JEROME J. HOLZ ("Executive").
WHEREAS, Executive currently serves as Chairman of the Board and Vice
President of SFSC, and in such capacities, Executive consults on a regular basis
with management of SFSC concerning matters of strategic planning, business
development and company policies;
WHEREAS, Executive has been a director of SFSC since its inception in
1984, a director of the State Financial Bank (Wisconsin), a wholly-owned
subsidiary of SFSC (the "Bank"), since 1960, a director of State Financial
Bank-Waterford, a wholly-owned subsidiary of SFSC, since 1995, a director of
State Financial Bank (Illinois), a wholly-owned subsidiary of SFSC, since 1998,
and a director of Home Federal Savings of Elgin, a wholly-owned subsidiary of
SFSC, since 1998, and in each such position Executive has materially contributed
to SFSC's success;
WHEREAS, the nature of the services provided by Executive to SFSC have
in recent years become more consultative and such services increasingly have
been requested by SFSC and provided by Executive more on an as needed basis
rather than on a day-to-day basis; and
WHEREAS, SFSC wishes to establish this Agreement for purposes of
promoting in Executive the strongest interest in the successful operation of
SFSC, to facilitate an orderly transition upon the cessation or reduction of
certain duties by Executive, and to provide to Executive benefits upon
retirement or disability in consideration of: (a) past services provided by
Executive to SFSC and its affiliates; (b) Executive's commitment to remain
employed by SFSC and the services to be performed for SFSC until December 31,
1999 (the "Retirement Date"); (c) consulting and other services to be performed
for SFSC subsequent to the Retirement Date; and (d) other commitments and
agreements made by Executive herein;
NOW, THEREFORE, in consideration of the premises, terms and conditions
hereinafter set forth, the parties hereto agree as follows:
1. Duties During Employment Period.
Executive shall continue to serve SFSC, for the remainder of
calendar year 1999 and ending on the Retirement Date (the "Employment Period"),
as an executive officer with the title of Vice President of SFSC. After the
Retirement Date, Executive shall cease to be an executive officer or employee of
SFSC.
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During the Employment Period, Executive shall have the following
duties, together with such other duties, subject to Executive's availability, as
the SFSC's President or Board of Directors may reasonably assign from time to
time:
(a) Executive shall perform duties respecting customer service
and account retention for the Bank's high net worth clientele (the "Clientele").
(b) Executive shall assist customer service staff with difficult
Clientele and with Clientele inquiries or problems.
(c) Executive shall be available for consultation on all new
products, regulations and policies applicable to SFSC, the Bank or the
Clientele, and shall participate as requested in regular staff meetings to
evaluate and discuss methods, changes and problems in the acquisition and
retention of Clientele.
(d) Executive shall be available for consultation on strategic
business alliances, acquisitions, divestitures, joint ventures and similar
business combinations and transactions as such are from time to time considered,
negotiated and consummated by the officers or Board of Directors of SFSC.
(e) Executive shall assist SFSC management in the establishment
and implementation of goals for the acquisition and retention of Clientele.
(f) Executive shall maintain his memberships in community
organizations and participate generally in the activities and affairs of such
organizations with a view toward furthering the interests of SFSC, and Executive
shall seek opportunities to join other similar organizations consistent with his
interests and availability; and
(d) At the request of the President or Board of Directors,
Executive shall participate in ceremonial activities of SFSC, including the
annual Christmas party, periodic employee social gatherings, branch openings,
award presentations, recognition functions, and the like.
During the Employment Period, Executive shall devote his best
efforts and attention to SFSC's business or the business of any of its
affiliates, except during usual vacation periods.
2. Duties as Chairman of the Board. Executive shall continue to serve
SFSC as Chairman of the Board until the earlier of his resignation, removal or
death or such time that his successor is duly elected and qualified; provided,
however, that Executive shall not serve as Chairman of the Board of SFSC after
December 31, 2004. During such time as Executive serves as Chairman of the Board
of SFSC, Executive agrees to accept and serve in the capacity of a reasonable
number of other director and/or chairman positions at SFSC affiliates as the
President or Board of Directors of SFSC may request from time to time.
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<PAGE>
3. Duties After Retirement Date.
Beginning January 1, 2000 and continuing until the end of
Executive's life (the "Consulting Period"), Executive shall be available to SFSC
and its Board of Directors and the executive officers of SFSC for consulting
services respecting SFSC's business and the Clientele, at such times and places
as may be mutually convenient to and agreed by Executive and SFSC. During the
Consulting Period, Executive shall serve as a "good will ambassador" in the
general community, and shall use his best efforts to preserve the business
relationships between SFSC, the Bank and the Bank's customers and to refer
potential customers to the Bank. Executive shall continue to perform the duties
described in subsection 1(c) through 1(g), except that Executive shall no longer
be responsible to assist in the administrative and organizational aspects of
SFSC, and it is understood that Executive's general level of activities on
behalf of SFSC will be substantially reduced. SFSC shall not request Executive
to perform any services which are inconsistent with his previous duties and
experience as an executive of SFSC or which would unreasonably interfere with
his normal activities in retirement. Consulting services may be provided by
telephone, and nothing herein shall be construed to require the Executive's
residence or continued location in the Milwaukee area.
4. Compensation.
4.1. Compensation for Executive.
(a) During the Employment Period, SFSC shall continue to
pay to Executive, and Executive shall continue to accept from SFSC, a total
annual compensation in accordance with such rates, terms and conditions as in
effect between SFSC and Executive as of the date hereof.
(b) SFSC shall pay to Executive, and Executive shall accept
from SFSC, a total annual compensation in the amount of One Hundred Thousand
Dollars ($100,000) (or proration thereof) for each year (or portion thereof)
after the Retirement Date for which Executive serves as Chairman of the Board of
SFSC. While Executive serves as Chairman of the Board of SFSC, he shall not
receive additional director or committee fees for his service as a Director or
committee member for SFSC or any affiliate of SFSC. After Executive ceases to be
Chairman of the Board of SFSC, he shall be compensated for any continued service
as a Director or committee member of SFSC or any affiliate of SFSC in the same
manner as any outside Director.
(c) Throughout the Consulting Period, subject to Section
4.1(d) below, SFSC shall pay to Executive, and Executive shall accept from SFSC,
an annual consulting compensation of Two Hundred and Twenty Five Thousand
Dollars ($225,000), a portion of which shall constitute deferred compensation
for services rendered prior to the Retirement Date and the balance shall be paid
in respect of Executive's continuing duties and obligations set forth in
paragraph 2 of this Agreement.
(d) If, during the Consulting Period, as a result of the
Executive's disability due to physical or mental illness or injury, the
Executive shall have been absent from
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<PAGE>
the Executive's duties hereunder on a full-time basis for a period of 182 days
and, within thirty days after the Company notifies the Executive in writing that
it intends to reduce the Executive's compensation, the Executive shall not have
returned to the performance of the Executive's consulting duties hereunder, then
the Company may reduce the Executive's compensation for purposes of this
Agreement to an annual amount of $100,000, effective upon the first day of the
calendar month following the expiration of the 30-day period following notice to
the Executive.
All compensation payable to Executive under this Section
4.1:(i) shall be payable in regular periodic installments under and in
accordance with SFSC's payroll plan in effect from time to time, and (ii) shall
cease upon Executive's death, except for any unpaid amounts attributable to
periods prior to the first day of the month of Executive's death, which unpaid
amounts shall be promptly paid by SFSC to Executive's estate.
Executive shall receive no other monetary compensation from
SFSC after the Employment Period, except (i) as the Board of Directors may
approve in its sole discretion for services or performance beyond Executive's
obligations under this Agreement and (ii) under SFSC's Deferred Compensation
Agreement, dated December 9, 1980, and SFSC's Stock Incentive Plan, to the
extent each is applicable to directors, for such time as Executive serves as a
director of SFSC or any of its affiliates. Except as otherwise provided in this
Agreement, Executive hereby waives his right to participate in SFSC's deferred
compensation programs at any time in the future (except to the extent of
benefits accrued as of the date hereof). Executive also understands that after
the end of the Employment Period he shall have no rights to continue in active
participation in the SFSC retirement plans (except to the extent of benefits
accrued to the end of the Employment Period), and in the event he may be
determined to be an employee of SFSC following the Employment Period, Executive
waives his right to participate in such plans following the Employment Period
and further waives his right to receive any further payments in lieu of his
participation in the SFSC retirement plans including payments attributable to
periods prior to the date hereof (except to the extent of benefits accrued to
the end of the Employment Period).
4.2. Fringe Benefits.
Throughout the Consulting Period, SFSC shall provide, at no
cost to Executive, for his lifetime, supplemental Medicare insurance coverage
and prescription medication coverage that is reasonably acceptable to Executive
and comparable to the coverage in effect for Executive on the date hereof. To
that end, SFSC shall reimburse Executive for premium payments Executive makes
under such supplemental Medicare insurance coverage arrangement and/or for
prescription medication coverage. However, SFSC reserves the right at any time
and at SFSC's sole discretion to provide, at no cost to Executive, in lieu of
such reimbursement for premium payments, supplemental Medicare insurance
coverage comparable to the coverage in effect for Executive on the date hereof.
Except as otherwise provided in this Agreement, Executive shall continue to
participate in all fringe benefit programs of the SFSC during the Employment
Period and shall cease to participate in such programs during the Consulting
Period. Executive's failure or inability to perform services to SFSC as
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<PAGE>
contemplated in this Agreement shall not affect SFSC's obligation to provide
supplemental Medicare insurance coverage and prescription medication coverage as
provided in this Section 4.2.
4.3. Expenses.
During the Employment Period and the Consulting Period, SFSC
shall reimburse Executive for all reasonable documented expenses incurred by
Executive in performance of his duties under this Agreement, except that SFSC
shall not be required to reimburse Executive after the Retirement Date for club
dues and club expenses (other than documented club expenses which are incurred
by Executive in the performance of his duties and approved by SFSC).
4.4. Disability.
No separate provision is made for a disability benefit under
this Agreement. However, for purposes of this Agreement, Executive shall be
considered, notwithstanding any such disability, to continue to be employed
until the Retirement Date and Executive shall continue to receive compensation
payments pursuant to Section 4.1 for the duration of the Employment Period and
the Consulting Period.
4.5. Release.
Except as specifically provided in this Agreement or
hereafter specifically approved by the Board of Directors of SFSC, Executive
agrees to release and forever discharge SFSC and all of its present and former
directors, officers, shareholders, and its and their successors, assigns and
representatives from any and all claims to compensation, monetary or otherwise,
which Executive may have now or in the future.
5. Change in Control of SFSC.
In the event there is a Change in Control (as hereinafter defined)
of SFSC during the Consulting Period, the Executive shall, at his sole
discretion, be entitled to receive, and SFSC shall promptly pay, all remaining
consulting compensation as provided in Section 4.1(c) (or 4.1(d), if applicable)
above in one lump sum payment computed on the basis of the present value of the
remaining consulting compensation for the remainder of the consultant's then
actuarial life expectancy. The life expectancy computations under this Section 5
shall be made pursuant to applicable Internal Revenue Service rules and
regulations (Table 90CM) and the present value computations shall use a discount
rate of 8%.
A "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have occurred:
(a) Any person (other than (A) SFSC or any of its subsidiaries,
(B) a trustee or other fiduciary holding securities under any employee benefit
plan of SFSC or any of its subsidiaries, (C) an underwriter temporarily holding
securities pursuant to an offering of
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<PAGE>
such securities or (D) a corporation owned, directly or indirectly, by the
stockholders of SFSC in substantially the same proportions as their ownership of
stock in the SFSC ("Excluded Persons")) is or becomes the "Beneficial Owner" (as
such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Act")), directly or indirectly, of securities of SFSC (not
including in the securities beneficially owned by such person any securities
acquired directly from SFSC or its affiliates after June 1, 1999 pursuant to
express authorization by the Board that refers to this exception) representing
25% or more of either the then outstanding shares of common stock of SFSC or the
combined voting power of SFSC's then outstanding voting securities; or
(b) The following individuals cease for any reason to constitute
a majority of the number of directors then serving: individuals who, on December
1, 1999, constituted the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of SFSC, as such terms are used in Rule 14a-11 of
Regulation 14A under the Act) whose appointment or election by the Board or
nomination for election by SFSC's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either were
directors on December 1, 1999 or whose appointment, election or nomination for
election was previously so approved; or
(c) The stockholders of SFSC approve a merger, consolidation or
share exchange of SFSC with any other corporation or approve the issuance of
voting securities of SFSC in connection with a merger, consolidation or share
exchange of SFSC (or any direct or indirect subsidiary of SFSC) pursuant to
applicable stock exchange requirements, other than (A) a merger, consolidation
or share exchange which would result in the voting securities of SFSC
outstanding immediately prior to such merger, consolidation or share exchange
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity or any parent thereof) at least
50% of the combined voting power of the voting securities of SFSC or such
surviving entity or any parent thereof outstanding immediately after such
merger, consolidation or share exchange, or (B) a merger, consolidation or share
exchange which would result in the voting securities of SFSC outstanding
immediately prior to such merger, consolidation or share exchange continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof) at least 25% of the
combined voting power of the voting securities of SFSC or such surviving entity
or any parent thereof outstanding immediately after such merger, consolidation
or share exchange, but only if the individuals described in subsection (ii)
above cease for any reason to constitute a majority of the number of directors
of SFSC or such surviving entity or any parent thereof (for purposes of this
determination SFSC shall be deemed to include such surviving entity or any
parent thereof); or
(d) The stockholders of SFSC approve a plan of complete
liquidation or dissolution of SFSC or an agreement for the sale or disposition
by SFSC of all or substantially all of SFSC's assets (in one transaction or a
series of related transactions within any period of 24 consecutive months),
other than a sale or disposition by SFSC of all or substantially all of SFSC's
assets to an entity at least 75% of the combined voting power of the
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<PAGE>
voting securities of which are owned by persons in substantially the same
proportions as their ownership of SFSC immediately prior to such sale.
Notwithstanding the foregoing, no "Change in Control" shall be
deemed to have occurred if there is consummated any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of SFSC immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity that owns all or substantially all of the assets or voting securities
of SFSC immediately following such transaction or series of transactions.
6. Further Obligations of the Executive.
(a) Competition. The Executive agrees that during the Consulting
Period, the Executive shall not, without the written consent of SFSC, directly
or indirectly, as an employee, owner, partner, agent or otherwise, participate
in any manner (or assist or advise any other person) in the business of a
commercial bank (or of a business in direct competition with commercial banks,
such as a savings and loan association, mortgage bank or consumer finance
company, leasing company, credit union or commercial or consumer lender) at a
place of business within the State of Wisconsin or Illinois or within 50 miles
of any business operation of SFSC or any affiliate of SFSC; provided, however,
that Executive may be employed by any affiliate of SFSC. The restrictions herein
do not bar the Executive from ownership of securities bought and sold on a
public market.
(b) Confidential Information. During and following the
Executive's employment by SFSC, including the Consulting Period, the Executive
shall hold in confidence and not directly or indirectly disclose or use or copy
or make lists of any confidential information or proprietary data of SFSC or the
Bank, except to the extent authorized in writing by the Board of Directors of
SFSC or required by any court or administrative agency, other than to an
employee of SFSC or the Bank or a person to whom disclosure is reasonably
necessary or appropriate in connection with the performance by the Executive of
duties as an executive of SFSC. Confidential information shall not include any
information known generally to the pubic or any information of a type not
otherwise considered confidential by persons engaged in the same business or a
business similar to that of SFSC. All records, files, documents and materials or
copies thereof, relating to SFSC's business which the Executive shall prepare,
or use, or come into contact with, shall be and remain the sole property of
SFSC.
7. Assignment of Benefits.
Unless ordered by a court of competent jurisdiction, Executive
shall not have any right to assign the right to receive any benefits hereunder,
and in the event of any assignment or transfer, whether voluntary or
involuntary, except pursuant to an order of a court of competent jurisdiction.
In the event Executive attempts such a transfer or assignment, SFSC shall not
have any further liability hereunder.
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<PAGE>
8. Taxes.
SFSC shall deduct from all payments made hereunder all applicable
federal or state taxes required by law to be withheld from such payments.
9. Amendment.
The parties may amend, modify and supplement this Agreement in
such manner as they may agree upon in writing.
10. Construction.
This Agreement shall be governed by and construed in accordance
with the laws of the State of Wisconsin.
11. Notice.
Any notice required or permitted to be made under this Agreement
shall be sufficient if sent by certified mail, postage prepaid, addressed to
SFSC at 10708 West Janesville Road, Hales Corners, Wisconsin 53130, and to the
Executive at 4567 N. Sawyer Rd., Oconomowoc Lake, Wisconsin 53066.
12. Captions.
The captions at the head of a section or a paragraph of this
Agreement are designed for convenience of reference only and are not to be
resorted to for the purpose of interpreting any provision of this Agreement.
13. Severability.
The invalidity of any portion of this Agreement shall not
invalidate the remainder thereof, and said remainder shall continue in full
force and effect.
14. Binding Effect.
This Agreement shall be binding upon and shall inure to the
benefit of the Executive and SFSC and its successors. The term "successor" as
used herein shall include any person, firm, corporation, or other business
entity which at any time, by merger, consolidation, purchase or otherwise,
acquires all or substantially all of SFSC's stock, assets or business. No sale
of substantially all of SFSC's assets shall be made without the buyer expressly
assuming the obligation of this Agreement. SFSC further agrees that it will not
be a party to any merger, consolidation or reorganization unless and until its
obligations hereunder are expressly assumed by the successor or successors.
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<PAGE>
15. Entire Agreement.
This Agreement contains the entire understanding of the parties
respecting the subject matter hereof and supersedes all other oral and written
agreements.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties as of the date first set forth above.
STATE FINANCIAL SERVICES CORPORATION
By:_____________________________________
Michael J. Falbo
President and Chief Executive Officer
Attest:_________________________________
Title:__________________________________
EXECUTIVE
________________________________________
Jerome J. Holz
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KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT
THIS AGREEMENT, is made and entered into as of the 1st day of October,
1999, by and between STATE FINANCIAL SERVICES CORPORATION, a Wisconsin
corporation (hereinafter referred to as the "Company"), and _________________
(hereinafter referred to as the "Executive").
W I T N E S S E T H :
WHEREAS, the Executive is employed by the Company and/or a subsidiary
of the Company in a key executive capacity, and the Executive's services are
valuable to the conduct of the business of the Company;
WHEREAS, the Board of Directors of the Company (the "Board")
recognizes that circumstances may arise in which a change in control of the
Company occurs, through acquisition or otherwise, thereby causing uncertainty
about the Executive's future employment with the Company and/or any such
subsidiary without regard to the Executive's competence or past contributions,
which uncertainty may result in the loss of valuable services of the Executive
to the detriment of the Company and its shareholders, and the Company and the
Executive wish to provide reasonable security to the Executive against changes
in the Executive's relationship with the Company in the event of any such change
in control;
WHEREAS, the Company and the Executive desire that any proposal for a
change in control or acquisition of the Company will be considered by the
Executive objectively and with reference only to the best interests of the
Company and its shareholders; and
WHEREAS, the Executive will be in a better position to consider the
Company's best interests if the Executive is afforded reasonable security, as
provided in this Agreement, against altered conditions of employment which could
result from any such change in control or acquisition.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto mutually
covenant and agree as follows:
1. Definitions.
(a) Act. The term "Act" means the Securities Exchange Act of
1934, as amended.
(b) Accrued Benefits. The term "Accrued Benefits" shall include
the following amounts, payable as described herein: (i) all base salary for the
time period ending with the Termination Date; (ii) reimbursement for any and all
monies advanced in connection with the Executive's employment for reasonable and
necessary expenses incurred by the Executive on
<PAGE>
behalf of the Company and its Affiliates for the time period ending with the
Termination Date; (iii) any and all other cash earned through the Termination
Date and deferred at the election of the Executive or pursuant to any deferred
compensation plan then in effect; (iv) notwithstanding any provision of any
bonus or incentive compensation plan applicable to the Executive, a lump sum
amount, in cash, equal to the sum of (A) any bonus or incentive compensation
that has been allocated or awarded to the Executive for a fiscal year or other
measuring period under the plan that ends prior to the Termination Date but has
not yet been paid (pursuant to Section 5(f) or otherwise) and (B) a pro rata
portion to the Termination Date of the aggregate value of all contingent bonus
or incentive compensation awards to the Executive for all uncompleted periods
under the plan calculated as to each such award as if the Goals with respect to
such bonus or incentive compensation award had been attained; and (v) all other
payments and benefits to which the Executive or in the event of the Executive's
death, the Executive's surviving spouse or other beneficiary) may be entitled as
compensatory fringe benefits or under the terms of any benefit plan of the
Employer, including severance payments under the Employer's severance policies
and practices in the form most favorable to the Executive that were in effect at
any time during the one-year period prior to the Effective Date. Payment of
Accrued Benefits shall be made promptly in accordance with the Employee's
prevailing practice with respect to clauses (i) and (ii) or, with respect to
clauses (iii), (iv) and (v), pursuant to the terms of the benefit plan or
practice establishing such benefits.
(c) Affiliate and Associate. The terms "Affiliate" and
"Associate" shall have the respective meanings ascribed to such terms in Rule
12b-2 of the General Rules and Regulations of the Act.
(d) Annual Cash Compensation. The term "Annual Cash Compensation"
shall mean the sum of (A) the Executive's Annual Base Salary, plus (B) the
highest of (1) the annual bonus or incentive compensation award earned by the
Executive under any cash bonus or incentive compensation plan of the Company or
any of its Affiliates during the three complete fiscal years of the Company
immediately preceding the Termination Date or, if more favorable to the
Executive, during the three complete fiscal years of the Company immediately
preceding the Effective Date; (2) the Executive's bonus or incentive
compensation Targeted Bonus for the fiscal year in which the Termination Date
occurs; or (3) the highest average annual bonus and/or incentive compensation
earned during the three complete fiscal years of the Company immediately
preceding the Termination Date (or, if more favorable to the Executive, during
the three complete fiscal years of the Company immediately preceding the
Effective Date) under any cash bonus or incentive compensation plan of the
Company or any of its Affiliates by the group of executives of the Company and
its Affiliates participating under such plan during such fiscal years at a
status or position comparable to that at which the Executive participated or
would have participated pursuant to the Executive's most senior position at any
time during the year preceding the Effective Date or thereafter until the
Termination Date, plus (C) the Company Contribution to the ESOP, Money Purchase
Pension Plan and Supplemental Executive Plan for the fiscal year of the Company
out of the three complete fiscal years prior to the Termination Date in which
the combined Company Contribution was highest.
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(e) Cause. The Company may terminate the Executive's employment
after the Effective Date for "Cause" only if the conditions set forth in
paragraphs (i) and (ii) have been met and the Company otherwise complies with
this Agreement:
(i) (A) the Executive has committed any act of fraud,
embezzlement or theft in connection with the Executive's Tduties as an
Executive or in the course of employment with the Company and/or its
subsidiaries; (B) the Executive has willfully and continually failed to
perform substantially the Executive's duties with the Company or any of its
Affiliates (other than any such failure resulting from incapacity due to
physical or mental illness or injury, regardless of whether such illness or
injury is job-related) for an appropriate period, which shall not be less
than 30 days, after the Chief Executive Officer of the Company (or, if the
Executive is then Chief Executive Officer, the Board) has delivered a
written demand for performance to the Executive that specifically
identifies the manner in which the Chief Executive Officer (or the Board,
as the case may be) believes the Executive has not substantially performed
the Executive's duties; (C) the Executive has willfully engaged in illegal
conduct or gross misconduct that is materially and demonstrably injurious
to the Company; (D) the Executive has willfully and wrongfully disclosed
any trade secret or other confidential information of the Company or any of
its Affiliates; or (E) the Executive has engaged in any Competitive
Activity; and in any such case the act or omission shall have been
determined by the Board to have been materially harmful to the Company and
its subsidiaries taken as a whole.
For purposes of this provision, (1) no act or failure to act
on the part of the Executive shall be considered "willful" unless it is
done, or omitted to be done, by the Executive in bad faith or without
reasonable belief that the Executive's action or omission was in the best
interests of the Company and (2) any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board or upon
the instructions of the Chief Executive Officer or a senior officer of the
Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the Executive
in good faith and in the best interests of the Company.
(ii) (A) The Company terminates the Executive's employment
by delivering a Notice of Termination to the Executive, (B) prior to the
time the Company has terminated the Executive's employment pursuant to a
Notice of Termination, the Board, by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board, has adopted a
resolution finding that the Executive was guilty of conduct set forth in
this definition of Cause, and specifying the particulars thereof in detail,
at a meeting of the Board called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board) and (C) the Company delivers a copy of such
resolution to the Executive with the Notice of Termination at the time the
Executive's employment is terminated.
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In the event of a dispute regarding whether the Executive's employment has been
terminated for Cause, no claim by the Company that the Company has terminated
the Executive's employment for Cause in accordance with this Agreement shall be
given effect unless the Company establishes by clear and convincing evidence
that the Company has complied with the requirements of this Agreement to
terminate the Executive's employment for Cause.
(f) Change in Control. A "Change in Control" shall be deemed to
have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(i) any Person (other than (A) the Company or any of its
subsidiaries, (B) a trustee or other fiduciary holding securities under any
employee benefit plan of the Company or any of its subsidiaries, (C) an
underwriter temporarily holding securities pursuant to an offering of such
securities or (D) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock in the Company ("Excluded Persons")) is or becomes the
"Beneficial Owner" (as such term is defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired
directly from the Company or its Affiliates after June 1, 1999 pursuant to
express authorization by the Board that refers to this exception)
representing 25% or more of either the then outstanding shares of common
stock of the Company or the combined voting power of the Company's then
outstanding voting securities; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals
who, on June 1, 1999, constituted the Board and any new director (other
than a director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company,
as such terms are used in Rule 14a-11 of Regulation 14A under the Act)
whose appointment or election by the Board or nomination for election by
the Company's stockholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors on
June 1, 1999 or whose appointment, election or nomination for election was
previously so approved; or
(iii) the stockholders of the Company approve a merger,
consolidation or share exchange of the Company with any other corporation
or approve the issuance of voting securities of the Company in connection
with a merger, consolidation or share exchange of the Company (or any
direct or indirect subsidiary of the Company) pursuant to applicable stock
exchange requirements, other than (A) a merger, consolidation or share
exchange which would result in the voting securities of the Company
outstanding immediately prior to such merger, consolidation or share
exchange continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any
parent thereof) at least 50% of the combined voting power of the voting
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger, consolidation or share exchange,
or (B) a merger, consolidation or share exchange
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which would result in the voting securities of the Company outstanding
immediately prior to such merger, consolidation or share exchange
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof) at least 25% of the combined voting power of the voting securities
of the Company or such surviving entity or any parent thereof outstanding
immediately after such merger, consolidation or share exchange, but only if
the individuals described in subsection (ii) above cease for any reason to
constitute a majority of the number of directors of the Company or such
surviving entity or any parent thereof (for purposes of this determination
the Company shall be deemed to include such surviving entity or any parent
thereof); or
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the
Company's assets (in one transaction or a series of related transactions
within any period of 24 consecutive months), other than a sale or
disposition by the Company of all or substantially all of the Company's
assets to an entity at least 75% of the combined voting power of the voting
securities of which are owned by Persons in substantially the same
proportions as their ownership of the Company immediately prior to such
sale.
Notwithstanding the foregoing, no "Change in Control" shall be
deemed to have occurred if there is consummated any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity that owns all or substantially all of the assets or voting securities
of the Company immediately following such transaction or series of transactions.
(g) Code. The term "Code" means the Internal Revenue Code of
1986, including any amendments thereto or successor tax codes thereof.
(h) Competitive Activity. The Executive shall engage in a
"Competitive Activity" if the Executive participates in the management of, is
employed by or owns any interest in any business enterprise at a location within
the United States that engages in substantial competition with the Company or
its subsidiaries, where such enterprise's revenues from any competitive
activities amount to 10% or more of such enterprise's consolidated net revenues
and sales for its most recently completed fiscal year; provided, however, that
owning stock or other securities of a competitor amounting to less than five
percent of the outstanding capital stock of such competitor shall not be a
"Competitive Activity".
(i) Covered Termination. The term "Covered Termination" means any
termination of the Executive's employment during the Employment Period where the
Termination Date or the date Notice of Termination is delivered is any date on
or prior to the end of the Employment Period.
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(j) Effective Date. The term "Effective Date" shall mean the
first date on which a Change in Control occurs. Anything in this Agreement to
the contrary notwithstanding, if (i) a Change in Control occurs, (ii) the
Executive's employment with the Employer terminates (whether by the Company, the
Executive or otherwise) within one-year prior to the Change in Control and (iii)
it is reasonably demonstrated by the Executive that (A) any such termination of
employment by the Employer (1) was at the request of a third party who has taken
steps reasonably calculated to effect a Change in Control or (2) otherwise arose
in connection with or in anticipation of a Change in Control, or (B) any such
termination of employment by the Executive took place subsequent to the
occurrence of an event described in clause (ii), (iii), (iv) or (v) of the
definition of "Good Reason" which event (1) occurred at the request of a third
party who has taken steps reasonably calculated to effect a Change in Control or
(2) otherwise arose in connection with or in anticipation of a Change in
Control, then for all purposes of this Agreement the term "Effective Date" shall
mean the day immediately prior to the date of such termination of employment.
(k) Employer. The term "Employer" means the Company and/or any
subsidiary of the Company that employed the Executive immediately prior to the
Effective Date.
(l) Good Reason. The Executive shall have a "Good Reason" for
termination of employment on or after the Effective Date if the Executive
determines in good faith that any of the following events has occurred:
(i) any breach of this Agreement by the Company, including
specifically any breach by the Company of its agreements contained in
Section 4, Section 5 or Section 6, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith that the Company
remedies promptly after receipt of notice thereof given by the Executive;
(ii) any reduction in the Executive's base salary,
percentage of base salary available as incentive compensation or bonus
opportunity or benefits, in each case relative to those most favorable to
the Executive in effect at any time during the one-year period prior to the
Effective Date or, to the extent more favorable to the Executive, those in
effect after the Effective Date;
(iii) a material adverse change, without the Executive's
prior written consent, in the Executive's working conditions or status with
the Company or the Employer from such working conditions or status in
effect during the one-year period prior to the Effective Date or, to the
extent more favorable to the Executive, those in effect after the Effective
Date, including but not limited to (A) a material change in the nature or
scope of the Executive's titles, authority, powers, functions, duties,
reporting requirements or responsibilities, or (B) a material reduction in
the level of support services, staff, secretarial and other assistance,
office space and accoutrements, but excluding for this purpose an isolated,
insubstantial and inadvertent event not occurring in bad faith that the
Company remedies promptly after receipt of notice thereof given by the
Executive;
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(iv) the relocation of the Executive's principal place of
employment to a location more than 25 miles from the Executive's principal
place of employment on the date one year prior to the Effective Date;
(v) the Employer requires the Executive to travel on
Employer business to a materially greater extent than was required during
the one-year period prior to the Effective Date;
(vi) failure by the Company to obtain the agreement referred
to in Section 16(a) as provided therein;
(vii) the Executive has continued the Executive's employment
through the first anniversary of the Change in Control; provided, however,
that the Executive may exercise the Executive's rights to terminate the
Executive's employment under this clause (vii) only if the Executive
delivers the Notice of Termination during the 60 days following such first
anniversary; or
(viii) the Company or the Employer terminates the Executive's
employment after a Change in Control without delivering a Notice of
Termination in accordance with Section 12;
provided that (A) any such event occurs following the Effective Date or (B) in
the case of any event described in clauses (ii), (iii), (iv) or (v) above, such
event occurs on or prior to the Effective Date under circumstances described in
clause (iii)(B)(l) or (iii)(B)(2) of the definition of "Effective Date." In the
event of a dispute regarding whether the Executive terminated the Executive's
employment for "Good Reason" in accordance with this Agreement, no claim by the
Company that such termination does not constitute a Covered Termination shall be
given effect unless the Company establishes by clear and convincing evidence
that such termination does not constitute a Covered Termination. Any election by
the Executive to terminate the Executive's employment for Good Reason shall not
be deemed a voluntary termination of employment by the Executive for purposes of
any other employee benefit or other plan.
(m) Normal Retirement Date. The term "Normal Retirement Date"
means the date the Executive reaches "Normal Retirement Age" as defined in the
State Financial Services Corporation Money Purchase Pension Plan as in effect on
the date hereof, or the corresponding date under any successor plan of the
Employer as in effect on the Effective Date.
(n) Notice of Termination. The term "Notice of Termination" means
a written notice as contemplated by Section 12.
(o) Person. The term "Person" shall have the meaning given in
Section 3(a)(9) of the Act, as modified and used in Sections 13(d) and 14(d)
thereof.
(p) Termination Date. Except as otherwise provided in Section
9(b) and Section 16(a), the term "Termination Date" means (i) if the Executive's
employment is terminated by the Executive's death, the date of death; (ii) if
the Executive's employment is terminated by
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reason of voluntary early retirement, as agreed in writing by the Company and
the Executive, the date of such early retirement that is set forth in such
written agreement; (iii) if the Executive's employment is terminated for
purposes of this Agreement by reason of disability pursuant to Section 11,
thirty days after the Notice of Termination is given; (iv) if the Executive's
employment is terminated by the Executive voluntarily (other than for Good
Reason), the date the Notice of Termination is given; and (v) if the Executive's
employment is terminated by the Company (other than by reason of disability
pursuant to Section 11) or by the Executive for Good Reason, thirty days after
the Notice of Termination is given. Notwithstanding the foregoing,
(A) If the Executive shall in good faith give a Notice of
Termination for Good Reason and the Company notifies the Executive that a
dispute exists concerning the termination within the fifteen-day period
following receipt thereof, then the Executive may elect to continue the
Executive's employment during such dispute and the Termination Date shall be
determined under this paragraph. If the Executive so elects and it is thereafter
determined that the Executive terminated the Executive's employment for Good
Reason in accordance with this Agreement, then the Termination Date shall be the
earlier of (1) the date on which the dispute is finally determined, either (x)
by mutual written agreement of the parties or (y) in accordance with Section 21
or (2) the date of the Executive's death. If the Executive so elects and it is
thereafter determined that the Executive did not terminate the Executive's
employment for Good Reason in accordance with this Agreement, then the
employment of the Executive hereunder shall continue after such determination as
if the Executive had not delivered the Notice of Termination asserting Good
Reason and there shall be no Termination Date arising out of such Notice. In
either case, this Agreement continues, until the Termination Date, if any, as if
the Executive had not delivered the Notice of Termination except that, if it is
finally determined that the Executive terminated the Executive's employment for
Good Reason in accordance with this Agreement, then the Executive shall in no
case be denied the benefits described in Section 8 (including a Termination
Payment) based on events occurring after the Executive delivered the Executive's
Notice of Termination.
(B) If an opinion is required to be delivered pursuant to Section
8(a)(ii) and such opinion shall not have been delivered, then the Termination
Date shall be the date on which such opinion is delivered.
(C) Except as provided in paragraph (A) above, if the party
receiving the Notice of Termination notifies the other party that a dispute
exists concerning the termination within the fifteen-day period following
receipt thereof and it is finally determined that termination of the Executive's
employment for the reason asserted in such Notice of Termination was not in
accordance with this Agreement, then (1) if such Notice was delivered by the
Executive, then the Executive will be deemed to have voluntarily terminated the
Executive's employment other than for Good Reason by means of such Notice and
(2) if delivered by the Company, then the Company will be deemed to have
terminated the Executive's employment other than by reason of death, disability
or Cause by means of such Notice.
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2. Termination or Cancellation Prior to the Effective Date. The
Employer and the Executive shall each retain the right to terminate the
employment of the Executive at any time prior to the Effective Date. If the
Executive's employment is terminated prior to the Effective Date, then this
Agreement shall be terminated and cancelled and of no further force or effect
and any and all rights and obligations of the parties hereunder shall cease. In
addition, this Agreement shall terminate upon the Executive ceasing to be an
officer of the Employer prior to a Change in Control unless the Executive can
reasonably demonstrate that such change in status occurred under circumstances
described in clause (iii)(B)(l) or (iii)(B)(2) of the definition of "Effective
Date" in Section 1 hereof.
3. Employment Period. If the Executive is employed by the Employer on
the Effective Date, then the Company will, or will cause the Employer to,
continue thereafter to employ the Executive during the Employment Period (as
hereinafter defined), and the Executive will remain in the employ of the
Employer, in accordance with and subject to the terms and provisions of this
Agreement. For purposes of this Agreement, the term "Employment Period" means a
period (i) commencing on the Effective Date, and (ii) ending at 11:59 p.m.
Milwaukee Time on the earlier of the third anniversary of such date or the
Executive's Normal Retirement Date.
4. Duties. During the Employment Period, the Executive shall, in the
most significant capacities and positions held by the Executive at any time
during the one-year period preceding the Effective Date or in such other
capacities and positions as may be agreed to by the Company and the Executive in
writing, devote the Executive's best efforts and all of the Executive's business
time, attention and skill to the business and affairs of the Employer, as such
business and affairs now exist and as they may hereafter be conducted.
5. Compensation. During the Employment Period, the Executive shall be
compensated as follows:
(a) The Executive shall receive, at reasonable intervals (but not
less often than monthly) and in accordance with such standard policies as may be
in effect immediately prior to the Effective Date, an annual base salary in cash
equivalent of not less than twelve times the Executive's highest monthly base
salary for the twelve-month period immediately preceding the month in which the
Effective Date occurs or, if higher, annual base salary at the rate in effect
immediately prior to the Effective Date (which base salary shall, unless
otherwise agreed in writing by the Executive, include the current receipt by the
Executive of any amounts which, prior to the Effective Date, the Executive had
elected to defer, whether such compensation is deferred under Section 401(k) of
the Code or otherwise), subject to upward adjustment as provided in Section 6
(such salary amount as adjusted upward from time to time is hereafter referred
to as the "Annual Base Salary").
(b) The Executive shall receive fringe benefits at least equal in
value to those provided for the Executive at any time during the one-year period
immediately preceding the Effective Date or, if more favorable to the Executive,
those provided generally at any time after the Effective Date to any executives
of the Company and its Affiliates of comparable status and position to the
Executive. The Executive shall be reimbursed, at such intervals and
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in accordance with such standard policies that are most favorable to the
Executive that were in effect at any time during the one-year period immediately
preceding the Effective Date or, if more favorable to the Executive, those
provided generally at any time after the Effective Date to any executives of the
Company and its Affiliates of comparable status and position to the Executive,
for any and all monies advanced in connection with the Executive's employment
for reasonable and necessary expenses incurred by the Executive on behalf of the
Company and its Affiliates, including travel expenses.
(c) The Executive and/or the Executive's family, as the case may
be, shall be included, to the extent eligible thereunder (which eligibility
shall not be conditioned on the Executive's salary grade or on any other
requirement that excludes executives of the Company and its Affiliates of
comparable status and position to the Executive unless such exclusion was in
effect for such plan or an equivalent plan on the date one year prior to the
Effective Date), in any and all welfare benefit plans, practices, policies and
programs providing benefits for the Company's salaried employees in general or,
if more favorable to the Executive, to any executives of the Company and its
Affiliates of comparable status and position to the Executive, including but not
limited to group life insurance, hospitalization, medical and dental plans;
provided, that, (i) in no event shall the aggregate level of benefits under such
plans, practices, policies and programs in which the Executive is included be
less than the aggregate level of benefits under plans, practices, policies and
programs of the type referred to in this Section 5(c) in which the Executive was
participating at any time during the one-year period immediately preceding the
Effective Date and (ii) in no event shall the aggregate level of benefits under
such plans, practices, policies and programs be less than the aggregate level of
benefits under plans, practices, policies and programs of the type referred to
in this Section 5(c) provided at any time after the Effective Date to any
executive of the Company and its Affiliates of comparable status and position to
the Executive.
(d) The Executive shall annually be entitled to not less than the
amount of paid vacation and not fewer than the number of paid holidays to which
the Executive was entitled annually at any time during the one-year period
immediately preceding the Effective Date or such greater amount of paid vacation
and number of paid holidays as may be made available annually to the Executive
or any other executive of the Company and its Affiliates of comparable status
and position to the Executive at any time after the Effective Date.
(e) The Executive shall be included in all plans providing
additional benefits to any executives of the Company and its Affiliates of
comparable status and position to the Executive, including but not limited to
deferred compensation, split-dollar life insurance, retirement, supplemental
retirement, stock option, stock appreciation, stock bonus and similar or
comparable plans; provided, that, (i) in no event shall the aggregate level of
benefits under such plans be less than the aggregate level of benefits under
plans of the type referred to in this Section 5(e) in which the Executive was
participating at any time during the one-year period immediately preceding the
Effective Date; (ii) in no event shall the aggregate level of benefits under
such plans be less than the aggregate level of benefits under the plans of the
type referred to in this Section 5(c) provided at any time after the Effective
Date to the Executive or any executive of the Company and its Affiliates of
comparable status and position
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to the Executive; and (iii) the Company's obligation to include the Executive in
bonus or incentive compensation plans shall be determined by Section 5(f).
(f) To assure that the Executive will have an opportunity to earn
incentive compensation after the Effective Date, the Executive shall be included
in a bonus plan of the Company that shall satisfy the standards described below
(the "Bonus Plan"). Bonuses under the Bonus Plan shall be payable with respect
to achieving such financial or other goals reasonably related to the business of
the Company, including the Employer, as the Company shall establish (the
"Goals"), all of which Goals shall be attainable, prior to the end of the
Employment Period, with approximately the same degree of probability as the
goals under the Employer's annual incentive plan currently in effect, or the
successor to such plan, in the form most favorable to the Executive that was in
effect at any time during the one-year period prior to the Effective Date (the
"Existing Plan") and in view of the Company's existing and projected financial
and business circumstances applicable at the time. The amount of the bonus (the
"Bonus Amount") that the Executive is eligible to earn under the Bonus Plan
shall be no less than the amount of the Executive's highest maximum potential
award under the Existing Plan at any time during the one-year period prior to
the Effective Date or, if higher, any maximum potential award under the Bonus
Plan or any other bonus or incentive compensation plan in effect after the
Effective Date for the Executive or for any executive of the Company and its
Affiliates of comparable status and position to the Executive (such bonus amount
herein referred to as the "Targeted Bonus"), and if the Goals are not achieved
(and, therefore, the entire Targeted Bonus is not payable), then the Bonus Plan
shall provide for a payment of a Bonus Amount not less than a portion of the
Targeted Bonus reasonably related to that portion of the Goals that were
achieved. Payment of the Bonus Amount (i) shall be in cash, unless otherwise
agreed by the Executive, and (ii) shall not be affected by any circumstance
occurring subsequent to the end of the Employment Period, including termination
of the Executive's employment.
6. Annual Compensation Adjustments. During the Employment Period, the
Board of Directors of the Company (or an appropriate committee thereof) will
consider and appraise, at least annually, the contributions of the Executive to
the Employer, and in accordance with the Company's practice prior to the
Effective Date, due consideration shall be given, at least annually, to the
upward adjustment of the Executive's Annual Base Salary (i) commensurate with
increases generally given to other executives of the Company and its Affiliates
of comparable status and position to the Executive, and (ii) as the scope of the
Company's operations or the Executive's duties expand.
7. Termination During Employment Period.
(a) Right to Terminate. During the Employment Period, (i) the
Company shall be entitled to terminate the Executive's employment (A) for Cause,
(B) by reason of the Executive's disability pursuant to Section 11, or (C) for
any other reason, and (ii) the Executive shall be entitled to terminate the
Executive's employment for any reason. Any such termination shall be subject to
the procedures set forth in Section 12 and shall be subject to any consequences
of such termination set forth in this Agreement. Any termination of the
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Executive's employment during the Employment Period by the Employer shall be
deemed a termination by the Company for purposes of this Agreement.
(b) Termination for Cause or Without Good Reason. If there is a
Covered Termination for Cause or due to the Executive's voluntarily terminating
the Executive's employment other than for Good Reason, then the Executive shall
be entitled to receive only Accrued Benefits.
(c) Termination Giving Rise to a Termination Payment. If there is
a Covered Termination by the Executive for Good Reason, or by the Company other
than by reason of (i) death, (ii) disability pursuant to Section 11, or (iii)
Cause, then the Executive shall be entitled to receive, and the Company shall
promptly pay, Accrued Benefits and, in lieu of further base salary for periods
following the Termination Date, as liquidated damages and additional severance
pay and in consideration of the covenant of the Executive set forth in Section
13(a), the Termination Payment pursuant to Section 8(a).
8. Payments Upon Termination.
(a) Termination Payments.
(i) Subject to the limits set forth in Section 8(a)(ii),
for purposes of this Agreement, the "Termination Payment" shall be an
amount equal to the Annual Cash Compensation multiplied by the number of
years or fractional portion thereof remaining in the Employment Period
determined as of the Termination Date, except that the Termination Payment
shall not be less than the amount of Annual Cash Compensation. The
Termination Payment shall be paid to the Executive in cash equivalent not
later than ten business days after the Termination Date. The Executive
shall not be required to mitigate the amount of the Termination Payment by
securing other employment or otherwise, nor will such Termination Payment
be reduced by reason of the Executive securing other employment or for any
other reason. The Termination Payment shall be in addition to any other
severance payments to which the Executive is entitled under the Company's
severance policies and practices in the form most favorable to the
Executive that were in effect at any time during the one-year period prior
to the Effective Date.
(ii) Notwithstanding any other provision of this Agreement,
if any portion of the Termination Payment or any other payment under this
Agreement, or under any other agreement with or plan of the Company or the
Employer (in the aggregate "Total Payments"), would constitute an "excess
parachute payment," then the Total Payments to be made to the Executive
shall be reduced such that the value of the aggregate Total Payments that
the Executive is entitled to receive shall be One Dollar ($1) less than the
maximum amount which the Executive may receive without becoming subject to
the tax imposed by Section 4999 of the Code (or any successor provision) or
which the Company may pay without loss of deduction under Section 280G(a)
of the Code (or any successor provision). For purposes of this Agreement,
the terms "excess parachute payment" and "parachute payments" shall have
the
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meanings assigned to them in Section 280G of the Code (or any successor
provision), and such "parachute payments" shall be valued as provided
therein. Present value for purposes of this Agreement shall be calculated
in accordance with Section 1274(b)(2) of the Code (or any successor
provision). Within sixty days following delivery of the Notice of
Termination or notice by the Company to the Executive of its belief that
there is a payment or benefit due the Executive which will result in an
excess parachute payment as defined in Section 280G of the Code (or any
successor provision), the Executive and the Company, at the Company's
expense, shall obtain the opinion (which need not be unqualified) of
nationally recognized tax counsel selected by the Company's independent
auditors and acceptable to the Executive in the Executive's sole
discretion, which sets forth (A) the amount of the Base Period Income, (B)
the amount and present value of Total Payments and (C) the amount and
present value of any excess parachute payments without regard to the
limitations of this Section 8(a)(ii). As used in this Section 8(a)(ii), the
term "Base Period Income" means an amount equal to the Executive's
"annualized includible compensation for the base period" as defined in
Section 280G(d)(l) of the Code (or any successor provision). For purposes
of such opinion, the value of any noncash benefits or any deferred payment
or benefit shall be determined by the Company's independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the Code
(or any successor provisions), which determination shall be evidenced in a
certificate of such auditors addressed to the Company and the Executive.
Such opinion shall be dated as of the Termination Date and addressed to the
Company and the Executive and shall be binding upon the Company and the
Executive. If such opinion determines that there would be an excess
parachute payment, then the Termination Payment hereunder or any other
payment determined by such counsel to be includible in Total Payments shall
be reduced or eliminated as specified by the Executive in writing delivered
to the Company within thirty days of the Executive's receipt of such
opinion or, if the Executive falls to so notify the Company, then as the
Company shall reasonably determine, so that under the bases of calculations
set forth in such opinion there will be no excess parachute payment. If
such counsel so requests in connection with the opinion required by this
Section, the Executive and the Company shall obtain, at the Company's
expense, and the counsel may rely on in providing the opinion, the advice
of a firm of recognized executive compensation consultants as to the
reasonableness of any item of compensation to be received by the Executive.
Notwithstanding the foregoing, the provisions of this Section 8(a)(ii),
including the calculations, notices and opinions provided for herein, shall
be based upon the conclusive presumption that the following are reasonable:
(1) the compensation and benefits provided for in Section 5 and (2) any
other compensation, including but not limited to the Accrued Benefits,
earned prior to the Termination Date by the Executive pursuant to the
Company's compensation programs if such payments would have been made in
the future in any event, even though the timing of such payment is
triggered by the Change in Control or the Termination Date. If the
provisions of Sections 280G and 4999 of the Code (or any successor
provisions) are repealed without succession, then this Section 8(a)(ii)
shall be of no further force or effect.
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(b) Additional Benefits. If there is a Covered Termination and
the Executive is entitled to Accrued Benefits and the Termination Payment, then
the Executive shall be entitled to the following additional benefits:
(i) Until the earlier of the end of the Employment Period
or such time as the Executive has obtained new employment and is covered by
benefits which in the aggregate are at least equal in value to the
following benefits, the Executive shall continue to be covered, at the
expense of the Company, by the most favorable life insurance,
hospitalization, medical and dental coverage and other welfare benefits
provided to the Executive and the Executive's family during the one-year
period immediately preceding the Effective Date or at any time thereafter
or, if more favorable to the Executive, coverage as was required hereunder
with respect to the Executive immediately prior to the date Notice of
Termination is given.
(ii) The Executive shall receive, at the expense of the
Company, outplacement services, on an individualized basis at a level of
service commensurate with the Executive's most senior status with the
Company during the one-year period prior to the Effective Date (or, if
higher, at any time after the Effective Date), provided by a nationally
recognized executive placement firm selected by the Company with the
consent of the Executive, which consent will not be unreasonably withheld:
provided that the cost to the Company of such services shall not exceed 15%
of the Executive's Annual Base Salary.
(iii) The Company shall bear up to $10,000 in the aggregate
of fees and expenses of consultants and/or legal or accounting advisors
engaged by the Executive to advise the Executive as to matters relating to
the computation of benefits due and payable under this Section 8.
9. Death.
(a) Except as provided in Section 9(b), in the event of a Covered
Termination due to the Executive's death, the Executive's estate, heirs and
beneficiaries shall receive all the Executive's Accrued Benefits through the
Termination Date.
(b) If the Executive dies after a Notice of Termination is given
(i) by the Company or (ii) by the Executive for Good Reason, then the
Executive's estate, heirs and beneficiaries shall be entitled to the benefits
described in Section 9(a) and, subject to the provisions of this Agreement, to
such Termination Payment to which the Executive would have been entitled had the
Executive lived. In such event, the Termination Date shall be thirty days
following the giving of the Notice of Termination, subject to extension pursuant
to the definition of "Termination Date" in Section 1(p).
10. Retirement. If, during the Employment Period, the Executive and
the Employer shall execute an agreement providing for the early retirement of
the Executive from the Employer, or the Executive shall otherwise give notice
that the Executive is voluntarily choosing to retire early from the Employer,
then the Executive shall receive Accrued Benefits through the Termination Date;
provided, that if the Executive's employment is terminated by the Executive for
Good Reason or by the Company other than by reason of death, disability or
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Cause and the Executive also, in connection with such termination, elects
voluntary early retirement, then the Executive shall also be entitled to receive
a Termination Payment pursuant to Section 8(a).
11. Termination for Disability. If, during the Employment Period, as a
result of the Executive's disability due to physical or mental illness or injury
(regardless of whether such illness or injury is job-related), the Executive
shall have been absent from the Executive's duties hereunder on a full-time
basis for a period of 182 days and, within thirty days after the Company
notifies the Executive in writing that it intends to terminate the Executive's
employment (which notice shall not constitute the Notice of Termination
contemplated below), the Executive shall not have returned to the performance of
the Executive's duties hereunder on a full-time basis, then the Company may
terminate the Executive's employment for purposes of this Agreement pursuant to
a Notice of Termination. If the Executive's employment is terminated on account
of the Executive's disability in accordance with this Section, then the
Executive shall receive Accrued Benefits in accordance with Section 8(a) and
shall remain eligible for all benefits provided by any long term disability
programs of the Employer in effect at the time the Company sends notice to the
Executive of its intent to terminate pursuant to this Section.
12. Termination Notice and Procedure.
(a) Any termination of the Executive's employment during the
Employment Period by the Company or the Executive (other than a termination of
the Executive's employment referenced in the second sentence of the definition
of "Effective Date" in Section 1(j) hereof) shall be communicated by written
Notice of Termination to the Executive, if such Notice is given by the Company,
and to the Company, if such Notice is given by the Executive, all in accordance
with the following procedures and those set forth in Section 22:
(i) If such termination is for disability, Cause or Good
Reason, the Notice of Termination shall indicate in reasonable detail the
facts and circumstances alleged to provide a basis for such termination.
(ii) Any Notice of Termination by the Company shall have
been approved, prior to the giving thereof to the Executive, by a
resolution duly adopted by a majority of the directors of the Company (or
any successor corporation) then in office, a copy of which shall accompany
the Notice.
(iii) If the Notice is given by the Executive for Good
Reason, then the Executive may cease performing the Executive's duties
hereunder on or after the date 15 days after the delivery of Notice of
Termination (unless the Notice of Termination is based upon clause (viii)
of the definition of "Good Reason" in Section 1(l), in which case the
Executive may cease performing his duties at the time the Executive's
employment is terminated) and shall in any event cease employment on the
Termination Date, if any, arising from the delivery of such Notice. If the
Notice is given by the Company, then the Executive may cease performing the
Executive's duties hereunder on the date of receipt of the Notice of
Termination, subject to the Executive's rights hereunder.
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(iv) The recipient of any Notice of Termination shall
personally deliver or mail in accordance with Section 22 written notice of
any dispute relating to such Notice of Termination to the party giving such
Notice within fifteen days after receipt thereof. After the expiration of
such fifteen days, the contents of the Notice of Termination shall become
final and not subject to dispute.
Notwithstanding the foregoing, (A) if the Executive terminates the Executive's
employment after a Change in Control without complying with this Section 12,
then the Executive will be deemed to have voluntarily terminated the Executive's
employment other than for Good Reason and deemed to have delivered a written
Notice of Termination to that effect to the Company as of the date of such
termination and (B) if the Company or the Employer terminates the Executive's
employment after a Change in Control without complying with this Section 12,
then the Company will be deemed to have terminated the Executive's employment
other than by reason of death, disability, or Cause and the Company will be
deemed to have delivered a written Notice of Termination to that effect to the
Executive as of the date of such termination. Under circumstances described in
clause (B) above, the Executive may, but shall not be obligated to, also deliver
a Notice of Termination based upon clause (viii) of the definition of "Good
Reason" in Section 1(l) for the purpose of subjecting such Notice to Section
12(a)(iv).
(b) If a Change in Control occurs and the Executive's employment
with the Employer terminates (whether by the Company, the Executive or
otherwise) within one-year prior to the Change in Control, then the executive
may assert that such termination is a Covered Termination by sending a written
Notice of Termination to the Company at any time prior to the first anniversary
of the Change in Control in accordance with the procedures set forth in this
Section 12(b) and those set forth in Section 22. If the Executive asserts that
the Executive terminated the Executive's employment for Good Reason or that the
Company terminated the Executive's employment other than for disability or
Cause, then the Notice of Termination shall indicate in reasonable detail the
facts and circumstances alleged to provide a basis for such assertions. The
Company shall personally deliver or mail in accordance with Section 22 written
notice of any dispute relating to such Notice of Termination to the Executive
within 15 days after receipt thereof. After the expiration of such 15 days, the
contents of the Notice of Termination shall become final and not subject to
dispute.
13. Further Obligations of the Executive.
(a) Competition. The Executive agrees that, in the event of any
Covered Termination where the Executive is entitled to (and receives) Accrued
Benefits and the Termination Payment, the Executive shall not, for a period of
six months after the Termination Date, without the prior written approval of the
Company's Board of Directors, engage in any Competitive Activity.
(b) Confidentiality. During and following the Executive's
employment by the Employer, the Executive shall hold in confidence and not
directly or indirectly disclose or use or copy or make lists of any confidential
information or proprietary data of the Company (including that of the Employer),
except to the extent authorized in writing by the Board of
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Directors of the Company or required by any court or administrative agency,
other than to an employee of the Company or a person to whom disclosure is
reasonably necessary or appropriate in connection with the performance by the
Executive of duties as an executive of the Company or the Employer. Confidential
information shall not include any information known generally to the public or
any information of a type not otherwise considered confidential by persons
engaged in the same business or a business similar to that of the Company. All
records, files, documents and materials, or copies thereof, relating to the
business of the Company which the Executive shall prepare, or use, or come into
contact with, shall be and remain the sole property of the Company and shall be
promptly returned to the Company upon termination of employment with the
Employer.
14. Expenses and Interest. If, after the Effective Date, (i) a dispute
arises with respect to the enforcement of the Executive's rights under this
Agreement, (ii) any legal or arbitration proceeding shall be brought to enforce
or interpret any provision contained herein or to recover damages for breach
hereof, or (iii) any tax audit or proceeding is commenced that is attributable
in part to the application of Section 4999 of the Code, in any case so long as
the Executive is not acting in bad faith, then the Company shall reimburse the
Executive for any reasonable attorneys' fees and necessary costs and
disbursements incurred as a result of such dispute, legal or arbitration
proceeding or tax audit or proceeding ("Expenses"), and prejudgment interest on
any money judgment or arbitration award obtained by the Executive calculated at
the rate published in The Wall Street Journal, from time to time, as the prime
rate from the date that payments to the Executive should have been made under
this Agreement. Within ten days after the Executive's written request therefor,
the Company shall pay to the Executive, or such other person or entity as the
Executive may designate in writing to the Company, the Executive's reasonable
Expenses in advance of the final disposition or conclusion of any such dispute,
legal or arbitration proceeding.
15. Payment Obligations Absolute. The Company's obligation during and
after the Employment Period to pay the Executive the amounts and to make the
benefit and other arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any setoff, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or anyone else. Except as provided in
Section 14, all amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final, and the Company will not seek to recover all or any part of such payment
from the Executive, or from whomsoever may be entitled thereto, for any reason
whatsoever.
16. Successors.
(a) If the Company sells, assigns or transfers all or
substantially all of its business and assets to any Person or if the Company
merges into or consolidates or otherwise combines (where the Company does not
survive such combination) with any Person (any such event, a "Sale of
Business"), then the Company shall assign all of its right, title and interest
in this Agreement as of the date of such event to such Person, and the Company
shall cause such Person, by written agreement in form and substance reasonably
satisfactory to the Executive, to expressly assume and agree to perform from and
after the date of such assignment all of the terms, conditions and provisions
imposed by this Agreement upon the Company. Failure of the Company to obtain
such agreement prior to the effective
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date of such Sale of Business shall be a breach of this Agreement constituting
"Good Reason" hereunder, except that for purposes of implementing the foregoing,
the date upon which such Sale of Business becomes effective shall be deemed the
Termination Date. In case of such assignment by the Company and of assumption
and agreement by such Person, as used in this Agreement, "Company" shall
thereafter mean such Person which executes and delivers the agreement provided
for in this Section 16 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law, and this Agreement shall inure
to the benefit of, and be enforceable by, such Person. The Executive shall, in
the Executive's discretion, be entitled to proceed against any or all of such
Persons, any Person which theretofore was such a successor to the Company (as
defined in the first paragraph of this Agreement) and the Company (as so
defined) in any action to enforce any rights of the Executive hereunder. Except
as provided in this Subsection, this Agreement shall not be assignable by the
Company. This Agreement shall not be terminated by the voluntary or involuntary
dissolution of the Company.
(b) This Agreement and all rights of the Executive shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, heirs and beneficiaries. All amounts
payable to the Executive under Sections 7, 8, 9, 10, 11 and 14 if the Executive
had lived shall be paid, in the event of the Executive's death, to the
Executive's estate, heirs and representatives; provided, however, that the
foregoing shall not be construed to modify any terms of any benefit plan of the
Employer, as such terms are in effect on the Effective Date, that expressly
govern benefits under such plan in the event of the Executive's death.
17. Severability. The provisions of this Agreement shall be regarded
as divisible, and if any of said provisions or any part hereof are declared
invalid or unenforceable by a court of competent jurisdiction, then the validity
and enforceability of the remainder of such provisions or parts hereof and the
applicability thereof shall not be affected thereby.
18. Amendment. This Agreement may not be amended or modified at any
time except by written instrument executed by the Company and the Executive.
19. Withholding. The Employer shall be entitled to withhold from
amounts to be paid to the Executive hereunder any federal, state or local
withholding or other taxes or charges which it is from time to time required to
withhold; provided, that the amount so withheld shall not exceed the minimum
amount required to be withheld by law. The Employer shall be entitled to rely on
an opinion of nationally recognized tax counsel if any question as to the amount
or requirement of any such withholding shall arise.
20. Certain Rules of Construction. No party shall be considered as
being responsible for the drafting of this Agreement for the purpose of applying
any rule construing ambiguities against the drafter or otherwise. No draft of
this Agreement shall be taken into account in construing this Agreement. Any
provision of this Agreement which requires an agreement in writing shall be
deemed to require that the writing in question be signed by the Executive and an
authorized representative of the Company.
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21. Governing Law; Resolution of Disputes.
(a) This Agreement and the rights and obligations hereunder shall
be governed by and construed in accordance with the internal laws of the State
of Wisconsin (excluding any choice of law rules that may direct the application
of the laws of another jurisdiction) except that Section 21(b) shall be
construed in accordance with the Federal Arbitration Act if arbitration is
chosen by the Executive as the method of dispute resolution.
(b) Any dispute arising out of this Agreement shall, at the
Executive's election, be determined by arbitration under the rules of the
American Arbitration Association then in effect (but subject to any evidentiary
standards set forth in this Agreement), in which case both parties shall be
bound by the arbitration award, or by litigation. Whether the dispute is to be
settled by arbitration or litigation, the venue for the arbitration or
litigation shall be Milwaukee, Wisconsin or, at the Executive's election, if the
Executive is no longer residing or working in the Milwaukee, Wisconsin
metropolitan area, in the judicial district encompassing the city in which the
Executive resides; provided, that, if the Executive is not then residing in the
United States, the election of the Executive with respect to such venue shall be
either Milwaukee, Wisconsin or in the judicial district encompassing that city
in the United States among the thirty cities having the largest population (as
determined by the most recent United States Census data available at the
Termination Date) that is closest to the Executive's residence. The parties
consent to personal jurisdiction in each trial court in the selected venue
having subject matter jurisdiction notwithstanding their residence or situs, and
each party irrevocably consents to service of process in the manner provided
hereunder for the giving of notices.
22. Notice. Notices given pursuant to this Agreement shall be in
writing and, except as otherwise provided by Section 12(a)(iii), shall be deemed
given when actually received by the Executive or actually received by the
Company's Secretary or any officer of the Company other than the Executive. If
mailed, such notices shall be mailed by United States registered or certified
mail, return receipt requested, addressee only, postage prepaid, if to the
Company, Attention: Secretary (or, if the Executive is then Secretary, to the
Chief Executive Officer), 10708 West Janesville Road, Hales Corners, Wisconsin
53130, or if to the Executive, at the address set forth below the Executive's
signature to this Agreement, or to such other address as the party to be
notified shall have theretofore given to the other party in writing.
(a) Additional Payment. (a) If, notwithstanding the provisions of
Section 8a(ii), but subject to subsection (b), it is ultimately determined by a
court or pursuant to a final determination by the Internal Revenue Service that
any portion of Total Payments is subject to the tax (the "Excise Tax") imposed
by Section 4999 of the Code (or any successor provision), then the Company shall
pay to the Executive an additional amount (the "Gross-Up Payment") such that the
net amount retained by the Executive after deduction of any Excise Tax and any
interest charges or penalties in respect of the imposition of such Excise Tax
(but not any federal, state or local income tax) on the Total Payments, and any
federal, state and local income tax and Excise Tax upon the payment provided for
by this Section 23 shall be equal to the Total Payments. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income taxes at the highest marginal rate of federal
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income taxation in the calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal rates of taxation in
the state and locality of the Executive's domicile for income tax purposes on
the date the Gross-Up Payment is made, net of the maximum reduction in federal
income taxes that could be obtained from deduction of such state and local
taxes.
(b) If legislation is enacted that would require the Company's
shareholders to approve this Agreement, prior to a Change in Control, due solely
to the provision contained in subsection (a) of this Section 23, then
(i) from and after such time as shareholder approval would
be required, until shareholder approval is obtained as required by such
legislation, subsection (a) shall be of no force and effect;
(ii) if the Company seeks shareholder approval of any other
agreement providing similar benefits to any other executive of the Company,
then the Company shall seek shareholder approval of this Agreement at the
same shareholders' meeting or meetings at which the shareholders consider
any such other agreement; and
(iii) the Company and the Executive shall use their best
efforts to consider and agree in writing upon an amendment to this Section
23 such that, as amended, this Subsection would provide the Executive with
the benefits intended to be afforded to the Executive by subsection (a)
without requiring shareholder approval.
23. No Waiver. The Executive's or the Company's failure to insist upon
strict compliance with any provision of this Agreement or the failure to assert
any right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
24. Headings. The headings herein contained are for reference only and
shall not affect the meaning or interpretation of any provision of this
Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
STATE FINANCIAL SERVICES CORPORATION
By:_________________________________
Name:
Title:
EXECUTIVE
______________________________(SEAL)
Name:
KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT
THIS AGREEMENT, is made and entered into as of the 1st day of October,
1999, by and between STATE FINANCIAL SERVICES CORPORATION, a Wisconsin
corporation (hereinafter referred to as the "Company"), and _________________
(hereinafter referred to as the "Executive").
W I T N E S S E T H :
WHEREAS, the Executive is employed by the Company and/or a subsidiary
of the Company in a key executive capacity, and the Executive's services are
valuable to the conduct of the business of the Company;
WHEREAS, the Board of Directors of the Company (the "Board")
recognizes that circumstances may arise in which a change in control of the
Company occurs, through acquisition or otherwise, thereby causing uncertainty
about the Executive's future employment with the Company and/or any such
subsidiary without regard to the Executive's competence or past contributions,
which uncertainty may result in the loss of valuable services of the Executive
to the detriment of the Company and its shareholders, and the Company and the
Executive wish to provide reasonable security to the Executive against changes
in the Executive's relationship with the Company in the event of any such change
in control;
WHEREAS, the Company and the Executive desire that any proposal for a
change in control or acquisition of the Company will be considered by the
Executive objectively and with reference only to the best interests of the
Company and its shareholders; and
WHEREAS, the Executive will be in a better position to consider the
Company's best interests if the Executive is afforded reasonable security, as
provided in this Agreement, against altered conditions of employment which could
result from any such change in control or acquisition.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto mutually
covenant and agree as follows:
1. Definitions.
(a) Act. The term "Act" means the Securities Exchange Act of
1934, as amended.
(b) Accrued Benefits. The term "Accrued Benefits" shall include
the following amounts, payable as described herein: (i) all base salary for the
time period ending with the Termination Date; (ii) reimbursement for any and all
monies advanced in connection with the Executive's employment for reasonable and
necessary expenses incurred by the Executive on
<PAGE>
behalf of the Company and its Affiliates for the time period ending with the
Termination Date; (iii) any and all other cash earned through the Termination
Date and deferred at the election of the Executive or pursuant to any deferred
compensation plan then in effect; (iv) notwithstanding any provision of any
bonus or incentive compensation plan applicable to the Executive, a lump sum
amount, in cash, equal to the sum of (A) any bonus or incentive compensation
that has been allocated or awarded to the Executive for a fiscal year or other
measuring period under the plan that ends prior to the Termination Date but has
not yet been paid (pursuant to Section 5(f) or otherwise) and (B) a pro rata
portion to the Termination Date of the aggregate value of all contingent bonus
or incentive compensation awards to the Executive for all uncompleted periods
under the plan calculated as to each such award as if the Goals with respect to
such bonus or incentive compensation award had been attained; and (v) all other
payments and benefits to which the Executive or in the event of the Executive's
death, the Executive's surviving spouse or other beneficiary) may be entitled as
compensatory fringe benefits or under the terms of any benefit plan of the
Employer, including severance payments under the Employer's severance policies
and practices in the form most favorable to the Executive that were in effect at
any time during the one-year period prior to the Effective Date. Payment of
Accrued Benefits shall be made promptly in accordance with the Employee's
prevailing practice with respect to clauses (i) and (ii) or, with respect to
clauses (iii), (iv) and (v), pursuant to the terms of the benefit plan or
practice establishing such benefits.
(c) Affiliate and Associate. The terms "Affiliate" and
"Associate" shall have the respective meanings ascribed to such terms in Rule
12b-2 of the General Rules and Regulations of the Act.
(d) Annual Cash Compensation. The term "Annual Cash Compensation"
shall mean the sum of (A) the Executive's Annual Base Salary, plus (B) the
highest of (1) the annual bonus or incentive compensation award earned by the
Executive under any cash bonus or incentive compensation plan of the Company or
any of its Affiliates during the three complete fiscal years of the Company
immediately preceding the Termination Date or, if more favorable to the
Executive, during the three complete fiscal years of the Company immediately
preceding the Effective Date; (2) the Executive's bonus or incentive
compensation Targeted Bonus for the fiscal year in which the Termination Date
occurs; or (3) the highest average annual bonus and/or incentive compensation
earned during the three complete fiscal years of the Company immediately
preceding the Termination Date (or, if more favorable to the Executive, during
the three complete fiscal years of the Company immediately preceding the
Effective Date) under any cash bonus or incentive compensation plan of the
Company or any of its Affiliates by the group of executives of the Company and
its Affiliates participating under such plan during such fiscal years at a
status or position comparable to that at which the Executive participated or
would have participated pursuant to the Executive's most senior position at any
time during the year preceding the Effective Date or thereafter until the
Termination Date, plus (C) the Company Contribution to the ESOP, Money Purchase
Pension Plan and Supplemental Executive Plan for the fiscal year of the Company
out of the three complete fiscal years prior to the Termination Date in which
the combined Company Contribution was highest.
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(e) Cause. The Company may terminate the Executive's employment
after the Effective Date for "Cause" only if the conditions set forth in
paragraphs (i) and (ii) have been met and the Company otherwise complies with
this Agreement:
(i) (A) the Executive has committed any act of fraud,
embezzlement or theft in connection with the Executive's duties as an
Executive or in the course of employment with the Company and/or its
subsidiaries; (B) the Executive has willfully and continually failed to
perform substantially the Executive's duties with the Company or any of its
Affiliates (other than any such failure resulting from incapacity due to
physical or mental illness or injury, regardless of whether such illness or
injury is job-related) for an appropriate period, which shall not be less
than 30 days, after the Chief Executive Officer of the Company (or, if the
Executive is then Chief Executive Officer, the Board) has delivered a
written demand for performance to the Executive that specifically
identifies the manner in which the Chief Executive Officer (or the Board,
as the case may be) believes the Executive has not substantially performed
the Executive's duties; (C) the Executive has willfully engaged in illegal
conduct or gross misconduct that is materially and demonstrably injurious
to the Company; (D) the Executive has willfully and wrongfully disclosed
any trade secret or other confidential information of the Company or any of
its Affiliates; or (E) the Executive has engaged in any Competitive
Activity; and in any such case the act or omission shall have been
determined by the Board to have been materially harmful to the Company and
its subsidiaries taken as a whole.
For purposes of this provision, (1) no act or failure to act
on the part of the Executive shall be considered "willful" unless it is
done, or omitted to be done, by the Executive in bad faith or without
reasonable belief that the Executive's action or omission was in the best
interests of the Company and (2) any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board or upon
the instructions of the Chief Executive Officer or a senior officer of the
Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the Executive
in good faith and in the best interests of the Company.
(ii) (A) The Company terminates the Executive's employment
by delivering a Notice of Termination to the Executive, (B) prior to the
time the Company has terminated the Executive's employment pursuant to a
Notice of Termination, the Board, by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board, has adopted a
resolution finding that the Executive was guilty of conduct set forth in
this definition of Cause, and specifying the particulars thereof in detail,
at a meeting of the Board called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board) and (C) the Company delivers a copy of such
resolution to the Executive with the Notice of Termination at the time the
Executive's employment is terminated.
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In the event of a dispute regarding whether the Executive's employment has been
terminated for Cause, no claim by the Company that the Company has terminated
the Executive's employment for Cause in accordance with this Agreement shall be
given effect unless the Company establishes by clear and convincing evidence
that the Company has complied with the requirements of this Agreement to
terminate the Executive's employment for Cause.
(f) Change in Control. A "Change in Control" shall be deemed to
have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(i) any Person (other than (A) the Company or any of its
subsidiaries, (B) a trustee or other fiduciary holding securities under any
employee benefit plan of the Company or any of its subsidiaries, (C) an
underwriter temporarily holding securities pursuant to an offering of such
securities or (D) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock in the Company ("Excluded Persons")) is or becomes the
"Beneficial Owner" (as such term is defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired
directly from the Company or its Affiliates after June 1, 1999 pursuant to
express authorization by the Board that refers to this exception)
representing 25% or more of either the then outstanding shares of common
stock of the Company or the combined voting power of the Company's then
outstanding voting securities; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals
who, on June 1, 1999, constituted the Board and any new director (other
than a director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company,
as such terms are used in Rule 14a-11 of Regulation 14A under the Act)
whose appointment or election by the Board or nomination for election by
the Company's stockholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors on
June 1, 1999 or whose appointment, election or nomination for election was
previously so approved; or
(iii) the stockholders of the Company approve a merger,
consolidation or share exchange of the Company with any other corporation
or approve the issuance of voting securities of the Company in connection
with a merger, consolidation or share exchange of the Company (or any
direct or indirect subsidiary of the Company) pursuant to applicable stock
exchange requirements, other than (A) a merger, consolidation or share
exchange which would result in the voting securities of the Company
outstanding immediately prior to such merger, consolidation or share
exchange continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any
parent thereof) at least 50% of the combined voting power of the voting
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger, consolidation or share exchange,
or (B) a merger, consolidation or share exchange
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which would result in the voting securities of the Company outstanding
immediately prior to such merger, consolidation or share exchange
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof) at least 25% of the combined voting power of the voting securities
of the Company or such surviving entity or any parent thereof outstanding
immediately after such merger, consolidation or share exchange, but only if
the individuals described in subsection (ii) above cease for any reason to
constitute a majority of the number of directors of the Company or such
surviving entity or any parent thereof (for purposes of this determination
the Company shall be deemed to include such surviving entity or any parent
thereof); or
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the
Company's assets (in one transaction or a series of related transactions
within any period of 24 consecutive months), other than a sale or
disposition by the Company of all or substantially all of the Company's
assets to an entity at least 75% of the combined voting power of the voting
securities of which are owned by Persons in substantially the same
proportions as their ownership of the Company immediately prior to such
sale.
Notwithstanding the foregoing, no "Change in Control" shall be
deemed to have occurred if there is consummated any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity that owns all or substantially all of the assets or voting securities
of the Company immediately following such transaction or series of transactions.
(g) Code. The term "Code" means the Internal Revenue Code of
1986, including any amendments thereto or successor tax codes thereof.
(h) Competitive Activity. The Executive shall engage in a
"Competitive Activity" if the Executive participates in the management of, is
employed by or owns any interest in any business enterprise at a location within
the United States that engages in substantial competition with the Company or
its subsidiaries, where such enterprise's revenues from any competitive
activities amount to 10% or more of such enterprise's consolidated net revenues
and sales for its most recently completed fiscal year; provided, however, that
owning stock or other securities of a competitor amounting to less than five
percent of the outstanding capital stock of such competitor shall not be a
"Competitive Activity".
(i) Covered Termination. The term "Covered Termination" means any
termination of the Executive's employment during the Employment Period where the
Termination Date or the date Notice of Termination is delivered is any date on
or prior to the end of the Employment Period.
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(j) Effective Date. The term "Effective Date" shall mean the
first date on which a Change in Control occurs. Anything in this Agreement to
the contrary notwithstanding, if (i) a Change in Control occurs, (ii) the
Executive's employment with the Employer terminates (whether by the Company, the
Executive or otherwise) within one-year prior to the Change in Control and (iii)
it is reasonably demonstrated by the Executive that (A) any such termination of
employment by the Employer (1) was at the request of a third party who has taken
steps reasonably calculated to effect a Change in Control or (2) otherwise arose
in connection with or in anticipation of a Change in Control, or (B) any such
termination of employment by the Executive took place subsequent to the
occurrence of an event described in clause (ii), (iii), (iv) or (v) of the
definition of "Good Reason" which event (1) occurred at the request of a third
party who has taken steps reasonably calculated to effect a Change in Control or
(2) otherwise arose in connection with or in anticipation of a Change in
Control, then for all purposes of this Agreement the term "Effective Date" shall
mean the day immediately prior to the date of such termination of employment.
(k) Employer. The term "Employer" means the Company and/or any
subsidiary of the Company that employed the Executive immediately prior to the
Effective Date.
(l) Good Reason. The Executive shall have a "Good Reason" for
termination of employment on or after the Effective Date if the Executive
determines in good faith that any of the following events has occurred:
(i) any breach of this Agreement by the Company, including
specifically any breach by the Company of its agreements contained in
Section 4, Section 5 or Section 6, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith that the Company
remedies promptly after receipt of notice thereof given by the Executive;
(ii) any reduction in the Executive's base salary,
percentage of base salary available as incentive compensation or bonus
opportunity or benefits, in each case relative to those most favorable to
the Executive in effect at any time during the one-year period prior to the
Effective Date or, to the extent more favorable to the Executive, those in
effect after the Effective Date;
(iii) a material adverse change, without the Executive's
prior written consent, in the Executive's working conditions or status with
the Company or the Employer from such working conditions or status in
effect during the one-year period prior to the Effective Date or, to the
extent more favorable to the Executive, those in effect after the Effective
Date, including but not limited to (A) a material change in the nature or
scope of the Executive's titles, authority, powers, functions, duties,
reporting requirements or responsibilities, or (B) a material reduction in
the level of support services, staff, secretarial and other assistance,
office space and accoutrements, but excluding for this purpose an isolated,
insubstantial and inadvertent event not occurring in bad faith that the
Company remedies promptly after receipt of notice thereof given by the
Executive;
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(iv) the relocation of the Executive's principal place of
employment to a location more than 25 miles from the Executive's principal
place of employment on the date one year prior to the Effective Date;
(v) the Employer requires the Executive to travel on
Employer business to a materially greater extent than was required during
the one-year period prior to the Effective Date;
(vi) failure by the Company to obtain the agreement referred
to in Section 16(a) as provided therein; or
(vii) the Company or the Employer terminates the Executive's
employment after a Change in Control without delivering a Notice of
Termination in accordance with Section 12;
provided that (A) any such event occurs following the Effective Date or (B) in
the case of any event described in clauses (ii), (iii), (iv) or (v) above, such
event occurs on or prior to the Effective Date under circumstances described in
clause (iii)(B)(l) or (iii)(B)(2) of the definition of "Effective Date." In the
event of a dispute regarding whether the Executive terminated the Executive's
employment for "Good Reason" in accordance with this Agreement, no claim by the
Company that such termination does not constitute a Covered Termination shall be
given effect unless the Company establishes by clear and convincing evidence
that such termination does not constitute a Covered Termination. Any election by
the Executive to terminate the Executive's employment for Good Reason shall not
be deemed a voluntary termination of employment by the Executive for purposes of
any other employee benefit or other plan.
(m) Normal Retirement Date. The term "Normal Retirement Date"
means the date the Executive reaches "Normal Retirement Age" as defined in the
State Financial Services Corporation Money Purchase Pension Plan as in effect on
the date hereof, or the corresponding date under any successor plan of the
Employer as in effect on the Effective Date.
(n) Notice of Termination. The term "Notice of Termination" means
a written notice as contemplated by Section 12.
(o) Person. The term "Person" shall have the meaning given in
Section 3(a)(9) of the Act, as modified and used in Sections 13(d) and 14(d)
thereof.
(p) Termination Date. Except as otherwise provided in Section
9(b) and Section 16(a), the term "Termination Date" means (i) if the Executive's
employment is terminated by the Executive's death, the date of death; (ii) if
the Executive's employment is terminated by reason of voluntary early
retirement, as agreed in writing by the Company and the Executive, the date of
such early retirement that is set forth in such written agreement; (iii) if the
Executive's employment is terminated for purposes of this Agreement by reason of
disability pursuant to Section 11, thirty days after the Notice of Termination
is given; (iv) if the Executive's employment is terminated by the Executive
voluntarily (other than for Good Reason), the date the Notice of Termination is
given; and (v) if the Executive's employment is
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terminated by the Company (other than by reason of disability pursuant to
Section 11) or by the Executive for Good Reason, thirty days after the Notice of
Termination is given. Notwithstanding the foregoing,
(A) If the Executive shall in good faith give a Notice of
Termination for Good Reason and the Company notifies the Executive that a
dispute exists concerning the termination within the fifteen-day period
following receipt thereof, then the Executive may elect to continue the
Executive's employment during such dispute and the Termination Date shall be
determined under this paragraph. If the Executive so elects and it is thereafter
determined that the Executive terminated the Executive's employment for Good
Reason in accordance with this Agreement, then the Termination Date shall be the
earlier of (1) the date on which the dispute is finally determined, either (x)
by mutual written agreement of the parties or (y) in accordance with Section 21
or (2) the date of the Executive's death. If the Executive so elects and it is
thereafter determined that the Executive did not terminate the Executive's
employment for Good Reason in accordance with this Agreement, then the
employment of the Executive hereunder shall continue after such determination as
if the Executive had not delivered the Notice of Termination asserting Good
Reason and there shall be no Termination Date arising out of such Notice. In
either case, this Agreement continues, until the Termination Date, if any, as if
the Executive had not delivered the Notice of Termination except that, if it is
finally determined that the Executive terminated the Executive's employment for
Good Reason in accordance with this Agreement, then the Executive shall in no
case be denied the benefits described in Section 8 (including a Termination
Payment) based on events occurring after the Executive delivered the Executive's
Notice of Termination.
(B) If an opinion is required to be delivered pursuant to Section
8(a)(ii) and such opinion shall not have been delivered, then the Termination
Date shall be the date on which such opinion is delivered.
(C) Except as provided in paragraph (A) above, if the party
receiving the Notice of Termination notifies the other party that a dispute
exists concerning the termination within the fifteen-day period following
receipt thereof and it is finally determined that termination of the Executive's
employment for the reason asserted in such Notice of Termination was not in
accordance with this Agreement, then (1) if such Notice was delivered by the
Executive, then the Executive will be deemed to have voluntarily terminated the
Executive's employment other than for Good Reason by means of such Notice and
(2) if delivered by the Company, then the Company will be deemed to have
terminated the Executive's employment other than by reason of death, disability
or Cause by means of such Notice.
2. Termination or Cancellation Prior to the Effective Date. The
Employer and the Executive shall each retain the right to terminate the
employment of the Executive at any time prior to the Effective Date. If the
Executive's employment is terminated prior to the Effective Date, then this
Agreement shall be terminated and cancelled and of no further force or effect
and any and all rights and obligations of the parties hereunder shall cease. In
addition, this Agreement shall terminate upon the Executive ceasing to be an
officer of the Employer prior to a Change in Control unless the Executive can
reasonably demonstrate that
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such change in status occurred under circumstances described in clause
(iii)(B)(l) or (iii)(B)(2) of the definition of "Effective Date" in Section 1
hereof.
3. Employment Period. If the Executive is employed by the Employer on
the Effective Date, then the Company will, or will cause the Employer to,
continue thereafter to employ the Executive during the Employment Period (as
hereinafter defined), and the Executive will remain in the employ of the
Employer, in accordance with and subject to the terms and provisions of this
Agreement. For purposes of this Agreement, the term "Employment Period" means a
period (i) commencing on the Effective Date, and (ii) ending at 11:59 p.m.
Milwaukee Time on the earlier of the second anniversary of such date or the
Executive's Normal Retirement Date.
4. Duties. During the Employment Period, the Executive shall, in the
most significant capacities and positions held by the Executive at any time
during the one-year period preceding the Effective Date or in such other
capacities and positions as may be agreed to by the Company and the Executive in
writing, devote the Executive's best efforts and all of the Executive's business
time, attention and skill to the business and affairs of the Employer, as such
business and affairs now exist and as they may hereafter be conducted.
5. Compensation. During the Employment Period, the Executive shall be
compensated as follows:
(a) The Executive shall receive, at reasonable intervals (but not
less often than monthly) and in accordance with such standard policies as may be
in effect immediately prior to the Effective Date, an annual base salary in cash
equivalent of not less than twelve times the Executive's highest monthly base
salary for the twelve-month period immediately preceding the month in which the
Effective Date occurs or, if higher, annual base salary at the rate in effect
immediately prior to the Effective Date which base salary shall, unless
otherwise agreed in writing by the Executive, include the current receipt by the
Executive of any amounts which, prior to the Effective Date, the Executive had
elected to defer, whether such compensation is deferred under Section 401(k) of
the Code or otherwise), subject to upward adjustment as provided in Section 6
(such salary amount as adjusted upward from time to time is hereafter referred
to as the "Annual Base Salary").
(b) The Executive shall receive fringe benefits at least equal in
value to those provided for the Executive at any time during the one-year period
immediately preceding the Effective Date or, if more favorable to the Executive,
those provided generally at any time after the Effective Date to any executives
of the Company and its Affiliates of comparable status and position to the
Executive. The Executive shall be reimbursed, at such intervals and in
accordance with such standard policies that are most favorable to the Executive
that were in effect at any time during the one-year period immediately preceding
the Effective Date or, if more favorable to the Executive, those provided
generally at any time after the Effective Date to any executives of the Company
and its Affiliates of comparable status and position to the Executive, for any
and all monies advanced in connection with the Executive's employment for
reasonable and necessary expenses incurred by the Executive on behalf of the
Company and its Affiliates, including travel expenses.
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(c) The Executive and/or the Executive's family, as the case may
be, shall be included, to the extent eligible thereunder (which eligibility
shall not be conditioned on the Executive's salary grade or on any other
requirement that excludes executives of the Company and its Affiliates of
comparable status and position to the Executive unless such exclusion was in
effect for such plan or an equivalent plan on the date one year prior to the
Effective Date), in any and all welfare benefit plans, practices, policies and
programs providing benefits for the Company's salaried employees in general or,
if more favorable to the Executive, to any executives of the Company and its
Affiliates of comparable status and position to the Executive, including but not
limited to group life insurance, hospitalization, medical and dental plans;
provided, that, (i) in no event shall the aggregate level of benefits under such
plans, practices, policies and programs in which the Executive is included be
less than the aggregate level of benefits under plans, practices, policies and
programs of the type referred to in this Section 5(c) in which the Executive was
participating at any time during the one-year period immediately preceding the
Effective Date and (ii) in no event shall the aggregate level of benefits under
such plans, practices, policies and programs be less than the aggregate level of
benefits under plans, practices, policies and programs of the type referred to
in this Section 5(c) provided at any time after the Effective Date to any
executive of the Company and its Affiliates of comparable status and position to
the Executive.
(d) The Executive shall annually be entitled to not less than the
amount of paid vacation and not fewer than the number of paid holidays to which
the Executive was entitled annually at any time during the one-year period
immediately preceding the Effective Date or such greater amount of paid vacation
and number of paid holidays as may be made available annually to the Executive
or any other executive of the Company and its Affiliates of comparable status
and position to the Executive at any time after the Effective Date.
(e) The Executive shall be included in all plans providing
additional benefits to any executives of the Company and its Affiliates of
comparable status and position to the Executive, including but not limited to
deferred compensation, split-dollar life insurance, retirement, supplemental
retirement, stock option, stock appreciation, stock bonus and similar or
comparable plans; provided, that, (i) in no event shall the aggregate level of
benefits under such plans be less than the aggregate level of benefits under
plans of the type referred to in this Section 5(e) in which the Executive was
participating at any time during the one-year period immediately preceding the
Effective Date; (ii) in no event shall the aggregate level of benefits under
such plans be less than the aggregate level of benefits under the plans of the
type referred to in this Section 5(c) provided at any time after the Effective
Date to the Executive or any executive of the Company and its Affiliates of
comparable status and position to the Executive; and (iii) the Company's
obligation to include the Executive in bonus or incentive compensation plans
shall be determined by Section 5(f).
(f) To assure that the Executive will have an opportunity to earn
incentive compensation after the Effective Date, the Executive shall be included
in a bonus plan of the Company that shall satisfy the standards described below
(the "Bonus Plan"). Bonuses under the Bonus Plan shall be payable with respect
to achieving such financial or other goals reasonably related to the business of
the Company, including the Employer, as the Company shall establish (the
"Goals"), all of which Goals shall be attainable, prior to the end of the
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Employment Period, with approximately the same degree of probability as the
goals under the Employer's annual incentive plan currently in effect, or the
successor to such plan, in the form most favorable to the Executive that was in
effect at any time during the one-year period prior to the Effective Date (the
"Existing Plan") and in view of the Company's existing and projected financial
and business circumstances applicable at the time. The amount of the bonus (the
"Bonus Amount") that the Executive is eligible to earn under the Bonus Plan
shall be no less than the amount of the Executive's highest maximum potential
award under the Existing Plan at any time during the one-year period prior to
the Effective Date or, if higher, any maximum potential award under the Bonus
Plan or any other bonus or incentive compensation plan in effect after the
Effective Date for the Executive or for any executive of the Company and its
Affiliates of comparable status and position to the Executive (such bonus amount
herein referred to as the "Targeted Bonus"), and if the Goals are not achieved
(and, therefore, the entire Targeted Bonus is not payable), then the Bonus Plan
shall provide for a payment of a Bonus Amount not less than a portion of the
Targeted Bonus reasonably related to that portion of the Goals that were
achieved. Payment of the Bonus Amount (i) shall be in cash, unless otherwise
agreed by the Executive, and (ii) shall not be affected by any circumstance
occurring subsequent to the end of the Employment Period, including termination
of the Executive's employment.
6. Annual Compensation Adjustments. During the Employment Period, the
Board of Directors of the Company (or an appropriate committee thereof) will
consider and appraise, at least annually, the contributions of the Executive to
the Employer, and in accordance with the Company's practice prior to the
Effective Date, due consideration shall be given, at least annually, to the
upward adjustment of the Executive's Annual Base Salary (i) commensurate with
increases generally given to other executives of the Company and its Affiliates
of comparable status and position to the Executive, and (ii) as the scope of the
Company's operations or the Executive's duties expand.
7. Termination During Employment Period.
(a) Right to Terminate. During the Employment Period, (i) the
Company shall be entitled to terminate the Executive's employment (A) for Cause,
(B) by reason of the Executive's disability pursuant to Section 11, or (C) for
any other reason, and (ii) the Executive shall be entitled to terminate the
Executive's employment for any reason. Any such termination shall be subject to
the procedures set forth in Section 12 and shall be subject to any consequences
of such termination set forth in this Agreement. Any termination of the
Executive's employment during the Employment Period by the Employer shall be
deemed a termination by the Company for purposes of this Agreement.
(b) Termination for Cause or Without Good Reason. If there is a
Covered Termination for Cause or due to the Executive's voluntarily terminating
the Executive's employment other than for Good Reason, then the Executive shall
be entitled to receive only Accrued Benefits.
(c) Termination Giving Rise to a Termination Payment. If there is
a Covered Termination by the Executive for Good Reason, or by the Company other
than by reason of (i)
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death, (ii) disability pursuant to Section 11, or (iii) Cause, then the
Executive shall be entitled to receive, and the Company shall promptly pay,
Accrued Benefits and, in lieu of further base salary for periods following the
Termination Date, as liquidated damages and additional severance pay and in
consideration of the covenant of the Executive set forth in Section 13(a), the
Termination Payment pursuant to Section 8(a).
8. Payments Upon Termination.
(a) Termination Payments.
(i) Subject to the limits set forth in Section 8(a)(ii),
for purposes of this Agreement, the "Termination Payment" shall be an
amount equal to the Annual Cash Compensation multiplied by the number of
years or fractional portion thereof remaining in the Employment Period
determined as of the Termination Date, except that the Termination Payment
shall not be less than the amount of Annual Cash Compensation. The
Termination Payment shall be paid to the Executive in cash equivalent not
later than ten business days after the Termination Date. The Executive
shall not be required to mitigate the amount of the Termination Payment by
securing other employment or otherwise, nor will such Termination Payment
be reduced by reason of the Executive securing other employment or for any
other reason. The Termination Payment shall be in addition to any other
severance payments to which the Executive is entitled under the Company's
severance policies and practices in the form most favorable to the
Executive that were in effect at any time during the one-year period prior
to the Effective Date.
(ii) Notwithstanding any other provision of this Agreement,
if any portion of the Termination Payment or any other payment under this
Agreement, or under any other agreement with or plan of the Company or the
Employer (in the aggregate "Total Payments"), would constitute an "excess
parachute payment," then the Total Payments to be made to the Executive
shall be reduced such that the value of the aggregate Total Payments that
the Executive is entitled to receive shall be One Dollar ($1) less than the
maximum amount which the Executive may receive without becoming subject to
the tax imposed by Section 4999 of the Code (or any successor provision) or
which the Company may pay without loss of deduction under Section 280G(a)
of the Code (or any successor provision). For purposes of this Agreement,
the terms "excess parachute payment" and "parachute payments" shall have
the meanings assigned to them in Section 280G of the Code (or any successor
provision), and such "parachute payments" shall be valued as provided
therein. Present value for purposes of this Agreement shall be calculated
in accordance with Section 1274(b)(2) of the Code (or any successor
provision). Within sixty days following delivery of the Notice of
Termination or notice by the Company to the Executive of its belief that
there is a payment or benefit due the Executive which will result in an
excess parachute payment as defined in Section 280G of the Code (or any
successor provision), the Executive and the Company, at the Company's
expense, shall obtain the opinion (which need not be unqualified) of
nationally recognized tax counsel selected by the Company's independent
auditors and acceptable to the Executive in the Executive's
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sole discretion, which sets forth (A) the amount of the Base Period Income,
(B) the amount and present value of Total Payments and (C) the amount and
present value of any excess parachute payments without regard to the
limitations of this Section 8(a)(ii). As used in this Section 8(a)(ii), the
term "Base Period Income" means an amount equal to the Executive's
"annualized includible compensation for the base period" as defined in
Section 280G(d)(l) of the Code (or any successor provision). For purposes
of such opinion, the value of any noncash benefits or any deferred payment
or benefit shall be determined by the Company's independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the Code
(or any successor provisions), which determination shall be evidenced in a
certificate of such auditors addressed to the Company and the Executive.
Such opinion shall be dated as of the Termination Date and addressed to the
Company and the Executive and shall be binding upon the Company and the
Executive. If such opinion determines that there would be an excess
parachute payment, then the Termination Payment hereunder or any other
payment determined by such counsel to be includible in Total Payments shall
be reduced or eliminated as specified by the Executive in writing delivered
to the Company within thirty days of the Executive's receipt of such
opinion or, if the Executive falls to so notify the Company, then as the
Company shall reasonably determine, so that under the bases of calculations
set forth in such opinion there will be no excess parachute payment. If
such counsel so requests in connection with the opinion required by this
Section, the Executive and the Company shall obtain, at the Company's
expense, and the counsel may rely on in providing the opinion, the advice
of a firm of recognized executive compensation consultants as to the
reasonableness of any item of compensation to be received by the Executive.
Notwithstanding the foregoing, the provisions of this Section 8(a)(ii),
including the calculations, notices and opinions provided for herein, shall
be based upon the conclusive presumption that the following are reasonable:
(1) the compensation and benefits provided for in Section 5 and (2) any
other compensation, including but not limited to the Accrued Benefits,
earned prior to the Termination Date by the Executive pursuant to the
Company's compensation programs if such payments would have been made in
the future in any event, even though the timing of such payment is
triggered by the Change in Control or the Termination Date. If the
provisions of Sections 280G and 4999 of the Code (or any successor
provisions) are repealed without succession, then this Section 8(a)(ii)
shall be of no further force or effect.
(b) Additional Benefits. If there is a Covered Termination and
the Executive is entitled to Accrued Benefits and the Termination Payment, then
the Executive shall be entitled to the following additional benefits:
(i) Until the earlier of the end of the Employment Period
or such time as the Executive has obtained new employment and is covered by
benefits which in the aggregate are at least equal in value to the
following benefits, the Executive shall continue to be covered, at the
expense of the Company, by the most favorable life insurance,
hospitalization, medical and dental coverage and other welfare benefits
provided to the Executive and the Executive's family during the one-year
period immediately preceding the Effective Date or at any time thereafter
or, if more
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favorable to the Executive, coverage as was required hereunder with respect
to the Executive immediately prior to the date Notice of Termination is
given.
(ii) The Executive shall receive, at the expense of the
Company, outplacement services, on an individualized basis at a level of
service commensurate with the Executive's most senior status with the
Company during the one-year period prior to the Effective Date (or, if
higher, at any time after the Effective Date), provided by a nationally
recognized executive placement firm selected by the Company with the
consent of the Executive, which consent will not be unreasonably withheld:
provided that the cost to the Company of such services shall not exceed 15%
of the Executive's Annual Base Salary.
(iii) The Company shall bear up to $10,000 in the aggregate
of fees and expenses of consultants and/or legal or accounting advisors
engaged by the Executive to advise the Executive as to matters relating to
the computation of benefits due and payable under this Section 8.
9. Death.
(a) Except as provided in Section 9(b), in the event of a Covered
Termination due to the Executive's death, the Executive's estate, heirs and
beneficiaries shall receive all the Executive's Accrued Benefits through the
Termination Date.
(b) If the Executive dies after a Notice of Termination is given
(i) by the Company or (ii) by the Executive for Good Reason, then the
Executive's estate, heirs and beneficiaries shall be entitled to the benefits
described in Section 9(a) and, subject to the provisions of this Agreement, to
such Termination Payment to which the Executive would have been entitled had the
Executive lived. In such event, the Termination Date shall be thirty days
following the giving of the Notice of Termination, subject to extension pursuant
to the definition of "Termination Date" in Section 1(p).
10. Retirement. If, during the Employment Period, the Executive and
the Employer shall execute an agreement providing for the early retirement of
the Executive from the Employer, or the Executive shall otherwise give notice
that the Executive is voluntarily choosing to retire early from the Employer,
then the Executive shall receive Accrued Benefits through the Termination Date;
provided, that if the Executive's employment is terminated by the Executive for
Good Reason or by the Company other than by reason of death, disability or Cause
and the Executive also, in connection with such termination, elects voluntary
early retirement, then the Executive shall also be entitled to receive a
Termination Payment pursuant to Section 8(a).
11. Termination for Disability. If, during the Employment Period, as a
result of the Executive's disability due to physical or mental illness or injury
(regardless of whether such illness or injury is job-related), the Executive
shall have been absent from the Executive's duties hereunder
-14-
<PAGE>
on a full-time basis for a period of 182 days and, within thirty days after the
Company notifies the Executive in writing that it intends to terminate the
Executive's employment (which notice shall not constitute the Notice of
Termination contemplated below), the Executive shall not have returned to the
performance of the Executive's duties hereunder on a full-time basis, then the
Company may terminate the Executive's employment for purposes of this Agreement
pursuant to a Notice of Termination. If the Executive's employment is terminated
on account of the Executive's disability in accordance with this Section, then
the Executive shall receive Accrued Benefits in accordance with Section 8(a) and
shall remain eligible for all benefits provided by any long term disability
programs of the Employer in effect at the time the Company sends notice to the
Executive of its intent to terminate pursuant to this Section.
12. Termination Notice and Procedure.
(a) Any termination of the Executive's employment during the
Employment Period by the Company or the Executive (other than a termination of
the Executive's employment referenced in the second sentence of the definition
of "Effective Date" in Section 1(j) hereof) shall be communicated by written
Notice of Termination to the Executive, if such Notice is given by the Company,
and to the Company, if such Notice is given by the Executive, all in accordance
with the following procedures and those set forth in Section 22:
(i) If such termination is for disability, Cause or Good
Reason, the Notice of Termination shall indicate in reasonable detail the
facts and circumstances alleged to provide a basis for such termination.
(ii) Any Notice of Termination by the Company shall have
been approved, prior to the giving thereof to the Executive, by a
resolution duly adopted by a majority of the directors of the Company (or
any successor corporation) then in office, a copy of which shall accompany
the Notice.
(iii) If the Notice is given by the Executive for Good
Reason, then the Executive may cease performing the Executive's duties
hereunder on or after the date 15 days after the delivery of Notice of
Termination (unless the Notice of Termination is based upon clause (viii)
of the definition of "Good Reason" in Section 1(l), in which case the
Executive may cease performing his duties at the time the Executive's
employment is terminated) and shall in any event cease employment on the
Termination Date, if any, arising from the delivery of such Notice. If the
Notice is given by the Company, then the Executive may cease performing the
Executive's duties hereunder on the date of receipt of the Notice of
Termination, subject to the Executive's rights hereunder.
(iv) The recipient of any Notice of Termination shall
personally deliver or mail in accordance with Section 22 written notice of
any dispute relating to such Notice of Termination to the party giving such
Notice within fifteen days after receipt thereof. After the expiration of
such fifteen days, the contents of the Notice of Termination shall become
final and not subject to dispute.
Notwithstanding the foregoing, (A) if the Executive terminates the Executive's
employment after a Change in Control without complying with this Section 12,
then the Executive will be deemed to have voluntarily terminated the Executive's
employment other than for Good Reason and deemed to have delivered a written
Notice of Termination to that effect to the
-15-
<PAGE>
Company as of the date of such termination and (B) if the Company or the
Employer terminates the Executive's employment after a Change in Control without
complying with this Section 12, then the Company will be deemed to have
terminated the Executive's employment other than by reason of death, disability,
or Cause and the Company will be deemed to have delivered a written Notice of
Termination to that effect to the Executive as of the date of such termination.
Under circumstances described in clause (B) above, the Executive may, but shall
not be obligated to, also deliver a Notice of Termination based upon clause
(viii) of the definition of "Good Reason" in Section 1(l) for the purpose of
subjecting such Notice to Section 12(a)(iv).
(b) If a Change in Control occurs and the Executive's employment
with the Employer terminates (whether by the Company, the Executive or
otherwise) within one-year prior to the Change in Control, then the executive
may assert that such termination is a Covered Termination by sending a written
Notice of Termination to the Company at any time prior to the first anniversary
of the Change in Control in accordance with the procedures set forth in this
Section 12(b) and those set forth in Section 22. If the Executive asserts that
the Executive terminated the Executive's employment for Good Reason or that the
Company terminated the Executive's employment other than for disability or
Cause, then the Notice of Termination shall indicate in reasonable detail the
facts and circumstances alleged to provide a basis for such assertions. The
Company shall personally deliver or mail in accordance with Section 22 written
notice of any dispute relating to such Notice of Termination to the Executive
within 15 days after receipt thereof. After the expiration of such 15 days, the
contents of the Notice of Termination shall become final and not subject to
dispute.
13. Further Obligations of the Executive.
(a) Competition. The Executive agrees that, in the event of any
Covered Termination where the Executive is entitled to (and receives) Accrued
Benefits and the Termination Payment, the Executive shall not, for a period of
six months after the Termination Date, without the prior written approval of the
Company's Board of Directors, engage in any Competitive Activity.
(b) Confidentiality. During and following the Executive's
employment by the Employer, the Executive shall hold in confidence and not
directly or indirectly disclose or use or copy or make lists of any confidential
information or proprietary data of the Company (including that of the Employer),
except to the extent authorized in writing by the Board of Directors of the
Company or required by any court or administrative agency, other than to an
employee of the Company or a person to whom disclosure is reasonably necessary
or appropriate in connection with the performance by the Executive of duties as
an executive of the Company or the Employer. Confidential information shall not
include any information known generally to the public or any information of a
type not otherwise considered confidential by persons engaged in the same
business or a business similar to that of the Company. All records, files,
documents and materials, or copies thereof, relating to the business of the
Company which the Executive shall prepare, or use, or come into contact with,
shall be and remain the sole property of the Company and shall be promptly
returned to the Company upon termination of employment with the Employer.
-16-
<PAGE>
14. Expenses and Interest. If, after the Effective Date, (i) a dispute
arises with respect to the enforcement of the Executive's rights under this
Agreement, (ii) any legal or arbitration proceeding shall be brought to enforce
or interpret any provision contained herein or to recover damages for breach
hereof, or (iii) any tax audit or proceeding is commenced that is attributable
in part to the application of Section 4999 of the Code, in any case so long as
the Executive is not acting in bad faith, then the Company shall reimburse the
Executive for any reasonable attorneys' fees and necessary costs and
disbursements incurred as a result of such dispute, legal or arbitration
proceeding or tax audit or proceeding ("Expenses"), and prejudgment interest on
any money judgment or arbitration award obtained by the Executive calculated at
the rate published in The Wall Street Journal, from time to time, as the prime
rate from the date that payments to the Executive should have been made under
this Agreement. Within ten days after the Executive's written request therefor,
the Company shall pay to the Executive, or such other person or entity as the
Executive may designate in writing to the Company, the Executive's reasonable
Expenses in advance of the final disposition or conclusion of any such dispute,
legal or arbitration proceeding.
15. Payment Obligations Absolute. The Company's obligation during and
after the Employment Period to pay the Executive the amounts and to make the
benefit and other arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any setoff, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or anyone else. Except as provided in
Section 14, all amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final, and the Company will not seek to recover all or any part of such payment
from the Executive, or from whomsoever may be entitled thereto, for any reason
whatsoever.
16. Successors.
(a) If the Company sells, assigns or transfers all or
substantially all of its business and assets to any Person or if the Company
merges into or consolidates or otherwise combines (where the Company does not
survive such combination) with any Person (any such event, a "Sale of
Business"), then the Company shall assign all of its right, title and interest
in this Agreement as of the date of such event to such Person, and the Company
shall cause such Person, by written agreement in form and substance reasonably
satisfactory to the Executive, to expressly assume and agree to perform from and
after the date of such assignment all of the terms, conditions and provisions
imposed by this Agreement upon the Company. Failure of the Company to obtain
such agreement prior to the effective date of such Sale of Business shall be a
breach of this Agreement constituting "Good Reason" hereunder, except that for
purposes of implementing the foregoing, the date upon which such Sale of
Business becomes effective shall be deemed the Termination Date. In case of such
assignment by the Company and of assumption and agreement by such Person, as
used in this Agreement, "Company" shall thereafter mean such Person which
executes and delivers the agreement provided for in this Section 16 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law, and this Agreement shall inure to the benefit of, and be
enforceable by, such Person. The Executive shall, in the Executive's discretion,
be entitled to proceed against any or all of such Persons, any Person which
theretofore was such a successor to the Company (as defined in the first
paragraph of this Agreement) and the Company (as so defined) in any action to
enforce any rights of the
-17-
<PAGE>
Executive hereunder. Except as provided in this Subsection, this Agreement shall
not be assignable by the Company. This Agreement shall not be terminated by the
voluntary or involuntary dissolution of the Company.
(b) This Agreement and all rights of the Executive shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, heirs and beneficiaries. All amounts
payable to the Executive under Sections 7, 8, 9, 10, 11 and 14 if the Executive
had lived shall be paid, in the event of the Executive's death, to the
Executive's estate, heirs and representatives; provided, however, that the
foregoing shall not be construed to modify any terms of any benefit plan of the
Employer, as such terms are in effect on the Effective Date, that expressly
govern benefits under such plan in the event of the Executive's death.
17. Severability. The provisions of this Agreement shall be regarded
as divisible, and if any of said provisions or any part hereof are declared
invalid or unenforceable by a court of competent jurisdiction, then the validity
and enforceability of the remainder of such provisions or parts hereof and the
applicability thereof shall not be affected thereby.
18. Amendment. This Agreement may not be amended or modified at any
time except by written instrument executed by the Company and the Executive.
19. Withholding. The Employer shall be entitled to withhold from
amounts to be paid to the Executive hereunder any federal, state or local
withholding or other taxes or charges which it is from time to time required to
withhold; provided, that the amount so withheld shall not exceed the minimum
amount required to be withheld by law. The Employer shall be entitled to rely on
an opinion of nationally recognized tax counsel if any question as to the amount
or requirement of any such withholding shall arise.
20. Certain Rules of Construction. No party shall be considered as
being responsible for the drafting of this Agreement for the purpose of applying
any rule construing ambiguities against the drafter or otherwise. No draft of
this Agreement shall be taken into account in construing this Agreement. Any
provision of this Agreement which requires an agreement in writing shall be
deemed to require that the writing in question be signed by the Executive and an
authorized representative of the Company.
21. Governing Law; Resolution of Disputes.
(a) This Agreement and the rights and obligations hereunder shall
be governed by and construed in accordance with the internal laws of the State
of Wisconsin (excluding any choice of law rules that may direct the application
of the laws of another jurisdiction) except that Section 21(b) shall be
construed in accordance with the Federal Arbitration Act if arbitration is
chosen by the Executive as the method of dispute resolution.
(b) Any dispute arising out of this Agreement shall, at the
Executive's election, be determined by arbitration under the rules of the
American Arbitration Association then in effect (but subject to any evidentiary
standards set forth in this Agreement), in which case both parties shall be
bound by the arbitration award, or by litigation. Whether the dispute is to be
settled by arbitration or litigation, the venue for the arbitration or
litigation shall be
-18-
<PAGE>
Milwaukee, Wisconsin or, at the Executive's election, if the Executive is no
longer residing or working in the Milwaukee, Wisconsin metropolitan area, in the
judicial district encompassing the city in which the Executive resides;
provided, that, if the Executive is not then residing in the United States, the
election of the Executive with respect to such venue shall be either Milwaukee,
Wisconsin or in the judicial district encompassing that city in the United
States among the thirty cities having the largest population (as determined by
the most recent United States Census data available at the Termination Date)
that is closest to the Executive's residence. The parties consent to personal
jurisdiction in each trial court in the selected venue having subject matter
jurisdiction notwithstanding their residence or situs, and each party
irrevocably consents to service of process in the manner provided hereunder for
the giving of notices.
22. Notice. Notices given pursuant to this Agreement shall be in
writing and, except as otherwise provided by Section 12(a)(iii), shall be deemed
given when actually received by the Executive or actually received by the
Company's Secretary or any officer of the Company other than the Executive. If
mailed, such notices shall be mailed by United States registered or certified
mail, return receipt requested, addressee only, postage prepaid, if to the
Company, Attention: Secretary (or, if the Executive is then Secretary, to the
Chief Executive Officer), 10708 West Janesville Road, Hales Corners, Wisconsin
53130, or if to the Executive, at the address set forth below the Executive's
signature to this Agreement, or to such other address as the party to be
notified shall have theretofore given to the other party in writing.
(a) Additional Payment. (a) If, notwithstanding the provisions of
Section 8a(ii), but subject to subsection (b), it is ultimately determined by a
court or pursuant to a final determination by the Internal Revenue Service that
any portion of Total Payments is subject to the tax (the "Excise Tax") imposed
by Section 4999 of the Code (or any successor provision), then the Company shall
pay to the Executive an additional amount (the "Gross-Up Payment") such that the
net amount retained by the Executive after deduction of any Excise Tax and any
interest charges or penalties in respect of the imposition of such Excise Tax
(but not any federal, state or local income tax) on the Total Payments, and any
federal, state and local income tax and Excise Tax upon the payment provided for
by this Section 23 shall be equal to the Total Payments. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income taxes at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rates of taxation in the state and
locality of the Executive's domicile for income tax purposes on the date the
Gross-Up Payment is made, net of the maximum reduction in federal income taxes
that could be obtained from deduction of such state and local taxes.
(b) If legislation is enacted that would require the Company's
shareholders to approve this Agreement, prior to a Change in Control, due solely
to the provision contained in subsection (a) of this Section 23, then
-19-
<PAGE>
(i) from and after such time as shareholder approval would
be required, until shareholder approval is obtained as required by such
legislation, subsection (a) shall be of no force and effect;
(ii) if the Company seeks shareholder approval of any other
agreement providing similar benefits to any other executive of the Company,
then the Company shall seek shareholder approval of this Agreement at the
same shareholders' meeting or meetings at which the shareholders consider
any such other agreement; and
(iii) the Company and the Executive shall use their best
efforts to consider and agree in writing upon an amendment to this Section
23 such that, as amended, this Subsection would provide the Executive with
the benefits intended to be afforded to the Executive by subsection (a)
without requiring shareholder approval.
23. No Waiver. The Executive's or the Company's failure to insist
upon strict compliance with any provision of this Agreement or the failure to
assert any right the Executive or the Company may have hereunder, including,
without limitation, the right of the Executive to terminate employment for Good
Reason, shall not be deemed to be a waiver of such provision or right or any
other provision or right of this Agreement.
24. Headings. The headings herein contained are for reference
only and shall not affect the meaning or interpretation of any provision of this
Agreement.
-20-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
STATE FINANCIAL SERVICES CORPORATION
By:_________________________________
Name:
Title:
EXECUTIVE
______________________________(SEAL)
Name:
-21-
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>
<CAPTION>
As of or for the years ended December 31,(1)
1999 1998 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Condensed Income Statement:
Total interest income
(taxable equivalent)(2) $ 66,610 $ 58,397 $ 49,743 $ 45,935 $ 42,707
Total interest expense 30,132 25,923 20,072 19,633 18,186
- - -----------------------------------------------------------------------------------------------------------
Net interest income 36,478 32,475 26,671 26,302 24,521
Provision for loan losses 750 690 450 330 370
Other income 7,993 6,965 4,664 4,281 3,631
Other expense 30,963 34,801 22,195 22,732 18,529
- - -----------------------------------------------------------------------------------------------------------
Income before income tax 12,758 3,948 11,690 7,521 9,253
Income tax 4,333 1,981 3,961 2,420 3,191
Less taxable equivalent adjustment 993 810 512 453 419
- - -----------------------------------------------------------------------------------------------------------
Net income $ 7,432 $ 1,157 $ 7,217 $ 4,648 $ 5,643
===========================================================================================================
Per share data(3):
Basic earnings per share(4) $ 0.80 $ 0.12 $ 0.75 $ 0.48 $ n/a
Diluted earnings per share(4) 0.80 0.12 0.74 0.48 n/a
Cash dividends declared 0.48 0.48 0.40 0.33 0.28
Book value 12.79 13.36 13.19 14.10 n/a
Balance sheet totals (at period end):
Total assets 1,090,024 828,369 773,873 657,557 589,558
Loans, net of unearned discount 742,196 607,949 563,174 460,369 450,196
Allowance for loan losses 6,905 4,485 4,370 3,552 3,537
Deposits 847,051 652,905 617,995 508,464 508,049
Borrowed funds 89,634 29,117 9,850 8,000 7,300
Subordinated debentures and
long-term debt 39,959 6,750 5,300 962 5,062
Shareholders' equity 109,668 134,637 133,763 135,408 69,064
Financial and Regulatory Ratios:
Asset growth 31.59% 7.04% 17.69% 11.53% 5.18%
Return on average assets 0.78 0.15 1.09 0.76 1.02
Return on average equity 6.00 0.86 5.40 5.05 8.63
Dividend payout ratio 58.77 457.40 49.80 27.10 17.10
Allowance for loan losses
to non-performing loans 145.34 131.87 124.15 106.44 153.52
Non-performing assets to total assets 0.50 0.47 0.58 0.64 0.55
Net charge-offs to average loans 0.08 0.10 0.06 0.07 0.05
(1) All financial data has been restated to reflect the Company's acquisition of Home Federal Savings of Elgin
using the pooling-of-interests method of accounting. Amounts include balances and results of operations of BNI
since the effective date of its acquisition by the Company on June 23, 1999. Amounts include balances and
results of operations of LLC since the effective date of its acquisition by the Company on September 8, 1998.
Amounts include balances and results of operations of Richmond since the effective date of its acquisition 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. 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; and the 20% stock
dividend, declared in January 1996, as if each had occurred as of January 1, 1995.
(4) Per share information is excluded from presentation as of and for the year ended December 31, 1995 because
Home did not issue stock until September 26, 1996.
(5) All dividends represent the amount per share declared by the Company for each period presented.
</TABLE>
5
<PAGE>
<TABLE>
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):
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------- -------------------------------------------
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 $18,344 $18,067 $14,947 $14,260 $14,451 $14,479 $14,415 $14,242
Interest expense 9,138 8,299 6,394 6,302 6,597 6,568 6,401 6,357
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest income 9,206 9,768 8,553 7,958 7,854 7,911 8,014 7,885
Provision for loan losses 203 202 173 172 172 173 172 173
Other income 1,638 2,174 2,337 1,844 1,771 1,856 1,718 1,620
Other expense 8,973 8,261 6,811 6,918 14,634 6,595 6,724 6,851
- - -----------------------------------------------------------------------------------------------------------------------------
Income before income tax 1,668 3,479 3,906 2,712 (5,181) 2,999 2,836 2,481
Income tax 665 1,077 1,406 1,185 (975) 1,068 1,008 881
- - -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,003 $ 2,402 $ 2,500 $ 1,527 $(4,206) $ 1,931 $ 1,828 $ 1,600
- - -----------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $ 0.12 $ 0.26 $ 0.26 $ 0.16 $ (0.44) $ 0.20 $ 0.19 $ 0.17
Net income per share - diluted 0.12 0.26 0.26 0.16 (0.44) 0.20 0.19 0.16
Dividends per share1 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.10
- - -----------------------------
(1) All dividends represent the amount per share declared by the Company for each period presented.
</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, 1999, as well as providing comparisons
with previous years. This discussion should be read in conjunction with the
Consolidated Financial Statements and accompanying notes and the selected
financial data presented elsewhere in this annual report.
On June 23, 1999, the Company completed its cash acquisition of First
Waukegan Corporation, and its subsidiary, BNI, N.A. The acquisition was recorded
as a purchase. Application of purchase accounting requires the inclusion of
FWC's and BNI's operating results in the consolidated statements of income from
the date of acquisition. Accordingly, FWC's and BNI's operating results for the
period June 23, 1999 through December 31, 1999 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 the
year ended December 31, 1999. FWC and BNI's financial condition is included in
the Company's consolidated balance sheets dated December 31, 1999. No operating
results of FWC and BNI are included in the Company's consolidated statements of
income for the years ended December 31, 1998 & 1997.
On December 15, 1998, the Company completed its acquisition of Home
Bancorp of Elgin, Inc, the parent company of Home, a federally chartered thrift.
The acquisition was accounted for using the pooling-of-interests method of
accounting. Accordingly, all financial data presented herein has been restated
to include the balances and results of Home as of and for the periods presented.
On September 8, 1998, the Company completed its stock acquisition of
LCC. The acquisition was accounted for as a purchase. The Company's Consolidated
Statements of Income, and related schedules in Management's Discussion and
Analysis of Financial Condition and Results of Operations include LCC's results
for the full year ended December 31, 1999 and for the period September 8, 1998
through December 31, 1998.
On December 31, 1997, the Company completed its cash acquisition of
Richmond, SFII, and SFIA. Accounted for as a purchase, the Company's
Consolidated Statements of Income and related schedules in Management's
Discussion and Analysis of Financial Condition and Results of Operations include
results for Richmond, SFII, and SFIA for the years ended December 31, 1999 &
1998 only.
On August 24, 1995, the Company acquired SFBW. Accounted for as a
purchase, the Company's Consolidated Statements of Income, and related schedules
in Management's Discussion and Analysis of Financial Condition and Results of
Operations include SFBW's results for the full year in 1999, 1998, 1997, 1996,
and from August 24 through December 31 in 1995.
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, 1999, taxable-equivalent net interest income increased
$4,003,000 (12.3%) to $36,478,000. The inclusion of BNI accounted for $4,015,000
of this change. Excluding BNI, taxable-equivalent net interest income decreased
$12,000 (0.04%) for the year ended December 31, 1999. Changes in the volume of
outstanding interest-earning assets and interest-bearing liabilities accounted
for $3,956,000 and changes in the rate accounted for $47,000 of the 1999
improvement in taxable-equivalent net interest income.
6
<PAGE>
Management's Discussion
Volume changes most fundamentally impacted the components of the
Company's consolidated taxable-equivalent net interest income in 1999.
Taxable-equivalent total interest income increased $8,213,000 in 1999 due to a
$132,280,000 (17.8%) increase in the volume of average total outstanding
interest-earning assets resulting from the inclusion of BNI and internal growth
at the other banks. As a result of the volume increase, total interest income
improved $10,327,000 for the year ended December 31, 1999. Interest rate changes
offset the volume improvement by $2,114,000 mainly due to loan rate contraction
due to intense pricing competition and the inclusion of BNI's comparatively
lower yielding loan portfolio. The combined impact of these changes resulted in
contraction in the Company's taxable-equivalent yield on interest-earning assets
to 7.59% in 1999 from 7.84% in 1998.
The Company experienced a decrease in its funding costs during 1999 to
4.14% from 4.46% for the year ended December 31, 1998. The decreased funding
cost resulted mainly from lower rates on savings, NOW, and money market deposits
resulting from Management's strategic repricing decisions on these products.
Time deposit costs also fell to 5.37% in 1999 from 5.79% in 1998 as higher rate
deposits matured. The Company relied on a greater amount of interest-bearing
liabilities to fund average interest-earning assets in 1999, mainly due to the
stock repurchase program, the cash acquisition of BNI, and loan growth exceeding
deposit growth in 1999. Short-term borrowings increased in 1999 to 10.7% of the
Company's average interest-bearing liabilities compared to 3.7% in 1998. For the
year ended December 31, 1999, average money market accounts comprised 21.0% of
the Company's average interest-bearing liabilities compared to 18.8% for 1998.
Time deposits comprised 37.4% of the Company's average interest-bearing
liabilities compared to 44.9% in 1998.
The Company's net yield on interest-earning assets (net interest
margin) contracted to 4.16% for the year ended December 31, 1999 from 4.36% for
the year ended December 31, 1998 as a result of the aforementioned changes.
For the year ended December 31, 1998, taxable-equivalent net interest
income increased $2,803,000 (9.4%) compared to the year ended December 31, 1997.
The inclusion of Richmond accounted for $2,848,000 of this change. Excluding
Richmond, taxable-equivalent net interest income decreased $46,000 (0.1%) for
the year ended December 31, 1998. Changes in the volume of outstanding
interest-earning assets and interest-bearing liabilities accounted for
$3,828,000 of the 1998 improvement in taxable-equivalent net interest income.
This was offset by rate reductions of $1,025,000 resulting mainly from intense
commercial loan pricing competition and mortgage loan refinancing activity
during the year.
The Company's 1998 cost of funds increased to 4.46% from 4.32% for the
year ended December 31, 1997, which mainly resulted from incorporating
Richmond's relatively higher cost of funds, primarily in time deposits, into the
Company's consolidated operations. Exclusive of Richmond, the Company reported a
cost of funds of 4.37%, a 5 basis point increase over 1997 due to comparatively
higher short-term interest rates in 1998, and a greater percentage of
interest-bearing liabilities in higher cost categories specifically, money
market accounts and time deposits, in 1998 as compared to 1997. Due to the
general increase in short-term interest rates, the cost of money market accounts
in 1998 rose to 4.38% consolidated and 4.41% exclusive of Richmond from 4.37% in
1997. For the year ended December 31, 1998, average money market accounts
comprised 18.8% of the Company's average interest-bearing liabilities compared
to 18.6% for 1997. Costs of time deposits increased to 5.79% in 1998 from 5.70%
due to the inclusion of Richmond's higher priced portfolio during the year.
Exclusive of Richmond, the average rate incurred on time deposits was 5.69% in
1998. Additionally, a greater percentage of the Company's funding come from this
higher cost source in 1998 (44.9%) as compared to 1997 (43.0%).
[GRAPHIC OMITTED]
7
<PAGE>
<TABLE>
The following table sets forth average balances, related interest income and expense, and effective interest yields and rates
for the years ended December 31, 1999, 1998, and 1997 (dollars in thousands):
<CAPTION>
1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1,2,3) $683,095 $54,761 8.02% $585,479 $48,822 8.34% $491,482 $ 41,679 8.48%
Taxable investment securities 123,446 7,600 6.16 71,801 4,381 6.10 81,671 5,044 6.18
Tax-exempt investment securities(3) 37,033 2,539 6.86 29,683 2,040 6.87 17,354 1,272 7.33
Other short-term investments 6,901 357 5.18 8,004 459 5.73 1,542 90 5.84
Interest-earning deposits 19,553 964 4.93 38,342 2,062 5.38 29,287 1,510 5.16
Federal funds sold 7,254 389 5.36 11,692 633 5.41 2,714 148 5.45
- - ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 877,282 66,610 7.59 745,002 58,397 7.84 624,051 49,743 7.97
- - ----------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets:
Cash and due from banks 34,046 23,031 19,964
Premises and equipment, net 17,716 13,521 12,061
Other assets 25,688 18,473 9,791
Less allowance for loan losses (5,682) (4,475) (3,672)
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $949,050 $795,552 $662,195
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $ 97,797 $ 1,715 1.75% $ 82,778 $ 1,890 2.28% $ 65,453 $ 1,323 2.02%
Money market accounts 152,636 6,155 4.03 109,509 4,794 4.38 86,354 3,770 4.37
Savings deposits 127,524 3,391 2.66 106,543 3,007 2.82 102,080 2,951 2.89
Time deposits 272,194 14,613 5.37 261,032 15,105 5.79 200,082 11,409 5.70
Notes payable 13,882 938 6.76 2,053 143 6.97 679 46 6.77
FHLB borrowings 45,775 2,399 5.24 10,417 519 4.98 2,917 174 5.97
Federal funds purchased 9,529 493 5.17 61 4 6.56 1,822 105 5.76
Securities sold under
agreement to repurchase 8,938 428 4.79 8,690 460 5.29 5,559 293 5.27
- - ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 728,275 30,132 4.14 581,083 25,922 4.46 464,946 20,071 4.32
- - ----------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits 90,173 72,684 58,687
Other 6,810 6,767 4,747
- - ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 825,258 660,534 528,380
- - ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 123,792 135,018 133,815
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $949,050 $795,552 $662,195
==================================================================================================================================
Net interest earnings and
interest rate spread $ 36,478 3.46% $32,475 3.38% $29,672 3.65%
- - ----------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets 4.16% 4.36% 4.75%
- - ----------------------------------
(1) For the purpose of these computations, nonaccrual loans are included in the daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material in amount) and interest income, which has been received
from borrowers whose loans were removed from nonaccrual during the period indicated.
(3) Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented.
</TABLE>
8
<PAGE>
Management's Discussion
<TABLE>
The following table presents the amount of changes in interest income and interest expense for major
components of interest-earning assets and interest-bearing liabilities (dollars in thousands). The table distinguishes
between the changes related to average outstanding balances (changes in volume holding the initial rate constant) and
the changes related to average interest rates (changes in average rate holding the initial balance constant). Change
attributable to the combined impact of volume and rate have been allocated proportionately to change due to volume and
change due to rate.
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase/(Decrease) Due to Increase/(Decrease) Due to
- - ------------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans(1,2) $ 7,874 $(1,935) $ 5,939 $7,842 $ (699) $7,143
Taxable investment securities 3,183 36 3,219 (606) (57) (663)
Tax-exempt investment securities(2) 505 (6) 499 853 (85) 768
Other short-term investments (60) (43) (103) 371 (2) 369
Interest-earnings deposits (937) (161) (1,098) 485 67 552
Federal funds sold (238) (6) (244) 486 (1) 485
- - ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $10,327 $(2,114) $ 8,213 $9,431 $ (777) $8,654
Interest paid on:
NOW accounts $ 308 $ (483) $ (175) $ 382 $ (185) $ 567
Money market accounts 1,768 (407) 1,361 1,015 9 1,024
Savings deposits 562 (178) 384 128 (72) 56
Time deposits 630 (1,122) (492) 3,533 163 3,696
Notes payable, mortgage payable, federal
funds purchased and securities sold
under agreement to repurchase 3,101 31 3,132 545 (37) 508
- - ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,369 (2,159) 4,210 5,603 248 5,851
- - ------------------------------------------------------------------------------------------------------------------------
Net interest income $ 3,956 $ 47 $ 4,003 $3,828 $(1,025) $2,803
- - ------------------------------------------------------------------------------------------------------------------------
(1) Interest earned on loans includes loan fees (which are not material in amount) and interest income, which has been received
from borrowers whose loans were removed from nonaccrual during the period indicated.
(2) Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented.
</TABLE>
Provision for Loan Losses
The provision for loan losses charged to earnings results from a
quarterly analysis of 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 $750,000, $690,000, and $450,000 for the years ended December 31,
1999, 1998, and 1997, respectively. The increase in 1999 provisions was solely
the impact of the inclusion of BNI in the Company's operating results. The
increase in 1998 provisions was solely the impact of the inclusion of Richmond
in the Company's operating results.
Other Income
In 1999, other income increased $1,028,000 (14.8%) compared to 1998.
The inclusion of BNI accounted for $1,006,000 of this change. Exclusive of BNI
and LCC, other income decreased $436,000 (6.3%) due to decreases in mortgage
sale gains and marking $45,000,000 of loans to market, offset by improvements in
merchant services incomes, security transaction commissions and investment
security gains. Other income increased $2,301,000 (49.3%) in 1998 as compared to
1997. The first year inclusion of Richmond in 1998 accounted for $1,224,000 of
this increase and the inclusion of LCC from September 1998 accounted for
$168,000 of this increase. Exclusive of Richmond and LCC, other income increased
$909,000 (19.5%) due to investment security gains realized at State Financial
Services Corporation, increases in mortgage origination gains, and the
implementation of ATM surcharges at the Banks during the fourth quarter of 1997.
9
<PAGE>
The composition of other income is shown in the following table
(dollars in thousands).
- - --------------------------------------------------------------------------------
Years ended December 31,
- - --------------------------------------------------------------------------------
1999 1998 1997
- - --------------------------------------------------------------------------------
Service charges on deposit accounts $2,185 $1,956 $1,671
Merchant services 1,547 1,270 1,161
Building rent 260 279 310
ATM service charges 666 760 491
Security transaction commissions 502 370 122
Asset management commissions 622 164 0
Gains on mortgage origination sales 1,012 962 225
FMV adj. on mortgages marked to market (736) 0 0
Investment securities gaines (losses) 992 421 (1)
Other 943 783 685
- - --------------------------------------------------------------------------------
Total other income $7,993 $6,965 $4,664
- - --------------------------------------------------------------------------------
For the year ended December 31, 1999, service charges on deposit
accounts increased $229,000 (11.7%) compared to 1998, of which $309,000 was due
to the inclusion of BNI's results. Exclusive of BNI, service charges on deposit
accounts decreased $80,000 (4.1%) the majority of which was due to reduced
income from service charges to deposit accounts. Service charges on deposit
accounts for the year ended December 31, 1998 increased $285,000 (17.1%) as
compared to the year ended December 31, 1997, of which $301,000 was due to the
inclusion of Richmond's results. Exclusive of Richmond, service charges on
deposit accounts decreased $16,000 (1.0%) mainly due to reduced income from
service charges to business deposit accounts.
Merchant services are the fees the Company charges businesses for
processing credit card payments. Income in this category increased $277,000
(21.8%) in 1999 and $109,000 (9.4%) in 1998. Both the 1999 and 1998 increases
were due to volume increases and rate adjustments during each respective year.
Building rent income decreased $19,000 (6.8%) in 1999 mainly due to
the Company acquiring more space that was previously rented out to unrelated
tenants. Building rental income decreased $31,000 (10.0%) in 1998 due to a
reduction in space occupied at the Company's Greenfield Office of SFB, which was
previously sublet to an unrelated tenant.
ATM service charges are the terminal usage fees charged to
non-customers for their use of the Company's ATM's and the fees received from
other institutions resulting from their customers' usage of the Company's
automated teller machines. The Company began charging terminal usage fees to
non-customers in November 1997. For the year ended December 31, 1999, ATM
service charges decreased $94,000 (12.4%) in total and $162,000 (21.3%)
exclusive of BNI due to lower volume. For the year ended December 31, 1998 ATM
service charges increased $269,000 (54.8%) in total and $232,000 (50.3%)
exclusive of Richmond due to the implementation of the terminal usage fees at
the end of 1997.
Security transaction commissions are the fees received from the
Company's investment services and brokerage activities. In 1999, security
transaction commissions increased $132,000 (35.7%) due to increased volume at
SFB and added brokerage activities at Home. For the year ended December 31,
1998, security transaction commissions increased $248,000, which included
$182,000 from Richmond. Exclusive of Richmond, security transaction commissions
increased $66,000 (54.1%) due to increased volume at SFB and SFBW.
Asset management commissions represent the fees charged by LCC for its
services. For the year ended December 31, 1999, asset management commissions
increased $458,000 compared to 1998 due to a full year inclusion of LCC.
Commissions for the year ended December 31, 1998 represent the amounts collected
from the effective date of LCC's acquisition (September 8, 1998) by the Company.
Gains on mortgage origination sales increased $50,000 (5.2%) in 1999
compared to 1998. Exclusive of BNI, gains on mortgage origination sales
decreased $402,000 due to a lower volume of mortgage origination sales. For the
year ended December 31, 1998, mortgage origination gains increased $737,000
(327.6%) compared to 1997. The inclusion of Richmond accounted for $467,000 of
this increase. Absent Richmond, mortgage origination gains increased $270,000
(119.6%) due to the continued growth of State Financial Mortgage Company
impacted by the Company's marketing efforts and the favorable mortgage
refinancing market experienced during 1998.
During 1999, there was a negative fair market adjustment on mortgages
marked to market of $736,000. This resulted from marking approximately
$45,000,000 of Home's mortgages to market in anticipation of securitizing and
selling them to the secondary market in the first quarter 2000.
For the year ended December 31, 1999, the Company realized $992,000 in
investment security gains mainly from the sale of marketable equity securities
and Home's realizing $252,000 from the sale of its ATM service provider. For the
year ended December 31, 1998, the Company realized $400,000 in gains from the
sale of marketable equity securities and $21,000 in gains from investment
security sales.
10
<PAGE>
Management's Discussion
Other income increased $160,000 (20.4%) in 1999 and $98,000 (14.3%) in
1998. The increase in 1999 was mainly due to the inclusion of BNI's $127,000 in
other income, which included $60,000 in trust fee income from their trust
division, $38,000 in exchange & commission, and $29,000 in safe deposit rent.
Exclusive of BNI, other income increased $33,000. This net increase was
comprised primarily of increased insurance commissions of $25,000, $57,000 of
cashier check commissions received from a new activity implemented in 1999, and
gains of $148,000 on fixed asset sales, mainly from property sold by SFB & Home.
These were offset by the $147,000 gain from the sale of SFB's & SFBW's credit
card portfolio in 1998, a decrease of $26,000 in miscellaneous credit card
income, and a $13,000 loss on sale of other real estate. The $98,000 (14.3%)
increase in other income during 1998 was mainly due to the inclusion of
Richmond's $144,000 in other income, which included $90,000 in insurance
commissions from SFIA. Exclusive of Richmond, other income decreased $46,000 in
1998. This net decrease was comprised primarily of an increase of $147,000
related to the sale of SFB's & SFBW's credit card portfolio and $16,000 in
increased dividends on corporate life insurance in 1998. These were offset by a
decline of $27,000 in other real estate gains and $182,000 in excess funds
realized from the curtailment of Home's defined benefit pension plan in 1997.
Other Expense
Other expense decreased $3,839,000 (11.0%) for the year ended December
31, 1999 which included $4,083,000 for expenses at BNI, and $598,000 in
merger-related charges related to the Home acquisition for 1999. Exclusive of
BNI and the merger-related charges for 1999 and the merger-related charges for
1998, other expense was $26,281,000 for 1999 and $26,884,000 for 1998 a decrease
of $603,000 (2.2%). For the year ended December 31, 1998, other expense
increased $12,606,000 (56.8%) which included $3,731,000 for expenses at Richmond
and $7,917,000 in merger-related charges related to the Home acquisition.
Exclusive of Richmond and the merger-related charges, other expense for the year
ended December 31, 1998 was $23,154,000, an increase of $958,000 (4.3%) from the
year ended December 31, 1997. The major components of other expense are detailed
in the following table (dollars in thousands).
Years ended December 31,
- - --------------------------------------------------------------------------------
1999 1998 1997
- - --------------------------------------------------------------------------------
Salaries and employee benefits $13,881 $12,907 $10,195
Occupancy and equipment 4,877 4,004 3,713
Data processing 2,054 1,978 1,698
Legal and professional 1,241 1,141 994
Merchant services 1,116 949 917
ATM 565 630 621
Advertising 1,133 901 806
Goodwill amortization 1,387 633 151
Merger-related charge 598 7,917 0
Other 4,111 3,742 3,101
- - --------------------------------------------------------------------------------
Total other expense $30,963 $34,802 $22,196
================================================================================
Salaries and employee benefits increased in total $974,000 in 1999 of
which the inclusion of BNI comprised $1,916,000. Exclusive of BNI, salaries and
employee benefits decreased $942,000 (7.3% ) in 1999. This decrease was mainly
due to efficiencies realized from the merger with Home and reduced health
insurance costs. For the year ended December 31, 1998, salaries and employee
benefits increased $2,712,000, of which the inclusion of Richmond comprised
$1,795,000. Exclusive of Richmond, salaries and employee benefits increased
$917,000 (9.0%) in 1998. This increase was due to normal salary adjustments, the
full year inclusion of personnel costs of SFBW's Burlington office, increased
costs for Home's ESOP and Recognition and Retention Plan, and rate increases on
employee medical and dental insurance benefits.
Occupancy and equipment expense increased $873,000 in 1999, of which
the inclusion of BNI accounted for $599,000 of the increase. Without the BNI
impact, occupancy and equipment expense increased $274,000 (6.8%) for the year
ended 1999 due to increased depreciation expense due to new computer and
telephone networks. For the year ended December 31, 1998, occupancy and
equipment expense increased $291,000, of which the inclusion of Richmond
accounted for $458,000 of the increase. Without the Richmond impact, occupancy
and equipment expense decreased $167,000 (4.5%) for the year ended 1998 due to
lower rent expense resulting from reduced space occupied by SFB's Greenfield
office and decreased depreciation costs due to more of the Company's costs
reaching the end of their depreciable lives.
During 1999, data processing expense increased $76,000 in total and
decreased $125,000 (6.3%) exclusive of BNI. The decrease was due to the
re-negotiation of the Company's contract with its data service provider and the
conversion of Richmond, Home, and BNI to the Company's service provider in 1999.
For the year ended December 31, 1998, data processing expense increased $280,000
in total and $127,000 (7.5%) exclusive of Richmond due to rate adjustments from
the Company's service provider and increased services utilized by SFB and SFBW
during the year.
Legal and professional fees increased $100,000 in 1999, of which BNI
accounted for $184,000 of the increase. Exclusive of BNI, legal and professional
fees decreased $84,000 (7.4%) due to efficiencies realized from the Home merger
and reduced legal costs on collection activities. For the year ended December
31, 1998, legal and professional fees increased $147,000. Richmond and LCC
accounted for $101,000 of the increase. Exclusive of Richmond and LCC, legal and
professional fees increased $46,000 (4.6%) mainly due to increased legal costs
incurred at the Banks during 1998 and additional outside consulting services
used by Home.
11
<PAGE>
Merchant service expense results from costs paid to third parties to
provide the Company's business customers the ability to accept credit cards in
payment for goods and services. The $167,000 (17.6%) increase in 1999 and the
$32,000 (3.5%) increase in 1998 were 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 is the fees charged by the Company's service provider for
the Company's customer use of automated teller machines that are not owned by
the Company. For the year ended December 31, 1999, ATM expense decreased $67,000
(10.6%) compared to the year ended December 31, 1998. Exclusive of BNI's ATM
expense of $9,000 for 1999 the Company's ATM expense decreased $76,000 due to
lower volume. For the year ended December 31, 1998, ATM expense increased $9,000
(1.4%) compared to 1997. The modest increase for 1998 is due to increased volume
and increased rates by the service provider.
Advertising expense increased $232,000 in 1999, of which $42,000 was
due to the inclusion of BNI. Absent the acquisition impact, advertising expense
increased $190,000 (21.1%) in 1999 mainly due to additional marketing to
business customers during the year. For the year ended December 31, 1998,
advertising expense increased $95,000 of which $81,000 was due to the inclusion
of Richmond and LCC. Absent acquisition impacts, advertising expense increased
$14,000 (1.7%) in 1998.
Goodwill amortization increased $754,000 in 1999 due to a full year
amortization related to the LCC acquisition and the inclusion of the BNI
acquisition. BNI accounted for $676,000 of this increase with LCC representing
the remaining $78,000. BNI's, Richmond's, and LCC's goodwill is being written
off over 15 years.
In 1999, the Company recognized $598,000 in merger-related charges
related to its acquisition of Home. In 1998, the Company recognized $7,918,000
in merger-related charges related to its acquisition of Home. In 1998, the
merger-related charge represented costs incurred for legal, professional, and
investment banking fees of $2,638,000, dissolution of Home's Recognition and
Retention Plan of $3,149,000, payments made under severance agreements of
$1,297,000, and $834,000 in various expenses associated with merging the two
companies. This included adjustments made to conform Home with the Company's
accounting methods, regulatory filing fees, and various costs associated with
each company's special shareholders' meeting held to consider the merger. In
1999, the merger-related charge related solely to the dissolution of Home's
ESOP. Refer to Note 2 for additional information on the merger related charges.
Other expense increased $371,000 in 1999, including $456,000 in
expenses at BNI. Exclusive of BNI, other expense decreased $85,000 (2.3%) due to
decreases in director fees, credit card expense, loan collection expense, other
real estate expense, and liability insurance, offset by increases in telephone,
delivery and postage, charity & donation, and travel and auto. For the year
ended December 31, 1998, other expense increased $641,000, including $162,000 in
expenses at Richmond and LCC. Exclusive of Richmond and LCC, other expense
increased $479,000 (15.4%) due to increases in correspondent bank fees, postage
and delivery, telephone expense, and increased regulatory assessments.
Income Tax
The Company's consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities and loans.
Additionally, 1998's consolidated income tax rate was impacted by approximately
$3.0 million of the merger-related charges which were not deductible for income
tax purposes. The Company recorded provisions for income tax of $4,333,000 in
1999, $1,981,000 in 1998, and $3,961,000 in 1997. Income tax expense increased
$2,352,000 in 1999 as the Company's pre-tax income increased $8,627,000. The
Company's effective tax rate for 1999 was 36.8% compared to 63.1% for 1998. The
Company's higher effective tax rate in 1998 was due to certain nondeductible
merger-related charges associated with the Home acquisition. Exclusive of the
merger-related charges, and the related tax implications, the Company reported a
35.8% effective tax rate in 1998.
Net Income and Dividends
For the years ended December 31, 1999, 1998, and 1997, the Company
reported net income of $7,432,000, $1,157,000, and $7,217,000, respectively.
Merger-related charges of $598,000 in 1999 and $7,900,000 in 1998 impacted each
respective year's earnings. Excluding these charges on a tax-effected basis, the
Company reported net income of $7,093,000 for the year ended 1998. The Company's
return on average assets for the years ended December 31, 1999, 1998, and 1997
was 0.78%, 0.15%, and 1.09%, respectively. Return on average equity for the same
periods was 6.00%, 0.86%, and 5.40%. Exclusive of the tax-effected
merger-related charges, return on average assets and return on average equity
were 0.89% and 6.84%, respectively, for the year ended December 31, 1999 and
.089% and 5.25% for the year ended December 31, 1998. On a per share basis,
basic earnings were $0.80 for 1999, $0.12 for 1998 and $0.75 for 1997. Exclusive
of merger-related charges, basic earnings per share were $0.91 for 1999 and
$0.74 for 1998.The Company paid per share dividends of $0.48, $0.48, and $0.40
for the years ended December 31, 1999, 1998, and 1997.
[GRAPHIC OMITTED]
12
<PAGE>
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, 1999
and 1998, the Company reported total assets of $1,090,024,000 and $828,369,000
respectively. Of the $261,655,000 increase in total assets between 1999 and
1998, $228,187,000 was due to the BNI acquisition. Exclusive of the BNI, the
Company's total assets increased $33,468,000 (4.0%) due to internal growth and
the opening of State Financial Bank - Waterford's new Elkhorn office in October
1999. Between 1997 and 1998, total assets increased $54,496,000 (7.0%) due to
internal growth 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 88.4% at December
31, 1999 compared to 93.8% at December 31, 1998. The following table shows the
Company's loan portfolio composition on the dates indicated (dollars in
thousands).
<TABLE>
<CAPTION>
At December 31,
- - -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $129,470 17.3% $ 56,675 9.2% $ 56,030 9.9% $ 44,088 9.5% $ 46,323 10.2%
Real Estate 546,538 73.0 506,844 82.8 461,700 81.4 375,985 81.0 372,399 82.1
Installment 62,180 8.3 37,519 6.1 37,496 6.6 30,619 6.6 22,624 5.0
Other 10,913 1.4 11,395 1.9 12,318 2.1 13,230 2.9 12,387 2.7
- - -----------------------------------------------------------------------------------------------------------------------------
Total Loans $749,101 $612,433 $567,544 $463,922 $453,733
=============================================================================================================================
</TABLE>
Total loans outstanding increased $136,668,000 (22.3%) in 1999 mainly
due to the BNI acquisition and internal loan growth over the preceding twelve
months. The BNI acquisition accounted for $86,500,000 of the Company's 1999 loan
growth. Internally, loans grew $50,168,000 due to strong loan demand.
Real estate loans represent the Company's largest loan category,
comprising 73.0% of the loan portfolio at December 31, 1999 compared to 82.8% at
December 31, 1998. This decreased concentration resulted from management's
strategic decisions to diversify Home's loan portfolio into commercial and
installment loans and the incorporation of BNI's loan portfolio. The Company
expects the percentage of real estate loans to continue to decrease in 2000 as
it continues to diversify Home's loan portfolio and the securitization of
approximately $45,000,000 in mortgage loans during the first quarter of 2000.
Real estate loans increased $39,694,000 (7.8%) from year end 1998 to 1999. The
BNI acquisition accounted for $25,743,000 of this increase with the remainder
due to internal growth. In 1998, Home experienced $50,045,000 in loan growth.
All of Home's mortgage loans are secured by 1-4 family owner-occupied
residential mortgages. A decrease of $5,000,000 in Richmond's mortgage loans
offset the growth in Home's loan portfolio as the Company tightened Richmond's
underwriting standards following the acquisition.
[GRAPHIC OMITTED]
The Company continues to emphasize commercial real estate lending.
Commercial real estate activity increased $32,956,000 in 1999. The BNI
acquisition accounted for $23,039,000 of this increase. The remaining increase
was due to some internal growth during 1999, after relatively flat activity
during 1998 due to intense pricing competition in the Company's markets during
the year. The Company's commercial real estate loans continue to be generally
secured by owner occupied, improved property such as office buildings,
warehouses, small manufacturing operations, and retail facilities located in the
Company's primary market areas subject to a maximum 75% loan to value ratio
pursuant to its loan policy. Loans for construction and land development are
generally secured by the property under construction or development up to a
maximum loan to value of 75% of estimated cost or appraisal value of the
completed project whichever is less. The Company further monitors construction
and land development credits by disbursing draws under the credit commitment
upon satisfactory title company inspections of construction progress and
evidence of proper lien waivers. The borrower's creditworthiness and the
economic feasibility and cash flow abilities of the project are fundamental
concerns in the Company's commercial real estate and construction/land
development lending. Loans secured by commercial property, whether existing or
under construction, and land development are generally larger in size and
involve greater risks than residential mortgage loans because payments on loans
secured by commercial property are dependent upon the successful operation and
management of these properties, businesses, or developments. As a result, the
13
<PAGE>
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.
The Company's real estate loans, like all of the Company's loans, are
underwritten according to its written loan policy. The loan policy sets forth
the term, debt service capacity, credit extension, and loan to value guidelines
which the Company considers acceptable to recognize the level of risk associated
with each specific loan category. The following table sets forth the percentage
composition of the real estate loan portfolio as of December 31, 1999.
Commercial real estate 17.04%
1-4 family first liens on residential real estate 72.38
Multifamily residential 2.85
1-4 family junior liens on residential real estate 3.11
(including home equity lines of credit)
Construction, land development, and farmland 4.62
Commercial loans increased $72,795,000 (128.4%) in 1999. The BNI
acquisition accounted for $49,465,000 of this increase. The remaining increase
of $23,330,000 represents internal commercial loan growth at the other offices.
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 $24,661,000 during 1999. The BNI
acquisition a represented $10,852,000 of the increase. The remaining increase of
$13,809,000 (36.8%) was due to increased volume of indirect auto loans. The
Company cultivates installment loans primarily through the purchase of loan
contracts from its network of auto dealers developed over the years. The Company
continues to pursue additional auto dealer contacts to build this network of
loan referrals. The Company's indirect auto loan underwriting emphasizes the
purchase of the highest quality loan contracts to minimize risk of loss in this
lending activity.
Other loans decreased $482,000 (4.2%) in 1999 which included $440,000
from the BNI acquisition. Net of BNI, the $922,000 decrease in other loans was
primarily due to decreases in other loans, including personal reserve accounts,
student loans and municipal loans.
The following table shows the maturity of loans (excluding residential
mortgages on one-to-four-family residences, installment loans, and lease
financing) outstanding as of December 31, 1999 (dollars in thousands). Also
provided are the amounts due after one year classified according to the
sensitivity to changes in interest rates.
After One
Within But Within After
One Year Five Years Five Years Total
- - --------------------------------------------------------------------------------
Commercial $ 42,196 $ 48,026 $ 4,170 $ 94,392
Real Estate 39,628 84,111 21,514 145,253
- - --------------------------------------------------------------------------------
$ 81,824 $132,138 $ 25,684 $239,645
================================================================================
Loans Maturing after
one year with:
Fixed Interest Rates $213,326 $306,861
Variable Interest Rates 49,137 13,947
- - --------------------------------------------------------------------------------
TOTAL $264,463 $320,808
================================================================================
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, 1999, the Allowance was $6,905,000, an
increase of $2,420,000 from the balance at December 31, 1998. The inclusion of
the BNI allowance at December 31, 1999 represented $1,989,000 of this increase.
The remaining increase was the result of loan loss provisions exceeding net
charge-offs by $431,000 during the year.
14
<PAGE>
Management's Discussion
<TABLE>
The balance of the Allowance and actual loan loss experience for the last five years is
summarized in the following table (dollars in thousands).
<CAPTION>
Years ended December 31,
- - -------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $4,485 $4,370 $3,553 $3,537 $2,632
Charge-offs:
Commercial 776 146 123 122 70
Real estate 57 39 40 100 82
Installment 283 465 71 46 82
Other 48 149 147 118 78
- - -------------------------------------------------------------------------------------------------------
Total charge-offs 1,164 799 381 386 312
- - -------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 445 79 8 19 58
Real estate 14 59 29 2 12
Installment 121 60 16 26 34
Other 25 26 17 25 9
- - -------------------------------------------------------------------------------------------------------
Total recoveries 605 224 70 72 113
- - -------------------------------------------------------------------------------------------------------
Net charge-offs 559 575 311 314 199
Balance of acquired allowance
at date of acquisition 2,229 0 678 0 734
Additions charged to operations 750 690 450 330 370
- - -------------------------------------------------------------------------------------------------------
Balance at end of period $6,905 $4,485 $4,370 $3,553 $3,537
Ratios:
Net charge-offs to average
loans outstanding 0.08% 0.10% 0.06% 0.07% 0.05%
Net charge-offs to total
allowance 8.10 12.82 7.12 8.84 5.63
Allowance to year end
loans outstanding 0.92 0.73 0.77 0.77 0.78
</TABLE>
The Allowance represents management's estimate of an amount adequate
to provide for losses inherent in the loan portfolio. Overall, management's
evaluation of the adequacy of the Allowance is based on ongoing review and
grading of the loan portfolio, consideration of past loan loss experience,
trends in past due and nonperforming loans, risk characteristics of the various
classifications of loans, current economic conditions, the fair value of
underlying collateral and other factors which could affect credit losses. The
Allowance is composed of specific and general valuation allowances.
Management's risk analysis incorporates loan classifications assigned
by lending personnel and the Company's internal loan review officer. The
Company's lending personnel and internal loan review officer review all
significant credits for adverse situations that may impact the borrower's
ability to repay. The Corporation establishes specific valuation allowances on
income-producing real estate loans considered impaired. A loan is considered
impaired (and a specific valuation allowance established for an amount equal to
the impairment) when the carrying amount of the loan exceeds the present value
of the expected future cash flows, discounted at the loans original effective
interest rate, or the fair value of the underlying collateral. General valuation
allowances are based on an evaluation of the various risk components that are
inherent in the credit portfolio. The risk components that are evaluated include
past loan loss experience; the level of nonperforming and classified assets;
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; peer group comparisons;
regulatory guidance; and other relevant factors.
Management continues to target and maintain the Allowance equal to the
allocation methodology plus an unallocated portion, as determined by economic
conditions and emerging systemic factors on the Corporation's borrowers.
Management allocates allowance for credit losses by categories of risk. For
income-producing properties, the allocation is based on a quarterly review of
individual loans. The allocations for the remaining portfolios are based upon
the risk category assigned by the lending personnel and internal loan review
officer or for loans not specifically reviewed on analysis of historical
delinquency and charge-off statistics and trends. Reserve factors used by the
Company for criticized loan categories are consistent with regulatory agencies.
The mechanism used to address differences between estimated and actual loan loss
experience includes review of recent nonperforming loan trends, underwriting
trends and external factors. The allocation methods used for December 31, 1999
and 1998 were generally comparable.
The Allowance is increased by provisions charged to earnings and
reduced by charge-offs, net of recoveries. Management may transfer reserves
between specific and general valuation allowances as considered necessary. The
Allowance is based on a risk model developed and implemented by management and
approved by the Corporation's board of directors. The adequacy of the Allowance
is approved quarterly by the Corporation's board of directors.
As a percentage of total loans, the Allowance was 0.92% at the end of
1999 compared to 0.73% at the end of 1998. The increase in the Allowance is a
function of several factors. First, total loan growth from year end 1998 to 1999
was 8.2%, excluding the 1999 purchase of BNI. The growth was strongest in the
commercial portfolio (particularly commercial real estate), increasing
$23,330,000 or 41.1%, net of the 1999 BNI acquisition, as management works to
increase the relative amount commercial loans in the portfolio. This segment of
the loan portfolio
15
<PAGE>
carries greater inherent credit risk (described under section "Lending
Activities") and accordingly additional allowance is allocated to this
portfolio. Second, the purchase of BNI in 1999 resulted in the inclusion of
additional commercial loans and their higher ratio of allowance to loans. Third,
nonperforming loans as a percentage of total loans increased to 0.64% from 0.55%
at December 31, 1999 and 1998, respectively. Net charge-offs have remained
relatively consistent between 1998 and 1999.
Management believes the Allowance to be adequate at December 31, 1999.
While management uses available information to recognize losses on loans, future
adjustments to the Allowance may be necessary based on changes in economic
conditions and the impact of these changes on the Corporation's borrowers. As an
integral part of their examination process, various regulatory agencies also
review the Allowance. Such agencies may require that changes in the Allowance be
recognized when their credit evaluations differ from those of management, based
on their judgments about information available to them at the time of their
examination.
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. The Company generally does not recognize income on
loans past due 90 days or more.
[GRAPHIC OMITTED]
<TABLE>
The following table summarizes non-performing assets on the dates indicated (dollars in
thousands).
<CAPTION>
At or for the years ended December 31,
- - ------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $4,737 $3,245 $3,500 $3,300 $2,302
Accruing loans past due 90
days or more 14 106 20 38 2
Restructured loans 0 0 0 0 0
- - ------------------------------------------------------------------------------------------------------
Total non-performing and
restructured loans 4,751 3,351 3,520 3,338 2,304
- - ------------------------------------------------------------------------------------------------------
Other real estate owned 740 572 620 895 956
- - ------------------------------------------------------------------------------------------------------
Total non-performing assets $5,491 $3,923 $4,140 $4,233 $3,260
Ratios:
Non-performing loans to total loans 0.64% 0.55% 0.62% 0.72% 0.51%
Allowance to non-performing loans 145.34 133.84 124.15 106.44 153.52
Non-performing assets to total assets 0.50 0.47 0.58 0.64 0.55
Interest income that would have
been recorded on nonaccrual loans
under original terms $ 425 $ 286 $ 270 $ 309 $ 288
Interest income recorded during the
period on nonaccrual loans 71 158 145 145 141
</TABLE>
Effective January 1, 1996, 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 1999, 1998, 1997, and
1996 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 1996, 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, 1999, the Company identified approximately
$2,052,000 in loans which are considered impaired. These loans are included as
part of the nonaccrual loans set forth in the table above and represent 0.27% 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, 1999, there were $562,000 in loans to borrowers where
available information indicated that such loans are likely to later be included
as nonaccrual, impaired (as defined in SFAS No. 114), past due, or restructured.
16
<PAGE>
Management's Discussion
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, 1999 increased
$122,743,000, including $105,550,000 in investment securities acquired with BNI.
The remaining increase in the Banks' investment portfolio was due to
approximately $17,243,000 in collateralized mortgage obligations in leveraged
transactions, the reinvestment of portfolio cash flows, primarily in obligations
of states and political subdivisions and mortgage-related securities, to take
advantage of the comparatively more attractive yields on these investment
securities as opposed to U.S. treasury and agency obligations. 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,
- - ---------------------------------------------------------------------------------------------------
1999 1998 1997
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $ 34,774 15.4% $ 41,200 39.9% $ 46,822 48.6%
Obligations of states and
political subdivisions 40,401 17.9 30,828 29.8 25,922 26.9
Mortgage-related securities 137,659 60.9 21,792 21.1 17,242 17.9
Other securities 13,238 5.9 9,509 9.2 6,377 6.6
- - ---------------------------------------------------------------------------------------------------
TOTAL $226,072 $103,329 $ 96,363
===================================================================================================
</TABLE>
The composition of the Company's investment securities has been
influenced by the general market conditions prevalent during 1999. U.S. Treasury
securities and obligations of U.S. government agencies (Treasuries/Agencies)
decreased $6,426,000 in 1999 due to the Company's decision to increase the
amount of investments deployed in obligations of states and political
subdivisions and mortgage-related securities to take advantage of the
comparatively higher yields available on these investment products. As a result
of this decline, the percentage of the Company's investment portfolio invested
in Treasuries/Agencies decreased to 15.4% at December 31, 1999 from 39.9% at
December 31, 1998.
Obligations of states and political subdivisions increased $9,573,000
at December 31, 1999 compared to December 31, 1998. Exclusive of BNI,
obligations of states and political subsidiaries increased $2,292,000 due to the
Company reinvesting Treasuries/Agencies maturities in municipal investments to
enhance its portfolio yield. At December 31, 1999, obligations of states and
political subdivisions were 17.9% of the Company's investment portfolio as
compared to 29.8% at December 31, 1998.
During 1999, balances in mortgage-related securities increased
$115,867,000. This increase included $96,459,000 related to the BNI acquisition
as well as reinvesting maturing Treasuries/Agencies in this category. The
Company's mortgage-related securities represent balances outstanding on
fixed-rate collateralized-mortgage obligations (CMO's) supported by one-to-four
family residential mortgage securities issued by the Federal National Mortgage
Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). To
avoid exposure to prepayments, wide market value fluctuations, and
recoverability, the Company purchases only the conservative early trances of the
respective CMOs. These investments closely resemble treasury securities in their
shorter maturities, marketability, and repayment predictability and accordingly
are the least volatile to the impact of market interest rate fluctuations. At
December 31, 1999, the remaining average life of the Company's mortgage-related
securities was slightly more than five years. Management does not consider the
Company to be exposed to significant interest rate risk or recoverability
related to these investments. At December 31, 1999, mortgage-related securities
accounted for 60.9% of the Company's investment portfolio compared to 21.1% at
December 31, 1998.
Other securities increased $3,729,000 in 1999. BNI accounted for
$1,593,000 of this increase. The remaining increase was due to the Company's
purchase of additional marketable equity securities during the year. At December
31, 1999, other securities represented 5.8% of the Company's investment
portfolio compared to 9.2% at December 31, 1998.
17
<PAGE>
The maturities and weighted-average yield of the Company's investment
securities at December 31, 1999 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 $ 6,006 5.87% $ 22,168 5.83% $ 6,600 6.23% $ 0 0.00%
Obligations of states and political
subdivisions 881 7.33 22,681 6.49 15,079 6.29 1,760 7.20
Mortgage-related securities 4,807 7.02 62,578 6.81 33,844 6.96 36,430 6.96
Other securities 11,070 3.91 1,991 6.76 100 10.00 76 7.25
- - -------------------------------------------------------------------------------------------------------------------------
TOTAL $22,764 5.22% $109,418 6.54% $55,623 6.70% $38,267 6.97%
=========================================================================================================================
</TABLE>
At December 31, 1999, the Company had equity investments in 13 bank
stocks at an acquired cost of approximately $4,200,000. Since the fourth quarter
1998, the Company has committed a portion of its investment portfolio to
purchasing bank stocks at prices it believed attractive.
At December 31, 1999, the Company had $33,000 in net unrealized gains
on its held-to-maturity securities and $4,137,000 in net unrealized losses on
its available-for-sale securities. Of the unrealized losses on the Company's
available-for-sale securities at December 31, 1999, approximately $781,000 was
the result of price depreciation on marketable equity securities resulting from
the general weakness in the financial stock sector at December 31, 1999. The
remaining $3,356,000 in unrealized losses at December 31, 1999 resulted from
price depreciation on investment securities related to the generally higher
interest rate environment. 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.
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, 1999, total average deposits increased
$107,777,000 (17.0%) due to the inclusion of BNI and internal deposit growth at
SFB, SFBW, Richmond & Home. As the Richmond acquisition was consummated on
December 31, 1997, no averages for Richmond are included in any average deposit
information for the year 1997.
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,
- - ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------
Average Average % of Average Average % of Average Average % of
Amount Rate Total Amount Rate Total Amount Rate Total
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 90,173 0.00% 12.2% $ 72,684 0.00% 11.5% $ 58,687 0.00% 11.4%
NOW accounts 97,797 1.75 13.2 82,778 2.28 13.1 65,453 2.02 12.8
Money market deposits 152,636 4.03 20.6 109,509 4.38 17.3 86,354 4.37 16.8
Savings 127,523 2.66 17.2 106,543 2.82 16.8 102,080 2.89 19.9
Time deposits 272,194 5.37 36.8 261,032 5.79 41.3 200,082 5.70 39.0
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL $740,323 3.49% $632,546 3.92% $512,656 3.79%
=========================================================================================================================
</TABLE>
18
<PAGE>
Management's Discussion
For the year ended December 31, 1999, average non-interest bearing
demand deposits increased $17,489,000 (24.1%). The inclusion of BNI in the
Company's averages for 1999 accounted for $17,337,000 of this increase.
Exclusive of BNI, average non-interest bearing demand deposits increased
$152,000 (0.2%). Non-interest bearing demand deposits represent 12.2% of the
Company's average deposit portfolio at December 31, 1999 compared to 11.5% at
December 31, 1998.
Average NOW accounts increased $15,019,000 (18.1%) for the year ended
December 31, 1999 over 1998. BNI accounted for $7,231,000 of this increase.
Exclusive of BNI, average NOW accounts increased $7,788,000 (9.4%) mainly due to
growth in personal, business, and municipal account relationships during the
year. At December 31, 1999, NOW accounts represent 13.2% of the Company's
average total deposits compared to 13.1% at December 31, 1998.
Average money market deposits increased $43,127,000 (39.4%) in total
and $15,762,000 (14.4%) exclusive of BNI for the year ended December 31, 1999.
The Company continues to experience growth from this funding source due to the
popularity of the Money Market Index Account. At December 31, 1999, average
money market balances of the Company, represent 20.6% of average total deposits
compared to 17.3% at December 31, 1998.
Average savings balances increased $20,980,000 (19.7%). The inclusion
of BNI added $19,837,000 to the Company's average savings balances. Average
savings balances represent 17.2% of average total deposits at December 31, 1999
compared to 16.8% at December 31, 1998.
Average time deposit balances increased $11,162,000 (4.3%) in total
and decreased $15,341,000 (5.9%) exclusive of BNI for the year ended December
31, 1999 compared to the year ended December 31, 1998. This decrease was mainly
due to depositors continuing desire to maintain balances in more liquid
instruments and the relative attractiveness of alternative nondeposit products.
At December 31, 1999, average time deposits represent 36.8% of average total
deposits compared to 41.3% at December 31, 1998.
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1999 are summarized as follows
(dollars in thousands).
3 month or less $ 33,218
Over 3 through 6 months 10,650
Over 6 through 12 months 8,933
Over 12 months 11,386
------------------------------------------
TOTAL $ 64,187
==========================================
Approximately 5.9% of the Company's total assets at December 31, 1999
were supported by time deposits with balances in excess of $100,000 as compared
to 5.5% at December 31, 1998. 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.
Liquidity
The primary functions of asset/liability management are to assure
adequate liquidity and to maintain an appropriate balance between
interest-earning assets and interest-bearing liabilities. Liquidity management
involves the ability to meet the cash flow requirements of depositors and
borrowers.
The Company's primary funding sources are deposits, loan principal
repayments, and maturities of loans and investment securities. 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, 1999, the Company reported a $49,059,0000 net increase
in loans. Advances from the Federal Home Loan Bank funded $45,800,000 of the net
loan increase with the balance funded by deposit growth. Deposits, exclusive of
BNI, increased $9,156,000 in total, of which $3,259,000 went to fund loan
growth. The remaining $5,897,000 in 1999 deposit growth combined with $8,531,000
in cash provided by operating activities and $33,209,000 in net notes payable
proceeds, repayments on the Company's ESOP, proceeds of $14,446,000 from Federal
Funds Purchased, and proceeds from stock option exercises were used to purchase
BNI, fund $21,550,000 in net investment securities increases, purchase treasury
stock at SFSC, pay cash dividends, and fund net increases in cash and cash
equivalents.
19
<PAGE>
For the year ended December 31, 1998, the Company reported a
$45,465,000 increase in net loans. Advances from the Federal Home Loan Bank
funded $20,000,000 of the net loan increase with the balance funded by deposit
growth. Deposits increased $34,910,000 in total, of which $25,465,000 went to
fund loan growth. The remaining $9,445,000 in 1998 deposit growth combined with
$6,454,000 in cash provided by operating activities and $1,245,000 in net notes
payable proceeds, repayments on the Company's ESOP and proceeds from stock
option exercises to fund $6,685,000 in net investment securities increases,
purchase treasury stock at Home, pay cash dividends, and net increases in cash
and cash equivalents. Additionally, the Company issued $2,410,000 in its common
stock to fund the LCC acquisition in September, 1998.
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 $59,784,000 and $82,230,000 at
December 31, 1999 and 1998, respectively. Liquid assets in excess of necessary
cash reserves are generally invested in short-term investments such as federal
funds sold, commercial paper, and interest-earning deposits.
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, 1999 (dollars in millions). For purposes of
presentation in the following table, the Company used the national deposit decay
rate assumptions published by its regulators as of December 31, 1999, which, for
NOW accounts, money market accounts, and savings deposits in the one year or
less category were 59%, 65%, and 80%, respectively. 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 following
table given the general movement in interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates.
Total
0-30 31-90 91-365 0-365
Days Days Days Days
- - --------------------------------------------------------------------------------
ASSETS
Loans
Fixed $ 23.5 $ 17.9 $ 63.1 $ 104.5
Variable 166.4 0.0 0.0 166.3
Investments 8.9 2.7 19.5 31.0
Federal funds 0.9 0.0 0.0 0.9
- - --------------------------------------------------------------------------------
Total $ 199.7 $ 20.4 $ 82.6 $ 302.7
================================================================================
LIABILITIES
Savings deposits
& NOW deposits $ 26.9 $ 53.9 $ 80.8 $ 161.6
Time deposits 31.0 60.8 124.7 216.4
Money market deposits 16.0 32.0 48.0 96.1
Other interest-bearing
liabilities 15.4 0.0 40.0 55.4
- - --------------------------------------------------------------------------------
Total $ 89.3 $ 146.7 $ 293.5 $ 529.5
================================================================================
Interest sensitivity gap $ 110.4 $(126.3) $(210.9) $(226.8)
Cumulative interest
sensitivity gap 110.4 (15.9) (226.8) (226.8)
Cumulative interest sensitivity
gap as a percentage of total
earning assets 11.4% -1.6% -23.3% -23.3%
Cumulative total interest-
earning assets as a percentage
of cumulative interest-bearing
liabilities 223.6% 93.3% 57.2% 57.2%
At December 31, 1999, interest-sensitive assets and interest-sensitive
liabilities subject to repricing within one year, a percentage of total assets
were 27.8% and 48.6%, respectively. Variable rate and maturing fixed rate loans
are the primary interest-sensitive assets repricing within one year. Time
deposits are the most significant liabilities subject to repricing within one
year on the funding side of the balance sheet. The table above demonstrates the
Company is liability-sensitive at December 31, 1999, which would normally
indicate that the Company's net interest margin would improve if rates decreased
and deteriorate if interest rates increased.
The Company's negative gap position at the one year time horizon is
impacted primarily by the fixed rate mortgage portfolio. The pending sale of
approximately $45,000,000 in 1-4 family real estate mortgage will reduce the
Company's one year negative cumulative gap to $181,000,000 and its cumulative
gap as a percent of total earning assets to (18.7%). The Company would consider
further securitization of its fixed rate mortgage portfolio under favorable
pricing terms and the availability of immediately available funding uses at
equal or comparable higher rates than the foregone yield on the contemplated
securitization.
20
<PAGE>
Management's Discussion
Capital Resources
Total shareholders' equity decreased $24,970,000 in 1999, increased
$873,000 in 1998, and decreased $1,644,000 in 1997. The decrease in 1999 was
mainly due to the Company's stock repurchase program under which the Company
repurchased approximately 1.5 million shares of common stock at a price of
$16.66. The increase in 1998 was mainly due to the retirement of Home's
Recognition and Retention Plan commensurate with the merger and the annual
allocation of ESOP shares in both State's and Home's respective plans. Total
shareholder's equity decreased in 1997 due to Home's acquisition of treasury
shares and the formation of the Recognition and Retention Plan exceeding the
amount of net earnings retention during the year.
<TABLE>
<CAPTION>
Years ended December 31,
- - -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- - -----------------------------------------------------------------------------------------------------------------
Exclusive of Exclusive of
merger-related merger-related
As stated charge As stated charge
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on assets 0.78% 0.89% 0.15% 0.89% 1.09%
Return on equity 6.00 6.84 0.86 5.25 5.40
Earnings retained 41.23 48.44 (357.40) 25.40 50.20
Dividend payout ratio 58.77 51.56 457.40 74.60 49.80
Average equity to average assets 13.04 16.97 20.21
Asset growth 31.59 7.04 17.69
=================================================================================================================
</TABLE>
There are certain regulatory constraints which affect the Company's
capital levels. At December 31, 1999, the Company exceeded all of the regulatory
capital requirements. See Note 9 and Note 13 to the Consolidated Financial
Statements for additional explanation of these regulatory constraints.
Impact of Inflation and Changing Prices
The Company's Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of changes in the relative purchasing power of
money over time impacted by inflation. The impact of inflation is reflected in
the company's other 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
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company competed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company expensed approximately $40,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its internal systems, or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
Pending Accounting Changes
Pending accounting changes for 1999 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.
21
<PAGE>
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.
/s/ Michael J. Falbo /s/ Michael A. Reindl
Michael J. Falbo Michael A. Reindl
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,
1999, and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 financial statements of
Home Federal Savings and Loan Association of Elgin for the year ended December
31, 1998, or the consolidated financial statements of Home Bancorp of Elgin,
Inc. and subsidiary for the year ended December 31, 1997, which statements
reflect total assets of $383,231,000 in 1998, and total revenue of $26,965,923
in 1998, and $26,317,237 in 1997. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to data included for Home Federal Savings and Loan Association of Elgin
and Home Federal Bancorp, Inc. and subsidiary, is based solely on the reports of
other auditors.
We conducted our audits in accordance with audit standards generally
accepted in the United States. 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 the reports 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,
1999, and 1998, and the consolidated results of its operations and cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
January 21, 2000 /s/ Ernst & Young LLP
Ernst & Young LLP
22
<PAGE>
Financial Statements
Consolidated Balance Sheets
December 31,
- - --------------------------------------------------------------------------------
1999 1998
- - --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 51,710,232 $ 31,028,203
Interest-bearing bank balances 7,128,225 29,793,241
Federal funds sold 945,576 8,508,387
Commercial paper - 12,900,000
Cash and cash equivalents 59,784,033 82,229,831
Investment securities:
Held-to-maturity (fair value of
$3,366,087-1999 and $10,479,402-1998) 3,333,183 10,290,241
Available-for-sale (at fair value) 218,602,218 94,704,827
Loans (net of allowance for loans losses
of $6,904,980-1999 and $4,484,504-1998) 694,193,405 606,038,019
Loans held for sale 48,002,714 1,910,881
Premises and equipment 22,819,347 13,333,369
Accrued interest receivable 5,810,538 4,485,332
Goodwill, net 28,306,540 9,659,712
Other assets 9,172,363 5,716,311
- - --------------------------------------------------------------------------------
$1,090,024,341 $828,368,523
================================================================================
Liabilities and shareholders' equity
Deposits:
Demand $ 117,298,997 $ 81,540,940
Savings 269,317,506 199,266,311
Money market 160,169,964 120,297,093
Time deposits in excess of $100,000 69,034,677 45,610,283
Other time deposits 231,229,420 206,190,258
- - --------------------------------------------------------------------------------
Total deposits 847,050,564 652,904,885
Notes payable 39,958,609 6,750,000
Securities sold under agreement to repurchase 15,733,809 4,116,677
Federal funds purchased 12,400,000 -
Federal Home Loan Bank advances 61,500,000 25,000,000
Accrued expenses and other liabilities 1,520,251 3,270,762
Accrued interest payable 2,193,555 1,688,920
- - --------------------------------------------------------------------------------
Total liabilities 980,356,788 693,731,244
Shareholders' equity:
Preferred stock $1 par value;
authorized-100,000 shares; issued
and outstanding-none - -
Common stock, $.10 par value;
authorized-25,000,000 shares; 10,092,684
shares issued and outstanding in 1999,
and 10,076,017 in 1998, including
1,515,140 treasury shares in 1999 1,009,269 1,007,602
Additional paid-in capital 94,923,187 94,153,564
Retained earnings 46,812,497 43,748,273
Accumulated other comprehensive income (2,709,310) 1,080,549
Unearned shares held by ESOP (5,131,608) (5,352,709)
Treasury stock (25,236,482) -
- - --------------------------------------------------------------------------------
Total shareholders' equity 109,667,553 134,637,279
- - --------------------------------------------------------------------------------
$1,090,024,341 $828,368,523
================================================================================
See accompanying notes.
23
<PAGE>
Consolidated Statements of Income
Year ended December 31,
- - --------------------------------------------------------------------------------
1999 1998 1997
- - --------------------------------------------------------------------------------
Interest Income:
Loans $54,631,410 $48,705,672 $41,599,154
Investment securities:
Taxable 8,921,184 6,902,230 6,644,283
Tax-exempt 1,675,685 1,346,350 839,358
Federal funds sold and
other short-term investments 388,961 632,586 148,152
- - --------------------------------------------------------------------------------
Total interest income 65,617,240 57,586,838 49,230,947
Interest expense:
Deposits 25,873,922 24,795,930 19,453,399
Notes payable and other borrowings 4,258,120 1,126,660 618,079
- - --------------------------------------------------------------------------------
Total interest expense 30,132,042 25,922,590 20,071,478
- - --------------------------------------------------------------------------------
Net interest income 35,485,198 31,664,248 29,159,469
Provision for loan losses 750,000 690,000 450,000
- - --------------------------------------------------------------------------------
Net interest income after provision
for loan losses 34,735,198 30,974,248 28,709,469
- - --------------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 2,185,081 1,955,905 1,670,515
ATM service charges 665,751 760,362 490,708
Gain on sale of loans 1,012,538 961,517 225,108
Fair market value adjustment-loans
held for sale (735,538) - -
Merchant services 1,546,600 1,270,240 1,160,692
Building rent 260,400 278,418 310,014
Security transaction commissions 502,418 534,462 122,382
Asset management fees 621,689 163,834 -
Investment securities gains
(losses), net 992,469 420,817 (649)
Other 941,758 783,007 685,489
- - --------------------------------------------------------------------------------
7,993,166 6,964,728 4,664,259
Other expenses:
Salaries and employee benefits 13,881,079 12,907,315 10,194,853
Net occupancy expense 1,465,792 1,216,761 1,213,368
Equipment rentals, depreciation
and maintenance 3,410,883 2,786,845 2,500,073
Data Processing 2,053,887 1,977,794 1,698,200
Legal and professional 1,241,124 1,140,723 993,799
ATM fees 564,761 630,449 620,345
Merchant services 1,115,660 948,651 917,216
Merger-related charges 598,291 7,917,613 -
Advertising 1,133,258 900,604 806,037
Goodwill amortization 1,387,127 632,837 151,426
Other 4,111,023 3,741,876 3,100,526
- - --------------------------------------------------------------------------------
30,962,885 34,801,468 22,195,843
- - --------------------------------------------------------------------------------
Income before income taxes 11,765,479 3,137,508 11,177,885
Income taxes 4,332,997 1,980,595 3,961,080
- - --------------------------------------------------------------------------------
Net income $ 7,432,482 $ 1,156,913 $ 7,216,805
================================================================================
Basic earnings per share $ .80 $ .12 $ .75
Diluted earnings per share .80 .12 .74
================================================================================
See accompanying notes.
24
<PAGE>
Financial Statements
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-In Retained Comprehensive ESOP
Stock Capital Earnings Income Shares
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $ 1,027,901 $ 96,718,054 $ 47,882,792 $ 888,649 $ (6,385,962)
Comprehensive income:
Net income -- -- 1,156,913 -- --
Other comprehensive
income - Change in net
unrealized gain on
securities available-
for-sale, net of income
taxes of $132,068 -- -- -- 191,900 --
- - ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 1,156,913 191,900 --
Cash dividends declared by
pooled companies:
State Financial - $0.12
per share -- -- (2,581,561) -- --
Home Bancorp - $0.10 per share -- -- (2,709,871) -- --
Issuance of 22,360 shares under
stock option plans 2,236 237,417 -- -- --
Issuance of 113,241 shares in
acquisition of LCC 11,324 2,398,875 -- -- --
Purchase of 198,338 shares of
treasury stock - Home Bancorp -- -- -- -- --
Retirement of 338,593 shares of
treasury stock - Home Bancorp (33,859) (5,723,199) -- -- --
Earned Recognition and
Retention Plan Stock -- -- -- -- --
ESOP shares earned -- 522,417 -- -- 1,033,253
- - ------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 1,007,602 94,153,564 43,748,273 1,080,549 (5,352,709)
Balances at December 31, 1998 $ 1,007,602 $ 94,153,564 $ 43,748,273 $ 1,080,549 $(5,352,709)
Comprehensive income:
Net income -- -- 7,432,482 -- --
Other comprehensive income -
Change in net unrealized
gain on securities available-
for-sale, net of income taxes
of $2,013,224 -- -- -- (3,789,859) --
- - ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 7,432,482 (3,789,859) --
Cash dividends declared - $0.12
per share -- -- (4,368,258) -- --
Issuance of 16,667 shares under
stock option plans 1,667 171,332 -- -- --
Purchase of 1,515,140 shares of
treasury stock -- -- -- -- --
ESOP shares earned -- 598,291 -- -- 221,101
Balances at December 31, 1999 $ 1,009,26 $ 94,923,187 $ 46,812,497 $(2,709,310) $(5,131,608)
========================================================================================================================
<CAPTION>
Unearned
Shares
Acquired by
Recognition
and
Retention Treasury
Plan Stock Total
-----------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1997 $ (3,898,482) $ (2,469,602) $ 133,763,350
Comprehensive income:
Net income -- -- 1,156,913
Other comprehensive
income - Change in net
unrealized gain on
securities available-
for-sale, net of income
taxes of $132,068 -- -- 191,900
- - --------------------------------------------------------------------------------------
Total comprehensive income -- -- 1,348,813
Cash dividends declared by
pooled companies:
State Financial - $0.12
per share -- -- (2,581,561)
Home Bancorp - $0.10 per share -- -- (2,709,871)
Issuance of 22,360 shares under
stock option plans -- -- 239,653
Issuance of 113,241 shares in
acquisition of LCC -- -- 2,410,199
Purchase of 198,338 shares of
treasury stock - Home Bancorp -- (3,287,456) (3,287,456)
Retirement of 338,593 shares of
treasury stock - Home Bancorp -- 5,757,058 --
Earned Recognition and
Retention Plan Stock 3,898,482 -- 3,898,482
ESOP shares earned -- -- 1,555,670
- - ---------------------------------------------------------------------------------------
Balances at December 31, 1998 -- -- 134,637,279
Balances at December 31, 1998 -- $ -- $ 134,637,279
Comprehensive income:
Net income -- -- 7,432,482
Other comprehensive income -
Change in net unrealized
gain on securities available-
for-sale, net of income taxes
of $2,013,224 -- -- (3,666,586)
- - -------------------------------------------------------------------------------------
Total comprehensive income -- -- 3,642,623
Cash dividends declared - $0.12
per share -- -- (4,368,258)
Issuance of 16,667 shares under
stock option plans -- -- 172,999
Purchase of 1,515,140 shares of
treasury stock -- (25,236,482) (25,236,482)
ESOP shares earned -- -- 891,392
- - ---------------------------------------------------------------------------------------
Balances at December 31, 1999 $ -- $ (25,236,482) $ 109,667,553
=======================================================================================
</TABLE>
See accompanying notes.
25
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
- - ------------------------------------------------------------------------------------------------------
1999 1998 1997
- - ------------------------------------------------------------------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income $ 7,432,482 $ 1,156,913 $ 7,216,805
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 750,000 690,000 450,000
Provision for depreciation 1,875,639 1,539,644 1,425,949
Amortization of investment securities
premiums and accretion of discounts
on investment securities 667,023 139,712 (558,770)
Amortization of goodwill 1,387,127 632,837 151,426
Amortization of branch acquisition premium - - 49,442
Deferred income tax provision (benefit) 124,000 (1,501,000) (157,006)
Market adjustment for committed ESOP shares 598,291 522,417 370,922
Cost of Recognition and Retention Plan - 3,898,481 599,767
Fair market value adjustment - loans
held for sale 735,538 - -
Decrease (increase) in interest receivable (1,325,206) (104,756) 84,666
Increase (decrease) in interest payable (2,240,365) (341,447) 235,551
Realized investment securities (gains) losses (992,469) (420,817) 649
Other (480,623) (1,232,918) (566,195)
- - ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,531,437 6,454,413 9,303,206
Investing activities
Proceeds from maturity or principal payments of
held-to-maturity investment securities 6,920,216 10,757,979 64,644,921
Purchases of securities available-for-sale (57,962,731) (53,575,276) (27,550,247)
Maturities and sales of securities available-for-sale 33,249,508 36,132,603 17,008,319
Net increase in loans (49,058,772) (45,464,865) (52,932,908)
Net purchases of premises and equipment (4,877,569) (777,257) (1,065,555)
Business acquisition, net of cash and cash
equivalents acquired of $7,721,000 and $1,400
and $7,673,036 in 1999, 1998 and 1997 (25,965,273) (2,408,799) (3,192,426)
- - ------------------------------------------------------------------------------------------------------
Net cash used by investing activities (97,694,621) (55,335,615) (3,087,896)
</TABLE>
See accompanying notes.
26
<PAGE>
Financial Statements
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
- - --------------------------------------------------------------------------------
1999 1998 1997
- - --------------------------------------------------------------------------------
Financing activities
Net increase in deposits $ 9,156,285 $34,910,317 $29,609,088
Repayment of notes payable (6,750,000) (204,902) (961,844)
Proceeds of notes payable 39,958,609 1,450,000 3,900,000
Net decrease (increase) in
guaranteed ESOP obligation 221,101 1,033,253 (442,482)
Net change in securities sold
under agreements to repurchase 5,617,132 (733,483) 2,450,000
Increase in Federal Home Loan
Bank advances 36,500,000 20,000,000 5,000,000
Cash dividends (4,368,258) (5,291,432) (3,591,432)
Proceeds (repayments) of federal
funds purchased 11,446,000 - (5,600,000)
Purchase of Recognition and
Retention Plan stock - - (4,498,248)
Shares issued in acquisition - 2,410,199 -
Purchase of treasury stock (25,236,482) (3,287,457) (2,469,602)
Issuance of common stock under
Dividend Reinvestment Plan - - 204,818
Award of restricted stock 23,531 - -
Proceeds from exercise of stock
options 149,468 239,654 126,183
- - --------------------------------------------------------------------------------
Net cash provided by financing
activities 66,717,386 50,526,149 23,726,661
- - --------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (22,445,798) 1,644,947 29,941,971
Cash and cash equivalents at
beginning of year 82,229,381 80,584,884 50,642,913
- - --------------------------------------------------------------------------------
Cash and cash equivalents at end
of year $ 59,784,033 $ 82,229,831 $80,584,884
================================================================================
Supplementary information:
Interest paid $ 33,372,407 $ 26,265,360 $19,836,509
Income taxes paid 4,396,500 2,403,500 3,450,040
Noncash transactions: Retirement
of treasury stock - 5,757,058 -
Transfer of loans held for
investment to loans held for sale 48,738,252 - -
See accompanying notes.
Notes to Consolidated Financial Statements - December 31, 1999
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 is a multibank holding company headquartered in Hales
Corners, Wisconsin. Through its wholly owned subsidiaries, State Financial Bank
(Wisconsin), State Financial Bank - Waterford, State Financial Bank (Illinois),
Home Federal Savings and Loan Association of Elgin and Bank of Northern
Illinois, N.A. (BNI) (collectively the Banks), the Company provides retail and
commercial banking services, brokerage activities and mortgage lending services
through its 23 branch locations. The Banks have 11 branch locations in Wisconsin
serving Milwaukee, Waukesha and Racine counties, and 12 branch locations in
Illinois serving McHenry, Lake, Kane and Cook counties. The Company is also the
parent holding company of State Financial Insurance Agency, a subsidiary of
State Financial Bank (Illinois) which sells retail and commercial property and
casualty insurance; and Lokken, Chesnut & Cape, which provides asset management
and financial planning services to the Banks' customers and markets.
The Banks and the Company's other subsidiaries are subject to
competition from other financial institutions and financial service providers,
and are subject to the regulations of certain federal, State of Wisconsin and
State of Illinois agencies, and undergo periodic examinations by those
regulatory agencies.
Consolidation
The consolidated financial statements include the accounts of the
parent company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Business Combinations
In business combinations accounted for using the purchase method of
accounting, the net assets of the companies acquired are recorded at fair value
at the date of acquisition and the results of operations of acquired companies
are included from the date of acquisition.
27
<PAGE>
1. Accounting Policies (continued)
In business combinations accounted for as poolings-of-interests, the
financial position and results of operations and cash flows of the respective
companies are restated as though the companies were combined for all historical
periods.
Intangibles
The excess of the purchase price over the fair value of net assets of
subsidiaries acquired consists primarily of goodwill that is being amortized on
a straight-line to operating expense over 15 years. The carrying amount of
goodwill is reviewed if facts and circumstances suggest that it may be impaired.
If this review indicates that it is not recoverable, as determined based on the
estimated undiscounted cash flows of the entity acquired over the remaining
amortization period, the carrying amount of the goodwill is reduced by the
estimated shortfall of the cash flows discounted to reflect the Company's cost
of capital.
The results of operations of acquired companies are included since the
date of acquisition.
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.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing bank balances, federal funds
sold and commercial paper investments with an original maturity of three months
or less.
Investment Securities
Securities are classified as held to maturity and carried at amortized
cost if management has the intent and ability to hold the securities to
maturity.
All other debt securities 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 is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-related securities, over the estimated life of the security. Such
amortization is calculated using the level-yield method, adjusted for
prepayments and is included in interest income from investments. Realized gains
and losses, and declines in value judged to be other than temporary are included
in net securities gains and losses. The cost of securities is based on the
specific identification method.
Interest on Loans
Interest income on loans is accrued and credited to operations based
on the principal amount outstanding. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest
and/or when, in the opinion of management, full collection is unlikely. When
interest accruals are discontinued, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in the prior year is
charged to the allowance for loan losses. Management may elect to continue the
accrual of interest when the loan is in the process of collection and the fair
value of collateral is sufficient to cover the principal balance and accrued
interest. Interest received on nonaccrual loans is either applied against
principal or reported as interest income according to management's judgment
regarding the collectibility of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
Loan Fees and Related Costs
Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amounts are amortized as an
adjustment of the related loan's yield. The Company is generally amortizing
these amounts using the level-yield method over the contractual life of the
related loans. Fees related to standby letters of credit are recognized over the
commitment period.
Loans Held for Sale
Loans held for sale consist of residential mortgagees and are carried
at the lower of cost or aggregate market value. Net unrealized losses are
recognized through a valuation allowance and a charge to income.
Allowance for Loan Losses
The allowance for loan losses is composed of specific and general
valuation allowances. The Company establishes specific valuation allowances on
income-producing real estate loans considered impaired. A loan is considered
impaired (and a specific valuation allowance established for an amount equal to
the impairment) when the carrying amount of the loan exceeds the present value
of the expected future cash flows, discounted at the loan's original effective
interest rate, or the fair value of the underlying collateral.
General valuation allowances are based on an evaluation of the various
risk components that are inherent in the credit portfolio. The risk components
that are evaluated include past loan loss experience; the level of nonperforming
and classified assets; 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;
peer group comparisons; regulatory guidance; and other relevant factors. The
allowance is increased by provisions charged to earnings and reduced by
charge-offs, net of recoveries. Management may transfer reserves between
specific and general valuation allowances as considered necessary. The adequacy
of the allowance for loan losses is approved quarterly by the Company's board of
directors. The allowance reflects management's best estimate of the reserves
needed to provide for the impairment of income-producing real estate loans, as
well as other credit risks of the Banks and is based on a risk model developed
and implemented by management and approved by the Company's board of directors.
However, actual results could differ from this estimate and future additions to
the allowance may be necessary based on unforeseen changes in economic
conditions. In addition, federal regulators periodically review the Banks'
allowance for loan losses. Such regulators have the authority to require the
Banks to recognize additions to the allowance at the time of their examination.
28
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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. Leasehold improvements are amortized using both
accelerated and straight-line methods over the shorter of the useful life of the
leasehold asset or lease term.
Treasury Stock
The Company records common stock purchased for treasury stock at cost.
At the date of subsequent reissueance, the treasury stock account is reduced by
the cost of such stock on a first-in, first-out basis.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted-average common shares outstanding less unearned ESOP shares. Diluted
earnings per share are 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 using the Treasury Stock
method.
The denominators for the earnings per share amounts are as
follows:
1999 1998 1997
- - --------------------------------------------------------------------------------
Basic:
Weighted-average number
of shares outstanding 9,711,923 10,109,059 10,193,642
Less: weighted-average
number of unearned
ESOP shares (408,631) (503,182) (553,635)
- - --------------------------------------------------------------------------------
Denominator for basic
earnings per share 9,303,292 9,605,877 9,640,007
Fully diluted:
Denominator for basic
earnings per share 9,303,292 9,605,877 9,640,007
================================================================================
Add: assumed conversion
of stock options using
the treasury stock method 16,383 74,089 89,832
Denominator for fully
diluted earnings per share 9,319,675 9,679,966 9,729,839
================================================================================
At December 31, 1999, 651,714 stock options with a weighted - average
exercise price of $16.20 were excluded from the calculation of fully diluted
earnings per share as their impact was anti-dilutive.
Income Taxes
The Company accounts for income taxes using the liability method.
Deferred income tax assets and liabilities are adjusted regularly to amounts
estimated to be receivable or payable based on current tax law and the Company's
tax status. Valuation allowances are established for deferred tax assets for
amounts for which it is more likely than not that they will be realized.
Stock Option Plan
Statement of Financial Accounting Standards (Statement) No. 123,
"Accounting for Stock-Based Compensation," permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, Statement No. 123 allows entities 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 as if the
fair value based method defined in Statement No. 123 had been applied. The
Company accounts for its stock option plans 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. The fair
value of the stock options granted was not material for the years ended December
31, 1999, 1998, and 1997.
Employee Stock Ownership Plan (ESOP)
Compensation expense under the ESOP is equal to the fair value of
common shares released or committed to be released to participants in the ESOP
in each respective period. Common stock purchased by the ESOP and not committed
to be released to participants is included in the consolidated balance sheet at
cost as a reduction of shareholders' equity.
Segment Information
The Company evaluates segment performance based on geographic
location-State Financial Bank (Wisconsin), State Financial Bank -Waterford,
State Financial Bank (Illinois), Home Federal Savings and Loan Association of
Elgin and Bank of Northern Illinois, N.A.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform with
the 1999 presentation.
Pending Accounting Changes
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities and Deferral o4f the Effective Date of FASB Statement No.
133," which defers the effective date of Statement No. 133 until years beginning
after June 15, 2000, provide a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. Statement 133
requires all derivatives to be recorded on the balance sheet at fair value.
However, the Statement provides for special accounting for certain derivatives
that meet the definition of hedges. Changes in the fair value of derivatives
that do not meet the definition of hedges are required to be reported in
earnings in the period of the change. The Corporation does not use derivative
financial instruments such as futures, swaps, caps, floors, options, interest or
principal only strips of similar financial instruments; therefore, the Statement
is not expected to have a significant impact on the Company. The Corporation
expects to adopt Statement No. 133 on January 1, 2001.
29
<PAGE>
2. Acquisitions
On June 23, 1999, the Company completed its acquisition of First
Waukegan Corporation and subsidiary, Bank of Northern Illinois, N.A. (BNI). The
Company purchased the outstanding common stock of First Waukegan Corporation for
$33,633,000 in cash. The acquisition was recorded using purchase accounting.
On a pro forma basis, total income, net income, and basic earnings per
share for the year ended December 31, 1999 and 1998, after giving effect to the
acquisition of BNI as if it occurred on January 1, 1998, follow:
1999 1998
--------------------------------------------------------------
Total income $81,221 $82,658
Net income 4,884 (320)
Basic earnings per share .52 ($.03)
Diluted earnings per share .52 ($.03)
==============================================================
On December 15, 1998, the Company merged with Home Bancorp of Elgin,
Inc. (Home Bancorp). During the combination, Home Bancorp was merged into State
Financial Services Corporation and its wholly owned subsidiary bank, Home,
became a wholly owned subsidiary of the Company. Each outstanding share of Home
Bancorp common stock was converted into and exchanged for .914 shares of the
Company's common stock, resulting in the issuance of 6,067,862 shares. The
acquisition was accounted for as a pooling-of-interests, and, accordingly, all
historical financial information for the Company has been restated to include
Home for all periods presented herein. Certain reclassifications were made to
the Home financial statements to conform to the Company's presentations. Charges
totaling $201,245 were recorded to conform Home's accounting policies for fixed
assets and contributions.
In connection with the merger, the Company recorded charges of
$7,917,613 for merger-related costs in 1998. In the first quarter of 1999, the
Home ESOP sold a sufficient number of shares to repay the ESOP debt. Shares
remaining in the Home ESOP after repayment of the ESOP debt (48,840) were
allocated to Home ESOP participants, resulting in an additional merger-related
charge of $598,291.
Additional employment severance payments, not recorded as of December
31, 1999, or 1998, and ranging from $835,000 to $1,100,000, may be incurred
should five certain Home employees who have contractual severance arrangements
all choose to terminate their employment with the Company prior to December 15,
2000. The actual amount of expense incurred, if any, is dependent upon the
number of these employees choosing to terminate their employment with the
Company and the point in time at which this election is made. The amount of
payment actually paid to any one of these five employees will be reduced by the
applicable employee's pro rata monthly salary multiplied by the number of months
between the merger date (December 15, 1998) and the month in which the employee
notifies the Company of his/her desire to terminate their employment. The
Company will recognize any expense resulting from these severance agreements as
additional merger-related charges in the period notification is received from
one of these Home employees. The Company has received no notice from the
employees that they intend to terminate their employment with the Company.
Details of the merger-related costs follow:
1999 1998
- - --------------------------------------------------------------------------------
Legal, accounting and professional fees $ - $ 2,638,342
RRP termination - 3,148,773
Severance - 1,297,498
Other - 833,000
Home ESOP termination 598,291 -
- - --------------------------------------------------------------------------------
$ 598,291 $ 7,917,613
================================================================================
Of the $7,917,613 in merger-related charges recognized in 1998,
$7,517,477 was actually paid during 1998, and the remaining $400,136 was paid in
1999.
On September 8, 1998, the Company completed its acquisition of Lokken,
Chesnut and Cape, LLC, an asset management firm located in La Crosse, Wisconsin.
The Company purchased the outstanding common stock of LCC in exchange for
113,241 shares of its common stock valued at $21.19 per share on the transaction
date. An additional 28,310 shares of common stock may be issued on January 31,
2002, subject to LCC meeting or exceeding certain operating performance targets
in 1999, 2000, and 2001. Such additional shares will be recorded as an
adjustment of the purchase price. The acquisition was recorded as a purchase. 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 as a purchase.
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 years ended
December 31, 1999, and 1998, was approximately $6,363,000 and $4,169,000,
respectively.
30
<PAGE>
4. Investment Securities
<TABLE>
The amortized cost and estimated fair values of investments in debt securities follow:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- - --------------------------------------------------------------------------------------------------------
Held-to-Maturity
December 31, 1999:
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $ 702,824 $ 10,743 $ (23,401) $ 690,166
Obligations of state and political
subdivisions 2,130,359 52,446 (4) 2,182,801
Other securities 500,000 100 (6,980) 493,120
- - --------------------------------------------------------------------------------------------------------
$ 3,333,183 $ 63,289 $ (30,385) $ 3,366,087
========================================================================================================
December 31, 1998:
U.S. Treasury securities and obligations
of U.S. government agencies $ 5,340,509 $ 58,263 $ (5,672) $ 5,393,100
Obligations of state and political
subdivisions 4,449,732 131,333 (823) 4,580,242
Other securities 500,000 11,520 (5,460) 506,060
- - --------------------------------------------------------------------------------------------------------
$ 10,290,241 $ 201,116 $ (11,955) $ 10,479,402
========================================================================================================
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- - --------------------------------------------------------------------------------------------------------
Available-for-Sale
December 31, 1999:
U.S. Treasury securities and obligations
of U.S. government agencies $ 34,070,802 $ 23,012 $ (666,461) $ 33,427,453
Obligations of state and political
subdivisions 38,270,684 17,074 (848,113) 37,439,645
Mortgage-related securities 137,659,412 75,953 (1,936,436) 135,798,929
Other securities 12,738,323 - (802,131) 11,936,192
- - --------------------------------------------------------------------------------------------------------
$222,739,221 $ 116,139 $ 4,253,141 $218,602,219
========================================================================================================
December 31, 1998:
U.S. Treasury securities and obligations
of U.S. government agencies $ 35,859,284 $ 539,153 $ (61,131) $ 36,337,306
Obligations of state and political
subdivisions 26,378,209 544,358 (7,286) 26,915,281
Mortgage-related securities 21,792,307 201,250 (15,178) 21,978,379
Other securities 9,008,946 464,915 - 9,473,861
- - --------------------------------------------------------------------------------------------------------
$ 93,038,746 $1,749,676 $ (83,595) $ 94,704,827
========================================================================================================
</TABLE>
31
<PAGE>
4. Investment Securities (continued)
The amortized cost and estimated fair value of investment securities
at December 31, 1999, 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>
Due in one year or less $ 225,000 $ 227,270 $ 22,539,294 $ 21,714,292
Due after one year through five years 1,322,864 1,307,405 108,095,099 106,387,114
Due after five years through ten years 1,384,235 1,420,803 54,238,886 53,119,992
Due after ten years 401,084 410,609 37,865,942 37,380,821
- - ------------------------------------------------------------------------------------------------------
$3,333,183 $3,366,087 $222,739,221 $218,602,219
======================================================================================================
</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 $3,756,789 and $13,308,960 during 1999 and
1998, respectively. Gross gains of $992,469 and $420,817 were realized on the
1999 and 1998 sales, respectively. No losses were recognized in either 1999 or
1998 on investment security sales. No investment securities were sold during
1997.
1999
-------------------------------------------------------------------------------
Before Tax Net-of-
Tax (Benefit) Tax
Amount Expense Amount
- - --------------------------------------------------------------------------------
Unrealized losses on available-
for-sale securities $(4,810,614) $(1,624,076) $(3,186,538)
Less: reclassification adjustment
for gains realized in net income (992,469) (389,148) (603,321)
- - --------------------------------------------------------------------------------
Net unrealized losses $(5,803,083) $(2,013,224) $(3,789,859)
================================================================================
1998
- - --------------------------------------------------------------------------------
Before Tax Net-of-
Tax (Benefit) Tax
Amount Expense Amount
- - --------------------------------------------------------------------------------
Unrealized gains on available-
for-sale securities $ 744,785 $ 297,070 $ 447,715
Less: reclassification adjustment
for gains realized in net income (420,817) (165,002) (255,815)
- - --------------------------------------------------------------------------------
Net unrealized gains $ 323,968 $ 132,068 $ 191,900
================================================================================
1997
- - --------------------------------------------------------------------------------
Before Tax Net-of-
Tax (Benefit) Tax
Amount Expense Amount
- - --------------------------------------------------------------------------------
Unrealized gains on available-
for-sale securities $ 1,246,423 $ 420,897 $ 825,526
Less: reclassification adjustment
for gains realized in net income 649 254 395
- - --------------------------------------------------------------------------------
Net unrealized gains $ 1,247,072 $ 421,151 $ 825,921
================================================================================
At December 31, 1999 and 1998, investment securities with a carrying
value of $28,100,518 and $25,430,899, respectively, were pledged as collateral
to secure public deposits and for other purposes.
32
<PAGE>
5. Loans
A summary of loans outstanding at December 31, 1999 and 1998, follows:
1999 1998
---------------------------------------------------------------
Commercial $129,470,314 $ 56,675,361
Consumer 62,179,613 37,518,890
Real estate mortgage 498,534,986 504,933,663
Other 10,913,472 11,394,609
---------------------------------------------------------------
$701,098,385 $610,522,523
===============================================================
6. Allowance for Loan Losses
Changes in the allowance for loan losses for the three years ended
December 31, 1999, are as follows:
1999 1998 1997
- - --------------------------------------------------------------------------------
Balance at beginning of year $ 4,484,504 $ 4,370,209 $ 3,552,378
Allowance from acquired bank 2,228,482 - 678,235
Provision for loan losses 750,000 690,000 450,000
Charge-offs (1,163,057) (799,609) (381,037)
Recoveries 605,051 223,904 70,633
- - --------------------------------------------------------------------------------
Net charge-offs (558,006) (575,705) (310,404)
- - --------------------------------------------------------------------------------
Balance at end of year $ 6,904,980 $ 4,484,504 $ 4,370,209
================================================================================
Total nonaccrual loans were $3,961,527 and $3,245,065 at December 31,
1999 and 1998, 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, 1999, and 1998, to such related parties were approximately
$23,581,000 and $13,542,000, respectively. During 1999, approximately
$12,994,000 of new loans were made and repayments totaled approximately
$2,955,000. Loans to related parties are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility.
8. Premises and Equipment
A summary of premises and equipment at December 31, 1999 and 1998, is
as follows:
1999 1998
-----------------------------------------------------------------
Buildings $21,094,892 $14,000,208
Furniture and equipment 20,752,279 12,063,683
Leasehold improvements 2,961,262 2,385,413
-----------------------------------------------------------------
44,808,433 28,449,304
Less accumulated depreciation (26,747,777) (17,751,796)
Land 4,758,691 2,635,861
-----------------------------------------------------------------
$22,819,347 $13,333,369
=================================================================
9. Federal Home Loan Bank and Other Borrowings
Federal Home Loan Bank advances and other borrowings at December 31
are summarized as follows:
1999 1998
- - --------------------------------------------------------------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
- - --------------------------------------------------------------------------------
2004 $ 27,500,000 5.54% $ - -%
2008 20,000,000 5.02 - -
Open line of credit 14,000,000 4.74 25,000,000 5.13%
Total FHLB advances 61,500,000 5.19 25,000,000 5.13
Notes Payable 39,958,609 7.47 6,750,000 6.94
Securities sold under
agreement to repurchase 15,733,809 6.25 4,116,677 4.74
Federal funds purchased 12,400,000 5.63 - -
- - --------------------------------------------------------------------------------
Total $129,592,418 6.06% $35,866,677 5.43%
================================================================================
At December 31, 1999, and 1998, advances from the Federal Home Loan
Bank totaled $61,500,000 and $25,000,000, respectively.
33
<PAGE>
9. Federal Home Loan Bank and Other Borrowings (continued)
The Company has a collateral pledge agreement whereby it agrees to
keep on hand, free of all other pledges, loans and encumbrances, performing
loans with unpaid principal balances aggregating no less than 167% of the
outstanding secured advances. All stock in the Federal Home Loan Bank of Chicago
is also pledged as additional collateral for advances.
The Company has a $40,000,000 line of credit available through April
30, 2000, at 90-day LIBOR plus 1.35%. Outstanding advances under this line
totaled $39,958,609 and $6,750,000 at December 31, 1999 and 1998, respectively.
The Company also has Federal funds purchased and securities sold under
repurchase agreements. Federal funds purchased generally mature within one to
four days from the transaction date. Securities sold under agreements to
repurchase are entered into with customers and nationally recognized securities
dealers. Securities sold under agreements to repurchase can have varying
maturities. In exchange for the loan, the Company pledges designated collateral,
which consists generally of investment securities, to the customer or securities
dealer.
10. Deposits
Remaining contractual maturities of time deposits for the years 2000
through 2004 and thereafter are $217,047,000, $45,433,000, $13,743,000,
$13,489,000 and $10,552,000, respectively.
11. 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. Home employees became eligible to participate in the plan upon
consummation of the business combination. Home employees received full credit
for service with Home for purposes of eligibility and are treated as new hires
for purposes of vesting. 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 $269,425 in 1999, $128,965 in 1998 and $150,334 in 1997. Plan assets
are invested in a diversified portfolio of high-quality debt and equity
investments.
The Company sponsors a 401(k) savings plan which covers all full-time
employees who have completed one year of service and are at least 21 years old.
Home employees became participants of the plan upon consummation of the merger
and received credit for prior service for purposes of eligibility and vesting.
Company contributions are discretionary. The Company has not made any
contributions for 1999, 1998 or 1997.
The Company 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
committed. 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.
In addition, Home had an ESOP formed in September 1996. The Home ESOP
covered substantially all Home employees age 21 or over with at least 1,000
hours of service. The Home ESOP borrowed $5,607,400 from Home Bancorp and
purchased 512,516 common shares. Home committed to make discretionary
contributions to the Home ESOP sufficient to meet debt service requirements of
the loan over a period of ten years.
On December 15, 1998, in connection with the merger of Home Bancorp
with the Company, common shares held by the Home ESOP were converted into an
equivalent number of shares of State Financial using the merger exchange ratio
of .914 per share. As discussed in Note 2, in 1999, the Home ESOP sold a
sufficient number of shares to repay the ESOP debt (314,025). The remaining
48,840 shares held by the Home ESOP were allocated to Home ESOP participants.
During the years ended December 31, 1998, and 1997, 85,587 and 51,252 shares
were allocated, respectively. Subsequent to the Home ESOP debt repayment the
Home ESOP was merged into the Company 401(k) plan.
The aggregate activity in the number of unearned ESOP shares follows:
1999 1998 1997
- - --------------------------------------------------------------------------------
Balance at beginning of year $445,696 $545,976 $550,658
Shares committed to be released 70,195 100,280 64,682
Additional shares purchased - - 60,000
- - --------------------------------------------------------------------------------
Balance at end of year $375,501 $445,696 $545,976
================================================================================
At December 31, 1999, the fair value of unearned ESOP shares is
$4,506,012. Total ESOP expense recognized for the years ended December 31, 1999,
1998 and 1997, was $269,535, $1,069,000 and $932,000, respectively.
Recognition and Retention Plan (RRP)
On April 17, 1997, Home adopted an RRP. The fair value of the Home
Bancorp shares on the grant date is amortized to compensation expense as Home's
employees and directors become vested in those shares. Shares vested at a rate
of 20% per year with the first vesting period ending May 1, 1998.
As provided for under the plan provisions, all RRP shares granted
became fully vested on November 5, 1998, the date the shareholders of Home
Bancorp approved Home Bancorp's merger with the Company. The accelerated vesting
resulted in additional compensation expense of $3,148,773 for the year ended
December 31, 1998, which is classified as part of the merger-related charges.
For the years ended December 31, 1998 and 1997, RRP expense totaled $3,898,481
and $599,766, respectively. All shares which were granted under the RRP were
distributed to employees during the year ended December 31, 1998.
34
<PAGE>
12. 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 for Wisconsin and a combined
state return for Illinois.
Significant components of the provision for income taxes attributable
to continuing operations are as follows:
1999 1998 1997
- - --------------------------------------------------------------------------------
Current:
Federal $3,647,997 $ 2,890,595 $3,537,080
State 561,000 591,000 581,000
- - --------------------------------------------------------------------------------
4,208,997 3,481,595 4,118,080
Deferred (credit):
Federal 26,000 (1,205,000) (133,000)
State 98,000 (296,000) (24,000)
- - --------------------------------------------------------------------------------
124,000 (1,501,000) (157,000)
- - --------------------------------------------------------------------------------
$4,332,997 $ 1,980,595 $3,961,080
================================================================================
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,
1999, and 1998, are as follows:
1999 1998
- - --------------------------------------------------------------------------------
Deferred tax assets:
Federal net operating loss carryforward $ 131,000 $ 169,000
State net operating loss carryforward 598,000 330,000
Allowance for loan loss 732,000 -
Unrealized loss on investment securities 1,892,000 -
Accumulated depreciation 460,000 -
Recognition and Retention Plan - 1,399,000
Unearned income 237,000 265,000
Deferred loan fees 144,000 304,000
Other 668,000 378,000
- - --------------------------------------------------------------------------------
4,862,000 2,845,000
Valuation allowance for deferred tax assets (672,000) (491,000)
- - --------------------------------------------------------------------------------
Net deferred tax assets 4,190,000 2,354,000
Deferred tax liabilities:
FHLB dividends $ 157,000 $ 157,000
Accumulated depreciation - 49,000
Allowance for loan losses - 79,000
Unrealized gain on investment securities - 585,000
Other 866,000 397,000
- - --------------------------------------------------------------------------------
Total deferred tax liabilities 1,023,000 1,267,000
- - --------------------------------------------------------------------------------
Net deferred tax asset $3,167,000 $1,087,000
================================================================================
The income tax expense differs from that computed at the federal
statutory corporate tax rate as follows:
1999 1998 1997
- - --------------------------------------------------------------------------------
Income before income taxes $11,765,479 $3,137,508 $11,177,885
Income tax expense at the
federal statutory rate $ 4,117,918 $1,066,753 $ 3,800,515
Increase (decrease) resulting from:
Tax-exempt interest income (600,000) (532,000) (322,000)
State income taxes, net of
federal income tax benefit 429,000 195,000 367,569
Nondeductible merger-related
expenses 228,000 932,000 -
Goodwill amortization 486,000 291,000 -
Increase (decrease) in valuation
allowance for deferred
tax assets (35,000) (35,000) 39,000
Other (292,921) 62,842 75,996
- - --------------------------------------------------------------------------------
$ 4,332,997 $1,980,595 $ 3,961,080
================================================================================
At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $334,000 and state net operating loss
carryforwards of approximately $11,929,000. The federal net operating loss
carryforwards and $334,000 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 2000 through 2014.
Retained earnings at December 31, 1999, and 1998, include $4,798,000
for which no provision for federal income tax has been made. Home qualified
under provisions of the Internal Revenue Code that permitted it to deduct from
taxable income an allowance for bad debts that differed from the provision for
losses charged to income for financial reporting purposes. If income taxes had
been provided, the deferred tax liability would have been approximately
$1,800,000.
13. 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, 1999, the Banks had net retained earnings of
$5,217,787, 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, 1999, 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.
35
<PAGE>
13. Restrictions on Subsidiaries' Dividends, Loans or Advances
(continued)
The Office of Thrift Supervision (OTS) imposes limitations upon all
capital distributions by savings institutions, including cash dividends. An
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution (Tier 1 Association), and has not been
advised by the OTS that it is in need of more than normal supervision, could,
after prior notice but without the approval of the OTS, make capital
distributions during a calendar year up to the higher of (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its surplus capital ratio (the excess capital over its fully phased-in
capital requirements) at the beginning of the calendar year; or (ii) 75% of its
net income over the most recent four-quarter period. Any additional capital
distributions would require prior regulatory approval. The OTS has the ability
to object to a capital distribution notice on safety and soundness grounds.
14. Stockholders' Equity
On July 27, 1999, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a Right) for each outstanding
share of common stock, $.10 par value, of the Company. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Class A Preferred Stock, $1 par value (the Preferred Shares), of the Company at
a price of $70 per one one-thousandth of a Preferred Share, subject to
adjustment. The Rights are not exercisable until the earlier to occur of (i) a
public announcement that a person or group of affiliated or associated persons
has acquired beneficial ownership of 15% or more of the outstanding Common
Shares or (ii) ten business days following the commencement of, or announcement
of an intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of 15% or
more of such outstanding Common Shares. The Rights will expire on July 27, 2009.
Each Preferred Share will be entitled to a minimum preferential quarterly
dividend payment of $10 per share but will be entitled to an aggregate dividend
of 1,000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $1,000 per share but will be entitled to an
aggregate payment of 1,000 times the payment made per Common Share.
Each Preferred Share will have 1,000 votes, voting together with the
Common Shares. Finally, in the event of any merger, consolidation or other
transaction in which Common Shares are exchanged, each Preferred Share will be
entitled to receive 1,000 times the amount received per Common Share. These
rights are protected by customary antidilution provisions. Because of the nature
of the Preferred Shares' dividend, voting and liquidation rights, the value of
the one one-thousandth interest in a Preferred Share purchasable upon exercise
of each Right should approximate the value of one Common Share.
15. Financial Instruments With Off-Balance-Sheet Risk
Loan commitments are made to accommodate the financial needs of the
Company's customers. Standby letters of credit commit the Company to make
payments on behalf of customers when certain specified future events occur. Both
arrangements have credit risk essentially the same as that involved in extending
loans to customers and are subject to the Company's normal credit policies.
Collateral is obtained based on management's credit assessment of the customer.
The Company's maximum exposure to credit loss for loan commitments
(unfunded loans and unused lines of credit) and standby letters of credit
outstanding at December 31, 1999, were $86,592,000 and $4,439,000, respectively.
All such arrangements expire in 2000. Loan commitments and standby letters of
credit were $63,343,000 and $1,360,000, respectively, at December 31, 1998.
16. 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 $517,500, $453,583 and
$563,720 in 1999, 1998 and 1997, 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, 1999:
2000 $ 476,000
2001 436,000
2002 437,250
2003 434,000
2004 419,000
Thereafter 1,402,000
---------------------------------
$ 3,604,250
=================================
Minimum rentals for 2000 include $106,000 relative to space used by
the Banks which is leased from a partnership, two partners of which are also
directors of the Company.
17. Regulatory Capital
The Company and subsidiary Banks are subject to various regulatory
capital requirements administered by state and federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company and subsidiary Banks'
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and subsidiary Banks must
meet specific capital guidelines that involve quantitative measures of the
Company and subsidiary Banks' assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company and
subsidiary Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsidiary Banks to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes, as of
December 31, 1999, that the Company and subsidiary Banks meet all capital
adequacy requirements to which they are subject.
36
<PAGE>
17. Regulatory Capital (continued)
As of December 31, 1999, 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 and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institutions' category.
The Company and subsidiary Banks' actual, minimum and well-capitalized
capital amounts and ratios are also presented in the table (dollars in
thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions Actual
- - -------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- - -------------------------------------------------------------------------------------------------------
As of December 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets):
Consolidated $50,984 8% $63,730 10% $103,187 16.2%
State Financial Bank 18,070 8 22,588 10 25,791 11.4
State Financial Bank - Waterford 3,341 8 4,176 10 4,485 10.7
State Financial Bank - Illinois 4,073 8 5,092 10 7,404 14.5
Home Federal Savings 16,850 8 21,062 10 66,085 31.4
Bank of Northern Illinois 8,408 8 10,510 10 15,866 15.1
Tier I Capital
(to Risk Weighted Assets):
Consolidated 25,492 4 38,238 6 96,282 15.1
State Financial Bank 9,035 4 13,553 6 23,542 10.4
State Financial Bank - Waterford 1,670 4 2,506 6 3,962 9.5
State Financial Bank - Illinois 2,037 4 3,055 6 6,766 13.3
Home Federal Savings 8,425 12,637 6 64,806 30.8
Bank of Northern Illinois 4,204 4 6,306 6 14,544 13.8
Tier I Capital
(to Average Assets):
Consolidated 42,706 4 53,382 5 96,282 9.0
State Financial Bank 11,940 4 14,926 5 23,542 7.9
State Financial Bank - Waterford 2,296 4 2,870 5 3,962 6.9
State Financial Bank - Illinois 3,162 4 3,953 5 6,766 8.6
Home Federal Savings 16,052 4 20,065 5 64,806 16.1
Bank of Northern Illinois 8,953 4 11,192 5 14,544 6.5
As of December 31, 1998
Total Capital
(to Risk Weighted Assets):
Consolidated $41,674 8% $52,092 10% $128,371 24.6%
State Financial Bank 15,908 8 19,885 10 24,951 12.5
State Financial Bank - Waterford 2,950 8 3,687 10 4,348 11.8
State Financial Bank - Illinois 3,732 8 4,665 10 6,933 14.9
Home Federal Savings 18,046 8 22,558 10 73,604 32.6
Tier I Capital
(to Risk Weighted Assets):
Consolidated 20,837 4 31,255 6 123,897 23.8
State Financial Bank 7,954 4 11,931 6 22,888 11.5
State Financial Bank - Waterford 1,475 4 2,212 6 3,886 10.5
State Financial Bank - Illinois 1,866 4 2,799 6 6,349 13.6
Home Federal Savings N/A N/A 13,535 6 72,425 32.11
Tier I Capital
(to Average Assets):
Consolidated 32,538 4 40,673 5 123,896 15.2
State Financial Bank 11,174 4 13,968 5 22,889 8.2
State Financial Bank - Waterford 2,103 4 2,628 5 3,887 7.4
State Financial Bank - Illinois 3,133 4 3,916 5 6,370 8.1
Home Federal Savings 11,502 3 19,170 5 72,425 18.9
</TABLE>
37
<PAGE>
18. Stock Plans and Options
At the Annual Shareholders Meeting held on May 13, 1998, the
shareholders approved the 1998 Stock Incentive Plan allowing for the grant of
restricted stock incentive stock options and nonqualified options to officers,
directors and key consultants of the Company (the 1998 Plan). The 1998 Plan
replaced previous similar 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.
On April 17, 1997, Home adopted a stock option plan (Home Plan)
pursuant to which Home's board of directors may grant stock options to
directors, officers and employees of Home. Substantially all options were
granted in 1997. The exercise price is equal to the fair market value of the
common stock at the date of grant, and the option term cannot exceed ten years.
On December 15, 1998, in connection with the merger of Home with State
Financial, all common stock options under the plan became fully vested and were
converted into an equivalent number of options to purchase shares of State
Financial using the merger exchange ratio of .914 per share. On an adjusted
basis, options to purchase 640,645 shares were authorized under the Home Plan.
A summary of all 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 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 - - (23,240) 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 21.87 646,712 14.15 - 21.87 647,312
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 - 21.87 717,359 3.85 - 21.87 719,531
Granted - - 7,000 15.53 7,000
Vested restricted stock (519) 22.00 - - (519)
Exercised - - (22,637) 4.23 - 14.15 (22,637)
Canceled - - (774) 8.11 - 13.03 (774)
- - ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 1,653 22.00 700,948 3.85 - 21.87 702,601
Granted 1,500 15.69 2,950 15.69 4,450
Vested restricted stock - - - - -
Exercised - - (15,167) 4.23 - 13.03 (15,167)
Canceled - - (1,361) 13.03 - 15.53 (1,361)
- - ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 3,153 $22.00 687,370 $3.85 - $21.87 690,523
============================================================================================================
</TABLE>
At December 31, 1999, the weighted-average remaining contractual life
of outstanding options was seven years at a weighted-average exercisable price
of $15.78 per share.
19. 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.
38
<PAGE>
19. Fair Values of Financial Instruments (continued)
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 Commercial Paper
The carrying amounts reported in the balance sheet for cash, federal
funds sold and other short-term investments approximate those assets' fair
values.
Investment Securities
Fair values for investment securities are based on quoted market
prices, where available.
Loans Receivable
For variable-rate mortgage loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for commercial real estate loans and fixed-rate mortgage, consumer
and other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Deposits
The fair values disclosed for interest and noninterest checking
accounts, savings accounts and money market accounts are, by definition, equal
to the amount payable on demand at the reporting date (i.e., their carrying
amounts). The fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities of the outstanding certificates of deposit.
Securities Sold Under Agreement to Repurchase and Federal Funds
Purchased
The carrying amounts of securities sold under agreement to repurchase
and federal funds purchased approximate their fair value.
Accrued Interest Receivable and Payable
The carrying amounts reported in the balance sheet for accrued
interest receivable and payable approximate their fair values.
Notes Payable
The carrying values of the Company's notes payable approximate fair
value.
Federal Home Loan Bank Advances
The fair value of FHLB advances is estimated using a discounted cash
flow calculation that applies rates quoted by the FHLB as of the measurement
date to a schedule of aggregate contractual maturities of such liabilities at
such date.
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
- - ----------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 51,710,232 $ 51,710,232 $ 31,028,203 $ 31,028,203
Interest-bearing bank balances 7,128,225 7,128,225 29,793,241 29,793,241
Federal funds sold 945,576 945,576 8,508,387 8,508,387
Commercial paper - - 12,900,000 12,900,000
Investment securities 221,935,401 221,968,305 104,995,068 105,184,229
Loans 701,098,385 688,364,567 610,522,523 612,190,282
Accrued interest Loans held
for sale 48,002,714 48,002,714 1,910,881 1,910,881
Deposits 847,050,564 847,864,552 652,904,886 656,566,765
Accrued interest receivable 5,810,538 5,810,538 4,485,332 4,485,332
Notes payable 39,958,609 39,958,609 6,750,000 6,750,000
Securities sold under agreement
to repurchase 15,733,809 15,733,809 4,116,677 4,116,677
Federal funds purchased 12,400,000 12,400,000 25,000,000 25,000,000
Accrued interest payable 2,193,555 2,193,555 1,688,290 1,688,920
Federal Home Loan Bank advances 61,500,000 61,500,000 25,000,000 25,000,000
====================================================================================================
</TABLE>
39
<PAGE>
20. Segment Information
Description of Reportable Segments
The Company evaluates segment performance for each subsidiary bank,
which is differentiated primarily by geographic location. The Company has five
reportable segments: State Financial Bank (Wisconsin), State Financial Bank in
Waterford; State Financial Bank (Illinois), Home Federal Savings and Loan
Association of Elgin and Bank of Northern Illinois, N.A. Each Bank provides a
full range of retail and commercial banking services. Additionally, State
Financial Bank (Illinois) provides insurance brokerage services. Home provides
primarily one- to four-family residential mortgage lending funded by retail
deposits.
Measurement of Segment Profit or Loss
Management evaluates the after-tax performance of each of the
subsidiary banks based on that bank's actual earning assets, nonearning assets
and funding sources. Each subsidiary bank has its own net interest income,
provision for loan losses, other income, noninterest expense and income tax
provision as captured by the bank's accounting systems. The accounting policies
of the reportable segments are the same as those disclosed on the summary of
significant accounting policies. The "all other" category includes primarily the
results of the parent company. Intercompany and other amounts, which are
included in "all other," are not material.
Segment Profit and Loss Statements and Other Information
The following tables contain profit (loss) statements for each of the
subsidiary banks for the years ended December 31, 1999, and 1998:
<TABLE>
<CAPTION>
Year ended December 31, 1999
- - ------------------------------------------------------------------------------------------------------------------------------------
Home Federal
State State Savings and
State Financial Financial Loan Bank of
Financial Bank - Bank - Association Northern
Bank Waterford Illinois of Elgin Illinois, N.A. All Other Consolidated
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 21,292,893 $ 3,910,039 $ 5,482,698 $ 26,812,935 $ 7,262,465 $ 856,210 $ 65,617,240
Interest expense 8,185,662 1,748,478 2,576,102 13,668,256 3,335,889 617,655 30,132,042
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 13,107,231 2,161,561 2,906,596 13,144,679 3,926,576 238,555 35,485,198
Provision for loan losses 300,000 30,000 240,000 120,000 60,000 - 750,000
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 12,807,231 2,131,561 2,666,596 13,024,679 3,866,576 238,555 34,735,198
Other income 3,680,885 358,517 857,372 1,256,140 1,003,566 836,686 7,993,166
Merger-related charges - - - - - - -
Other noninterest expense 10,101,826 1,852,483 3,367,506 9,682,224 4,080,659 1,878,187 30,962,885
- - ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 6,386,290 637,595 156,462 4,498,595 789,483 (802,946) 11,765,479
Income taxes 1,932,419 184,190 167,423 1,785,082 478,972 (215,089) 4,332,997
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,453,871 $ 453,405 $ (10,961) $ 2,813,513 $ 310,511 $ (587,857) 7,432,482
====================================================================================================================================
Total assets $305,294,734 $58,183,639 $79,204,160 $411,152,903 $228,187,449 $8,001,456 $1,090,024,341
====================================================================================================================================
<CAPTION>
Year ended December 31, 1998
- - --------------------------------------------------------------------------------------------------------------------
Home Federal
State State Savings and
State Financial Financial Loan
Financial Bank - Bank - Association
Bank Waterford Illinois of Elgin All Other Consolidated
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 20,935,463 $ 3,823,423 $ 6,240,364 $ 26,562,628 $ 24,960 $ 57,586,838
Interest expense 8,591,552 1,841,284 3,496,908 11,876,189 116,657 25,922,590
- - --------------------------------------------------------------------------------------------------------------------
Net interest income 12,343,911 1,982,139 2,743,456 14,686,439 (91,697) 31,644,248
Provision for loan losses 300,000 30,000 240,000 120,000 - 690,000
- - --------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 12,043,911 1,952,139 2,503,456 14,566,439 (91,697) 30,974,248
Other income 3,669,152 400,772 1,223,697 1,138,617 532,490 6,964,728
Merger-related charges 222,830 - - 6,834,058 860,725 7,917,613
Other noninterest expense 9,248,979 1,736,632 3,731,499 11,566,242 600,503 26,833,855
- - --------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 6,241,254 616,279 (4,346) (2,695,244) (1,020,435) 3,137,508
Income taxes 1,994,411 198,192 95,526 (230,043) (77,491) 1,980,595
- - --------------------------------------------------------------------------------------------------------------------
Net income $ 4,246,843 $ 418,087 $ (99,872) $ (2,465,201) $ (942,944) $ 1,156,913
====================================================================================================================================
Total assets $279,299,451 $60,856,396 $83,346,810 $397,382,333 $ 7,483,533 $828,368,523
====================================================================================================================================
</TABLE>
40
<PAGE>
21. State Financial Services Corporation (Parent Company Only)
Financial Information
Financial statements of the Company at December 31, 1999 and 1998, and
for the three years ended December 31, 1999, follow:
BALANCE SHEETS
December 31,
- - --------------------------------------------------------------------------------
1999 1998
- - --------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,242,495 $ 14,608,694
Investments:
Available-for-sale 3,964,294 3,927,711
Held-to-maturity 100,000 100,000
Investment in State Financial Bank (Wisconsin) 22,939,443 23,462,124
Investment in State Financial Bank - Waterford 5,072,511 5,231,692
Investment in State Financial Mortgage Company 402,626 344,305
Investment in State Financial Bank - Illinois 11,850,454 12,392,445
Investment in Home Federal Savings and
Loan Association 64,793,588 72,424,604
Investment in Bank of Northern Illinois, N.A. 32,749,039 -
Investment in Lokken, Chestnut & Cape 2,228,736 2,362,175
Loans receivable from subsidiaries 241,886 4,207,063
Recoverable income taxes 3,172,931 2,643,893
Fixed assets 189,843 173,309
Other assets 1,315,559 478,992
- - --------------------------------------------------------------------------------
Total assets $150,263,505 $142,357,007
Liabilities
Accrued expenses and other liabilities $ 637,343 $ 969,728
Notes payable 39,958,609 6,750,000
Shareholders' equity
Common stock 1,009,269 1,007,602
Additional paid-in capital 94,923,187 94,153,564
Retained earnings 46,812,497 43,748,273
Accumulated other comprehensive income (2,709,310) 1,080,549
Unearned shares held by ESOP (5,131,608) (5,352,709)
Unearned shares acquired by Recognition
and Retention Plan - -
Treasury stock (25,236,482) -
- - --------------------------------------------------------------------------------
Total shareholders' equity 109,667,553 134,637,279
- - --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $150,263,505 $142,357,007
================================================================================
41
<PAGE>
21. State Financial Services Corporation (Parent Company Only)
Financial Information (continued)
STATEMENTS OF INCOME
Year ended December 31,
- - --------------------------------------------------------------------------------
1999 1998 1997
- - --------------------------------------------------------------------------------
Income:
Dividends $ 19,300,000 $ 4,575,000 $ 4,225,000
Interest 682,157 1,387,670 2,179,353
Management fees 1,404,738 1,161,625 781,870
Other 780,540 431,402 36,260
- - --------------------------------------------------------------------------------
22,167,435 7,555,697 7,222,483
Expenses:
Interest 1,160,430 130,222 120,283
Other 2,492,910 9,650,631 3,049,862
- - --------------------------------------------------------------------------------
3,653,340 9,780,853 3,170,145
- - --------------------------------------------------------------------------------
Income (losses) before
income tax credit and
equity in undistributed
net income of subsidiaries 18,514,095 (2,225,156) 4,052,338
Income (taxes) credit 273,166 1,528,092 33,988
- - --------------------------------------------------------------------------------
18,787,261 (697,064) 4,086,326
Equity in undistributed net
income (excess of net income
of subsidiaries over dividends) (11,354,779) 1,853,977 3,130,479
- - --------------------------------------------------------------------------------
Net income $ 7,432,482 $ 1,156,913 $ 7,216,805
- - --------------------------------------------------------------------------------
42
<PAGE>
21. State Financial Services Corporation (Parent Company Only)
Financial Information (continued)
STATEMENTS OF CASH FLOWS
Year ended December 31,
- - --------------------------------------------------------------------------------
1999 1998 1997
- - --------------------------------------------------------------------------------
Operating activities
Net income $ 7,432,482 $ 1,156,913 $ 7,216,805
Adjustments to reconcile net
income to net cash provided
by operating activities.
Equity in undistributed income 11,354,779 (1,853,977) (3,130,479)
Provision for depreciation 70,110 52,236 60,285
Increase in recoverable income
taxes (529,038) (1,965,548) (48,892)
Accretion of discounts - - (210,166)
Cost of Recognition and
Retention Plan stock - 3,898,481 599,767
Realized investment securities
losses (gains), net (739,095) (399,104) 649
Other (340,523) 903 (157,259)
- - --------------------------------------------------------------------------------
Net cash provided by operating
activities 17,248,715 889,904 4,330,710
Investing activities
Purchase of investment securities - - -
Maturities of investment securities - - 26,150,000
Purchases of securities available
for sale (6,498,828) (3,390,024) (395,548)
Maturities of securities available
for sale 2,810,092 - 1,550,000
Sale of securities available for
sale 3,196,977 1,294,466 979,915
Decrease (increase) in loans
receivable from subsidiaries 3,965,077 699,412 560,740
Retirement of Home ESOP (3,970,077) - -
Purchase of premises and equipment (86,644) (114,485) (24,463)
Acquisition of subsidiaries (33,686,273) (2,243,609) (10,865,462)
Additional investment in
subsidiaries (343,209) (1,407,711) (100,000)
- - --------------------------------------------------------------------------------
Net cash provided (used) by
investing activities (34,612,885) (5,342,009) 17,855,182
Financing activities
Proceeds (repayment) of notes
payable 33,208,609 2,850,000 2,938,156
Decrease (increase) in guaranteed
ESOP obligation 221,101 96,855 (1,033,222)
Cash dividends (4,368,257) (5,291,432) (3,591,252)
Purchased Recognition and Retention
Plan stock - - (4,498,248)
Purchase of treasury stock (25,236,482) (3,287,456) (2,469,602)
Issuance of common stock in
acquisition - 2,410,199 -
Proceeds from exercise of stock
options 173,000 239,653 344,126
- - --------------------------------------------------------------------------------
Net cash provided (used) by
financing activities 3,997,971 (2,982,181) (8,280,042)
- - --------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (13,366,199) (7,434,286) 13,905,850
Cash and cash equivalents at
beginning of year 14,608,694 22,042,980 8,137,130
- - --------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 1,242,495 $14,608,694 $ 22,042,980
================================================================================
43
<PAGE>
Investor Information
Market Price and Dividends for Common Stock
At March 10, 2000, there were approximately 1,416 shareholders of
record and 3,779 estimated additional beneficial shareholders for an approximate
total of 5,195 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 13 to
the Consolidated Financial Statements for information concerning restrictions on
the payment of dividends. Although the Company has regularly paid dividends
since its inception in 1984, there can be no assurance that such dividends will
be paid in the future.
The following table sets forth the historical market price of and
dividends declared with respect to Common Stock since January 1, 1998. All
figures have been restated to give effect to the 6 for 5 stock split declared in
January 1998 as if it had occurred as of January 1, 1998.
Price Cash
Quarter Ended High Low Dividend
- - --------------------------------------------------------------------------------
March 31, 1998 $ 29.27 $ 25.75 $ 0.12
June 30, 1998 26.00 20.94 0.12
September 30, 1998 23.50 15.50 0.12
December 31, 1998 20.00 14.75 0.12
March 31, 1999 $ 15.13 $ 12.00 $ 0.12
June 30, 1999 16.00 11.63 0.12
September 30, 1999 17.50 14.56 0.12
December 31, 1999 16.63 10.88 0.12
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, 1999 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 3, 2000, at the
Tuckaway Country Club, 6901 West Drexel Avenue, Franklin, WI.
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
1555 North RiverCenter Drive
Milwaukee, WI 53212
(800) 637-7549
(414) 276-3737
44
<PAGE>
State Financial Services Corporation
Directors
Michael J. Falbo - President and CEO
Jerome J. Holz - Chairman of the Board
Richard A. Horn
Ulice Payne, Jr.
Thomas S. Rakow
David M. Stamm
Barbara E. Weis
Officers
Linda L. August - Auditor
Beth J. Bahr - Vice President, Human Resources Officer
John B. Beckwith - Senior Vice President
Donna M. Bembenek - Vice President and Director of Marketing
Donald J. Buechler - Loan Review Officer
Carl R. Cecelia - Vice President, Audit, Loan Review, and Compliance
Christopher M. Hefter - Information Systems Officer
Annette F. Esteves - Assistant Vice President and
Assistant Controller
Michael J. Falbo - President and Chief Executive Officer
Jerome J. Holz - Chairman of the Board and Vice President
Philip F. Hudson - Senior Vice President
Melanie M. Murphy - Assistant Vice President and
Assistant Controller
Michael A. Reindl - Senior Vice President, Controller and Chief
Financial Officer; Secretary/Treasurer
Daniel L. Westrope - Senior Vice President
Andrea Williamson - Compliance Officer
Banking Subsidiaries
State Financial Bank (Wisconsin)
Directors
Bruce Arbit
John B. Beckwith, President
Michael J. Falbo, Vice Chairman & CEO
Michael Green
Jerome J. Holz, Chairman of the Board
Richard A. Horn
Philip F. Hudson,
Roger H. Kriete
Peyton A. Muehlmeier
Robert R. Spitzer
David M. Stamm
Judith Stathas
Barbara E. Weis
State Financial Bank (Wisconsin) continued
Directors Emeritus
Gordon Banerian
Dr. Charles Wilson
Cyril Zvonar
Office Locations
Brookfield (262) 789-9003
Glendale (414) 351-7400
Greenfield (414) 281-2500
Hales Corners (414) 425-1600
Milwaukee/University (414) 961-5800
Muskego (262) 679-2800
Waukesha (262) 544-1750
State Financial Bank - Waterford
Directors
Michael J. Falbo
Jerome J. Holz
Frances M. Koukol
Thomas M. Lilly, President and CEO
Gary Schildt
Robert R. Spitzer, Chairman of the Board
Director Emeritus
Charles M. Noll
Office Locations
Burlington (262) 763-9955
Elkhorn (262) 742-1600
Waterford (262) 534-3151
State Financial Bank (Illinois)
Directors
Susan J. Dubs, President
Ronald S. Erdmann
Bruce Everly
Michael J. Falbo
Jerome J. Holz
Philip Hudson, Chairman of the Board and CEO
Daniel L. Westrope
Charles F. Wonderlic
Office Locations
Richmond (815) 678-2461
Libertyville (847) 680-1077
45
<PAGE>
Home Federal Savings and Loan
Association of Elgin
Directors
Michael J Falbo, Chairman of the Board
Orval M. Graening
Henry R. Hines
Jerome J. Holz
Donald E. Laird
Leigh C. O'Connor
Thomas S. Rakow
Richard S. Scheflow
Daniel L. Westrope, President and CEO
Office Locations
Bartlett (630) 830-3434
Crystal Lake (815) 459-5880
Elgin (847) 742-3800
Roselle (630) 893-0020
South Elgin (847) 741-9555
Bank of Northern Illinois N.A.
Directors
Jay Burgess
Michael J. Falbo, Chairman of the Board
Robert Franz
Barbara Gordon
Jerome J. Holz
Philip F. Hudson, Vice Chairman
John Moulis
Frank Mynard, President & CEO
Office Locations
Waukegan (847) 623-3800
Gurnee (847) 623-3800
Libertyville (847) 623-3800
Glen Oak (847) 724-9000
Glenview (847) 724-9000
Other Subsidiaries
State Financial Investments Inc.
John B. Beckwith, President
Gary R. Dunham, Vice President
Telephone (847) 587-4710
State Financial Insurance Agency
Daniel L. Westrope, President
Leon M. Johnson, Vice President
Telephone (414) 525-3148
State Financial Mortgage Company
Thomas M. Lilly, President
Lokken, Chesnut, & Cape
Jeffrey M. Lokken, CEO
James C. Naleid, President
Paul H. Robinson, Secretary/Treasurer
Telephone (800) 658-9423
Deposits in State Financial Bank, State Financial Bank - Waterford, State
Financial Bank (Illinois), Home Federal Savings and Loan Association of Elgin
and Bank of Northern Illinois, N.A. are FDIC insured up to $100,000.
EXHIBIT 21
SUBSIDIARIES OF STATE FINANCIAL SERVICES CORPORATION
State of
Subsidiary Name Incorporation
State Financial Bank (Wisconsin) 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
State Financial Bank (Illinois) (3) Illinois
State Financial Insurance Agency (4) Wisconsin
Richmond Financial Services, Inc. (3) Illinois
Lokken Chesnut & Cape Minnesota
Home Federal Savings & Loan Association of Elgin Illinois
Bank of Northern Illinois, N. A. Illinois
State Financial Funding Corporation (5) Nevada
State Financial Real Estate Investment Corporation (6) Wisconsin
- - -----------------------------------
(1) Subsidiary of State Financial Bank
(2) Subsidiary of State Financial Bank - Waterford
(3) Subsidiary of Richmond Bancorp, Inc.
(4) Subsidiary of Richmond Bank
(5) Subsidiary of Bank of Northern Illinois, N. A.
(6) Subsidiary of State Financial Funding Corporation
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following
documents of our report dated January 21, 2000, with respect to the consolidated
financial statements of State Financial Services Corporation incorporated by
reference in the Annual Report (Form 10-K) for the year ended December 31, 1999:
o Registration Statement (Form S-8 No. 333-69563) pertaining to the
State Financial Services Corporation 401 (k) Savings Plan.
o Registration Statement (Form S-8 No. 333-69565) pertaining to the
State Financial Services Corporation 1998 Stock Incentive Plan.
/s/ Ernst & Young, LLP
Chicago, Illinois
March 29, 2000
Independent Auditor's Report
The Board of Directors
Home Federal Savings and loan
Association of Elgin, Inc.
Elgin, Illinois:
We have audited the balance sheet of Home Federal Savings and Loan Association
of Elgin (the Association) as of December 31, 1998, and the related statements
of operations, stockholder's equity, and cash flows for the year ended December
31, 1998 (not presented separately herein). These financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Home Federal Savings
and Loan Association of Elgin as of December 31, 1998, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG, LLP
January 29, 1999
Independent Auditor's Report
The Board of Directors
Home Bancorp of Elgin, Inc.
Elgin, Illinois:
We have audited the consolidated statements of earnings, stockholders' equity,
and cash flows of Home Bancorp of Elgin, Inc. and subsidiary (the Company) for
the year ended December 31, 1997 (not presented separately herein). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Home Bancorp of Elgin, Inc. and subsidiary for the year ended December 31, 1997
in conformity with generally accepted accounting principles.
/s/ KPMG, LLP
Chicago, Illinois
January 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 51,710,232
<INT-BEARING-DEPOSITS> 7,128,225
<FED-FUNDS-SOLD> 945,576
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 218,602,218
<INVESTMENTS-CARRYING> 3,333,183
<INVESTMENTS-MARKET> 3,366,087
<LOANS> 749,101,099
<ALLOWANCE> 6,904,980
<TOTAL-ASSETS> 1,090,024,341
<DEPOSITS> 847,050,564
<SHORT-TERM> 89,633,809
<LIABILITIES-OTHER> 3,713,806
<LONG-TERM> 39,958,609
1,009,269
0
<COMMON> 0
<OTHER-SE> 108,658,284
<TOTAL-LIABILITIES-AND-EQUITY> 1,090,024,341
<INTEREST-LOAN> 54,631,410
<INTEREST-INVEST> 10,596,869
<INTEREST-OTHER> 388,961
<INTEREST-TOTAL> 65,617,240
<INTEREST-DEPOSIT> 25,873,922
<INTEREST-EXPENSE> 30,132,042
<INTEREST-INCOME-NET> 35,485,198
<LOAN-LOSSES> 750,000
<SECURITIES-GAINS> 992,469
<EXPENSE-OTHER> 30,962,885
<INCOME-PRETAX> 11,765,479
<INCOME-PRE-EXTRAORDINARY> 11,765,479
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,432,482
<EPS-BASIC> 0.80
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 4.16
<LOANS-NON> 4,737,000
<LOANS-PAST> 14,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 562,000
<ALLOWANCE-OPEN> 4,484,504
<CHARGE-OFFS> 1,163,056
<RECOVERIES> 605,049
<ALLOWANCE-CLOSE> 6,904,979
<ALLOWANCE-DOMESTIC> 6,904,979
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
