<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2000 Commission File Number 0-22224
- --------------------------------------------------------------------------------
HALLMARK CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incorporation) (I.R.S. Employer Identification No.)
5555 N. Port Washington Road
Glendale, Wisconsin 53217
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (414) 290-7900
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 [ ]
The number of shares outstanding of the issuer's common stock, par value $1.00
per share, was 2,563,241 at May 12, 2000, the latest practicable date.
<PAGE> 2
HALLMARK CAPITAL CORP. AND SUBSIDIARY
FORM 10-Q
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of March 31, 2000 and June 30, 1999 (unaudited)................................... 1
Consolidated Statements of Income for the Three and Nine Months
ended March 31, 2000 and 1999 (unaudited)............................................ 2
Consolidated Statements of Shareholders' Equity for the Nine
Months ended March 31, 2000 and 1999 (unaudited)..................................... 3
Consolidated Statements of Cash Flows for the Nine Months
ended March 31, 2000 and 1999 (unaudited)............................................ 4
Notes to Consolidated Financial Statements (unaudited).................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................... 31
Part II. Other Information
Item 1. Legal Proceedings....................................................................... 32
Item 2. Changes in Securities and Use of Proceeds............................................... 32
Item 3. Defaults Upon Senior Securities......................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders..................................... 32
Item 5. Other Information....................................................................... 32
Item 6. Exhibits and Reports on Form 8-K........................................................ 32
Signature Page.......................................................................... 33
</TABLE>
<PAGE> 3
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
-------------------- ------------
<S> <C> <C>
ASSETS
Cash and non-interest bearing deposits..................................... $2,731 $3,582
Interest-bearing deposits.................................................. 7,755 5,017
-------- --------
Cash and cash equivalents.................................................. 10,486 8,599
Securities available-for-sale (at fair value):
Investment securities.................................................... 38,252 44,902
Mortgage-backed and related securities................................... 39,828 55,566
Securities held-to-maturity:
Mortgage-backed and related securities (fair value -
$15,233 at March 31, 2000; $54,854 at June 30, 1999).................... 15,627 54,618
Loans held for sale, at lower of cost or market............................ 13,775 6,437
Loans receivable, net...................................................... 374,735 281,120
Investment in Federal Home Loan Bank stock, at cost....................... 7,627 6,527
Foreclosed properties, net................................................. 960 621
Office properties and equipment............................................ 5,533 5,771
Prepaid expenses and other assets.......................................... 7,302 5,498
-------- --------
Total assets..................................................... $514,125 $469,659
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits................................................................. $331,796 $288,714
Notes payable and other borrowings....................................... 141,784 129,519
Advance payments by borrowers for taxes and insurance.................... 1,993 3,225
Accrued interest on deposit accounts and other borrowings................ 3,808 2,006
Accrued expenses and other liabilities................................... 1,979 11,699
-------- --------
Total liabilities................................................ $481,360 $435,163
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 2,000,000 shares;
none outstanding....................................................... - -
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued 3,162,500 shares; outstanding 2,563,241 shares at
March 31, 2000 and 2,839,941 shares at June 30, 1999................... 3,162 3,162
Additional paid-in capital............................................... 10,141 9,937
Unearned ESOP compensation............................................... (315) (405)
Unearned restricted stock awards......................................... (74) (78)
Accumulated other comprehensive loss..................................... (2,090) (1,089)
Treasury stock, at cost: 599,259 shares at March 31, 2000
and 322,559 shares at June 30, 1999.................................... (5,824) (2,796)
Retained earnings, substantially restricted.............................. 27,765 25,765
-------- --------
Total shareholders' equity....................................... $ 32,765 $ 34,496
-------- --------
Total liabilities and shareholders' equity....................... $514,125 $469,659
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
1
<PAGE> 4
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
2000 1999 2000 1999
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable.................................................. $7,600 $5,954 $20,707 $17,825
Securities and interest-bearing deposits.......................... 1,411 1,923 4,507 6,102
Mortgage-backed and related securities............................ 1,005 924 3,246 2,119
-------- ------- -------- --------
Total interest income................................... 10,016 8,801 28,460 26,046
INTEREST EXPENSE:
Deposits.......................................................... 4,578 3,970 12,210 11,686
Advance payments by borrowers for taxes and insurance............. 6 5 57 60
Notes payable and other borrowings................................ 2,305 1,874 6,801 5,650
-------- ------- ---------- ---------
Total interest expense.................................. 6,889 5,849 19,068 17,396
-------- ------- --------- --------
Net interest income............................................... 3,127 2,952 9,392 8,650
Provision for losses on loans..................................... 337 140 627 480
-------- ------- -------- --------
Net interest income after provision for losses on loans........... 2,790 2,812 8,765 8,170
NON-INTEREST INCOME:
Service charges on loans.......................................... 77 127 235 262
Service charges on deposit accounts............................... 106 107 347 341
Loan servicing fees, net.......................................... 12 7 36 20
Insurance commissions............................................. 36 31 86 60
Gain (loss) on sale of securities and
mortgage-backed and related securities, net................... (14) - 48 35
Gain (loss) on loans held for sale................................ (189) 180 (35) 832
Other income...................................................... 60 121 166 209
-------- ------- -------- --------
Total non-interest income............................... 88 573 883 1,759
NON-INTEREST EXPENSE:
Compensation and benefits......................................... 1,169 1,363 3,721 3,885
Marketing......................................................... 87 96 289 260
Occupancy and equipment........................................... 347 449 1,164 1,242
Deposit insurance premiums........................................ 17 45 105 127
Other non-interest expense........................................ 425 374 1,089 1,078
-------- ------- -------- --------
Total non-interest expense.............................. 2,045 2,327 6,368 6,592
-------- ------- -------- --------
Income before income taxes........................................ 833 1,058 3,280 3,337
Income taxes...................................................... 229 340 1,011 1,112
-------- ------- -------- --------
Net income................................................... $ 604 $ 718 $ 2,269 $ 2,225
======== ======= ======= =======
Earnings per share - (basic) ................................ $ 0.24 $ 0.26 $ 0.88 $ 0.80
======== ======= ======== ========
Earnings per share - (diluted) .............................. $ 0.23 $ 0.25 $ 0.85 $ 0.78
======== ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
2
<PAGE> 5
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional Unearned Unearned
Common Paid-In ESOP Restricted
Stock Capital Compensation Stock
------- --------- ------------ -----------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED MARCH 31, 2000
Balance at June 30, 1999 .......................... $ 3,162 $ 9,937 ($ 405) ($ 78)
Net income ........................................ -- -- -- --
Accumulated other comprehensive income:
Unrealized holding loss arising during period . -- -- -- --
Re-classification adjustment for gains
realized in income ............................ -- -- -- --
Income tax effect ............................ -- -- -- --
Comprehensive income .............................. -- -- -- --
Cash Dividends ($.05 per share) ................... -- -- -- --
Amortization of unearned ESOP and
restricted stock award compensation ............. -- 204 90 4
Purchase of treasury stock (276,700 shares) ....... -- -- -- --
-------- -------- -------- --------
Balance at March 31, 2000 ......................... $ 3,162 $10,141 ($ 315) ($ 74)
======== ======== ======== ========
NINE MONTHS ENDED MARCH 31, 1999
Balance at June 30, 1998 .......................... $ 3,162 $ 9,512 ($ 532) ($124)
Net income ........................................ -- -- -- --
Accumulated other comprehensive income:
Unrealized holding gain arising during period . -- -- -- --
Re-classification adjustment for gains
realized in income ............................ -- -- -- --
Income tax effect ............................ -- -- -- --
Comprehensive income .............................. -- -- -- --
Amortization of unearned ESOP and
restricted stock award compensation ............. -- 206 81 44
Purchase of treasury stock (70,900 shares) ........ -- -- -- --
Exercise of stock options (38,624 shares) ......... -- 113 -- --
-------- -------- -------- --------
Balance at March 31, 1999 ......................... $ 3,162 $ 9,831 ($ 451) ($ 80)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Retained Treasury Comprehensive Shareholders'
Earnings Stock loss Equity
----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED MARCH 31, 2000
Balance at June 30, 1999 .......................... $25,765 ($2,796) ($ 1,089) $34,496
Net income ........................................ 2,269 -- -- 2,269
Accumulated other comprehensive income:
Unrealized holding loss arising during period . -- -- (1,554) (1,554)
Re-classification adjustment for gains
realized in income ............................ -- -- (48) (48)
Income tax effect ............................ -- -- 601 601
--------
Comprehensive income .............................. -- -- -- (1,001)
Cash Dividends ($.05 per share) ................... (269) -- -- (269)
Amortization of unearned ESOP and
restricted stock award compensation ............. -- -- -- 298
Purchase of treasury stock (276,700 shares) ....... -- (3,028) -- (3,028)
-------- -------- -------- --------
Balance at March 31, 2000 ......................... $27,765 ($5,824) ($2,090) $32,765
======== ======== ======== ========
NINE MONTHS ENDED MARCH 31, 1999
Balance at June 30, 1998 .......................... $22,847 ($1,385) ($ 27) $33,453
Net income ........................................ 2,225 -- -- 2,225
Accumulated other comprehensive income:
Unrealized holding gain arising during period . -- -- (104) (104)
Re-classification adjustment for gains
realized in income ............................ -- -- (35) (35)
Income tax effect ............................ -- -- 14 14
--------
Comprehensive income .............................. -- -- -- 2,072
Amortization of unearned ESOP and
restricted stock award compensation ............. -- -- -- 331
Purchase of treasury stock (70,900 shares) ........ -- (898) -- (898)
Exercise of stock options (38,624 shares) ......... (124) 285 -- 274
-------- -------- -------- --------
Balance at March 31, 1999 ......................... $24,948 ($1,998) ($ 152) $35,260
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
3
<PAGE> 6
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
----------------------------------
2000 1999
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income.................................................................. $ 2,269 $ 2,225
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans............................................. 627 480
Provision for depreciation and amortization............................... 562 328
Net gain on sales of investments and
mortgage-backed and related securities.................................. (48) (35)
Proceeds from the sale of trading securities.............................. 24,107 -
Net gain (loss) on loans held for sale.................................... 35 (832)
Amortization of unearned ESOP and restricted stock awards................. 298 331
Loans originated for sale................................................. (15,976) (49,319)
Sales of loans originated for sale........................................ 8,422 46,376
Increase in prepaid expenses and other assets............................. (1,804) (1,158)
Decrease in payables for investments purchased........................... (9,909) (9,858)
Increase in accrued expenses and other liabilities........................ 1,991 152
Other adjustments......................................................... 940 (366)
-------- ---------
Net cash provided by (used in) operating activities......................... 11,514 (11,676)
-------- ---------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale..................... 46,602 5,535
Proceeds from the maturity of securities available-for-sale................. 4,160 8,150
Purchases of securities available-for-sale.................................. (34,737) (103,130)
Proceeds from maturities of securities held-to-maturity..................... - 572
Purchases of mortgage-backed and related securities......................... (8,096) (10,320)
Principal collected on mortgage-backed and related securities............... 27,595 74,895
Net increase in loans receivable............................................ (95,719) (2,967)
Proceeds from sales of foreclosed properties................................ 980 11
Purchase of Federal Home Loan Bank stock.................................... (1,100) (899)
Purchases of office properties and equipment, net........................... (130) (439)
-------- ---------
Net cash used in investing activities....................................... (60,445) (28,592)
-------- ---------
FINANCING ACTIVITIES
Net increase in deposits.................................................... 43,082 36,236
Proceeds from long-term notes payable to Federal Home Loan Bank............. 95,000 25,000
Repayment of long-term notes payable to Federal Home Loan Bank.............. (81,500) (13,000)
Net increase in short-term notes payable and other borrowings............... (1,235) -
Exercise of stock options................................................... - 274
Purchase of treasury stock.................................................. (3,028) (898)
Cash dividends.............................................................. (269) -
Net increase in advance payments by borrowers for
taxes and insurance....................................................... (1,232) (1,513)
-------- ---------
Net cash provided by financing activities................................... 50,818 46,099
-------- ---------
Increase in cash and cash equivalents....................................... 1,887 5,831
Cash and cash equivalents at beginning of period............................ 8,599 8,184
-------- ---------
Cash and cash equivalents at end of period.................................. $10,486 $14,015
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
4
<PAGE> 7
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposit accounts) .............. $17,286 $11,234
Income taxes paid ........................................................... $754 $844
Non-cash transactions:
Loans transferred to foreclosed properties................................... $1,319 -
Securities and mortgage-backed securities reclassified to
trading and securities available-for-sale.................................. $37,803 -
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
5
<PAGE> 8
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods have been included.
The results of operations and other data for the three and nine months ended
March 31, 2000 are not necessarily indicative of results that may be expected
for the entire fiscal year ending June 30, 2000.
The unaudited consolidated financial statements include the accounts of Hallmark
Capital Corp. (the "Company") and its wholly-owned subsidiary, West Allis
Savings Bank and subsidiaries (the "Bank") as of and for the three and nine
months ended March 31, 2000. All material intercompany accounts and transactions
have been eliminated in consolidation.
(2) STOCK BENEFITS AND INCENTIVE PLANS
At March 31, 2000, the Company has reserved 375,642 shares of common stock for a
non-qualified stock option plan for employees and directors. With respect to
options, which have not been granted, the option exercise price cannot be less
than the fair market value of the underlying common stock as of the date of
option grant, and the maximum term cannot exceed ten years. At March 31, 2000
there were 279,480 shares outstanding. No options were exercised, cancelled or
granted during the nine months ended March 31, 2000.
(3) EARNINGS PER SHARE
Basic earnings per share of common stock for the three and nine months ended
March 31, 2000 and March 31, 1999 have been computed by dividing net income for
the period by the weighted average number of shares of common stock reduced by
ungranted restricted stock and uncommitted ESOP shares. Diluted earnings per
share is calculated by dividing net income by the sum of the weighted average
shares used in the basic earnings per share calculation plus the effect of
dilutive stock options. The effect of dilutive stock options is calculated using
the treasury stock method. The computation of earnings per share is as follows:
6
<PAGE> 9
(3) EARNINGS PER SHARE (CONT.)
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended March 31, 2000 Ended March 31, 1999
--------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding........... 2,627,682 2,627,682 2,881,965 2,881,965
Ungranted restricted stock........................... (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares.............................. (94,875) (94,875) (120,175) (120,175)
Common stock equivalents due to
dilutive effect of stock options.................. -- 69,632 -- 87,692
--------- ----------- --------- ----------
Total weighted average common shares
and equivalents outstanding.................. 2,514,345 2,583,977 2,743,328 2,831,020
========= =========== ========= ==========
Net income for period........................ $604,000 $604,000 $718,000 $718,000
Earnings per share........................... $0.24 $0.23 $0.26 $0.25
========= =========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months For the Nine Months
Ended March 31, 2000 Ended March 31, 1999
-------------------------- ------------------------
Basic Diluted Basic Diluted
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding...... 2,706,019 2,706,019 2,907,363 2,907,363
Ungranted restricted stock...................... (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares......................... (94,875) (94,875) (120,175) (120,175)
Common stock equivalents due to
dilutive effect of stock options............. -- 75,844 -- 95,345
--------- --------- --------- ---------
Total weighted average common shares
and equivalents outstanding.................. 2,592,682 2,668,526 2,768,726 2,864,071
========= ========= ========= =========
Net income for period........................ $2,269,000 $2,269,000 $2,225,000 $2,225,000
Earnings per share........................... $0.88 $0.85 $0.80 $0.78
========= ========= ========= =========
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
Commitments to originate mortgage loans of $6.3 million at March 31, 2000
represent amounts which the Bank expects to fund during the quarter ending June
30, 2000. There were no commitments to sell fixed-rate mortgage loans at March
31, 2000. The Bank had unissued credit under existing home equity line-of-credit
loans and credit card lines of $12.2 million and $6.2 million, respectively, as
of March 31, 2000. Also, the Bank had unused credit under existing commercial
line-of-credit loans of $8.0 million at March 31, 2000. The Bank had no
commitments to purchase fixed-rate mortgage related securities as of March 31,
2000.
(5) REGULATORY CAPITAL ANALYSIS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt and corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
also are subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
7
<PAGE> 10
(5) REGULATORY CAPITAL ANALYSIS (CONT.)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). As of March 31, 2000, Management believes that the Bank
meets all capital adequacy requirements to which it is subject.
As of March 31, 2000, the Bank is well capitalized as defined by regulatory
standards. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
the table below. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are presented in the tables below.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------ -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Tier I Capital Leverage
(to Average Assets):
Consolidated........................ $34,096 6.37% $16,062 3.00% N/A N/A
West Allis Savings Bank............. 32,708 6.12 16,037 3.00 26,728 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated........................ 34,096 9.97 13,673 4.00 N/A N/A
West Allis Savings Bank............. 32,708 9.53 13,734 4.00 20,601 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated........................ 37,305 10.91 27,347 8.00 N/A N/A
West Allis Savings Bank............. 35,917 10.46 27,468 8.00 34,336 10.00
</TABLE>
As a state-chartered savings bank, the Bank also is subject to a minimum
regulatory capital requirement of the State of Wisconsin. At March 31, 2000, on
a fully-phased-in basis of 6.0%, the Bank had actual capital of $34,545,000 with
a required amount of $31,095,000, for excess capital of $3,450,000. There is no
requirement to calculate the amount to be well capitalized under prompt
corrective action provisions on a consolidated basis.
8
<PAGE> 11
(6) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
-------------------- -------------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
--------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential one-to-four family................... $182,606 46.0% $147,960 49.5% $34,646
Home equity...................................... 20,864 5.3% 20,457 6.8% 407
Residential multi-family......................... 44,233 11.1% 36,320 12.2% 7,913
Commercial real estate........................... 70,158 17.7% 42,366 14.2% 27,792
Residential construction......................... 19,758 5.0% 12,673 4.2% 7,085
Other construction and land...................... 27,274 6.9% 17,056 5.7% 10,218
--------- ------- ---------- ------- ----------
Total real estate mortgage loans............ 364,893 92.0% 276,832 92.6% 88,061
Consumer-related loans:
Automobile....................................... 299 0.1% 444 0.2% (145)
Credit card...................................... 2,243 0.6% 2,372 0.8% (129)
Other consumer loans............................. 908 0.2% 1,030 0.3% (122)
--------- ------- ---------- ------- ----------
Total consumer-related loans................ 3,450 0.9% 3,846 1.3% (396)
--------- ------- ---------- ------- ----------
Commercial loans..................................... 28,170 7.1% 18,254 6.1% 9,916
--------- -------- ---------- -------- --------
Gross loans................................. 396,513 100.0% 298,932 100.0% 97,581
Accrued interest receivable.......................... 2,119 1,664
Less:
Undisbursed portion of loan proceeds............. (19,871) (16,279)
Deferred loan fees............................... (651) (490)
Deferred interest on sale of REO................. (61) --
Deferred gain on sale of REO..................... (13) --
Unearned interest................................ (92) (59)
Allowances for loan losses....................... (3,209) (2,648)
--------- ----------
$374,735 $281,120
========= ==========
</TABLE>
Loans serviced for investors totaled $44.3 million and $29.2 million at March
31, 2000 and June 30, 1999, respectively.
9
<PAGE> 12
(7) NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000 JUNE 30, 1999
------------------------------ ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- --------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Advances from
Federal Home Loan Bank 1999 $ -- --% $ 7,000 6.55%
2000 10,002 6.33 27,002 5.98
2001 3,000 5.91 3,000 5.91
2002 5,000 6.43 28,500 5.61
2003 3,042 5.60 8,042 5.13
2004 65,000 5.55 5,000 6.32
2005 35,000 6.03 5,000 5.33
2007 6,500 6.52 6,500 6.52
2008 5,000 4.35 30,000 4.79
-------- --------
$132,544 5.78% $120,044 5.59%
===== =====
Securities sold under
Agreements to repurchase 1999 $ -- --% $ 9,475 5.25%
2004 9,240 5.69 -- --
-------- --------
$ 9,240 5.69% $ 9,475 5.25%
-------- ===== -------- =====
$141,784 $ 129,519
======== =========
</TABLE>
FHLB advances totaled $132.5 million, or 93.5%, and $120.0 million, or 92.7%, of
total borrowings at March 31, 2000 and June 30, 1999, respectively. Certain
advances are callable by the FHLB, advances callable within one year amount to
$85.0 million and $50.5 million at March 31, 2000 and June 30, 1999,
respectively. The Company is required to maintain as collateral unencumbered
one-to-four family mortgage loans in its portfolio such that the outstanding
balance of FHLB advances does not exceed 60% of the book value of this
collateral. The Company had delivered mortgage-backed securities with a carrying
value of $37.1 million and $51.9 million at March 31, 2000 and June 30, 1999,
respectively. In addition, all FHLB advances are collateralized by all Federal
Home Loan Bank stock and are subject to prepayment penalties. The Company's
unused advance line with the Federal Home Loan Bank was $5.3 million based upon
collateral pledged at March 31, 2000. FHLB variable rate term borrowings consist
of $5.0 million tied to the one-month LIBOR index.
The Company enters into sales of mortgage-backed securities with agreements to
repurchase identical securities (reverse repurchase agreements) and
substantially identical securities (dollar reverse repurchase agreements). These
transactions are treated as financings with the obligations to repurchase
securities reflected as a liability. The dollar amount of securities underlying
the agreements remains in the asset accounts. The securities underlying the
agreements are delivered to the counterparty's account. Securities sold under
agreements to repurchase were $9.2 million and $9.5 million at March 31, 2000
and June 30, 1999, respectively.
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<PAGE> 13
(8) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan (ESOP) 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 initially borrowed
$1.0 million from the Company and purchased 253,000 common shares issued in
connection with the Bank's conversion from mutual to stock form in 1993
(Conversion). The debt bears a variable interest rate based on the borrower's
prime lending rate which was 9.0% at March 31, 2000. The balance of this loan
was $404,800 and $506,000 at March 31, 2000 and 1999, respectively. The Bank
makes annual contributions to the ESOP equal to the ESOP's debt service. All
dividends received by the ESOP are paid to the ESOP cash accounts. 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 the 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 additional 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 compensation expense. ESOP compensation
expense for the nine months ended March 31, 2000 and 1999 was $306,000 and
$288,000, respectively.
The following is a summary of ESOP shares at March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Shares
-------------------------
2000 1999
-------- ----------
<S> <C> <C>
Allocated shares.............................................. 138,931 121,792
Unreleased shares............................................. 83,309 107,441
-------- ----------
Total ESOP shares............................................. 222,240 229,233
======== ==========
Fair value of unreleased shares at March 31,.................. $781,000 $1,142,000
======== ==========
</TABLE>
11
<PAGE> 14
(9) ACCOUNTING FOR DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES
Effective January 1, 2000, the Company adopted Financial Accounting Standards
Board Statement No. 133 Accounting for Derivative Instruments and Hedging
Activities. As permitted by The Statement, the Company transferred
held-to-maturity mortgage-backed and related securities with a carrying value of
$37,803,000 to trading securities ($24,320,000) and to securities
available-for-sale ($13,483,000). At the time of transfer there was an
unrealized gain on the trading securities of $16,000 and an unrealized gain on
the securities available-for-sale of $60,000. The unrealized gains are included
in the loss on sale of securities and mortgage-backed and related securities in
the Consolidated Statements of Income for the trading securities and in Other
Comprehensive Income-Unrealized Holding Loss in the quarter ended March 31, 2000
and are not presented as a cumulative effect of an accounting change due to
their immateriality to net income and comprehensive net income for the period.
During the quarter ended March 31, 2000, the Company entered into interest rate
caps with a notional amount of $75.0 million with maturity dates ranging from
June 14, 2001 to January 3, 2002. The interest rate caps are carried at fair
market value of $269,000 in the Consolidated Statement of Financial Condition at
March 31, 2000. The difference between the cost of the caps of $340,000 and the
fair market value is included in expense for the quarter. At March 31, 2000, the
Company designated these caps as a cash flow hedge of the interest rate risk on
short-term wholesale certificates of deposit which renew every 90 days and are
indexed to the 3-month LIBOR. The caps are tied to the 3-month LIBOR interest
rate with a 7% strike rate. Cash payments will be received by the Company if the
3-month LIBOR exceeds 7%.
The Company formally documents all relationships between hedging instruments and
hedged items as well as its risk-management objective and strategy for
undertaking the hedge transaction. This process includes linking derivatives
that are designated as fair value or cash flow hedges to specific recorded
assets or liabilities or to firm commitments on forecasted transactions.
The Company formally assesses at inception and on an ongoing basis, whether
derivatives that are used in hedging transactions have been highly effective in
offsetting fair values or cash flows of hedged items and whether they are
expected to continue to be highly effective in the future.
If at any time the Company determined that the hedge was no longer highly
effective, or if the hedged forecasted transactions were not executed, hedge
accounting would be discontinued and the derivative instrument would continue to
be marked to its fair value with gains or losses recognized in non-interest
income. The change in fair value of derivative instruments designated as cash
flow hedges will be recognized in other comprehensive income in future periods
and the changes in the fair value of derivative instruments designated as fair
value hedges will be recognized in non-interest income or expense.
At March 31, 2000, the interest rate caps are the only derivative instruments
used by the Company to manage interest rate risk. The Company's derivative
activities are monitored by its Asset Liability Committee as part of that
Committee's oversight of risk management and asset/liability functions.
12
<PAGE> 15
HALLMARK CAPITAL CORP. AND SUBSIDIARY
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings with the
Securities and Exchange Commission, in annual 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," "intends
to" 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.
GENERAL
The Company's primary strategy since the Conversion has been to focus on
effectively utilizing the capital acquired in the Conversion through asset
growth and asset portfolio diversification into higher-yielding assets. This
strategy resulted in an increase in the Company's asset size from $179.6 million
at June 30, 1994 to $514.1 million at March 31, 2000. The Company's asset growth
has come primarily through (i) the origination and purchase of mortgage loans
(principally loans secured by one-to-four family owner-occupied homes) within
and outside of the Company's primary lending area, (ii) the purchase of
mortgage-backed and related securities, and (iii) the origination and purchase
of commercial real-estate and business loans within and outside of the Company's
primary lending area. This asset growth was funded through significant increases
in Federal Home Loan Bank ("FHLB") advances and other borrowings, and increases
in deposits consisting primarily of brokered and non-brokered wholesale
deposits.
The Company's asset portfolio diversification has been, and continues to be,
achieved by altering the composition of loans and securities originated,
purchased, sold and held in the total asset portfolio. In particular, the
Company has primarily focused on originating and purchasing higher-yielding
multi-family, commercial real estate and commercial business loans secured by
properties or assets located within the Company's primary lending area (as
defined herein), to either replace or supplement lower-yielding one-to-four
family mortgage loans and principal run-off from the mortgage securities
portfolio.* As part of its asset portfolio diversification strategy, the Company
established a new commercial lending division in fiscal 1997 to originate
commercial/industrial real estate term loans, construction loans, equipment
leasing, inventory/equipment/receivables financing, lines of credit, letters of
credit and government loan programs both within and outside of the Company's
primary lending area. In fiscal 2000, the Company intends to continue its asset
portfolio diversification strategy while maintaining a steady rate of growth of
its asset base. The Company does not expect significant asset growth during the
last quarter of fiscal year 2000.*
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<PAGE> 16
In fiscal 2000, the Company's business strategy is to continue its focus on
increasing net interest income and generating additional non-interest income
from existing and new revenue sources.* In order to increase net interest
income, the Company intends to continue to utilize its asset portfolio
diversification strategy of selling lower-yielding assets such as securities and
one-to-four family mortgage loans that conform to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("Fannie Mae")
guidelines in the secondary market to provide liquidity to fund higher-yielding
one-to-four family non-conforming mortgage, multi-family, commercial real estate
and commercial business loan originations and purchases, increase non-interest
income and maintain adequate levels of capital.* The Company anticipates that
increased sales of one-to-four family conforming mortgage loans will decrease
the proportion of the gross loan portfolio represented by such loans and will
increase non-interest income as a result of increased gains on the sales of such
loans.*
Portfolio diversification in fiscal 2000 also will include an increased level of
purchases of loans or participation interests in loans originated by other
lenders both within and outside the Company's primary lending area.* Loans
purchased, or participation interests purchased, which relate to properties or
business assets located outside of the Company's primary lending area will
primarily consist of higher-yielding non-conforming one-to-four family,
multi-family, commercial real estate, multi-family construction, commercial real
estate construction and commercial business loans.* Loan purchases of $85.6
million contributed to the asset growth during the nine months ended March 31,
2000. The loans purchased were higher yielding, non-conforming one-to-four
family, multi-family, land, commercial real estate and commercial loans. Of the
$85.6 million in non-conforming higher yielding loans purchased for the
Company's portfolio during the nine month period ended March 31, 2000, $33.4
million were one-to-four family loans and $34.8 million were commercial real
estate loans, none of which conformed to FHMLC and Fannie Mae secondary market
guidelines. Such loans are secured by properties located primarily in the
midwest region of the country, outside of the Company's primary lending area.
In fiscal 2000, the Company projects total loan and participation interest
purchases which relate to residential and commercial properties or business
assets to be approximately $100 million compared to $56.9 million in fiscal
1999.* The Company anticipates that approximately $50 million of such amount
will relate to one-to-four family non-conforming mortgage loans secured by
properties located outside of the Company's primary lending area and the balance
(approximately $40 million) will relate to the purchase of multi-family,
multi-family construction, commercial real estate, commercial construction and
commercial business loans secured by properties and assets located both inside
and outside its primary lending area.* In deciding whether or not to purchase a
loan or participation interest in a loan secured by properties or business
assets located outside of the Company's primary lending area, management of the
Company has applied, and will continue to apply, underwriting guidelines at
least as strict as those applicable to the origination of similar loans within
its primary lending area.*
In fiscal 2000, the Company will evaluate opportunities to purchase one-to-four
family mortgage loans which conform to FHMLC and Fannie Mae underwriting
guidelines and non-conforming portfolio loans which are not sold in the
secondary agency market due to underwriting characteristics that do not conform
to the secondary agency market.* Purchases of conforming and non-conforming
one-to-four family mortgage loans will include lending opportunities on a
national basis. One-to-four family non-conforming loans also will be originated
by the Company within its primary lending area. For the nine months ended March
31, 2000, the Company purchased $33.4 million of non-conforming one-to-four
family mortgage loans.
In fiscal 2000, the Company also intends to continue increasing the activities
of its commercial lending division as another element of its overall portfolio
diversification strategy.* The focus of the Company's commercial lending
operation will be the origination and purchase of small business loans and
leases.* During fiscal 1999, the Company originated and purchased $137.7 million
of multi-family, commercial real estate, multi-family construction, commercial
construction and commercial business loans, lines of credit and leases. For the
nine months ended March 31, 2000, the Company originated and purchased $115.9
14
<PAGE> 17
million of multi-family, commercial real estate, multi-family construction,
land, commercial construction and commercial business loans, lines of credit and
leases. Management currently projects that the commercial lending division will
increase its level of originations and purchases to approximately $120 million
in new commercial loans, lines of credit and leases during fiscal 2000.*
Management believes the commercial lending component of its operations will
benefit the Company longer term and contribute to a long-term increase in net
income and return on equity.* The commercial lending division also has enhanced
the Company's core deposit base, through the establishment of new deposit
relationships with the commercial lending division's customers.
The Company established a new mortgage banking subsidiary, Hallmark Financial,
Inc. (d/b/a Major Finance) at the end of fiscal 1999 to provide lending
activities involving higher credit risk financial services (also known as
subprime lending). For the nine months ended March 31, 2000, Major Finance acted
as a broker of non-conforming subprime residential and commercial mortgage
loans. As a broker, Major Finance would interview prospective borrowers,
complete a loan application, collect and verify financial data on the borrower
and submit the loan file to a potential lender or investor. The lender or
investor would then make the final underwriting decision and close the loan in
their own name. Major Finance would receive a fee directly from the lender or
investor for its brokering services. No loans were funded or originated by the
Bank and retained in its portfolio. For the nine months ended March 31, 2000,
the majority of Major Finance's subprime lending activity related to residential
mortgage loans. Based on the performance of Major Finance and current market
factors, the Company has decided to discontinue originating and brokering loans
through the Major Finance subsidiary.
During fiscal 2000, the Company intends to increase its non-interest income by
expanding the residential lending and commercial banking fee income producing
divisions.* The Company expects one-to-four family mortgage loan originations to
remain strong despite the generally higher level of market interest rates.* It
is currently anticipated that substantially all of the 30-year fixed rate
conforming one-to-four family mortgage loans originated in fiscal 2000 will be
sold in the secondary market resulting in income from gains on loans sold.*
During the nine months ended March 31, 2000, the Company originated and sold
$8.1 million in such loans, resulting in $181,000 income from gains on loans
sold. The Company also expects increased fee income from the commercial banking
division resulting from a growth in business deposit relationships and loan
originations.* The Company expects its insurance subsidiary, Hallmark Planning
Services, Inc., to continue to generate fee income from investment product and
annuity sales.* The Company also has recently implemented a program for mortgage
contract cash processing within the commercial lending division, a service
intended to generate fee income.* The Bank acts as a partial sub-servicer,
providing a cash/processing function for nationally-originated commercial real
estate loans.
The Company also intends to expand its community "relationship banking" focus by
targeting cross sales opportunities to individuals and businesses through
customer segmentation and database marketing, planning the opening of a new
retail location at the Company's headquarters in Glendale, Wisconsin, and
expanding the delivery of products and services through the Internet.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered
deposits, proceeds from principal and interest payments on loans, principal and
interest payments on mortgage-backed and related securities, FHLB-Chicago
advances and reverse repurchase agreements. Alternative funding sources are
evaluated and utilized based upon factors such as interest rates, availability,
maturity, administrative costs and retention capability. Although maturity 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 loans and mortgage securities prepayments increased in
fiscal 1999 overall as interest rates declined significantly during the first
half of the fiscal year before increasing in the last half of the fiscal year.
During fiscal years 1997 and 1998, prepayments increased as interest rates
decreased in the second half of both fiscal years. As a result of the upward
trend in interest rates extended through the nine month period ending March 31,
2000, the mortgage
15
<PAGE> 18
loan and mortgage securities prepayments and gain on sales of loans has
decreased compared to the nine month period ended March 31, 1999.
The primary investing activity of the Company is the origination and purchase of
loans and the purchase of mortgage-backed and related securities. For the nine
months ended March 31, 2000, the Company originated and purchased loans totaling
$110.2 million and $85.6 million, respectively, as compared to the nine months
ended March 31, 1999 when originated and purchased loans totaled $161.2 million
and $29.9 million, respectively. Purchases of mortgage-backed and related
securities held-to-maturity for the nine months ended March 31, 2000 and 1999
totaled $8.1 million and $10.3 million, respectively. There were no purchases of
investment securities held-to-maturity for the nine months ended March 31, 2000
and 1999. For the nine months ended March 31, 2000 and 1999, these activities
were funded primarily by principal repayments on loans of $90.1 million and
$145.1 million, respectively; principal repayments on mortgage-backed and
related securities of $27.6 million and $74.9 million, respectively; proceeds
from the sale of mortgage loans of $8.4 million and $46.4 million, respectively;
net proceeds from notes payable to the FHLB-Chicago of $12.5 million and $12.0
million, respectively; and a net increase in deposits of $43.1 million during
the 2000 period. Purchases of securities available-for-sale totaled $34.7
million and sales were $46.6 for the nine months ended March 31, 2000, compared
to purchases of $103.1 million and sales of $5.5 million for the nine months
ended March 31, 1999. Sales of trading securities totaled $24.1 million for the
nine months ended March 31, 2000. There were no sales of trading securities for
the nine months ended March 31, 1999.
The Company is required to maintain minimum levels of liquid assets under the
regulations of the Wisconsin Department of Financial Institutions, Division of
Savings and Loan for state-chartered stock savings banks. Savings banks are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers acceptances, certain corporate debt
securities, securities of certain mutual funds and specified United States
government, state or federal agency obligations) of not less than 8.0%. The
Company's liquidity ratio was 11.4% at March 31, 2000. The Company adjusts its
liquidity levels to meet various funding needs and to meet its asset and
liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The levels of these assets
are dependent on the Company's operating, financing, lending and investing
activities during any given period. At March 31, 2000 and June 30, 1999, cash
and cash equivalents were $10.5 million and $8.6 million, respectively. The
increase in cash and cash equivalents was due to an increase in deposits,
FHLB-Chicago advances, securities sold under agreements to repurchase and the
sales of mortgage backed and related securities.
Management believes that the strategy of leveraging the capital acquired in the
Conversion to achieve the targeted asset size established by the Board of
Directors within a three-to-five year period following the Conversion could not
have been achieved solely through the use of retail deposits from the local
market. Management also believes that the costs, overhead and interest expense
of achieving comparable retail deposit growth would have exceeded the costs
related to the use of FHLB-Chicago advances and wholesale brokered deposits as a
funding source. However, management recognizes 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 Bank
location or other intangible reasons. The Company maintains a $10.0 million
backup credit facility for contingency purposes to replace funds from wholesale
brokered deposits should retention of those deposits diminish due to
extraordinary events in the financial markets. The Company's overall cost of
funds has increased in recent years due primarily to a much greater percentage
of the deposits being in certificates, both wholesale brokered and retail, as
opposed to passbooks, money market accounts and checking accounts. Management
believes that a significant portion of its retail deposits will remain with the
Company and, in the case of wholesale brokered deposits, may be replaced with
similar type accounts 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.
At March 31, 2000, retail and wholesale certificates of deposit totaled $57.8
million and $215.8 million, respectively. Management believes that a significant
portion of its retail deposits will remain with the Company and, in the case of
wholesale brokered deposits, may be replaced with similar type accounts
16
<PAGE> 19
should the level of interest rates change.* However, in the event of a
significant increase in market interest rates, the cost of obtaining replacement
wholesale deposits and FHLB advances would increase as well.
The Bank's Board of Directors has set a maximum limitation of total borrowings
equal to 32% of total assets. The internal limitation is 3% below the allowable
borrowing limit (for all borrowings including FHLB advances and reverse
repurchase agreements) of 35% of total assets established by the FHLB-Chicago.
At March 31, 2000, FHLB advances totaled $132.5 million or 25.7% of the Bank's
total assets. At March 31, 2000, securities sold under agreements to repurchase
were $9.2 million or 1.8% of the Bank's total assets. At March 31, 2000, the
Bank had unused borrowing authority under the borrowing limitations established
by the Board of Directors of $23.0 million and $38.5 million under the FHLB
total asset limitation. The Bank has and intends to continue to fund asset
portfolio diversification in fiscal 2000 through modest increases in FHLB
advances and reverse repurchase agreements.
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-Chicago. Whenever the Company requires funds beyond its ability to
generate them internally, additional sources of funds usually are available and
obtainable from the wholesale brokered and non-brokered market as well as the
unused credit line from the FHLB-Chicago, and funds also may be available
through reverse repurchase agreements wherein the Company pledges investment,
mortgage-backed or related securities. The Company maintains a $10.0 million
contingent backup credit facility with a major correspondent bank to replace a
portion of its interest rate sensitive liabilities, such as borrowings and
wholesale brokered and non-brokered deposits should such funding sources become
difficult or impracticable to obtain or retain due to a changing interest rate
environment. The Company also has a federal funds open line of credit in the
amount of $10.0 million with a correspondent bank which does not require the
direct pledging of any assets. In addition, the Company maintains a relatively
high level of liquid assets such as investment securities and mortgage-backed
and related securities available-for-sale in order to ensure sufficient sources
of funds are available to meet the Company's liquidity needs.
The Company has various unfunded commitments at March 31, 2000 which represent
amounts the Company expects to fund during the quarter ended June 30, 2000. For
a summary of such commitment see discussion under footnote (4) "Commitments and
Contingencies" contained in the section entitled, "Notes to Consolidated
Financial Statements." The Company anticipates it will have sufficient funds
available to meet its current loan commitments, including loan applications
received and in process to the issuance of firm commitments.
CHANGE IN FINANCIAL CONDITION
Total assets increased $44.4 million, or 9.5%, from $469.7 million at June 30,
1999 to $514.1 million at March 31, 2000. This increase is primarily reflected
in an increase in loans receivable and loans held for sale, funded primarily by
an increase in deposits, FHLB-Chicago advances, securities sold under agreements
to repurchase and decreases in securities available-for-sale. Cash and cash
equivalents were $10.5 million and $8.6 million at March 31, 2000 and June 30,
1999, respectively. The increase in cash and cash equivalents was due to an
increase in deposits, FHLB-Chicago advances, securities sold under agreements to
repurchase and the sales of mortgage backed and related securities.
Loans receivable increased to $374.7 million at March 31, 2000 compared to
$281.1 million at June 30, 1999. The increase at March 31, 2000 compared to June
30, 1999 is primarily the result of the purchase of non-conforming one-to-four
family, multi-family and commercial real estate loans secured by properties
located out of the Company's primary lending area, as such loans carried higher
yields than comparable mortgage-backed and related securities during the nine
months ended March 31, 2000.
Total mortgage loans originated and purchased amounted to $159.9 million ($76.0
million of which were purchased mortgage loans) and $148.5 million ($3.5 million
of which were purchased mortgage loans) for the
17
<PAGE> 20
nine months ended March 31, 2000 and 1999, respectively. The Company originated
$42.2 million of conforming one-to-four family mortgage and construction loans
within the primary lending area and purchased $33.4 million of non-conforming
one-to-four family mortgage loans outside of the primary lending area. The
Company originated $12.8 million of non-conforming multi-family loans within the
primary lending area and purchased $7.3 million of non-conforming multi-family
loans outside of the primary lending area for the period ending March 31, 2000.
Total commercial real estate mortgage loans originated and purchased totaled
$59.3 million and $33.2 million for the nine months ended March 31, 2000 and
1999, respectively. Of the $59.3 million commercial real estate mortgage loans
originated and purchased, $24.5 million were originations of non-conforming
commercial real estate loans within the Company's primary lending area, while
$33.3 million were purchases of non-conforming commercial real estate loans
outside the Company's primary lending area and $1.5 million were purchased
non-conforming commercial real estate loans within the Company's primary lending
area. The Company originated $22.0 million of non-conforming commercial loans
within the primary lending area and purchased $9.6 million of non-conforming
commercial loans outside of the primary lending area. At March 31, 2000, the
multifamily and commercial components of the Company's loan portfolio totaled
$169.8 million, or 42.8% of the total loan portfolio, compared to $119.7
million, or 39.8% of the total loan portfolio at March 31, 1999.
Sales of fixed-rate mortgage loans totaled $7.5 million and $49.3 million for
the nine months ended March 31, 2000 and 1999, respectively. The decrease in the
sales of fixed-rate mortgage loans is due to management's intent to hold a
greater number of these loans in the portfolio and the lower volume of
originations in the nine months ended March 31, 2000 compared to March 31, 1999.
Securities available-for-sale decreased to $78.1 million at March 31, 2000
compared to $100.5 million at June 30, 1999. Mortgage-backed and related
securities held-to-maturity decreased to $15.6 million at March 31, 2000
compared to $54.6 million at June 30, 1999. The decrease in securities
available-for-sale was the result of management's decision to sell securities to
fund loan purchases and originations which carry higher yields than securities.
As a result of the adoption of Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"), the Company transferred securities within the investment portfolio. The
Company transferred securities totaling $37,803,000 from the held-to-maturity to
the trading and available-for-sale classifications. All securities transferred
to trading were sold during the quarter ended March 31, 2000 at a loss of
$36,000.
Deposits increased $43.1 million to $331.8 million at March 31, 2000 from $288.7
million at June 30, 1999. The increase in deposits was primarily due to the
Company's increase in wholesale brokered deposits. Brokered certificates of
deposit totaled $199.3 million at March 31, 2000, representing 60.1% of total
deposits as compared to $101.2 million, or 35.0% of total deposits, at June 30,
1999. Non-brokered wholesale deposits totaled $16.5 million at March 31, 2000,
representing 5.0% of total deposits as compared to $55.2 million, or 19.1% of
total deposits at June 30, 1999. Deposits are the Company's primary source of
externally generated funds. The level of deposits is heavily influenced by such
factors as the general level of short- and long-term interest rates as well as
alternative yields that investors may obtain on competing investment securities
such as money market mutual funds.
FHLB-Chicago advances increased to $132.5 million at March 31, 2000 compared to
$120.0 million at June 30, 1999. At March 31, 2000, securities sold under
agreements to repurchase were $9.2 million compared to $9.5 million at June 30,
1999. The Company has increased its use of FHLB-Chicago advances and securities
sold under agreements to repurchase as a funding source due to attractive rates
offered in relation to deposit funds obtainable in the Company's local market.
18
<PAGE> 21
ASSET/LIABILITY MANAGEMENT
The Company closely monitors interest rate risk in an attempt to manage the
extent to which net interest income is significantly affected by changes in
market interest rates. In managing the Company's interest rate risk during the
nine months ended March 31, 2000, the Company utilized wholesale brokered and
non-brokered deposits and FHLB-advances to fund increases in the Company's
interest-bearing assets due primarily to the attractive rates offered on
wholesale deposits and FHLB advances. At March 31, 2000, the Company's estimated
cumulative one-year gap between assets and liabilities was a negative 41.0% of
total assets as compared to a negative 25.6% at June 30, 1999.
The increase in the Company's negative one-year gap reflects the increased use
of shorter-term maturity deposits and FHLB advances to fund a larger portfolio
of fixed-rate mortgage loans. Beginning in January 2000 and in conjunction with
the increased negative gap position of the Company, management with the approval
of the Board of Directors has started to manage the interest rate risk on the
Company's short-term wholesale certificates of deposit using interest rate caps
to limit the Company's exposure to rising interest rates. See Footnote (9)
"Accounting for Derivative Investments and Hedging Activities" for discussion of
the caps. At March 31, 2000, the notional amount of the interest rate caps was
$75 million with maturity dates of June 14, 2001 and January 3, 2002. The
interest rate caps are tied to the 3-month LIBOR interest rate with a 7.0%
strike rate. Payments will be received by the Bank if the 3-month LIBOR
increases over the 7.0% strike rate. The unamortized cost of the interest rate
caps at March 31, 2000 is $269,000 with a fair value of $269,000 which is
recorded as an other asset in the Consolidated Statement of Financial Condition.
The time value of the caps of $51,000 and the change in fair value of $20,000
are recognized in Interest Expense in the Consolidated Statements of Income in
the three months ended March 31, 2000. There are certain risks associated with
interest rate caps, including the risk that the counterparty may default and
that there may not be an exact correlation between the indices on which the
interest rate cap agreements are based and the terms of the hedged liabilities.
In order to offset these risks, the Company generally enters into interest rate
cap agreements only with nationally recognized securities firms and monitors the
credit status of counterparties, the level of collateral for such caps and the
correlation between the hedged liabilities and the indices utilized.
During periods of rising interest rates, a negative interest rate sensitivity
gap would tend to negatively affect net interest income, while a positive
interest rate sensitivity gap would positively affect net income.
Notwithstanding, the potential positive effect of the Company's one-year gap
position during periods of falling interest rates, the Company could experience
substantial prepayments of its fixed rate mortgage loans and mortgage-backed and
related securities, which would result in the reinvestment of such proceeds at
market rates which would be lower than the then current rates.*
19
<PAGE> 22
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at March 31, 2000 the amounts of interest-earning
assets and interest-bearing liabilities maturing or repricing within the time
periods indicated, based on the information and assumptions set forth in the
notes thereto.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
----------------------------------------------------------------
MORE THAN MORE THAN
WITHIN FOUR TO ONE YEAR THREE YEARS
THREE TWELVE TO THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
--------- --------- ----------- ----------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate....................................$ 16,426 $30,597 $ 68,301 $69,738 $ 61,309 $246,371
Adjustable rate............................... 28,511 41,888 31,609 6,376 1,245 109,629
Consumer loans (2)................................. 123 2,441 506 160 - 3,230
Commercial loans (2)............................... 9,827 6,029 6,669 4,802 - 27,327
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale.. 1,575 4,299 8,922 6,265 10,165 31,226
Adjustable rate............................... 13,816 10,413 - - - 24,229
Investment securities and
securities available-for-sale ................... 15,613 728 - 9,597 27,696 53,634
---------- -------- -------- ------- -------- --------
Total interest-earning assets.................$ 85,891 $ 96,395 $116,007 $96,938 $100,415 $495,646
========== ======== ======== ======= ======== ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts..................................$ 231 $ 692 $ 1,097 $ 538 $ 516 $ 3,074
Money market deposit accounts................. 4,163 12,488 9,325 1,492 284 27,752
Passbook savings accounts..................... 1,480 4,440 7,045 3,452 3,316 19,733
Certificates of deposit....................... 171,0584 86,570 13,482 1,993 - 273,629
Escrow deposits............................... - 1,993 - - - 1,993
Borrowings(4)
FHLB advances and other borrowings............ 34,242 75,000 13,042 8,000 11,500 141,784
--------- -------- --------- ------- --------- --------
Total interest-bearing liabilities............ $211,700 $181,183 $ 43,991 $15,475 $ 15,616 $467,965
========= ======== ========= ======= ========= ========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities.....................($125,809) ($ 84,788) $ 72,016 $81,463 $84,799 $ 27,681
======== ======== ======== ======= ======= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities.........($125,809) ($210,597) ($138,581) ($57,118) $27,681 $ 27,681
======== ======== ======== ======== ======= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets.....................(24.5)% (41.0)% (27.0)% (11.1)% 5.4% 5.4%
===== ====== ====== ===== === ===
</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 annual prepayment rates ranging from 5% to 20%, based on
the loan type.
(2) Balances have been reduced for undisbursed loan proceeds, unearned credit
insurance premiums, deferred loan fees, purchased loan discounts and the
allowance for loan losses, which aggregated $23.7 million at March 31,
2000.
(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 historical
amount of such accounts to be core deposits having significantly longer
effective maturities and times to repricing based on the Company's
historical 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 30%, 30%
and 60%, 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 currently. If all of the Company's NOW accounts,
passbook savings accounts and money market deposit accounts had been
assumed to be subject to repricing within one year, the one-year cumulative
deficiency of interest-earning assets over interest-bearing liabilities
would have been $237.7 million or 46.2% 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.
20
<PAGE> 23
ASSET QUALITY
The Company and the Bank regularly review assets to determine proper valuation.
The review consists of an update of the historical loss experience, valuation of
the underlying collateral and the outlook for the economy in general as well as
the regulatory environment.
The following table sets forth information regarding the Bank's non-accrual
loans and foreclosed properties at the dates indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
MAR 31 DEC 31 SEP 30 JUN 30 MAR 31
2000 1999 1999 1999 1999
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans............................ $1,812 $2,100 $1,100 $2,118 $2,266
Non-accrual consumer loans............................ 63 65 49 88 129
Non-accrual commercial leases......................... 163 - - - -
------ ------ ------ ------ ------
Total non-accrual loans............................... $2,038 $2,165 $1,149 $2,206 $2,395
====== ====== ====== ====== ======
Loans 90 days or more delinquent and still accruing... 118 118 82 219 54
------ ------ ------ ------ ------
Total non-performing loans............................ $2,156 $2,283 $1,231 $2,425 $2,449
====== ====== ====== ====== ======
Non-accrual investment securities..................... - - 235 235 233
Total foreclosed real estate net of
related allowance for losses ....................... 960 960 1,893 621 512
------ ------ ------ ------ ------
Total non-performing assets........................... $3,116 $3,243 $3,359 $3,281 $3,194
====== ====== ====== ====== ======
Non-performing loans to gross loans receivable........ 0.54% 0.61% 0.34% 0.81% 0.83%
===== ===== ===== ===== =====
Non-performing assets to total assets................. 0.61% 0.63% 0.64% 0.70% 0.67%
===== ===== ===== ===== =====
</TABLE>
At March 31, 2000, non-performing loans decreased to $2.2 million from $2.4
million at June 30, 1999. The decrease is due primarily to the decrease in
non-accrual mortgage loans and loans 90 days or more delinquent and still
accruing, which consist primarily of credit card loans. Impaired loans decreased
to $0 at March 31, 2000 from $1.1 million at June 30, 1999. Impaired loans
consist primarily of commercial and commercial real estate loans for which,
based on current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Management believes that these loans are adequately collateralized
and/or have specific loan loss reserves established which are adequate to absorb
probable losses related to resolution.
Potential problem loans are loans where known information about possible credit
problems of borrowers causes management to have doubts as to the ability of such
borrowers to comply with the present loan repayment terms. The decision by
management to categorize a loan as a potential problem loan does not necessarily
indicate that the Company expects losses to occur, but that management
recognizes there is a higher degree of risk associated with these performing
loans. At March 31, 2000, the Bank had a potential problem loan with a balance
of $1.9 million secured by 13 first lien one-to-four family mortgages held in
trust for the benefit of the Bank and a secondary payee under the loan
obligation. The original balance of the loan was $4.1 million. At March 31,
2000, the loan was current as to payment of principal and interest. Proceeds
from payments made to the trustee from potential homeowners (occupying the
properties under 2-year leases with an option to purchase at an agreed upon
price upon expiration of the lease-term), or from any other eventual sale of the
one-to-four family residences securing the obligation, are to be applied by the
trustee first to the repayment of the total of all principal and interest due
the Bank, with any excess over such amounts becoming due to the secondary payee.
The Bank assumed responsibility for receipt and servicing of payments from the
potential homeowners upon the secondary
21
<PAGE> 24
payee's filing of bankruptcy in June 1999. The Bank also removed a third party
bank as the bond trustee and appointed itself as trustee in December 1999. The
one-to-four family properties securing the obligation are located in the Bank's
primary lending area and management believes the underlying value of the
properties and the Bank's first lien status are sufficient to prevent any
significant loss from this credit.
ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Bank's allowance for loan
losses:
<TABLE>
<CAPTION>
NINE MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED
MAR. 31, 2000 JUNE 30, 1999 MAR. 31, 1999
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 2,648 $ 2,329 $ 2,329
Additions charged to expense:
Multi-family and commercial real estate.......... 342 310 340
Consumer......................................... 88 120 80
Commercial....................................... 197 50 60
---------- ---------- ----------
627 480 480
Recoveries:
Consumer........................................ 18 15 9
Charge-offs:
One- to four-family............................. (30) (11) (11)
Multi-family & commercial real estate........... (5) (34) (171)
Consumer........................................ (49) (131) (113)
---------- ---------- ----------
(84) (176) (295)
---------- ---------- ----------
Net charge-offs.................................... (66) (161) (286)
---------- ---------- ----------
Balance at end of period........................... $ 3,209 $ 2,648 $ 2,523
========== ========== ==========
Allowance for loan losses to non-performing loans at
end of the period................................. 148.86% 109.19% 103.02%
========== ========== ==========
Allowance for loan losses to
total loans at end of the period................. 0.81% 0.89% 0.85%
========== ========== ==========
</TABLE>
The level of allowance for loan losses at March 31, 2000, reflects the continued
low level of charged off loans. Management believes that the allowance for loan
losses is adequate as of March 31, 2000.
22
<PAGE> 25
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND
1999
GENERAL
Net income for the three months ended March 31, 2000 decreased to $604,000 from
$718,000 for the comparable 1999 period. The decrease in net income was
primarily due to a decrease in gains on the sale of loans and an increase in the
provision for losses on loans. Return on average equity decreased to 7.25% for
the three months ended March 31, 2000 from 8.25% for the comparable 1999 period.
Return on average assets decreased to 0.46% for the three months ended March 31,
2000 from 0.59% for the comparable 1999 period. The decrease in the return on
average equity and the return on average assets is due to the decrease in net
income for the three months ended March 31, 2000. The decrease is primarily due
to an increase in the provision for loan losses and a decrease in non-interest
income, partially offset by an increase in interest income and a decrease in
non-interest expense for the three months ended March 31, 2000 compared to March
31, 1999.
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------
2000 1999
------------------------------ ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
--------- --------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans.......................... $349,726 $6,910 7.90% $268,089 $5,430 8.10%
Consumer loans.......................... 3,363 120 14.27 3,270 144 14.51
Commercial loans........................ 21,138 569 10.77 16,603 381 9.18
--------- -------- -------- ------
Total loans.......................... 374,227 7,599 8.12 288,662 5,955 8.25
Securities held-to-maturity:
Mortgage-backed securities............ 1,626 25 6.15 13,000 204 6.28
Mortgage related securities........... 13,870 249 7.18 41,608 671 6.45
--------- -------- -------- ------
Total mortgage-backed
and related securities............. 15,496 274 7.07 54,608 875 6.41
Investment and other securities......... 11,083 159 5.74 21,275 280 5.26
Securities available-for-sale........... 106,356 1,850 6.96 104,007 1,586 6.10
Federal Home Loan Bank stock............ 7,627 133 6.98 6,793 105 6.18
-------- -------- -------- ------
Total interest-earning assets......... 514,789 10,015 7.78 475,345 8,801 7.41
Non-interest earning assets............... 13,196 12,780
--------- --------
Total assets.......................... $527,985 $488,125
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts............................ $ 2,846 12 1.69% $ 2,805 12 1.71%
Money market deposit accounts........... 29,217 334 4.57 40,639 464 4.57
Passbook accounts....................... 19,517 142 2.91 20,765 149 2.87
Certificates of deposit................. 268,359 4,090 6.10 243,370 3,345 5.50
--------- ------- -------- ------
Total deposits........................ 319,939 4,578 5.72 307,579 3,970 5.16
Advance payments by borrowers
for taxes and insurance................ 1,171 6 2.05 908 5 2.20
Borrowings................................ 161,243 2,305 5.72 131,746 1,874 5.69
--------- ------- -------- ------
Total interest-bearing liabilities.... 482,353 6,889 5.71 440,233 5,849 5.31
Non-interest bearing deposits
and liabilities......................... 12,296 13,081
Shareholders' equity...................... 33,336 34,811
---------- --------
Total liabilities and
shareholders' equity................ $527,985 $488,125
======== ========
Net interest income/interest rate spread.. $3,126 2.07% $2,952 2.10%
====== ===== ====== =====
Net earning assets/net interest margin.... $32,436 2.43% $35,112 2.48%
========= ===== ======== =====
</TABLE>
23
<PAGE> 26
Net interest income before provision for losses on loans increased $175,000, or
5.9%, to $3.1 million for the three months ended March 31, 2000 from $3.0
million for the comparable 1999 period. Interest income increased $1.2 million
for the three months ended March 31, 2000, partially offset by an increase in
interest expense of $1.0 million. The level of net interest income primarily
reflects a 8.3% increase in average interest-earning assets to $514.8 million
for the three months ended March 31, 2000 from $475.3 million for the comparable
1999 period, partially offset by a decrease in interest rate spread to 2.07% for
the three months ended March 31, 2000 from 2.10% for the comparable 1999 period
and by a 7.6% decrease in the excess of the Company's average interest-earning
assets over average interest-bearing liabilities to $32.4 million for the three
months ended March 31, 2000 from $35.1 million for the comparable 1999 period.
The decrease in interest rate spread was primarily due to higher costing
deposits and borrowings in the 2000 period as compared to the 1999 period.
INTEREST INCOME
Interest income increased 13.8% to $10.0 million for the three months ended
March 31, 2000 from $8.8 million for the comparable 1999 period. The increase in
interest income was the result of an increase in average interest-earning assets
of 8.3% to $514.8 million for the three months ended March 31, 2000 from $475.3
million for the comparable 1999 period and an increase of 37 basis points in the
yield on interest-earning assets to 7.78% for the three months ended March 31,
2000 from 7.41% for the comparable 1999 period. Interest income on loans
increased 27.6% to $7.6 million for the three months ended March 31, 2000, from
$6.0 million for the comparable 1999 period. The increase was the result of an
increase in the Company's average gross loans of 29.6% to $374.2 million for the
three months ended March 31, 2000 from $288.7 million for the comparable 1999
period, partially offset by a decrease in average yield to 8.12% for the 2000
period from 8.25% for the comparable 1999 period. Gross loans increased
primarily as a result of the Company purchasing more loans in the secondary
market and increases in multi-family and commercial components of the portfolio
and retaining substantially all of its adjustable and short-term fixed rate loan
originations. See "Change in Financial Condition" for a discussion of the
increase in gross loans. The decrease in yield is attributable to the increase
in loans originated and purchased at lower interest rates since the period
ending March 31, 1999. The interest rates on loans originated and purchased
during the quarter ended March 31, 2000 are increasing but the effect of the
increasing rate environment is not yet reflected in the yield. The lag in
increasing yield is due to previously originated fixed rate loans bearing
a lower yield that are in the portfolio, as well as adjustable rate loans that
have not been fully indexed to the current rate.
Interest income on mortgage-backed securities decreased 87.7% to $25,000 for the
three months ended March 31, 2000 from $204,000 for the comparable 1999 period.
The decrease was primarily due to a decrease in average balances to $1.6 million
for the three months ended March 31, 2000 from $13.0 million for the comparable
1999 period and by a decrease in average yield to 6.15% for the 2000 period from
6.28% for the 1999 period. Interest income on mortgage-related securities
decreased 62.9% to $249,000 for the three months ended March 31, 2000 from
$671,000 for the comparable 1999 period. The decrease was primarily due to a
decrease in average balances to $13.9 million for the three months ended March
31, 2000 from $41.6 million for the comparable 1999 period, offset by an
increase in yield to 7.18% for the 2000 period from 6.45% for the 1999 period.
The decrease in average balances mortgage-backed securities and mortgage-related
securities was primarily due to the sale of $2.8 million and $23.1 million,
respectively, in the 2000 period. The increase in average yield on
mortgage-related securities was primarily due to accelerated amortization of
purchase premiums on mortgage related securities due to faster than projected
principal repayments during the 1999 period. The decrease in average balances of
mortgage-backed and related securities is due to management's decision to
replace securities that were sold and repayed with loans. Interest income on
investment securities and securities available-for-sale and investment and other
securities decreased 7.7% to $2.0 million for the three months ended March 31,
2000 from $1.9 million for the comparable 1999 period. The increase was
primarily due to an increase in average yield to 6.84% for the three months
ended March 31, 2000 from 5.96% for the comparable 1999 period offset by a
decrease in average balances to $117.4 million for the three months ended March
31, 2000 from $125.3 million for the 1999 period. The decrease in securities
available-for-sale was due to management's decision to sell
24
<PAGE> 27
securities during the 2000 period to fund loan originations and purchases. The
increased average yield was primarily attributable to the increase in average
maturity of the available-for-sale investments during the 2000 period.
INTEREST EXPENSE
Interest expense increased 17.8% to $6.9 million for the three months ended
March 31, 2000 from $5.8 million for the comparable 1999 period. The increase
was the result of an 9.6% increase in the average amount of interest-bearing
liabilities to $482.4 million for the three months ended March 31, 2000 compared
to $440.2 million for the comparable 1999 period and by an increase in the
average rate paid on interest-bearing liabilities to 5.71% for the 2000 period
from 5.31% for the 1999 period. The increased balances of certificate of deposit
accounts and borrowings at higher average interest rates was the primary reason
for the increase in the average rate paid on the interest-bearing liabilities
for the three months ended March 31, 2000 as compared to the 1999 period.
Interest expense on deposits increased 15.3% to $4.6 million for the three
months ended March 31, 2000 from $4.0 million for the comparable 1999 period.
The increase was the result of an increase in the average rate paid to 5.72% for
the three months ended March 31, 2000 from 5.16% for the 1999 period and by an
increase in average balances of 4.0% to $319.9 million for the three months
ended March 31, 2000 from $307.6 million for the comparable 1999 period. The
increase in deposits was primarily due to an increase of 10.3% in certificates
of deposit accounts to $268.4 million for the three months ended March 31, 2000
from $243.4 million for the comparable 1999 period, with an increase in the
average rate paid to 6.10% for the 2000 period from 5.50% for the 1999 period.
NOW accounts increased 1.5% to $2.846 million for the three months ended March
31, 2000 from $2.805 million for the comparable 1999 period and by an increase
in average rate paid to 1.69% for the 2000 period from 1.71% for the 1999
period. Offsetting the increases in deposits was a decrease in money market
deposit accounts of 28.1% to $29.2 million for the three months ended March 31,
2000 from $40.6 million for the comparable 1999 period. Money market deposit
accounts decreased primarily due to higher rates offered in the Company's local
market during the three months ended March 31, 2000. The Company's increase in
certificates of deposit was the result of aggressive marketing and pricing and
the use of brokered certificates of deposit. Of the $268.4 million in the
average balance of certificates of deposit for the three months ended March 31,
2000, $190.5 million, or 71.0%, represented brokered certificates of deposit
compared to $117.4 million, or 48.2%, for the 1999 period. The average rate paid
on brokered certificates of deposit increased to 5.87% for the three months
ended March 31, 2000 from 5.72% for the comparable 1999 period. The increase was
primarily due to the increased interest rate environment in the 2000 period as
compared to the 1999 period. Interest on borrowings (FHLB advances and reverse
repurchase agreements) increased 23.0% to $2.3 million for the three months
ended March 31, 2000 from $1.9 million for the comparable 1999 period. The
increase was primarily due to the increase in average balances of FHLB advances
and reverse repurchase agreements of 22.4% to $161.2 million for the three
months ended March 31, 2000 from $131.7 million for the comparable 1999 period
and an increase in the average rate paid to 5.72% for the 2000 period from 5.69%
for the 1999 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 140.7% to $337,000 for the three
months ended March 31, 2000 from $140,000 for the comparable 1999 period. The
level of allowance for losses on loans generally is determined by the Bank's
historical loan loss experience, the condition and composition of the Bank's
loan portfolio, and existing general economic conditions. Management anticipates
that as the Company's volume of multi-family and commercial/non-residential real
estate lending activity continues to increase, the Company will continue to
build a higher level of allowance for loan losses established through a
provision for loan losses.* Based on management's evaluation of the loan
portfolio and the increase in gross loans during the three months ended March
31, 2000, the allowance for losses on loans increased 23.1% to $3.2 million at
March 31, 2000 compared to $2.6 million at June 30, 1999. While the allowance
for losses on loans increased, the allowance for loan losses as a percentage of
gross loans decreased to 0.81% at March 31, 2000 from 0.89% at June 30, 1999
reflecting the continued low level of loans charged off. The amount of
non-performing loans at March 31, 2000 was $2.2 million, or 0.54% of gross
loans, compared to $2.4 million,
25
<PAGE> 28
or 0.81% of gross loans, at June 30, 1999 and $2.4 million or 0.83% of gross
loans at March 31, 1999. Management believes that these loans are adequately
collateralized and/or have specific loan loss reserves established which are
adequate to absorb probable losses related to resolution.
NON-INTEREST INCOME
Non-interest income decreased 84.6% to $88,000 for the three months ended March
31, 2000 from $573,000 for the comparable 1999 period. The largest components of
the decrease were a decrease in gains on the sale of loans to a loss of
($189,000) for the three months ended March 31, 2000 from $180,000 for the
comparable 1999 period, a decrease in gains on the sale of securities and
mortgage-backed and related securities to a loss of $14,000 for the three months
ended March 31, 2000 from $0 for the comparable 1999 period, a decrease in
service charges on loans to $77,000 for the three months ended March 31, 2000
from $127,000 for the comparable 1999 period and a decrease on other income to
$60,000 for the three months ended March 31, 2000 from $121,000 for the
comparable 1999 period. Partially offsetting the decreases in non-interest
income was an increase in loan servicing fees to $12,000 for the three months
ended March 31, 2000 from $7,000 for the comparable 1999 period and an increase
in insurance commissions to $36,000 for the three months ended March 31, 2000
from $31,000 for the comparable 1999 period. The decrease in gains on the sale
of loans reflects the write-down to market value of loans held-for-sale at March
31, 2000 due to the higher level of interest rates. The loss on sale of
securities and mortgage-backed and related securities reflects the sale of $25.0
million in mortgage-backed and related securities used to fund loan growth.
NON-INTEREST EXPENSE
Non-interest expense decreased 12.1% to $2.0 million for the three months ended
March 31, 2000 from $2.3 million for the comparable 1999 period. The decrease
was primarily due to a decrease in compensation and benefits expense of $194,000
to $1.2 million for the three months ended March 31,2000 from $1.4 million for
the comparable 1999 period, a decrease in occupancy and equipment expense of
$132,000 to $347,000 for the three months ended March 31, 2000 from $449,000 for
the comparable 1999 period, a decrease in deposit insurance premiums of $28,000
to $17,000 for the three months ended March 31, 2000 from $45,000 for the
comparable 1999 period and a decrease in marketing expense of $9,000 to $87,000
for the three months ended March 31, 2000 from $96,000 for the comparable 1999
period. Partially, offsetting the decreases was an increase in other
non-interest expense of $51,000 to $425,000 for the three months ended March 31,
2000 from $374,000 for the comparable 1999 period. The decrease in compensation
and benefits expense primarily relates to a decrease in the accrual for
incentive compensation and a lower number of full time equivalent employees. The
decrease in occupancy and equipment expense is primarily due to a refund credit
for telecommunications equipment received in the 2000 period. The decrease in
deposit insurance premiums relates to a decreased premium rate charged by the
FDIC for deposit insurance in the 2000 period. The increase in other
non-interest expense is primarily due to increases in printing, office supplies,
organization dues, legal and other miscellaneous expenses.
26
<PAGE> 29
RESULTS OF OPERATIONS - COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2000 AND
1999
GENERAL
Net income for the nine months ended March 31, 2000 increased to $2.3 million
from $2.2 million for the comparable 1999 period. The increase in net income was
primarily due to an increase in net interest income, offset by an increase in
the provision for losses on loans and a decrease in non-interest income. Return
on average equity increased to 8.96% for the nine months ended March 31, 2000
from 8.64% for the comparable 1999 period. Return on average assets decreased to
0.59% for the nine months ended March 31, 2000 from 0.63% for the comparable
1999 period. The decrease in the return on average equity and the return on
average assets is due to the decrease in net income for the nine months ended
March 31, 2000. The decrease is primarily due to an increase in the provision
for loan losses and a decrease in non-interest income, partially offset by an
increase in interest income and a decrease in non-interest expense for the three
months ended March 31, 2000 compared to March 31, 1999.
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------
2000 1999
--------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans.......................... $315,329 $18,765 7.93% $265,383 $16,385 8.23%
Consumer loans.......................... 3,486 365 13.96 4,273 437 13.64
Commercial loans........................ 20,441 1,577 10.29 14,588 1,002 9.16
-------- -------- -------- -------
Total loans.......................... 339,256 20,707 8.14 284,244 17,824 8.36
Securities held-to-maturity:
Mortgage-backed securities............ 6,864 322 6.25 15,470 751 6.47
Mortgage related securities........... 34,304 1,681 6.53 43,117 2,263 7.00
-------- -------- -------- -------
Total mortgage-backed
and related securities............. 41,168 2,003 6.49 58,587 3,014 6.86
Investment and other securities......... 9,526 404 5.65 19,313 792 5.47
Securities available-for-sale........... 99,011 4,961 6.68 85,934 4,095 6.35
Federal Home Loan Bank stock............ 7,246 385 7.08 6,539 321 6.55
-------- -------- -------- -------
Total interest-earning assets......... 496,207 28,460 7.65 454,617 26,046 7.64
Non-interest earning assets............... 18,472 13,708
--------- --------
Total assets.......................... $514,679 $468,325
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts............................ $ 2,837 37 1.74% $ 2,735 35 1.71%
Money market deposit accounts........... 32,607 1,095 4.48 35,852 1,361 5.06
Passbook accounts....................... 20,133 440 2.91 21,127 461 2.91
Certificates of deposit................. 249,625 10,638 5.68 230,526 9,829 5.68
-------- -------- -------- ------
Total deposits........................ 305,202 12,210 5.33 290,240 11,686 5.37
Advance payments by borrowers
for taxes and insurance................ 3,242 57 2.34 3,000 60 2.67
Borrowings................................ 159,449 6,801 5.69 128,134 5,650 5.88
-------- ------- -------- ------
Total interest-bearing liabilities.... 467,893 19,068 5.43 421,374 17,396 5.50
Non-interest bearing deposits
and liabilities......................... 13,033 12,615
Shareholders' equity...................... 33,753 34,336
-------- --------
Total liabilities and
shareholders' equity................ $514,679 $468,325
======== ========
Net interest income/interest rate spread.. $9,392 2.20% $8,650 2.13%
====== ===== ====== =====
Net earning assets/net interest margin.... $28,314 2.52% $33,243 2.54%
======== ===== ======== =====
</TABLE>
27
<PAGE> 30
Net interest income before provision for losses on loans increased $742,000 or
8.6% to $9.4 million for the nine months ended March 31, 2000 from $8.7 million
for the comparable 1999 period. Interest income increased $2.4 million for the
nine months ended March 31, 2000, partially offset by an increase in interest
expense of $1.7 million. The level of net interest income primarily reflects a
9.1% increase in average interest-earning assets to $496.2 million for the nine
months ended March 31, 2000 from $454.6 million for the comparable 1999 period,
an increase in interest rate spread to 2.20% for the nine months ended March 31,
2000 from 2.13% for the comparable 1999 period, offset by a 14.8% decrease in
the excess of the Company's average interest-earning assets over average
interest-bearing liabilities to $28.3 million for the nine months ended March
31, 2000 from $33.2 million for the comparable 1999 period.
INTEREST INCOME
Interest income increased 9.3% to $28.5 million for the nine months ended March
31, 2000 from $26.0 million for the comparable 1999 period. The increase in
interest income was the result of an increase in average interest-earning assets
of 9.1% to $496.2 million for the nine months ended March 31, 2000 from $454.6
million for the comparable 1999 period and by an increase of 1 basis point in
the yield on interest-earning assets to 7.65% for the nine months ended March
31, 2000 from 7.64% for the comparable 1999 period. Interest income on loans
increased 16.2% to $20.7 million for the nine months ended March 31, 2000 from
$17.8 million for the comparable 1999 period. The increase was the result of an
increase in average gross loans of 19.4% to $339.3 million for the nine months
ended March 31, 2000 from $284.2 million for the comparable 1999 period,
partially offset by a decrease in average yield to 8.14% for the nine months
ended March 31, 2000 from 8.36% for the comparable 1999 period. Gross loans
increased primarily as a result of the Company retaining substantially all of
its adjustable and short-term fixed rate loan originations and purchasing more
loans in the secondary market. The decrease in yield is attributable to the
increase in loans refinanced at lower interest rates in fiscal 1999. Interest
income on mortgage-backed securities decreased 57.1% to $322,000 for the nine
months ended March 31, 2000 from $751,000 for the comparable 1999 period. The
decrease was primarily due to a decrease in average balances to $6.9 million for
the nine months ended March 31, 2000 from $15.5 million for the comparable 1999
and a decrease in average yield to 6.25% for the 2000 period from 6.47% for the
1999 period. Interest income on mortgage-related securities decreased 25.7% to
$1.7 million for the nine months ended March 31, 2000 from $2.3 million for the
comparable 1999 period. The decrease was primarily due to a decrease in average
yield to 6.53% for the nine months ended March 31, 2000 from 7.00% for the
comparable 1999 period and by a decrease in average balances to $34.3 million
for the nine months ended March 31, 2000 from $43.1 million for the comparable
1999 period. The decrease in average yield on mortgage-backed securities and
mortgage-related securities was primarily due to the adjustment in the
adjustable rate securities portion of this portfolio which decreased due to
lower interest rates and the accelerated amortization of purchase premiums on
mortgage-backed securities due to faster than projected principal repayments
during the 1999 period. The decline in average balances of mortgage-backed
securities is due to management's decision to increase the securities
available-for-sale portfolio. Interest income on investment securities and
securities available-for-sale increased 9.8% to $5.4 million for the nine months
ended March 31, 2000 from $4.9 million for the comparable 1999 period. The
increase was primarily due to an increase in average balance to $108.5 million
for the nine months ended March 31, 2000 from $105.2 million for the 1999 period
and an increase in average yield to 6.59% for the 2000 period from 6.19% for the
1999 period. The higher average yield was primarily attributable to the increase
in the average maturity of the securities in this portfolio.
INTEREST EXPENSE
Interest expense increased 9.6% to $19.1 million for the nine months ended March
31, 2000 from $17.4 million for the comparable 1999 period. The increase was the
result of an 11.0% increase in the average amount of interest-bearing
liabilities to $467.9 million for the nine months ended March 31, 2000 compared
to $421.4 million for the comparable 1999 period, partially offset by a decrease
in the average rate paid on interest-bearing liabilities to 5.43% for the 2000
period from 5.50% for the 1999 period. The increased balances of certificates of
deposit (including brokered deposits), NOW accounts and borrowings at lower
average interest rates was the primary reason for the decrease in the average
rate paid on the interest-bearing liabilities for the nine months ended March
31, 2000 as compared to the comparable 1999 period.
28
<PAGE> 31
Interest expense on deposits increased 4.5% to $12.2 million for the nine months
ended March 31, 2000 from $11.7 million for the comparable 1999 period. The
increase was the result of an increase in average balances of 5.2% to $305.2
million for the nine months ended March 31, 2000 from $290.2 million for the
comparable 1999 period, offset by a decrease in the average rate paid to 5.33%
for the nine months ended March 31, 2000 from 5.37% for the 1999 period. The
increase in deposits was primarily due to an increase of 8.3% in certificates of
deposit (including brokered deposits) to $249.6 million for the nine months
ended March 31, 2000 from $230.5 million for the 1999 period. NOW accounts
increased 3.7% to $2.8 million for the nine months ended March 31, 2000 from
$2.7 million for the comparable 1999 period, with an increase in average rate
paid to 1.74% for the 2000 period from 1.71% for the 1999 period. The increases
in certificates of deposit and NOW accounts were offset by a decrease in money
market deposit accounts of 9.1% to $32.6 million for the nine months ended March
31, 2000 from $35.9 million for the comparable 1999 period, with a decrease in
the average rate paid on such deposits to 4.48% for the 2000 period from 5.06%
for the 1999 period and a decrease in passbook accounts of 4.7% to $20.1 million
for the nine months ended March 31, 2000 from $21.1 million for the comparable
1999 period. Money market deposit accounts decreased primarily due to higher
rates offered in the Company's local market during the nine months ended March
31, 2000. The Company's increase in certificates of deposit was the result of
aggressive marketing and pricing and the use of brokered certificates of
deposit. Of the $249.6 million in the average balance of certificates of deposit
for the nine months ended March 31, 2000, $153.9 million, or 61.7%, represented
brokered certificates of deposit compared to $101.3 million, or 44.0%, for the
1999 period. The average rate paid on brokered certificates of deposit decreased
to 5.66% for the nine months ended March 31, 2000 from 5.72% for the comparable
1999 period. The decrease was primarily due to the longer average maturity of
the brokered deposits in the 1999 period. Interest on borrowings (FHLB advances
and reverse repurchase agreements) increased 20.4% to $6.8 million for the nine
months ended March 31, 2000 from $5.7 million for the comparable 1999 period.
The increase was primarily due to the increase in average balance to $159.4 for
the nine months ended March 31, 2000 from $128.1 for the comparable 1999 period,
partially offset by a decrease in average rate paid to 5.69% for the nine months
ended March 31, 2000 from 5.88% for the 1999 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 30.6% to $627,000 for the nine
months ended March 31, 2000 from $480,000 for the comparable 1999 period. For a
discussion of the factors considered by management in determining the
appropriate level of allowance for losses on loans to be established through a
provision for losses on loans, see comments under "Provision for Losses on
Loans" contained in the section entitled, "Results of Operations - Comparison of
the Three Months Ended March 31, 2000 and 1999."
NON-INTEREST INCOME
Non-interest income decreased 49.9% to $882,000 for the nine months ended March
31, 2000 from $1.8 million for the comparable 1999 period. The largest
components of the decrease was a decrease in gains on the sale of loans to loss
of ($35,000) for the nine months ended March 31, 2000 from $832,000 for the
comparable 1999 period, a decrease in other income to $166,000 for the nine
months ended March 31, 2000 from $209,000 for the comparable 1999 period and a
decrease in service charges on loans to $234,000 for the nine months ended March
31, 2000 from $262,000 for the comparable 1999 period. Partially offsetting the
decreases in non-interest income was an increase in gains on the sale of
securities and mortgage-backed and related securities to $48,000 for the nine
months ended March 31, 2000 from $35,000 for the comparable 1999 period, an
increase in service charges on deposit accounts to $347,000 for the nine months
ended March 31, 2000 from $341,000 for the comparable 1999, an increase in
insurance commissions to $86,000 for the nine months ended March 31, 2000 from
$60,000 for the comparable 1999 period and an increase in loan servicing fees to
$36,000 for the nine months ended March 31, 2000 from $20,000 for the comparable
1999 period. The decrease in gains on the sale of loans reflects the decrease in
long-term fixed rate loans sold into the secondary market during the 2000 period
as compared to the 1999 period due to the higher level of interest rates that
led to a lower level of mortgage loans refinanced in the 2000 period as compared
to the 1999 period. Also, the decrease in gains on the sale of loans reflects
the write-down to market value of loans held-for-sale at March 31, 2000 due to
the higher level of interest rates.
29
<PAGE> 32
NON-INTEREST EXPENSE
Non-interest expense decreased 3.4% to $6.4 million for the nine months ended
March 31, 2000 from $6.6 million for the comparable 1999 period. The decrease
was primarily due to a decrease in compensation and benefits expense of $164,000
to $3.7 million for the nine months ended March 31, 2000 from $3.9 million for
the comparable 1999 period, a decrease in occupancy and equipment expense of
$78,000 to $1.164 million for the nine months ended March 31, 2000 from $1.242
million for the comparable 1999 period and a decrease in deposit insurance
premiums of $22,000 to $105,000 for the nine months ended March 31, 2000 from
$127,000 for the comparable 1999 period. Partially offsetting the decreases in
non-interest income was a increase in marketing expense of $29,000 to $289,000
for the nine months ended March 31, 2000 from $260,000 for the comparable 1999
period and a increase in other non-interest expense of $11,000 to $1.089 million
for the nine months ended March 31, 2000 from $1.078 million for the comparable
1999 period. The decrease in compensation and benefits expense primarily relates
to a decrease in the accrual for incentive compensation and a lower number of
full time equivalent employees. The decrease in occupancy and equipment expense
is primarily due to a refund credit for telecommunications equipment received in
the 2000 period. The decrease in deposit insurance premiums relates to a
decreased premium rate charged by the FDIC for deposit insurance in the 2000
period. The increase in other non-interest expense is primarily due to increases
in printing, office supplies, organization dues, legal and other miscellaneous
expenses.
IMPACT OF YEAR 2000
The Company believes it has adequately addressed the Year 200 issue. The Company
identified areas of computer and other operations critical for the delivery of
its loan and deposit products. The majority of the Company's applications used
in operations were purchased from outside vendors. The vendors providing the
software were responsible for maintenance of the systems and modifications to
enable uninterrupted usage after December 31, 1999. The Company's plan included
obtaining certification of compliance from third parties and testing all of the
impacted applications (both internally developed and third party provided).
Testing of the system and conversion activities were completed as of June 30,
1999. There were no mission critical systems which were non-compliant. The
Company developed and finalized contingency plans for any adverse situations
that may have arisen related to Year 2000. The Company's plan also included
reviewing any potential risks associated with loan and deposit data base
information due to the Year 2000 issue.
Subsequent to January 1, 2000, all computer systems continue to function as
expected and has not affected the ability of the Company to deliver its products
and services to date. Management will continue to monitor computer systems for
problems or errors associated with their operation. Based on currently available
information, management does not anticipate that the cost to address the Year
2000 issues will have a material adverse impact on the Company's financial
position.* Direct expenditures for the nine months ended March 31, 2000 and for
the fiscal year ended June 30, 1999 totaled $13,100 and $37,800, respectively.
Direct expenditures included capital expenditures for compliant equipment and
software, write-offs of non-compliant equipment and software upgrades. The
expenditures were funded by increases in the Company's non-interest expense
budget.
The Company also made inquiries and reviewed plans of certain third parties,
such as commercial loan customers, where Year 2000 failures could have resulted
in a significant adverse impact on the Company. The Company had completed the
inquiry and review process and was satisfied the Bank would not be subject to
significant adverse impact. Based on information available, the Bank has not
experienced any difficulties with third parties related to the Year 2000 issue.
30
<PAGE> 33
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options but has decided to purchase interest rate caps to manage the
interest rate risk on the Company's short-term wholesale certificates of
deposit. 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. These financial instruments consist primarily of commitments to
extend credit. These instruments involve to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the consolidated
balance sheets. 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 and may require
collateral from the borrower if deemed necessary by the Company.
The information required herein pursuant to Item 305 of Regulation S-K is
incorporated by reference in sections entitled "Liquidity and Capital Resources"
from pages 15 to 17 and "Asset/Liability Management" from pages 19 to 20 hereof.
31
<PAGE> 34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to legal
proceedings arising out of its lending activities and other operations.
However, there are no pending legal proceedings of which the Company or
the Bank is a party which, if determined adversely to the Company or
the Bank, would have a material adverse effect on the consolidated
financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On April 26, 2000, the Company announced it had declared a dividend of
$0.05 per share on the common stock of the Company. The dividend will
be payable on May 24, 2000 to shareholders of record as of May 10,
2000.
On February 1, 2000, the Company announced it had adopted a share
repurchase program for its common stock to purchase up to 5%, or
approximately 135,000 shares. The repurchased shares will become
treasury shares and will be used for general corporate purposes. As of
March 31, 2000, the Company had purchased 134,700 shares of common
stock pursuant to the repurchase program and completed the repurchase
program.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
<TABLE>
<C> <S>
10.1 Hallmark Capital Corp. Employment Agreement with James D. Smessaert
10.2 Hallmark Capital Corp. Employment Agreement with Peter A. Gilbert
10.3 West Allis Savings Bank Employment Agreement with James D. Smessaert
10.4 West Allis Savings Bank Employment Agreement with Peter A. Gilbert
11 Computation of Earnings per Share - See Note 2 to the unaudited Consolidated Financial Statements
27 Financial Data Schedule
</TABLE>
No reports on Form 8-K were filed during the quarter for which this
report was filed.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
32
<PAGE> 35
SIGNATURES
Pursuant to the requirement 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.
Hallmark Capital Corp.
----------------------
(Registrant)
Date: May 12, 2000 /s/ James D. Smessaert
-------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: May 12, 2000 /s/ Arthur E. Thompson
-------------------------
Arthur E. Thompson
Chief Financial Officer
33
<PAGE> 36
SIGNATURES
Pursuant to the requirement 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.
Hallmark Capital Corp.
----------------------
(Registrant)
Date: May 12, 2000 -------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: May 12, 2000 -------------------------
Arthur E. Thompson
Chief Financial Officer
33
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
10.1 Hallmark Capital Corp. Employment Agreement with James D. Smessaert
10.2 Hallmark Capital Corp. Employment Agreement with Peter A. Gilbert
10.3 West Allis Savings Bank Employment Agreement with James D. Smessaert
10.4 West Allis Savings Bank Employment Agreement with Peter A. Gilbert
27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange
Commission for information only and not filed.
</TABLE>
34
<PAGE> 1
HALLMARK CAPITAL CORP.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of ______________________ the
"Commencement Date") between Hallmark Capital Corp., its successors and assigns,
a Wisconsin corporation, (hereinafter referred to as the "Company"), having its
principal offices located at 5555 North Port Washington Road, Glendale,
Wisconsin 53217, and James D. Smessaert (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the financial services industry has substantially benefited
both West Allis Savings Bank (the "Bank") and the Company and whose continued
employment by the Company in the capacities of President, Chief Executive
Officer and Chairman of the Board ("Corporate Position") will benefit the
Company in the future; and
WHEREAS, the parties are mutually desirous of entering into this Agreement
setting forth the terms and conditions for the employment relationship between
the Company and Executive; and
WHEREAS, the Company's Board of Directors has approved and authorized its
entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below:
1. Employment. The Company shall employ Executive, and Executive shall
serve the Company, on the terms and conditions set forth in this Agreement.
2. Term of Employment. The period of Executive's employment under this
Agreement shall coincide with his period of employment by the Bank under the
West Allis Savings Bank Employment Agreement (the "Bank Agreement") entered into
between the Bank and Executive and bearing even date herewith. The term of
employment as in effect from time to time hereunder shall be referred to as the
"Employment Term".
3. Position and Duties. Executive shall serve the Company in his Corporate
Position as its President and Chief Executive Officer. As such, Executive shall
report directly to the Company's Board of Directors, be nominated as a
management candidate for election to the Board of Directors upon expiration of
each term thereon while this Agreement remains in effect, and be generally
responsible for selection and supervision of the Company's management team and
for the formulation of Company business and personnel policies, and shall render
executive, policy-making and other management services of the type customarily
performed by persons serving in similar capacities at other bank and savings
bank holding companies, together with such other duties and responsibilities as
may be appropriate to
<PAGE> 2
Executive's position and as may be from time to time determined by the Bank's
Board of Directors to be necessary to its operations and in accordance with its
bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Company the compensation and
benefits set forth below:
(i) Base Salary. During the Employment Term, Executive shall receive a
base salary payable by the Bank ("Base Salary") in such amount as may from
time to time be approved by the Board of Directors of the Bank; provided,
however, that the Company and Executive agree that (i) a portion of the
amount received by Executive from the Bank will be allocable to time and
effort of the Executive spent on behalf of the Company pursuant to this
Agreement, and (ii) that the Company may reimburse the Bank in an amount
jointly determined by the Boards of Directors of the Company and Bank to
reflect such allocable portion. No increase in Base Salary paid by the Bank
(or the amount thereof reimbursed by the Company) or other compensation
granted by the Company or Bank shall in any way limit or reduce any other
obligation of the Company under this Agreement. Executive's Base Salary and
other compensation shall be paid in accordance with the Bank's regular
payroll practices, as then in effect.
(ii) Bonus Payments. In addition to Base Salary, Executive shall be
entitled, during the Employment Term, to participate in and receive
payments from all bonus and other incentive compensation plans (as
currently in effect, as modified from time to time, or as subsequently
adopted) of the Company; provided, however, that nothing contained herein
shall grant Executive the right to continue in any bonus or other incentive
compensation plan following its discontinuance by the Board (except to the
extent Executive had earned or otherwise accumulated vested rights therein
prior to such discontinuance).
(iii) Other Benefits. During the Employment Term, the Company shall
provide to Executive all other benefits of employment (or, with Executive's
consent, equivalent benefits) generally made available to other Executive
Officers of the Company. In addition, Executive shall participate in any
stock purchase, stock option or stock appreciation rights, plans, or any
other stock based program of any type, made available by the Company to its
Executive Officers.
Executive shall be entitled to the same vacation, sick time, personal
days and other perquisites in the same manner and to the same extent as
such benefits are available under the Bank Agreement; provided that this
Agreement is intended to allow Executive to utilize the perquisites as
provided pursuant to the Bank Agreement and not to create additional
perquisites hereunder.
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 paragraph 4(iii) (except to
the extent Executive had previously earned or accumulated vested rights
therein) following termination or discontinuance of such plan, program or
perquisite by the Board.
-2-
<PAGE> 3
5. Termination. This Agreement shall terminate upon the effective date of
termination of the Bank Agreement.
Upon termination of this Agreement simultaneous with termination of the
Bank Agreement, Executive shall be entitled to the receipt of
termination/severance benefits from the Bank as determined under all applicable
provisions of the Bank Agreement ("Severance Benefits"). The Bank shall be
primarily responsible for the payment of Severance Benefits; provided, however,
that the Company may reimburse the Bank for a portion of the cost of Executive's
Severance Benefits in any amount jointly determined by the Boards of Directors
of the Company and Bank to correspond to the allocation of Executive's time and
effort between Bank and Company matters during the 12-month period preceding
termination of the Bank Agreement. Notwithstanding the foregoing, if the
application of Section 6 of the Bank Agreement results in Unpaid Severance as
defined therein, the Company shall be responsible for payment to Executive of
the entire amount of the Unpaid Severance and shall also pay to Executive an
additional amount (the "Reimbursement Payment") such that the net amount
retained by Executive after deduction of (i) any tax imposed by Section 4999 of
the Internal Revenue Code (the "Excise Tax") and any interest charges or
penalties in respect to the imposition of such Excise Tax (but not any federal,
state or local income tax) on the Total Payments (which shall include the
Termination Benefits and the Unpaid Severance, together with any other payments
or benefits paid by the Bank or Company, including but not limited to any amount
or value attributable to the vesting of stock options upon Executive's
termination to which said Excise Tax applies by reason of Section 280G of the
Code), and (ii) any federal, state and local income tax and Excise Tax upon the
payment pursuant to Section 5(i) above, so that the total received by Executive
after deduction of said Excise Taxes shall be equal to the total of the
Severance Benefits actually paid by the Bank plus the Unpaid Severance. For
purposes of determining the amount of Reimbursement Payment, Executive shall be
deemed to pay federal income taxes at the highest marginal rate of federal
income taxation in the calendar year in which the Reimbursement Payment is to be
made and state and local income taxes at the highest marginal rate of taxation
in the state and locality of Executive's domicile for income tax purposes on the
date the Reimbursement Payment is made, net of the maximum reduction of federal
income taxes that could be obtained from deduction of such state and local
taxes.
6. General Provisions.
(i) Successors; Binding Agreement.
(A) The Company 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 Company
("successor organization") to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that the Company would have been required to perform if no such
succession had taken place. 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 twelve
(12) months or the then remaining term under the Bank Agreement,
the same rights and remedies (recognizing them as being available
and
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<PAGE> 4
applicable as the result of the "change in control" effectuating
said succession) provided under this Agreement upon a "change in
control".
As used in this Agreement "Company" shall mean the Company
as hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement
provided for in this Section 6 or which otherwise becomes bound
by the terms and provisions of this Agreement by operation of
this Agreement or law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle Executive as his
exclusive remedy to compensation from the Company in the same
amount and on the same terms as he would be entitled to pursuant
to this Agreement under Section 5. 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 Executive and his heirs, beneficiaries and
personal representatives and the Company and any successor
organization.
(ii) Noncompetition Provision. Executive acknowledges that the
development of personal contacts and relationships is an essential element
in the financial services industry, that the Company has invested
considerable time and money in his development of such contacts and
relationships, that the Company could suffer irreparable harm if he were to
leave employment and solicit the business of Company customers, and that it
is reasonable to protect the Company 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) of the Bank Agreement, or upon expiration of this Agreement
as a result of Executive's election (but not as the result of an election
by the Company) not to continue automatic annual renewals, Executive shall
not accept employment with any Significant Competitor of the Bank or
Company for a period of twelve (12) months following such termination. For
purposes of this Agreement, the term Significant Competitor means any
financial institution including, but not limited to, any commercial bank,
savings bank, savings and loan association, credit union, or mortgage
banking corporation which, at the time of termination of this Agreement, or
during the period of this covenant not to compete, has a home, branch or
other office in any county in which the Bank or Company has an office 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 $500,000 in commercial or mortgage loans secured by
real property in any such county.
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<PAGE> 5
Executive agrees that the non-competition provisions set forth herein
are necessary for the protection of the Bank and Company 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, Bank 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
Company brings legal action for injunctive or other relief, the Company
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. In addition to such other relief as may be awarded, if the
Company is the prevailing party it shall be entitled to reimbursement for
all reasonable costs, including attorneys' fees, incurred in enforcing its
rights hereunder.
(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 the Company,
United States registered mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Company:
Hallmark Capital Corporation
5555 North Port Washington Road
Glendale, WI 53217
or if to Executive, at the address set forth below:
Mr. James D. Smessaert
N19 W28985 Golf Ridge North
Pewaukee, WI 53072
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement, or to recover damages for breach of
it, the prevailing party shall be entitled to recover from the other party
reasonable attorneys' fees and necessary costs and disbursements incurred
in such litigation, in addition to any other relief to which such
prevailing party may be entitled.
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 reexecution of this Agreement pursuant to section 6(i),
Executive shall be entitled to recover from the Company (A) reasonable
attorney's fees and necessary costs and disbursements incurred in such
litigation if Executive is the prevailing party, or (B) reasonable
attorneys fees and necessary costs and disbursements of up to $7,500
incurred in such litigation if Executive is not the prevailing party.
Recovery of attorneys fees and costs as provided herein
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<PAGE> 6
following a change in control or reexecution shall be in addition to any
other relief to which Executive may be entitled.
(v) Withholding. The Company shall be entitled to withhold from
amounts to be paid to Executive under this Agreement any federal, state, or
local withholding or other taxes of charges which it is from time to time
required to withhold. The Company 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) Miscellaneous. No provision of this Agreement may be amended,
waived or discharged unless such amendment, waiver of discharge is agreed
to in writing and signed by Executive and such Company officer as may be
specifically designated by the Board. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with,
any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not
expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the
laws of the State of Wisconsin.
(vii) 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.
(viii) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(ix) Headings. Headings contained in this Agreement are for reference
only and shall not affect the meaning or interpretation of any provision of
this Agreement.
(x) 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.
Hallmark Capital Corp. Executive:
By ___________________________ _________________________
Title __________________________
Witness
By ____________________________
Title ___________________________
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<PAGE> 1
WEST ALLIS SAVINGS BANK
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of _____________________ (the
"Commencement Date") between West Allis Savings Bank, its successors and
assigns, a state chartered savings bank (hereinafter referred to as the "Bank"),
having its principal offices located at 5555 North Port Washington Road,
Glendale, Wisconsin 53217, and Peter A. Gilbert (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the financial services industry has substantially benefited
the Bank and whose continued employment as an executive member of its management
team in the position of Executive Vice President, Chief Operating Officer
("Corporate Position") will continue to benefit the Bank in the future; and
WHEREAS, the parties are mutually desirous of entering into this Agreement
setting forth the terms and conditions for the employment relationship between
the Bank and Executive; and
WHEREAS, the Bank's Board of Directors has approved and authorized its
entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below:
1. Employment. Bank shall continue to employ Executive, and Executive shall
continue to serve Bank, on the terms and conditions set forth in this Agreement,
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 the Commencement Date and expire on the third
anniversary of the last day of the month preceding such date, unless sooner
terminated as provided herein; provided that, on each annual anniversary of the
last day of said month, the term of employment may be extended by action of the
Bank's Board of Directors to add one additional year to the remaining term of
employment annually restoring such term to a full three-years. The Board of
Directors or Executive shall each provide the other with at least ninety (90)
days' advance written notice of any decision on their respective parts not to
extend the Agreement on its Anniversary Date. The term of employment as in
effect from time to time hereunder shall be referred to as the "Employment
Term".
3. Position and Duties. Subject to Section 5(iv)(B), Executive shall serve
the Bank in his Corporate Position as its Executive Vice President and Chief
Operating Officer. As such, Executive shall report directly to the Bank's Board
of Directors, be nominated as a management
<PAGE> 2
candidate for election to the Board of Directors upon expiration of each term
thereon while this Agreement remains in effect, and be generally responsible for
selection and supervision of the Bank's management team and for the formulation
of Bank business and personnel policies, and shall render executive,
policy-making and other management services of the type customarily performed by
persons serving in similar capacities at other savings banks and savings and
loan associations, together with such other duties and responsibilities as may
be appropriate to Executive's position and as may be from time to time
determined by the Bank's Board of Directors to be necessary to its operations
and in accordance with its bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Bank the compensation and benefits
set forth below:
(i) Base Salary. During the Employment Term, Executive shall receive a
base salary ("Base Salary") in such amount as may from time to time be
approved by the Board. The Base Salary shall at no time be less than $ per
annum (which amount shall be paid by the Bank subject to reimbursement by
Hallmark Capital Corp. (the "Company") of any portion that is jointly
determined by their Boards of Directors to appropriately reflect the
allocation of Executive's time and efforts between the Bank and Company),
unless Executive and Bank mutually agree to some lesser amount reflecting a
reduction in Executive's duties in contemplation of retirement. No increase
in Base Salary or other compensation granted by the Board shall in any way
limit or reduce any other obligation of the Bank under this Agreement and,
once established at a specified annual rate, Executive's Base Salary under
this Agreement shall not thereafter be reduced except as part of a general
pro-rata reduction in compensation applicable to all Bank 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 Bank's regular
payroll practices, as then in effect.
(ii) Bonus Payments. In addition to Base Salary, Executive shall be
entitled, during the Employment Term, to participate in and receive
payments from all Bank bonus and other incentive compensation plans (as
currently in effect, as modified from time to time, or as subsequently
adopted); provided, however, that nothing contained herein shall grant
Executive the right to continue in any bonus or other incentive
compensation plan following its discontinuance by the Board (except to the
extent Executive had earned or otherwise accumulated vested rights therein
prior to such discontinuance).
For purposes of this Agreement, the term "Executive Officers" shall
mean all officers of the Bank serving as President or a Senior
Vice-President of the Bank.
(iii) Other Benefits. During the Employment Term, the Bank 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, in any
corporate automobile program, and in any pension, profit-sharing, Employee
Stock Ownership Plan ("ESOP") deferred compensation, 401(k) or
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<PAGE> 3
other or similar retirement program. In addition, Executive shall
participate, on the same basis (which may include allocations based on
compensation, years of service, or such other uniformly applied criteria as
the Board may determine) as other Executive Officers, in any stock
purchase, stock option or stock appreciation rights, plans, or any other
stock based program of any type, made available by the Bank to such
Executive Officers.
Executive shall be entitled to vacation, sick time, personal days and
other perquisites in the same manner and to the same extent as provided
under Bank policies as in effect from time to time for its other Executive
Officers.
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 paragraph 4(iii) (except to
the extent Executive had previously earned or accumulated vested rights
therein) following termination or discontinuance of such plan, program or
perquisite by the Board.
5. Termination. 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 set forth below, is referred to as the "Termination
Date".
(i) Death; Disability; Retirement. This Agreement shall terminate upon
the death, disability or retirement 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 duties with the
Bank for a period of 180 consecutive days. Any question as to the existence
of Executive's disability upon which Executive and the Bank cannot agree
shall be determined by a qualified independent physician mutually agreeable
to Executive and the Bank 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 Bank. 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 such
payment period from (i) any disability plans provided by the Bank, and/or
(ii) any governmental social security or workers compensation program.
As used in this Agreement, the term "retirement" shall mean
Executive's retirement in accordance with and pursuant to any Bank
retirement plan generally applicable to its 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.
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<PAGE> 4
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 as in effect
on the date of death, disability or retirement.
(ii) Cause. The Bank may terminate Executive's employment under this
Agreement for cause at any time, and thereafter the Bank's obligations
under this Agreement shall cease and terminate. Notwithstanding anything to
the contrary contained in this Agreement, 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 willful failure by Executive to substantially perform his
duties 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;
(B) Any willful act of misconduct by Executive which is materially
injurious to the Bank monetarily or otherwise;
(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 or final cease
and desist order; or
(G) Incompetence, personal dishonesty or material breach of any
provision of this Agreement which would have a material adverse
impact on the Bank.
For purposes of this Subsection (5)(ii), 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 Bank.
(iii) Voluntary Termination by Executive. Executive may voluntarily
terminate his employment under this Agreement at any time by giving at
least ninety (90) days prior written notice to the Bank. In such event,
Executive shall receive all compensation and other benefits in which he was
vested or to which he was otherwise entitled under
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<PAGE> 5
Section 4 through the date specified in such notice (the "Termination
Date"), in addition to all other benefits available to him under Bank
benefit plans in effect on the Termination Date.
(iv) Termination by Executive After Change in Control. For purposes of
this Agreement, a "change in control" shall mean a change in control with
respect to the Bank or the Company of a nature 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, such 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 or
Company's then outstanding securities; or (ii) during any period of two
consecutive years, individuals who at the beginning of such period
constitute 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. The Executive may
terminate his employment under this Agreement by giving at least ninety
(90) days prior written notice to the Bank at any time (i) within eighteen
(18) months of the effective date of a "change in control", or (ii) after
the occurrence, at any time subsequent to a "change in control," of any of
the following events, without Executive's express written consent:
(A) Executive is assigned to any positions, duties or
responsibilities that are less significant than his positions,
duties and responsibilities immediately prior to any change in
control;
(B) Executive is removed from, or the Board fails to re-elect
Executive to, his Corporate Position, except (i) in connection
with termination of Executive's employment for cause, disability
or retirement, or (ii) in connection with any change in control
after which the Bank is not the continuing or surviving
corporation (unless the successor organization has executed an
agreement as required by Section 7(i)(A) and the removal or
failure to re-elect is limited to his Corporate Position with the
Bank);
(C) Executive's Base Salary is reduced or the Executive experiences
in any year a reduction of the ratio of his bonus payment to his
Base Salary which is greater than the average reduction in the
ratio of bonus payments to base salaries in such year experienced
by all other Executive Officers of the Bank (including the
executive officers of any successor to or acquiror of the Bank)
or any other failure by the Bank to comply with Section 4;
(D) Executive is transferred to a location not within a 25 mile
radius of the City of Milwaukee; or
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<PAGE> 6
(E) The Bank fails to obtain an agreement from any successor
organization as required by Section 7(i)(A).
(v) Suspension or Termination Required by the Wisconsin Department of
Financial Institutions ("WDFI") or the FDIC.
(A) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice
served under section 8(e)(3), or section 8(g)(1), of the Federal
Deposit Insurance Act [12 U.S.C.ss.1818(e)(3) and (g)(1)], the
Bank's obligations under the Agreement shall be suspended as of
the date of service of the notice unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, Bank
may, in its discretion, (1) pay Executive all of the compensation
withheld while its obligations under this Agreement were
suspended, and (2) reinstate any of its obligations which were
suspended.
(B) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order
issued under section 8(e)(4) or section 8(g)(1) of the Federal
Deposit Insurance Act [12 U.S.C. ss. 1818(e)(4) or (g)(1)], the
obligations of the Bank under the Agreement shall terminate as of
the effective date of the order, provided that any vested rights
of the Executive to compensation and/or benefits under the Bank's
Pension Plan 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 continued operation of the Bank, (i) by the
Commissioner, at the time the FDIC or Resolution Trust
Corporation ("RTC") enters into an agreement to provide
assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the Federal Deposit Insurance Act;
or (ii) by the WDFI at the time that office approves a
supervisory merger to resolve problems related to operation of
the Bank or when the Bank is determined by the WDFI 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,
and the Executive shall receive the compensation and benefits set
forth in section 5(vi) of this Agreement.
(vi) Termination by Bank Other Than Due to Death, Disability,
Retirement, or For Cause. If this Agreement is terminated by the Bank for
any reason other than death, disability, retirement or for cause as set
forth in Section 5(i) or (ii), then following the Termination Date:
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<PAGE> 7
(A) In lieu of any further salary payments to Executive for a period
subsequent to the Termination Date, Executive shall receive
Severance Pay in the amount of one (1) year's Base Salary (based
on his highest Base Salary within the three (3) years preceding
his Date of Termination) payable in accordance with the Bank's
normal payroll practice and beginning with the first normal pay
date following his Date of Termination.
(B) In addition to such Base Salary payments, 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.
(C) In the event of termination of Executive under this subsection
5(vi) following a "change in control" and within the greater of
twelve (12) months or the Employment Term remaining under the
Agreement as of the effective date of such "change in control",
Executive shall have the option of having this subsection 5(vi)
or subsection 5(vii) applicable to such termination.
(vii) Benefits Upon Termination by Executive After a "Change in
Control". If this Agreement is terminated by Executive pursuant to Section
5 (iv) after a "change in control", then, following the Termination Date:
(A) In lieu of any further salary payments to Executive for a period
subsequent to the Termination Date, Executive shall receive
severance pay in the form of payments continuing for the then
remaining unexpired portion of the Employment Term in the amount
and at the times provided in Section 4(i) and (ii). Executive may
elect to receive such payments ("Severance Payments") in one lump
sum, calculated on the basis of his average annual compensation
for the past three years multiplied by the time remaining to the
end of the term of this Agreement, subject to limitations set
forth in Section 6 below; provided that the amount of such
Severance Payment shall not in any event be less than three (3)
year's compensation for Executive based on Executive's annual
compensation as of the Termination Date.
(B) In addition to the retirement benefits to which Executive is
entitled under all tax qualified retirement plans maintained by
the Bank (hereinafter collectively referred to as "Plan"), as
amended from time to time, Executive shall receive as additional
severance benefits a retirement benefit paid under this
Agreement, which benefit (except as provided below) shall be
determined in accordance with, and paid under this Agreement 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 Plan
that he would have received had he continued in the employment of
the Bank for the balance of the Employment Term at the highest
annual rate of Base Salary in
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<PAGE> 8
effect during the twelve (12) months immediately preceding the
Termination Date. Such Base Salary shall be deemed to represent
the compensation received by Executive during each such
additional year for purposes of determining his additional
retirement benefits under this Subsection 5(vi).
(C) In addition to other amounts payable to Executive under this
Section 5, Executive shall be entitled to receive all 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,
together with the continuation of other benefits under Section
4(iii), excepting those Section 4(ii) provisions relating to
stock options or similar stock programs in which Executive had no
interest as of the date of termination of his employment, for the
remaining unexpired portion of the Employment Term subject to the
limitations set forth in Section 6 below.
6. Limitations on Termination Compensation. In the event that the severance
benefits payable to Executive under Subsection 5(vii) ("Severance Benefits"), or
any other payments or benefits received or to be received by Executive from the
Bank (whether payable pursuant to the terms of this Agreement, any other plan,
agreement or arrangement with the Bank or any corporation ("Affiliate")
affiliated with the Bank 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 Bank'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 Bank
(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 Bank occurred (which average shall be
referred to as the "Base Amount"), the amount of such Severance Benefits payable
under this Agreement shall be reduced 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 Bank (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 (i) Executive shall have
effectively waived his receipt or enjoyment of any such payment or benefit which
triggered the applicability of this Section 6, or (ii) in the opinion of such
tax counsel, the Severance Benefits (in its full amount or as partially reduced,
as the case may be) plus all other payments or benefits which constitute
"parachute payments" within the meaning of Section 280G(b)(2) of the Code are
reasonable compensation for services actually rendered, within the meaning of
Section 280G (b)(4) of the Code, and such payments are deductible by the Bank.
The Base Amount shall include every type and form of compensation includable in
Executive's gross income in respect of his employment by the Bank (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, 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 Bank's independent auditors in
accordance
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<PAGE> 9
with the principles of Sections 280G (b)(3) and (4) of the Code, with the value
of any amount by which the Severance Benefits payable under this Agreement are
reduced pursuant to this Section 6 and/or the value of any other benefit not
provided plus any other amount not paid by the Bank, the Company, or any plan
maintained by either (regardless of its source) being referred to collectively
herein as the Unpaid Severance.
Executive shall have the right to request that the Bank obtain a ruling
from the Internal Revenue Service ("Service") as to whether any or all payments
or benefits determined by such tax counsel are, in the view of the Service,
"parachute payments" under Section 280G. If a ruling is sought pursuant to
Executive's request, no Severance Benefits payable under this Agreement shall be
made to Executive until after fifteen (15) days from the date of such ruling.
For purposes of this Section 6, Executive and the Bank agree to be bound by the
Service's ruling as to whether payments constitute "parachute payments" under
Section 280G. If the Service declines, for any reason, to provide the ruling
requested, the tax counsel's opinion provided with respect to what payments or
benefits constitute "parachute payments" shall control, and the period during
which the Severance Benefits may be deferred shall be extended to a date fifteen
(15) days from the date of the Service's notice indicating that no ruling would
be forthcoming.
In the event that Section 280G, or any successor statute, is repealed, this
Section 6 shall cease to be effective on the effective date of such repeal. The
parties to this Agreement recognize that final regulations under Section 280G of
the Code may affect the amounts that may be paid under this Agreement and agreed
that, upon issuance of such final regulations this Agreement may be modified as
in good faith deemed necessary in light of the provisions of such regulations to
achieve the purposes of this Agreement, and that consent to such modifications
shall not be unreasonably withheld.
7. General Provisions.
(i) Successors; Binding Agreement.
(A) The Bank 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 Bank
("successor organization") to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that the Bank would have been required to perform if no such
succession had taken place or to reexecute this Agreement as
provided pursuant to section 5(iv). 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 twelve (12) 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) provided under this
Agreement upon a "change in control".
As used in this Agreement "Bank" shall mean the Bank as
hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement
provided for in this
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<PAGE> 10
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 Bank to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Executive as his exclusive remedy to
compensation from the Bank 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 5(iv). 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 Executive and his heirs, beneficiaries and
personal representatives and the Bank 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 Bank has invested considerable time
and money in his development of such contacts and relationships, that Bank
could suffer irreparable harm if he were to leave employment and solicit
the business of Bank customers, and that it is reasonable to protect Bank
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 the Bank) not to continue automatic annual renewals,
Executive shall not accept employment with any Significant Competitor of
Bank for a period of twelve (12) months following such termination. For
purposes of this Agreement, the term Significant Competitor means any
financial institution including, but not limited to, any commercial bank,
savings bank, savings and loan association, credit union, or mortgage
banking corporation which, at the time of termination of Executive's
employment with Bank, or during the period of this covenant not to compete,
has a home, branch or other office in any county in which Bank has an
office 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 $500,000 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 Bank 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, Bank
shall be entitled, in addition to its other legal remedies, to enjoin
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<PAGE> 11
the employment of Executive with any Significant Competitor for the period
set forth herein. If Executive violates this covenant and Bank brings legal
action for injunctive or other relief, Bank 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. In addition to such other
relief as may be awarded, if Bank is the prevailing party it shall be
entitled to reimbursement for all reasonable costs, including attorneys'
fees, incurred in enforcing its rights hereunder.
(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 Bank States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Bank:
West Allis Savings Bank
5555 Port Washington Road
P. O. Box 17499
Glendale, WI 53217-0499
or if to Executive, at the address set forth below:
Mr. Peter A. Gilbert
1613 Golf View Drive East
Sheboygan, WI 53083
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement, or to recover damages for breach of
it, the prevailing party shall be entitled to recover from the other party
reasonable attorneys' fees and necessary costs and disbursements incurred
in such litigation, in addition to any other relief to which such
prevailing party may be entitled.
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 reexecution of this Agreement pursuant to section 5(iv),
Executive shall be entitled to recover from the Bank (A) reasonable
attorney's fees and necessary costs and disbursements incurred in such
litigation if Executive is the prevailing party, or (B) reasonable
attorneys fees and necessary costs and disbursements of up to $7,500
incurred in such litigation if Executive is not the prevailing party.
Recovery of attorneys fees and costs as provided herein following a change
in control or reexecution shall be in addition to any other relief to which
Executive may be entitled.
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<PAGE> 12
(v) Withholding. The Bank shall be entitled to withhold from amounts
to be paid to Executive under this Agreement any federal, state, or local
withholding or other taxes of charges which it is from time to time
required to withhold. The Bank 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) Miscellaneous. No provision of this Agreement may be amended,
waived or discharged unless such amendment, waiver of discharge is agreed
to in writing and signed by Executive and such Bank officer as may be
specifically designated by the Board. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with,
any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not
expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the
laws of the State of Wisconsin.
(vii) 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.
(viii) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(ix) Headings. Headings contained in this Agreement are for reference
only and shall not affect the meaning or interpretation of any provision of
this Agreement.
(x) 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.
West Allis Savings Bank Executive:
By ___________________________ _________________________
Title ________________________
Witness
By ____________________________
Title _________________________
-12-
<PAGE> 1
HALLMARK CAPITAL CORP.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of ______________________ the
"Commencement Date") between Hallmark Capital Corp., its successors and assigns,
a Wisconsin corporation, (hereinafter referred to as the "Company"), having its
principal offices located at 5555 North Port Washington Road, Glendale,
Wisconsin 53217, and Peter A. Gilbert (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the financial services industry has substantially benefited
both West Allis Savings Bank (the "Bank") and the Company and whose continued
employment by the Company in the capacities of Executive Vice President, Chief
Operating Officer ("Corporate Position") will benefit the Company in the future;
and
WHEREAS, the parties are mutually desirous of entering into this Agreement
setting forth the terms and conditions for the employment relationship between
the Company and Executive; and
WHEREAS, the Company's Board of Directors has approved and authorized its
entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below:
1. Employment. The Company shall employ Executive, and Executive shall
serve the Company, on the terms and conditions set forth in this Agreement.
2. Term of Employment. The period of Executive's employment under this
Agreement shall coincide with his period of employment by the Bank under the
West Allis Savings Bank Employment Agreement (the "Bank Agreement") entered into
between the Bank and Executive and bearing even date herewith. The term of
employment as in effect from time to time hereunder shall be referred to as the
"Employment Term".
3. Position and Duties. Executive shall serve the Company in his Corporate
Position as its Executive Vice President and Chief Operating Officer. As such,
Executive shall report directly to the Company's Board of Directors, be
nominated as a management candidate for election to the Board of Directors upon
expiration of each term thereon while this Agreement remains in effect, and be
generally responsible for selection and supervision of the Company's management
team and for the formulation of Company business and personnel policies, and
shall render executive, policy-making and other management services of the type
customarily performed by persons serving in similar capacities at other bank and
savings bank holding companies, together with such other duties and
responsibilities as may be appropriate to Executive's position and as may
<PAGE> 2
be from time to time determined by the Bank's Board of Directors to be necessary
to its operations and in accordance with its bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Company the compensation and
benefits set forth below:
(i) Base Salary. During the Employment Term, Executive shall receive a
base salary payable by the Bank ("Base Salary") in such amount as may from
time to time be approved by the Board of Directors of the Bank; provided,
however, that the Company and Executive agree that (i) a portion of the
amount received by Executive from the Bank will be allocable to time and
effort of the Executive spent on behalf of the Company pursuant to this
Agreement, and (ii) that the Company may reimburse the Bank in an amount
jointly determined by the Boards of Directors of the Company and Bank to
reflect such allocable portion. No increase in Base Salary paid by the Bank
(or the amount thereof reimbursed by the Company) or other compensation
granted by the Company or Bank shall in any way limit or reduce any other
obligation of the Company under this Agreement. Executive's Base Salary and
other compensation shall be paid in accordance with the Bank's regular
payroll practices, as then in effect.
(ii) Bonus Payments. In addition to Base Salary, Executive shall be
entitled, during the Employment Term, to participate in and receive
payments from all bonus and other incentive compensation plans (as
currently in effect, as modified from time to time, or as subsequently
adopted) of the Company; provided, however, that nothing contained herein
shall grant Executive the right to continue in any bonus or other incentive
compensation plan following its discontinuance by the Board (except to the
extent Executive had earned or otherwise accumulated vested rights therein
prior to such discontinuance).
(iii) Other Benefits. During the Employment Term, the Company shall
provide to Executive all other benefits of employment (or, with Executive's
consent, equivalent benefits) generally made available to other Executive
Officers of the Company. In addition, Executive shall participate in any
stock purchase, stock option or stock appreciation rights, plans, or any
other stock based program of any type, made available by the Company to its
Executive Officers.
Executive shall be entitled to the same vacation, sick time, personal
days and other perquisites in the same manner and to the same extent as
such benefits are available under the Bank Agreement; provided that this
Agreement is intended to allow Executive to utilize the perquisites as
provided pursuant to the Bank Agreement and not to create additional
perquisites hereunder.
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 paragraph 4(iii) (except to
the extent Executive had previously earned or accumulated vested rights
therein) following termination or discontinuance of such plan, program or
perquisite by the Board.
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<PAGE> 3
5. Termination. This Agreement shall terminate upon the effective date of
termination of the Bank Agreement.
Upon termination of this Agreement simultaneous with termination of the
Bank Agreement, Executive shall be entitled to the receipt of
termination/severance benefits from the Bank as determined under all applicable
provisions of the Bank Agreement ("Severance Benefits"). The Bank shall be
primarily responsible for the payment of Severance Benefits; provided, however,
that the Company may reimburse the Bank for a portion of the cost of Executive's
Severance Benefits in any amount jointly determined by the Boards of Directors
of the Company and Bank to correspond to the allocation of Executive's time and
effort between Bank and Company matters during the 12-month period preceding
termination of the Bank Agreement. Notwithstanding the foregoing, if the
application of Section 6 of the Bank Agreement results in Unpaid Severance as
defined therein, the Company shall be responsible for payment to Executive of
the entire amount of the Unpaid Severance and shall also pay to Executive an
additional amount (the "Reimbursement Payment") such that the net amount
retained by Executive after deduction of (i) any tax imposed by Section 4999 of
the Internal Revenue Code (the "Excise Tax") and any interest charges or
penalties in respect to the imposition of such Excise Tax (but not any federal,
state or local income tax) on the Total Payments (which shall include the
Termination Benefits and the Unpaid Severance, together with any other payments
or benefits paid by the Bank or Company, including but not limited to any amount
or value attributable to the vesting of stock options upon Executive's
termination to which said Excise Tax applies by reason of Section 280G of the
Code), and (ii) any federal, state and local income tax and Excise Tax upon the
payment pursuant to Section 5(i) above, so that the total received by Executive
after deduction of said Excise Taxes shall be equal to the total of the
Severance Benefits actually paid by the Bank plus the Unpaid Severance. For
purposes of determining the amount of Reimbursement Payment, Executive shall be
deemed to pay federal income taxes at the highest marginal rate of federal
income taxation in the calendar year in which the Reimbursement Payment is to be
made and state and local income taxes at the highest marginal rate of taxation
in the state and locality of Executive's domicile for income tax purposes on the
date the Reimbursement Payment is made, net of the maximum reduction of federal
income taxes that could be obtained from deduction of such state and local
taxes.
6. General Provisions.
(i) Successors; Binding Agreement.
(A) The Company 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 Company
("successor organization") to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that the Company would have been required to perform if no such
succession had taken place. 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 twelve
(12) months or the then remaining term under the Bank Agreement,
the same rights and remedies (recognizing them as being available
and
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<PAGE> 4
applicable as the result of the "change in control" effectuating
said succession) provided under this Agreement upon a "change in
control".
As used in this Agreement "Company" shall mean the Company
as hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement
provided for in this Section 6 or which otherwise becomes bound
by the terms and provisions of this Agreement by operation of
this Agreement or law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle Executive as his
exclusive remedy to compensation from the Company in the same
amount and on the same terms as he would be entitled to pursuant
to this Agreement under Section 5. 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 Executive and his heirs, beneficiaries and
personal representatives and the Company and any successor
organization.
(ii) Noncompetition Provision. Executive acknowledges that the
development of personal contacts and relationships is an essential element
in the financial services industry, that the Company has invested
considerable time and money in his development of such contacts and
relationships, that the Company could suffer irreparable harm if he were to
leave employment and solicit the business of Company customers, and that it
is reasonable to protect the Company 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) of the Bank Agreement, or upon expiration of this Agreement
as a result of Executive's election (but not as the result of an election
by the Company) not to continue automatic annual renewals, Executive shall
not accept employment with any Significant Competitor of the Bank or
Company for a period of twelve (12) months following such termination. For
purposes of this Agreement, the term Significant Competitor means any
financial institution including, but not limited to, any commercial bank,
savings bank, savings and loan association, credit union, or mortgage
banking corporation which, at the time of termination of this Agreement, or
during the period of this covenant not to compete, has a home, branch or
other office in any county in which the Bank or Company has an office 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 $500,000 in commercial or mortgage loans secured by
real property in any such county.
-4-
<PAGE> 5
Executive agrees that the non-competition provisions set forth herein
are necessary for the protection of the Bank and Company 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, Bank 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
Company brings legal action for injunctive or other relief, the Company
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. In addition to such other relief as may be awarded, if the
Company is the prevailing party it shall be entitled to reimbursement for
all reasonable costs, including attorneys' fees, incurred in enforcing its
rights hereunder.
(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 the Company,
United States registered mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Company:
Hallmark Capital Corporation
5555 North Port Washington Road
Glendale, WI 53217
or if to Executive, at the address set forth below:
Mr. James D. Smessaert
N18 W28985 Golf Ridge North
Pewaukee, WI 53072
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement, or to recover damages for breach of
it, the prevailing party shall be entitled to recover from the other party
reasonable attorneys' fees and necessary costs and disbursements incurred
in such litigation, in addition to any other relief to which such
prevailing party may be entitled.
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 reexecution of this Agreement pursuant to section 6(i),
Executive shall be entitled to recover from the Company (A) reasonable
attorney's fees and necessary costs and disbursements incurred in such
litigation if Executive is the prevailing party, or (B) reasonable
attorneys fees and necessary costs and disbursements of up to $7,500
incurred in such litigation if Executive is not the prevailing party.
Recovery of attorneys fees and costs as provided herein
-5-
<PAGE> 6
following a change in control or reexecution shall be in addition to any
other relief to which Executive may be entitled.
(v) Withholding. The Company shall be entitled to withhold from
amounts to be paid to Executive under this Agreement any federal, state, or
local withholding or other taxes of charges which it is from time to time
required to withhold. The Company 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) Miscellaneous. No provision of this Agreement may be amended,
waived or discharged unless such amendment, waiver of discharge is agreed
to in writing and signed by Executive and such Company officer as may be
specifically designated by the Board. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with,
any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not
expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the
laws of the State of Wisconsin.
(vii) 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.
(viii) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(ix) Headings. Headings contained in this Agreement are for reference
only and shall not affect the meaning or interpretation of any provision of
this Agreement.
(x) 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.
Hallmark Capital Corp. Executive:
By ___________________________ _________________________
Title ________________________
Witness
By ___________________________
Title ________________________
-6-
<PAGE> 1
WEST ALLIS SAVINGS BANK
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of _____________________ (the
"Commencement Date") between West Allis Savings Bank, its successors and
assigns, a state chartered savings bank (hereinafter referred to as the "Bank"),
having its principal offices located at 5555 North Port Washington Road,
Glendale, Wisconsin 53217, and James D. Smessaert (the "Executive").
RECITALS
WHEREAS, Executive is a key employee, whose extensive background, knowledge
and experience in the financial services industry has substantially benefited
the Bank and whose continued employment as an executive member of its management
team in the position of President, Chief Executive Officer and Chairman of the
Board ("Corporate Position") will continue to benefit the Bank in the future;
and
WHEREAS, the parties are mutually desirous of entering into this Agreement
setting forth the terms and conditions for the employment relationship between
the Bank and Executive; and
WHEREAS, the Bank's Board of Directors has approved and authorized its
entry into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below:
1. Employment. Bank shall continue to employ Executive, and Executive shall
continue to serve Bank, on the terms and conditions set forth in this Agreement,
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 the Commencement Date and expire on the third
anniversary of the last day of the month preceding such date, unless sooner
terminated as provided herein; provided that, on each annual anniversary of the
last day of said month, the term of employment may be extended by action of the
Bank's Board of Directors to add one additional year to the remaining term of
employment annually restoring such term to a full three-years. The Board of
Directors or Executive shall each provide the other with at least ninety (90)
days' advance written notice of any decision on their respective parts not to
extend the Agreement on its Anniversary Date. The term of employment as in
effect from time to time hereunder shall be referred to as the "Employment
Term".
3. Position and Duties. Subject to Section 5(iv)(B), Executive shall serve
the Bank in his Corporate Position as its President and Chief Executive Officer.
As such, Executive shall report directly to the Bank's Board of Directors, be
nominated as a management candidate for election
<PAGE> 2
to the Board of Directors upon expiration of each term thereon while this
Agreement remains in effect, and be generally responsible for selection and
supervision of the Bank's management team and for the formulation of Bank
business and personnel policies, and shall render executive, policy-making and
other management services of the type customarily performed by persons serving
in similar capacities at other savings banks and savings and loan associations,
together with such other duties and responsibilities as may be appropriate to
Executive's position and as may be from time to time determined by the Bank's
Board of Directors to be necessary to its operations and in accordance with its
bylaws.
4. Compensation. As compensation for services provided pursuant to this
Agreement, Executive shall receive from the Bank the compensation and benefits
set forth below:
(i) Base Salary. During the Employment Term, Executive shall receive a
base salary ("Base Salary") in such amount as may from time to time be
approved by the Board. The Base Salary shall at no time be less than $ per
annum (which amount shall be paid by the Bank subject to reimbursement by
Hallmark Capital Corp. (the "Company") of any portion that is jointly
determined by their Boards of Directors to appropriately reflect the
allocation of Executive's time and efforts between the Bank and Company),
unless Executive and Bank mutually agree to some lesser amount reflecting a
reduction in Executive's duties in contemplation of retirement. No increase
in Base Salary or other compensation granted by the Board shall in any way
limit or reduce any other obligation of the Bank under this Agreement and,
once established at a specified annual rate, Executive's Base Salary under
this Agreement shall not thereafter be reduced except as part of a general
pro-rata reduction in compensation applicable to all Bank 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 Bank's regular
payroll practices, as then in effect.
(ii) Bonus Payments. In addition to Base Salary, Executive shall be
entitled, during the Employment Term, to participate in and receive
payments from all Bank bonus and other incentive compensation plans (as
currently in effect, as modified from time to time, or as subsequently
adopted); provided, however, that nothing contained herein shall grant
Executive the right to continue in any bonus or other incentive
compensation plan following its discontinuance by the Board (except to the
extent Executive had earned or otherwise accumulated vested rights therein
prior to such discontinuance).
For purposes of this Agreement, the term "Executive Officers" shall
mean all officers of the Bank serving as President or a Senior
Vice-President of the Bank.
(iii) Other Benefits. During the Employment Term, the Bank 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, in any
corporate automobile program, and in any pension, profit-sharing, Employee
Stock Ownership Plan ("ESOP") deferred compensation, 401(k) or
-2-
<PAGE> 3
other or similar retirement program. In addition, Executive shall
participate, on the same basis (which may include allocations based on
compensation, years of service, or such other uniformly applied criteria as
the Board may determine) as other Executive Officers, in any stock
purchase, stock option or stock appreciation rights, plans, or any other
stock based program of any type, made available by the Bank to such
Executive Officers.
Executive shall be entitled to vacation, sick time, personal days and
other perquisites in the same manner and to the same extent as provided
under Bank policies as in effect from time to time for its other Executive
Officers.
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 paragraph 4(iii) (except to
the extent Executive had previously earned or accumulated vested rights
therein) following termination or discontinuance of such plan, program or
perquisite by the Board.
5. Termination. 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 set forth below, is referred to as the "Termination
Date".
(i) Death; Disability; Retirement. This Agreement shall terminate upon
the death, disability or retirement 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 duties with the
Bank for a period of 180 consecutive days. Any question as to the existence
of Executive's disability upon which Executive and the Bank cannot agree
shall be determined by a qualified independent physician mutually agreeable
to Executive and the Bank 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 Bank. 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 such
payment period from (i) any disability plans provided by the Bank, and/or
(ii) any governmental social security or workers compensation program.
As used in this Agreement, the term "retirement" shall mean
Executive's retirement in accordance with and pursuant to any Bank
retirement plan generally applicable to its 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.
-3-
<PAGE> 4
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 as in effect
on the date of death, disability or retirement.
(ii) Cause. The Bank may terminate Executive's employment under this
Agreement for cause at any time, and thereafter the Bank's obligations
under this Agreement shall cease and terminate. Notwithstanding anything to
the contrary contained in this Agreement, 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 willful failure by Executive to substantially perform his
duties 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;
(B) Any willful act of misconduct by Executive which is materially
injurious to the Bank monetarily or otherwise;
(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 or final cease
and desist order; or
(G) Incompetence, personal dishonesty or material breach of any
provision of this Agreement which would have a material adverse
impact on the Bank.
For purposes of this Subsection (5)(ii), 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 Bank.
(iii) Voluntary Termination by Executive. Executive may voluntarily
terminate his employment under this Agreement at any time by giving at
least ninety (90) days prior written notice to the Bank. In such event,
Executive shall receive all compensation and other benefits in which he was
vested or to which he was otherwise entitled under
-4-
<PAGE> 5
Section 4 through the date specified in such notice (the "Termination
Date"), in addition to all other benefits available to him under Bank
benefit plans in effect on the Termination Date.
(iv) Termination by Executive After Change in Control. For purposes of
this Agreement, a "change in control" shall mean a change in control with
respect to the Bank or the Company of a nature 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, such 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 or
Company's then outstanding securities; or (ii) during any period of two
consecutive years, individuals who at the beginning of such period
constitute 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. The Executive may
terminate his employment under this Agreement by giving at least ninety
(90) days prior written notice to the Bank at any time (i) within eighteen
(18) months of the effective date of a "change in control", or (ii) after
the occurrence, at any time subsequent to a "change in control," of any of
the following events, without Executive's express written consent:
(A) Executive is assigned to any positions, duties or
responsibilities that are less significant than his positions,
duties and responsibilities immediately prior to any change in
control;
(B) Executive is removed from, or the Board fails to re-elect
Executive to, his Corporate Position, except (i) in connection
with termination of Executive's employment for cause, disability
or retirement, or (ii) in connection with any change in control
after which the Bank is not the continuing or surviving
corporation (unless the successor organization has executed an
agreement as required by Section 7(i)(A) and the removal or
failure to re-elect is limited to his Corporate Position with the
Bank);
(C) Executive's Base Salary is reduced or the Executive
experiences in any year a reduction of the ratio of his bonus
payment to his Base Salary which is greater than the average
reduction in the ratio of bonus payments to base salaries in such
year experienced by all other Executive Officers of the Bank
(including the executive officers of any successor to or acquiror
of the Bank) or any other failure by the Bank to comply with
Section 4;
(D) Executive is transferred to a location not within a 25 mile
radius of the City of Milwaukee; or
-5-
<PAGE> 6
(E) The Bank fails to obtain an agreement from any successor
organization as required by Section 7(i)(A).
(v) Suspension or Termination Required by the Wisconsin Department of
Financial Institutions ("WDFI") or the FDIC.
(A) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice
served under section 8(e)(3), or section 8(g)(1), of the Federal
Deposit Insurance Act [12 U.S.C.ss.1818(e)(3) and (g)(1)], the
Bank's obligations under the Agreement shall be suspended as of
the date of service of the notice unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, Bank
may, in its discretion, (1) pay Executive all of the compensation
withheld while its obligations under this Agreement were
suspended, and (2) reinstate any of its obligations which were
suspended.
(B) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order
issued under section 8(e)(4) or section 8(g)(1) of the Federal
Deposit Insurance Act [12 U.S.C. ss. 1818(e)(4) or (g)(1)], the
obligations of the Bank under the Agreement shall terminate as of
the effective date of the order, provided that any vested rights
of the Executive to compensation and/or benefits under the Bank's
Pension Plan 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 continued operation of the Bank, (i) by the
Commissioner, at the time the FDIC or Resolution Trust
Corporation ("RTC") enters into an agreement to provide
assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the Federal Deposit Insurance Act;
or (ii) by the WDFI at the time that office approves a
supervisory merger to resolve problems related to operation of
the Bank or when the Bank is determined by the WDFI 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,
and the Executive shall receive the compensation and benefits set
forth in section 5(vi) of this Agreement.
(vi) Termination by Bank Other Than Due to Death, Disability,
Retirement, or For Cause. If this Agreement is terminated by the Bank for
any reason other than death, disability, retirement or for cause as set
forth in Section 5(i) or (ii), then following the Termination Date:
-6-
<PAGE> 7
(A) In lieu of any further salary payments to Executive for a period
subsequent to the Termination Date, Executive shall receive
Severance Pay in the amount of one (1) year's Base Salary (based
on his highest Base Salary within the three (3) years preceding
his Date of Termination) payable in accordance with the Bank's
normal payroll practice and beginning with the first normal pay
date following his Date of Termination.
(B) In addition to such Base Salary payments, 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.
(C) In the event of termination of Executive under this subsection
5(vi) following a "change in control" and within the greater of
twelve (12) months or the Employment Term remaining under the
Agreement as of the effective date of such "change in control",
Executive shall have the option of having this subsection 5(vi)
or subsection 5(vii) applicable to such termination.
(vii) Benefits Upon Termination by Executive After a "Change in
Control". If this Agreement is terminated by Executive pursuant to Section
5 (iv) after a "change in control", then, following the Termination Date:
(A) In lieu of any further salary payments to Executive for a period
subsequent to the Termination Date, Executive shall receive
severance pay in the form of payments continuing for the then
remaining unexpired portion of the Employment Term in the amount
and at the times provided in Section 4(i) and (ii). Executive may
elect to receive such payments ("Severance Payments") in one lump
sum, calculated on the basis of his average annual compensation
for the past three years multiplied by the time remaining to the
end of the term of this Agreement, subject to limitations set
forth in Section 6 below; provided that the amount of such
Severance Payment shall not in any event be less than three (3)
year's compensation for Executive based on Executive's annual
compensation as of the Termination Date.
(B) In addition to the retirement benefits to which Executive is
entitled under all tax qualified retirement plans maintained by
the Bank (hereinafter collectively referred to as "Plan"), as
amended from time to time, Executive shall receive as additional
severance benefits a retirement benefit paid under this
Agreement, which benefit (except as provided below) shall be
determined in accordance with, and paid under this Agreement 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 Plan
that he would have received had he continued in the employment of
the Bank for the balance of the Employment Term at the highest
annual rate of Base Salary in
-7-
<PAGE> 8
effect during the twelve (12) months immediately preceding the
Termination Date. Such Base Salary shall be deemed to represent
the compensation received by Executive during each such
additional year for purposes of determining his additional
retirement benefits under this Subsection 5(vi).
(C) In addition to other amounts payable to Executive under this
Section 5, Executive shall be entitled to receive all 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,
together with the continuation of other benefits under Section
4(iii), excepting those Section 4(ii) provisions relating to
stock options or similar stock programs in which Executive had no
interest as of the date of termination of his employment, for the
remaining unexpired portion of the Employment Term subject to the
limitations set forth in Section 6 below.
6. Limitations on Termination Compensation. In the event that the severance
benefits payable to Executive under Subsection 5(vii) ("Severance Benefits"), or
any other payments or benefits received or to be received by Executive from the
Bank (whether payable pursuant to the terms of this Agreement, any other plan,
agreement or arrangement with the Bank or any corporation ("Affiliate")
affiliated with the Bank 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 Bank'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 Bank
(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 Bank occurred (which average shall be
referred to as the "Base Amount"), the amount of such Severance Benefits payable
under this Agreement shall be reduced 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 Bank (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 (i) Executive shall have
effectively waived his receipt or enjoyment of any such payment or benefit which
triggered the applicability of this Section 6, or (ii) in the opinion of such
tax counsel, the Severance Benefits (in its full amount or as partially reduced,
as the case may be) plus all other payments or benefits which constitute
"parachute payments" within the meaning of Section 280G(b)(2) of the Code are
reasonable compensation for services actually rendered, within the meaning of
Section 280G(b)(4) of the Code, and such payments are deductible by the Bank.
The Base Amount shall include every type and form of compensation includable in
Executive's gross income in respect of his employment by the Bank (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, 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 Bank's independent auditors in
accordance
-8-
<PAGE> 9
with the principles of Sections 280G(b)(3) and (4) of the Code, with
the value of any amount by which the Severance Benefits payable under this
Agreement are reduced pursuant to this Section 6 and/or the value of any other
benefit not provided plus any other amount not paid by the Bank, the Company, or
any plan maintained by either (regardless of its source) being referred to
collectively herein as the Unpaid Severance.
Executive shall have the right to request that the Bank obtain a ruling
from the Internal Revenue Service ("Service") as to whether any or all payments
or benefits determined by such tax counsel are, in the view of the Service,
"parachute payments" under Section 280G. If a ruling is sought pursuant to
Executive's request, no Severance Benefits payable under this Agreement shall be
made to Executive until after fifteen (15) days from the date of such ruling.
For purposes of this Section 6, Executive and the Bank agree to be bound by the
Service's ruling as to whether payments constitute "parachute payments" under
Section 280G. If the Service declines, for any reason, to provide the ruling
requested, the tax counsel's opinion provided with respect to what payments or
benefits constitute "parachute payments" shall control, and the period during
which the Severance Benefits may be deferred shall be extended to a date fifteen
(15) days from the date of the Service's notice indicating that no ruling would
be forthcoming.
In the event that Section 280G, or any successor statute, is repealed, this
Section 6 shall cease to be effective on the effective date of such repeal. The
parties to this Agreement recognize that final regulations under Section 280G of
the Code may affect the amounts that may be paid under this Agreement and agreed
that, upon issuance of such final regulations this Agreement may be modified as
in good faith deemed necessary in light of the provisions of such regulations to
achieve the purposes of this Agreement, and that consent to such modifications
shall not be unreasonably withheld.
7. General Provisions.
(i) Successors; Binding Agreement.
(A) The Bank 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 Bank
("successor organization") to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that the Bank would have been required to perform if no such
succession had taken place or to reexecute this Agreement as
provided pursuant to section 5(iv). 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 twelve (12) 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) provided under this
Agreement upon a "change in control".
As used in this Agreement "Bank" shall mean the Bank as
hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement
provided for in this
-9-
<PAGE> 10
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 Bank to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Executive as his exclusive remedy to
compensation from the Bank 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 5(iv). 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 Executive and his heirs, beneficiaries and
personal representatives and the Bank 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 Bank has invested considerable time
and money in his development of such contacts and relationships, that Bank
could suffer irreparable harm if he were to leave employment and solicit
the business of Bank customers, and that it is reasonable to protect Bank
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 the Bank) not to continue automatic annual renewals,
Executive shall not accept employment with any Significant Competitor of
Bank for a period of twelve (12) months following such termination. For
purposes of this Agreement, the term Significant Competitor means any
financial institution including, but not limited to, any commercial bank,
savings bank, savings and loan association, credit union, or mortgage
banking corporation which, at the time of termination of Executive's
employment with Bank, or during the period of this covenant not to compete,
has a home, branch or other office in any county in which Bank has an
office 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 $500,000 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 Bank 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, Bank
shall be entitled, in addition to its other legal remedies, to enjoin
-10-
<PAGE> 11
the employment of Executive with any Significant Competitor for the period
set forth herein. If Executive violates this covenant and Bank brings legal
action for injunctive or other relief, Bank 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. In addition to such other
relief as may be awarded, if Bank is the prevailing party it shall be
entitled to reimbursement for all reasonable costs, including attorneys'
fees, incurred in enforcing its rights hereunder.
(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 Bank States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Bank:
West Allis Savings Bank
5555 Port Washington Road
P. O. Box 17499
Glendale, WI 53217-0499
or if to Executive, at the address set forth below:
Mr. James D. Smessaert
N19 W28985 Golf Ridge North
Pewaukee, WI 53072
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(iv) Expenses. If any legal proceeding is necessary to enforce or
interpret the terms of this Agreement, or to recover damages for breach of
it, the prevailing party shall be entitled to recover from the other party
reasonable attorneys' fees and necessary costs and disbursements incurred
in such litigation, in addition to any other relief to which such
prevailing party may be entitled.
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 reexecution of this Agreement pursuant to section 5(iv),
Executive shall be entitled to recover from the Bank (A) reasonable
attorney's fees and necessary costs and disbursements incurred in such
litigation if Executive is the prevailing party, or (B) reasonable
attorneys fees and necessary costs and disbursements of up to $7,500
incurred in such litigation if Executive is not the prevailing party.
Recovery of attorneys fees and costs as provided herein following a change
in control or reexecution shall be in addition to any other relief to which
Executive may be entitled.
-11-
<PAGE> 12
(v) Withholding. The Bank shall be entitled to withhold from amounts
to be paid to Executive under this Agreement any federal, state, or local
withholding or other taxes of charges which it is from time to time
required to withhold. The Bank 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) Miscellaneous. No provision of this Agreement may be amended,
waived or discharged unless such amendment, waiver of discharge is agreed
to in writing and signed by Executive and such Bank officer as may be
specifically designated by the Board. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with,
any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not
expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the
laws of the State of Wisconsin.
(vii) 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.
(viii) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(ix) Headings. Headings contained in this Agreement are for reference
only and shall not affect the meaning or interpretation of any provision of
this Agreement.
(x) 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.
West Allis Savings Bank Executive:
By ___________________________ _________________________
Title ________________________
Witness
By ___________________________
Title ________________________
-12-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,731
<INT-BEARING-DEPOSITS> 7,755
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,080
<INVESTMENTS-CARRYING> 78,080
<INVESTMENTS-MARKET> 78,080
<LOANS> 374,735
<ALLOWANCE> 3,209
<TOTAL-ASSETS> 514,125
<DEPOSITS> 331,796
<SHORT-TERM> 10,002
<LIABILITIES-OTHER> 7,780
<LONG-TERM> 131,782
0
0
<COMMON> 32,765
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 514,125
<INTEREST-LOAN> 20,707
<INTEREST-INVEST> 7,753
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 28,460
<INTEREST-DEPOSIT> 12,210
<INTEREST-EXPENSE> 19,068
<INTEREST-INCOME-NET> 9,392
<LOAN-LOSSES> 627
<SECURITIES-GAINS> 48
<EXPENSE-OTHER> 6,368
<INCOME-PRETAX> 3,280
<INCOME-PRE-EXTRAORDINARY> 3,280
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,269
<EPS-BASIC> 0.88
<EPS-DILUTED> 0.85
<YIELD-ACTUAL> 8.14
<LOANS-NON> 2,038
<LOANS-PAST> 118
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,648
<CHARGE-OFFS> 84
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 3,209
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,209
</TABLE>
