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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, 1997
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1747461
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203
- -------------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(414) 486-8700
-------------------------------
(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
---------------------------------------
Preferred Stock Purchase Rights
-------------------------------
(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 28, 1997, there were issued and outstanding 5,251,011
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 28, 1997, was
$202.8 million. Soley for the purposes of this calculation, all executive
officers and directors of the Registrant are considered to be affiliates; also
included as "affiliate 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 1998
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>
PART I
ITEM 1 - BUSINESS........................................................................ 3
ITEM 2 - PROPERTIES...................................................................... 38
ITEM 3 - LEGAL PROCEEDINGS............................................................... 38
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................. 38
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS............................................................. 39
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA.................................. 40
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................... 42
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................... 63
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................... 64
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................................ 97
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 98
ITEM 11 - EXECUTIVE COMPENSATION.......................................................... 98
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................. 98
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................. 98
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................. 98
SIGNATURES .................................................................................. 101
</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 holding company
incorporated under the laws of the State of Wisconsin and is engaged in the
financial services business through its wholly-owned subsidiary, St. Francis
Bank, F.S.B. (the "Bank"), a federally-chartered stock savings bank. For the
majority of fiscal 1997, the Company also conducted operations through Bank
Wisconsin, a wholly-owned state-chartered bank ("Bank Wisconsin") which was
merged with and into the Bank in September, 1997. 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. In February 1997, the Company completed the
acquisition of Kilbourn State Bank in Milwaukee, Wisconsin. Kilbourn State Bank
was merged into Bank Wisconsin after the acquisition was completed. As noted
above, in September 1997, Bank Wisconsin was merged into the Bank, with the Bank
being the surviving entity.
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
nineteen full-service, two limited service and two loan production 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 and 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 also
invests in affordable housing
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projects throughout the State of Wisconsin. The Company's revenues are derived
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 affordable housing projects do not provide a significant source of income
before taxes but rather, provide income in the form of income tax credits which
reduce the Company's income tax liability. 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 13400 Bishops Lane, Suite 350, Brookfield, 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
$784.8 million at September 30, 1997, was first mortgage loans secured by
owner-occupied one- to four-family residences. At September 30, 1997, one- to
four-family mortgage loans totaled $240.5 million or 30.7% of gross loans. Of
the total one- to four-family mortgage loans, $196.4 million or 81.7% were ARMs.
Of the remaining loans held at September 30, 1997, 15.4% were in consumer loans,
14.7% were home equity loans, 12.9% were in multi-family mortgage loans, 11.2%
were in commercial real estate, 9.2% were in commercial and agricultural and
5.9% were in residential construction. 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 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. One of the Company's strategies
will be to attempt to diversify its loan portfolio through lending efforts in
all of the above categories. The acquisitions of Bank Wisconsin and Kilbourn
State Bank have led to the establishment of a commercial lending function at the
Company. In addition, the Bank has been actively growing its consumer and home
equity loan portfolios in recent years. 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.
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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 on 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,
------------------------------------------------------------------
1997 1996 1995
-------------------- ----------------- ---------------------
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............... $240,522 30.7% $270,614 40.5% $209,140 39.3%
Residential construction.......... 46,340 5.9% 32,249 4.8% 25,277 4.8%
Multi-family....................... 101,289 12.9% 103,262 15.4% 93,756 17.6%
Commercial real estate............ 87,950 11.2% 46,391 6.9% 28,277 5.3%
Home equity....................... 115,293 14.7% 90,579 13.5% 80,159 15.1%
-------- -------- -------- -------- ----------- ---------
591,394 75.4% 543,095 81.1% 436,609 82.1%
Consumer loans:
Interim financing and installment 120,305 15.3% 88,236 13.2% 69,038 13.0%
Education......................... 948 0.1% 12,142 1.8% 12,833 2.4%
--------- -------- -------- -------- ----------- ---------
121,253 15.4% 100,378 15.0% 81,871 15.4%
--------- -------- -------- -------- ----------- ---------
Commercial and agriculture 72,144 9.2% 25,177 3.9% 13,608 2.5%
--------- -------- -------- -------- ----------- ---------
Gross loans receivable......... 784,791 100.0% 668,650 100.0% 532,088 100.0%
======== ======== =========
Less:
Mortgage loans held for sale...... 24,630 20,582 1,138
Loans in process................... 38,200 29,631 10,903
Unearned discounts and
Deferred loan fees............. 2,332 1,874 2,081
Allowance for loan losses......... 6,202 5,217 4,076
Other............................. 552 647 582
--------- -------- -----------
Loans receivable, net............... $712,875 $610,699 $513,308
========= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1994 1993
------------------- ------------------
Percent Percent
Amount Of Total Amount Of Total
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One-tofour-family................... $178,700 38.6% $145,730 39.9%
Residential construction............ 60,048 13.0% 49,004 13.4%
Multi-family........................ 95,019 20.5% 61,215 16.8%
Commercial real estate.............. 18,347 4.0% 19,381 5.3%
Home equity......................... 66,031 14.2% 65,597 17.9%
-------- -------- -------- --------
418,145 90.3% 340,927 93.3%
Consumer loans:
Interim financing and installment.... 34,554 7.5% 15,124 4.1%
Education........................... 10,113 2.2% 9,430 2.6%
-------- -------- -------- --------
44,667 9.7% 24,554 6.7%
Commercial and agriculture -- -- -- --
-------- -------- -------- --------
Gross loans receivable............ 462,812 100.0% 365,481 100.0%
======== ========
Less:
Mortgage loans held for sale........ 2,978 10,043
Loans in process.................... 26,015 24,872
Unearned discounts and
Deferred loan fees................ 2,351 2,855
Allowance for loan losses........... 3,435 3,204
Other............................... 280 120
-------- --------
Loans receivable, net................... $427,753 $324,387
======== ========
</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,
---------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period ................................... $ 543,095 $ 436,609 $ 418,145
Mortgage loans originated:
One- to four-family ................................ 104,009 97,565 29,350
Residential construction ........................... 59,566 31,320 14,866
Multi-family ....................................... 22,959 29,310 3,306
Commercial real estate ............................. 36,643 14,935 7,295
Home equity ........................................ 86,995 65,104 54,549
--------- --------- ---------
Total mortgage loans originated .................. 310,172 238,234 109,366
Mortgage loans purchased:
One- to four-family ................................ 21,480 56,230 28,805
Commercial real estate ............................. 3,220 -- --
--------- --------- ---------
Total mortgage loans purchased ................... 24,700 56,230 28,805
--------- --------- ---------
Total mortgage loans originated and purchased .... 334,872 294,464 138,171
Transfer of mortgage loans to foreclosed properties. (496) (103) (5,960)
Principal repayments ............................... (111,898) (125,315) (86,993)
Sales of mortgage loans:
Exchanged for mortgage-backed securities ........... (57,337) -- (1,988)
Cash sales ......................................... (116,842) (62,560) (24,766)
--------- --------- ---------
Total sales of loans ............................. (174,179) (62,560) (26,754)
--------- --------- ---------
At end of period ......................................... $ 591,394 $ 543,095 $ 436,609
========= ========= =========
Consumer loans (gross):
At beginning of period ................................... $ 100,378 $ 81,871 $ 44,667
Loans originated ................................... 57,157 61,378 41,444
Loans purchased .................................... 888 12,786 37,379
Repossessions and foreclosures ..................... (229) (23) --
Loans charged-off .................................. (2,028) (167) (55)
Principal repayments ............................... (22,745) (40,365) (26,303)
Loans sold ......................................... (12,168) (15,102) (15,261)
--------- --------- ---------
At end of period ......................................... $ 121,253 $ 100,378 $ 81,871
========= ========= =========
Commercial and agricultural loans (gross):
At beginning of period ................................... $ 25,177 $ 13,608 $ --
Loans originated ................................... 33,358 14,034 8,765
Loans purchased .................................... 30,182 3,736 10,721
Principal repayments ............................... (16,573) (6,201) (5,878)
--------- --------- ---------
At end of period ......................................... $ 72,144 $ 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, 1997. The table does not include prepayments or scheduled
principal amortization. Prepayments and scheduled principal amortization on
mortgage loans totaled $111.9 million, $125.3 million and $87.0 million for the
years ended September 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
At September 30, 1997
---------------------------------------------------------------------------------------------------
One- to
Four- Multi- Commercial Commercial Gross
Family Family Real Home and Loans
(1) (1) Estate Equity Consumer Agriculture Receivable
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year ........ $ 118,933 $ 56,509 $ 34,152 $ 114,336 $ 65,127 $ 42,790 $ 431,847
After one year:
One to three years .... 72,897 16,900 18,416 957 18,709 29,354 157,233
Three to five years ... 26,999 25,386 19,229 -- 18,708 -- 90,322
Over five years ....... 68,033 2,494 16,153 -- 18,709 -- 105,389
--------- --------- --------- --------- --------- --------- ---------
Total due after one year 167,929 44,780 53,798 957 56,126 29,354 352,944
--------- --------- --------- --------- --------- --------- ---------
Total amounts due ...... 286,862 101,289 87,950 115,293 121,253 72,144 784,791
Less:
Mortgage loans held for (24,630) -- -- -- -- -- (24,630)
sale
Loans in process ....... (26,859) (4,661) (6,680) -- -- -- (38,200)
Unearned discounts,
premiums
and deferred loan ..... (1,380) (952) -- -- (552) -- (2,884)
fees, net
Allowance for loan ..... (925) (670) (1,281) (629) (717) (1,980) (6,202)
losses
--------- --------- --------- --------- --------- --------- ---------
Loans receivable, net ..... $ 233,068 $ 95,006 $ 79,989 $ 114,664 $ 119,984 $ 70,164 $ 712,875
========= ========= ========= ========= ========= ========= =========
</TABLE>
(1) Includes some residential construction lending.
The following table sets forth at September 30, 1997 the dollar amount of all
loans and mortgage-backed and related securities due after September 30, 1998,
and whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due after September 30, 1998
----------------------------------------
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family (1) ............ $ 81,415 $ 86,514 $ 167,929
Multi-family (1) ................... 26,989 17,791 44,780
Commercial real estate ............. 32,424 21,374 53,798
Home equity ........................ 957 -- 957
Consumer loans ........................ 44,777 11,349 56,126
Commercial and agriculture ............ 29,354 -- 29,354
---------- ---------- ----------
Gross loans receivable ............. 215,916 137,028 352,944
Mortgage-backed and related securities 170,191 516,750 686,941
---------- ---------- ----------
Gross loans receivable and mortgage-
Backed and related securities ... $ 386,107 $ 653,778 $1,039,885
========== ========== ==========
</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, 1997, the Company had $240.5 million in one- to four-family
mortgage loans or 30.7% of the gross loan portfolio compared with $270.6 million
or 40.5% of the portfolio at September 30, 1996. The decrease in the dollar
amount of the portfolio was largely the result of the lower interest rate
environment in effect during the course of the year. The larger decline in the
percent of one- to four-family loans to total loans also was due to the
increasing levels of other types of lending at the Bank. During periods of lower
interest rates, such as experienced during the last year, many of the Company's
one- to four-family loan customers prefer loans with fixed rates which the
Company originates and sells in the secondary market in connection with interest
rate risk management. Consequently, the lower volume of adjustable rate loan
originations may not then be enough to offset the amount of repayments and
prepayments taking place within the Company's loan portfolio. In such
environments, the Company's level of gains on mortgage loans may be higher due
to the increased percentage of loans being originated which are subsequently
sold in lieu of being retained in the Company's portfolio. The volume of one- to
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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 and the Company anticipates that as a result total originations
will continue to increase assuming continuing 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.
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 up to 95%. When the loan to value ratio exceeds 80%, private
mortgage insurance is generally required which insures payment of the principal
balance and reduces the Company's exposure to 75% loan to value or less. Single
family residential construction 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, 1997, the Company had $46.3 million in residential construction
mortgage loans or 5.9% of the gross loan portfolio compared with $32.2 million
or 4.8% of the portfolio at September 30, 1996. A significant portion of the
Company's construction lending 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, 1997, the largest aggregate amount of loans outstanding to any
one borrower consisted of a loan on a multi-family project in Madison,
Wisconsin, of $8.1 million. This loan does not exceed the regulatory "loans to
one borrower" limitation at September 30, 1997 of $18.6 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 evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired. In some instances, the risk level is
mitigated by obtaining individual guarantees which may increase the level of
collateral supporting the loan. Despite the risks inherent in multi-family
lending, the Company's delinquent multi-family loans as a percentage of gross
loans has been minimal.
10
<PAGE> 11
At September 30, 1997, the Company had $101.3 million in multi-family mortgage
loans or 12.9% of the gross loan portfolio compared with $103.3 million or 15.4%
of the portfolio at September 30, 1996. The Company is continuing its efforts to
increase the amount of the multi-family loans in the loan portfolio as these
loans generally offer a greater yield than single-family loans, which the
Company believes justifies 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,
1997, the balance of such loans held by the Company was $88.0 million. As of
September 30, 1997, the largest loans outstanding to any one borrower relating
to commercial real estate consisted of two loans totaling $7.6 million on an
office building and a shopping center in Madison, 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 involve a greater degree of
credit risk than residential mortgage loans and generally carry large loan
balances, and payments on loans secured by commercial real estate are often
susceptible to adverse conditions in the real estate market or the economy.
Despite the risks inherent in commercial real estate lending, the Company's
delinquent commercial real estate loans as a percentage of gross loans has been
minimal.
At September 30, 1997, the Company had $88.0 million in commercial real estate
mortgage loans or 11.2% of the gross loan portfolio compared with $46.4 million
or 6.9% of the portfolio at September 30, 1996. The Company is continuing its
efforts to increase the amount of commercial real estate loans in the loan
portfolio as these loans generally offer a better interest rate than
single-family loans, which the Company believes justifies 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, 1997,
the Company held $115.3 million in home equity loans or 14.7% of the gross loan
portfolio compared with $90.6 million or 13.5% of the portfolio at September 30,
1996. Home equity loans offer the Company an asset that adjusts with current
rates of interest as part of the Company's management of its interest rate risk.
CONSUMER LENDING
The Company has been expanding its consumer lending portfolio because higher
yields can be obtained, the Company believes there is strong consumer demand for
such loan products, and the Company historically has experienced relatively low
delinquency and few losses on such products except for losses on sub-prime auto
loans described further herein. Management also believes that offering consumer
loan products helps to expand and create stronger customer relationships. At
September 30, 1997, consumer loans totaled $121.3 million or 15.4% of gross
loans compared to $100.4 million or 15.0% of gross loans at September 30, 1996.
The increase in the portfolio has been primarily in the area of indirect auto
lending through dealers located in the Company's primary market area and fixed
term installment loans the Company makes that are secured by second mortgages in
residential properties.
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
11
<PAGE> 12
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 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 guarantees from the
originator. The level of delinquencies and defaults on these loans increased
significantly during fiscal 1996 and the Company ceased purchasing 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 balance of the purchased automobile loans was $1.1 million at
September 30, 1997.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of unsecured loans or loans 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. Although the delinquencies and net
charge-offs in the Company's consumer loan portfolio generally have been low,
there can be no assurance that the level of delinquencies and charge-offs will
not increase in the future.
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. Also, the repayment of loans secured by commercial business assets
is typically dependent upon the successful operation of the business and the
eventual cash flows of the business. 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. Typically, the
Company targets smaller businesses with which to establish commercial banking
relationships. These relationships may include secured or partially secured real
estate, business or cash flow loans and inventory lending. Collateral can take
many forms, such as real estate, inventory, equipment or may include personal
guarantees of business owners or personal or other collateral of the business
owner. The Company takes into account all cash flows attributable to the
business plus collateral when making the lending decision. Despite the risks
inherent in commercial lending, the Company's delinquent commercial loans as a
percentage of gross loans has been minimal.
At September 30, 1997, the Company had $72.1 million in commercial loans or 9.2%
of the gross loan portfolio compared with $25.2 million or 3.9% of the portfolio
at September 30, 1996. $18.7 million in commercial loans were purchased as part
of the Kilbourn State Bank acquisition. At September 30, 1997, the largest
commercial loan outstanding was a $5.9 million lease financing arrangement and
the largest outstanding line of credit was a $9.0 million line on a
manufacturing facility. 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. The Company intends to continue to increase its
involvement in commercial lending and expects that this portfolio will grow as a
percentage of the total loan portfolio.*
CREDIT ENHANCEMENT PROGRAMS
The Company has entered into agreements whereby, for an initial and annual fee,
it would guarantee payment of an industrial revenue bond issue ("IRB"). The
IRB's were issued by municipalities to finance real estate owned by a third
party. The Company has not pledged any collateral for purposes of these
agreements. At September 30, 1997, the amount of the IRB's for which the Company
has guaranteed payment was $11.2 million.
12
<PAGE> 13
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, 1997, the Company originated $10.2
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,
primarily 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 $116.8
million with gains of $1.6 million for the year ended September 30, 1997, and
totaled $62.6 million with gains of $1.1 million for the year ended September
30, 1996. 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. 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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Asset/Liability Management."
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, 1997, the Company had outstanding mortgage commitments totaling $27.7
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 .375%
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 $311.7 million at September 30, 1997.
PURCHASE OF MORTGAGE LOANS
The Company, as a regular part of its mortgage lending activities, purchases
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, 1997, the Company purchased
$21.5 million of loans from other originators compared to $15.5 million of loans
purchased during the fiscal year ended September 30, 1996. As part of the
Company's plans to diversify its single-family loan production, it is expected
that purchases of loans from other originators will continue in future years.*
13
<PAGE> 14
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 loan products within its primary market area is limited
and competition for that limited demand 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. Of the $21.5 million one- to four-family mortgage loans
purchased during the year ended September 30, 1997, $728,000 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 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. The Company also may charge points for the
origination of loans in exchange for a lower interest rate on the loan itself;
however, 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. Commitment fees are periodically collected on commercial real estate or
multi-family mortgage loans but are rarely collected as part of the origination
of single-family mortgage loans.
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.
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<PAGE> 15
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, 1997, the
Company had a total of five one- to four-family loans in foreclosed properties
with a carrying value of $416,000.
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,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
One-to four-family mortgage loans ...... $ 660 $ 44 $ 296 $ 175 $ 117
Multifamily mortgage loans ............. -- -- -- 7,446 1,840
Commercial real estate loans ........... 850 -- -- -- --
--------- --------- --------- --------- ---------
Total non-performing
mortgage loans ................. 1,510 44 296 7,621 1,957
Commercial loans ....................... 100 -- -- -- --
Consumer loans ......................... 1,385 3,846 136 14 29
--------- --------- --------- --------- ---------
Total non-performing loans......... 2,995 3,890 432 7,635 1,986
Foreclosed properties .................. 416 80 5,833 17 389
--------- --------- --------- --------- ---------
Total non-performing assets........ $ 3,411 $ 3,970 $ 6,265 $ 7,652 $ 2,375
========= ========= ========= ========= =========
Total non-performing loans to
gross loans.......................... 0.38% 0.58% 0.08% 1.65% 0.54%
Allowance for loan losses to
total non-performing loans........... 207.08 134.11 943.52 44.99 161.33
Total non-performing assets to
total assets......................... 0.21 0.28 0.53 0.75 0.29
Interest on non-performing loans
on the accrual basis................. $ 744 $ 296 $ 34 $ 596 $ 180
Actual interest received on
non-performing loans................. 303 11 26 315 128
--------- --------- --------- --------- ---------
Net reduction of interest income ....... $ 441 $ 285 $ 8 $ 281 $ 52
========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 16
Non-performing assets as of September 30, 1997 and 1996 included $1.1 million
and $3.6 million, respectively, of purchased auto loans which are past due or in
default or are expected to become past due. The auto loans were purchased in
1995 and 1996 under a warehouse financing arrangement the Company had with an
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, 1997,
the carrying amount of the sub-prime auto loan portfolio was $1.1 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 been lower than anticipated. The Company recorded
$2.0 million in net charge-offs in fiscal 1997, which includes $1.9 million due
to the aforementioned auto loans. Also included in non-performing assets in 1997
is a single $850,000 commercial real estate loan on a shopping center.
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.
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, 1997, the Company had assets classified as
Substandard of $4.7 million, $899,000 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 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.
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<PAGE> 17
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.
A summary of activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ........... $5,217 $4,076 $3,435 $3,204 $3,181
Provision for loan losses .............. 1,280 1,300 240 240 95
Charge-Offs:
Mortgage Loans:
One- to four family ............. 24 15 42 52 24
Multifamily ..................... -- -- 210 -- --
Commercial real estate .......... -- -- -- -- --
Home equity ..................... -- 6 -- 13 24
Consumer ........................... 2,028 167 55 17 29
Commercial and agricultural ........ 2 -- -- -- --
------ ------ ------ ------ ------
Total charge-offs ............ 2,054 188 307 82 77
Recoveries:
Mortgage Loans:
One- to four family ............. -- -- -- -- --
Multifamily ..................... -- -- -- -- --
Commercial real estate .......... -- -- -- -- --
Home equity ..................... -- 21 -- -- --
Consumer ........................... 80 8 12 2 5
Commercial and agricultural ........ 1 -- 2 -- --
------ ------ ------ ------ ------
Total recoveries ............. 81 29 14 2 5
------ ------ ------ ------ ------
Net Charge-Offs ........................ 1,973 159 293 80 72
Acquired bank's allowance .............. 1,678 -- 694 -- --
Reclassified allowance ................. -- -- -- 71 --
====== ====== ====== ====== ======
Balance at end of period ............... $6,202 $5,217 $4,076 $3,435 $3,204
====== ====== ====== ====== ======
Ratio of allowance for loan losses to
gross loans receivable at end of period. 0.79% 0.78% 0.77% 0.74% 0.88%
Ratio of allowance for loan losses to
non-performing loans at end of period... 207% 134% 944% 45% 161%
Ratio of net charge-offs to average
Gross loans during period .............. 0.30% 0.03% 0.06% 0.02% 0.02%
</TABLE>
It is not anticipated that charge-offs during the year ending September 30, 1998
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 for the subprime auto loans and the single commercial real
estate loan previously discussed. The 1997 increase in the amount of the
allowance for loan losses supports the growth in the loan portfolio and is
primarily attributable to the $1.7 million allowance of the acquired Kilbourn
State Bank. In addition, the increase in the allowance for loan losses supports
the increase in loan types other than one- to four-family mortgage loans. Such
loans may result in a higher level of charge-offs than the Company's more
traditional lending products.
17
<PAGE> 18
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,
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ---------------------------- --------------------------
% 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 ............ $ 925 0.32% 36.6% $ 957 0.32% 45.3% $1,031 0.44% 44.1%
Multi-family ................... 670 0.66% 12.9% 840 0.81% 15.4% 957 1.02% 17.6%
Commercial real estate ......... 1,281 1.46% 11.2% 593 1.28% 6.9% 619 2.19% 5.3%
Home equity .................... 629 0.55% 14.7% 449 0.50% 13.5% 504 0.63% 15.1%
------ ----- ------ ----- ------ -----
Total mortgage loans .............. 3,505 75.4% 2,839 81.1% 3,111 82.1%
Consumer .......................... 717 0.59% 15.4% 2,128 2.12% 15.0% 789 0.96% 15.4%
Commercial and agriculture ........ 1,980 2.74% 9.2% 250 0.99% 3.9% 176 1.29% 2.5%
------ ----- ------ ----- ------ -----
Total allowance for loan losses. $6,202 100.0% $5,217 100.0% $4,076 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
1994 1993
------------------------------- ------------------------------
% 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 ............ $ 718 0.27% 51.6% $ 619 0.32% 53.3%
Multi-family ................... 2,068 2.07% 20.5% 1,252 2.05% 16.8%
Commercial real estate ......... 163 0.89% 4.0% 954 4.92% 5.3%
Home equity .................... 259 0.39% 14.2% 251 0.38% 17.9%
------ ------ ------ -----
Total mortgage loans .............. 3,208 90.3% 3,076 93.3%
Consumer .......................... 227 0.51% 9.7% 128 0.52% 6.7%
Commercial and agriculture ........ -- -- -- -- -- --
------ ------ ------ -----
Total allowance for loan losses. $3,435 100.0% $3,204 100.0%
====== ====== ====== =====
</TABLE>
The increase in the allocated reserve on commercial real estate was due to the
aforementioned shopping center loan, the increase in the reserve allocated on
commercial loans was due to the increased volume of lending in that area along
with the reserve that was part of the Kilbourn State Bank acquisition, while the
decrease in the allocated reserve on consumer loans was due to the decrease in
non-performing subprime auto loans.
18
<PAGE> 19
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 corporate debt, asset-backed securities,
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. At the time of purchase, all of the Company's investments are
investment grade as rated by at least one of the major rating agencies.
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 CMO's.
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. Private issue
mortgage-backed securities generally will have a higher rate of interest than
agency securities to compensate for the higher level of credit risk. In
addition, mortgage-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
19
<PAGE> 20
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. Mortgage-backed securities may be
either agency issued or private issued. Credit risk would tend to be higher for
private issue securities which would generally be reflected in a higher rate of
return.
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. Although the CMO or
REMIC structure is a legal entity on its own, the underlying collateral can be
agency securities or individual loans. Thus, credit risk can vary depending upon
the underlying collateral.
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, 1997, private-issue
mortgage-backed securities, CMO's and REMIC's totaled $667.2 million, 74% of
which had a credit rating of AAA, 21% of which had a credit rating of AA, 4% of
which had a credit rating of A and 1% which had a credit rating of BBB. At
September 30, 1996, private-issue mortgage-backed securities, CMO's and REMIC's
totaled $567.4 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. During the
year ended September 30, 1997, the Company incurred an impairment loss of $3.4
million on four private issue mortgage-backed securities with a carrying value
prior to the impairment of $12.5 million. The new cost basis of these securities
of $9.1 million is the Company's estimate of the fair value of these securities.
This is the level at which the remaining cash flows should provide a return at a
market rate of interest.* However, there can be no assurance that the write-down
of these securities will be sufficient to cover all losses which the Company may
in fact realize on such securities or that additional write-downs of these or
other securities will not be necessary in the future. The four issues, two of
which were rated "A" and two of which were rate "BBB", are collateralized by
single-family loans relating to properties located primarily in California. The
impairment loss was recognized because of reported delinquency, default and loss
severity on the individual securities. It was determined that the various cash
reserves and subordinate positions would not be adequate to fully protect the
Company's investment and that the resultant cash flows to be received by the
Company would be less than the carrying value of the securities. The Company is
in the process of identifying and implementing additional procedures designed to
provide earlier indications of issues relating to its' securities portfolio.
Private issue mortgage-backed securities 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. In determining if declines in value in
mortgage-backed and related securities are other than temporary, management
estimates future cash flows to be generated by pools of loans
20
<PAGE> 21
underlying the securities. Included in this evaluation are such factors as i)
estimated loan prepayment rates, ii) a review of delinquencies, foreclosures,
repossessions and recovery rates relative to the underlying mortgage loans
collateralizing each security, iii) the level of available subordination or
other credit enhancements, iv) an assessment of the servicer of the underlying
mortgage portfolio, and v) the rating assigned to each security by independent
national rating agencies.
At September 30, 1997, 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.
COMPOSITION OF THE COMPANY'S MORTGAGE-BACKED AND RELATED SECURITIES PORTFOLIO
Held to Maturity. At September 30, 1997, the Company held $66.8 million in its
mortgage-backed and related securities held to maturity portfolio. The estimated
market value of those securities at that date was $66.2 million. Of this amount,
at September 30, 1997, 100% were fixed rate REMIC securities. At September 30,
1997, the mortgage-backed and related securities held to maturity portfolio
represented 4.0% of the Company's total assets compared to $68.4 million or 4.9%
of total assets at September 30, 1996.
The following table sets forth certain information regarding the amortized cost,
weighted average yields and maturities of the Company's mortgage-backed and
related securities held to maturity at September 30, 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------
Over one year to
five years Over ten years
--------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
------------ ------------ ----------- -------------
(Dollars in thousands)
REMIC's:
<S> <C> <C> <C> <C>
FNMA................. $ 108 8.55% $ 1,994 6.65%
FHLMC................ - - 1,917 8.04%
Private Issue........ - - 62,830 6.63%
----------- -----------
$ 108 $ 66,741
=========== ===========
--------------------------------------------------------
Total
------------ -----------------------------------------
Average
Remaining Estimated Weighted
Years to Amortized Fair Average
Maturity Cost Value Yield
------------ ------------ ----------- -------------
(Dollars
in
thousands)
REMIC's:
FNMA................. 16.2 $ 2,102 $ 2,100 6.70%
FHLMC................ 17.9 1,917 1,944 8.04%
Private Issue........ 22.4 62,830 62,175 6.63%
---------- --------
$ 66,849 $ 66,219
========== ========
</TABLE>
21
<PAGE> 22
available for sale with a carrying and estimated market value of $620.7 million
or 37.4% of total assets. Of these, $20.4 million were MBS's issued by various
federal agencies, $224.9 million were private issue MBS's, $221.8 million were
agency REMIC's, $153.7 million were private issue REMIC's and $37,000 were CMO
residuals. At September 30, 1996, the Company's mortgage-backed and related
securities held for sale were $519.8 million, representing 37.0% of total
assets. Of these, $19.8 million were MBS's issued by various federal agencies,
$197.3 million were private issue MBS's, $95.4 million were agency REMIC's,
$206.4 million were private issue REMIC's, $842,000 were adjustable rate
mortgage mutual fund investments and $68,000 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 issue
mortgage-backed securities and adjustable rate REMIC's which the Company views
as having favorable interest rate risk and pricing characteristics in
comparison to other investment alternatives. Although there may various
subordination levels within the MBS or REMIC structure or levels of collateral
underlying the securities that should protect the Company's position in the
securities, private issue securities represent an additional level of credit
risk when compared with agency issue securities. The Company takes its
perception of that additional credit risk into consideration when making the
determination of whether to buy the security at the price and yield offered.
22
<PAGE> 23
The following table sets forth certain information regarding the amortized cost,
weighted average yields and maturities of the Company's mortgage-backed and
related securities available for sale at September 30, 1997.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Over one year to Over five years to
five years ten years Over ten years
--------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
------------ ----------- ------------ ------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Participation certificates:
GNMA................. -- -- -- -- $ 3,604 9.60%
FNMA................. -- -- -- -- 12,277 5.44%
FHLMC................ $ 3,932 6.84% -- -- 146 10.00%
Private Issue........ -- -- $ 6,229 7.58% 218,301 7.25%
REMIC's:
GNMA................. 4,219 5.88% -- -- -- --
FNMA................. 10,487 6.54% 811 7.64% 54,887 7.00%
FHLMC................ 705 7.21% -- -- 149,446 7.45%
Private Issue........ 2,245 6.14% -- -- 151,413 8.31%
============ ============ ============
$ 21,588 $ 7,040 $ 590,074
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
Total
-------------------------------------------------------
Average
Remaining Estimated Weighted
Years to Amortized Fair Average
Maturity Cost Value Yield
------------ ------------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Participation certificates:
GNMA................. 21.54 $ 3,604 $ 3,903 9.60%
FNMA................. 29.44 12,277 12,367 5.44%
FHLMC................ 4.04 4,078 4,102 6.95%
Private Issue........ 27.03 224,530 224,861 7.26%
REMIC's:
GNMA................. 4.55 4,219 4,247 5.88%
FNMA................. 21.63 66,185 66,732 6.94%
FHLMC................ 28.21 150,151 150,805 7.45%
Private Issue........ 25.15 153,658 153,662 8.28%
============ =============
$ 618,702 $ 620,679
============ =============
</TABLE>
Held for Trading. At September 30, 1997 and 1996, the Company did not have any
assets in its trading portfolio. 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 mortgage loans which are swapped for mortgage-backed securities backed
by the original loans. These securities are required to be classified as trading
securities. The Company expects to continue to sell mortgage loans by this
method in future years.*
23
<PAGE> 24
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,
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 DEBT AND EQUITY SECURITIES PORTFOLIO
Held to Maturity. At September 30, 1997, the Company had debt securities with an
amortized cost of $3.8 million and an estimated market value of $3.9 million. Of
the total, $3.0 million were U.S. Treasury and agency obligations and $0.8
million were state and municipal obligations. The Company purchases debt
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 amortized cost,
weighted average yields and maturities of the Company's investment securities
held to maturity at September 30, 1997. 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
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
------------ ------------ ------------ ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency.......... $ 2,001 7.83% $ 1,022 7.94% -- --
State and municipal obligations... -- -- 250 9.09% $ 560 9.28%
----------- ----------- -----------
$ 2,001 $ 1,272 $ 560
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------
Total
------------------------------------------------------
Average
Remaining Estimated Weighted
Years to Amortized Fair Average
Maturity Cost Value Yield
------------ ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and agency............ 0.7 $ 3,023 $ 3,069 7.87%
State and municipal obligations..... 5.5 810 839 9.22%
----------- -----------
$ 3,833 $ 3,908
=========== ===========
</TABLE>
24
<PAGE> 25
Available for Sale. At September 30, 1997, the Company had securities available
for sale with an amortized cost and estimated market value of $56.2 million. Of
the total, $22.1 million were U.S. Treasury or agency obligations, $0.4 million
were state and municipal securities, $5.5 million were corporate notes and
bonds, $20.7 million were asset-backed securities and $7.5 million were
marketable equity securities, primarily shares of mutual funds invested in bank
or thrift eligible securities.
The following table sets forth certain information regarding the amortized cost,
weighted average yields and maturities of the Company's investment securities
available for sale at September 30, 1997. 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
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
------------ ------------ ------------ ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency......... $ 3,503 6.12% $ 14,589 6.31% $ 1,933 7.81%
State and municipal obligations.. -- -- 60 7.05% 369 7.83%
Corporate notes and bonds........ 4,518 5.98% 1,000 6.31% -- --
Asset-backed securities.......... -- -- 6,917 7.30% 3,951 6.51%
Marketable equity securities..... 7,461 5.11% -- -- -- --
----------- ----------- -----------
$ 15,482 $ 22,566 $ 6,253
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
------------------------- ----------------------------------------------------
Over ten years Total
------------------------- ----------------------------------------------------
Average
Weighted Remaining Estimated Weighted
Amortized Average Years to Amortized Fair Average
Cost Yield Maturity Cost Value Yield
------------ ------------ ------------ ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency......... $ 2,001 7.39% 3.6 $ 22,026 $ 22,124 5.33%
State and municipal obligations.. - - 7.0 429 435 7.72%
Corporate notes and bonds........ - - .9 5,518 5,527 6.04%
Asset-backed securities.......... 10,332 6.65% 11.1 21,200 20,700 6.84%
Marketable equity securities..... - - - 7,461 7,461 5.11%
----------- ----------- -----------
$ 12,333 $ 56,634 $ 56,247
=========== =========== ===========
</TABLE>
25
<PAGE> 26
AFFORDABLE HOUSING ACTIVITIES
The Company, through the Bank's subsidiary St. Francis Equity Properties
("SFEP"), invests in affordable housing properties throughout the State of
Wisconsin. The properties qualify for tax credits under Section 42 of the
Internal Revenue Code ("Code"). The Code provides a per state volume cap on the
amounts of low-income housing tax credits that may be taken in each state. In
order to claim a tax credit, a credit allocation must be received from the
appropriate state or local housing development authority, which in Wisconsin is
the Wisconsin Housing and Economic Development Authority ("WHEDA"). Typically,
SFEP will commit to the equity funding of a specific property that a developer
has submitted to WHEDA for approval and received. The developer then builds the
property, generally with financing from the Bank, with final equity funding from
SFEP coming at the completion of construction. Each property is structured as a
limited liability partnership ("LLP") or limited liability corporation ("LLC"),
with SFEP being a 98% or 99% partner or owner in each individual LLP or LLC.
The investment in the properties is treated as an equity investment for
accounting purposes and the financial condition, results of operations and cash
flows of each LLP or LLC is consolidated in the Company's financial statements.
The operations of the properties are not expected to contribute significantly to
the Company's net income before income taxes. However, the properties do
contribute in the form of income tax credits, which lower the Company's
effective tax rate. Once established, the credits on each property last for ten
years and are passed through from the LLP or LLC to SFEP and reduce the
consolidated federal tax liability of the Company. Gross revenues of SFEP were
$3.4 million, $1.9 million and $1.1 million for the years ended September 30,
1997, 1996 and 1995 respectively. Gross expenses of SFEP were $3.9 million, $2.2
million and $1.4 million for each of the three years. The net operating loss of
SFEP results in an income tax benefit which is then increased by the income tax
credits which totaled $2.9 million, $1.6 million and $875,000 for the years
ended September 30, 1997, 1996 and 1995, respectively.
SFEP has been increasing the number and dollar amount invested in affordable
housing projects since first investing in 1993. At September 30, 1997 the amount
invested in affordable housing projects was $51.5 million compared with $36.9
million at September 30, 1996. At September 30, 1997, SFEP was a equity partner
in 25 projects compared with 20 at September 30, 1996.
The primary risk to the Company's results of operations from the affordable
housing investments involves the maintenance of the tax credits. The Company has
instituted several procedures which it believes will result in the maintenance
of the tax credits. Those procedures include outside audit of the individual LLP
or LLC including tenant compliance records, outside audit of the original
development costs, review of the LLP or LLC and tenant compliance records by the
Company's staff and review of audit and compliance records of the LLP or LLC
performed by WHEDA. The Company believes that it has maintained compliance on
all of its properties and that through September 30, 1997, no income tax credits
are at risk.
Other risks of the affordable housing investments include the risks common to
the owning and operating of apartment units, including, 1) length of time of
initial lease up, 2) tenant vacancy factors, 3) operating costs of the
properties, 4) unexpected or significant capital improvement costs, and 5) the
market for the type of apartment unit in the area in which it resides. Although
marketing studies are part of the initial development of the property, there can
be no assurance that other similar properties might be built near any of the
Company's properties at a later date and have an adverse effect upon the
occupancy rate of the Company's units.
26
<PAGE> 27
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, 1997 and 1996, the Company had
advances from the FHLB of $385.1 million or 23.2% of total assets and $373.6
million or 26.6% of total assets, respectively. At September 30, 1997, the
Company had reverse repurchase agreements outstanding of $22.5 million or 1.4%
of total assets. The Company had no outstanding reverse repurchase agreements at
September 30, 1996. Of the Company's outstanding FHLB advances at September 30,
1997, $95.0 million will mature before September 30, 1998. Based on sources and
uses of funds projections, it is anticipated that all of the maturing advances,
which represent 24.7% 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. Deposit promotions may involve the use of
specific advertising for a type of deposit or it may include some form of
pricing incentive, either a deposit product with a higher rate than currently
offered by most competitors in the Company's market area or a temporary pricing
concession for a limited period of time. 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, 1997, the
Company had $140.8 million of brokered deposits, representing 12.9% of total
deposits, compared to $138.6 million or 15.8% of total deposits at September 30,
1996. Maturities of brokered certificates range from three months to longer term
certificates and include certificates that are callable at the option of the
Company. 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.
27
<PAGE> 28
At September 30, 1997, the Company had outstanding $48.6 million in certificates
of deposit in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Amount at
September 30, 1997
------------------
(IN THOUSANDS)
<S> <C>
Three months or less..................................... $ 13,980
Over three through six months............................ 17,599
Over six months through twelve months.................... 6,675
Over twelve months....................................... 10,311
------------
Total................................ $ 48,565
============
</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,
-----------------------------------------------------------------------------
1997 1996
-------------------------------------- -------------------------------------
Percent Percent
of Average of Average
Total Stated Total Stated
Amount Deposits Rate Amount Deposits Rate
------------- ---------- ---------- --------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing... $ 52,582 4.8% -- $ 34,377 3.9% --
Interest bearing....... 54,126 5.0% 1.61% 39,710 4.5% 1.49%
Passbook accounts.......... 105,356 9.7% 2.91% 79,362 9.0% 2.87%
Money market
Demand accounts........ 265,382 24.4% 4.87% 176,838 20.2% 4.53%
Certificates............... 609,690 56.1% 6.06% 547,397 62.4% 5.60%
----------- ------- --------- -------
Total deposits............. $ 1,087,136 100.0% 4.95% $ 877,684 100.0% 4.74%
=========== ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1995
--------------------------------------
Percent
of Average
Total Stated
Amount Deposits Rate
------------ -------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Demand deposits:
Non-interest bearing... $ 26,879 3.9% --
Interest bearing....... 42,687 6.2% 1.47%
Passbook accounts.......... 87,678 12.7% 2.75%
Money market
Demand accounts........ 121,016 17.6% 4.55%
Certificates............... 410,088 59.6% 5.81%
--------- ------
Total deposits............. $ 688,348 100.0% 4.78%
========= ======
</TABLE>
28
<PAGE> 29
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 primarily in 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, 1997, the Company's FHLB advances totaled $385.1 million,
representing 25.1% of total liabilities, up from the $373.6 million outstanding
at September 30, 1996. At September 30, 1997, the Company had a borrowing
capacity available of $199.2 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, 1997 and 1996, the
Company had $22.5 million and zero, respectively, of reverse repurchase
agreements.
The Bank line of credit was established by the Company for purposes of funding
activities of the Company. These typically include dividends, share repurchases
and acquisitions for cash such as the Kilbourn State Bank acquisition. Dividends
received from the Bank are used as the primary source of cash to pay principal
and interest on the line of credit. The line of credit has a maximum borrowing
amount of $20.0 million and is collateralized by the stock of the Bank. At
September 30, 1997, the Company had $11.0 million outstanding on the line of
credit. The line was not in existence at September 30, 1996.
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.
29
<PAGE> 30
The following table sets forth certain information regarding the Company's FHLB
advances, borrowed funds and reverse repurchase agreements at or for the years
ended on the dates indicated.
<TABLE>
<CAPTION>
At or for the year ended September 30,
----------------------------------------
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............................... $ 388,802 $ 344,787 $ 330,253
Maximum amount outstanding at any month-end during
the year............................................ 422,569 373,569 343,505
Balance outstanding at end of year........................ 385,056 373,569 330,073
Weighted average interest rate during the year (1)........ 5.67% 5.43% 5.60%
Weighted average interest rate at end of year............. 5.66% 5.45% 5.61%
Reverse repurchase agreements:
Average balance outstanding............................... $ 5,425 $ 703 $ 10,062
Maximum amount outstanding at any month-end during
the year............................................ 22,481 -- 30,432
Balance outstanding at end of year........................ 22,481 -- 13,521
Weighted average interest rate during the year (1)........ 5.60% 5.81% 5.69%
Weighted average interest rate at end of year............. 5.80% -- 5.81%
Bank line of credit
Average balance outstanding............................... $ 5,615 -- --
Maximum amount outstanding at any month-end during
the year............................................
Maximum amount outstanding at any month-end during
the year............................................. 12,000 -- --
Balance outstanding at end of year........................ 11,000 -- --
Weighted average interest rate during the year (1)........ 6.89% -- --
Weighted average interest rate at end of year............. 6.93% -- --
Total advances, reverse repurchase agreements
and bank line of credit:
Average balance outstanding............................... $ 399,842 $ 345,490 $ 340,315
Maximum amount outstanding at any month-end during
the year............................................ 439,875 373,569 365,937
Balance outstanding at end of year........................ 418,537 373,569 343,594
Weighted average interest rate during the year (1)........ 5.69% 5.43% 5.61%
Weighted average interest rate at end of year............. 5.70% 5.45% 4.97%
</TABLE>
(1) Computed on the basis of average daily balances.
SUBSIDIARY ACTIVITIES
During the fiscal year ended September 30, 1997, 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, 1997,
the Bank's total investment in S-F Insurance was approximately $186,000 and S-F
Insurance's assets of $186,000 consisted primarily of cash.
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-
30
<PAGE> 31
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 25 projects within the state of Wisconsin. Additionally, the Bank has
provided 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, 1997, the Bank had loans
outstanding to such projects of $28.8 million. At September 30, 1997, the Bank's
total investment in S-F Equity was approximately $2.5 million and S-F Equity's
assets of $53.5 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, 1997, the Bank's total investment in
S-F Mortgage was approximately $190,000 and S-F Mortgage's assets of $190,000
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, 1997,
the Bank's total investment in SF Investment was approximately $239.8 million
and the assets consisted primarily of mortgage-related securities.
PERSONNEL
As of September 30, 1997, the Company had 310 full-time employees and 90
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.
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 would 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
31
<PAGE> 32
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, 1996, 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 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 out 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 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.
32
<PAGE> 33
REGULATION
The Company is 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"). Prior to the consummation of
the merger of Bank Wisconsin with and into the Bank (the "Merger"), the Company
was also 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 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, was formerly 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. Since the Merger was
consummated near the end of this past fiscal year, a brief summary of those
regulations applicable to Bank Wisconsin and the Company by virtue of its status
as a bank holding company is included in the discussion below.
HOLDING COMPANY REGULATIONS
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.
The BHCA required the Company to obtain prior FRB approval before it could
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.
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
33
<PAGE> 34
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 July 1997.
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, 1997 was $126,000, based on the Bank's assets as of March
31, 1997 of $1.4 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, 1997, the Company maintained 88.0% 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 was authorized to make
loans and investments, provided that the total liabilities of any person,
partnership, corporation or bank did not exceed 20% of the capital of the bank
with certain exceptions.
Bank Wisconsin was also permitted to 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 could not exceed 50% of
the capital of the bank, and temporary borrowings of any local government unit
maturing within one year from date of issue could not exceed 60% of the bank's
capital and surplus. Bank Wisconsin could also invest in equity positions, such
as profit-participation projects, in an amount determined by the Division.
The Division examined the affairs of Bank Wisconsin on an annual basis. The
Division was permitted to assess Bank Wisconsin fees in connection with any
examination, as well as an annual assessment for maintenance of the Division's
office.
FEDERAL REGULATIONS
The Bank is and Bank Wisconsin formerly was subject to federal regulations which
address various issues including, but not limited to, insurance of deposits,
capital requirements, and community reinvestment requirements.
o INSURANCE OF DEPOSITS
The Bank's deposits are insured up to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the FDIC. Bank Wisconsin's deposits
were 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.
34
<PAGE> 35
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."
o CAPITAL REQUIREMENTS
FDIC REGULATION
Bank Wisconsin was 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 had 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-weighted assets. At the time of the Merger, Bank Wisconsin
exceeded all of the FDIC capital requirements.
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 at 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, 1997:
<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............... 24,661 1.50% 117,337 7.14% 92,676 5.64%
Core capital .................. 49,363 3.00% 117,337 7.14% 67,974 4.14%
Risk-based capital............. 80,523 8.00% 122,856 12.21% 42,333 4.21%
</TABLE>
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 savings 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
35
<PAGE> 36
amortization schedule, and general valuation loan and lease loss allowances
up to 1.25% of risk-weighted assets. The OTS risk-based capital regulation
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."
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 was phased in over
a period of time and became fully effective 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. Management of the Company does not
anticipate that the new CRA regulations will adversely affect the Bank.
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.
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 is in compliance with these
requirements with a total investment in FHLB-Chicago stock of $20.8 million at
September 30, 1997.
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, 1997, the Bank had $385.1 million in advances
from the FHLB-Chicago. See "Business of the Company."
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 $49.3 million of transaction accounts.
There
36
<PAGE> 37
has been a 0% reserve requirement on non-personal deposits since December 27,
1990. In addition, the first $4.4 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, 1997, the Bank 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.
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. The Bank has not been
significantly affected by such restrictions on loans to insiders.
TRANSACTIONS WITH AFFILIATES
The Bank is required and Bank Wisconsin was required to 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.
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<PAGE> 38
ITEM 2. PROPERTIES
The Company conducts its business through 19 full-service locations, two limited
service offices in residential retirement communities and two loan production
offices. Nine of the full-service branches are located in Milwaukee County, five
are in Waukesha County, three 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.
The total net book value of property owned by the Company was $17.4 million at
September 30, 1997.
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, 1997.
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 52, is an Executive Vice President of the Bank. Mr.
Hazzard has held his position with the Bank since September 1997. From November
1994 to September 1997, Mr. Hazzard was President of Bank Wisconsin, a
subsidiary of the Company that was merged into the Bank during 1997. Prior to
joining Bank Wisconsin, Mr. Hazzard served as President and Chief Executive
Officer of Associated Bank/F&M Bank Menomonee Falls, Wisconsin.
WILLIAM R. HOTZ, age 52, is Secretary and is an Executive Vice President of the
Company and of the Bank. Mr. Hotz joined the Company in those positions in May
1997 and was appointed an Executive Vice President of the Bank in September
1997. Prior to joining the Company and the Bank, Mr. Hotz was a shareholder of
the law firm of von Briesen, Purtell & Roper, s.c.
BRUCE R. SHERMAN, age 52, is an Executive Vice President of the Company and of
the Bank. Mr. Sherman became Executive Vice President of the Company and the
Bank in September 1997. Mr. Sherman had been a Vice President of the Company
since June 1993 and Senior Vice President and Treasurer of the Bank since 1984.
BRADLEY J. SMITH, age 42, is an Executive Vice President of the Bank. Mr. Smith
became Executive Vice President of the Bank in January 1997. Prior to joining
the Bank, Mr. Smith was a Senior Vice President of Provident Bank in Cincinnati,
Ohio from 1993 to 1996 and a Vice President prior to 1993.
JON D. SORENSON, age 42, is Chief Financial Officer and Treasurer and is an
Executive Vice President of the Company and of the Bank. Mr. Sorenson became
Chief Financial Officer and Treasurer of the Company in November 1992, and of
the Bank in September 1997. From December 1992 to September 1997, Mr. Sorenson
was a Senior Vice President of the Bank and prior to that he was a Vice
President of the Bank.
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<PAGE> 39
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, 1997, there were approximately 1,300 holders of record and
approximately 3,100 beneficial holders owning a total of 5,226,998 shares.
The Company paid quarterly dividends of $0.10 per share starting in November
1995, increased the dividend to $0.12 per share in November 1996 and increased
it again to $0.14 per share in November 1997. 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 September 25, 1997, the Company's Board of Directors adopted a shareholders'
rights plan (the "Rights Plan"). Under the terms of the Rights Plan, the Board
of Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. Upon becoming exercisable, each right
entitles shareholders to buy one one-hundredth of a share of the Company's
preferred stock at an exercise price of $150. Rights do not become exercisable
until eleven business days after any person or group has acquired, commenced, or
announced its intention to commence a tender or exchange offer to acquire 15% or
more of the Company's common stock, or in the event a person or group owning 10%
or more of the Company's common stock is deemed to be "adverse" to the Company.
If the rights become exercisable, holders of each right, other than the
acquiror, upon payment of the exercise price, will have the right to purchase
the Company's common stock (in lieu of preferred shares) having a value equal to
two times the exercise price. If the Company is acquired in a merger, share
exchange or other business combination or 50% or more of its consolidated assets
or earning power are sold, rights holders, other than the acquiring or adverse
person or group, will be entitled to purchase the acquiror's shares at a similar
discount. If the rights become exercisable, the Company may also exchange
rights, other than those held by the acquiring or adverse person or group, in
whole or in part, at an exchange ratio of one share of the Company's common
stock per right held. Rights are redeemable by the Company at any time until
they are excercisable at the exchange rate of $.01 per right. Issuance of the
rights has no immediate dilutive effect, does not currently affect reported
earnings per share, is not taxable to the Company or its shareholders, and will
not change the way in which the Company's shares are traded. The rights expire
in ten years.
On November 11, 1997, the Company's current share repurchase plan expired. The
plan was in effect from November 11, 1996 to November 11, 1997 and allowed for
the purchase of up to 538,100 shares over the twelve month period. The Company
actually purchased 275,000 shares during that time period at an average cost of
$32.07 per share. On October 31, 1997 the Company announced that, subsequent to
the expiration of its current share repurchase program, it had adopted a share
repurchase program for its common stock. The Company plans to purchase up to
10%, or approximately 523,000 shares over a twelve month period commencing
November 18, 1997 depending on market conditions. The repurchased shares will
become treasury shares and will be used for general corporate purposes.
39
<PAGE> 40
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,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Selected Financial Data: (In thousands)
<S> <C> <C> <C> <C> <C>
Total assets................................ $1,660,649 $1,404,116 $1,189,215 $1,026,806 $812,473
Cash and cash equivalents................... 42,858 22,459 20,780 15,951 11,753
Loans receivable, net....................... 712,875 610,699 513,308 427,753 324,387
Mortgage loans held for sale................ 24,630 20,582 1,138 2,978 10,043
Debt securities held to maturity............ 3,833 6,215 49,928 23,804 28,813
Debt and equity securities available for
sale................................... 56,247 60,001 4,142 2,374 915
Mortgage-backed and related securities
held to maturity....................... 66,849 68,392 157,495 159,178 370,562
Mortgage-backed and related securities
available for sale..................... 620,716 519,766 360,077 336,772 32,655
Deposits.................................... 1,087,136 877,684 688,348 569,892 552,004
Advances from the FHLB and other borrowings. 420,228 375,034 345,681 317,317 122,180
Shareholders' equity........................ 128,530 125,179 135,228 122,701 124,452
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended September 30,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Selected Operating Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest and dividend income......... $ 108,146 $ 92,097 $ 83,787 $ 60,133 $ 49,784
Total interest expense..................... 69,363 56,413 50,223 31,633 27,629
---------- --------- ---------- ---------- ----------
Net interest income before provision
for loan losses....................... 38,783 35,684 33,564 28,500 22,155
Provision for loan losses.................. 1,280 1,300 240 240 95
---------- --------- ---------- ---------- ----------
Net interest income..................... 37,503 34,384 33,324 28,260 22,060
Other operating income, net
Loan servicing and loan related fees....... 1,813 1,258 1,276 1,116 1,110
Impairment loss on mortgage-backed
securities............................ (3,400) -- -- -- --
Gain (loss) on debt and equity and
mortgage-backed and related securities
available for sale, net.............. 1,289 3,311 2,576 (101) 2,351
Gain on sales of mortgage loans held for
sale, net............................. 1,562 1,057 261 137 649
Other operating income (1)................. 7,398 4,988 4,218 2,342 1,829
---------- --------- ---------- ---------- ----------
Total other operating income, net....... 8,662 10,614 8,331 3,494 5,939
---------- --------- ---------- ---------- ----------
General and administrative expenses (2).... 32,903 31,622 22,679 19,381 16,205
---------- --------- ---------- ---------- ----------
Income before income tax expense and
cumulative effect of change in
accounting principle.................... 13,262 13,376 18,976 12,373 11,794
Income tax expense......................... 1,544 2,911 6,277 4,336 4,625
---------- --------- ---------- ---------- ----------
Net income........................ $ 11,718 $ 10,465 $ 12,699 $ 8,037 $ 7,169
========== ========= ========== ========== ==========
Earnings per share................ $ 2.20 $ 1.82 $ 2.10 $ 1.16 $ 0.31
========== ========= ========== ========== ==========
Dividends per share.................$ 0.48 $ 0.40 n/a n/a n/a
</TABLE>
(1) Other operating income for the year ended September 30, 1997 included the
effects of a $3,400,000 write-down of mortgage-backed securities for other
than temporary impairment.
(2) General and administrative expenses for the year ended September 30,
1996 include a one-time special SAIF assessment of $4.2 million.
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<PAGE> 41
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONT.)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
At or For the Year Ended September 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios (4):
Return on average assets ................. 0.77% 0.82% 1.10% 0.87% 1.00%
Return on average equity ................. 9.17 7.81 10.02 6.44 8.99
Shareholders' equity to total assets ..... 7.74 8.92 11.37 11.95 15.32
Average shareholders' equity to average
assets ................................ 8.37 10.48 10.95 13.52 11.14
Dividend payout ratio .................... 21.82 21.98 n/a n/a n/a
Net interest spread during the period (1). 2.45 2.56 2.56 2.61 2.63
Net interest margin (1) .................. 2.73 2.97 3.04 3.17 3.20
General and administrative expenses to
average assets ........................ 2.16 2.47 1.96 2.10 2.26
Other operating income to average assets.. 0.57 0.83 0.72 0.38 0.83
Average interest-earning assets to average
Interest-bearing liabilities ........... 105.82 108.73 110.37 115.94 114.13
Asset Quality Ratios:
Non-performing loans to gross loans (2) .. 0.38 0.58 0.08 1.65 0.54
Non-performing assets to total assets (2). 0.21 0.28 0.53 0.75 0.29
Allowance for loan losses to gross loans.. 0.79 0.78 0.77 0.74 0.88
Allowance for loan losses to
non-performing loans (2) .............. 207.08 134.11 943.52 44.99 161.33
Allowance for loan losses to
non-performing assets (2) ............. 181.82 131.41 65.06 44.89 134.91
Net charge-offs to average loans ......... 0.30 0.03 0.06 0.02 0.02
Regulatory Capital Ratios (3):
Tangible ratio ........................... 7.14 6.86 8.49 8.97 11.62
Core ratio ............................... 7.14 6.86 8.49 8.97 11.62
Tier 1 risk-based ratio .................. 11.66 12.60 16.57 18.97 23.57
Total risk-based ratio ................... 12.21 13.12 17.18 19.54 24.12
Other Data:
Number of deposit accounts ............... 119,575 96,880 88,391 75,708 75,632
Number of real estate loans outstanding .. 3,623 3,888 4,018 3,741 3,569
Number of real estate loans serviced ..... 7,672 7,101 6,579 6,272 5,854
Mortgage loan originations (in thousands). $ 310,172 $ 238,234 $ 109,366 $ 282,368 $ 257,562
Consumer loan originations (in thousands). $ 57,157 $ 61,378 $ 41,444 $ 35,896 $ 19,329
Full service customer facilities ......... 19 15 13 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 for 1993 through
1997.
(4) Performance ratios for the year ended September 30, 1996 include the effects
of the one-time special SAIF assessment of $4.2 million.
41
<PAGE> 42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
St. Francis Capital Corporation (the "Company") is a bank holding company
incorporated under the laws of the State of Wisconsin and is engaged in the
financial services business through its wholly-owned subsidiary, St. Francis
Bank, F.S.B. (the "Bank"), a federally-chartered savings 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 February 1997, the Company completed
the acquisition of the stock of Kilbourn State Bank, which subsequently merged
into Bank Wisconsin. The Company merged the operations of its St. Francis Bank
and Bank Wisconsin bank subsidiaries in September 1997 and currently operates
with one subsidiary, St. Francis Bank.
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.
Advances and changes in available technology can significantly impact the
business and operations of the Company. The Company is in the process of
conducting a review of its computer systems and its third-party systems to
identify those that could be affected by the "Year 2000" issue and is developing
an implementation plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's programs or programs of third-party
providers that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected, Year 2000 issues
could result in a major system failure or miscalculations and material costs to
the Company. The Company presently believes that, with modifications to existing
software and converting to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and converted, nor will compliance with the Year 2000 problem result in
a material cost.* However, if such modifications and conversions are not
completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.
FINANCIAL CONDITION
Total assets of the Company increased $256.5 million to $1.66 billion at
September 30, 1997 from $1.40 billion at September 30, 1996. The increase was
primarily in loans receivable, including loans held for sale, which increased
$106.3 million, and mortgage-backed and related securities, including securities
available for sale, which increased $99.4 million. At September 30, 1997, the
Company's statement of financial condition also includes the assets and
liabilities of Kilbourn State Bank since the acquisition was consummated on
February 28, 1997. The acquisition of Kilbourn State Bank added $93.0 million to
total assets, including additions of $62.6 million to net loans and $67.8
million to deposits. The increase in
42
<PAGE> 43
loans receivable was partially due to increases in mortgage loan originations.
The growth in assets was funded primarily by an increase in deposits of $209.5
million and an increase in advances and other borrowings of $45.2 million.
Mortgage-backed and related securities, including securities available for sale,
increased to $687.6 million at September 30, 1997 from $588.2 million at
September 30, 1996, which represented 41.4% and 41.9% of total assets,
respectively. The increase was the result of purchasing short- and medium-term
REMIC's. These securities were financed primarily with advances from the Federal
Home Loan Bank of Chicago (the "FHLB") and deposit growth. 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. The Company purchases
mortgage-backed securities that are guaranteed by both government sponsored
enterprises such as FHLMC, FNMA and GNMA as well as securities that are issued
by private mortgage security conduits. These securities have credit ratings of A
or better at the time of purchase and meet the Federal Financial Institutions
Examination Council definition of low-risk securities. 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 and generally will have a higher yield. 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.
At September 30, 1997, the Company recorded declines in fair value judged to be
other than temporary on four of its private issue mortgage-backed securities.
The Company believes that these four securities, two of which were rated "A" and
the other two of which were rated "BBB" at September 30, 1997, were impaired at
September 30, 1997. Therefore, in accordance with generally accepted accounting
principles, these securities were written down to fair value and the impairment
loss was recorded in the Company's income statement. Prior to the adjustment,
the Company's cost basis in these securities was $12.5 million. The impairment
loss resulted in a new cost basis of $9.1 million for these four issues. The
four issues under impairment are private issue mortgage-backed securities backed
by single-family loans relating to properties located primarily in California.
The underlying loans have experienced significant delinquencies and foreclosures
and the Company learned that recoveries on these loans were less than previously
realized and that the various subordinate and cash positions within the
mortgage-backed structures may no longer protect the Company's position in the
securities. The Company has written the securities down to fair value which is a
level where the remaining cash flows should provide a return at a market rate of
interest income on the remaining cost basis.
Subsequent to September 30, 1997, the Company has conducted a review of its
mortgage-backed and related securities portfolio and its debt and equity
securities portfolio relating primarily to the levels of credit and interest
rate risk within the portfolios. Credit issues reviewed included global
portfolio issues such as the amount of various securities with ratings other
than "AAA", the highest of the investment grade ratings and security specific
issues such as the collateral level of individual securities. Interest rate risk
issues included review of maturity and repricing characteristics of the
securities and of the portfolio as a whole. Primarily as a result of the
Company's view of the current external credit risk and external interest rate
risk cycles and the Company's internal view of its investment management
position, selected securities from the mortgage-backed securities and debt and
equity securities portfolios have been sold subsequent to year-end. From October
1, 1997 through December 19, 1997, the Company has sold securities totaling
$122.1 million at a net gain of $493,000. The net gain consisted of gross gains
of $2.1 million and gross losses of $1.6 million. The net gain will be reflected
in the Company's results of operations during the first quarter of its fiscal
year ending September 30, 1998. Other activity, including sales during the
remaining part of the quarter, may result in a final amount different than that
discussed above.
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<PAGE> 44
Total loans, including loans held for sale, increased to $737.5 million at
September 30, 1997 from $631.2 million at September 30, 1996, primarily due to
the aforementioned Kilbourn State Bank acquisition. Mortgage loans increased to
$476.1 million during the year compared to $452.5 million in 1996. The Company
increased loan origination activity during the year, originating $223.2 million
of first mortgage loans compared to $173.1 million in the prior year. Additional
activity in loans included mortgage loans sold for the year ended September 30,
1997 of $116.8 million, up from $62.6 million for the year ended September 30,
1996, and mortgage loans purchased during the year ended September 30, 1997 of
$24.7 million, down from $56.2 million for the year ended September 30, 1996.
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. Additionally, the Company has increased its emphasis
on commercial and consumer lending, which are primarily retained in the
Company's loan portfolio. For the year ended September 30, 1997, the Company
originated approximately $144.2 million of consumer and home equity loans,
purchased $888,000 and sold $12.2 million of these same types of loans, compared
with originations of $126.5 million, purchases of $12.8 million and sales of
$15.1 million for the year ended September 30, 1996. Exclusive of the Kilbourn
State Bank acquisition, the Company originated $33.4 million of commercial loans
during the year ended September 30, 1997 compared with $14.0 million of
originations for the year ended September 30, 1996. Consumer and commercial
lending represent a different level of risk than mortgage lending which is
primarily collateral based lending. Consumer and commercial loans are primarily
based on the assessment of the cash flow and repayment ability of the customer
or business to which funds have been lent.
Debt and equity securities, including those available for sale, decreased $6.1
million to $60.1 million at September 30, 1997, from $66.2 million at September
30, 1996. Debt and equity securities are comprised primarily of U.S. Treasury
Notes, tax-exempt obligations, asset-backed securities, mutual fund investments
and commercial paper.
Real estate held for investment increased $14.6 million to $51.5 million at
September 30, 1997, from $36.9 million at September 30, 1996. 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 25 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 $209.5 million to $1.09 billion at September 30, 1997 from
$877.7 million at September 30, 1996. The increase in deposits was primarily due
to an increase of $67.8 million from the Kilbourn State Bank acquisition as well
as increases of $88.5 million in money market demand account deposits and $62.3
million in certificates of deposit. The Company has continued to offer new
deposit products in an effort to attract new deposits and maintain current
relationships with customers. Significant new deposit products offered which
have contributed to the increase include certificates of deposit and a money
market demand account with an interest rate tied to a nationally recognized
money market index. At September 30, 1997, the Company had approximately $140.8
million in brokered certificates of deposit compared with $138.6 million at
September 30, 1996. The brokered deposits are generally of terms from three
months to ten years in maturity with interest rates that approximate the
Company's retail certificate rates. At September 30, 1997, $89.9 million of the
brokered deposits having longer maturities are callable within one to two years.
Although the Company has experienced growth in its deposit liabilities during
1997, there can be no assurance that this trend will continue in the future, nor
can there be any assurance the Company will retain the deposits it now has.* The
level of deposit flows 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.
Advances and other borrowings increased to $420.2 million at September 30, 1997,
from $375.0 million at September 30, 1996. This increase is due primarily to the
Company's previously discussed leveraging
44
<PAGE> 45
strategy to increase its earning assets through the purchase of short- and
medium-term mortgage-related securities using FHLB advances as a funding source.
At September 30, 1997, the Company had $163.0 million in interest rate swaps
outstanding compared with $55.0 million at September 30, 1996. The swaps are
designed to offset the changing interest payments of some of the Company's
borrowings and brokered certificates. Fixed pay-floating receive swaps totaled
$55.0 million at September 30, 1997 and were entered into to hedge interest
rates on borrowings from the FHLB used to fund purchases of fixed rate
securities. Fixed pay-floating 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. Fixed receive-floating pay swaps
totaled $108.0 million at September 30, 1997 and were entered into to hedge
interest rates on brokered deposits used to fund the purchase of floating rate
securities. Fixed receive-floating pay swaps will provide for a lower interest
expense (or interest income) in a falling rate environment while adding to
interest expense in a rising rate environment. During the year ended September
30, 1997, the Company recorded a net reduction of interest expense of $752,000
as a result of the Company's interest rate swap agreements.
At September 30, 1997, the Company had $30.0 million in interest rate corridors
outstanding compared with none at September 30, 1996. The Company uses interest
rate corridors to help protect its net interest margin in various interest rate
environments. $20.0 million of the interest rate corridors pay the Company the
range difference or a full 1.0% when the three-month LIBOR rate is within the
corridor strike rates. There are no payments due to the Company when three-month
LIBOR rates are outside of the corridor strike rates. $10.0 million of the
interest rate corridors pay the Company the difference between the three-month
LIBOR and the low limit of the corridor strike rate up to the full amount of the
corridor strike rate. There are no payments due to the Company when three-month
LIBOR rates are below the corridor strike rate. When rates are above the
corridor strike rate, the corridor pays the Company the full corridor range of
1.0%.
There are certain risks associated with swaps and corridors, 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 corridor agreements only with nationally recognized securities
firms and monitors the credit status of counterparties, the level of collateral
for such swaps and corridors and the correlation between the hedged liabilities
and indices utilized.
During the year, the Company's Board of Directors adopted a shareholders' rights
plan (the "Rights Plan"). Under the terms of the Rights Plan, the Board of
Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. If the rights become exercisable, holders of
each right, other than the acquiror, upon payment of the exercise price, will
have the right to purchase the Company's common stock (in lieu of preferred
shares) having a value equal to two times the exercise price. Rights are
redeemable by the Company at any time until they are excercisable at the
exchange rate of $.01 per right. Issuance of the rights has no immediate
dilutive effect, does not currently affect reported earnings per share, is not
taxable to the Company or its shareholders, and will not change the way in which
the Company's shares are traded. The rights expire in ten years.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL
Net income for the year ended September 30, 1997 increased $1.2 million or 12.0%
to $11.7 million from $10.5 million for the year ended September 30, 1996. The
recent results include the operations of Kilbourn State Bank since its
acquisition on February 28, 1997. The prior year results were significantly
affected by a one-time industry-wide assessment of $2.5 million, after tax, for
the recapitalization of the Savings Association Insurance Fund ("SAIF"). The
increase in net income was primarily the result of an increase in earning
assets, which resulted in a $3.1 million increase in net interest income and a
$1.4 million decrease in income tax expense, partially offset by a $2.0 million
decrease in other income and a $1.3 million increase in general and
administrative expenses. The decrease in other income was primarily
45
<PAGE> 46
due to a $3.4 million writedown to reflect an impairment loss in the Company's
mortgage-backed securities portfolio.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $3.1 million or
8.7% to $38.8 million for the year ended September 30, 1997 compared to $35.7
million for the year ended September 30, 1996. The increase was due to an
increase of $217.3 million in average earning assets, partially offset by a
decrease in the net interest margin to 2.73% in 1997 from 2.97% in 1996. While
the Company has adopted interest rate risk policies in an effort to protect net
interest income from significant increases in interest rates, the Company's net
income could still be affected by a narrowing of its net interest rate spread.
Total interest income increased $16.0 million or 17.4% to $108.1 million for the
year ended September 30, 1997 compared to $92.1 million for the year ended
September 30, 1996. The increase in interest income was primarily the result of
a $10.1 million increase in interest on loans and a $4.1 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 $677.9 million for
the year ended September 30, 1997, compared to $553.7 million for the year ended
September 30, 1996, partially offset by a decrease in the average yield on
loans, which decreased to 8.50% for the year ended September 30, 1997, from
8.58% for the year ended September 30, 1996. The increase in the average balance
of loans is due primarily to the Company's recent efforts to emphasize
commercial, consumer and home equity lending in addition to the Kilbourn State
Bank acquisition. However, such loans, while potentially resulting ultimately in
higher yields for the Company, may result in a higher level of credit risk than
conventional mortgage loans. The decrease in the average yield is primarily due
to the Company now selling substantially all new originations of initially
higher yielding long-term, fixed-rate single-family mortgage loans in the
secondary market and retaining new originations of initially lower yielding
adjustable-rate single-family 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 $627.4 million for the year ended September 30,
1997 from $559.5 million for the year ended September 30, 1996, partially offset
by a decrease in the average yield on such securities to 6.90% for the year
ended September 30, 1997 from 7.00% for the year ended September 30, 1996. 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 $13.0 million or 23.0% to $69.4 million for the
year ended September 30, 1997 compared to $56.4 million for the year ended
September 30, 1996. Interest expense on deposits increased $9.4 million or 24.9%
to $47.0 million for the year ended September 30, 1997 compared to $37.6 million
for the year ended September 30, 1996. 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 $934.9
million for the year ended September 30, 1997, from $757.3 million for the year
ended September 30, 1996. The increases in the balances of deposits are due to
the Company's offering of additional deposit products, the use of brokers to
sell certificates of deposit and the Kilbourn State Bank acquisition. The
average cost of deposits increased to 5.03% for the year ended September 30,
1997, from 4.97% for the year ended September 30, 1996. Brokered deposits
increased to $140.8 million during the year compared to $138.6 million in 1996
at weighted average stated rates of 6.49% and 5.35%, respectively. The higher
cost of the brokered certificates reflects the use of longer-term callable
brokered deposits to fund the Company's leverage program. The Company then, in
effect, lowers the cost of the deposits through the use of interest rate swaps
to rates approximating short-term rates. This funding then matches the interest
rate characteristics of the related asset, which is generally a short-term
adjusting mortgage-backed security. The average cost of deposits increased even
though overall market rates of interest were slightly lower for the year ended
September 30, 1997 compared with the prior year. The Company will generally meet
its local competition in the pricing of deposit products which may mean that its
cost of funds may not correlate exactly with national market rates such as
treasury rates or LIBOR. As part of a continuing strategy, the Company continues
to offer deposit products that compete more effectively with money market funds
and other non-financial deposit products. Such accounts have
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<PAGE> 47
generally changed the Company's traditional mix of deposit accounts to one that
is more adjustable to current interest rates such as the money market demand
account. This has resulted in passbook and certificate of deposit accounts
representing a lower percentage of the Company's total deposit portfolio.
Interest expense on advances and other borrowings increased $3.6 million or
19.0% to $22.3 million for the year ended September 30, 1997 from $18.8 million
for the year ended September 30, 1996. The average balance of advances and other
borrowings increased to $399.8 million for the year ended September 30, 1997,
from $341.2 million for the year ended September 30, 1996, while the average
cost of advances and other borrowings increased to 5.59% for the year ended
September 30, 1997, from 5.50% for the year ended September 30, 1996. 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 are indexed to three-month LIBOR rates which have increased modestly over
the current year.
PROVISION FOR LOAN LOSSES
The provision for loan losses remained unchanged at $1.3 million for the years
ended September 30, 1997 and 1996. A significant portion of the provision for
the year ended September 30, 1997 includes a provision to recognize the
potential loss on a commercial real estate loan while the prior year includes a
provision of $1.0 million for loan losses related to purchased auto loans. The
commercial real estate loan is on a shopping center property located in
Wisconsin. The allowance for loan losses totaled $6.2 million and $5.2 million
at September 30, 1997 and 1996, respectively, representing 0.79% and 0.78% of
total loans, respectively. Net charge-offs were $2.0 million during the year
ended September 30, 1997 and $159,000 during the year ended September 30, 1996.
Defaults of purchased subprime auto loans and related repossessed autos sold
during the year resulted in charge-offs of $1.9 million. It is anticipated that
as more of the auto loans default and repossessed autos are sold, additional
charge-offs will be incurred, but in lower amounts than in 1997.* 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 decreased $2.0 million or 18.4% to $8.6 million for the
year ended September 30, 1997 compared to $10.6 million for the year ended
September 30, 1996. The decrease was primarily due to a $3.4 million writedown
to fair value on four of the Company's private issue mortgage-backed securities
and decreases in gains on investments and mortgage-backed and related
securities, partially offset by increases in gains on mortgage loans held for
sale, gains on trading account activity and increased income from the Company's
affordable housing subsidiary. During the year ended September 30, 1997, the
Company recorded declines in fair value judged to be other than temporary on
four of its private issue mortgage-backed securities. The Company believes that
these four securities, two of which were rated "A" and the other two of which
were rated "BBB" at September 30, 1997, were impaired during the year.
Therefore, in accordance with generally accepted accounting principles, these
securities were written down to fair value and the impairment loss was recorded
in the Company's income statement. Management's decision to write down these
issues reflects a decline in value resulting from the deterioration of the
collateral securing the loans within the REMIC structures. That decision is a
result of the level of delinquencies, foreclosures, repossessions and recovery
rates on the underlying loans. The securities have been written down to $9.1
million at September 30, 1997 compared to an original amortized cost basis of
$12.5 million. This is a level at which the remaining estimated cash flows
should result in a market yield on the securities.*
Gains on investments and mortgage-backed and related securities were $1.3
million for the year ended September 30, 1997, compared to $3.3 million for the
year ended September 30, 1996. The gains recognized were primarily due to
declining interest rates and the Company's continuing review of its
mortgage-backed securities portfolio. During the year the Company will sell
securities from its mortgage-backed securities portfolio and replace them with
similar securities with more favorable interest rate and
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<PAGE> 48
maturity characteristics. This is generally done when, in the opinion of
management, a security being held in portfolio appears to be overvalued and the
Company will receive greater economic value by selling the security rather than
retaining it. The Company does not consider gains on the sales of securities as
a predictable source of earnings as such sales are based on the Company's
aforementioned review of individual securities within the Company's available
for sale portfolio whereby securities may be sold and replaced with ones that
offer a better combination of interest income, interest rate risk or credit risk
than the security sold. Gain/(loss) on foreclosed properties decreased to a loss
of $22,000 from a gain of $865,000 for the years ended September 30, 1997 and
1996, respectively. For the year ended September 30, 1996, the gain was the
result of the sale of one foreclosed property which had a carrying value of $5.8
million. The gain on sale of this property was $684,000. Gains from the trading
account increased to $726,000 from $109,000 for the years ended September 30,
1997 and 1996, respectively. The increase in trading gains was the result of the
sale of mortgage-backed securities which the Company had exchanged for its own
mortgage loans ("loan swaps"). This method of selling the Company's salable
mortgage production is required, under accounting rules, to be accounted for as
a "trading" activity, and as such, the resulting realized and unrealized gains
or losses are classified as trading income. The level of trading gains may
fluctuate due to the volume of originations of single-family mortgage loans
which in turn can fluctuate due to changes in interest rates. Sales of loans as
opposed to loan swaps are recorded as sales of mortgage loans in the income
statement. Income from the operations of the Company's affordable housing
subsidiary (which represents primarily rental income) increased to $3.4 million
from $1.9 million for the years ended September 30, 1997 and 1996, respectively.
The Company currently has 23 properties fully in operation compared to 15 in the
prior year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1.3 million or 4.1% to $32.9
million for the year ended September 30, 1997, compared to $31.6 million for the
year ended September 30, 1996. The prior year included a one-time charge of $4.2
million for the recapitalization of the Savings Association Insurance Fund.
General operating expenses of the Company have increased for various reasons,
including; 1) costs associated with the Kilbourn State Bank acquisition, 2) the
opening of four new branches, 3) the establishment of a centralized call center,
4) expansion of the Company's lending areas and 5) other increased
activity connected with the Company's higher level of earning assets. Expense
categories significantly affected by the above items include compensation and
benefits which were $15.6 million for the year ended September 30, 1997
compared with $13.2 million for the prior year, occupancy and furniture and
equipment expenses which combined were $5.0 million for the year ended
September 30, 1997 compared with $4.0 million for the prior year, and telephone
and postage expense which was $1.0 million for the year ended September 30,
1997 compared with $724,000 for the prior year. In addition, the affordable
housing subsidiary showed an increase in operating expenses to $3.9 million
compared with $2.2 million in the prior year, primarily as a result of the
Company currently having 23 properties fully in operation compared to 15 in the
prior year. Amortization of intangible assets increased to $834,000 for the
year ended September 30, 1997 compared with $446,000 during the prior year due
to the purchase of Kilbourn State Bank during the year.
INCOME TAX EXPENSE
Income tax expense decreased by $1.4 million or 47.0% to $1.5 million for the
year ended September 30, 1997 compared to $2.9 million for the year ended
September 30, 1996. The decrease was primarily the result of income tax credits
received from investments in the low-income housing. The Company's effective tax
rate was 11.6% for the year ended September 30, 1997, compared to 21.8% for the
year ended September 30, 1996. The decrease in effective rates reflects the
effect of the tax credits earned by the Company's affordable housing subsidiary.
Income tax credits increased to $2.9 million for the year ended September 30,
1997, compared to $1.7 million in the prior year.
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<PAGE> 49
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 loan 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 by
the Company. Interest expense on advances and other borrowings decreased
$645,000 or 3.3% to $18.8 million for the year ended
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<PAGE> 50
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> 51
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.
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, 1997, 1996 and 1995, 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 $159,000, $457,000 and $465,000 for the years
ended September 30, 1997, 1996 and 1995, 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. Tax-exempt investments are immaterial
and the tax-equivalent method of presentation is not included in the schedule.
Interest rate swaps, which are accounted for as a hedge of the cost of various
liabilities, are included in the category of liability being hedged.
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<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET 1997 1996 1995
----------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and overnight deposits. $ 19,089 $ 1,048 5.49% $ 16,110 $ 864 5.36% $ 19,975 $ 1,118 5.60%
Trading account securities ............... 3,183 224 7.04 41 3 7.32 8,098 519 6.41
Debt and equity securities ............... 71,042 4,634 6.52 54,213 3,329 6.14 40,136 2,396 5.97
Mortgage-backed and related securities ... 627,393 43,266 6.90 559,531 39,163 7.00 516,931 36,689 7.10
Loans:
First mortgage ......................... 419,827 34,460 8.21 357,529 29,324 8.20 352,843 27,597 7.82
Home equity ............................ 101,962 9,555 9.37 81,842 7,889 9.64 75,399 7,439 9.87
Consumer ............................... 107,972 9,337 8.65 95,093 8,513 8.95 62,730 5,797 9.24
Commercial and agricultural ............ 48,169 4,249 8.82 19,202 1,786 9.30 11,630 1,142 9.82
-------------------- -------------------- --------------------
Total loans .......................... 677,930 57,601 8.50 553,666 47,512 8.58 502,602 41,975 8.35
Federal Home Loan Bank stock ............. 20,084 1,373 6.84 17,859 1,226 6.86 17,086 1,090 6.38
-------------------- -------------------- --------------------
Total earning assets ............... 1,418,721 108,146 7.62 1,201,420 92,097 7.67 1,104,828 83,787 7.58
-------- ------- -------
Valuation allowances...................... (7,394) (3,798) (7,529)
Cash and due from banks................... 23,032 14,334 12,442
Other assets.............................. 91,979 66,441 46,724
---------- ---------- ----------
Total assets........................ $1,526,338 $1,278,397 $1,156,465
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts............................ $ 50,433 $ 843 1.67 $ 42,013 $ 614 1.46 $ 41,821 $ 553 1.32
Money market demand accounts............ 216,715 10,306 4.76 147,121 6,787 4.61 108,530 4,681 4.31
Passbook................................ 91,586 2,617 2.86 84,078 2,392 2.84 92,609 2,560 2.76
Certificates of deposit................. 576,133 33,226 5.77 484,051 27,817 5.75 411,753 22,981 5.58
-------------------- -------------------- --------------------
Total interest-bearing deposits....... 934,867 46,992 5.03 757,263 37,610 4.97 654,713 30,775 4.70
Advances and other borrowings............. 399,842 22,338 5.59 341,184 18,765 5.50 339,827 19,402 5.71
Advances from borrowers for taxes and
insurance........................ 5,967 33 0.55 6,477 38 0.59 6,520 46 0.71
-------------------- -------------------- --------------------
Total interest-bearing liabilities.... 1,340,676 69,363 5.17 1,104,924 56,413 5.11 1,001,060 50,223 5.02
-------- ------- -------
Non-interest bearing deposits............. 44,453 27,812 20,391
Other liabilities......................... 13,384 11,721 8,337
Shareholders' equity...................... 127,825 133,940 126,677
----------- ---------- ----------
Total liabilities and shareholders'
equity........................... $ 1,526,338 $1,278,397 $1,156,465
=========== ========== ==========
Net interest income....................... $ 38,783 $35,684 $ 33,564
======== ======= ========
Net yield on interest-earning assets...... 2.73 % 2.97 % 3.04%
Interest rate spread...................... 2.45 2.56 2.56
Ratio of earning assets to
interest-bearing liabilities..... 105.82 108.73 110.37
</TABLE>
<PAGE> 53
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,
---------------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------------------------- --------------------------------------------
RATE/ RATE/
(In thousands) RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and
overnight deposits .......... $ 20 $ 160 $ 4 $ 184 $ (47) $ (216) $ 9 $ (254)
Trading account securities ... -- 230 (9) 221 74 (516) (74) (516)
Debt and equity securities ... 207 1,033 65 1,305 69 840 24 933
Mortgage-backed and related
securities .................. (577) 4,750 (70) 4,103 (508) 3,024 (42) 2,474
Loans:
Mortgage .................. 22 5,110 4 5,136 1,343 367 17 1,727
Home equity ............... (219) 1,939 (54) 1,666 (171) 636 (15) 450
Consumer .................. (290) 1,153 (39) 824 (181) 2,991 (94) 2,716
Commercial and agriculture. (92) 2,694 (139) 2,463 (60) 744 (40) 644
-------- -------- -------- -------- -------- -------- -------- --------
Gross loans receivable... (579) 10,896 (228) 10,089 931 4,738 (132) 5,537
Federal Home Loan Bank stock.. (5) 153 (1) 147 83 49 4 136
-------- -------- -------- -------- -------- -------- -------- --------
Change in interest
income ................. (934) 17,222 (239) 16,049 602 7,919 (211) 8,310
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts .............. 88 123 18 229 58 3 -- 61
Money market demand
accounts .................. 209 3,211 99 3,519 326 1,664 116 2,106
Passbook .................. 10 214 1 225 75 (236) (7) (168)
Certificates of deposit ... 28 5,291 90 5,409 680 4,037 119 4,836
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits .......... 335 8,839 208 9,382 1,139 5,468 228 6,835
Advances and other borrowings. 362 3,226 (15) 3,573 (712) 77 (3) (638)
Advances from borrowers for
taxes and insurance ......... (2) (3) -- (5) (7) -- -- (7)
-------- -------- -------- -------- -------- -------- -------- --------
Change in interest
expense ................. 695 12,062 193 12,950 420 5,545 225 6,190
-------- -------- -------- -------- -------- -------- -------- --------
Change in net interest
income .................. $ (1,629) $ 5,160 $ (432) $ 3,099 $ 182 $ 2,374 $ (436) $ 2,120
======== ======== ======== ======== ======== ======== ======== ========
</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.
53
<PAGE> 54
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 originating and purchasing of 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. The
Company's assets and liabilities maturing and repricing within one year
generally result in a negative one-year gap, which is when the level of
liabilities maturing or repricing within one year are greater than the level of
assets maturing or repricing within the same period of time. If interest rates
were to rise significantly, and for a prolonged period, the Company's operating
results could be adversely affected. The Company attempts to maintain a negative
one-year gap of less than 15% of total assets. If in the estimation of
management, the one-year gap exceeded or was soon to exceed that limit, actions
would be taken to reduce the Company's exposure to rising interest rates. These
steps could include the sale of longer-term assets, the obtaining of longer-term
deposits or other liabilities and the use of interest rate swaps or other
off-balance sheet instruments that would reduce the Company's overall interest
rate risk position.
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; (iii) the Company has utilized longer term
borrowings, principally secured from the FHLB, in order to manage its assets and
liabilities and enhance earnings; and (iv) the Company is utilizing its capital
position to increase earning assets by investing primarily in agency or private
issue REMIC securities with short and medium terms of two to five years and
financing the purchases with FHLB advances or brokered deposits 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 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, 1997, total interest-bearing
liabilities maturing or repricing within one year exceeded total
interest-earning assets maturing or repricing in the same period by $179.4
million, representing a negative cumulative one year gap ratio of 10.8%,
compared to a negative cumulative one year gap ratio of 9.7% at September 30,
1996. 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.
54
<PAGE> 55
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997:
<TABLE>
<CAPTION>
More More
than than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed .......................... $ 14,813 $ 28,385 $ 46,528 $ 26,772 $ 87,308 $ 203,806
Variable ....................... 74,255 74,100 78,509 48,745 8,956 284,565
Consumer loans (2) .................. 42,095 126,283 18,709 18,708 18,709 224,504
Mortgage-backed and related
securities ......................... 3,830 11,490 22,235 15,502 13,791 66,848
Assets available for sale:
Mortgage loans ................. 24,630 -- -- -- -- 24,630
Fixed rate mortgage related .... 8,771 26,314 32,323 24,572 18,882 110,862
Variable rate mortgage related . 347,147 162,707 -- -- -- 509,854
Investment securities .......... 16,098 16,377 22,968 312 492 56,247
Trading account securities .......... -- -- -- -- -- --
Other assets ........................ 42,858 2,001 1,021 -- 1,243 47,123
----------- ----------- ----------- ----------- ----------- -----------
$ 574,497 $ 447,657 $ 222,293 $ 134,611 $ 149,381 $ 1,528,439
=========== =========== =========== =========== =========== ===========
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts ................... $ 5,048 $ 15,142 $ 20,733 $ 8,229 $ 4,974 $ 54,126
Passbook savings accounts ...... 4,478 13,433 27,205 18,741 41,500 105,357
Money market deposit accounts .. 57,503 191,609 11,136 2,784 2,350 265,382
Certificates of deposit ........ 269,793 161,401 66,821 111,675 -- 609,690
Borrowings (4) ...................... 415,172 5,000 56 -- -- 420,228
Impact of interest rate swaps ....... 53,000 10,000 35,000 (23,000) (75,000) --
----------- ----------- ----------- ----------- ----------- -----------
Total .......................... $ 804,994 $ 396,585 $ 160,951 $ 118,429 $ (26,176) $ 1,454,783
=========== =========== =========== =========== =========== ===========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ....... $ (230,497) $ 51,072 $ 61,342 $ 16,182 $ 175,557 $ 73,656
=========== =========== =========== =========== =========== ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ....... $ (230,497) $ (179,425) $ (118,083) $ (101,901) $ 73,656
=========== =========== =========== =========== ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total Assets ............ -13.88% -10.80% -7.11% -6.14% 4.44%
=========== =========== =========== =========== ===========
</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 $47.3 million at September 30,
1997.
(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 $316.1 million or 19.0% 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.
55
<PAGE> 56
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") from time to
time in order to reduce the interest rate risk associated with certain assets
and liabilities. The agreements have been both fixed-pay, floating-receive swaps
whereby the Company pays interest at a fixed rate and receives interest at a
floating rate based on a notional amount of principal, locking in a fixed cost
of funds and fixed-receive, floating-pay swaps whereby the Company receives
interest at a fixed rate and pays interest at a floating rate based on a
notional amount of principal, locking in a floating cost 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.
There are certain risks associated with swaps, 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 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 have been designed to more accurately match the interest cash flows of
certain liabilities used to fund specific assets to the interest rate
characteristics of those assets. However, there is no assurance that in the
event interest rates change, the swaps will move on the same basis or in the
same amounts as its cost of funds. At September 30, 1997 and 1996, the Company
had interest rate swaps outstanding with a notional amount of $163.0 million and
$55.0 million, respectively. $163.0 million is the largest aggregate notional
amount of the Company's interest rate swaps at any one time over the past five
years.
56
<PAGE> 57
The agreements consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Notional
Amount Maturity Call Fixed Variable
(000s) Type Date Date Rate Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10,000 Fixed Pay-Floating Receive 1998 not applicable 5.43% 5.72%
10,000 Fixed Pay-Floating Receive 1998 not applicable 5.23 5.74
15,000 Fixed Pay-Floating Receive 1998 not applicable 5.25 5.71
10,000 Fixed Pay-Floating Receive 1998 not applicable 4.93 5.78
10,000 Fixed Pay-Floating Receive 1998 not applicable 5.04 5.72
15,000 Fixed Receive-Floating Pay 2007 1999 7.15 5.57
15,000 Fixed Receive-Floating Pay 2002 1998 7.00 5.57
20,000 Fixed Receive-Floating Pay 2004 1998 7.00 5.55
10,000 Fixed Receive-Floating Pay 2007 1999 7.13 5.61
15,000 Fixed Receive-Floating Pay 2007 1999 7.05 5.61
15,000 Fixed Receive-Floating Pay 2007 1999 6.90 5.54
8,000 Fixed Receive-Floating Pay 2002 1998 7.00 5.06
10,000 Fixed Receive-Floating Pay 1998 1998 6.10 5.72
</TABLE>
For the years ended September 30, 1997, 1996 and 1995, the Company realized net
interest income on interest rate exchange agreement activity of $752,000,
$413,000 and $628,000, respectively. While this activity resulted in net
interest income in fiscal years 1997, 1996 and 1995, the Company effectively
matched the related funding costs of certain assets with the interest rate
characteristics of those assets. The Company's Investment Policy limits the
notional amount of outstanding interest rate exchange agreements to $250.0
million. Any notional amounts of interest rate exchange agreements in excess of
$250.0 million must be approved by the Company's Board of Directors.
The Company also has begun to use interest rate corridors to help protect its
net interest margin in various interest rate environments. The corridors are of
two general types. One type of corridor pays 1.0% per annum of the notional
amount over its life only when the three-month LIBOR rate is between the
corridor strike rates (inclusive of the strike rates). There are no payments due
to the Company when the three-month LIBOR rate is outside the corridor strike
rates. The other type of corridor pays the Company a percent per annum equal to
the three-month LIBOR rate minus the lower corridor strike rate on the notional
amount when three-month LIBOR is within the corridor strike rates. When the
three-month LIBOR rate is above the upper strike rate (equal to 1.0% above the
lower strike rate), the corridor pays the Company 1.0% per annum.
The interest rate corridors consist of the following:
<TABLE>
<CAPTION>
- ---------- ------------------------------------------------------- --------- ------------
Notional
Amount Maturity
(000s) Payment Type Date Strike Rates
- ---------- ------------------------------------------------------- --------- ------------
<S> <C> <C> <C>
$10,000 Three-month LIBOR minus lower strike price (up to 1.0%) 2001 7.75%-8.75%
15,000 1.0% when three-month LIBOR within corridor 1999 6.50%-7.50%
5,000 1.0% when three-month LIBOR within corridor 2001 7.75%-8.75%
</TABLE>
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
57
<PAGE> 58
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 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, 1997,
1996 and 1995, the Company realized gains on that combined activity of $844,000,
$203,000 and $335,000, respectively. At September 30, 1997 and 1996, the
notional amount of outstanding short put options (which if exercised could
result in a purchase) were zero and $4.0 million, respectively. As of September
30, 1997 and 1996, the notional amount of outstanding short call options (which
if exercised could result in a sale) were $2.0 million and $4.0 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 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.
58
<PAGE> 59
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearning liabilities outstanding at
September 30, 1997.
<TABLE>
<CAPTION>
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years to Four Years
------------------ ------------------ ------------------ ------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Mortgage and
commercial loans:
Fixed rate $ 54.5 8.15% $ 30.2 8.18% $ 16.3 8.11% $ 16.1 8.09%
Adjustable rate 71.1 8.27% 47.7 8.32% 42.4 8.30% 30.6 8.24%
Consumer loans:
Fixed rate 9.8 8.75% 15.7 8.68% 10.5 8.67% 13.8 9.12%
Adjustable rate 26.8 9.57% 19.2 9.48% 39.8 9.28% 22.9 9.15%
Mortgage-backed
Securities:
fixed rate 50.6 7.09% 32.6 6.92% 21.8 6.92% 19.1 6.93%
adjustable rate 78.7 7.01% 51.1 7.03% 41.9 7.03% 27.1 7.06%
Debt and equity
securities 32.5 6.32% 14.9 6.37% 8.0 6.40% 0.2 6.27%
Other 44.9 5.85% 1.0 5.81% -- -- -- --
-------- -------- -------- --------
Total interest
earning assets $ 368.9 7.47% $ 212.4 7.76% $ 180.7 7.97% $ 129.8 8.03%
======== ======== ======== ========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 20.2 1.42% $ 12.7 1.42% $ 8.0 1.42% $ 5.0 1.42%
Passbooks 17.9 2.95% 14.9 2.95% 12.3 2.95% 10.2 2.95%
Money market 250.5 4.58% 7.4 4.58% 3.7 4.58% 1.9 4.58%
Certificates 436.9 5.78% 145.8 5.80% 15.2 5.92% 7.7 5.76%
Borrowings
fixed rate 51.1 5.38% 35.0 5.23% 0.1 6.94% -- --
adjustable rate 84.1 5.78% 190.0 5.69% 55.0 5.67% 5.0 5.70%
-------- -------- -------- --------
Total interest
bearing liabilities $ 860.7 5.25% $ 405.8 5.44% $ 94.3 4.95% $ 29.8 3.98%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
------------------ ------------------ -------------------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Mortgage and
commercial loans:
Fixed rate $ 10.7 8.08% $ 87.3 8.22% $ 215.1 8.17% $ 216.5
Adjustable rate 23.1 8.24% 83.0 8.23% 297.9 8.27% 305.7
Consumer loans:
Fixed rate 15.1 9.15% 42.6 9.03% 107.5 8.95% 108.1
Adjustable rate 8.3 10.37% -- -- 117.0 9.43% 118.1
Mortgage-backed
Securities:
fixed rate 20.9 7.09% 32.7 6.82% 177.7 6.97% 177.1
adjustable rate 19.8 7.07% 291.3 6.93% 509.9 6.97% 509.9
Debt and equity
securities 0.1 7.35% 0.5 7.25% 56.2 6.35% 56.2
Other -- -- 1.2 5.15% 47.1 5.83% 46.8
------- -------- ---------- --------
Total interest
earning assets $ 98.0 8.06% $ 538.6 7.50% $ 1,528.4 7.66% $1,538.4
======= ======== ========== ========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 3.2 1.42% $ 5.0 1.42% $ 54.1 1.42% $ 54.6
Passbooks 8.5 2.95% 41.5 2.95% 105.3 2.95% 105.4
Money market 0.9 4.58% 0.9 4.58% 265.3 4.58% 264.0
Certificates 3.6 5.91% 0.6 6.23% 609.8 5.79% 609.3
Borrowings
fixed rate -- -- -- -- 86.2 5.32% 86.1
adjustable rate -- -- -- -- 334.1 5.71% 334.0
------- -------- ---------- --------
Total interest
bearing liabilities $ 16.2 3.40% $ 48.0 2.86% $ 1,454.8 5.15% $1,453.4
======= ======== ========== ========
</TABLE>
59
<PAGE> 60
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, but have generally been
higher during 1997 because of the generally lower level of interest rates
throughout the year.
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 ratio
was 7.1% at both September 30, 1997 and 1996. 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, 1997 and 1996, liquid assets of the Bank (as defined in the OTS
regulations) were $81.9 million and $57.3 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. 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. 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, 1997, FHLB advances totaled
$385.1 million or 25.1% of total liabilities and at September 30, 1996, FHLB
advances were $373.6 million or 29.2% of total liabilities. At September 30,
1997, the Company had a borrowing capacity available of $199.2 million from the
FHLB; however, additional securities may have to be pledged as collateral. At
September 30, 1997, reverse repurchase agreements totaled $22.5 million or 1.5%
of total liabilities compared with zero at September 30, 1996. 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.
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, 1997 and 1996, were $92.4 million and $68.2 million, respectively. Funds
received from principal repayments on loans for the years ended September 30,
1997 and 1996, were $153.2 million and $172.0 million, respectively. In addition
to principal repayments, the Company sells mortgage loans to government agencies
60
<PAGE> 61
(primarily FNMA) and to institutional investors. Total mortgage loan sales to
FNMA and others were $174.2 million and $62.6 million for the years ended
September 30, 1997 and 1996, 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 $400.7 million and $313.6 million for the years ended
September 30, 1997 and 1996, respectively. Purchases of mortgage-backed and
related securities totaled $306.4 million and $324.6 million for the years ended
September 30, 1997 and 1996, respectively. During the years ended September 30,
1997 and 1996, the Company repurchased approximately 387,000 and 608,000 shares
of its common stock in share repurchase programs at a total cost of
approximately $11.8 million and $15.5 million, respectively.
At September 30, 1997 and 1996, the Company had outstanding loan commitments
including lines of credit of $164.7 million and $159.2 million, respectively.
The Company had no commitments to purchase loans outstanding at either of these
dates. At September 30, 1997 and 1996, the Company had commitments to purchase
$1.9 million and $12.8 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,
including brokered certificates, which are scheduled to mature in one year or
less at September 30, 1997 and 1996, were $401.5 million and $358.3 million,
respectively. Management believes that a significant portion of such deposits
will remain with the Company.
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 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 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.
The "Deposit Insurance Funds Act of 1996" (the "DIF Act") addressed the deposit
insurance premium disparity. Pursuant to the terms of the DIF Act, the FDIC was
directed to impose a special assessment on SAIF-assessable
61
<PAGE> 62
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
required 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, the special assessment rate was determined to be 65.7 basis
points. 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 for the year
ended September 30, 1996. 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 applied 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") were included in the SAIF rates for these institutions during that
period.
The DIF Act addressed 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, have been shared by all insured depository institutions
since 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 eliminated the statutory link between FICO's
assessments and amounts authorized to be assessed by the SAIF. Effective January
1, 1997, all insured institutions are now paying an annual assessment to fund
interest payments on the FICO bonds. 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.
After payment of the one-time assessment described above, the Bank has continued
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
In February 1997, Financial Accounting Standards Board (FASB) issued SFAS No.
128, "Earnings per Share," which is effective for financial statements issued
for periods ending after December 15, 1997. This statement simplifies the
standards for computing earnings per share previously found in APB No. 15. It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic EPS and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Earlier
application of this statement is not permitted. The Company has determined that
the impact of adoption will not have a material effect on the earnings per share
of the Company.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose
62
<PAGE> 63
financial statements. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is incorporated
herein by reference.
63
<PAGE> 64
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 Subsidiary (the "Company") as of
September 30, 1997 and 1996, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the years in the
three year period ended September 30, 1997. 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 Subsidiary as of September 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three
year period ended September 30, 1997 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
November 13, 1997
64
<PAGE> 65
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
(In thousands) 1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,899 $ 17,604
Federal funds sold and overnight deposits 19,959 4,855
----------- -----------
Cash and cash equivalents 42,858 22,459
----------- -----------
Trading account securities, at fair value -- --
Assets available for sale, at fair value:
Debt and equity securities (notes 3 and 9) 56,247 60,001
Mortgage-backed and related securities (notes 4 and 9) 620,716 519,766
Mortgage loans held for sale, at lower of cost or market (note 5) 24,630 20,582
Securities held to maturity, at amortized cost:
Debt securities (market values of $3,908 and $6,331,
respectively) (note 3) 3,833 6,215
Mortgage-backed and related securities (market values of $66,219
and $65,316, respectively) (notes 4 and 9) 66,849 68,392
Loans receivable, net (notes 5 and 9) 712,875 610,699
Federal Home Loan Bank stock, at cost 20,843 19,063
Accrued interest receivable (note 6) 9,250 8,067
Foreclosed properties 416 80
Real estate held for investment 51,476 36,865
Premises and equipment, net (note 7) 24,711 16,432
Other assets (notes 5 and 11) 25,945 15,495
----------- -----------
Total assets $ 1,660,649 $ 1,404,116
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 8) $ 1,087,136 $ 877,684
Short term borrowings (note 9) 129,381 19,020
Long term borrowings (note 9) 290,847 356,014
Advances from borrowers for taxes and insurance 9,563 11,092
Accrued interest payable and other liabilities (notes 8 & 15) 15,192 15,127
----------- -----------
Total liabilities 1,532,119 1,278,937
----------- -----------
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, 5,226,998 and 5,475,509 shares, respectively 73 73
Additional paid-in-capital 73,541 72,243
Unrealized gain (loss) on securities available for sale, net of tax 1,046 (1,765)
Unearned ESOP compensation (note 15) (3,088) (3,488)
Treasury stock, at cost (2,062,622 and 1,814,111 shares,
respectively) (note 14) (44,511) (35,529)
Retained earnings, substantially restricted (note 12) 101,469 93,645
----------- -----------
Total shareholders' equity 128,530 125,179
----------- -----------
Total liabilities and shareholders' equity $ 1,660,649 $ 1,404,116
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
65
<PAGE> 66
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------
(In thousands, except per share data) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest and dividend income:
Loans (note 5) $ 57,601 $ 47,512 $ 41,975
Mortgage-backed and related securities 43,266 39,163 36,689
Debt and equity securities 4,634 3,329 2,396
Federal funds sold and overnight deposits 1,048 864 1,118
Federal Home Loan Bank stock 1,373 1,226 1,090
Trading account securities 224 3 519
--------- --------- ---------
Total interest and dividend income 108,146 92,097 83,787
Interest expense:
Deposits (note 8) 46,992 37,610 30,775
Advances and other borrowings 22,371 18,803 19,448
--------- --------- ---------
Total interest expense 69,363 56,413 50,223
--------- --------- ---------
Net interest income before provision for loan losses 38,783 35,684 33,564
Provision for loan losses (note 5) 1,280 1,300 240
--------- --------- ---------
Net interest income 37,503 34,384 33,324
--------- --------- ---------
Other operating income (expense), net:
Loan servicing and loan related fees 1,813 1,258 1,276
Deposit fees and service charges 2,159 1,451 1,316
Trading securities gains and commitment fees, net 726 109 1,098
Impairment loss on mortgage-backed securities (3,400) -- --
Gain on debt and equity and mortgage-backed and
related securities available for sale, net (notes 3 and 4) 1,289 3,311 2,576
Gain on sales of mortgage loans held for sale, net (note 5) 1,562 1,057 261
Insurance and annuity commissions 398 249 261
Gain (loss) on foreclosed properties (22) 865 (13)
Income from affordable housing 3,363 1,899 1,093
Other income 774 415 463
--------- --------- ---------
Total other operating income, net 8,662 10,614 8,331
--------- --------- ---------
General and administrative expenses:
Compensation and other employee benefits 15,564 13,242 11,198
Office building, including depreciation 2,551 2,106 1,755
Furniture and equipment, including depreciation 2,466 1,874 1,457
Federal deposit insurance premiums 742 5,641 1,476
Real estate held for investment 3,901 2,156 1,412
Other general and administrative expenses (note 10) 7,679 6,603 5,381
--------- --------- ---------
Total general and administrative expenses 32,903 31,622 22,679
--------- --------- ---------
Income before income tax expense 13,262 13,376 18,976
Income tax expense (note 11) 1,544 2,911 6,277
--------- --------- ---------
Net income $ 11,718 $ 10,465 $ 12,699
========= ========= =========
Earnings per share (note 13) $ 2.20 $ 1.82 $ 2.10
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
66
<PAGE> 67
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Number of Unrealized
Shares of Gain (Loss)
Common Additional on Securities Unearned
(Dollars in thousands Stock Common Paid-In Available ESOP
except for shares outstanding Outstanding Stock Capital For Sale Compensation
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 6,435,277 $ 73 $ 71,425 $ (2,733) $ (4,366)
Net income -- -- -- -- --
Exercise of stock options 16,470 -- -- -- --
Purchase of treasury stock (372,948) -- -- -- --
Amortization of unearned compensation -- -- 394 -- 370
Change in unrealized gain (loss) on
securities available for sale,
net of tax -- -- -- 5,065 --
--------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1995 6,078,799 73 71,819 2,332 (3,996)
Net income -- -- -- -- --
Cash dividend - $0.40 per share -- -- -- -- --
Exercise of stock options 5,100 -- -- -- --
Purchase of treasury stock (608,390) -- -- -- --
Amortization of unearned compensation -- -- 424 -- 508
Change in unrealized gain (loss) on
securities available for sale,
net of tax -- -- -- (4,097) --
--------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1996 5,475,509 73 72,243 (1,765) (3,488)
Net income -- -- -- -- --
Cash dividend - $0.48 per share -- -- -- -- --
Exercise of stock options 138,790 -- 432 -- --
Purchase of treasury stock (387,301) -- -- -- --
Amortization of unearned compensation -- -- 866 -- 400
Change in unrealized gain (loss) on
securities available for sale, net of -- -- -- 2,811 --
tax
--------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1997 5,226,998 $ 73 $ 73,541 $ 1,046 $ (3,088)
========= ========== ========== ========== ==========
<CAPTION>
Unearned
(Dollars in thousands Restricted Treasury Retained
except for shares outstanding Stock Stock Earnings Total
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 $ (1,636) $ (13,333) $ 73,271 $ 122,701
Net income -- -- 12,699 12,699
Exercise of stock options -- 264 (127) 137
Purchase of treasury stock -- (7,073) -- (7,073)
Amortization of unearned compensation 935 -- -- 1,699
Change in unrealized gain (loss) on
securities available for sale,
net of tax -- -- -- 5,065
---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1995 (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 options -- 96 (464) (368)
Purchase of treasury stock -- (15,483) -- (15,483)
Amortization of unearned compensation 701 -- -- 1,633
Change in unrealized gain (loss) on
securities available for sale,
net of tax -- -- -- (4,097)
---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1996 -- (35,529) 93,645 125,179
Net income -- -- 11,718 11,718
Cash dividend - $0.48 per share -- -- (2,450) (2,450)
Exercise of stock options -- 2,834 (1,444) 1,822
Purchase of treasury stock -- (11,816) -- (11,816)
Amortization of unearned compensation -- -- -- 1,266
Change in unrealized gain (loss) on
securities available for sale, net of -- -- -- 2,811
tax
---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1997 $ -- $ (44,511) $ 101,469 $ 128,530
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
67
<PAGE> 68
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,718 $ 10,465 $ 12,699
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provisions for loan losses 1,280 1,300 240
Depreciation, accretion and amortization 3,507 2,526 2,028
Deferred income taxes (691) (2,073) (496)
Gain on investments, mortgage-backed and related
securities and trading account securities, net
(2,015) (3,420) (3,674)
Impairment loss on mortgage-backed securities 3,400 -- --
Gain on sales of mortgage loans held for sale (1,562) (1,057) (261)
Stock-based compensation expense 1,266 1,633 1,699
(Increase) decrease in loans held for sale 4,048 (7,507) (14,922)
Decrease in trading account securities, net -- 3,000 10,196
Other, net (3,380) 4,974 (9,252)
--------- --------- ---------
Total adjustments 5,853 (624) (14,442)
--------- --------- ---------
Net cash provided (used) by operating activities 17,571 9,841 (1,743)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity 2,841 25,508 34,217
Purchases of debt securities held to maturity (459) (18,535) (60,341)
Purchases of mortgage-backed and related securities
held to maturity -- (1,000) (10,293)
Principal repayments on mortgage-backed and related
securities held to maturity 1,543 5,573 11,976
Purchases of mortgage-backed securities available for sale (306,405) (323,622) (159,432)
Proceeds from sales of mortgage-backed securities
available for sale 112,315 178,602 135,078
Principal repayments on mortgage-backed securities
available for sale 90,868 62,579 22,752
Purchase of debt and equity securities available for sale (51,199) (64,944) (2,818)
Proceeds from sales of debt and equity securities available
for sale
47,200 33,875 1,050
Proceeds from maturities of debt and equity securities
available
for sale 15,399 16,369 --
Bank acquisition, net of cash acquired (7,118) -- 9,543
Purchases of Federal Home Loan Bank stock (2,580) (2,059) (1,265)
Redemption of Federal Home Loan Bank stock 800 436 --
Purchase of loans (25,587) (69,016) (67,426)
Increase in loans, net of loans held for sale (14,030) (40,312) (28,952)
Increase in real estate held for investment (14,611) (12,601) (14,446)
Proceeds from sale of foreclosed properties -- 6,767 --
Purchases of premises and equipment, net (10,526) (6,634) (3,428)
--------- --------- ---------
Net cash used in investing activities (161,549) (209,014) (133,785)
--------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
68
<PAGE> 69
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 141,650 189,336 118,456
Proceeds from advances and other borrowings 224,965 140,122 38,548
Repayments on advances and other borrowings (210,746) (97,248) (18,432)
Increase (decrease) in securities sold under agreements
to repurchase 22,481 (13,521) 8,248
Increase (decrease) in advances from borrowers for taxes
and insurance (1,529) 213 610
Dividends paid (2,450) (2,199) --
Stock option transactions 1,822 (368) --
Purchase of treasury stock (11,816) (15,483) (7,073)
--------- --------- ---------
Net cash provided by financing activities 164,377 200,852 140,357
========= ========= =========
Increase in cash and cash equivalents 20,399 1,679 4,829
Cash and cash equivalents:
Beginning of year 22,459 20,780 15,951
--------- --------- ---------
End of year $ 42,858 $ 22,459 $ 20,780
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 69,062 $ 57,143 $ 48,243
Income taxes 2,205 4,521 11,085
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed securities $ 57,337 -- $ 1,988
Transfer of mortgage-backed and related securities
to assets available for sale -- $ 117,300 --
Transfer from loans to foreclosed properties 725 126 5,960
Transfer of mortgage loans to mortgage loans held for sale 28,433 11,937 4,941
Acquisitions:
Assets acquired $ 93,044 -- $ 84,626
Cash paid for purchase of stock $ (25,283) -- $ (13,315)
Cash acquired 18,165 -- 22,858
--------- --------- ---------
Net cash received (used) for acquisitions $ (7,118) -- $ 9,543
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
69
<PAGE> 70
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of St. Francis Capital Corporation and
subsidiary (the "Company") conform to generally accepted accounting principles
and to general practice within the banking industry. The Company provides a
full range of banking and related financial services to individual and
corporate customers through its network of bank affiliates. The Company 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. 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.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary, St. Francis Bank, F.S.B. ("Bank"), 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 which are all more than 50% owned by SFEP. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(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 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.
In determining if declines in value in mortgage-backed and related securities
are other than temporary, management estimates future cash flows to be
generated by pools of loans underlying the securities. Included in this
evaluation are such factors as i) estimated loan prepayment rates, ii) a review
of delinquencies, foreclosures, repossessions and recovery rates relative to
the underlying mortgage loans collateralizing each security, iii) the level of
available subordination or other credit enhancements, iv) an assessment of the
servicer of the underlying mortgage portfolio and v) the rating assigned to
each security by independent national rating agencies.
70
<PAGE> 71
(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 are carried at the outstanding principal amount reduced by purchased
discount, deferred fees, unearned insurance premiums, loans in process and the
allowance for loan losses. Loans sold with recourse are derecognized at the
time of sale. The estimated liability related to recourse provisions is
periodically evaluated with increases charged to expense. Loans for which
management has the intent and ability to hold for the foreseeable future or
until maturity or repayment 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.
(g) Mortgage Servicing Rights
The value of mortgage servicing rights is amortized in relation to the
servicing revenue expected to be earned. The evaluation of mortgage servicing
rights for impairment takes into consideration certain risk characteristics
including loan type, note rate, prepayment trends and external market factors.
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," which was effective for
transactions 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 consistent application of a
financial-components approach that focuses on control. This statement was
adopted on January 1, 1997. The effect of adopting this statement was not
material to the Company's results of operations or financial condition.
(h) 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. With respect to loans which are deemed impaired,
the calculation of reserve levels is based upon the discounted present value of
expected cash flows received from the debtor or other measures of value such as
market prices or collateral values.
71
<PAGE> 72
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.
(i) 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 line
item trading securities gains and commitment fees, net.
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.
(j) 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.
(k) 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.
(l) 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.
(m) 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.
(n) 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.
72
<PAGE> 73
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.
(o) Stock-based Compensation Plans
The Company has various stock based compensation plans that authorize the
granting of stock options, restricted stock, and other stock based awards to
eligible employees. The Company has elected to not adopt the recognition
provisions of SFAS No. 123, "Accounting for Stock Based Compensation", which
requires a fair-value based method of accounting for stock options and equity
awards, but will continue to follow APB No. 25, "Accounting for Stock Issued &
Employees", and related interpretations to account for its stock based
compensation plans. Pursuant to the disclosure requirements of SFAS No. 123,
the Company has included in Note 15 the effect of the fair value of employee
stock-based compensation plans on net income and earnings per share on a
pro-forma basis as if the fair value based method of accounting defined in SFAS
No. 123 was applied.
(p) Pending Accounting Changes
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share," which is effective for financial statements
issued for periods ending after December 15, 1997. This statement simplifies
the standards for computing earnings per share previously found in APB No. 15.
It replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic EPS and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Earlier application of this statement is not permitted. The Company has
determined that the impact of adoption will not have a material effect on the
earnings per share of the Company.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
(q) Reclassification
Certain amounts for prior years have been reclassified to conform to the 1997
presentation.
73
<PAGE> 74
(2) ACQUISITIONS
In February 1997, the Company completed the acquisition of Kilbourn State Bank
for $25.3 million cash. Under the terms of the agreement, the Company acquired
all of the outstanding shares of Kilbourn State Bank, with the acquisition
being 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. The acquisition of Kilbourn State Bank added $93.0
million in assets, including additions of $62.6 million to net loans and $67.8
million to deposits.
The excess of cost over the fair value of assets acquired is accounted for as
goodwill and will be amortized over fifteen years using the straight-line
method. The amount of goodwill recorded due to the acquisition was $9.1
million.
(3) DEBT AND EQUITY SECURITIES
The following is a summary of available for sale and held to maturity debt and
equity securities:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------ Estimated
(In thousands) Cost Gains Losses Fair Value
- ------------------------------------------------- --------- -------- ------- ----------
<S> <C> <C> <C> <C>
At September 30, 1997:
Available for sale:
U.S. Treasury obligations and obligations of
U.S. Government agencies $22,026 $ 124 $ 26 $22,124
State and municipal obligations 429 6 -- 435
Corporate notes and bonds 5,518 12 3 5,527
Asset-backed securities 21,200 51 551 20,700
Marketable equity securities 7,461 -- -- 7,461
------- ------- ------- -------
$56,634 $ 193 $ 580 $56,247
======= ======= ======= =======
Held to maturity:
U.S. Treasury obligations and obligations of
U.S. Government agencies $ 3,023 $ 46 $ -- $ 3,069
State and municipal obligations 810 29 -- 839
------- ------- ------- -------
$ 3,833 $ 75 $ -- $ 3,908
======= ======= ======= =======
At September 30, 1996:
Available for sale:
U.S. Treasury obligations and obligations of
U.S. Government agencies $25,077 $ 106 $ 172 $25,011
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
------- ------- ------- -------
$60,134 $ 144 $ 277 $60,001
======= ======= ======= =======
Held to maturity:
U.S. Treasury obligations and obligations of
U.S. Government agencies $ 3,040 $ 73 $ -- $ 3,113
State and municipal obligations 1,184 33 -- 1,217
Corporate notes and bonds 1,991 10 -- 2,001
------- ------- ------- -------
$ 6,215 $ 116 $ -- $ 6,331
======= ======= ======= =======
</TABLE>
74
<PAGE> 75
The amortized cost and estimated fair value of debt and equity securities
available for sale and held to maturity at September 30, 1997, by contractual
maturity, are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
(In thousands) Cost Fair Value
-------------- -------------
<S> <C> <C>
Less than one year $ 10,022 $ 10,047
Greater than one year but less than five years 23,777 23,317
Greater than five years but less than ten years 6,874 6,910
Greater than ten years 12,333 12,420
-------------- -------------
53,006 52,694
Marketable equity securities 7,461 7,461
-------------- -------------
$ 60,467 60,155
============== =============
</TABLE>
During the years ended September 30, 1997, 1996 and 1995, proceeds from the
sale of available for sale debt and equity securities were $47.2 million, $33.9
million and $1.1 million, respectively. The gross realized gains on such sales
totaled $65,000, $614,000 and $52,000 in 1997, 1996 and 1995, respectively.
The gross realized losses on such sales totaled $24,000, $126,000 and $32,000
in 1997, 1996 and 1995, respectively. There were no sales of held to maturity
debt securities in 1997, 1996 and 1995.
Under implementation guidance for SFAS 115 provided by the Financial Accounting
Standards Board, the Company, at December 31, 1995, reclassified securities
from its held-to-maturity portfolio to available-for-sale that had an amortized
cost basis of $28.9 million and a fair value of $29.1 million at the time of
the transfer.
(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>
Gross Unrealized
Amortized -------------------- Estimated
(In thousands) Cost Gains Losses Fair Value
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
At September 30, 1997:
Available for sale:
Participation certificates:
GNMA $ 3,604 $ 299 $ -- $ 3,903
FNMA 12,277 90 -- 12,367
FHLMC 4,078 24 -- 4,102
Private issue 224,530 1,160 829 224,861
REMICs :
GNMA 4,219 28 -- 4,247
FNMA 66,185 634 87 66,732
FHLMC 150,151 735 81 150,805
Private issue 153,658 859 855 153,662
CMO residual 37 -- -- 37
-------- -------- -------- --------
$618,739 $ 3,829 $ 1,852 $620,716
======== ======== ======== ========
Held to maturity:
REMICs :
FNMA $ 2,102 $ 7 $ 9 $ 2,100
FHLMC 1,917 27 -- 1,944
Private issue 62,830 59 714 62,175
-------- -------- -------- --------
$ 66,849 $ 93 $ 723 $ 66,219
======== ======== ======== ========
</TABLE>
75
<PAGE> 76
<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 9,729 49 47 9,731
Private issue 198,755 527 2,018 197,264
REMICs:
FNMA 41,763 587 111 42,239
FHLMC 52,988 475 260 53,203
Private issue 208,675 940 3,265 206,350
Adjustable rate mortgage mutual fund 842 -- -- 842
CMO residual 68 -- -- 68
-------- -------- -------- --------
$522,496 $ 2,985 $ 5,715 $519,766
======== ======== ======== ========
Held to maturity:
REMICs :
FNMA $ 2,968 $ 26 $ 26 $ 2,968
FHLMC 2,533 57 -- 2,590
Private issue 62,891 -- 3,133 59,758
-------- -------- -------- --------
$ 68,392 $ 83 $ 3,159 $ 65,316
======== ======== ======== ========
</TABLE>
During the years ended September 30, 1997, 1996 and 1995, proceeds from the
sale of available for sale mortgage-backed and related securities were $112.3
million, $178.6 million and $135.1 million, respectively. The gross realized
gains on such sales totaled $1.3 million, $2.8 million and $3.1 million in
1997, 1996 and 1995, respectively. The gross realized losses on such sales
totaled $28,000, $10,000 and $422,000 in 1997, 1996 and 1995, respectively.
There were no sales of held to maturity mortgage-backed and related securities
in 1997, 1996 and 1995.
During the year ended September 30, 1997, the Company recorded an impairment
loss of $3.4 million to reflect other than temporary impairment of the carrying
value of certain private issue mortgage-backed securities. The securities,
carried at $12.5 million prior to the writedown, were adjusted to fair value of
$9.1 million. Based on the new carrying value, estimated future cash flows on
the securities should reflect a market rate of interest.
At September 30, 1997 and 1996, $267.7 million and $240.4 million,
respectively, of mortgage-related securities were pledged as collateral for
FHLB advances.
Under implementation guidance for SFAS 115 provided by the Financial Accounting
Standards Board, the Company, at December 31, 1995, reclassified
mortgage-backed and related securities from its held-to-maturity portfolio to
available- for-sale with an amortized cost basis of $88.4 million and a fair
value of $88.6 million.
76
<PAGE> 77
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------
(In thousands) 1997 1996
-------- --------
<S> <C> <C>
First mortgage - one- to four-family $240,522 $270,614
First mortgage - residential construction 46,340 32,249
First mortgage - multi-family 101,289 103,262
Commercial real estate 87,950 46,391
Home equity 115,293 90,579
Commercial and agriculture 72,144 25,177
Consumer secured by real estate 89,627 66,346
Interim financing and consumer loans 15,255 15,604
Indirect auto 15,423 6,286
Education 948 12,142
-------- --------
Total gross loans 784,791 668,650
-------- --------
Less:
Loans in process 38,200 29,631
Unearned insurance premiums 552 647
Deferred loan and guarantee fees 1,290 851
Purchased loan discount 1,042 1,023
Allowance for loan losses 6,202 5,217
-------- --------
Total deductions 47,286 37,369
-------- --------
Total loans receivable 737,505 631,281
Less: First mortgage loans held for sale 24,630 20,582
-------- --------
Loans receivable, net $712,875 $610,699
======== ========
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
(In thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 5,217 $ 4,076 $ 3,435
Provision charged to expense 1,280 1,300 240
Loans charged off, net of recoveries (1,973) (159) (293)
Acquired bank's allowance 1,678 -- 694
------- ------- -------
Balance at end of year $ 6,202 $ 5,217 $ 4,076
======= ======= =======
</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 $3.0 million and $3.9 million at September
30, 1997 and 1996, respectively. Non-performing loans at September 30, 1997
and 1996 include $1.1 million and $3.6 million, respectively of purchased auto
loans which are past due or in default. Also included in non-performing assets
in 1997 is a single $850,000 commercial real estate loan collateralized by a
shopping center mortgage. Impaired loans totaled $1.9 million and $3.6 million
at September 30, 1997 and 1996, respectively. These loans had associated
impairment reserves of $782,000 and $1.1 million at September 30, 1997 and
1996, respectively. During 1997 and 1996, the average balance of impaired
loans was $4.1 million and $1.4 million, respectively, and no interest income
was recorded. Interest income on impaired loans is recognized only to the
extent that payments are expected to exceed the amount of principal due on the
loans.
77
<PAGE> 78
The effect of non-performing loans on interest income is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------
(In thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest at original contractual rate $ 744 $ 296 $ 34
Interest collected 303 11 26
-------- -------- --------
Net reduction of interest income $ 441 $ 285 $ 8
======== ======== ========
</TABLE>
Capitalized mortgage servicing rights total $1.8 million and $701,000 at
September 30, 1997 and 1996, respectively. The Company recorded gains of $1.1
million and $634,000, respectively; and amortization expense of $48,000 and
$23,000, respectively, for the years ended September 30, 1997 and 1996. The
fair value approximates the amount of capitalized mortgage servicing rights at
September 30, 1997 and 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) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Mortgage loans underlying pass-through
securities - FNMA $177,649 $141,944 $162,777
Mortgage loan portfolios serviced for:
FNMA 115,080 72,038 17,838
FHLMC 982 1,233 1,529
Other investors 17,965 11,619 13,070
-------- -------- --------
Total loans serviced for others $311,676 $226,834 $195,214
======== ======== ========
Custodial escrow balances maintained in
connection with the foregoing loan servicing
and included in demand deposits $ 10,810 $ 8,738 $ 8,193
======== ======== ========
</TABLE>
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------
(In thousands) 1997 1996
------ ------
<S> <C> <C>
Mortgage-backed and related securities $3,535 $3,166
Loans receivable 4,670 3,691
Other 1,045 1,210
------ ------
$9,250 $8,067
====== ======
</TABLE>
78
<PAGE> 79
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment, at cost, follows:
<TABLE>
<CAPTION>
September 30,
---------------------
(In thousands) 1997 1996
-------- --------
<S> <C> <C>
Land and land improvements $ 4,755 $ 2,890
Office buildings and improvements 16,479 11,825
Furniture, fixtures and equipment 13,264 9,730
Leasehold improvements 1,060 588
-------- --------
35,559 25,033
Accumulated depreciation and amortization (10,847) (8,601)
-------- --------
$ 24,711 $ 16,432
======== ========
Range of depreciable lives:
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,
-----------------------------------------------------------------------
1997 1996
-------------------------------------- --------------------------------
Weighted Weighted
average average
(Dollars in thousands) rate Amount Percent rate Amount Percent
---------- -------------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing- -- $ 52,582 4.8% -- $ 34,377 3.9%
Interest bearing 1.61% 54,126 5.0 1.49% 39,710 4.5
Passbook accounts 2.91 105,356 9.7 2.87 79,362 9.0
Money market
Demand accounts 4.87 265,382 24.4 4.53 176,838 20.2
Certificates of deposit 6.06 609,690 56.1 5.60 547,397 62.4
---------- ----- --------- -----
Total deposits 4.95 $1,087,136 100.0% 4.74 $ 877,684 100.0%
========== ===== ========= =====
</TABLE>
The certificates category above includes approximately $140.8 million and
$138.6 million of brokered deposits at weighted average stated rates of 6.49%
and 5.35% at September 30, 1997 and September 30, 1996, respectively.
Aggregate annual maturities of certificate accounts at September 30, 1997 are
as follows:
<TABLE>
<CAPTION>
Weighted
average
Matures during year ended September 30: Amount rate
- --------------------------------------- ------------ ---------
(Dollars in thousands)
<S> <C> <C>
1998 $ 401,534 5.81%
1999 87,163 5.93
2000 11,544 5.94
2001 6,897 5.74
2002 27,468 6.77
Thereafter 75,084 7.37
------------
$ 609,690
============
</TABLE>
79
<PAGE> 80
Certificates include approximately $48.6 million and $31.7 million in
denominations of $100,000 or more at September 30, 1997 and 1996, respectively.
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------
(In thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Demand deposits $ 843 $ 614 $ 553
Money market demand accounts 10,306 6,787 4,681
Passbook accounts 2,617 2,392 2,560
Certificates of deposit 33,226 27,817 22,981
------- ------- -------
$46,992 $37,610 $30,775
======= ======= =======
</TABLE>
Accrued interest payable on deposits totaled approximately $3.6 million and
$3.5 million at September 30, 1997 and 1996, respectively.
(9) SHORT AND LONG TERM 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 1997 1996 year ended 1997 1996
---- ---- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Reverse repurchase agreements 5.80 % - % 1998 $ 22,481 $ -
Bank line of credit 6.93 - 1998 11,000 -
Advances from Federal Home
Loan Bank Of Chicago - 5.09 Open Line Advance - 6,000
- 5.63 1997 - 12,509
5.62 5.49 1998 95,000 95,000
5.68 5.54 1999 230,000 230,000
5.67 5.56 2000 55,056 25,060
5.70 5.50 2001 5,000 5,000
Federal Reserve Bank
Treasury tax & loan advances 5.42 5.16 Daily overnight 900 511
Mortgages payable 9.22 9.40 Various 791 954
-------- --------
$420,228 $375,034
======== ========
</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, 1997 and 1996, $234.2 million and $262.0 million, respectively,
of mortgage loans and $287.6 million and $240.4 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, 1997 and 1996 was approximately $422.6 million and $375.0
million, respectively. The approximate average amount outstanding was $388.8
million and $344.8 million for those same years. The weighted average interest
rate was 5.67% and 5.43% during those years. The Federal Reserve Bank advances
are
80
<PAGE> 81
collateralized by U.S. Treasury bills with a carrying value of $2.0 million and
$1.0 million at September 30, 1997 and 1996, respectively.
Securities sold under agreements to repurchase averaged $5.4 million and
$703,000 based on average daily balances during the years ended September 30,
1997 and 1996, respectively. The maximum amount outstanding at any month-end
was $22.5 million and zero during those years, respectively. The average
balances are calculated based on daily balances. Securities sold under
agreements to repurchase were delivered for escrow to the broker-dealer who
arranged the transactions.
The Bank line of credit averaged $5.6 million for the year ended September 30,
1997 with a maximum amount outstanding at any month-end of $12.0 million.
There was no line of credit outstanding at any time for the year ended
September 30, 1996. The line of credit allows for individual advances of one to
six months at rates tied to equivalent term LIBOR indices and is collateralized
by the stock of the Bank. The line of credit allows for up to $20.0 million in
borrowings.
(10) OTHER GENERAL AND ADMINISTRATIVE EXPENSES
Other general and administrative expenses are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------
(In thousands) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Data processing $1,574 $1,317 $1,115
Advertising 1,350 1,425 868
Stationery, printing and office supplies 617 481 364
Telephone and postage 1,036 724 530
Insurance and surety bond premiums 130 103 151
Professional fees and services 475 310 442
Supervisory assessment 253 220 202
Amortization of intangible assets 834 446 383
Organization dues and subscriptions 123 124 96
Consumer lending 234 357 327
Miscellaneous 1,053 1,096 903
------ ------ ------
$7,679 $6,603 $5,381
====== ====== ======
</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, 1997
Current $ 2,114 $ 121 $ 2,235
Deferred (507) (184) (691)
------- ------- -------
$ 1,607 $ (63) $ 1,544
======= ======= =======
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
======= ======= =======
</TABLE>
81
<PAGE> 82
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) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal income tax expense at statutory rate of 35% $ 4,642 $ 4,682 $ 6,642
State income taxes, net of Federal income tax benefit (176) (35) 830
Tax exempt interest (156) (237) (295)
Non-deductible compensation 127 176 138
Acquisition intangible amortization 152 21 18
Change in beginning of year valuation allowance -- (171) (41)
Affordable housing credits (2,923) (1,617) (875)
Other, net (122) 92 (140)
------- ------- -------
$ 1,544 $ 2,911 $ 6,277
======= ======= =======
</TABLE>
Included in other assets is a deferred tax asset of $ 2.6 million and $2.3
million at September 30, 1997 and 1996, respectively. 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) 1997 1996
------- -------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses $ 1,260 $ 335
Deferred interest and fee income 807 911
Net operating losses 590 275
Valuation adjustments and reserves 1,412 33
Accrued expenses 199 64
Accrued deposit insurance premium -- 1,668
Deferred compensation 572 660
Unrealized loss on available for sale securities -- 510
Non-qualified stock option exercise 447 --
Other -- 20
------- -------
Gross deferred tax assets 5,287 4,476
Less valuation allowance (425) (199)
------- -------
Net deferred tax assets 4,862 4,285
DEFERRED TAX LIABILITIES:
Fixed asset tax basis adjustments (883) (371)
FHLB stock tax basis adjustment (307) (307)
Unrealized gains on available for sale securities (125) --
Unamortized accounting change for securities
marked to market (526) (1,036)
Other (376) (227)
------- -------
Gross deferred tax liability (2,217) (1,941)
------- -------
Net deferred tax asset (liability) $ 2,645 $ 2,344
======= =======
</TABLE>
At September 30, 1997 and 1996, deferred tax assets include approximately $11.5
million and $5.4 million of various state net operating loss carry forwards
respectively, which begin to expire in 1999 and are reduced by the valuation
allowance to the extent full realization is in doubt.
82
<PAGE> 83
(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, 1997, the balance of the
liquidation account was approximately $24.2 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, 1997, the Bank paid dividends to
the Company totaling $11.5 million. As of September 30, 1997, retained
earnings of the Bank of approximately $21.3 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 was permitted to deduct an annual addition
to a reserve for bad debts. This amount differed 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, 1997 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 and the Bank 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 effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined).
83
<PAGE> 84
Management believes, as of September 30, 1997, that the Company and the Bank
meet all capital adequacy requirements to which they are subject.
As of September 30, 1997, the most recent notification from the OTS categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action. A well-capitalized institution significantly exceeds the
required minimum level for each relevant capital measure. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The following table summarizes the Bank's capital ratios and the ratios
required by federal regulations at September 30, 1997:
<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 . . . . . . 24,661 1.50% 117,337 7.14% 92,676 5.64%
Core capital . . . . . . . . 49,363 3.00% 117,337 7.14% 67,974 4.14%
Risk-based capital . . . . . 80,523 8.00% 122,856 12.21% 42,333 4.21%
</TABLE>
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>
On September 25, 1997, the Company's Board of Directors adopted a shareholders'
rights plan (the "Rights Plan"). Under the terms of the Rights Plan, the Board
of Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. Upon becoming exercisable, each right
entitles shareholders to buy one one-hundredth of a share of the Company's
preferred stock at an exercise price of $150. Rights do not become exercisable
until eleven business days after any person or group has acquired, commenced,
or announced its intention to commence a tender or exchange offer to acquire
15% or more of the Company's common stock, or in the event a person or group
owning 10% or more of the Company's common stock is deemed to be "adverse" to
the Company. If the rights become exercisable, holders of each right, other
than the acquiror, upon payment of the exercise price, will have the right to
purchase the Company's common stock (in lieu of preferred shares) having a
value equal to two times the exercise price. If the Company is acquired in a
merger, share exchange or other business combination or 50% or more of its
consolidated assets or earning power are sold, rights holders, other than the
acquiring or adverse person or group, will be entitled to purchase the
acquiror's shares at a similar discount. If the rights become exercisable, the
Company may also exchange rights, other than those held by the acquiring or
adverse person or group, in whole or in part, at an exchange ratio of one share
of the Company's common stock per right held. Rights are redeemable by the
Company at any time until they are exercisable at the exchange rate of $.01 per
right. Issuance of the rights has no immediate dilutive effect, does not
currently affect reported earnings per share, is not taxable to the Company or
its shareholders, and will not change the way in which the Company's shares are
traded. The rights expire in ten years.
84
<PAGE> 85
(13) EARNINGS PER SHARE
Earnings per share of common stock for the years ended September 30, 1997, 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. Total shares
outstanding for earnings per share calculation purposes have been reduced by
the ESOP shares that have not been committed to be released.
The computation of earnings per common share for the years ended September 30
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income for the period $11,718,000 $10,465,000 $12,699,000
=========== =========== ===========
Common shares issued 7,289,620 7,289,620 7,289,620
Net treasury shares 1,939,847 1,450,789 1,066,069
Unallocated ESOP shares 321,730 363,222 404,466
----------- ----------- -----------
Weighted average common shares
Outstanding during the period 5,028,043 5,475,609 5,819,085
Common stock equivalents based on
The treasury stock method 305,506 289,416 224,307
----------- ----------- -----------
Total weighted average common shares
and equivalents outstanding 5,333,549 5,765,025 6,043,392
=========== =========== ===========
Earnings per share $ 2.20 $ 1.82 $ 2.10
=========== =========== ===========
</TABLE>
Primary and fully diluted earnings per share for the years ended September 30,
1997, 1996 and 1995, respectively, are the same.
(14) STOCK REPURCHASE PROGRAM
On November 7, 1996, the Company announced it had adopted a share repurchase
program for its common stock whereby the Company could purchase up to 10% of
the outstanding stock, or approximately 538,100 shares, commencing November 11,
1996 and concluding before November 11, 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, 1997, 275,000 shares had been repurchased at an
average price of $32.07 per share. This is the seventh such repurchase program
that the Company has undertaken, the most recent of which was completed
November 7, 1996. At September 30, 1997, an aggregate of 2,207,952 shares had
been repurchased in all such repurchase programs at an average price of $21.36.
On October 31, 1997, the Company announced, subsequent to the expiration of the
existing share repurchase program, a new program to repurchase up to 10% of the
outstanding stock, or approximately 523,000 shares. The program is authorized
for twelve months starting November 18, 1997.
(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
85
<PAGE> 86
years ended September 1997, 1996 and 1995 was approximately $427,000, $289,000
and $282,000, 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,
1997, 1996 and 1995 was approximately $154,000, $111,000 and $95,000,
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, 1997 and 1996 amounting to $618,000 and
$591,000, 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 8.50% at September 30, 1997. The balance of this
loan was $3.8 million and $4.1 million at September 30, 1997 and 1996,
respectively. The Bank makes 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. 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
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, 1997, 1996 and 1995 was $1.3 million, $932,000 and
$764,000, respectively. The following is a summary of ESOP shares at September
30, 1997 and 1996:
<TABLE>
<CAPTION>
Number of Shares
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Allocated shares 152,403 111,175
Shares released for allocation 30,091 30,659
Unreleased shares 308,154 348,814
----------- -----------
Total ESOP shares 490,648 490,648
=========== ===========
Fair value of unreleased shares
at September 30, $11,517,000 $ 8,982,000
=========== ===========
</TABLE>
86
<PAGE> 87
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 of the option grant,
and the maximum term cannot exceed ten years. Stock options awarded to
directors may be exercised at any time or on a cumulative basis over varying
time periods, 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 which may
include provisions for acceleration of vesting periods.
At September 30, 1997, 68,487 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, 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 granted 336,200 26.25 - 38.75
Options canceled (17,246) 10.00 - 29.00
Options exercised (138,790) 10.00
----------- ----------------
September 30, 1997 656,566 10.00 - 38.75
=========== ================
Options exercisable 326,866 $ 10.00
=========== ================
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------------
Average Weighted
Exercise Number Exercise Average Number Average
Price Range Outstanding Price Life* Outstanding Exercise Price
- ----------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$10.00 326,866 $10.00 5.72 326,866 $10.00
$16.75 8,500 $16.75 6.92 - -
$26.25-$29.00 319,200 $28.91 9.56 - -
$38.75 2,000 $38.75 9.75 - -
</TABLE>
*Average contractual life remaining in years
For purposes of providing the pro-forma disclosures required under SFAS No.
123, "Accounting for Stock-Based Compensation", the fair value of stock options
granted was estimated using the Black-Scholes option pricing model. The per
share weighted-average fair value of stock options granted during 1997 was
$7.18 on the date of grant with the following weighted-average assumptions:
expected dividend yield of 1.47%, risk-free interest rate of 6.75%, an expected
life of 10 years and expected volatility of 15%.
Had compensation cost for the Company's stock-based plans been determined in
accordance with SFAS
87
<PAGE> 88
No. 123, net income would have been $11.5 million in 1997. Earnings per share
would have been $2.16 in 1997. This pro-forma net income reflects only
options granted in 1997. Therefore, the full impact of calculating
compensation cost under SFAS No. 123 is not reflected in the pro-forma net
income amounts.
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, were amortized as compensation expense as participants became fully
vested. All participants became fully vested as of June 18, 1996. MRP expense
for the years ended September 30, 1997, 1996 and 1995 was $-0-, $701,000 and
$935,000, 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.
<TABLE>
<CAPTION>
Contractual or Notional
Amount(s)
September 30,
1997 1996
-------- ----------
(In thousands)
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk, are as follows:
Commitments to extend credit:
Fixed-rate loans $ 10,890 $ 18,487
Variable-rate loans 16,792 18,722
Mortgage loans sold with recourse 39,763 1,618
Guarantees under IRB issues 11,220 4,200
Interest rate swap agreements 163,000 55,000
Interest rate corridors 30,000 --
Commitments to:
Purchase mortgage-backed securities 1,930 12,800
Sell mortgage-backed securities 1,930 1,100
Unused and open-ended lines of credit:
Consumer 122,970 107,052
Commercial 14,075 14,935
Open option contracts written:
Short-put options -- 4,000
Short-call options 2,000 4,000
Commitments to fund equity investments 2,903 13,796
</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, 1997 have interest rates ranging from 6.625% to 9.00%. Because
some commitments expire without being
88
<PAGE> 89
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.
Loans sold with recourse represent one- to four-family mortgage loans that are
sold to secondary market agencies, primarily FNMA, with the servicing of these
loans being retained by the Company. The Company receives a larger servicing
spread on those loans being serviced then it would if the loans had been sold
without recourse.
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 IRBs are issued by municipalities 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.
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. The notional
amounts of these agreements represent the amounts on which interest payments
are exchanged between the counterparties. The notional amounts do not
represent direct credit exposures. The Company is exposed to credit-related
losses in the event of nonperformance by the counterparties on interest rate
payments but does not expect any counterparty to fail to meet their
obligations. The fixed pay-floating receive agreements were entered into as
hedges of the interest rates on FHLB advances. The fixed receive-floating pay
agreements were entered into as hedges of the interest rates on fixed rate
brokered certificates. Interest receivable or payable on interest rate swaps
is recognized using the accrual method. The use of interest rate swaps enables
the Company to synthetically alter the repricing characteristics of designated
interest-bearing liabilities.
The agreements at September 30, 1997 consist of the following:
<TABLE>
<CAPTION>
Notional
Amount Maturity Call Fixed Variable
(000s) Type Date Date Rate Rate
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10,000 Fixed Pay-Floating Receive 1998 not applicable 5.43 5.72
10,000 Fixed Pay-Floating Receive 1998 not applicable 5.23 5.74
15,000 Fixed Pay-Floating Receive 1998 not applicable 5.25 5.71
10,000 Fixed Pay-Floating Receive 1998 not applicable 4.93 5.78
10,000 Fixed Pay-Floating Receive 1998 not applicable 5.04 5.72
15,000 Fixed Receive-Floating Pay 2007 1999 7.15 5.57
15,000 Fixed Receive-Floating Pay 2002 1998 7.00 5.57
20,000 Fixed Receive-Floating Pay 2004 1998 7.00 5.55
10,000 Fixed Receive-Floating Pay 2007 1999 7.13 5.61
15,000 Fixed Receive-Floating Pay 2007 1999 7.05 5.61
15,000 Fixed Receive-Floating Pay 2007 1999 6.90 5.54
8,000 Fixed Receive-Floating Pay 2002 1998 7.00 5.06
10,000 Fixed Receive-Floating Pay 1998 1998 6.10 5.72
</TABLE>
The fair value of interest rate swaps, which is based on the present value of
the swap using dealer quotes, represent the estimated amount the Company would
receive or pay to terminate the agreements taking into account current interest
rates and market volatility. The interest rate swaps are off-balance sheet
items; therefore at September 30, 1997, the gross unrealized gains and losses
of $328,000 and $710,000, respectively, equals the fair value loss of the
interest rate swaps of $382,000. At September 30, 1996, the gross unrealized
gains and losses of $599,000 and $0, respectively, equals the fair value of the
interest rate swaps of $599,000.
89
<PAGE> 90
The Company use interest rate corridors to help protect its net interest margin
in various interest rate environments. The corridors are of two general types.
One type of corridor pays 1.0% per annum of the notional amount over its life
only when the three-month LIBOR rate is between the corridor strike rates
(inclusive of the strike rate). There are no payments due to the Company when
the three-month LIBOR rate is outside the corridor strike rates. The other
type of corridor pays the Company a percent per annum equal to the three-month
LIBOR rate minus the lower corridor strike rate on the notional amount when
three-month LIBOR is within the corridor strike rates. When the three-month
LIBOR rate is above the upper strike rate (equal to 1.0% above the lower strike
rate), the corridor pays the Company 1.0% per annum.
The interest rate corridors consist of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Notional
Amount Maturity
(000s) Payment Type Date Strike Rates
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$10,000 Three-month LIBOR minus lower strike price (up to 1.0%) 2001 7.75%-8.75%
15,000 1.0% when three-month LIBOR within corridor 1999 6.50%-7.50%
5,000 1.0% when three-month LIBOR within corridor 2001 7.75%-8.75%
</TABLE>
These instruments do not qualify as hedges and are accounted for in the trading
portfolio, and therefore, are valued at fair value. The fair value of the
interest rate corridors is $63,000 at September 30, 1997.
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 expiration of the options range
from seven to 44 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 investment in the low-income
housing projects is included in the Company's balance sheet as real estate held
for investment.
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 $4.3 million
of commercial real estate and multi-family loans are outside Wisconsin as of
September 30, 1997.
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
90
<PAGE> 91
these actions.
The Company leases 13 offices under agreements which expire at various dates
through January 2030, with nine leases having renewable options. Rent expense
under these agreements totaled approximately $468,000, $252,000 and $232,000
for the years ended September 30, 1997, 1996 and 1995, respectively.
The future minimum rental commitments as of September 30, 1997 under these
leases for the next five years and thereafter, are as follows:
<TABLE>
<CAPTION>
Years ended Amount
September 30, (In thousands)
------------- --------------
<S> <C>
1998 $ 818
1999 782
2000 736
2001 723
2002 723
2003 and thereafter 6,059
</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, 1997:
<TABLE>
<CAPTION>
Carrying Fair
(In thousands) Value Value
---------- -----------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $ 42,858 $ 42,858
Debt and equity securities 60,080 60,155
Mortgage-backed and related securities 687,565 686,935
Mortgage loans held for sale 24,630 25,048
Loans receivable 712,875 723,268
Federal Home Loan Bank stock 20,843 20,843
Financial Liabilities:
Certificate accounts 609,691 609,691
Other deposit accounts 477,446 477,446
Advances and other borrowings 420,228 420,228
</TABLE>
91
<PAGE> 92
<TABLE>
<CAPTION>
Notional Carrying Fair
(In thousands) Amount Value Value
-------- -------- --------
<S> <C> <C> <C>
Off-Balance Sheet Items:
Commitments to extend credit $ 27,682 -- *
Unused and open-ended lines of credit 137,045 -- *
Commitments to purchase mortgage-backed and related securities 1,930 -- --
Commitments to sell mortgage-backed and related securities 1,930 -- --
Interest rate swap agreements 163,000 $ (553) $ 382
Interest rate corridors 30,000 63 63
Open option contracts:
Short-put options -- -- --
Short-call options 2,000 (8) (8)
</TABLE>
* Amount is not material.
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 66,216 66,332
Mortgage-backed and related securities 588,158 585,082
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 375,034 375,034
</TABLE>
<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.
92
<PAGE> 93
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. In accordance
with SFAS No. 107, the fair value of liabilities cannot be less than the
carrying value.
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
borrowing arrangements. In accordance with SFAS No. 107, the fair value of
liabilities cannot be less than the carrying value.
OFF-BALANCE SHEET ITEMS: The fair value of the Company's off-balance sheet
instruments are based on quoted market prices and 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 interest rate corridors is based on dealer quotes at period end. The
corridors are marked to market as a trading asset. 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.
93
<PAGE> 94
(18) FINANCIAL INFORMATION OF ST. FRANCIS CAPITAL CORPORATION (PARENT ONLY)
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
(In thousands) 1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash, all with Bank $ 2,430 $ 13,858
Debt and equity securities available for sale -- 2,986
Mortgage-backed and related securities available for sale 476 1,522
Investment in subsidiaries, at equity 136,473 106,206
Accrued interest receivable and other assets 791 607
--------- ---------
Total assets $ 140,170 $ 125,179
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Advances and other borrowings $ 11,000 --
Accrued interest and other liabilities 640 --
--------- ---------
Total liabilities 11,640 --
--------- ---------
Shareholders' equity:
Common stock 73 $ 73
Additional paid-in capital 73,541 72,243
Unrealized gain (loss) on securities available for sale 1,046 (1,765)
Unearned ESOP compensation (3,088) (3,488)
Treasury stock, at cost (44,511) (35,529)
Retained earnings, substantially restricted 101,469 93,645
--------- ---------
Total shareholders' equity 128,530 125,179
--------- ---------
Total liabilities and shareholders' equity $ 140,170 $ 125,179
========= =========
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended
September 30,
(In thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Dividend received from Bank $ 11,500 $ 13,124 $ 15,396
Interest and other dividend income 701 1,487 1,707
Other income (loss) (25) 291 45
General and administrative expenses (1,160) (1,138) (862)
-------- -------- --------
General and administrative expenses
Income before income tax expense and equity in
Undistributed earnings of subsidiaries 10,598 13,764 16,286
Income tax expense (335) 143 114
-------- -------- --------
Income before equity in undistributed earnings of
Subsidiaries 10,933 13,621 16,172
Equity in (distributed) undistributed earnings of
subsidiaries 785 (3,156) (3,473)
-------- -------- --------
Net income $ 11,718 $ 10,465 $ 12,699
======== ======== ========
</TABLE>
94
<PAGE> 95
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
September 30,
(In thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,718 $ 10,465 $ 12,699
Adjustments to reconcile net income to
Cash provided by operations:
Equity in distributed (undistributed) earnings of
subsidiaries (785) 3,156 3,473
Increase in liabilities 640 -- --
Other, net (307) 288 (139)
-------- -------- --------
Cash provided by operations 11,266 13,909 16,033
-------- -------- --------
Cash flows from investing activities:
Purchase of Bank Wisconsin stock -- -- (13,315)
Purchase of Kilbourn State Bank stock (25,283) -- --
Proceeds from sales of securities available for sale 3,900 18,075 900
Purchase of securities available for sale -- (3,824) --
Principal repayments on securities available for sale 133 181 --
-------- -------- --------
Cash provided by (used in) investing activities (21,250) 14,432 (12,415)
-------- -------- --------
Cash flows from financing activities:
Stock option transactions 1,822 (368) --
Proceeds from advances and other borrowings 12,000 -- --
Repayments from advances and other borrowings (1,000) -- --
Purchase of treasury stock (11,816) (15,483) (7,073)
Dividends paid (2,450) (2,199) --
-------- -------- --------
Cash used in financing activities (1,444) (18,050) (7,073)
-------- -------- --------
Increase (decrease) in cash (11,428) 10,291 (3,455)
Cash at beginning of year 13,858 3,567 7,022
-------- -------- --------
Cash at end of year $ 2,430 $ 13,858 $ 3,567
======== ======== ========
</TABLE>
95
<PAGE> 96
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
For the quarter ended
---------------------------------------------------
Sep 30 Jun 30 Mar 31 Dec 31
1997 1997 1997 1996
----------- ----------- ----------- -----------
(Dollars in thousands, except earnings per share and market prices)
<S> <C> <C> <C> <C>
Interest and dividend income $ 29,317 $ 28,304 $ 25,691 $ 24,834
Interest expense 19,109 18,058 16,312 15,884
----------- ----------- ----------- -----------
Net interest income 10,208 10,246 9,379 8,950
Provision for loan losses 779 129 111 261
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 9,429 10,117 9,268 8,689
Gain (loss) on sales of investments
and mortgage-backed and
related securities 251 411 151 476
Gain on sales of mortgage
Loans held for sale, net 728 464 143 227
Other operating income 1,237 264 2,356 1,954
----------- ----------- ----------- -----------
Total other operating income 2,216 1,139 2,650 2,657
General and administrative expenses 8,314 8,840 8,287 7,462
----------- ----------- ----------- -----------
Income (loss) before income
tax expense 3,331 2,416 3,631 3,884
Income tax expense (benefit) 222 (60) 655 727
----------- ----------- ----------- -----------
Net income (loss) $ 3,109 $ 2,476 $ 2,976 $ 3,157
=========== =========== =========== ===========
Earnings (loss)per share (1) $ 0.59 $ 0.46 $ 0.56 $ 0.59
Weighted average common stock
equivalents 5,229,931 5,339,389 5,335,033 5,348,785
Market Information:
High $ 38.00 $ 38.75 $ 32.25 $ 27.00
Low 33.88 29.00 26.00 25.00
Close 37.75 38.75 29.50 26.00
<CAPTION>
For the quarter ended
----------------------------------------------------
Sep 30 Jun 30 Mar 31 Dec 31
1996 1996 1996 1995
----------- ----------- ----------- -----------
(Dollars in thousands, except earnings per share and market prices)
<S> <C> <C> <C> <C>
Interest and dividend income $ 24,217 $ 23,253 $ 22,899 $ 21,728
Interest expense 15,079 14,248 13,899 13,187
----------- ----------- ----------- -----------
Net interest income 9,138 9,005 9,000 8,541
Provision for loan losses 1,078 78 78 66
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 8,060 8,927 8,922 8,475
Gain (loss) on sales of investments
and mortgage-backed and
related securities 35 (1) 1,678 1,599
Gain on sales of mortgage
Loans held for sale, net 242 157 437 221
Other operating income 1,437 1,116 2,054 1,639
----------- ----------- ----------- -----------
Total other operating income 1,714 1,272 4,169 3,459
General and administrative expenses 11,561 6,972 6,992 6,097
----------- ----------- ----------- -----------
Income (loss) before income
tax expense (1,787) 3,227 6,099 5,837
Income tax expense (benefit) (1,357) 683 1,823 1,762
----------- ----------- ----------- -----------
Net income (loss) $ (430) $ 2,544 $ 4,276 $ 4,075
=========== =========== =========== ===========
Earnings (loss)per share (1) $ (0.08) $ 0.45 $ 0.73 $ 0.68
Weighted average common stock
equivalents 5,532,790 5,673,282 5,878,562 5,973,557
Market Information:
High $26.25 $ 28.00 $ 28.00 $ 25.50
Low 24.75 24.00 22.25 22.25
Close 25.75 25.00 27.25 23.25
</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.
Net income and earnings per share as reported above for the three-month period
ended June 30, 1997 has been restated from the previously issued unaudited
quarterly financial statements. The Company determined that it had not
properly evaluated other than temporary impairment on private mortgage-backed
securities during the quarter ended June 30, 1997. The net effect of the
change was to decrease net income by $1.2 million or $.23 per share for the
three months ended June 30, 1997.
The quarter ended September 30, 1997 contained the effect of an other than
temporary impairment loss on private mortgage-backed securities. The loss was
$1.35 million with an after-tax effect on net income of $790,000 or $0.15 per
share for the quarter. The quarter also contained the effect of an additional
provision for loan losses of $650,000 with an after-tax effect of $390,000 or
$0.07 per share for the quarter, to provide for a potential default on a
commercial real estate property.
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 31, 1997, the Company declared a dividend of $0.14 per share on the
Company's common stock for the quarter ended September 30, 1997, which was the
ninth cash dividend payment since the Company became a publicly-held company in
June 1993. The dividend was payable on November 21, 1997 to shareholders of
record as of November 10, 1997. At November 28, 1997, the closing price of the
Company's common stock was $38.25 per share.
96
<PAGE> 97
EVENTS SUBSEQUENT TO YEAR END (UNAUDITED)
Subsequent to September 30, 1997, the Company has conducted a review of its
mortgage-backed and related securities portfolio and its debt and equity
securities portfolio as to the levels of credit and interest rate risk within
the portfolios. From October 1, 1997 through December 19, 1997, the Company
has sold securities totaling $122.1 million at a net gain of $493,000. The net
gain consisted of gross gains of $2.1 million and gross losses of $1.6 million.
The net gain will be reflected in the Company's results of operations during
the first quarter of its fiscal year ending September 30, 1998. Other
activity, including sales during the remaining part of the quarter, may result
in a final amount different than that discussed above.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
97
<PAGE> 98
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 29, 1997, relating to the 1998 Annual Meeting of
Shareholders currently scheduled for January 28, 1998, 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 29, 1997, relating to the 1998 Annual Meeting of
Shareholders currently scheduled for January 28, 1998, 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 29, 1997, 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 29, 1997, relating to the 1998 Annual Meeting of
Shareholders currently scheduled for January 28, 1998, 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 29, 1997, relating to the 1998 Annual Meeting of
Shareholders currently scheduled for January 28, 1998, 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, 1997 and
1996
Consolidated Statements of Income for Years Ended September 30, 1997, 1996
and 1995
Consolidated Statements of Shareholders' Equity for Years Ended September
30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for Years Ended September 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
98
<PAGE> 99
(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.
(a) (3) EXHIBITS:
<TABLE>
<S> <C>
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)
3.5 Articles of Amendment to the Articles of Incorporation of Registrant(4)
3.6 Shareholders' Rights Agreement dated as of September 25, 1997 between the Registrant and Firstar Trust Company(4)
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(3)
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)
10.24 1997 Employment Agreement-Bradley J. Smith(4)
10.25 St. Francis Capital Corporation 1997 Stock Option Plan(4)
10.26 Split Dollar Life Insurance Agreement-Thomas R. Perz(4)
11.1 Statement regarding computation of per share earnings See footnote (13) in Part II Item 8
13.1 1997 Summary Annual Report to Shareholders(5)
21.1 Subsidiaries of the Registrant See "Subsidiaries" in Part I Item I
23.1 Consent of KPMG Peat Marwick LLP(4)
24.1 Powers of Attorney for certain officers and directors(1)
27.1 Financial Data Schedule(4)
99.1 Proxy Statement for 1998 Annual Meeting of Shareholders(4)
</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) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996.
(4) Filed herewith.
(5) Filed in paper format pursuant to Rule 101(b)(1) of Regulation S-T.
93
<PAGE> 100
(b) REPORTS ON FORM 8-K
A report on Form 8-K dated September 30, 1997 was filed by the Company during
the three months ended September 30, 1997, relating to an Item 5 disclosure of
the Company's adoption of a Shareholder Rights Plan.
(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).
100
<PAGE> 101
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/ Thomas R. Perz
-----------------------------------
Thomas R. Perz, President and
Chief Executive Officer
(Duly Authorized Representative)
Date: December 11, 1997
-----------------------------------
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.
<TABLE>
<S> <C>
/s/ Thomas R. Perz /s/ Jon D. Sorenson
---------------------------------- -----------------------------------
Thomas R. Perz, President, Jon D. Sorenson, Chief Financial
Chief Executive Officer and Officer and Treasurer (Principal
Director (Principal Executive and Financial and Accounting Officer)
Operating Officer)
Date: December 11, 1997 Date: December 11, 1997
-------------------------- --------------------------
/s/ John C. Schlosser /s/ Julia H. Taylor
---------------------------------- -----------------------------------
John C. Schlosser, Chairman of the Julia H. Taylor, Director
Board and Director
Date: December 11, 1997 Date: December 11, 1997
-------------------------- --------------------------
/s/ Rudolph T. Hoppe /s/ Edward W. Mentzer
---------------------------------- -----------------------------------
Rudolph T. Hoppe, Director Edward W. Mentzer, Director
Date: December 11, 1997 Date: December 11, 1997
-------------------------- --------------------------
/s/ Jeffrey A. Reigle /s/ Edmund O. Templeton
---------------------------------- -----------------------------------
Jeffrey A. Reigle, Director Edmund O. Templeton, Director
Date: December 11, 1997 Date: December 11, 1997
-------------------------- --------------------------
/s/ David J. Drury
-----------------------------------
David J. Drury, Director
Date: December 11, 1997
--------------------------
</TABLE>
101
<PAGE> 1
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
ST. FRANCIS CAPITAL CORP.
St. Francis Capital Corporation, a corporation organized and existing
under Chapter 180 of the Wisconsin Business Corporation Law (the "Corporation"),
does hereby certify that the Board of Directors of the Corporation (the "Board")
duly adopted the necessary resolutions to create a new series of Preferred Stock
consisting of 120,000 shares designated as Series A Junior Participating
Preferred Stock, $.01 par value per share, pursuant to Section 180.0602 of the
Wisconsin Business Corporation Law ("WBCL") and the authority conferred upon the
Board by the Articles of Incorporation; and to effectuate the foregoing, further
approved the amendment of Subsection B of Article IV of the existing Articles of
Incorporation, to read as follows:
B. PREFERRED STOCK. Shares of Preferred Stock may be issued
from time to time, in one or more classes or series, in any manner
permitted by law pursuant to a resolution or resolutions of the Board,
each class or series to be appropriately designated prior to issuance
of any shares thereof. The Board is authorized to act under WBCL
Section 180.0602 (or any successor statutory provision) to determine
with respect to any class or series of shares of preferred stock the
preference, limitations and relative rights, in whole or in part,
before the issuance of any shares of that class or series. The Board
also may create one or more series within a class and, with respect to
any series, determine the number of shares, the distinguishing
designation and preferences, limitation and relative rights, in whole
or in part, before issuance of shares of that series.
1. DESIGNATION OF SERIES: NUMBER OF SHARES. There is
designated a series of Preferred Stock titled as "Series A Junior
Participating Preferred Stock," par value $.01 per share (the "Series A
Preferred Stock"), and the authorized number of shares constituting the
Series A Preferred Stock shall be 120,000. Such number of authorized
shares may be increased or decreased, from time to time, by resolution
of the Board; provided, however, that no such decrease shall reduce the
number of authorized shares of the Series A Preferred Stock to a number
less than the number of shares of the Series A Preferred Stock then
outstanding, plus the number of such shares then reserved for issuance
upon the exercise of any outstanding options, warrants or rights or the
exercise of any conversion or exchange privilege contained in any
outstanding security issued by the Corporation.
1
<PAGE> 2
2. DIVIDENDS AND DISTRIBUTIONS.
a. Subject to the rights of the holders of shares of any
other series of Preferred Stock (or shares of any other class of
capital stock of the Corporation) ranking senior to the Series A
Preferred Stock with respect to dividends, the holders of shares of the
Series A Preferred Stock, in preference to the holders of shares of
Common Stock and of any other class of capital stock of the Corporation
ranking junior to the Series A Preferred Stock with respect to
dividends, shall be entitled to receive, when, as and if declared by
the Board out of funds legally available therefor, such dividends,
subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend payable in
shares of Common Stock or subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common
Stock. In the event the Company shall at any time after September 25,
1997 (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount to which holders of shares of Series
A Preferred Stock were entitled immediately prior to such event shall
be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
b. The Board shall declare, out of funds legally
available therefor, a dividend or distribution on the Series A
Preferred Stock, as provided in paragraph (a) of this Section
immediately after it has declared a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock).
3. VOTING RIGHTS. In addition to any other voting rights
required by applicable law, the holders of shares of the Series A
Preferred Stock shall have the following voting rights:
a. Each share of the Series A Preferred Stock shall
entitle the holder thereof to 100 votes on all matters submitted to a
vote of the shareholders of the Corporation. The multiple of 100 (the
"Voting Multiple") set forth in the preceding sentence shall be
adjusted from time to time as hereinafter provided in this paragraph.
In the event that the Corporation shall at any time after the effective
date of this amendment to the Articles of Incorporation (the
"Amendment") (i) declare or pay any dividend on Common Stock payable in
shares of Common Stock, or (ii) effect a subdivision, combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then, in each such case, the
2
<PAGE> 3
Voting Multiple there after applicable to the determination of the
number of votes per share to which the holders of shares of the Series
A Preferred Stock shall be entitled shall be the Voting Multiple in
effect immediately prior to such event multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding immediately after such event and the denominator of which
shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
b. Except as otherwise provided in this Amendment, in
any other amendment establishing another series of Preferred Stock (or
any series of any other class of capital stock of the Corporation) or
by applicable law, the holders of the Series A Preferred Stock, the
holders of Common Stock and the holders of any other class of capital
stock of the Corporation having general voting rights shall vote
together as a single class on all matters submitted to a vote of the
shareholders of the Corporation.
c. Except as otherwise provided in this Amendment or by
applicable law, the holders of the Series A Preferred Stock shall have
no special voting rights and their consent shall not be required
(except to the extent provided in paragraph (b) of this Section for the
taking of any corporate action.
4. CERTAIN RESTRICTIONS.
a. Whenever dividends or other distributions payable
on the Series A Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on outstanding shares of the
Series A Preferred Stock shall have been paid in full, the Corporation
shall not:
(1) declare or pay dividends or make any other
distributions on any shares of any class of capital stock of the
Corporation ranking junior (either as to dividends or upon liquidation,
dissolution or winding up of the Corporation) to the Series A Preferred
Stock;
(2) declare or pay dividends, or make any other
distributions, on any shares of any class of capital stock of the
Corporation ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up of the Corporation) with the
Series A Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
accrued and unpaid in proportion to the total amounts to which the
holders of all such shares are then entitled;
(3) redeem, purchase or otherwise acquire for
consideration any shares of any class of capital stock of the
Corporation ranking junior (either as to dividends or upon liquidation,
dissolution or winding up of the Corporation) to the Series A Preferred
Stock, except that the Corporation may at any time redeem, purchase or
otherwise acquire any shares of such junior stock
3
<PAGE> 4
in exchange for other shares of any class of capital stock of the
Corporation ranking junior (both as to dividends and upon dissolution,
liquidation or winding up of the Corporation) to the Series A Preferred
Stock; or
(4) purchase or otherwise acquire for
consideration any shares of the Series A Preferred Stock or any shares
of any class of capital stock of the Corporation ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up
of the Corporation) with the Series A Preferred Stock, or redeem any
shares of such parity stock, except in accordance with a purchase offer
made in writing or by publication to the holders of all such shares
upon such terms and conditions as the Board, after taking into
consideration the respective annual dividend rates and the other
relative powers, preferences and rights of the respective series and
classes of such shares, shall determine in good faith will result in
fair and equitable treatment among the respective holders of shares of
all such series and classes.
b. The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any
shares of any class of capital stock of the Corporation unless the
Corporation could, under paragraph (a) of this Section, purchase or
otherwise acquire such shares at such time and in such manner.
5. REACQUIRED SHARES. Any shares of the Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after such purchase
or acquisition. All such cancelled shares shall thereupon become
authorized and unissued shares of Preferred Stock and may be reissued
as part of any new series of Preferred Stock, subject to the conditions
and restrictions on issuance set forth in the Articles of Incorporation
of the Corporation, from time to time, in any other amendment
establishing another series of Preferred Stock (or any series of any
other class of capital stock of the Corporation) or in any applicable
law.
6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation (whether voluntary or otherwise), dissolution or winding up
of the Corporation, no distribution shall be made (a) to the holders of
shares of any class of capital stock of the Corporation ranking junior
(either as to dividends or upon liquidation, dissolution or winding up
of the Corporation) to the Series A Preferred Stock unless, prior
thereto, the holder of each outstanding share of the Series A Preferred
Stock shall have received an amount equal to the accrued and unpaid
dividends and distributions thereon, whether or not declared, to the
date of such payment, plus an amount equal to the greater of (i) $1.00,
and (ii) an aggregate amount, subject to adjustment as hereinafter
provided in this Section, equal to 100 times the aggregate per share
amount to be distributed to the holders of Common Stock, or (b) to the
holders of shares of any class of capital stock of the Corporation
ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up of the Corporation) with the Series A
Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such
4
<PAGE> 5
parity stock in proportion to the total amounts to which the holders of
all such shares are entitled upon such liquidation, dissolution or
winding up. In the event that the Corporation shall at any time after
the effective date of this Amendment (a) declare or pay any dividend on
Common Stock payable in shares of Common Stock, or (b) effect a
subdivision, combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then, in each such case, the aggregate amount
per share to which the holders of shares of the Series A Preferred
Stock would have been entitled to receive immediately prior to such
event pursuant to clause (a)(ii) of the preceding sentence shall be
adjusted by multiplying such aggregate per share amount by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding immediately after such event and the denominator of which
shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
7. CONSOLIDATION, MERGER, ETC. In the event that the
Corporation shall be a party to any consolidation, merger, combination
or other transaction in which the outstanding shares of Common Stock
are converted or changed into or exchanged for other capital stock,
securities, cash or other property, or any combination thereof, then,
in each such case, each share of the Series A Preferred Stock shall at
the same time be similarly converted or changed into or exchanged for
an aggregate amount, subject to adjustment as hereinafter provided in
this Section, equal to 100 times the aggregate amount of capital stock,
securities, cash and/or other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is being
converted or changed or exchanged. In the event that the Corporation
shall at any time after the effective date of this Amendment declare or
pay any dividend on Common Stock payable in shares of Common Stock or
effect a subdivision, combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then, in each such case, the
aggregate amount per share to which the holders of shares of the Series
A Preferred Stock would have been entitled to receive immediately prior
to such event pursuant to the preceding sentence shall be adjusted by
multiplying such aggregate per share amount by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding immediately after such event and the denominator of which
shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
8. NO REDEMPTION. The shares of the Series A Preferred
Stock shall not be redeemable at any time.
5
<PAGE> 6
9. RANK. Unless otherwise provided in the amendment
establishing another series of Preferred Stock after the effective date
of this Amendment, the Series A Preferred Stock shall rank, as to the
payment of dividends and the making of any other distribution of assets
of the Corporation, senior to the Common Stock, but junior to all other
series of the Preferred Stock.
10. AMENDMENTS. The Articles of Incorporation of the
Corporation shall not be amended in any manner which would materially
alter or change the powers, preferences and rights of the Series A
Preferred Stock so as to adversely affect any thereof without the
affirmative vote of the holders of at least two-thirds of the
outstanding shares of the Series A Preferred Stock, voting separately
as a single class.
11. FRACTIONAL SHARES. Fractional shares of the Series A
Preferred Stock may be issued, but, unless the Board shall otherwise
determine, only in multiples of one one-hundredth of a share. The
holder of any fractional share of the Series A Preferred Stock shall be
entitled to receive dividends, participate in distributions, exercise
voting rights and have the benefit of all other powers, preferences and
rights relating to the Series A Preferred Stock in the same proportion
as such fractional share bears to a whole share.
The foregoing constitutes the text of this Amendment. None of the
shares of Series A Junior Participating Preferred Stock authorized thereby has
been issued as of the date hereof.
This Amendment to the Articles of Incorporation of the Corporation was
adopted by the Board of Directors of the Corporation at a meeting of the Board
of Directors held on September 25, 1997 in accordance with Section 180.0602 of
the Wisconsin Business Corporation Law. Shareholder approval of this Amendment
was not required.
Dated as of the 25th day of September, 1997.
By: ______________________________
Thomas R. Perz
President/Chief Executive Officer
This document was drafted by and is returnable to:
JAMES P. PETERSON, ESQ.
MICHAEL BEST & FRIEDRICH LLP
100 EAST WISCONSIN AVENUE
SUITE 3300
MILWAUKEE, WI 53202
(414) 271-6560
6
<PAGE> 1
SHAREHOLDER RIGHTS AGREEMENT
DATED AS OF SEPTEMBER 25, 1997
BETWEEN
ST. FRANCIS CAPITAL CORPORATION
AND
FIRSTAR TRUST CO.
AS RIGHTS AGENT
<PAGE> 2
SHAREHOLDER RIGHTS AGREEMENT
THIS SHAREHOLDERS RIGHTS AGREEMENT (this "Agreement") is dated as of
September 25, 1997 between St. Francis Capital Corporation, a Wisconsin
corporation (the "Company"), and Firstar Trust Co., a Wisconsin-chartered trust
company (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company (the "Board") desires to
provide all shareholders of the Company with the opportunity to benefit from the
long-term prospects and value of the Company and to ensure that all such
shareholders receive fair and equal treatment in the event of any proposed
takeover of the Company; and
WHEREAS, on September 25, 1997, the Board authorized and declared a
dividend of one preferred stock purchase right (individually a "Right" and
collectively the "Rights") for each share of Common Stock (as hereinafter
defined) of the Company outstanding at the Close of Business (as hereinafter
defined) on October 10, 1997 (the "Record Date"), each Right representing the
right to purchase one one-hundredth of a Preferred Share (as hereinafter
defined), upon the terms and subject to the conditions hereinafter set forth,
and contemplates that one Right will be issued with respect to each share of
Common Stock which shall become outstanding after the Record Date and prior to
the earlier of the Redemption Date and the Final Expiration Date (as such terms
are hereinafter defined), including any shares of Common Stock issued by reason
of the exercise of any option, warrant, right (other than the Rights) or
conversion or exchange privilege contained in any option, warrant, right (other
than the Rights) or convertible or exchangeable security issued by the Company
prior to the Distribution Date (as hereinafter defined), unless the Board shall
expressly provide to the contrary at the time of issuance of any such option,
warrant, right or convertible or exchangeable security;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.1 CERTAIN DEFINITIONS. For the purposes of this Agreement, the
following terms shall have the respective meanings set forth below:
(a) "Acquiring Person" shall mean any Person (as hereinafter
defined) who or which, together with all Affiliates and Associates (as
hereinafter defined) of such Person, shall be the Beneficial Owner (as
hereinafter defined) of 15% or more of the shares of Common Stock of the Company
then outstanding, but shall not include (i) the Company, (ii) any Subsidiary (as
hereinafter defined) of the Company, (iii) any employee stock ownership plan,
employee benefit plan or other compensation program or arrangement of the
Company or any Subsidiary, or (iv) any Person holding such shares of Common
Stock for or pursuant to the terms of any such plan,
-1-
<PAGE> 3
program or arrangement set forth in (iii) above (collectively, "Exempt
Persons"). Notwithstanding the preceding sentence, (A) no Person shall become an
Acquiring Person as the result of an acquisition by the Company of shares of its
Common Stock which, by reason of reducing the number of then outstanding shares
of Common Stock, increases the percentage of then outstanding shares of Common
Stock Beneficially Owned by such Person to 15% or more; provided, however, that
if such Person shall, after such acquisition by the Company, become the
Beneficial Owner (as hereinafter defined) of any additional shares of Common
Stock of the Company, then such Person shall be deemed to be an Acquiring
Person, and (B) an Acquiring Person shall not include any Person who is the
Beneficial Owner of 15% or more of the outstanding shares of Common Stock but
who acquired Beneficial Ownership of shares of Common Stock without any plan or
intention to seek or affect control of the Company, if such Person promptly
enters into an irrevocable commitment promptly to divest, and thereafter
promptly divests (without exercising or retaining any power, including voting,
with respect to such shares) sufficient shares of Common Stock (or securities
convertible into, exchangeable into or exercisable for Common Stock), so that
such Person ceases to be the Beneficial Owner of 15% or more of the outstanding
shares of Common Stock, in which case such Person shall then be deemed never to
have become an Acquiring Person.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 (as may be amended from time to time)
promulgated under the Exchange Act (as hereinafter defined); provided, however,
that no director or officer of the Company shall be deemed an Affiliate or
Associate of any other director or officer of the Company solely as a result of
his or her being a director or officer of the Company.
(c) "Beneficial Owner" (including the terms "Beneficially Own" and
"Beneficial Ownership"), when used with respect to any Person, shall be deemed
to include any securities which:
(i) such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly (determined as
provided in Rule 13d-3 [as may be amended from time to time]
promulgated under the Exchange Act);
(ii) such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has:
(A) the right to acquire (whether such
right is exercisable immediately or
only after the passage of time or
upon the satisfaction of any
conditions, or both) pursuant to any
written or oral agreement,
arrangement or understanding (other
than customary agreements with and
among underwriters and selling group
members with respect to a bona fide
public offering of securities), upon
the exercise of any options,
warrants, rights (other than the
Rights) or conversion or exchange
privileges or otherwise; provided,
however, that a Person shall not be
deemed the Beneficial Owner of, or
to Beneficially Own securities
tendered pursuant to a tender or
exchange offer made by or on behalf
-2-
<PAGE> 4
of such Person or any of such
Person's Affiliates or Associates
until such tendered securities are
accepted for purchase or exchange,
and securities issuable upon
exercise of the Rights at any time
prior to the Distribution Date, or
(B) the right to vote pursuant to any
written or oral agreement,
arrangement or understanding;
provided, however, that a Person
shall not be deemed the Beneficial
Owner of, or to Beneficially Own,
any security otherwise subject to
this item (B) if such agreement,
arrangement or understanding to vote
arises solely from a revocable proxy
or consent given to such Person or
any of such Person's Affiliates or
Associates in response to a public
proxy or consent solicitation made
pursuant to, and in accordance with,
the applicable rules and regulations
under the Exchange Act, and is not
also then reportable by such Person
on Schedule 13D (or any comparable
or successor report then in effect)
under the Exchange Act, or
(C) the right to dispose of pursuant to
any written or oral agreement,
arrangement or understanding (other
than customary agreements with and
among underwriters and selling group
members with respect to a bona fide
public offering of securities); or
(iii) are beneficially owned, directly or indirectly,
by any other Person with which such Person or any of such Person's
Affiliates or Associates has any written or oral agreement, arrangement
or understanding (other than customary agreements with and among
underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting (except to the extent contemplated by the proviso to Section
1.1(c)(ii)(B) hereof) or disposing of any securities of the Company.
Notwithstanding anything contained in Section 1.1(c)(i) hereof, no director or
officer of the Company or any of its Subsidiaries shall be deemed to be the
Beneficial Owner of, or to Beneficially Own, shares of Common Stock or other
securities of the Company beneficially owned by any other director or officer of
the Company or any of its Subsidiaries solely as a result of his or her being a
director or officer of the Company or any of its Subsidiaries.
(d) "Business Day" shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of Wisconsin are
authorized or obligated by law or executive order to close.
(e) "Certificate of Designations" shall mean the Certificate
of Designations for the Preferred Shares in substantially the form attached
hereto as EXHIBIT A.
-3-
<PAGE> 5
(f) "Close of Business" on any given date shall mean 5:00
P.M., Wisconsin time, on such date or, if such date is not a Business Day, then
5:00 P.M., Wisconsin time, on the next succeeding Business Day.
(g) "Common Stock," when used with reference to the Company,
shall mean the Common Stock, $.01 par value per share, of the Company. "Common
Stock," when used with reference to any Person other than the Company, shall
mean the capital stock with the greatest voting power (or the other equity
securities or equity interests having the power to control or direct management)
of such Person or, if such Person is a Subsidiary of another Person, of the
Person which ultimately controls such first-mentioned Person and which has
issued and outstanding such capital stock, equity securities or equity
interests.
(h) "Disinterested Director" shall mean any member of the
Board who is not a Restricted Person (as hereinafter defined), or a
representative or nominee of a Restricted Person, who was a member of the Board
as of the date of this Agreement, or any individual who subsequently becomes a
member of the Board after the date of this Agreement who is not a Restricted
Person, or a representative or nominee of a Restricted Person, if such
individual's nomination for election or election to the Board is recommended or
approved by a majority of the Disinterested Directors then in office.
(i) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(j) "Fair Market Value," when used with respect to Preferred
Shares or shares of Common Stock or other capital stock of any class
(collectively, the "Stock"), to any option, warrant, right or other security or
evidence of indebtedness (collectively, a "Security") or to any other property,
shall be determined as follows:
(i) In the case of any Stock or Security which is
publicly traded, the Fair Market Value on any date shall be deemed to
be the average of the daily closing prices per share of such Stock or
per unit of such Security for the 30 consecutive Trading Days (as
hereinafter defined) immediately prior to such date; provided, however,
that in the event that the Fair Market Value per share of any Stock is
determined during a period commencing after the public announcement by
its issuer of a dividend or distribution on such Stock payable in
shares of such Stock or securities convertible into or exchangeable for
shares of such Stock or a subdivision, combination, consolidation or
reclassification of such Stock, and ending prior to the expiration of
the 30 Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination,
consolidation or reclassification, then, in each such case, the Fair
Market Value of such Stock shall be properly adjusted to take into
account "ex-dividend" trading. The closing price for each day shall be
the last sale price, regular way, or, in case no such sale shall take
place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to
-4-
<PAGE> 6
trading, as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to
trading on the principal national securities exchange on which such
Stock or Security is listed or admitted to trading; or if such Stock or
Security is not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the
average of the last quoted high bid and low asked prices in the
over-the-counter market, as reported by Nasdaq or any other similar
system then in use; or if on any such day no bid for such Stock or
Security is quoted by any such organization, the average of the closing
bid and asked prices, as furnished by a professional market maker
making a market in such Stock or Security selected by the Board. If
during any relevant period no market maker is making a market in such
Stock or Security, its Fair Market Value on a specified date shall be
determined reasonably and with good faith to the holders of the Rights
by the Board; provided, however, that if at the time of such
determination there shall be an Acquiring Person or an Adverse Person
(as hereinafter defined), the Fair Market Value of such Stock or
Security on such date shall be determined by a nationally recognized
investment banking firm selected by the Board, which determination
shall be described in a statement filed with the Rights Agent and shall
be binding on the Company, the Rights Agent and the holders of the
Rights.
(ii) In the case of any Stock or Security which is
not publicly traded, the Fair Market Value on any date shall be the
fair value per share of such Stock or per unit of such Security as
determined reasonably and with utmost good faith to the holders of the
Rights by the Board; provided, however, that if at the time of such
determination there shall be an Acquiring Person or an Adverse Person,
the Fair Market Value of such Stock or Security on such date shall be
determined by a nationally recognized investment banking firm selected
by the Board, which determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Company, the
Rights Agent and the holders of the Rights.
(iii) In the case of any property which is not a
Stock or a Security, the Fair Market Value on any date shall be
determined reasonably and with utmost good faith to the holders of
Rights by the Board; provided, however, that if at the time of such
determination there shall be an Acquiring Person or an Adverse Person,
the Fair Market Value of such property on such date shall be determined
by a nationally recognized investment banking firm selected by the
Board, which determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Company, the Rights Agent
and the holders of the Rights.
(k) "Interested Shareholder" shall mean any Restricted Person
and any Affiliate or Associate of any other Person in which such Restricted
Person has an interest, and any Person acting, directly or indirectly, on behalf
of or in concert with any such Restricted Person.
(l) "Permitted Offer" shall mean any tender or exchange offer
for all of the outstanding shares of Common Stock of the Company at a price and
on terms determined, prior to the purchase of shares under such tender or
exchange offer, by at least a majority of the Disinterested Directors who are
not officers of the Company to be appropriate (taking into account all factors
which such Disinterested Directors deem relevant, including, without limitation,
prices reasonably obtainable if the Company or its assets were sold on an
orderly basis designed to realize maximum value) and otherwise in the best
interests of the Company and its shareholders (other than the Person or any
Affiliate or Associate thereof on whose behalf or for whose benefit such tender
or exchange offer is being made).
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(m) "Person" shall mean any individual, firm, corporation,
partnership, limited liability company, association or other entity, and shall
include any successor (by merger or otherwise) of any of the foregoing.
(n) "Preferred Shares" shall mean the Series A Junior
Participating Preferred Stock, $.01 par value per share, of the Company, which
series shall have the powers, preferences and other rights set forth in the
Certificate of Designations.
(o) "Principal Party" shall mean: in the case of any
transaction described in Section 3.3(a)(i) or (ii), the Person which is the
issuer of the securities into which shares of Common Stock of the Company are
being converted or exchanged in such transaction or, if there shall be more than
one such issuer, the issuer having shares of Common Stock with the greatest
aggregate market value; or if no securities are being issued in such transaction
for shares of Common Stock of the Company, the Person which is the other party
to such transaction or, if there shall be more than one such Person, the Person
having shares of Common Stock with the greatest aggregate market value; and in
the case of any transaction described in Section 3.3(a)(iii), the Person which
is the party receiving the greatest portion of the assets or earning power sold
or otherwise transferred pursuant to such transaction or transactions; provided,
however, that in any such case (i) if the shares of Common Stock of such Person
shall not at the time of the consummation of such transaction been continuously
registered under Section 12 of the Exchange Act during the immediately preceding
twelve-month period, and such Person shall be a direct or indirect Subsidiary or
Affiliate of another Person the shares of Common Stock of which shall have been
so registered, "Principal Party" shall mean such other Person; (ii) if such
Person shall be a direct or indirect Subsidiary or Affiliate of more than one
other Person, the shares of Common Stock of two or more of which shall have been
so registered, "Principal Party" shall mean whichever of such other Persons
shall have Common Stock with the greatest aggregate market value; or (iii) if
such Person shall be owned, directly or indirectly, by a joint venture formed by
two or more Persons which are not owned, directly or indirectly, by the same
Person, the rules set forth in clauses (i) and (ii) of this proviso shall apply
to each chain of ownership of any joint venturer as though such joint venture
were a "Subsidiary" of all of such joint venturers, and the Principal Party in
each such chain shall bear the obligations and duties set forth in Section 3.3
in the same proportion as their direct or indirect ownership interest in such
Person bears to the total of such ownership interests.
(p) "Restricted Person" shall mean an Acquiring Person, an
Adverse Person and any Affiliate or Associate of an Acquiring Person or an
Adverse Person.
(q) "Rights Certificates" shall mean the certificates
evidencing the Rights after the Distribution Date.
(r) "Securities Act" shall mean the Securities Act of 1933, as
amended.
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(s) "Share Acquisition Date" shall mean the first date on
which there shall be, as determined by a majority of the Disinterested Directors
then in office in their sole discretion, a public announcement (which shall
include, without limitation, any press release or publicly available filing with
the Securities and Exchange Commission or any other federal or state
governmental authority or agency) by the Company or any Person that such Person
has become an Acquiring Person.
(t) "Subsidiary" of any Person shall mean any corporation,
limited liability company or other entity of which a majority of the voting
power (with respect to such Person's equity securities or equity interests
having the power to control or direct management) is owned, directly or
indirectly, by such Person.
(u) "Summary of Rights" shall mean the Summary of Rights to
Purchase shares of Series A Junior Participating Preferred Stock in
substantially the form attached hereto as EXHIBIT C.
(v) "Trading Day" shall mean a day on which the principal
national securities exchange on which such Stock or Security is listed or
admitted to trading is open for the transaction of business or, if such Stock or
Security is not listed or admitted to trading on any national securities
exchange, a Business Day.
ARTICLE II
THE RIGHTS
2.1 ISSUANCE OF RIGHTS CERTIFICATES.
(a) The Rights shall be evidenced (subject to the provisions
of paragraph (b) of this Section) by the certificates for shares of Common Stock
registered in the names of holders of Common Stock (which certificates for
shares of Common Stock also shall be deemed to be certificates for Rights) and
not by separate certificates until the earliest of (such date being hereinafter
the "Distribution Date"):
(i) The Close of Business on the tenth Business Day
after the Share Acquisition Date (or, if the Share Acquisition Date
shall have occurred prior to the Record Date, the Close of Business on
the tenth Business Day after the Record Date);
(ii) The Close of Business on the tenth Business Day
(or such other Business Day as may be determined, in compliance with
this Agreement, by action of the Board) after the date of the
commencement by any Person (other than an Exempt Person) of, or the
first public announcement of the intention of any Person (other than an
Exempt Person) to commence, a tender or exchange offer if, upon the
consummation thereof, such Person would be the Beneficial Owner of 15%
or more of the shares of Common Stock of the Company then outstanding;
and
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<PAGE> 9
(iii) The Close of Business on the tenth Business Day after at
least a majority of the Disinterested Directors who are not officers of
the Company shall have determined that a Person is an "Adverse Person"
(as hereinafter defined).
Such date shall be referred to herein as the "Distribution Date"; provided,
however, that if any tender or exchange offer referred to in Section 2.1(a)(ii)
is cancelled, terminated or otherwise withdrawn prior to the Distribution Date
without the purchase of any Common Stock pursuant thereto, such offer shall be
deemed for the purposes of the definition of "Distribution Date" never to have
been commenced or publicly announced.
(b) As soon as practicable after the Distribution Date (or, in
the case of any shares of Common Stock of the Company which are issued or
otherwise become outstanding after the Distribution Date and prior to the Final
Expiration Date, including any shares of Common Stock issued by reason of the
exercise of any option, warrant, right (other than the Rights) or conversion or
exchange privilege contained in any option, warrant, right (other than the
Rights) or convertible or exchangeable security issued by the Company prior to
the Distribution Date, unless the Board shall have expressly provided to the
contrary at the time of issuance of any such option, warrant, right or
convertible or exchangeable security, simultaneously with the issuance of stock
certificates for such shares of Common Stock), the Company shall prepare and
execute, the Rights Agent shall countersign and the Company shall deliver or
cause to be delivered or the Rights Agent shall, if requested, deliver, by
first-class mail, postage prepaid, to each record holder of shares of Common
Stock of the Company as of the Close of Business on the Distribution Date or, in
the case of shares of Common Stock issued or otherwise becoming outstanding
after the Distribution Date (unless otherwise provided), to each record holder
of the shares of Common Stock so being issued or becoming outstanding at the
time of such occurrence, at the record holder's last address shown on the
registry books of the transfer agent for the Common Stock of the Company, one or
more Rights Certificates evidencing one Right for each share of Common Stock of
the Company so held, issued or becoming outstanding. As of and after the
Distribution Date, the Rights shall be evidenced solely by the Rights
Certificates.
(c) On the Record Date, or as soon as practicable thereafter,
the Company shall send a copy of the Summary of Rights, by first-class mail,
postage prepaid, to each record holder of shares of Common Stock of the Company
as of the Close of Business on the Record Date, at such record holder's last
address as shown by the records of the Company.
(d) Until the Distribution Date, no Rights Certificates shall
be issued. Each stock certificate for shares of Common Stock of the Company
outstanding as of the Record Date, until the earliest of the Distribution Date,
the Redemption Date and the Final Expiration Date, shall be deemed also to
constitute a certificate for the Rights associated with the shares represented
thereby, together with a copy of the Summary of Rights attached thereto and the
registered holder of such shares also shall be the registered holder of the
associated Rights. Until the earliest of the Distribution Date, the Redemption
Date and the Final Expiration Date, the surrender for transfer of any such stock
certificate, with or without a copy of the Summary of Rights attached thereto,
shall constitute the transfer of the Rights associated with the shares of Common
Stock represented thereby.
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<PAGE> 10
(e) Any stock certificate for shares of Common Stock of the
Company which shall be delivered by or on behalf of the Company (including,
without limitation, stock certificates for shares of Common Stock which are
reacquired by the Company and then transferred) after the Record Date and prior
to the earliest of the Distribution Date, the Redemption Date and the Final
Expiration Date shall have impressed, printed or written thereon, or otherwise
affixed thereto, the following legend:
"This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Shareholder Rights Agreement dated
as of September 25, 1997 (the "Rights Agreement") between St. Francis
Capital Corporation and Firstar Trust Co., as Rights Agent, the terms,
provisions and conditions of which are incorporated herein by reference
and made a part hereof. The Rights Agreement is on file at the
principal office of the Rights Agent, and the Rights Agent will mail to
the holder of this certificate a copy without charge after receipt of a
written request therefor. Under certain circumstances set forth in the
Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. Under
certain circumstances set forth in the Rights Agreement, the Rights may
be redeemed at a redemption price (subject to adjustment) of $.01 per
Right, may be exchanged, in whole or in part, for shares of Common
Stock at an exchange rate (subject to adjustment) of one share of
Common Stock per Right or may become exercisable for securities or
assets of the Company or another entity. Under certain circumstances
set forth in the Rights Agreement, Rights Beneficially Owned by a
Restricted Person (as such terms are defined in the Rights Agreement)
or by certain transferees from a Restricted Person, shall be or become
void."
Each stock certificate containing the foregoing legend, until the earliest of
the Distribution Date, the Redemption Date and the Final Expiration Date, shall
be deemed also to constitute a certificate for the Rights associated with the
shares represented thereby, and the registered holder of such shares also shall
be the registered holder of the associated Rights. The omission of the foregoing
legend shall not in any manner whatsoever affect the application or
interpretation of Section 2.5(c).
(f) In the event that the Company shall reacquire any shares
of its Common Stock after the Record Date and prior to the Distribution Date,
the Rights associated with such shares shall be deemed cancelled and retired,
the Company not being entitled to exercise any Rights associated with shares of
its Common Stock which are no longer outstanding.
2.2 FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (including the Form of Election to
Purchase and Certification of Status and the Form of Assignment and Certificate
of Status to be set forth on the reverse side thereof) shall be in substantially
the form attached hereto as EXHIBIT B and may have such marks of identification
or designation and such legends, summaries or endorsements set forth thereon as
the Company may deem appropriate or to comply with any applicable law or any
rule or regulation made pursuant thereto or with any rule or regulation of any
stock exchange on which the Rights may from time to time be listed. Subject to
the terms of this
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<PAGE> 11
Agreement, the Rights Certificates, whenever distributed, shall be dated as of
the Record Date (or, in the case of Rights with respect to shares of Common
Stock issued or becoming outstanding after the Record Date, the same date as the
stock certificate evidencing such shares), shall (if the Company shall so
require) indicate the date of countersignature by the Rights Agent and shall
entitle the holders thereof to purchase such number of one one-hundredths of a
Preferred Share at the Exercise Price as shall be set forth therein, subject to
adjustment as provided herein.
(b) Any Rights Certificate that represents Rights Beneficially
Owned by: (i) a Restricted Person, (ii) a transferee from a Restricted Person
who becomes a transferee after the Acquiring Person or Adverse Person becomes
such, or (iii) a transferee from a Restricted Person who becomes a transferee
prior to or concurrently with the Acquiring Person or Adverse Person becoming
such and receives such Rights pursuant to either a transfer (whether or not for
consideration) from such Acquiring Person or Adverse Person (or any Affiliate or
Associate thereof) to holders of equity interests in such Acquiring Person or
Adverse Person (or any such Affiliate or Associate) or to any Person with whom
such Acquiring Person or Adverse Person (or any such Affiliate or Associate) has
any continuing written or oral agreement, arrangement or understanding regarding
the transferred Rights or a transfer which the Board has determined is part of a
plan, arrangement or understanding which intends to effect the avoidance of
Section 2.5(c) (collectively, a "Restricted Person/Transferee"), and any Rights
Certificate issued pursuant to the transfer, exchange, replacement or adjustment
of any other Rights Certificate referred to in this sentence, shall have deleted
therefrom the second sentence of the legend on the Rights Certificate attached
hereto as EXHIBIT B and, in lieu thereof, shall contain the following two
sentences:
"The Rights represented by this Rights Certificate are or were
Beneficially Owned by a Restricted Person as such term is defined in
the Rights Agreement. This Rights Certificate and the Rights
represented hereby shall be or become void under the circumstances
specified in Section 2.5(c) of the Rights Agreement."
The Company shall give prompt written notice to the Rights Agent after becoming
aware of the existence and identity of any Restricted Person. The failure to
insert the foregoing sentences on any such Rights Certificate or any defect
therein shall not in any manner whatsoever affect the application or
interpretation of Section 2.5(c). The Company shall specify to the Rights Agent
in writing which Rights Certificates are to be so legended.
2.3 COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President, any of its Vice Presidents
or its Treasurer, either manually or by facsimile signature attested by its
Secretary or any of its Assistant Secretaries, either manually or by facsimile
signature. The Rights Certificates shall be manually countersigned by an
authorized signatory of the Rights Agent and shall not be valid or obligatory
for any purpose unless so countersigned. In case any officer of the Company who
shall have executed any Rights Certificate shall cease to be such officer of the
Company before such Rights Certificate shall have been countersigned by an
authorized signatory of the Rights Agent and issued and delivered by or on
behalf of the Company, such Rights Certificate, nevertheless, may be
countersigned by the
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<PAGE> 12
Rights Agent and issued and delivered by or on behalf of the Company with the
same force and effect as though the individual who executed such Rights
Certificate or who attested the Company's seal thereon had not ceased to be such
officer; and any Rights Certificate may be executed on behalf of the Company by
any individual who, at the actual date of such execution, shall be a proper
officer of the Company, although at the date of execution of this Rights
Agreement such person was not such an officer.
(b) After the Distribution Date, the Rights Agent shall keep
or cause to be kept, at its principal office, books for registration and
transfer of the Rights Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Rights Certificates, the
number of Rights evidenced on its face by each Rights Certificate, the date of
each Rights Certificate and (if required by the Company) the date of
countersignature by the Rights Agent.
2.4 MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
(a) If any mutilated Rights Certificate is surrendered to the
Rights Agent prior to the earlier to occur of the Final Expiration Date, the
time at which the Rights are exercised pursuant to Section 2.5 and the time at
which Rights are exchanged pursuant to the provisions of Section 3.2, the
Company shall execute and the Rights Agent shall countersign and deliver in
exchange therefor a new Rights Certificate evidencing the same number of Rights
as did the Rights Certificate so surrendered.
(b) If there shall be delivered to the Company and the Rights
Agent prior to the Final Expiration Date evidence to their satisfaction of the
destruction, loss or theft of any Rights Certificate and such security or
indemnity as may be required by them to save each of them and any of their
agents harmless, then, subject to the terms of this Agreement and in the absence
of notice to the Company or the Rights Agent that such Rights Certificate has
been acquired by a bona fide purchaser, the Company shall execute and upon its
request the Rights Agent shall countersign and deliver, in lieu of any such
destroyed, lost or stolen Rights Certificate, a new Rights Certificate
evidencing the same number of Rights as did the Rights Certificate so destroyed,
lost or stolen.
(c) As a condition to the issuance of any new Rights
Certificate under this Section, the Company may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other expenses (including the fees and expenses of the
Rights Agent) connected therewith.
(d) Every new Rights Certificate issued pursuant to this
Section in lieu of any destroyed, lost or stolen Rights Certificate shall
evidence an original additional contractual obligation of the Company, whether
or not the destroyed, lost or stolen Rights Certificate shall be at any time
enforceable by anyone, and shall be entitled to all the benefits of this
Agreement equally and proportionately with any and all other Rights duly issued
hereunder.
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2.5 EXERCISE OF RIGHTS; EXERCISE PRICE; EXPIRATION DATE OF RIGHTS.
(a) No Right may be exercised until the Business Day after the
Distribution Date. At any time on and after the Business Day after the
Distribution Date and prior to the earliest of (i) the Close of Business on
September 25, 2007 (the "Final Expiration Date"), and (ii) the time at which
such Rights are exchanged as provided in Section 3.2, the registered holder of
any Rights Certificate may exercise the Rights evidenced thereby, except as
otherwise provided herein and subject to Section 2.5(c), in whole or in part,
upon surrender of such Rights Certificate, with the Form of Election to Purchase
and Certification of Status on the reverse side thereof duly executed, together
with such signature guarantees and other documentation as the Rights Agent may
reasonably request, to the Rights Agent at its principal office, accompanied by
payment (as provided in Section 2.5(b)) of the Exercise Price for each one
one-hundredth of a Preferred Share (or after a "Triggering Event" [as
hereinafter defined], the securities, cash and other property purchasable in
lieu thereof) as to which the surrendered Rights are then being exercised.
(b) Upon receipt of a Rights Certificate representing then
exercisable Rights, with the Form of Election to Purchase and Certification of
Status on the reverse side thereof duly executed, together with such signature
guarantees and other documentation as the Rights Agent may reasonably request,
accompanied by payment of the Exercise Price for the number of one
one-hundredths of a Preferred Share (or after a Triggering Event, the
securities, cash and other property purchasable in lieu thereof) being
purchased, plus the amount of any applicable transfer tax (as determined by the
Rights Agent) required to be paid by the holder of such Rights Certificate, by
certified or cashier's check or money order payable to the order of the Company,
the Rights Agent shall, subject to the terms and conditions of this Agreement,
thereupon promptly:
(i) Requisition from any transfer agent for the
Preferred Shares (or, if the Rights Agent is such a transfer agent,
make available) stock certificates for the number of one one-hundredths
of a Preferred Share being purchased, the Company hereby irrevocably
authorizing any such transfer agent to comply with all such requests;
(ii) Requisition from the depository agent depository
receipts for the number of one one-hundredths of a Preferred Share
being purchased (in which case stock certificates for the Preferred
Shares represented by such depository receipts shall be deposited by
the transfer agent for the Preferred Shares with the depository agent
and to which the Company hereby irrevocably authorizing any such
depository agent to comply with all such requests) if the Company shall
have elected to deposit the Preferred Shares issuable upon exercise of
the Rights with a depository agent;
(iii) Requisition or obtain from the appropriate
Person or Persons such securities, cash and other property as may then
be purchasable in lieu of Preferred Shares after a Triggering Event
(the Company hereby irrevocably authorizing all such requests);
(iv) Requisition from the Company the amount of cash
to be paid in lieu of the issuance of any fractional share of Preferred
Shares when appropriate; and
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(v) Cause the same to be delivered to or upon the order of
the registered holder of such Rights Certificate, registered (when
appropriate) in such name or names as may be designated by such
registered holder promptly after receipt of such stock certificates,
depository receipts, securities, cash and/or other property.
(c) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Flip-In Event (as hereinafter
defined), any Rights Beneficially Owned by a Restricted Person/Transferee shall
be or become void without any further action. No holder of such Rights shall
have any rights whatsoever with respect to such Rights, whether under any
provision of this Agreement or otherwise, from and after such first occurrence.
The Company shall use all reasonable efforts to ensure that the provisions of
this Section and Section 2.2(b) are complied with, but shall have no liability
to any holder of the Rights Certificates or to any other Person as a result of
the Company's failure to make any applicable finding or determination with
respect to any Restricted Person, or any transferee of any thereof.
(d) Notwithstanding Section 2.5(a), a Right may be exercised
by the holder thereof on or after the Business Day after the Distribution Date
and prior to the receipt of the associated Rights Certificate by notifying the
Rights Agent in writing and furnishing to the Rights Agent such information and
evidence as to such election as the Rights Agent may reasonably request;
provided, however, that the Rights Agent shall not be required to take any of
the actions specified in this Section until such holder shall have fully
satisfied the applicable requirements specified therein.
(e) Neither the Rights Agent nor the Company shall be
obligated to undertake any action with respect to any Rights or Rights
Certificate upon the purported exercise or transfer thereof unless the
registered holder thereof shall have completed and signed the Certification of
Status following the Form of Election to Purchase or the Form of Assignment, as
the case may be, set forth on the reverse side of the Rights Certificate
surrendered for such exercise or transfer, and provided such additional evidence
as to the identity of the Beneficial Owner (or former Beneficial Owner) thereof
or the Affiliates or Associates thereof as the Company shall reasonably request.
(f) In case the registered holder of any Rights Certificate
shall exercise less than all of the Rights evidenced thereby, then, subject to
the provisions of Section 5.6, a new Rights Certificate evidencing the Rights
remaining unexercised shall be prepared and executed by the Company and
countersigned and delivered by the Rights Agent to the registered holder of such
surrendered Rights Certificate or to such registered holder's duly authorized
assigns.
2.6 EXERCISE PRICE. The price for each one one-hundredth of a Preferred
Share purchased upon exercise of the Rights shall initially be $150 (the
"Exercise Price"), shall be subject to adjustment from time to time as provided
in this Agreement and shall be payable in lawful money of the United States of
America in accordance with Section 2.5(b).
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2.7 ADJUSTMENT OF EXERCISE PRICE, NUMBER AND KIND OF SHARES AND RIGHTS.
(a) In the event that the Company shall at any time after the
date of this Agreement declare a dividend on the Preferred Shares payable in
Preferred Shares, subdivide the outstanding Preferred Shares into a greater
number of Preferred Shares, combine or consolidate the outstanding Preferred
Shares into a smaller number of Preferred Shares or issue any shares of capital
stock of any class in a reclassification of the Preferred Shares (including any
such reclassification in connection with a combination or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 2.7 and in Section 2.5(c), the Exercise Price in effect
at the Close of Business on the record date for such dividend or at the
effective time of such subdivision, combination, consolidation or
reclassification, and the number and kind of shares of capital stock issuable
upon exercise of the Rights at such date or time, shall be proportionately
adjusted so that the registered holder of each Right exercised after such date
or time shall be entitled to receive the aggregate number and kind of shares of
capital stock which, if such Right had been exercised immediately prior to such
date or time and at a time when the registry books of the transfer agent for the
Preferred Shares were open, such registered holder would have been entitled to
receive by reason of such dividend, subdivision, combination, consolidation or
reclassification; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon the exercise thereof.
If an event shall occur which would require an adjustment under both this
paragraph and Section 3.1, the adjustment provided for in this paragraph shall
be in addition to, and shall be made prior to, any adjustment required pursuant
to such Section 3.1.
(b) In the event that the Company shall fix a record date for
the making of any distribution to all registered holders of Preferred Shares of
options, warrants or rights entitling them (for a period expiring not later than
45 calendar days after such record date) to subscribe for or purchase (i)
Preferred Shares or shares of capital stock of any class of the Company having
the same or more favorable powers, preferences and rights as the Preferred
Shares ("Equivalent Preferred Shares"), or (ii) securities convertible into or
exchangeable for Preferred Shares or Equivalent Preferred Shares, at a price per
Preferred Share or per Equivalent Preferred Share (or having a conversion or
exchange price per share, in the case of securities convertible into or
exchangeable for Preferred Shares or Equivalent Preferred Shares) less than the
Fair Market Value of one Preferred Share on such record date, the Exercise Price
to be in effect after such record date shall be determined by multiplying the
Exercise Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of Preferred Shares outstanding on
such record date, plus the number of Preferred Shares which the aggregate
offering price of the total number of Preferred Shares and/or Equivalent
Preferred Shares so to be offered (and/or the aggregate initial conversion or
exchange price, in the case of convertible or exchangeable securities so to be
offered) would purchase at such Fair Market Value, and the denominator of which
shall be the number of Preferred Shares outstanding on such record date, plus
the total number of Preferred Shares and/or Equivalent Preferred Shares so to be
offered (and/or into or for which the convertible or exchangeable securities so
to be offered are initially convertible or exchangeable); provided, however,
that in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital stock of the
Company issuable upon the exercise thereof. In case all or part of such
subscription price may be paid in a form other than cash, the value of such
non-cash consideration shall be
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its Fair Market Value. Preferred Shares owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any computation
provided for in this subsection. The adjustment required by this subsection
shall be made successively whenever such a record date is fixed; and in the
event that such distribution is not so made, the Exercise Price shall be
adjusted to the Exercise Price which would have been in effect if such record
date had not been fixed.
(c) In the event that the Company shall fix a record date for
the making of any distribution to all registered holders of Preferred Shares
(including any such distribution made in connection with a combination or merger
in which the Company is the continuing or surviving corporation) of cash (other
than a regular quarterly cash dividend), options, warrants or rights (other than
those referred to in Section 3.1), securities, evidences of indebtedness or
other property (excluding any dividend payable in Preferred Shares, but
including any dividend payable in other shares of capital stock), the Exercise
Price to be in effect after such record date shall be determined by multiplying
the Exercise Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the Fair Market Value of one
one-hundredth of a Preferred Share on such record date, less the Fair Market
Value of the cash, options, warrants, rights, securities, evidences of
indebtedness or other property so to be distributed and properly attributable to
one one-hundredth of a Preferred Share, and the denominator of which shall be
such Fair Market Value of one one-hundredth of a Preferred Share. The adjustment
required by this subsection shall be made successively whenever such a record
date is fixed; and in the event that such distribution is not so made, the
Exercise Price shall be adjusted to the Exercise Price which would have been in
effect if such record date had not been fixed.
(d) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least 1.0% in
the Exercise Price then in effect; provided, however, that any adjustments which
by reason of this subsection are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section shall be made to the nearest whole cent, to the nearest one
ten-thousandth of a share of Common Stock or other capital stock of any class
(other than Preferred Shares) or to the nearest one one-millionth of a Preferred
Share, as the case may be. Notwithstanding the first sentence of this
subsection, any adjustment required by this Section shall be made no later than
the earliest to occur of three years after the date of the occurrence requiring
such adjustment, the Redemption Date, and the Final Expiration Date.
(e) If as a result of an adjustment required by any Triggering
Event the holder of any Rights thereafter exercised shall become entitled to
receive any shares of capital stock of any class of the Company (other than
Preferred Shares), the number of such other shares so receivable upon exercise
of any Rights shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as reasonably possible to the provisions with
respect to the Preferred Shares contained in this Section, and the provisions of
this Agreement with respect to the Preferred Shares shall apply on like terms to
any such other shares.
(f) All Rights originally issued by the Company subsequent to
any adjustment made to the Exercise Price hereunder shall evidence the right to
purchase, at the adjusted Exercise Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
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<PAGE> 17
(g) Before taking any action which would cause an adjustment
reducing the Exercise Price below one one-hundredth of the then par value, if
any, of the Preferred Shares issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Exercise Price.
(h) Anything in this Section to the contrary notwithstanding,
the Board shall be entitled to make reductions in the Exercise Price, in
addition to the adjustments expressly required by this Section, as and to the
extent that the Board, in its sole discretion, shall determine to be advisable
in order that any dividend on the Preferred Shares payable in Preferred Shares,
any subdivision, combination or consolidation of the Preferred Shares (by
reclassification or otherwise than by payment of dividends in Preferred Shares)
into a greater or lesser number of Preferred Shares, any issuance of Preferred
Shares solely for cash at less than the Fair Market Value thereof, any issuance
solely for cash of Preferred Shares or securities which by their terms are
convertible into or exchangeable for Preferred Shares or any issuance of
options, warrants, rights, securities, evidences of indebtedness or other
property subject to subsection (b) or (c) of this Section, hereafter made by the
Company to the holders of the Preferred Shares, shall not be taxable to such
holders.
(i) Unless the Company shall have exercised the option
provided in Section 2.7(b), upon each adjustment of the Exercise Price as a
result of the calculations required by Sections 2.7(b) and 2.7(c), each Right
outstanding immediately prior to the making of such Exercise Price adjustment
shall thereafter evidence the right to purchase, at the adjusted Exercise Price,
the number of one one-hundredths of a Preferred Share (calculated to the nearest
one onemillionth) determined by (i) multiplying the number of one one-hundredths
of a Preferred Share purchasable upon exercise of such Right immediately prior
to such adjustment by the Exercise Price in effect immediately prior to such
adjustment and (ii) dividing the product so obtained by the Exercise Price in
effect immediately after such adjustment.
(j) The Company may elect, on or after the date on which any
adjustment of the Exercise Price is required to be made hereunder, to adjust the
number of Rights outstanding in substitution for making an adjustment in the
number of one one-hundredths of a Preferred Share purchasable upon exercise of
each Right. Each Right outstanding after such an adjustment in the number of
Rights shall be exercisable for the same number of one one-hundredths of a
Preferred Share as such Right was exercisable for immediately prior to such
adjustment; but each Right held of record prior to such adjustment shall become
the number of Rights (calculated to the nearest one ten-thousandth) determined
by dividing the Exercise Price in effect immediately prior to the occurrence
requiring the adjustment of the Exercise Price by the Exercise Price in effect
immediately after such adjustment of the Exercise Price. The Company shall make
a prompt public announcement of its election to adjust the number of Rights
outstanding, indicating the record date for the adjustment and, if known at the
time of such announcement, the amount of the adjustment to be made. Such record
date may be the date on which the Exercise Price is required to be adjusted or
any day thereafter, unless the Rights Certificates shall have been issued, in
which case such record date shall be at least ten days after the date of such
public announcement. If the Rights Certificates shall have been issued, upon
each adjustment of the number of Rights outstanding pursuant to this subsection,
the Company shall, as promptly as practicable, cause to be distributed to each
registered holder of the Rights Certificates on such
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<PAGE> 18
record date Rights Certificates evidencing, subject to Section 5.6, the
additional Rights to which such registered holder shall be entitled as a result
of such adjustment; or, at its option, the Company shall cause to be distributed
to each such registered holder, in substitution and replacement for the Rights
Certificates held by such registered holder prior to the date of such
adjustment, but only upon surrender thereof (if so required by the Company), new
Rights Certificates evidencing all the Rights to which such registered holder
shall be entitled after such adjustment. Rights Certificates so distributed
shall be executed and countersigned in the manner provided by this Agreement
(and may designate, at the option of the Company, the adjusted Exercise Price)
and shall be registered in the names of the registered holders of the Rights
Certificates on the record date specified in the aforesaid public announcement.
(k) In the event that the Company shall at any time after the
date of this Agreement and prior to the Distribution Date declare a dividend on
its outstanding shares of Common Stock payable in shares of Common Stock or
effect a subdivision, combination or consolidation of its outstanding shares of
Common Stock (by reclassification or otherwise than by payment of dividends in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then, in each such case, the number of one one-hundredths of a Preferred
Share purchasable after such event upon proper exercise of each Right shall be
determined by multiplying the number of one one-hundredths of a Preferred Share
so purchasable immediately prior to such event by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such event and the denominator of which shall be the number of shares
of Common Stock outstanding immediately after such event; and each share of
Common Stock outstanding immediately after such event shall have issued with
respect to it the same number of Rights which each share of Common Stock
outstanding immediately prior to such event had issued with respect to it. This
adjustment shall be made successively whenever such a dividend is declared or
such a subdivision, combination or consolidation is effected.
(l) Irrespective of any adjustment or change in the Exercise
Price or the number of one one-hundredths of a Preferred Share issuable upon
exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to designate the Exercise Price and the number of one
one-hundredths of a Preferred Share which were designated in the Rights
Certificates originally issued hereunder.
(m) In any case in which this Section shall require an
adjustment of the Exercise Price effective as of the record date for a
particular event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Rights exercised after such record date
of the Preferred Shares (and/or the other shares of capital stock, securities or
other property of the Company, if any) issuable upon such exercise in excess of
the Preferred Shares (and/or the other shares of capital stock, securities or
other property of the Company, if any) issuable upon such exercise on the basis
of the Exercise Price in effect immediately prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such excess
upon the occurrence of such event.
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<PAGE> 19
2.8 CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights
Certificates surrendered for the purpose of exercise, transfer, split-up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation. If the Rights
Certificates are in cancelled form when surrendered to the Rights Agent, they
shall be cancelled by it. No Rights Certificates shall be issued in lieu of the
cancelled Rights Certificates except as expressly permitted by this Agreement.
The Company shall deliver to the Rights Agent for cancellation, and the Rights
Agent shall cancel, any other Rights Certificate purchased or reacquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all cancelled Rights Certificates to the Company or shall, at the written
request of the Company, destroy such cancelled Rights Certificates and deliver a
certificate of the destruction thereof to the Company.
2.9 RESERVATION AND AVAILABILITY OF PREFERRED SHARES.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued Preferred Shares,
or any authorized and issued Preferred Shares held in its treasury, the number
of Preferred Shares required to permit the exercise in full of all outstanding
Rights.
(b) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Preferred Shares delivered upon
exercise of the Rights shall, at the time of delivery of the stock certificates
therefor in accordance with Section 2.5(b) (including the receipt of payment of
the Exercise Price), be duly and validly authorized and issued and fully paid
and nonassessable.
(c) The Company covenants and agrees that it will use its best
efforts to (i) file, as soon as practicable after the occurrence of a Flip-In
Event for which the consideration to be delivered by the Company upon exercise
of the Rights has been determined, or as soon as required by law after the
Distribution Date, as the case may be, a registration statement on an
appropriate form under the Securities Act with respect to the securities
purchasable upon exercise of the Rights, (ii) cause such registration statement
to become effective as soon as practicable after such filing, and (iii) cause
such registration statement to remain effective (with a prospectus which at all
times meets the requirements of the Securities Act) until the earliest of the
date as of which the Rights are no longer exercisable for such securities, the
Redemption Date and the Final Expiration Date. The Company further covenants and
agrees that it will take such action as may be appropriate under, and which will
ensure compliance with, the securities or "blue sky" laws of such jurisdictions
as may be necessary or appropriate in connection with the exercisability of the
Rights. The Company may temporarily suspend, for not more than 120 days after
the applicable date specified in the first sentence of this subsection, the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective and to complete such securities or
"blue sky" law action. Upon such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, and the Company also shall issue a public announcement at such time
as the suspension shall no longer be in effect. Failure of the Company to notify
the Rights Agent of any such suspension shall not affect the effectiveness
thereof. Notwithstanding any provision of this Agreement to the contrary, the
Rights shall not be exercisable in any jurisdiction unless the requisite
qualification or exemption in such jurisdiction shall have been effected. Until
otherwise
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<PAGE> 20
notified in writing by the Company, the Rights Agent may assume that each
purported exercise of the Rights is permitted by this Agreement and by
applicable law, and the Rights Agent shall not be liable for acting in reliance
upon such assumption.
(d) The Company covenants and agrees that, subject to Section 2.4,
it will pay when due and payable any and all federal and state original issue or
transfer taxes and charges which may be payable in respect of the issuance or
delivery of the Rights or the Rights Certificates or of any stock certificate
for Preferred Shares issued upon exercise of the Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of any Rights Certificate to a Person other than, or
the issuance of any stock certificate for Preferred Shares upon exercise of any
of the Rights represented by such Rights Certificate in a name other than, the
registered holder of such Rights Certificate or to issue or deliver any Rights
Certificate or stock certificate for Preferred Shares upon such transfer or
exercise until any such tax shall have been paid (any such tax being payable by
the holder of such Rights Certificate at the time of surrender thereof) or until
it has been established to the Company's reasonable satisfaction that no such
tax is due.
(e) After a Triggering Event, the provisions of this Section shall
apply, to the extent applicable and appropriate, to all shares of capital stock
and other securities then purchasable upon exercise of the Rights.
2.10 RECORD DATE OF PREFERRED SHARE OWNERSHIP. The Person in whose name
any stock certificate for Preferred Shares is issued upon exercise of any of the
Rights shall for all purposes be deemed to have become the holder of record of
the Preferred Shares represented thereby on, and such stock certificate shall be
dated, the date upon which the Rights Certificate evidencing such Rights was
duly surrendered to the Rights Agent with proper payment of the Exercise Price
(and all applicable transfer taxes, if any); provided, however, that if the date
of such surrender and payment shall be a date upon which the registry books of
the transfer agent for the Preferred Shares are closed, such Person shall be
deemed to have become the record holder of such Preferred Shares on, and such
stock certificate shall be dated, the next succeeding Business Day on which such
registry books are open.
ARTICLE III
ADJUSTMENTS TO THE RIGHTS IN THE EVENT OF
CERTAIN TRANSACTIONS
3.1 FLIP-IN.
(a) For purposes of this Article III, the "Product" shall be
defined as the product of the then current Exercise Price and the number of one
one-hundredths of a Preferred Share for which such Right was exercisable prior
to such occurrence.
(b) Subject to Section 3.2, promptly upon the occurrence of an
event described in (i), (ii) or (iii) below (where each event shall be referred
to herein as a "Flip-In Event") proper provision shall be made so that the
registered holder of each Right, except as otherwise provided in Section 2.5(c),
shall thereafter have the right to receive, upon exercise thereof and payment
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<PAGE> 21
of the Product, in accordance with this Agreement, in lieu of Preferred Shares,
the number of shares of Common Stock determined dividing the Product by 50% of
the Fair Market Value of one share of Common Stock on the date of such
occurrence:
(i) The occurrence of a Share Acquisition Date;
(ii) The commencement by any Person (other than an
Exempt Person) of, or the first public announcement of the intention of
any Person (other than an Exempt Person) to commence, a tender or
exchange offer if, upon the consummation thereof, such Person would be
the Beneficial Owner of 15% or more of the shares of Common Stock of
the Company then outstanding; provided, however, that if any such
tender or exchange offer is cancelled, terminated or otherwise
withdrawn prior to the Distribution Date without the purchase of any
Common Stock pursuant thereto, such offer shall be deemed never to have
been commenced or publicly announced; or
(iii) At least a majority of the Disinterested
Directors who are not officers of the Company shall declare that any
Person is an "Adverse Person." A Person may be declared as an Adverse
Person if it is determined by at least a majority of the Disinterested
Directors who are not officers of the Company after reasonable inquiry
and investigation (including such consultation, if any, with such
Person as such Disinterested Directors shall deem appropriate) that a
Person, either alone or with its Affiliates and Associates, has become
the Beneficial Owner of 10% or more of the outstanding shares of Common
Stock of the Company and that:
(A) such Beneficial Ownership by such
Person is intended to cause, is
reasonably likely to cause or will
cause the Company to repurchase the
shares of Common Stock Beneficially
Owned by such Person (and/or its
Affiliates and Associates) or the
Company to take other action or
enter into one or a series of
related transactions which would
provide such Person (and/or its
Affiliates and Associates) with
short-term financial gain under
circumstances which would not be, in
the judgment of such Disinterested
Directors, in the best long-term
interests of the Company and its
shareholders, or
(B) such Beneficial Ownership is having
or reasonably likely to have a
material adverse effect (including,
but not limited to, impairment of
the Company's relationships with
customers or its ability to maintain
its competitive position) on the
business or prospects of the Company
(provided, however, that such
Disinterested Directors may
determine not to declare a Person to
be an Adverse Person if, prior to
the time that such Person acquired
10% or more of the then outstanding
shares of Common Stock of the
Company, such Person provides a
written statement of its purposes
and intentions in connection with
its proposed acquisition of
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<PAGE> 22
such shares of Common Stock,
together with any other information
reasonably requested of such Person
by such Disinterested Directors, and
such Disinterested Directors, based
on such written statement and
information and such further inquiry
and investigation as such
Disinterested Directors shall deem
necessary or appropriate, notify
such Person in writing that such
Person will not then be declared to
be an Adverse Person.
The Disinterested Directors may expressly condition in any manner their
determination not to declare a Person to be an Adverse Person in such respects
as they deem appropriate, including, without limitation, such Person's not
acquiring more than a specified amount or percentage of the Company's then
outstanding capital stock or other securities and/or such Person's not taking
actions inconsistent with the purposes and intentions disclosed in its written
statement provided to the Board.
(c) No delay or failure by at least a majority of the
Disinterested Directors who are not officers of the Company to declare any
Person to be an Adverse Person shall in any way waive or otherwise affect the
power of such Disinterested Directors thereafter to declare such Person to be an
Adverse Person. In the event that at least a majority of such Disinterested
Directors should at any time determine, after reasonable inquiry and
investigation, including such consultation, if any, with such Person as such
Disinterested Directors shall deem necessary or appropriate, that such Person
has not met or complied with any condition specified by such Disinterested
Directors, such Disinterested Directors may at any time thereafter declare such
Person to be an Adverse Person.
(d) In the event that there shall not be sufficient authorized
and unissued or treasury shares of Common Stock to permit the exercise in full
of the Rights in accordance with Section 3.1(b), the Company shall take all
necessary action to authorize and reserve for issuance such number of additional
shares of Common Stock as may from time to time be required to be issued upon
the exercise in full of all outstanding Rights and, if necessary, shall use its
best efforts to obtain shareholder approval thereof. Notwithstanding the
preceding sentence, if at least a majority of the Disinterested Directors shall
determine that such action is necessary or appropriate and is not contrary to
the best interests of the holders of the Rights or if a sufficient number of
shares of Common Stock cannot be issued for such purpose in accordance with the
provisions hereof, such Disinterested Directors may cause the Company, in lieu
of issuing shares of Common Stock to distribute, upon the exercise of each
Right, cash, debt securities, shares of preferred stock of the Company, other
property or any combination thereof, having an aggregate Fair Market Value equal
to the Fair Market Value of the number of shares of Common Stock which otherwise
would have been issuable. Any such decision by a majority of the Disinterested
Directors must be made and publicly announced within 45 days after the
occurrence of any Flip-In Event.
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<PAGE> 23
3.2 EXCHANGE.
(a) The Board may, at its option, at any time on or after the
occurrence of a Flip-In Event, exchange all or any part of the then outstanding
and exercisable Rights (which shall not include any Rights which have become
void pursuant to Section 2.5(c)) for shares of Common Stock of the Company at an
exchange rate of one share of Common Stock per Right, appropriately adjusted
(such exchange rate being hereinafter called the "Exchange Rate"); provided,
however, that the Board shall not be authorized to effect such an exchange at
any time after any Person (other than an Exempt Person), together with the
Affiliates and Associates of such Person, shall have become the Beneficial Owner
of 50.0% or more of the then outstanding shares of Common Stock of the Company.
(b) Immediately after action by the Board directing the
exchange of any Rights pursuant to this Section, and without any further action
and without any notice, the right to exercise such Rights shall terminate, and
thereafter each registered holder of such Rights shall only be entitled to
receive the number of shares of Common Stock of the Company which shall equal
the number of such Rights held by such registered holder multiplied by the
Exchange Rate then in effect. The Company shall give prompt written notice to
the Rights Agent and prompt public notice to the holders of the Rights of any
such exchange; provided, however, that the failure to give, or any defect in,
any such notice shall not affect the validity of such exchange. Within 15
Business Days after action by the Board directing the exchange of any Rights,
the Company shall mail (or cause the Rights Agent to mail) a notice of exchange
to each registered holder of such Rights, at its last address appearing on the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Stock of the Company. Any
notice which is mailed in the manner provided in this subsection (b) shall be
deemed given, whether or not received by the registered holder to whom sent.
Each notice of exchange shall state the method by which the exchange of shares
of Common Stock for Rights will be effected and, in the event of any partial
exchange, the number of Rights which will be exchanged. Any partial exchange
shall be effected pro rata among the registered holders of the Rights based upon
the number of Rights held (excluding Rights which shall have become void
pursuant to Section 2.5(c)); and, in such case, a new Rights Certificate
evidencing the Rights not being exchanged shall be prepared and executed by the
Company and countersigned and delivered by the Rights Agent to the registered
holder of such Rights.
(c) In any exchange pursuant to this Section, the Company, at
its option, may substitute Preferred Shares (or Equivalent Preferred Shares) for
shares of Common Stock in effecting an exchange for Rights, at the initial rate
of one one-hundredth of a Preferred Share (or Equivalent Preferred Share) for
each share of Common Stock, appropriately adjusted to reflect any adjustments in
the voting rights of the Preferred Shares pursuant to the Certificate of
Designations attached hereto as EXHIBIT A, so that the fractional Preferred
Share delivered in lieu of each share of Common Stock shall have the same voting
rights as one share of Common Stock.
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<PAGE> 24
(d) In the event that there shall not be sufficient authorized
and unissued or treasury shares of Common Stock or Preferred Shares (or
Equivalent Preferred Shares) to permit the exchange of Rights directed by the
Board, the Company shall take all necessary action to authorize and reserve for
issuance such number of additional shares of Common Stock or Preferred Shares
(or Equivalent Preferred Shares) as may be required for issuance upon such
exchange and, if necessary, shall use its best efforts to obtain shareholder
approval thereof.
(e) The Company shall not be required to issue fractional
shares of Common Stock in exchange for Rights or to distribute stock
certificates which evidence fractional shares of Common Stock. If the Company
shall determine not to issue fractional shares of Common Stock, the Company
shall pay to the registered holders of the Rights with respect to which such
fractional shares would otherwise be issuable an amount in cash equal to the
same fraction of the Fair Market Value for the Trading Day immediately prior to
the date of such exchange) of one share of Common Stock.
3.3 FLIP-OVER.
(a) In the event that, on or after the occurrence of a Flip-In
Event, and an event described in (i), (ii) or (ii) below (where each such event
shall be referred to herein as a "Flip-Over Event," and where a Flip-In Event or
a Flip-Over Event shall sometimes be referred to herein as a "Triggering
Event"), proper provision shall be made so that the registered holder of each
Right, except as otherwise provided in Section 2.5(c), shall thereafter have the
right to receive, upon exercise thereof and payment of an amount equal to the
Product, in accordance with this Agreement, in lieu of Preferred Shares, the
number of freely tradable shares (which shall be duly authorized, validly
issued, fully paid and nonassessable) of Common Stock of the Principal Party or,
in the case of a merger described in clause (ii) of this Section 3.3(a) in which
the Common Stock of the Company shall remain outstanding, unconverted and
unchanged, of the Company, free and clear of all rights of call or first
refusal, liens, encumbrances or other adverse claims, determined by dividing the
Product by 50% of the Fair Market Value of the shares of Common Stock of such
Principal Party (or, if appropriate, the Company) on the date of consummation of
a Flip-Over Event. Such Flip-Over Events are as follows:
(i) The Company shall consolidate with, or merge with
and into, any Interested Shareholder or, if in such consolidation or
merger all holders of the Common Stock of the Company are not treated
the same, any other Person (other than a wholly-owned Subsidiary of the
Company in a transaction not prohibited by Section 3.3(i), so that the
Company shall not be the continuing or surviving corporation;
(ii) Any Interested Shareholder or, if in such merger
all holders of the Common Stock of the Company are not treated the
same, any other Person (other than a wholly-owned Subsidiary of the
Company in a transaction not prohibited by Section 3.3(i)) shall merge
with and into the Company, so that the Company shall be the continuing
or surviving corporation, and in connection with such merger either all
or part of the outstanding shares of Common Stock of the Company shall
be converted or changed into or exchanged for capital stock or other
securities of any other Person (or the Company), cash and/or other
property or such shares of Common Stock shall remain outstanding,
unconverted and unchanged; or
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<PAGE> 25
(iii) the Company shall sell or otherwise transfer
(or one or more of its Subsidiaries shall sell or otherwise transfer),
in one or a series of related transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to any Interested Shareholder
or, if in such transaction or transactions the holders of the Common
Stock of the Company are not treated the same, any other Person or
Persons (other than the Company or one or more of its wholly-owned
Subsidiaries in one or more transactions, each of which is not
prohibited by Section 3.3(i));
(b) Upon the consummation of a Flip-Over Event, such Principal
Party shall thereafter be liable for, and shall assume, by reason of the
consummation of such Flip-Over Event, all the obligations and duties of the
Company under this Agreement. The term "Company" shall thereafter be deemed to
refer to such Principal Party, it being specifically intended that the
applicable provisions of this Agreement shall apply to such Principal Party and
such Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of its shares of Common Stock to permit
exercise of all outstanding Rights in accordance with this subsection and the
distribution of cash, debt securities, shares and other property in accordance
with Section 3.1(d)) in connection with the consummation of a Flip-Over Event as
may be necessary to assure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably possible, in relation to the shares of
Common Stock thereafter deliverable upon exercise of the Rights.
(c) After the Distribution Date, the Company shall not
consolidate or merge with any other Person (other than a wholly owned Subsidiary
of the Company in a transaction not prohibited by Section 3.3(i)), or sell or
otherwise transfer (or permit one or more of its Subsidiaries to sell or
otherwise transfer), in one or a series of related transactions, assets or
earning power aggregating 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company or one or more of its wholly-owned Subsidiaries in one
or more transactions, each of which is not prohibited by Section 3.3(i)), if (i)
at the time of or immediately after the consummation of such transaction there
are any options, warrants, rights, conversion or exchange privileges or
securities outstanding or any written or oral agreements, arrangements or
understandings (including provisions contained in the Company's Certificate of
Incorporation or Bylaws) in effect which, as a result of the consummation of
such transaction, would eliminate or substantially diminish the benefits
intended to be afforded by the Rights, or (ii) prior to, simultaneously with or
immediately after such transaction the shareholders of the Person who
constitutes, or would constitute, the Principal Party for the purpose of
subsection (a) of this Section shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates or Associates.
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(d) The Company shall not consummate any Flip-Over Event
unless prior thereto (i) the Principal Party shall have a sufficient number of
authorized shares of its Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section, and (ii) the Company, the Principal Party and each other Person who may
become the Principal Party as a result of the consummation of such Flip-Over
Event shall have executed and delivered to the Rights Agent a supplemental
agreement providing for the implementation of all the terms and conditions set
forth in this Section and that, as soon as practicable after the date of such
Flip-Over Event, the Principal Party, at its own expense, shall:
(i) Prepare and file a registration statement on an
appropriate form under the Securities Act with respect to the Rights
and the securities purchasable upon exercise thereof, and use its best
efforts to cause such registration statement to become effective as
soon as practicable after such filing and to remain effective (with a
prospectus which at all times meets the requirements of the Securities
Act) until the earliest of the date as of which the Rights are no
longer exercisable for such securities, the Redemption Date and the
Final Expiration Date;
(ii) Use its best efforts to qualify or register the
Rights and the securities purchasable upon exercise thereof under the
securities or "blue sky" laws of such jurisdictions as may be necessary
or appropriate in connection with the exercisability of the Rights;
(iii) Use its best efforts to list (or continue the
listing of) the Rights and the securities purchasable upon exercise
thereof on a national securities exchange or to meet the eligibility
requirements for quotation on Nasdaq; and
(iv) Deliver to the registered holders of the Rights
historical financial statements for the Principal Party and each of its
Affiliates complying in all material respects with the requirements for
registration of securities on Form 10 under the Exchange Act.
(e) Notwithstanding anything in this Agreement to the
contrary, this Section shall not apply if (i) such transaction is consummated
with a Person or Persons who acquired their shares of Common Stock of the
Company pursuant to a Permitted Offer, (ii) the price per share of Common Stock
of the Company provided in such transaction shall not be less than the price per
share of Common Stock paid to all holders whose shares were purchased pursuant
to such Permitted Offer, and (iii) the form of consideration being offered to
the remaining holders of the Common Stock of the Company pursuant to such
transaction is the same as the form of consideration paid pursuant to such
Permitted Offer. Upon consummation of any transaction authorized by this
subsection (e), all Rights shall expire.
(f) If, in the case of any transaction described in clause
(iii) of subsection (a) of this Section, the Person or Persons to whom assets or
earning power are sold or otherwise transferred are individuals, then, in lieu
of any other payment or distribution required by this Section, the Company shall
require as a condition to such transaction that, such Person or Persons shall
pay to each holder of a Rights Certificate, upon its surrender to the Rights
Agent and in
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exchange therefor (without requiring any payment by such holder), cash in the
amount determined by multiplying the then current Exercise Price by the number
of one one-hundredths of a Preferred Share for which a Right is then
exercisable.
(g) In no event shall the Rights Agent have any obligations or
duties in respect of any Flip-Over Event, except as expressly set forth in this
Agreement. The Rights Agent may rely, and shall be fully protected in relying
upon, a certificate of the Company stating that the provisions of this Section
have been fulfilled. The prior written consent of the Rights Agent shall be
required in connection with any supplemental agreement which alters or impairs
the rights, obligations, duties or immunities of the Rights Agent hereunder.
(h) The provisions of this Section shall similarly apply to
successive consolidations, mergers, sales or other transfers. In the event that
a Flip-Over Event shall occur at any time after the occurrence of a Flip-In
Event, the Rights which have not been theretofore exercised shall thereafter be
exercisable in the manner described in this Section.
(i) Except as permitted by Sections 5.1 and 5.9, the Company
covenants and agrees that, after the Distribution Date, it will not take, or
permit any of its Subsidiaries to take, any action if at the time such action
would be taken it is reasonably foreseeable that such action would eliminate or
substantially diminish the benefits intended to be afforded by the Rights.
3.4 CERTIFICATE OF ADJUSTED EXERCISE PRICE OR NUMBER OF SHARES.
Whenever any adjustment shall be required, the Company shall promptly (i)
prepare a certificate setting forth such adjustment and a brief statement of the
facts requiring such adjustment, (ii) file with the Rights Agent and with each
transfer agent (if different than the Rights Agent) for the Preferred Shares or
the Common Stock of the Company a copy of such certificate and (iii) mail a
brief summary thereof to each registered holder of the Rights in accordance with
Section 5.8. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment described therein and shall not be deemed to
have knowledge of any such adjustment unless and until it shall have received
such certificate.
ARTICLE IV
THE RIGHTS AGENT
4.1 APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights
Agent to act as agent for the Company and the holders of the Rights in
accordance with the terms and conditions of this Agreement. The Rights Agent
hereby accepts such appointment. The Company may from time to time appoint such
Co-Rights Agents as it may deem necessary or desirable.
4.2 CONCERNING THE RIGHTS AGENT.
(a) The Company covenants and agrees to pay to the Rights
Agent reasonable compensation for all services rendered by it hereunder and,
from time to time on the written request of the Rights Agent, to reimburse it
for all reasonable expenses and counsel fees incurred in connection with the
acceptance and administration of this Agreement and the performance of
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its obligations and duties hereunder. The Company also covenants and agrees to
indemnify the Rights Agent for, and to hold it harmless against, any loss,
liability or expense, incurred without negligence, bad faith or willful
misconduct on its part, for any action taken, suffered or omitted by it in
connection with the acceptance and administration of this Agreement and the
performance of its obligations and duties hereunder, including the costs and
expenses of defending against any claim of liability arising therefrom, directly
or indirectly.
(b) The Rights Agent shall be protected and shall incur no
liability for, or in respect of, any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Rights
Certificate, stock certificate for Preferred Shares, Common Stock or other
shares of capital stock of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to be executed and, where necessary, verified or acknowledged by the proper
Person or Persons.
4.3 MERGER OR CONSOLIDATION OF THE RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the shareholder services or corporate trust business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided that such corporation would be
eligible for appointment as successor Rights Agent under Section 4.5. In case at
the time any successor Rights Agent shall succeed to the agency created by this
Agreement any of the Rights Certificates countersigned by its predecessor Rights
Agent shall not have been delivered, such successor Rights Agent may adopt the
countersignature of its predecessor Rights Agent and deliver the Rights
Certificates so countersigned; or in case at such time any of the Rights
Certificates shall not have been countersigned, such successor Rights Agent may
countersign such Rights Certificates either in the name of its predecessor
Rights Agent or in the name of such successor Rights Agent; and in all such
cases, such Rights Certificates shall have the full force and effect provided
therein and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver the Rights Certificates so countersigned; or in
case at such time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases, such Rights
Certificates shall have the full force and effect provided therein and in this
Agreement.
4.4 DUTIES OF THE RIGHTS AGENT. The Rights Agent undertakes the
obligations and duties imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of the Rights
Certificates (or, prior to the Distribution Date, the stock certificates for the
Common Stock of the Company), by accepting the same, shall be bound, and no
implied obligations or duties shall be read into this Agreement against the
Rights Agent.
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(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the written opinion of such legal counsel
shall be authorization and protection to the Rights Agent as to any action
taken, suffered or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking, suffering or omitting any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate executed by any one of the Chairman of the Board,
the President, any Vice President, the Treasurer or the Secretary of the Company
and delivered to the Rights Agent; and such certificate shall be authorization
and protection to the Rights Agent as to any action taken, suffered or omitted
by it in good faith in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and
any other Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereon) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be responsible for the validity of
this Agreement or the execution and delivery hereof (except for its due
execution hereof) or for the validity or execution of any Rights Certificate
(except for its countersignature thereon); nor shall the Rights Agent be
responsible for any breach by the Company of any covenant or condition contained
in this Agreement or in any Rights Certificate; nor shall the Rights Agent be
responsible for any change in the exercisability of the Rights (including Rights
becoming void pursuant to Section 2.5(c)), for any adjustment or change (or for
the manner or method of determining same) in the terms of the Rights (including
any adjustment or change in the Exercise Price or in the number or kind of
shares, securities or other property issuable upon the exercise thereof)
required by this Agreement or for ascertaining the existence of facts which
would require any such change or adjustment (except with respect to the exercise
of Rights evidenced by Rights Certificates after actual notice, in the manner
provided in Section 3.3, that such change or adjustment is required); nor shall
the Rights Agent by any act hereunder be deemed to have made any representation
or warranty as to the authorization or reservation of any Preferred Shares or
shares of Common Stock to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any Preferred Shares or shares of Common Stock
will, when issued, be validly authorized and issued and fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further acts, instruments and assurances as may reasonably be required by
the Rights Agent for the carrying out or performing by the Rights Agent of the
provisions of this Agreement.
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(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its obligations and duties
hereunder from any one of the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company, and to apply to such
officers for advice or instructions in connection with its obligations and
duties; and the Rights Agent shall not be liable for any action taken, suffered
or omitted by it in good faith and in accordance with the written instructions
of any such officer or for any delay in acting while waiting for such
instructions.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in the Rights or in any other
securities of the Company (including the Preferred Shares and its Common Stock)
or become pecuniarily interested in any transaction in which the Company (or any
of its Subsidiaries) may be interested, or contract with or lend money to the
Company (or any of its Subsidiaries), and may otherwise act as fully and freely
as though it were not the Rights Agent under this Agreement; and nothing herein
shall preclude the Rights Agent from acting in any other capacity for the
Company, any of its Subsidiaries or any other entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any of its obligations or duties hereunder
either directly or by or through its attorneys or agents, and the Rights Agent
shall not be answerable or accountable for any act, default, neglect or
misconduct of any such attorney or agent or for any loss to the Company
resulting from any such act, default, neglect or misconduct, provided the Rights
Agent exercised reasonable care in the selection and continued employment of
such attorney or agent.
(j) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the Form of Certification of Status
attached to the Form of Election to Purchase or the Form of Assignment, as the
case may be, has either not been completed or indicates an affirmative response
to Question 1 and/or 2 thereof, the Rights Agent shall not take any further
action with respect to the requested exercise or transfer without first
consulting with the Company.
(k) No provision of this Agreement shall require the Rights Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its obligations or duties or in the exercise of its
rights or powers hereunder if there shall be reasonable grounds for believing
that repayment of such funds or adequate indemnification against such risk or
liability is not reasonably assured.
4.5 RESIGNATION OR REMOVAL OF THE RIGHTS AGENT. The Rights Agent or any
successor Rights Agent may resign and be discharged from its obligations and
duties under this Agreement upon 30 days' prior notice to the Company and to
each transfer agent for the Preferred Shares and for the Common Stock of the
Company, sent by registered or certified mail, postage prepaid, and to each
registered holder of the Rights Certificates, sent by first-class mail, postage
prepaid. The Company may remove the Rights Agent or any successor Rights Agent
upon 30 days' prior notice to the Rights Agent or successor Rights Agent, as the
case may be, and to each transfer agent for the Preferred Shares and for the
Common Stock of the Company, sent by registered or certified mail, postage
prepaid, and to each registered holder of the Rights Certificates, sent by first
class mail, postage prepaid. If the Rights Agent or any successor Rights
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Agent shall resign or be removed or shall otherwise become incapable of acting,
the Company shall appoint a successor Rights Agent. If the Company shall fail to
make such appointment within 30 days after giving notice of such removal or
after receiving notice of such resignation or incapacity, either from the
resigning or incapacitated Rights Agent or from the registered holder of any
Rights Certificate (who shall, with such notice, submit its Rights Certificate
for inspection by the Company), then the incumbent Rights Agent or the
registered holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a successor Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States of
America or the State of Wisconsin (or of any other state so long as such
corporation is authorized to do business as a banking institution in the State
of Wisconsin), be in good standing under the laws of the jurisdiction of its
incorporation, have an office in the State of Wisconsin, be authorized under
such laws to exercise corporate trust or stock transfer powers, be subject to
supervision or examination by federal or state authority and have at the time of
its appointment as Rights Agent a combined capital and surplus of at least
$50,000,000. After its appointment, the successor Rights Agent shall be vested
with the same rights, powers, obligations, duties and immunities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent for
the Preferred Shares and for the Common Stock of the Company, and mail notice
thereof to the registered holders of the Rights Certificates. Failure to give
any notice provided for in this Section, however, or any defect therein, shall
not affect the legality or validity of the resignation or removal of the Rights
Agent or any successor Rights Agent or the appointment of any successor thereto.
ARTICLE V
MISCELLANEOUS
5.1 REDEMPTION.
(a) The Board may, at its option, at any time prior to the earliest
of the (i) Distribution Date, and (ii) the Final Expiration Date (where such
date at which Rights are redeemed pursuant to this Section shall be referred to
herein as the "Redemption Date"), redeem all, but not less than all, of the then
outstanding Rights at a redemption price of $.01 per Right, as may be adjusted
as provided in Section 5.1(f) (the "Redemption Price"), provided that, if the
Board shall authorize the redemption of the Rights in the circumstances set
forth in either of clauses (A) or (B) below, there must be more than one
Disinterested Director then in office and such authorization shall require the
concurrence of at least a majority of such Disinterested Directors: (A) such
authorization shall occur on or after the date a Person becomes an Acquiring
Person or an Adverse Person, or (B) such authorization shall occur on or after
the date of a change (resulting from a solicitation of either proxies or one or
more written shareholder consents) in a majority of the directors in office at
the commencement of such solicitation if any Person who shall be a participant
in such solicitation has stated (or, if upon the commencement of such
solicitation, at least a majority of the Disinterested Directors shall have
determined in
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good faith) that such Person (or any of its Affiliates or Associates) intends to
take, or may consider taking, any action which would result in such Person
becoming an Acquiring Person or an Adverse Person.
(b) Notwithstanding any other provision of this Agreement, the
Rights shall not be exercisable after the first occurrence of a Flip-Over Event
until such time as the Company's right of redemption under this Section shall
have expired.
(c) In considering whether to redeem the Rights, the Board and the
Disinterested Directors may consider the best long and short term interests of
the Company and its shareholders, including, without limitation, the effects of
the redemption of the Rights upon employees, creditors, suppliers and customers
of the Company or of its Subsidiaries and upon the communities in which offices
or other establishments of the Company and such Subsidiaries are located and all
other pertinent factors. The redemption of the Rights by the Board may be made
effective at such time, on such basis and with such conditions as the Board, in
its sole discretion, may establish.
(d) Immediately after action by the Board directing the redemption
of the Rights and without any further action and without any notice, the right
to exercise the Rights shall terminate, and thereafter each registered holder of
the Rights shall only be entitled to receive the Redemption Price therefor. The
Company shall give prompt written notice to the Rights Agent and prompt public
notice to the holders of the Rights of any such redemption; provided, however,
that the failure to give, or any defect in, any such notice shall not affect the
validity of such redemption. Within ten days after action by the Board directing
the redemption of the Rights, the Company shall mail (or cause the Rights Agent
to mail) a notice of redemption to each registered holder of the then
outstanding Rights, at its last address appearing on the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
transfer agent for the Common Stock of the Company. Any notice which is mailed
in the manner provided in this subsection shall be deemed given, whether or not
received by the registered holder to whom sent. Each notice of redemption shall
state the method by which payment of the Redemption Price is to be made. Neither
the Company nor any of its Affiliates or Associates may at any time redeem,
acquire or purchase for value any Rights other than in the manner set forth in
this Section and Section 3.2 or in connection with any purchase of outstanding
shares of its Common Stock prior to the Distribution Date.
(e) The Company may, at its option, pay the Redemption Price in
cash, shares of Common Stock (based on its Fair Market Value) as of the date of
redemption) or any other form of consideration deemed appropriate by the Board.
(f) In the event that the Company shall at any time after the date
of this Agreement (i) declare a dividend on its outstanding shares of Common
Stock payable in shares of Common Stock, or (ii) effect a subdivision,
combination or consolidation of its outstanding shares of Common Stock (by
reclassification or otherwise than by payment of dividends in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then, in each
such case, the Redemption Price after such event shall equal the Redemption
Price in effect immediately prior to such event multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the
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denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event; provided, however, that such adjustment shall be
made only if the amount of the Redemption Price would be reduced or increased by
at least $0.001 per Right.
5.2 RIGHTS OF ACTION. All rights of action in respect of this
Agreement, other than rights of action which the Rights Agent may have under
Sections 4.2 and 4.4, are vested in the registered holders of the Rights
Certificates (or, prior to the Distribution Date, the registered holders of the
Common Stock of the Company); and the registered holder of any Rights
Certificate (or, prior to the Distribution Date, of any stock certificate for
shares of such Common Stock), without the consent of the Rights Agent or of the
holder of any other Rights Certificate (or, prior to the Distribution Date, of
any other stock certificate for shares of Common Stock), may, on such registered
holder's own behalf and for such registered holder's own benefit, enforce, and
may institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, such registered holder's right to
exercise the Rights evidenced by such Rights Certificate (or, prior to the
Distribution Date, such stock certificate) in the manner provided in such Rights
Certificate and in this Agreement. Without limiting the generality of the
foregoing or any remedies available to the holders of the Rights, it is
specifically acknowledged that the registered holders of the Rights would not
have an adequate remedy at law for any breach of this Agreement and will be
entitled to specific performance of the obligations and duties under, and
injunctive relief against any actual or threatened violations of the obligations
and duties of any Person subject to, this Agreement.
5.3 AGREEMENTS OF HOLDERS OF THE RIGHTS. Each holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) Prior to the Distribution Date, the Rights shall be
transferable only simultaneously and together with the transfer of shares of
Common Stock of the Company;
(b) After the Distribution Date, the Rights Certificates shall be
transferable on the registry books of the Rights Agent only if surrendered at
the principal office of the Rights Agent, with the Form of Assignment and
Certification of Status on the reverse side thereof duly executed, together with
such signature guarantees and other documentation as the Rights Agent may
reasonably request;
(c) Subject to Sections 2.4 and 2.5(c), the Company and the Rights
Agent may deem and treat the Person in whose name any Rights Certificate (or,
prior to the Distribution Date, any stock certificate for the Common Stock of
the Company) is registered as the absolute owner thereof and of the Rights
represented thereby (notwithstanding any notations of ownership or other writing
on such Rights Certificate or stock certificate made by anyone other than the
Company or the Rights Agent) for all purposes whatsoever, and neither the
Company nor the Rights Agent shall be affected by any notice to the contrary;
and
(d) Neither the Company nor the Rights Agent shall have any
liability to any holder of a Right or to any other Person because of its
inability to perform any of its obligations or duties under this Agreement by
reason of any applicable law, any preliminary or permanent injunction or other
order, decree or ruling issued by a court of competent jurisdiction or by a
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governmental, regulatory or administrative agency or commission or any rule,
regulation or executive order promulgated or enacted by any such governmental
authority prohibiting or otherwise restraining performance of any such
obligation or duty; provided, however, that the Company shall use its best
efforts to have any such injunction, order, decree or ruling lifted or otherwise
overturned as soon as reasonably possible.
5.4 RIGHTS CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No holder, as
such, of any Rights Certificate shall be entitled to vote, to receive dividends
or other distributions on or to exercise any preemptive rights with respect to,
or shall be deemed for any other purpose to be the holder of, the Preferred
Shares or other shares of capital stock of any class of the Company which may at
the time be issuable upon exercise of the Rights represented thereby; nor shall
anything contained herein or in any Rights Certificate be construed to confer
upon the holder of any Rights Certificate, as such, any of the rights of a
shareholder of the Company, or any right to vote for the election of directors
or upon any other matter submitted to shareholders at any meeting thereof, to
give or withhold consent to any corporate action, to receive notice of meetings
or other actions affecting shareholders (except as provided in Section 5.7) or
to receive dividends, subscription rights or other distributions, until the
Rights represented by such Rights Certificate shall have been exercised, in
whole or in part, in accordance with the provisions hereof.
5.5 ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any provision
of this Agreement or of the Rights Certificates to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing the Rights in such
form as may be approved by the Board to reflect any adjustment or change in the
Exercise Price or in the number or kind of shares, securities or other property
issuable upon exercise of the Rights in accordance with the provisions of this
Agreement; provided, however, that (i) no such Rights Certificates shall be
issued if, and to the extent that, the Company shall be advised by counsel that
such issuance could create a significant risk of material adverse tax
consequences to the Company or to the Persons to whom such Rights Certificates
would be issued and (ii) no such Rights Certificates shall be issued if, and to
the extent that, appropriate adjustment shall otherwise have been made in lieu
of the issuance thereof.
5.6 FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractional Rights or
to distribute Rights Certificates which evidence fractional Rights. If the
Company shall determine not to issue fractional Rights, the Company shall pay,
to the registered holders of the Rights with respect to which fractional Rights
would otherwise be issuable an amount in cash equal to the same fraction of the
Fair Market Value for the Trading Day immediately prior to the date on which
such fractional Rights would otherwise have been issued) of one Right in lieu of
issuing fractional Rights.
(b) The Company shall not be required to issue fractional Preferred
Shares (other than fractions which are multiples of one one-hundredth of a
Preferred Share) upon exercise of the Rights or to distribute stock certificates
which evidence fractional Preferred Shares (other than fractions which are
multiples of one one-hundredth of a Preferred Share). If the Company shall
determine not to issue fractional Preferred Shares that are not multiples of one
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one-hundredth of a Preferred Share, the Company shall pay to the registered
holders of the Rights Certificates at the time Rights represented thereby are
exercised, in lieu of such fractional Preferred Shares, an amount in cash equal
to the same fraction of the Fair Market Value for the Trading Day immediately
prior to the date of such exercise of one one-hundredth of a Preferred Share.
(c) Each holder of a Right, by accepting the same, expressly waives
such holder's right to receive or exercise any fractional Right or to receive
any fractional Preferred Share upon the exercise of such Right (except as
provided in this Section).
5.7 NOTICE TO HOLDERS OF RIGHTS CERTIFICATES OF CERTAIN EVENTS.
(a) In the event that any time after the Distribution Date, the
Company shall propose: (i) to pay any dividend payable in shares of capital
stock of any class of the Company to the holders of Preferred Shares (other than
a regular quarterly cash dividend); (ii) to effect any reclassification of the
Preferred Shares (other than a reclassification involving only the subdivision
of the outstanding Preferred Shares); (iii) to make any distribution to the
holders of Preferred Shares described in Section 2.7(b) or 2.7(c); (iv) to
effect any Flip-Over Event; (v) to pay any dividend on its shares of Common
Stock payable in shares of Common Stock or to effect a subdivision, combination
or consolidation of its outstanding shares of Common Stock (by reclassification
or otherwise than by payment of dividends in shares of Common Stock); or (vi) to
effect the liquidation, dissolution or winding up of the Company; then, in each
such case, the Company shall give to the Rights Agent and each registered holder
of the Rights, in the manner provided in Section 5.8, written notice of such
proposed action, which shall specify the record date for such stock dividend or
distribution or the date on which such reclassification, Flip-Over Event,
liquidation, dissolution or winding up is expected to occur (and the date for
participation therein by the holders of the Common Stock and/or Preferred Shares
if any such date is to be fixed). Such notice shall be given, in the case of any
action described in clause (i) or (iii) of the preceding sentence, at least ten
days prior to the record date and, in the case of any other such action, at
least 20 days prior to the date of taking of such proposed action or the date
for participation therein by the holders of Preferred Shares, whichever shall be
the earlier.
(b) In case any Section Flip-In Event shall occur, the Company
shall, as soon as practicable thereafter, give to the Rights Agent and each
registered holder of the Rights, in the manner provided in Section 5.8, written
notice of the occurrence thereof, which notice shall describe such occurrence
and its consequences in reasonable detail.
5.8 NOTICES. Except as otherwise provided herein, notices or demands
authorized by this Agreement to be given or made by the Rights Agent or by the
registered holder of any Rights, Rights Certificate or stock certificate for
shares of Common Stock of the Company to or on the Company shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed (until
another address shall be filed in writing with the Rights Agent) as follows:
St. Francis Capital Corporation
13400 Bishops Lane, Suite 350
Brookfield, Wisconsin 53005-6203
Attention: Thomas R. Perz, President/CEO
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Except as otherwise provided herein, notices or demands authorized by this
Agreement to be given or made by the Company or by the registered holder of any
Rights, Rights Certificate or stock certificate for shares of Common Stock of
the Company to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address
shall be filed in writing with the Company) as follows:
Firstar Trust Co.
615 East Michigan Avenue, 4th Floor
P.O Box 2077
Milwaukee, Wisconsin 53202
Attention: Eugene R. Lee, Vice President
Except as otherwise provided herein, notices or demands authorized by this
Agreement to be given or made by the Company or the Rights Agent to the
registered holder of any Rights, Rights Certificate or stock certificate for
shares of Common Stock of the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed to such holder at its last
address appearing on the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Stock of the Company.
5.9 SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date, but
subject to the last sentence of this Section, the Company and the Rights Agent,
if so directed in writing by the Company may supplement or amend any term,
provision or condition of this Agreement, without the approval of the registered
holders of the stock certificates representing the Common Stock and the Rights.
From and after the Distribution Date, but subject to the last sentence of this
Section, the Company and the Rights Agent, if so directed in writing by the
Company may supplement or amend this Agreement, without the approval of the
registered holders of the Rights (however represented), in order to: (i) cure
any ambiguity; (ii) correct or supplement any term, provision or condition of
this Agreement which may be defective or inconsistent with any other term,
provision or condition hereof; (iii) shorten or lengthen any time period
specified herein (except that after the first occurrence of an event described
in either clause (A) or (B) in the first sentence of Section 5.1(a), there must
be Disinterested Directors then in office and any such shortening or lengthening
shall require the concurrence of at least a majority of such Disinterested
Directors); or (iv) change or supplement one or more of the terms, provisions or
conditions hereof, other than as described in (iii) above, in any manner which
the Company may deem necessary or desirable and which shall not materially
adversely affect, as determined by the Board (with the concurrence of at least a
majority of the Disinterested Directors), the interests of the holders (other
than a Restricted Person or the transferees thereof specified in Section 2.5(c))
of the Rights (however represented); provided, however, that this Agreement may
not be supplemented or amended pursuant to clause (iii) of this sentence (A) to
lengthen any time period unless (I) approved by at least a majority of the
Disinterested Directors, and (II) such lengthening is for the purpose of
protecting, enhancing or clarifying the rights of, and/or the benefits to, the
holders (other than a Restricted Person or the transferees thereof specified in
Section 2.5(c)) of the Rights, or (B) to lengthen any time period relating to
when the Rights may be redeemed if at such time the Rights are not then
redeemable. Upon the delivery of a certificate from an appropriate officer of
the Company stating that the proposed supplement or amendment is in compliance
with the terms of this Section, the Rights Agent shall execute such supplement
or amendment; provided, however, that the Rights Agent shall not be required to
execute any
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<PAGE> 37
supplement or amendment which affects any of the Rights Agent's rights, powers,
obligations, duties or immunities under this Agreement without its consent. On
and after the Distribution Date, no supplement or amendment shall be made which
changes the Exercise Price, the number of one one-hundredths of a Preferred
Share for which a Right is exercisable, the Redemption Price or the Final
Expiration Date. Prior to the Distribution Date, the interests of the holders of
the Rights shall be deemed coincident with the interests of the holders of the
Common Stock of the Company.
5.10 SUCCESSORS. All of the terms, provisions and conditions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns.
5.11 CERTAIN DETERMINATIONS AND ACTIONS BY THE BOARD. For all purposes
of this Agreement, any calculation of the number of shares of Common Stock
outstanding at any particular time, including the determination of the
percentage of such outstanding shares of which any Person is the Beneficial
Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i), as in effect on the date hereof, under the Exchange Act. The
Board (or, as and when set forth herein, the Disinterested Directors) shall have
the exclusive power and authority to interpret this Agreement and to exercise
all rights and powers specifically granted to the Board or to the Company, or as
may be necessary or advisable in the administration of this Agreement,
including, without limitation, the right and power to make all determinations
deemed necessary or advisable for such administration, including, without
limitation, a determination to redeem or not to redeem the Rights, to exchange
or not to exchange the Rights, to declare a Person to be an Adverse Person or to
supplement or amend this Agreement. All such calculations, determinations,
interpretations and exercises (including, for purposes of clause (ii) below, all
omissions with respect to the foregoing) which are done or made by the Board (or
the Disinterested Directors) in good faith shall (i) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other Persons and (ii) not subject any director (including any Disinterested
Director) to any liability to the holders of the Rights or to any other Person.
5.12 BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, the registered holders of the stock certificates for the Common Stock of
the Company) any legal or equitable right, remedy or claim under this Agreement;
but this Agreement shall be for the sole and exclusive benefit of the Company,
the Rights Agent and the registered holders of the Rights Certificates (and,
prior to the Distribution Date, the registered holders of the stock certificates
for the Common Stock of the Company).
5.13 SEVERABILITY. If any term, provision or condition of this
Agreement shall be held by a court of competent jurisdiction or other lawful
authority to be invalid, void or unenforceable, the remaining terms, provisions,
and conditions of this Agreement shall remain in full force and effect and shall
in no way affected, impaired or invalidated; provided, however, that if any such
term, provision or condition is held by such court or authority to be invalid,
void or unenforceable and the Board (with the concurrence of at least a majority
of the Disinterested Directors then in office) shall determine in good faith
that severing the same from this Agreement
-36-
<PAGE> 38
would adversely affect the purposes or effect of this Agreement, the right of
redemption set forth in Section 5.6 shall be reinstated and shall not expire
until the Close of Business on the tenth day following the date of such
determination by the Board.
5.14 GOVERNING LAW. This Agreement and each Rights Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Wisconsin and for all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts made and to be performed
entirely within such State.
5.15 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall for all purposes be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
5.16 DESCRIPTIVE READINGS. Descriptive headings of the several Sections
of this Agreement are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
ST. FRANCIS CAPITAL CORPORATION
By:_____________________________________
Thomas R. Perz, President/CEO
FIRSTAR TRUST CO.
By:_____________________________________
Eugene R. Lee, Vice President
ATTEST
By:_____________________________________
William Caruso, Assistant Secretary
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<PAGE> 39
EXHIBIT A
FORM
OF
CERTIFICATE OF DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
ST. FRANCIS CAPITAL CORPORATION
(Pursuant to Section 180.0602 of the Wisconsin Business Corporation Law)
St. Francis Capital Corporation, a corporation organized and existing
under the Wisconsin Business Corporation Law (the "Corporation"), does hereby
certify that, pursuant to authority conferred upon its Board of Directors by its
Articles of Incorporation and by the provisions of 180.0602 of the Wisconsin
Business Corporation Law, the following resolution was adopted by its Board of
Directors at a meeting duly called and held on September 25, 1997:
RESOLVED, that pursuant to the authority conferred upon the
Board of Directors of the Corporation (the "Board") by the provisions
of the Articles of Incorporation of the Corporation and the provisions
of Section 180.0602 of the Wisconsin Business Corporation Law, there is
hereby created a series of Preferred Stock of the Corporation, which
series shall have the following powers, designations, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions thereof, in addition to
those set forth in the Articles of Incorporation of the Corporation:
SECTION 1. DESIGNATION OF SERIES: NUMBER OF SHARES. There is designated
a series of Preferred Stock titled as "Series A Junior Participating Preferred
Stock," par value $.01 per share (the "Series A Preferred Stock"), and the
authorized number of shares constituting the Series A Preferred Stock shall be
120,000. Such number of authorized shares may be increased or decreased, from
time to time, by resolution of the Board; provided, however, that no such
decrease shall reduce the number of authorized shares of the Series A Preferred
Stock to a number less than the number of shares of the Series A Preferred Stock
then outstanding, plus the number of such shares then reserved for issuance upon
the exercise of any outstanding options, warrants or rights or the exercise of
any conversion or exchange privilege contained in any outstanding security
issued by the Corporation.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of shares of any
other series of Preferred Stock (or shares of any other class of capital stock
of the Corporation) ranking senior to the Series A Preferred Stock with respect
to dividends, the holders of shares of the Series A Preferred Stock, in
preference to the holders of shares of Common Stock and of any other class of
capital
<PAGE> 40
stock of the Corporation ranking junior to the Series A Preferred Stock with
respect to dividends, shall be entitled to receive, when, as and if declared by
the Board out of funds legally available therefor, such dividends, subject to
the provision for adjustment hereinafter set forth, equal to 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock. In the event the Company shall at any
time after September 25, 1997 (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Board shall declare, out of funds legally available
therefor, a dividend or distribution on the Series A Preferred Stock, as
provided in paragraph (A) of this Section 2, immediately after it has declared a
dividend or distribution on the Common Stock (other than a dividend payable in
shares of Common Stock).
SECTION 3. VOTING RIGHTS. In addition to any other voting rights
required by applicable law, the holders of shares of the Series A Preferred
Stock shall have the following voting rights:
(A) Each share of the Series A Preferred Stock shall entitle
the holder thereof to 100 votes on all matters submitted to a vote of the
shareholders of the Corporation. The multiple of 100 (the "Voting Multiple") set
forth in the preceding sentence shall be adjusted from time to time as
hereinafter provided in this paragraph (A). In the event that the Corporation
shall at any time after the effective date of this Resolution of the Board
("Resolution") (i) declare or pay any dividend on Common Stock payable in shares
of Common Stock, or (ii) effect a subdivision, combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then, in each such case, the Voting Multiple
thereafter applicable to the determination of the number of votes per share to
which the holders of shares of the Series A Preferred Stock shall be entitled
shall be the Voting Multiple in effect immediately prior to such event
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding immediately after such event and the denominator of
which shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) Except as otherwise provided in this Resolution, in any
other resolution establishing another series of Preferred Stock (or any series
of any other class of capital stock of the Corporation) or by applicable law,
the holders of the Series A Preferred Stock, the holders of Common Stock and the
holders of any other class of capital stock of the Corporation having general
voting rights shall vote together as a single class on all matters submitted to
a vote of the shareholders of the Corporation.
2
<PAGE> 41
(C) Except as otherwise provided in this Resolution or by
applicable law, the holders of the Series A Preferred Stock shall have no
special voting rights and their consent shall not be required (except to the
extent provided in paragraph (B) of this Section 3) for the taking of any
corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever dividends or other distributions payable on the
Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and
until all accrued and unpaid dividends and distributions, whether or not
declared, on outstanding shares of the Series A Preferred Stock shall have been
paid in full, the Corporation shall not:
(i) Declare or pay dividends or make any other
distributions on any shares of any class of capital stock of
the Corporation ranking junior (either as to dividends or upon
liquidation, dissolution or winding up of the Corporation) to
the Series A Preferred Stock;
(ii) Declare or pay dividends, or make any other
distributions, on any shares of any class of capital stock of
the Corporation ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up of the
Corporation) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and all
such parity stock on which dividends are accrued and unpaid in
proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) Redeem, purchase or otherwise acquire for
consideration any shares of any class of capital stock of the
Corporation ranking junior (either as to dividends or upon
liquidation, dissolution or winding up of the Corporation) to
the Series A Preferred Stock, except that the Corporation may
at any time redeem, purchase or otherwise acquire any shares
of such junior stock in exchange for other shares of any class
of capital stock of the Corporation ranking junior (both as to
dividends and upon dissolution, liquidation or winding up of
the Corporation) to the Series A Preferred Stock; or
(iv) Purchase or otherwise acquire for consideration
any shares of the Series A Preferred Stock or any shares of
any class of capital stock of the Corporation ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up of the Corporation) with the Series
A Preferred Stock, or redeem any shares of such parity stock,
except in accordance with a purchase offer made in writing or
by publication to the holders of all such shares upon such
terms and conditions as the Board, after taking into
consideration the respective annual dividend rates and the
other relative powers, preferences and rights of the
respective series and classes of such shares, shall determine
in good faith will result in fair and equitable treatment
among the respective holders of shares of all such series and
classes.
3
<PAGE> 42
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of any
class of capital stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such shares at
such time and in such manner.
SECTION 5. REACQUIRED SHARES. Any shares of the Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after such purchase or
acquisition. All such cancelled shares shall thereupon become authorized and
unissued shares of Preferred Stock and may be reissued as part of any new series
of Preferred Stock, subject to the conditions and restrictions on issuance set
forth in the Articles of Incorporation of the Corporation, from time to time, in
any other resolution establishing another series of Preferred Stock (or any
series of any other class of capital stock of the Corporation) or in any
applicable law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation
(whether voluntary or otherwise), dissolution or winding up of the Corporation,
no distribution shall be made (a) to the holders of shares of any class of
capital stock of the Corporation ranking junior (either as to dividends or upon
liquidation, dissolution or winding up of the Corporation) to the Series A
Preferred Stock unless, prior thereto, the holder of each outstanding share of
the Series A Preferred Stock shall have received an amount equal to the accrued
and unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment, plus an amount equal to the greater of (i) $1.00, and (ii)
an aggregate amount, subject to adjustment as hereinafter provided in this
Section 6, equal to 100 times the aggregate per share amount to be distributed
to the holders of Common Stock, or (b) to the holders of shares of any class of
capital stock of the Corporation ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up of the Corporation) with the Series
A Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event that the Corporation shall at any time after the
effective date of this Resolution (a) declare or pay any dividend on Common
Stock payable in shares of Common Stock, or (b) effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then, in each
such case, the aggregate amount per share to which the holders of shares of the
Series A Preferred Stock would have been entitled to receive immediately prior
to such event pursuant to clause (a)(ii) of the preceding sentence shall be
adjusted by multiplying such aggregate per share amount by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately after such event and the denominator of which shall be the number of
shares of Common Stock that were outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC. In the event that the
Corporation shall be a party to any consolidation, merger, combination or other
transaction in which the outstanding shares of Common Stock are converted or
changed into or exchanged for other capital stock, securities, cash or other
property, or any combination thereof, then, in each such case, each share of the
Series A Preferred Stock shall at the same time be similarly converted or
changed into or exchanged for an aggregate amount, subject to adjustment as
hereinafter provided in this Section 7, equal to 100 times the aggregate amount
of capital stock, securities, cash and/or other
4
<PAGE> 43
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is being converted or changed or exchanged. In the event
that the Corporation shall at any time after the effective date of this
Resolution declare or pay any dividend on Common Stock payable in shares of
Common Stock or effect a subdivision, combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then, in each such case, the aggregate amount per
share to which the holders of shares of the Series A Preferred Stock would have
been entitled to receive immediately prior to such event pursuant to the
preceding sentence shall be adjusted by multiplying such aggregate per share
amount by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
SECTION 8. NO REDEMPTION. The shares of the Series A Preferred Stock
shall not be redeemable at any time.
SECTION 9. RANK. Unless otherwise provided in the resolution
establishing another series of Preferred Stock after the effective date of this
Resolution, the Series A Preferred Stock shall rank, as to the payment of
dividends and the making of any other distribution of assets of the Corporation,
senior to the Common Stock, but junior to all other series of the Preferred
Stock.
SECTION 10. AMENDMENTS. The Articles of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences and rights of the Series A Preferred Stock so as
to adversely affect any thereof without the affirmative vote of the holders of
at least two-thirds of the outstanding shares of the Series A Preferred Stock,
voting separately as a single class.
SECTION 11. FRACTIONAL SHARES. Fractional shares of the Series A
Preferred Stock may be issued, but, unless the Board shall otherwise determine,
only in multiples of one one-hundredth of a share. The holder of any fractional
share of the Series A Preferred Stock shall be entitled to receive dividends,
participate in distributions, exercise voting rights and have the benefit of all
other powers, preferences and rights relating to the Series A Preferred Stock in
the same proportion as such fractional share bears to a whole share.
5
<PAGE> 44
IN WITNESS WHEREOF, St. Francis Capital Corporation has caused this
Certificate to be executed and attested by its duly authorized officers this
25th day of September, 1997.
ST. FRANCIS CAPITAL CORPORATION
By_________________________________
Name: Thomas R. Perz
Title: President/CEO
Attest:____________________________
Name:______________________________
Title:_____________________________
6
<PAGE> 45
EXHIBIT B
[Form of Rights Certificate]
Certificate No. R-__________________ ____________Rights
NOT EXERCISABLE AFTER SEPTEMBER 25, 2007 OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF ST. FRANCIS CAPITAL CORPORATION,
AT $.0l PER RIGHT, AND EXCHANGE ON THE TERMS SET FORTH IN THE
SHAREHOLDER RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES
DESCRIBED IN SUCH SHAREHOLDER RIGHTS AGREEMENT, RIGHTS
BENEFICIALLY OWNED BY A RESTRICTED PERSON (AS SUCH TERM IS
DEFINED IN SUCH AGREEMENT), OR BY CERTAIN TRANSFEREES FROM A
RESTRICTED PERSON, SHALL BE OR BECOME VOID.
RIGHTS CERTIFICATE
ST. FRANCIS CAPITAL CORPORATION
This certifies that , or registered assigns, is the registered owner of
the number of Rights set forth above, each of which entitles the owner, subject
to the terms, provisions and conditions of the Shareholder Rights Agreement
dated as of September 25, 1997 (the "Rights Agreement") between St. Francis
Capital Corporation, a Wisconsin corporation (the "Company"), and Firstar Trust
Co., a Wisconsin-chartered trust company (the "Rights Agent"), to purchase from
the Company at any time after the Distribution Date and prior to the Close of
Business on September 25, 2007, at the principal office of the Rights Agent or
its successor as Rights Agent, one one-hundredth of a fully paid and
nonassessable share of Series A Junior Participating Preferred Stock, $.01 par
value per share (the "Preferred Shares"), of the Company at a purchase price of
$150 per one one-hundredth of a Preferred Share (the "Exercise Price"), upon
presentation and surrender of this Rights Certificate with the Form of Election
to Purchase and the related Form of Certification of Status duly executed,
together with such signature guarantees and other documentation as the Rights
Agent may reasonably request. The number of Rights evidenced by this Rights
Certificate (as well as the number of one one-hundredths of a Preferred Share
which may be purchased upon the exercise of each Right) set forth above, and the
Exercise Price set forth above, are the numbers and the Exercise Price as of ,
______, based on the Preferred Shares as constituted on such date. As provided
in the Rights Agreement, such number of Rights (and/or such number of one
one-hundredths of a Preferred Share) and such Exercise Price are subject to
change and adjustment upon the happening of certain events specified in the
Rights Agreement. Capitalized terms not defined herein have the respective
meanings specified in the Rights Agreement.
<PAGE> 46
From and after the first occurrence of a Flip-In Event, if the Rights
evidenced by this Rights Certificate are Beneficially Owned by (i) a Restricted
Person, (ii) a transferee from a Restricted Person who becomes a transferee
after the Acquiring Person or Adverse Person becomes such, or (iii) under
certain circumstances specified in the Rights Agreement, a transferee from a
Restricted Person who becomes a transferee prior to or concurrently with the
Acquiring Person or Adverse Person becoming such, such Rights shall be or become
void, and no holder hereof shall have any rights whatsoever with respect to such
Rights.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
incorporated herein by reference and made a part hereof, to which Rights
Agreement reference is hereby made for a full description of the rights, powers,
obligations, duties and immunities hereunder of the Company, the Rights Agent
and the holders of the Rights Certificates. Under the circumstances set forth in
the Rights Agreement, the exercisability of the Rights represented hereby may be
temporarily suspended. The Rights Agreement is on file at the principal office
of the Company and at the principal office of the Rights Agent, and a copy will
be provided upon written request to the Secretary of the Company.
Upon surrender at the principal office of the Rights Agent, this Rights
Certificate, with or without other Rights Certificates, may be exchanged for one
or more Rights Certificates of like tenor and date evidencing Rights entitling
the holder to purchase the same aggregate number of one one-hundredths of a
Preferred Share as the Rights evidenced by the Rights Certificates so
surrendered. If this Rights Certificate shall be exercised in part, the holder
hereof shall be entitled to receive, upon surrender hereof, one or more Rights
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Rights Certificate (i) may be redeemed, at the direction of the Board,
at a redemption price (subject to adjustment) of $.0l per Right (payable in
cash, shares of Common Stock of the Company or any other form of consideration
deemed appropriate by the Board), or (ii) under certain circumstances, may be
exchanged, in whole or in part, at the direction of the Board, for shares of
Common Stock of the Company or Preferred Shares at an exchange rate (subject to
adjustment) of one share of Common Stock or one one-hundredth of a Preferred
Share per Right.
No fractional Preferred Share will be issued upon the exercise of any
Rights represented hereby (other than fractions which are a multiple of one
one-hundredth of a Preferred Share), but in lieu thereof a cash payment will be
made as provided in the Rights Agreement.
In certain circumstances described in the Rights Agreement, the Rights
evidenced hereby may entitle the registered holder thereof to purchase
securities of an entity other than the Company or securities or assets of the
Company other than the Preferred Shares, all as provided in the Rights
Agreement.
No holder, as such, of this Rights Certificate shall be entitled to
vote, to receive dividends or other distributions on or to exercise any
preemptive rights with respect to, or shall be deemed for any other purpose to
be the holder of, the Preferred Shares or other shares of capital stock
<PAGE> 47
of any class of the Company which may at any time be issuable upon exercise
hereof; nor shall anything contained herein or in the Rights Agreement be
construed to confer upon the holder hereof, as such, any of the rights of a
shareholder of the Company, or any right to vote for the election of directors
or upon any other matter submitted to shareholders at any meeting thereof, to
give or withhold consent to any corporate action, to receive notice of meetings
or other actions affecting shareholders (except as provided in the Rights
Agreement) or to receive dividends, subscription rights or other distributions,
until the Rights evidenced by this Rights Certificate shall have been exercised,
in whole or in part, in accordance with the provisions of the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
IN WITNESS WHEREOF, this Rights Certificate has been executed by the
Company by the duly authorized facsimile signature of a proper officer of the
Company and a facsimile of its corporate seal has been imprinted hereon and duly
attested by the duly authorized facsimile signature of a proper officer of the
Company.
Dated as of_________________,___.
ST. FRANCIS CAPITAL CORPORATION
By:_______________________________
Name:
Title:
ATTEST:___________________________
Name:
Title:
Countersigned:
FIRSTAR TRUST CO. (AS RIGHTS AGENT)
By:_______________________________
Authorized Signature
ATTEST:___________________________
Name:
Title:
<PAGE> 48
[Reverse Side of Rights Certificate]
FORM OF ELECTION TO PURCHASE
(To be executed by the registered holder if such holder desires to exercise
Rights represented by this Rights Certificate)
TO: ST. FRANCIS CAPITAL CORPORATION
The undersigned hereby irrevocably elects to exercise Rights
represented by this Rights Certificate to purchase the Preferred Shares (or
other securities, cash or property) issuable upon the exercise of such Rights
and requests that certificates for such Preferred Shares be issued in the name
of:
Please print name and address: _________________________________
_________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Please insert social security,
taxpayer identification
or other identifying number: _________________________________
If such number of Rights shall not be all the Rights represented by
this Rights Certificate, a new Rights Certificate for the remaining unexercised
Rights shall be registered in the name of and delivered to:
Please print name and address: _________________________________
_________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Please insert social security,
taxpayer identification
or other identifying number: _________________________________
Dated:________________________, _____
_________________________________
Signature
Signatures must be guaranteed by an Eligible Guarantor Institution, as
defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934,
as amended.
Signature Guaranteed:___________________________________________________________
<PAGE> 49
CERTIFICATION OF STATUS
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being exercised by or on
behalf of a Person who is or was a Restricted Person (as such term is defined in
the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire, directly or indirectly, the Rights evidenced by
this Rights Certificate from any Person who is, was or subsequently became a
Restricted Person.
Dated:____________________,_____________________________________________________
Signature
Signatures must be guaranteed by an Eligible Guarantor Institution, as
defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934,
as amended.
Signature Guaranteed:___________________________________________________________
NOTICE
The signature(s) on the foregoing Form of Election to Purchase and
Certification of Status must correspond to the name written upon the face of
this Rights Certificate in every particular, without alteration or any change
whatsoever.
In the event the Certification of Status set forth above is not
completed, the Company will deem the beneficial owner of the Rights represented
by this Rights Certificate to be a Restricted Person (as such term is defined in
the Rights Agreement), will not honor the Election to Purchase and will affix a
legend to such effect on this Rights Certificate and on any Rights Certificates
issued in exchange for this Rights Certificate.
<PAGE> 50
[Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer this Rights Certificate)
FOR VALUE RECEIVED_______________ hereby sells, assigns and transfers unto
________________________________________________________________________________
________________________________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint_____________ Attorney, to
transfer the within Rights Certificate on the books of the within-named Company,
with full power of substitution.
Dated:_____________________,________________________________________________
Signature
Signatures must be guaranteed by an Eligible Guarantor Institution, as
defined in SEC Rule 17Ad-15 promulgated under the Securities Exchange Act of
1934, as amended.
Signature Guaranteed:___________________________________________________________
<PAGE> 51
CERTIFICATION OF STATUS
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned or
transferred by or on behalf of a Person who is or was a Restricted Person (as
such term is defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire, directly or indirectly, the Rights evidenced by
this Rights Certificate from any Person who is, was or subsequently became a
Restricted Person.
Dated:____________________,_____________________________________________________
Signature
Signatures must be guaranteed by an Eligible Guarantor Institution, as
defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934,
as amended.
Signature Guaranteed:___________________________________________________________
NOTICE
The signature(s) on the foregoing Form of Assignment and Certification
of Status must correspond to the name written upon the face of this Rights
Certificate in every particular, without alteration or any change whatsoever.
In the event the Certification of Status set forth above is not
completed, the Company will deem the beneficial owner of the Rights represented
by this Rights Certificate to be a Restricted Person (as such term is defined in
the Rights Agreement), will not honor the Assignment and will affix a legend to
such effect on this Rights Certificate and on any Rights Certificates issued in
exchange for this Rights Certificate.
<PAGE> 52
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
SHARES OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
On September 25, 1997, the Board of Directors (the "Board") of St.
Francis Capital Corporation (the "Company") declared a dividend of one preferred
stock purchase right (a "Right") for each outstanding share of Common Stock,
$.01 par value per share (the "Common Stock"), of the Company. The dividend is
payable to the holders of record of the Common Stock at the Close of Business on
October 10, 1997 (the "Record Date"). Except as described below, each Right
entitles the holder thereof, at any time on or after the Business Day (as
hereinafter defined) following the Distribution Date (as hereinafter defined)
and prior to the earliest of the Close of Business on the "Final Expiration
Date" (as hereinafter defined) and the time at which such Rights are exchanged,
to purchase from the Company one one-hundredth of a share of the Company's
Series A Junior Participating Preferred Stock, $.01 par value per share (the
"Preferred Shares"), at a price of $150 per one one-hundredth of a Preferred
Share, subject to adjustment (the "Exercise Price"). The Rights may not be
exercised until the Business Day after the Distribution Date. The terms of the
Rights are set forth in the Shareholder Rights Agreement dated as of September
25, 1997 (the "Rights Agreement") between the Company and Firstar Trust Co., as
Rights Agent (the "Rights Agent"). Capitalized terms not defined herein have the
respective meanings specified in the Rights Agreement.
1. DISTRIBUTION DATE; TRANSFER OF RIGHTS.
Initially, the Rights associated with the Common Stock outstanding as
of the Record Date will be evidenced solely by the certificates for shares of
Common Stock, with a copy of this Summary of Rights attached thereto.
Certificates for shares of Common Stock delivered by or on behalf of the Company
after the Record Date and prior to the earliest of the Distribution Date,
redemption of the Rights or the Final Expiration Date, either upon transfer of
outstanding shares, including certificates for shares of Common Stock which were
reacquired by the Company and then transferred, or original issuance of
additional shares of Common Stock, will contain a notation incorporating the
Rights Agreement by reference. Until the Distribution Date, redemption of the
Rights or the Final Expiration Date, the Rights may be transferred only with the
associated shares of Common Stock and the surrender for transfer of any
certificate for shares of Common Stock, with or without a notation and whether
or not a copy of this Summary of Rights is attached thereto, shall constitute
the transfer of the Rights associated with the shares of Common Stock
represented by such stock certificate.
The Rights will separate from the Common Stock upon the earliest to
occur of: (i) the Close of Business on the tenth Business Day after the first
date on which there shall be, as determined by a majority of the Disinterested
Directors (as hereinafter defined) then in office in their sole discretion, a
public announcement by the Company or any Person that such Person has become an
Acquiring Person (as hereinafter defined); (ii) the Close of Business on the
tenth Business Day (or such later Business Day as may be determined by action of
the Board) after the commencement by any Person (other than an Exempt Person)
of, or the first public announcement
<PAGE> 53
of the intention of any Person to commence, a tender or exchange offer if, upon
consummation thereof, such Person would be the Beneficial Owner of 15% or more
of the outstanding shares of Common Stock (provided, however, that if such
tender or exchange offer is cancelled, terminated or otherwise withdrawn prior
to the Distribution Date without the purchase of any Common Stock, such offer
shall be deemed for purposes of the definition of "Distribution Date" never to
have been commenced or publicly announced); and (iii) the Close of Business on
the tenth Business Day after a determination by at least a majority of the
Disinterested Directors who are not officers of the Company that a Person has
become an Adverse Person (as hereinafter defined). The earliest of the dates
specified in clauses (i), (ii) and (iii) is the "Distribution Date." After the
Distribution Date, the Rights will be evidenced solely by separate certificates.
An "Acquiring Person" is any Person who or which, together with its
Affiliates and Associates, has become the Beneficial Owner of 15% or more of the
shares of Common Stock then outstanding, but does not include (i) the Company,
(ii) any Subsidiary of the Company, (iii) any employee stock ownership plan,
employee benefit plan or other compensation program or arrangement of the
Company or of any Subsidiary, (iv) any Person holding shares of Common Stock for
or pursuant to the terms of any such plan, program or arrangement set forth in
(iii) above, (v) any Person who becomes the Beneficial Owner of 15% or more of
the outstanding Common Stock solely as a result of an acquisition of Common
Stock by the Company, until such time as such Person acquires additional Common
Stock, or (vi) any Person who becomes an Acquiring Person without any plan or
intent to seek or affect control of the Company if such Person promptly enters
into an irrevocable commitment promptly to divest and thereafter promptly
divests such Common Stock so that such Person ceases to be the Beneficial Owner
of 15% or more of the outstanding Common Stock (the Persons specified in clauses
(i) through (iv) being herein collectively called "Exempt Persons"). An "Adverse
Person" is any Person who or which, together with its Affiliates and Associates,
has acquired 10% or more of the Common Stock outstanding and has been
determined, by at least a majority of the Disinterested Directors who are not
officers of the Company, to be reasonably likely to cause the Company to take
action which would provide such Person with a short-term financial gain not in
the best long-term interests of the Company and its shareholders or is
reasonably likely to have a material adverse effect on the business or prospects
of the Company. A "Disinterested Director" is any member of the Board who is not
a Restricted Person (as hereinafter defined), or a representative or nominee of
a Restricted Person, and who was a member of the Board as of the date of the
Rights Agreement, or any individual who subsequently becomes a member of the
Board and is not a Restricted Person or a representative or nominee of a
Restricted Person, if such Person's nomination for election to the Board is
recommended or approved by a majority of the Disinterested Directors then in
office. A "Restricted Person" is an Acquiring Person, an Adverse Person or any
Affiliate or Associate thereof.
As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to the
holders of record of the Common Stock as of the Close of Business on the
Distribution Date. Each share of Common Stock issued by the Company after the
Distribution Date and prior to the Final Expiration Date, including shares of
Common Stock issued by reason of the exercise of any option, warrant, right
(other than the Rights) or conversion or exchange privilege (other than the
Rights) or convertible or exchangeable security issued by the Company prior to
the Distribution Date, will be accompanied
<PAGE> 54
by a Right (unless the Board expressly provides to the contrary at the time of
issuance of any such option, warrant, right or convertible or exchangeable
security), and Rights Certificates evidencing such Rights will be issued at the
same time as the certificates for the associated shares of Common Stock.
2. TERMS OF PREFERRED SHARES.
The Preferred Shares receivable upon exercise of the Rights will not be
redeemable. Each Preferred Share will entitle the record holder thereof to
receive a preferential dividend equal to 100 times the aggregate per share
amount of all cash dividends, and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions (other than
in shares of Common Stock) declared on the Common Stock, adjusted to give effect
to any dividend on the Common Stock payable in shares of Common Stock or any
subdivision, combination or reclassification of the Common Stock (a "Dilution
Event"). In the event of liquidation of the Company, the holder of each
Preferred Share will be entitled to receive a preferential liquidation payment
equal to the greater of $1.00 and 100 times the aggregate per share amount to be
distributed to the holders of the Common Stock, adjusted to give effect to any
Dilution Event, plus an amount equal to accrued and unpaid dividends and
distributions on such Preferred Share, whether or not declared, to the date of
such payment. Each Preferred Share will entitle the holder thereof to 100 votes
on all matters submitted to a vote of the shareholders of the Company, voting
together as a single class with the holders of the Common Stock and the holders
of any other class of capital stock having general voting rights, adjusted to
give effect to any Dilution Event. In the event of any merger, consolidation or
other transaction in which the outstanding shares of Common Stock of the Company
are exchanged for or converted into other capital stock, securities, cash or
other property, each Preferred Share will be similarly exchanged or converted
into 100 times the per share amount applicable to the Common Stock, adjusted to
give effect to any Dilution Event.
3. EXERCISE OR EXCHANGE OF RIGHTS UNDER CERTAIN CIRCUMSTANCES.
In the event that (i) a Person becomes an Acquiring Person, (ii) a
Person (other than an Exempt Person) commences or first publicly announces the
intention of a Person (other than an Exempt Person) to commence a tender or
exchange offer if, upon the consummation thereof, such Person would be the
Beneficial Owner of 15% or more of the shares of Common Stock outstanding, or
(iii) a person is declared to be an Adverse Person (where the earliest of such
events shall be referred to as a "Flip-In Event"), proper provision will be made
so that the registered holder of each Right (other than Rights Beneficially
Owned by a Restricted Person or their designated transferees) will thereafter
have the right, unless the Rights are earlier redeemed, exchanged or expire, to
acquire, upon exercise and payment of the Exercise Price, to receive the number
of shares of Common Stock which, at the time of the occurrence of such event,
will have a market value equal to two times the then current Exercise Price.
After a Flip-In Event, all rights which are, or (under certain circumstances
specified in the Rights Agreement) were, Beneficially Owned by a Restricted
Person or designated transferees therefrom, will be or become void. Under no
circumstances may a Right be exercised unless the Company's option to redeem the
Rights has expired.
<PAGE> 55
At any time after a Flip-In Event and prior to the time that any Person
(other than an Exempt Person), together with its Affiliates and Associates, has
become the Beneficial Owner of 50% or more of the outstanding shares of Common
Stock, the Board may direct that all or any part of the outstanding and
exercisable Rights (other than Rights which have become void) be exchanged for
shares of Common Stock at the exchange rate of one share of Common Stock per
Right, adjusted to give effect to any Dilution Event. Any partial exchange will
be effected pro rata among the registered holders of the Rights based upon the
number of Rights held.
If, on or after the occurrence of a Flip-In Event: (i) the Company
merges into or consolidates with an Interested Shareholder (as hereinafter
defined) or, unless all holders of the Common Stock are treated the same,
another Person (with limited designated exceptions); (ii) an Interested
Shareholder or, unless all holders of the Common Stock are treated the same,
another Person (with limited exceptions) merges into the Company and either (A)
all or part of the outstanding shares of Common Stock of the Company are
converted into capital stock or other securities of any other Person (or the
Company), cash and/or other property, or (B) such shares remain outstanding,
unconverted and unchanged; or (iii) the Company sells or transfers 50% or more
of its consolidated assets or earning power in one or a series of related
transactions to an Interested Shareholder or, unless all holders of the
Company's outstanding shares of Common Stock are treated the same, another
Person (with limited exceptions); then proper provision will be made so that the
registered holder of each Right (other than Rights which have become void) will
thereafter have the right to acquire, upon exercise and payment of the Exercise
Price, the number of common shares of the acquiror (or of another Person
affiliated therewith) which, at the time of consummation of such transaction,
will have a market value equal to two times the then current Exercise Price. An
"Interested Shareholder" is any Restricted Person or any Affiliate or Associate
of any other Person in which such Restricted Person has an interest, or any
Person acting, directly or indirectly, on behalf of or in concert with any such
Restricted Person.
4. ADJUSTMENTS TO EXERCISE PRICE AND STOCK PURCHASABLE UPON EXERCISE.
The Exercise Price payable and the number and kind of shares of capital
stock issuable upon exercise of the Rights are subject to adjustment from time
to time to prevent dilution (i) in the event of a dividend payable in Preferred
Shares on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to the holders of the Preferred Shares of certain
options, warrants or rights to subscribe for or purchase Preferred Shares at a
price, or securities convertible into or exchangeable for Preferred Shares with
a conversion or exchange price, less than the then current market price of the
Preferred Shares, or (iii) upon the distribution to the holders of the Preferred
Shares of cash, securities, evidences of indebtedness or other property (other
than a regular quarterly cash dividend or a dividend payable in Preferred
Shares) or options, warrants or rights (other than those referred to in clause
(ii) above). The number of outstanding Rights and the number of one
one-hundredths of a Preferred Share issuable upon exercise of each Right also
are subject to adjustment in the event of a dividend on the Common Stock payable
in shares of Common Stock or a subdivision, combination or reclassification of
the Common Stock occurring, in any such case, prior to the Distribution Date.
<PAGE> 56
With certain specified exceptions, no adjustment in the Exercise Price
will be made until the cumulative adjustments required equal at least 1% of the
Exercise Price. The Company is not required to issue fractional Preferred Shares
(other than fractions which are multiples of one one-hundredth of a Preferred
Share), but in lieu thereof the Company will make a cash payment based upon the
market value of the Preferred Shares on the trading day immediately preceding
the date of exercise.
5. REDEMPTION OF RIGHTS.
At any time prior to the earliest of the Distribution Date and the
Final Expiration Date, the Board may redeem the Rights in whole, but not in
part, at the redemption price of $.0l per Right, adjusted to give effect to any
Dilution Event (the "Redemption Price"); provided, however, that, under certain
circumstances specified in the Rights Agreement, the Rights may not be redeemed
unless there is more than one Disinterested Director in office and such
redemption is approved by at least a majority of such Disinterested Directors.
The redemption of the Rights may be made effective at such time, on such basis
and with such conditions as the Board, in its sole discretion, may establish.
Immediately after action by the Board directing the redemption of the Rights,
the option to exercise the Rights will terminate, and thereafter each registered
holder of the Rights will only be entitled to receive the Redemption Price
therefor.
6. AMENDMENT OF THE RIGHTS.
Prior to the Distribution Date, the terms of the Rights and the Rights
Agreement may be supplemented or amended by the Board in any manner. From and
after the Distribution Date, the Rights may be supplemented or amended by the
Board, without the approval of the holders of the Rights, in certain respects
which do not materially adversely affect, as determined by the Board (with the
concurrence of at least a majority of the Disinterested Directors), the
interests of such holders (excluding the interests of any Restricted Person);
provided, however, that the Rights Agreement cannot be amended to lengthen (i)
any time period unless such lengthening is approved by at least a majority of
the Disinterested Directors, and such lengthening is for the benefit of the
holders of the Rights (excluding the interests of any Acquiring Person, Adverse
Person or Affiliate or Associate thereof), or (ii) any time period relating to
when the Rights may be redeemed if at such time the Rights are not then
redeemable.
7. MISCELLANEOUS.
The Rights will expire on the Close of Business on September 25, 2007
(the "Final Expiration Date"), unless the Final Expiration Date is extended or
the Rights are earlier redeemed or exchanged by the Company. Until a Right is
exercised, the holder thereof, as such, will have no rights as a shareholder of
the Company, including, without limitation, the right to vote or to receive
dividends. A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to Form 8-K dated September 25, 1997. A copy
of the Rights Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of JANUARY 6, 1997 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 Bradley J. Smith (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the banking industry are expected to substantially benefit the
Bank and Company and whose employment as an executive member of their respective
management teams in the position of Executive Vice President, Retail for the
Bank ("Corporate Position") will 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 employ Executive, and Executive
shall 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 JANUARY 6, 1997 (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,
respectively, in his Corporate Position, reporting directly to their Chief
Executive Officers and 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 $147,000.00 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 at an appropriate level in 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
-2-
<PAGE> 3
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.
Executive shall receive vacation, sick time, personal days and other
perquisites pursuant to Employers' policies as in effect from time to time
for 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 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".
-3-
<PAGE> 4
(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 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.
-4-
<PAGE> 5
(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 (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.
-5-
<PAGE> 6
(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. section1818(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 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
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<PAGE> 7
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 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
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<PAGE> 8
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 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.
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<PAGE> 9
(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;
(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;
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<PAGE> 10
(E) Without Executive's express written consent, Employers failure 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 "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.
(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
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<PAGE> 11
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 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
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<PAGE> 12
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 28OG (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 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
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<PAGE> 13
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 he 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 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
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<PAGE> 14
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 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
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<PAGE> 15
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
If to the Executive:
Mr. Bradley J. Smith
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.
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<PAGE> 16
(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 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
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<PAGE> 17
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) Heading. 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.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as
of the date first above written.
Executive:
/s/ BRADLEY J. SMITH
-----------------------------------
Bradley J. Smith
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<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION
By: /s/ THOMAS R. PERZ
-----------------------------
Its: Executive Vice President
----------------------------
ST. FRANCIS BANK, F.S.B.
By: /s/ JUDITH M. GAUVIN
-----------------------------
Its: Sr. Vice President
----------------------------
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<PAGE> 1
ST. FRANCIS CAPITAL CORPORATION
1997 STOCK OPTION PLAN
1. PURPOSE.
The purpose of the St. Francis Capital Corporation (the "Holding Company")
1997 Stock Option Plan (the "Plan") is to advance the interests of the Holding
Company and its shareholders by providing those key employees and directors of
the Holding Company and its Affiliates, including St. Francis Bank, F.S.B. (the
"Bank"), upon whose judgment, initiative and efforts the successful conduct of
the business of the Holding Company and its affiliates largely depends, with
additional incentive to perform in a superior manner. A purpose of the Plan is
also to attract people of experience and ability to the service of the Holding
Company and its Affiliates.
2. DEFINITIONS.
(a) "Affiliate" means (i) a member of a controlled group of corporations
of which the Holding Company is a member or (ii) an unincorporated trade or
business which is under common control with the Holding Company as determined
in accordance with Section 414(c) of the Internal Revenue Code of 1986, as
amended, (the "Code") and the regulations issued thereunder. For purposes
hereof, a "controlled group of corporations" shall mean a controlled group of
corporations as defined in Section 1563(a) of the Code determined without
regard to Section 1563(a)(4) and (e)(3)(C).
(b) "Award" means a grant of Non-statutory Stock Options or Incentive
Stock Options under the provisions of this Plan.
(c) "Board of Directors" or "Board" means the board of directors of the
Holding Company.
(d) "Change in Control" of the Holding Company means a Change in Control
of a nature that: (i) would be required to be reported in response to Item 1 of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); or (ii) results in a Change in Control of the Bank or the Holding
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), as in effect on the effective date of this Plan; or (iii)
without limitation shall be deemed to have occurred at such time as (a) 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 Bank or the Holding
Company representing 25% or more of the Bank's or the
<PAGE> 2
Holding Company's outstanding securities ordinarily having the right to vote at
the election of directors except for any securities of the Bank purchased by
the Holding Company in connection with the conversion of the Bank to the stock
form and any securities purchased by the Bank's employee stock benefit plans;
or (b) individuals who constitute the Board on the date hereof (the "Incumbent
Board"), cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the date hereof
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 Holding Company's shareholders was approved by the same Nominating
Committee serving under an Incumbent Board, shall be, for purposes of this
clause (b), considered as though he were a member of the Incumbent Board; or
(c) a plan of reorganization, a merger, consolidation, sale of all or
substantially all the assets of the Bank or Holding Company or similar
transaction in which the Bank or Holding Company is not the surviving
institution is approved by shareholders and becomes effective; or (d) a proxy
statement soliciting proxies from stockholders of the Holding Company, by
someone other than the current management of the Holding Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of
the Holding Company or the Bank or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or Property or securities not issued by the Bank or the
Holding Company shall be distributed and shareholders approve the action
disclosed in the proxy materials.
(e) "Committee" means a committee consisting of two or more Non-Employee
Directors appointed by the Board pursuant to Section 3 hereof. "Non-Employee
Director," as defined in Rule 16b-3 promulgated by the Securities and Exchange
Commission ("SEC") under the Exchange Act, means a director who (i) is not
currently an officer or otherwise employed by the Holding Company or the Bank,
or a parent or other subsidiary of the Holding Company, (ii) does not receive
compensation for consulting services or in any other capacity from the Holding
Company or the Bank in excess of $60,000 in any one year, (iii) does not
possess an interest in and is not engaged in business relationships required to
be reported under Items 404(a) or 404(b) of Regulation S-K promulgated under
the Exchange Act and (iv) is an Outside Director as defined in Treas. Reg.
1.162-27.
(f) "Common Stock" means the Common Stock of the Holding Company, par
value, $.01 per share.
(g) "Date of Grant" means the date an Award is effective pursuant to the
terms hereof.
2
<PAGE> 3
(h) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an Employee to perform the work
customarily assigned to him and the inability of an Outside Director to perform
the services customarily performed by an Outside Director. Additionally, a
medical doctor selected or approved by the Committee must advise the Committee
that it is either not possible to determine when such Disability will terminate
or that it appears probable that such Disability will be permanent during the
remainder of said participant's lifetime.
(i) "Employee" means any person who is currently employed by the Holding
Company or any Affiliate.
(j) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the closing price as reported by the National
Association of Securities Dealers Automated Quotation System (as published by
the Wall Street Journal, if published) on such date or if the Common Stock was
not traded on such date, on the next preceding day on which the Common Stock was
traded thereon or the last previous date on which a sale is reported.
(k) "Incentive Stock Option" means an Option granted by the Committee to a
Participant, which Option is designed as an Incentive Stock Option pursuant to
Section 8 of this Plan.
(l) "Non-Statutory Stock Option" means an Option granted to a participant
and which is not an Incentive Stock Option.
(m) "Option" means an Award granted under Section 7 or Section 8 of this
Plan.
(n) "Outside Director" means a member of the Board of Directors of the
Holding Company or the Bank, not also serving as an Employee of the Holding
Company or any of its Affiliates.
(o) "Participant" means an employee of the Holding Company or its
affiliates chosen by the Committee to participate in the Plan, or an Outside
Director.
(p) "Plan Year(s)" means a calendar year or years commencing on or after
January 1, 1997.
(q) "Termination for Cause" means the termination upon personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, or the
willful violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order or the material breach of
any provisions of an Employee's employment contract.
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<PAGE> 4
3. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it sees necessary for the proper administration of the Plan and
to make whatever determinations and interpretations in connection with the Plan
it sees as necessary or advisable with respect to Participants. All
determinations and interpretations made by the Committee shall be binding and
conclusive on such Participants and on their legal representatives and
beneficiaries.
4. TYPES OF AWARDS.
Awards under the Plan may be granted in any one or a combination of:
(a) Non-statutory Stock Options; and
(b) Incentive Stock Options;
as defined in paragraphs 7 and 8 of the Plan.
5. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for purchase pursuant to the exercise of options granted under
the Plan is 220,000 shares of Common Stock of the Holding Company, par value
$.01 per share. Of the total shares of Common Stock available under the Plan,
no more than 50,000 options shall be issued to any Participant in any period of
three (3) calendar years. These shares of Common Stock may be either authorized
but unissued shares or shares previously issued and reacquired by the Holding
Company. To the extent that options are granted under the Plan, the shares
underlying such options will be unavailable for future grants under the Plan
except that, to the extent that options granted under the Plan terminate,
expire or are canceled without having been exercised new Awards may be made
with respect to these shares.
6. ELIGIBILITY.
Officers and other Employees (including Employees who are also directors
of the Holding Company or its Affiliates) shall be eligible to receive
Incentive Stock Options and Non-statutory Stock Options under the Plan. Outside
Directors shall be eligible to receive Non-statutory Stock Options under the
Plan.
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<PAGE> 5
7. NON-STATUTORY STOCK OPTIONS.
7.1 Grant of Non-statutory Stock Options.
(a) Grants to Employees. The Committee may, from time to time, grant
Non-statutory Stock Options to Employees and, upon such terms and
conditions as the Committee may determine, grant Non-statutory Stock Options
in exchange for and upon surrender of previously granted Awards under this
Plan.
(b) Grants to Outside Directors. The Board may, from time to time,
grant Non-statutory Stock Options to Outside Directors and, upon such terms
and conditions as the Board may determine, grant Non-statutory Stock Options
in exchange for and upon surrender of previously granted Awards under this
Plan.
(c) Terms of Non-Statutory Options. Non-statutory Stock Options
granted under this Plan are subject to the following terms and conditions:
(i) Price. The purchase price per share of Common Stock
deliverable upon the exercise of each Non-statutory Stock Option shall be
determined on the date the option is granted. Such purchase price shall be
the Fair Market Value of the Holding Company's Common Stock on the Date of
Grant or such greater amount as determined by the Committee with respect to
Employees or by the Board with respect to Outside Directors. Shares may be
purchased only upon full payment of the purchase price. Payment of the
purchase price may be made, in whole or in part, through the surrender of
shares of the Common Stock of the Holding Company at the Fair Market Value
of such shares on the date of surrender determined in the manner described
in Section 2(j) of the Plan.
(ii) Terms of Options. The term during which each Non-statutory
Stock Option may be exercised shall be 10 years from the Date of Grant, or
such shorter period determined by the Committee with respect to Employees or
by the Board with respect to Outside Directors. The Committee shall deter-
mine with respect to Employees, and the Board shall determine with respect
to Outside Directors the date on which each Non-statutory Stock Option
shall become exercisable and may provide that a Non-statutory Stock Option
shall become exercisable in installments. The shares comprising each
installment may be purchased in whole or in part at any time after such
installment becomes purchasable. The Committee may, in its sole discretion,
accelerate the time at which any Non-statutory Stock Option granted to an
Employee may be exercised in whole or in part. The Board may, in its sole
discretion accelerate the time at which any Non-statutory Stock Option
granted to an Outside Director may be exercised in whole or in part.
Notwithstanding the above, in the event of a Change in Control of the
Holding Company, all Non-statutory Stock Options shall be come immediately
exercisable.
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<PAGE> 6
(iii) Termination of Service. Upon the termination of a Participant's
service for any reason other than Disability, death, retirement or Termination
for Cause, the Participant's Non-statutory Stock Options shall be exercisable
only as to those shares which were immediately purchasable by the Participant at
the date of termination and only for a period of three months following
termination. In the event of Termination for Cause, all rights under the
Participant's Non-statutory Stock Options shall expire upon termination. In the
event of the death, retirement or Disability of any Participant or a Change in
Control, all Non-statutory Stock Options held by the Participant, whether or not
exercisable at such time, shall be exercisable by the Participant of his legal
representatives or beneficiaries of the Participant for one year or such longer
period as determined by the Committee following the date of the Participant's
death, or cessation of service due to Disability or retirement, or following a
Change in Control; provided that in no event shall the period extend beyond the
expiration of the Non-statutory Stock Option term. For purposes of this Section
a Participant who has served as both an Employee and as a member of the Board of
Directors shall have terminated service only when he has terminated service as
both an Employee and a director.
8. INCENTIVE STOCK OPTIONS.
8.1 Grant of Incentive Stock Options.
The Committee may, from time to time, grant Incentive Stock Options to
Employees. Incentive Stock Options granted to pursuant to the Plan shall be
subject to the following terms and conditions:
(a) Price. The purchase price per share of Common Stock deliverable upon
the exercise of each Incentive Stock Option shall be not less than 100% of
the Fair Market Value of the Holding Company's Common Stock on the Date of
Grant. However, if a Participant owns Common Stock possessing more than 10% of
the total combined voting power of all classes of Common Stock of the Holding
Company (or under Section 425(d) of the Code is deemed to own Common Stock
representing more than 10% of the total combined voting power of all such
classes of Common Stock), the purchase price per share of Common Stock
deliverable upon the exercise of each Incentive Stock Option shall not be less
than 110% of the Fair Market Value of the Holding Company's Common Stock on the
Date of Grant. Payment of the purchase price may be made, in whole or in part,
through the surrender of shares of the Common Stock of the Holding Company at
the Fair Market Value of such shares on the date of surrender determined in the
manner described in Section 2(j).
(b) Amounts of Options. Incentive Stock Options may be granted to any
Employee in such amounts as determined by the Committee. In the case of an
option intended to qualify as an
6
<PAGE> 7
Incentive Stock Option, the aggregate Fair Market Value (determined as of the
time the option is granted) of the Common Stock with respect to which Incentive
Stock Options granted are exercisable for the first time by the Participant
during any calendar year (under all plans of the Participant's employer
corporation and its parent and subsidiary corporations) shall not exceed
$100,000. The provisions of this Section 8.1(b) shall be construed and applied
in accordance with Section 422(d) of the Code and the regulations, if any,
promulgated thereunder. To the extent an award under this Section 8.1 exceeds
this $100,000 limit, the portion of the award in excess of such limit shall be
deemed a Non-statutory Stock Option.
(c) Terms of Options. The term during which each Incentive Stock Option
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If at the time an Incentive Stock Option is granted to
an Employee, the Employee owns Common Stock representing more than 10% of the
total combined voting power of the Holding Company (or, under Section 425(d) of
the Code, is deemed to own Common Stock representing more than 10% of the total
combined voting power of all such classes of Common Stock) the Incentive Stock
Option granted to such Employee shall not be exercisable after the expiration
of five years from the Date of Grant. No Incentive Stock Option granted under
this Plan is transferable except by will or the laws of descent and
distribution and is exercisable in his lifetime only by the Employee to whom
is it granted.
The Committee shall determine the date on which each Incentive Stock
Option shall become exercisable and may provide that an Incentive Stock Option
shall become exercisable in installments. The shares comprising each
installment may be purchased in whole or in part at any time after such
installment becomes purchasable, provided that the amount able to be first
exercised in a given year is consistent with the terms of Section 422 of the
Code. The Committee may, in its sole discretion, accelerate the time at which
any Incentive Stock Option may be exercised in whole or in part, provided that
it is consistent with the terms of Section 422 of the Code. Notwithstanding the
above, in the event of a Change in Control of the Holding Company, all
Incentive Stock Options shall become immediately exercisable.
(d) Termination of Employment. Upon the termination of a Participant's
service for any reason other than Disability, Change in Control, death,
retirement or Termination for Cause, the Incentive Stock Options shall be
exercisable only as to those shares which were immediately purchasable by the
Participant at the date of termination and only for a period of three months
following termination. In the event of Termination for Cause all rights under
the Participant's Incentive Stock Options shall expire upon termination.
7
<PAGE> 8
In the event of death, retirement or Disability of any Employee, all
Incentive Stock Options held by such Participant, whether or not exercisable at
such time, shall be exercisable by the Participant or the Participant's legal
representatives or beneficiaries for one year following the date of the
Participant's death, retirement or cessation of employment due to Disability;
provided, however, that such option shall not be eligible for treatment as an
Incentive Stock Option in the event such option is exercised more than three
months following the date of the Participant's cessation of employment. Upon
termination of the Participant's service due to a Change in Control, all
Incentive Stock Options held by such Participant, whether or not exercisable at
such time, shall be exercisable for a period of one year following the date of
Participant's cessation of employment; provided however, that such option shall
not be eligible for treatment as an Incentive Stock Option in the event such
option is exercised more than three months following the date of the
Participant's cessation of employment. In no event shall the exercise period
extend beyond the expiration of the Incentive Stock Option term. For purposes
of this Section a Participant who has served as both an Employee and as a
member of the Board of Directors shall have terminated service only when he has
terminated service as both an Employee and a director.
(e) Compliance with Code. The options granted under this Section 8 of the
Plan are intended to qualify as incentive stock options within the meaning of
Section 422 of the Code, but the Holding Company makes no warranty as to the
qualification of any option as an incentive stock option within the meaning of
Section 422 of the Code.
9. SURRENDER OPTION.
In the event of a Participant's termination of employment (or service as a
Director), the Participant (or the Participant's Personal representative(s),
heir(s), or devisee(s)) may, in a form acceptable to the Committee make
application to surrender all or part of options held by such Participant in
exchange for a cash payment from the Holding Company of an amount equal to the
difference between the Fair Market Value of the Common Stock on the date of
termination and the exercise price per share of the option on the Date of
Grant. Whether the Committee accepts such application or determines to make
payment, in whole or part, is within its absolute and sole discretion, it being
expressly understood that the Committee is under no obligation to any
Participant whatsoever to make such payments. In the event that the Committee
accepts such application and the Holding Company determines to make payment,
such payment shall be in lieu of the exercise of the underlying option and such
option shall cease to be exercisable.
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<PAGE> 9
10. RIGHTS OF A SHAREHOLDER; LIMITED TRANSFERABILITY.
No Participant shall have any rights as a shareholder with respect to any
shares covered by a Non-statutory and/or Incentive Stock Option until the date
of issuance of a stock certificate for such shares. Nothing in this Plan or in
any Award granted confers on any person any right to continue in the employ of
the Holding Company or its Affiliates or to continue to perform services for
the Holding Company or its Affiliates or interferes in any way with the right
of the Holding Company or its Affiliates to terminate a Participant's services
as an officer or other Employee at any time.
No Incentive Stock Option granted under this Plan is transferable except
by will or the laws of descent and distribution and is exercisable in his or
her lifetime only by the Participant to whom it is granted.
Non-statutory Stock Options granted hereunder may be exercised only during
a Participant's lifetime by the Participant, the Participant's guardian or
legal representative or by a permissible transferee. Non-statutory Stock
Options shall be transferable by Participants pursuant to the laws of descent
and distribution upon a Participant's death, and during a Participant's
lifetime, Non-statutory Stock Options shall be transferable by Participants to
members of their immediate family, trusts for the benefit of members of their
immediate family, and charitable institutions ("permissible transferee") to the
extent permitted under Section 16 of the Exchange Act and subject to federal
and state securities laws. The term "immediate family" shall mean any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, sister-in-law, or brother-in-law and
shall include adoptive relationships.
The Committee shall have the authority to establish rules and regulations
specifically governing the transfer of stock options granted under this Plan as
it deems necessary and advisable.
11. AGREEMENT WITH GRANTEES.
Each Award of Options will be evidenced by a written agreement, executed
by the Participant and the Holding Company or its Affiliates which describes
the conditions for receiving the Awards including the date of Award, the
purchase price if any, applicable periods, and any other terms and conditions
as may be required by applicable securities law.
12. DESIGNATION OF BENEFICIARY.
A Participant may, with the consent of the Committee, designate a person
or persons to receive, in the event of death,
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<PAGE> 10
any stock option Award to which the Participant would then be entitled. Such
designation will be made upon forms supplied by and delivered to the Holding
Company and may be revoked in writing. If a Participant fails effectively to
designate a beneficiary, then the Participant's estate will be deemed to be the
beneficiary.
13. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock of
the Holding 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 Holding Company,
the Committee will make such adjustments to previously granted Awards, to
prevent dilution or enlargement of the rights of the Participant, including any
or all of the following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
which may be awarded under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
covered by Awards already made under the Plan;
(c) adjustments in the purchase price of outstanding Incentive and/or
Non-statutory Stock Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award.
14. WITHHOLDING.
There may be deducted from each distribution of cash and/or Common Stock
under the Plan the amount of tax required by any governmental authority to be
withheld.
15. AMENDMENT OF THE PLAN.
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect; provided however, that Sections 7.1 and 8.1
governing grants shall not be amended more than once every six months other
than to comport with the Code or the Employee Retirement Income Security Act of
1974, as amended, if applicable.
The Board may determine that shareholder approval of any amendment to this
Plan may be advisable for any reason, including but not limited to, for the
purpose of obtaining or retaining any
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<PAGE> 11
statutory or regulatory benefits under tax, securities or other laws or
satisfying applicable stock exchange listing requirements.
No such termination, modification or amendment may affect the rights of a
Participant under an outstanding Award.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as of the date the Plan is approved by
shareholders at an annual or special meeting of shareholders (the "Effective
Date"). The Plan also shall be presented to shareholders of the Holding Company
for ratification for purposes of: (i) satisfying one of the requirements of
Section 422 of the Code governing the tax treatment for Incentive Stock
Options; and (ii) maintaining listing on the NASDAQ National Market System.
17. TERMINATION OF THE PLAN.
No Awards under the Plan shall be granted more than ten (10) years after
the Effective Date of the Plan. The Board of Directors has the right to suspend
or terminate the Plan at any time. No termination shall, without the consent of
a Participant, adversely affect such individual's right under a previously
granted award.
18. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the State of
Wisconsin to the extent not Preempted by Federal law as now or hereafter in
effect.
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<PAGE> 12
19. COMPLIANCE WITH SECTION 16.
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
12/14/96 /s/ Thomas R. Perz
- ---------------------- -----------------------------------
Date Adopted (Signature)
Title
1/22/97 /s/ Brian T. Kaye
- ---------------------- -----------------------------------
Date Approved by Secretary
Stockholders
12
<PAGE> 1
ST. FRANCIS BANK, FSB
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
THIS AGREEMENT made and entered into as of this 1st day of June, 1997,
by and between St. Francis Bank, FSB, (hereinafter referred to as the "Bank"),
and Thomas R. Perz, (the "Employee").
PREMISES
A. The Employee is employed by the Bank; and
B. The Employee wishes to provide life insurance protection for his
family in the event of his death, under a whole life insurance policy insuring
his life (hereinafter referred to as the "Policy"), which is described in
Exhibit A attached hereto and by this reference made a part hereof, and which is
being issued by Pacific Mutual Life Insurance Company (hereinafter referred to
as the "Insurer"); and
C. The Bank wishes to obtain key man insurance in the event of
Employee's death because the death of the Employee would cause the Bank
financial loss; and
D. The Bank is willing to pay the premiums due on the Policy as an
additional employment benefit for the Employee and to obtain key man insurance
benefits in the event of Employee's death, on the terms and conditions
hereinafter set forth; and
E. The Employee is the owner of the Policy and as such possesses all
the incidents of ownership in and to the policy; and
F. The Bank wishes to have the Policy collaterally assigned to it by
the Employee, in order to secure payment of its share of the benefit in the
event of the Employee's death and to secure the repayment of the amounts which
it will pay toward the premiums on the Policy.
NOW, THEREFORE, in consideration of the premises and of the mutual
promises contained herein, the parties hereto agree as follows:
1. Purchase of Policy. The Employee will purchase the Policy from the
Insurer in the initial face amount of $1,985,753. The parties hereto will take
all necessary action to cause the Insurer to issue the Policy, and shall take
any further action which may be necessary to cause the Policy to conform to the
provisions of this Agreement. The parties hereto agree that the Policy shall be
subject to the terms and conditions of this Agreement and of the collateral
assignment filed with the Insurer relating to the Policy.
<PAGE> 2
2. Ownership of Policy. The Employee shall be the sole and absolute
owner of the Policy, and may exercise all ownership rights granted by the terms
of the Policy, except as may otherwise be provided herein.
3. Policy Dividends. Any dividend declared on the Policy shall be
applied to purchase paid-up additional insurance on the life of the Employee.
The parties hereto agree that the dividend election provisions of the Policy
shall conform to the provisions hereof.
4. Payment of Premiums. On or before the due date of each Policy
premium, or within the grace period provided therein, the Bank shall pay the
full amount of the premium to the Insurer, and shall, upon request, promptly
furnish the Employee evidence of timely payment of such premium. The Bank shall
annually furnish the Employee a statement of the amount of income reportable by
the Employee for federal and state income tax purposes, as a result of the
insurance protection provided to the Employee's beneficiary.
5. Collateral Assignment. To secure the repayment to the Bank of the
amount of the premiums on the Policy paid by it hereunder, the Employee has,
contemporaneously herewith, assigned the Policy to the Bank as collateral under
the form used by the Insurer for such assignments. The collateral assignment
("Collateral Assignment") of the Policy to the Bank hereunder shall not be
terminated, altered or amended by the Employee, without the express written
consent of the Bank. The parties hereto agree to take all action necessary to
cause such Collateral Assignment to conform to the provisions of this Agreement.
6. Limitations on Employee's Rights in Policy.
a. Except as otherwise provided herein, the Employee shall not sell,
assign, transfer, borrow against, surrender or cancel the Policy, change the
beneficiary designation provision thereof, nor terminate the dividend election
thereof without, in any such case, the express written consent of the Bank.
b. Notwithstanding any provision hereof to the contrary, the
Employee shall have the right to absolutely and irrevocably give to a donee all
of his right, title and interest in and to the Policy, subject to the Collateral
Assignment of the Policy to the Bank pursuant hereto. The Employee may exercise
this right by executing a written transfer of ownership in the form used by the
Insurer for irrevocable gifts of insurance policies, and delivering this form
to the Bank. Upon receipt of such form, executed by the Employee and duly
accepted by the donee thereof, the Bank shall consent thereto in writing, and
shall thereafter treat the Employee's donee as the sole owner of all of the
Employee's right, title and interest in and to the Policy, subject to this
Agreement and the Collateral Assignment of the Policy to the Bank pursuant
thereto. Thereafter, the Employee shall have no right, title. or interest in and
to the Policy, all such rights being vested in and exercisable only by such
donee.
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<PAGE> 3
7. Collection of Death Proceeds.
a. Upon the death of the Employee, the Bank shall cooperate with the
beneficiary or beneficiaries designated by the Employee to take whatever action
is necessary to collect the death benefit provided under the Policy; when such
benefit has been collected and paid as provided herein, this Agreement shall
thereupon terminate.
b. Upon the death of the Employee, the Bank shall have the
unqualified right to receive a portion of such death benefit equal to the
greater of: (i) $750,000; or (ii) the total amount of the premiums paid by it
hereunder, reduced by any outstanding indebtedness which was incurred by the
Bank and secured by the Policy, including any interest due on such indebtedness.
The balance of the death benefit provided under the Policy, if any, shall be
paid directly to the beneficiary or beneficiaries designated by the Employee, in
the manner and in the amount or amounts provided in the beneficiary designation
provision of the Policy. In no event shall the amount payable to the Bank
hereunder exceed the Policy proceeds payable at the death of the Employee. No
amount shall be paid from such death benefit to the beneficiary or beneficiaries
designated by the Employee until the full amount due the Bank hereunder has been
paid. The parties hereto agree that the beneficiary designation provision of the
Policy shall conform to the provisions hereof.
c. Notwithstanding any provision hereof to the contrary, in the
event that, for any reason whatsoever, no death benefit is payable under the
Policy upon the death of the Employee and in lieu thereof the Insurer refunds
all or any part of the premiums paid for the Policy, the Bank shall have the
unqualified right to such premiums.
8. Termination of the Agreement During the Employee's Lifetime.
a. This Agreement shall terminate during the Employee's lifetime,
without notice, upon the occurrence of any of the following events: (a) total
cessation of the Bank's business; (b) bankruptcy, receivership or dissolution of
the Bank; or (c) termination of Employee's employment by the Bank (other than by
reason of his death).
b. In addition, the Employee may terminate this Agreement by written
notice to the Bank. Such termination shall be effective as of the date of such
notice.
9. Disposition of the Policy on Termination of the Agreement During
the Employee's Lifetime.
a. For sixty (60) days after the date of the termination of this
Agreement during the Employee's lifetime, the Employee shall have the option of
obtaining the release of the Collateral Assignment of the Policy to the Bank. To
obtain such release, the Employee shall repay to the Bank the total amount of
the premium payments made by the Bank hereunder, less any indebtedness secured
by the Policy which was incurred by the Bank and remains outstanding as of the
date of such termination, including any interest due on such indebtedness. Upon
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<PAGE> 4
receipt of such amount, the Bank shall release the Collateral Assignment of the
Policy, by the execution and delivery of an appropriate instrument of release.
b. If the Employee fails to exercise such option within such sixty
(60) day period, then, at the request of the Bank, the Employee shall execute
any document or documents required by the Insurer to transfer the Interest of
the Employee in the Policy to the Bank. Alternatively, the Bank may enforce its
right to be repaid the amount of the premiums on the Policy paid by it from the
cash surrender value of the Policy under the Collateral Assignment of the
Policy; provided that in the event the cash surrender value of the Policy
exceeds the amount due the Bank, such excess shall be paid to the Employee.
Thereafter, neither the Employee nor his respective heirs, assigns, or
beneficiaries shall have any further interest in and to the Policy, either under
the terms thereof or under this Agreement.
10. Insurer Not a Party. The Insurer shall be fully discharged from its
obligations under the Policy by payment of the Policy death benefit to the
beneficiary or beneficiaries named in the Policy, subject to the terms and
conditions of the Policy and the Collateral Assignment. In no event shall the
Insurer be considered a party to this Agreement, or any modification or
amendment hereof. No provision of this Agreement, nor of any modification or
amendment hereof, shall in any way be construed as enlarging, changing, varying,
or in any other way affecting the obligations of the Insurer as expressly
provided in the Policy, except insofar as the provisions hereof are made a part
of the Policy by the Collateral Assignment.
11. Amendment. This Agreement may not be amended, altered or modified,
except by a written instrument signed by the parties hereto, or their respective
successors or assigns, and may not be otherwise terminated except as provided
herein.
12. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Bank and its successors and assigns, and the Employee, his
successors, assigns, heirs, executors, administrators and beneficiaries.
13. Notices. Any notice, consent or demand required or permitted to be
given under the provisions of this Agreement shall be in writing, and shall be
signed by the party giving or making the same. If such notice, consent or demand
is mailed to a party hereto, it shall be sent by United States certified mail,
postage prepaid, addressed to such party's last known address as shown on the
records of the Bank. The date of such mailing shall be deemed the date of
notice, consent or demand.
14. Governing Law. This Agreement, and the rights of the parties
hereunder, shall be governed by and construed in accordance with the laws of the
State of Wisconsin.
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<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
duplicate, as of the day and year first above written.
ST. FRANCIS BANK, FSB
BY /s/ JUDITH M. GAUVIN
---------------------------
ATTEST:
/s/ WILLIAM R. HOTZ
- -------------------------------
Secretary
/s/ THOMAS R. PERZ
---------------------------
Thomas R. Perz
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<PAGE> 6
EXHIBIT A
The following life insurance policy is subject to the attached Split-Dollar
Agreement:
Insurer Pacific Mutual Life Insurance Company
------------------------------------------
Insured Thomas R. Perz
------------------------------------------
Policy Number 0123246150
------------------------------------------
Face Amount $1,985,753
------------------------------------------
Date of Issue June 1, 1997
------------------------------------------
-6-
<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 and 333-24057) on Form S-8 of St. Francis Capital Corporation of
our report dated November 13, 1997, relating to the consolidated statements of
financial condition of St. Francis Capital Corporation and Subsidiary as of
September 30, 1997 and 1996, 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, 1997, which report appears in the September 30, 1997
annual report on Form 10-K of St. Francis Capital Corporation.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
December 26, 1997
102
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 22,899
<INT-BEARING-DEPOSITS> 19,959
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 676,716
<INVESTMENTS-CARRYING> 70,682
<INVESTMENTS-MARKET> 70,127
<LOANS> 737,505
<ALLOWANCE> 6,202
<TOTAL-ASSETS> 1,660,649
<DEPOSITS> 1,087,136
<SHORT-TERM> 129,381
<LIABILITIES-OTHER> 24,755
<LONG-TERM> 290,847
0
0
<COMMON> 73
<OTHER-SE> 128,457
<TOTAL-LIABILITIES-AND-EQUITY> 1,660,649
<INTEREST-LOAN> 57,601
<INTEREST-INVEST> 47,900
<INTEREST-OTHER> 2,645
<INTEREST-TOTAL> 108,146
<INTEREST-DEPOSIT> 46,992
<INTEREST-EXPENSE> 69,363
<INTEREST-INCOME-NET> 38,783
<LOAN-LOSSES> 1,280
<SECURITIES-GAINS> (2,111)
<EXPENSE-OTHER> 7,679
<INCOME-PRETAX> 13,262
<INCOME-PRE-EXTRAORDINARY> 13,262
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,718
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.20
<YIELD-ACTUAL> 2.73
<LOANS-NON> 2,995
<LOANS-PAST> 73
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,217
<CHARGE-OFFS> 2,054
<RECOVERIES> 81
<ALLOWANCE-CLOSE> 6,202
<ALLOWANCE-DOMESTIC> 6,202
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to 14a-11(c) or Rule 14a-12
St. Francis Capital Corp.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
---------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
---------------------------------------------------------------------
(3) Filing party:
---------------------------------------------------------------------
(4) Date filed:
---------------------------------------------------------------------
<PAGE> 2
ST. FRANCIS CAPITAL CORPORATION [LOGO]
13400 BISHOPS LANE, SUITE 350
BROOKFIELD, WISCONSIN 53005-6203
(414) 486-8700
-----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 28, 1998
-----------------
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 28, 1998, at 10:00 a.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 two directors each for three-year
terms, and in each case until his or her successor is
elected and qualified;
2. The ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors of the Company
for the fiscal year ending September 30, 1998; and
3. 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, 1997 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 William R. Hotz
December 29, 1997 Executive Vice President,
Secretary and General Counsel
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]
13400 BISHOPS LANE, SUITE 350
BROOKFIELD, WISCONSIN 53005-6203
(414) 486-8700
December 29, 1997
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. which will be held on Wednesday,
January 28, 1998, at 10:00 a.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, 1997.
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, I wish to thank you for your continued support.
Sincerely yours,
Thomas R. Perz
President and Chief Executive Officer
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION [LOGO]
13400 BISHOPS LANE, SUITE 350
BROOKFIELD, WISCONSIN 53005-6203
(414) 486-8700
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF SHAREHOLDERS
To Be Held On January 28, 1998
------------------------------
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
28, 1998, at 10:00 a.m., Milwaukee time, at the Midway Hotel Airport, 5105 S.
Howell Avenue, Milwaukee, Wisconsin and at any adjournments or postponements
thereof.
The 1997 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, 1997, accompany this Proxy Statement and
appointment form of proxy (the "proxy"), which are being mailed to shareholders
on or about December 29, 1997.
Only shareholders of record at the close of business on December 1,
1997 (the "Voting Record Date") will be entitled to vote at the Annual Meeting.
On the Voting Record Date, there were 5,251,011 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 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 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, 1998. 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> 5
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 the nominees
for director named in this Proxy Statement 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, 1998. 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 (William R. Hotz, Secretary, St. Francis Capital Corporation,
13400 Bishops Lane, Suite 350, Brookfield, Wisconsin 53005-6203); (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 $3,500,
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> 6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of November 30, 1997 (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) . . . . . . 408,625 7.8%
Neumeier Investment Counsel (7) . . . . . . . . . . . . . 340,375 6.5
St. Francis Bank, F.S.B.
Employee Stock Ownership Trust (5) . . . . . . . . . . 338,245 6.4
Thomas R. Perz (2)(3)(4) . . . . . . . . . . . . . . . . 148,914 2.8
David J. Drury (2) . . . . . . . . . . . . . . . . . . . 12,525 **
Rudolph T. Hoppe (2) . . . . . . . . . . . . . . . . . . 44,625 1.0
Edward W. Mentzer (2) . . . . . . . . . . . . . . . . . . 40,119 1.0
Jeffrey A. Reigle (2) . . . . . . . . . . . . . . . . . . 5,100 **
John C. Schlosser (2)(3)(4) . . . . . . . . . . . . . . . 112,184 2.1
Julia H. Taylor (2) . . . . . . . . . . . . . . . . . . . 4,000 **
Edmund O. Templeton (2) . . . . . . . . . . . . . . . . . 69,267 1.3
James C. Hazzard (2)(3)(4) . . . . . . . . . . . . . . . 5,096 **
Bruce R. Sherman (2)(3)(4) . . . . . . . . . . . . . . . 74,152 1.4
Bradley J. Smith (2) . . . . . . . . . . . . . . . . . . 1,250 **
All directors and executive officers
as a group (24 persons) (2)(3)(4) . . . . . . . . . . . 807,774 14.6%
</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. Perz - 52,500 shares;
Mr. Drury - 12,000 shares; Mr. Hoppe - 15,592 shares; Mr. Mentzer -
12,059 shares; Mr. Reigle - 4,000 shares; Mr. Schlosser - 52,000
shares; Ms. Taylor - 4,000 shares; Mr. Templeton - 18,822 shares; Mr.
Hazzard - 1,250; Mr. Sherman - 20,532 shares; and Mr. Smith - 1,250.
(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 and the St. Francis Capital Corporation
1997 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 15,221 have been allocated to the
accounts of the named executive officers in the Summary Compensation
Table as follows: Mr. Schlosser - 4,920; Mr. Perz - 4,554; Mr. Smith
- 0; Mr. Sherman - 4,152 and Mr. Hazzard-1,595.
(5) Marshall & Ilsley Trust Company ("Trustee") is the trustee for the St.
Francis Bank, F.S.B. Employee Stock Ownership Trust. The Trustee's
address is 1000 North Water Street, Milwaukee, Wisconsin 53202.
(6) Based upon Amendment No. 3 to a Schedule 13G, dated February 12, 1997,
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. 2 to a Schedule 13G, dated January 30, 1997,
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> 7
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. The person being nominated as a director is not 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 the persons named as nominees 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 recommended by the Board of Directors. At
this time, the Board of Directors knows of no reason why the nominees listed
below may not be able to serve as a director if elected. In April 1997, the
Board of Directors of the Company elected Julia H. Taylor for a term expiring
at the Annual Meeting to fill the vacancy created by the death of director
William F. Double in December 1996. The following tables present information
concerning the nominees for director and continuing directors.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR OF DIRECTOR OF
AND PRINCIPAL OCCUPATION THE COMPANY ST. FRANCIS BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE SINCE
---- --- -------------------------- ----- -----
<S> <C> <C> <C> <C>
NOMINEES FOR DIRECTOR FOR THREE-YEAR TERM EXPIRING IN 2001
Edward W. Mentzer 61 Director of the Company and St. 1992 1982
Francis Bank; Currently
Chairman Emeritus, and from 1995 to 1997,
Chairman of the Board of Plastic
Engineered Components Inc., a privately
held plastic injection molded products
manufacturer, located in Waukesha,
Wisconsin; From 1989 to 1995, President
and Chairman of the Board of Plastic
Engineered Components Inc.
Julia H. Taylor 44 Director of the Company and St. 1997 1996
Francis Bank; Since 1986,
Executive Director and Chief
Executive Officer of the YWCA
of Greater Milwaukee
</TABLE>
-4-
<PAGE> 8
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR OF DIRECTOR OF
AND PRINCIPAL OCCUPATION THE COMPANY ST. FRANCIS BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE SINCE
---- --- -------------------------- ----- -----
<S> <C> <C> <C> <C>
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS
DIRECTORS WHOSE TERMS EXPIRE IN 1999
David J. Drury 49 Director of the Company and St. 1994 1997
Francis Bank; From 1994 to
1997, 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.
Rudolph T. Hoppe 71 Director of the Company and St. 1992 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 53 President, Chief Executive 1992 1983
Officer and Director of the
Company; Chairman of the Board,
President and Chief Executive
Officer of St. Francis Bank.
</TABLE>
-5-
<PAGE> 9
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR OF DIRECTOR OF
AND PRINCIPAL OCCUPATION THE COMPANY ST. FRANCIS BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE SINCE
---- --- -------------------------- ----- -----
<S> <C> <C> <C> <C>
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Jeffrey A. Reigle 46 Director of the Company and 1997 1997
St. Francis Bank; 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.
John C. Schlosser 69 Chairman of the Board of the 1992 1978
Company; Director of St.
Francis Bank.
Edmund O. Templeton 54 Director of the Company and St. 1992 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.
</TABLE>
The affirmative vote of a plurality of the votes cast is required for
the election of the director nominees. 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> 10
MATTER 2.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for the fiscal year ended September
30, 1997 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, 1998. 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 calendar year. During the fiscal year ended September 30,
1997, the Board of Directors of the Company held seven 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, 1997.
In fiscal 1997, the Audit Committee of the Company consisted of
Messrs. William F. Double (until his death in December 1996), David J. Drury,
Rudolph T. Hoppe, Jeffrey A. Reigle and Julia H. Taylor (effective in June
1997), who are neither officers or employees of the Company or its subsidiaries
("Outside Directors"). 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 two times during the
fiscal year ended September 30, 1997.
In fiscal 1997, the Compensation Committee consisted of three Outside
Directors of the Company, including Messrs. David J. Drury, Edward W. Mentzer
and Edmund O. Templeton. During the fiscal year ended September 30, 1997, 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 1997, 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 Bank Wisconsin.
-7-
<PAGE> 11
The Compensation Committee of the Company met four times during the fiscal year
ended September 30, 1997. In November 1997, the Compensation Committee of the
Company met to issue the Compensation Committee Report which appears in this
Proxy Statement. 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 the nominees for director to stand for election
at the Annual Meeting. In October 1997, 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 1999 Annual Meeting."
COMPENSATION COMMITTEE REPORT
I. COMPENSATION COMMITTEE, COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1997, the Compensation Committee of the Board of Directors
of the Company consisted of Outside Directors, Messrs. David J. Drury, Edward
W. Mentzer and Edmund O. Templeton, who are not former officers or employees of
the Company or any of its subsidiaries. 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.
During the fiscal year ended September 30, 1997, 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 1997, 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. Effective
September 19, 1997, Bank Wisconsin was merged with and into St. Francis Bank,
with St. Francis Bank being the surviving federally chartered savings bank.
Therefore, in fiscal 1998, the Company's Compensation Committee will review and
ratify compensation decisions made by the St. Francis Bank Board with respect
to executive officers of both the Company and the combined resulting bank. In
November 1997, the Compensation Committee of the Company met to issue this
Compensation Committee Report.
II. EXECUTIVE COMPENSATION POLICIES AND PLANS
It is the policy of the Company 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 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:
(i) provide competitive compensation packages comparable to those offered by
other peer group financial institutions; (ii) provide the Company and its
subsidiaries with the ability to compete for and retain talented executives
that are critical to the Company's long-term success; and (iii) provide
incentives to achieve the Company's financial performance objectives and
exceptional individual performance with the goal of enhancing shareholder
value.
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<PAGE> 12
The executive compensation package consists of the 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 Company's stock option plans, and (iii) executive
benefits. For a further discussion of the executive benefits made available to
officers of the subsidiary banks during the fiscal year ended September 30,
1997, see "Compensation of Executive Officers and Directors-Benefits."
The Compensation Committee and the Company's Board recognize 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. The Company has two stock option
plans, the St. Francis Capital Corporation 1993 Incentive Stock Option Plan
(the "1993 Option Plan") and the St. Francis Capital Corporation 1997 Stock
Option Plan (the "1997 Option Plan") (collectively, the "Option Plans").
Executive officers and directors of the Company are eligible to receive both
discretionary option grants (as determined by the Company's Board and the
Compensation Committee) and performance-based option grants. In fiscal 1997,
the Board of Directors of the Company adopted the St. Francis Capital
Corporation 1997 Stock Option Allocation Plan (the "Option Allocation Plan")
which outlines the guidelines for, and factors to be considered by, the
Compensation Committee in granting performance-based options. For a further
discussion of the Option Allocation Plan, see "Compensation of Executive
Officers and Directors - Stock Option Plans."
The Compensation Committee also recognizes that "compensation" (as
that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code")) in excess of $1,000,000 per year to an
executive officer is not deductible by the Company unless such compensation is
performance-based compensation approved by shareholders of the Company and
thus, is not "compensation" for purposes of complying with the limit on
deductibility. The Compensation Committee has been advised that no executive
officer of the Company received compensation in fiscal 1997 that will result in
the loss of a corporate federal income tax deduction under Section 162(m) of
the Internal Revenue Code.
III. COMPENSATION DECISIONS FOR FISCAL 1997
Base salary adjustments for fiscal 1997, as reflected in the Summary
Compensation Table set forth in this Proxy Statement, were made based upon the
Compensation Committee's review of individual and corporate performance.
During fiscal 1997, executive officers of the Company participated in
an incentive compensation program established and approved by the Compensation
Committee for the Company (the "STFR-ICP"). Incentive compensation earned
under the STFR-ICP is established as a percentage of each officer's base salary
and may exceed established percentages of base salaries if the Company
surpasses specific corporate performance targets applicable to various
executive officer groups and individual performance objectives are met.
Incentive compensation may be less than the established percentages if the
Company does not achieve the corporate performance targets and individual
performance objectives are not met. The STFR-ICP corporate performance targets
for the executive groups are based upon the Company's net income, with the
percentage calculation of incentive compensation applicable to participants in
each group dependent upon differing components of net income, including gains
on the sale of securities and leverage income. The STFR-ICP provides for a
target of 40% of base salary for the Company's President (Mr. Thomas R. Perz),
and a target of 35% of base salaries for other executive officers who
participate in the STFR-ICP. Executive officers of St. Francis Bank who do not
participate in the STFR-ICP are eligible to participate in the St. Francis Bank
Incentive Compensation Program ("SFB-ICP"). Under this plan, incentive
compensation earned also is established as a percentage of each officer's base
salary and may exceed established percentages of base salaries if St. Francis
Bank surpasses the target level of net income
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<PAGE> 13
(excluding gains on the sale of securities and excluding leverage income of St.
Francis Bank) ("core income") and individual performance objectives are met.
Incentive compensation may be less than the established percentages if St.
Francis Bank does not achieve the target core income level and individual
performance objectives are not met. The SFB- ICP provides for a target of 30%
of base salary for St. Francis Bank's Executive Vice President - Retail Banking
(Mr. Bradley J. Smith) and 25% for other Senior Vice Presidents of St. Francis
Bank.
The corporate and bank performance targets of the STFR-ICP and SFB-ICP
are reviewed and established annually by the Board of Directors of the Company
and St. Francis Bank, respectively, and may vary from year to year, as may the
parameters of such plans. Remuneration earned under the STFR-ICP and SFB-ICP
for the fiscal year ended September 30, 1997 will be paid by St. Francis Bank
in January 1998.
In anticipation of the merger of Bank Wisconsin with and into St.
Francis Bank (effective in September 1997), the Compensation Committee did not
determine Mr. Hazzard's incentive compensation under the Bank Wisconsin
Incentive Compensation Program, which was in effect for fiscal 1996. Mr.
Hazzard's incentive compensation was based upon achievement of St. Francis
Bank's core income, and the target for his incentive compensation was
established at 30% of base salary.
The Company did not achieve the net income target established for
fiscal 1997 under the STFR-ICP and therefore, executive officers of the Company
will earn incentive compensation at levels less than the targeted levels. The
aggregate payout under the STFR-ICP for fiscal 1997 was $99,645. The average
bonus earned under the STFR-ICP in fiscal 1997 by participants (other than Mr.
Perz) was 17.6% of their base salaries. St. Francis Bank did not achieve the
core income target established for fiscal 1997 under the SFB-ICP, and
therefore, executive officers of St. Francis Bank will earn incentive
compensation at levels lower than the targeted levels. The aggregate payout
under the SFB-ICP for fiscal 1997 was $137,584. The average bonus earned under
the SFB-ICP in fiscal 1997 by participants was 16.2% of their base salaries.
In fiscal 1997, in connection with adoption of the Option Allocation
Plan, a total of 262,200 performance-based options were granted to executive
officers of the Company and its subsidiaries. Based upon the Company achieving
83% of its Earnings Per Share target and 100% of the Business Line targets
(average), under the vesting formula established under the Option Allocation
Plan, each participant's option award will vest for fiscal 1997 at a rate of
15% of one-third of the amount of their initial option grant. In April 1997,
Messrs. Sherman, Smith and Hazzard (the executive officers appearing in the
1997 Summary Compensation Table other than Messrs. Perz and Schlosser) each
were granted 25,000 performance-based options under the Option Allocation Plan.
Of the performance-based options awarded to each of these individuals, 1,250
vested in fiscal 1997 for each officer based upon the formula under the Option
Allocation Plan.
IV. PRESIDENT AND CHIEF EXECUTIVE OFFICER COMPENSATION IN FISCAL 1997
Effective February 1, 1997, John C. Schlosser relinquished his
position as President and Chief Executive Officer of the Company to Thomas R.
Perz, who also serves as Chairman of the Board, President and Chief Executive
Officer of St. Francis Bank. Mr. Schlosser continued as Chairman of the Board
of Directors of the Company and continued to serve the Company and its
President in a consultive role on special projects in fiscal 1997. His base
salary (excluding amounts deferred under certain deferred compensation
agreements with St. Francis Bank) from January 1, 1996 through January 31, 1997
remained the same as for fiscal 1996 ($287,955). Effective February 1, 1997,
Mr. Schlosser's base salary was changed to $150,000 per year under a contract
extending until January 1999.
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<PAGE> 14
In establishing the compensation of Mr. Perz for fiscal 1997, the
Compensation Committee specifically considered the Company's and St. Francis
Bank's overall operating performance and compared such operating results to
other thrifts headquartered in Wisconsin. The Compensation Committee also
considered the individual performance of Mr. Perz and his revised
responsibilities during fiscal 1997, including his 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, 1997 was $264,448 (excluding amounts deferred under
his deferred compensation agreement with St. Francis Bank). Mr. Perz's
targeted ICP remuneration was set at 40% of base salary under the STFR-ICP.
The Company did not meet all of the incentive compensation targets established
by the Board of Directors for fiscal 1997 under the STFR-ICP, and therefore,
Mr. Perz will receive incentive compensation equal to $56,327 for fiscal 1997,
or 21.3% of his $264,448 base salary established at the beginning of fiscal
1997. In addition, in April 1997, Mr. Perz was granted 50,000
performance-based options under the Option Allocation Plan. Of the
performance-based options awarded to Mr. Perz, 2,500 vested in fiscal 1997
based upon the formula under the Option Allocation Plan.
COMPENSATION COMMITTEE
DAVID J. DRURY
EDWARD W. MENTZER
EDMUND O. TEMPLETON
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<PAGE> 15
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
During the fiscal year ended September 30, 1997, 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. 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, 1995, 1996 and
1997.
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>
Thomas R. Perz . . . . . . 1997 $ 269,448 $ 68,742 50,000 $57,298
President and CEO of the 1996 229,448 53,127 -- 45,265
Company and St. Francis 1995 229,448 88,044 -- 36,571
Bank
John C. Schlosser . . . . . 1997 195,985 12,389 -- 32,513
Chairman of the Board of 1996 287,955 -- -- 42,755
the Company 1995 292,955 129,580 -- 39,519
Bruce R. Sherman . . . . . 1997 155,000 28,866 25,000 51,083
Executive Vice President- 1996 145,000 26,100 -- 41,397
Investments of the 1995 139,038 75,695 -- 37,496
Company and St. Francis
Bank
Bradley J. Smith (6) . . . 1997 147,000 23,897 35,000 30,808
Executive Vice President-
Retail Banking of St.
Francis Bank
James C. Hazzard . . . . . 1997 123,500 28,405 25,000 42,937
Executive Vice President- 1996 105,000 35,000 -- 28,188
Commercial Banking of 1995 100,000 25,000 8,500 --
St. Francis Bank
</TABLE>
- -----------------------------
(FOOTNOTES ON FOLLOWING PAGE)
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<PAGE> 16
- ------------------------------
(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, 1995, 1996 and 1997, including compensation deferred in
fiscal 1995 by Mr. Schlosser and in fiscal 1995, 1996 and 1997 by Mr.
Perz under deferred compensation agreements entered into with St.
Francis Bank. See "-Deferred Compensation Agreements." For a
description of the employment agreement entered into in fiscal 1997 by
and between the Company and Mr. Schlosser, see "- Employment
Agreements."
(3) Senior executive officers of the Company and St. Francis Bank receive
remuneration under separate Incentive Compensation Programs ("ICPs").
In addition to ICP remuneration, the named executive officers earned
non-cash compensation in fiscal 1997 in the form of a grant of shares
of Common Stock on October 10, 1996 under the St. Francis Bank,
F.S.B. Management Recognition and Retention Plan (the "MRP") as
follows: (i) Mr. Perz - 488 shares; (ii) Mr. Schlosser - 487 shares;
(iii) Mr. Sherman - 487 shares; (iv) Mr. Smith - 0; and (v) Mr.
Hazzard - 250 shares. The amounts indicated for the fiscal year ended
September 30, 1997 represent incentive compensation earned by the
named executive officers under the ICPs for the Company and St.
Francis Bank for fiscal 1997 and the value of the MRP shares awarded
on October 10, 1996 based upon the value of the Common Stock on that
date ($25.44). Mr. Hazzard participated in the ICP applicable to Bank
Wisconsin in fiscal 1996; in fiscal 1995 and 1997, his incentive
compensation was determined separately and established at 25% of his
base salary and 30% of his base salary, respectively. Mr. Schlosser
did not participate in an ICP in fiscal 1996 or 1997.
(4) The option awards indicated for fiscal 1997 were granted to the named
executive officers pursuant to the St. Francis Capital Corporation
1997 Stock Option Allocation Plan (the "Option Allocation Plan") which
is a performance-based option plan. The portion of the initial award
indicated in the table which vested in fiscal 1997 for each of the
named individuals based upon the Company achieving certain Earnings
Per Share targets and Business Line targets (average) under the Option
Allocation Plan is as follows: (i) Mr. Perz - 2,500; (ii) Mr.
Sherman - 1,250; (iii) Mr. Smith - 1,250; and (iv) Mr. Hazzard -
1,250. For further information regarding the Option Allocation Plan,
see "Compensation Committee Report." In connection with his retention
in January 1997, Mr. Smith was granted options as a discretionary
award; therefore, the aggregate fiscal 1997 option award indicated for
Mr. Smith represents a grant of 25,000 options pursuant to the Option
Allocation Plan and 10,000 options as a discretionary award. Mr.
Schlosser is not eligible to participate in the Option Allocation
Plan; however, Mr. Schlosser did receive option awards in fiscal 1997
in his capacity as a director of the Company. See "- Directors'
Compensation."
(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 and Long-Term Disability Policies, and
the reportable economic benefit to the named individuals pursuant to
the Executive Split Dollar Life Insurance Plan (the "Split Dollar
Plan") during the fiscal years ended September 30, 1995, 1996 and
1997. The amounts shown for each individual for the fiscal year ended
September 30, 1997 are derived from the following figures: (i) Mr.
Schlosser: $11,388 - Pension Plan contribution; $2,750 - 401(k) Plan
matching contribution; $36,595 - ESOP allocation; $607 - Split Dollar
Plan premium; $1,173 - Long-Term Disability Policy premium; (ii) Mr.
Perz: $11,388 - Pension Plan contribution; $2,875 - 401(k) Plan
matching contribution; $36,371 - ESOP allocation; $2,288 - Split
Dollar Plan premium; $4,376 - Long-Term Disability Policy premium;
(iii) Mr. Smith: $613- 401(k) Plan matching contribution; $30,128 -
ESOP allocation; $67 - Split Dollar Plan premium; (iv) Mr. Sherman:
$11,388 - Pension Plan contribution; $2,875 - 401(k) Plan matching
contribution; $36,146 - ESOP allocation; $168 - Split Dollar Plan
premium; $506 - Long-Term Disability Policy premium; and (v) Mr.
Hazzard: $9,788 - Pension Plan contribution; $2,975 - 401(k) Plan
matching contribution; $30,128 - ESOP allocation; $46 - Split Dollar
Plan premium. The amounts for fiscal 1996 and 1995 have been restated
to reflect the reportable individual economic benefit rather than the
premiums paid under the Split Dollar Plan as such premiums are refunded
to the registrant upon the executive's death or the policy maturity
date.
(6) Mr. Smith was hired on January 6, 1997; the salary amount indicated
for fiscal 1997 has been annualized.
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<PAGE> 17
EMPLOYMENT AGREEMENTS
In fiscal 1996, the Company and St. Francis Bank entered into
three-year employment agreements with Messrs. Perz and Sherman to be effective
commencing at the beginning of fiscal 1997. In October 1996, Bank Wisconsin
entered into a new three-year employment agreement with Mr. Hazzard which was
assumed by St. Francis Bank in connection with the merger of St. Francis Bank
and Bank Wisconsin in September 1997. On January 6, 1997, in connection with
his retention as Executive Vice President of St. Francis Bank, the Company and
St. Francis Bank entered into a three-year employment agreement with Mr. Smith.
The term of these employment agreements with Messrs. Perz, Sherman, Smith 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 and St. Francis
Bank maintain a stable and competent management base.
Under the employment agreements in effect for fiscal 1997, the base
salaries for Messrs. Perz, Sherman, Smith and Hazzard were $264,448, $155,000,
$147,000 and $123,500, respectively. Base salaries may be increased by the
Board of Directors of the Company or St. Francis Bank, 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. 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, Sherman,
Smith and Hazzard may be terminated by the Company or St. Francis Bank upon
death, disability, retirement, for cause at any time, or in certain events
specified by the regulations of the OTS. If the Company or St. Francis Bank
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 or St. Francis Bank 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.
Sherman, Smith 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. Sherman, Smith 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 or St. Francis Bank for a period
of twelve months following termination.
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
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<PAGE> 18
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 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.
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
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<PAGE> 19
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. These
agreements were renewed in January 1993 and January 1994 for Messrs. Mentzer
and Perz, respectively. 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 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 $76,000 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.
-16-
<PAGE> 20
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 and Executive Vice Presidents and Senior Vice Presidents of St.
Francis Bank participate. The life insurance benefit is equal to the
executives' salary up to $250,000. St. Francis Bank pays the PS-58 cost of the
insurance and 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 and the executive will receive the remainder of the death benefit or
the cash surrender value.
In June 1997, Mr. Perz and St. Francis Bank entered into the St.
Francis Bank, FSB Split Dollar Life Insurance Agreement (the "1997 Split Dollar
Agreement") pursuant to which Mr. Perz is entitled to split dollar life
insurance benefits in addition to those provided for under the Split Dollar
Plan. The life insurance benefit is equal to $1,985,753. St. Francis Bank
pays the PS-58 cost of the insurance and the premium. Upon the death of Mr.
Perz or the policy maturity date, St. Francis Bank will receive the greater of
$750,000 or the aggregate premiums paid on behalf of Mr. Perz and Mr. Perz will
receive the remainder of the death benefit or the cash surrender value
401(k) PLAN, EMPLOYEE STOCK OWNERSHIP PLAN AND MONEY PURCHASE PENSION PLAN
St. Francis Bank participates and Bank Wisconsin participated (for
fiscal 1997) 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. For
fiscal 1997, each subsidiary bank of the Company made 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. The 401(k) Plan's trustee is the Marshall & Ilsley Trust Company.
In connection with the conversion of St. Francis Bank, 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. Bank Wisconsin employees became
eligible for participation in the ESOP effective November 1994. 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 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 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. The ESOP's trustee is Marshall & Ilsley Trust
Company.
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 November 1994. Employees are eligible to
participate after completing a twelve-month period of 1,000 or more hours of
employment and attaining age 21. 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. The Pension Plan's
trustee is the Marshall & Ilsley Trust Company.
-17-
<PAGE> 21
STOCK OPTION PLANS
The Company has two stock option plans, the St. Francis Capital
Corporation 1993 Incentive Stock Option Plan (the "1993 Option Plan") and the
St. Francis Capital Corporation 1997 Stock Option Plan (the "1997 Option Plan")
(collectively, the "Option Plans").
In 1993, the Board of Directors of the Company adopted the 1993 Option
Plan. All employees of the Company and its subsidiaries are eligible to
participate in the 1993 Option Plan. As of September 30, 1997, the Company and
its subsidiaries had 419 eligible employees. The 1993 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, 1997, options to purchase 560,740 shares of
Common Stock had been granted under the 1993 Option Plan and no shares of
Common Stock were available for granting under the 1993 Option Plan.
In November 1996, the Board of Directors of the Company adopted the
1997 Option Plan in which all directors, officers and employees of the Company
and its subsidiaries are eligible to participate. The 1997 Option Plan was
approved by the Company's shareholders on January 22, 1997. As of December 1,
1997, the Company had 432 directors, officers and employees eligible to
participate in the 1997 Option Plan. The 1997 Option Plan authorizes the grant
of (i) Incentive Stock Options; and (ii) Non-Statutory Options. As of
September 30, 1997, options to purchase a total of 151,513 shares of Common
Stock had been granted under the 1997 Option Plan and a total of 68,487 shares
of Common Stock were available for granting.
In fiscal 1997, the Board of Directors of the Company adopted the St.
Francis Capital Corporation 1997 Stock Option Allocation Plan (the "Option
Allocation Plan") which outlines the guidelines for, and factors to be
considered by, the Compensation Committee in granting performance-based
options. The Option Allocation Plan is designed to strengthen the link between
executive compensation and long-term organization performance by providing
guidelines for the grant and vesting of performance-based options to executive
officers. Pursuant to the Option Allocation Plan, participants are granted
options which are subject to vesting over a six-year period based upon the
Company's achievement of certain "Business Line" goals and "Earnings Per Share"
goals established by the Board of Directors of St. Francis Bank and the
Company, respectively, at the beginning of each fiscal year. The "Business
Line" targets relate to the following areas: (i) one-to-four family lending
(origination targets); (ii) commercial lending (growth targets); (iii) consumer
lending (growth targets); (iv) commercial real estate and multi-family lending
(growth targets); (v) deposits (growth targets); and (vi) investments/leverage
(net growth). The option grants to eligible participants are intended to
qualify as Incentive Stock Options under the Internal Revenue Code to the
extent permitted by applicable law.
At the end of each fiscal year, the Compensation Committee will
compare the Company's performance for the fiscal year to the established goals
under the Option Allocation Plan to determine the percentage of option shares
which will vest in such year for each participant. Each year, during the first
five years of the option award term, up to one-third of the options granted (or
if less, the remaining options granted) will be subject to accelerated vesting,
depending upon the degree of the Company's success in achieving the annual
performance targets budgeted for the fiscal year. No vesting will occur in a
fiscal year if the Company's earnings per share or the "Business Line" targets
(average) are less than 80% of the budgeted target. The Compensation
Committee, may, in its discretion, accelerate the vesting of all or a portion
of the options awarded to participants, on an individual or group basis, which
do not vest due to failure to achieve budgeted targets for the Business Line
and Earnings Per Share Targets in any particular year of the option award term.
All option shares not vested by the sixth year of the option award term shall
become vested in the sixth year, irrespective of Company performance.
-18-
<PAGE> 22
Under the Option Allocation Plan, a participant must be employed at
the end of the fiscal year to be eligible for vesting of option grants.
Termination of a participant's service for any reason (other than death,
disability, change in control or retirement) (as defined in the 1997 Option
Plan) will result in the forfeiture of all unvested options. For further
information regarding option grants and decisions related thereto in fiscal
1997, see "Compensation Committee Report."
The following table sets forth certain information concerning
individual grants of stock options under the Option Plans to each of the
executive officers named in the Summary Compensation Table during the fiscal
year ended September 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF % OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO PER SHARE
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR(1) PRICE ($/SH) DATE PRESENT VALUE(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thomas R. Perz . . . 50,000 17.84% $29.00 2007 $360,000
John C. Schlosser . 6,000 2.14 29.00 2007 43,200
Bruce R. Sherman . . 25,000 8.92 29.00 2007 180,000
Bradley J. Smith . . 10,000 3.56 26.25 2007 56,700
25,000 8.92 29.00 2007 180,000
James C. Hazzard . . 25,000 8.92 29.00 2007 180,000
</TABLE>
- -----------------
(1) With the exception of the 10,000 options granted to Mr. Smith in
January 1997 and the 6,000 options granted to Mr. Schlosser, all of
the options set forth in the above table represent the number of
shares subject to performance-based option grants which vested in part
in fiscal 1997 as follows: (i) Mr. Perz - 2,500; (ii) Mr. Sherman -
1,250; (iii) Mr. Smith - 1,250; and (iv) Mr. Hazzard - 1,250. The
10,000 option award granted to Mr. Smith vests as follows: (i)
01/06/01 - 1,667; (ii) 01/06/02 - 1,667; (iii) 01/06/03 - 1,667; (iv)
01/06/04 - 1,667; (v) 01/06/05 - 1,667; and (vi) 01/06/06 - 1,665;
and the 6,000 option grant to Mr. Schlosser vests as follows: (i)
04/24/97 - 2,000; (ii) 01/28/98 - 2,000; and (iii) 01/27/99 - 2,000.
Options to purchase 280,200 shares of Common Stock were granted to
eligible employees under the Option Plans during the fiscal year ended
September 30, 1997.
(2) Based upon the Black-Scholes option pricing model, adopted for use in
valuing stock options, based upon the following variable assumptions:
(i) a ten year option term; (ii) a volatility statistic of 15%; (iii)
a dividend yield of 1.47% and (iv) a risk-free rate of return
representing the interest rate on a U.S. Treasury security with a ten
year maturity on the date of grant. The actual value, if any, an
executive may realize will depend upon the excess of the stock price
over the exercise price on the date the option is exercised. There is
no assurance the value realized will be at or near the value estimated
by the Black-Scholes model.
-19-
<PAGE> 23
The following table sets forth certain information concerning the
exercise of stock options granted under the Option Plans by each of the
executive officers named in the Summary Compensation Table during the fiscal
year ended September 30, 1997.
<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>
Thomas R. Perz 0 0 52,500 67,593 $1,389,688 $947,859
John C. Schlosser 0 0 52,000 24,093 1,385,500 583,546
Bruce R. Sherman 11,260 $291,135 32,045 23,750 853,482 198,906
Bradley J. Smith 0 0 1,250 33,750 10,469 310,156
James C. Hazzard 0 0 1,250 8,500 10,469 375,219
</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 ($37.38) and the exercise price of the options at
September 30, 1997.
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.
-20-
<PAGE> 24
DIRECTORS' COMPENSATION
BOARD FEES
Compensation paid to Company directors in fiscal 1997 included a
monthly retainer of $1,125 (increased from $1,000 effective January 1, 1997)
plus a fee of $1,500 per regular meeting attended (increased from $1,000
effective January 1, 1997), $500 per special meeting attended and $500 per
Company Board committee meeting attended.
From October 1, 1996 through December 31, 1996, Company directors who
also were directors of St. Francis Bank received a fee of $500 per St. Francis
Bank Board meeting attended and Company directors who also were 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
special board meeting or committee meeting attended. Effective January 1,
1997, the fee structure for Company directors who also serve on the Board of
Directors of either St. Francis Bank or Bank Wisconsin was revised and such
individuals received a fee of $1,000 for each regular Board meeting and $500
per committee meeting of the respective subsidiary banks attended for the
remainder of the fiscal year.
In fiscal 1997, Company directors Hoppe, Mentzer (from October 1996
through December 1996 only), Perz, Schlosser, Taylor and Templeton also served
on the Board of Directors of St. Francis Bank, and Company directors Drury
(from December 1996 through September 1997 only), Mentzer, Perz and Reigle
(from October 1996 through December 1996 only) served on the Board of Directors
of Bank Wisconsin.
OPTION GRANTS TO OUTSIDE DIRECTORS UNDER THE 1997 STOCK OPTION PLAN
On April 25, 1997, the Outside Directors of the Company, Messrs.
Drury, Hoppe, Mentzer, Reigle, Schlosser and Templeton and Ms. Taylor each were
granted options to purchase 16,000, 6,000, 6,000, 8,000, 6,000, 6,000 and 8,000
shares of Common Stock, respectively. The option grants are subject to varying
vesting schedules and the exercise price for all option grants is $29.00.
MRP AWARDS TO DIRECTORS IN FISCAL 1997
On October 1996, directors Drury, Hoppe, Mentzer, Schlosser and
Templeton each were awarded 125 shares of Common Stock under the St. Francis
Bank Management Recognition and Retention Plan.
PERFORMANCE GRAPH
The following graph shows a semi-annual comparison from September 1993
to September 1997 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, 1997. 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.
-21-
<PAGE> 25
COMPARISON OF ANNUAL
CUMULATIVE TOTAL RETURN AMONG THE COMPANY,
NASDAQ STOCK MARKET (U.S.) INDEX AND
NASDAQ FINANCIAL INDEX(1)
[GRAPH]
<TABLE>
<CAPTION>
09/30/93 09/30/94 09/30/95 09/30/96 09/30/97
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Company Common Stock................. $100.00 $122.03 $154.24 $177.29 $259.36
NASDAQ (U.S.)........................ $100.00 $100.82 $139.26 $165.25 $226.83
NASDAQ Financial..................... $100.00 $105.39 $133.36 $165.09 $259.98
</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, 1997. 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. Commencing December 31, 1996, the Company increased its
quarterly dividend to $0.12 per share through September 30, 1997. The
performance graph is based upon closing prices on the trading day
specified.
-22-
<PAGE> 26
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 provide, and the policies of Bank
Wisconsin provided, 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, 1997.
In fiscal 1997, St. Francis Bank retained Richard W. Double, Esq., a
partner in the law firm of Double & Double, as counsel. Mr. Richard Double is
a director of St. Francis Bank. During the fiscal year ended September 30,
1997, St. Francis Bank paid Mr. Richard Double and the law firm of Double &
Double, in the aggregate, $97,197 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, 1997, officers, directors and greater than ten percent
shareholders complied with all Section 16(a) filing requirements.
SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
To be considered for inclusion in the proxy statement relating to the
Annual Meeting to be held in January 1999, shareholder proposals must be
received at the principal executive offices of the Company at 13400 Bishops
Lane, Suite 350, Brookfield, Wisconsin 53005-6203, Attention: William R. Hotz,
Secretary, no later than August 18, 1998. If such proposal is in compliance
with all of the requirements of 17 C.F.R. Section 20.14a-8 ("Rule 14a-8") of
the Rules and Regulations under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), it will be included in the proxy statement and set forth
on the appointment form of proxy issued for such annual meeting of
shareholders. It is urged that any such proposals be sent certified mail,
return receipt requested.
-23-
<PAGE> 27
Shareholder proposals which are not submitted for inclusion in the
Company's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before an annual meeting pursuant to Article VII of the Company's
Articles of Incorporation. For business to be properly brought before an
annual meeting, a shareholder must have given timely notice thereof in writing
to the Secretary of the Company. To be timely, a shareholder's notice must be
delivered to or mailed by first class United States mail, postage prepaid, to
the principal executive offices of the Company not later than the close of
business on the tenth day following the day on which notice of the annual
meeting was mailed to the shareholders. A shareholder's notice must set forth
certain information in accordance with Article VII of the Company's Articles of
Incorporation. The notice must include the shareholder's name and address, as
they appear on the Company's record of shareholders, the class and number of
shares of the Company's common stock beneficially owned by such shareholder, a
brief description of the proposed business, the reason for considering such
business at the annual meeting and any material interest of the shareholder in
the proposed business.
OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING
The Board of Directors knows of no business which will be presented
for consideration at the Annual Meeting other than as stated in the Notice of
Annual Meeting of Shareholders. If, however, other matters are properly
brought before the Annual Meeting or any adjournments or postponements thereof,
it is the intention of the persons named in the accompanying proxy to vote the
shares represented thereby on such matters in accordance with their best
judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
William R. Hotz
Executive Vice President,
Milwaukee, Wisconsin Secretary and General Counsel
December 29, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
-24-
<PAGE> 28
REVOCABLE
PROXY
ST. FRANCIS CAPITAL CORPORATION
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 28, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders (the "Annual Meeting") and the Proxy Statement and,
revoking any proxy heretofore given, hereby constitutes and appoints Messrs.
Thomas R. Perz or John C. Schlosser, directors of St. Francis Capital
Corporation (the "Company"), to represent and to vote, as designated below, all
the shares of common stock of the Company held of record by the undersigned on
December 1, 1997, at the Annual Meeting which will be held on January 28, 1998,
at 10:00 a.m., local time, at the Midway Hotel Airport, 5105 S. Howell Avenue,
Milwaukee, Wisconsin, and at any adjournments or postponements thereof.
This proxy is revocable and will be voted as directed below, but if no
directions are specified, this proxy will be voted FOR each of the matters
listed below. If any other business is presented at the Annual Meeting, or any
adjournments or postponements thereof, this proxy will be voted by the Board of
Directors of the Company in their best judgment. At the present time, the
Board of Directors of the Company knows of no other business to be presented at
the Annual Meeting.
DETACH BELOW AND RETURN USING THE ENVELOPE PROVIDED
ST. FRANCIS CAPITAL CORPORATION ANNUAL MEETING OF SHAREHOLDERS
1. ELECTION OF DIRECTORS:
1 - Edward W. Mentzer 2 - Julia H. Taylor
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
to the left (except to vote for all nominees
as specified below). listed to the left.
(Instructions: To withhold authority to vote
for any indicated nominee, write the number(s) [ ]
of nominee(s) in the box provided to the right.)
2. Ratification of the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the fiscal year ending September 30, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting or any
adjournments or postponements thereof.
Date
-----------------------------
Check appropriate box
Indicate changes below:
Address Change? [ ] Name Change? [ ]
NO. OF SHARES
----------------------------------------
----------------------------------------
Signature(s) in Box
IMPORTANT: Please sign exactly as your
name appears on this proxy. When signing
as an attorney, administrator, agent,
corporation, officer, executor, trustee,
guardian or similiar position, please
add your full title to your signature. If
shares of common stock are held jointly,
each holder may sign but only one
signature is required.
