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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1747461
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3545 SOUTH KINNICKINNIC AVENUE, MILWAUKEE, WISCONSIN 53235-3700
- ------------------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(414) 744-8600
--------------
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
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 Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [ X ] No [ ] (2) Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of November 29, 1996, there were issued and outstanding 5,371,064
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the average of the bid and ask price of such stock as of November 29, 1996, was
$117.8 million. Soley for the purposes of this calculation, all executive
officers and directors of the Registrant are considered to be affiliates; also
included as "affilliate shares" are certain shares held by various employee
benefit plans where the trustees are directors of the Registrant or are
required to vote a portion of unallocated shares at the direction of executive
officers or directors of the Registrant. The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the Registrant that such person is an affiliate of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for the 1997
Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
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FORM 10-K TABLE OF CONTENTS
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PAGE
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<S> <C> <C> <C>
PART I
ITEM 1 - BUSINESS 3
ITEM 2 - PROPERTIES 35
ITEM 3 - LEGAL PROCEEDINGS 37
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 37
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS 38
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA 39
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 41
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 60
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 91
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 91
ITEM 11 - EXECUTIVE COMPENSATION 91
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 91
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 91
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 91
SIGNATURES 94
</TABLE>
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PART I
FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K or future filings with the
Securities and Exchange Commission, in quarterly reports or press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, various words or phrases are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include words and phrases such as "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions and various other statements indicated herein with an
asterisk after such statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made, and to advise readers that various factors could affect
the Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected. Such factors
include, but are not limited to: (i) general market rates, (ii) general
economic conditions, (iii) legislative/regulatory changes, (iv) monetary and
fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the
quality or composition of the Company's loan and investment portfolios, (vi)
demand for loan products, (vii) deposit flows, (viii) competition, (ix) demand
for financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
ITEM 1. BUSINESS
GENERAL
St. Francis Capital Corporation (the "Company") is a multi-bank holding company
incorporated under the laws of the State of Wisconsin and is engaged in the
financial services business through its wholly-owned subsidiaries, St. Francis
Bank, F.S.B. (the "Bank"), a federally-chartered stock savings bank, and Bank
Wisconsin ("Bank Wisconsin"), a state-chartered commercial bank. In June 1993,
the Bank converted from a federally-chartered mutual savings institution to a
stock savings institution. As part of the conversion, the Company acquired all
of the outstanding common stock of the Bank. In November 1994, the Company
completed the acquisition of the stock of Valley Bank East Central in Kewaskum,
Wisconsin as well as the deposits and certain assets of the Hartford, Wisconsin
branch of Valley Bank Milwaukee. The acquired bank offices were combined as a
commercial bank named Bank Wisconsin. The Company has reached a definitive
agreement to acquire Kilbourn State Bank, a state-chartered commercial bank
headquartered in Milwaukee, Wisconsin. The acquisition is currently expected
to be completed in early 1997.
The Bank is headquartered in Milwaukee, Wisconsin. Its deposits are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF"),
administered by the Federal Deposit Insurance Corporation ("FDIC"). Originally
chartered in 1923, the Bank serves southeastern Wisconsin with a network of
twelve full-service, two limited service and two loan production offices. Bank
Wisconsin is headquartered in Kewaskum, Wisconsin. Its deposits are insured up
to applicable limits by the Bank Insurance Fund ("BIF"), also administered by
the FDIC. Bank Wisconsin serves southeastern Wisconsin with three full service
offices.
The Company's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from other
operations, primarily to originate mortgage, consumer and other loans within
its primary market areas and to invest in mortgage-backed and related
securities. Primary areas of lending include single-family, multi-family
residential mortgages, home equity lines of credit, second mortgages,
commercial real estate and commercial loans. The Company also purchases
single-family mortgage loans, either by directly purchasing individual loans
from other local mortgage lenders or by purchasing pools of single-family
mortgage loans originated by other non-local lenders and secured by properties
located outside the State of Wisconsin. The Company also invests a significant
portion of its assets in mortgage-backed and related securities, and to a
lesser extent, invests in debt and equity securities, including U.S. Government
and federal agency securities, short-term liquid assets and other marketable
securities. The Company's revenues are derived
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principally from interest on its loan portfolio, interest on mortgage-backed
and related securities and interest and dividends on its debt and equity
securities. The Company's principal sources of funds are from deposits,
including brokered deposits, repayments on loans and mortgage- backed and
related securities and advances from the Federal Home Loan Bank - Chicago
("FHLB").
MARKET AREA AND COMPETITION
The Company offers a variety of deposit products, services and mortgage loan
offerings primarily within the metropolitan Milwaukee area. The Company's main
office is located at 3545 South Kinnickinnic Avenue, Milwaukee, Wisconsin. The
Company's primary market area consists of Milwaukee and Waukesha counties, and
portions of Ozaukee, Washington, Walworth and Kenosha counties. With the
exception of the downtown Milwaukee branch office, all full service branches of
the Bank are located in areas that generally are characterized as residential
neighborhoods, containing predominantly one- and two-family residences.
The Company has significant competition in its mortgage, consumer and
commercial lending business, as well as in attracting deposits. The Company's
competition for loans is principally from other thrift institutions, savings
banks, mortgage banking companies, insurance companies and commercial banks.
However, its most direct competition for deposits historically has come from
other thrifts, savings banks, commercial banks and credit unions. The Company
has faced additional competition for funds from a number of institutions,
including the availability of short-term money market funds and other corporate
and government securities funds offered by other financial service companies,
such as brokerage firms and insurance companies.
LENDING ACTIVITIES
GENERAL
The Company's largest component of the gross loan portfolio, which totaled
$668.7 million at September 30, 1996, was first mortgage loans secured by
owner-occupied one- to four-family residences. At September 30, 1996, one- to
four-family mortgage loans totaled $270.6 million or 40.5% of gross loans. Of
the total one- to four-family mortgage loans, $ 210.2 million or 77.7% were
ARMs. Of the remaining loans held at September 30, 1996, 15.4% of gross loans
were in multi-family mortgage loans, 15.0% of gross loans were in consumer
loans, 13.5% of gross loans were home equity loans, and the balance were in
residential construction, commercial real estate, commercial and agricultural
production loans. As part of its strategy to manage interest rate risk, the
Company originates primarily ARM loans or fixed rate loans which have shorter
maturities for its own loan portfolio. However, the Company also offers longer
term fixed rate mortgage loans, many of which are sold immediately in the
secondary market.
The Company has been actively growing its loan portfolio which in addition to
its traditional one- to four-family lending, includes consumer, commercial,
multi-family and commercial real estate lending. The Company will continue to
attempt to diversify its loan portfolio through lending efforts in all of the
above categories. Areas of lending other than one- to four-family generally
have higher levels of credit risk and higher yields than one- to four-family
lending. In addition, the Company may purchase loans in the above categories
in addition to originating the loans on its own. Purchased loans involve
different types of underwriting than loans originated directly by the Company
and as such represent a different level of risk.
Levels of originations of various lending categories may vary from year-to-year
and result from levels of interest rates, market demand for loans and emphasis
by the Company to various types of loans. The Company will adjust its lending
emphasis occasionally in accordance with its view of the relative returns and
risks available at that time in each category of lending. Although there is
likely to be activity in all areas in which the Company makes loans in any
given year, the amount will vary given the above factors.
COMPOSITION OF LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated.
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<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------------------
Percent Percent Percent
Amount of Total Amount Of Total Amount Of Total
--------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 270,614 40.5% $ 209,140 39.3% $178,700 38.6%
Residential construction 32,249 4.8% 25,277 4.8% 60,048 13.0%
Multi-family 103,262 15.4% 93,756 17.6% 95,019 20.5%
Commercial real estate 46,391 6.9% 28,277 5.3% 18,347 4.0%
Home equity 90,579 13.5% 80,159 15.1% 66,031 14.2%
--------- ----- --------- ----- -------- -----
543,095 81.1% 436,609 82.1% 418,145 90.3%
Consumer loans:
Interim financing and installment 88,236 13.2% 69,038 13.0% 34,554 7.5%
Education 12,142 1.8% 12,833 2.4% 10,113 2.2%
--------- ----- --------- ----- -------- -----
100,378 15.0% 81,871 15.4% 44,667 9.7%
Commercial and agriculture 25,177 3.9% 13,608 2.5%
--------- ----- --------- ----- -------- -----
Gross loans receivable 668,650 100.0% 532,088 100.0% 462,812 100.0%
===== ===== =====
Less:
Mortgage loans held for sale 20,582 1,138 2,978
Loans in process 29,631 10,903 26,015
Unearned discounts and
deferred loan fees 1,874 2,081 2,351
Allowance for loan losses 5,217 4,076 3,435
Other 647 582 280
--------- -------- --------
Loans receivable, net $ 610,699 $513,308 $427,753
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
1993 1992
--------------------- --------------------
Percent Percent
Amount of Total Amount Of Total
--------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 145,730 39.9% $ 171,971 51.8%
Residential construction 49,004 13.4% 11,245 3.4%
Multi-family 61,215 16.8% 43,431 13.1%
Commercial real estate 19,381 5.3% 20,407 6.2%
Home equity 65,597 17.9% 63,713 19.2%
--------- ----- --------- -----
340,927 93.3% 310,767 93.7%
Consumer loans:
Interim financing and installment 15,124 4.1% 12,207 3.7%
Education 9,430 2.6% 8,837 2.6%
--------- ----- --------- -----
24,554 6.7% 21,044 6.3%
Commercial and agriculture - - - -
--------- ----- --------- -----
Gross loans receivable 365,481 100.0% 331,811 100.0%
===== =====
Less:
Mortgage loans held for sale 10,043 18,394
Loans in process 24,872 8,840
Unearned discounts and
deferred loan fees 2,855 3,320
Allowance for loan losses 3,204 3,181
Other 120 112
--------- ---------
Loans receivable, net $ 324,387 $ 297,964
========= =========
</TABLE>
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The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the years indicated. Mortgage
loans held for sale are included in the totals.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period $ 436,609 $ 418,145 $ 340,927
Mortgage loans originated:
One- to four-family 97,565 29,350 113,205
Residential construction 31,320 14,866 65,795
Multi-family 29,310 3,306 49,973
Commercial real estate 14,935 7,295 900
Home equity 65,104 54,549 52,495
--------- --------- ---------
Total mortgage loans originated 238,234 109,366 282,368
Mortgage loans purchased:
One- to four-family 56,230 28,805 -
--------- --------- ---------
Total mortgage loans originated and purchased 294,464 138,171 282,368
Transfer of mortgage loans to real estate owned (103) (5,960) (148)
Principal repayments (125,315) (86,993) (115,040)
Sales of mortgage loans:
Exchanged for mortgage-backed securities - (1,988) (76,565)
Cash sales (62,560) (24,766) (13,397)
--------- --------- ---------
Total sales of loans (62,560) (26,754) (89,962)
--------- --------- ---------
At end of period $ 543,095 $ 436,609 $ 418,145
========= ========= =========
Consumer loans (gross):
At beginning of period $ 81,871 $ 44,667 $ 24,554
Loans originated 61,378 41,444 35,896
Loans purchased 12,786 37,379 4,188
Transfer of consumer loans to repossessed assets (23) - -
Principal repayments (40,532) (26,358) (19,971)
Loans sold (15,102) (15,261) -
--------- --------- ---------
At end of period $ 100,378 $ 81,871 $ 44,667
========= ========= =========
Commercial and agricultural loans (gross):
At beginning of period $ 13,608 $ - -
Loans originated 14,034 8,765 -
Loans purchased 3,736 10,721 -
Principal repayments (6,201) (5,878) -
--------- --------- ---------
At end of period $ 25,177 $ 13,608 -
========= ========= =========
</TABLE>
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LOAN MATURITY AND REPRICING
The following table shows the maturity of the Company's loan portfolio at
September 30, 1996. The table does not include prepayments or scheduled
principal amortization. Prepayments and scheduled principal amortization on
mortgage loans totaled $125.3 million, $87.0 million and $115.0 million for the
years ended September 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
At September 30, 1996
----------------------------------------------------------------------------------------
One- to Commercial Gross
Four- Multi- Commercial Home and Loans
Family (1) Family (1) Real Estate Equity Consumer Agriculture Receivable
---------- ----------- ----------- --------- ------------ ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 130,158 $ 57,608 $ 19,310 $ 89,829 $ 45,062 $ 18,409 $ 360,376
After one year:
One to three years 99,236 17,228 8,419 750 11,063 5,250 141,948
Three to five years 28,415 25,880 10,143 - 16,595 1,388 82,420
Over five years 45,054 2,546 8,519 - 27,658 130 83,906
---------- ----------- ----------- --------- ------------ ----------- ----------
Total due after one year 172,705 45,654 27,081 750 55,316 6,768 308,274
---------- ----------- ----------- --------- ------------ ----------- ----------
Total amounts due 302,863 103,262 46,391 90,579 100,378 25,177 668,650
Less:
Mortgage loans held for sale (20,582) - - - - - (20,582)
Loans in process (29,631) - - - - - (29,631)
Unearned discounts, premiums
and deferred loan fees, net (1,068) (847) - - (606) - (2,521)
Allowance for loan losses (957) (840) (593) (449) (2,128) (250) (5,217)
---------- ----------- ----------- --------- ------------ ----------- ----------
Loans receivable, net $ 250,625 $ 101,575 $ 45,798 $ 90,130 $ 97,644 $ 24,927 $ 610,699
========== =========== =========== ========= ============ =========== ==========
</TABLE>
(1) Includes some residential construction lending.
The following table sets forth at September 30, 1996 the dollar amount of all
loans and mortgage-backed and related securities due after September 30, 1997,
and whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due after September 30, 1997
-----------------------------------------
Fixed Adjustable Total
------------- ------------ ------------
<S> <C> <C> <C>
(In thousands)
Mortgage loans:
One- to four-family (1) $ 62,089 $ 110,616 $ 172,705
Multi-family (1) 27,517 18,137 45,654
Commercial real estate 16,322 10,759 27,081
Home equity 750 - 750
Consumer loans 44,131 11,185 55,316
Commercial and agriculture 6,768 - 6,768
------------- ------------ ------------
Gross loans receivable 157,577 150,697 308,274
Mortgage-backed and related securities 188,183 404,529 592,712
------------- ------------ ------------
Gross loans receivable and mortgage-
backed and related securities $ 345,760 $ 555,226 $ 900,986
============= ============ ============
</TABLE>
(1) Includes some residential construction lending.
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ONE- TO FOUR-FAMILY MORTGAGE LENDING
A significant portion of the Company's lending activity is the origination of
first mortgage loans secured by one- to four-family, owner occupied residences
within the Company's primary market area. Long-term 15- and 30- year
fixed-rate loans are generally originated to be sold in the secondary market as
are five and seven year balloon loans. Shorter-term ARM loans are originated
both for sale in the secondary market and for the Company's loan portfolio. In
addition, loans made under special loan terms or programs, principally
originated within the purposes of the Community Reinvestment Act of 1977, as
amended ("CRA") are retained for the Company's own loan portfolio. The Company
follows FNMA underwriting guidelines for most one- to four-family mortgage
loans.
The lending policy of the Company generally allows for mortgage loans to be
made in amounts of up to 100% of the appraised value of the real estate to be
mortgaged to the Company. Loans that are to be sold in the secondary market
are made at 80% or less of appraised value under underwriting guidelines of the
major mortgage secondary market makers. Loans retained in the Company's
portfolio are made at levels of up to 100% of appraised value and may have
private mortgage insurance or no mortgage insurance in some cases. With
respect to those loans made at levels of up to 100% of appraised value, other
underwriting criteria, such as debt service ability and credit history are
given greater emphasis than lending involving lower loan to value ratios. In
addition, loans with higher loan to value ratios generally are made at higher
interest rates than other loans and may have a higher level of risk of default.
The Company makes loans under various governmental programs including the
Federal Housing Authority ("FHA"), the federal and state Veterans
Administration ("VA"), the Wisconsin Housing and Economic Development Authority
("WHEDA") and other City of Milwaukee-sponsored mortgage loan programs, and
sells these loans. See "-Loan Sales and Purchases."
Included in mortgage loans held by the Company as part of its loan portfolio
are ARM loans. Current one-year ARM loans typically adjust by a maximum of two
percentage points per year with a lifetime cap approximating six percentage
points above the interest rate established at the origination date of the ARM
loan. Monthly payments of principal and interest are adjusted when the
interest rate adjusts, in order to maintain full amortization of the mortgage
loan within a maximum 30-year term. The initial rate offered on ARM loans
fluctuates with general interest rate changes, and are determined by secondary
market pricing, competitive conditions and the Company's yield requirements.
Currently, the Company primarily utilizes the one-year Constant Maturity
Treasury rate in order to determine the interest rate payable upon the
adjustment date of its ARM loans outstanding. Most of the ARM loans are
granted with conversion capabilities which provide terms under which the
borrower may convert the mortgage loan to a fixed rate mortgage loan for a
limited period during the early term of the ARM loan. The terms at which the
ARM may be converted to a fixed rate loan are established at the date of loan
origination and are set at a level allowing the Company to immediately sell the
ARM loan at the date of conversion.
The Company offers balloon loan programs under which the interest rate and
monthly payments are fixed for the first five or seven years of the mortgage
loan and, thereafter, provided certain conditions are met, the loan would
adjust to then current rates at the end of the fifth or seventh year, at which
time the loan balance is then amortized for the full remaining term of the
loan, based upon interest rates and appropriate principal and interest payments
then in effect.
At September 30, 1996, the Company had $270.6 million in one- to four-family
mortgage loans or 40.5% of the gross loan portfolio compared with $209.1
million or 39.3% of the portfolio at September 30, 1995. The increase was
largely due to increases in the Company's lending activity that resulted from a
lower level of interest rates during the current year and to the Company's
purchasing of mortgage loans during the year from other loan originators. The
volume of one- to four-family mortgage loans is highly dependent on the
relative levels of interest rates, although the Company has been expanding its
one- to four-family lending capacity which will tend to keep total originations
higher than in prior years with similar interest rate levels. In addition,
one- to four-family lending is subject to numerous competitors which can result
in lower origination totals if the competitors are willing to make loans at
lower rates than the Company.
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RESIDENTIAL CONSTRUCTION LENDING
Residential construction loans are made to individuals who have signed
construction contracts with a home builder. Loan proceeds are disbursed in
increments as construction of the residence progresses. These loans have loan
to value ratios not exceeding 90%. When the loan to value ratio exceeds 80%,
private mortgage insurance is required which insures payment of the principal
balance and reduces the Company's exposure to 75% loan to value or less.
Single family residential loans are structured to allow the borrower to pay
interest only on the funds advanced during the first nine months of the loan.
Thereafter, the borrower is required to begin making principal and interest
payments based on an amortization schedule of 351 months or less. Single family
residential construction loan programs typically offered by the Company are
one- or three-year ARM loans or certain balloon loans amortized over a
351-month period after the nine month interest only period.
The Company does not engage in construction lending for large tract
developments. However, from time to time, the Company will consider multi-
family residential construction lending. The loan to value on these loans does
not exceed 80%. Multi-family construction loans typically offered by the
Company are ARM loans amortized over 348 months after allowing for interest
only payments during a twelve month construction period. Loan proceeds are
advanced in increments as construction of the project progresses.
At September 30, 1996, the Company had $32.2 million in residential
construction mortgage loans or 4.8% of the gross loan portfolio compared with
$25.3 million or 4.8% of the portfolio at September 30, 1995. Much of the
construction lending done by the Company results in a permanent mortgage loan
that is either retained in the mortgage loan portfolio or sold in the secondary
market.
MULTI-FAMILY LENDING
The Company originates multi-family loans which it holds in its loan portfolio.
Over the last five years, the Company has increased its emphasis in
multi-family lending and has offered both adjustable- and fixed-rate loans.
Multi-family loans generally have shorter maturities than one- to four-family
mortgage loans, though the Company will make multi-family loans with terms of
up to 30 years. The rates charged on the Company's fixed rate and ARM
multi-family loans are typically higher than on one- to four-family residential
properties. Multi-family ARM loans typically adjust in a manner similar to
that of the Company's other ARM loans, although generally at a slightly higher
rate. Multi- family loans generally are underwritten in amounts of up to 80%
of the lesser of the appraised value or purchase price of the underlying
property.
At September 30, 1996, the largest aggregate amount of loans outstanding to any
one borrower consisted of a loan to two multi-family projects in Greenfield and
Brookfield, Wisconsin, of $7.6 million. This loan does not exceed the
regulatory "loans to one borrower" limitation at September 30, 1996 of $14.0
million. See "-Regulation." Loans secured by multi-family real estate
generally involve a greater degree of credit risk than one- to four-family
loans and carry larger loan balances. The increased credit risk is the result
of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income- producing properties and the increased difficulty of monitoring these
types of loans.
At September 30, 1996, the Company had $103.3 million in multi-family mortgage
loans or 15.4% of the gross loan portfolio compared with $93.8 million or 17.6%
of the portfolio at September 30, 1995. The Company is continuing its efforts
to increase the amount of the multi-family loans in the portfolio as these
loans generally offer a better interest rate than single-family loans, which it
believes more than offsets the increased credit risk.
COMMERCIAL REAL ESTATE LENDING
The current lending policy of the Company includes originating or purchasing
non-residential mortgage loans on a variety of commercial properties, including
small office buildings, warehouses, small industrial/manufacturing buildings,
motel properties and other improved non- residential properties. At September
30, 1996, the balance of such loans held by the Company was $46.4 million. As
of September 30, 1996, the largest outstanding loan on a commercial real estate
property was $2.0 million on a shopping center located in Waukesha, Wisconsin.
Commercial real estate loans generally are underwritten in amounts up to 75% of
the lesser of the appraised value or purchase price of the underlying property.
However, loans secured by commercial real estate properties still
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involve a greater degree of risk than residential mortgage loans, and payments
on loans secured by commercial real estate are often susceptible to adverse
conditions in the real estate market or the economy.
At September 30, 1996, the Company had $46.4 million in commercial real estate
mortgage loans or 6.9% of the gross loan portfolio compared with $28.3 million
or 5.3% of the portfolio at September 30, 1995. The Company is continuing its
efforts to increase the amount of commercial real estate loans in the portfolio
as these loans generally offer a better interest rate than single-family loans,
which it believes more than offsets the increased credit risk.
HOME EQUITY LENDING
The Company has increased its emphasis in originating home equity loans secured
by one- to four-family residences within its primary market area. These loans
currently are originated with an interest rate indexed to the prime rate and
adjustable monthly. The home equity loans are revolving lines of credit which
are granted for a five-year term, renewable at the sole discretion of the
Company for additional five-year periods. The maximum amortization to repay
home equity loans is based on 1.5% of the outstanding balance. Typically, an
origination fee is charged upon the origination of the loan and an annual
service fee is charged thereafter. Home equity lines of credit may be made at
up to a 100% loan-to-value level including any outstanding prior liens against
the property which serves as collateral for the mortgage loan. For loans over
80% loan-to-value, the Company may obtain private mortgage insurance. The
Company is usually in a second lien position on home equity loans. At
September 30, 1996, the Company held $90.6 million in home equity loans or
13.5% of the gross loan portfolio compared with $80.2 million or 15.1% of the
portfolio at September 30, 1995. Home equity loans offer the Company an asset
that adjusts with current rates of interest for the management of its interest
rate risk.
CONSUMER LENDING
The Company has been expanding its consumer lending portfolio because higher
yields can be obtained, there is strong consumer demand for such products, and
the Company historically has experienced relatively low delinquency and few
losses on such products except for potential losses on sub-prime auto loans.
Management also believes that offering consumer loan products helps to expand
and create stronger customer relationships. At September 30, 1996, consumer
loans totaled $100.4 million or 15.0% of gross loans compared to $81.9 million
or 15.4% of gross loans at September 30, 1995.
The Company originates a variety of secured consumer loans, including home
improvement loans, automobile loans, educational loans, fixed term installment
loans and interim financing loans, as well as loans secured by savings accounts
and unsecured loans. Consumer loan terms vary according to the type of
collateral, term of the loan and creditworthiness of the borrower.
During fiscal year 1995 and through January 1996, the Company purchased
sub-prime automobile loans originated throughout the United States under a
warehouse financing agreement. The intent was to warehouse the loans until the
originator could originate sufficient quantities to securitize the loans to
sell to institutional investors. The loans were serviced by an independent
third party servicer and had various levels of insurance and also guaranties
from the originator. The level of delinquencies and defaults on these loans
increased significantly during fiscal 1996 and the Company ceased making such
loans. The Company currently has no intent to enter into any similar
arrangement but does intend to continue to originate or purchase automobile
loans in its primary market areas. The increase in non-performing consumer
loans was primarily the result of the purchased sub-prime automobile loans.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of unsecured or secured by rapidly depreciating assets
such as automobiles. In such case, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such a loan.
10
<PAGE> 11
At September 30, 1996, the Company had $100.4 million in consumer loans or
15.0% of the gross loan portfolio compared with $81.9 million or 15.4% of the
portfolio at September 30, 1995. The increase in the portfolio has been
primarily in the area of fixed term installment loans the Company makes that
are secured by second mortgages in residential properties.
COMMERCIAL AND AGRICULTURE LENDING
The Company originates a variety of commercial and agriculture loans, including
inventory and receivable financing, equipment loans, agriculture production
loans and interim financing loans, as well as loans secured by corporate or
farm assets and unsecured loans. Commercial and agriculture loans involve a
greater degree of risk than most other types of loans, and payments on
commercial and agriculture loans are often susceptible to adverse employment
and economic conditions. At September 30, 1996, commercial and agriculture
loans totaled $25.2 million. The Company anticipates commercial and
agriculture lending to continue to increase as management believes this type of
lending is an important component of a balanced loan portfolio.
At September 30, 1996, the Company had $25.2 million in commercial loans or
3.9% of the gross loan portfolio compared with $13.6 million or 2.5% of the
portfolio at September 30, 1995. Beginning with the purchase of Bank
Wisconsin, the Company has begun to build a commercial loan portfolio as one of
the components of its loan portfolio.
CREDIT ENHANCEMENT PROGRAMS
The Company has entered into an agreement whereby, for an initial and annual
fee, it would guarantee payment of an industrial revenue bond issue ("IRB").
The IRB was issued by a municipality to finance real estate owned by a third
party. The Company has not pledged any collateral for purposes of this
agreement. At September 30, 1996, the amount of the IRB for which the Company
has guaranteed payment was $4.2 million.
LOAN SALES AND PURCHASES
SALE OF MORTGAGE LOANS
The Company makes loans under various governmental programs including FHA, VA,
WHEDA and other City of Milwaukee-sponsored mortgage loan programs. All loans
made under the various governmental agency programs are underwritten to and
must meet all requirements of the appropriate city, state or federal agency.
Most of the Company's loans granted under governmental agency programs are sold
either to secondary market purchasers of such loans or, in the case of WHEDA
loans, sold directly to WHEDA, all on a non-recourse basis. Except for loans
sold to WHEDA, servicing of the loans is typically released to the purchaser of
such loans. For the year ended September 30, 1996, the Company originated $6.7
million of loans under these various governmental programs.
In recent years the Company has sold a significant amount of its originated
residential mortgage loans to secondary marketing agencies, principally FNMA,
all on a non-recourse basis. All mortgage loans, upon commitment, are
immediately categorized either as to be held for investment or held for sale.
Mortgage loans originated and sold to the secondary market totaled $60.0
million with gains of $1.1 million for the year ended September 30, 1996, and
totaled $19.1 million with gains of $261,000 for the year ended September 30,
1995. The level of mortgage loan sales is dependent on the amount of sellable
loans being originated by the Company. Depending on factors such as interest
rates, levels of refinancings and competitive factors in the Company's primary
market area, the amount of mortgage loan originations ultimately sold can vary
significantly. Levels of interest rates, competition for loans and a greater
emphasis by the Company resulted in the higher level of one- to four-family
mortgage loans originations for the current fiscal year compared to the prior
year which in turn, resulted in the higher level of gains. The Company is
subject to interest rate risk on fixed rate loans in its pipeline from the
point in time that the rate is locked with the borrower until the actual swap
of the loan and sale of the related security. The Company utilizes various
financial techniques to mitigate such interest rate risk, including short
call/put option strategies, long put options and forward sales commitments.
Any one or all of these strategies may be used depending upon management's
determination of interest rate volatility, the amount of loans currently in the
pipeline and current market conditions for mortgage-backed securities. See
"-Asset/Liability Management Techniques."
11
<PAGE> 12
Loan commitments are issued as soon as possible upon completion of the
underwriting process, and mortgage loans are closed as soon as all title
clearance and other required procedures have been completed. Because of the
frequency of both the issuance of commitments and the scheduled closing dates
of the loans, the amount of loan commitments outstanding will vary. At
September 30, 1996, the Company had outstanding mortgage commitments totaling
$37.2 million.
The Company retains servicing of the majority of mortgage loans sold, receiving
a servicing fee, which represents the difference between the mortgage rate on
the loans sold and the yield at which such loans are sold. The servicing yield
earned by the Company on such transactions is typically between .25% and .50%
of the total balance of the loan serviced. The origination of a high volume of
mortgage loans and the related sales of the loans with servicing retained
provides the Company with additional sources of non-interest income through
loan servicing income and gains on the sales of loans. Mortgage loans serviced
for others totaled $226.8 million at September 30, 1996.
PURCHASE OF MORTGAGE LOANS
During fiscal 1996, the Company began as a regular part of its mortgage lending
activity, purchasing single-family mortgage loans originated in its primary
market area by other lenders, primarily mortgage bankers and brokers. The
types of loans purchased are generally newly originated loans with the same
characteristics as the loans normally originated by the Company in its regular
lending operations. This includes both fixed and adjustable rate mortgage
loans which may or may not be sold in the secondary market. The Company pays a
fee to the originating mortgage banker or broker which is amortized over the
life of the loan for loans retained in the portfolio or which becomes an
adjustment to the gain or loss recognized on loans sold in the secondary
market. The Company maintains the same underwriting standards on these loans as
it does on the loans it originates directly. During the fiscal year ended
September 30, 1996, the Company purchased $15.5 million of loans from other
originators compared to zero loans purchased during fiscal year ended September
30, 1995.
The Company also has purchased pools of single-family loans originated by other
lenders in other parts of the country. The loans purchased have generally been
adjustable rate loans with interest rate adjustment features of one month to
one year and are indexed to both current indexes such as the one-year treasury
or to lagging indexes such as the 11th district cost of funds. The loans are
originated in other parts of the country, primarily California, where
adjustable rate lending is more prevalent. As part of its interest rate risk
management, the Company occasionally purchases adjustable rate assets because
the availability of similar product within its primary market area is limited
and competition for that limited amount may force interest rates to levels
considered too low compared to other available instruments. The Company
generally does not make a significant amount of short-term adjustable rate
loans in its home market. The loan pools that have been purchased generally
have been originated in prior years and have seasoning of one to ten years. Of
the $56.2 million one- to four-family mortgage loans purchased during the year
ended September 30, 1996, $40.7 million were loans secured by properties
located outside the state of Wisconsin. Purchased loans can result in a higher
level of risk due to the Company not being involved in the original lending
process. Efforts taken to mitigate the additional risk include underwriting
efforts by the Company prior to purchase, review of the historical payment and
credit history of the loans being purchased and purchasing the loans with
yields that offer additional yield for the risks taken.
LOAN ORIGINATION, SERVICING AND OTHER FEES
In addition to interest earned on loans, the Company receives income through
fees in connection with loan originations, loan sales, loan modifications, late
payments and for miscellaneous services related to its loans, including loan
servicing. Income from these activities varies from period to period with the
volume and type of loans originated.
In connection with the origination of mortgage loans, the Company typically
charges points for origination, commitment and discounts, and fees for
processing and closing in addition to requiring borrower reimbursement for
out-of-pocket fees for costs associated with obtaining independent appraisals,
credit reports, title insurance, private mortgage insurance and other items.
Since the availability of zero point mortgage loans in recent years, most
borrowers typically accept a slightly higher interest rate and pay zero points.
Commitment fees are paid by the applicant at the time of loan commitment,
whereas the origination and discount fees are paid at time of closing.
12
<PAGE> 13
DELINQUENCIES, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
DELINQUENT LOANS
When a borrower fails to make a required payment by the end of the month in
which the payment is due, the Company generally initiates collection
procedures. The Company will send a late notice, and in most cases,
delinquencies are cured promptly. However, if a loan has been delinquent for
more than 60 days, the Company contacts the borrower directly, to determine the
reason for the delinquency and to effect a cure, and where it believes
appropriate, reviews the condition of the property and the financial position
of the borrower. At that time the Company may (i) accept a repayment program
for the arrearage; (ii) seek evidence of efforts by the borrower to sell the
property; (iii) request a deed in lieu of foreclosure; or (iv) initiate
foreclosure proceedings. When a loan, secured by a mortgage, is delinquent for
three or more monthly installments, the Company generally will initiate
foreclosure proceedings. With respect to delinquencies on FHA, VA or other
governmental loan program mortgage loans, the Company follows the appropriate
notification and foreclosure procedures prescribed by the respective agencies.
On mortgage loans or loan participations purchased by the Company, the Company
receives monthly reports from its loan servicers with which it monitors the
loan portfolio. Based upon servicing agreements with the servicers of the
loan, the Company relies upon the servicer to contact delinquent borrowers,
collect delinquent amounts and initiate foreclosure proceedings, when
necessary, all in accordance with applicable laws, regulations and the terms of
the servicing agreements between the Company and its servicing agents.
NON-PERFORMING ASSETS
Loans are placed on nonaccrual status when, in the judgment of Company
management, the probability of collection of principal or interest is deemed
insufficient to warrant further accrual of interest. The Company discontinues
the accrual of interest on loans when the borrower is delinquent as to a
contractually due principal or interest payment by 90 days or more. When a
loan is placed on nonaccrual status, all of the accrued interest on it is
reversed by way of a charge to interest income. Interest income is recorded on
nonaccrual loans when cash payments of interest are received. Accrual of
interest on a nonaccrual loan is resumed when all contractually past due
payments are current and when management believes the outstanding loan
principal and contractually due interest is no longer doubtful of collection.
Property acquired by the Company as a result of a foreclosure or by deed in
lieu of foreclosure is classified as foreclosed property. Foreclosed property
is recorded at the lower of the unpaid principal balance of the related loan or
the fair market value of the real estate acquired less the estimated costs to
sell the real estate. The amount by which the recorded loan balance exceeds
the fair market value of the real estate acquired less the estimated costs to
sell the real estate is charged against the allowance for loan losses at the
date title is received. Any subsequent reduction in the carrying value of a
foreclosed property, along with expenses incurred to maintain or dispose of a
foreclosed property, is charged against current earnings. At September 30,
1996, the Company had a total of two properties in foreclosed properties with a
carrying value of $80,000. Non-performing assets as of September 30, 1995
included a single $5.7 million multi-family construction loan on a 104-unit
apartment complex. During the year ended September 30, 1996, the property was
sold at a gain of $684,000.
13
<PAGE> 14
Non-performing loans include loans placed on nonaccrual status and troubled
debt restructurings. Non-performing assets include non-performing loans and
foreclosed properties. The following table sets forth non-performing loans and
assets:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Nonaccrual $ 44 $ 296 $ 7,621 $ 1,957 $ 740
Troubled debt restructurings - - - - 1,863
-------- ------- ------- ------- --------
Total non-performing
mortgage loans 44 $ 296 7,621 1,957 2,603
Consumer loans 3,846 136 14 29 27
-------- ------- ------- ------- --------
Total non-performing loans 3,890 432 7,635 1,986 2,630
Foreclosed properties 80 5,833 17 389 557
-------- ------- ------- ------- --------
Total non-performing assets $ 3,970 6,265 $ 7,652 $ 2,375 $ 3,187
======== ======= ======= ======= ========
Total non-performing loans to
gross loans 0.58% 0.08% 1.65% 0.54% 0.79%
Allowance for loan losses to
total non-performing loans 134.11 943.52 44.99 161.33 120.95
Total non-performing assets to
total assets 0.28 0.53 0.75 0.29 0.46
Interest on non-performing loans
on the accrual basis $ 296 $ 34 $ 596 $ 180 $ 213
Actual interest received on
non-performing loans 11 26 315 128 66
-------- ------- ------- ------- --------
Net reduction of interest income $ 285 $ 8 $ 281 $ 52 $ 147
======== ======= ======= ======= ========
</TABLE>
Non-performing assets as of September 30, 1996 included $3.6 million of
purchased auto loans which are past due or in default. The auto loans were
purchased over the past two years under a warehouse financing arrangement the
Company had with the originator of sub-prime automobile loans. The intent of
the financing was to warehouse the loans until the originator could originate
sufficient quantities to securitize the loans and sell to institutional
investors. At that time, the loans would be sold back to the originator. The
loans were serviced by an independent third party servicer and the loans had
various levels of insurance and in addition were guaranteed as to principal and
interest payments by the originator of the loans. The maximum amount that the
Company had outstanding at any point in time was a balance of $14.6 million
during February, 1996. The Company has not funded any loans since that time
and as of September 30, 1996, the balance of the sub-prime auto loans was $7.7
million. Actions have been taken to repossess the collateral on the delinquent
loans and to enforce the guarantee of the originator of these loans; however,
it is anticipated that some portion of these loans will ultimately result in a
charge-off due to the possible inability of the originator to perform under its
guaranty.* In addition, the level of insurance collected on policies paying
for credit losses on the loans has beed lower than anticipated. No significant
charge-offs have occurred through September 30, 1996, as the Company is still
pursuing repossession and disposition of the autos and enforcement of the
guarantee of the originator. An additional $1.0 million in loan loss provision
was taken during the year ended September 30, 1996 and management believes that
the allowance for loan losses is adequate to provide for potential losses based
on current conditions.
Non-performing assets as of September 30, 1995 and 1994 included a single $5.7
million multi-family construction loan on a 104-unit apartment complex. During
the year ended September 30, 1995, the loan was transferred from nonaccrual to
foreclosed properties. The property was sold during 1996 at a gain of
$684,000.
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<PAGE> 15
Most of the Company's loans are secured by one- to four-family properties
located in southeastern Wisconsin. There are no concentrations of loans
exceeding 10% of loans which are not otherwise disclosed as a category of
loans.
CLASSIFICATION OF ASSETS
Federal regulations require that each insured financial institution classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions by regulatory authorities, regulatory examiners have
authority to identify problem assets as Substandard, Doubtful or Loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Company will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, questionable, and there is a high possibility of
loss. An asset classified as Loss is considered uncollectible and of such
little value that continuance as an asset of the Company is not warranted.
Assets classified as Substandard or Doubtful require the Company to establish
prudent general allowances for loan losses. Assets classified as Loss must
either be charged off or must have a specific allowance established for 100% of
the asset classified as a Loss. At September 30, 1996, the Company had assets
classified as Substandard of $6.1 million, $77,000 classified as Doubtful and
none classified as Loss. The amounts in the Substandard classification
primarily consist of the previously discussed sub-prime auto loans and other
real estate-related loans with minor credit concerns. Most of the real
estate-related loans are current as to principal and interest, but have some
weaknesses that are being monitored by the Company.
Except for the aforementioned loans included in non-performing assets, the
classified assets principally consist of residential mortgage or consumer loans
and foreclosed properties. None of these remaining classified assets are
considered to represent either individually or in the aggregate any material
loss to the Company; however, such risk has been considered in establishing the
allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
Under federal regulations, when an insured institution classifies problem
assets as either Substandard or Doubtful, it is required to establish general
allowances for loan losses in an amount deemed prudent by management. In
addition to general valuation allowances, the Company may establish specific
loss reserves against specific assets in which a loss may be realized. General
allowances represent loss allowances which have been established to recognize
the inherent risks associated with lending activities, but which, unlike
specific allowances, have not been allocated to recognize probable losses on
particular problem assets. The Company's determination as to its
classification of assets and the amount of its specific and general valuation
allowances are subject to review by the Company's regulators which can order
the establishment of additional general or specific loss allowances.
The allowance for loan losses is a material estimate that is particularly
susceptible to significant changes in the near term and is established through
a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers, among other matters, the estimated net
realizable value of the underlying collateral, economic conditions, historical
loan loss experience and other factors that warrant recognition in providing
for an adequate loan loss allowance.
15
<PAGE> 16
The following table shows the Company's total allowance for loan losses and the
allocation to the various categories of loans at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
% OF % OF % OF
% OF LOANS IN % OF LOANS IN % OF LOANS IN
TOTAL CATEGORY TOTAL CATEGORY TOTAL CATEGORY
LOANS BY TO TOTAL LOANS BY TO TOTAL LOANS BY TO TOTAL
AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS
------ -------- -------- ------ -------- -------- ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of Allowance:
Mortgage loans:
One- to four-family $ 957 0.32% 45.3% $1,031 0.44% 44.1% $ 718 0.27% 51.6%
Multi-family 840 0.81% 15.4% 957 1.02% 17.6% 2,068 2.07% 20.5%
Commercial real estate 593 1.28% 6.9% 619 2.19% 5.3% 163 0.89% 4.0%
Home equity 449 0.50% 13.5% 504 0.63% 15.1% 259 0.39% 14.2%
------ ------ ------ ------ ------ ------
Total mortgage loans 2,839 81.1% 3,111 82.1% 3,208 90.3%
Consumer 2,128 2.12% 15.0% 789 0.96% 15.4% 227 0.51% 9.7%
Commercial and agriculture 250 0.99% 3.9% 176 1.29% 2.5% - - -
------ ------ ------ ------ ------ ------
Total allowance for loan losses $5,217 100.0% $4,076 100.0% $3,435 100.0%
====== ====== ====== ====== ====== ======
At September 30,
-------------------------------------------------------
1993 1992
--------------------------- --------------------------
% of % of
% of Loans in % of Loans in
Total Category Total Category
Loans by to Total Loans by to Total
Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Breakdown of Allowance:
Mortgage loans:
One- to four-family $ 619 0.32% 53.3% $ 647 0.81% 55.2%
Multi-family 1,252 2.05% 16.8% 1,132 2.61% 13.1%
Commercial real estate 954 4.92% 5.3% 817 4.00% 6.2%
Home equity 251 0.38% 17.9% 431 0.68% 19.2%
------ ------ ------ ------
Total mortgage loans 3,076 93.3% 3,027 93.7%
Consumer 128 0.52% 6.7% 154 0.73% 6.3%
Commercial and agriculture - - - - - -
------ ------ ------ ------
Total allowance for loan losses $3,204 100.0% $3,181 100.0%
====== ====== ====== ======
</TABLE>
16
<PAGE> 17
It is not anticipated that charge-offs during the year ending September 30,
1997 will exceed the amount allocated to any individual category of loans.
Furthermore, there are no material loans about which management is aware that
there exists serious doubts as to the ability of the borrower to comply with
the loan terms, except as disclosed herein. The increase in the amount of the
allowance for loan losses attributable to consumer loans is primarily the
result of the additional $1.0 million loan loss provision taken by the Company
during the year related to the portfolio of sub-prime auto loans.
INVESTMENT ACTIVITIES
GENERAL
The investment policy of the Company, which is established by the Board of
Directors and implemented by the Asset/Liability Committee, is designed
primarily to provide and maintain required liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk and
complement the Company's lending activities. The Company's investment policy
permits investment in various types of liquid assets permissible under OTS
regulations, which include U.S. Treasury obligations, securities of various
federal agencies, certain certificates of deposits of insured banks and savings
institutions, certain bankers' acceptances and the purchase of federal funds.
The Company also invests in investment grade corporate debt and mortgage-backed
securities ("MBS's") and collateralized repurchase agreements, municipal
securities, mortgage mutual funds, collateralized mortgage obligations
("CMO's"), real estate mortgage investment conduits ("REMIC's"), interest-only
stripped securities ("IO's"), principal-only stripped securities ("PO's") and
CMO residuals.
The Company determines the appropriate classification of securities at the time
of purchase and reevaluates such designations as of each statement of condition
date based on regulatory and accounting guidelines. The Company has
incorporated the requirements of those guidelines into the Company's investment
policy and has categorized its investments in three separate categories: (i)
Held to Maturity: debt and mortgage-backed and related securities are
classified as held to maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
carried at amortized cost; (ii) Available for Sale: debt and mortgage-back
and related securities not classified as held to maturity or trading and
marketable equity securities not classified as trading are classified as
available for sale. Available for sale securities are stated at fair value,
with the unrealized gains or losses, net of tax, reported as a separate
component of shareholders' equity; and (iii) Trading: the Company maintains a
separate portfolio of assets which are carried at market value and have been
acquired for short term/trading purposes, to enhance the Company's financial
results, with unrealized gains or losses recognized in current income.
The investment activities of the Company consist primarily of investments in
mortgage-backed and related securities and other debt and equity securities,
consisting primarily of securities issued or guaranteed by the United States
Government or agencies thereof and corporate obligations. Typical investments
include federally sponsored agency mortgage pass-throughs, private issue and
senior-subordinated pass- throughs and federally sponsored agency and private
issue collateralized mortgage obligations.
MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgage loans, the principal and interest
payments on which are passed from the mortgage loan originators through
intermediaries that pool and repackage the participation interest in the form
of securities for sale to investors such as the Company. Such intermediaries
which guarantee the payment of principal and interest to investors can be
government sponsored enterprises such as FHLMC, FNMA and GNMA or private
mortgage security conduits. Mortgage- backed securities issued by government
sponsored enterprises generally increase the quality of the Company's assets by
virtue of the guarantees that back them. When the intermediary is a private
entity, neither the principal or interest on such securities is guaranteed. In
addition, loans that back private mortgage-backed securities generally are
non-conforming loans and consequently have a greater amount of credit risk. In
addition, mortgage-
17
<PAGE> 18
backed securities generally are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
Mortgage-backed securities typically are issued with stated principal amounts
and the securities are backed by pools of mortgage loans that include loans
with interest rates that are within a range and have similar maturities. The
underlying pool of mortgage loans can be composed of either fixed-rate mortgage
loans or ARM loans. Mortgage-backed securities generally are referred to as
participation certificates or pass- through certificates. As a result, the
interest rate risk characteristics of the underlying pool of mortgage loans,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder while the credit risk is not, if guaranteed. The
average life of a mortgage-backed pass-through security is equal to the average
lives of the underlying mortgage loans and is dependent on rates of prepayments
which are significantly influenced by changes in the interest rate environment.
The actual prepayments of the underlying mortgage loans depend upon many
factors, including the type of mortgage loan, the coupon rate, the age of the
mortgage loan, the geographical location of the real estate collateralizing the
mortgage loan and general levels of market interest rates.
CMO's and REMIC's typically are issued by a special purpose entity, which may
be organized in a variety of legal forms, such as a trust, a corporation or a
partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage-related securities. Once combined, the cash
flows can be divided into "tranches" or "classes" of individual securities,
thereby creating more predictable average lives for each security than the
underlying pass-through pools. Accordingly, under this security structure all
principal paydowns from the various mortgage pools are allocated to a
mortgage-related securities' class or classes structured to have priority
until it has been paid off. Thus, these securities are intended to address the
reinvestment concerns associated with mortgage-backed security pass- throughs,
namely that they tend to pay off when interest rates fall.
When purchased by the Company, these securities have credit ratings of A or
better and meet the Federal Financial Institutions Examination Council
definition of low-risk securities. At September 30, 1996, private-issue
mortgage-backed securities, CMO's and REMIC's totaled $570.6 million, 75% of
which had a credit rating of AAA, 18% of which had a credit rating of AA, and
7% of which had a credit rating of A. At September 30, 1995, private-issue
mortgage-backed securities, CMO's and REMIC's totaled $467.1 million, 84% of
which had a credit rating of AAA and 16% of which had a credit rating of AA.
The higher amount of private issue MBS's is a result of the Company's view of
the benefit of higher interest rates generally available on private issue MBS's
versus the additional credit risk associated with such securities in comparison
with agency MBS's. Private issue MBS's and REMIC's have been an integral
component of the Company's plan to increase earning assets by purchasing such
securities and funding them with advances from the Federal Home Loan Bank or
with brokered certificates of deposit. Investment and aggregate investment
limitations and credit quality parameters of each class of investment are
prescribed in the Company's investment policy. The Company performs analyses
on mortgage related securities prior to purchase and on an ongoing basis to
determine the impact on earnings and market value under various interest rate
and prepayment conditions.
At September 30, 1996, the aggregate securities of any single issuer (excluding
securities of the U.S. government and U.S. government agencies and
corporations) did not exceed 10% of the Company's shareholders' equity.
18
<PAGE> 19
COMPOSITION OF THE COMPANY'S MORTGAGE-BACKED AND RELATED SECURITIES PORTFOLIO
Held to Maturity. At September 30, 1996, the Company held $71.4 million in its
mortgage-backed and related securities held to maturity portfolio. The
estimated market value of those securities at that date was $68.4 million. Of
this amount, at September 30, 1996, 100% were fixed rate CMO and REMIC
securities. At September 30, 1996, the mortgage-backed and related securities
held to maturity portfolio represented 5.1% of the Company's total assets
compared to $157.5 million or 13.2% of total assets at September 30, 1995.
During the year, the Company reclassified $88.4 million of securities from
held-to-maturity to available for sale under guidance issued by the Financial
Accounting Standards Board which allowed a one-time reclassification of such
securities.
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's mortgage-backed
and related securities held to maturity at September 30, 1996.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Over one year to Over five years to
five years ten years Over ten years
---------------------- ------------------------- --------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----------- --------- ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Part. Cert.-FNMA $3,040 8.55% - - - -
REMIC's - - $ 486 5.10% $67,906 6.63%
------ ------- -------
$3,040 $ 486 $67,906
====== ======= =======
<CAPTION>
------------------------------------------------
Total
------------------------------------------------
Average
Remaining Estimated Weighted
Years to Carrying Fair Average
Maturity Value Value Yield
--------- ------------ ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Part. Cert.-FNMA 1.7 $ 3,040 $ 3,113 8.55%
REMIC's 22.9 68,392 65,316 6.61%
------- ------- ----
$71,432 $68,429
======= =======
</TABLE>
19
<PAGE> 20
The following table shows the maturity of the Company's mortgage-related
securities portfolio held to maturity at September 30, 1996.
<TABLE>
<CAPTION>
At September 30, 1996
------------------------------------------------------
Total
Mortgage-
Related
FNMAs REMIC's Securities
------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Amounts due:
Within one year $ - $ - $ -
After one year:
One to three years 3,040 - 3,040
Three to five years - - -
Five to ten years - 486 486
Ten to 20 years - 18,180 18,180
Over 20 years - 49,905 49,905
--------- ---------- ---------
Total due after one year 3,040 68,571 71,611
--------- ---------- ---------
Total amounts due 3,040 68,571 71,611
Less:
Unearned premiums and (discounts), net - (179) (179)
--------- ---------- ---------
Total mortgage-related securities, net $ 3,040 $ 68,392 $ 71,432
========= ========== =========
</TABLE>
Available for Sale. At September 30, 1996, the Company had mortgage-backed and
related securities available for sale with a carrying and estimated market
value of $521.3 million or 37.1% of total assets. Of these, $21.3 million were
MBS's issued by various federal agencies, $197.3 million were private issue
MBS's, $301.8 million were REMIC's and CMO's, $842,000 were adjustable rate
mortgage mutual fund investments and $68,000 were CMO residuals. At September
30, 1995, the Company's mortgage-backed and related securities held for sale
were $360.1 million, representing 30.3% of total assets. Of these, $49.0
million were MBS's issued by various federal agencies, $132.2 million were
private issue MBS's, $177.3 million were REMIC's and CMO's, $1.5 million were
adjustable rate mortgage mutual fund investments and $116,000 were CMO
residuals. The Company is utilizing its capital position to increase earning
assets by increasing the level of mortgage-backed and related securities.
During the past year, the emphasis has been on purchasing adjustable rate
private MBS's and adjustable rate REMIC's which the Company views as having
favorable interest rate risk and pricing characteristics in comparison to other
investment alternatives.
Held for Trading. At September 30, 1996, the Company did not have any assets
in its trading portfolio compared with $3.0 million at September 30, 1995. The
trading portfolio of the Company has typically carried various mortgage-backed
or related securities that are purchased for short-term trading profits or
securities that are required to be classified as such by regulatory definition.
The Company may from time to time originate mortgages which were swapped.
These securities are required to be classified as trading securities. The
Company expects to sell mortgage loans by this method in future years and thus
have higher balances in its trading portfolio.
OTHER SECURITIES
The Company invests in various types of liquid assets that are permissible
investments for federally chartered savings associations or state-chartered
commercial banks, including U.S. Treasury obligations, securities of various
federal agencies, certain certificates of deposit of insured banks and savings
institutions, federal funds and, from time to time, repurchase agreements.
Subject to various restrictions applicable to all federally chartered savings
associations or state-chartered commercial banks, the Company also invests its
assets in commercial paper, investment grade corporate debt securities,
20
<PAGE> 21
municipal securities, asset-backed securities and mutual funds, the assets of
which conform to the investments the Company is otherwise authorized to make
directly. Debt and equity securities are classified as either
available-for-sale or held-to-maturity at the time of purchase and carried at
market value if available-for-sale or at amortized cost if held-to-maturity.
The Company's current investment policy permits purchases only of investments
rated investment grade by a nationally recognized rating agency and does not
permit purchases of securities of non-investment grade quality.
COMPOSITION OF THE COMPANY'S SECURITIES PORTFOLIO
Held to Maturity. At September 30, 1996, the Company had debt and equity
securities with a carrying value of $3.2 million and an estimated market value
of $3.2 million. Of the total, $1.2 million were state and municipal
obligations and $2.0 million were corporate notes. The Company purchases debt
and equity securities that are in the top three investment grades (A or better)
at the time that the investment is made.
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's investment
securities at September 30, 1996. The yields on the municipal securities
represent their taxable-equivalent yield.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Over one year to Over five years to
Less than one year five years ten years
------------------------ ----------------------- ----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Corporate notes and bonds $ 1,991 5.36% - - -
State and municipal obligations - - $ 373 6.47% $ 811 6.11%
-------- ------- -------
$ 1,991 $ 373 $ 811
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Over ten years Total
----------------------- -----------------------------------------------------
Average
Weighted Remaining Estimated Weighted
Carrying Average Years to Carrying Fair Average
Value Yield Maturity Value Value Yield
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Corporate notes and bonds - - 0.2 $ 1,991 $ 2,001 5.36%
State and municipal obligations - - 5.8 1,184 1,217 6.22%
-------- -------- -------
- $ 3,175 $ 3,218
======== ======== =======
</TABLE>
Available for Sale. At September 30, 1996, the Company had securities
available for sale with a carrying value and estimated market value of $58.5
million. Of the total, $23.5 million were U.S. Treasury or agency obligations,
$5.9 million were state and municipal securities, $7.6 million were corporate
notes and bonds, $4.8 million were asset-backed securities and $16.8 million
were marketable equity securities, primarily shares of mutual funds invested in
bank or thrift eligible securities.
21
<PAGE> 22
SOURCES OF FUNDS
GENERAL
The Company's primary sources of funds for use in lending, investing and for
other general purposes are deposits, including brokered deposits, proceeds from
principal and interest payment on loans, mortgage-backed and related securities
and debt and equity securities, FHLB advances, and to a lesser extent, reverse
repurchase agreements. Contractual loan payments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general market interest rates and economic
conditions. Borrowings may be used on a short-term basis to compensate for
seasonal or other reductions in normal sources of funds or for deposit inflows
at less than projected levels, or they also may be used on a longer-term basis
to support expanded lending or investment activities.* The Company utilizes
advances from the FHLB and reverse repurchase agreements as sources for its
borrowings. The Company is currently utilizing its capital position to increase
assets by investing in primarily mortgage-backed or REMIC securities with
adjustable rates or short and medium terms and financing the purchases with
advances from the FHLB that generally match the expected maturity duration of
the respective securities. At September 30, 1996 and 1995, the Company had
advances from the FHLB of $373.6 million or 26.6% of total assets and $330.1
million or 27.8% of total assets, respectively. The Company had no outstanding
reverse repurchase agreements at September 30, 1996. At September 30, 1995,
the Company had reverse repurchase agreements outstanding of $13.5 million or
1.1% of total assets. Of the Company's outstanding FHLB advances at September
30, 1996, $12.5 million will mature before September 30, 1997. Based on
sources and uses of funds projections, it is anticipated that all of the
maturing advances, which represent 3.3% of the total FHLB advances outstanding,
will be repaid upon their maturity dates.*
DEPOSITS
The Company offers a variety of deposit accounts having a range of interest
rates and terms. The Company's deposits principally consist of demand accounts
(non-interest bearing checking, NOW, MMDA and passbook) and certificates of
deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates and competition. The Company's
deposits are obtained primarily from the areas in which its branches are
located, and the Company relies principally on customer service, marketing
programs and long-standing relationships with customers to attract and retain
these deposits. Various types of advertising and promotion to attract and
retain deposit accounts also are used. For several years, the Company also has
used brokered deposits as a funding source for its business activities. The
brokered deposits are used to fund both general operating activities of the
Company and to fund the Company's leverage program. At September 30, 1996, the
Company had $138.6 million of brokered deposits, representing 15.8% of total
deposits, compared to $38.0 million or 5.5% of total deposits at September 30,
1995. The increase in brokered deposits has occurred because the Company has
used such certificates in its plan to fund additional earning assets to
increase net interest income, primarily mortgage-backed and related securities.
In addition, the Company has used brokered deposits to fund some operational
activities when such funds offer a better or quicker funding source than retail
deposits or FHLB advances.
Management monitors the Company's certificate accounts and, based on historical
experience, management believes it will retain a large portion of such accounts
upon maturity. However, management believes that the likelihood for retention
of brokered certificates of deposit is more a function of the rate paid on such
accounts as compared to retail deposits which may be established due to branch
location or other intangible reasons. Management considers Company
profitability, the matching of term lengths with assets, the attractiveness to
customers and rates offered by competitors in deposit offerings and promotions.
The Company has been competitive in the types of accounts and interest rates
it has offered on its deposit products. The Company intends to continue its
efforts to attract deposits as a primary source of funds for supporting its
lending and investing activities. The Company has lowered the rates on its
deposit accounts in the last two years because of generally lower market
interest rates.
22
<PAGE> 23
At September 30, 1996, the Company had outstanding $25.7 million in
certificates of deposit in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Amount at
September 30,1996
-----------------
(IN THOUSANDS)
<S> <C>
Three months or less $ 4,562
Over three through six months 8,078
Over six months through twelve months 6,186
Over twelve months 6,873
-----------
Total $ 25,699
===========
</TABLE>
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented. Management does not believe that the
use of year-end balances instead of average balances resulted in any material
difference in the information presented. In this table, brokered deposits are
included with certificates.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------
1996 1995
----------------------------------- ----------------------------------
Percent Average Percent Average
of Total stated of Total stated
Amount Deposits rate Amount Deposits rate
--------- -------- ------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 34,377 3.9% - $ 26,879 3.9% -
Interest bearing 39,710 4.5% 1.49% 42,687 6.2% 1.47%
Passbook accounts 79,362 9.0% 2.87% 87,678 12.7% 2.75%
Money market
demand accounts 176,838 20.2% 4.53% 121,016 17.6% 4.55%
Certificates 547,397 62.4% 5.60% 410,088 59.6% 5.81%
--------- ----- --------- -----
Total deposits $ 877,684 100.0% 4.74% $ 688,348 100.0% 4.78%
========= ===== ========= =====
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------------
1994
----------------------------------
Percent Average
of Total stated
Amount Deposits rate
--------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 18,663 3.3% -
Interest bearing 30,552 5.4% 1.50%
Passbook accounts 95,504 16.8% 2.60%
Money market
demand accounts 91,055 16.0% 4.00%
Certificates 334,118 58.5% 4.80%
-------- -----
Total deposits $569,892 100.0% 3.97%
======== =====
</TABLE>
23
<PAGE> 24
BORROWINGS AND OTHER FINANCING TRANSACTIONS
Although deposits are the Company's largest source of funds, the Company's
policy has been to utilize borrowings as an alternative or less costly source
of funds. The Company utilizes borrowings as part of its asset/liability
investment strategy. Borrowings are collateralized when management believes it
can profitably re-invest those funds for the benefit of the Company. The
Company obtains advances from the FHLB. These advances are collateralized by
the capital stock of the FHLB held by the Company and certain of its mortgage
loans and mortgage-backed and related securities. Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. Additionally, the Company is currently
utilizing its capital position to increase assets by investing in primarily
mortgage-backed REMIC securities with adjustable rates or short and medium
terms and financing the purchases with advances from the FHLB that generally
match the expected maturity duration of the respective securities. The maximum
amount the FHLB will advance to member institutions for purposes other than
meeting withdrawals fluctuates from time to time in accordance with policies of
the OTS and the FHLB. At September 30, 1996, the Company's FHLB advances
totaled $373.6 million, representing 29.2% of total liabilities, up from the
$330.1 million outstanding at September 30, 1995. At September 30, 1996, the
Company had a borrowing capacity available of $116.3 million from the FHLB,
however, additional securities may have to be pledged as collateral.
The Company's borrowings from time to time include reverse repurchase
agreements. The form of reverse repurchase agreement used by the Company
involves the sales of securities owned by the Company with a commitment to
repurchase the same or substantially the same securities at a predetermined
price at a future date, typically within 30 days to six months. These
transactions are treated as borrowings collateralized by the securities sold
and are therefore included as other borrowings on the Company's Consolidated
Financial Statements. These transactions are authorized by the Company's
Investment Policy and are governed by agreements with primary government
dealers under PSA Master Repurchase Agreements. At September 30, 1996 and
1995, the Company had zero and $13.5 million, respectively, of reverse
repurchase agreements.
While increases in borrowings and changes in the collateralization levels due
to market interest rate changes could require the Company to add collateral to
secure its borrowings, the Company does not anticipate having a shortage of
qualified collateral to pledge against its borrowings.
24
<PAGE> 25
The following table sets forth certain information regarding the Company's FHLB
advances, borrowed funds and reverse repurchase agreements at or for the
periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or for the year ended September 30,
--------------------------------------------
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding $344,787 $330,253 $245,965
Maximum amount outstanding at any
month-end during the year 373,569 343,505 323,505
Balance outstanding at end of year 373,569 330,073 310,505
Weighted average interest rate
during the year (1) 5.43% 5.60% 4.44%
Weighted average interest rate at
end of year 5.45% 5.61% 4.97%
Reverse repurchase agreements:
Average balance outstanding $ 703 $ 10,062 $ 4,640
Maximum amount outstanding at any
month-end during the year - 30,432 22,305
Balance outstanding at end of year - 13,521 5,501
Weighted average interest rate
during the year (1) 5.81% 5.69% 4.59%
Weighted average interest rate at
end of year - 5.81% 4.75%
Total advances and reverse repurchase
agreements:
Average balance outstanding $345,490 $340,315 $250,605
Maximum amount outstanding at any
month-end during the year 373,569 365,937 345,810
Balance outstanding at end of year 373,569 343,594 316,006
Weighted average interest rate
during the year (1) 5.43% 5.61% 4.44%
Weighted average interest rate at
end of year 5.45% 4.97% 4.97%
</TABLE>
- ------------------------
(1) Computed on the basis of average daily balances.
SUBSIDIARY ACTIVITIES
During the fiscal year ended September 30, 1996, the Bank had four wholly-owned
subsidiaries: St. Francis Insurance Corp. ("S-F Insurance"), St. Francis
Equity Properties, Inc. ("S-F Equity"), S-F Mortgage Corp. ("S-F Mortgage") and
SF Investment Services ("SF Investment").
S-F Insurance. S-F Insurance offers credit life and disability insurance on
consumer and mortgage loans sold exclusively through licensed agents who also
are employees of the Bank. The Bank is reimbursed by S-F Insurance for
administration and sales services provided by the Bank. At September 30, 1996,
the Bank's total investment in S-F Insurance was approximately $165,000 and S-F
Insurance's assets of $167,000 consisted primarily of cash.
25
<PAGE> 26
S-F Equity Properties. S-F Equity Properties ("SFEP") is a Wisconsin
corporation incorporated in February 1993 to own, operate and develop
multi-family rental property, either as a limited partner or through other
ownership status, for investment and subsequent resale. Properties include
projects for low-to-moderate income housing, which would qualify for tax
credits under Section 42 of the Internal Revenue Code (the "Code"). SFEP is
currently a limited partner in 20 projects and has committed to equity
investments in an additional five projects within the state of Wisconsin.
Additionally, the Bank has provided financing or committed to provide financing
to 24 of the projects. However, the primary return to the Company on these
projects is in the form of tax credits earned over the first ten years of the
projects life. At September 30, 1996, the Bank had loans outstanding to such
projects of $21.3 million. At September 30, 1996, the Bank's total investment
in S- F Equity was approximately $1.5 million and S-F Equity's assets of $37.7
million consisted primarily of its interests in the properties developed.
S-F Mortgage. S-F Mortgage is presently an inactive subsidiary which has not
engaged in business during the past five years. The Company has no current
plans to activate S-F Mortgage. At September 30, 1996, the Bank's total
investment in S-F Mortgage was approximately $184,000 and S-F Mortgage's
assets of $185,000 consisted primarily of cash.
SF Investment. SF Investment is a company incorporated in Nevada for the
purpose of managing a portion of the Bank's investment portfolio. At September
30, 1996, the Bank's total investment in SF Investment was approximately $252.6
million and the assets consisted of primarily mortgage-related securities.
Bank Wisconsin has two wholly-owned subsidiaries: Bank Wisconsin Insurance
Services ("BW Insurance") and BWS Investment Services ("BWS Investment"). BW
Insurance is presently an inactive subsidiary which has not engaged in any
business during the year ended September 30, 1996. Bank Wisconsin's investment
in BW Insurance is $11,000. BWS Investment is a company incorporated in Nevada
for the purpose of managing a portion of Bank Wisconsin's investment portfolio.
At September 30, 1996, Bank Wisconsin's total investment in BWS Investment was
approximately $12.5 million and the assets consisted of primarily
mortgage-related securities.
PERSONNEL
As of September 30, 1996, the Company had 261 full-time employees and 82
part-time employees. The employees of the Company are not represented by a
collective bargaining unit and the Company believes its relationship with its
employees to be good.
FEDERAL TAXATION
GENERAL
The following discussion of tax matters is intended to be a summary of the
material tax rules applicable to the Company and does not purport to be a
comprehensive description of all applicable tax rules.
Historically, for federal income tax purposes, the Company has reported its
income and expenses primarily on the hybrid method of accounting and has filed
its consolidated federal income tax returns on this basis through September 30,
1987. Since 1987, the Company has been an accrual taxpayer. Both before and
after the Conversion, the Company is and will be subject to the rules of
federal income taxation applicable to corporations. Generally, the Internal
Revenue Code requires that all corporations, including the Company, compute
taxable income under the accrual method of accounting. For its taxable year
ended September 30, 1996, the Company was subject to a maximum federal income
tax rate of 35%. The Company was audited by the IRS for taxable years through
the year ended September 30, 1993.
26
<PAGE> 27
BAD DEBT RESERVES
For the taxable years beginning before 1996, savings institutions, such as the
Bank, which meet certain definitional tests primarily relating to their assets
and the nature of their business ("qualifying thrifts"), are permitted to
establish a reserve for bad debts and to make annual additions thereto, which
additions may, within specified formula limits, be deducted in arriving at
their taxable income. Each year the Bank will review the most favorable way to
calculate the deduction attributable to an addition to the bad debt reserve.
For the taxable years beginning before 1996, earnings appropriated for bad debt
reserves and deducted for federal income tax purposes cannot be used by the
Bank to pay cash dividends to the Company without the payment of income taxes
by the Bank at the then current income tax rate on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. Thus, any dividends to the Company that
would reduce amounts appropriated to the Bank's bad debt reserves and deducted
for federal income tax purposes could create a tax liability for the Company.
The Bank does not intend to pay dividends that would result in a recapture of
its bad debt reserves.
On August 20, 1996, the President signed the Small Business Job Protection Act
of 1996 ("the Act"). The Act repealed the reserve method of accounting for bad
debts by thrift institutions, effective for taxable years beginning after 1995.
Thrift institutions such as the Bank with more than $500 million in assets are
now required to use the specific charge-off method. The Act also grants
partial relief from the bad debt reserve recapture "recapture" which occurs in
connection with the change in method of accounting. The pre-1988 reserves are
not required to be included in income in connection with the change in method
of accounting. In addition, the Act suspends recapture of post-1987 reserves
for a period of two years, conditioned on the institution's compliance with
certain residential loan requirements. Institution's can meet this residential
loan requirement if the principal amount of residential loans made during a
taxable year was not less than the "base amount" for such year. The base
amount is determined on an institution-by-institution basis, and constitutes
the average of the principal amounts of residential loans made by an
institution during the six most recent taxable years. Notwithstanding the
foregoing, institutions will be required to pay for recaptured post-1987 bad
debt reserves ratably over a six-year period starting in 1998. Since
provisions for deferred income tax have been provided for on post-1987 bad debt
reserves, there will not be any additional income tax expense to the Bank on
recapture.
CORPORATE ALTERNATIVE MINIMUM TAX
For taxable years beginning after December 31, 1986, the Internal Revenue Code
imposes an alternative minimum taxable income ("AMTI") which is imposed at a
rate of 20%. For the taxable years beginning before 1996, the excess of the
bad debt reserve deduction using the percentage of taxable income method, over
the deduction that would have been allowable under an experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating losses. For taxable years beginning after
December 31, 1989, the adjustment to AMTI based on book income will be an
amount equal to 75% of the amount by which a corporation's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0
million is imposed on corporations, including the Company, whether or not an
Alternative Minimum Tax ("AMT") is paid. From time to time the Company may be
subject to AMT tax. The Company was subject to an environmental tax liability
for the year ended September 30, 1995, which was not material.
DISTRIBUTIONS
To the extent that (i) the Company's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under an
experience method and (ii) the Company makes "non-dividend distributions" to
shareholders that are considered to result in distributions from the excess bad
debt reserve or the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be
included in the Company's taxable income. Non-dividend
27
<PAGE> 28
distributions include distributions in excess of the Company's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid of
the Company's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Company's bad debt reserves.
The amount of additional taxable income created from an Excess Distribution is
an amount that when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if certain portions of the Bank's
accumulated tax bad debt reserve are used for any purpose other than to absorb
qualified bad debt loans, such as for the payment of dividends or other
distributions with respect to the Company's capital stock (including
distributions upon redemption or liquidation), approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 35% corporate income tax rate (exclusive of state
taxes). See "Dividend Policy" and "Regulation" for limits on the payment of
dividends of the Bank and the Company.
STATE TAXATION
The State of Wisconsin imposes a tax on the Wisconsin taxable income of
corporations, including savings institutions, at the rate of 7.9%. Wisconsin
taxable income is generally similar to federal taxable income except that
interest from state and municipal obligations is taxable, no deduction is
allowed for state income taxes and net operating losses may be carried forward
but not back. Wisconsin law does not provide for filing of consolidated state
income tax returns. The Company was audited by the Wisconsin Department of
Revenue for taxable years through September 30, 1990. The results of the audit
assessment, which resulted in an additional $620,000 of taxes, have been taken
into account in calculating income tax expenses. The Company is contesting
virtually all of the audit assessment, but the results or timing of its
challenge is unknown.
REGULATION
The Company is a bank holding company registered with and subject to regulation
by the Board of Governors of the Federal Reserve System (the "FRB") under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is also
a savings and loan holding company registered with and subject to regulation by
the Office of Thrift Supervision (the "OTS") under the Home Owners' Loan Act of
1993, as amended (the "HOLA"). The Company is required to file certain reports
and otherwise comply with the rules and regulations of the OTS, the FRB, and
the Securities and Exchange Commission (the "SEC") under the federal securities
laws. The Bank, as a federally chartered savings bank, is subject to
regulatory oversight by its primary regulator, the OTS. Bank Wisconsin, as a
state chartered commercial bank, is subject to regulatory supervision by the
Wisconsin Department of Financial Institutions, Division of Banking (the
"Division") and the Federal Deposit Insurance Corporation, (the "FDIC"), its
primary federal regulator.
HOLDING COMPANY REGULATIONS
The BHCA requires the Company to obtain prior FRB approval before it may
acquire substantially all of the assets of any bank, or ownership or control or
any voting shares of any bank, if, after such acquisition, it would own or
control, directly or indirectly, more than 5% of the voting shares of such
bank.
The BHCA limits the activities of bank holding companies to managing,
controlling and servicing their subsidiary banks and to engaging in certain
non-banking activities determined by the FRB to be so "closely related" to
banking as to be a "proper incident" thereto. With the exception of such
closely related activities, bank holding companies are prohibited from
acquiring direct or indirect ownership of more than 5% of the voting stock of
any company which is not a bank. The FRB has also permitted bank holding
companies to engage in certain additional activities on a case-by-case basis.
28
<PAGE> 29
The Company must obtain approval from the OTS before acquiring control of more
than 5% of the voting shares of any other SAIF - insured institution. Such
acquisitions generally are prohibited if they result in a multiple savings and
loan holding company controlling savings institutions in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings institution.
REGULATION OF FEDERAL SAVINGS BANKS
The OTS has extensive regulatory and supervisory authority over the operations
of the Bank. This regulation and supervision established a comprehensive
framework of activities in which the Bank can engage and is intended primarily
for the protection of the insurance fund and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
The OTS also has enforcement authority over the Bank and the Company, and their
affiliated parties. This enforcement authority includes, among other things,
the ability to assess civil money penalties, issue cease-and-desist or removal
orders and initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws or regulations or for unsafe or unsound
practices. Other actions or inaction may provide the basis for enforcement
actions, including misleading or untimely reports filed with the OTS.
The Bank is required to file periodic reports with the OTS Regional Director
and is subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted, examiners may, among other things, require the Bank
to provide for higher general or specific loan loss reserves or write down the
value of certain assets. The last regular examination by the OTS was in June
1996.
ASSESSMENTS
Savings institutions are required by OTS regulations to pay assessments to the
OTS to fund the operations of the OTS. The general assessment, paid on a
semiannual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the institution's latest
quarterly Thrift Financial Report. The Bank's OTS assessment for the six month
period ended June 30, 1996 was $115,000, based on the Bank's assets as of March
31, 1996 of $1.2 billion and the current OTS assessment rate.
QUALIFIED THRIFT LENDER REQUIREMENT
In order for the Bank to exercise the powers granted to SAIF-insured
institutions and maintain full access to Federal Home Loan Bank ("FHLB")
advances, it must qualify as a qualified thrift lender ("QTL"). Under the HOLA
and OTS regulations, savings institutions are required to maintain a level of
qualified thrift investments equal to at least 65% of its "portfolio assets"
(as defined by statute) on a monthly basis for nine out of twelve months per
calendar year. Qualified thrift investments for purposes of the QTL test
consist primarily of the residential mortgages and related investments. As of
September 30, 1996, the Company maintained 95.9% of its portfolio assets in
qualified thrift investments and therefore met the QTL test.
WISCONSIN COMMERCIAL BANK REGULATION
As a Wisconsin chartered commercial bank, Bank Wisconsin is authorized to make
loans and investments, provided that the total liabilities of any person,
partnership, corporation or bank shall not exceed 20% of the capital of the
bank, with certain exceptions.
Bank Wisconsin may also invest funds in certain types of debt and equity
securities, including obligations of local governments and agencies.
Investment of debt securities in local government units may not exceed 50% of
the capital of the bank, and temporary borrowings of any local government unit
maturing within one year from the date of issues may not exceed 60% of the
bank's capital and surplus. Bank
29
<PAGE> 30
Wisconsin may invest in equity positions, such as profit-participation
projects, in an amount determined by the Division.
Bank Wisconsin is subject to statutory and regulatory restrictions on a wide
variety of activities. Subject to regulatory approval, Bank Wisconsin may,
directly or through a subsidiary, undertake any activity, exercise any power or
offer any financially related product or services that any other provider of
financial products or services may undertake, exercise or provide or that the
Division finds to be financially related.
The Division examines the affairs of Bank Wisconsin on an annual basis. The
Division will assess Bank Wisconsin fees in connection with any examination, as
well as an annual assessment for maintenance of the Division's Office. Based
on the assessment rates published by the Division and Bank Wisconsin's total
assets of $92.1 million at December 31, 1995, the Bank paid approximately
$3,000 in assessments for the year ending December 31, 1996.
FEDERAL REGULATIONS
Both the Bank and Bank Wisconsin are subject to federal regulations which
address various issues including, but not limited to insurance of deposits,
capital requirements, and community reinvestment requirements.
- - INSURANCE OF DEPOSITS
The Bank's deposits are insured up to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the FDIC while Bank Wisconsin's
deposits are insured up to applicable limits under the Bank Insurance Fund
("BIF") of the FDIC. The FDIC regulations assign institutions to a
particular capital group based on the level of an institution's capital --
"well capitalized," "adequately capitalized," and "undercapitalized".
These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to
be healthy to those which are considered to be of substantial supervisory
concern. The matrix so created results in nine assessments risk
classifications, with reduced insurance rates paid by well capitalized,
financially sound institutions and higher rates paid by undercapitalized
institutions that pose a substantial risk of loss to the insurance fund
unless effective corrective action is taken.
Under the Federal Deposit Insurance Act (the "FDI Act"), insurance of
deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the Division.
Management of the Company does not know of any practice, condition or
violation that might lead to the termination of deposit insurance. See,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Regulatory Legislative Developments."
- - CAPITAL REQUIREMENTS
FDIC REGULATION
Bank Wisconsin is required to follow FDIC capital adequacy guidelines which
prescribe minimum levels of capital and require that institutions meet
certain risk-based and leverage capital requirements. Under the FDIC
capital regulations, Bank Wisconsin is required to meet the following
capital standards: (i) "Tier 1 capital" in an amount not less than 3% of
total assets; (ii) "Tier 1 capital" in an amount not less than 4% of
risk-weighted assets; and (iii) "total capital" in an amount not less than
8% of risk-weight assets.
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<PAGE> 31
The following table summarizes Bank Wisconsin's capital ratios and the
ratios required by federal regulators at September 30, 1996:
<TABLE>
<CAPTION>
Regulatory
Requirement Capital Excess Capital
------------------ ------------------ ------------------
Capital Standard Amount Percent Amount Percent Amount Percent
---------------- ------- ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital/average assets 2,890 3.00% 8,789 9.12% 5,899 6.12%
Tier 1 capital/risk-based 2,840 4.00% 8,789 12.38% 5,949 8.38%
Total capital/risk-based 5,680 8.00% 9,478 13.35% 3,798 5.35%
</TABLE>
FDIC-regulated institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial
Institutions Examination Council) are required to maintain "Tier 1
capital" equal to at least 3% of total assets (the "leverage limit"
requirement). For all other FDIC-insured institutions, the minimum
leverage limit requirement is 3% of total assets plus at least an
additional 100 to 200 basis point. Tier 1 capital is defined to include
the sum of common stockholders' equity, noncumulative perpetual preferred
stock (including any related surplus), and minority interests in
consolidated subsidiaries, minus all intangible assets (other than
qualifying servicing rights). An institution that fails to meet the
minimum leverage limit requirement must file a capital restoration plan
with the appropriate FDIC regional director that details the steps it will
take to reach capital compliance.
Bank Wisconsin also is required to adhere to certain risk-based capital
guidelines which are designed to provide a measure of capital more
sensitive to the risk profiles of individual banks. Under the risk-based
capital guidelines, capital is divided into two tiers: core (Tier 1)
capital, as defined above, and supplementary capital (Tier 2). Tier 2
capital is limited to 100% of core capital and includes cumulative
perpetual preferred stock, perpetual preferred stock, mandatory convertible
securities, subordinated debt, intermediate preferred stock and allowance
for possible loan and lease losses. Allowance for possible loan and lease
losses includable in supplementary capital is the sum of Tier 1 and Tier 2
capital. The risk-based capital framework assigns balance sheet assets to
one of four broad risk categories which are assigned risk-weights ranging
from 0% to 100% based primarily on the degree of credit risk associated
with the obligor. Off-balance sheet items are converted to an on-balance
sheet "credit equivalent" amount utilizing certain conversion factors. The
weighted sum of the four risk-weighted categories equals risk-weighted
assets.
OTS REGULATION
The OTS capital regulations require savings institutions to meet three
capital standards: (i) "core capital" in an amount not less than 3% of
adjusted total assets; (ii) "tangible capital" in an amount not less than
1.5% of adjusted total assets; and (iii) "risk-based capital" of an least
8% of risk-weighted assets. Savings institutions must meet all of the
standards in order to comply with the capital requirements.
The following table summarizes the Bank's capital ratios and the ratios
required by federal regulations at September 30, 1996:
<TABLE>
<CAPTION>
Regulatory
Requirement Capital Excess Capital
------------------ ------------------ ------------------
Capital Standard Amount Percent Amount Percent Amount Percent
---------------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital 19,457 1.50% 89,092 6.86% 69,635 5.37%
Core capital 38,915 3.00% 89,092 6.86% 50,177 3.86%
Risk-based capital 56,576 8.00% 92,764 13.12% 36,188 5.12%
</TABLE>
31
<PAGE> 32
The minimum core capital requirement is 3% of adjusted total assets (the
"leverage limit" requirement). Core capital is defined to include common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
amounts of consolidated subsidiaries, less any unidentifiable intangible
assets (other than limited amounts of purchased mortgage servicing rights,
supervisory goodwill and other intangibles that meet certain salability and
market valuation tests); and equity and debt investments in subsidiaries
which are not "includable subsidiaries." Includable subsidiaries are
defined as subsidiaries engaged solely in activities permissible for a
national bank, engaged in activities impermissible for a national bank but
only as an agent for its customers, or engaged solely in mortgage-banking
activities.
Each saving institution must also maintain total capital equal to at least
8% of risk-weighted assets. Total capital consists of the sum of core and
supplementary capital, provided that supplementary capital cannot exceed
core capital, as defined above. Supplementary capital includes permanent
capital instruments such as, cumulative perpetual preferred stock,
perpetual subordinated debt, and mandatory convertible subordinated debt,
maturing capital instruments such as, subordinated debt, intermediate-term
preferred stock and mandatory redeemable preferred stock, subject to an
amortization schedule, and general valuation loan and lease loss allowances
up to 1.25% of risk-weighted assets. The OTS risk-based capital
regulation, like the FDIC regulation described above, assigns each balance
sheet asset held by a savings institution to one of five risk categories
based on the amount of credit risk associated with that particular class of
asset.
- - COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977, as amended (the "CRA"), a
depository institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs
of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited
to its particular community, consistent with the CRA. The CRA requires the
federal regulators to assess the institution's record of meeting with the
credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. The CRA also
requires all institutions to make public disclosure of their CRA ratings
and requires an institution's primary regulator to provide a written
evaluation of an institution's performance. The Bank's latest CRA rating,
received in May 1996, was "Outstanding," and Bank Wisconsin's latest CRA
rating, received in March 1996, was "Satisfactory".
On May 4, 1995, the federal banking regulators adopted a final rule ("Final
CRA Rule") governing compliance with CRA. The Final CRA Rule eliminates
the previous CRA regulation's twelve assessment factors and substitutes a
performance based evaluation system. The Final CRA Rule will be phased in
over a period of time and become fully effective by July 1, 1997. Under
the Final CRA Rule, an institution's performance in meeting the credit
needs of its entire community, including low- and moderate-income areas, as
required by the CRA, will generally be evaluated under three assessment
tests relating to lending, investment and service.
The lending test analyzes lending performance using five criteria: (i) the
number and amount of loans in the institution's assessment area, (ii) the
geographic distribution of lending, including the proportion of lending in
the assessment area, the dispersion of lending in the assessment area, and
in the number and amount of loans in the institution's assessment area,
(ii) borrower characteristics, such as the income level of individual
borrowers and the size of businesses or farms, (iii) the number and amount,
as well as the complexity and innovativeness of an institution's community
development lending and (iv) the use of innovative or flexible lending
practices in a safe and sound manner to address the credit needs of low- or
moderate-income individuals or areas.
32
<PAGE> 33
The investment test analyzes investment performance using four criteria:
(i) the dollar amount of qualified investments, (ii) the innovativeness or
complexity of qualified investments, (iii) the responsiveness of qualified
investments to credit and community development needs, and (iv) the degree
to which the qualified investments made by the institution are not
routinely provided by private investors.
The service test analyzes service performance using six criteria: (i) the
institution's branch distribution among low-, moderate-, middle-, and
upper-income areas, (ii) its record of opening and closing branches,
particularly in low- and moderate- income areas, (iii) the availability and
effectiveness of alternative systems for delivering retail banking
services, (iv) the rate of services provided in low-, moderate-, middle-
and upper-income areas and extent to which those services are tailored to
meet the needs of those areas, (v) the extent to which the institution
provides community development services, and (vi) the innovativeness and
responsiveness of community development services provided.
Financial institutions with assets of less than $250 million, or a
financial institution with assets of less than $250 million that is a
subsidiary or a holding company with assets if less than $1 billion, will
be evaluated under a streamlined assessment method based primarily on its
lending record. The streamlined test considers an institution's
loan-to-deposit ratio adjusted for seasonal variation and special lending
activities, its percentage of loans and other lending related businesses
and farms of different sizes, the geographic distribution of its loan, and
its record of taking action, if warranted, in response to written
complaints. In lieu of being evaluated under the three assessment tests or
the streamlined test, a financial institution can adopt a "strategic plan"
and elect to be evaluated on the basis of achieving the goals and
benchmarks outlined in the strategic plan.
The data collection requirements under the revised regulation were
effective January 1, 1996, with the reporting requirements to be effective
January 1, 1997. Evaluations under the lending, investment and service
tests generally will begin July 1, 1997, although evaluations under the
small institution performance standards, which will not utilize newly
required data, began January 1, 1996. In addition, beginning January 1,
1996, any institution may submit a strategic plan for approval or elect to
be examined under the revised performance tests, if the institution
provides the necessary data.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System, consisting of twelve FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank and Bank Wisconsin, as members of the FHLB-Chicago, are required to
acquire and hold shares of capital stock in the FHLB-Chicago in an amount equal
to 1% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year. Further, at no time shall advances (borrowings) from the FHLB-Chicago
exceed 20 times the amount paid by such member for FHLB-Chicago capital stock.
The Bank and Bank Wisconsin are in compliance with these requirements with a
total investment in FHLB-Chicago stock of $19.0 million at September 30, 1996.
Among other benefits, the FHLBs provide a central credit facility primarily for
member institutions. It makes advances to members in accordance with policies
and procedures established by the FHFB and the Board of Directors of the
FHLB-Chicago. At September 30, 1996, the Bank and Bank Wisconsin had $373.6
million in advances from the FHLB-Chicago. See "Business of the Company."
33
<PAGE> 34
RESERVE REQUIREMENTS
Regulation D, promulgated by the FRB, imposes reserve requirements on all
depository institutions which maintain transaction accounts or non- personal
time deposits. Checking accounts, NOW accounts and certain other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain money
market deposit accounts). Under Regulation D, a depository institution must
maintain average daily reserves equal to 3% on the first $52.0 million of
transaction accounts. There has been a 0% reserve requirement on non-personal
deposits since December 27, 1990. In addition, the first $4.3 million of
otherwise reservable liabilities are exempt from the reserve requirement.
These percentages and tranches are subject to adjustment by the FRB. As of
September 30, 1996, the Bank and Bank Wisconsin met Regulation D reserve
requirements.
OTHER FEDERAL LAWS
RESTRICTIONS ON LOANS TO INSIDERS
Federal regulations establish limits on the total amount an institution may
lend to its executive officers, directors, and principal shareholders, and
their related interests (collectively referred to in this section as
"insiders"). Generally, an insider may borrow an aggregate amount not
exceeding 15% of the institution's unimpaired capital and unimpaired surplus on
an unsecured basis and an additional 10% on a secured basis. The regulations
limit, with certain exceptions, the aggregate amount a depository institution
may lend to its insiders as a class to an amount not exceeding the
institution's unimpaired capital and unimpaired surplus. FRB regulations also
provide for certain exceptions from the definition of "extension of credit"
that pose a minimal risk to institutions, including extensions of credit
secured by obligations fully guaranteed by the federal government,
unconditional takeout commitments or guarantees of any U.S. agency, department
or wholly-owned corporation, or a segregated deposit account at the
institution.
When extending credit to an insider, an institution must apply underwriting
policies and procedures no less stringent than those applied for comparable
transactions with non-insiders. Generally, all loans to insiders must be
approved by a majority of the institution's disinterested directors. Any
credit extension to an executive officer must be reported to the board of
directors, include a current financial statement of the borrower, and include a
demand feature which permits the institution to call the loan if the officer's
borrowings from other institutions aggregated with the loan exceeds applicable
limits. An insider cannot knowingly receive, or permit a related interest to
receive, a loan that violates applicable regulations. Neither the Bank nor
Bank Wisconsin have been significantly affected by such restrictions on loans
to insiders.
TRANSACTIONS WITH AFFILIATES
Both the Bank and Bank Wisconsin must comply with Sections 23A and 23B of the
Federal Reserve Act ("Sections 23A and 23B") relative to transactions with
affiliates. Generally, Sections 23A and 23B limit the extent to which the
insured institution or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus, place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and require
that all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guaranty and similar other types of
transactions. Exemptions from 23A or 23B may be granted only by the Federal
Reserve Board. The Company has not been significantly affected by such
restrictions on transactions with affiliates.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the SEC under Section 12(g) of
the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other restrictions and other
requirements of the SEC under the Exchange Act.
34
<PAGE> 35
ITEM 2. PROPERTIES
The Company conducts its business through 15 full-service locations, two
limited service offices in residential retirement communities and two loan
production offices. Seven of the full-service branches are located in
Milwaukee County, four are in Waukesha County, two are in Washington County,
one in Ozaukee County, and one is in Walworth County. Management believes the
current facilities are adequate to meet the present and immediately foreseeable
needs of the Company. A listing of the Company's offices is as follows:
<TABLE>
<CAPTION>
LEASE NET
YEAR OWNED OR EXPIRATION BOOK
LOCATION OPENED LEASED DATE VALUE
- -------- ------ ------ ---- -------
<S> <C> <C> <C> <C>
FULL SERVICE OFFICES:
Milwaukee/St. Francis Home Office (1) 1923 Owned - $ 2,848,000
3545 South Kinnickinnic Avenue
Milwaukee, WI 53235
Thiensville Office (1) 1975 Owned - 429,000
153 North Main Street
Thiensville, WI 53092
Muskego Office (1) 1976 Owned - 455,000
S74 W17100 Janesville Road
Muskego, WI 53150
Elmbrook/Wauwatosa Office (1) 1977 Owned - 857,000
2360 North 124th Street
Milwaukee, WI 53226
West Allis Office (1) 1978 Owned - 693,000
9330 West Greenfield Avenue
West Allis, WI 53214
Greendale Office (1) 1980 Leased 2030 456,000
5499 South 76th Street (Land Only)
Greendale, WI 53129
Cudahy Office (1) 1980 Owned - 1,545,000
6042 South Packard Avenue
Cudahy, WI 53110
Milwaukee/Downtown Office (1) 1981 Leased 1999 77,000
142 West Wisconsin Avenue
Milwaukee, WI 53203
Wauwatosa Village Office (1) 1984 Leased 1997 71,000
6810 West State Street
Wauwatosa, WI 53213
Waukesha Office (1) 1986 Leased 2021 479,000
2116 East Moreland Blvd. (Land Only)
Waukesha, WI 53186
New Berlin Office (1) 1988 Leased 2027 397,000
3670 South Moorland Road (Land Only)
New Berlin, WI 53151
</TABLE>
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<PAGE> 36
Kewaskum Office (2) 1994 Owned - 365,000
1225 Fond du Lac Avenue
Kewaskum, WI 53040
Hartford Office (2) 1994 Owned - 633,000
709 Grand Avenue
Hartford, WI 53027
Lake Geneva (1) 1996 Owned - 1,075,000
401 Broad Street
Lake Geneva, WI 53147
Menomonee Falls (2) 1996 Owned - 911,000
N88 W16586 Appleton Avenue
Menomonee Falls, WI 53051-0864
LIMITED SERVICE OFFICES:
Tudor Oaks Office (1) 1977 Leased Monthly 1,000
S77 W12929 McShane Drive
Muskego, WI 53150
Alexian Village Office (1) 1978 Leased 2003 1,000
9301 North 76th Street
Milwaukee, WI 53223
LOAN PRODUCTION OFFICES:
International Building (1) 1994 Leased 2004 28,000
611 W. National Avenue
Milwaukee, WI 53204
MEC (1) 1994 Leased Monthly -
2821 N. Fourth Street
Milwaukee, WI 53202
5912 75th Street (1) 1994 Leased 2003 88,000
Kenosha, WI 53142
Total Net Book Value: $11,409,000
===========
(1) Office of St. Francis Bank, F.S.B.
(2) Office of Bank Wisconsin
36
<PAGE> 37
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these various legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these legal actions should not
have a material effect on the Company's consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the three months
ended September 30, 1996.
Executive Officers of the Registrant Who Are Not Directors
The following information as to the business experience during the past five
years is supplied with respect to executive officers of the Company who do not
serve on the Company's Board of Directors. There are no arrangements or
understandings between the persons named and any other person pursuant to which
such officers were selected, nor are there any family relationships among them.
JAMES C. HAZZARD, age 51, is President of Bank Wisconsin, one of the Company's
subsidiary. Mr. Hazzard has held his position with Bank Wisconsin since its
inception in 1994. Prior to joining Bank Wisconsin, Mr. Hazzard served as
President and Chief Executive Officer of Associated Bank/F&M Bank Menomonee
Falls, Wisconsin.
BRUCE R. SHERMAN, age 51, is a Vice President of the Company and Senior Vice
President and Treasurer of the Bank. Mr. Sherman has held his position with
the Bank since 1984, and became Vice President of the Company in June 1993.
From 1973 until joining the Bank, Mr. Sherman was with the public accounting
firm of Ernst & Whinney.
BRIAN T. KAYE, age 55, is Secretary of the Company and Secretary and Executive
Vice President of the Bank. Mr. Kaye has held the position of Executive Vice
President of the Bank since August 1989 and his position of Secretary of the
Bank since July 1990, and became Secretary of the Company in November 1992.
Mr. Kaye was a Senior Vice President of First Financial Bank, F.S.B. from 1988
until joining the Bank. From 1982 to 1988, he was a Senior Vice President of
National Savings & Loan. Prior to joining the Bank, Mr. Kaye served as Deputy
Commissioner of the Wisconsin Office of Commissioner of Savings & Loan.
JON D. SORENSON, age 41, is Chief Financial Officer and Treasurer of the
Company and Senior Vice President of the Bank. Mr. Sorenson became Chief
Financial Officer and Treasurer of the Company in November 1992, and has held
his position with the Bank since December 1992. From September 1990 to
December 1992, Mr. Sorenson was a Vice President of the Bank. From 1985 to
1990, Mr. Sorenson was Vice President- Assistant Controller of First Bank
System, a bank holding company. From 1982 to 1985, he was a Vice President and
Treasurer of First Federal Savings-Eau Claire.
WILLIAM T. JAMES, age 37, is Assistant Vice President of the Company and Vice
President of the Bank. Mr. James became Assistant Vice President of the
Company in June 1993, and has held his position with the Bank since April 1991.
Mr. James joined the Bank in 1983.
37
<PAGE> 38
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is currently being traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") National
Market System over-the-counter exchange under the symbol of STFR. Information
required by this item is incorporated by reference to the "Quarterly financial
information (unaudited)" shown in Note 19 to Notes to Consolidated Financial
Statements and the "Earnings per share" Note 13 to Notes to Consolidated
Financial Statements included under Item 8 of this Annual Report on Form 10-K.
As of October 31, 1996, there were approximately 1,300 holders of record and
approximately 4,500 beneficial holders owning a total of 5,381,064 shares.
The Company paid quarterly dividends of $0.10 per share starting November 1995
and has increased the dividend to $0.12 per share effective November 1996. No
dividends were paid prior to November 1995. While there can be no assurance of
the payment of future dividends, the Company anticipates that future dividends,
if paid, would be paid on a quarterly basis in February, May, August and
November. Future payments of dividends will be subject to determination and
declaration by the Company's Board of Directors, which will take into account
the Company's financial condition, results of operations, tax considerations,
industry standards, economic conditions and other factors, including regulatory
restrictions which affect the payment of dividends by the Company's
subsidiaries to the Company.
On November 7, 1996, the Company announced it had completed the repurchase of
282,945 shares, or 5% of its common stock outstanding at an average price of
$25.75 per share. The repurchased shares were classified as treasury shares
and may be used for general corporate purposes.
On November 7, 1996, the Company announced it had adopted a share repurchase
program for its common stock. The Company plans to purchase up to 10%, or
538,100 shares over a twelve month period commencing November 11, 1996
depending on market conditions. The repurchased shares will become treasury
shares and will be used for general corporate purposes.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data. The
financial data is derived in part from, and should be read in conjunction with,
the Consolidated Financial Statements and notes thereto presented elsewhere in
this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
September 30,
(In thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $1,404,116 $1,189,215 $1,026,806 $812,473 $688,850
Cash and cash equivalents 22,459 20,780 15,951 11,753 27,384
Loans receivable, net 610,699 513,308 427,753 324,387 297,964
Mortgage loans held for sale 20,582 1,138 2,978 10,043 18,394
Securities held to maturity 3,175 49,928 23,804 28,813 13,879
Mortgage-backed and related securities held to maturity 71,432 157,495 159,178 370,562 263,311
Mortgage-backed and related securities available for sale 521,280 360,077 336,772 32,655 33,758
Deposits 877,684 688,348 569,892 552,004 537,444
Advances from the FHLB and other borrowings 375,034 345,681 317,317 122,180 77,581
Shareholders' equity 125,179 135,228 122,701 124,452 58,101
<CAPTION>
Year Ended September 30,
(In thousands, except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest and dividend income $ 92,097 $ 83,787 $ 60,133 $ 49,784 $ 55,335
Total interest expense 56,413 50,223 31,633 27,629 35,118
---------- ---------- ---------- -------- --------
Net interest income before provision for loan losses 35,684 33,564 28,500 22,155 20,217
Provision for loan losses 1,300 240 240 95 955
---------- ---------- ---------- -------- --------
Net interest income 34,384 33,324 28,260 22,060 19,262
Other operating income (expense), net
Loan servicing and loan related fees 1,258 1,276 1,116 1,110 1,159
Gain (loss) on investments and mortgage-backed
and related securities, net 3,311 2,576 (101) 2,351 259
Gain on sales of mortgage loans held for sale, net 1,057 261 137 649 799
Other operating income 4,988 4,218 2,342 1,829 1,616
---------- ---------- ---------- -------- --------
Total other operating income, net 10,614 8,331 3,494 5,939 3,833
---------- ---------- ---------- -------- --------
General and administrative expenses (1) 31,622 22,679 19,381 16,205 15,400
---------- ---------- ---------- -------- --------
Income before income tax expense and cumulative
effect of change in accounting principle 13,376 18,976 12,373 11,794 7,695
Income tax expense 2,911 6,277 4,336 4,625 3,965
---------- ---------- ---------- -------- --------
Income before cumulative effect of change in
accounting principle 10,465 12,699 8,037 7,169 3,730
Cumulative effect of change in accounting for
income taxes - - - - 280
---------- ---------- ---------- -------- --------
Net income $ 10,465 $ 12,699 $ 8,037 $ 7,169 $ 4,010
========== ========== ========== ======== ========
Earnings per share $ 1.82 $ 2.10 $ 1.16 $ 0.31 N/A
========== ========== ========== ======== ========
</TABLE>
(1) General and administrative expenses for the year ended September 30, 1996
include the one-time special SAIF assessment of $4,155,000 discussed
under Recent Regulatory Legislative Developments on page 58.
39
<PAGE> 40
Selected consolidated financial and other data (cont.)
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios (4)
Return on average assets 0.82% 1.10% 0.87% 1.00% 0.60%
Return on average equity 7.81 10.02 6.44 8.99 7.01
Shareholders' equity to total assets 8.92 11.37 11.95 15.32 8.43
Average shareholders' equity to average assets 10.48 10.95 13.52 11.14 8.50
Net interest spread during the period (1) 2.56 2.56 2.61 2.63 2.68
Net interest margin (1) 2.97 3.04 3.17 3.20 3.10
General and administrative expenses to average assets 2.47 1.96 2.10 2.26 2.29
Other operating income to average assets 0.83 0.72 0.38 0.83 0.57
Average interest-earning assets to average
interest-bearing liabilities 108.73 110.37 115.94 114.13 107.76
Asset Quality Ratios
Non-performing loans to gross loans (2) 0.58 0.08 1.65 0.54 0.79
Non-performing assets to total assets (2) 0.28 0.53 0.75 0.29 0.46
Allowance for loan losses to gross loans 0.78 0.77 0.74 0.88 0.96
Allowance for loan losses to non-performing loans (2) 134.11 943.52 44.99 161.33 120.95
Allowance for loan losses to non-performing assets (2) 131.41 65.06 44.89 134.91 99.81
Net charge-offs to average loans 0.03 0.06 0.02 0.02 0.29
Regulatory Capital Ratios (3)
Tangible ratio 6.86 8.49 8.97 11.62 8.40
Core ratio 6.86 8.49 8.97 11.62 8.40
Tier 1 risk-based ratio 12.60 16.57 18.97 23.57 N/A
Total risk-based ratio 13.12 17.18 19.54 24.12 17.00
Other Data
Number of deposit accounts 96,880 88,391 75,708 75,632 77,577
Number of real estate loans outstanding 3,888 4,018 3,741 3,569 3,969
Number of real estate loans serviced 7,101 6,579 6,272 5,854 5,600
Mortgage loan originations (in thousands) $ 238,234 $ 109,366 $ 282,368 $ 257,562 $ 171,004
Consumer loan originations (in thousands) $ 61,378 $ 41,444 $ 35,896 $ 19,329 $ 14,122
Full service customer facilities 15 13 11 11 11
</TABLE>
- ---------------
(1) Net interest spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(2) Non-performing loans consist of nonaccrual loans and troubled debt
restructurings. Non-performing assets consist of non-performing loans
and foreclosed properties, which consist of real estate acquired by
foreclosure or deed-in-lieu thereof.
(3) Capital ratios are those of St. Francis Bank, F.S.B. only.
(4) Performance ratios for the year ended September 30, 1996 include the
one-time special SAIF assessment of $4.2 million.
40
<PAGE> 41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
St. Francis Capital Corporation (the "Company") is a multi-bank holding company
incorporated under the laws of the State of Wisconsin and is engaged in the
financial services business through its wholly-owned subsidiaries, St. Francis
Bank, F.S.B. (the "Bank"), a federally-chartered savings bank, and Bank
Wisconsin ("Bank Wisconsin"), a state-chartered commercial bank. In June 1993,
the Bank converted from a federally-chartered mutual savings institution to a
stock savings institution. As part of the conversion, the Company acquired all
of the outstanding common stock of the Bank. In November 1994, the Company
completed the acquisition of the stock of Valley Bank East Central in Kewaskum,
Wisconsin as well as the deposits and certain assets of the Hartford, Wisconsin
branch of Valley Bank Milwaukee. The acquired bank offices were combined as a
commercial bank named Bank Wisconsin.
The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on interest-earning
assets, consisting primarily of mortgage, consumer and commercial loans,
mortgage-backed and related securities and other investment securities, and the
interest paid on interest-bearing liabilities, consisting primarily of deposits
and borrowings from the Federal Home Loan Bank of Chicago (the "FHLB"). Net
interest income is a function of the Company's net interest spread, which is
the difference between the average yield earned on interest-earning assets and
the average rate paid on interest-bearing liabilities, as well as a function of
average ratio of interest-earning assets as compared to interest-bearing
liabilities. The Company's earnings also are affected by the level of its
other income, including loan servicing fees, deposit charges and fees and gains
on trading assets and sales of loans and securities, as well as its level of
non-interest expenses, including employee compensation and benefits, occupancy
and equipment costs and federal deposit insurance premiums.
The Company's operating results are significantly affected by general economic
conditions and the monetary, fiscal and regulatory policies of governmental
agencies. Lending activities are influenced by the demand for and supply of
housing competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds likewise are heavily
influenced by prevailing market rates of interest on competing investment
alternatives, account maturities and the levels of personal income and savings
in the Company's market areas.
FINANCIAL CONDITION
Total assets of the Company increased $214.9 million to $1.4 billion at
September 30, 1996 from $1.2 billion at September 30, 1995. The increase was
in loans receivable, including loans held for sale, which increased $116.8
million, and mortgage-backed and related securities, including securities
available for sale, which increased $75.1 million. The increase in loans
receivable was partially due to increases in mortgage loan originations and
purchases. The mortgage loan purchases were of single-family mortgage loans
either by direct purchase of individual loans from other local mortgage lenders
or by purchases of pools of single-family mortgage loans originated in other
parts of the country. The growth in assets was funded primarily by an increase
in deposits of $189.3 million and an increase in advances and other borrowings
of $29.4 million.
During the current fiscal year, the Company reclassified $88.4 million of
mortgage-backed and related securities from held-to-maturity to
available-for-sale. The reclassification was completed under guidance issued
by the Financial Accounting Standards Board allowing a one-time
reclassification of such securities. Mortgage-backed and related securities,
including securities available for sale, increased to $592.7 million at
September 30, 1996 from $517.6 million at September 30, 1995, which represented
42.2% and 43.5% of total assets, respectively. The increase was the result of
purchasing short- and medium-term REMIC's and CMO's. These securities were
financed primarily with advances from the Federal Home Loan Bank of Chicago
(the "FHLB") and deposit growth, primarily brokered deposits. The Company is
utilizing its capital position to increase earning assets by investing
primarily in REMIC securities with short and medium terms of two to five years
and financing the purchases with FHLB advances that generally match the
expected average lives of the respective securities. These securities
41
<PAGE> 42
have credit ratings of A or better and primarily meet the Federal Financial
Institutions Examination Council definition of low-risk securities. Management
believes that this strategy will increase the earnings of the Company as well
as limit its exposure to credit risk and future changes in interest rates. The
Company has been an active purchaser of adjustable rate mortgage-backed
securities as well as short-term mortgage-related securities because of their
lower level of interest rate risk and low credit risk in relation to the
interest earned on such securities.
Total loans, including loans held for sale, increased to $631.2 million at
September 30, 1996 from $514.4 million at September 30, 1995. Mortgage loans
increased to $452.5 million during the year compared to $356.5 million in 1995.
The Company increased loan origination activity during the year, originating
$173.1 million of first mortgage loans compared to $54.8 million in the prior
year. Additional activity in loans included mortgage loans sold for the year
ended September 30, 1996 of $62.6 million, up from $24.8 million for the year
ended September 30, 1995, and mortgage loans purchased during the year ended
September 30, 1996 of $56.2 million, up from $28.8 million for the year ended
September 30, 1995. The increase in mortgage loans purchased is primarily due
to the Company's increase in purchases of one-to-four family ARM loans.
Long-term 15- and 30- year fixed-rate loans are generally originated to be sold
in the secondary market as are five and seven year balloon loans. Shorter-term
ARM loans are originated both for sale in the secondary market and for the
Company's loan portfolio. For the year ended September 30, 1996, the Company
originated approximately $126.5 million of consumer and home equity loans,
purchased $12.8 million and sold $15.1 million of these same types of loans,
compared with originations of $96.0 million, purchases of $37.4 million and
sales of $15.3 million for the year ended September 30, 1995.
Debt and equity securities, including those available for sale, increased $7.6
million to $61.7 million at September 30, 1996, from $54.1 million at September
30, 1995. Debt and equity securities are comprised primarily of U.S. Treasury
Notes, tax-exempt obligations, mutual fund investments, preferred stock issues
and commercial paper. During the current fiscal year, the Company reclassified
$28.9 million of securities from held-to-maturity to available-for-sale. The
reclassification was completed under guidance issued by the Financial
Accounting Standards Board allowing a one-time reclassification of such
securities.
Real estate held for investment increased $12.6 million to $36.9 million at
September 30, 1996, from $24.3 million at September 30, 1995. Real estate held
for investment consists of affordable housing projects in which a subsidiary of
the Bank invests, which qualify for tax credits under Section 42 of the
Internal Revenue Code. The subsidiary currently is a limited partner in 20
projects and has committed to equity investments in an additional five
projects, all within the state of Wisconsin. Additionally, the Bank has
provided financing or committed to provide financing to 24 of the projects.
However, the primary return to the Company on these projects is in the form of
income tax credits earned over the first ten years of the project.
Deposits increased $189.3 million to $877.7 million at September 30, 1996 from
$688.3 million at September 30, 1995. The Company continued to sell
certificates of deposit through investment brokers, which totaled $138.6
million at September 30, 1996, an increase of $100.6 million from the prior
year. Additionally, a new totally-free checking account and various odd-term
certificates of deposits were introduced during the year in an effort to
attract deposits. Although the Company has experienced growth in its deposit
liabilities during 1996, there can be no assurance that this trend will
continue in the future.* The level of deposit inflows during any given period
is heavily influenced by factors such as the general level of interest rates as
well as alternative yields that investors may obtain on competing instruments,
such as money market mutual funds.
42
<PAGE> 43
Advances and other borrowings increased to $375.0 million at September 30,
1996, from $345.7 million at September 30, 1995. This increase is due
primarily to the Company's previously discussed leveraging strategy to increase
its earning assets through the purchase of short- and medium-term
mortgage-related securities using FHLB advances as a funding source. In
connection with this leveraging strategy, the Company has entered into interest
rate swap agreements for some of the variable rate advances, swapping the
variable rate for a fixed rate (fixed-pay, variable-receive). Interest rate
swaps outstanding totaled $55 million and $65 million at September 30, 1996 and
1995, respectively. The swaps are designed to offset the changing interest
payments of some of the Company's borrowings. The current fixed-pay,
variable-receive swaps will provide for a lower interest expense (or interest
income) in a rising rate environment while adding to interest expense in a
falling rate environment. During the year ended September 30, 1996, the
Company recorded a net reduction of interest expense of $413,000.
43
<PAGE> 44
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL
Net income for the year ended September 30, 1996 before a one-time significant
charge increased $300,000 or 2.4% to $13.0 million from $12.7 million for the
year ended September 30, 1995. The significant charge was a one-time
industry-wide assessment of $2.5 million, after tax, for the recapitalization
of the Savings Association Insurance Fund ("SAIF"). The Company reported
actual net income of $10.5 million for the year ended September 30, 1996. The
change was primarily the result of an increase in earning assets, which
resulted in a $2.1 million increase in net interest income, a $2.3 million
increase in other income and a $3.4 million decrease in income tax expense,
partially offset by a $1.1 million increase in provision for loan losses and a
$8.9 million increase in general and administrative expenses.
NET INTEREST INCOME
Net interest income before provision for loans losses increased $2.1 million or
6.3% to $35.7 million for the year ended September 30, 1996 compared to $33.6
million for the year ended September 30, 1995. The increase was due to an
increase of $96.6 million in average earning assets, partially offset by a
decrease in the net interest margin to 2.97% in 1996 from 3.04% in 1995.
Total interest income increased $8.3 million or 9.9% to $92.1 million for the
year ended September 30, 1996 compared to $83.8 million for the year ended
September 30, 1995. The increase in interest income was primarily the result
of a $5.5 million increase in interest on loans and a $2.5 million increase in
interest on mortgage-backed and related securities. The increase in interest
on loans was due to increases in the average balance of loans to $553.7 million
for the year ended September 30, 1996, as compared to $502.6 million for the
year ended September 30, 1995, and an increase in the average yield on loans,
which increased to 8.58% for the year ended September 30, 1996, from 8.35% for
the year ended September 30, 1995. The increase in the yields and average
balances of loans is consistent with the Company's recent efforts to emphasize
higher yielding loans, such as those made in consumer and home equity lending
and an increase in the level of loan purchases. Such loans while resulting in
higher yields for the Company may result in a higher level of credit risk than
conventional mortgage loans. The increase in interest income on
mortgage-backed and related securities was due to an increase in the average
balance of such securities to $559.5 million for the year ended September 30,
1996, from $516.9 million for the year ended September 30, 1995, however, the
average yield on such securities decreased to 7.00% for the year ended
September 30, 1996, from 7.10% for the year ended September 30, 1995. The
Company has purchased significant amounts of adjustable rate and short- and
medium-term securities during the past two years as part of its efforts to
increase earning assets, funding those purchases with FHLB advances, whose
terms generally match the securities purchased.
Total interest expense increased $6.2 million or 12.4% to $56.4 million for the
year ended September 30, 1996 compared to $50.2 million for the year ended
September 30, 1995. Interest expense on deposits increased $6.8 million or
22.1% to $37.6 million for the year ended September 30, 1996 compared to $30.8
million for the year ended September 30, 1995. The increase in interest
expense was the result of increases in the average balances and costs on
deposits and advances and other borrowings. The average balances of deposits
increased to $757.3 million for the year ended September 30, 1996, from $654.7
million for the year ended September 30, 1995. The increases in the balances
of deposits are due to the Company's offering of additional deposit products
and the use of brokers to purchase certificates of deposit. The average cost
of deposits increased to 4.97% for the year ended September 30, 1996, from
4.70% for the year ended September 30, 1995. Brokered deposits increased to
$138.6 million during the year compared to $38.0 million in 1995 at weighted
average stated rates of 5.35% and 6.24%, respectively. The average cost of
deposits increased even though overall market rates of interest were slightly
lower for the year ended September 30, 1996 compared with the prior year. The
Company has been emphasizing deposit accounts such as its prime CD and its
market investor account because of the deposit growth it believes these
accounts can bring over the other products the Company offers. However, these
accounts also tend to have a higher rate of interest than the average of other
deposit accounts offered
44
<PAGE> 45
by the Company. Interest expense on advances and other borrowings decreased
$645,000 or 3.3% to $18.8 million for the year ended September 30, 1996 from
$19.4 million for the year ended September 30, 1995. The average balance of
advances and other borrowings increased to $341.2 million for the year ended
September 30, 1996, from $339.8 million for the year ended September 30, 1995,
while the average cost of advances and other borrowings decreased to 5.50% for
the year ended September 30, 1996, from 5.71% for the year ended September 30,
1995. The increase in the average balance of borrowings was a result of the
aforementioned leveraging program with most of the borrowings being
adjustable-rate advances which have repriced downwards as market rates of
interest have decreased.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $1.3 million for the year ended
September 30, 1996 compared to a provision for loan losses of $240,000 for the
year ended September 30, 1995. For the year ended September 30, 1996, the
Company recorded an additional provision of $1.0 million for loan losses on a
pool of auto loans purchased by the Company. The allowance for loan losses
totaled $5.2 million and $4.1 million at September 30, 1996 and 1995,
respectively, representing 0.78% and 0.77% of total loans, respectively. Net
charge-offs were $159,000 during the year ended September 30, 1996 and $293,000
during the year ended September 30, 1995. Included in the net charge-offs for
the year ended September 30, 1995 was a $210,000 charge-off for the settlement
of a loan on a multi-family property in Houston, Texas. The provision for loan
loss is established based on management's evaluation of the risk inherent in
its loan portfolio and the general economy. Such evaluation, which includes a
review of all loans on which full collectibility may not be reasonably assured,
considers, among other matters, the estimated net realizable value of the
underlying collateral, economic conditions, historical loan loss experience and
other factors that warrant recognition in providing for an accurate provision
for loan losses.
OTHER OPERATING INCOME
Other operating income increased $2.3 million or 27.4% to $10.6 million for the
year ended September 30, 1996 compared to $8.3 million for the year ended
September 30, 1995. The increases were due primarily to gains on investments
and mortgage-backed and related securities, gains on mortgage loans held for
sale, gains on foreclosed properties and real estate held for sale and
increased income from the Company's affordable housing subsidiary. Gains on
investments and mortgage-backed and related securities were $3.3 million for
the year ended September 30, 1996, compared to $2.6 million for the year ended
September 30, 1995. The gains recognized were primarily due to declining
interest rates and the Company's repositioning of its existing leverage
portfolio. The Company sold securities from the leverage portfolio and
replaced them with similar securities with more favorable interest rate and
maturity characteristics. One of the Company's asset/liability management
techniques utilizes options which provide it with a practical floor and cap on
portfolio market values for moderately adverse interest rate movements.
However, during periods of rapidly rising interest rates, the strategy may not
prevent a market value loss from being recognized overall, and also may result
in additional losses incurred on the options themselves. Gains on sales of
mortgage loans held for sale increased to $1.1 million for the year ended
September 30, 1996 compared to $261,000 for the year ended September 30, 1995.
Gain/(loss) on foreclosed properties and real estate held for sale, net
increased due to the Company recording a gain of $684,000 in 1996 on the cash
sale of a foreclosed multi-family property acquired in August, 1995. The
operations of the Company's affordable housing subsidiary had increases in
income (which represents primarily rental income) for the year ended September
30, 1996 of $806,000 from the previous year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $8.9 million or 39.2% to $31.6
million for the year ended September 30, 1996, compared to $22.7 million for
the year ended September 30, 1995. General and administrative expenses were
higher primarily because of increased compensation and other costs associated
with the Company's expansion of various lines of business, including an
increased emphasis on commercial banking, higher levels of mortgage and
consumer loan originations, the opening of two new branches and the
establishment of a centralized call center. FDIC premiums increased $4.2
million due to the one-time charge for recapitalization of the Savings
Association Insurance Fund ("SAIF"). A reduction in FDIC premium rates are
expected to favorably impact general and administrative expenses in fiscal
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<PAGE> 46
1997.* The expenses related to the operation of the Company's affordable
housing subsidiary increased $744,000 for the year ended September 30, 1996.
INCOME TAX EXPENSE
Income tax expense decreased by $3.4 million or 53.6% to $2.9 million for the
year ended September 30, 1996 compared to $6.3 million for the year ended
September 30, 1995. The decrease was a result of a decrease in income before
income tax expense, income tax credits received from investment in the
low-income housing units and increased municipal interest and dividends. The
Company's effective tax rate was 21.8% for the year ended September 30, 1996,
compared to 33.1% for the year ended September 30, 1995.
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<PAGE> 47
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL
Net income for the year ended September 30, 1995 increased $4.7 million or
58.0% to $12.7 million from $8.0 million for the year ended September 30, 1994.
The increase was primarily the result of an increase in earning assets, which
resulted in a $5.1 million increase in net interest income and a $4.8 million
increase in other income, partially offset by a $3.3 million increase in
general and administrative expenses and a $1.9 million increase in income tax
expense.
NET INTEREST INCOME
Net interest income before provision for loans losses increased $5.1 million or
17.8% to $33.6 million for the year ended September 30, 1995 compared to $28.5
million for the year ended September 30, 1994. The increase was due to an
increase of $207.2 million in average earning assets, partially offset by a
decrease in the net interest margin to 3.04% in 1995 from 3.17% in 1994.
Total interest income increased $23.7 million or 39.3% to $83.8 million for the
year ended September 30, 1995 compared to $60.1 million for the year ended
September 30, 1994. The increase in interest income was primarily the result
of a $10.7 million increase in interest on loans and a $10.4 million increase
in interest on mortgage-backed and related securities. The increase in
interest on loans was due to increases in the average balance of loans to
$502.6 million for the year ended September 30, 1995, as compared to $387.4
million for the year ended September 30, 1994, and an increase in the average
yield on loans, which increased to 8.35% for the year ended September 30, 1995,
from 8.06% for the year ended September 30, 1994. The increase in the yields
and average balances of loans includes the addition of the Bank Wisconsin loans
and also is consistent with the Company's recent efforts to emphasize higher
yielding loans, such as those made in consumer and home equity lending. The
increase in interest income on mortgage-backed and related securities was due
to an increase in the average balance of such securities to $516.9 million for
the year ended September 30, 1995, from $454.5 million for the year ended
September 30, 1994 and an increase in the average yield on such securities,
which increased to 7.10% for the year ended September 30, 1995, from 5.78% for
the year ended September 30, 1994. The Company has purchased significant
amounts of adjustable rate and short- and medium-term securities during the
past two years as part of its efforts to increase earning assets, funding those
purchases with FHLB advances, whose terms generally match the securities
purchased.
Total interest expense increased $18.6 million or 58.8% to $50.2 million for
the year ended September 30, 1995 compared to $31.6 million for the year ended
September 30, 1994. The increase in interest expense was the result of
increases in the average balances and costs on deposits and advances and other
borrowings. The average balances of deposits increased to $654.7 million for
the year ended September 30, 1995, from $525.8 million for the year ended
September 30, 1994. The increases in the balances of deposits are due to the
acquisition of Bank Wisconsin and the related deposits, the Company's offering
of additional deposit products and the use of brokers to sell certificates of
deposit. The average cost of deposits increased to 4.70% for the year ended
September 30, 1995, from 3.90% for the year ended September 30, 1994. Deposit
rates paid by the Company reflected the general increase in market rates of
interest paid on deposit products during the recent year. The average balance
of advances and other borrowings increased to $339.8 million for the year ended
September 30, 1995, from $242.7 million for the year ended September 30, 1994,
while the average cost of advances and other borrowings increased to 5.71% for
the year ended September 30, 1995, from 4.56% for the year ended September 30,
1994. The increase in the average balance of borrowings was a result of the
aforementioned leveraging program with most of the borrowings being
adjustable-rate advances which have repriced upwards as market rates of
interest have increased.
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<PAGE> 48
PROVISION FOR LOAN LOSSES
During each of the years ended September 30, 1995 and 1994, the Company
recorded a provision for loan losses of $240,000. Furthermore, approximately
$694,000 was added to the Company's allowance for loan losses as a result of
the acquisition of Bank Wisconsin. The allowance for loan losses totaled $4.1
million and $3.4 million at September 30, 1995 and 1994, respectively,
representing 0.77% and 0.74% of total loans, respectively. Net charge-offs
were $293,000 during the year ended September 30, 1995 and $80,000 during the
year ended September 30, 1994. Included in the net charge-offs for the year
ended September 30, 1995 was a $210,000 charge-off for the settlement of a loan
on a multi-family property in Houston, Texas.
OTHER OPERATING INCOME
Other operating income increased $4.8 million or 138.4% to $8.3 million for the
year ended September 30, 1995 compared to $3.5 million for the year ended
September 30, 1994. The increases were due primarily to gains on investments
and mortgage-backed and related securities, gains on trading account activity
and increased income from the Company's affordable housing subsidiary. Gains
on investments and mortgage-backed and related securities were $2.6 million for
the year ended September 30, 1995, compared to losses of $101,000 for the year
ended September 30, 1994. The gains recognized were primarily due to declining
interest rates and the Company's repositioning of its existing leverage
portfolio. The Company sold securities from the leverage portfolio and
replaced them with similar securities with more favorable interest rate and
maturity characteristics. The losses recognized during fiscal 1994 were to
adjust the carrying amount of mortgage loans and related mortgage- backed and
related security option positions due to the general increase in interest rates
during the period. One of the Company's asset/liability management techniques
utilizes options which provide it with a practical floor and cap on portfolio
market values for moderately adverse interest rate movements. However, during
periods of rapidly rising interest rates, the strategy may not prevent a market
value loss from being recognized overall, and also may result in additional
losses incurred on the options themselves, which did occur during fiscal 1994.
The Company believes that its lending activity of salable mortgage loans will
continue to be less than the previous year's periods and thus the notional
amounts of option positions and forward commitments also will be less than
previous years due to a continued decline in fixed rate originations.* Gains
from the trading account were $1.1 million for the year ended September 30,
1995, compared with gains of $13,000 for the year ended September 30, 1994.
The gains during the current year reflect the effect of recently falling
interest rates on the Company's holding of trading assets. The increase in
other income was due primarily to the operations of the Company's affordable
housing subsidiary, which had increases in income (which represents primarily
rental income) for the year ended September 30, 1995 of $735,000 from the
previous year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $3.3 million or 17.0% to $22.7
million for the year ended September 30, 1995, compared to $19.4 million for
the year ended September 30, 1994. The increases are due primarily to the
inclusion of the general and administrative expenses of Bank Wisconsin,
acquired in November 1994, which added approximately $2.5 million to general
and administrative expenses for the year ended September 30, 1995, and the
expenses related to the operation of the Company's affordable housing
subsidiary, which had increases in operating expenses for the year ended
September 30, 1995 of $909,000 from the previous year. Additionally, the
Company recognized $383,000 of amortization of goodwill that resulted from its
acquisition of Bank Wisconsin.
INCOME TAX EXPENSE
Income tax expense increased by $2.0 million or 44.8% to $6.3 million for the
year ended September 30, 1995 compared to $4.3 million for the year ended
September 30, 1994. The increase was a result of an increase in income before
income tax expense, partially offset by income tax credits received from the
low-income housing units in which a subsidiary of the Bank have invested and
municipal interest and dividends. The Company's effective tax rate was 33.1%
for the year ended September 30, 1995, compared to 35.0% for the year ended
September 30, 1994.
48
<PAGE> 49
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
consolidated average statements of financial condition and the consolidated
statements of income for the years ended September 30, 1996, 1995 and 1994, and
reflects the average yield on assets and average cost of liabilities for the
years indicated. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
years shown. Average balances are derived principally from average daily
balances and include non- accruing loans. The yields and costs include fees
which are considered adjustments to yields. The amount of interest income
resulting from the recognition of loan fees was $457,000, $465,000 and $791,000
for the years ended September 30, 1996, 1995 and 1994, respectively. Interest
income on non-accruing loans is reflected in the year that it is collected.
Such amounts are not material to net interest income or net change in net
interest income in any year. Non-accrual loans are included in the average
balances and do not have a material effect on the average yield.
49
<PAGE> 50
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET 1996 1995 1994
-------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight
deposits $16,110 $ 864 5.36 % $ 19,975 $ 1,118 5.60 % $17,241 $ 587 3.40%
Trading account securities 41 3 7.32 8,098 519 6.41 4,250 185 4.35
Debt and equity securities 54,213 3,329 6.14 40,136 2,396 5.97 22,348 1,148 5.14
Mortgage-backed and related
securities 559,531 39,163 7.00 516,931 36,689 7.10 454,466 26,262 5.78
Loans:
First mortgage 357,529 29,324 8.20 352,843 27,597 7.82 287,031 23,003 8.01
Home equity 81,842 7,889 9.64 75,399 7,439 9.87 64,358 5,102 7.93
Consumer 95,093 8,513 8.95 62,730 5,797 9.24 35,968 3,124 8.69
Commercial and agricultural 19,202 1,786 9.30 11,630 1,142 9.82 - - -
------------------- ------------------- -----------------
Total loans 553,666 47,512 8.58 502,602 41,975 8.35 387,357 31,229 8.06
Federal Home Loan Bank stock 17,859 1,226 6.86 17,086 1,090 6.38 12,003 722 6.02
------------------- ------------------- -----------------
Total earning assets 1,201,420 92,097 7.67 1,104,828 83,787 7.58 897,665 60,133 6.70
------- ------- -------
Valuation allowances (3,798) (7,529) (7,587)
Cash and due from banks 14,334 12,442 9,854
Other assets 66,441 46,724 23,352
---------- ---------- --------
Total assets $1,278,397 $1,156,465 $923,284
========== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 42,013 $ 614 1.46 $ 41,821 $ 553 1.32 $33,170 $ 516 1.56
Money market demand accounts 147,121 6,787 4.61 108,530 4,681 4.31 70,236 1,946 2.77
Passbook 84,078 2,392 2.84 92,609 2,560 2.76 106,148 2,811 2.65
Certificates of deposit 484,051 27,817 5.75 411,753 22,981 5.58 316,216 15,243 4.82
------------------- ------------------- -----------------
Total interest-bearing deposits 757,263 37,610 4.97 654,713 30,775 4.70 525,770 20,516 3.90
Advances and other borrowings 341,184 18,765 5.50 339,827 19,402 5.71 242,676 11,057 4.56
Advances from borrowers for taxes
and insurance 6,477 38 0.59 6,520 46 0.71 5,794 60 1.04
------------------- ------------------- -----------------
Total interest-bearing
liabilities 1,104,924 56,413 5.11 1,001,060 50,223 5.02 774,240 31,633 4.09
------- ------- -------
Non-interest bearing deposits 27,812 20,391 17,628
Other liabilities 11,721 8,337 6,596
Shareholders' equity 133,940 126,677 124,820
---------- ---------- --------
Total liabilities and
shareholders' equity $1,278,397 $1,156,465 $923,284
========== ========== ========
Net interest income $35,684 $ 33,564 $28,500
======= ======== =======
Net yield on interest-earning assets 2.97 % 3.04 % 3.17%
Interest rate spread 2.56 2.56 2.61
Ratio of earning assets to
interest-bearing liabilities 108.73 110.37 115.94
</TABLE>
50
<PAGE> 51
RATE/VOLUME ANALYSIS
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volumes of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest- bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (iii) changes attributable to the
combined impact of volume and rate (changes in the rate multiplied by the
changes in the volume) and (iv) the net change.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
- ----------------------------------------------------------------------------------------------------------------------
RATE/ RATE/
(In thousands) RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and overnight
deposits $ (47) $(216) $ 9 $(254) $378 $93 $60 $531
Trading account securities 74 (516) (74) (516) 87 168 79 334
Securities 69 840 24 933 186 914 148 1,248
Mortgage-backed and related securities (508) 3,024 (42) 2,474 5,994 3,610 822 10,426
Loans:
Mortgage 1,343 367 17 1,727 (553) 5,274 (127) 4,594
Home equity (171) 636 (15) 450 1,248 875 214 2,337
Consumer (181) 2,991 (94) 2,716 200 2,324 149 2,673
Commercial and agriculture (60) 744 (40) 644 - - 1,142 1,142
------ ------- ------ ------- ----- -------- ----- ---------
Gross loans receivable 931 4,738 (132) 5,537 895 8,473 1,378 10,746
Federal Home Loan Bank stock 83 49 4 136 44 306 19 369
------ ------- ------ ------- ----- -------- ----- ---------
Total 602 7,919 (211) 8,310 7,584 13,564 2,506 23,654
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts 58 3 - 61 (77) 135 (21) 37
Money market demand accounts 326 1,664 116 2,106 1,083 1,061 591 2,735
Passbook 75 (236) (7) (168) 123 (359) (15) (251)
------ ------- ------ ------- ----- -------- ----- ---------
Certificates of deposit 680 4,037 119 4,836 2,406 4,605 727 7,738
Total deposits 1,139 5,468 228 6,835 3,535 5,442 1,282 10,259
Advances and other
borrowings (712) 77 (3) (638) 2,798 4,426 1,121 8,345
Advances from borrowers for taxes
and insurance (7) - - (7) (19) 8 (3) (14)
------ ------- ------ ------- ----- -------- ----- ---------
Total 420 5,545 225 6,190 6,314 9,876 2,400 18,590
------ ------- ------ ------- ----- -------- ----- ---------
Net change in net
interest income $ 182 $ 2,374 $ (436) $ 2,120 1,270 $ 3,688 106 $ 5,064
====== ======= ====== ======= ===== ======== ===== =========
</TABLE>
ASSET/LIABILITY MANAGEMENT
The Company's profitability, like that of most financial institutions, depends
to a large extent upon its net interest income, which is the difference between
interest earned on its interest-earning assets, such as loans and investments,
and its interest expense paid on interest-bearing liabilities, such as
deposits and borrowings.
The Company maintains a high level of short-term savings deposits, including
passbook savings, NOW checking accounts and money market deposit accounts.
These accounts typically react more quickly to changes in market interest rates
than the Company's investments in mortgage-backed and related securities and
mortgage loans because of the shorter maturity and repricing characteristics of
deposits. As a result, sharp increases in interest rates may adversely affect
earnings while decreases in interest rates may beneficially affect earnings.
51
<PAGE> 52
In an attempt to manage vulnerability to interest rate changes, management
closely monitors the Company's interest rate risks. The Company has
established its investment strategies through an Asset/Liability Committee
which reports to the Board of Directors. The Committee generally meets monthly
and reviews the Company's interest rate risk position, maturing securities and
borrowings, interest rates and programs for raising deposits, including retail
and brokered and nonbrokered wholesale deposits, and making and purchasing
loans and develops policies dealing with these issues. The Company primarily
seeks to manage its interest rate risk through structuring its balance sheet
by investing in a variety of different types of financial instruments in order
to reduce its vulnerability to changes in interest rates and to enhance its
income. Although the Company's assets and liabilities maturing and repricing
within one year are currently relatively well matched, if interest rates were
to rise significantly, and for a prolonged period, the Company's operating
results could be adversely affected.
Generally, the Company uses the following strategies to reduce its interest
rate risk: (i) the Company seeks to originate and hold a variety of ARMs or
other mortgage loans with short- to medium-term average lives or terms and
invests in primarily adjustable-rate mortgage-backed and related securities
with short- to medium-term average lives; (ii) the Company seeks to lengthen
the maturities of deposits when deemed cost effective through the pricing and
promotion of certificates of deposit with terms of one to five years, and
periodically utilizes deposit marketing programs offering maturity and
repricing terms structured to complement the repricing and maturity
characteristics of the existing asset/liability mix; and (iii) the Company has
utilized longer term borrowings, principally secured from the FHLB, in order to
manage its assets and liabilities and enhance earnings. Furthermore, the
Company is utilizing its capital position to increase earning assets by
investing primarily in REMIC securities with short and medium terms of two to
five years and financing the purchases with FHLB advances that generally match
the expected average lives of the respective securities.
By originating and purchasing ARM loans and other mortgage loans with short to
medium terms and by investing in primarily variable-rate, short- to medium-term
securities, the Company has been able to reduce interest rate risk by more
closely matching the terms and repricing characteristics of its assets and
liabilities. In addition, because of the relative liquidity of mortgage-backed
and related securities, the Company can restructure its interest-earning asset
portfolio more quickly and effectively in a changing interest rate environment.
Although the Company has continued in its emphasis upon originating ARM loans
and has been developing other types of mortgage loans with shorter average
lives, customer demands for fixed rate mortgage and consumer loans and the
level of the Company's portfolio of fixed rate mortgage loans and investments
with longer average lives continues to affect its gap position. The Company's
ARM loans and ARM mortgage-backed and related securities also typically have
annual and lifetime caps on interest rate increases, which reduces the extent
to which they protect the Company against interest rate risk.
The Company continues to closely monitor its interest rate risk as that risk
relates to its strategies. At September 30, 1996, total interest-bearing
liabilities maturing or repricing within one year exceeded total
interest-earning assets maturing or repricing in the same period by $135.7
million, representing a negative cumulative one year gap ratio of 9.7%,
compared to a negative cumulative one year gap ratio of 10.9% at September 30,
1995. With a negative gap position, during periods of rising interest rates it
is expected that the cost of the Company's interest-bearing liabilities will
rise more quickly than the yield on its interest-earning assets, which will
have a negative effect upon its net interest income. Although the opposite
effect on net interest income would occur in periods of falling interest rates,
the Company could experience substantial prepayments of its fixed-rate mortgage
loans and mortgage-backed and related securities in periods of falling interest
rates, which results in the reinvestment of such proceeds at market rates which
are lower than current rates. The change in the cumulative one year gap from
September 30, 1996 to September 30, 1995 was largely the result of the increase
in originating and purchasing ARM loans and other types of mortgage loans with
shorter average lives.
52
<PAGE> 53
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996:
<TABLE>
<CAPTION>
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Total
-----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed $ 14,717 $ 21,701 $ 25,321 $ 28,851 $ 52,201 $ 142,791
Variable 66,845 68,352 105,564 36,974 4,047 281,782
Consumer loans (2) 92,087 38,723 11,063 16,595 27,658 186,126
Mortgage-backed and related securities 1,259 4,034 29,560 27,317 9,262 71,432
Assets available for sale:
Mortgage loans 20,582 - - - - 20,582
Fixed rate mortgagE related 6,500 20,546 36,417 12,412 40,746 116,621
Variable rate mortgage related 295,165 109,494 - - - 404,659
Other 22,286 9,132 8,033 10,793 8,243 58,487
Trading account securities - - - - - -
Investment securities and other assets 22,459 - 3,715 - - 26,174
-----------------------------------------------------------------------------------
Total $541,900 $271,982 $219,673 $132,942 $142,157 $1,308,654
===================================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts $ 3,280 $ 11,140 $ 15,252 $ 6,054 $ 3,984 $ 39,710
Passbook savings accounts 3,373 10,119 20,492 14,117 31,261 79,362
Money market deposit accounts 38,683 116,663 16,119 4,030 1,343 176,838
Certificates of deposit 285,165 176,136 74,317 11,779 - 547,397
Borrowings (4) 304,965 9 70,000 60 - 375,034
-----------------------------------------------------------------------------------
Total $635,466 $314,067 $196,180 $ 36,040 $ 36,588 $1,218,341
===================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(93,566) $(42,085) $ 23,493 $ 96,902 $105,569 $ 90,313
===================================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities $(93,566) ($135,651) ($112,158) ($ 15,256) $ 90,313
====================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets -6.66% -9.66% -7.99% -1.09% 6.43%
=====================================================================
</TABLE>
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing
the Company's historical prepayment statistics, modified for forecasted
statistics using the Public Securities Association model of prepayments.*
For fixed rate mortgage loans and mortgage-backed and related securities,
annual prepayment rates ranging from 8% to 30%, based on the loan coupon
rate, were used.
(2) Balances have been reduced for undisbursed loan proceeds, unearned
insurance premiums, deferred loan fees, purchased loan discounts and
allowances for loan losses, which aggregated $37.4 million at September
30, 1996.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposits in changing
interest rate environments. NOW accounts, passbook savings accounts and
money market deposit accounts are assumed to be withdrawn at annual rates
of 37%, 17% and 88%, respectively, of the declining balance of such
accounts during the period shown. The withdrawal rates used are higher
than the Company's historical rates but are considered by management to be
more indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $248.3 million or 17.7% of
total assets.
(4) Adjustable and floating rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due. The effect of interest rate swap agreements
are included in the balances. The effect of the interest rate swap
agreements are to decrease borrowings set to mature or reprice within
three months by $55.0 million and increase borrowings set to mature
or reprice in more than one year to three years by $55.0 million .
53
<PAGE> 54
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market 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. Additionally, certain assets, such as ARM loans and
mortgage-backed and related securities, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of ARM loans and mortgage-backed and related
securities in the Company's portfolios could decrease in future periods if
market interest rates remain at or decrease below current levels due to the
exercise of conversion options and refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase.
From time to time, the Company has utilized a variety of financial instruments
and strategies to manage the interest rate risk associated with its interest
rate sensitive assets and liabilities. Techniques that have been utilized
include interest rate swaps and caps, financial futures and options and forward
commitments. At various points in time, the Company, responding to changing
interest rate, prepayment, credit and market value risk environments, may
emphasize one strategy or financial instrument over another in its endeavor to
achieve the desired interest rate and market value risk profile.
The Company has entered into various off-balance sheet transactions that are
not yet, or never may be, reflected on the balance sheet. The transactions,
while not affecting the balance sheet, may have some effect on earnings. Due
to the possible balance sheet and earnings effect of these items, there is some
potential credit, interest rate and market value price risk inherent in these
transactions. The Company has been primarily utilizing these items to manage
the interest rate and market value risk relating to mortgage-backed securities
that result from the MBS loan swap program. These mortgage-backed securities
are then ultimately sold either through forward commitments or option
contracts. As a result, the majority of held for sale off-balance sheet
transactions do not impact the balance sheet. The Asset/Liability Committee
recommends aggregate limits which may change from time to time, as specifically
authorized by the Board of Directors.
The Company enters into interest rate exchange agreements ("swaps" and "caps")
from time to time in order to reduce the interest rate risk associated with
certain assets and liabilities. The swap transactions have been fixed-pay,
floating-receive payments whereby the Company pays interest at a fixed rate and
receives interest at a floating rate based on a pre-determined, or notional
amount of principal, locking in fixed costs of funds. The net interest income
or expense resulting from the differential between exchanging floating rate and
fixed rate interest payments is recorded on a current basis. The interest rate
caps were purchased to limit interest rate costs in the event of interest rate
increases. Costs to purchase caps are amortized over the term of the caps.
There are certain risks associated with swaps and caps, including the risk that
the counterparty may default and that there may not be an exact correlation
between the indices on which the swap agreements are based and the terms of the
hedged liabilities. In order to offset these risks, the Company generally
enters into swap and cap agreements only with nationally recognized securities
firms and monitors the credit status of counterparties, the level of collateral
for such swaps and the correlation between the hedged liabilities and indices
utilized. Generally, the swaps and caps have been designed to increase in
value in the event of a rise in interest rates and decrease in value in the
event of a fall in interest rates, in order to partially offset the effect on
the additional costs of funds resulting from an increase in interest rates.
However, there is no assurance that in the event interest rates change, the
swaps and caps will move on the same basis or in the same amounts as its cost
of funds. At September 30, 1996 and 1995, the Company had interest rate swaps
outstanding with a notional amount of $55.0 million and $65.0 million,
respectively. $65.0 million is the largest aggregate notional amount of the
Company's interest rate swaps and caps at any one time over the past five
years.
54
<PAGE> 55
The agreements consist of the following:
<TABLE>
<CAPTION>
Notional
Amount Maturity Fixed Variable
(000s) Type Date Rate Rate
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$10,000 Fixed Pay-Floating Receive 1998 4.93% 5.57%
10,000 Fixed Pay-Floating Receive 1998 5.04 5.63
15,000 Fixed Pay-Floating Receive 1998 5.25 5.63
10,000 Fixed Pay-Floating Receive 1998 5.23 5.50
10,000 Fixed Pay-Floating Receive 1998 5.43 5.66
</TABLE>
There were no outstanding interest rate caps at September 30, 1996 or 1995.
For the years ended September 30, 1996 and 1995, the Company incurred net
interest income on interest rate exchange agreement activity of $413,000 and
$628,000, respectively, while incurring net interest expense of $658,000 for
the year ended September 30, 1994. While this activity resulted in net
interest income in fiscal years 1996 and 1995 and net interest expense in
fiscal year 1994, the Company effectively fixed the related funding costs of
assets associated with the agreements. The Company's Investment Policy limits
the notional amount of outstanding interest rate exchange agreements to $150.0
million. Any notional amounts of interest rate exchange agreements in excess
of $150.0 million must be approved by the Company's Board of Directors.
The Company also utilizes financial futures or options to manage anticipated
increases in interest rates and the resulting decline in the market prices of
its mortgage loan production. Option contracts represent a right (not the
obligation) for the owner of the contract to purchase or sell specified
securities at some specified future (forward) date at a specified price.
Options can be purchased and owned (long), or sold and owned by a counterparty
(short). A long put position represents the right to sell, while a long call
represents the right to purchase. A short put position represents the right of
the counterparty to sell securities to the Company, resulting in a purchase. A
short call option position represents the right of the counterparty to purchase
from the Company, resulting in a sale. These options when exercised become
commitments to purchase or sell securities. These options are over-the-counter
options to purchase or sell mortgage-backed securities and exchange-trade
options on U.S. Treasury futures. The options provide a practical floor and cap
on portfolio market values for moderate interest rate movements while the
forward contracts are used to offset actual and anticipated on- and off-balance
sheet positions of the Company. These options result in a certain amount of
potential interest rate and market value risk exposure for the Company. The
amount of the actual exposure is determined by the exercise of these options.
The Company generally sells options for settlement no more than four months
forward. An option's likelihood of exercise is dependent upon the relation of
the market price of the underlying security to the strike price of the option.
The strategy is not meant to offset losses that could be incurred during a
substantial interest rate move such as that which occurred during the year
ended September 30, 1994 and actually may result in additional losses on the
instruments themselves which is beyond the losses the Company would have
incurred had the management techniques not been utilized. The combined effect
of the Company's option, forward commitment and loan swap activity is included
in the income statement as part of gain (loss) on debt and equity and
mortgage-backed and related securities. For the years ended September 30, 1996
and 1995, the Company realized gains on that combined activity of $203,000 and
$335,000, respectively, as compared to realized losses of $2.4 million for the
year ended September 30, 1994. The loss for the year ended September 30, 1994
was generally the result of the steep increase in interest rates represented by
the rise in the Company's rate of 7.30% on 30-year fixed rate loans quoted in
February 1994 to 9.30% quoted in September 1994. At September 30, 1996 and
1995, the notional amount of outstanding short put options (which if exercised
could result in a purchase) were $4.0 million and $13.0 million, respectively.
As of September 30, 1996 and 1995, the notional amount of outstanding short
call options (which if exercised could result in a sale) were $4.0 million and
$16.0 million, respectively. The notional amount of options and forward
contracts outstanding varies and is a function of the current lending activity
of salable mortgage loans. In order to limit the risks which may be associated
with such financial options or futures, the Company's Investment Policy limits
the amount of outstanding sold puts or calls used to manage the Company's
available for sale portfolio to $40.0 million; the amount of financial futures
or purchased options used to manage Company's held for sale portfolio to $20.0
million; and the amount of financial options used to manage
<PAGE> 56
the Company's available for sale portfolio to $40.0 million; the amount of
financial futures or purchased options used to manage Company's held for sale
portfolio to $20.0 million; and the amount of financial options used to manage
the Company's trading portfolio to $20.0 million. Any amounts of outstanding
financial options or futures in excess of these amounts must be approved by the
Company's Board of Directors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings from the FHLB,
proceeds from principal and interest payments on loans and principal and
interest payments on mortgage-backed and related securities and on debt and
equity securities. Although maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows, mortgage prepayments and
prepayments on mortgage-backed and related securities are influenced
significantly by general interest rates, economic conditions and competition.
Mortgage loan and mortgage security prepayments slowed during 1995 and 1996
because of the generally higher level of interest rates. Prepayments had
accelerated considerably throughout most of 1994 because of generally lower
interest rates, which prompted significant mortgage refinancing activity.
The Bank is required to maintain minimum levels of liquid assets as defined
under OTS regulations. These requirements, which may be changed by the OTS
depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio of liquid
assets to deposits and short-term borrowings is currently 5.0%. The Bank's
liquidity ratios were 7.1% and 7.6% at September 30, 1996 and 1995,
respectively. The Bank adjusts its liquidity levels in order to meet various
funding needs and to meet its asset and liability management objectives.
The Bank's most liquid assets are cash and cash equivalents and highly liquid,
short-term investments. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At September 30, 1996 and 1995, liquid assets of the Bank (as defined in the
OTS regulations) were $57.3 million and $48.1 million, respectively. Liquidity
levels are reviewed regularly and decisions are made as to how excess liquid
funds are to be invested. During periods in which the Bank is unable to
originate a sufficient amount of loans that it intends to retain, such as ARM
loans and other loans with shorter durations or terms, and during periods of
high principal prepayments, the Bank will increase liquid assets with remaining
amounts invested in mortgage-backed and related securities which are not
liquidity-qualifying under OTS regulations.
Liquidity management for the Company is both an ongoing and long-term function
of the Company's asset/liability management strategy. Excess funds generally
are invested in short-term investments such as federal funds or overnight
deposits at the FHLB. During fiscal 1996, the Company has found brokered
certificates of deposit to be an efficient source and a cost-effective method,
relative to local retail market deposits, of meeting the Company's funding
needs. In fiscal 1996, the pricing of brokered deposits ranged from 23 to 36
basis points above comparable term U.S. treasury securities. Management
recognizes that the likelihood for retention of brokered certificates of
deposits is more a function of the rate paid on such accounts as compared to
retail deposits which may be established due to branch location or other
intangible reasons. Management believes that a significant portion of its
retail deposits will remain with the Company, and in the case of brokered
deposits, may be replaced with similar type accounts even should the level of
interest rates change. However, in the event of a significant increase in
market interest rates, the cost of obtaining replacement brokered deposits
would increase as well. Whenever the Company requires funds beyond its ability
to generate them internally, additional sources of funds are available and
obtained from borrowings from the FHLB. Funds also may be available through
reverse repurchase agreements wherein the Company pledges mortgage-backed
securities. The Company utilizes its borrowing capabilities on a regular
basis. At September 30, 1996, FHLB advances totaled $373.6 million or 29.2% of
total liabilities and at September 30, 1995, FHLB advances were $330.1 million
or 31.3% of total liabilities. At September 30, 1996, the Company had a
borrowing capacity available of $116.3 million from the FHLB, however,
additional securities may have to be pledged as collateral. At September 30,
1996, there were no reverse repurchase agreements and at September 30, 1995,
reverse repurchase agreements totaled $13.5 million or 1.3% of total
liabilities. The Company's reverse repurchase agreements are generally
short-term, with maturities of less than 90 days. In a rising interest rate
environment, such short-term borrowings present the risk that upon maturity,
the borrowings will have to be replaced with higher rate borrowings. The
Company generally has matched such borrowings to specific assets and has
relatively little liquidity risk due to the fact that the assets and borrowings
mature at approximately the same time.
56
<PAGE> 57
The amount of principal repayments on loans and mortgage securities are heavily
influenced by the general level of interest rates in the economy. Funds
received from principal repayments on mortgage securities for the years ended
September 30, 1996 and 1995, were $68.2 million and $34.7 million,
respectively. Funds received from principal repayments on loans for the years
ended September 30, 1996 and 1995, were $172.0 million and $122.2 million,
respectively. In addition to principal repayments, the Company sells mortgage
loans to government agencies (primarily FNMA) and to institutional investors.
Total mortgage loan sales to FNMA and others were $62.6 million and $26.8
million for the years ended September 30, 1996 and 1995, respectively.
Through both origination and purchase, the Company primarily reinvests funds
received back into loans receivable and mortgage-backed and related securities.
Loan originations totaled $313.6 million and $159.6 million for the years ended
September 30, 1996 and 1995, respectively. Purchases of mortgage-backed and
related securities totaled $324.6 million and $169.7 million for the years
ended September 30, 1996 and 1994, respectively. During the years ended
September 30, 1996 and 1995, the Company repurchased approximately 608,000 and
373,000 shares of its common stock in share repurchase programs at a total cost
of approximately $15.5 million and $7.1 million, respectively.
At September 30, 1996 and 1995, the Company had outstanding loan commitments
including lines of credit of $159.2 million and $100.2 million, respectively.
The Company had no commitments to purchase loans outstanding at either of these
dates. At September 30, 1996 and 1995, the Company had commitments to purchase
$12.8 million and $13.7 million, respectively, of mortgage-backed and related
securities. The Company anticipates it will have sufficient funds available to
meet its current loan commitments, including loan applications received and in
process prior to the issuance of firm commitments. Certificates of deposit
which are scheduled to mature in one year or less at September 30, 1996 and
1995, were $358.3 million and $292.8 million, respectively. Management
believes that a significant portion of such deposits will remain with the
Company.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
contains provisions for capital standards that require banks to have a minimum
3% leverage ratio (Tier 1 capital to adjusted total assets), a minimum 4% Tier
1 capital to risk-weighted assets and a minimum 8% qualifying total capital to
risk-weighted assets. Both the Bank's and Bank Wisconsin's regulatory capital
exceeds all minimum standards required under FDICIA.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
RECENT REGULATORY LEGISLATIVE DEVELOPMENTS
The deposits of thrift institutions such as the Bank are insured up to
applicable limits under the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). Deposits of commercial banks
such as Bank Wisconsin are insured under the Bank Insurance Fund ("BIF") of the
FDIC. Insured institutions pay assessments to the applicable fund based on
assessment rate schedules determined by the law and FDIC regulation.
Premium levels for the BIF and the SAIF are set in order to permit the funds to
be capitalized at a level equal to 1.25% of total fund deposits. As the funds
reach their designated ratios, the FDIC has authority to lower fund premium
assessments to rates sufficient to maintain the designated reserve ratio.
Historically, BIF and SAIF
57
<PAGE> 58
assessment schedules had been identical. In May 1995, the BIF achieved its
designated ratio and the FDIC lowered BIF premium rates for most BIF-insured
institutions. In November 1995, the FDIC reduced assessment rates by four cents
per $100 of deposits for all BIF-insured institutions, producing a premium rate
schedule ranging from zero (i.e. whereby such institutions are subject only to a
$2,000 minimum annual premium) to 27 cents per $100 of deposits depending on the
institution's risk-based premium category. Based on these assessment rate
modifications, the majority of BIF members pay only a $2,000 minimum annual
premium. The SAIF has not achieved its designated reserve ratio and is not
anticipated to do so prior to year 2001. Premium rates for SAIF-insured members
were being paid at an average of 23.4 cents per $100 of deposits. As a result
of the modified assessment rate provisions, SAIF member institutions such as the
Bank were placed at a competitive disadvantage based on higher deposit insurance
premium obligations.
Congress recently passed legislation to address the deposit insurance premium
disparity. The "Deposit Insurance Funds Act of 1996" (the "DIF Act") was
included as part of an Omnibus Appropriations Bill that was signed into law on
September 30, 1996. Pursuant to the terms of the DIF Act, the FDIC was directed
to impose a special assessment on SAIF-assessable deposits at a rate that would
cause the SAIF to achieve its designated reserve ratio of 1.25% of SAIF-insured
deposits as of October 1, 1996. The DIF Act requires that the special
assessment be applied against the SAIF-assessable deposits held by institutions
as of March 31, 1995. Pursuant to the final rule issued by the FDIC on October
16, 1996, the special assessment rate was determined to be 65.7 basis points.
This one-time special assessment, which would fully capitalize SAIF, was
targeted to be collected on November 27, 1996.
Based on the special assessment being imposed at 65.7 basis points per $100 of
insurable deposits, the amount of the assessment to the Bank was $4.2 million
with an after-tax effect on income of $2.5 million or $0.45 cents per share. As
described below, with the recapitalization of the SAIF, BIF and SAIF premiums
will be comparable and FDIC premium expense for the Bank will therefore be
reduced in future periods.
The FDIC published a proposed rule on October 16, 1996, under which a permanent
base assessment schedule for the SAIF would be established, setting assessment
rates at a range of 4 to 31 basis points. The proposed rule also called for an
adjusted assessment schedule reducing these rates by 4 basis points to reflect
current conditions, producing an effective SAIF assessment range of 0 to 27
basis points, beginning October 1, 1996. This assessment range is comparable to
the current schedule for BIF-institutions. A special interim rate schedule
ranging from 18 to 27 basis points applies to the majority of SAIF-member
savings associations for the last quarter of 1996, reflecting the fact that
assessments related to certain bond obligations of the Financing Corporation
("FICO") are included in the SAIF rates for these institutions during that
period.
The DIF Act addresses other matters which will affect the Bank. Obligations
pursuant to the FICO bonds, which were issued to ameliorate the savings and loan
crisis in the 1980's, will be shared by all insured depository institutions
beginning after December 31, 1996. This obligation had previously been the sole
responsibility of SAIF-insured institutions and had been funded through SAIF
assessments. The DIF Act eliminates the statutory link between FICO's
assessments and amounts authorized to be assessed by the SAIF, effective January
1, 1997. All insured institutions will pay an annual assessment to fund
interest payments on the FICO bonds. Beginning in 1997, BIF-member institutions
will pay one-fifth the rate to be paid by SAIF members, for the first three
years. After January 1, 2000, BIF and SAIF members will share the FICO payments
on a pro-rata basis, which will be assessed at 2.4 basis points, until the bonds
mature in 2017.
In addition, the DIF Act provides for the merger of BIF and SAIF into a single
Deposit Insurance Fund. This provision will be effective January 1, 1999,
assuming that no insured depository institution is a savings association on that
date. This legislation contemplates that the savings association charter will
be phased out over that period of time. The DIF Act also calls for the
Secretary of the Treasury to undertake a study concerning the development of a
common charter for all insured depository institutions and the abolition of
separate and distinct charters for banks and savings associations.
58
<PAGE> 59
Management anticipates that the Bank, after consideration of the one-time
assessment described above, will continue to exceed all the regulatory minimum
capital levels.* Although management is unable to predict the ultimate effect
on Company operations of the FICO bond assessments, the merger of the BIF and
SAIF, and the potential abolition of separate and distinct charters for banks
and savings associations, management does not presently anticipate that these
provisions will have a material impact on the financial condition of the
Company in future periods.
CURRENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board issued Statement No. 123, "Accounting
for Stock Based Compensation," which will be adopted by the Company on October
1, 1996. The statement requires that a fair value based method be used to
value employee compensation plans that include stock based awards. The
statement permits a company to either recognize compensation expense under SFAS
No. 123 or continue to use prior accounting rules which did not consider the
market value of stock in certain award plans. If adoption of the statement's
fair value procedures are not used in the computation of compensation expense
in the income statement, the company must disclose in a note to the financial
statements the pro-forma impact of adoption. The Company has elected not to
recognize additional compensation expense under SFAS No. 123, but will provide
any necessary disclosures in notes to its financial statements beginning in the
year ending September 30, 1997. Therefore, there will be no effect of the
Company adopting this statement on its results of operations.
The Financial Accounting Standards Board issued Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which is effective for transfers occurring after December 31,
1996. This statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on a
consistent application of a financial-components approach that focuses on
control. The effect of adopting this statement will not be material to the
Company's results of operations.
59
<PAGE> 60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
St. Francis Capital Corporation:
We have audited the accompanying consolidated statements of financial condition
of St. Francis Capital Corporation and Subsidiaries (the "Company") as of
September 30, 1996 and 1995, and the related consolidated statements of income,
changes in shareholders' equity and cash flow for each of the years in the
three year period ended September 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of St. Francis
Capital Corporation and Subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1996 in conformity with generally
accepted accounting principles.
As discussed in note 1(f) to the consolidated financial statements the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights," an amendment of FASB Statement No. 65.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
October 25, 1996
<PAGE> 61
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
September 30,
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,604 $ 15,710
Federal funds sold and overnight deposits 4,855 5,070
------------ ------------
Cash and cash equivalents 22,459 20,780
------------ ------------
Trading account securities, at market - 3,000
Assets available for sale, at market:
Debt and equity securities (notes 3 and 9) 58,487 4,142
Mortgage-backed and related securities (notes 4 and 9) 521,280 360,077
Mortgage loans held for sale, at lower of cost or market (note 5) 20,582 1,138
Securities held to maturity:
Debt and equity securities (market values of $3,218 and $49,574,
respectively) (note 3) 3,175 49,928
Mortgage-backed and related securities (market values of $68,429
and $155,896, respectively) (notes 5 and 9) 71,432 157,495
Loans receivable, net (notes 5 and 9) 610,699 513,308
Federal Home Loan Bank stock, at cost 19,063 17,440
Accrued interest receivable (note 6) 8,067 7,012
Foreclosed properties 80 5,833
Real estate held for investment 36,865 24,264
Premises and equipment, net (note 7) 16,432 10,892
Other assets (notes 5 and 11) 15,495 13,906
------------ ------------
Total assets $ 1,404,116 $ 1,189,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 8) $ 877,684 $ 688,348
Advances and other borrowings (note 9) 375,034 345,681
Advances from borrowers for taxes and insurance 11,092 10,879
Accrued interest payable and other liabilities (notes 8 & 15) 15,127 9,079
------------ ------------
Total liabilities 1,278,937 1,053,987
------------ ------------
Commitments and contingencies (notes 2 and 16) - -
Shareholders' equity:
Preferred stock $.01 par value:
Authorized, 6,000,000 shares
None issued - -
Common stock $.01 par value:
Authorized 12,000,000 shares
Issued 7,289,620 shares
Outstanding, 5,475,509 and 6,078,799 shares, respectively 73 73
Additional paid-in-capital 72,243 71,819
Unrealized gain (loss) on securities available for sale, net of tax (1,765) 2,332
Unearned ESOP compensation (note 15) (3,488) (3,996)
Unearned restricted stock (note 15) - (701)
Treasury stock, at cost (1,814,111 and 1,210,821 shares at September 30,
1996 and 1995, respectively) (note 14) (35,529) (20,142)
Retained earnings, substantially restricted (note 12) 93,645 85,843
------------ ------------
Total shareholders' equity 125,179 135,228
------------ ------------
Total liabilities and shareholders' equity $ 1,404,116 $ 1,189,215
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
61
<PAGE> 62
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year ended September 30,
(In thousands, except per share data) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans (note 5) $ 47,512 $ 41,975 $ 31,229
Mortgage-backed and related securities 39,163 36,689 26,262
Debt and equity securities 3,329 2,396 1,148
Federal funds sold and overnight deposits 864 1,118 587
Federal Home Loan Bank stock 1,226 1,090 722
Trading account securities 3 519 185
---------- ---------- -----------
Total interest and dividend income 92,097 83,787 60,133
Interest expense:
Deposits (note 8) 37,610 30,775 20,516
Advances and other borrowings 18,803 19,448 11,117
---------- ---------- -----------
Total interest expense 56,413 50,223 31,633
---------- ---------- -----------
Net interest income before provision for loan losses 35,684 33,564 28,500
Provision for loan losses (note 5) 1,300 240 240
---------- ---------- -----------
Net interest income 34,384 33,324 28,260
---------- ---------- -----------
Other operating income (expense), net:
Loan servicing and loan related fees 1,258 1,276 1,116
Depository fees and service charges 1,451 1,316 1,092
Trading securities gains and commitment fees, net 109 1,098 13
Gain (loss) on sale of securities, net (notes 3 and 4) 3,311 2,576 (101)
Gain on sales of mortgage loans held for sale, net (note 5) 1,057 261 137
Insurance and annuity commissions 249 261 424
Gain (loss) on foreclosed properties and real estate
held for sale, net 865 (13) 21
Income from affordable housing 1,899 1,093 373
Other income 415 463 419
---------- ---------- -----------
Total other operating income, net 10,614 8,331 3,494
---------- ---------- -----------
General and administrative expenses:
Compensation, payroll taxes and other employee benefits 13,242 11,198 10,451
Office building expenses, including depreciation 2,106 1,755 1,514
Furniture and equipment expenses, including 1,874 1,457 1,200
Federal deposit insurance premiums 5,641 1,476 1,254
Real estate held for investment operations 2,156 1,412 575
Other general and administrative expenses (note 10) 6,603 5,381 4,387
---------- ---------- -----------
Total general and administrative expenses 31,622 22,679 19,381
---------- ---------- -----------
Income before income tax expense 13,376 18,976 12,373
Income tax expense (note 11) 2,911 6,277 4,336
---------- ---------- -----------
Net income $ 10,465 $ 12,699 $ 8,037
========== ========== ===========
Earnings per share (note 13) $ 1.82 $ 2.10 $ 1.16
========== ========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
62
<PAGE> 63
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
Shares of Additional on Securities Unearned Unearned
Common Common Paid-In Available ESOP Restricted Treasury Retained
(Dollars in thousands) Stock Stock Capital For Sale Compensation Stock Stock Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993 6,938,620 $ 73 $71,425 - $(4,657) $(2,570) $ (5,089) $65,270 $124,452
Net income - - - - - - - 8,037 8,037
Exercise of stock 2,816 - - - - - 36 (36) -
Purchase of treasury stock (506,159) - - - - - (8,280) - (8,280)
Amortization of unearned
compensation - - - - 291 934 - - 1,225
Unrealized loss on securities
available for sale - - - $(2,733) - - - - (2,733)
--------- ----- ------- ------- ------- ------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1994 6,435,277 73 71,425 (2,733) (4,366) (1,636) (13,333) 73,271 122,701
Net income - - - - - - - 12,699 12,699
Exercise of stock 16,470 - - - - - 264 (127) 137
Purchase of treasury stock (372,948) - - - - - (7,073) - (7,073)
Amortization of unearned
compensation - - 394 - 370 935 - - 1,699
Unrealized gain on securities
for sale - - - 5,065 - - - - 5,065
--------- ----- ------- ------- ------- ------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1995 6,078,799 73 71,819 2,332 (3,996) (701) (20,142) 85,843 135,228
Net income - - - - - - - 10,465 10,465
Cash dividend - $0.40 per
share - - - - - - - (2,199) (2,199)
Exercise of stock 5,100 - - - - - 96 (464) (368)
Purchase of treasury stock (608,390) - - - - - (15,483) - (15,483)
Amortization of unearned
compensation - - 424 - 508 701 - - 1,633
Unrealized loss on securities
available for sale - - - (4,097) - - - - (4,097)
--------- ----- ------- ------- ------- ------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1996 5,475,509 $ 73 $72,243 $(1,765) $(3,488) $ - $(35,529) $93,645 $125,179
========= ===== ======= ======= ======= ======= ======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
63
<PAGE> 64
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,465 $ 12,699 $ 8,037
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provisions for loan losses 1,300 240 240
Depreciation, accretion and amortization 2,526 2,028 1,971
Deferred income taxes (2,073) (496) 2,455
(Gain) loss on investments, mortgage-backed and related
securities and trading account securities, net (3,420) (3,674) 88
Gains on the sales of mortgage loans held for sale, net (1,057) (261) (137)
Stock-based compensation expense 1,633 1,699 1,225
Increase in loans held for sale (7,507) (14,922) (56,048)
Decrease (increase) in trading account securities, net 3,000 10,196 (9,704)
Other, net 4,974 291 2,306
----------- ----------- -----------
Total adjustments (624) (4,899) (57,604)
----------- ----------- -----------
Net cash provided by (used in) operating activities 9,841 7,800 (49,567)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt and equity securities 25,508 34,217 29,763
Purchases of debt and equity securities (18,535) (60,341) (24,754)
Purchases of mortgage-backed and related securities (1,000) (10,293) (85,285)
Principal repayments on mortgage-backed and related
securities 5,573 11,976 79,182
Purchases of mortgage-backed securities available for sale (323,622) (159,432) (234,114)
Proceeds from sales of mortgage-backed securities
available for sale 178,602 135,078 149,133
Principal repayments on mortgage-backed securities
available for sale 62,579 22,752 61,768
Purchase of debt and equity securities available for sale (64,944) (2,818) (2,059)
Proceeds from sales of debt and equity securities available for
Proceeds from maturities of debt and equity securities available
for sale 16,369 - -
Purchases of Federal Home Loan Bank stock (2,059) (1,265) (10,174)
Redemption of Federal Home Loan Bank stock 436 - -
Purchase of loans (69,016) (67,426) (4,188)
Increase in loans, net of loans held for sale (40,312) (28,952) (103,366)
Increase in real estate held for investment (12,601) (14,446) (7,757)
Proceeds from sale of foreclosed properties 6,767 - -
Purchases of premises and equipment, net (6,634) (3,428) (1,845)
----------- ----------- -----------
Net cash used in investing activities (209,014) (143,328) (153,096)
----------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
64
<PAGE> 65
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------
1996 1995 1994
----------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 189,336 118,456 17,888
Proceeds from advances and other borrowings 140,122 38,548 243,154
Repayments on advances and other borrowings (97,248) (18,432) (53,498)
Increase (decrease) in securities sold under agreements
to repurchase (13,521) 8,248 5,501
Increase in advances from borrowers for taxes
and insurance 213 610 2,096
Dividends paid (2,199) - -
Stock option transactions (368) - -
Purchase of treasury stock (15,483) (7,073) (8,280)
----------- ---------- ----------
Net cash provided by financing activities 200,852 140,357 206,861
----------- ---------- ----------
Increase in cash and cash equivalents 1,679 4,829 4,198
Cash and cash equivalents:
Beginning of period 20,780 15,951 11,753
----------- ---------- ----------
End of period $ 22,459 $ 20,780 $ 15,951
=========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 57,143 $ 48,243 $ 30,207
Income taxes 4,521 11,085 2,106
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed securities - 1,988 76,565
Transfer of mortgage-backed and related securities
to assets available for sale 117,300 - 204,308
Transfer from loans to foreclosed properties 126 5,960 148
Transfer of mortgage loans to mortgage loans held for sale 11,937 4,941 13,452
</TABLE>
See accompanying Notes to Consolidated Financial Statements
65
<PAGE> 66
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of St. Francis Capital Corporation and
subsidiaries (the "Company") conform to generally accepted accounting
principles and to general practice within the banking industry. The
Corporation provides a full range of banking and related financial services to
individual and corporate customers through its network of bank affiliates. The
Corporation is subject to competition from other financial institutions and is
regulated by federal and state banking agencies and undergoes periodic
examinations by those agencies. The following is a description of the more
significant of those policies that the Company follows in preparing and
presenting its consolidated financial statements.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, St. Francis Bank, F.S.B. ("Bank"), and Bank
Wisconsin ("Bank Wisconsin"), the Bank's subsidiaries, SF Investment Corp. ("SF
Investment"), St. Francis Development Corp. (liquidated September 30, 1995),
St. Francis Insurance Services Corp., S-F Mortgage Corp. and St. Francis Equity
Properties ("SFEP") and limited partnerships more than 50% owned by SFEP and
Bank Wisconsin's subsidiaries, BW Investment Corp. ("BW Investment") and BW
Insurance Services ("BW Insurance"). All significant intercompany accounts and
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
(b) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, interest-bearing deposits with the FHLB and
other financial institutions and federal funds sold.
(c) Trading Account Securities
Trading account securities include debt securities which are held for resale in
anticipation of short-term market movements. Trading account securities are
stated at fair value. Gains and losses, both realized and unrealized, are
included in trading securities gains and commitment fees, net.
(d) Securities Held to Maturity and Available For Sale
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designations as of each
statement of condition date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held to maturity securities are stated at
amortized cost.
Debt securities not classified as held to maturity or trading and marketable
equity securities not classified as trading are classified as available for
sale. Available for sale securities are stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity.
The cost of debt securities classified as held to maturity or available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity, or in the case of mortgage-backed and related securities, over the
estimated life of the security. Such amortization is based on a level-yield
method and is included in interest income from the respective security.
Interest and dividends are included in interest and dividend income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net gains and losses from sales of
investments and mortgage-backed and related securities. The cost of securities
sold is based on the specific identification method.
66
<PAGE> 67
(e) Loans Held For Sale
Mortgage loans held for sale generally consist of current production of certain
fixed-rate and adjustable-rate first mortgage loans. Mortgage loans held for
sale are carried at the lower of cost (less principal payments received) or
market value, as determined by outstanding commitments from investors or
current quoted investor yield requirements on an aggregate basis.
(f) Loans and Fees and Income on Loans
Loans for which management has the intent and ability to hold for the
foreseeable future or until maturity or pay off are carried at their unpaid
principal balances. Interest on loans is recorded as income in the period
earned.
Loans are normally placed on non-accrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact on
the collectibility of principal or interest on loans, it is management's
practice to place such loans on non-accrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously
accrued and uncollected interest on such loans is reversed, amortization of
related loan fees is suspended, and income is recorded only to the extent that
interest payments are subsequently received in cash and a determination has
been made that the principal balance of the loan is collectible. If
collectibility of the principal is in doubt, payments received are applied to
loan principal.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amounts amortized as an adjustment of the related
loan's yield. These amounts are amortized to income using the level yield
method, over the contractual life of the related loans. Discounts on purchased
loans are amortized using a method which approximates level yield. Unamortized
discounts on purchased loans which prepay are amortized immediately.
Loan origination fees and costs associated with loans sold are deferred and
recognized at the time of sale as a component of gain or loss on the sale of
loans. Fees for the servicing of loans are recognized as income when earned.
The Company adopted Financial Accounting Standards Board Statement No. 122,
"Accounting for Mortgage Servicing Rights" as of October 1, 1995. This
statement requires that separate assets be recognized for the rights to service
mortgage loans for others whether those servicing rights are purchased or
related to loans originated by the Company. The cost of mortgage servicing
rights is amortized in relation to the servicing revenue expected to be earned.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. The Company periodically evaluates the carrying value and
remaining amortization periods for impairment. For purposes of measuring
impairment, the rights are stratified based upon predominant risk
characteristics. The evaluation of mortgage servicing rights takes into
consideration certain risk characteristics including loan type, note rate,
prepayment trends and external market factors. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing rights for
a stratum exceed their fair value.
(g) Allowance for Loan Losses
The allowance for loan losses is a material estimate that is particularly
susceptible to significant change in the near term. The allowance for loan
losses is maintained at a level adequate to provide for loan losses through
charges to operating expense. The allowance is based upon past loan loss
experience and other factors which, in management's judgment, deserve current
recognition in estimating loan losses. Such other factors considered by
management include growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans and economic
conditions. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant properties
which collateralize loans.
67
<PAGE> 68
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions
to the allowance based on their judgments about information available to them
at the time of their examination.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" effective October 1, 1994. SFAS No. 114 requires that impaired
loans be measured at the present value of expected future cash flows discounted
at the loan's effective interest rate, or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. SFAS No. 118 eliminates the provisions in SFAS No.
114 that describe how a creditor should report interest income on an impaired
loan and allows a creditor to use existing methods to recognize, measure and
display interest income on an impaired loan.
(h) Financial Options
Interest rate swaps, forward and future commitments and contracts and option
contracts purchased or sold may be used from time to time to manage interest
rate exposure by hedging specific assets or liabilities. Realized and
unrealized gains and losses on these instruments are deferred and amortized
over the life of the hedged assets and liabilities. Financial instruments
which do not meet the criteria for hedge accounting are marked to market in
aggregate and any gains or losses are recognized in the income statement.
Fees received on options written are deferred at the time the fees are received
and recognized in other operating income at the earlier of the settlement or
the expiration of the contract.
(i) Foreclosed Properties
Foreclosed properties (which were acquired by foreclosure or by deed in lieu of
foreclosure) are initially recorded at the lower of the carrying value of the
related loan balance or the fair market value of the real estate acquired less
the estimated costs to sell the real estate at the date title is received.
Costs relating to the development and improvement of the property are
capitalized. Income and expenses incurred in connection with holding and
operating the property are charged to expense. Valuations are periodically
performed by management and independent third parties and an allowance for loss
is established by a charge to expense if the carrying value of a property
exceeds its fair value less estimated costs to sell.
(j) Real Estate Held for Investment
Real estate held for investment is multi-family rental property (affordable
housing projects) that SFEP, a wholly-owned subsidiary of the Bank, owns,
operates and develops as a limited partner. The properties are recorded at
cost less accumulated depreciation. The Company evaluates the recoverability
of the carrying value on a regular basis. If the recoverability was determined
to be in doubt, a valuation allowance would be established by way of a charge
to expense. Depreciation expense is provided on a straight-line basis over the
estimated useful life of the assets. Expenditures for normal repairs and
maintenance are charged to expense as incurred.
(k) Premises and Equipment
Premises and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization expense are provided on a
straight-line basis over the estimated useful lives of the assets. The cost of
leasehold improvements is amortized on the straight-line basis over the lesser
of the term of the respective lease or the estimated economic life of the
improvements.
Expenditures for normal repairs and maintenance are charged to expense as
incurred. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is recorded in income.
68
<PAGE> 69
(l) Federal Home Loan Bank Stock
The Company's investment in Federal Home Loan Bank stock meets the minimum
amount required by current regulation and is carried at cost which is its
redeemable (fair) value since the market for this stock is limited.
(m) Income Taxes
The Company and its subsidiaries file consolidated Federal income tax returns.
Federal income tax expense is allocated to each subsidiary based on an
intercompany tax sharing agreement. Each subsidiary files separate state and
local income or franchise tax returns.
Income taxes are accounted for using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to the differences between the
financial statement carrying amount of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date.
Affordable housing tax credits are recognized as a reduction of income tax
expense in the year they are available to be used in the Company's consolidated
income tax returns.
(n) Pending Accounting Changes
The Financial Accounting Standards Board issued Statement No. 123, "Accounting
for Stock Based Compensation," which will be adopted by the Company on October
1, 1996. The statement requires that a fair value based method be used to
value employee compensation plans that include stock based awards. The
statement permits a company to either recognize compensation expense under SFAS
No. 123 or continue to use prior accounting rules which did not consider the
market value of stock in certain award plans. If adoption of the statement's
fair value procedures are not used in the computation of compensation expense
in the income statement, the Company must disclose in a note to the financial
statements the pro-forma impact of adoption. The Company has elected not to
recognize additional compensation expense under SFAS No. 123, but will provide
any necessary disclosures in notes to its financial statements beginning in the
year ending September 30, 1997. Therefore, there will be no effect of the
Company adopting this statement on its results of operations.
The Financial Accounting Standards Board issued Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which is effective for transfers occurring after December 31,
1996. This statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on a
consistent application of a financial-components approach that focuses on
control. The effect of adopting this statement is not expected to be material
to the Company's financial position or results of operations.
(o) Reclassification
Certain amounts for prior years have been reclassified to conform to the 1996
presentation.
(2) ACQUISITIONS
In November 1994, the Company completed the acquisition of the stock of Valley
Bank East Central in Kewaskum, Wisconsin as well as the deposits and certain
assets of the Hartford, Wisconsin branch of Valley Bank Milwaukee for $13.3
million cash. The acquired bank offices are now operating as a commercial bank
named Bank Wisconsin, and the acquisition was accounted for as a purchase. The
related accounts and results of operations are included in the Company's
consolidated financial statements from the date of acquisition. At the time of
acquisition, Bank Wisconsin had assets of approximately $85 million and
deposits of approximately $70 million.
69
<PAGE> 70
The excess of cost over the fair value of tangible assets acquired is accounted
for as goodwill and is being amortized over the estimated useful life of
fifteen years using the straight-line method. Goodwill, net of accumulated
amortization, totaled $5.8 million and $6.3 million at September 30, 1996 and
1995, respectively.
In April 1996, the Company announced that it had reached a definitive agreement
with Kilbourn State Bank for the acquisition of Kilbourn State Bank by St.
Francis Capital Corporation for $23.5 million plus an adjustment to be
determined at closing dependent upon the capital level of Kilbourn State Bank
at that time. Under the terms of the definitive agreement, the Company will
acquire all of the outstanding shares of Kilbourn State Bank for cash, with
Kilbourn subsequently merging into Bank Wisconsin, the Company's commercial
banking subsidiary. The acquisition, which has been approved by the Board of
Directors of the Company and Kilbourn State Bank, is expected to close by the
second quarter of 1997, subject to Kilbourn shareholder approval and various
other conditions of closing.
70
<PAGE> 71
(3) DEBT AND EQUITY SECURITIES
The following is a summary of available for sale and held to maturity debt and
equity securities:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
At September 30, 1996:
Available for sale:
U.S. Treasury obligations and obligations of
U.S. Government agencies $ 23,565 $ 100 $ 168 $ 23,497
State and municipal obligations 5,961 - 78 5,883
Corporate notes and bonds 7,558 31 27 7,562
Asset-backed securities 4,756 - - 4,756
Marketable equity securities 16,782 7 - 16,789
----------- ------------ ------------ -----------
$ 58,622 $ 138 $ 273 $ 58,487
=========== ============ ============ ===========
Held to maturity:
Corporate notes and bonds $ 1,991 $ 10 $ - $ 2,001
State and municipal obligations 1,184 33 - 1,217
----------- ------------ ------------ -----------
$ 3,175 $ 43 $ - $ 3,218
=========== ============ ============ ===========
At September 30, 1995:
Available for sale:
State and municipal obligations $ 5 $ - $ - $ 5
Corporate notes and bonds 986 5 - 991
Marketable equity securities 2,901 263 18 3,146
----------- ------------ ------------ -----------
$ 3,892 $ 268 $ 18 $ 4,142
=========== ============ ============ ===========
Held to maturity:
U.S. Treasury obligations and obligations of
U.S. Government agencies $ 18,940 $ 81 $ 59 $ 18,962
Corporate notes and bonds 15,060 112 - 15,172
State and municipal obligations 15,928 40 528 15,440
----------- ------------ ------------ -----------
$ 49,928 $ 233 $ 587 $ 49,574
=========== ============ ============ ===========
</TABLE>
The amortized cost and estimated fair value of debt and equity securities
available for sale and held to maturity at September 30, 1996, by contractual
maturity, are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
(In thousands) Cost Fair Value
-------------- ------------
<S> <C> <C>
Less than one year $ 6,583 $ 6,605
Greater than one year but less than five years 23,446 23,407
Greater than five years but less than ten years 3,453 3,483
Greater than ten years 11,533 11,421
-------------- ------------
45,015 44,916
Marketable equity securities 16,782 16,789
-------------- ------------
$ 61,797 $ 61,705
============== ============
</TABLE>
Proceeds from the sale of available for sale debt and equity securities at
September 30, 1996 were $33.9 million; gross profits of $614,000 and gross
losses of $126,000 were realized on those sales. During the years ended
September 30, 1995 and 1994, there were no sales of held to maturity debt and
equity securities.
71
<PAGE> 72
Under implementation guidance for SFAS 115, the Company, at December 31, 1995,
reclassified $28.9 million of its held-to-maturity portfolio to
available-for-sale.
(4) MORTGAGE-BACKED AND RELATED SECURITIES
The following is a summary of available for sale mortgage-backed and related
securities and held to maturity mortgage-backed and related securities:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At September 30, 1996:
Available for sale:
Participation certificates:
GNMA $ 4,809 $ 332 $ - $ 5,141
FNMA 4,867 75 14 4,928
FHLMC 11,241 55 51 11,245
Private issue 198,755 527 2,018 197,264
REMICs 303,426 2,002 3,636 301,792
Adjustable rate mortgage mutual fund 842 - - 842
CMO residual 68 - - 68
-------- ------ ------ --------
$524,008 $2,991 $5,719 $521,280
======== ====== ====== ========
Held to maturity:
Collateralized mortgage obligations $ 3,040 $ 73 $ - $ 3,113
REMICs 68,392 83 3,159 65,316
-------- ------ ------ --------
$ 71,432 $ 156 $3,159 $ 68,429
======== ====== ====== ========
At September 30, 1995:
Available for sale:
Participation certificates:
GNMA $ 16,992 $ 846 $ - $ 17,838
FNMA 19,430 284 7 19,707
FHLMC 11,234 222 - 11,456
Private issue 132,281 243 314 132,210
Collateralized mortgage obligations 1,703 - 27 1,676
REMICs 173,309 2,957 666 175,600
Adjustable rate mortgage mutual fund 1,462 12 - 1,474
CMO residual 135 - 19 116
-------- ------ ------ --------
$356,546 $4,564 $1,033 $360,077
======== ====== ====== ========
Held to maturity:
Collateralized mortgage obligations $ 9,914 $ 32 $ 25 $ 9,921
REMICs 147,581 995 2,601 145,975
-------- ------ ------ --------
$157,495 $1,027 $2,626 $155,896
======== ====== ====== ========
</TABLE>
Under implementation guidance for SFAS 115, the Company, at December 31, 1995,
reclassified $88.4 million of its held-to-maturity portfolio to
available-for-sale.
During the years ended September 30, 1996, 1995 and 1994, proceeds from the
sale of available for sale mortgage-backed and related securities were $178.6
million, $135.1 million and $149.1 million, respectively. The gross realized
gains on such sales totaled $2.8 million, $3.1 million and $3.8 million in
1996, 1995 and 1994, respectively. The gross realized losses on such sales
totaled $10,000, $422,000 and
72
<PAGE> 73
$3.1 million in 1996, 1995 and 1994, respectively. There were no sales of
held to maturity mortgage-backed and related securities.
At September 30, 1996 and 1995, $240.4 million and $222.7 million,
respectively, of mortgage-related securities were pledged as collateral for
FHLB advances.
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage - one- to four-family $ 270,614 $ 209,140
First mortgage - residential construction 32,249 25,277
First mortgage - multi-family 103,262 93,756
Commercial real estate 46,391 28,277
Home equity 90,579 80,159
Commercial and agriculture 25,177 13,608
Consumer secured by real estate 66,346 47,060
Interim financing and consumer loans 21,890 21,978
Education 12,142 12,833
------------ -----------
Total gross loans 668,650 532,088
------------ -----------
Less:
Loans in process 29,631 10,903
Unearned insurance premiums 647 582
Deferred loan and guarantee fees 851 1,021
Purchased loan discount 1,023 1,060
Allowance for loan losses 5,217 4,076
------------ -----------
Total deductions 37,369 17,642
------------ -----------
Total loans receivable 631,281 514,446
Less: First mortgage loans held for sale 20,582 1,138
------------ -----------
Loans receivable, net $ 610,699 $ 513,308
============ ===========
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 4,076 $ 3,435 $ 3,204
Provision charged to expense 1,300 240 240
Loans charged off, net of recoveries (159) (293) (80)
Acquired bank's allowance - 694 -
Reclassified allowance - - 71
------------- ------------ -----------
Balance at end of year $ 5,217 $ 4,076 $ 3,435
============= ============ ===========
</TABLE>
Recoveries are insignificant in all years. Non-performing loans, which include
loans on which the accrual of interest has been discontinued, and troubled debt
restructurings totaled approximately $3.9 million and $432,000 at September 30,
1996 and 1995, respectively. Non-performing loans at September 30, 1996
include $3.6 million of purchased auto loans which are past due or in default.
Impaired loans totaled $3.6 million at September 30, 1996. These loans had
associated impairment reserves of $1.1 million. During 1996, the average
balance of impaired loans was $1.4 million and no interest income was recorded.
The reclassified allowance in 1994 relates to the allowance for loss on the
amounts of real estate in judgment and in-substance foreclosed loans which were
reclassified to loans in 1994.
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<PAGE> 74
The effect of non-performing loans on interest income is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------
(In thousands) 1996 1995 1994
-------------- ---- ---- ----
<S> <C> <C> <C>
Interest at original contractual rate $ 296 $ 34 $ 596
Interest collected 11 26 315
----- ----- -----
Net reduction of interest income $ 285 $ 8 $ 281
===== ===== =====
</TABLE>
Capitalized mortgage servicing rights totaled $701,000 at September 30, 1996.
The Company recorded additional gains of $634,000 and amortization expense of
$23,000 for the year ended September 30, 1996. The fair value approximates the
amount of capitalized mortgage servicing rights at September 30, 1996.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
(In thousands) 1996 1995
-------------- ---- ----
<S> <C> <C>
Mortgage loans underlying pass-through securities - FNMA $141,944 $162,777
Mortgage loan portfolios serviced for:
FNMA 72,038 17,838
FHLMC 1,233 1,529
Other investors 11,619 13,070
-------- --------
Total loans serviced for others $226,834 $195,214
======== ========
Custodial escrow balances maintained in connection with the
foregoing loan servicing and included in demand deposits $ 8,738 $ 8,193
======== ========
</TABLE>
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
(In thousands) 1996 1995
-------------- ---- ----
<S> <C> <C>
Mortgage-backed and related securities $ 3,166 $ 2,531
Loans receivable 3,691 3,355
Other 1,210 1,126
------- -------
$ 8,067 $ 7,012
======= =======
</TABLE>
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment, at cost, follows:
<TABLE>
<CAPTION>
September 30,
----------------------
(In thousands) 1996 1995
-------------- ---- ----
<S> <C> <C>
Land and land improvements $ 2,890 $ 2,042
Office buildings and improvements 11,825 8,566
Furniture, fixtures and equipment 9,730 7,244
Leasehold improvements 588 547
-------- --------
25,033 18,399
Accumulated depreciation and amortization (8,601) (7,507)
-------- --------
$ 16,432 $ 10,892
======== ========
</TABLE>
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<PAGE> 75
Range of depreciable lives:
<TABLE>
<S> <C>
Office buildings and improvements 5 - 40 years
Furniture, fixtures and equipment 5 - 10 years
Leasehold improvements 5 - 40 years
</TABLE>
(8) DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------
(Dollars in thousands) 1996 1995
---------------------- ------------------------------- ----------------------------------
Weighted Weighted
average average
rate Amount Percent rate Amount Percent
-------- ------ ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing - $ 34,377 3.9% - $ 26,879 3.9%
Interest bearing 1.49% 39,710 4.5 1.47% 42,687 6.2
Passbook accounts 2.87 79,362 9.0 2.75 87,678 12.7
Money market
demand accounts 4.53 176,838 20.2 4.55 121,016 17.6
Certificates 5.60 547,397 62.4 5.81 410,088 59.6
-------- ----- -------- -----
Total deposits 4.74 $877,684 100.0% 4.78 $688,348 100.0%
======== ===== ======== =====
</TABLE>
The certificates category above includes approximately $138.6 million and $38.0
million of brokered deposits at weighted average stated rates of 5.35% and
6.24% at September 30, 1996 and September 30, 1995, respectively.
Aggregate annual maturities of certificate accounts at September 30, 1996 are
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Weighted
average
Matures during year ended September 30: Amount rate
- --------------------------------------- ------ --------
<S> <C> <C>
1997 $ 358,252 5.46%
1998 166,216 5.90
1999 10,799 5.48
2000 5,466 5.99
2001 6,589 5.74
Thereafter 75 8.00
---------
$ 547,397
=========
</TABLE>
Certificates include approximately $25.7 million and $14.8 million in
denominations of $100,000 or more at September 30, 1996 and 1995, respectively.
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
(In thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Demand deposits $ 614 $ 553 $ 516
Money market demand accounts 6,787 4,681 1,946
Passbook and certificate accounts 30,209 25,541 18,054
-------- -------- --------
$ 37,610 $ 30,775 $ 20,516
======== ======== ========
</TABLE>
75
<PAGE> 76
Accrued interest payable on deposits totaled approximately $3.5 million and $2.7
million at September 30, 1996 and 1995, respectively.
(9) ADVANCES AND OTHER BORROWINGS
Advances and other borrowings consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) Weighted Average
Interest Rate
----------------------
September 30, September 30,
---------------------- Matures in fiscal --------------------
Description 1996 1995 year ended 1996 1995
- ----------- ------ ------ ----------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Reverse repurchase agreements - % 5.81% 1996 $ - $ 13,521
Advances from Federal Home
Loan Bank Of Chicago 5.09 - Open Line Advance 6,000 -
- 4.79 1996 - 20,000
5.63 7.00 1997 12,509 9
5.49 5.77 1998 95,000 85,000
5.54 5.84 1999 230,000 200,000
5.56 5.95 2000 25,060 25,064
5.50 - 2001 and after 5,000 -
Federal Reserve Bank
Treasury tax & loan advances 5.16 6.66 Daily overnight 511 958
Mortgages payable 9.40 9.67 Various 954 1,129
-------- --------
$375,034 $345,681
======== ========
</TABLE>
The Company is required to maintain as collateral unencumbered mortgage loans
and mortgage-related securities such that the outstanding balance of Federal
Home Loan Bank ("FHLB") advances does not exceed 60% of the book value of this
collateral. In addition, these notes are collateralized by all FHLB stock. At
September 30, 1996 and 1995, $262.0 million and $220.0 million, respectively, of
mortgage loans and $240.4 million and $222.7 million, respectively, of
mortgage-related securities were pledged as collateral for FHLB advances. The
variable rate advances are tied to the one-month and three-month LIBOR indices.
FHLB advances are subject to a prepayment penalty if they are repaid prior to
maturity. The maximum amount of borrowings at any month end during the years
ended September 30, 1996 and 1995 was approximately $375.0 million and $367.2
million, respectively. The approximate average amount outstanding was $344.8
million and $341.7 for those same years. The weighted average interest rate was
5.43% and 5.62% during those years. The Federal Reserve Bank advances are
collateralized by U.S. Treasury bills with a carrying value of $1.0 million at
September 30, 1996 and 1995.
Securities sold under agreements to repurchase averaged $703,000 and $10.1
million based on average daily balances during the years ended September 30,
1996 and 1995, respectively. The maximum amount outstanding at any month-end
was zero and $22.3 million during those years.
76
<PAGE> 77
(10) GENERAL AND ADMINISTRATIVE EXPENSES
Other general and administrative expenses are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------
(In thousands) 1996 1995 1994
- -------------- ------ ------ ------
<S> <C> <C> <C>
Data processing $1,317 $1,115 $ 705
Advertising 1,425 868 995
Stationery, printing and office supplies 481 364 367
Telephone and postage 724 530 480
Insurance and surety bond premiums 103 151 123
Professional fees and services 310 442 431
Supervisory assessment 220 202 164
Amortization of intangible assets 446 383 -
Organization dues and subscriptions 124 96 93
Consumer lending 357 327 261
Miscellaneous 1,096 903 768
------ ------ ------
$6,603 $5,381 $4,387
====== ====== ======
</TABLE>
(11) INCOME TAXES
Income tax expense (benefit) in the consolidated statements of income consists
of the following:
<TABLE>
<CAPTION>
(In thousands) Federal State Total
- -------------- ------- ------- --------
<S> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
Current $ 4,785 $ 199 $ 4,984
Deferred (1,820) (253) (2,073)
------- ------ -------
$ 2,965 $ (54) $ 2,911
======= ======= =======
YEAR ENDED SEPTEMBER 30, 1995
Current $ 5,450 $1,323 $ 6,773
Deferred (434) (62) (496)
------- ------ -------
$ 5,016 $1,261 $ 6,277
======= ====== =======
YEAR ENDED SEPTEMBER 30, 1994
Current $ 1,155 $ 726 $ 1,881
Deferred 2,140 315 2,455
------- ------ -------
$ 3,295 $1,041 $ 4,336
======= ====== =======
</TABLE>
77
<PAGE> 78
Actual income tax expense differs from the "expected" income tax expense
computed by applying the statutory Federal corporate tax rate to income before
income tax expense, as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
(In thousands) 1996 1995 1994
- -------------- ---- ---- ----
<S> <C> <C> <C>
Federal income tax expense at statutory rate of
35% for 1996 and 1995; 34% for 1994 $ 4,682 $6,642 $4,207
State income taxes, net of Federal income tax benefit (35) 830 779
Tax exempt interest (237) (295) (198)
Non-deductible compensation 176 138 -
Dividends received deduction (3) (16) (74)
Unused net operating losses - 31 -
Change in beginning of year valuation allowance (171) (41) (92)
Affordable housing credits (1,617) (875) (331)
Other, net 116 (137) 45
------- ------ ------
$ 2,911 $6,277 $4,336
======= ====== ======
</TABLE>
Included in other assets is a deferred tax asset of $2.3 million at September
30, 1996 and a deferred tax liability of $239,000 at September 30, 1995. The
tax effects of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
September 30,
------------------
(In thousands) 1996 1995
- -------------- ---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Loans, principally due to allowance for losses $ 335 $ 572
Deferred fee income 911 882
Net operating losses 99 206
Valuation adjustments and reserves 33 78
Accrued expenses 1,732 32
Deferred compensation 660 540
Unrealized losses on available for sale securities 510 -
Other 20 2
------- ------
Gross deferred tax assets 4,300 2,312
Less valuation allowance (99) (206)
------- ------
Net deferred tax assets 4,201 2,106
DEFERRED TAX LIABILITIES:
Fixed assets, principally due to differences in
depreciation (371) (260)
Unamortized accounting change for securities
marked to market (1,036) (1,564)
Other (450) (521)
------- ------
Gross deferred tax liability (1,857) (2,345)
------- ------
Net deferred tax asset (liability) $ 2,344 $ (239)
======= ======
</TABLE>
At September 30, 1996 and 1995, deferred tax assets and the valuation allowance
include approximately $99,000 and $206,000, respectively, relating to various
state net operating loss carry forwards of approximately $1.9 million and $3.9
million for those periods, which begin to expire in 1999.
78
<PAGE> 79
(12) SHAREHOLDERS' EQUITY
In accordance with federal regulations, at the time the Bank converted from a
federal mutual savings bank to a federal stock savings bank, the Bank
established a liquidation account equal to its retained earnings of $63.0
million to provide a limited priority claim for the benefit of qualifying
depositors who maintain their deposit accounts at the Bank after conversion.
The liquidation account is reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In
the unlikely event of a complete liquidation of the Bank, and only in such
event, each eligible account holder would receive from the liquidation account
a liquidation distribution based on his or her proportionate share of the then
remaining qualifying deposits. At September 30, 1996, the balance of the
liquidation account was approximately $33.3 million. Under current
regulations, the Bank is not permitted to pay dividends on its stock if the
effect would reduce its regulatory capital below the liquidation account.
Office of Thrift Supervision ("OTS") regulations also provide that an
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution could, and after prior notice but without
approval by the OTS, make capital distributions during the calendar year of up
to 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. Any additional capital distributions would require prior regulatory
approval. During the year ended September 30, 1996, the Bank paid dividends to
the Company totaling $13.1 million. As of September 30, 1996, retained
earnings of the Bank of approximately $22.1 million were free of restriction
and available for dividend payments.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its shareholders. However, the Company's source of
funds for future dividends may depend upon dividends from the Bank.
Under the Internal Revenue Code and the Wisconsin Statutes, for tax years
beginning before 1996, the Company is permitted to deduct an annual addition to
a reserve for bad debts. This amount differs from the provision for loan
losses recorded for financial accounting purposes. Under prior law, bad debt
deductions for income tax purposes were included in taxable income of later
years only if the bad debt reserves were used for purposes other than to absorb
bad debt losses. Because the Company did not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes were provided.
Shareholders' equity at September 30, 1996 includes approximately $21.9 million
for which no federal or state income taxes were provided. Under SFAS No. 109,
deferred income taxes have been provided on certain additions to the tax
reserve for bad debts.
The Small Business Job Protection Act of 1996 repealed the bad debt reserve
method for tax years beginning after 1995. The Bank will not be required to
recapture into income any of the restricted amounts previously deducted except
in the unlikely event of a partial or complete liquidation of the Bank or if
nondividend distributions to shareholders exceed current and accumulated
earnings and profits.
The Company, the Bank and Bank Wisconsin are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material affect on the Company's, Bank's and Bank Wisconsin's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company, the Bank and Bank
Wisconsin must meet specific capital guidelines that involve quantitative
measures of the Company's, the Bank's and Bank Wisconsin's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's, the Bank's and Bank
79
<PAGE> 80
Wisconsin's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") contains
provisions for regulatory capital standards that require a minimum 3.0% Tier 1
leverage capital ratio, a minimum 4.0% Tier 1 capital to risk-weighted assets
capital ratio and a minimum 8.0% qualifying total capital to risk-weighted
assets capital ratio. At September 30, 1996, the Bank's and Bank Wisconsin's
regulatory capital exceed all minimum standards required under FDICIA.
As of September 30, 1996, the Bank and Bank Wisconsin are well capitalized as
defined by the regulatory capital standards. To be categorized as well
capitalized, the Bank and Bank Wisconsin must maintain a minimum total
risk-based ratio of 10.0%, Tier 1 risk-based ratio of 6.0%, and a Tier 1
leverage ratio of 5.0%.
The following table summarizes the Company's, the Bank's and Bank Wisconsin's
capital amounts and capital ratios, and the capital ratios required by the
Company's regulators at September 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated 126,257 16.81% 60,103 8.00% N/A
St. Francis Bank 92,764 13.12% 56,576 8.00% 70,721 10.00%
Bank Wisconsin 9,478 13.35% 5,680 8.00% 7,100 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 121,040 16.11% 30,052 4.00% N/A
St. Francis Bank 89,092 12.60% 28,288 4.00% 42,432 6.00%
Bank Wisconsin 8,789 12.38% 2,840 4.00% 4,260 6.00%
Tier 1 Capital (to Average Assets):
Consolidated 121,040 9.00% 40,327 3.00% N/A
St. Francis Bank 89,092 6.86% 38,915 3.00% 64,858 5.00%
Bank Wisconsin 8,789 9.12% 2,890 3.00% 4,817 5.00%
</TABLE>
(13) EARNINGS PER SHARE
Earnings per share of common stock for the years ended September 30, 1996 and
1995, have been determined by dividing net income for the year by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Stock options are regarded as common stock
equivalents and are, therefore, considered in per share calculations. Common
stock equivalents are computed using the treasury stock method. Effective
October 1, 1994, the Company adopted SOP 93-6 (see note 15). Therefore, total
shares outstanding beginning with the quarter ended December 31, 1994 have been
reduced by the ESOP shares that have not been committed to be released. Prior
period per share calculations have not been restated.
80
<PAGE> 81
The computation of earnings per common share for the years ended September 30,
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Net income for the period $10,465,000 $12,699,000 $8,037,000
=========== =========== ==========
Common shares issued 7,289,620 7,289,620 7,289,620
Net Treasury shares 1,450,789 1,066,069 575,451
Unallocated ESOP shares 363,222 404,466 -
----------- ----------- ----------
Weighted average common shares
outstanding during the period 5,475,609 5,819,085 6,714,169
Common stock equivalents based on
the treasury stock method 289,416 224,307 190,752
----------- ----------- ----------
Total weighted average common shares
and equivalents outstanding 5,765,025 6,043,392 6,904,921
=========== =========== ==========
Earnings per share $ 1.82 $ 2.10 $ 1.16
=========== =========== ==========
</TABLE>
Primary and fully diluted earnings per share for the years ended September 30,
1996, 1995 and 1994, respectively, are the same.
(14) STOCK REPURCHASE PROGRAM
On July 10, 1996, the Company announced it had adopted a share repurchase
program for its common stock whereby the Company planned to purchase up to 5%
of the outstanding stock, or approximately 282,945 shares, commencing July 12,
1996 and concluding before January 31, 1997, depending upon market conditions.
The repurchased shares would become treasury shares and would be used for the
exercise of stock options under the stock option plan and for general corporate
purposes. At September 30, 1996, 188,500 shares had been repurchased at an
average price of $25.89 per share. This is the sixth such repurchase program
that the Company has undertaken, the most recent of which was completed May 13,
1996. At September 30, 1996, an aggregate of 1,838,507 shares had been
repurchased in all such repurchase programs at an average price of $19.54.
(15) EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS:
The Company has a defined contribution pension plan which covers substantially
all employees who are at least 21 years of age and have completed 1,000 hours
or more of service each year. Company contributions are based on a set
percentage of each participant's compensation for the plan year. Plan expense
for the years ended September 1996, 1995 and 1994 was approximately $289,000,
$282,000 and $311,000, respectively. The Company funds the plan's costs.
The Company also has a defined contribution savings plan for substantially all
employees. The plan is qualified under Section 401(k) of the Internal Revenue
Code. Participation in the plan requires that an employee be at least 21 years
of age and have a minimum of six months of full-time service. Participants may
elect to defer a portion of their compensation (between 2% and 7%) and
contribute this amount to the plan. Under the plan, the Company will match the
contribution made by each employee up to fifty percent of 4% of the eligible
employee's annual compensation. Plan expense for the years ended September 30,
81
<PAGE> 82
1996, 1995 and 1994 was approximately $111,000, $95,000 and $88,000,
respectively. The Company funds the plan's costs.
The aggregate benefit payable to any employee of both defined contribution
plans is dependent upon the rates of contribution, the earnings of the fund and
the length of time such employee continues as a participant.
OFFICER DEFERRED COMPENSATION PLAN:
The Company has deferred compensation plans covering certain officers of the
Company. These arrangements provide for monthly payments to be made upon
retirement or reaching certain age levels for periods of 10 to 15 years. A
liability is recorded for the present value of the future payments under these
agreements earned through September 30, 1996 and 1995 amounting to $591,000 and
$564,000, respectively. The Company owns insurance policies on the lives of
these officers which are intended to fund these benefits.
EMPLOYEE STOCK OWNERSHIP PLAN:
In conjunction with the conversion of the Bank to a stock savings bank, an
employee stock ownership plan ("ESOP") was adopted covering all full-time
employees of the Company who have attained age 21 and completed one year of
service during which they work at least 1,000 hours. The ESOP borrowed $4.9
million from the Company and purchased 490,600 common shares issued in the
conversion. The debt bears a variable interest rate based on the borrower's
prime lending rate which was 8.25% at September 30, 1996. The balance of this
loan was $4.1 million and $4.4 million at September 30, 1996 and 1995,
respectively. The Bank and Bank Wisconsin make annual contributions to the
ESOP equal to the ESOP's debt service less dividends received by the ESOP. All
dividends received by the ESOP are used to pay debt service. The ESOP shares
initially were pledged as collateral for its debt. As the debt is repaid,
shares are released from collateral and allocated to active employees, based on
the proportion of debt service paid in the year. The Company accounts for its
ESOP in accordance with Statement of Position 93-6. Accordingly, the debt of
the ESOP is recorded as debt and the shares pledged as collateral are reported
as unearned ESOP shares in the statement of financial position. As shares are
released from collateral, the company reports compensation expense equal to the
current market price of the shares for the years ended September 30, 1996 and
1995 and equal to the original cost for the year ended September 30, 1994. The
excess of the current market price of shares released over the cost of those
shares is credited to paid-in-capital. As shares are released they become
outstanding for earnings-per-share (EPS) computations. Dividends on allocated
ESOP shares are recorded as a reduction of shareholders' equity; dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest. ESOP compensation expense for the years ended September 30, 1996,
1995 and 1994 was $932,000, $764,000 and $291,000, respectively. The following
is a summary of ESOP shares at September 30, 1996:
<TABLE>
<CAPTION>
Shares
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Allocated shares 111,175 71,243
Shares released for allocation 30,659 29,085
Unreleased shares 348,766 390,272
---------- ----------
Total ESOP shares 490,600 490,600
========== ==========
Fair value of unreleased shares
at September 30, $9,000,000 $8,900,000
========== ==========
</TABLE>
STOCK OPTION AND INCENTIVE PLANS:
The Company has adopted stock option plans for the benefit of directors and
officers of the Company. The option exercise price cannot be less than the
fair value of the underlying common stock as of the date
82
<PAGE> 83
of the option grant, and the maximum term cannot exceed ten years. The stock
options awarded to directors may be exercised at any time after grant provided
the grantee remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time periods,
depending on the individual option grant terms.
At September 30, 1996, 195,478 shares were reserved for future grants. Further
information concerning the options is as follows:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
-------- -----------
<S> <C> <C>
Shares under option
September 30, 1993 531,293 $ 10.00
Options granted 8,500 16.75
Options canceled - -
Options exercised (6,988) 10.00
------- --------------
September 30, 1994 532,805 10.00 - 16.75
Options granted - -
Options canceled (6,309) 10.00
Options exercised (21,142) 10.00
------- --------------
September 30, 1995 505,354 10.00 - 16.75
Options granted - -
Options canceled - -
Options exercised (28,952) 10.00
------- --------------
September 30, 1996 476,402 $10.00 - 16.75
======= ==============
Options exercisable 359,470 $10.00 - 16.75
======= ==============
</TABLE>
Options exercised during the year ended September 30, 1996 were exercised for
$289,520 in cash.
MANAGEMENT RECOGNITION AND RETENTION PLAN:
The Company and the Bank have a Management Recognition and Retention Plan
("MRP"). Pursuant to the MRP, 280,370 shares of common stock were awarded to
directors and officers and are earned over three years. The aggregate purchase
price of these shares, initially recorded as a reduction of shareholders'
equity, will be amortized as compensation expense as participants become fully
vested. All participants became fully vested as of June 18, 1996. MRP expense
for the years ended September 30, 1996, 1995 and 1994 was $701,000, $935,000
and $934,000, respectively.
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER COMMITMENTS
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated financial statements. The contractual or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for the commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for instruments reflected in the consolidated financial
statements.
83
<PAGE> 84
<TABLE>
<CAPTION>
Contractual or Notional Amount(s)
September 30,
----------------------------------
1996 1995
--------- --------
(In thousands)
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk, are as follows:
Commitments to extend credit:
Fixed-rate loans $ 18,487 $ 3,886
Variable-rate loans 18,722 588
Guarantees under IRB issues 4,200 4,200
Interest rate swap agreements 55,000 65,000
Commitments to:
Purchase mortgage-backed securities 12,800 13,700
Sell mortgage-backed securities 1,100 -
Unused and open-ended lines of credit:
Consumer 107,052 89,061
Commercial 14,935 6,711
Open option contracts written:
Short-put options 4,000 13,000
Short-call options 4,000 16,000
Commitments to fund equity investments 13,796 14,283
</TABLE>
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 of 45 days or less or other
termination clauses and may require a fee. Fixed-rate loan commitments as of
September 30, 1996 have interest rates ranging from 6.50% to 9.75%. Because
some commitments expire without being drawn upon, the total commitment amounts
do not necessarily represent cash requirements. The Company evaluates the
creditworthiness of each customer on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of credit
is based on management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained consists
primarily of one- to four-family residences and other residential and
commercial real estate.
The Company has entered into agreements whereby, for an initial and annual fee,
it will guarantee payment for an industrial development revenue bond issue
("IRB"). The IRB is issued by a municipality to finance real estate owned by a
third party. Potential loss on a guarantee is the notional amount of the
guarantee less the value of the real estate collateral. Appraised values of
the real estate collateral exceed the amount of the guarantee. An IRB
commitment of $7.0 million is included in the fixed-rate loan commitments
above.
Interest rate swap agreements generally involve the exchange of fixed and
variable rate interest payments without the exchange of the underlying notional
amount on which the interest rate payments are calculated. While interest rate
swaps on their own have market risk, these agreements were entered into as
hedges of the interest rates on FHLB advances which were used to fund fixed
rate securities.
84
<PAGE> 85
The agreements at September 30, 1996 consist of the following:
<TABLE>
<CAPTION>
Notional
Amount Maturity Fixed Variable
(000s) Type Date Rate Rate
- --------- ---- -------- ----- --------
<S> <C> <C> <C> <C>
$10,000 Fixed Pay-Floating Receive 1998 4.93% 5.57%
10,000 Fixed Pay-Floating Receive 1998 5.04 5.63
15,000 Fixed Pay-Floating Receive 1998 5.25 5.63
10,000 Fixed Pay-Floating Receive 1998 5.23 5.50
10,000 Fixed Pay-Floating Receive 1998 5.43 5.66
</TABLE>
Commitments to buy/sell mortgage-backed securities are contracts which
represent notional amounts to buy/sell mortgage-backed securities at a future
date and specified price. Such commitments generally have fixed settlement
dates.
The unused and open consumer lines of credit are conditional commitments issued
by the Company for extensions of credit such as home equity, auto, credit card
or other similar consumer type financing. Furthermore, the unused and open
commercial lines of credit are also conditional commitments issued by the
Company for extensions of credit such as working capital, agricultural
production, equipment or other similar commercial type financing. The credit
risk involved in extending lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for these
commitments may include, but may not be limited to, real estate, investment
securities, equipment, accounts receivable, inventory and Company deposits.
The open option contracts written represent the notional amounts to buy
(short-put options) or sell (short-call options) mortgage-backed securities
(GNMA or FNMA) at a future date and specified price. The Company receives a
premium/fee for option contracts written which gives the purchaser the right,
but not the obligation to buy or sell mortgage-backed securities within a
specified time period for a contracted price. Because these contracts can
expire without being drawn upon, the total commitment amounts do not
necessarily represent cash requirements. The options expire in 37 days.
The commitments to fund equity investments represent amounts St. Francis Equity
Properties ("SFEP"), a subsidiary of the Bank, is committed to invest in
low-income housing projects, which would qualify for tax credits under Section
42 of the Internal Revenue Code (the "Code"). The Code provides a per state
volume cap on the amounts of low-income housing tax credits ("LIHTCs") that may
be taken with respect to low-income housing projects in each state. In order
to claim a LIHTC, a credit allocation must be received from the appropriate
state or local housing development authority. SFEP is currently a limited
partner in 20 projects and has committed to equity investments in an additional
five projects within the state of Wisconsin. At September 30, 1996, SFEP's
equity investments in such projects totaled $13.5 million. Additionally, the
Bank has provided financing or committed to provide financing to 24 of the
projects. However, the primary return to the Company on these projects is in
the form of tax credits. At September 30, 1996, the Bank had loans outstanding
to such projects of $21.3 million. While the Company has experienced
considerable growth in this area, there can be no assurance that the current
rate of growth can be continued.
The Company's primary business activities include granting residential mortgage
and consumer loans to customers located within the proximity of their branch
locations, primarily within the State of Wisconsin. Approximately $1.3 million
of commercial real estate and multi-family loans are outside Wisconsin as of
September 30, 1996.
In the normal course of business, various legal proceedings involving the
Company are pending. Management, based upon advice from legal counsel, does
not anticipate any significant losses as a result of these actions.
85
<PAGE> 86
The Company leases nine offices under agreements which expire at various dates
through January 2030, with six leases having renewable options. Rent expense
under these agreements totaled approximately $252,000, $232,000 and $205,000
for the years ended September 30, 1996, 1995 and 1994, respectively.
The future minimum rental commitments as of September 30, 1996 under these
leases for the next five years and thereafter, are as follows:
<TABLE>
<CAPTION>
Years ended Amount
September 30, (In thousands)
------------- --------------
<S> <C>
1997 $ 266
1998 229
1999 204
2000 165
2001 152
2002 and thereafter 2,260
</TABLE>
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (SFAS No. 107), requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. 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 materially 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.
SFAS No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent, and should not be interpreted to
represent, the underlying value of the Company.
The following table presents the estimates of fair value of financial
instruments at September 30, 1996:
<TABLE>
<CAPTION>
Carrying Fair
(In thousands) Value Value
- -------------- --------- ---------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents 22,459 22,459
Debt and equity securities 61,662 61,705
Mortgage-backed and related securities 592,712 589,709
Mortgage loans held for sale 20,582 20,614
Loans receivable 610,699 614,425
Federal Home Loan Bank stock 19,063 19,063
Financial Liabilities:
Certificate accounts 547,397 547,448
Other deposit accounts 330,287 330,287
Advances and other borrowings 375,034 374,798
</TABLE>
86
<PAGE> 87
<TABLE>
<CAPTION>
Notional Carrying Fair
(In thousands) Amount Value Value
- -------------- --------- ---------- -------
<S> <C> <C> <C>
Off-Balance Sheet Items:
Commitments to extend credit $ 37,209 - *
Unused and open-ended lines of credit 121,987 - *
Commitments to purchase mortgage-backed and related securities 12,800 - -
Commitments to sell mortgage-backed and related securities 1,100 - -
Interest rate swap agreements 55,000 $ (549) $ 599
Open option contracts:
Short-put options 4,000 3 3
Short-call options 4,000 (4) (4)
</TABLE>
* Amount is not material.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets' fair values.
DEBT AND EQUITY AND MORTGAGE-BACKED AND RELATED SECURITIES: Fair values for
debt and equity and mortgage-backed and related securities are based on quoted
market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
MORTGAGE LOANS HELD FOR SALE: The fair values for mortgage loans held for sale
are based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics
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 residential mortgage loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair
values for commercial real estate loans, rental property mortgage loans and
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. The carrying amount of accrued interest
approximates its fair value.
FEDERAL HOME LOAN BANK STOCK: Federal Home Loan Bank stock is carried at cost
which is its redeemable (fair) value since the market for this stock is
limited.
CERTIFICATE ACCOUNTS: The fair values of 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.
OTHER DEPOSITS: The fair values disclosed for other deposits, which include
interest and non-interest checking accounts, passbook accounts and money market
accounts, are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying value amounts).
FEDERAL HOME LOAN BANK AND OTHER BORROWINGS: The fair values of the Company's
long-term borrowings are estimated using discounted cash flow analyses, based
on the Company's current incremental borrowing rates for similar types of
borrowings arrangements.
87
<PAGE> 88
OFF-BALANCE SHEET ITEMS: The fair value of the Company's off-balance sheet
instruments are based on quoted market prices, fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the credit standing of the related counterparty.
The fair value of the interest rate swap agreements is based on the present
value of the swap using dealer quotes. These values represent the estimated
amount the Company would receive or pay to terminate the agreements taking into
account current interest rates and market volatility. The fair value of the
commitment to fund equity investments is not determinable and is therefore not
shown.
The fair value estimates are presented for on-balance sheet financial
instruments without attempting to estimate the value of the Company's long-term
relationships with depositors and the benefit that results from low-cost
funding provided by deposit liabilities.
(18) FINANCIAL INFORMATION OF ST. FRANCIS CAPITAL CORPORATION (PARENT ONLY)
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
(In thousands) 1996 1995
- -------------- ----------- -----------
<S> <C> <C>
ASSETS
Cash, all with Bank $ 13,858 $ 3,567
Debt and equity securities available for sale 2,986 1,474
Mortgage-backed and related securities available for sale 1,522 1,759
Debt and equity securities held to maturity - 9,691
Mortgage-backed and related securities held to maturity - 6,016
Investment in subsidiaries, at equity 106,206 111,827
Accrued interest receivable and other assets 607 894
----------- -----------
Total assets $ 125,179 $ 135,228
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities - -
Shareholders' equity:
Common stock $ 73 $ 73
Additional paid-in capital 72,243 71,819
Unrealized gain (loss) on securities available for sale (1,765) 2,332
Unearned ESOP compensation (3,488) (3,996)
Unearned restricted stock - (701)
Treasury stock, at cost (35,529) (20,142)
Retained earnings, substantially restricted 93,645 85,843
----------- -----------
Total shareholders' equity 125,179 135,228
----------- -----------
Total liabilities and shareholders' equity $ 125,179 $ 135,228
=========== ===========
</TABLE>
88
<PAGE> 89
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended
September 30,
(In thousands) 1996 1995 1994
- -------------- ----------- ------------ ----------
<S> <C> <C> <C>
Dividend received from Bank $ 13,124 $ 15,396 $ 6,863
Interest and other dividend income 1,487 1,707 1,647
Other income (loss) 291 45 (99)
General and administrative expenses (1,138) (862) (517)
----------- ----------- ----------
Income before income tax expense and equity in
undistributed earnings of subsidiaries 13,764 16,286 7,894
Income tax expense 143 114 184
----------- ----------- ----------
Income before equity in undistributed earnings of
subsidiaries 13,621 16,172 7,710
Equity in (distributed) undistributed earnings of subsidiaries (3,156) (3,473) 327
----------- ----------- ----------
Net income $ 10,465 $ 12,699 $ 8,037
============ ============ ==========
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
September 30,
(In thousands) 1996 1995 1994
- -------------- ---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,465 $ 12,699 $ 8,037
Adjustments to reconcile net income to
cash provided by operations:
Equity in distributed (undistributed)
earnings of subsidiaries 3,156 3,473 (327)
Increase (decrease) in liabilities - - (124)
Other, net 288 (139) (159)
---------- ---------- ---------
Cash provided by operations 13,909 16,033 7,427
---------- ---------- ---------
Cash flows from investing activities:
Purchase of Bank Wisconsin stock - (13,315) -
Proceeds from sales of securities available for sale 18,075 900 4,725
Purchase of securities available for sale (3,824) (1,475)
Principal repayments on securities available for sale 181 6,440
Purchase of securities held to maturity - (2,434)
Cash provided by (used in) investing activities 14,432 (12,415) 7,256
---------- ---------- ---------
Cash flows from financing activities:
Stock option transactions (368) - -
Purchase of treasury stock (15,483) (7,073) (8,280)
Dividends paid (2,199) - -
Cash used in financing activities (18,050) (7,073) (8,280)
---------- ---------- ---------
Increase in cash 10,291 (3,455) 6,403
Cash at beginning of period 3,567 7,022 619
---------- ---------- ---------
Cash at end of period $ 13,858 $ 3,567 $ 7,022
========== ========== =========
</TABLE>
89
<PAGE> 90
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
For the quarter ended,
--------------------------------------------------------------------------------------------
Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 Dec 31
1996 1996 1996 1995 1995 1995 1995 1994
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except earnings per share and market prices)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $ 24,217 $ 23,253 $ 22,899 $ 21,728 $ 21,604 $ 22,052 $ 21,233 $ 18,898
Interest expense 15,079 14,248 13,899 13,187 13,140 13,453 12,859 10,771
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income 9,138 9,005 9,000 8,541 8,464 8,599 8,374 8,127
Provision for loan losses 1,078 78 78 66 60 60 60 60
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 8,060 8,927 8,922 8,475 8,404 8,539 8,314 8,067
Gain (loss) on sales of investments
and mortgage-backed and related
securities 35 (1) 1,678 1,599 1,196 1,193 265 (78)
Gain (loss) on sales of mortgage
loans held for sale, net 242 157 437 221 60 82 49 70
Other operating income 1,437 1,116 2,054 1,639 1,427 1,756 1,472 839
--------- --------- --------- --------- --------- --------- --------- ---------
Total other operating income 1,714 1,272 4,169 3,459 2,683 3,031 1,786 831
General and administrative expenses 11,561 6,972 6,992 6,097 5,810 5,851 5,583 5,435
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income tax expense (1,787) 3,227 6,099 5,837 5,277 5,719 4,517 3,463
Income tax expense (1,357) 683 1,823 1,762 1,623 1,935 1,541 1,178
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $ (430) $ 2,544 $ 4,276 $ 4,075 $ 3,654 $ 3,784 $ 2,976 $ 2,285
========= ========= ========= ========= ========= ========= ========= =========
Earnings per share (1) $ (0.08) $ 0.45 $ 0.73 $ 0.68 $ 0.61 $ 0.62 $ 0.49 $ 0.38
Weighted average common stock
equivalents 5,532,790 5,673,282 5,878,562 5,973,557 5,983,752 6,085,623 6,055,149 6,041,422
Market Information:
High $ 26.25 $ 28.00 $ 28.00 $ 25.50 $ 22.75 $ 20.25 $ 18.50 $ 17.25
Low 24.75 24.00 22.25 22.25 20.00 17.75 13.75 13.50
Close 25.75 25.00 27.25 23.25 22.75 20.00 18.25 14.00
</TABLE>
(1) Earnings per share of common stock have been determined by dividing net
income for the period by the weighted average number of shares of common stock
and common stock equivalents outstanding during the period.
The quarter ended September 30, 1996 contained the effect of a one-time
assessment from the Federal Deposit Insurance Corporation for recapitalization
of the Savings Association Insurance Fund. The assessment was $4.2 million
with an after-tax effect on net income of $2.5 million or $0.45 per share for
the quarter. The quarter also contained the effect of an additional provision
for loan losses of $1.0 million with an after-tax effect of $600,000 or $0.11
per share for the quarter, to provide for potential losses on a pool of
sub-prime auto loans.
On October 25, 1996, the Company declared a dividend of $0.12 per share on the
Company's common stock for the quarter ended September 30, 1996, which was the
fifth cash dividend payment since the Company became a publicly-held company in
June 1993. The dividend was payable on November 22, 1996 to shareholders of
record as of November 8, 1996. At November 29, 1996, the closing price of the
Company's common stock was $27.00 per share.
90
<PAGE> 91
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors is included under
the heading "Election of Directors" in the Company's definitive Proxy
Statement, dated December 16, 1996, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for January 22, 1997, which is incorporated
herein by reference. Information concerning executive officers who are not
directors is contained in Part I of this Form 10-K pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the heading "Compensation
of Executive Officers and Directors" in the Company's definitive Proxy
Statement, dated December 16, 1996, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for January 22, 1997, which is incorporated
herein by reference. However, the information set forth under the heading
"Compensation Committee Report" in the Company's definitive Proxy Statement
dated December 16, 1996, shall not be deemed to be incorporated by reference by
any general statement into any filing and shall not otherwise be deemed to be
filed under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is included under the heading "Security
Ownership of Certain Beneficial Owners" in the Company's definitive Proxy
Statement, dated December 16, 1996, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for January 22, 1997, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is included under the heading "Indebtedness
of Management and Certain Transactions" in the Company's definitive Proxy
Statement, dated December 16, 1996, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for January 22, 1997, which is incorporated
herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The following financial statements and financial statement schedules are
included under a separate caption "Financial Statements and Supplementary Data"
in Part II, Item 8 hereof and are incorporated herein by reference:
Consolidated Statements of Financial Condition at September 30, 1996
and 1995
Consolidated Statements of Income for Years Ended September 30, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity for Years Ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for Years Ended September 30,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
91
<PAGE> 92
(A) (2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Consolidated Financial Statements.
<TABLE>
<S> <C>
(A)(3) EXHIBITS:
3.1 Articles of Incorporation of Registrant (1)
3.2 Amended By-laws of Registrant (2)
3.3 Stock Charter of St. Francis Bank, F.S.B. (1)
3.4 By-laws of St. Francis Bank, F.S.B. (1)
10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan (1)
10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan (1)
10.3 St. Francis Bank, F.S.B. Employee Stock Ownership Plan (1)
10.4 Credit Agreement by and between St. Francis Bank, F.S.B. Employee Stock Ownership
Trust and Registrant (1)
10.5 St. Francis Bank, F.S.B. Management Recognition and Retention Plan and Trust (1)
10.6 St. Francis Capital Corporation 1993 Incentive Stock Option Plan (1)
10.7 St. Francis Capital Corporation 1993 Stock Option Plan for Outside Directors (1)
10.8 1980 Deferred Compensation Agreement-John C. Schlosser (1)
10.9 1986 Deferred Compensation Agreement-John C. Schlosser (1)
10.10 1986 Deferred Compensation Agreement-Thomas R. Perz (1)
10.11 1987 Deferred Compensation Agreement-Thomas R. Perz (1)
10.12 1988 Deferred Compensation Agreement-Edward W. Mentzer (1)
10.13 1992 Consulting, Non-Competition and Supplemental Compensation Agreement-John C. Schlosser (1)
10.14 1993 Employment Agreement-John C. Schlosser (1)
10.15 1993 Employment Agreement-Thomas R. Perz (1)
10.16 1993 Employment Agreement-Brian T. Kaye (1)
10.17 1993 Employment Agreement-Bruce R. Sherman (1)
10.18 1994 Employment Agreement-James C. Hazzard (2)
10.19 1996 Employment Agreement-Thomas R. Perz (3)
10.20 1996 Employment Agreement-Brian T. Kaye (3)
10.21 1996 Employment Agreement-Bruce R. Sherman (3)
10.22 1996 Employment Agreement-James C. Hazzard (3)
10.23 1996 Employment Agreement-John C. Schlosser (3)
11.1 Statement regarding computation of per share earnings See footnote (13) in Part II Item 8
13.1 1996 Summary Annual Report to Shareholders (4)
21.1 Subsidiaries of the Registrant See "Subsidiaries" in Part I Item I
23.1 Consent of KPMG Peat Marwick LLP (3)
24.1 Powers of Attorney for certain officers and directors (1)
27.1 Financial Data Schedule (3)
99.1 Appraisal Agreement with R.P. Financial, Inc. (1)
99.2 Appraisal Report of R.P. Financial, Inc. (1)
99.3 Stock Order Form for Subscription and Community Offerings (1)
99.4 Proxy Statement for Special Meeting of Members of St. Francis Bank, F.S.B. (1)
99.5 Marketing Materials (1)
99.6 Proxy Statement for 1997 Annual Meeting of Shareholders (3)
</TABLE>
(1) Incorporated by reference to exhibits filed with the Registrant's Form S-1
Registration Statement declared effective on April 22, 1993. (Registration
Number 33-58680).
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
(3) Filed herewith.
(4) Filed in paper format pursuant to Rule 101(b)(1) of Regulation S-T.
92
<PAGE> 93
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three months ended
September 30, 1996.
(C) EXHIBITS
Reference is made to the exhibit index set forth above at (a)(3).
(D) FINANCIAL STATEMENT SCHEDULES
Reference is made to the disclosure set forth above at (a)(1 and 2).
93
<PAGE> 94
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.
ST. FRANCIS CAPITAL CORPORATION
By:/s/ John C. Schlosser
----------------------
John C. Schlosser, President and
Chief Executive Officer
(Duly Authorized Representative)
Date:December 11, 1996
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the dates indicated.
/s/ John C. Schlosser /s/ Jon D. Sorenson
- ----------------------------- --------------------------------
John C. Schlosser, President, Jon D. Sorenson, Chief Financial
Chief Executive Officer and Officer and Treasurer
Director (Principal Executive (Principal Financial and
Accounting Officer)
Date: December 11, 1996 Date: December 11, 1996
----------------- -----------------
/s/ Thomas R. Perz
- ----------------------------- --------------------------------
Thomas R. Perz, Vice President William F. Double, Director
and Director
Date: December 11, 1996 Date: December 11, 1996
----------------- -----------------
/s/ Rudolph T. Hoppe /s/ Edward W. Mentzer
- ----------------------------- --------------------------------
Rudolph T. Hoppe, Director Edward W. Mentzer, Director
Date: December 11, 1996 Date: December 11, 1996
----------------- -----------------
/s/ James C. Hazzard /s/ Edmund O. Templeton
- ----------------------------- --------------------------------
James C. Hazzard, Director Edmund O. Templeton, Director
Date: December 11, 1996 Date: December 11, 1996
----------------- -----------------
/s/ David J. Drury
- -----------------------------
David J. Drury, Director
Date: December 11, 1996
-----------------
94
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of October 1, 1996 between St.
Francis Capital Corporation (the "Company"), a Wisconsin-chartered corporation,
St. Francis Bank, F.S.B. (the "Bank"), a federally-chartered savings and loan
and wholly-owned subsidiary of the Company, their respective successors and
assigns, and Thomas R. Perz (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the savings and loan industry has substantially benefitted the
Bank and Company and whose continued employment as an executive member of their
respective management teams in the positions of President and Chief Executive
Officer ("Corporate Position") will continue to benefit the Bank and Company in
the future; and
WHEREAS, the parties are mutually desirous of entering into this Agreement
setting forth the terms and conditions for the employment relationship between
the Bank, Company (sometimes collectively referred to herein as the
"Employers"), and Executive; and
WHEREAS, the respective Boards of Directors of the Employers have approved
and authorized their entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below:
1. Employment. The Bank and Company shall continue to employ Executive,
and Executive shall continue to serve the Bank and Company, on the terms,
conditions and for the period set forth in Section 2 of this Agreement.
2. Term of Employment. The period of Executive's employment under this
Agreement shall begin as of October 1, 1996 (the Commencement Date) and expire
on the third anniversary of the date immediately preceding the Commencement
Date, unless sooner terminated as provided herein; provided that, on each date
immediately preceding the anniversary of the Commencement Date, the term of
employment may be extended by action of the Bank's and Company's Boards of
Directors, following an explicit review by said Boards of the Executive's
performance under this Agreement (with appropriate documentation thereof and
after taking into account all relevant factors including Executive's performance
hereunder), to add one additional year to the remaining term of employment
annually restoring such term to a full three-years. The Board of
<PAGE> 2
Directors or Executive shall each provide the other with at least ninety (90)
days' advance written notice of any decision on their respective parts not to
extend the Agreement on any date immediately preceding an anniversary of the
Commencement Date. The term of employment as in effect from time to time
hereunder shall be referred to as the "Employment Term".
3. Positions and Duties. Executive shall serve the Bank and Company in
his Corporate Position as President and Chief Executive Officer of each
respectively. As such, Executive shall report directly to their Boards of
Directors, be elected to or nominated as a management candidate for election to
the respective Boards of Directors upon expiration of each term thereon while
this Agreement remains in effect, serve as a member of the Bank's and Company's
Management Committees and be generally responsible for selection and supervision
of the Bank's and Company's management personnel and for the formulation of
their business and personnel policies, rendering executive, policy-making and
other management services of the type customarily performed by persons serving
in similar capacities at other institutions, together with such other duties and
responsibilities as may be appropriate to Executive's position and as may be
from time to time determined by the Bank's and Company's Boards of Directors to
be necessary to their operations and in accordance with their bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Bank the compensation and benefits
set forth below:
(i) Base Salary. During the Employment Term, Executive shall
receive from Employers a base salary ("Base Salary") in such amount as
may from time to time be approved by their Boards of Directors. The
Base Salary shall at no time be less than $264,448 per annum,
payable by the Bank and Company in such proportion as shall be
determined by their Boards of Directors. The Base Salary may be
increased from time to time as determined by the Employers' Boards of
Directors, provided that no such increase in Base Salary or other
compensation shall in any way limit or reduce any other obligation of
the Employers under this Agreement. Once established at a specified
annual rate, Executive's Base Salary shall not thereafter be reduced
except as part of a general pro-rata reduction in compensation
applicable to all Executive Officers; provided, however, that no such
reduction shall be permitted following a "change in control" as
defined herein. Executive's Base Salary and other compensation shall
be paid in accordance with the Employers' regular payroll practices as
from time to time in effect. For purposes of this Agreement, the term
"Executive Officers" shall mean all officers of the Bank and/or
Company having a written Employment Agreement.
-2-
<PAGE> 3
(ii) Bonus and Incentive Plans. Executive shall be entitled, during
the Employment Term, to participate in and receive payments from all bonus
and other incentive compensation plans (as currently in effect, as modified
from time to time, or as subsequently adopted); provided, however, that
nothing contained herein shall grant Executive the right to continue in any
bonus or other incentive compensation plan following its discontinuance by
the Board or Boards (except to the extent Executive had earned or otherwise
accumulated vested rights therein prior to such discontinuance). In
addition, Executive shall participate in all stock purchase, stock option,
stock appreciation right, stock grant, or other stock based incentive
programs of any type made available by Employers to their Executive
Officers. The Employers shall not make any changes in such plans, benefits
or privileges which would adversely affect Executive's rights or benefits
thereunder, unless such change occurs pursuant to a program applicable to
all Executive Officers of the Employers and does not result in a
proportionately greater adverse change in the rights and benefits of
Executive as compared with other Executive Officers.
(iii) Other Benefits. During the Employment Term, Employers shall
provide to Executive all other benefits of employment (or, with Executive's
consent, equivalent benefits) generally made available to other Executive
Officers. Such benefits shall include participation by Executive in any
group health, life, disability, or similar insurance program and in any
pension, profit-sharing, Employee Stock Ownership Plan ("ESOP"), 401(k) or
other or similar retirement program. Employers shall continue in effect
any individual insurance plans or deferred compensation agreements in
effect as of the Commencement Date and Executive shall be entitled to use
of an automobile provided by Employers under the terms of such corporate
automobile policy as they shall maintain in effect and as it may be amended
from time to time.
Executive shall receive vacation, sick time, personal days and other
perquisites in the same manner and to the same extent as provided under the
Employers' policies as in effect from time to time for other Executive
Officers. Employers shall also reimburse Executive or otherwise provide
for or pay all reasonable expenses incurred by Executive in furtherance of
or in connection with the business of Employers, including but not by way
of limitation, travel expenses and all reasonable entertainment expenses
(whether incurred at Executive's residence, while traveling or otherwise)
subject to such reasonable documentation and other limitations as may be
imposed by the Boards of Directors of the Employers.
Nothing contained herein shall be construed as granting Executive the
right to continue in any benefit plan or
-3-
<PAGE> 4
program, or to receive any other perquisite of employment provided under
this subsection 4(iii) following termination or discontinuance of such
plan, program or perquisite by the Board (except to the extent Executive
had previously earned or accumulated vested rights therein).
5. Termination Other Than Following a Change-In-Control. This Agreement
may be terminated, subject to payment of the compensation and other benefits
described below, upon occurrence of any of the events described herein. In case
of such termination, the date on which Executive ceases to be employed under
this Agreement, after giving effect to any prior notice requirement, is referred
to as the "Termination Date".
(i) Death, Retirement. This Agreement shall terminate at the death
or retirement of Executive. As used herein, the term "retirement" shall
mean Executive's retirement in accordance with and pursuant to any
retirement plan of the Employers generally applicable to Executive Officers
or in accordance with any retirement arrangement established for Executive
with his consent.
If termination occurs for such reason, no additional compensation
shall be payable to Executive under this Agreement except as specifically
provided herein. Notwithstanding anything to the contrary contained
herein, Executive shall receive all compensation and other benefits to
which he was entitled under Section 4 through the Termination Date and, in
addition, shall receive all other benefits available to him under the
Bank's benefit plans and programs to which he was entitled by reason of
employment through the Termination Date.
(ii) Disability. This Agreement shall terminate upon the
disability of Executive. As used in this Agreement, "disability" shall
mean Executive's inability, as the result of physical or mental incapacity,
to substantially perform his employment duties for a period of 90
consecutive days. Any question as to the existence of Executive's
disability upon which Executive and Employers cannot agree shall be
determined by a qualified independent physician mutually agreeable to
Executive and Employers or, if the parties are unable to agree upon a
physician within ten (10) days after notice from either to the other
suggesting a physician, by a physician designated by the then president of
the medical society for the county in which Executive maintains his
principal residence. The costs of any such medical examination shall be
borne by the Employers. If Executive is terminated due to disability, he
shall be paid 100% of his Base Salary at the rate in effect at the time
notice of termination is given for one year and thereafter an annual amount
equal to 75% of such Base Salary for any remaining portion of the
Employment Term, such amounts
-4-
<PAGE> 5
to be paid in substantially equal monthly installments and offset by any
monthly payments actually received by Executive during the payment period
from (i) any disability plans provided by the Employers, and/or (ii) any
governmental social security or workers compensation program.
If termination occurs for such reason, no additional compensation
shall be payable to Executive except as specifically provided herein.
Notwithstanding anything to the contrary contained herein, Executive shall
receive all compensation and other benefits to which he was entitled under
Section 4 through the Termination Date and, in addition, shall receive all
other benefits under the Employers' benefit plans and programs to which he
was entitled by reason of employment through the Termination Date.
(iii) Cause. Employers may terminate Executive's employment under
this Agreement for cause at any time, and thereafter their obligations
under this Agreement shall cease and terminate. Notwithstanding anything
to the contrary contained herein, Executive shall receive all compensation
and other benefits in which he was vested or to which he was otherwise
entitled under Section 4, and the plans and programs provided therein, by
reason of employment through the Termination Date.
For purposes of this Agreement, "Cause" shall mean:
(A) The intentional failure by Executive to substantially perform
assigned duties (appropriate to his position and level of
compensation) with the Bank (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness) after a written demand for substantial
performance is delivered to Executive by the Board, which demand
specifically identifies the manner in which the Board believes
Executive has not substantially performed his duties, advises
Executive of what steps must be taken to achieve substantial
performance, and allows Executive Sixty (60) days in which to
demonstrate such performance;
(B) Any willful act of misconduct by Executive;
(C) A criminal conviction of Executive for any act involving
dishonesty, breach of trust or a violation of the banking or
savings and loan laws of the United States;
(D) A criminal conviction of Executive for the commission of any
felony;
-5-
<PAGE> 6
(E) A breach of fiduciary duty involving personal profit;
(F) A willful violation of any law, rule or regulation (other than a
traffic violation or similar offenses) or final cease and desist
order; or
(G) Personal dishonesty or material breach of any provision of this
Agreement.
For purposes of this Subsection (5)(iii), no act, or failure to act, on
Executive's part shall be deemed "willful" unless done, or omitted to be
done, by Executive not in good faith and without reasonable belief that the
action or omission was in the best interest of the Employers.
(iv) Voluntary Termination by Executive. Executive may voluntarily
terminate his employment under this Agreement at any time by giving at
least thirty (30) days prior written notice to Employers. In such event,
Executive shall receive all compensation and other benefits in which he was
vested or to which he was otherwise entitled under Section 4 through the
date specified in such notice (the "Termination Date"), in addition to all
other benefits available to him under benefit plans and programs to which
he was entitled by reason of employment through the Termination Date.
(v) Suspension or Termination Required by the OTS
(A) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Employers' affairs by a
notice served under section 8(e)(3), or section 8(g)(1), of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(3) and
(g)(1)], the Employers' obligations under the Agreement shall be
suspended as of the date of service of the notice unless stayed
by appropriate proceedings. If the charges in the notice are
dismissed, the Employers shall (i) pay Executive all of the
compensation withheld while their obligations under this
Agreement were suspended, and (ii) reinstate such obligations as
were suspended.
(B) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Employers' affairs by an
order issued under section 8(e)(4) or section 8(g)(1) of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(4) or
(g)(1)], the obligations of the Employers under the Agreement
shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
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(C) If the Bank is in default as defined in section 3(x)(1) of the
Federal Deposit Insurance Act [12 U.S.C. 1813 (x)(1)], all
obligations under the Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of
the Executive.
(D) All obligations under the Agreement shall be terminated, except
to the extent determined that continuation of the contract is
necessary for the Employers' continued operations (i) by the
Director of the OTS, or his or her designee at the time the FDIC
or Resolution Trust Corporation ("RTC") enters into an agreement
to provide assistance to or on behalf of the Employers under the
authority contained in section 13(c) of the Federal Deposit
Insurance Act; or (ii) by the Director of the OTS, or his or her
designee, at the time it approves a supervisory merger to resolve
problems related to operation of the Employers or when the
Employers are determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(E) In the event that 12 C.F.R. Section 563.39, or any successor
regulation, is repealed, this section 5(v) shall cease to be
effective on the effective date of such repeal. In the event that
12 C.F.R. Section 563.39, or any successor regulation, is
amended or modified, this Agreement shall be revised to reflect
the amended or modified provisions if: (1) the amended or
modified provision is required to be included in this Agreement;
or (2) if not so required, the Executive requests that the
Agreement be so revised.
(vi) Other Termination. If this Agreement is terminated (1) by the
Employers other than for cause, death, disability or retirement (and other
than following a change in control as defined in Section 6), or (2) by
Executive due to a failure by Employers to comply with any material
provision of this Agreement, which failure has not been cured within thirty
(30) days after notice of such non-compliance has been given by Executive
to Employers; then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent to
the Termination Date, Executive shall receive Severance Pay for a
twenty-four (24) month period in accordance with the Employers'
normal payroll practices, beginning with the first pay date
following the Termination Date. The monthly
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<PAGE> 8
rate of Severance Pay shall be the monthly Base Salary received
by Executive (based on his highest rate of Base Salary within the
3 years preceding his Termination Date) plus one-twelfth of the
total bonus and incentive compensation paid to or vested in
Executive on the basis of his most recently completed calendar
year of employment.
(B) Employers shall maintain and provide for the period during which
Severance Payments are to be made and ending at the earlier of
(i) the expiration of such period, or (ii) the date of the
Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such employment
to benefits substantially similar to those described in this
subparagraph (B)), at no cost to the Executive, the Executive's
continued participation in all group insurance, life insurance,
health and accident, disability and other employee benefit plans,
programs and arrangements in which Executive was entitled to
participate immediately prior to the Termination Date (other than
retirement plans, deferred compensation, or stock compensation
plans of the Employers), provided that in the event Executive's
participation in any plan, program or arrangement as provided in
this subparagraph (B) is barred, or during such period any such
plan, program or arrangement is discontinued or the benefits
thereunder are materially reduced, the Employers shall arrange to
provide the Executive with benefits substantially similar to
those which the Executive was entitled to receive under such
plans, programs and arrangements immediately prior to the
Termination Date.
(C) In addition to such Severance Pay and continued benefits,
Executive shall receive all other compensation and benefits in
which he was vested or to which he was otherwise entitled under
Section 4 and the plans and programs provided therein by reason
of employment through the Termination Date.
6. Termination by Executive After Change in Control.
(i) Definition "Change in Control". For purposes of this Agreement, a
"change in control" shall mean any change in control with respect to the
Bank or Company that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act") or any successor thereto;
provided that, without limitation, a change
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<PAGE> 9
in control shall be deemed to have occurred if (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities representing 25% or more of the
combined voting power of the Bank's or Company's then outstanding
securities; or (ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors of
the Bank or Company cease for any reason to constitute at least a majority
thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
(ii) Good Reason for Executive Termination. The Executive may
terminate his employment under this Agreement for "good reason" by giving
at least thirty (30) days prior written notice to the Bank at any time
within twenty-four (24) months of the effective date of a change in
control. Occurrence of any of the following events shall constitute good
reason:
(A) Without the Executive's express written consent, assignment by
the Employers of any duties which are materially inconsistent
with Executive's positions, duties, responsibilities and status
with the Employers immediately prior to a change in control, or a
material change in the Executive's reporting responsibilities,
titles or offices as in effect immediately prior to such change
in control, or any removal of the Executive from or any failure
to re-elect the Executive to all or any portion of his Corporate
Position, except in connection with a termination of Executive's
employment for cause, disability, retirement or death (or by the
Executive other than for good reason as defined in this section
6(B)).
(B) Without the Executive's express written consent, a reduction by
the Employers in the Executive's Base Salary as in effect on the
date of the change in control or as the same may have been
increased from time to time thereafter;
(C) The principal executive offices of either of the Employers are
relocated outside of the Milwaukee, Wisconsin metropolitan area
or, without the Executive's express written consent, the
Employers require the Executive to be based anywhere other than
an area in which the Employers principal executives offices are
located, except for required
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<PAGE> 10
travel on business of the Employers to an extent substantially
consistent with the Executive's present business travel
obligations;
(D) Without Executive's express written consent, the Employers fail
or refuse to continue Executive's participation in incentive
compensation and stock incentive programs comparable to either
(1) those in effect prior to the change in control or (2) those
subsequently in effect for the senior executives of any acquiring
company effecting the change in control;
(E) Without Executive's express written consent, Employers fail to
provide the Executive with the same fringe benefits that were
provided to Executive immediately prior to a change in control,
or with a package of fringe benefits (including paid vacations)
that, though one or more of such benefits may vary from those in
effect immediately prior to such change in control, is
substantially comparable in all material respects to such fringe
benefits taken as a whole;
(F) Any purported termination of the Executive's employment for
cause, disability or retirement which is not effected in
accordance with the notice requirements applicable under this
Agreement; or
(G) The failure by either of the Employers to obtain the assumption
of, or an agreement to perform this Agreement by any successor as
contemplated in Section 7(i) hereof;
(iii) Benefits Upon Termination by Executive After a "Change in Control".
If this Agreement is terminated by Executive for good reason following a change
in control, then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent to
the Termination Date, Executive shall receive Severance Pay for
the longer of (i) the remaining unexpired term of the agreement
as in effect immediately prior to the Termination Date, or (ii) a
thirty-six (36) month period. Payments shall be made in
accordance with the Employers' normal payroll practices,
beginning with the first pay date following the Termination Date.
The monthly rate of Severance Pay shall be the average monthly
Base Salary received by Executive (based on his highest rate of
Base Salary within the 3 years preceding his Termination Date)
plus one-twelfth of
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<PAGE> 11
the total bonus and incentive compensation paid to or vested in
Executive on the basis of his most recently completed calendar
year of employment.
(B) Employers shall maintain and provide for the period during which
Severance Payments are to be made and ending at the earlier of
(i) the expiration of such period, or (ii) the date of the
Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such other
employment to benefits substantially similar to those described
in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance, life
insurance, health and accident, disability and other employee
benefit plans, programs and arrangements in which the Executive
was entitled to participate immediately prior to the Termination
Date (other than retirement and deferred compensation plans and
individual insurance policies covered under subsection 6(C) or
stock compensation plans of the Employers), provided that in the
event Executive's participation in any plan, program or
arrangement as provided in this subparagraph (B) is barred, or
during such period any such plan, program or arrangement is
discontinued or the benefits thereunder are materially reduced,
the Employers shall arrange to provide Executive with benefits
substantially similar to those Executive was entitled to receive
under such plans, programs and arrangements immediately prior to
the Termination Date.
(C) Executive shall also receive all other compensation and benefits
in which he was vested or to which he was otherwise entitled
under section 4 and the plans and programs provided therein by
reason of employment through the Termination Date. In addition to
benefits to which Executive is entitled under retirement and
deferred compensation plans and individual insurance policies
maintained by Employers (hereinafter collectively referred to as
"Plan"), Executive shall receive as additional severance benefits
a benefit paid under this Agreement, which benefit shall be
determined in accordance with and paid under this Agreement, but
in the form and at the times provided in the Plan. Such benefits
shall be determined as if Executive were fully vested under the
Plan and had accumulated (after any termination under this
Agreement) the additional years of credit service under the
applicable Plan that he would have
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<PAGE> 12
received had he continued in the employment of the Bank for the
period during which Severance Payments are to be made and at the
annual compensation level represented by such payments. Such
Severance Payment level shall be deemed to represent the
compensation received by Executive during each such additional
year for purposes of determining his additional benefits under
this Subsection 6(C).
(iv) Limitation of Benefits under Certain Circumstances. If the severance
benefits payable to Executive under this Section 6 ("Severance Benefits"), or
any other payments or benefits received or to be received by Executive from
Employers (whether payable pursuant to the terms of this Agreement, any other
plan, agreement or arrangement with the Employers or any corporation affiliated
with the Employers ("Affiliate") within the meaning of Section 1504 of the
Internal Revenue Code of 1954, as amended (the "Code")), in the opinion of tax
counsel selected by the Employers's independent auditors and acceptable to
Executive, constitute "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and the present value of such "parachute payments"
equals or exceeds three times the average of the annual compensation payable to
Executive by the Employers (or an Affiliate) and includable in Executive's gross
income for federal income tax purposes for the five (5) calendar years preceding
the year in which a change in ownership or control of the Employers occurred
("Base Amount"), such Severance Benefits shall be reduced, in a manner
determined by Executive, to an amount the present value of which (when combined
with the present value of any other payments or benefits otherwise received or
to be received by Executive from the Employers (or an Affiliate) that are deemed
"parachute payments") is equal to 2.99 times the Base Amount, notwithstanding
any other provision to the contrary in this Agreement. The Severance Benefits
shall not be reduced if (A) Executive shall have effectively waived his receipt
or enjoyment of any such payment or benefit which triggered the applicability of
this Section 6(iv), or (B) in the opinion of such tax counsel, the Severance
Benefits (in its full amount or as partially reduced, as the case may be) plus
all other payments or benefits which constitute "parachute payments" within the
meaning of Section 280G(b)(2) of the Code are reasonable compensation for
services actually rendered, within the meaning of Section 280G (b)(4) of the
code, and such payments are deductible by the Employers. The Base Amount shall
include every type and form of compensation includable in Executive's gross
income in respect of his employment by the Employers (or an Affiliate), except
to the extent otherwise provided in temporary or final regulations promulgated
under Section 280G (b) of the Code. For purposes of this Section 6(iv), a
"change in ownership or control" shall have the meaning set forth in Section
280G(b) of the Code and any temporary or final regulations promulgated
thereunder. The present value of any non-cash benefit or any deferred cash
payment shall be determined by the Employers' independent auditors in
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<PAGE> 13
accordance with the principles of Sections 280G (b)(3) and (4) of the Code.
In the event that Employers and/or the Executive do not agree with the
opinion of such counsel, (A) Employers shall pay to the Executive the maximum
amount of payments and benefits pursuant to Section 6, as selected by the
Executive, which such opinion indicates that there is a high probability do not
result in any of such payments and benefits being non-deductible to the
Employers and subject to the imposition of the excise tax imposed under Section
4999 of the Code and (B) Employers may request, and Executive shall have the
right to demand the Employers request, a ruling from the IRS as to whether the
disputed payments and benefits pursuant to Section 6 hereof have such
consequences. Any such request for a ruling from the IRS shall be promptly
prepared and filed by the Employers, but in no event later than thirty (30) days
from the date of the opinion of counsel referred to above, and shall be subject
to Executive's approval prior to filing, which shall not be unreasonably
withheld. Employers and Executive agree to be bound by any ruling received from
the IRS and to make appropriate payments to each other to reflect any such
rulings, together with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code. Nothing contained herein shall result in a
reduction of any payments or benefits to which the Executive may be entitled
upon termination of employment under any circumstances other than as specified
herein or a reduction in payments and benefits other than those provided in this
Section 6.
In the event that Section 280G, or any successor statute, is repealed, this
Section 6 shall cease to be effective on the effective date of such repeal. The
parties to this Agreement recognize that final regulations under Section 280G of
the Code may affect the amounts that may be paid under this Agreement and agreed
that, upon issuance of such final regulations this Agreement may be modified as
in good faith deemed necessary in light of the provisions of such regulations to
achieve the purposes of this Agreement, and that consent to such modifications
shall not be unreasonably withheld.
7. General Provisions.
(i) Successors; Binding Agreement.
(A) Employers will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Employers
("successor organization") to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that Employers would have been required to perform if no such
succession had taken place or to re-execute this Agreement as
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<PAGE> 14
provided pursuant to section 6(ii)(G). If such succession is the
result of a "change in control" as defined herein, such
assumption shall specifically preserve to Executive, for the
greater of twenty-four (24) months or the then remaining term of
this Agreement, the same rights and remedies (recognizing them as
being available and applicable as the result of the "change in
control" effectuating said succession) as provided under this
Agreement upon a "change in control".
As used in this Agreement "Employers" shall mean the
Employers as hereinbefore defined (and any successor to their
business and/or assets) which executes and delivers the agreement
provided for in this Section 7 or which otherwise becomes bound
by the terms and provisions of this Agreement by operation of
this Agreement or law. Failure of the Employers to obtain such
agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle Executive, if he
elects to terminate this Agreement, to compensation from the
Employers in the same amount and on the same terms as he would be
entitled to under this Agreement if he terminated his employment
under Section 6. For purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be
deemed the Termination Date.
(B) No right or interest to or in any payments or benefits under this
agreement shall be assignable or transferable in any respect by
the Executive, nor shall any such payment, right or interest be
subject to seizure, attachment or creditor's process for payment
of any debts, judgments, or obligations of Executive.
(C) This Agreement shall be binding upon and inure to the benefit of
and be enforceable by (1) Executive and his heirs, beneficiaries
and personal representatives, and (2) the Employers and any
successor organization.
(ii) Noncompetition Provision. Executive acknowledges that the
development of personal contacts and relationships is an essential element
of the savings and loan business, that Employers has invested considerable
time and money in his development of such contacts and relationships, that
Employers could suffer irreparable harm if he were to leave employment and
solicit the business of the Employers customers, and that it is reasonable
to protect the Employers against competitive
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<PAGE> 15
activities by Executive. Executive covenants and agrees, in recognition of
the foregoing and in consideration of the mutual promises contained herein,
that in the event of a voluntary termination of employment by Executive
pursuant to Section 5(iii), or upon expiration of this Agreement as a
result of Executive's election (but not as the result of an election by
Employers) not to continue automatic annual renewals, Executive shall not
accept employment with any Significant Competitor of Bank for a period of
twelve (12) months following such termination. For purposes of this
Agreement, the term Significant Competitor means any financial institution
including, but not limited to, any commercial bank, savings bank, savings
and loan association, credit union, or mortgage banking corporation which,
at the time of termination of Executive's employment, or during the period
of this covenant not to compete, has a home, branch or other office in
Milwaukee County or which has, during the twelve (12) months preceding
Executive's termination, originated, or which during the period of this
covenant not to compete originates, more than $50,000,000 in commercial or
mortgage loans secured by real property in any such county.
Executive agrees that the non-competition provisions set forth herein
are necessary for the protection of the Employers and are reasonably
limited as to (i) the scope of activities affected, (ii) their duration and
geographic scope, and (iii) their effect on Executive and the public. In
the event Executive violates the non-competition provisions set forth
herein, the Employers shall be entitled, in addition to its other legal
remedies, to enjoin the employment of Executive with any Significant
Competitor for the period set forth herein. If Executive violates this
covenant and the Employers bring legal action for injunctive or other
relief, the Employers shall not, as a result of the time involved in
obtaining such relief, be deprived of the benefit of the full period of the
restrictive covenant. Accordingly, the covenant shall be deemed to have
the duration specified herein, computed from the date such relief is
granted, but reduced by any period between commencement of the period and
the date of the first violation.
(iii) Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Bank or Company:
St. Francis Capital Corporation
3545 South Kinnickinnic Avenue
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<PAGE> 16
Milwaukee, Wisconsin 53207
Attn: Secretary
If to the Executive:
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement (or to recover damages for breach of
it) in the absence of a change in control, the prevailing party shall be
entitled to recover from the other party reasonable attorneys' fees and
necessary costs and disbursements incurred in such litigation, in addition
to any other relief to which such prevailing party may be entitled.
Notwithstanding the foregoing, in the event of a legal proceeding to
enforce or interpret the terms of this Agreement following a change in
control or a re-execution of this Agreement pursuant to section 6(ii)(G),
the only recoverable costs shall be those which Executive shall be entitled
to recover from the Bank (i.e. reasonable attorneys' fees and necessary
costs and disbursements incurred in such litigation), which fees shall be
recoverable only if the Executive is the prevailing party. Recovery of
attorneys' fees and costs as provided herein following a change in control
or re-execution shall be in addition to any other relief to which Executive
may be entitled.
(v) Withholding. Employers shall be entitled to withhold from
amounts to be paid to Executive under this Agreement any federal, state, or
local withholding or other taxes or charges which it is from time to time
required to withhold. Employers shall be entitled to rely on an opinion of
counsel if any question as to the amount or requirement of any such
withholding shall arise.
(vi) Notice of Termination. Any purported termination by the
Employers under Sections 5(i), (ii), (iii) or (iv), or by Executive under
Sections 5(vi) or 6(ii) shall be communicated by written "Notice of
Termination" to the other party. For purposes of this Agreement, a "Notice
of Termination" shall mean a dated notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination under
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<PAGE> 17
the provision so indicated, (iii) specifies a Date of Termination, which
shall be not less than thirty (30) nor more than ninety (90) days after
such Notice of Termination is given, except in the case of termination of
Executive's employment for Cause; and (iv) is given in the manner specified
in Section 7(iii) of this Agreement.
(vii) Miscellaneous. No provision of this Agreement may be amended,
waived or discharged unless such amendment, waiver or discharge is agreed
to in writing and signed by Executive and such officers of the Employers
as may be specifically designated by the Board. No waiver by either party
hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not expressly set forth in this Agreement
and it is agreed that execution of this Agreement shall result in its
superseding and extinguishing any rights of Executive under any other
employment agreement previously in effect between himself, the Employers,
or any of their affiliates. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Wisconsin.
(viii) Mitigation; Exclusivity of Benefits. The Executive shall not
be required to mitigate the amount of any benefits hereunder by seeking
other employment or otherwise, nor shall the amount of any such benefits be
reduced by any compensation earned by the Executive as a result of
employment by another employer after the Termination Date or otherwise.
(ix) Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
(x) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(xi) Headings. Headings contained in this Agreement are for
reference only and shall not affect the meaning or interpretation of any
provision of this Agreement.
(xii) Effective Date. The effective date of this Agreement shall be
the date indicated in the first section of this Agreement, notwithstanding
the actual date of execution by any party.
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IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the date first above written.
Executive:
----------------------------------
Thomas R. Perz
ST. FRANCIS CAPITAL CORPORATION
By:
------------------------------
Its:
------------------------------
ST. FRANCIS BANK, F.S.B.
By:
------------------------------
Its:
------------------------------
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<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of October 1, 1996 between St.
Francis Capital Corporation (the "Company"), a Wisconsin-chartered corporation,
St. Francis Bank, F.S.B. (the "Bank"), a federally-chartered savings and loan
and wholly-owned subsidiary of the Company, their respective successors and
assigns, and Brian T. Kaye (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the savings and loan industry has substantially benefitted the
Bank and Company and whose continued employment as an executive member of their
respective management teams in the positions of Executive Vice President and
Corporate Secretary for the Bank and Secretary for the Company, ("Corporate
Position") will continue to benefit the Bank and Company in the future; and
WHEREAS, the parties are mutually desirous of entering into this Agreement
setting forth the terms and conditions for the employment relationship between
the Bank, Company (sometimes collectively referred to herein as the
"Employers"), and Executive; and
WHEREAS, the respective Boards of Directors of the Employers have approved
and authorized their entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below:
1. Employment. The Bank and Company shall continue to employ Executive,
and Executive shall continue to serve the Bank and Company, on the terms,
conditions and for the period set forth in Section 2 of this Agreement.
2. Term of Employment. The period of Executive's employment under this
Agreement shall begin as of October 1, 1996 (the Commencement Date) and expire
on the third anniversary of the date immediately preceding the Commencement
Date, unless sooner terminated as provided herein; provided that, on each date
immediately preceding the anniversary of the Commencement Date, the term of
employment may be extended by action of the Bank's and Company's Boards of
Directors, following an explicit review by said Boards of the Executive's
performance under this Agreement (with appropriate documentation thereof and
after taking into account all relevant factors including Executive's performance
hereunder), to add one additional year to the remaining term of employment
<PAGE> 2
annually restoring such term to a full three-years. The Board of Directors or
Executive shall each provide the other with at least ninety (90) days' advance
written notice of any decision on their respective parts not to extend the
Agreement on any date immediately preceding an anniversary of the Commencement
Date. The term of employment as in effect from time to time hereunder shall be
referred to as the "Employment Term".
3. Positions and Duties. Executive shall serve the Bank and Company,
respectively, in his Corporate Position, reporting directly to their Chief
Executive Officers and serving as a member of the Bank's and Company's
Management Committees and being generally responsible to assist in the
formulation of their business and personnel policies, rendering executive,
policy-making and other management services of the type customarily performed by
persons serving in similar capacities at other institutions, together with such
other duties and responsibilities as may be appropriate to Executive's position
and as may be from time to time determined by the Bank's and Company's Boards of
Directors to be necessary to their operations and in accordance with their
bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Bank the compensation and benefits
set forth below:
(i) Base Salary. During the Employment Term, Executive shall
receive from Employers a base salary ("Base Salary") in such amount as may
from time to time be approved by their Boards of Directors. The Base
Salary shall at no time be less than $161,114 per annum, payable by the
Bank and Company in such proportion as shall be determined by their Boards
of Directors. The Base Salary may be increased from time to time as
determined by the Employers' Boards of Directors, provided that no such
increase in Base Salary or other compensation shall in any way limit or
reduce any other obligation of the Employers under this Agreement. Once
established at a specified annual rate, Executive's Base Salary shall not
thereafter be reduced except as part of a general pro-rata reduction in
compensation applicable to all Executive Officers; provided, however, that
no such reduction shall be permitted following a "change in control" as
defined herein. Executive's Base Salary and other compensation shall be
paid in accordance with the Employers' regular payroll practices as from
time to time in effect. For purposes of this Agreement, the term
"Executive Officers" shall mean all officers of the Bank and/or Company
having a written Employment Agreement.
(ii) Bonus and Incentive Plans. Executive shall be entitled, during
the Employment Term, to participate in and receive payments from all bonus
and other incentive compensation plans (as currently in effect, as modified
from
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time to time, or as subsequently adopted); provided, however, that nothing
contained herein shall grant Executive the right to continue in any bonus
or other incentive compensation plan following its discontinuance by the
Board or Boards (except to the extent Executive had earned or otherwise
accumulated vested rights therein prior to such discontinuance). In
addition, Executive shall participate in all stock purchase, stock option,
stock appreciation right, stock grant, or other stock based incentive
programs of any type made available by Employers to their Executive
Officers. The Employers shall not make any changes in such plans, benefits
or privileges which would adversely affect Executive's rights or benefits
thereunder, unless such change occurs pursuant to a program applicable to
all Executive Officers of the Employers and does not result in a
proportionately greater adverse change in the rights and benefits of
Executive as compared with other Executive Officers.
(iii) Other Benefits. During the Employment Term, Employers shall
provide to Executive all other benefits of employment (or, with Executive's
consent, equivalent benefits) generally made available to other Executive
Officers. Such benefits shall include participation by Executive in any
group health, life, disability, or similar insurance program and in any
pension, profit-sharing, Employee Stock Ownership Plan ("ESOP"), 401(k) or
other or similar retirement program. Employers shall continue in effect
any individual insurance plans or deferred compensation agreements in
effect as of the Commencement Date and Executive shall be entitled to use
of an automobile provided by Employers under the terms of such corporate
automobile policy as they shall maintain in effect and as it may be amended
from time to time.
Executive shall receive vacation, sick time, personal days and other
perquisites in the same manner and to the same extent as provided under the
Employers' policies as in effect from time to time for other Executive
Officers. Employers shall also reimburse Executive or otherwise provide
for or pay all reasonable expenses incurred by Executive in furtherance of
or in connection with the business of Employers, including but not by way
of limitation, travel expenses and all reasonable entertainment expenses
(whether incurred at Executive's residence, while traveling or otherwise)
subject to such reasonable documentation and other limitations as may be
imposed by the Boards of Directors of the Employers.
Nothing contained herein shall be construed as granting Executive the
right to continue in any benefit plan or program, or to receive any other
perquisite of employment provided under this subsection 4(iii) following
termination or discontinuance of such plan, program or perquisite by the
Board (except to the extent Executive had previously earned or
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accumulated vested rights therein).
5. Termination Other Than Following a Change-In-Control. This Agreement
may be terminated, subject to payment of the compensation and other benefits
described below, upon occurrence of any of the events described herein. In case
of such termination, the date on which Executive ceases to be employed under
this Agreement, after giving effect to any prior notice requirement, is referred
to as the "Termination Date".
(i) Death, Retirement. This Agreement shall terminate at the death
or retirement of Executive. As used herein, the term "retirement" shall
mean Executive's retirement in accordance with and pursuant to any
retirement plan of the Employers generally applicable to Executive Officers
or in accordance with any retirement arrangement established for Executive
with his consent.
If termination occurs for such reason, no additional compensation
shall be payable to Executive under this Agreement except as specifically
provided herein. Notwithstanding anything to the contrary contained
herein, Executive shall receive all compensation and other benefits to
which he was entitled under Section 4 through the Termination Date and, in
addition, shall receive all other benefits available to him under the
Bank's benefit plans and programs to which he was entitled by reason of
employment through the Termination Date.
(ii) Disability. This Agreement shall terminate upon the
disability of Executive. As used in this Agreement, "disability" shall
mean Executive's inability, as the result of physical or mental incapacity,
to substantially perform his employment duties for a period of 90
consecutive days. Any question as to the existence of Executive's
disability upon which Executive and Employers cannot agree shall be
determined by a qualified independent physician mutually agreeable to
Executive and Employers or, if the parties are unable to agree upon a
physician within ten (10) days after notice from either to the other
suggesting a physician, by a physician designated by the then president of
the medical society for the county in which Executive maintains his
principal residence. The costs of any such medical examination shall be
borne by the Employers. If Executive is terminated due to disability, he
shall be paid 100% of his Base Salary at the rate in effect at the time
notice of termination is given for one year and thereafter an annual amount
equal to 75% of such Base Salary for any remaining portion of the
Employment Term, such amounts to be paid in substantially equal monthly
installments and offset by any monthly payments actually received by
Executive during the payment period from (i) any disability plans provided
by the Employers, and/or (ii) any governmental social
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security or workers compensation program.
If termination occurs for such reason, no additional compensation
shall be payable to Executive except as specifically provided herein.
Notwithstanding anything to the contrary contained herein, Executive shall
receive all compensation and other benefits to which he was entitled under
Section 4 through the Termination Date and, in addition, shall receive all
other benefits under the Employers' benefit plans and programs to which he
was entitled by reason of employment through the Termination Date.
(iii) Cause. Employers may terminate Executive's employment under
this Agreement for cause at any time, and thereafter their obligations
under this Agreement shall cease and terminate. Notwithstanding anything
to the contrary contained herein, Executive shall receive all compensation
and other benefits in which he was vested or to which he was otherwise
entitled under Section 4, and the plans and programs provided therein, by
reason of employment through the Termination Date.
For purposes of this Agreement, "Cause" shall mean:
(A) The intentional failure by Executive to substantially perform
assigned duties (appropriate to his position and level of
compensation) with the Bank (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness) after a written demand for substantial
performance is delivered to Executive by the Board, which demand
specifically identifies the manner in which the Board believes
Executive has not substantially performed his duties, advises
Executive of what steps must be taken to achieve substantial
performance, and allows Executive Sixty (60) days in which to
demonstrate such performance;
(B) Any willful act of misconduct by Executive;
(C) A criminal conviction of Executive for any act involving
dishonesty, breach of trust or a violation of the banking or
savings and loan laws of the United States;
(D) A criminal conviction of Executive for the commission of any
felony;
(E) A breach of fiduciary duty involving personal profit;
(F) A willful violation of any law, rule or regulation
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(other than a traffic violation or similar offenses) or final
cease and desist order; or
(G) Personal dishonesty or material breach of any provision of this
Agreement.
For purposes of this Subsection (5)(iii), no act, or failure to act, on
Executive's part shall be deemed "willful" unless done, or omitted to be
done, by Executive not in good faith and without reasonable belief that the
action or omission was in the best interest of the Employers.
(iv) Voluntary Termination by Executive. Executive may voluntarily
terminate his employment under this Agreement at any time by giving at
least thirty (30) days prior written notice to Employers. In such event,
Executive shall receive all compensation and other benefits in which he was
vested or to which he was otherwise entitled under Section 4 through the
date specified in such notice (the "Termination Date"), in addition to all
other benefits available to him under benefit plans and programs to which
he was entitled by reason of employment through the Termination Date.
(v) Suspension or Termination Required by the OTS
(A) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Employers' affairs by a
notice served under section 8(e)(3), or section 8(g)(1), of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(3) and
(g)(1)], the Employers' obligations under the Agreement shall be
suspended as of the date of service of the notice unless stayed
by appropriate proceedings. If the charges in the notice are
dismissed, the Employers shall (i) pay Executive all of the
compensation withheld while their obligations under this
Agreement were suspended, and (ii) reinstate such obligations as
were suspended.
(B) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Employers' affairs by an
order issued under section 8(e)(4) or section 8(g)(1) of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(4) or
(g)(1)], the obligations of the Employers under the Agreement
shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(C) If the Bank is in default as defined in section 3(x)(1) of the
Federal Deposit Insurance Act [12 U.S.C. 1813 (x)(1)], all
obligations under the
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Agreement shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the Executive.
(D) All obligations under the Agreement shall be terminated, except
to the extent determined that continuation of the contract is
necessary for the Employers' continued operations (i) by the
Director of the OTS, or his or her designee at the time the FDIC
or Resolution Trust Corporation ("RTC") enters into an agreement
to provide assistance to or on behalf of the Employers under the
authority contained in section 13(c) of the Federal Deposit
Insurance Act; or (ii) by the Director of the OTS, or his or her
designee, at the time it approves a supervisory merger to resolve
problems related to operation of the Employers or when the
Employers are determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(E) In the event that 12 C.F.R. Section 563.39, or any successor
regulation, is repealed, this section 5(v) shall cease to be
effective on the effective date of such repeal. In the event that
12 C.F.R. Section 563.39, or any successor regulation, is
amended or modified, this Agreement shall be revised to reflect
the amended or modified provisions if: (1) the amended or
modified provision is required to be included in this Agreement;
or (2) if not so required, the Executive requests that the
Agreement be so revised.
(vi) Other Termination. If this Agreement is terminated (1) by the
Employers other than for cause, death, disability or retirement (and other
than following a change in control as defined in Section 6), or (2) by
Executive due to a failure by Employers to comply with any material
provision of this Agreement, which failure has not been cured within thirty
(30) days after notice of such non-compliance has been given by Executive
to Employers; then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent to
the Termination Date, Executive shall receive Severance Pay for a
twelve (12) month period in accordance with the Employers' normal
payroll practices, beginning with the first pay date following
the Termination Date. The monthly rate of Severance Pay shall be
the monthly Base Salary received by Executive (based on his
highest rate of Base Salary within the 3 years preceding
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<PAGE> 8
his Termination Date) plus one-twelfth of the total bonus and
incentive compensation paid to or vested in Executive on the
basis of his most recently completed calendar year of employment.
(B) Employers shall maintain and provide for the period during which
Severance Payments are to be made and ending at the earlier of
(i) the expiration of such period, or (ii) the date of the
Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such employment
to benefits substantially similar to those described in this
subparagraph (B)), at no cost to the Executive, the Executive's
continued participation in all group insurance, life insurance,
health and accident, disability and other employee benefit plans,
programs and arrangements in which Executive was entitled to
participate immediately prior to the Termination Date (other than
retirement plans, deferred compensation, or stock compensation
plans of the Employers), provided that in the event Executive's
participation in any plan, program or arrangement as provided in
this subparagraph (B) is barred, or during such period any such
plan, program or arrangement is discontinued or the benefits
thereunder are materially reduced, the Employers shall arrange to
provide the Executive with benefits substantially similar to
those which the Executive was entitled to receive under such
plans, programs and arrangements immediately prior to the
Termination Date.
(C) In addition to such Severance Pay and continued benefits,
Executive shall receive all other compensation and benefits in
which he was vested or to which he was otherwise entitled under
Section 4 and the plans and programs provided therein by reason
of employment through the Termination Date.
6. Termination by Executive After Change in Control.
(i) Definition "Change in Control". For purposes of this Agreement, a
"change in control" shall mean any change in control with respect to the
Bank or Company that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act") or any successor thereto;
provided that, without limitation, a change in control shall be deemed to
have occurred if (i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
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<PAGE> 9
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities representing 25% or more of the combined voting power of the
Bank's or Company's then outstanding securities; or (ii) during any period
of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Bank or Company cease for any
reason to constitute at least a majority thereof unless the election, or
the nomination for election by stockholders, of each new director was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period.
(ii) Good Reason for Executive Termination. The Executive may
terminate his employment under this Agreement for "good reason" by giving
at least thirty (30) days prior written notice to the Bank at any time
within twenty-four (24) months of the effective date of a change in
control. Occurrence of any of the following events shall constitute good
reason:
(A) Without the Executive's express written consent, assignment by
the Employers of any duties which are materially inconsistent
with Executive's positions, duties, responsibilities and status
with the Employers immediately prior to a change in control, or a
material change in the Executive's reporting responsibilities,
titles or offices as in effect immediately prior to such change
in control, or any removal of the Executive from or any failure
to re-elect the Executive to all or any portion of his Corporate
Position, except in connection with a termination of Executive's
employment for cause, disability, retirement or death (or by the
Executive other than for good reason as defined in this section
6(B)).
(B) Without the Executive's express written consent, a reduction by
the Employers in the Executive's Base Salary as in effect on the
date of the change in control or as the same may have been
increased from time to time thereafter;
(C) The principal executive offices of either of the Employers are
relocated outside of the Milwaukee, Wisconsin metropolitan area
or, without the Executive's express written consent, the
Employers require the Executive to be based anywhere other than
an area in which the Employers principal executives offices are
located, except for required travel on business of the Employers
to an extent substantially consistent with the Executive's
present business travel obligations;
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<PAGE> 10
(D) Without Executive's express written consent, the Employers fail
or refuse to continue Executive's participation in incentive
compensation and stock incentive programs comparable to either
(1) those in effect prior to the change in control or (2) those
subsequently in effect for the senior executives of any acquiring
company effecting the change in control;
(E) Without Executive's express written consent, Employers fail to
provide the Executive with the same fringe benefits that were
provided to Executive immediately prior to a change in control,
or with a package of fringe benefits (including paid vacations)
that, though one or more of such benefits may vary from those in
effect immediately prior to such change in control, is
substantially comparable in all material respects to such fringe
benefits taken as a whole;
(F) Any purported termination of the Executive's employment for
cause, disability or retirement which is not effected in
accordance with the notice requirements applicable under this
Agreement; or
(G) The failure by either of the Employers to obtain the assumption
of, or an agreement to perform this Agreement by any successor as
contemplated in Section 7(i) hereof;
(iii) Benefits Upon Termination by Executive After a "Change in Control".
If this Agreement is terminated by Executive for good reason following a change
in control, then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent to
the Termination Date, Executive shall receive Severance Pay for
the longer of (i) the remaining unexpired term of the agreement
as in effect immediately prior to the Termination Date, or (ii) a
thirty-six (36) month period. Payments shall be made in
accordance with the Employers' normal payroll practices,
beginning with the first pay date following the Termination Date.
The monthly rate of Severance Pay shall be the average monthly
Base Salary received by Executive (based on his highest rate of
Base Salary within the 3 years preceding his Termination Date)
plus one-twelfth of the total bonus and incentive compensation
paid to or vested in Executive on the basis of his most recently
completed calendar year of employment.
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(B) Employers shall maintain and provide for the period during which
Severance Payments are to be made and ending at the earlier of
(i) the expiration of such period, or (ii) the date of the
Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such other
employment to benefits substantially similar to those described
in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance, life
insurance, health and accident, disability and other employee
benefit plans, programs and arrangements in which the Executive
was entitled to participate immediately prior to the Termination
Date (other than retirement and deferred compensation plans and
individual insurance policies covered under subsection 6(C) or
stock compensation plans of the Employers), provided that in the
event Executive's participation in any plan, program or
arrangement as provided in this subparagraph (B) is barred, or
during such period any such plan, program or arrangement is
discontinued or the benefits thereunder are materially reduced,
the Employers shall arrange to provide Executive with benefits
substantially similar to those Executive was entitled to receive
under such plans, programs and arrangements immediately prior to
the Termination Date.
(C) Executive shall also receive all other compensation and benefits
in which he was vested or to which he was otherwise entitled
under section 4 and the plans and programs provided therein by
reason of employment through the Termination Date. In addition
to benefits to which Executive is entitled under retirement and
deferred compensation plans and individual insurance policies
maintained by Employers (hereinafter collectively referred to as
"Plan"), Executive shall receive as additional severance benefits
a benefit paid under this Agreement, which benefit shall be
determined in accordance with and paid under this Agreement, but
in the form and at the times provided in the Plan. Such benefits
shall be determined as if Executive were fully vested under the
Plan and had accumulated (after any termination under this
Agreement) the additional years of credit service under the
applicable Plan that he would have received had he continued in
the employment of the Bank for the period during which Severance
Payments are to be made and at the annual compensation level
represented by such payments. Such Severance
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Payment level shall be deemed to represent the compensation
received by Executive during each such additional year for
purposes of determining his additional benefits under this
Subsection 6(C).
(iv) Limitation of Benefits under Certain Circumstances. If the severance
benefits payable to Executive under this Section 6 ("Severance Benefits"), or
any other payments or benefits received or to be received by Executive from
Employers (whether payable pursuant to the terms of this Agreement, any other
plan, agreement or arrangement with the Employers or any corporation affiliated
with the Employers ("Affiliate") within the meaning of Section 1504 of the
Internal Revenue Code of 1954, as amended (the "Code")), in the opinion of tax
counsel selected by the Employers's independent auditors and acceptable to
Executive, constitute "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and the present value of such "parachute payments"
equals or exceeds three times the average of the annual compensation payable to
Executive by the Employers (or an Affiliate) and includable in Executive's gross
income for federal income tax purposes for the five (5) calendar years preceding
the year in which a change in ownership or control of the Employers occurred
("Base Amount"), such Severance Benefits shall be reduced, in a manner
determined by Executive, to an amount the present value of which (when combined
with the present value of any other payments or benefits otherwise received or
to be received by Executive from the Employers (or an Affiliate) that are deemed
"parachute payments") is equal to 2.99 times the Base Amount, notwithstanding
any other provision to the contrary in this Agreement. The Severance Benefits
shall not be reduced if (A) Executive shall have effectively waived his receipt
or enjoyment of any such payment or benefit which triggered the applicability of
this Section 6(iv), or (B) in the opinion of such tax counsel, the Severance
Benefits (in its full amount or as partially reduced, as the case may be) plus
all other payments or benefits which constitute "parachute payments" within the
meaning of Section 280G(b)(2) of the Code are reasonable compensation for
services actually rendered, within the meaning of Section 280G (b)(4) of the
code, and such payments are deductible by the Employers. The Base Amount shall
include every type and form of compensation includable in Executive's gross
income in respect of his employment by the Employers (or an Affiliate), except
to the extent otherwise provided in temporary or final regulations promulgated
under Section 280G (b) of the Code. For purposes of this Section 6(iv), a
"change in ownership or control" shall have the meaning set forth in Section
280G(b) of the Code and any temporary or final regulations promulgated
thereunder. The present value of any non-cash benefit or any deferred cash
payment shall be determined by the Employers' independent auditors in accordance
with the principles of Sections 280G (b)(3) and (4) of the Code.
In the event that Employers and/or the Executive do not agree
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with the opinion of such counsel, (A) Employers shall pay to the Executive the
maximum amount of payments and benefits pursuant to Section 6, as selected by
the Executive, which such opinion indicates that there is a high probability do
not result in any of such payments and benefits being non-deductible to the
Employers and subject to the imposition of the excise tax imposed under Section
4999 of the Code and (B) Employers may request, and Executive shall have the
right to demand the Employers request, a ruling from the IRS as to whether the
disputed payments and benefits pursuant to Section 6 hereof have such
consequences. Any such request for a ruling from the IRS shall be promptly
prepared and filed by the Employers, but in no event later than thirty (30) days
from the date of the opinion of counsel referred to above, and shall be subject
to Executive's approval prior to filing, which shall not be unreasonably
withheld. Employers and Executive agree to be bound by any ruling received from
the IRS and to make appropriate payments to each other to reflect any such
rulings, together with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code. Nothing contained herein shall result in a
reduction of any payments or benefits to which the Executive may be entitled
upon termination of employment under any circumstances other than as specified
herein or a reduction in payments and benefits other than those provided in this
Section 6.
In the event that Section 280G, or any successor statute, is repealed, this
Section 6 shall cease to be effective on the effective date of such repeal. The
parties to this Agreement recognize that final regulations under Section 280G of
the Code may affect the amounts that may be paid under this Agreement and agreed
that, upon issuance of such final regulations this Agreement may be modified as
in good faith deemed necessary in light of the provisions of such regulations to
achieve the purposes of this Agreement, and that consent to such modifications
shall not be unreasonably withheld.
7. General Provisions.
(i) Successors; Binding Agreement.
(A) Employers will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Employers
("successor organization") to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that Employers would have been required to perform if no such
succession had taken place or to re-execute this Agreement as
provided pursuant to section 6(ii)(G). If such succession is the
result of a "change in control" as defined herein, such
assumption shall specifically preserve to Executive, for the
greater
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of twenty-four (24) months or the then remaining term of this
Agreement, the same rights and remedies (recognizing them as
being available and applicable as the result of the "change in
control" effectuating said succession) as provided under this
Agreement upon a "change in control".
As used in this Agreement "Employers" shall mean the
Employers as hereinbefore defined (and any successor to their
business and/or assets) which executes and delivers the agreement
provided for in this Section 7 or which otherwise becomes bound
by the terms and provisions of this Agreement by operation of
this Agreement or law. Failure of the Employers to obtain such
agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle Executive, if he
elects to terminate this Agreement, to compensation from the
Employers in the same amount and on the same terms as he would be
entitled to under this Agreement if he terminated his employment
under Section 6. For purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be
deemed the Termination Date.
(B) No right or interest to or in any payments or benefits under this
agreement shall be assignable or transferable in any respect by
the Executive, nor shall any such payment, right or interest be
subject to seizure, attachment or creditor's process for payment
of any debts, judgments, or obligations of Executive.
(C) This Agreement shall be binding upon and inure to the benefit of
and be enforceable by (1) Executive and his heirs, beneficiaries
and personal representatives, and (2) the Employers and any
successor organization.
(ii) Noncompetition Provision. Executive acknowledges that the
development of personal contacts and relationships is an essential element
of the savings and loan business, that Employers has invested considerable
time and money in his development of such contacts and relationships, that
Employers could suffer irreparable harm if he were to leave employment and
solicit the business of the Employers customers, and that it is reasonable
to protect the Employers against competitive activities by Executive.
Executive covenants and agrees, in recognition of the foregoing and in
consideration of the mutual promises contained herein, that in the event of
a voluntary termination of employment by Executive pursuant to
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Section 5(iii), or upon expiration of this Agreement as a result of
Executive's election (but not as the result of an election by Employers)
not to continue automatic annual renewals, Executive shall not accept
employment with any Significant Competitor of Bank for a period of twelve
(12) months following such termination. For purposes of this Agreement,
the term Significant Competitor means any financial institution including,
but not limited to, any commercial bank, savings bank, savings and loan
association, credit union, or mortgage banking corporation which, at the
time of termination of Executive's employment, or during the period of this
covenant not to compete, has a home, branch or other office in Milwaukee
County or which has, during the twelve (12) months preceding Executive's
termination, originated, or which during the period of this covenant not to
compete originates, more than $50,000,000 in commercial or mortgage loans
secured by real property in any such county.
Executive agrees that the non-competition provisions set forth herein
are necessary for the protection of the Employers and are reasonably
limited as to (i) the scope of activities affected, (ii) their duration and
geographic scope, and (iii) their effect on Executive and the public. In
the event Executive violates the non-competition provisions set forth
herein, the Employers shall be entitled, in addition to its other legal
remedies, to enjoin the employment of Executive with any Significant
Competitor for the period set forth herein. If Executive violates this
covenant and the Employers bring legal action for injunctive or other
relief, the Employers shall not, as a result of the time involved in
obtaining such relief, be deprived of the benefit of the full period of the
restrictive covenant. Accordingly, the covenant shall be deemed to have
the duration specified herein, computed from the date such relief is
granted, but reduced by any period between commencement of the period and
the date of the first violation.
(iii) Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Bank or Company:
St. Francis Capital Corporation
3545 South Kinnickinnic Avenue
Milwaukee, Wisconsin 53207
Attn: Secretary
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If to the Executive:
Mr. Brian T. Kaye
3825 Bradee Road
Brookfield, Wisconsin
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement (or to recover damages for breach of
it) in the absence of a change in control, the prevailing party shall be
entitled to recover from the other party reasonable attorneys' fees and
necessary costs and disbursements incurred in such litigation, in addition
to any other relief to which such prevailing party may be entitled.
Notwithstanding the foregoing, in the event of a legal proceeding to
enforce or interpret the terms of this Agreement following a change in
control or a re-execution of this Agreement pursuant to section 6(ii)(G),
the only recoverable costs shall be those which Executive shall be entitled
to recover from the Bank (i.e. reasonable attorneys' fees and necessary
costs and disbursements incurred in such litigation), which fees shall be
recoverable only if the Executive is the prevailing party. Recovery of
attorneys' fees and costs as provided herein following a change in control
or re-execution shall be in addition to any other relief to which Executive
may be entitled.
(v) Withholding. Employers shall be entitled to withhold from
amounts to be paid to Executive under this Agreement any federal, state, or
local withholding or other taxes or charges which it is from time to time
required to withhold. Employers shall be entitled to rely on an opinion of
counsel if any question as to the amount or requirement of any such
withholding shall arise.
(vi) Notice of Termination. Any purported termination by the
Employers under Sections 5(i), (ii), (iii) or (iv), or by Executive under
Sections 5(vi) or 6(ii) shall be communicated by written "Notice of
Termination" to the other party. For purposes of this Agreement, a "Notice
of Termination" shall mean a dated notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination under the provision so indicated, (iii) specifies a Date of
Termination, which shall be not less than thirty (30) nor more
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<PAGE> 17
than ninety (90) days after such Notice of Termination is given, except in
the case of termination of Executive's employment for Cause; and (iv) is
given in the manner specified in Section 7(iii) of this Agreement.
(vii) Miscellaneous. No provision of this Agreement may be amended,
waived or discharged unless such amendment, waiver or discharge is agreed
to in writing and signed by Executive and such officers of the Employers
as may be specifically designated by the Board. No waiver by either party
hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not expressly set forth in this Agreement
and it is agreed that execution of this Agreement shall result in its
superseding and extinguishing any rights of Executive under any other
employment agreement previously in effect between himself, the Employers,
or any of their affiliates. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Wisconsin.
(viii) Mitigation; Exclusivity of Benefits. The Executive shall not
be required to mitigate the amount of any benefits hereunder by seeking
other employment or otherwise, nor shall the amount of any such benefits be
reduced by any compensation earned by the Executive as a result of
employment by another employer after the Termination Date or otherwise.
(ix) Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
(x) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(xi) Headings. Headings contained in this Agreement are for
reference only and shall not affect the meaning or interpretation of any
provision of this Agreement.
(xii) Effective Date. The effective date of this Agreement shall be
the date indicated in the first section of this Agreement, notwithstanding
the actual date of execution by any party.
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IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the date first above written.
Executive:
--------------------------------
Brian T. Kaye
ST. FRANCIS CAPITAL CORPORATION
By:
-----------------------------
Its:
----------------------------
ST. FRANCIS BANK, F.S.B.
By:
-----------------------------
Its:
----------------------------
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<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of October 1, 1996 between St.
Francis Capital Corporation (the "Company"), a Wisconsin-chartered corporation,
St. Francis Bank, F.S.B. (the "Bank"), a federally-chartered savings and loan
and wholly-owned subsidiary of the Company, their respective successors and
assigns, and Bruce R. Sherman (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the savings and loan industry has substantially benefitted the
Bank and Company and whose continued employment as an executive member of their
respective management teams in the positions of Senior Vice President,
Asset/Liability manager, Treasurer for the Bank and Vice President for the
Company, ("Corporate Position") will continue to benefit the Bank and Company in
the future; and
WHEREAS, the parties are mutually desirous of entering into this Agreement
setting forth the terms and conditions for the employment relationship between
the Bank, Company (sometimes collectively referred to herein as the
"Employers"), and Executive; and
WHEREAS, the respective Boards of Directors of the Employers have approved
and authorized their entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below:
1. Employment. The Bank and Company shall continue to employ Executive,
and Executive shall continue to serve the Bank and Company, on the terms,
conditions and for the period set forth in Section 2 of this Agreement.
2. Term of Employment. The period of Executive's employment under this
Agreement shall begin as of October 1, 1996 (the Commencement Date) and expire
on the third anniversary of the date immediately preceding the Commencement
Date, unless sooner terminated as provided herein; provided that, on each date
immediately preceding the anniversary of the Commencement Date, the term of
employment may be extended by action of the Bank's and Company's Boards of
Directors, following an explicit review by said Boards of the Executive's
performance under this Agreement (with appropriate documentation thereof and
after taking into account all relevant factors including Executive's performance
hereunder), to add one additional year to the remaining term of employment
<PAGE> 2
annually restoring such term to a full three-years. The Board of Directors or
Executive shall each provide the other with at least ninety (90) days' advance
written notice of any decision on their respective parts not to extend the
Agreement on any date immediately preceding an anniversary of the Commencement
Date. The term of employment as in effect from time to time hereunder shall be
referred to as the "Employment Term".
3. Positions and Duties. Executive shall serve the Bank and Company,
respectively, in his Corporate Position, reporting directly to their Chief
Executive Officers and serving as a member of the Bank's and Company's
Management Committees and being generally responsible to assist in the
formulation of their business and personnel policies, rendering executive,
policy-making and other management services of the type customarily performed by
persons serving in similar capacities at other institutions, together with such
other duties and responsibilities as may be appropriate to Executive's position
and as may be from time to time determined by the Bank's and Company's Boards of
Directors to be necessary to their operations and in accordance with their
bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Bank the compensation and benefits
set forth below:
(i) Base Salary. During the Employment Term, Executive shall
receive from Employers a base salary ("Base Salary") in such amount as may
from time to time be approved by their Boards of Directors. The Base
Salary shall at no time be less than $155,000 per annum, payable by the
Bank and Company in such proportion as shall be determined by their Boards
of Directors. The Base Salary may be increased from time to time as
determined by the Employers' Boards of Directors, provided that no such
increase in Base Salary or other compensation shall in any way limit or
reduce any other obligation of the Employers under this Agreement. Once
established at a specified annual rate, Executive's Base Salary shall not
thereafter be reduced except as part of a general pro-rata reduction in
compensation applicable to all Executive Officers; provided, however, that
no such reduction shall be permitted following a "change in control" as
defined herein. Executive's Base Salary and other compensation shall be
paid in accordance with the Employers' regular payroll practices as from
time to time in effect. For purposes of this Agreement, the term
"Executive Officers" shall mean all officers of the Bank and/or Company
having a written Employment Agreement.
(ii) Bonus and Incentive Plans. Executive shall be entitled, during
the Employment Term, to participate in and receive payments from all bonus
and other incentive compensation plans (as currently in effect, as modified
from
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time to time, or as subsequently adopted); provided, however, that nothing
contained herein shall grant Executive the right to continue in any bonus
or other incentive compensation plan following its discontinuance by the
Board or Boards (except to the extent Executive had earned or otherwise
accumulated vested rights therein prior to such discontinuance). In
addition, Executive shall participate in all stock purchase, stock option,
stock appreciation right, stock grant, or other stock based incentive
programs of any type made available by Employers to their Executive
Officers. The Employers shall not make any changes in such plans, benefits
or privileges which would adversely affect Executive's rights or benefits
thereunder, unless such change occurs pursuant to a program applicable to
all Executive Officers of the Employers and does not result in a
proportionately greater adverse change in the rights and benefits of
Executive as compared with other Executive Officers.
(iii) Other Benefits. During the Employment Term, Employers shall
provide to Executive all other benefits of employment (or, with Executive's
consent, equivalent benefits) generally made available to other Executive
Officers. Such benefits shall include participation by Executive in any
group health, life, disability, or similar insurance program and in any
pension, profit-sharing, Employee Stock Ownership Plan ("ESOP"), 401(k) or
other or similar retirement program. Employers shall continue in effect
any individual insurance plans or deferred compensation agreements in
effect as of the Commencement Date and Executive shall be entitled to use
of an automobile provided by Employers under the terms of such corporate
automobile policy as they shall maintain in effect and as it may be amended
from time to time.
Executive shall receive vacation, sick time, personal days and other
perquisites in the same manner and to the same extent as provided under the
Employers' policies as in effect from time to time for other Executive
Officers. Employers shall also reimburse Executive or otherwise provide
for or pay all reasonable expenses incurred by Executive in furtherance of
or in connection with the business of Employers, including but not by way
of limitation, travel expenses and all reasonable entertainment expenses
(whether incurred at Executive's residence, while traveling or otherwise)
subject to such reasonable documentation and other limitations as may be
imposed by the Boards of Directors of the Employers.
Nothing contained herein shall be construed as granting Executive the
right to continue in any benefit plan or program, or to receive any other
perquisite of employment provided under this subsection 4(iii) following
termination or discontinuance of such plan, program or perquisite by the
Board (except to the extent Executive had previously earned or
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<PAGE> 4
accumulated vested rights therein).
5. Termination Other Than Following a Change-In-Control. This Agreement
may be terminated, subject to payment of the compensation and other benefits
described below, upon occurrence of any of the events described herein. In case
of such termination, the date on which Executive ceases to be employed under
this Agreement, after giving effect to any prior notice requirement, is referred
to as the "Termination Date".
(i) Death, Retirement. This Agreement shall terminate at the death
or retirement of Executive. As used herein, the term "retirement" shall
mean Executive's retirement in accordance with and pursuant to any
retirement plan of the Employers generally applicable to Executive Officers
or in accordance with any retirement arrangement established for Executive
with his consent.
If termination occurs for such reason, no additional compensation
shall be payable to Executive under this Agreement except as specifically
provided herein. Notwithstanding anything to the contrary contained
herein, Executive shall receive all compensation and other benefits to
which he was entitled under Section 4 through the Termination Date and, in
addition, shall receive all other benefits available to him under the
Bank's benefit plans and programs to which he was entitled by reason of
employment through the Termination Date.
(ii) Disability. This Agreement shall terminate upon the
disability of Executive. As used in this Agreement, "disability" shall
mean Executive's inability, as the result of physical or mental incapacity,
to substantially perform his employment duties for a period of 90
consecutive days. Any question as to the existence of Executive's
disability upon which Executive and Employers cannot agree shall be
determined by a qualified independent physician mutually agreeable to
Executive and Employers or, if the parties are unable to agree upon a
physician within ten (10) days after notice from either to the other
suggesting a physician, by a physician designated by the then president of
the medical society for the county in which Executive maintains his
principal residence. The costs of any such medical examination shall be
borne by the Employers. If Executive is terminated due to disability, he
shall be paid 100% of his Base Salary at the rate in effect at the time
notice of termination is given for one year and thereafter an annual amount
equal to 75% of such Base Salary for any remaining portion of the
Employment Term, such amounts to be paid in substantially equal monthly
installments and offset by any monthly payments actually received by
Executive during the payment period from (i) any disability plans provided
by the Employers, and/or (ii) any governmental social
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<PAGE> 5
security or workers compensation program.
If termination occurs for such reason, no additional compensation
shall be payable to Executive except as specifically provided herein.
Notwithstanding anything to the contrary contained herein, Executive shall
receive all compensation and other benefits to which he was entitled under
Section 4 through the Termination Date and, in addition, shall receive all
other benefits under the Employers' benefit plans and programs to which he
was entitled by reason of employment through the Termination Date.
(iii) Cause. Employers may terminate Executive's employment under
this Agreement for cause at any time, and thereafter their obligations
under this Agreement shall cease and terminate. Notwithstanding anything
to the contrary contained herein, Executive shall receive all compensation
and other benefits in which he was vested or to which he was otherwise
entitled under Section 4, and the plans and programs provided therein, by
reason of employment through the Termination Date.
For purposes of this Agreement, "Cause" shall mean:
(A) The intentional failure by Executive to substantially perform
assigned duties (appropriate to his position and level of
compensation) with the Bank (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness) after a written demand for substantial
performance is delivered to Executive by the Board, which demand
specifically identifies the manner in which the Board believes
Executive has not substantially performed his duties, advises
Executive of what steps must be taken to achieve substantial
performance, and allows Executive Sixty (60) days in which to
demonstrate such performance;
(B) Any willful act of misconduct by Executive;
(C) A criminal conviction of Executive for any act involving
dishonesty, breach of trust or a violation of the banking or
savings and loan laws of the United States;
(D) A criminal conviction of Executive for the commission of any
felony;
(E) A breach of fiduciary duty involving personal profit;
(F) A willful violation of any law, rule or regulation
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<PAGE> 6
(other than a traffic violation or similar offenses) or final
cease and desist order; or
(G) Personal dishonesty or material breach of any provision of this
Agreement.
For purposes of this Subsection (5)(iii), no act, or failure to act, on
Executive's part shall be deemed "willful" unless done, or omitted to be
done, by Executive not in good faith and without reasonable belief that the
action or omission was in the best interest of the Employers.
(iv) Voluntary Termination by Executive. Executive may voluntarily
terminate his employment under this Agreement at any time by giving at
least thirty (30) days prior written notice to Employers. In such event,
Executive shall receive all compensation and other benefits in which he was
vested or to which he was otherwise entitled under Section 4 through the
date specified in such notice (the "Termination Date"), in addition to all
other benefits available to him under benefit plans and programs to which
he was entitled by reason of employment through the Termination Date.
(v) Suspension or Termination Required by the OTS
(A) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Employers' affairs by a
notice served under section 8(e)(3), or section 8(g)(1), of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(3) and
(g)(1)], the Employers' obligations under the Agreement shall be
suspended as of the date of service of the notice unless stayed
by appropriate proceedings. If the charges in the notice are
dismissed, the Employers shall (i) pay Executive all of the
compensation withheld while their obligations under this
Agreement were suspended, and (ii) reinstate such obligations as
were suspended.
(B) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Employers' affairs by an
order issued under section 8(e)(4) or section 8(g)(1) of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(4) or
(g)(1)], the obligations of the Employers under the Agreement
shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(C) If the Bank is in default as defined in section 3(x)(1) of the
Federal Deposit Insurance Act [12 U.S.C. 1813 (x)(1)], all
obligations under the
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<PAGE> 7
Agreement shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the Executive.
(D) All obligations under the Agreement shall be terminated, except
to the extent determined that continuation of the contract is
necessary for the Employers' continued operations (i) by the
Director of the OTS, or his or her designee at the time the FDIC
or Resolution Trust Corporation ("RTC") enters into an agreement
to provide assistance to or on behalf of the Employers under the
authority contained in section 13(c) of the Federal Deposit
Insurance Act; or (ii) by the Director of the OTS, or his or her
designee, at the time it approves a supervisory merger to resolve
problems related to operation of the Employers or when the
Employers are determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(E) In the event that 12 C.F.R. Section 563.39, or any successor
regulation, is repealed, this section 5(v) shall cease to be
effective on the effective date of such repeal. In the event that
12 C.F.R. Section 563.39, or any successor regulation, is
amended or modified, this Agreement shall be revised to reflect
the amended or modified provisions if: (1) the amended or
modified provision is required to be included in this Agreement;
or (2) if not so required, the Executive requests that the
Agreement be so revised.
(vi) Other Termination. If this Agreement is terminated (1) by the
Employers other than for cause, death, disability or retirement (and other
than following a change in control as defined in Section 6), or (2) by
Executive due to a failure by Employers to comply with any material
provision of this Agreement, which failure has not been cured within thirty
(30) days after notice of such non-compliance has been given by Executive
to Employers; then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent to
the Termination Date, Executive shall receive Severance Pay for a
twelve (12) month period in accordance with the Employers' normal
payroll practices, beginning with the first pay date following
the Termination Date. The monthly rate of Severance Pay shall be
the monthly Base Salary received by Executive (based on his
highest rate of Base Salary within the 3 years preceding
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<PAGE> 8
his Termination Date) plus one-twelfth of the total bonus and
incentive compensation paid to or vested in Executive on the
basis of his most recently completed calendar year of employment.
(B) Employers shall maintain and provide for the period during which
Severance Payments are to be made and ending at the earlier of
(i) the expiration of such period, or (ii) the date of the
Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such employment
to benefits substantially similar to those described in this
subparagraph (B)), at no cost to the Executive, the Executive's
continued participation in all group insurance, life insurance,
health and accident, disability and other employee benefit plans,
programs and arrangements in which Executive was entitled to
participate immediately prior to the Termination Date (other than
retirement plans, deferred compensation, or stock compensation
plans of the Employers), provided that in the event Executive's
participation in any plan, program or arrangement as provided in
this subparagraph (B) is barred, or during such period any such
plan, program or arrangement is discontinued or the benefits
thereunder are materially reduced, the Employers shall arrange to
provide the Executive with benefits substantially similar to
those which the Executive was entitled to receive under such
plans, programs and arrangements immediately prior to the
Termination Date.
(C) In addition to such Severance Pay and continued benefits,
Executive shall receive all other compensation and benefits in
which he was vested or to which he was otherwise entitled under
Section 4 and the plans and programs provided therein by reason
of employment through the Termination Date.
6. Termination by Executive After Change in Control.
(i) Definition "Change in Control". For purposes of this Agreement, a
"change in control" shall mean any change in control with respect to the
Bank or Company that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act") or any successor thereto;
provided that, without limitation, a change in control shall be deemed to
have occurred if (i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
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<PAGE> 9
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities representing 25% or more of the combined voting power of the
Bank's or Company's then outstanding securities; or (ii) during any period
of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Bank or Company cease for any
reason to constitute at least a majority thereof unless the election, or
the nomination for election by stockholders, of each new director was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period.
(ii) Good Reason for Executive Termination. The Executive may
terminate his employment under this Agreement for "good reason" by giving
at least thirty (30) days prior written notice to the Bank at any time
within twenty-four (24) months of the effective date of a change in
control. Occurrence of any of the following events shall constitute good
reason:
(A) Without the Executive's express written consent, assignment by
the Employers of any duties which are materially inconsistent
with Executive's positions, duties, responsibilities and status
with the Employers immediately prior to a change in control, or a
material change in the Executive's reporting responsibilities,
titles or offices as in effect immediately prior to such change
in control, or any removal of the Executive from or any failure
to re-elect the Executive to all or any portion of his Corporate
Position, except in connection with a termination of Executive's
employment for cause, disability, retirement or death (or by the
Executive other than for good reason as defined in this section
6(B)).
(B) Without the Executive's express written consent, a reduction by
the Employers in the Executive's Base Salary as in effect on the
date of the change in control or as the same may have been
increased from time to time thereafter;
(C) The principal executive offices of either of the Employers are
relocated outside of the Milwaukee, Wisconsin metropolitan area
or, without the Executive's express written consent, the
Employers require the Executive to be based anywhere other than
an area in which the Employers principal executives offices are
located, except for required travel on business of the Employers
to an extent substantially consistent with the Executive's
present business travel obligations;
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<PAGE> 10
(D) Without Executive's express written consent, the Employers fail
or refuse to continue Executive's participation in incentive
compensation and stock incentive programs comparable to either
(1) those in effect prior to the change in control or (2) those
subsequently in effect for the senior executives of any
acquiring company effecting the change in control;
(E) Without Executive's express written consent, Employers fail to
provide the Executive with the same fringe benefits that were
provided to Executive immediately prior to a change in control,
or with a package of fringe benefits (including paid vacations)
that, though one or more of such benefits may vary from those
in effect immediately prior to such change in control, is
substantially comparable in all material respects to such
fringe benefits taken as a whole;
(F) Any purported termination of the Executive's employment for
cause, disability or retirement which is not effected in
accordance with the notice requirements applicable under this
Agreement; or
(G) The failure by either of the Employers to obtain the assumption
of, or an agreement to perform this Agreement by any successor
as contemplated in Section 7(i) hereof;
(iii) Benefits Upon Termination by Executive After a "Change in Control".
If this Agreement is terminated by Executive for good reason following a change
in control, then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent
to the Termination Date, Executive shall receive Severance Pay
for the longer of (i) the remaining unexpired term of the
agreement as in effect immediately prior to the Termination
Date, or (ii) a thirty-six (36) month period. Payments shall
be made in accordance with the Employers' normal payroll
practices, beginning with the first pay date following the
Termination Date. The monthly rate of Severance Pay shall be
the average monthly Base Salary received by Executive (based on
his highest rate of Base Salary within the 3 years preceding
his Termination Date) plus one-twelfth of the total bonus and
incentive compensation paid to or vested in Executive on the
basis of his most recently completed calendar year of
employment.
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(B) Employers shall maintain and provide for the period during
which Severance Payments are to be made and ending at the
earlier of (i) the expiration of such period, or (ii) the date
of the Executive's full-time employment by another employer
(provided that the Executive is entitled under the terms of
such other employment to benefits substantially similar to
those described in this subparagraph (B)), at no cost to the
Executive, the Executive's continued participation in all group
insurance, life insurance, health and accident, disability and
other employee benefit plans, programs and arrangements in
which the Executive was entitled to participate immediately
prior to the Termination Date (other than retirement and
deferred compensation plans and individual insurance policies
covered under subsection 6(C) or stock compensation plans of
the Employers), provided that in the event Executive's
participation in any plan, program or arrangement as provided
in this subparagraph (B) is barred, or during such period any
such plan, program or arrangement is discontinued or the
benefits thereunder are materially reduced, the Employers shall
arrange to provide Executive with benefits substantially
similar to those Executive was entitled to receive under such
plans, programs and arrangements immediately prior to the
Termination Date.
(C) Executive shall also receive all other compensation and
benefits in which he was vested or to which he was otherwise
entitled under section 4 and the plans and programs provided
therein by reason of employment through the Termination Date.
In addition to benefits to which Executive is entitled under
retirement and deferred compensation plans and individual
insurance policies maintained by Employers (hereinafter
collectively referred to as "Plan"), Executive shall receive as
additional severance benefits a benefit paid under this
Agreement, which benefit shall be determined in accordance with
and paid under this Agreement, but in the form and at the times
provided in the Plan. Such benefits shall be determined as if
Executive were fully vested under the Plan and had accumulated
(after any termination under this Agreement) the additional
years of credit service under the applicable Plan that he would
have received had he continued in the employment of the Bank
for the period during which Severance Payments are to be made
and at the annual compensation level represented by such
payments. Such Severance
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Payment level shall be deemed to represent the compensation
received by Executive during each such additional year for
purposes of determining his additional benefits under this
Subsection 6(C).
(iv) Limitation of Benefits under Certain Circumstances. If the severance
benefits payable to Executive under this Section 6 ("Severance Benefits"), or
any other payments or benefits received or to be received by Executive from
Employers (whether payable pursuant to the terms of this Agreement, any other
plan, agreement or arrangement with the Employers or any corporation affiliated
with the Employers ("Affiliate") within the meaning of Section 1504 of the
Internal Revenue Code of 1954, as amended (the "Code")), in the opinion of tax
counsel selected by the Employers's independent auditors and acceptable to
Executive, constitute "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and the present value of such "parachute payments"
equals or exceeds three times the average of the annual compensation payable to
Executive by the Employers (or an Affiliate) and includable in Executive's gross
income for federal income tax purposes for the five (5) calendar years preceding
the year in which a change in ownership or control of the Employers occurred
("Base Amount"), such Severance Benefits shall be reduced, in a manner
determined by Executive, to an amount the present value of which (when combined
with the present value of any other payments or benefits otherwise received or
to be received by Executive from the Employers (or an Affiliate) that are deemed
"parachute payments") is equal to 2.99 times the Base Amount, notwithstanding
any other provision to the contrary in this Agreement. The Severance Benefits
shall not be reduced if (A) Executive shall have effectively waived his receipt
or enjoyment of any such payment or benefit which triggered the applicability of
this Section 6(iv), or (B) in the opinion of such tax counsel, the Severance
Benefits (in its full amount or as partially reduced, as the case may be) plus
all other payments or benefits which constitute "parachute payments" within the
meaning of Section 280G(b)(2) of the Code are reasonable compensation for
services actually rendered, within the meaning of Section 280G (b)(4) of the
code, and such payments are deductible by the Employers. The Base Amount shall
include every type and form of compensation includable in Executive's gross
income in respect of his employment by the Employers (or an Affiliate), except
to the extent otherwise provided in temporary or final regulations promulgated
under Section 280G (b) of the Code. For purposes of this Section 6(iv), a
"change in ownership or control" shall have the meaning set forth in Section
280G(b) of the Code and any temporary or final regulations promulgated
thereunder. The present value of any non-cash benefit or any deferred cash
payment shall be determined by the Employers' independent auditors in accordance
with the principles of Sections 280G (b)(3) and (4) of the Code.
In the event that Employers and/or the Executive do not agree
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with the opinion of such counsel, (A) Employers shall pay to the Executive the
maximum amount of payments and benefits pursuant to Section 6, as selected by
the Executive, which such opinion indicates that there is a high probability do
not result in any of such payments and benefits being non-deductible to the
Employers and subject to the imposition of the excise tax imposed under Section
4999 of the Code and (B) Employers may request, and Executive shall have the
right to demand the Employers request, a ruling from the IRS as to whether the
disputed payments and benefits pursuant to Section 6 hereof have such
consequences. Any such request for a ruling from the IRS shall be promptly
prepared and filed by the Employers, but in no event later than thirty (30) days
from the date of the opinion of counsel referred to above, and shall be subject
to Executive's approval prior to filing, which shall not be unreasonably
withheld. Employers and Executive agree to be bound by any ruling received from
the IRS and to make appropriate payments to each other to reflect any such
rulings, together with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code. Nothing contained herein shall result in a
reduction of any payments or benefits to which the Executive may be entitled
upon termination of employment under any circumstances other than as specified
herein or a reduction in payments and benefits other than those provided in this
Section 6.
In the event that Section 280G, or any successor statute, is repealed, this
Section 6 shall cease to be effective on the effective date of such repeal. The
parties to this Agreement recognize that final regulations under Section 280G of
the Code may affect the amounts that may be paid under this Agreement and agreed
that, upon issuance of such final regulations this Agreement may be modified as
in good faith deemed necessary in light of the provisions of such regulations to
achieve the purposes of this Agreement, and that consent to such modifications
shall not be unreasonably withheld.
7. General Provisions.
(i) Successors; Binding Agreement.
(A) Employers will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Employers
("successor organization") to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that Employers would have been required to perform if no such
succession had taken place or to re-execute this Agreement as
provided pursuant to section 6(ii)(G). If such succession is the
result of a "change in control" as defined herein, such
assumption shall specifically preserve to Executive, for the
greater
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<PAGE> 14
of twenty-four (24) months or the then remaining term of this
Agreement, the same rights and remedies (recognizing them as being
available and applicable as the result of the "change in control"
effectuating said succession) as provided under this Agreement upon a
"change in control".
As used in this Agreement "Employers" shall mean the Employers as
hereinbefore defined (and any successor to their business and/or
assets) which executes and delivers the agreement provided for in this
Section 7 or which otherwise becomes bound by the terms and provisions
of this Agreement by operation of this Agreement or law. Failure of
the Employers to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall
entitle Executive, if he elects to terminate this Agreement, to
compensation from the Employers in the same amount and on the same
terms as he would be entitled to under this Agreement if he terminated
his employment under Section 6. For purposes of implementing the
foregoing, the date on which any such succession becomes effective
shall be deemed the Termination Date.
(B) No right or interest to or in any payments or benefits under this
agreement shall be assignable or transferable in any respect by the
Executive, nor shall any such payment, right or interest be subject to
seizure, attachment or creditor's process for payment of any debts,
judgments, or obligations of Executive.
(C) This Agreement shall be binding upon and inure to the benefit of and
be enforceable by (1) Executive and his heirs, beneficiaries and
personal representatives, and (2) the Employers and any successor
organization.
(ii) Noncompetition Provision. Executive acknowledges that the
development of personal contacts and relationships is an essential element of
the savings and loan business, that Employers has invested considerable time and
money in his development of such contacts and relationships, that Employers
could suffer irreparable harm if he were to leave employment and solicit the
business of the Employers customers, and that it is reasonable to protect the
Employers against competitive activities by Executive. Executive covenants and
agrees, in recognition of the foregoing and in consideration of the mutual
promises contained herein, that in the event of a voluntary termination of
employment by Executive pursuant to
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<PAGE> 15
Section 5(iii), or upon expiration of this Agreement as a result of
Executive's election (but not as the result of an election by Employers)
not to continue automatic annual renewals, Executive shall not accept
employment with any Significant Competitor of Bank for a period of twelve
(12) months following such termination. For purposes of this Agreement,
the term Significant Competitor means any financial institution including,
but not limited to, any commercial bank, savings bank, savings and loan
association, credit union, or mortgage banking corporation which, at the
time of termination of Executive's employment, or during the period of this
covenant not to compete, has a home, branch or other office in Milwaukee
County or which has, during the twelve (12) months preceding Executive's
termination, originated, or which during the period of this covenant not to
compete originates, more than $50,000,000 in commercial or mortgage loans
secured by real property in any such county.
Executive agrees that the non-competition provisions set forth herein
are necessary for the protection of the Employers and are reasonably
limited as to (i) the scope of activities affected, (ii) their duration and
geographic scope, and (iii) their effect on Executive and the public. In
the event Executive violates the non-competition provisions set forth
herein, the Employers shall be entitled, in addition to its other legal
remedies, to enjoin the employment of Executive with any Significant
Competitor for the period set forth herein. If Executive violates this
covenant and the Employers bring legal action for injunctive or other
relief, the Employers shall not, as a result of the time involved in
obtaining such relief, be deprived of the benefit of the full period of the
restrictive covenant. Accordingly, the covenant shall be deemed to have
the duration specified herein, computed from the date such relief is
granted, but reduced by any period between commencement of the period and
the date of the first violation.
(iii) Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Bank or Company:
St. Francis Capital Corporation
3545 South Kinnickinnic Avenue
Milwaukee, Wisconsin 53207
Attn: Secretary
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<PAGE> 16
If to the Executive:
Mr. Bruce R. Sherman
or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement (or to recover damages for breach of
it) in the absence of a change in control, the prevailing party shall be
entitled to recover from the other party reasonable attorneys' fees and
necessary costs and disbursements incurred in such litigation, in addition
to any other relief to which such prevailing party may be entitled.
Notwithstanding the foregoing, in the event of a legal proceeding to
enforce or interpret the terms of this Agreement following a change in
control or a re-execution of this Agreement pursuant to section 6(ii)(G),
the only recoverable costs shall be those which Executive shall be entitled
to recover from the Bank (i.e. reasonable attorneys' fees and necessary
costs and disbursements incurred in such litigation), which fees shall be
recoverable only if the Executive is the prevailing party. Recovery of
attorneys' fees and costs as provided herein following a change in control
or re-execution shall be in addition to any other relief to which Executive
may be entitled.
(v) Withholding. Employers shall be entitled to withhold from
amounts to be paid to Executive under this Agreement any federal, state, or
local withholding or other taxes or charges which it is from time to time
required to withhold. Employers shall be entitled to rely on an opinion of
counsel if any question as to the amount or requirement of any such
withholding shall arise.
(vi) Notice of Termination. Any purported termination by the
Employers under Sections 5(i), (ii), (iii) or (iv), or by Executive under
Sections 5(vi) or 6(ii) shall be communicated by written "Notice of
Termination" to the other party. For purposes of this Agreement, a "Notice
of Termination" shall mean a dated notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination under the provision so indicated, (iii) specifies a Date of
Termination, which shall be not less than thirty (30) nor more
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<PAGE> 17
than ninety (90) days after such Notice of Termination is given, except in
the case of termination of Executive's employment for Cause; and (iv) is
given in the manner specified in Section 7(iii) of this Agreement.
(vii) Miscellaneous. No provision of this Agreement may be amended,
waived or discharged unless such amendment, waiver or discharge is agreed
to in writing and signed by Executive and such officers of the Employers
as may be specifically designated by the Board. No waiver by either party
hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not expressly set forth in this Agreement
and it is agreed that execution of this Agreement shall result in its
superseding and extinguishing any rights of Executive under any other
employment agreement previously in effect between himself, the Employers,
or any of their affiliates. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Wisconsin.
(viii) Mitigation; Exclusivity of Benefits. The Executive shall not
be required to mitigate the amount of any benefits hereunder by seeking
other employment or otherwise, nor shall the amount of any such benefits be
reduced by any compensation earned by the Executive as a result of
employment by another employer after the Termination Date or otherwise.
(ix) Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
(x) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(xi) Headings. Headings contained in this Agreement are for
reference only and shall not affect the meaning or interpretation of any
provision of this Agreement.
(xii) Effective Date. The effective date of this Agreement shall be
the date indicated in the first section of this Agreement, notwithstanding
the actual date of execution by any party.
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<PAGE> 18
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as
of the date first above written.
Executive:
-------------------------------------
Bruce R. Sherman
ST. FRANCIS CAPITAL CORPORATION
By:
---------------------------------------
Its:
---------------------------------
ST. FRANCIS BANK, F.S.B.
By:
---------------------------------------
Its:
---------------------------------
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<PAGE> 1
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of October 1, 1996 between Bank
Wisconsin (the "Bank"), a Wisconsin-chartered corporation, its successors and
assigns, and James C. Hazzard (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the savings and loan industry have substantially benefitted
the Bank and whose continued employment as its President and Chief Executive
Officer and as a member of its Board of Directors ("Corporate Position") will
continue to benefit the Bank in the future; and
WHEREAS, the parties are mutually desirous of entering into this Agreement
setting forth the terms and conditions for the employment relationship between
the Bank (hereinafter sometimes referred to as the "Employer") and Executive;
and
WHEREAS, the Board of Directors of the Bank has approved and authorized
entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below:
1. Employment. The Bank shall continue to employ Executive, and Executive
shall continue to serve the Bank, on the terms, conditions and for the period
set forth in Section 2 of this Agreement.
2. Term of Employment. The period of Executive's employment under this
Agreement shall begin as of October 1, 1996 (the Commencement Date) and expire
on the third anniversary of the date immediately preceding the Commencement
Date, unless sooner terminated as provided herein; provided that, on each date
immediately preceding the anniversary of the Commencement Date, the term of
employment may be extended by action of the Bank's Board of Directors, following
an explicit review by said Board of the Executive's performance under this
Agreement (with appropriate documentation thereof and after taking into account
all relevant factors including Executive's performance hereunder), to add one
additional year to the remaining term of employment annually restoring such term
to a full three-years. The Board of Directors or Executive shall each provide
the other with at least ninety (90) days' advance written notice of any decision
on their respective parts not to extend the Agreement on any date immediately
preceding an anniversary of the Commencement Date. The term of employment as
<PAGE> 2
in effect from time to time hereunder shall be referred to as the "Employment
Term".
3. Positions and Duties. Executive shall serve the Bank in his Corporate
Position as its President and Chief Executive Officer. As such, Executive shall
report directly to the Board of Directors, be nominated as a management
candidate for election to the Board of Directors upon expiration of each term
thereon while this Agreement remains in effect, and work in connection with the
formulation of business and personnel policies, rendering executive,
policy-making and other management services of the type customarily performed by
persons serving in similar capacities at other institutions, together with such
other duties and responsibilities as may be appropriate to Executive's position
and as may be from time to time determined by the Bank's Board of Directors to
be necessary to its operations and in accordance with its bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Employer the compensation and
benefits set forth below:
(i) Base Salary. During the Employment Term, Executive shall
receive from Employer a base salary ("Base Salary") in such amount as
may from time to time be approved by the Board of Directors. The Base
Salary shall at no time be less than $115,000 per annum, payable by
the Bank. The Base Salary may be increased from time to time as
determined by the Employer's Board of Directors, provided that no such
increase in Base Salary or other compensation shall in any way limit
or reduce any other obligation of the Employer under this Agreement.
Once established at a specified annual rate, Executive's Base Salary
shall not thereafter be reduced except as part of a general pro-rata
reduction in compensation applicable to all Executive Officers or by
agreement of the Executive in connection with a retirement program
established by the Employer on his behalf; provided, however, that no
such reduction shall be permitted following a "change in control" as
defined herein. Executive's Base Salary and other compensation shall
be paid in accordance with the Employer's regular payroll practices as
from time to time in effect.
(ii) Bonus and Incentive Plans. Executive shall be entitled,
during the Employment Term, to participate in and receive payments
from all bonus and other incentive compensation plans of the Bank (as
currently in effect, as modified from time to time, or as subsequently
adopted); provided, however, that nothing contained herein shall grant
Executive the right to continue in any bonus or other incentive
compensation plan following its discontinuance (except to the extent
Executive had earned or otherwise accumulated vested rights therein
prior to such
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<PAGE> 3
discontinuance). In addition, Executive shall participate in all stock
purchase, stock option, stock appreciation right, stock grant, or other
stock based incentive programs of any type made available by the Bank or
Bank to their Executive Officers. Employer shall not make any changes in
such plans, benefits or privileges which would adversely affect Executive's
rights or benefits thereunder, unless such change occurs pursuant to a
program applicable to all of their Executive Officers of the Employer and
does not result in a proportionately greater adverse change in the rights
and benefits of Executive as compared with other Executive Officers.
(iii) Other Benefits. During the Employment Term, Employer shall
provide to Executive all other benefits of employment (or, with Executive's
consent, equivalent benefits) generally made available to other Executive
Officers. Such benefits shall include participation by Executive in any
group health, life, disability, or similar insurance program and in any
pension, profit-sharing, Employee Stock Ownership Plan ("ESOP"), 401(k) or
other or similar retirement program. Employer shall continue in effect any
individual insurance plans or deferred compensation agreements in effect as
of the Commencement Date and Executive shall be entitled to use of an
automobile provided by Employer under the terms of such corporate
automobile policy as they shall maintain in effect and as it may be amended
from time to time.
Executive shall receive vacation, sick time, personal days and other
perquisites in the same manner and to the same extent as provided under the
Employer's policies as in effect from time to time for other Executive
Officers. Employer shall also reimburse Executive or otherwise provide for
or pay all reasonable expenses incurred by Executive in furtherance of or
in connection with the business of Employer, including but not by way of
limitation, travel expenses and all reasonable entertainment expenses
(whether incurred at Executive's residence, while traveling or otherwise)
subject to such reasonable documentation and other limitations as may be
imposed by the Board of Directors of the Employer.
Nothing contained herein shall be construed as granting Executive the
right to continue in any benefit plan or program, or to receive any other
perquisite of employment provided under this subsection 4(iii) following
termination or discontinuance of such plan, program or perquisite by the
Board (except to the extent Executive had previously earned or accumulated
vested rights therein).
5. Termination Other Than Following a Change-In-Control. This Agreement
may be terminated, subject to payment of the compensation and other benefits
described below, upon occurrence of
<PAGE> 4
any of the events described herein. In case of such termination, the date on
which Executive ceases to be employed under this Agreement, after giving effect
to any prior notice requirement, is referred to as the "Termination Date".
(i) Death, Retirement. This Agreement shall terminate at the
death or retirement of Executive. As used herein, the term
"retirement" shall mean Executive's retirement in accordance with and
pursuant to any retirement plan of the Employer generally applicable
to Executive Officers or in accordance with any retirement arrangement
established for Executive with his consent.
If termination occurs for such reason, no additional compensation
shall be payable to Executive under this Agreement except as
specifically provided herein. Notwithstanding anything to the
contrary contained herein, Executive shall receive all compensation
and other benefits to which he was entitled under Section 4 through
the Termination Date and, in addition, shall receive all other
benefits available to him under the Bank's benefit plans and programs
to which he was entitled by reason of employment through the
Termination Date.
(ii) Disability. This Agreement shall terminate upon the
disability of Executive. As used in this Agreement, "disability"
shall mean Executive's inability, as the result of physical or mental
incapacity, to substantially perform his employment duties for a
period of 90 consecutive days. Any question as to the existence of
Executive's disability upon which Executive and Employer cannot agree
shall be determined by a qualified independent physician mutually
agreeable to Executive and Employer or, if the parties are unable to
agree upon a physician within ten (10) days after notice from either
to the other suggesting a physician, by a physician designated by the
then president of the medical society for the county in which
Executive maintains his principal residence. The costs of any such
medical examination shall be borne by the Employer. If Executive is
terminated due to disability, he shall be paid 100% of his Base
Salary at the rate in effect at the time notice of termination is
given for one year and thereafter an annual amount equal to 75% of
such Base Salary for any remaining portion of the Employment Term,
such amounts to be paid in substantially equal monthly installments
and offset by any monthly payments actually received by Executive
during the payment period from (i) any disability plans provided by
the Employer, and/or (ii) any governmental social security or workers
compensation program.
If termination occurs for such reason, no additional compensation
shall be payable to Executive except as specifically provided herein.
Notwithstanding anything to the
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<PAGE> 5
contrary contained herein, Executive shall receive all compensation and
other benefits to which he was entitled under Section 4 through the
Termination Date and, in addition, shall receive all other benefits under
the Employer's benefit plans and programs to which he was entitled by
reason of employment through the Termination Date.
(iii) Cause. Employer may terminate Executive's employment under
this Agreement for cause at any time, and thereafter their obligations
under this Agreement shall cease and terminate. Notwithstanding anything
to the contrary contained herein, Executive shall receive all compensation
and other benefits in which he was vested or to which he was otherwise
entitled under Section 4, and the plans and programs provided therein, by
reason of employment through the Termination Date.
For purposes of this Agreement, "Cause" shall mean:
(A) The intentional failure by Executive to substantially perform
assigned duties (appropriate to his position and level of
compensation) with the Employer (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness) after a written demand for substantial
performance is delivered to Executive by the Board, which demand
specifically identifies the manner in which the Board believes
Executive has not substantially performed his duties, advises
Executive of what steps must be taken to achieve substantial
performance, and allows Executive Sixty (60) days in which to
demonstrate such performance;
(B) Any willful act of misconduct by Executive;
(C) A criminal conviction of Executive for any act involving
dishonesty, breach of trust or a violation of the banking or
savings and loan laws of the United States;
(D) A criminal conviction of Executive for the commission of any
felony;
(E) A breach of fiduciary duty involving personal profit;
(F) A willful violation of any law, rule or regulation (other than a
traffic violation or similar offenses) or final cease and desist
order; or
(G) Personal dishonesty or material breach of any provision of this
Agreement.
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<PAGE> 6
For purposes of this Subsection (5)(iii), no act, or failure to act, on
Executive's part shall be deemed "willful" unless done, or omitted to be
done, by Executive not in good faith and without reasonable belief that the
action or omission was in the best interest of the Employer.
(iv) Voluntary Termination by Executive. Executive may voluntarily
terminate his employment under this Agreement at any time by giving at
least thirty (30) days prior written notice to Employer. In such event,
Executive shall receive all compensation and other benefits in which he was
vested or to which he was otherwise entitled under Section 4 through the
date specified in such notice (the "Termination Date"), in addition to all
other benefits available to him under benefit plans and programs to which
he was entitled by reason of employment through the Termination Date.
(v) Suspension or Termination Required by the OTS
(A) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Employer's affairs by a
notice served under section 8(e)(3), or section 8(g)(1), of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(3) and
(g)(1)], the Employer's obligations under the Agreement shall be
suspended as of the date of service of the notice unless stayed
by appropriate proceedings. If the charges in the notice are
dismissed, the Employer shall (i) pay Executive all of the
compensation withheld while their obligations under this
Agreement were suspended, and (ii) reinstate such obligations as
were suspended.
(B) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Employer's affairs by an
order issued under section 8(e)(4) or section 8(g)(1) of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(4) or
(g)(1)], the obligations of the Employer under the Agreement
shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(C) If the Bank is in default as defined in section 3(x)(1) of the
Federal Deposit Insurance Act [12 U.S.C. 1813 (x)(1)], all
obligations under the Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of
the Executive.
(D) All obligations under the Agreement shall be terminated, except
to the extent determined that
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<PAGE> 7
continuation of the contract is necessary for the Employer's
continued operations (i) by the Director of the OTS, or his or
her designee at the time the FDIC or Resolution Trust Corporation
("RTC") enters into an agreement to provide assistance to or on
behalf of the Employer under the authority contained in section
13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director of the OTS, or his or her designee, at the time it
approves a supervisory merger to resolve problems related to
operation of the Employer or when the Employer is determined by
the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however,
shall not be affected by such action.
(E) In the event that 12 C.F.R. Section 563.39, or any successor
regulation, is repealed, this section 5(v) shall cease to be
effective on the effective date of such repeal. In the event that
12 C.F.R. Section 563.39, or any successor regulation, is
amended or modified, this Agreement shall be revised to reflect
the amended or modified provisions if: (1) the amended or
modified provision is required to be included in this Agreement;
or (2) if not so required, the Executive requests that the
Agreement be so revised.
(vi) Other Termination. If this Agreement is terminated (1) by the
Employer other than for cause, death, disability or retirement (and other
than following a change in control as defined in Section 6), or (2) by
Executive due to a failure by Employer to comply with any material
provision of this Agreement, which failure has not been cured within thirty
(30) days after notice of such non-compliance has been given by Executive
to Employer; then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent to
the Termination Date, Executive shall receive Severance Pay for a
twelve (12) month period in accordance with the Employer's normal
payroll practices, beginning with the first pay date following
the Termination Date. The monthly rate of Severance Pay shall be
the monthly Base Salary received by Executive (based on his
highest rate of Base Salary within the 3 years preceding his
Termination Date) plus one-twelfth of the total bonus and
incentive compensation paid to or vested in Executive on the
basis of his most recently completed calendar year of employment.
(B) Employer shall maintain and provide for the period
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<PAGE> 8
during which Severance Payments are to be made and ending at the
earlier of (i) the expiration of such period, or (ii) the date of
the Executive's full-time employment by another employer
(provided that the Executive is entitled under the terms of such
employment to benefits substantially similar to those described
in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance, life
insurance, health and accident, disability and other employee
benefit plans, programs and arrangements in which Executive was
entitled to participate immediately prior to the Termination Date
(other than retirement plans, deferred compensation, or stock
compensation plans of the Employer), provided that in the event
Executive's participation in any plan, program or arrangement as
provided in this subparagraph (B) is barred, or during such
period any such plan, program or arrangement is discontinued or
the benefits thereunder are materially reduced, the Employer
shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was entitled
to receive under such plans, programs and arrangements
immediately prior to the Termination Date.
(C) In addition to such Severance Pay and continued benefits,
Executive shall receive all other compensation and benefits in
which he was vested or to which he was otherwise entitled under
Section 4 and the plans and programs provided therein by reason
of employment through the Termination Date.
6. Termination by Executive After Change in Control.
(i) Definition "Change in Control". For purposes of this Agreement, a
"change in control" shall mean any change in control with respect to the
Bank or St. Francis Capital Corporation (the "Corporation") that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended ("Exchange Act") or any successor thereto; provided that, without
limitation, a change in control shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities representing 25%
or more of the combined voting power of the Bank's or Company's then
outstanding securities; or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
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<PAGE> 9
Directors of the Bank or Corporation cease for any reason to constitute at
least a majority thereof unless the election, or the nomination for
election by stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were directors
at the beginning of the period.
(ii) Good Reason for Executive Termination. The Executive may
terminate his employment under this Agreement for "good reason" by giving
at least thirty (30) days prior written notice to the Bank at any time
within twenty-four (24) months of the effective date of a change in
control. Occurrence of any of the following events shall constitute good
reason:
(A) Without the Executive's express written consent, assignment by
the Employer of any duties which are materially inconsistent with
Executive's positions, duties, responsibilities and status with
the Employer immediately prior to a change in control, or a
material change in the Executive's reporting responsibilities,
titles or offices as in effect immediately prior to such change
in control, or any removal of the Executive from or any failure
to re-elect the Executive to all or any portion of his Corporate
Position, except in connection with a termination of Executive's
employment for cause, disability, retirement or death (or by the
Executive other than for good reason as defined in this section
6(B)).
(B) Without the Executive's express written consent, a reduction by
the Employer in the Executive's Base Salary as in effect on the
date of the change in control or as the same may have been
increased from time to time thereafter;
(C) The principal executive offices of the Employer are relocated
outside of the Milwaukee, Wisconsin metropolitan area or, without
the Executive's express written consent, the Employer requires
the Executive to be based anywhere other than an area in which
the Employer principal executives offices are located, except for
required travel on business of the Employer to an extent
substantially consistent with the Executive's present business
travel obligations;
(D) Without Executive's express written consent, the Employer fails
or refuse to continue Executive's participation in incentive
compensation and stock incentive programs comparable to either
(1) those
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in effect prior to the change in control or (2) those
subsequently in effect for the senior executives of any acquiring
company effecting the change in control;
(E) Without Executive's express written consent, Employer fail to
provide the Executive with the same fringe benefits that were
provided to Executive immediately prior to a change in control,
or with a package of fringe benefits (including paid vacations)
that, though one or more of such benefits may vary from those in
effect immediately prior to such change in control, is
substantially comparable in all material respects to such fringe
benefits taken as a whole;
(F) Any purported termination of the Executive's employment for
cause, disability or retirement which is not effected in
accordance with the notice requirements applicable under this
Agreement; or
(G) The failure by the Employer to obtain the assumption of, or an
agreement to perform this Agreement by any successor as
contemplated in Section 7(i) hereof;
(iii) Benefits Upon Termination by Executive After a "Change in Control".
If this Agreement is terminated by Executive for good reason following a change
in control, then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent to
the Termination Date, Executive shall receive Severance Pay for
the longer of (i) the remaining unexpired term of the agreement
as in effect immediately prior to the Termination Date, or (ii) a
thirty-six (36) month period. Payments shall be made in
accordance with the Employer's normal payroll practices,
beginning with the first pay date following the Termination Date.
The monthly rate of Severance Pay shall be the average monthly
Base Salary received by Executive (based on his highest rate of
Base Salary within the 3 years preceding his Termination Date)
plus one-twelfth of the total bonus and incentive compensation
paid to or vested in Executive on the basis of his most recently
completed calendar year of employment.
(B) Employer shall maintain and provide for the period during which
Severance Payments are to be made and ending at the earlier of
(i) the expiration of such period, or (ii) the date of the
Executive's full-
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time employment by another employer (provided that the Executive
is entitled under the terms of such other employment to benefits
substantially similar to those described in this subparagraph
(B)), at no cost to the Executive, the Executive's continued
participation in all group insurance, life insurance, health and
accident, disability and other employee benefit plans, programs
and arrangements in which the Executive was entitled to
participate immediately prior to the Termination Date (other than
retirement and deferred compensation plans and individual
insurance policies covered under subsection 6(C) or stock
compensation plans of the Employer), provided that in the event
Executive's participation in any plan, program or arrangement as
provided in this subparagraph (B) is barred, or during such
period any such plan, program or arrangement is discontinued or
the benefits thereunder are materially reduced, the Employer
shall arrange to provide Executive with benefits substantially
similar to those Executive was entitled to receive under such
plans, programs and arrangements immediately prior to the
Termination Date.
(C) Executive shall also receive all other compensation and benefits
in which he was vested or to which he was otherwise entitled
under section 4 and the plans and programs provided therein by
reason of employment through the Termination Date. In addition
to benefits to which Executive is entitled under retirement and
deferred compensation plans and individual insurance policies
maintained by the Corporation and Bank (hereinafter collectively
referred to as "Plan"), Executive shall receive as additional
severance benefits a benefit paid under this Agreement, which
benefit shall be determined in accordance with and paid under
this Agreement, but in the form and at the times provided in the
Plan. Such benefits shall be determined as if Executive were
fully vested under the Plan and had accumulated (after any
termination under this Agreement) the additional years of credit
service under the applicable Plan that he would have received had
he continued in the employment of the Bank for the period during
which Severance Payments are to be made and at the annual
compensation level represented by such payments. Such Severance
Payment level shall be deemed to represent the compensation
received by Executive during each such additional year for
purposes of determining his additional benefits under this
Subsection 6(C).
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(iv) Limitation of Benefits under Certain Circumstances. If the severance
benefits payable to Executive under this Section 6 ("Severance Benefits"), or
any other payments or benefits received or to be received by Executive from
Employer (whether payable pursuant to the terms of this Agreement, any other
plan, agreement or arrangement with the Employer or any corporation affiliated
with the Employer ("Affiliate") within the meaning of Section 1504 of the
Internal Revenue Code of 1954, as amended (the "Code")), in the opinion of tax
counsel selected by the Employer's independent auditors and acceptable to
Executive, constitute "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and the present value of such "parachute payments"
equals or exceeds three times the average of the annual compensation payable to
Executive by the Employer (or an Affiliate) and includable in Executive's gross
income for federal income tax purposes for the five (5) calendar years preceding
the year in which a change in ownership or control of the Employer occurred
("Base Amount"), such Severance Benefits shall be reduced, in a manner
determined by Executive, to an amount the present value of which (when combined
with the present value of any other payments or benefits otherwise received or
to be received by Executive from the Employer (or an Affiliate) that are deemed
"parachute payments") is equal to 2.99 times the Base Amount, notwithstanding
any other provision to the contrary in this Agreement. The Severance Benefits
shall not be reduced if (A) Executive shall have effectively waived his receipt
or enjoyment of any such payment or benefit which triggered the applicability of
this Section 6(iv), or (B) in the opinion of such tax counsel, the Severance
Benefits (in its full amount or as partially reduced, as the case may be) plus
all other payments or benefits which constitute "parachute payments" within the
meaning of Section 280G(b)(2) of the Code are reasonable compensation for
services actually rendered, within the meaning of Section 280G (b)(4) of the
code, and such payments are deductible by the Employer. The Base Amount shall
include every type and form of compensation includable in Executive's gross
income in respect of his employment by the Employer (or an Affiliate), except to
the extent otherwise provided in temporary or final regulations promulgated
under Section 280G (b) of the Code. For purposes of this Section 6(iv), a
"change in ownership or control" shall have the meaning set forth in Section
280G(b) of the Code and any temporary or final regulations promulgated
thereunder. The present value of any non-cash benefit or any deferred cash
payment shall be determined by the Employer's independent auditors in accordance
with the principles of Sections 280G (b)(3) and (4) of the Code.
In the event that Employer and/or the Executive do not agree with the
opinion of such counsel, (A) Employer shall pay to the Executive the maximum
amount of payments and benefits pursuant to Section 6, as selected by the
Executive, which such opinion indicates that there is a high probability do not
result in any of such payments and benefits being non-deductible to the Employer
and
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subject to the imposition of the excise tax imposed under Section 4999 of the
Code and (B) Employer may request, and Executive shall have the right to demand
the Employer's request, a ruling from the IRS as to whether the disputed
payments and benefits pursuant to Section 6 hereof have such consequences. Any
such request for a ruling from the IRS shall be promptly prepared and filed by
the Employer, but in no event later than thirty (30) days from the date of the
opinion of counsel referred to above, and shall be subject to Executive's
approval prior to filing, which shall not be unreasonably withheld. Employer
and Executive agree to be bound by any ruling received from the IRS and to make
appropriate payments to each other to reflect any such rulings, together with
interest at the applicable federal rate provided for in Section 7872(f)(2) of
the Code. Nothing contained herein shall result in a reduction of any payments
or benefits to which the Executive may be entitled upon termination of
employment under any circumstances other than as specified herein or a reduction
in payments and benefits other than those provided in this Section 6.
In the event that Section 280G, or any successor statute, is repealed, this
Section 6 shall cease to be effective on the effective date of such repeal. The
parties to this Agreement recognize that final regulations under Section 280G of
the Code may affect the amounts that may be paid under this Agreement and agreed
that, upon issuance of such final regulations this Agreement may be modified as
in good faith deemed necessary in light of the provisions of such regulations to
achieve the purposes of this Agreement, and that consent to such modifications
shall not be unreasonably withheld.
7. General Provisions.
(i) Successors; Binding Agreement.
(A) Employer will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Employer
("successor organization") to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that Employer would have been required to perform if no such
succession had taken place or to re-execute this Agreement as
provided pursuant to section 6(ii)(G). If such succession is the
result of a "change in control" as defined herein, such
assumption shall specifically preserve to Executive, for the
greater of twenty-four (24) months or the then remaining term of
this Agreement, the same rights and remedies (recognizing them as
being available and applicable as the result of the "change in
control" effectuating said succession) as provided under
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this Agreement upon a "change in control".
As used in this Agreement "Employer" shall mean the Employer
as hereinbefore defined (and any successor to its business and/or
assets) which executes and delivers the agreement provided for in
this Section 7 or which otherwise becomes bound by the terms and
provisions of this Agreement by operation of this Agreement or
law. Failure of the Employer to obtain such agreement prior to
the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle Executive, if he elects to
terminate this Agreement, to compensation from the Employer in
the same amount and on the same terms as he would be entitled to
under this Agreement if he terminated his employment under
Section 6. For purposes of implementing the foregoing, the date
on which any such succession becomes effective shall be deemed
the Termination Date.
(B) No right or interest to or in any payments or benefits under this
agreement shall be assignable or transferable in any respect by
the Executive, nor shall any such payment, right or interest be
subject to seizure, attachment or creditor's process for payment
of any debts, judgments, or obligations of Executive.
(C) This Agreement shall be binding upon and inure to the benefit of
and be enforceable by (1) Executive and his heirs, beneficiaries
and personal representatives, and (2) the Employer and any
successor organization.
(ii) Noncompetition Provision. Executive acknowledges that the
development of personal contacts and relationships is an essential element
of the savings and loan business, that Employer has invested considerable
time and money in his development of such contacts and relationships, that
Employer could suffer irreparable harm if he were to leave employment and
solicit the business of the Employer's customers, and that it is reasonable
to protect the Employer against competitive activities by Executive.
Executive covenants and agrees, in recognition of the foregoing and in
consideration of the mutual promises contained herein, that in the event of
a voluntary termination of employment by Executive pursuant to Section
5(iii), or upon expiration of this Agreement as a result of Executive's
election (but not as the result of an election by Employer) not to continue
automatic annual renewals, Executive shall not accept employment with any
Significant Competitor of Bank for a period of twelve (12)
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months following such termination. For purposes of this Agreement, the
term Significant Competitor means any financial institution including, but
not limited to, any commercial bank, savings bank, savings and loan
association, credit union, or mortgage banking corporation which, at the
time of termination of Executive's employment, or during the period of this
covenant not to compete, has a home, branch or other office in Milwaukee,
Ozaukee, Washington or Waukesha Counties or which has, during the twelve
(12) months preceding Executive's termination, originated, or which during
the period of this covenant not to compete originates, more than $5,000,000
in commercial or mortgage loans secured by real property in any such
county.
Executive agrees that the non-competition provisions set forth herein
are necessary for the protection of the Employer and are reasonably limited
as to (i) the scope of activities affected, (ii) their duration and
geographic scope, and (iii) their effect on Executive and the public. In
the event Executive violates the non-competition provisions set forth
herein, the Employer shall be entitled, in addition to its other legal
remedies, to enjoin the employment of Executive with any Significant
Competitor for the period set forth herein. If Executive violates this
covenant and the Employer brings legal action for injunctive or other
relief, the Employer shall not, as a result of the time involved in
obtaining such relief, be deprived of the benefit of the full period of the
restrictive covenant. Accordingly, the covenant shall be deemed to have
the duration specified herein, computed from the date such relief is
granted, but reduced by any period between commencement of the period and
the date of the first violation.
(iii) Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Bank:
Bank Wisconsin
c/o St. Francis Capital Corporation
3545 South Kinnickinnic Avenue
Milwaukee, Wisconsin 53207
Attn: Secretary
If to the Executive:
Mr. James C. Hazzard
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or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement (or to recover damages for breach of
it) in the absence of a change in control, the prevailing party shall be
entitled to recover from the other party reasonable attorneys' fees and
necessary costs and disbursements incurred in such litigation, in addition
to any other relief to which such prevailing party may be entitled.
Notwithstanding the foregoing, in the event of a legal proceeding to
enforce or interpret the terms of this Agreement following a change in
control or a re-execution of this Agreement pursuant to section 6(ii)(G),
the only recoverable costs shall be those which Executive shall be entitled
to recover from the Bank (i.e. reasonable attorneys' fees and necessary
costs and disbursements incurred in such litigation), which fees shall be
recoverable only if the Executive is the prevailing party. Recovery of
attorneys' fees and costs as provided herein following a change in control
or re-execution shall be in addition to any other relief to which Executive
may be entitled.
(v) Withholding. Employer shall be entitled to withhold from amounts
to be paid to Executive under this Agreement any federal, state, or local
withholding or other taxes or charges which it is from time to time
required to withhold. Employer shall be entitled to rely on an opinion of
counsel if any question as to the amount or requirement of any such
withholding shall arise.
(vi) Notice of Termination. Any purported termination by the
Employer under Sections 5(i), (ii), (iii) or (iv), or by Executive under
Sections 5(vi) or 6(ii) shall be communicated by written "Notice of
Termination" to the other party. For purposes of this Agreement, a "Notice
of Termination" shall mean a dated notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination under the provision so indicated, (iii) specifies a Date of
Termination, which shall be not less than thirty (30) nor more than ninety
(90) days after such Notice of Termination is given, except in the case of
termination of Executive's employment for Cause; and (iv) is given in the
manner specified in Section 7(iii) of this Agreement.
(vii) Miscellaneous. No provision of this Agreement
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may be amended, waived or discharged unless such amendment, waiver or
discharge is agreed to in writing and signed by Executive and such officers
of the Employer as may be specifically designated by the Board. No waiver
by either party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not expressly set forth in this Agreement
and it is agreed that execution of this Agreement shall result in its
superceding and extinguishing any rights of Executive under any other
employment previously in effect between himself, the Employer, or any
affiliate of the Employer. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Wisconsin.
(viii) Mitigation; Exclusivity of Benefits. The Executive shall not
be required to mitigate the amount of any benefits hereunder by seeking
other employment or otherwise, nor shall the amount of any such benefits be
reduced by any compensation earned by the Executive as a result of
employment by another employer after the Termination Date or otherwise.
(ix) Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
(x) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(xi) Headings. Headings contained in this Agreement are for
reference only and shall not affect the meaning or interpretation of any
provision of this Agreement.
(xii) Effective Date. The effective date of this Agreement shall be
the date indicated in the first section of this Agreement, notwithstanding
the actual date of execution by any party.
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IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the date first above written.
Executive:
-------------------------------------
James C. Hazzard
ST. FRANCIS CAPITAL CORPORATION
By:
-----------------------------------
Its:
----------------------------------
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EXHIBIT 10.23
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of October 1, 1996 between St.
Francis Capital Corporation (the "Company"), a Wisconsin-chartered
corporation, its successors and assigns, and John C. Schlosser (the
"Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background,
knowledge and experience in the savings and loan industry have substantially
benefitted the Company and its subsidiary, St. Francis Bank, F.S.B. (the
"Bank"), and whose continued employment as an executive member of the
Company's management team, as Chairman of the Company's Board of Directors
and as its President and CEO through January 22, 1997 and continuing as
Chairman thereafter ("Corporate Position") will continue to benefit the Company
in the future; and
WHEREAS, the parties are mutually desirous of entering into this
Agreement setting forth the terms and conditions for the employment
relationship between the Company (hereinafter sometimes referred to as the
"Employer") and Executive; and
WHEREAS, the Board of Directors of the Company has approved and authorized
entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth below:
1. Employment. The Company shall continue to employ Executive, and
Executive shall continue to serve the Company, on the terms, conditions and
for the period set forth in Section 2 of this Agreement.
2. Term of Employment. The period of Executive's employment under this
Agreement shall begin as of October 1, 1996 (the Commencement Date) and expire
as of January 2, 1999, unless sooner terminated as provided herein. The term
of employment as in effect from time to time hereunder shall be referred to as
the "Employment Term".
3. Positions and Duties. Executive shall serve the Company in his
Corporate Position, which through January 22, 1997, shall include service as
its President, CEO, and Chairman of its Board of Directors. Thereafter, during
the balance of the Employment Term, Executive shall serve as Chairman of the
Company's Board of Directors. As such, Executive shall serve as a consultant
to the President, counseling with the President and CEO in such areas as
<PAGE> 2
may be requested and with such other duties and responsibilities as may be
appropriate to Executive's position and as may be from time to time determined
by the Company's Board of Directors to be necessary to its operations and in
accordance with its bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Employer the compensation and
benefits set forth below:
(i) Base Salary. During the Employment Term, Executive shall
receive from Employer a base salary ("Base Salary"), payable by the
Company, which shall at no time be less than (i) $287,955 per annum for
the period through January 31, 1997, or (ii) $150,000 per annum for the
balance of the Employment Term thereafter. Executive's Base Salary and
other compensation shall be paid in accordance with the Employer's regular
payroll practices as from time to time in effect.
(ii) Other Benefits. During the Employment Term, Employer shall
provide to Executive such benefits (or, with Executive's consent,
equivalent benefits) as are generally made available to other Executive
Officers, exclusive of benefits under bonus and/or stock incentive plans.
Such benefits shall include participation by Executive in any group health,
life, disability, or similar insurance program and in any pension,
profit-sharing, Employee Stock Ownership Plan ("ESOP"), 401(k) or other or
similar retirement program. Employer shall continue in effect any
individual insurance plans or deferred compensation agreements in effect as
of the Commencement Date and Executive shall be entitled to use of an
automobile provided by Employer under the terms of such corporate
automobile policy as they shall maintain in effect and as it may be amended
from time to time.
Executive shall receive vacation, sick time, personal days and other
perquisites in the same manner and to the same extent as provided under the
Employer's policies as in effect from time to time for other Executive
Officers. Employer shall also reimburse Executive or otherwise provide for
or pay all reasonable expenses incurred by Executive in furtherance of or
in connection with the business of Employer, including but not by way of
limitation, travel expenses and all reasonable entertainment expenses
(whether incurred at Executive's residence, while traveling or otherwise)
subject to such reasonable documentation and other limitations as may be
imposed by the Board of Directors of the Employer.
Nothing contained herein shall be construed as granting Executive the
right to continue in any benefit plan or program, or to receive any other
perquisite of employment provided under this subsection 4(iii) following
termination or
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discontinuance of such plan, program or perquisite by the Board (except to
the extent Executive had previously earned or accumulated vested rights
therein).
5. Termination Other Than Following a Change-In-Control. This Agreement
may be terminated, subject to payment of the compensation and other benefits
described below, upon occurrence of any of the events described herein. In case
of such termination, the date on which Executive ceases to be employed under
this Agreement, after giving effect to any prior notice requirement, is referred
to as the "Termination Date".
(i) Death, Retirement. This Agreement shall terminate at the death
or retirement of Executive. As used herein, the term "retirement" shall
mean Executive's retirement in accordance with and pursuant to any
retirement plan of the Employer generally applicable to Executive Officers
or in accordance with any retirement arrangement established for Executive
with his consent.
If termination occurs for such reason, no additional compensation
shall be payable to Executive under this Agreement except as specifically
provided herein. Notwithstanding anything to the contrary contained
herein, Executive shall receive all compensation and other benefits to
which he was entitled under Section 4 through the Termination Date and, in
addition, shall receive all other benefits available to him under the
Bank's benefit plans and programs to which he was entitled by reason of
employment through the Termination Date.
(ii) Disability. This Agreement shall terminate upon the
disability of Executive. As used in this Agreement, "disability" shall
mean Executive's inability, as the result of physical or mental incapacity,
to substantially perform his employment duties for a period of 90
consecutive days. Any question as to the existence of Executive's
disability upon which Executive and Employer cannot agree shall be
determined by a qualified independent physician mutually agreeable to
Executive and Employer or, if the parties are unable to agree upon a
physician within ten (10) days after notice from either to the other
suggesting a physician, by a physician designated by the then president of
the medical society for the county in which Executive maintains his
principal residence. The costs of any such medical examination shall be
borne by the Employer. If Executive is terminated due to disability, he
shall be paid 100% of his Base Salary at the rate in effect at the time
notice of termination is given for one year and thereafter an annual amount
equal to 75% of such Base Salary for any remaining portion of the
Employment Term, such amounts to be paid in substantially equal monthly
installments and offset by any monthly payments actually received by
Executive
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during the payment period from (i) any disability plans provided by the
Employer, and/or (ii) any governmental social security or workers
compensation program.
If termination occurs for such reason, no additional compensation
shall be payable to Executive except as specifically provided herein.
Notwithstanding anything to the contrary contained herein, Executive shall
receive all compensation and other benefits to which he was entitled under
Section 4 through the Termination Date and, in addition, shall receive all
other benefits under the Employer's benefit plans and programs to which he
was entitled by reason of employment through the Termination Date.
(iii) Cause. Employer may terminate Executive's employment under
this Agreement for cause at any time, and thereafter their obligations
under this Agreement shall cease and terminate. Notwithstanding anything
to the contrary contained herein, Executive shall receive all compensation
and other benefits in which he was vested or to which he was otherwise
entitled under Section 4, and the plans and programs provided therein, by
reason of employment through the Termination Date.
For purposes of this Agreement, "Cause" shall mean:
(A) The intentional failure by Executive to substantially
perform assigned duties (appropriate to his position and level of
compensation) with the Employer (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness) after a written demand for substantial
performance is delivered to Executive by the Board, which demand
specifically identifies the manner in which the Board believes
Executive has not substantially performed his duties, advises
Executive of what steps must be taken to achieve substantial
performance, and allows Executive Sixty (60) days in which to
demonstrate such performance;
(B) Any willful act of misconduct by Executive;
(C) A criminal conviction of Executive for any act involving
dishonesty, breach of trust or a violation of the banking or
savings and loan laws of the United States;
(D) A criminal conviction of Executive for the commission of any
felony;
(E) A breach of fiduciary duty involving personal profit;
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<PAGE> 5
(F) A willful violation of any law, rule or regulation (other than
a traffic violation or similar offenses) or final cease and
desist order; or
(G) Personal dishonesty or material breach of any provision of this
Agreement.
For purposes of this Subsection (5)(iii), no act, or failure to act, on
Executive's part shall be deemed "willful" unless done, or omitted to be
done, by Executive not in good faith and without reasonable belief that
the action or omission was in the best interest of the Employer.
(iv) Voluntary Termination by Executive. Executive may voluntarily
terminate his employment under this Agreement at any time by giving at
least thirty (30) days prior written notice to Employer. In such event,
Executive shall receive all compensation and other benefits in which he
was vested or to which he was otherwise entitled under Section 4 through
the date specified in such notice (the "Termination Date"), in addition to
all other benefits available to him under benefit plans and programs to
which he was entitled by reason of employment through the Termination
Date.
(v) Suspension or Termination Required by the OTS
(A) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Employer's affairs by a
notice served under section 8(e)(3), or section 8(g)(1), of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(3)
and (g)(1)], the Employer's obligations under the Agreement
shall be suspended as of the date of service of the notice
unless stayed by appropriate proceedings. If the charges in
the notice are dismissed, the Employer shall (i) pay Executive
all of the compensation withheld while their obligations under
this Agreement were suspended, and (ii) reinstate such
obligations as were suspended.
(B) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Employer's affairs by an
order issued under section 8(e)(4) or section 8(g)(1) of the
Federal Deposit Insurance Act [12 U.S.C. Section 1818(e)(4) or
(g)(1)], the obligations of the Employer under the Agreement
shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be affected.
(C) If the Bank is in default as defined in section 3(x)(1) of the
Federal Deposit Insurance Act [12
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<PAGE> 6
U.S.C. 1813 (x)(1)], all obligations under the Agreement shall
terminate as of the date of default, but this paragraph shall
not affect any vested rights of the Executive.
(D) All obligations under the Agreement shall be terminated, except
to the extent determined that continuation of the contract is
necessary for the Employer's continued operations (i) by the
Director of the OTS, or his or her designee at the time the
FDIC or Resolution Trust Corporation ("RTC") enters into an
agreement to provide assistance to or on behalf of the Employer
under the authority contained in section 13(c) of the Federal
Deposit Insurance Act; or (ii) by the Director of the OTS, or
his or her designee, at the time it approves a supervisory
merger to resolve problems related to operation of the Employer
or when the Employer is determined by the Director of the OTS
to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be
affected by such action.
(E) In the event that 12 C.F.R. Section 563.39, or any successor
regulation, is repealed, this section 5(v) shall cease to be
effective on the effective date of such repeal. In the event
that 12 C.F.R. Section 563.39, or any successor regulation, is
amended or modified, this Agreement shall be revised to
reflect the amended or modified provisions if: (1) the amended
or modified provision is required to be included in this
Agreement; or (2) if not so required, the Executive requests
that the Agreement be so revised.
(vi) Other Termination. If this Agreement is terminated (1) by the
Employer other than for cause, death, disability or retirement or (2) by
Executive due to a failure by Employer to comply with any material
provision of this Agreement, which failure has not been cured within thirty
(30) days after notice of such non-compliance has been given by Executive
to Employer; then following the Termination Date:
(A) In lieu of any further salary payments to Executive subsequent
to the Termination Date, Executive shall receive Severance Pay
for the Covered Period, which shall be the remainder of the
Employment Term. Payments under this Agreement shall be in
accordance with the Employer's normal payroll practices,
beginning with the first pay date following the Termination
Date. The monthly rate of Severance Pay shall be determined
based on the
-6-
<PAGE> 7
monthly Base Salary that would have been payable to Executive
under the terms of this Agreement for the Covered Period.
(B) Employer shall maintain and provide for the period during which
Severance Payments are to be made and ending at the earlier of
(i) the expiration of such period, or (ii) the date of the
Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such
employment to benefits substantially similar to those described
in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance,
life insurance, health and accident, disability and other
employee benefit plans, programs and arrangements in which
Executive was entitled to participate immediately prior to the
Termination Date (other than retirement plans, deferred
compensation, or stock compensation plans of the Employer),
provided that in the event Executive's participation in any
plan, program or arrangement as provided in this subparagraph
(B) is barred, or during such period any such plan, program or
arrangement is discontinued or the benefits thereunder are
materially reduced, the Employer shall arrange to provide the
Executive with benefits substantially similar to those which
the Executive was entitled to receive under such plans,
programs and arrangements immediately prior to the Termination
Date.
(C) In addition to such Severance Pay and continued benefits,
Executive shall receive all other compensation and benefits in
which he was vested or to which he was otherwise entitled under
Section 4 and the plans and programs provided therein by reason
of employment through the Termination Date.
6. General Provisions.
(i) Successors; Binding Agreement.
(A) No right or interest to or in any payments or benefits under
this agreement shall be assignable or transferable in any
respect by the Executive, nor shall any such payment, right or
interest be subject to seizure, attachment or creditor's
process for payment of any debts, judgments, or obligations of
Executive.
(B) This Agreement shall be binding upon and inure to
-7-
<PAGE> 8
the benefit of and be enforceable by (1) Executive and his
heirs, beneficiaries and personal representatives, and (2) the
Employer and any successor organization.
(ii) Noncompetition Provision. Executive acknowledges that the
development of personal contacts and relationships is an essential
element of the savings and loan business, that Employer has invested
considerable time and money in his development of such contacts and
relationships, that Employer could suffer irreparable harm if he were to
leave employment and solicit the business of the Employer's customers,
and that it is reasonable to protect the Employer against competitive
activities by Executive. Executive covenants and agrees, in recognition
of the foregoing and in consideration of the mutual promises contained
herein, that in the event of a voluntary termination of employment by
Executive pursuant to Section 5(iv), Executive shall not accept
employment with any Significant Competitor of Bank for a period of twelve
(12) months following such termination. For purposes of this Agreement,
the term Significant Competitor means any financial institution
including, but not limited to, any commercial bank, savings bank, savings
and loan association, credit union, or mortgage banking corporation
which, at the time of termination of Executive's employment, or during
the period of this covenant not to compete, has a home, branch or other
office in Milwaukee County or which has, during the twelve (12) months
preceding Executive's termination, originated, or which during the period
of this covenant not to compete originates, more than $50,000,000 in
commercial or mortgage loans secured by real property in any such county.
Executive agrees that the non-competition provisions set forth
herein are necessary for the protection of the Employer and are
reasonably limited as to (i) the scope of activities affected, (ii) their
duration and geographic scope, and (iii) their effect on Executive and
the public. In the event Executive violates the non-competition
provisions set forth herein, the Employer shall be entitled, in addition
to its other legal remedies, to enjoin the employment of Executive with
any Significant Competitor for the period set forth herein. If Executive
violates this covenant and the Employer brings legal action for
injunctive or other relief, the Employer shall not, as a result of the
time involved in obtaining such relief, be deprived of the benefit of the
full period of the restrictive covenant. Accordingly, the covenant shall
be deemed to have the duration specified herein, computed from the date
such relief is granted, but reduced by any period between commencement of
the period and the date of the first violation.
(iii) Notice. For purposes of this Agreement, notices
-8-
<PAGE> 9
and all other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Company:
St. Francis Capital Corporation
3545 South Kinnickinnic Avenue
Milwaukee, Wisconsin 53207
Attn: Secretary
If to the Executive:
Mr. John C. Schlosser
W175 S7217 Lake Drive
Muskego, Wisconsin 53150
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement (or to recover damages for breach of
it), the prevailing party shall be entitled to recover from the other party
reasonable attorneys' fees and necessary costs and disbursements incurred
in such litigation, in addition to any other relief to which such
prevailing party may be entitled.
(v) Withholding. Employer shall be entitled to withhold from amounts
to be paid to Executive under this Agreement any federal, state, or local
withholding or other taxes or charges which it is from time to time
required to withhold. Employer shall be entitled to rely on an opinion of
counsel if any question as to the amount or requirement of any such
withholding shall arise.
(vi) Notice of Termination. Any purported termination by the
Employer under Sections 5(i), (ii), (iii), or (vi), or by Executive under
Section 5(iv) or 5(vi) shall be communicated by written "Notice of
Termination" to the other party. For purposes of this Agreement, a "Notice
of Termination" shall mean a dated notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination under the provision so indicated, (iii) specifies a Date of
Termination, which shall be not less than thirty (30) nor more than ninety
(90) days after such Notice of Termination is
-9-
<PAGE> 10
given, except in the case of termination of Executive's employment for
Cause; and (iv) is given in the manner specified in Section 6(iii) of this
Agreement.
(vii) Miscellaneous. No provision of this Agreement may be
amended, waived or discharged unless such amendment, waiver or discharge
is agreed to in writing and signed by Executive and such officers of the
Employer as may be specifically designated by the Board. No waiver by
either party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not expressly set forth in this Agreement
and it is agreed that execution of this Agreement shall result in its
superseding and extinguishing any rights of Executive under any other
employment agreement previously in effect between himself, the Employer, or
any affiliate of the Employer. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the
State of Wisconsin.
(viii) Mitigation; Exclusivity of Benefits. The Executive shall not
be required to mitigate the amount of any benefits hereunder by seeking
other employment or otherwise, nor shall the amount of any such benefits be
reduced by any compensation earned by the Executive as a result of
employment by another employer after the Termination Date or otherwise.
(ix) Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
(x) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(xi) Headings. Headings contained in this Agreement are for
reference only and shall not affect the meaning or interpretation of any
provision of this Agreement.
(xii) Effective Date. The effective date of this Agreement shall
be the date indicated in the first section of this Agreement,
notwithstanding the actual date of execution by any party.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the date first above written.
Executive:
---------------------------------
John C. Schlosser
ST. FRANCIS CAPITAL CORPORATION
By:
------------------------------
Its:
-----------------------------
-11-
<PAGE> 1
EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
St. Francis Capital Corporation:
We Consent to incorporation by reference in the registration statement
(No. 33-70012) on Form S-8 of St. Francis Capital Corporation of our report
dated October 25, 1996, relating to the consolidated statements of financial
condition of St. Francis Capital Corporation and Subsidiaries as of September
30, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1996, which report appears in the September 30, 1996
annual report on Form 10-K of St. Francis Capital Corporation.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
December 16, 1996
95
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-k FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 17,604
<INT-BEARING-DEPOSITS> 4,855
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 579,767
<INVESTMENTS-CARRYING> 74,607
<INVESTMENTS-MARKET> 71,647
<LOANS> 610,699
<ALLOWANCE> 5,217
<TOTAL-ASSETS> 1,404,116
<DEPOSITS> 877,684
<SHORT-TERM> 6,511
<LIABILITIES-OTHER> 26,219
<LONG-TERM> 368,523
0
0
<COMMON> 73
<OTHER-SE> 125,106
<TOTAL-LIABILITIES-AND-EQUITY> 1,404,116
<INTEREST-LOAN> 47,512
<INTEREST-INVEST> 42,492
<INTEREST-OTHER> 2,093
<INTEREST-TOTAL> 92,097
<INTEREST-DEPOSIT> 37,610
<INTEREST-EXPENSE> 56,413
<INTEREST-INCOME-NET> 35,684
<LOAN-LOSSES> 1,300
<SECURITIES-GAINS> 3,311
<EXPENSE-OTHER> 6,603
<INCOME-PRETAX> 13,376
<INCOME-PRE-EXTRAORDINARY> 10,465
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,465
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.82
<YIELD-ACTUAL> 2.97
<LOANS-NON> 3,890
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,076
<CHARGE-OFFS> 1,300
<RECOVERIES> 159
<ALLOWANCE-CLOSE> 5,217
<ALLOWANCE-DOMESTIC> 5,217
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
St. Francis Capital Corporation [LOGO]
3545 SOUTH KINNICKINNIC AVENUE
MILWAUKEE, WISCONSIN 53235
(414) 744-8600
December 16, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of St. Francis Capital Corporation (the "Company"), the
holding company for St. Francis Bank, F.S.B. and Bank Wisconsin, which will be
held on Wednesday, January 22, 1997, at 4:00 p.m., Milwaukee time, at the
Midway Hotel Airport, 5105 S. Howell Avenue, Milwaukee, Wisconsin.
The attached Notice of Annual Meeting of Shareholders and Proxy
Statement describe the formal business to be conducted at the Annual Meeting.
We also have enclosed a copy of the Company's Summary Annual Report and the
Company's Form 10-K Annual Report for the fiscal year ended September 30, 1996.
Directors and officers of the Company, as well as representatives of KPMG Peat
Marwick LLP, the Company's independent auditors, will be present at the Annual
Meeting to respond to any questions that our shareholders may have.
The vote of every shareholder is important to us. Please sign and
return the enclosed appointment of proxy form promptly in the postage-paid
envelope provided, regardless of whether you are able to attend the Annual
Meeting in person. If you attend the Annual Meeting, you may vote in person
even if you have already mailed your proxy.
On behalf of the Board of Directors and all of the employees of the
Company and its subsidiaries, I wish to thank you for your continued support.
Sincerely yours,
John C. Schlosser
President and Chief Executive Officer
<PAGE> 2
St. Francis Capital Corporation [LOGO]
3545 SOUTH KINNICKINNIC AVENUE
MILWAUKEE, WISCONSIN 53235
(414) 744-8600
_________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 22, 1997
_________________
TO THE HOLDERS OF COMMON STOCK OF ST. FRANCIS CAPITAL CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Annual Meeting") of St. Francis Capital Corporation (the "Company") will be
held on Wednesday, January 22, 1997, at 4:00 p.m., Milwaukee time, at the
Midway Hotel Airport, 5105 S. Howell Avenue, Milwaukee, Wisconsin.
The Annual Meeting is for the purpose of considering and voting upon
the following matters, all of which are set forth more completely in the
accompanying Proxy Statement:
1. The election of three directors each for three-year
terms, and in each case until their successors are
elected and qualified;
2. The approval of the St. Francis Capital Corporation
1997 Stock Option Plan;
3. The ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors of the Company
for the fiscal year ending September 30, 1997; and
4. Such other matters as may properly come before the
Annual Meeting or any adjournments or postponements
thereof. The Board of Directors is not aware of any
other such business.
The Board of Directors has established December 1, 1996 as the record
date for the determination of shareholders entitled to notice of and to vote at
the Annual Meeting and any adjournments or postponements thereof. Only
shareholders of record as of the close of business on that date will be
entitled to vote at the Annual Meeting or any adjournments or postponements
thereof. In the event there are not sufficient votes for a quorum or to
approve or ratify any of the foregoing proposals at the time of the Annual
Meeting, the Annual Meeting may be adjourned or postponed in order to permit
further solicitation of proxies by the Company.
BY ORDER OF THE BOARD OF DIRECTORS
Milwaukee, Wisconsin Brian T. Kaye
December 16, 1996 Secretary
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED.
<PAGE> 3
St. Francis Capital Corporation [LOGO]
3545 SOUTH KINNICKINNIC AVENUE
MILWAUKEE, WISCONSIN 53235
(414) 744-8600
_____________________________________
PROXY STATEMENT
_______________________________
ANNUAL MEETING OF SHAREHOLDERS
To Be Held On January 22, 1997
______________________________________________
This Proxy Statement is being furnished to holders of common stock,
$0.01 par value per share (the "Common Stock") of St. Francis Capital
Corporation (the "Company") in connection with the solicitation on behalf of
the Board of Directors of the Company of proxies to be used at the Annual
Meeting of Shareholders (the "Annual Meeting") to be held on Wednesday, January
22, 1997, at 4:00 p.m., Milwaukee time, at the Midway Hotel Airport, 5105 S.
Howell Avenue, Milwaukee, Wisconsin and at any adjournments or postponements
thereof.
The 1996 Summary Annual Report and the Company's Form 10-K Annual
Report, including the Company's consolidated financial statements for the
fiscal year ended September 30, 1996, accompany this Proxy Statement and
appointment form of proxy (the "proxy"), which are being mailed to shareholders
on or about December 16, 1996.
Only shareholders of record at the close of business on December 1,
1996 (the "Voting Record Date") will be entitled to vote at the Annual Meeting.
On the Voting Record Date, there were 5,371,064 shares of Common Stock
outstanding and the Company had no other class of securities outstanding.
The presence, in person or by proxy, of the holders of at least a
majority of the total number of shares of Common Stock entitled to vote is
necessary to constitute a quorum at the Annual Meeting. As to the election of
directors, the proxy being provided by the Board of Directors enables a
shareholder to vote for the election of the nominees proposed by the Board, or
to withhold authority to vote for one or more of the nominees being proposed.
Article VI of the Company's Articles of Incorporation provides that there will
be no cumulative voting by shareholders for the election of the Company's
directors. Under the Wisconsin Business Corporation Law, directors are elected
by a plurality of the votes cast with a quorum present. The affirmative vote
of at least a majority of the shares of Common Stock represented in person or
by proxy at the Annual Meeting is necessary to approve the St. Francis Capital
Corporation 1997 Stock Option Plan (the "1997 Stock Option Plan"). The
affirmative vote of a majority of the total votes cast in person or by proxy is
necessary to ratify the appointment of KPMG Peat Marwick LLP as auditors for
the fiscal year ending September 30, 1997. Abstentions are included in the
determination of shares present and voting for purposes of whether a quorum
exists, while broker non-votes are not. Neither abstentions nor broker
non-votes are counted in determining whether a matter has been approved. In
the event there are not sufficient votes for a quorum or to approve or ratify
any proposal at the time of the Annual Meeting, the Annual Meeting may be
adjourned or postponed in order to permit the further solicitation of proxies.
<PAGE> 4
As provided in the Company's Articles of Incorporation, record holders
of Common Stock who beneficially own in excess of 10% of the outstanding shares
of Common Stock (the "10% Limit") are not entitled to any vote in respect of
the shares held in excess of the 10% Limit. A person or entity is deemed to
beneficially own shares owned by an affiliate of, as well as such persons
acting in concert with, such person or entity. The Company's Articles of
Incorporation authorize the Board to make all determinations necessary to
implement and apply the 10% Limit, including determining whatever persons or
entities are acting in concert.
Shareholders are requested to vote by completing the enclosed proxy
and returning it signed and dated in the enclosed postage-paid envelope.
Shareholders are urged to indicate their vote in the spaces provided on the
proxy. Proxies solicited by the Board of Directors of the Company will be
voted in accordance with the directions given therein. Where no instructions
are indicated, signed proxies will be voted FOR the election of each of the
nominees for director named in this Proxy Statement, FOR approval of the 1997
Stock Option Plan and FOR the ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors of the Company for the fiscal year ending
September 30, 1997. Returning your completed proxy form will not prevent you
from voting in person at the Annual Meeting should you be present and wish to
do so.
Any shareholder giving a proxy has the power to revoke it any time
before it is exercised by (i) filing with the Secretary of the Company written
notice thereof (Brian T. Kaye, Secretary, St. Francis Capital Corporation, 3545
South Kinnickinnic Avenue, Milwaukee, Wisconsin 53235); (ii) submitting a
duly-executed proxy bearing a later date; or (iii) appearing at the Annual
Meeting and giving the Secretary notice of his or her intention to vote in
person. If you are a shareholder whose shares are not registered in your own
name, you will need additional documentation from your record holder to vote
personally at the Annual Meeting. Proxies solicited hereby may be exercised
only at the Annual Meeting and any adjournment or postponement thereof and will
not be used for any other meeting.
The cost of solicitation of proxies by mail on behalf of the Board of
Directors will be borne by the Company. The Company has retained D.F. King &
Co., Inc., a professional proxy solicitation firm, to assist in the
solicitation of proxies. D.F. King & Co., Inc. will be paid a fee of $5,000,
plus reimbursement for out-of-pocket expenses. Proxies also may be solicited
by personal interview or by telephone, in addition to the use of the mails by
directors, officers and regular employees of the Company and St. Francis Bank,
F.S.B. ("St. Francis Bank"), without additional compensation therefor. The
Company also has made arrangements with brokerage firms, banks, nominees and
other fiduciaries to forward proxy solicitation materials for shares of Common
Stock held of record by the beneficial owners of such shares. The Company will
reimburse such holders for their reasonable out-of-pocket expenses.
Proxies solicited hereby will be returned to the Board of Directors,
and will be tabulated by inspectors of election designated by the Board of
Directors, who will not be employed by, or a director of, the Company or any of
its affiliates.
-2-
<PAGE> 5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of November 30, 1996 (except as noted otherwise below) by (i)
each shareholder known to the Company to beneficially own more than 5% of the
shares of Common Stock outstanding, as disclosed in certain reports regarding
such ownership filed with the Company and with the Securities and Exchange
Commission (the "SEC"), in accordance with Sections 13(d) or 13(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) each
director and director nominee of the Company, (iii) each of the executive
officers of the Company appearing in the Summary Compensation Table below, and
(iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME OWNED (1) PERCENT OF CLASS*
---- --------- -----------------
<S> <C> <C>
Brandes Investment Partners, Incorporated (6) . . . . . . 472,535 8.8%
Neumeier Investment Counsel (7) . . . . . . . . . . . . . 329,400 6.1
St. Francis Bank, F.S.B.
Employee Stock Ownership Trust (5) . . . . . . . . . . 379,473 7.1
John C. Schlosser (2)(3)(4) . . . . . . . . . . . . . . . 133,237 2.5
Thomas R. Perz (2)(3)(4) . . . . . . . . . . . . . . . . 135,441 2.5
David J. Drury . . . . . . . . . . . . . . . . . . . . . 225 **
William F. Double (2) . . . . . . . . . . . . . . . . . 48,841 **
James C. Hazzard (3)(4) . . . . . . . . . . . . . . . . . 3,040 **
Rudolph T. Hoppe (2) . . . . . . . . . . . . . . . . . . 42,625 **
Edward W. Mentzer (2) . . . . . . . . . . . . . . . . . . 55,396 1.0
Jeffrey A. Reigle . . . . . . . . . . . . . . . . . . . . -- --
Edmund O. Templeton (2) . . . . . . . . . . . . . . . . . 75,678 1.4
Brian T. Kaye (2)(3)(4) . . . . . . . . . . . . . . . . . 81,023 1.5
Bruce R. Sherman (2)(3)(4) . . . . . . . . . . . . . . . 80,425 1.5
All directors and executive officers
as a group (16 persons) (2)(3)(4) . . . . . . . . . . . 841,166 14.8%
</TABLE>
_____________________________
* As of the Voting Record Date.
** Amount represents less than 1% of the total shares of Common Stock
outstanding.
(1) Unless otherwise indicated, includes shares of Common Stock held
directly by the individuals as well as by members of such individuals'
immediate family who share the same household, shares held in trust
and other indirect forms of ownership over which shares the
individuals effectively exercise sole or shared voting and/or
investment power. Fractional shares of Common Stock held by certain
executive officers under the St. Francis Bank, F.S.B. Employee Stock
Ownership Plan ("ESOP") have been rounded to the nearest whole share.
(2) Includes shares of Common Stock which the named individuals have the
right to acquire within 60 days of the Voting Record Date pursuant to
the exercise of stock options as follows: Mr. Schlosser - 40,000
shares; Mr. Perz - 40,000 shares; Mr. Double - 21,146 shares; Mr.
Hoppe - 13,592 shares; Mr. Mentzer - 27,336 shares; Mr. Templeton -
25,233 shares; Mr. Kaye - 40,000 shares; and Mr. Sherman - 33,644
shares.
(3) Does not include options for shares of Common Stock which do not vest
within 60 days of the Voting Record Date which have been awarded to
executive officers under the St. Francis Capital Corporation 1993
Incentive Stock Option Plan.
(4) Includes shares of Common Stock allocated to certain executive
officers under the ESOP, for which such individuals possess shared
voting power, of which approximately 14,854 have been allocated to the
accounts of the named executive officers in the Summary Compensation
Table as follows: Mr. Schlosser - 3,941; Mr. Perz - 3,581; Mr. Kaye -
3,356; Mr. Sherman - 3,186 and Mr. Hazzard-790.
(5) First Bank Milwaukee, N.A. ("Trustee") is the trustee for the St.
Francis Bank, F.S.B. Employee Stock Ownership Trust. The Trustee's
address is 201 West Wisconsin Avenue, Milwaukee, Wisconsin 53202.
(6) Based upon Amendment No. 2 to a Schedule 13G, dated February 12, 1996,
filed with the Company pursuant to the Exchange Act by Brandes
Investment Partners, Incorporated, an investment advisor, located at
12750 High Bluff Drive, Suite 420, San Diego, California 92130.
(7) Based upon Amendment No. 1 to a Schedule 13G, dated February 2, 1996,
filed with the Company pursuant to the Exchange Act by Neumeier
Investment Counsel, an investment advisor, located at 26435 Carmel
Rancho Blvd., Carmel, California 93923.
-3-
<PAGE> 6
MATTERS TO BE VOTED ON AT THE ANNUAL MEETING
MATTER 1.
ELECTION OF DIRECTORS
Pursuant to the Articles of Incorporation of the Company, at the first
annual meeting of shareholders of the Company held on January 26, 1994,
directors of the Company were divided into three classes as equal in number as
possible. Directors of the first class were elected to hold office for a term
expiring at the first succeeding annual meeting, directors of the second class
were elected to hold office for a term expiring at the second succeeding annual
meeting and directors of the third class were elected to hold office for a term
expiring at the third succeeding annual meeting, and in each case until their
successors are elected and qualified. At each subsequent annual meeting of
shareholders, one class of directors, or approximately one-third of the total
number of directors, are to be elected for a term of three years. There are no
family relationships among any of the directors and/or executive officers of
the Company. No person being nominated as a director is being proposed for
election pursuant to any agreement or understanding between any person and the
Company.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted FOR the election of the nominees for director listed
below. If any person named as nominee should be unable or unwilling to stand
for election at the time of the Annual Meeting, the proxies will nominate and
vote for any replacement nominee or nominees recommended by the Board of
Directors. At this time, the Board of Directors knows of no reason why any of
the nominees listed below may not be able to serve as a director if elected.
The following tables present information concerning the nominees for
director and continuing directors. All of the following nominees have served as
a director the Company since the Company's formation in December 1992, except
director David J. Drury who was elected by shareholders at the Company's annual
meeting of shareholders held in January 1996 and director nominee Jeffrey A.
Reigle.
<TABLE>
<CAPTION>
Position with the Company Director of Director of
and Principal Occupation St. Francis Bank Wisconsin
Name Age During the Past Five Years Bank Since Since
---- --- -------------------------- ---------- -----
NOMINEES FOR DIRECTOR FOR THREE-YEAR TERMS EXPIRING IN 2000
<S> <C> <C> <C> <C>
Jeffrey A. Reigle 45 Director of Bank Wisconsin, the -- 1994
Company's wholly-owned state-
chartered bank subsidiary;
Since 1992, President and Chief
Executive Officer of Regal
Ware, Inc., a privately held
manufacturer of utensils and
electrical appliances, located
in Kewaskum, Wisconsin; From
1989-1991, Executive Vice
President-Housewares of Regal
Ware, Inc.
</TABLE>
-4-
<PAGE> 7
<TABLE>
<CAPTION>
Position with the Company Director of Director of
and Principal Occupation St. Francis Bank Wisconsin
Name Age During the Past Five Years Bank Since Since
---- --- -------------------------- ---------- -----
<S> <C> <C>
John C. Schlosser 68 Director, President, Chief 1978 1994
Executive Officer and Chairman
of the Board of the Company;
Chairman of the Board of St.
Francis Bank; Director of Bank
Wisconsin.
Edmund O. Templeton 53 Director of the Company and St. 1990 --
Francis Bank; Since 1969,
President, Pilot Systems, Inc.,
a privately held company that
sells, develops and services a
variety of computer software
programs for medium-sized
manufacturing companies,
located in Brookfield,
Wisconsin.
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS
DIRECTORS WHOSE TERMS EXPIRE IN 1998
William F. Double 86 Director of the Company and St. 1987 --
Francis Bank; Prior to
retirement, from 1976 to 1987,
partner in the law firm of
Double & Double, General
Counsel to St. Francis Bank.
Edward W. Mentzer 60 Director of the Company, St. 1982 1996
Francis Bank and Bank
Wisconsin; Since 1995, Chairman
of the Board of Plastic
Engineered Components Inc., a
privately held plastic
injection molded products
manufacturer, located in
Waukesha, Wisconsin; From 1992
to 1995, President, and from
1989 to 1992, Chief Executive
Officer of Plastic Engineered
Components Inc.
</TABLE>
-5-
<PAGE> 8
<TABLE>
<CAPTION>
Position with the Company Director of Director of
and Principal Occupation St. Francis Bank Wisconsin
Name Age During the Past Five Years Bank Since Since
---- --- -------------------------- ---------- -----
<S> <C> <C> <C> <C>
Rudolph T. Hoppe 70 Director of the Company and St. 1980 --
Francis Bank; Prior to
retirement, from 1965 to 1990,
President of Glenora Company,
an accounting, tax and
investment services firm,
located in Milwaukee,
Wisconsin; Director, Plexus
Corporation, a publicly traded
electronic products
manufacturing and design
company, located in Neenah,
Wisconsin.
Thomas R. Perz 52 Director and Vice President of 1983
the Company; Director, 1994
President and Chief Executive
Officer of St. Francis Bank;
Director of Bank Wisconsin.
David J. Drury 48 Director of the Company; Since -- --
1994, President, Stolper-
Fabralloy Company LLC, a
privately held manufacturer of
turbomachinery components,
located in Brookfield,
Wisconsin; From 1989-1993,
Executive Vice President,
Oldenburg Group, Inc., an
industrial holding company,
located in Milwaukee,
Wisconsin; Since 1989, director
of Jason, Inc., a publicly held
manufacturer of automotive
trim, finishing, power
generation and industrial
products, located in Milwaukee,
Wisconsin.
</TABLE>
The affirmative vote of a plurality of the votes cast is required for
the election of directors. Unless otherwise specified, the shares of Common
Stock represented by the proxies solicited hereby will be voted in favor of the
election of the above-described nominees. The Board of Directors recommends
that you vote FOR election of the nominees for director.
-6-
<PAGE> 9
MATTER 2.
APPROVAL OF THE
ST. FRANCIS CAPITAL CORPORATION
1997 STOCK OPTION PLAN
The Board of Directors of the Company proposes for consideration and
approval by the Company's shareholders the St. Francis Capital Corporation 1997
Stock Option Plan (the "1997 Stock Option Plan"). Absent shareholder approval,
the 1997 Stock Option Plan will not be effective and no grants of options to
purchase shares of Common Stock will be made thereunder. Shareholder approval
of the 1997 Stock Option Plan will qualify the 1997 Stock Option Plan for
granting Incentive Stock Options under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Internal Revenue Code"), and is a non-quantitative
listing requirement under the By-laws of the National Association of Securities
Dealers, Inc. ("NASD") which is applicable to all issuers, including the
Company, whose shares are traded on the NASDAQ National Market System.
PURPOSE OF THE 1997 STOCK OPTION PLAN
In connection with the conversion of St. Francis Bank from mutual to
stock form and the issuance of the Common Stock in connection therewith in 1993
(the "Conversion"), the Board of Directors adopted two stock option plans, the
St. Francis Capital Corporation 1993 Stock Option Plan for Outside Directors
of the Company and its Affiliates (the "Directors' Plan") and the St. Francis
Capital Corporation 1993 Incentive Stock Option Plan (the "Incentive Stock
Option Plan"), which authorized in the aggregate options to purchase 140,185
and 560,740 shares of Common Stock, respectively. The Directors' Plan and
Incentive Stock Option Plan were approved by the Company's shareholders at a
Special Meeting of Shareholders held on September 15, 1993. In connection with
the Conversion, options to purchase 140,185 shares of Common Stock were granted
to directors of the Company under the Directors' Plan and options to purchase
391,198 shares of Common Stock were granted to officers of the Company under
the Incentive Stock Option Plan. With the exception of options to purchase
8,500 shares of Common Stock granted to Mr. James C. Hazzard in connection with
his retention as President and Chief Executive Officer of Bank Wisconsin in
fiscal 1995, no additional option grants have been made to directors, executive
officers or employees of the Company or its subsidiaries. No options remain
available for future grant under the Directors' Plan and options to purchase
167,441 shares of Common Stock remain available for future grant under the
Incentive Stock Option Plan.
In November 1996, at the direction of the Board of Directors of the
Company, the Compensation Committee of the Board of Directors of the Company
reviewed the scope and adequacy of Company's current stock-based compensation
plans with the long-term objective of increasing the stock-based components of
total compensation paid to directors, officers and employees of the Company and
its subsidiaries. The Board of Directors believes that increasing the
stock-based components of total compensation serves to further align the
interests of the Company's directors, officers and employees and its
shareholders. Based upon such review, the Compensation Committee recommended,
and the Board of Directors approved, the proposed 1997 Stock Option Plan as a
method of increasing the stock-based components of total compensation and
providing an adequate reserve of options for additional corporate purposes such
as retaining existing directors, officers and employees, recruiting future
directors and officers, and for issuances in connection with potential
strategic acquisitions.
-7-
<PAGE> 10
ELIGIBILITY, TYPE OF OPTION GRANTS AND SHARES SUBJECT TO PLAN
Under the proposed 1997 Stock Option Plan, all directors, officers and
employees of the Company and its subsidiaries are eligible to participate. As
of December 1, 1996, the Company had 368 directors, officers and employees
eligible to participate in the 1997 Stock Option Plan. The 1997 Stock Option
Plan authorizes the grant of (i) options to purchase shares of Common Stock
intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code ("Incentive Stock Options"); and (ii) options that do not
so qualify ("Non-Statutory Options"). If approved by shareholders, under the
1997 Stock Option Plan, options for a total of 220,000 shares of Common Stock,
or approximately 4.0% of the number of shares of Common Stock outstanding on
the Voting Record Date, will be made available for granting to eligible
participants. The Company currently has no plans to grant options under the
1997 Stock Option Plan and would not have granted options under the 1997 Stock
Option Plan if such plan had been in effect in fiscal 1996.
The shares of Common Stock to be issued by the Company upon the
exercise of options by optionees may be acquired either through open market
purchases by the Company, or issued from authorized but unissued shares of
Common Stock. If additional authorized but unissued shares of Common Stock are
issued upon the exercise of options, the interests of existing shareholders
will be diluted.
ADMINISTRATION
The proposed 1997 Stock Option Plan will be administered jointly by
the Board of Directors of the Company and the Compensation Committee of the
Board of Directors of the Company. The Compensation Committee will consist
solely of "non-employee directors" as that term is defined under Rule 16b-3
promulgated by the SEC under the Exchange Act and "outside directors" as that
term is defined under applicable regulations issued by the Internal Revenue
Service under the Internal Revenue Code. The Board of Directors shall make
the following determinations with respect to grants to outside directors and
the Compensation Committee shall make the following determinations with respect
to grants to eligible participants other than outside directors: (i) the
persons to whom options are granted; (ii) the terms at which options are to be
granted; (iii) the number of shares of Common Stock subject to an individual
grant; (iv) the vesting schedule applicable to individual grants; and (v) the
expiration date of the option (which shall not be later than ten years from the
date the option is granted). The exercise price may be paid in cash or shares
of Common Stock and shall be the fair market value (as defined in the 1997
Stock Option Plan) of the Common Stock on the date of grant or such greater
amount as determined by the Compensation Committee with respect to grants to
eligible participants other than outside directors, and by the Board of
Directors with respect to grants to outside directors.
TERMS AND CONDITIONS OF OPTION GRANTS
Options granted under the 1997 Stock Option Plan are subject to
certain terms and conditions as described herein. Of the total number of
shares of Common Stock available for grant under the 1997 Stock Option Plan, a
participant may not be granted options to purchase more than 50,000 shares of
Common Stock in any period of three calendar years.
The aggregate fair market value of shares of Common Stock with respect
to which Incentive Stock Options may be granted to an eligible participant
which are exercisable for the first time in any calendar year may not exceed
$100,000. Any option granted in excess of such amount shall be treated as a
Non-Statutory Option. Incentive Stock Options granted to any person who is the
beneficial owner of more than 10% of the outstanding shares of Common Stock may
be exercised only for a period of five years following the date of grant and
the exercise price at the time of grant must be equal to at least 110% of the
fair market value of the Common Stock on the date of the grant.
-8-
<PAGE> 11
No option granted under the 1997 Stock Option Plan will be exercisable
after three months after the date on which the optionee ceases to perform
services for the Company, except that in the event of death, retirement or
disability, all options, whether or not exercisable at such time, may be
exercisable for up to one year thereafter or such longer period as determined by
the Compensation Committee of the Company. Options held by employees terminated
for cause will terminate on the date of termination. Termination "for cause"
includes termination due to personal dishonesty, incompetence, willful
misconduct, the intentional failure to perform stated duties, breach of
fiduciary duty involving personal dishonesty, willful violations of law, the
entry of a final cease and desist order or the material breach of any provisions
of an employee's employment contract.
In the event of a Change of Control of the Company, all Incentive Stock
Options and Non-Statutory Options, whether or not exercisable at such time,
shall become immediately exercisable. If a participant is terminated due to
such Change of Control, all options shall be exercisable for a period of one
year following such Change of Control, or such longer period as determined by
the Compensation Committee; provided that in no event shall the period extend
beyond the option term and in the case of Incentive Stock Options, such options
shall not be eligible for treatment as Incentive Stock Options if exercised more
than three months following the date of a participant's cessation of employment.
"Change of Control" is defined to mean a change of control of a nature that: (i)
would be required to be reported to the SEC by the Company in a current report
on Form 8-K; or (ii) results in a change in control of St. Francis Bank or the
Company within the meaning of the Home Owners Loan Act of 1933 and the rules and
regulations promulgated by the Office of Thrift Supervision (or its predecessor
agency) (the "OTS"). In addition, under the 1997 Stock Option Plan, a Change of
Control shall be deemed to have occurred at such time as (i) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company or its subsidiaries
representing 25% or more of such entities' outstanding voting securities; (ii)
individuals who constitute the current Board of Directors of the Company (the
"Incumbent Board"), cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the
effective date of the 1997 Stock Option Plan whose election was approved by a
vote of at least three-quarters of the directors comprising the Incumbent Board,
or whose nomination for election by the Company's shareholders was approved by
the same Nominating Committee serving under an Incumbent Board, shall be
considered as a member of the Incumbent Board; or (iii) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Company or similar transaction in which the Company is not the
surviving institution; or (iv) any change of control of the Company instituted
by an entity or individual other than current management of the Company.
In the event of a participant's termination of employment, the Company, if
requested by the participant, may elect to pay the participant, or beneficiary
in the event of death, in exchange for cancellation of the option, the amount by
which the fair market value of the Common Stock exceeds the exercise price of
the option on the date of the participant's termination of employment.
Incentive Stock Options may be transferred only by will or the laws of
descent and distribution. Non-Statutory Options may be transferred by
participants pursuant to the laws of descent and distribution and during a
participant's lifetime by participants to members of their "immediate family"
(as defined in the 1997 Stock Option Plan), trusts for the benefit of members of
their immediate family and charitable institutions to the extent permitted under
Section 16 of the Exchange Act and subject to federal and state securities laws.
-9-
<PAGE> 12
FEDERAL INCOME TAX TREATMENT
An optionee will not be deemed to have received taxable income upon
the grant or exercise of an Incentive Stock Option, provided that such shares
of Common Stock are held for at least one year after the date of exercise and
two years after the date of grant. No gain or loss will be recognized by the
Company as a result of the grant or exercise of Incentive Stock Options. An
optionee will be deemed to receive ordinary income upon exercise of
Non-Statutory Options in an amount equal to the amount by which the fair market
value of the Common Stock on the exercise date exceeds the exercise price. The
amount of any ordinary income deemed to be received by an optionee due to a
premature disposition of the shares of Common Stock acquired upon the exercise
of an Incentive Stock Option or upon the exercise of a Non-Statutory Option
will be deductible expense for tax purposes for the Company. At this time,
generally accepted accounting principles ("GAAP") do not require compensation
expense to be recorded for any options granted for which the exercise price
equals the market value on the date of grant. When options are exercised, the
net proceeds received by the Company will be recorded as an increase in Common
Stock and paid-in capital.
ADJUSTMENTS IN THE EVENT OF CAPITAL CHANGES
In the event the number of shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
of stock or other securities of the Company by reason of any stock dividend or
split, recapitalization, merger, consolidation, spin-off, reorganization,
combination or exchange of shares, or other similar corporate change, or other
increase or decrease in such shares without receipt or payment of consideration
by the Company, the following appropriate adjustments may be made to prevent
dilution or enlargement of the rights of participants, including any or all of
the following: (i) adjustments in the aggregate number or kind of shares of
Common Stock which may be awarded; (ii) adjustments in the aggregate number or
kind of shares of Common Stock covered by outstanding option grants; and (iii)
adjustments in the purchase price of outstanding option grants. No such
adjustments may, however, materially change the value of benefits available to
participants under a previously granted award.
DURATION AND AMENDMENT OF 1997 STOCK OPTION PLAN
No options will be awarded under the 1997 Stock Option Plan following
the tenth anniversary of approval of the 1997 Stock Option Plan by shareholders
of the Company.
The Board of Directors of the Company may amend the 1997 Stock Option
Plan in any respect; provided, however, that certain provisions governing the
terms of Incentive Stock Option and Non-Statutory Option grants shall not be
amended more than once every six months to comport with the Internal Revenue
Code or the Employee Retirement Income Security Act of 1974, as amended, if
applicable. In addition, the Board of Directors may determine that shareholder
approval of any amendment to the 1997 Stock Option Plan may be advisable for
any reason, including but not limited to, for the purpose of obtaining or
retaining any statutory or regulatory benefits under tax, securities or other
laws or satisfying applicable stock exchange listing requirements.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON STOCK
REPRESENTED IN PERSON OR BY PROXY AND VOTED AT THE ANNUAL MEETING IS REQUIRED
FOR APPROVAL OF THE 1997 STOCK OPTION PLAN. UNLESS MARKED TO THE CONTRARY, THE
SHARES OF COMMON STOCK REPRESENTED BY THE ENCLOSED PROXY WILL BE VOTED FOR
APPROVAL OF THE 1997 STOCK OPTION PLAN. THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR APPROVAL OF THE 1997 STOCK OPTION PLAN.
-10-
<PAGE> 13
MATTER 3.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for the fiscal year ended September
30, 1996 were KPMG Peat Marwick LLP. The Board of Directors of the Company has
reappointed KPMG Peat Marwick LLP to perform the audit of the Company's
financial statements for the year ending September 30, 1997. Representatives
of KPMG Peat Marwick LLP will be present at the Annual Meeting and will be
given the opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions from the Company's shareholders.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON STOCK
REPRESENTED IN PERSON OR BY PROXY AND VOTED AT THE ANNUAL MEETING IS REQUIRED
FOR RATIFICATION OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS OF THE
COMPANY. UNLESS MARKED TO THE CONTRARY, THE SHARES OF COMMON STOCK REPRESENTED
BY THE ENCLOSED PROXY WILL BE VOTED FOR RATIFICATION OF THE APPOINTMENT OF KPMG
PEAT MARWICK LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF KPMG PEAT
MARWICK LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
Regular meetings of the Board of Directors of the Company are held
eight times per year. During the fiscal year ended September 30, 1996, the
Board of Directors of the Company held eight regular meetings and one special
meeting. No incumbent director attended fewer than 75% of the aggregate total
number of meetings of the Board of Directors held and the total number of
committee meetings on which such director served during the fiscal year ended
September 30, 1996.
In fiscal 1996, the Audit Committee of the Company consisted of the
same three directors, Messrs. Rudolph T. Hoppe, Edward W. Mentzer and Edmund
O. Templeton, who are neither officers nor employees of the Company or its
subsidiaries ("Outside Directors"). In March 1996, the composition of the
Audit Committee was changed to include all Outside Directors of the Company,
including Messrs. Double, Drury, Hoppe, Mentzer and Templeton. The Audit
Committee reviews the scope and timing of the audit of the Company's financial
statements by the Company's independent public accountants and reviews with the
independent public accountants the Company's management policies and procedures
with respect to auditing and accounting controls. The Audit Committee also
reviews and evaluates the independence of the Company's accountants, approves
services rendered by such accountants and recommends to the Board the
engagement, continuation or discharge of the Company's accountants. The
Company's Audit Committee met four times during the fiscal year ended September
30, 1996.
Through February 1996, the Compensation Committee of the Board of
Directors of the Company consisted of Outside Directors, Messrs. Mentzer and
Templeton. In March 1996, the composition of the Compensation Committee was
changed to include all Outside Directors of the Company, including Messrs.
Double, Drury, Hoppe, Mentzer and Templeton. During the fiscal year ended
September 30, 1996, the Company did not pay separate compensation to its
executive officers and did not have any salaried employees. However, pursuant
to an agreement between the Company and St. Francis Bank, the Company
reimburses St. Francis Bank for the services of St. Francis Bank's officers and
employees for time devoted to Company affairs. In fiscal 1996, the
Compensation Committee of the Company reviewed and ratified the compensation
policies set by, and decisions made by, the Board of Directors of St. Francis
Bank and the Board of Directors of Bank Wisconsin.
-11-
<PAGE> 14
The Compensation Committee of the Company met four times during the fiscal
year ended September 30, 1996. In November 1996, the Compensation Committee of
the Company met to issue the Compensation Committee Report which appears in this
Proxy Statement. In fiscal 1997, executive compensation policies and programs
will be made and/or ratified by the Compensation Committee of the Company, which
will consider the recommendations of the Board of Directors of each of the
subsidiary banks. For a further discussion of the compensation policies of the
Company, see "Compensation Committee Report."
The entire Board of Directors of the Company acted as a Nominating
Committee for the selection of nominees for directors to stand for election at
the Annual Meeting. In October and December 1996, the Board, acting as the
Nominating Committee, considered nominations for directors. The Company's
By-laws allow for shareholder nominations of the directors and require such
nominations be made pursuant to timely notice in writing to the Secretary of the
Company. See "Shareholder Proposals for the 1998 Annual Meeting."
COMPENSATION COMMITTEE REPORT
COMPENSATION COMMITTEE
Through February 1996, the Compensation Committee of the Board of Directors
of the Company consisted of Outside Directors, Messrs. Mentzer and Templeton. In
March 1996, the composition of the Compensation Committee was changed to include
all Outside Directors of the Company, including Messrs. Double, Drury, Hoppe,
Mentzer and Templeton. During the fiscal year ended September 30, 1996, the
Company did not pay separate compensation to its executive officers and did not
have any salaried employees. However, pursuant to an agreement between the
Company and St. Francis Bank, the Company reimburses St. Francis Bank for the
services of St. Francis Bank's officers and employees for time devoted to
Company affairs. In fiscal 1996, the Compensation Committee of the Company
reviewed and ratified the compensation policies set by, and decisions made by,
the Board of Directors of St. Francis Bank and the Board of Directors of Bank
Wisconsin. In November 1996, the Compensation Committee of the Company met to
issue this Compensation Committee Report.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Through February 1996, the Compensation Committee was composed of two
Outside Directors, Messrs. Mentzer and Templeton, who are not former officers
or employees of the Company or any of its subsidiaries. In March 1996, the
Compensation Committee was composed of all Outside Directors. There are no
interlocks, as defined under the rules and regulations of the SEC, between the
Compensation Committee and corporate affiliates of members of the Compensation
Committee.
COMPENSATION COMMITTEE REPORT
Under rules established by the SEC, the Company is required to provide
certain data and information regarding the compensation and benefits provided to
the Company's Chief Executive Officer and certain other executive officers of
the Company. The rules require compensation disclosure in the form of tables
and a report of the Compensation Committee which explains the rationale and
considerations that led to fundamental compensation decisions affecting such
individuals. The Compensation Committee has prepared the following report, at
the direction of the Board of Directors of the Company, for inclusion in this
Proxy Statement.
-12-
<PAGE> 15
I. EXECUTIVE COMPENSATION POLICY
It is the policy of the Company and its subsidiary banks to maintain
an executive compensation program which will attract, motivate, retain and
reward senior executives and provide appropriate incentives intended to
generate long-term financial results which will benefit the Company, St.
Francis Bank and Bank Wisconsin, and shareholders of the Company. The
Company's executive compensation program incorporates a pay-for-performance
policy that compensates executives for both corporate and individual
performance. The executive compensation program is designed to achieve the
following objectives:
- Provide competitive compensation packages comparable to those
offered by other peer group financial institutions;
- Provide the Company and the subsidiary banks with the ability
to compete for and retain talented executives that are
critical to the Company's long-term success; and
- Provide incentives to achieve the Company's financial
performance objectives and exceptional individual performance
with the goal of enhancing shareholder value.
The executive compensation package consists of three major components:
(i) cash compensation, including base salary and an annual incentive bonus;
(ii) long-term incentive compensation in the form of stock options awarded
under the St. Francis Capital Corporation 1993 Incentive Stock Option Plan; and
(iii) executive benefits.
II. COMPENSATION DECISIONS FOR FISCAL 1996
In fiscal 1995, St. Francis Bank retained an independent compensation
consultant to review the salary levels, incentive program and individual
performance goals for executive officers of St. Francis Bank. The compensation
consultant's analysis included a review of senior officer salary studies and
surveys prepared by national and state trade associations, together with
available competitive compensation data. The consultant made specific
recommendations regarding adjustments to the salary levels of St. Francis Bank
executive officers as well as adjustments to the incentive compensation targets
for fiscal 1995 and 1996. These recommendations included proposed revisions to
the incentive compensation programs maintained by the Company's subsidiary
banks designed to ensure that incentives are based upon factors over which the
participants have direct influence and control, and are tied to longer-term
corporate performance. In reviewing and approving compensation decisions for
fiscal 1995, 1996 and 1997, the Compensation Committee has, and intends to,
consider the guidelines and recommendations of the independent compensation
consultant.
During fiscal 1996, the Board of Directors of St. Francis Bank
modified the existing Incentive Compensation Program ("SFB-ICP") pursuant to
which executive officers of St. Francis Bank receive cash incentive
remuneration. Under the modified SFB-ICP, executive officers earn their
targeted incentive compensation based on St. Francis Bank achieving a target
level of net income (excluding gains on the sale of securities) for the fiscal
year and based upon participants achieving certain individual performance goals
established at the beginning of each fiscal year. Previously, the SFB- ICP
provided for payment of incentive compensation based upon target levels of net
income, coupled with achievement of individual performance objectives. The
Board of Directors of St. Francis Bank decided to modify the SFB-ICP parameter
in fiscal 1996 based upon the recommendations of the independent compensation
consultant that incentives should be based upon factors over which SFB-ICP
participants have direct influence and control. The Company intends to further
modify its incentive programs for fiscal 1997 in pursuit of this objective as
discussed further herein. Incentive compensation earned under the SFB-ICP is
established as a percentage of each officer's base salary. Incentive
compensation may exceed established percentages of base salaries
-13-
<PAGE> 16
if St. Francis Bank surpasses the target level of net income (excluding gains
on the sale of securities) and individual performance objectives are met, or
may be less than the established percentages if St. Francis Bank does not
achieve the target net income level and individual performance objectives are
not met. The SFB-ICP provides for a target of 35% of base salary for St.
Francis Bank's President (Mr. Perz), a target of 30% of base salary for members
of St. Francis Bank's Investment Committee (Messrs. Kaye, Sherman and Sorenson)
and targets of 25% and 20% for other Senior Vice Presidents of St. Francis
Bank. The target net income level for St. Francis Bank is reviewed and
established annually by the Board of Directors of St. Francis Bank and may vary
from year to year, as may the specifics of the SFB-ICP. St. Francis Bank did
not achieve the net income target established for fiscal 1996, and therefore,
executive officers of St. Francis Bank will earn incentive compensation at
levels less than the target SFB-ICP levels. The aggregate pay-out under the
SFB-ICP for fiscal 1996 was $197,704. The average bonus earned under the
SFB-ICP in fiscal 1996 by participants (other than Mr. Perz) was 17% of their
base salaries compared to 31% in fiscal 1995.
During fiscal 1996, the Bank Wisconsin Incentive Compensation Program
(the "BW-ICP") was modified and redefined to include several executive officers
of Bank Wisconsin in addition to James C. Hazzard, President of Bank Wisconsin.
The BW-ICP provides for payment of cash incentive compensation as a percentage
of base salary based upon Bank Wisconsin achieving various levels of net income
and based upon participants achieving certain individual performance goals
established at the beginning of each fiscal year, and operates in a similar
manner as the SFB-ICP. The BW-ICP provides for a target of 25% of base salary
for Mr. Hazzard and lesser percentages of base salary for other participants.
Bank Wisconsin exceeded its net income target established for fiscal 1996, and
therefore, executive officers of Bank Wisconsin will earn incentive
compensation in excess of the target BW-ICP levels. The aggregate pay-out
under the BW- ICP was $63,500 for fiscal 1996. The average bonus earned under
the BW-ICP in fiscal 1996 by Bank Wisconsin's executive officers (other than
Mr. Hazzard) was 8% of their base salaries. Mr. Hazzard earned ICP
remuneration equal to $35,000 for fiscal 1996, or 35% of his $105,000 base
salary.
Remuneration earned under the SFB-ICP and BW-ICP for the fiscal year
ended September 30, 1996 will be paid by St. Francis Bank and Bank Wisconsin in
January 1997.
Senior officers of St. Francis Bank were awarded stock options during
the fiscal year ended September 30, 1993 in connection with the conversion of
St. Francis Bank from a federally-chartered mutual savings bank to a
federally-chartered state savings bank which was consummated in June 1993 (the
"Conversion") under the Incentive Stock Option Plan. Mr. Hazzard was granted
stock options in fiscal 1995 in connection with his retention as President of
Bank Wisconsin. No stock options were awarded to executive officers under the
Incentive Stock Option Plan during the fiscal year ended September 30, 1996.
Executive benefits paid by St. Francis Bank and Bank Wisconsin to its
executive officers were based upon each officer's contribution to the success
of the subsidiary bank and reflected each officer's position, salary and
specific responsibilities. Executive compensation and benefit plans applicable
to officers and directors of the subsidiary banks vary. For a further
discussion of the executive benefits made available to officers of the
subsidiary banks during the fiscal year ended September 30, 1996, see
"Compensation of Executive Officers and Directors - Benefits."
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<PAGE> 17
Stock options awarded to executive officers of St. Francis Bank during
the fiscal year ended September 30, 1993 in connection with the Conversion and
to Mr. Hazzard in connection with his retention as President of Bank Wisconsin
in fiscal 1995, and executive benefits paid during the fiscal year ended
September 30, 1996 were intended to promote the interests of St. Francis Bank,
Bank Wisconsin and the Company and its shareholders by enabling the subsidiary
banks to retain qualified management by providing competitive financial
incentives.
III. PRESIDENT AND CHIEF EXECUTIVE OFFICER COMPENSATION IN FISCAL 1996
Effective October 1, 1995, John C. Schlosser relinquished his
responsibilities as Chief Executive Officer of St. Francis Bank, and Thomas R.
Perz was named Chief Executive Officer. Mr. Schlosser continued as Chairman of
the Board of Directors of St. Francis Bank in fiscal 1996, and his base salary
(excluding amounts deferred under certain deferred compensation agreements with
St. Francis Bank) for fiscal 1996 remained the same as for fiscal 1995
($287,955), except that effective October 1, 1995, Mr. Schlosser was no longer
eligible to participate in the SFB-ICP. In addition, during fiscal 1996, Mr.
Schlosser continued to serve as President, Chief Executive Officer and Chairman
of the Board of Directors of the Company.
Following the 1997 Annual Meeting of Shareholders, Mr. Schlosser's
responsibilities and remuneration will be reduced as Mr. Schlosser will
relinquish his position as President and Chief Executive Officer of the Company
and all regular administrative activities for the Company. Mr. Perz will
succeed Mr. Schlosser as President and Chief Executive Officer of the Company.
Mr. Schlosser will continue as Chairman of the Board of Directors of the
Company and will further serve the Company and its President in a consultive
role and on special projects. Effective February 1, 1997, he will receive a
base salary of $150,000 per year under a contract extending until January 1999.
In establishing the compensation of Messrs. Schlosser and Perz, the
Compensation Committee specifically considered St. Francis Bank's overall
operating performance and compared St. Francis Bank's operating results to
other thrifts headquartered in Wisconsin. The Compensation Committee also
considered the individual performance of Messrs. Schlosser and Perz and the
revised responsibilities of such individuals during fiscal 1996, including
their individual performance and ability to develop, train and motivate a
competent management team and to execute the directives of the Board, as well
as to manage St. Francis Bank and the Company in a profitable, safe and sound
manner.
Mr. Perz's base salary (excluding ICP remuneration) for the fiscal
year ended September 30, 1996 remained at $224,448 (excluding amounts deferred
under his deferred compensation agreement with St. Francis Bank). Mr. Perz's
targeted ICP remuneration was set at 35% of base salary. St. Francis Bank did
not meet the net income target established by the Board of Directors for fiscal
1996 under the SFB-ICP, and therefore, Mr. Perz will receive incentive
compensation equal to $53,127 for fiscal 1996 under the SFB-ICP, or 23.7% of
his $224,448 base salary established at the beginning of fiscal 1996.
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<PAGE> 18
IV. MODIFICATIONS TO COMPENSATION PROGRAMS IN FISCAL 1997
In fiscal 1997, executive compensation policies and programs will be made
and/or ratified by the Compensation Committee of the Company which will consider
the recommendations of the Board of Directors of each of the subsidiary banks.
Based upon the recommendations of the independent compensation consultant
retained by St. Francis Bank in 1995 and the Compensation Committee's objective
to tie incentive compensation more directly to corporate performance, the
Compensation Committee has approved several additional modifications to its
incentive compensation programs for fiscal 1997. The Company has established an
incentive compensation program for St. Francis Capital Corporation (the
"STFR-ICP") for fiscal 1997 in which certain executive officers of the Company
will participate. Under the STFR-ICP, incentive compensation targets will
include various objective measures of Company-level performance. Individual
incentive compensation will be based upon the Company achieving specific
corporate performance targets applicable to various executive officer groups as
well as achievement of individual performance objectives. The SFB-ICP will
operate as it did in fiscal 1996, except that the corporate performance
indicator will be redefined as net income excluding gains on the sale of
securities and excluding leverage income of St. Francis Bank, and eligible
participants will include only those executive officers of St. Francis Bank who
do not participate in the STFR-ICP. The BW-ICP will remain the same for fiscal
1997.
V. SHAREHOLDER PROPOSAL TO APPROVE 1997 STOCK OPTION PLAN
In order to further promote the best interests of the Company and its
shareholders by providing key officers, employees and directors of the Company
and its subsidiaries with additional incentive to perform in a superior manner,
the Compensation Committee has reviewed and recommends that shareholders approve
the 1997 Stock Option Plan. The Compensation Committee recommends the
establishment of the 1997 Stock Option Plan to recognize the contributions of
both existing and prospective directors, officers and employees of the Company
and its affiliates. The Compensation Committee recognizes that stock options
are a performance-motivating incentive because they have no value unless the
price of the Common Stock increases above the exercise price applicable to
outstanding option grants. In determining whether to grant options under the
proposed 1997 Stock Option Plan, the Board of Directors and the Compensation
Committee, on a subjective basis and within their sole discretion, will review
management recommendations and evaluate the overall financial performance of the
Company and its subsidiaries, or any specific measure of financial performance
thereof. Options may be granted for achievement of both long-term and short-term
corporate performance objectives and also may be based upon an evaluation of
individual contributions to Company and subsidiary performance. The
Compensation Committee intends to grant options based upon review of various
corporate performance criteria, which may include the Company's ability to
improve return on assets, return on equity and efficiency ratio goals, as well
as earnings growth, new product development and growth in net income, deposits,
loans and any other targeted rate of improvement in the operations of the
Company and its subsidiaries.
COMPENSATION COMMITTEE
WILLIAM F. DOUBLE
DAVID J. DRURY
RUDOLPH T. HOPPE
EDWARD W. MENTZER
EDMUND O. TEMPLETON
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<PAGE> 19
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
During the fiscal year ended September 30, 1996, the Company did not
pay separate compensation to its executive officers. Separate compensation
will not be paid to the officers of the Company until such time as the officers
of the Company devote significant time to separate management of Company
affairs, which is not expected to occur until the Company becomes actively
involved in additional significant business beyond St. Francis Bank and Bank
Wisconsin. The following table summarizes the total compensation earned by St.
Francis Bank's Chief Executive Officer and the next four highest paid executive
officers of the Company's subsidiaries whose compensation (salary and bonus)
exceeded $100,000 during the Company's fiscal years ended September 30, 1994,
1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL NUMBER OF
COMPENSATION(1) SHARES
-------------------- SUBJECT TO ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OPTIONS(4) COMPENSATION(5)
- --------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
John C. Schlosser . . . . . 1996 $287,955 $ -- -- $61,855
Chairman of the Board of 1995 292,955 129,580 -- 59,016
St. Francis Bank and 1994 302,421 16,842 -- 63,493
President and CEO of
the Company
Thomas R. Perz . . . . . . 1996 229,448 53,127 -- 52,058
President and CEO 1995 229,448 88,044 -- 43,379
of St. Francis Bank and 1994 205,326 10,612 -- 45,215
and Vice President of
the Company
Brian T. Kaye . . . . . . . 1996 161,114 36,251 -- 53,276
Executive Vice President 1995 161,114 72,501 -- 48,876
and Secretary of 1994 161,958 7,793 -- 42,149
St. Francis Bank and
Secretary of the Company
Bruce R. Sherman . . . . . 1996 145,000 26,100 -- 49,176
Senior Vice President and 1995 139,038 75,695 -- 45,663
Treasurer of St. Francis 1994 140,177 6,955 -- 35,733
Bank and Vice President
of the Company
James C. Hazzard (6) . . . 1996 105,000 35,000 -- 28,188
President and CEO of 1995 100,000 25,000 8,500 --
Bank Wisconsin 1994 100,000 -- -- --
</TABLE>
- ------------------------------
(FOOTNOTES ON FOLLOWING PAGE)
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<PAGE> 20
______________________________
(1) Perquisites and other personal benefits provided to the named
executive officers by the Company did not exceed the lesser of $50,000
or 10% of each named executive officer's total annual salary and bonus
during the fiscal years indicated, and accordingly, are not included.
(2) Amounts shown include compensation earned and deferred at the election
of the named executive officers during the fiscal years ended
September 30, 1994, 1995 and 1996, including compensation deferred in
fiscal 1994 and 1995 by Mr. Schlosser and in fiscal 1994, 1995 and
1996 by Mr. Perz, respectively, under deferred compensation agreements
entered into with St. Francis Bank. See "-Deferred Compensation
Agreements."
(3) Senior officers of St. Francis Bank and Bank Wisconsin receive
remuneration under separate Incentive Compensation Programs ("ICPs").
The amounts indicated for the fiscal year ended September 30, 1996
represent incentive compensation earned by the named executive
officers under the ICPs for St. Francis Bank and Bank Wisconsin's
fiscal year ended September 30, 1996 which will be paid in January
1997. Mr. Schlosser did not participate in the St. Francis Bank ICP
in fiscal 1996.
(4) The amount shown in this column represents the total number of shares
of Common Stock subject to options granted to Mr. Hazzard during the
fiscal year ended September 30, 1995 under the Incentive Stock Option
Plan.
(5) Amounts shown in this column represent contributions by the Bank
pursuant to the St. Francis Bank, F.S.B. Money Purchase Pension Plan
(the "Pension Plan"), the St. Francis Bank, F.S.B. 401(k) Savings Plan
(the "401(k) Plan"), the ESOP, the Executive Split Dollar Life
Insurance Plan (the "Split Dollar Plan"), and Long-Term Disability
Policies during the fiscal years ended September 30, 1994, 1995 and
1996. The amounts shown for each individual for the fiscal year ended
September 30, 1996 are derived from the following figures: (i) Mr.
Schlosser: $11,388 - Pension Plan contribution; $3,000 - 401(k) Plan
matching contribution; $26,294 - ESOP allocation; $20,000 - Split
Dollar Plan premium; $1,173 - Long-Term Disability Policy premium;
(ii) Mr. Perz: $11,388 - Pension Plan contribution; $3,000 - 401(k)
Plan matching contribution; $26,294 - ESOP allocation; $7,000 - Split
Dollar Plan premium; $4,376 - Long-Term Disability Policy premium;
(iii) Mr. Kaye: $11,388 - Pension Plan contribution; $2,590 - 401(k)
Plan matching contribution; $26,294 - ESOP allocation; $11,525 - Split
Dollar Plan premium; $1,479- Long-Term Disability Policy premium; (iv)
Mr. Sherman: $11,388 - Pension Plan contribution; $3,000 - 401(k) Plan
matching contribution; $26,294- ESOP allocation; $7,979 - Split
Dollar Plan premium; $506 - Long-Term Disability Policy premium; and
(v) Mr. Hazzard: $7,748 - Pension Plan contribution; $2,117 - 401(k)
Plan matching contribution; and $18,232- ESOP allocation.
(6) Mr. Hazzard was hired on August 1, 1994; the salary amount indicated
for fiscal 1994 has been annualized. The ICP applicable to Mr.
Hazzard for fiscal 1995 provided for a bonus payment equal to 25% of
his base salary for fiscal 1995.
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<PAGE> 21
EMPLOYMENT AGREEMENTS
In June 1993, St. Francis Bank entered into three-year employment
agreements with Messrs. Schlosser, Perz, Kaye and Sherman. In fiscal 1994 and
1995, the terms of these agreements were extended for one year by Board action.
In lieu of renewal of the employment agreements in fiscal 1996, the Company and
St. Francis Bank entered into new three-year employment agreements with
Messrs. Perz, Kaye and Sherman to be effective as of October 1, 1996. In
August 1994, the Company entered into a one-year employment agreement with Mr.
Hazzard which was subsequently assigned to Bank Wisconsin, and in October 1996,
Bank Wisconsin entered into a new three-year employment agreement with Mr.
Hazzard. The term of these new employment agreements with Messrs. Perz, Kaye,
Sherman and Hazzard, which are described herein, may be restored to three years
by action of the Boards of Directors annually, subject to the Boards'
performance evaluation. Effective October 1, 1996, the Company entered into a
separate employment agreement with Mr. Schlosser as discussed further herein.
These employment agreements are intended to ensure that the Company, St.
Francis Bank and Bank Wisconsin maintain a stable and competent management
base.
Under the employment agreements in effect for fiscal 1996, the base
salaries for Messrs. Perz, Kaye, Sherman and Hazzard were $224,448, $161,114,
$145,000 and $105,000, respectively. Base salaries may be increased by the
Board of Directors of the Company, St. Francis Bank or Bank Wisconsin, as
applicable, but may not be reduced except as part of a general pro rata
reduction in compensation for all executive officers. In addition to base
salary, the agreements provide for payments from other incentive compensation
plans, and provide for other benefits, including participation in any group
health, life, disability, or similar insurance program and in any pension,
profit-sharing, employee stock ownership plan, deferred compensation, 401(k) or
other retirement plan maintained by St. Francis Bank and Bank Wisconsin, as
applicable. The agreements also provide for participation in any stock-based
incentive programs made available to executive officers of the Company and its
subsidiaries. The agreements with Messrs. Perz, Kaye, Sherman and Hazzard may
be terminated by the Company, St. Francis Bank or Bank Wisconsin, as
applicable, upon death, disability, retirement, for cause at any time, or in
certain events specified by the regulations of the OTS. If the Company, St.
Francis Bank or Bank Wisconsin terminate the agreements due to death or
retirement, for cause or pursuant to OTS regulations, the executives shall be
entitled to receive all compensation and benefits in which they were vested as
of the termination date. If the agreements are terminated due to disability,
the executives shall be entitled to receive 100% of their base salary at the
rate in effect at the time of termination for a period of one year and
thereafter an amount equal to 75% of such base salary for any remaining portion
of the employment term (offset by any payments received by executives under any
employer disability plans or government social security or workers'
compensation programs), together with other compensation and benefits in which
they were vested as of the termination date. If the Company, St. Francis Bank
or Bank Wisconsin terminate the agreements other than for the foregoing
reasons, or the executives terminate the agreements in accordance with the
terms stated therein, the executives are entitled to severance payments equal
to one year's base salary (in the case of Messrs. Kaye, Sherman and Hazzard)
and two year's base salary (in the case of Mr. Perz) (based upon the highest
base salary within the three years preceding the date of termination) and the
amount of bonus and incentive compensation paid to the executives in the most
recently completed calendar year of employment, payable over a twelve or
24-month period, as applicable. In addition, the executives shall be entitled
to participate in all group insurance, life insurance, health and accident,
disability and certain other employee benefit plans maintained by the employer,
at no cost to the executives, for a period of one year (in the case of Messrs.
Kaye, Sherman and Hazzard) or two years (in the case of Mr. Perz), or such
earlier time as the executives are employed on a full-time basis by another
employer which provides substantially similar benefits. The employment
agreements also contain covenant-not-to-compete provisions which prohibit the
executives from competing with a Significant Competitor (as defined therein) of
the Company, St. Francis Bank or Bank Wisconsin, as applicable, for a period of
twelve months following termination.
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<PAGE> 22
The employment agreements provide for severance payments if the
executives' employment terminates following a change in control. Under the
agreements, a "Change in Control" is generally defined to include any change in
control required to be reported under the federal securities laws, as well as
(i) the acquisition by any person of 25% or more of the Company's outstanding
voting securities, or (ii) a change in a majority of the directors of the
Company during any two-year period without approval of at least two-thirds of
the persons who were directors at the beginning of such period. Within 24
months of the effective date of any Change in Control, the executives may
terminate the agreements in the event certain conditions contained therein are
satisfied, and shall be entitled to receive as severance three year's base
salary (based upon the highest base salary within in the three years preceding
the date of termination) and the amount of bonus and incentive compensation
paid to the executives in the most recently completed calendar year of
employment, payable over a three-year period. In addition, the executives
shall be entitled to all other benefits and compensation which would have been
payable to them in the event of termination other than for death, disability,
cause or pursuant to OTS regulations, as described herein. In addition, the
executives are entitled to all qualified retirement and other benefits in which
they were vested. If the severance benefits payable following a Change in
Control would constitute "parachute payments" within the meaning of Section
280G(b)(2) of the Internal Revenue Code, and the present value of such
"parachute payments" equals or exceeds three times the executive's average
annual compensation for the five calendar years preceding the year in which a
Change in Control occurred, the severance benefits shall be reduced to an
amount equal to the present value of 2.99 times the average annual compensation
paid to the executive during the five years immediately preceding such Change
in Control.
The Company and Mr. Schlosser have entered into an employment
agreement to be effective as of October 1, 1996 through January 2, 1999. The
employment agreement provides that Mr. Schlosser shall continue to serve as
President, Chief Executive Officer and Chairman of the Board of the Company
through January 22, 1997 and thereafter, for the balance of the employment
term, shall serve as Chairman of the Board of Directors of the Company and will
further serve the Company in a consultive role and on special projects.
Through January 31, 1997, Mr. Schlosser shall be compensated at a base rate of
$287,955 per annum and effective February 1, 1997, he shall receive a base
salary of $150,000 per year. In addition to base salary, the agreement
provides for other benefits generally made available to other executive
officers of the Company and its subsidiaries, excluding benefits under the
Company's or its subsidiaries' bonus or stock-based plans. The agreement also
provides for termination upon death, retirement, disability, for cause, and in
the case of certain events specified by OTS regulations. If Mr. Schlosser
retires or dies, or Mr. Schlosser voluntarily terminates his employment
agreement, he or his estate shall be entitled to any compensation and benefits
in which he was vested as of his termination date. If the agreement is
terminated due to Mr. Schlosser's disability, Mr. Schlosser shall be entitled
to receive 100% of his base salary at the rate in effect at the time of
termination for the remainder of the employment term up to one year and
thereafter at an annual rate equal to 75% of such base salary for any remaining
portion of the employment term (offset by any payments received by Mr.
Schlosser under any employer disability plans or governmental social security
or workers' compensation programs). If Mr. Schlosser is terminated for cause,
Mr. Schlosser shall not be entitled to any severance payment; however, he
shall be entitled to any benefits in which he was vested as of the termination
date. If Mr. Schlosser is terminated by the Company other than for cause,
death, disability or retirement, or Mr. Schlosser terminates the employment
agreement pursuant to the terms contained therein, he shall be entitled to
receive as severance, salary payments under the employment agreement for the
remainder of the employment term, together with certain other benefits subject
to certain terms and conditions. The agreement also contains a
covenant-not-to-compete which prohibits Mr. Schlosser from competing with a
Significant Competitor (as defined therein) of the Company for a period of
twelve months following termination.
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<PAGE> 23
CONSULTING, NON-COMPETITION AND SUPPLEMENTAL COMPENSATION AGREEMENT
In August 1992, St. Francis Bank and Mr. Schlosser entered into a
consulting, non-competition and supplemental compensation agreement (the
"Consulting Agreement") pursuant to which St. Francis Bank agreed to pay Mr.
Schlosser (or his beneficiary) monthly payments of $4,166.67 for 120 months
upon his attainment of age 70, death, disability or termination of his
employment following a change of control. A "change of control" is defined to
include a change in the majority of St. Francis Bank's Board of Directors by
reason of the election of new directors not nominated by the Board, the merger
of St. Francis Bank, or the acquisition by any person or group of persons
acting in concert of 25% or more of the stock of St. Francis Bank. Death
benefit payments may be paid in a lump sum to Mr. Schlosser's beneficiary. No
benefits are payable if Mr. Schlosser's employment is terminated for cause.
"Cause" is defined as a willful and continued failure to perform his duties,
willful misconduct which is materially injurious to St. Francis Bank, a
criminal conviction involving the affairs of St. Francis Bank or removal by a
regulatory agency. If requested by St. Francis Bank, Mr. Schlosser will
provide consulting services to St. Francis Bank during the period benefits are
paid under the Consulting Agreement.
DEFERRED COMPENSATION AGREEMENTS
In December 1980, St. Francis Bank and Mr. Schlosser entered into a
deferred compensation agreement (the "1980 Agreement") in lieu of a $10,000 per
annum increase in Mr. Schlosser's base salary, pursuant to which St. Francis
Bank agreed to pay Mr. Schlosser (or his beneficiary) $156,000 over 13 years
following his normal retirement date, death or disability. If Mr. Schlosser's
employment with St. Francis Bank terminates other than for death or disability,
he will receive a lump sum in an amount equal to $833 multiplied by the number
of months he was employed by St. Francis Bank from January 1, 1981 until the
date of termination. In September 1986, St. Francis Bank and Mr. Schlosser
entered into a further deferred compensation agreement (the "1986 Agreement")
in lieu of a $5,000 per annum increase in Mr. Schlosser's base salary,
pursuant to which Mr. Schlosser (or his beneficiary) will receive $1,000 per
month following his normal retirement date, death or disability, with such
payments increasing 5% per annum until terminating after 15 years. The 1986
Agreement further provides that if Mr. Schlosser's employment terminates prior
to retirement for any reason other than disability, no payments will be made.
Both the 1980 and 1986 Agreements are non-tax qualified, unfunded deferred
compensation plans. Mr. Schlosser attained normal retirement age of 65 in
October 1993 and since January 1, 1994, St. Francis Bank has paid Mr. Schlosser
$1,000 per month under the 1980 Agreement and $1,000 per month plus the 5% per
annum increase which commenced January 1, 1995 under the 1986 Agreement.
In September 1986, St. Francis Bank and Mr. Perz entered into a
deferred compensation agreement in lieu of a $5,000 per annum increase in Mr.
Perz' base salary, pursuant to which St. Francis Bank agreed to pay Mr. Perz
$3,333 per month for the first year upon his retirement, death or disability,
with such monthly payments to be increased 5% each year thereafter for the
following 14 years. The deferred compensation agreement further provides that
if Mr. Perz' employment terminates before retirement for any reason other than
disability, no payments will be made. The deferred compensation agreement is a
non-tax qualified, unfunded plan.
In November 1987 and February 1988, Messrs. Mentzer and Perz each
entered into deferred compensation agreements whereby they agreed to defer
certain monthly directors' fees paid to them by St. Francis Bank. The deferred
compensation agreements are non-tax qualified, unfunded plans which establish
deferred benefit accounts for both Messrs. Perz and Mentzer. The deferred
benefit accounts are credited annually on April 30 of each year with interest
at a rate equal to one percentage point over the composite yield on Moody's
Long Term Bond Index Rate in effect on the preceding April 30. Upon
retirement, deferred compensation with accrued interest is to be paid to each
director or his designated beneficiary over ten years in annual installment
portions as designated in the
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<PAGE> 24
deferred compensation agreements. In the event of Mr. Perz' death before
retirement, his deferred compensation agreement provides that St. Francis Bank
shall pay his designated beneficiary an annual sum of $48,000 for a period of
ten years. In the event of Mr. Mentzer's death before retirement, his deferred
compensation agreement provides his designated beneficiary shall receive the
balance in his director's deferred benefit account over a period of ten years.
BENEFITS
EXECUTIVE SPLIT DOLLAR INSURANCE PROGRAM
St. Francis Bank established a Split Dollar Life Insurance Plan,
effective September 13, 1992 (the "Split Dollar Plan"), in which Messrs.
Schlosser, Perz, Kaye, Sherman, Koepp and Messrs. James S. Eckel and George M.
Vranes, and Ms. Judith M. Gauvin and Ms. Marynell M. Costa, Senior Vice
Presidents of St. Francis Bank, and Mr. Jon D. Sorenson, Chief Financial
Officer and Treasurer of the Company and Senior Vice President of St. Francis
Bank, participate. The life insurance benefit is equal to the executives'
salary up to $150,000. The executive pays the PS-58 cost of the insurance and
St. Francis Bank pays the premium. Upon the executive's death or the policy
maturity date, St. Francis Bank will receive all premiums paid on behalf of the
executive together with interest accrued thereon at a rate of 5% per annum and
the executive will receive the remainder of the death benefit or the cash
surrender value.
401(K) PLAN
St. Francis Bank and Bank Wisconsin participate in the St. Francis
Bank, F.S.B. 401(k) Savings Plan (the "401(k) Plan"), covering all of their
eligible employees. Employees are eligible to participate after completing a
six- month period of employment and attaining age 21. The 401(k) Plan permits
participants, subject to the limitations imposed by Section 401(k) of the
Internal Revenue Code, to make voluntary tax deferred contributions in amounts
between 2% and 7% of their annual compensation. Each subsidiary bank makes a
semi-monthly contribution to the 401(k) Plan in an amount equal to 50% of the
first 4% of compensation deferred by the participant for those participants
currently employed. Participants are 100% vested in their contributions and
the earnings thereon. Participants become 20% vested in the employer
contributions credited to their accounts and the earnings thereon after one
year of credited service, with vesting increasing 20% per year thereafter to
100% vesting after five years. Participants also become 100% vested on death,
disability and attainment of age 65. Bank Wisconsin participation in the
401(k) Plan became effective as of January 1, 1995, and Bank Wisconsin
employees vesting schedules included prior service with the predecessor
institutions to Bank Wisconsin. The 401(k) Plan permits participants to
receive distributions during service on account of hardship or upon attaining
age 59. Distributions from the 401(k) Plan are made upon termination of
service either in a lump sum or in installments over a period not to exceed the
greater of the life expectancy of the participant or the joint survivor life
expectancy of the participant and his designated beneficiary. Under the 401(k)
Plan, a separate account is established for each participating employee.
Participating employees may direct the trustee with respect to the investment
of assets held in their 401(k) Plan accounts among six investment options made
available by the trustee. The 401(k) Plan's trustee is the Marshall & Ilsley
Trust Company.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
In connection with the Conversion, St. Francis Bank established the
St. Francis Bank, F.S.B. Employee Stock Ownership Plan (the "ESOP") for its
eligible employees. The ESOP borrowed funds from the Company to purchase
490,643 shares of Common Stock. Collateral for the loan is the Common Stock
purchased by the ESOP.
-22-
<PAGE> 25
Bank Wisconsin employees became eligible for participation in the ESOP
effective November 1995. St. Francis Bank and Bank Wisconsin make scheduled
discretionary cash contributions to the ESOP sufficient to amortize the
principal and interest on the loan. The loan will be repaid principally from
contributions of St. Francis Bank and Bank Wisconsin to the ESOP over a period
of twelve years. Shares purchased by the ESOP will be held in a suspense
account for allocation among participants as the loan is repaid. Benefits
generally become 20% vested after the three years of credited service, with
vesting increasing 20% per year thereafter to 100% vesting after seven years.
Participants also become 100% vested on death, disability and attainment of age
65. Benefits may be payable, in either shares of Common Stock or cash, upon
death, retirement, early retirement, disability or separation from service.
MONEY PURCHASE PENSION PLAN
St. Francis Bank maintains the St. Francis Bank, F.S.B. Money Purchase
Pension Plan (the "Pension Plan"), a tax-qualified, defined contribution plan
covering all eligible employees. Bank Wisconsin employees became eligible to
participate in the Pension Plan as of January 1, 1995. Employees are eligible
to participate after completing a twelve-month period of 1,000 or more hours of
employment and attaining age 21. As of December 31 of each plan year, St.
Francis Bank and Bank Wisconsin contribute to the Pension Plan on behalf of
those participants currently employed. For plan years ending prior to January
1, 1993, St. Francis Bank contributed 14% of each participant's compensation up
to $15,300 and 18.3% of each participant's compensation in excess of $15,300.
For plan years ending after December 31, 1992, St. Francis Bank, and for plan
years commencing January 1, 1995, Bank Wisconsin, will contribute 4% of each
participant's compensation up to $15,300 and 8% of each participant's
compensation in excess of $15,300. Benefits generally become 20% vested after
three years of credited service, with vesting increasing 20% per year
thereafter to 100% vesting after seven years. Participants also become 100%
vested on death, disability or attainment of age 65. Distributions from the
Pension Plan are made upon termination of service either in a lump sum or in
installments over a period not to exceed the greater of the life expectancy of
the participant or the life expectancy of the joint survivor of the participant
and his designated beneficiary. Under the Pension Plan, a separate account is
established for each participating employee. Participating employees may
direct the trustee with respect to the investment of assets held in their
Pension Plan accounts among six investment options made available by the
trustee. The Pension Plan's trustee is the Marshall & Ilsley Trust Company.
INCENTIVE STOCK OPTION PLAN
In 1993, the Board of Directors of the Company adopted the St. Francis
Capital Corporation 1993 Incentive Stock Option Plan (the "Incentive Stock
Option Plan"). All employees of the Company and its subsidiaries are eligible
to participate in the Incentive Stock Option Plan. As of September 30, 1996,
the Company and its subsidiaries had 344 eligible employees. The Incentive
Stock Option Plan authorizes the grant of (i) options to purchase shares of
Common Stock intended to qualify as incentive stock options under Section 422A
of the Internal Revenue Code ("Incentive Stock Options"), (ii) options that do
not so qualify ("Non-Statutory Options"), and (iii) options which are
exercisable only upon a change in control of St. Francis Bank or the Holding
Company ("Limited Rights"). As of September 30, 1996, options to purchase
399,698 shares of Common Stock had been granted under the Incentive Stock
Option Plan and a total of 167,441 shares of Common Stock were available for
granting under the Incentive Stock Option Plan.
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<PAGE> 26
The executive officers listed in the Summary Compensation Table did
not receive individual grants under the Incentive Stock Option Plan during the
fiscal year ended September 30, 1996. The following table sets forth certain
information concerning the exercise of stock options granted under the
Incentive Stock Option Plan by each of the executive officers named in the
Summary Compensation Table during the fiscal year ended September 30, 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS OPTIONS AT
SHARES AT FISCAL YEAR END FISCAL YEAR END (1)
ACQUIRED VALUE --------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John C. Schlosser 0 $ 0 40,000 30,093 $635,200 $477,877
Thomas R. Perz 0 0 40,000 30,093 635,200 477,877
Brian T. Kaye 0 0 40,000 18,176 635,200 288,635
Bruce R. Sherman 0 0 33,644 8,411 534,267 133,567
James C. Hazzard 0 0 0 8,500 0 75,480
</TABLE>
- --------------------
(1) The value of Unexercised In-the-Money Options is based upon the
difference between the fair market value of the securities underlying
the options ($25.88) and the exercise price of the options [($10.00)
for Messrs. Schlosser, Perz, Kaye and Sherman; ($17.00) for Mr.
Hazzard] at September 30, 1996.
Incentive Stock Options granted to any person who is the beneficial
owner of more than 10% of the outstanding shares of Common Stock may be
exercised only for a period of five years following the date of grant and the
exercise price at the time of grant must be equal to at least 110% of the fair
market value of the Common Stock on the date of the grant. No option granted
in connection with the Incentive Stock Option Plan will be exercisable three
months after the date on which the optionee ceases to perform services for St.
Francis Bank or the Company, except that in the event of death, disability or
retirement, options may be exercisable for up to one year thereafter or such
longer period as determined by the Company with respect to the exercise of
Non-Statutory Options. If an optionee ceases to perform services for St.
Francis Bank or the Company due to retirement, Incentive Stock Options
exercised more than three months following the date the optionee ceases to
perform services shall be treated as Non-Statutory Stock Options. Options of
employees terminated for cause will terminate on the date of termination.
Termination for cause includes termination due to the intentional failure to
perform stated duties, breach of fiduciary duty involving personal dishonesty
resulting in a material loss to the Company, willful violations of law or the
entry of a final cease and desist order which results in a material loss to the
Company. Options will be immediately exercisable in the event of a change in
control. "Change of control" is defined to include the acquisition of
beneficial ownership of 20% or more of any class of equity security by a person
or group of persons acting in concert, a tender offer or exchange offer, merger
or other form of business combination, a sale of assets or a contested election
of directors which results in a change in control of a majority of the Board of
Directors.
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<PAGE> 27
DIRECTORS' COMPENSATION
BOARD FEES
Effective October 1, 1995, the schedule of Board meetings and
directors' fees were revised significantly. Because of the increased
responsibilities of the members of the Board of Directors of the Company,
including those resulting from the acquisition of Bank Wisconsin, and the
addition of directors to the Company Board that are not also directors of St.
Francis Bank, regularly scheduled Company Board meetings were no longer held on
the same date as St. Francis Bank Board meetings. Effective October 1, 1995,
regular Company Board meetings were held eight times per year. Compensation
paid to Company directors in fiscal 1996 included an annual retainer of $12,000
per year plus a fee of $1,000 per regular meeting attended, $500 per special
meeting attended and $500 per Company Board committee meeting attended.
Effective January 1, 1996, Company directors who also were directors of St.
Francis Bank did not receive an annual retainer of $11,400 paid to St. Francis
Bank directors, but did receive $500 per regular and special meeting of the
Board of Directors of St. Francis Bank attended, and $500 per St. Francis Bank
loan committee meeting attended. In fiscal 1996, Messrs. Schlosser, Perz and
Hazzard, directors of the Company who also currently serve as directors of Bank
Wisconsin, received an annual retainer of $1,800 plus $200 per meeting of the
Board of Directors of Bank Wisconsin attended, and $100 per Bank Wisconsin loan
committee meeting attended.
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
The Board of Directors of the Company has adopted the St. Francis
Capital Corporation 1993 Stock Option Plan for Outside Directors of the Company
and its Affiliates (the "Directors' Plan"). The Directors' Plan is
self-administered. Upon completion of the Conversion in June 1993, each person
serving as an Outside Director was granted options to purchase shares of Common
Stock under a percentage formula which included credit for each year of service
on the Board or year of service as legal counsel to St. Francis Bank. Under
the Directors' Plan and pursuant to the percentage formula, the Outside
Directors, Messrs. Double, Hoppe, Mentzer, Rice and Templeton, were granted
options to purchase, at $10.00 per share, 28,738, 28,038, 27,336, 30,840 and
25,233 shares of Common Stock, respectively, during the fiscal year ended
September 30, 1993. Options granted under the Directors' Plan vested
approximately 33.33% on the date of completion of the Conversion and
approximately 33.33% on each anniversary date of the Conversion for the
following two years. All options granted under the Directors' Plan will expire
upon the earlier of ten years following the date the option was granted or one
year following the date the optionee ceases to be a director. No options were
granted under the Directors' Plan during the fiscal year ended September 30,
1996.
PERFORMANCE GRAPH
The following graph shows a semi-annual comparison from September 1993
to September 1996 of the Company's cumulative shareholder return on the Common
Stock with (i) the cumulative total return on stocks included in the National
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") Stock
Market Index (for United States companies) and (ii) the cumulative total return
on stocks of NASDAQ listed companies included in the Standard Industrial
Classification (SIC) codes 602 - 679 (the "Nasdaq Financial Index"), commencing
on September 30, 1993 through September 30, 1996. The cumulative returns set
forth in each graph assume the reinvestment of dividends into additional shares
of the same class of equity securities at the frequency with which dividends
were paid on such securities during the applicable comparison period.
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<PAGE> 28
COMPARISON OF SEMI-ANNUAL
CUMULATIVE TOTAL RETURN AMONG THE COMPANY,
NASDAQ STOCK MARKET (U.S.) INDEX AND
NASDAQ FINANCIAL INDEX(1)
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
09/30/93 03/31/94 09/30/94 03/31/95 09/30/95 03/31/96 09/30/96
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Company Common Stock.......... $100.00 $98.31 $122.03 $123.73 $154.24 $186.10 $177.29
NASDAQ (U.S.) Stock Market.... $100.00 $97.67 $100.82 $108.65 $139.25 $147.54 $165.24
NASDAQ Financial.............. $100.00 $96.45 $105.39 $108.04 $133.37 $148.86 $165.29
</TABLE>
(1) Assumes $100.00 invested on September 30, 1993, and all dividends
reinvested through the end of the Company's fiscal year on September
30, 1996. The Company's Common Stock commenced trading on June 18,
1993. From September 30, 1993 to September 30, 1995, the Company did
not pay dividends on its Common Stock. On November 22, 1995, the
Company paid its first quarterly dividend and has paid quarterly
dividends of $0.10 per share since that time through September 30,
1996. The performance graph is based upon closing prices on the
trading day specified.
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<PAGE> 29
INDEBTEDNESS OF MANAGEMENT AND CERTAIN TRANSACTIONS
Current federal law requires that all loans or extensions of credit to
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans
made to a director or executive officer in excess of the greater of $25,000 or
5% of St. Francis Bank's capital and surplus (up to a maximum of $500,000) must
be approved in advance by a majority of the disinterested members of the Board
of Directors.
The policies of St. Francis Bank and Bank Wisconsin provide that all
loans or extensions of credit to executive officers and directors are to be
made in the ordinary course of business, on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and may not involve more than the
normal risk of collectibility or present other unfavorable features. All loans
were made by St. Francis Bank and Bank Wisconsin in the ordinary course of
business and were not made with favorable terms nor involved more than the
normal risk of collectibility or presented unfavorable features. All loans or
extensions of credit to executive officers and directors were current as of
September 30, 1996.
In fiscal 1996, St. Francis Bank retained Richard W. Double, Esq., a
partner in the law firm of Double & Double, as general counsel. Mr. Richard
Double is the son of William F. Double, a director of the Company and St.
Francis Bank. During the fiscal year ended September 30, 1996, St. Francis
Bank paid Mr. Richard Double and the law firm of Double & Double, in the
aggregate, $67,292 for legal services rendered to St. Francis Bank.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than
ten percent of the shares of Common Stock outstanding, to file reports of
ownership and changes in ownership with the SEC and the National Association of
Securities Dealers, Inc. Officers, directors and greater than ten percent
shareholders are required by regulation to furnish the Company with copies of
all Section 16(a) forms they file. Based upon review of the information
provided to the Company, the Company believes that during the fiscal year ended
September 30, 1996, officers, directors and greater than ten percent
shareholders complied with all Section 16(a) filing requirements.
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