SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant _X_
Filed by a Party other than the Registrant /__/
Check the appropriate box:
/_/ Preliminary Proxy Statement /_/ Confidential, for use of
_X_ Definitive Proxy Statement the Commission Only (as
/_/ Definitive Additional Materials permitted by Rule 14a-
/_/ Soliciting Material Pursuant to 6(e)(2))
Rule 14a-11(c) or Rule 14a-12
FIRST OZAUKEE CAPITAL CORP.
(Name of Registrant as Specified in its Charter)
Payment of filing fee (Check the appropriate box):
/_/ No fee required.
/_/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
1) Title of each class of securities to which transaction
applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
_X_ Fee paid previously with preliminary materials.
/_/ Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
July 9, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of
Shareholders of First Ozaukee Capital Corp. ("First Ozaukee"), to be
held on Wednesday, August 6, 1997, at 10:00 a.m. at the Cedarburg Cultural
Center, W62 N546 Washington Avenue, Cedarburg, Wisconsin.
As described in the accompanying Notice of Special Meeting of
Shareholders and Proxy Statement, at the Special Meeting you will be
asked to consider and vote upon a proposal to approve an Agreement and
Plan of Reorganization, dated as of April 25, 1997 (the "Merger
Agreement"), and a related Plan of Merger, dated as of July 8, 1997
(the "Plan of Merger"), pursuant to which First Ozaukee has agreed to
merge (the "Merger") with CIB Acquisition Corporation ("Acquisition
Corp."), a Wisconsin corporation and wholly owned subsidiary of
Central Illinois Bancorp, Inc. ("CIB"). In connection with the
Merger, holders of First Ozaukee common stock will be entitled to
receive $15.10 in cash for each share held, subject to adjustment as
more fully described in the accompanying Proxy Statement.
Consummation of the Merger is subject to certain customary conditions,
including the approval and adoption of the Merger Agreement, including
the Plan of Merger, by First Ozaukee's shareholders and the approval
by the appropriate Federal and state bank regulatory agencies. Upon
consummation of the Merger, First Ozaukee will become a wholly owned
subsidiary of CIB. In addition, you will be asked to consider and
vote upon a proposal to adjourn the Special Meeting in the event that
First Ozaukee's management should determine in its sole discretion, at
the time of the Special Meeting, that such adjournment is in the best
interest of First Ozaukee and its shareholders, which would include
adjourning the Special Meeting to enable management to solicit
additional proxies which may be necessary to ensure approval of the
Merger Agreement and the Plan of Merger.
The Board of Directors of First Ozaukee has determined that the
Merger is fair to, and in the best interest of, First Ozaukee and its
shareholders and has approved the Merger Agreement, including the Plan
of Merger. The Board unanimously recommends that you vote "FOR" the
approval and adoption of the Merger Agreement, including the Plan of
Merger. Robert W. Baird & Co. Incorporated, First Ozaukee's financial
advisor in connection with the Merger, has rendered a written opinion
to First Ozaukee's Board that the consideration to be received by
First Ozaukee's shareholders in the Merger is fair, from a financial
point of view, to such holders.
The Notice of Special Meeting of Shareholders and Proxy Statement
which follow describe the Merger in greater detail and provide
specific information concerning the Special Meeting. Please read
these materials carefully.
<PAGE> 3
IT IS VERY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE
SPECIAL MEETING, REGARDLESS OF WHETHER YOU PLAN TO ATTEND IN PERSON.
THE AFFIRMATIVE VOTE OF A MAJORITY OF ALL OF THE OUTSTANDING SHARES OF
FIRST OZAUKEE COMMON STOCK IS REQUIRED TO APPROVE AND ADOPT THE MERGER
AGREEMENT, INCLUDING THE PLAN OF MERGER. CONSEQUENTLY, A FAILURE TO
VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL.
ACCORDINGLY, PLEASE TAKE TIME TO CONSIDER AND VOTE UPON THIS
SIGNIFICANT MATTER.
PLEASE MARK, SIGN AND DATE EACH PROXY CARD YOU RECEIVE AND RETURN
IT PROMPTLY. This will not prevent you from voting in person at the
Special Meeting, but will assure that your vote is counted if you are
unable to attend. YOU SHOULD NOT SEND IN CERTIFICATES FOR YOUR SHARES
OF FIRST OZAUKEE COMMON STOCK AT THIS TIME. On behalf of the Board of
Directors, we urge you to vote for approval of the Merger Agreement
and the Plan of Merger. Your continued support and interest in First
Ozaukee are greatly appreciated.
Sincerely,
Russell S. Jones
President and Chief Executive Officer
<PAGE> 4
FIRST OZAUKEE CAPITAL CORP.
W61 N526 Washington Avenue
Cedarburg, Wisconsin 53012
______________________________________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 6, 1997
______________________________________________________
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
First Ozaukee Capital Corp. ("First Ozaukee") will be held on
Wednesday, August 6, 1997, at 10:00 a.m., at the Cedarburg Cultural
Center, W62 N546 Washington Avenue, Cedarburg, Wisconsin, for the following
purposes, which are more completely set forth in the accompanying
Proxy Statement:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Reorganization, dated as of April 25, 1997
(the "Merger Agreement"), between Central Illinois Bancorp, Inc.,
an Illinois corporation ("CIB"), and First Ozaukee, and a related
Plan of Merger, dated as of July 8, 1997 (the "Plan of
Merger"), between CIB Acquisition Corporation, a Wisconsin
corporation and wholly owned subsidiary of CIB ("Acquisition
Corp."), and First Ozaukee. As more fully described in the Proxy
Statement, pursuant to the Merger Agreement and the Plan of
Merger, Acquisition Corp. will merge with and into First Ozaukee
(the "Merger") with First Ozaukee being the surviving
corporation, and First Ozaukee will thereby become a wholly owned
subsidiary of CIB. In the Merger, each outstanding share of
common stock, par value $1.00 per share, of First Ozaukee
(excluding shares held by any First Ozaukee shareholder who
perfects dissenters' rights, shares held by First Ozaukee in
treasury and shares held by CIB) will be converted into $15.10 in
cash, subject to adjustment as more fully described in the Proxy
Statement.
2. To consider and vote upon a proposal to adjourn the Special
Meeting in the event that First Ozaukee's management should
determine in its sole discretion, at the time of the Special
Meeting, that such adjournment is in the best interest of First
Ozaukee and its shareholders, which would include adjourning the
Special Meeting to enable management to solicit additional
proxies which may be necessary to ensure approval of the Merger
Agreement and the Plan of Merger.
Shareholders of record at the close of business on June 30,
1997, are entitled to notice of and to vote at the Special Meeting and
any adjournment or postponement thereof. A list of shareholders
entitled to vote at the Special Meeting will be available for
inspection at the Special Meeting and at W61 N526 Washington Avenue,
Cedarburg, Wisconsin, for a period of ten days prior to the Special
Meeting.
Any shareholder entitled to vote at the Special Meeting shall
have the right to dissent from the Merger and to receive payment of
the fair value of the shares of First Ozaukee Common Stock held of
<PAGE> 5
record by such shareholder upon compliance with the provisions of
Sections 180.1301 to 180.1331 of the Wisconsin Business Corporation
Law, the full text of which is included as Appendix D to the Proxy
Statement, which is attached to this Notice of Special Meeting. For a
summary of the dissenters' rights of First Ozaukee shareholders, see
"Dissenters' Rights" in the Proxy Statement.
By Order of the Board of Directors,
Mary E. Lammers
Secretary
<PAGE> 6
FIRST OZAUKEE CAPITAL CORP.
W61 N526 Washington Avenue
Cedarburg, Wisconsin 53012
(414) 377-0750
_________________________________
PROXY STATEMENT
_________________________________
This Proxy Statement is being furnished to holders of shares of
common stock, $1.00 par value per share (the "First Ozaukee Common
Stock"), of First Ozaukee Capital Corp., a Wisconsin corporation
("First Ozaukee"), in connection with the solicitation of proxies by
the First Ozaukee Board of Directors (the "First Ozaukee Board") for
use at a Special Meeting of First Ozaukee shareholders to be held on
Wednesday, August 6, 1997, at 10:00 a.m., at the Cedarburg Cultural
Center, W62 N546 Washington Avenue, Cedarburg, Wisconsin, and at any
adjournment or postponement thereof (the "Special Meeting").
At the Special Meeting, holders of record of First Ozaukee Common
Stock as of the close of business on June 30, 1997 will consider and
vote upon a proposal to approve and adopt an Agreement and Plan of
Reorganization, dated as of April 25, 1997 (the "Merger Agreement"),
between Central Illinois Bancorp, Inc., an Illinois corporation ("CIB"),
and First Ozaukee, a copy of which is attached to this Proxy Statement
as Appendix A, and a related Plan of Merger, dated as of July 8, 1997
(the "Plan of Merger"), between CIB Acquisition Corporation, a Wisconsin
corporation and wholly owned subsidiary of CIB ("Acquisition Corp."),
and First Ozaukee, a copy of which is attached to this Proxy Statement
as Appendix B. Hereinafter, references to the Merger Agreement shall
be deemed to include the Plan of Merger. In addition, holders of
record of First Ozaukee Common Stock will consider and vote upon a
proposal to adjourn the Special Meeting in the event that First
Ozaukee's management should determine in its sole discretion, at the
time of the Special Meeting, that such adjournment is in the best
interest of First Ozaukee and its shareholders, which would include
adjourning the Special Meeting to enable management to solicit
additional proxies which may be necessary to ensure approval of the
Merger Agreement.
As more fully described herein, pursuant to the Merger Agreement,
Acquisition Corp. will merge with and into First Ozaukee (the
"Merger") with First Ozaukee being the surviving corporation, and
First Ozaukee will thereby become a wholly owned subsidiary of CIB.
In the Merger, each outstanding share of First Ozaukee Common Stock
(excluding shares held by any First Ozaukee shareholder who perfects
dissenters' rights, shares held by First Ozaukee in treasury and
shares held by CIB) will be converted into $15.10 in cash, subject to
adjustment (the "Merger Price"). The bid and asked prices per share
of the First Ozaukee Common Stock on April 24, 1997, the day prior to
the announcement of the Merger, were $12 and $12 3/4, respectively.
In addition, each holder of a stock option ("Stock Option" or "Stock
Options") under the First Ozaukee Capital Corp. 1995 Stock Option Plan
(the "Option Plan") will receive a cash payment (net of any tax
withholding requirements) equal to the product of (i) the number of
shares of First Ozaukee Common Stock subject to such Stock Option
multiplied by (ii) the excess, if any, of the Merger Price minus the
<PAGE> 7
exercise price per share of such Stock Option. After receipt of such
cash payment by holders of Stock Options, such Stock Options will be
no longer exercisable and will be deemed canceled.
THE FIRST OZAUKEE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
This Proxy Statement, the accompanying Notice of Special Meeting
and the accompanying Proxy Card are first being mailed to First
Ozaukee shareholders of record on or about July 9, 1997.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROXY STATEMENT AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST OZAUKEE. THIS PROXY
STATEMENT DOES NOT CONSTITUTE A SOLICITATION BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. THE
DELIVERY OF THIS DOCUMENT SHALL NOT UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST
OZAUKEE SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
First Ozaukee is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC").
Copies of such reports, proxy statements and other information can be
obtained, upon payment of prescribed fees, from the SEC at the Public
Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549. In addition, such reports, proxy statements and other
information can be inspected and copied at the SEC's facilities
referred to above and at the SEC's Regional Offices at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison, Suite 1400, Chicago, Illinois 60661. The SEC
maintains a web site on the World Wide Web that contains reports,
proxy statements and other information regarding issuers that file
electronically with the SEC. The address of such site is
"http://www.sec.gov."
<PAGE> 8
TABLE OF CONTENTS
Page
----
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . 10
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . 10
REASONS FOR THE MERGER . . . . . . . . . . . . . . . . . . . 11
OPINION OF FINANCIAL ADVISOR . . . . . . . . . . . . . . . . 11
INTERESTS OF CERTAIN PERSONS IN THE MERGER . . . . . . . . . 12
REGULATORY APPROVALS . . . . . . . . . . . . . . . . . . . . 13
ACCOUNTING TREATMENT . . . . . . . . . . . . . . . . . . . . 14
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . 14
DISSENTERS' RIGHTS . . . . . . . . . . . . . . . . . . . . . 14
FIRST OZAUKEE COMMON STOCK DATA . . . . . . . . . . . . . . 14
THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CENTRAL ILLINOIS BANCORP, INC. . . . . . . . . . . . . . . . 16
CIB ACQUISITION CORPORATION . . . . . . . . . . . . . . . . 16
FIRST OZAUKEE CAPITAL CORP. . . . . . . . . . . . . . . . . 16
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . 17
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING . . . . . . 17
RECORD DATE AND VOTING . . . . . . . . . . . . . . . . . . . 17
VOTE REQUIRED . . . . . . . . . . . . . . . . . . . . . . . 18
REVOCABILITY OF PROXIES . . . . . . . . . . . . . . . . . . 19
SOLICITATION OF PROXIES . . . . . . . . . . . . . . . . . . 19
BENEFICIAL STOCK OWNERSHIP . . . . . . . . . . . . . . . . . . . 19
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . 21
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 21
BACKGROUND OF THE MERGER . . . . . . . . . . . . . . . . . . 24
REASONS OF THE BOARD OF DIRECTORS OF FIRST OZAUKEE FOR
APPROVING THE MERGER . . . . . . . . . . . . . . . . . 26
OPINION OF FINANCIAL ADVISOR . . . . . . . . . . . . . . . . 27
INTERESTS OF CERTAIN PERSONS IN THE MERGER . . . . . . . . . 32
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . 35
EXCHANGE PROCEDURES AND PAYING AGENT . . . . . . . . . . . . 35
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 36
CONDUCT OF BUSINESS PENDING THE MERGER . . . . . . . . . . . 36
OTHER OFFERS; RIGHT OF FIRST REFUSAL . . . . . . . . . . . . 38
CONDITIONS TO CONSUMMATION OF THE MERGER . . . . . . . . . . 39
AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . 40
TERMINATION AND TERMINATION FEES . . . . . . . . . . . . . . 40
REGULATORY APPROVALS . . . . . . . . . . . . . . . . . . . . 42
ACCOUNTING TREATMENT . . . . . . . . . . . . . . . . . . . . 42
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . 42
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . 42
DISSENTERS' RIGHTS . . . . . . . . . . . . . . . . . . . . . . . 43
ADJOURNMENT OF SPECIAL MEETING . . . . . . . . . . . . . . . . . 47
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . 47
MARKET AREA AND COMPETITION . . . . . . . . . . . . . . . . 48
<PAGE> 9
LENDING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . 49
DELINQUENCIES, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS . 61
INVESTMENT ACTIVITIES . . . . . . . . . . . . . . . . . . . 67
SOURCES OF FUNDS . . . . . . . . . . . . . . . . . . . . . . 73
FEDERAL TAXATION . . . . . . . . . . . . . . . . . . . . . . 76
REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . 78
RESTRICTIONS UPON STATE-CHARTERED BANKS . . . . . . . . . . 84
HOLDING COMPANY REGULATION . . . . . . . . . . . . . . . . . 92
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . 95
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 95
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 96
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . 97
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . 97
MANAGEMENT STRATEGY . . . . . . . . . . . . . . . . . . . . 97
LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . . . . . . . 98
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES . . 100
RATE/VOLUME ANALYSIS . . . . . . . . . . . . . . . . . . . . 100
FINANCIAL CONDITION AT MARCH 31, 1997 . . . . . . . . . . . 101
COMPARISON OF RESULTS OF OPERATIONS OF THREE MONTHS ENDED
MARCH 31, 1997 TO THREE MONTHS ENDED MARCH 31, 1996 . . 101
COMPARISON OF RESULTS OF OPERATIONS OF THE YEAR ENDED
SEPTEMBER 30, 1996 TO THE YEAR ENDED SEPTEMBER 30,
1995 . . . . . . . . . . . . . . . . . . . . . . . . . 103
COMPARISON OF RESULTS OF OPERATION OF THE YEAR ENDED
SEPTEMBER 30, 1995 TO THE YEAR ENDED SEPTEMBER 30,
1994 . . . . . . . . . . . . . . . . . . . . . . . . . 104
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 106
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . 106
SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . 106
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 107
APPENDICES
----------
Appendix A Merger Agreement
Appendix B Plan of Merger
Appendix C Opinion of Financial Advisor
Appendix D Dissenters' Rights
<PAGE> 10
SUMMARY
The following is a summary of the material features of the
Merger. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained elsewhere in this
Proxy Statement or in the accompanying appendices. SHAREHOLDERS ARE
URGED TO READ THIS PROXY STATEMENT AND THE APPENDICES HERETO IN THEIR
ENTIRETY.
THE PARTIES
CENTRAL ILLINOIS BANCORP, INC. CIB, an Illinois corporation, was
organized in 1985 and is a registered bank holding company under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). CIB
owns Central Illinois Bank, Champaign, Illinois, Central Illinois
Bank, MC, Normal, Illinois and CIB Bank, Hillside, Illinois (the "CIB
Subsidiary Banks") as well as a mortgage company and a data processing
company. The CIB Subsidiary Banks conduct a general banking business
embracing most of the services, both commercial and consumer, which
banks may lawfully provide. The CIB Subsidiary Banks operate from 19
locations in the state of Illinois. CIB's principal executive offices
are located at 2913 West Kirby Avenue, Champaign, Illinois 61821
(telephone number (217) 355-0900).
CIB ACQUISITION CORPORATION. Acquisition Corp., a wholly owned
subsidiary of CIB, is a Wisconsin corporation with its principal
executive offices located in Champaign, Illinois. Acquisition Corp.
was formed for the sole purpose of facilitating the Merger. Pursuant
to the terms of the Merger Agreement Acquisition Corp. will merge with
and into First Ozaukee.
FIRST OZAUKEE CAPITAL CORP. First Ozaukee was incorporated under
the Wisconsin Business Corporation Law ("WBCL") in February 1994.
First Ozaukee is currently conducting business as a one-bank holding
company and its principal business is the business of First Ozaukee
Savings Bank (the "Bank"). The Bank was originally chartered as a
mutual savings and loan association by the State of Wisconsin in 1923.
On October 21, 1994, the Bank converted from the mutual to stock form
of organization and became a wholly owned subsidiary of First Ozaukee.
First Ozaukee's principal executive offices are located at W61 N526
Washington Avenue, Cedarburg, Wisconsin 53012 (telephone number (414)
377-0750). For a discussion of the business conducted by First
Ozaukee and the Bank, see "BUSINESS."
THE SPECIAL MEETING
The Special Meeting is scheduled to be held at the Cedarburg
Cultural Center, W62 N546 Washington Avenue, Cedarburg, Wisconsin, on
Wednesday, August 6, 1997 at 10:00 a.m. At the Special Meeting, holders
of First Ozaukee Common Stock will consider and vote upon the approval
and adoption of the Merger Agreement, including the related Plan of
Merger. A copy of the Merger Agreement is attached to this Proxy
Statement as Appendix A, and a copy of the Plan of Merger is attached
to this Proxy Statement as Appendix B. In addition to voting upon the
Merger Agreement, the First Ozaukee shareholders are being asked to
consider and vote upon a proposal to adjourn the Special Meeting in
the event that First Ozaukee's management should determine in its sole
discretion, at the time of the Special Meeting, that such
<PAGE> 11
adjournment is in the best interests of First Ozaukee and its
shareholders. The First Ozaukee Board has fixed the close of business
on June 30, 1997 as the record date for the determination of the holders
of First Ozaukee Common Stock entitled to receive notice of, and to vote
at, the Special Meeting. Only holders of record of First Ozaukee Common
Stock on such date will be entitled to vote at the Special Meeting and
at any postponement or adjournment thereof. The affirmative vote of a
majority of the outstanding shares of First Ozaukee Common Stock is required
in order to approve and adopt the Merger Agreement and the related Plan of
Merger.
THE MERGER
The Merger Agreement contemplates that CIB will acquire First
Ozaukee through the merger of Acquisition Corp. into First Ozaukee,
with First Ozaukee being the surviving corporation. As a result of
the Merger, First Ozaukee will become a wholly owned subsidiary of
CIB, and each share of First Ozaukee Common Stock outstanding
immediately prior to the Effective Time (as defined herein), other
than shares as to which dissenters' rights have been duly asserted and
perfected in accordance with Wisconsin law, shares held by First
Ozaukee in treasury and shares held by CIB, will be converted into
the right to receive the Merger Price of $15.10 in cash, subject to
adjustment. For a complete discussion of the potential adjustments to
the Merger Price, see "THE MERGER--The Merger." In addition, at the
Effective Time each holder of a Stock Option will receive a cash
payment, in full satisfaction of such Stock Option, equal to the
product of (i) the number of shares of First Ozaukee Common Stock
subject to such Stock Option multiplied by (ii) the excess, if any, of
the Merger Price minus the exercise price per share of such Stock
Option.
REASONS FOR THE MERGER
The First Ozaukee Board has unanimously approved the Merger
Agreement and has determined that the Merger is fair to, and in the
best interests of, First Ozaukee and its shareholders. The First
Ozaukee Board therefore unanimously recommends that holders of First
Ozaukee Common Stock vote "FOR" adoption and approval of the Merger
Agreement. In reaching its determination that the Merger Agreement is
fair to, and in the best interests of, First Ozaukee and holders of
First Ozaukee Common Stock, the First Ozaukee Board considered a
number of factors, both from a short-term and a long-term perspective.
For a discussion of the factors considered by the First Ozaukee Board,
see "THE MERGER--Reasons for the Merger."
OPINION OF FINANCIAL ADVISOR
Robert W. Baird & Co. Incorporated ("Baird") has delivered to the
Board of Directors of First Ozaukee its written opinion, dated July
9, 1997, to the effect that, as of such date, the Merger Price is
fair, from a financial point of view, to the holders of First Ozaukee
Common Stock (other than CIB and its affiliates). The full text of
the opinion of Baird, which sets forth the assumptions made,
procedures followed, matters considered and limitations on the review
undertaken, is attached as Appendix C hereto. HOLDERS OF FIRST
<PAGE> 12
OZAUKEE COMMON STOCK ARE URGED TO READ SUCH OPINION CAREFULLY AND IN
ITS ENTIRETY. See "The Merger--Opinion of Financial Advisor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of First Ozaukee's management, the Bank's
management and the Board of Directors of the Bank and the First
Ozaukee Board may be deemed to have interests in the Merger in
addition to their interests, if any, as holders of First Ozaukee
Common Stock. The First Ozaukee Board was aware of these factors and
considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.
CIB has agreed, from and after the Effective Time, to provide
indemnification in certain instances to each present and former
director and officer of First Ozaukee and the Bank. In addition,
First Ozaukee will purchase prior to the Effective Time a directors'
and officers' liability insurance policy for a period of three years
after the Effective Time to cover present and former directors and
officers of First Ozaukee and the Bank. See "THE MERGER--Interests of
Certain Persons in the Merger--Indemnification."
Upon completion of the Merger, Russell S. Jones's employment will
be terminated. First Ozaukee will pay Mr. Jones a severance payment
of $185,968. The Merger Agreement provides that if CIB terminates any
employee of First Ozaukee (other than Mr. Jones or Mary E. Lammers,
whose severance benefits will be provided for in written consulting
and employment agreements, respectively), within 12 months after the
Effective Time, and for a reason other than for cause, CIB will
provide severance payments to such employee as follows: (i) non-
officers would receive one-half month's salary per full year of
service not to exceed three months current salary; and (ii) officers
would receive one month's salary per full year of service not to
exceed six months current salary. In computing such severance
payments for regular part-time employees, their per month compensation
will be based on one-twelfth of the actual number of hours worked by
any such employee during the fiscal year ended September 30, 1996.
See "THE MERGER--Interests of Certain Persons in the Merger--Severance
Pay."
Prior to the Effective Time, First Ozaukee will terminate the
First Ozaukee Post-Retirement Welfare Benefit Program. Mr. Jones is
the only participant in such program who has vested rights under the
program. Pursuant to the Merger Agreement, CIB has agreed to pay Mr.
Jones $315.00 per month for 48 consecutive months after the Effective
Time and $150.00 per month after the Effective Time until Mr. Jones
obtains age 80 as reimbursement for the purchase of health insurance
coverage that otherwise would have been provided under the program
being terminated.
CIB Bank will offer Mr. Jones and Ms. Lammers a consulting and
employment agreement, respectively, which will supersede and replace
the employment agreements Mr. Jones and Ms. Lammers currently have
with the Bank. Mr. Jones's consulting agreement will be for a term of
two years. He will be paid $168,000 for consulting services during
such two year period. Ms. Lammers's agreement provides for a one-year
term commencing on the Effective Time, and her base annual salary will
<PAGE> 13
be no less than $45,250. See "THE MERGER--Interests of Certain
Persons in the Merger--Employment Agreements."
As of the Record Date, directors and executive officers of First
Ozaukee and the Bank beneficially owned an aggregate of 113,168 shares
of First Ozaukee Common Stock (exclusive of shares which could be
acquired upon exercise of Stock Options and unvested shares under
First Ozaukee's Incentive Plan (the "Incentive Plan")). Assuming the
Merger Price is $15.10 per share, these directors and executive
officers will receive a total of approximately $1,708,836.80. See
"THE MERGER--Interests of Certain Persons in the Merger--Share
Ownership."
Certain members of the Board of Directors and management hold
Stock Options to purchase shares of First Ozaukee Common Stock which
will be adjusted at the Effective Time so as to entitle the holder
thereof to receive an amount in cash in lieu of the shares. See "THE
MERGER--Interests of Certain Persons in the Merger--Stock Options."
Pursuant to the terms of the Merger Agreement, all awards of
unvested First Ozaukee Common Stock under the Incentive Plan granted
prior to the Effective Time will be considered shares of outstanding
First Ozaukee Common Stock as of the Effective Time and will entitle
grantees thereof, to receive the Merger Price in exchange for such
awarded shares. See "THE MERGER--Interests of Certain Persons in the
Merger--Accelerated Vesting Under the Incentive Plan."
Assuming a Merger Price of $15.10 per share, the aggregate cash
benefit of the cancellation of Stock Options and accelerated vesting
of the unvested Incentive Plan awards for the following directors and
executive officers would be as follows:
Director and/or Cash Consideration
Executive Officer to be Received
----------------- ------------------
Russell S. Jones $202,571.12
Mary E. Lammers $ 15,190.60
Frank M. Kennedy $ 16,047.78
George P. Kraemer $ 16,047.78
Richard E. Peterson $ 16,047.78
Harry J. Sanders $ 16,047.78
Total: $281,952.84
REGULATORY APPROVALS
The Merger cannot proceed in the absence of certain regulatory
approvals, including the approval of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") under the BHC Act
and the approval of the Wisconsin Department of Financial Institutions
(the "Wisconsin Department"). The necessary applications were filed
with the Federal Reserve Board and the Wisconsin Department of
Financial Institutions on May 23, 1997. See "THE MERGER--Regulatory
Approvals."
<PAGE> 14
ACCOUNTING TREATMENT
The Merger will be accounted for by CIB under the purchase method
of accounting. Under this method of accounting, the purchase price
will be allocated to assets acquired and liabilities assumed based on
their estimated fair values at the Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The cancellation of shares of First Ozaukee Common Stock in
exchange for cash pursuant to the Merger will be a taxable transaction
to holders of First Ozaukee Common Stock for federal income tax
purposes and may also be a taxable transaction under applicable state,
local and other tax laws. Holders of First Ozaukee Common Stock are
encouraged to consult their tax advisors concerning the federal income
tax consequences of the Merger in their particular circumstances, as
well as any tax consequences arising under foreign, state or local
law. See "THE MERGER--Certain Federal Income Tax Consequences."
DISSENTERS' RIGHTS
Under the provisions of Sections 180.1301 to 180.1331 of the
WBCL, any First Ozaukee shareholder who does not wish to accept the
cash consideration under the terms of the Merger Agreement has the
right to demand and obtain "fair value" in cash of his or her shares
of First Ozaukee Common Stock. Shareholders of First Ozaukee who wish
to exercise their dissenters' rights must comply with all of the
conditions set forth in Sections 180.1301 to 180.1331 of the WBCL, the
text of which is set forth in Appendix D hereto. A First Ozaukee
shareholder may assert his or her dissenter's rights only if (i) the
First Ozaukee shareholder delivers to First Ozaukee, before the vote
is taken at the Special Meeting on the Merger Agreement, a written
notice of his or her intent to demand payment for his or her shares in
the event the Merger is consummated and (ii) the First Ozaukee
shareholder does not vote in favor of the Merger Agreement. If a
First Ozaukee shareholder votes in favor of the Merger Agreement, he
or she will not be entitled to dissent and demand payment for his or
her shares. If a First Ozaukee shareholder submits a properly
executed proxy with no instructions indicated thereon, such proxy will
be voted "For" the proposal to approve the Merger Agreement and the
First Ozaukee shareholder will not be entitled to dissent and demand
payment for his or her shares. Merely voting against the Merger
Agreement will not satisfy the requirement that a written notice
declaring a shareholder's intent to demand payment be delivered before
the vote is taken at the Special Meeting. A shareholder's written
notice setting forth the intent to demand payment should be sent to
First Ozaukee Capital Corp., W61 N526 Washington Avenue, Cedarburg,
Wisconsin 53012, Attention: Mary E. Lammers, Secretary. The
proceedings resulting from such a demand may result in a determination
of value less than or greater than the cash consideration to be
received under the Merger Agreement. See "Dissenters' Rights" and
Appendix D for a more complete discussion of dissenters' rights.
FIRST OZAUKEE COMMON STOCK DATA
Shares of First Ozaukee Common Stock are traded infrequently in
the over-the-counter market through the OTC Bulletin Board under the
symbol "FOZK." The bid and asked prices per share of the First
<PAGE> 15
Ozaukee Common Stock on April 24, 1997, the day prior to the
announcement of the Merger, were $12 and $12 3/4, respectively.
The book value per share of First Ozaukee Common Stock at
September 30, 1996 was $13.05 and at March 31, 1997 was $13.17. The
net income (loss) per share of First Ozaukee Common Stock for the year
ended September 30, 1996 was ($0.40) and for the six months ended
March 31, 1997 was $0.05. First Ozaukee did not declare or pay any
cash dividends during the year ended September 30, 1996 and the six
months ended March 31, 1997.
As of June 30, 1997, First Ozaukee had approximately 160
shareholders of record (which includes nominees for beneficial owners
holding shares in "street name").
<PAGE> 16
THE PARTIES
CENTRAL ILLINOIS BANCORP, INC.
CIB, an Illinois corporation, was organized in 1985 and is a
registered bank holding company under the BHC Act. CIB owns Central
Illinois Bank, Champaign, Illinois, Central Illinois Bank, MC, Normal,
Illinois and CIB Bank, Hillside, Illinois (the "CIB Subsidiary Banks")
as well as a mortgage company and a data processing company. The CIB
Subsidiary Banks operate 19 locations in the State of Illinois. The
CIB Subsidiary Banks conduct a general banking business embracing most
of the services, both commercial and consumer, which banks may
lawfully provide, including the following principal services: the
acceptance of deposits for demand, savings and time accounts and the
servicing of such accounts; commercial, real estate and consumer
lending; safe deposit operations; and an extensive variety of
additional services tailored to the needs of individual customers. As
of March 31, 1997, CIB had, on a consolidated basis, total assets of
$606.3 million, total deposits of $524.8 million and shareholders'
equity of $64.3 million.
CIB's principal executive offices are located at 2913 West Kirby
Avenue, Champaign, Illinois 61821 (telephone number (217) 355-0900).
CIB ACQUISITION CORPORATION
Acquisition Corp., a wholly owned subsidiary of CIB, is a
Wisconsin corporation with its principal executive offices located in
Champaign, Illinois. Acquisition Corp. was formed for the sole
purpose of facilitating the Merger. Pursuant to the terms of the
Merger Agreement, at the Effective Time (as defined below),
Acquisition Corp. will merge with and into First Ozaukee.
FIRST OZAUKEE CAPITAL CORP.
First Ozaukee was incorporated under Wisconsin law in February
1994. First Ozaukee is currently conducting business as a one-bank
holding company and its sole business is the business of the Bank.
The principal assets of First Ozaukee are its investment in the Bank's
common stock and the net proceeds from the sale of First Ozaukee
Common Stock in connection with the conversion of the Bank from the
mutual to the stock form of organization on October 21, 1994, and a
loan to the First Ozaukee Savings Bank Employee Stock Ownership Plan
("ESOP") made in connection with the conversion. First Ozaukee's
principal revenue source is interest and dividends on its investments.
First Ozaukee's principal business is the business of the Bank. At
March 31, 1997, First Ozaukee had, on a consolidated basis, total
assets of approximately $35.0 million, total deposits of $26.3 million
and shareholders' equity of $8.3 million. Unless the context requires
otherwise, references herein to First Ozaukee shall be deemed to
include the Bank.
The Bank is a community oriented financial institution which
emphasizes retail financial services to individuals and consumers
within its market areas. The Bank's principal business is attracting
retail deposits from the general public and investing those deposits,
together with funds generated from other operations, primarily to
originate residential mortgage loans within its primary market areas
<PAGE> 17
and to invest in mortgage-backed securities and investment securities.
The principal lending is on one-to four-family owner-occupied homes,
including ARM loans, and to a lesser extent, the Bank also originates
home equity lines of credit, multi-family, other consumer,
commercial/non-residential and residential construction loans. The
Bank invests a significant portion of its assets in investment
securities and mortgage-backed securities, including U. S. Government
and federal agency securities, short-term liquid assets and other
marketable securities. The Bank's revenues are derived principally
from interest on its mortgage loan portfolio, interest on mortgage-
backed securities and interest and dividends on its investment
securities. The Bank's principal sources of funds are received from
deposits, repayments on loans and mortgage-backed securities.
First Ozaukee's principal executive offices are located at W61
N526 Washington Avenue, Cedarburg, Wisconsin 53012 (telephone number
(414) 377-0750).
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Each copy of this Proxy Statement mailed to holders of First
Ozaukee Common Stock is accompanied by a Proxy Card furnished in
connection with the solicitation of proxies by the First Ozaukee Board
for use at the Special Meeting. The Special Meeting is scheduled to
be held at the Cedarburg Cultural Center, W62 N546 Washington Avenue,
Cedarburg, Wisconsin, on Wednesday, August 6, 1997 at 10:00 a.m. At the
Special Meeting, holders of First Ozaukee Common Stock will consider
and vote upon the approval and adoption of the Merger Agreement,
including the related Plan of Merger. A copy of the Merger Agreement
is attached to this Proxy Statement as Appendix A, and a copy of the
Plan of Merger is attached to this Proxy Statement as Appendix B. In
addition to voting upon the Merger Agreement, the First Ozaukee
shareholders are being asked to consider and vote upon a proposal to
adjourn the Special Meeting in the event that First Ozaukee's
management should determine in its sole discretion, at the time of the
Special Meeting, that such adjournment is in the best interests of
First Ozaukee and its shareholders.
HOLDERS OF FIRST OZAUKEE COMMON STOCK ARE REQUESTED TO PROMPTLY
SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD TO FIRST OZAUKEE IN
THE ENCLOSED POSTAGE-PAID, ADDRESSED ENVELOPE. FAILURE TO RETURN A
PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL MEETING WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT.
RECORD DATE AND VOTING
The First Ozaukee Board has fixed the close of business on
June 30, 1997 as the record date (the "Record Date") for the
determination of the holders of First Ozaukee Common Stock entitled to
receive notice of and to vote at the Special Meeting. Only holders of
record of First Ozaukee Common Stock on the Record Date will be
entitled to vote at the Special Meeting and at any postponement or
adjournment thereof. As of the close of business on the Record Date,
there were 627,477 shares of First Ozaukee Common Stock outstanding.
<PAGE> 18
Each holder of First Ozaukee Common Stock on the Record Date will
be entitled to one vote for each share held of record upon each matter
properly submitted at the Special Meeting and at any postponement or
adjournment thereof. The presence, in person or by proxy, of the
holders of at least a majority of the total number of outstanding
shares of First Ozaukee Common Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum at the Special Meeting.
As provided in First Ozaukee's Articles of Incorporation, record
holders of First Ozaukee Common Stock who beneficially own in excess
of 10% of the outstanding shares of First Ozaukee Common Stock (the
"10% Limit") are not entitled to any vote in respect of the shares
held in excess of the 10% Limit. A person or entity is deemed to
beneficially own shares owned by an affiliate of, as well as such
persons acting in concert with, such person or entity. First
Ozaukee's Articles of Incorporation authorize the Board (i) to make
all determinations necessary to implement and apply the 10% Limit,
including determining whether persons or entities are acting in
concert, and (ii) to demand that any person who is reasonably believed
to beneficially own stock in excess of the 10% Limit supply
information to First Ozaukee to enable the Board to implement and
apply the 10% Limit.
HOLDERS OF FIRST OZAUKEE COMMON STOCK SHOULD NOT FORWARD ANY
STOCK CERTIFICATES WITH THEIR PROXY CARDS. Instructions regarding the
exchange of stock certificates for the Merger Consideration will be
furnished at a later date. See "THE MERGER--Exchange Procedures and
Paying Agent."
VOTE REQUIRED
The affirmative vote of a majority of the shares of First Ozaukee
Common Stock outstanding on the Record Date is required in order to
approve and adopt the Merger Agreement. BECAUSE APPROVAL OF THE
MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE
TOTAL OUTSTANDING SHARES OF FIRST OZAUKEE COMMON STOCK, AND NOT A
MAJORITY OF THE SHARES ACTUALLY VOTED, THE FAILURE TO SUBMIT A PROXY
CARD OR TO VOTE IN PERSON AT THE SPECIAL MEETING WILL HAVE THE SAME
EFFECT AS A VOTE "AGAINST" THE MERGER AGREEMENT. A properly executed
proxy marked "ABSTAIN," although counted for purposes of determining
whether there is a quorum at the Special Meeting, will not be voted
and will have the same effect as a vote "AGAINST" the Merger
Agreement. Broker non-votes (referring to where a broker or other
nominee physically indicates on the proxy that it does not have
discretionary authority as to certain shares of First Ozaukee Common
Stock to vote on a particular matter) will not be counted for purposes
of determining whether there is a quorum and will also have the same
effect as a vote "AGAINST" the Merger Agreement.
Shares of First Ozaukee Common Stock represented by properly
executed proxies will be voted in accordance with the instructions
indicated on the proxies. IF NO INSTRUCTIONS ARE INDICATED, PROPERLY
EXECUTED PROXIES WILL BE VOTED "FOR" THE PROPOSAL TO APPROVE THE
MERGER AGREEMENT AND "FOR" THE PROPOSAL TO ADJOURN THE SPECIAL MEETING
IN THE DISCRETION OF FIRST OZAUKEE'S MANAGEMENT AND OTHERWISE IN THE
DISCRETION OF PROXY HOLDERS AS TO ANY OTHER MATTER WHICH MAY PROPERLY
COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENT OR POSTPONEMENT
THEREOF. The grant of a proxy does not preclude a First Ozaukee
<PAGE> 19
shareholder from subsequently revoking such proxy and voting in person
at the Special Meeting.
If a quorum is not obtained, or if fewer shares of First Ozaukee
Common Stock are voted in favor of approval of the Merger Agreement
than the number required for approval, it is expected that the Special
Meeting will be postponed or adjourned for the purpose of allowing
additional time for obtaining additional proxies or votes, and, at any
subsequent reconvening of the Special Meeting, all proxies will be
voted in the same manner as such proxies would have been voted at the
original convening of the Special Meeting (except for any proxies
which have theretofore effectively been revoked or withdrawn).
No vote of CIB shareholders is required in connection with the
Merger Agreement.
The obligations of CIB and First Ozaukee to consummate the Merger
are subject, among other things, to the condition that the
shareholders of First Ozaukee approve and adopt the Merger Agreement.
REVOCABILITY OF PROXIES
The presence of a shareholder at the Special Meeting will not
automatically revoke such shareholder's proxy. However, a shareholder
may revoke a proxy at any time before its exercise by (i) delivering
to the Secretary of First Ozaukee a written notice of revocation at or
before the Special Meeting, (ii) delivering to the Secretary of First
Ozaukee at or before the Special Meeting a duly executed proxy bearing
a later date or (iii) attending the Special Meeting, giving oral
notice of revocation to the presiding officer of the meeting, and
voting in person. All written notices of revocation and other
communications with respect to the revocation of proxies should be
addressed to First Ozaukee Capital Corp., W61 N526 Washington Avenue,
Cedarburg, Wisconsin 53012, Attention: Mary E. Lammers, Secretary.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and
employees of First Ozaukee and the Bank may solicit proxies for the
Special Meeting from First Ozaukee shareholders personally or by
telephone or telegram without remuneration therefor other than the
compensation which such persons otherwise receive in their capacities
as directors, officers and employees. First Ozaukee will also provide
persons, firms, banks and corporations holding shares in their names
or in the names of nominees, which in either case are beneficially
owned by others, proxy materials for transmittal to such beneficial
owners and will reimburse such record owners for their reasonable
expenses in doing so. The cost of solicitation of proxies for the
Special Meeting will be borne by First Ozaukee.
BENEFICIAL STOCK OWNERSHIP
As of June 30, 1997, the directors and executive officers
of First Ozaukee beneficially owned, as a group, 153,376 shares of
First Ozaukee Common Stock (including 32,164 shares which could be
acquired within 60 days thereof upon the exercise of options)
representing approximately 23.3% of such shares outstanding. Such
directors and executive officers of First Ozaukee and the Bank intend
<PAGE> 20
to vote their issued and outstanding First Ozaukee shares "FOR"
approval and adoption of the Merger Agreement. As of the Record Date,
none of the directors or officers of First Ozaukee beneficially owned
any shares of CIB common stock. At June 11, 1997 CIB owned 16,000
shares of First Ozaukee Common Stock.
The following table sets forth information, as of June 30, 1997
as to First Ozaukee Common Stock beneficially owned by (i) each
director of First Ozaukee and certain executive officers of First
Ozaukee (all of whom are directors), and (ii) all directors and
officers of First Ozaukee as a group. No persons or entities are
known by management to beneficially own more than five percent of the
First Ozaukee Common Stock. Shares are deemed to be owned
beneficially by each person who has sole or shared power to vote or to
invest such shares, whether or not such person has any economic
interest in the shares. Except as otherwise indicated, shares are
owned with sole voting and investment power.
NAME AND ADDRESS OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
------------------- ------------------ ----------------
DIRECTORS:
Russell S. Jones 91,239 (1) 14.2% (7)
Frank M. Kennedy 14,021 (2) 2.2% (7)
George P. Kraemer 14,022 (3) 2.2% (7)
Richard E. Peterson 7,772 (4) 1.2% (7)
Harry J. Sanders 19,022 (5) 3.0% (7)
DIRECTORS AND 153,376 (6)
EXECUTIVE OFFICERS 23.3% (8)
OF FIRST OZAUKEE AS A
GROUP (7 PERSONS)
______________________
(1) Includes 1,454 shares allocated to Mr. Jones's account under the
ESOP, 16,076 shares which may be acquired by exercise of Stock
Options, 14,078 shares awarded and vested under the Incentive Plan
and 7,038 shares awarded and unvested under the Incentive Plan. Does
not include 12,500 shares held by Mr. Jones's spouse, as to which he
disclaims any voting or investment power.
(2) Includes 4,022 shares which may be acquired by exercise of Stock
Options, 8,338 shares held in Mr. Kennedy's individual retirement
account and 1,661 shares held by Mr. Kennedy's spouse in an individual
retirement account.
(3) Includes 4,022 shares which may be acquired by exercise of Stock
Options.
(4) Includes 4,022 shares which may be acquired by exercise of Stock
Options and 3,750 shares held jointly with Mr. Peterson's spouse.
(5) Includes 4,022 shares which may be acquired by exercise of Stock
Options, 10,000 shares held in Mr. Sanders's individual retirement
account and 5,000 shares held as co-trustee of the Harry J. and
Virginia M. Sanders Revocable Trust.
<PAGE> 21
(6) Includes 2,253 shares allocated under the ESOP, 32,164 shares
which may be acquired by exercise of Stock Options, 16,088 shares
awarded and vested under the Incentive Plan and 8,044 shares awarded
and unvested under the Incentive Plan.
(7) Percentage is calculated on a partially diluted basis, assuming
only the exercise of Stock Options by such individual which are
exercisable within 60 days.
(8) Percentage is calculated on a fully diluted basis, assuming the
exercise of all Stock Options by such individuals which are
exercisable within 60 days.
THE MERGER
GENERAL
The following information relates to matters contained in the
Merger Agreement, including the related Plan of Merger which are
incorporated herein by reference and attached hereto as Appendix A and
Appendix B, respectively. FIRST OZAUKEE SHAREHOLDERS ARE URGED TO
READ THE MERGER AGREEMENT AND THE PLAN OF MERGER IN THEIR ENTIRETY.
THE MERGER
MERGER PRICE. The Merger Agreement contemplates that CIB will
acquire First Ozaukee through the merger of Acquisition Corp. into
First Ozaukee, with First Ozaukee being the surviving corporation. As
a result of the Merger, First Ozaukee will become a wholly owned
subsidiary of CIB, and each share of First Ozaukee Common Stock
outstanding immediately prior to the Effective Time (as defined
below), other than shares as to which dissenters' rights have been
duly asserted and perfected in accordance with Wisconsin law, shares
held by First Ozaukee in treasury and shares held by CIB, will be
converted into the right to receive the Merger Price of $15.10 in
cash, subject to the potential adjustments described below. The
amount of the Merger Price was determined through arm's length
negotiations between First Ozaukee and CIB. After the Effective Time,
shareholders of First Ozaukee will no longer have an equity interest
in First Ozaukee.
POTENTIAL DECREASE TO MERGER PRICE. Pursuant to the Merger
Agreement, the shareholders' equity of First Ozaukee will be
determined as of the last business day of the month prior to the
Effective Time in accordance with generally accepted accounting
principles, except for the specific adjustments described below (the
"Base Capital").
If Base Capital is determined to be less than $8,113,000, the
Merger Price will be reduced (the "Reduced Merger Price") by an amount
equal to the quotient of (i) the remainder of (A) $8,113,000 less (B)
the Base Capital, divided by (ii) 687,811 (the number of outstanding
shares and awarded Stock Options of First Ozaukee Common Stock). If
the Reduced Merger Price is less than $15.05 per share, CIB in its
sole discretion may:
. use $15.05 as the Merger Price, or
<PAGE> 22
. propose to use the actual amount of the Reduced Merger
Price; thereby giving First Ozaukee the option of accepting
the Reduced Merger Price or terminating the Merger
Agreement.
For example, if the Reduced Merger Price is calculated to be
$15.00, CIB could agree to pay $15.05 per share or could propose to
pay $15.00 per share. However, if CIB proposes, in this example, to
pay $15.00, First Ozaukee would have the option of agreeing to the
$15.00 or terminating the Merger Agreement.
POTENTIAL ADJUSTMENTS TO BASE CAPITAL. CIB has retained A. G.
Edwards & Sons, Inc., Champaign, Illinois, at CIB's expense, to
calculate, as of the close of business on April 24, 1997 (the business
day prior to the date of the Merger Agreement) (the "Signing Value")
and as of the close of business on the business day prior to the
Effective Time (the "Closing Value"), the unrealized gain or loss on
all securities owned by First Ozaukee and designated as "Held to
Maturity." The Signing Value was calculated to be an unrealized loss
of $136,876.90. If the Closing Value is a greater unrealized loss,
then the Base Capital will be decreased by an amount equal to the
difference between (i) the Signing Value and (ii) the Closing Value.
No adjustment to Base Capital will be made if the Closing Value is
equal to the Signing Value or if the Closing Value is more positive
than the Signing Value by an amount equal to or less than $114,000.
As previously disclosed by First Ozaukee, the Bank has been named
by the Wisconsin Department of Natural Resources as a potentially
responsible party with respect to soil and groundwater contamination
beneath and adjacent to the Bank's Cedarburg home office (the
"Cedarburg Facility"). The Merger Agreement provides the Base Capital
will be reduced by the amount of Unreimbursable Expenses incurred or
estimated (by an environmental consultant retained by CIB and
reasonably acceptable to First Ozaukee) to be incurred by First
Ozaukee before and after closing, but not yet accrued on First
Ozaukee's books, relating to environmental remediation and liabilities
associated with the Cedarburg Facility. The term "Unreimbursable
Expenses" means all environmental remediation costs and expenses and
other liabilities that are not eligible for reimbursement from the
State of Wisconsin's Petroleum Environmental Cleanup Fund. CIB will
bear all costs and expenses of the environmental consultant retained
to determine the Unreimbursable Expenses.
In determining Base Capital, the following amounts will not be
deducted and if previously recorded, will be added to Base Capital:
. A severance payment of $185,968 to Russell S. Jones and all
tax benefits associated therewith; provided that if the
severance payment exceeds $185,968, the excess amount will
be deducted in calculating the Base Capital;
. Any amounts to be paid under the consulting agreement to be
entered into with Mr. Jones and all tax benefits associated
therewith;
. All fees up to a maximum aggregate amount of $170,000 paid
or due and payable to Baird in connection with the fairness
opinion, transaction fee and out-of-pocket expenses and to
<PAGE> 23
Schiff Hardin & Waite for legal services relating to the
Merger; provided, that if such fees paid or due and payable
exceed $170,000, such excess amount will be deducted in
calculating the Base Capital; and
. Accounting and tax adjustments that relate to the
termination of the Incentive Plan, the cashing out of the
stock options under the Option Plan and the reversal of the
ESOP contra equity account.
POTENTIAL INCREASE TO MERGER PRICE. The Signing Value, as noted
above, was an unrealized loss of $136,876.90. If the Closing Value is
greater (in a positive manner) than an unrealized loss of $22,876.90
(which is $114,000 greater than the Signing Value), then the Merger
Price or, if applicable, the Reduced Merger Price will be increased.
The amount of the increase will equal the quotient of (i) the
remainder of (A) the difference between the Closing Value and the
Signing Value less (B) $114,000, divided by (ii) 687,811 (the number
of outstanding shares and awarded Stock Options of First Ozaukee
Common Stock). If the Merger Price or, if applicable, the Reduced
Merger Price, as increased (the "Increased Merger Price"), is greater
than $15.15 per share, First Ozaukee in its sole discretion may:
. use $15.15 as the Merger Price; or
. propose to use the actual Increased Merger Price; thereby
giving CIB the option of paying the Increased Merger Price
or terminating the Merger Agreement.
For example, if the Increased Merger Price is calculated to be
$15.20, First Ozaukee could agree to receive $15.15 per share or could
propose to receive the $15.20 per share. However, if First Ozaukee
proposes, in this example, to receive $15.20, CIB would have the
option to agree to pay $15.20 per share or to terminate the Merger
Agreement.
STOCK OPTIONS. At the Effective Time each holder of a Stock
Option (regardless of whether or not exercisable at the Effective
Time) will receive a cash payment equal to the product of (i) the
number of shares of First Ozaukee Common Stock subject to such Stock
Option multiplied by (ii) the excess, if any, of the Merger Price
minus the exercise price per share of such Stock Option. After
receipt of such cash payment by holders of Stock Options, such Stock
Options will be no longer exercisable and will be deemed canceled. As
a condition to the receipt of such cash payment, each option holder
will be required to execute a cancellation agreement in a form
acceptable to CIB. The consideration to be received by executive
officers or directors of First Ozaukee in connection with the
termination of Stock Options pursuant to the Merger Agreement shall
hereinafter be referred to as the "Option Consideration."
INCENTIVE PLAN SHARES. Pursuant to the terms of the Merger
Agreement, all awards of unvested First Ozaukee Common Stock under the
Incentive Plan granted prior to the Effective Time will be considered
outstanding shares of First Ozaukee Common Stock as of the Effective
Time and the grantees will be vested in such awarded shares and will
receive the Merger Price in exchange for such awarded shares.
<PAGE> 24
BACKGROUND OF THE MERGER
In late 1995 and early 1996, the Board of Directors of First
Ozaukee determined that it needed to evaluate First Ozaukee's business
and strategic options relative to enhancing shareholder value. The
Board based its decision on a desire to find ways to improve First
Ozaukee's profitability, concerns about the Bank's ability to compete
as a small financial institution in an increasingly competitive
environment for financial services and an interest in increasing First
Ozaukee's stock price. To assist it in this evaluation, First Ozaukee
engaged Baird in February 1996 as First Ozaukee's financial advisor to
assist the Board of Directors in its review and assessment of
alternative strategic options available to First Ozaukee and the Bank,
including the transfer of control of part or all of its assets. On
February 13, 1996, First Ozaukee publicly announced its employment of
Baird.
On March 19, 1996, representatives of Baird presented a report to
the Board of Directors of First Ozaukee that assessed First Ozaukee's
financial and competitive position and set forth various strategic
alternatives for enhancing shareholder value. After a full discussion
of Baird's presentation, and based on the factors outlined above, the
Board determined to seek offers from third parties regarding a sale of
First Ozaukee. Mr. Russell S. Jones, First Ozaukee's President and
Chief Executive Officer, with the assistance of Baird, prepared a list
of financial institutions that might have an interest in acquiring
First Ozaukee. In preparing the list, Mr. Jones and Baird focused on
(i) financial institutions that had the financial wherewithal to
accomplish the acquisition and a strategic reason to enter or enhance
their position in the Cedarburg market and (ii) other financial
institutions that had expressed an interest in a business combination
with First Ozaukee. On April 16, 1996, a representative of Schiff
Hardin & Waite, First Ozaukee's legal counsel, met with the Board of
Directors to review the legal considerations attendant to selling the
company.
Beginning on April 4, 1996, Baird began contacting potential
purchasers. Expressions of interest were requested by May 13, 1996.
By this date, five financial institutions had submitted written
expressions of interest for a possible business combination with First
Ozaukee. Baird submitted its analysis of the five proposals to the
Board of Directors of First Ozaukee at a Board meeting held on May 21,
1996. At that meeting, the Board determined, based in part on the
analysis presented by Baird, to invite three of the five bidders (one
of which was CIB) to conduct a due diligence review of First Ozaukee
and submit a revised final bid by June 21, 1996. First Ozaukee
presented the final three bidders with a form of merger agreement it
had prepared in consultation with its legal counsel and Baird. The
three finalists were requested to revise the merger agreement to
reflect their final bid. At this time, one of the three final bidders
withdrew, choosing not to submit a final bid.
Baird submitted its analysis of CIB's revised bid and that of the
other remaining bidder (which was a stock-based thrift holding company
based in Milwaukee) ("Bidder Two") to the Board of Directors of First
Ozaukee at a meeting of the Board held on June 26, 1996. Because the
value of the merger consideration proposed by CIB and Bidder Two was
substantially the same, the Board directed Baird to contact the two
<PAGE> 25
bidders to seek an increase in the consideration being offered. A
representative of Schiff Hardin & Waite also attended this meeting and
addressed legal considerations involved in the bid process. Baird and
Mr. Jones were authorized by the Board of Directors to determine the
best offer for the sale of First Ozaukee and to proceed toward a
definitive merger agreement with the bidder offering the bid which was
in the best interest of First Ozaukee's shareholders. In response to
further discussions with the two bidders, CIB increased its offer,
while Bidder Two did not. Accordingly, First Ozaukee began
negotiating a definitive merger agreement with CIB.
On August 20, 1996, First Ozaukee's Board of Directors held a
regular meeting during which Mr. Jones provided the Board with an
update regarding negotiations with CIB. Mr. Jones reported that
continuing significant disagreements in the negotiations supported
giving CIB a short period of time to submit a revised proposal to
resolve the open issues. It was the consensus of the Board that CIB
should be requested to offer a proposal to resolve these issues, and
if progress was not made in a short period of time, Baird should begin
contacting other potential purchasers.
First Ozaukee's Board of Directors met again on September 30,
1996 to review a form of definitive merger agreement proposed by CIB.
Mr. Jones reviewed with the Board the status of the negotiations with
CIB and explained that while initial progress had been made in the
discussions after the last Board meeting, the parties had reached an
impasse in their negotiations related in large part, but not
exclusively, to disagreements with respect to adjustments to the
merger price and handling the environmental contamination on the
Bank's Cedarburg property. As a result, negotiations had been
suspended and Baird had initiated contact with other potential
purchasers as an alternative to completing a transaction with CIB.
Baird contacted six other potential purchasers (one of which had
submitted a bid for First Ozaukee during the initial bidding process),
but none of these potential buyers expressed an interest in pursuing a
transaction with First Ozaukee at what was considered a sufficient
price. Also, Baird contacted Bidder Two, but this organization
expressed no interest in pursuing a transaction at that time. While
these contacts were being made, CIB offered proposals to resolve some
of the outstanding issues between the parties. From late October 1996
through February 1997, CIB and First Ozaukee conducted on-and-off
discussions concerning these outstanding issues.
In mid-December 1996, Mr. Jones and representatives of Baird met
with a bank holding company in northeast Wisconsin. And while this
bank holding company expressed initial interest in a transaction,
after several weeks of further discussions, the bank holding company
terminated the negotiations.
In late December 1996, First Ozaukee began negotiating a letter
of intent with a stock-based thrift holding company located in
southeast Wisconsin concerning a possible business combination between
the two organizations. In late January 1997, however, discussions
with this thrift holding company terminated. Shortly thereafter,
Bidder Two contacted Baird seeking to reinitiate discussions. Through
February and into early March 1997, First Ozaukee negotiated toward a
definitive merger agreement with Bidder Two. In mid-March, however,
<PAGE> 26
negotiations with Bidder Two stalled based principally on
disagreements related to the merger consideration being offered, and
the discussions eventually terminated. Several weeks earlier, in late
February, First Ozaukee notified CIB that CIB's proposals aimed at
reaching an agreement with First Ozaukee were unacceptable and that it
was unwilling to participate in any further negotiations.
At approximately the time that First Ozaukee reinitiated
discussions with Bidder Two, it also had reinitiated discussions with
another Milwaukee-area thrift holding company (which had been one of
the initial, but not final, bidders). Negotiations with this other
Milwaukee-area thrift holding company also terminated based on First
Ozaukee's assessment, in consultation with Baird, that the amount of
merger consideration proposed was significantly insufficient. Because
discussions had terminated with several potential bidders by late
March 1997, and based on CIB's contact with First Ozaukee regarding
its continuing interest in a transaction, Mr. Jones and a
representative of Baird met with Mr. J. Michael Straka, CIB's
President and Chief Executive Officer, in Chicago on March 21, 1997.
Based on the favorable meeting in Chicago on March 21 that
resolved many of the outstanding issues that had posed a roadblock to
a transaction in September 1996, Mr. Jones determined to reinitiate
negotiations with CIB concerning a definitive merger agreement.
Drafts of the agreement were made available to the Board of Directors
as negotiation of the agreement progressed. A definitive merger
agreement with CIB was presented to the Board of Directors of First
Ozaukee at a Board meeting held on April 25, 1997. All of First
Ozaukee's directors attended the meeting, together with a
representative of Baird and legal counsel to First Ozaukee. At this
meeting, Baird provided a financial analysis of the offer and
delivered its opinion to the effect that, as of such date, the Merger
Price was fair, from a financial point of view, to the holders of
First Ozaukee Common Stock (other than CIB and its affiliates). See
"-- Opinion of Financial Advisor." After a careful review of the
Merger Agreement and related matters, the Board of Directors
unanimously voted to approve the Merger Agreement and Plan of Merger
and to submit them to First Ozaukee's shareholders for approval. The
Merger Agreement was executed and delivered by each of the parties on
April 25, 1997.
REASONS OF THE BOARD OF DIRECTORS OF FIRST OZAUKEE FOR APPROVING THE
MERGER
FIRST OZAUKEE. In its deliberations concerning the Merger, the
Board of Directors of First Ozaukee considered the following factors
as the primary reasons for approving the Merger Agreement: (i)
concerns regarding management succession, particularly the potential
difficulties associated with replacing Mr. Jones as he approached
retirement age and the effects thereof on the future business of First
Ozaukee, (ii) the prospects for enhancing shareholder value using
strategic alternatives other than a sale of First Ozaukee (as these
alternatives were presented to the Board of Directors by Baird on
March 19, 1996), (iii) First Ozaukee's difficulties in growing the
company to sufficient critical mass to take advantage of economies of
scale, (iv) the expressions of interest received from, and
negotiations toward a definitive merger agreement with, the several
other financial institutions that First Ozaukee had sought offers from
<PAGE> 27
beginning in March 1996, (v) the financial condition, earnings and
business prospects of First Ozaukee and the Bank, (vi) the amounts
paid in recent acquisitions for thrift holding companies approximately
the size of First Ozaukee, and (vii) the opinion of Baird that the
consideration to be received by the shareholders of First Ozaukee is
fair to them from a financial point of view. See "--Opinion of
Financial Advisor."
CIB. CIB has informed First Ozaukee that its Board of Directors
considered a number of factors, including, among other things, the
financial condition and operations of First Ozaukee and concluded that
the Merger presents a unique opportunity for CIB to enter the
Wisconsin banking market through the acquisition of an established
financial institution. CIB believes that the most effective and least
costly means to achieve this entry was the acquisition of a financial
institution having operations in the area. CIB has further informed
First Ozaukee that its decision to pursue discussions with First
Ozaukee was primarily a result of CIB's assessment of the value of
First Ozaukee's franchise, its asset base within that area and the
ability of CIB to bring a full range of banking services to the
customers of First Ozaukee.
OPINION OF FINANCIAL ADVISOR
The Board of Directors of First Ozaukee retained Baird to act as
its financial advisor and to render its opinion ("Opinion") as to
whether or not the cash Merger Price is fair, from a financial point
of view, to the holders of First Ozaukee Common Stock (other than CIB
and its affiliates). On April 25, 1997, Baird delivered its Opinion
to the Board of Directors of First Ozaukee to the effect that, as of
such date, the cash Merger Price was fair, from a financial point of
view, to such holders. Baird subsequently rendered its written
opinion, dated the date of this Proxy Statement, confirming its
earlier opinion.
THE FULL TEXT OF BAIRD'S OPINION, DATED THE DATE OF THIS PROXY
STATEMENT, WHICH SETS FORTH THE ASSUMPTIONS MADE, GENERAL PRO-
CEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE
OF REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS OPINION, IS ATTACHED AS
APPENDIX C TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. BAIRD'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, AS OF
THE DATE OF THE OPINION AND FROM A FINANCIAL POINT OF VIEW, OF THE
CASH MERGER PRICE TO THE HOLDERS OF FIRST OZAUKEE COMMON STOCK (OTHER
THAN CIB AND ITS AFFILIATES) AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY FIRST OZAUKEE SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE WITH RESPECT TO THE MERGER. BAIRD DID NOT MAKE ANY RECOMMENDA-
TION TO FIRST OZAUKEE CONCERNING THE FORM OR AMOUNT OF CONSIDERATION
TO BE RECEIVED IN THE MERGER. THE SUMMARY OF BAIRD'S OPINION SET
FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION ATTACHED HERETO AS APPENDIX C. FIRST OZAUKEE
SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY.
In conducting its investigation and analysis and in arriving at
the Opinion, Baird reviewed such information and took into account
such financial and economic factors as Baird deemed relevant under the
circumstances. In that connection, Baird, among other things: (i)
reviewed certain internal information, primarily financial in nature,
including projections, concerning the business and operations of First
Ozaukee furnished to Baird for purposes of its analysis, as well as
<PAGE> 28
publicly available information including but not limited to First
Ozaukee's recent filings with the SEC; (ii) reviewed the Merger
Agreement in the form presented to First Ozaukee's Board of Directors;
(iii) compared the historical market prices and trading activity of
First Ozaukee's Common Stock with those of certain other publicly
traded companies Baird deemed relevant; (iv) compared the financial
position and operating results of First Ozaukee with those of other
publicly traded companies Baird deemed relevant; and (v) compared the
financial terms of the Merger with the financial terms of certain
other business combinations Baird deemed relevant. Baird held
discussions with members of First Ozaukee's senior management
concerning First Ozaukee's historical and current financial condition
and operating results, as well as the future prospects of First
Ozaukee. As a part of its engagement, Baird was requested to and did
solicit third party indications of interest in acquiring all or any
part of First Ozaukee. Baird also considered such other information,
financial studies, analysis and investigations and financial, economic
and market criteria as Baird deemed relevant for the preparation of
its Opinion. The Merger Price was determined by First Ozaukee and CIB
in arm's-length negotiations. First Ozaukee did not place any
limitations upon Baird with respect to the procedures followed or
factors considered by Baird in rendering its Opinion.
In arriving at its Opinion, Baird assumed and relied upon the
accuracy and completeness of all of the financial and other
information that was publicly available or provided to it by or on
behalf of First Ozaukee, and was not engaged to independently verify
any such information. Baird assumed, with First Ozaukee's consent, (i)
that all material assets and liabilities (contingent or otherwise,
known or unknown) of First Ozaukee were as set forth in First
Ozaukee's financial statements, and (ii) the Merger would be accounted
for using the purchase method of accounting. Baird also assumed that
the financial forecasts examined by it were prepared on reasonable
bases reflecting the best available estimates and good faith judgments
of First Ozaukee's senior management as to future performance of First
Ozaukee. Baird did not undertake nor obtain an independent evaluation
or appraisal of any of the assets or liabilities (contingent or
otherwise) of First Ozaukee nor did it make a physical inspection of
the properties or facilities of First Ozaukee. Baird's Opinion
necessarily is based upon economic, monetary and market conditions as
they existed and could be evaluated on the date thereof, and does not
predict or take into account any changes which may occur, or
information which may become available, after the date thereof.
The following is a summary of the material financial analyses
performed by Baird in connection with rendering its Opinion.
ANALYSIS OF MERGER PRICE. Baird reviewed the terms of the
proposed Merger, including the form of the Merger Price, the proposed
method of accounting and the resulting cash value of the Merger Price
including possible adjustments thereto. The proposed form of Merger
Price was all cash consideration. The proposed method of accounting
for the Merger was the purchase method. The Merger Price was the
right to receive $15.10 per share for each share of First Ozaukee
Common Stock. The Merger Price could be adjusted downward by the
amount by which Base Capital (as defined in Section 1.2 of the Merger
Agreement) was below $8,113,000 divided by 687,811 shares. If the
Merger Price, so adjusted, was below $15.05, CIB would have the option
<PAGE> 29
of paying $15.05 or presenting a revised Merger Price. If CIB
presented a revised Merger Price, First Ozaukee would have the option
of accepting the revised Merger Price or terminating the Merger
Agreement. The Merger Price would be adjusted upward by the amount
that the securities designated by First Ozaukee as Held to Maturity
(as defined in Section 1.2 of the Merger Agreement) appreciated in
value between the day prior to the signing of the Merger Agreement and
the day prior to the Transaction Date in excess of $114,000 divided by
687,811 shares. If the Merger Price, so adjusted, was above $15.15,
First Ozaukee would have the option of accepting the $15.15 Merger
Price or presenting a revised Merger Price. If First Ozaukee
presented a revised Merger Price, CIB would have the option of
accepting the revised Merger Price or terminating the Merger
Agreement.
Baird calculated multiples of the Merger Price to First Ozaukee's
earnings per share ("EPS") (adjusted for the special assessment levied
on all Savings Association Insurance Fund members to recapitalize the
insurance fund (the "Special Assessment")) for the year ended December
31, 1996 ("Adjusted 1996 Earnings"), and reported book value per share
as of December 31, 1996 ("Book Value"). Baird also calculated the
implied premium to deposits indicated by the Merger (defined as (i)
the aggregate consideration including consideration paid for shares
outstanding plus the value of outstanding options to purchase First
Ozaukee Common Stock, less equity of First Ozaukee (such amount being
the "Adjusted Aggregate Consideration"), divided by (ii) total
deposits as of December 31, 1996) and the implied premium to "core"
deposits indicated by the Merger (defined as the Adjusted Aggregate
Consideration divided by total deposits as of December 31, 1996
excluding brokered deposits and jumbo certificates of deposit). These
calculations resulted in a multiple of Merger Price to Adjusted 1996
Earnings that was not meaningful due to losses during that period and
a multiple of Merger Price to Book Value of 1.152x. These
calculations also resulted in an implied deposit premium of 5.6% and
an implied core deposit premium of 5.8%.
ANALYSIS OF PUBLICLY TRADED SECURITIES OF COMPARABLE COMPANIES.
Baird reviewed certain publicly available financial information as of
the most recently reported period and stock market information as of
April 24, 1997 for certain publicly traded companies which Baird
deemed relevant. These companies included CSB Financial Group, Inc.,
East Side Financial, Incorporated, First Lancaster Bancshares, Inc.,
GF Bancorp, Incorporated, Harvest Home Financial Corporation, Indiana
Community Bank, SB, London Financial Corporation, Northwest Equity
Corporation, Pioneer Financial Corporation, Princeton Federal Bank,
FSB, Reliance Bancshares, Inc., StateFed Financial Corporation and TSB
Financial, Incorporated (the "First Ozaukee Comparable Companies").
The data described below with respect to the First Ozaukee Comparable
Companies consists of the median data for such group as of the most
recently reported period and are compared to First Ozaukee Common
Stock price (both based on closing prices as of April 24, 1997) and
First Ozaukee's financial and operating information as reported as of
December 31, 1996.
Baird noted that the ratios of the closing price of First Ozaukee
Common Stock to the latest twelve month ("LTM") earnings per share and
Adjusted 1996 Earnings were not meaningful for First Ozaukee due to
losses in 1996 and compared to 20.6x and 14.6x for the First Ozaukee
<PAGE> 30
Comparable Companies. Ratios of the Closing Price to stated book
value per share were 0.944x for First Ozaukee and 0.998x for the First
Ozaukee Comparable Companies. The assets and equity reported for
First Ozaukee were approximately $33.7 million and $8.23 million
compared to approximately $48.0 million and $11.32 million for the
First Ozaukee Comparable Companies. Baird also noted ratios of LTM
earnings items to average assets for (i) net interest income of 3.28%
for First Ozaukee and 3.64% for the First Ozaukee Comparable
Companies, (ii) provisions for loan losses of 0.05% for First Ozaukee
and 0.05% for the First Ozaukee Comparable Companies, (iii) other
(non-interest) income of 0.06% for First Ozaukee and 0.20% for the
First Ozaukee Comparable Companies, (iv) G&A expenses of 3.74% for
First Ozaukee and 2.31% for the First Ozaukee Comparable Companies,
(v) net income (i.e. return on average assets ("ROAA")) of (0.55%) for
First Ozaukee and 0.64% for the First Ozaukee Comparable Companies and
(vi) ratio of LTM earnings to average equity ("ROAE") of (2.42%) for
First Ozaukee and 3.62% for the First Ozaukee Comparable Companies.
Baird also noted LTM annual growth rates in assets, loans and deposits
of (7.0%), 39.9% and (9.7%) for First Ozaukee and 7.9%, 13.0% and 2.0%
for the First Ozaukee Comparable Companies. Baird noted capital-to-
assets and tangible capital-to-assets ratios of 24.4% (for both
measures) for First Ozaukee and 14.4% and 13.8%, respectively, for the
First Ozaukee Comparable Companies. Baird also noted certain asset
quality ratios including nonperforming assets plus 90 day and greater
delinquent assets to assets and reserves to loan value ratios of 0.29%
and 0.68%, respectively, for First Ozaukee and 0.42% and 0.51%,
respectively, for the First Ozaukee Comparable Companies.
ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS. Baird reviewed
certain information relating to three groups of transactions involving
business combinations of thrift institutions with assets of less than
$100 million announced from January 1, 1995 through April 23, 1997:
(i) a group of 31 business combinations, representing all such
announced transactions as reported by SNL Datasource (the "Entire
Group"); (ii) the 18 business combinations included in the Entire
Group with a return on average assets of less than 0.70% (the "ROAA
Group" ); (iii) the 11 business combinations included in the Entire
Group involving acquired thrifts with a capital-to-assets ratio in
excess of 15% (the "High Capital Group"). Based on the Merger Price
of $15.10, Baird calculated that: (i) the ratio of Merger Price to
First Ozaukee's Book Value equaled 115.2%, compared with high, median
and low price-to-book ratios of 207.6%, 128.0% and 93.1% for the
Entire Group, 207.6%, 130.5% and 93.1% for the ROAA Group and 162.7%,
127.3% and 107.7% for the High Capital Group; (ii) the ratio of
Merger Price to First Ozaukee's tangible book value equaled 115.2%,
compared with high, median and low price-to-tangible book ratios of
207.6%, 128.0% and 99.4% for the Entire Group, 207.6%, 130.5% and
99.4% for the ROAA Group and 162.7%, 127.3% and 107.7% for the High
Capital Group; (iii) the multiple of Merger Price to Adjusted 1996
earnings of First Ozaukee was not material due to losses in 1996 and
compared with high, median and low P/E Ratios based on LTM earnings
(adjusted for the Special Assessment, where applicable) of 65.5x,
24.5x and 13.1x for the Entire Group, 65.5x, 24.5x and 13.7x for the
ROAA Group and 65.5x, 35.9x and 17.1x for the High Capital Group; and
(iv) the implied "core" deposit premium indicated by the Merger
equaled 5.8%, compared with high, median, low premiums to "core"
deposits of 16.4%, 6.4% and (0.1)% for the Entire Group, 14.9%, 6.4%
<PAGE> 31
and (0.1%) for the ROAA Group and 16.4%, 9.5% and 3.9% for the High
Capital Group.
ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS - LEVERAGED CAPITAL
ANALYSIS. Baird also compared the above ratios for the ROAA Group
with the same ratios for First Ozaukee, as adjusted after giving
effect to a theoretical dividend (the "Theoretical Dividend") by First
Ozaukee sufficient to cause First Ozaukee's capital-to-assets ratio to
become equal to the median capital-to-assets ratio for the ROAA Group.
After adjusting for the Theoretical Dividend, Baird calculated that:
(i) the ratio of Merger Price to First Ozaukee's reported book value
equaled 157.7%, compared with high, median and low price-to-book
ratios of 207.6%, 130.5% and 93.1% for the ROAA Group; (ii) the ratio
of Merger Price to First Ozaukee's tangible book value equaled 157.7%,
compared with high, median and low price-to-tangible book ratios of
207.6%, 130.5% and 99.4% for the ROAA Group; (iii) the multiple of
Merger Price to Adjusted 1996 Earnings of First Ozaukee again is not
meaningful due to losses for First Ozaukee in 1996 and compared with
high, median and low P/E Ratios based on LTM earnings (adjusted for
the Special Assessment, where applicable) of 65.5x, 24.5x and 13.7x
for the ROAA Group.
DISCOUNTED DIVIDEND ANALYSIS. Baird performed a discounted
dividend analysis of First Ozaukee on a stand alone basis using First
Ozaukee management's projections for the five years ending September
30, 2001, without taking into account any cost savings and synergies
that may be realized following the Merger. Baird estimated terminal
values for First Ozaukee using perpetual growth rates between 4% and
7% on 2001 net income, as projected by First Ozaukee's senior
management, and discount rates between 9% and 13%. Such analysis
produced implied values of First Ozaukee Common Stock of $5.4 million
to $9.1 million or $8.90 to $14.26 per share. The above analyses
assumed dividends would be discontinued if First Ozaukee's equity-to-
asset ratio fell below six percent in determining the amount of
dividend payouts. Baird noted that the discounted dividend analysis
was included because it is a widely used valuation methodology, but
noted that the results of such methodology are highly dependent upon
the numerous assumptions that must be made, including earnings growth
rates, dividend payout rates, terminal values and discount rates.
STOCK TRADING ANALYSIS. Baird reviewed the historical trading
prices and volume of First Ozaukee Common Stock on a daily basis from
April 22, 1996 to April 24, 1997 and on a weekly basis from February
3, 1995 (the earliest available data) to April 24, 1997. Baird also
compared the relative trading prices of each of First Ozaukee Common
Stock and the average of the First Ozaukee Comparable Company stock
prices over one month, three month, six month and one year periods,
prior to announcement of each merger.
The foregoing summary, does not purport to be a complete
description of the analyses performed by Baird. The preparation of a
fairness opinion is a complete process and is not susceptible to
partial analysis or a summary description. Baird believes that its
analyses must be considered as a whole and that selecting portions of
such analyses without considering all factors and analyses would
create an incomplete view of the processes underlying the Opinion. In
its analyses, Baird relied upon numerous assumptions made by senior
management of First Ozaukee with respect to industry performance,
<PAGE> 32
general business and economic conditions, and other matters, many of
which are beyond the control of First Ozaukee. Analyses based upon
forecasts of future results are not necessarily indicative of actual
values, which may be significantly more or less favorable than
suggested by such analyses. No company or transaction used as a
comparison in the analyses is identical to First Ozaukee or to the
Merger. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning
financial and operating characteristics of the companies and other
factors that could affect the public trading volume of the companies
to which First Ozaukee and the Merger are being compared.
Additionally, any estimates included in Baird's analyses do not
purport to be appraisals and are not necessarily reflective of the
prices at which businesses actually may be sold. Because such
estimates are inherently subject to uncertainty, Baird, does not
assume responsibility for their accuracy.
In connection with its written opinion dated July 9, 1997,
Baird confirmed the appropriateness of its reliance on the analyses
used to render its Opinion dated April 25, 1997, by performing
procedures to update certain of such analyses and by reviewing the
assumptions on which such analyses were based and the factors
considered therewith.
Baird, as part of its investment banking business, is engaged in
the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities,
private placements, and valuations for estate, corporate and other
purposes. First Ozaukee retained Baird because of its experience and
expertise in the valuation of businesses and their securities in
connection with mergers and acquisitions. In the ordinary course of
business, Baird may from time to time trade equity securities of First
Ozaukee for its own account and for accounts of its customers and,
accordingly, may at any time hold a long or short position in such
securities.
COMPENSATION. Pursuant to an engagement letter dated February
14, 1996 between First Ozaukee and Baird, Baird has earned a retainer
fee of $20,000 and a fee of $50,000 for the rendering of its opinion
dated April 25, 1997. Both fees are fully creditable against the
Transaction Fee, defined below. In addition, Baird will receive a fee
(the "Transaction Fee") equal to 80% of the sum of (i) five percent of
the first million; (ii) four percent of the second million; (iii)
three percent of the third million; (iv) two percent of the fourth
million; and (v) one percent of any additional amount of the
consideration paid or payable in the Merger. First Ozaukee has also
agreed to reimburse Baird for certain of its reasonable out-of-pocket
expenses. First Ozaukee has also agreed to indemnify Baird, its
affiliates and their respective directors, officers, employees, agents
and controlling persons against certain liabilities relating to or
arising out of its engagement, including liabilities under the federal
securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of First Ozaukee's management, the Bank's
management and the Board of Directors of the Bank and the First
<PAGE> 33
Ozaukee Board may be deemed to have interests in the Merger in
addition to their interests, if any, as holders of First Ozaukee
Common Stock. The First Ozaukee Board was aware of these factors and
considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.
INDEMNIFICATION. CIB has agreed, from and after the Effective
Time, to indemnify and hold harmless each present and former director
and officer of First Ozaukee and the Bank against any costs or
expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities incurred in connection with any
claim, action, suit, proceeding, or investigation, whether civil,
administrative or investigative, arising out of matters existing or
occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at, or after the Effective Time, to the full extent
permitted under applicable law (and CIB has agreed to advance expenses
as incurred to the full extent permitted under applicable law,
provided that the person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that
such person is not entitled to indemnification). In addition, prior to
the Effective Time, First Ozaukee will purchase at its expense a
directors' and officers' liability insurance policy, which will be in
effect for a period of three years after the Effective Time and will
cover present and former directors and officers of First Ozaukee and
the Bank for matters existing or occurring prior to, at or after the
Effective Time.
SEVERANCE PAY. Upon completion of the Merger, Russell S. Jones's
employment with First Ozaukee and the Bank will be terminated. Under
the terms of Mr. Jones's existing employment agreement, if he is
terminated after a change in control of First Ozaukee, he is entitled
to a severance payment in the form of one year's base salary (highest
amount during the three years preceding termination) plus an
additional amount approximating the benefits Mr. Jones would have
obtained from all tax qualified retirement plans maintained by the
Bank if he had continued his employment for the term of the agreement.
Upon completion of the Merger, First Ozaukee will make a $185,968
severance payment to Mr. Jones. The Merger Agreement provides that if
CIB terminates any employee of First Ozaukee (other than Mr. Jones and
Ms. Lammers, whose severance benefits will be provided for in written
consulting and employment agreements, respectively), within 12 months
after the Effective Time, and for a reason other than for cause, CIB
will provide severance payments to such employee as follows: (i) non-
officers would receive one-half month's salary per full year of
service not to exceed three months current salary; and (ii) officers
would receive one month's salary per full year of service not to
exceed six months current salary. In computing such severance
payments for regular part-time employees, their per month compensation
will be based on one-twelfth of the actual number of hours worked by
any such employee during the fiscal year ended September 30, 1996.
POST-RETIREMENT WELFARE BENEFIT PAYMENT. Prior to the Effective
Time, First Ozaukee will terminate the First Ozaukee Post-Retirement
Welfare Benefit Program. Mr. Jones is the only participant in such
program who has vested rights under the program. Pursuant to the
Merger Agreement, CIB has agreed to pay Mr. Jones $315.00 per month
for 48 consecutive months after the Effective Time and $150.00 per
month after the Effective Time until Mr. Jones obtains age 80 as
<PAGE> 34
reimbursement for the purchase of health insurance coverage that
otherwise would have been provided under the program being terminated.
EMPLOYMENT AGREEMENTS. The Merger Agreement provides that, at
the Effective Time, Mr. Jones, the current President and Chief
Executive Officer of First Ozaukee and the Bank, will enter into a
consulting agreement with First Ozaukee and the Bank and that Mary E.
Lammers, the current Secretary of First Ozaukee and Vice President of
the Bank, will enter into an employment agreement to serve as Vice
President of the Bank. These agreements will supersede and replace
the employment agreements Mr. Jones and Ms. Lammers currently have
with the Bank. Mr. Jones's consulting agreement will be for a term of
two years commencing on the Effective Time and he will be paid
$168,000 for consulting services during such two year period. Ms.
Lammers's employment agreement will be for a one year term commencing
on the Effective Time and she will be paid an annual salary of no less
than $45,250. Pursuant to the employment agreement, Ms. Lammers will
be able to participate in all benefit plans and programs made
available to similarly situated officers of CIB and its affiliates.
The agreements restrict the ability of Mr. Jones and Ms. Lammers to
compete with the Bank if, in Mr. Jones's case, the agreement is
terminated for any reason or if, in Ms. Lammers's case, she
voluntarily terminates or fails to renew her employment agreement.
SHARE OWNERSHIP. As of the Record Date, directors and executive
officers of First Ozaukee and the Bank beneficially owned an aggregate
of 113,168 shares of First Ozaukee Common Stock (exclusive of shares
which could be acquired upon exercise of Stock Options and unvested
Incentive Plan shares). Assuming the Merger Price is $15.10, these
directors and executive officers will receive a total of approximately
$1,708,836.80 if the Merger is consummated.
STOCK OPTIONS. Certain members of the Board of Directors and
management hold Stock Options to purchase shares of First Ozaukee
Common Stock which will be adjusted so as to entitle the holder
thereof to receive an amount in cash in lieu of the shares (Option
Consideration). See "--The Merger--Stock Options." Assuming a Merger
Price of $15.10 per share, the Option Consideration to be received by
the following directors and executive officer would be as follows:
Director and/or
Executive Officer Option Consideration
----------------- --------------------
Russell S. Jones $96,297.32
Frank M. Kennedy $16,047.78
George P. Kraemer $16,047.78
Richard E. Peterson $16,047.78
Harry J. Sanders $16,047.78
ACCELERATED VESTING UNDER THE INCENTIVE PLAN. Pursuant to the
terms of the Merger Agreement, all awards of unvested First Ozaukee
Common Stock under the Incentive Plan granted prior to the Effective
Time will be considered shares of outstanding First Ozaukee Common
Stock as of the Effective Time and grantees will become vested in such
awarded shares and will receive the Merger Price in exchange for such
awarded shares. Assuming a Merger Price of $15.10 per share, the
<PAGE> 35
benefit of such accelerated vesting of Incentive Plan awards under the
Incentive Plan for the following executive officers would be as
follows:
Accelerated Merger Consideration to be
Executive Vesting Received for Accelerated
Officer Shares Vesting Shares
--------- ----------- --------------------------
Russell S. Jones 7,038 $ 106,273.80
Mary E. Lammers 1,006 $ 15,190.60
Under the terms of the Incentive Plan, the above-listed executive
officers automatically would be vested in the above-referenced shares
on November 7, 1997.
EFFECTIVE TIME
The "Effective Time" with respect to the Merger will be the time
at which articles of merger are filed with the Wisconsin Department in
accordance with the WBCL. It is anticipated that the articles of
merger will be filed with the Wisconsin Department (a) on the first
business day of the month after the satisfaction or waiver of all
conditions to the consummation of the Merger, which date would be no
later than 35 days after the later of the following events: (i) the
approval of the Merger Agreement by the First Ozaukee shareholders; or
(ii) the approval of the Merger by the appropriate regulatory
authorities, including the expiration of all applicable regulatory
waiting periods; or (b) such later date as agreed to by First Ozaukee
and CIB.
EXCHANGE PROCEDURES AND PAYING AGENT
CIB will cause a state or national bank unaffiliated with CIB and
having an office in the central business district of Milwaukee,
Wisconsin to act as its paying agent in connection with the Merger
(the "Paying Agent"). As soon as practicable after the First Ozaukee
shareholders have approved the Merger Agreement and the respective
regulatory authorities have approved the Merger (see "--Regulatory
Approvals"), CIB will cause the Paying Agent to mail to each holder of
record of shares of First Ozaukee Common Stock a form of letter of
transmittal pursuant to which each such holder will transmit their
stock certificate(s) representing shares of First Ozaukee Common Stock
or, in lieu thereof, such evidence of lost, stolen or mutilated
certificate or certificates and such surety bond or other security as
the Paying Agent may reasonably require. HOLDERS OF FIRST OZAUKEE
COMMON STOCK SHOULD NOT SEND IN ANY STOCK CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE PAYING
AGENT. After the Effective Time, each such holder that surrenders his
or her First Ozaukee Common Stock certificates or, in lieu thereof,
the required documentation for a lost, stolen or mutilated certificate
to the Paying Agent will, upon acceptance thereof by the Paying Agent,
be entitled to receive the Merger Price, without interest.
<PAGE> 36
The Paying Agent will accept stock certificates or, in lieu
thereof, the required documentation for a lost, stolen or mutilated
certificate upon compliance with such reasonable terms and conditions
as CIB or the Paying Agent may impose to effect an orderly exchange
thereof in accordance with customary exchange practices. If the
tender of a stock certificate or, in lieu thereof, the required
documentation for a lost, stolen or mutilated certificate is not in
compliance with such reasonable terms and conditions, the Paying Agent
will promptly return such items with instructions as to how to comply
with such terms and conditions.
After the Effective Time, holders of shares of First Ozaukee
Common Stock will cease to have rights with respect to such shares,
and the sole rights of such holders (other than holders who have
perfected dissenters' rights) will be to exchange their stock
certificates for payment of the Merger Price. After the Effective
Time, there will be no further transfer on the records of First
Ozaukee of shares of First Ozaukee Common Stock, and if stock
certificates are presented for transfer, they will be canceled against
delivery of the Merger Price. CIB will not be obligated to deliver
the Merger Price until a holder of First Ozaukee Common Stock
surrenders his or her stock certificates or furnishes, in lieu
thereof, the required documentation for a lost, stolen or mutilated
certificates. No interest will be accrued or paid on the Merger
Price.
Any holder of shares of First Ozaukee Common Stock with respect
to which dissenters' rights have been properly perfected will have the
right to receive the fair value of such shares in accordance with the
procedures described under "Dissenters' Rights" and in Appendix D to
this Proxy Statement.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, First Ozaukee and CIB have each made
certain customary representations and warranties relating to, among
other things, the parties' respective organization and qualification
to do business, authority relative to the Merger Agreement,
reliability of financial statements, and employee benefit plans. In
addition, First Ozaukee made certain representations and warranties
relating to its capitalization, lending activities, properties and
assets, insurance, compliance with applicable laws and regulations,
contracts, taxes, environmental matters, the timely filing of all
regulatory reports, the absence of certain legal proceedings and other
events, including material adverse changes in First Ozaukee's
business, income, assets, liabilities, or financial condition. For
detailed information on such representations and warranties, see
Articles II and III of the Merger Agreement attached hereto as
Appendix A.
CONDUCT OF BUSINESS PENDING THE MERGER
The Merger Agreement provides that between the date of execution
of the Merger Agreement and the Effective Time, First Ozaukee will
conduct its business in the usual and ordinary course consistent in
all material respects with prudent banking practices and use
reasonable efforts to maintain its reputation and business
relationships. In addition, First Ozaukee has agreed not to take, or
<PAGE> 37
permit the Bank to take, without the prior written consent of CIB,
any of the following actions, among other items:
(a) make any changes in the articles of incorporation or bylaws
of First Ozaukee or the Bank or in the number of issued and
outstanding shares of First Ozaukee Common Stock (except for existing
stock options of First Ozaukee Common Stock that may be exercised) or
Stock Options;
(b) increase the compensation of the officers and employees of
First Ozaukee or award or pay bonuses to any of the foregoing;
(c) make any loan, or renewal or restructuring of a loan for
$200,000 or more, except in the ordinary course of business and
consistent in all material respects with prudent banking practices and
policies and applicable rules and regulations of regulatory
authorities with respect to amount, terms, security and quality of the
borrower's credit;
(d) declare or pay any dividends or other distributions, or
adjust, split, combine or reclassify any capital stock of First
Ozaukee, directly or indirectly redeem or purchase or otherwise
acquire any of its capital stock, or grant any appreciation rights, or
grant any right to acquire any shares of First Ozaukee's capital
stock, or issue any additional shares of equity or debt securities
except for the exercise of outstanding Stock Options;
(e) except for transactions in the ordinary course of business
consistent with past practices, enter into, terminate or extend any
material agreement or make any change in any material lease or
contract;
(f) purchase or designate any existing or additional securities
as "Held to Maturity," purchase any security with a maturity in excess
of six months, or restructure or materially change its investment
securities portfolio or the manner in which it is classified or
reported unless required by generally accepted accounting principles;
(g) make any significant changes, outside the ordinary course of
business, in the general nature of the business conducted by First
Ozaukee, including but not limited to the investment or use of its
assets, the liabilities it incurs, or the facilities it operates;
(h) except for the employment or consulting agreements to be
entered into Mr. Jones and Ms. Lammers, existing officers of First
Ozaukee, enter into any employment, consulting or other similar
agreements;
(i) fail to file all required tax returns, fail to make or
accrue all tax payments and make any application for or consent to any
extension of time for filing any tax return or any extension of the
period of limitations applicable thereto;
(j) incur any liabilities or obligations, make any commitments
or disbursements, acquire or dispose of any property or asset, make
any contract or agreement, or engage in any transaction, except in the
ordinary course consistent in all material respects with prudent
banking practices;
<PAGE> 38
(k) engage in or agree to engage in any "covered transaction"
within the meaning of Sections 23A or 23B of the Federal Reserve Act;
(l) make any changes of a material nature in First Ozaukee's
accounting procedures, methods, policies or practices or the manner in
which it conducts its business and maintains its records; and
(m) accept, renew or purchase any brokered deposits or accept,
renew or purchase public funds in excess of 5% of the total deposits
of the Bank.
CIB has agreed to, and to cause its subsidiaries to, conduct
their respective businesses in the usual and ordinary course
consistent in all material respects with prudent banking practices and
in a manner that will not materially adversely affect CIB's ability to
obtain all necessary regulatory approvals for the Merger or its
ability to perform its obligation under the Merger Agreement.
OTHER OFFERS; RIGHT OF FIRST REFUSAL
First Ozaukee has agreed that during the term of the Merger
Agreement it will not permit or authorize any of its officers,
directors, shareholders or employees, or any investment banker,
attorney, accountant, agent or other representative of First Ozaukee
to directly or indirectly solicit, invite, entertain, encourage,
facilitate, participate in or undertake any discussions for the
purpose of (i) merging or consolidating First Ozaukee with a third
party, (ii) causing First Ozaukee to sell any of its assets or any
shares of its capital stock to a third party or to issue or grant any
options or rights to purchase shares of its capital stock to any third
party, or (iii) causing First Ozaukee to liquidate. In addition,
First Ozaukee has agreed not to enter into any agreement to accomplish
any of the foregoing actions, except (a) upon the termination of the
Merger Agreement, (b) with the prior written consent of CIB, (c)
pursuant to a written direction from any regulatory authority, or (d)
upon receipt by First Ozaukee of any unsolicited bonafide offer from a
third party where the Board of Directors of First Ozaukee reasonably
believes that its fiduciary duties require it to enter into
discussions with such third party.
In the event the Board of Directors of First Ozaukee does receive
an unsolicited offer from a third party to (a) acquire beneficial or
record ownership of at least a majority of the outstanding shares of
First Ozaukee Common Stock, (b) acquire all or substantially all of
First Ozaukee's assets, or (c) engage in a merger, consolidation,
recapitalization or other business combination with such third party,
First Ozaukee must deliver to CIB written notice of such offer. For a
30 day period after delivery of such unsolicited offer (or such longer
period required to obtain all regulatory approvals or as otherwise
agreed to by the parties), CIB will have the right to acquire First
Ozaukee on the same terms and conditions as the proposed transaction.
Within 21 days after delivery of the unsolicited offer, CIB must
notify First Ozaukee whether CIB intends to exercise its right of
first refusal. If CIB does not exercise its right of first refusal,
CIB will be entitled to receive certain payments upon termination of
the Merger Agreement. See "-- Termination and Termination Fees"
<PAGE> 39
CONDITIONS TO CONSUMMATION OF THE MERGER
JOINT CONDITIONS. The obligations of First Ozaukee and CIB to
consummate the Merger are subject to the satisfaction, unless waived,
of certain conditions, including the following: (i) the
representations and warranties of the other party in the Merger
Agreement, and in certain other documents delivered by such party
pursuant to the Merger Agreement, shall be true and correct in all
material respects on the date of the Merger Agreement and at the
Effective Time; (ii) the other party shall have performed all
agreements required by the Merger Agreement to be performed by such
party; (iii) the approval of all appropriate regulatory entities of
the Merger Agreement, upon such terms and conditions as are
satisfactory to CIB in its reasonable judgment, the expiration of all
required regulatory waiting periods and the nonexistence of a motion
for rehearing or appeal from such approval or commencement of any suit
or action seeking to enjoin the Merger or to obtain other relief in
respect of the Merger; (iv) no suit or action shall have been
instituted or threatened seeking to enjoin the consummation of the
Merger, or to obtain other relief in connection with the Merger
Agreement of the Merger (including but not limited to substantial
damages), which reasonably could be expected to result in the issuance
of an order enjoining the Merger or result in a determination that the
other party has failed to comply with applicable legal requirements of
a material nature in connection with the Merger or actions preparatory
thereto; (v) the execution of new employment or consulting agreements
for Russell S. Jones and Mary E. Lammers, existing officers of First
Ozaukee, and the cancellation of all existing employment, compensation
and severance agreements of Mr. Jones and Ms. Lammers with the Bank;
(vi) the opinion of Baird attached hereto as Appendix C that the
Merger is fair, from a financial point of view, to the shareholders of
First Ozaukee shall not have been withdrawn, amended or modified in
any material respect prior to the Effective Time, and (vii) each of
First Ozaukee and CIB shall have delivered, or caused to be delivered,
various certificates, legal opinions and other documents.
CIB'S CONDITIONS. In addition to the above listed joint
conditions, CIB's obligation to consummate the Merger is subject to
the satisfaction, unless waived, of certain conditions, including the
following: (i) five business days prior to completion of the Merger
CIB will commence a three business day due diligence examination of
First Ozaukee and the Bank to calculate the Base Capital; (ii) the
approval of the Merger Agreement by the First Ozaukee shareholders in
accordance with applicable Wisconsin law and the Articles of
Incorporation and Bylaws of First Ozaukee; (iii) no statute, rule,
regulation, order, injunction or decree shall have been enacted,
entered, promulgated or enforced by any governmental entity
prohibiting, restricting or making illegal the consummation of the
Merger; (iv) between April 25, 1997 (the date of the Merger Agreement)
and the Effective Time, First Ozaukee shall have conducted its
business in the ordinary course consistent in all material respects
with prudent banking practices, there shall not have occurred any
material adverse change or any condition, event, circumstance, fact or
occurrence (other than general economic or competitive conditions)
that may be expected to result in a material adverse change in First
Ozaukee's business, income, assets, liabilities or financial
condition; (v) neither First Ozaukee nor the Bank shall have been made
a party to, or threatened with, any actions, suits, proceedings or
<PAGE> 40
litigation, which in the opinion of CIB will have or is likely to have
a material adverse affect on the financial condition, assets or
business of First Ozaukee; (vi) First Ozaukee shall have obtained
written consents to the Merger to the extent required by law or
contractual terms with third parties; (vii) First Ozaukee shall have
paid a $185,968 severance payment to Mr. Jones; (viii) First Ozaukee
shareholders holding no more than 12% of the outstanding shares of
First Ozaukee Common Stock shall have perfected dissenters' rights
under Wisconsin law; (ix) First Ozaukee shall have fully funded and
terminated the First Ozaukee Post-Retirement Welfare Benefit Plan, the
Option Plan and the Incentive Plan; (x) First Ozaukee shall have fully
funded the First Ozaukee Pension Plan and shall have used its best
efforts to obtain a favorable final determination letter from the
Internal Revenue Service with regard to the termination of the Pension
Plan and the ESOP; (xi) First Ozaukee shall have terminated (without
making any payments) any obligations to provide death benefits to
employees, officers or directors and each such covered employee,
officer or director shall have delivered a letter agreeing to such
termination of benefits; (xii) First Ozaukee shall have sold the 1997
Cadillac DeVille owned by First Ozaukee for no less than fair market
value; (xiii) with respect to environmental matters, (1) First Ozaukee
shall have delivered to CIB a site closure letter, satisfactory to CIB
in its sole discretion, with regard to the Cedarburg Facility and
shall have expensed or accrued all Unreimbursable Expenses or (2) CIB
shall have obtained an opinion, satisfactory to CIB, from its
environmental consultant that the total of Unreimbursable Expenses
incurred and estimated to be incurred by First Ozaukee (excluding
expenses previously accrued or expensed) will not exceed $50,000 and
the adjustments, if any, have been made to the Merger Price; and (xiv)
First Ozaukee shall have provided documentation to the satisfaction of
CIB's counsel evidencing resolution of any violations of applicable
regulations, including the payment of any penalties, fines or
assessments.
FIRST OZAUKEE'S CONDITIONS. In addition to the above listed
joint conditions, First Ozaukee's obligation to consummate the Merger
is subject to the satisfaction, unless waived, of the approval of the
Merger Agreement by the Board of Directors of Acquisition Corp. and
its sole shareholder, CIB, in accordance with Wisconsin law and the
respective Articles of Incorporation and Bylaws of CIB and Acquisition
Corp.
AMENDMENT
The Merger Agreement may be amended by First Ozaukee and CIB at
any time before or after approval of the Merger Agreement by the First
Ozaukee shareholders. However, after the Plan of Merger has been
approved by the First Ozaukee shareholders, no amendment may affect
the rights of such shareholders in a manner that is materially adverse
to their interests.
TERMINATION AND TERMINATION FEES
The Merger Agreement may be terminated at any time prior to the
Effective Time, either before or after being approved by the First
Ozaukee shareholders, in the following circumstances: (i) by agreement
of CIB and First Ozaukee; (ii) by either CIB or First Ozaukee if the
Merger is not completed by December 1, 1997, or such later date agreed
<PAGE> 41
to by CIB and First Ozaukee; provided, that if CIB has requested all
necessary regulatory approvals before such date but the required
waiting periods have not expired, then such termination date will be
10 days after all required waiting periods have expired without any
motion for rehearing or appeal; (iii) by either CIB or First Ozaukee
at the Effective Time if any of the conditions precedent to the
terminating party's obligations to complete the Merger have not been
fulfilled or waived; (iv) by either CIB or First Ozaukee if the other
party makes a material breach or default of any covenant or agreement
in the Merger Agreement and such breach or default is not cured within
a reasonable time (not to exceed 20 days) after the terminating party
gives notice specifying the alleged default; (v) by First Ozaukee if
it does not accept the Reduced Merger Price (see "--The Merger--
Potential Decrease to Merger Price"); (vi) by CIB if it does not
accept the Increased Merger Price (see "--The Merger--Potential
Increase to Merger Price"); (vii) by First Ozaukee if its Board of
Directors determines that its fiduciary duties require it to accept an
unsolicited offer from a third party and CIB has not exercised its
right of first refusal (see "--Other Offers; Right of First Refusal");
or (viii) by First Ozaukee upon the first to occur of: (A) 30 days
after the regulatory applications or notices requesting approval of
the Merger have been denied and are not subject to appeal or an
appeal is not being diligently pursued in good faith, or (B) July 31,
1997, if on such date all regulatory applications or notices
requesting approval for the Merger have not been pending for more than
30 days.
In the event CIB terminates the Merger Agreement pursuant to
subsections (iii) or (iv) above, First Ozaukee will pay CIB's out-of-
pocket expenses (not to exceed $100,000) incurred in connection with
the Merger Agreement and Merger.
In the event First Ozaukee terminates the Merger Agreement
pursuant to subsections (iii) or (iv) above, CIB will pay First
Ozaukee's out-of-pocket expenses (not to exceed $100,000) incurred in
connection with the Merger Agreement and the Merger.
In the event that CIB does not have cash available at the
Effective Time to pay the Merger Price and First Ozaukee terminates
the Merger Agreement, CIB will pay First Ozaukee $300,000 in cash.
In the event that CIB is unable to obtain the necessary
regulatory approvals for the Merger due to a determination that CIB or
its affiliates would have inadequate capital upon completion of the
Merger, CIB will pay First Ozaukee $300,000 in cash.
In the event First Ozaukee terminates the Merger Agreement
because it accepts an unsolicited offer from a third party and CIB
does not exercise its right of first refusal, First Ozaukee will pay
CIB $300,000 in cash. In addition, First Ozaukee will pay CIB's out-
of-pocket expenses (not to exceed $100,000) incurred in connection
with the Merger Agreement and the Merger. If First Ozaukee does not
complete a transaction with the third party and later enters into
another agreement with CIB, CIB will refund the amount of CIB's
expenses paid by First Ozaukee.
The Plan of Merger automatically terminates if the Merger
Agreement is terminated.
<PAGE> 42
REGULATORY APPROVALS
CIB applied to the Federal Reserve Board under the BHC Act for
approval to acquire or control voting securities of First Ozaukee and
the Bank. In reviewing the application, the Federal Reserve Board
will consider whether the acquisition could reasonably be expected to
produce benefits to the public (such as greater convenience, increased
competition and gains in efficiency) that outweigh possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, and unsound banking practices).
The Federal Reserve Board will evaluate the financial and managerial
resources of CIB and its existing subsidiaries and of First Ozaukee
and the Bank and the effect of the proposed acquisition on those
resources. An application was filed with the Federal Reserve Board on
May 23, 1997.
In addition to the approval of the Federal Reserve Board, the
Merger is subject to the approval of the Wisconsin Department. In
reviewing the Merger, the Wisconsin Department will assess whether the
Merger is in the best interests of stockholders and customers, review
safety and soundness matters (capital, asset quality, management,
earnings, liquidity and sensitivity to market risks), review the
performance record of CIB, including CIB's compliance with the
Community Reinvestment Act of 1977, and assess compliance with
applicable laws. CIB filed an application with the Wisconsin
Department on May 23, 1997.
CIB and First Ozaukee are not aware of any other governmental
approvals or actions that are required for consummation of the Merger,
except as described above. Should any such approval or action be
required, it is presently contemplated that such approval or action
would be sought.
ACCOUNTING TREATMENT
The Merger will be accounted for by CIB under the purchase method
of accounting. Under this method of accounting, the purchase price
will be allocated to assets acquired and liabilities assumed based on
their estimated fair values at the Effective Time.
EXPENSES
The Merger Agreement provides, in general, that CIB and First
Ozaukee will each pay its own expenses in connection with the Merger
Agreement and the transactions contemplated thereby. Under certain
circumstances, CIB or First Ozaukee will be liable to pay the
expenses, up to $100,000, of the other party in connection with the
Merger Agreement and the Merger. See "-- Termination and Termination
Fees." First Ozaukee will pay all proxy solicitation and related
costs incurred in connection with the Special Meeting.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the principal federal income tax
consequences of the Merger is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the
regulations thereunder, judicial authority and administrative rulings
and practice as of the date hereof, any of which is subject to change
<PAGE> 43
at any time. The following discussion does not address the federal
income tax consequences to special classes of taxpayers, including,
without limitation, foreign corporations, tax exempt entities and
persons who acquired the First Ozaukee Common Stock pursuant to the
exercise of an employee stock option or otherwise as compensation.
Holders of First Ozaukee Common Stock are encouraged to consult
their tax advisors concerning the federal income tax consequences of
the Merger in their particular circumstances, as well as any tax
consequences arising under foreign, state or local law.
The cancellation of shares of First Ozaukee Common Stock in
exchange for cash pursuant to the Merger will be a taxable transaction
to holders of First Ozaukee Common Stock for federal income tax
purposes and may also be a taxable transaction under applicable state,
local and other tax laws.
In general, a holder of First Ozaukee Common Stock who receives
the Merger Price will recognize gain or loss equal to the difference
between the adjusted tax basis of his or her shares of First Ozaukee
Common Stock and the amount of cash received in exchange therefor.
Such gain or loss will be capital gain or loss if, as should be the
case for most shareholders, the shares are capital assets in the hands
of the shareholder and will be long-term gain or loss if the holding
period for the shares is more than one year. Each holder of a Stock
Option who receives the Option Consideration will recognize ordinary
compensation income subject to applicable federal and state
withholding obligations. The foregoing discussion may not apply to
shareholders who acquired their shares pursuant to the exercise of
employee stock options or other compensation arrangements with First
Ozaukee or who are not citizens or residents of the United States or
who are otherwise subject to special tax treatment under the Code.
Each holder of First Ozaukee Common Stock who receives the Merger
Price in cash and each holder of a Stock Option who receives the
Option Consideration will, in general, be required to provide to the
Paying Agent his, her or its social security or other taxpayer
identification number, or in certain instances other information, in
order to avoid "back-up withholding" requirements which might
otherwise apply under the Code. Any such person who does not furnish
his, her or its correct taxpayer identification number may be subject
to a penalty imposed by the IRS.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
NECESSARILY SET FORTH ALL OF THE TAX CONSEQUENCES OF THE MERGER THAT
MAY BE RELEVANT TO ALL FIRST OZAUKEE SHAREHOLDERS IN ALL
CIRCUMSTANCES. FIRST OZAUKEE SHAREHOLDERS SHOULD THEREFORE CONSULT
THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR OTHER TAX
LAWS.
DISSENTERS' RIGHTS
First Ozaukee shareholders who do not vote in favor of the Merger
Agreement and who follow certain other procedures summarized below
will have the right to dissent from the Merger and demand and obtain
payment of the "fair value" of their shares in cash in the event of
the consummation of the Merger. The proceedings resulting from such a
<PAGE> 44
demand may result in a determination of value less than or greater
than the cash consideration to be received under the Merger Agreement.
The following is a summary of the provisions of Sections 180.1301
to 180.1331 of the WBCL which specify the procedures that must be
followed by any First Ozaukee shareholder who wishes to demand payment
for the "fair value" of his or her shares in the event of consummation
of the Merger. Such provisions of the WBCL are set forth in their
entirety in Appendix D attached to this Proxy Statement, and this
summary is qualified in its entirety by reference to the exact
provisions of the WBCL set forth in Appendix D.
A First Ozaukee shareholder may assert his or her dissenter's
rights only if (i) the First Ozaukee shareholder delivers to First
Ozaukee, before the vote is taken at the Special Meeting on the Merger
Agreement, a written notice of his or her intent to demand payment for
his or her shares in the event the Merger is consummated and (ii) the
First Ozaukee shareholder does not vote in favor of the Merger
Agreement. If a First Ozaukee shareholder votes in favor of the
Merger Agreement, he or she will not be entitled to dissent and demand
payment for his or her shares. If a First Ozaukee shareholder does
not vote against the Merger Agreement or abstains from voting on the
Merger Agreement, such shareholder will not have waived his or her
dissenter's rights. However, if a First Ozaukee shareholder submits a
properly executed proxy with no instructions indicated thereon, such
proxy will be voted "For" the proposal to approve the Merger Agreement
and the First Ozaukee shareholder will not be entitled to dissent and
demand payment for his or her shares. Merely voting against the
Merger Agreement will not satisfy the requirement that a written
notice declaring a shareholder's intent to demand payment be delivered
before the vote is taken at the Special Meeting.
A shareholder's written notice setting forth the intent to demand
payment should be sent to First Ozaukee Capital Corp., W61 N526
Washington Avenue, Cedarburg, Wisconsin 53012, Attention: Mary E.
Lammers, Secretary.
Within ten days after the Merger is approved at the Special
Meeting, First Ozaukee will send to each First Ozaukee shareholder who
has delivered such a written notice of intent to demand payment and
has not voted in favor of the Merger Agreement (a "dissenting
shareholder") a notice (the "Dissenters' Notice"). The Dissenters'
Notice will set forth where the dissenting shareholder must send the
payment demand, when and where the certificates of shares of First
Ozaukee Common Stock held by the dissenting shareholder must be
deposited, and the date by which First Ozaukee must receive the
payment demand (which date may not be fewer than 30 days nor more than
60 days after the date on which the Dissenters' Notice is delivered).
In addition, the Dissenters' Notice must include (a) a form for
demanding payment that includes the date of the first announcement to
shareholders of the terms of the proposed Merger and requires the
dissenting shareholder to certify whether he or she acquired
beneficial ownership of the shares before that date, and (b) a copy of
the sections of the WBCL pertaining to dissenters' rights.
A dissenting shareholder who is sent a Dissenters' Notice must
demand payment in writing, certifying whether he or she acquired
beneficial ownership of the shares before the date specified in the
<PAGE> 45
Dissenters' Notice, and deposit his or her stock certificates in
accordance with the Dissenters' Notice. A dissenting shareholder who
does not demand payment or does not deposit his or her certificates
where required by the date set forth in the Dissenters' Notice will
not be entitled to payment for his or her shares as a dissenting
shareholder under the WBCL.
Upon the later of the consummation of the Merger or the receipt
of the payment demand, First Ozaukee will pay each dissenting
shareholder who has complied with the above requirements the amount
that First Ozaukee estimates to be the fair value of the dissenting
shareholder's shares, plus accrued interest. The payment must be
accompanied by the latest available year-end and interim financial
statements of First Ozaukee, a statement of First Ozaukee's estimate
of the fair value of the shares, an explanation of how the interest
was calculated, a statement of the dissenting shareholder's rights if
the dissenting shareholder is dissatisfied with the payment, and a
copy of the dissenters' rights sections of the WBCL.
First Ozaukee may elect to withhold the payment contemplated
above if the dissenting shareholder became the beneficial owner of the
shares after the date of the first announcement to the news media or
to shareholders of the terms of the Merger. First Ozaukee may instead
offer to such dissenting shareholders payment of First Ozaukee's
estimate of the fair value of the shares, plus accrued interest,
conditioned on the dissenting shareholder's acceptance of the payment
in full satisfaction of his or her demand. The offer must be
accompanied by a statement of First Ozaukee's estimate of the fair
value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenting shareholder's rights if
the dissenting shareholder is dissatisfied with the offer.
If (a) a dissenting shareholder believes that the amount of the
payment or the amount of the offer discussed in the two preceding
paragraphs is less than the fair value of his or her shares or that
the interest due is incorrectly calculated, (b) First Ozaukee fails to
make payment within 60 days after the date set in the Dissenters'
Notice for demanding payment, or (c) the Merger is not consummated and
First Ozaukee fails to return the deposited certificates within 60
days after the date set in the Dissenters' Notice for demanding
payment, the dissenting shareholder may notify (the "Dissatisfied
Notice") First Ozaukee of his or her estimate of the fair value of the
shares and the amount of interest due, and demand payment of his or
her estimate, less any amount previously paid. Within 60 days after
receiving the Dissatisfied Notice, First Ozaukee must either settle
the dispute with the dissatisfied shareholder or bring a special
proceeding and petition the court to determine the fair value of the
shares and accrued interest. If First Ozaukee does not settle the
dispute and does not bring the proceeding with such 60 day period,
First Ozaukee must pay each dissenting shareholder whose demand
remains unsettled the amount demanded in the Dissatisfied Notice.
Each dissenting shareholder made a party to the special proceeding is
entitled to judgment for either: (a) the amount, if any, by which the
court finds the fair value of the shares, plus interest, exceeds the
amount previously paid by First Ozaukee, or (b) the fair value, plus
interest, of the shares for which First Ozaukee elected to withhold
payment as contemplated above.
<PAGE> 46
The court in such a special proceeding shall determine all costs
of the proceeding, including the reasonable compensation and expenses
of appraisers, if any, appointed by the court and will assess the
costs against First Ozaukee; however, the court may assess costs
against all or some of the dissenting shareholders, in amounts the
court finds equitable, to the extent the court finds the dissenting
shareholders acted arbitrarily, vexatiously or not in good faith in
demanding payment. The parties to the proceeding will bear their own
costs and expenses; however, the court may also assess the fees and
expenses of counsel and experts for the respective parties in amounts
the court finds equitable, as follows:
(1) Against First Ozaukee and in favor of any or all dissenting
shareholders if the court finds that First Ozaukee did not
substantially comply with the requirements set forth above.
(2) Against either First Ozaukee or a dissenting shareholder and
in favor of any other party if the court finds that the
party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith with respect
to the rights provided in the dissenters' rights provisions
of the WBCL.
If the court finds that the services of counsel and experts for any
dissenting shareholder were of substantial benefit to other dissenting
shareholders similarly situated, the court may award to those counsel
and experts reasonable fees to be paid out of the amounts awarded to
the dissenting shareholders who were benefitted.
A record owner of First Ozaukee Common Stock may assert
dissenters' rights as to fewer than all the shares recorded in such
person's name only if such person dissents with respect to all shares
beneficially owned by any one person and notifies First Ozaukee in
writing of the name and address of each person on whose behalf the
record owner asserts dissenters' rights. The rights of a partial
dissenter are determined as if the shares as to which dissent is made
and the other shares were recorded in the names of different
shareholders. A beneficial owner of shares who is not the record
owner may assert dissenters' rights as to all the shares held on such
person's behalf only if the beneficial owner submits to First Ozaukee
the record owner's written consent to the dissent before or at the
same time the beneficial owner asserts dissenters' rights.
As used in the preceding paragraphs, (a) "fair value," with
respect to a dissenting shareholder's shares, means the value of the
shares immediately before the Effective Time, excluding any
appreciation or depreciation in anticipation of the Merger, unless
exclusion would be inequitable; and (b) "interest" means interest from
the Effective Time until the date of payment, at the average rate
currently paid by First Ozaukee on its principal bank loans, or, if
none, at a rate that is fair and equitable under all the
circumstances.
FAILURE TO FOLLOW ANY STEP REQUIRED BY SECTIONS 18.1301 TO
180.1331 OF THE WBCL IN CONNECTION WITH THE EXERCISE OF DISSENTERS'
RIGHTS MAY RESULT IN THE TERMINATION OF SUCH DISSENTERS' RIGHTS.
<PAGE> 47
ADJOURNMENT OF SPECIAL MEETING
Under certain circumstances, First Ozaukee's management may
determine at the time of the Special Meeting that it is in the best
interests of First Ozaukee and its shareholders to adjourn the Special
Meeting to a later date. For example, in the event that the number of
shares present, in person or by proxy, at the Special Meeting is
insufficient to constitute a quorum or to approve the Merger
Agreement, First Ozaukee might decide to adjourn the Special Meeting
to permit further solicitation of proxies. First Ozaukee might also
decide to adjourn the Special Meeting in the event that the parties
determine that regulatory approval of the Merger will be unduly
delayed or that events occurring subsequent to the date of this Proxy
Statement require First Ozaukee and CIB to furnish additional proxy
soliciting information to the First Ozaukee shareholders and to give
the shareholders an opportunity to assimilate such information. If
the Special Meeting is adjourned, no further notice of the time and
place of the adjourned meeting is required to be given to First
Ozaukee shareholders other than an announcement of such time and place
at the Special Meeting.
If the Special Meeting is postponed or adjourned, at any
subsequent reconvening of the Special Meeting, all proxies will be
voted in the same manner as such proxies would have been voted at the
original convening of the Special Meeting (except for any proxies
which have theretofore effectively been revoked or withdrawn).
In order to approve a proposal for adjournment of the Special
Meeting, the number of the shares present at the Special Meeting, in
person or by proxy, whether or not a quorum is present, and voted in
favor of the proposal must exceed the number of shares voted against
the proposal. In order to allow First Ozaukee's management to vote
proxies received by First Ozaukee at the time of the Special Meeting
in favor of such an adjournment, in the event that First Ozaukee
determines, in its sole discretion, that such an adjournment is in the
best interests of First Ozaukee and its shareholders, First Ozaukee
has submitted the question of adjournment as a separate matter for the
consideration and vote of the shareholders. The Board of Directors of
First Ozaukee recommends that the shareholders vote FOR the proposal
to adjourn the Special Meeting so that such proxies may be voted in
favor of such adjournment under such circumstances.
BUSINESS
GENERAL
First Ozaukee was formed for the purpose of owning all of the
outstanding stock of the Bank, issued in the mutual to stock
conversion of the Bank (the "Conversion"). The Conversion was
consummated on October 21, 1994; First Ozaukee issued 603,345 shares
of First Ozaukee Common Stock in exchange for proceeds of $4.8
million, and First Ozaukee purchased 1,000 shares of Common Stock of
the Bank for $1.9 million. The Bank is regulated by the Department of
Financial Institutions Division of Savings Institutions (the
"Commissioner") and the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank's deposits are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") of the FDIC. The Bank
also is a member of the Federal Home Loan Bank ("FHLB") system. The
<PAGE> 48
Bank was organized in 1923, and now has two full service offices
located in Ozaukee County, Wisconsin. Because First Ozaukee's only
significant business operations are that of the Bank, the business of
the Bank is essentially the only business of First Ozaukee.
The Bank is a community oriented financial institution which
emphasizes retail financial services to individuals and consumers
within its market areas. The Bank's principal business is attracting
retail deposits from the general public and investing those deposits,
together with funds generated from other operations, primarily to
originate residential mortgage loans within its primary market areas
and to invest in mortgage-backed securities and investment securities.
The principal lending is on one-to four-family owner-occupied homes,
including ARM loans, and to a lesser extent, the Bank also originates
home equity lines of credit, multi-family, other consumer,
commercial/non-residential and residential construction loans. The
Bank invests a significant portion of its assets in investment
securities and mortgage-backed securities, including U. S. Government
and federal agency securities, short-term liquid assets and other
marketable securities. The Bank's revenues are derived principally
from interest on its mortgage loan portfolio, interest on mortgage-
backed securities and interest and dividends on its investment
securities. The Bank's principal sources of funds are received from
deposits, repayments on loans and mortgage-backed securities.
MARKET AREA AND COMPETITION
The Bank offers a variety of deposit products, services and
mortgage loan offerings primarily within the metropolitan Milwaukee
area. The Bank's main office is located at W61 N526 Washington
Avenue, Cedarburg, Wisconsin which is approximately 20 miles north of
Milwaukee, and the Bank has one branch office located in Grafton,
Wisconsin which is approximately 22 miles north of Milwaukee. The
City of Cedarburg and the Village of Grafton are included within the
largest metropolitan statistical area ("MSA") within the State of
Wisconsin. The Bank's primary market area consists of Ozaukee and
Washington counties and the northern portions of Milwaukee county.
The Milwaukee MSA, which includes Milwaukee, Waukesha, Ozaukee and
Washington counties, includes a diverse economic base including
business, industry and agriculture. Cedarburg's most predominant
industry is manufacturing, which employs approximately 30% of its work
force. Major employers in Cedarburg area include Kelch Corp., Amcast
Industrial Corp., Wirth Printing, Carlson Tool Manufacturing Corp.,
Pioneer Tool and Die, Inc., High Voltage Components, Inc., Cedarburg
Dairy and Pioneer Container Corp. The service and retail industries
add economic diversity and stability in the Cedarburg area, employing
40% and 30% of the work force, respectively.
The Bank has significant competition in both its mortgage and
consumer lending business, as well as in attracting deposits. The
Bank's competition for loans is principally from other thrift
institutions, savings banks, mortgage banking companies, insurance
companies and commercial banks. Its most direct competition for
deposits historically has come from other thrifts, savings banks,
commercial banks and credit unions. Because of the lower interest
rate environment over the past several years, the Bank has faced
additional competition for funds from a number of institutions,
including the availability of short-term money market funds and other
<PAGE> 49
corporate and government securities funds offered by other financial
service companies, such as brokerage firms and insurance companies.
At or For the Year
Ended
September 30, 1996
---------------------
1996 1995 1994
---- ---- ----
KEY FINANCIAL RATIOS:
Performance ratios:
Return on assets (1) (0.66)% 0.29% 0.37%
Return on stockholders' equity (2) (2.89)% 1.37% 3.36%
Stockholders' equity to assets ratio (3) 22.69% 21.53% 10.49%
Dividend payout ratio (4) - - -
______________________________
(1) Net earnings (loss) divided by average total assets
(2) Net earnings (loss) divided by average stockholders' equity
(3) Average stockholders' equity divided by average total assets
(4) Dividends declared per share divided by net earnings per share
LENDING ACTIVITIES
GENERAL. The Bank's largest component of its gross loan
portfolio, which totaled $17.1 million at September 30, 1996 was first
mortgage loans secured by owner-occupied one-to four-family
residences. At September 30, 1996, one-to four-family mortgage loans
totaled $9.3 million or 54.62% of gross loans. Of the total one-to
four-family mortgage loans $9.1 million, or 97.3% were ARM loans. Of
the remaining loans held at September 30, 1996, 10.17% of gross loans,
or $1.7 million, were in home equity loans, 13.59% or $2.3 million
were in commercial/non-residential loans, 7.88% or $1.3 million were
in residential construction loans, 11.38% or $1.9 million were in
multi-family mortgage loans, and the balance were in other consumer
loans (not including home equity loans). As part of its strategy to
reduce interest rate risk, the Bank originates primarily ARM loans for
its own portfolio. However, because consumer demand for ARM loans has
not been high in the last few years in the Milwaukee area, the Bank
also offers longer term fixed rate mortgage loans, most of which are
sold immediately into the secondary market.
COMPOSITION OF LOAN PORTFOLIO. The following table sets forth
the composition of the Bank's loan portfolio in dollar amounts and in
percentages at the dates indicated.
<PAGE> 50
<TABLE>
<CAPTION>
At September 30
--------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Percent Percent Percent
Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One-to-four family $ 9,331 54.62% 8,681 56.89% 8,577 67.09%
Residential Construction (1) 1,347 7.88% 2,470 16.18% 141 1.10%
Multi-family 1,945 11.38% 908 5.95% 946 7.40%
Commercial 2,321 13.59% 1,881 12.33% 1,718 13.44%
------ ------ ------ ------ ------ ------
Total mortgage loans 14,944 87.47% 13,940 91.35% 11,382 89.03%
------ ------ ------ ------ ------ ------
Consumer loans:
Home equity 1,737 10.17% 899 5.89% 1,013 7.93%
Other consumer 404 2.36% 421 2.76% 389 3.04%
------ ------ ------ ------ ------ ------
Total consumer loans 2,141 12.53% 1,320 8.65% 1,402 10.97%
------ ------ ------ ------ ------ ------
Gross loans receivable 17,085 100.00% 15,260 100.00% 12,784 100.00%
------ ====== ------ ====== ------ =======
Loans in process (563) (1,336) (112)
Deferred fees and disc. (43) (58) ( 49)
Allowance for loan losses (134) (116) ( 98)
Allowance for uncollected (4) (3) (1)
interest ------ ------ ------
Total deductions (744) (1,513) (260)
------ ------ ------
Loans receivable, net $16,341 13,747 12,524
======= ====== ======
______________________
</TABLE>
(1) Residential construction includes both one- to four-family and
multi-family construction loans.
LOAN MATURITY AND REPRICING. The following table shows the
maturity or period to repricing of the Bank's loan portfolio at
September 30, 1996. Loans that have adjustable rates are shown as
being due in the period during which the interest rates are next
subject to change. The table does not include prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on mortgage loans totaled $ 2.7 million for the year
ended September 30, 1996.
<PAGE> 51
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------------------------------------------
Multi-
Family/
One-to- Nonres- Consumer
Four Family (1) idential (1) Loans Total
--------------- ------------ -------- -----
(In Thousands)
Amounts due: (2)
<S> <C> <C> <C> <C>
Within one year $6,012 2,532 1,312 9,856
----- ----- ----- -----
After one year:
One to three years 2,362 2,211 266 4,839
Three to five years 850 84 502 1,436
Five to ten years 89 123 61 273
Ten to twenty years 34 - - 34
Over Twenty years 84 - - 84
----- ----- ----- -----
Total due or repricing 3,419 2,418 829 6,666
after one year ----- ----- ----- -----
Total amounts due or repricing 9,431 4,950 2,141 16,522
Deferred fees and discounts (43) - - (43)
Allowance for loan losses (66) (43) (25) (134)
Allowance for uncollected interest (4) - - (4)
----- ----- ----- -----
Loans receivable, net $9,318 4,907 2,116 16,341
===== ===== ===== ======
_______________________
(1) Includes some residential construction lending.
(2) These amounts are net of loans in process.
</TABLE>
The following table sets forth at September 30, 1996 the dollar
amount of all loans due or scheduled to reprice after September 30,
1997, and whether such loans have fixed interest rates or adjustable
interest rates. Loans that have adjustable rates are shown as being
due in the period during which the interest rates are subject to
change.
<TABLE>
<CAPTION>
Due or Repricing After
September 30, 1997
-------------------------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Mortgage loans:
<S> <C> <C> <C>
One-to-four family (1) $ 299 3,120 3,419
Multi-family/Nonresidential (1) 274 2,144 2,418
Consumer loans 829 - 829
----- ----- -----
Total due or repricing after one year (2) $1,402 5,264 6,666
===== ===== =====
</TABLE>
___________________________
(1) Includes construction lending.
(2) These amounts are net of loans in process.
<PAGE> 52
ONE-TO FOUR-FAMILY MORTGAGE LENDING. The Bank's primary lending
activity has been the origination of first mortgage loans secured by
one-to four-family, owner-occupied residences, including townhouse and
condominium units, within the Bank's primary lending area. All of the
ARM loans are originated for the Bank's own portfolio and fixed rate
loans typically are held for sale and then sold into the secondary
market. At September 30, 1996, $9.3 million or 54.62% of the Bank's
gross loan portfolio consisted of loans secured by one-to four-family
residential properties. Of the one- to four-family residential
mortgage loans in the Bank's gross loan portfolio, $9.1 million or
97.3% consisted of ARM loans.
Because of the highly competitive mortgage loan market in which
the Bank originates loans, a variety of mortgage products are
available from the Bank, with a variety of interest rates, fees and
other origination terms. The Bank offers conventional fixed rate
mortgage loans and ARM loans with maturity dates which typically rank
from 15 to 30 years. Residential mortgage loans generally are
underwritten to FHLMC, FNMA and other agency guidelines. The bank
rarely originates loans in excess of these agency limits; however, if
the Bank does originate jumbo loans, the fixed rate jumbo loans
generally are sold servicing released without recourse to secondary
market purchasers and the ARM jumbo loans are underwritten in
accordance with the Bank's underwriting guidelines and are retained in
the Bank's loan portfolio. ARM loans are held in the Bank's portfolio
and fixed rate loans typically are sold into the secondary market.
Origination fees ranging from zero to two points generally are quoted
on mortgage loans. The interest rates charged on mortgage loans at
any given date will vary, depending upon the amount of origination
points to be paid. The interest rates at which the Bank offers to
grant a mortgage loan also are determined by the secondary market
pricing for comparable mortgage-backed securities, local mortgage loan
competition and the Bank's yield requirements. Since the availability
of zero point mortgage loans in recent years, most borrowers accept a
slightly higher interest rate and a no point mortgage loan.
Mortgage loan originations are solicited from real estate
brokers, builders, developers, existing or past customers and
residents of the local communities located in the Bank's primary
market area. The Bank advertises its product offerings in newspapers
and other media circulating throughout the primary market area in
addition to its loan origination officers soliciting prospects. Upon
receipt of a completed mortgage application from a prospective
borrower, a credit report is ordered, income and other information is
verified, and, as necessary, additional financial information is
requested. An appraisal of the real estate that is to secure the loan
is required. It is the Bank's policy to obtain title insurance on all
real estate first mortgage loans. Borrowers must present evidence of
appropriate hazard insurance and flood insurance (if applicable) prior
to the closing. Borrowers are required to advance funds on a monthly
basis, together with payments of principal and interest, to a mortgage
escrow account from which the Bank makes disbursements for items such
as real estate taxes, and in some instances, hazard insurance and
flood insurance. The lending policy of the Bank restricts mortgage
loans to 80% of the lesser of the appraised value or purchase price of
the real estate to be mortgaged to the Bank. The Bank makes mortgage
loans to 95% of the lesser of the appraised value or purchase price
subject to the availability of private mortgage insurance insuring the
<PAGE> 53
amount in excess of 75% of the loan. The Bank's underwriting
department, which is independent of loan origination, reviews all the
pertinent information and makes a credit decision for approval or
denial within established Bank policy guidelines. Most
recommendations to deny applications based on underwriting
considerations are reviewed by the Bank's President prior to a final
loan denial. All one- to four-family mortgage loan applications are
reviewed on a monthly basis by the Board of Directors. Mortgage loans
in the Bank's loan portfolio include due-on-sale clauses, which
provide the Bank with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers the
ownership of the property without the Bank's consent. The Bank
enforces the due-on-sale clauses of its mortgage loans.
Included in mortgage loans held by the Bank as part of its loan
portfolio are ARM loans. Current one-year ARM loans typically adjust
by a maximum of 100 basis points per year with a lifetime cap of
approximately 600 basis points above the interest rate established at
the origination date of the ARM loan. Monthly payments of principal
and interest are adjusted when the interest rate adjusts, in order to
maintain full amortization of the mortgage loan within a maximum
30-year term. Also offered are three-year ARM loans, which adjust
annually after the initial three year term. The initial rate offered
on ARM loans fluctuates with general interest rate changes and are
determined by secondary market pricing, competitive conditions and the
Bank's yield requirements. Currently, the Bank primarily utilizes the
OTS National Median Cost of Funds, plus a margin, in order to
determine the interest rate payable upon the adjustment date of its
ARM loans outstanding. In order to minimize the risk associated with
ARM loans, borrowers under ARM programs are qualified at the higher of
the initial offering rate or the fully-indexed rate and with a
specified minimum interest rate. None of the ARM loans are granted
with conversion options. As compared to fixed rate loans, ARM loans
generally pose different risks. In a rising interest rate
environment, the underlying loan payment rises, which increases the
potential for default by the borrower. At the same time, the
marketability of the underlying property may be adversely affected by
higher interest rates. In a decreasing interest rate environment,
mortgagors tend to refinance into fixed rate loans.
Although the Bank historically has focused its loan origination
activities on residential mortgage financing, commencing in mid-1991
the Bank expanded its one- to four-family owner-occupied residential
mortgage loan activities. As a result of the expanded emphasis on
mortgage loan originations, one- to four-family mortgage loan
originations were $9.6 million for the year ended September 30, 1993
compared to $4.2 million for the year ended September 30, 1992. Of
these amounts, $3.6 million and $1.7 million were ARM loans for the
years ended September 30, 1993 and 1992, respectively. However,
during the years ended September 30, 1996, 1995 and 1994, the Bank
originated only $1.4, $1.7 and $1.9 million of one-to four-family
mortgage loans, respectively, due to rising interest rates, the
increased competition for mortgage loan originations, the lack of
quality mortgage loan applications and a temporary reduction in
personnel concentrating on mortgage loan originations. All of the ARM
loans originated in these periods were retained in the Bank's loan
portfolio, while all of the fixed rate loans were sold to Fleet
Mortgage Corporation. Market interest rates on mortgage loans
<PAGE> 54
increased during the last half of 1994 and into 1995, before
decreasing in mid-1995, due to the anticipated lack of demand for
mortgage loan products and the increasing competition for mortgage
loan originations.
In the Bank's market areas, the demand for ARM loans compared to
fixed rate loans has been a function of several factors, including the
level of interest rates, the expectations of changes in the level of
interest rates and the difference between the interest rates and loan
fees offered for ARM loans and fixed rate loans. Due to consumer
preference for fixed rate loans, ARM loans are more difficult to
originate in low interest rate environments. However, the Bank has
emphasized ARM loans, and as a result, ARM loans amounted to 97%,
100%, and 26.3% of the Bank's total originations of one-to four-family
mortgage loans for the years ended September 30, 1996, 1995, and 1994
respectively.
MULTI-FAMILY LENDING. The Bank originates multi-family loans
which it holds in its loan portfolio. In recent years, the Bank has
offered only ARM multi-family loans with terms up to 30 years. The
rates charged on the Bank's ARM multi-family loans are typically 25 to
50 basis points higher than on one- to four-family residential
properties. Multi-family ARM loans typically adjust in a manner
similar to that of the Bank's other ARM loans. An origination fee of
1% to 2% is usually charged on such loans.
Multi-family loans generally are underwritten in amounts of up to
80% of the lesser of the appraised value or purchase price of the
underlying property. The underlying properties typically are
apartment buildings with 20 or less units. Appraisals on properties
which secure multi-family loans are performed by an independent
appraiser designated by the Bank at the time the application is
submitted. All appraisals on multi-family loans are reviewed by Bank
management. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history, an analysis of the
borrower's income, personal financial statements and banking
relationships, a review of the property, including cash flow
projections and historical operating results. The Bank evaluates all
aspects of multi-family lending in order to mitigate risk to the
extent possible. The Bank seeks to ensure that the property securing
the loans will generate sufficient cash flow to adequately cover
operating expenses and debt service payments. To this end,
multi-family loans generally are made at a loan-to-value ratio no
greater than 80%. Typically, individuals guarantee all of their
multi-family loans. Substantially all of the Bank's multi-family
loans are secured by properties located with 50 miles of the Bank's
principal office, and within the last five years, virtually all of the
Bank's multi-family loans it originated were located within 50 miles
of the Bank's principal office.
Loans secured by multi-family real estate generally involve a
greater degree of credit risk than one- to four-family mortgage loans
and carry larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general
economic conditions on income producing properties and the increased
difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family real
<PAGE> 55
estate is typically dependent upon the successful operation of the
related real estate project. If the cash flow from the project is
reduced, the borrower's ability to repay the loans may be impaired.
Despite the risk inherent in multi-family real estate lending, the
Bank's delinquent multifamily loans as a percentage of gross loans has
been minimal.
The Bank holds in its loan portfolio seven multi-family ARM loans
which at September 30, 1996 totaled $1.9 million or 11.38% of the
Bank's gross loans. The average outstanding loan balance on each
multifamily loan at September 30, 1996 was $277,857. All payments
under multi-family loans originated by the Bank were current and
performing in accordance with their terms at September 30, 1996.
The largest multi-family loan at September 30, 1996 had an
outstanding balance of $539,946 and was secured by two twelve-unit
apartment buildings located in Saukville, Wisconsin. All of the
multi-family loans are secured by apartment buildings, ranging from
twelve units to 20 units. At September 30, 1996, the largest
aggregate amount of loans outstanding to any one borrower totaled
$820,809, and consisted of three loans secured by multi-family
properties located in Grafton and Port Washington, Wisconsin and two
loans secured by commercial/non-residential properties. At September
30, 1996, these loans were current and performing in accordance with
their terms. These loans do not exceed the regulatory "loans to one
borrower" limitation at September 30, 1996. See "--Regulation".
RESIDENTIAL CONSTRUCTION LENDING. As part of its emphasis to
increase mortgage lending, the Bank has undertaken to expand its
market share of new single family owner occupied construction loans.
These loans are made to individuals who have signed construction
contracts with a home builder. Loan proceeds are disbursed in
increments as construction of the residence progresses. These loans
have loan to value ratios not exceeding 90%. When the loan to value
ratio exceeds 80%, private mortgage insurance ("PMI") is required
which insures payment of the principal balance and reduces the Bank's
exposure to 75% loan to value or less. Single family residential
loans are structured to allow the borrower to pay interest only on the
funds advanced during the first nine months of the loan. Thereafter
the borrower is required to begin making principal and interest
payments based on an amortization schedule of 351 months or less.
Single family residential construction loan programs typically offered
by the Bank are one or three year ARM loans.
The Bank does not engage in construction lending for large tract
developments. However, from time to time, the Bank will consider
multi-family residential construction lending. The loan to value
ratio on these loans does not exceed 80%. Multi-family construction
loans typically offered by the Bank are ARM loans amortized over 348
months after allowing for interest only payments during a twelve month
construction period. Loan proceeds are advanced in increments as
construction of the project processes.
At September 30, 1996, the Bank had one, one-to four-family
residential construction loan in its loan portfolio, of $222,450 and
had three multi-family construction loans aggregating $1,124,528. For
the year ended September 30, 1996, the Bank originated $711,000 and
$375,000, respectively of one- to four-family and multi-family
<PAGE> 56
construction loans. Because most residential construction loans are
ARM loans, residential construction loans afford the Bank the
opportunity to decrease the interest rate sensitivity of its loan
portfolio and to receive yields on fixed rate loans higher than those
obtainable on fixed rate loans secured by existing residential
properties. These higher yields, however, correspond to the higher
risks associated with residential construction loans.
In most cases, the Bank structures residential and multi-family
construction loans to automatically convert to regular first mortgage
loans upon completion of the project and certification of occupancy
has been obtained. Upon completion of construction, residential
construction loans generally become 30-year ARM loans with one- and
three-year interest rate adjustments. A conversion option generally
is available on the one-year ARM. This conversion option provides
terms under which the borrower may convert the ARM loan to a fixed
rate for a limited period of time in the early term of the ARM loan.
The terms at which the ARM loan may be converted to a fixed rate loan
are established at the date of loan origination and are set at a level
allowing the Bank to immediately sell the loan at the time of
conversion. Construction loans made in conjunction with the first
mortgage have a loan-to-value ratio limit not to exceed 80%. As with
other residential mortgage loans, when the loan to value ratio exceeds
80%, PMI is required. Coverage is required to reduce the Bank's
exposure to 75% of value, or less.
On a limited basis, the Bank offers residential construction
loans to home builders for speculation and model homes. These
construction loans convert to one-year ARM loans and typically are
made at loan to value ratios of 75%, or less. Payment terms are
generally interest only for twelve months. Thereafter, the borrower
is required to begin principal and interest payments to fully amortize
the loan. Loan proceeds are disbursed in increments as construction of
the residence progresses.
COMMERCIAL/NON-RESIDENTIAL LENDING. Although the current
strategy of the Bank does not include either originating or purchasing
commercial/non-residential mortgage loans, the Bank has, in the past,
originated loans secured by a variety of non-residential properties,
including small office buildings, and apartment buildings and small
industrial/manufacturing buildings. At September 30, 1996, the Bank's
commercial/non-residential loan portfolio totaled $2.3 million, or
13.59%, of the Bank's gross loan portfolio. All of the
commercial/non-residential loans in the Bank's loan portfolio have an
interest rate adjusted on an annual basis to the OTS national median
cost of funds. The largest commercial/non-residential loan and
concentration of loans to any one borrower at September 30, 1996 had
an outstanding balance of $517,963 (a 16.51% participating interest of
a $3.1 million loan) and was secured by an office building complex in
West Allis, Wisconsin. All payments under the Bank's
commercial/non-residential loans held in its loan portfolio were
current at September 30, 1996.
The risks associated with commercial real estate lending are
similar to the risks associated with multi-family lending discussed
above. To minimize these risks, the Bank generally imposes similar
underwriting standards in connection with commercial real estate
lending as it does with multi-family lending. Commercial real estate
<PAGE> 57
loans generally are underwritten in amounts of up to 75% of the lesser
of the appraised value or purchase price of the underlying property.
Appraisals on properties which secure commercial real estate loans are
performed by an independent appraiser designated by the Bank at the
time the application is submitted. All appraisals on commercial real
estate loans are reviewed by Bank management. In addition, the Bank's
underwriting procedures require verification of the borrower's credit
history, an analysis of the borrower's income, financial statements
and banking relationships, a review of the borrower's property
management experience and references and a review of the property,
including cash flow projections and historical operation results. The
Bank evaluates all aspects of commercial real estate lending in order
to mitigate risk to the extent possible. The Bank seeks to ensure
that the property securing the loans will generate sufficient cash
flow to adequately cover operating expenses and debt service payments.
In addition, the Bank obtains financial statements on an annual basis
to monitor cash flow and financial condition.
HOME EQUITY LENDING. The Bank originates home equity loans
secured by one- to four-family residences within its primary market
area. These loans are originated with an adjustable interest rate,
which currently adjust monthly to the prime rate plus 100 basis
points, and with fixed interest rates. The Bank originates both fixed
rate and variable rate home equity loans. The fixed rate home equity
loans typically are charged an origination fee and have a maximum
amortization of ten years. The ARM home equity loans are typically
revolving lines of credit which are granted with a five year term with
possible renewal of up to a maximum total term of 40 years. The
maximum amortization to prepay home equity loans is based on 2.0% of
the outstanding balance. The rate is adjusted monthly to the prime
rate plus 200 basis points. The home equity line of credit is
typically not charged an origination fee but is charged an annual
service fee. Home equity lines of credit usually are subject to an
80% loan to value limitation, including any outstanding prior liens
against the property which serve as collateral for the mortgage loan.
The Bank is usually in a second lien position on home equity loans.
The Bank reviews completed loan applications, receives a credit
report, verifies income and other financial data and either uses the
tax assessment of the property as assessed by the local municipality
or obtains a separate appraisal of the property in order to determine
the maximum amount it will loan on such property. At September 30,
1996 the Bank held $1.7 million in home equity line of credit loans.
OTHER CONSUMER LENDING. The Bank originates a variety of other
consumer loans, generally consisting of auto loans, home improvement
loans, loans secured by savings accounts and interim financing loans.
At September 30, 1996 the total portfolio of these other types of
loans totaled $404,000, or 2.36%, of gross loans. Automobile loans
comprised 92.6% of other consumer loans at September 30, 1996.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more risk than mortgage
loans because of the type and nature of the collateral and, in certain
cases, the absence of collateral.
The underwriting standards generally employed by the Bank for
other consumer loans include a determination of the applicant's
payment history on other debts and an assessment of the borrower's
ability to meet payments on the proposed loans along with existing
<PAGE> 58
obligations. In addition to the creditworthiness of the applicant,
the underwriting process also includes a comparison of the value of
the security in relation to the proposed loan amount. Upon receipt of
a completed consumer loan application from a prospective borrower, a
credit report is ordered, income and other information is verified
and, if necessary, additional financial information is requested.
For all consumer loans, the Bank's underwriters review all
pertinent information prior to making a credit decision. Consumer
loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or
secured by rapidly depreciating assets such as automobiles. Although
the level of delinquencies in the Bank's consumer loan portfolio has
been low, there can be no assurance that delinquencies will not
increase in the future.
The following table sets forth the Bank's loan originations,
sales and principal repayments for the periods indicated. Mortgage
loans held for sale are included in the totals:
<PAGE> 59
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Mortgage loans (gross):
<S> <C> <C> <C>
At beginning of period $13,940 11,382 15,909
------ ------ ------
Mortgage loans originated:
One- to four-family 913 1,703 1,892
One- to four-family construction 711 318 88
Multi-family construction 375 1,092 -
Commercial/nonresidential 110 391 -
------ ------ ------
Total mortgage loans originated 2,109 3,504 1,980
------ ------ ------
Mortgage loans purchased:
One- to four-family 475 - -
Multi-family 350 - -
Multi-family construction - 650 -
Commercial/nonresidential 1,020 - -
------ ------ ------
Total mortgage loans purchased 1,845 650 -
------ ------ ------
Principal repayments (2,662) (1,596) (4,767)
------ ------ ------
Sales of loans - Cash sales (288) - (1,740)
------ ------ ------
At end of period $14,944 13,940 11,382
====== ====== ======
Consumer loans (gross):
At beginning of period $ 1,320 1,402 1,652
Loans originated 1,437 670 726
Principal repayments (616) (752) (976)
------ ------ ------
At end of period $ 2,141 1,320 1,402
====== ====== ======
Total gross loans $17,085 15,260 12,784
====== ====== ======
</TABLE>
SALE OF MORTGAGE LOANS. In recent years the Bank has sold a
portion of its originated residential mortgage loans to secondary
marketing agencies, principally Fleet Mortgage Corporation ("Fleet"),
all on a nonrecourse basis. The Bank, in order to manage its interest
rate risk, primarily sells the fixed rate 15- and 30-year mortgage
loans it originates, and retains for its loan portfolio ARM loans it
originates. All mortgage loans, upon commitment, are immediately
categorized either as to be held for investment or held for sale.
Mortgage loans originated and sold to Fleet totaled $288,000 with
gains of $3,000 for the year ended September 30, 1996. The Bank sells
the servicing rights with all mortgage loans sold. The loans sold to
Fleet are restricted by contractual agreement to originations secured
by first mortgages on deeds of trust on one- to four-family
residential dwellings. Although Fleet has both a fixed rate and ARM
program, the Bank's policy has been to only sell its fixed rate loans
to Fleet. To comply with the loan purchase/sale agreement, the Bank
submits all fixed rate mortgage loan originations to a Fleet
<PAGE> 60
designated and approved independent underwriter to review the loan for
compliance with FHLMC and FNMA underwriting guidelines and all other
applicable documentation requirements which will insure conformity to
Fleet and secondary market underwriting standards and requirements.
Upon approval from the independent underwriter, the Bank will receive
a purchase commitment from Fleet.
Loan commitments are issued as soon as possible upon completion
of the underwriting process, and mortgage loans are closed as soon as
all title clearance and other required procedures have been completed.
Because of the frequency of both the issuance of commitments and the
scheduled closing dates of the loans, the amount of loan commitments
outstanding will vary. At September 30, 1996 there were commitments to
originate adjustable rate mortgage loans of $713,000.
The Bank is subject to interest rate risk on fixed rate loans in
its pipeline from the point in time that the rate is locked with the
borrower until it is sold in the secondary market. The interest rate
is locked in at the time of loan approval and a commitment to sell the
loan is obtained simultaneously.
PURCHASE OF MORTGAGE LOANS. The Bank has purchased loans or
portions of loans originated by other lenders from time to time.
During August, 1995, the Bank purchased $650,000, or a 54.17%
participating interest, in a $1.2 million construction loan secured by
eighteen single-family condominiums located in Port Washington,
Wisconsin. The loan was paid off in October, 1996.
During March, 1996, the Bank purchased seven single-family loans
totaling $475,000 located in Rockford, Illinois. During April, 1996,
the Bank purchased $520,000, or a 16.51% participating interest, in a
$3.15 million loan secured by an office building complex located in
West Allis, Wisconsin. During May, 1996, the Bank purchased $350,000,
or a 17.073% participating interest, in a $2.05 million loan secured
by a 70 unit apartment complex located in Madison, Wisconsin. During
August, 1996, the Bank purchased a $500,000 participating interest in
a $4.6 million construction loan secured by a hotel located in
Bloomington, Minnesota. During October, 1996 the Bank purchased 57
single-family loans totaling $4,047,000 located primarily in
Washington County, Wisconsin.
LOAN APPROVAL AND MONITORING. All loans are approved monthly by
the Board of Directors. Bank management has the authority to approve
consumer loans up to $100,000; one- to four-family mortgage loans up
to $300,000; multi-family loans up to $500,000; and
commercial/non-residential real estate loans up to $200,000. All
loans exceeding these amounts are presented to the Board of Directors
for final loan approval.
LOAN ORIGINATION, SERVICING AND OTHER FEES. In addition to
interest earned on loans, the Bank receives income through fees in
connection with loan originations, loan sales, loan modifications,
late payments and for miscellaneous services related to its loans.
Income from these activities varies from period to period with the
volume and type of loans originated. In connection with the
origination of mortgage loans, the Bank charges points for
origination, commitment and discounts, and fees for processing and
closing in addition to requiring borrower reimbursement for
<PAGE> 61
out-of-pocket fees for costs associated with obtaining independent
appraisals, credit reports, title insurance, private mortgage
insurance and other items. Because of the highly competitive mortgage
market in which the Bank originates loans, the point structure varies
considerably, depending upon the type of mortgage loan being made, its
interest rate and other competitive factors. Origination fees ranging
from zero to two points generally are quoted on mortgage loan
originations. The amount of the origination fee is typically higher
with a lower interest rate quoted and lower if a higher interest rate
is established for the loan. Since the availability of zero points
mortgage loans in recent years, most borrowers typically accept a
slightly higher interest rate and pay zero points. Commitment fees
are paid by the applicant at time of loan commitment, whereas the
origination and discount fees are paid at time of closing. Accounting
standards adopted under FASB 91 prescribe the accounting treatment for
origination and commitment fees. Loan origination and commitment fees
and certain direct loan origination costs are being deferred and the
net amounts amortized as an adjustment of the related loan's yield.
These amounts are amortized to interest income using the level yield
method over the contractual life of the related loans. Deferred loan
fees totaled $40,000, $51,000 and $42,000 at September 30, 1996, 1995
and 1994, respectively. Deferred loan origination fees and costs
associated with loans sold are recognized at the time of sale as a
component of gain or loss on the sale of loans.
DELINQUENCIES, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
DELINQUENT LOANS. When a borrower fails to make a required
payment by the end of the month in which the payment is due, the Bank
generally initiates collection procedures. The Bank will send a late
notice, and in most cases, delinquencies are cured promptly; however,
if a loan has been delinquent for more than 60 days, the Bank contacts
the borrower directly, to determine the reason for the delinquency and
to effect a cure, and where it believes appropriate, reviews the
condition of the property and the financial position of the borrower.
At that time, the Bank may: (i) accept a repayment program for the
arrearage; (ii) seek evidence of efforts by the borrower to sell the
property; (iii) request a deed in lieu of foreclosure; or (iv)
initiate foreclosure proceedings. When a loan secured by a mortgage
is delinquent for three or more monthly installments, the Bank
generally will initiate foreclosure proceedings.
On mortgage loans or loan participations purchased by the Bank,
the Bank receives monthly reports from its loan servicers with which
it monitors the loan portfolio. Based upon servicing agreements with
the servicers of the loan, the Bank relies upon the servicer to
contact delinquent borrowers, collect delinquent amounts and to
initiate foreclosure proceedings, when necessary, all in accordance
with applicable laws, regulations and the terms of the servicing
agreements between the Bank and its servicing agents.
<PAGE> 62
At September 30, 1996, 1995 and 1994 delinquencies in the Bank's
loan portfolio were as follows:
<TABLE>
<CAPTION>
At September 30, 1996
--------------------------------------------------------------
60-89 Days 90 Days or More
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- --------- -------- ---------
(Dollars in Thousands)
Mortgage loans:
<S> <C> <C> <C> <C>
One- to four-family - $ - 3 $ 85
Multi-family - - - -
Commercial/nonresidential - - - -
--- --- --- ---
Total mortgage loans - - 3 85
--- --- --- ---
Consumer loans:
Home equity - - 1 14
Other consumer - - 1 1
--- --- --- ---
Total consumer loans - - 2 15
--- --- --- ---
Total gross loans - $ - 5 $100
=== === === ===
Delinquent loans to gross loans - 0.59%
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
--------------------------------------------------------------------
60-89 Days 90 Days or More
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- --------- -------- --------
Mortgage loans:
<S> <C> <C> <C> <C>
One- to four-family 1 $193 2 $ 84
Multi-family - - - -
Commercial/nonresidential - - - -
--- --- --- ---
Total mortgage loans 1 193 2 84
--- --- --- ---
Consumer loans:
Home equity - - 1 2
Other consumer - - 1 2
-- --- --- ---
Total consumer loans - - 2 4
--- --- --- ---
Total gross loans - $193 4 $ 88
=== === === ===
Delinquent loans to gross loans 1.26% 0.58%
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
At September 30, 1994
--------------------------------------------------------------------
60-89 Days 90 Days or more
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- --------- -------- ---------
(Dollars in Thousands)
Mortgage loans:
<S> <C> <C> <C> <C>
One- to four-family 4 $273 2 $ 22
Multi-family - - - -
Commercial/nonresidential - - - -
--- --- --- ---
Total mortgage loans 4 273 2 22
--- --- --- ---
Consumer loans:
Home equity - - 2 5
Other consumer - - - -
--- --- --- ---
Total consumer loans - - 2 5
--- --- --- ---
Total gross loans 4 $273 4 $ 27
=== === === ===
Delinquent loans to gross loans 2.14% 0.21%
</TABLE>
NON-PERFORMING ASSETS. Loans are placed on non-accrual status
when, in the judgment of Bank management, the probability of
collection of principal or interest is deemed insufficient to warrant
further accrual of interest. The Bank discontinues the accrual of
interest on loans when the borrower is delinquent as to a
contractually due principal or interest payment by 90 days or more.
When a loan is placed on non-accrual status, all of the accrued
interest on that loan is reversed by way of a charge to interest
income. Accrual of interest on a non-accrual loan is resumed when all
contractually past due payments are current and when management
believes the outstanding loan principal and contractually due interest
is no longer doubtful of collection.
Property acquired by the Bank as a result of a foreclosure and
property upon which a judgment of foreclosure has been entered but
prior to foreclosure sale are classified as foreclosed properties.
Foreclosed properties are recorded at the lower of the unpaid
principal balance of the related loan or fair market value less
estimated selling costs. The amount by which the recorded loan
balance exceeds the fair market value less estimated selling costs at
the time a property is classified as foreclosed property is charged
against the allowance for loan losses. Expenses incurred to maintain
or dispose of a foreclosed property, is charged against current
earnings. At September 30, 1996, the Bank had no properties in
foreclosure.
Non-performing loans include loans placed on non-accrual status
and troubled debt restructurings. Non-performing assets consist only
of non-performing loans, since there are no foreclosed properties for
the periods indicated below. The following table sets forth
nonperforming loans and assets:
<PAGE> 64
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual mortgage loans $ 85 84 22
Non-accrual consumer loans 15 4 5
---- --- ---
Total non-performing assets $100 88 27
==== ==== ===
Total non-performing loans to 0.59% 0.58% 0.21%
gross loans receivable ==== ==== ====
Total non-performing assets to 0.29% 0.23% 0.07%
total assets ==== ==== ====
Interest on non-performing loans on
the accrual basis $ 9 7 3
Actual interest received on
non-performing loans 5 4 2
--- --- ---
Interest not yet received $ 4 3 1
=== === ===
</TABLE>
Most of the Bank's loans are secured by one- to four-family
properties. There are no concentrations of loans exceeding 10% of
loans which are not otherwise disclosed as a category of loans.
CLASSIFICATION OF ASSETS. Federal regulations require that each
insured financial institution classify its assets on a regular basis.
In addition, in connection with examination of insured institutions by
regulatory authorities, regulatory examiners have authority to
identify problem assets as substandard, doubtful or loss. Substandard
assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses
of substandard assets with the additional characteristics that the
weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, questionable, and
there is a high possibility of loss. An asset classified as loss is
considered uncollectible and of such little value that continuance as
an asset of the Bank is not warranted. The Bank has adopted an asset
classification methodology which parallels that required by federal
regulations. Assets classified as substandard or doubtful require the
Bank to establish prudent general allowances for loan losses. Assets
classified as loss must either be charged off or must have a specific
allowance established for 100% of the asset classified as a loss.
At September 30, 1996, based upon the Bank's asset classification
methodology, the Bank had assets classified as substandard of $99,611
and none classified as either doubtful or loss. Of the three loans
classified as substandard at September 30, 1996, all of the loans are
secured by one- to four-family properties. None of the assets
classified as substandard are considered to represent either
individually or in the aggregate any material loss to the Bank;
however, such risk has been considered in establishing the allowance
for loan losses.
<PAGE> 65
ALLOWANCE FOR LOAN LOSSES. Under federal regulations, when an
insured institution classifies problem assets as either Substandard or
Doubtful, it is required to establish general allowances for loans
losses in an amount deemed prudent by management. In addition to
general valuation allowances, the Bank may establish specific loss
reserves against specific assets in which a loss may be realized.
General allowances represent loss allowances which have been
established to recognize the inherent risks associated with lending
activities, but which, unlike specific allowances, have not been
allocated to recognize probable losses on particular problem assets.
The Bank's determination as to its classification of assets and the
amount of its specific and general valuation allowances are subject to
review by the Commissioner and the FDIC, either of which can order the
establishment of additional general or specific loss allowances.
The allowance for loan losses is established through a provision
for loan losses based on management's evaluation of the risk inherent
in its portfolio and the general economy. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers, among other matters, the estimated
value of the underlying collateral, the nature and type of collateral,
economic conditions, recent loan loss experience, industry standards,
regulatory considerations and other factors that warrant recognition
in providing for an adequate loss allowance. There can be no assurance
that the allowance for loan losses will be adequate to cover losses
which may in fact be realized in the future and that additional
provisions for loan losses will not be required.
The following table sets forth the activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $116 98 80
Provision for loan losses 18 18 18
Charge-offs, net of recoveries:
Mortgage loans - - -
Consumer loans - - -
Total charge-offs (net) - - -
--- --- ---
Balance at end of period $134 116 98
=== === ===
Ratio of allowance for loan losses to 0.78% 0.76% 0.77%
gross loan receivable
Ratio of allowance for loan losses to 134.00% 131.82% 362.96%
non-performing loans at end of period
Ratio of allowance for loan losses to 134.00% 131.82% 362.96%
non-performing assets at end of period
Ratio of net charge-offs to average - - -
gross loans during period
</TABLE>
The following table shows the Bank's total allowance for loan
losses and the allocation to the various categories of loans at the
dates indicated:
<PAGE> 66
<TABLE>
<CAPTION>
At September 30, 1996
--------------------------------------------------
% of Total Loans
% of Allowance In Category to
to Total Loans Total Outstanding
Amount by Category Loans
------ -------------- -----------------
(In Thousands)
Breakdown of allowance:
Mortgage loans:
<S> <C> <C> <C>
One- to four-family $ 62 .66% 54.62%
Construction 4 .30% 7.88%
Multi-family 20 1.03% 11.38%
Commercial/nonresidential 23 .99% 13.59%
--- -----
Total mortgage loans 109 87.47%
Consumer loans 25 1.17% 12.53%
--- -----
Total allowance for loan losses $134 100.00%
=== ======
At September 30, 1995
--------------------------------------------------
% of Total Loans
% of Allowance In Category to
to Total Loans Total Outstanding
Amount by Category Loans
------ -------------- -----------------
(In Thousands)
Breakdown of allowance:
Mortgage loans:
One- to four-family $ 54 0.62% 56.89%
Construction 6 0.24% 16.18%
Multi-family 13 1.43% 5.95%
Commercial/nonresidential 27 1.44% 12.33%
--- -----
Total mortgage loans 100 91.35%
Consumer loans 16 1.21% 8.65%
--- -----
Total allowance for loan losses $116 100.00%
=== ======
<PAGE> 67
At September 30, 1994
---------------------------------------------------
% of Total Loans
% of Allowance In Category to
to Total Loans Total Outstanding
Amount by Category Loans
----- -------------- -----------------
(In Thousands)
Breakdown of allowance:
Mortgage loans:
One- to four-family $ 51 0.59% 67.09%
Construction - - 1.10%
Multi-family 9 0.95% 7.40%
Commercial/nonresidential 16 0.93% 13.44%
--- -----
Total mortgage loans 76 89.03%
Consumer loans 22 1.57% 10.97%
--- -----
Total allowance for loan losses $ 98 100.00%
=== ======
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Bank, which is established
by the Board of Directors and implemented by the Bank's management, is
designed primarily to provide and maintain required liquidity,
generate a favorable return on investments without incurring undue
interest rate and credit risk and complement the Bank's lending
activities. The Bank's investment policy permits investment in
various types of liquid assets authorized under FDIC and state
regulations, which include U.S. Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured
banks and savings institutions, certain bankers' acceptances and
deposits at the FHLB-Chicago. The Bank also invests in investment
grade corporate debt securities and mortgage-backed securities.
The investment activities of the Bank consist primarily of
investment in mortgage-backed securities and investment securities,
consisting primarily of securities issued or guaranteed by the United
States Government or agencies thereof and corporate obligations.
Typical investments include federally sponsored agency mortgage
pass-throughs and private issue and senior-subordinated pass-throughs.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent
a participation interest in a pool of single-family or multi-family
mortgage loans, the principal and interest payments on which are
passed from the mortgage loan originators through intermediaries
(generally federal government-sponsored enterprises) that pool and
repackage the participation interest in the form of securities to
investors such as the Bank. Such federal government-sponsored
enterprises, which guarantee the payment of principal and interest to
investors include FHLMC, FNMA and GNMA. Mortgage-backed securities
generally increase the quality of the Bank's asset by virtue of the
guarantees that back them, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations
of the Bank.
<PAGE> 68
FHLMC, FNMA and GNMA were established to provide support for
low-and middle-income housing. There are limits to the maximum size
of loans that qualify for these programs. Currently, GNMA limits its
maximum loan size to $184,000 for VA loans and on average $124,875 for
FHA loans. FNMA and FHLMC limit their loans to $203,200. To
accommodate larger-sized loans and loans that for other reasons do not
conform to the agency programs, a number of private institutions have
established their own securitization programs.
Mortgage-backed securities typically are issued with stated
principal amounts and the securities are backed by pools of mortgage
loans with interest rates within a range and have varying maturities.
The underlying pool of mortgage loans can be composed of either fixed
rate mortgage or ARM loans. Mortgage-backed securities commonly are
referred to as mortgage participation certificates or past-through
certificates. As a result, the interest rate risk characteristics of
the underlying pool of mortgage loans (i.e., fixed rate or adjustable
rate, as well as prepayment risk) are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal
to the life of the underlying mortgage loans.
The actual maturity of a mortgage-backed security varies,
however, depending on when the mortgages prepay or repay the
underlying mortgage loans. Prepayments of the underlying mortgage
loans may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income
and the amortization of the premium or accretion of the discount,
related to the mortgage-backed security. Premiums and discounts on
mortgage-backed securities are amortized or accredited over the
estimated term of the securities using a level yield method. The
prepayment assumptions used to determine the amortization period for
premiums and discounts can significantly affect the yield of the
mortgage-backed security and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments
of the underlying mortgage loans depend on many factors, including
type of mortgage loans and general levels of market interest rates.
The difference between the interest rates on the underlying mortgage
loans and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling
mortgage interest rates, prepayments generally increase. If the
coupon rate of the underlying mortgage loans significantly exceeds the
prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the
underlying mortgage loans. Prepayment experience is more difficult to
estimate for adjustable rate mortgage-backed securities.
A senior-subordinated structure often is used with
mortgage-backed securities to provide credit enhancement for
pass-through securities when the underlying collateral is not
guaranteed by an agency of the United States Government. These
structures divide mortgage pools into two risk classes: a senior class
and one or more subordinated classes. The subordinated classes
provide protection to the senior classes. When cash flow is impaired,
debt service goes first to the holders of senior class securities. In
addition, incoming cash flows also may go into a reserve fund to meet
any future shortfalls of cash flow to senior noteholders. The
subordinated noteholder may not receive any funds until the senior
<PAGE> 69
noteholders have been paid and, when appropriate, until a specified
level of funds has been contributed to the reserve fund.
COMPOSITION OF BANK'S MORTGAGE-BACKED SECURITIES PORTFOLIO.
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Bank's mortgage-
backed securities held to maturity at September 30, 1996.
<TABLE>
<CAPTION>
At September 30, 1996
-------------------------------------------------------------------------
Over One to Over Five
One year or Less Five Years to Ten Years
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA $ - - - - $19 8.02%
FHLMC 83 8.58% - - - -
FNMA - - - - - -
--- ---
Total $ 83 8.58% - - $19 8.02%
=== ===
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
----------------------------------------------------------------------------------
Over Ten Years Mortgage-Backed Securities Total
Average Approx-
Weighted Remaining imate Weighted
Carrying Average Years to Carrying Market Average
Value Yield Maturity Value Value Yield
-------- -------- --------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
GNMA $ 8 9.87% 9.59 $ 27 $ 26 8.55%
FHLMC 2,234 6.13% 8.28 2,317 2,230 6.22%
FNMA 1,377 6.26% 9.07 1,377 1,326 6.26%
----- ----- -----
Total $3,619 6.19% 8.58 $3,721 $3,582 6.25%
===== ===== =====
</TABLE>
The table below sets forth certain information regarding the
carrying and market values and percentage of total carrying values of
the Bank's mortgage-backed securities held to maturity.
<PAGE> 70
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------
1996 1995
Carrying % of Market Carrying % of Market
Value Total Value Value Total Value
------- ----- ------ ------- ----- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA $ 27 0.72% $ 26 $ 62 1.46% $ 63
FHLMC 2,317 62.27% 2,230 2,615 61.56% 2,554
FNMA 1,377 37.01% 1,326 1,571 36.98% 1,530
----- ----- ----- ----- ----- -----
Total $3,721 100.00% $3,582 $4,248 100.00% $4,147
===== ====== ===== ===== ====== =====
</TABLE>
The following table sets forth the activity of the Bank's
mortgage-backed securities held to maturity during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
At beginning of period $4,248 4,876 2,409
Purchases - - 2,984
Sales - - -
Repayments (530) (632) (515)
Premium/discount amortization 3 4 (2)
----- ----- -----
At end of period $3,721 4,248 4,876
===== ===== =====
</TABLE>
INVESTMENT SECURITIES. The Bank invests in various types of
liquid assets that are permissible investments for state chartered
savings banks, including United States Treasury obligations,
securities of various federal agencies, certain certificates of
deposit of federally insured banks and savings institutions and
federal funds. Subject to various restrictions, the Bank also may
invest its assets in commercial paper and investment grade corporate
debt securities. The Bank's current investment policy permits
purchase only of investments rated investment grade (i.e., rated in
one of the top four rating categories) by a nationally recognized
statistical rating organization ("NRSRO") and does not permit
purchases of securities of noninvestment grade quality.
Medium-term corporate notes with a maximum maturity of three
years are authorized for purchase for the Bank's investment portfolio.
All purchases are limited to a pre-approved list of issuers, with
maximum exposure determined by the issuer's credit rating by a major
credit rating service. Medium-term corporate notes generally are
unsecured debentures of the issuing company. Most issues approved for
purchase are financing subsidiaries of major industrial companies. At
September 30, 1996, the Bank held $2.8 million of corporate debt
securities. All corporate debt securities purchased must be rated in
one of the top four rating categories by any of the NRSROs at the time
of purchase. The maximum exposure per issuer is limited to $1.0
<PAGE> 71
million for a single issuer rated in one of the two highest categories
and $500,000 for a single issuer rated in the third and fourth highest
categories.
The table below sets forth certain information regarding the
carrying and market values and percentage of total carrying values of
the First Ozaukee's securities.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------
1996 1995
Carrying % of Market Carrying % of Market
Value Total Value Value Total Value
-------- ----- ------ -------- ----- ------
(Dollars in Thousands)
Securities held to maturity:
<S> <C> <C> <C> <C> <C> <C>
U.S. government and othe $1,997 100.00% $1,992 $ 5,891 43.36% $ 5,947
agency obligations
Corporate notes - - - 7,696 56.64% 7,715
------ ------ ------ ------ ----- ------
Total $1,997 100.00% $1,992 $13,587 100.00% $13,662
===== ====== ===== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------
1996 1995
---- ----
Carrying Carrying
Value % of Amortized Value % of Amortized
(Market) Total Cost (Market) Total Cost
-------- ----- --------- -------- ----- ---------
(Dollars in Thousands)
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and other $7,097 72.00% $7,097 $4,506 100.00% $4,490
agency obligations
Corporate notes 2,760 28.00% 2,753 - - -
----- ----- ----- ----- ----- -----
Total $9,857 100.00% $9,850 $4,506 100.00% $4,490
===== ====== ===== ====== ====== =====
</TABLE>
<PAGE> 72
The table below sets forth certain information regarding the
carrying value, weighted average yields and maturities of First
Ozaukee's securities and FHLB stock, excluding mortgage-backed
securities, at September 30, 1996.
<TABLE>
<CAPTION>
At September 30, 1996
--------------------------------------------------------------------------
Over One to Over Five
One year or less Five Years to Ten Years
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------- -------- -------- -------- -------- -------
(Dollars in Thousands)
Securities held to maturity:
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and other - - $1,997 6.47% - -
agency obligations
FHLB Stock - - - - - -
----- ----- ----- ---- ---- ----
Total - - $1,997 6.47% - -
===== ===== ===== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
------------------------------------------------------------------------------
No Contractual
Over ten years Maturity Securities Total
Average
Weighted Remaining Weighted
Carrying Average Carrying Years to Carrying Market Average
Value Yield Value Maturity Value Value Yield
------- -------- -------- --------- -------- ------ --------
(Dollars in Thousands)
Securities held to maturity:
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and other - - - 2.83 $1,997 $1,992 6.47%
agency obligations
FHLB Stock - - $152 N/A 152 152 6.75%
---- ---- --- ----- -----
Total - - $152 $2,149 $2,144 6.49%
==== ==== === ===== =====
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
At September 30, 1996
----------------------------------------------------------------------
Over One to Over Five
One year or Less Five Years to Ten Years
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and other $2,605 6.76% $4,492 6.77% - -
agency obligations
Corporate notes 1,256 7.93% 1,497 6.39% - -
----- ----- ----- -----
Total $3,861 $5,989 - -
===== ===== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
------------------------------------------------------------------------------
Over ten years No Securities Total
Contractual
Maturity
Average
Weighted Remaining Weighted
Carrying Average Carrying Years to Carrying Market Average
Value Yield Value Maturity Value Value Yield
-------- -------- -------- --------- -------- ------ --------
(Dollars in Thousands)
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and other
agency obligations - - - 2.22 $7,097 $7,097 6.76%
Corporate notes - - - 1.07 2,753 2,760 7.09%
--- --- --- ----- -----
Total - - - 1.90 $9,850 $9,857 6.86%
=== === === ===== =====
</TABLE>
SOURCES OF FUNDS
GENERAL. The Bank's primary sources of funds for use in lending,
investing and for other general purposes are deposits, proceeds from
principal and interest payments on loans, mortgage-backed securities
and investment securities. Contractual loan payments are a relatively
stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general market interest
rates and economic conditions. Borrowings may be used on a short-term
basis to compensate for seasonal or other reductions in normal sources
of funds or for deposit inflows at less than projected levels. The
Bank is a member of the FHLB-Chicago and has occasionally borrowed
from the FHLB-Chicago.
DEPOSITS. The Bank offers a variety of deposit accounts having a
range of interest rates and terms. The Bank's deposits principally
consist of demand accounts (non-interest bearing checking, NOW, MMDA
and passbook) and certificates of deposit. The flow of deposits is
influenced significantly by general economic conditions, changes in
prevailing interest rates and competition. The Bank's deposits are
<PAGE> 74
obtained primarily from the areas in which its offices are located,
and the Bank relies principally on customer service, marketing
programs and promotion to attract and retain deposit accounts. The
Bank does not currently solicit or currently accept brokered deposits.
Management monitors the Bank's certificate accounts and based on
historical experience, management believes it will retain a large
portion of such accounts upon maturity. Management considers Bank
profitability, the matching of term lengths with assets, the
attractiveness to customers and rates offered by competitors in
deposit offerings and promotions. The Bank has been competitive in
the types of accounts and interest rates it has offered on its deposit
products. The Bank intends to continue its efforts to attract
deposits as a primary source of funds for supporting its lending and
investing activities.
Depositors have been shifting funds from lower interest
certificates of deposit to mutual funds and other investment
alternatives offering higher yields. However, the total decrease in
deposits for the year ended September 30, 1994 was positively affected
by an increase of $4.3 million in passbook account balances. Because
the Conversion was not consummated until October 21, 1994, the stock
proceeds were reflected in the passbook account balance at September
30, 1994. The decrease in deposit accounts for the year ended
September 30, 1995 is mainly related to the $4.8 million used to
purchase Common Stock in connection with the Conversion. Deposits
decreased by $4.6 million during the year ended September 30, 1996.
Management chose to price deposits to maintain interest margins rather
than match or beat interest rates offered by other financial
institutions or competing financial products such as mutual funds and
bonds.
The following table presents the deposit activity of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Deposits $33,576 42,949 40,249
Withdrawals (39,324) (47,609) (40,621)
------ ------ ------
Net deposits (withdrawals) (5,748) (4,660) (372)
Interest credited on deposits 1,241 1,086 1,021
Charge in accrued interest (39) (58) (21)
----- ----- ---
Total increase (decrease) in deposits $(4,546) (3,632) 628
===== ===== ===
</TABLE>
<PAGE> 75
The Bank had certificates of deposit in amounts of $100,000 or
more maturing as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Three months or less $208 $211
Over three through six months 104 -
Over six through twelve months 116 312
--- ---
Total $428 $523
=== ===
</TABLE>
The following table sets forth the distribution of the Bank's
deposit accounts at the dates indicated and the weighted average
nominal interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
At September 30, 1996 At September 30, 1995
------------------------------------ ------------------------------------
Weighted Weighted
Percent Average Percent Average
of total Nominal of total Nominal
Amount Deposits Rate Amount Deposits Rate
------ -------- -------- ------ -------- --------
(Dollars in Thousands)
Demand accounts:
<S> <C> <C> <C> <C> <C> <S>
Non-interest bearing $ 270 1.09% - $ 231 0.79% -
NOW 1,165 4.69% 2.65% 1,566 5.34% 2.62%
Money Market 2,669 10.74% 4.00% 2,809 9.57% 3.96%
Passbook 4,016 16.17% 2.75% 4,598 15.67% 2.78%
------ ----- ----- -----
Total demand accounts 8,120 32.69% 3.06% 9,204 31.37% 3.04%
------ ----- ----- -----
Certificate accounts:
One to six months 4,144 16.68% 5.14% 4,470 15.23% 6.18%
12 to 20 months 7,418 29.86% 5.40% 8,119 27.66% 6.12%
24 to 36 months 4,728 19.03% 5.50% 7,029 23.95% 5.39%
36 to 60 months 4 0.02% 4.80% 4 .01% 4.80%
Jumbo 428 1.72% 5.30% 523 1.78% 5.50%
------ ----- ----- -----
Total certificates 16,722 67.31% 5.36% 20,145 68.63% 5.86%
------ ----- ------ -----
Total deposit accounts 24,842 100.00% 4.61% 29,349 100.00% 4.98%
====== ======
Accrued interest 120 159
------ ------
Total deposits $24,962 $29,508
====== ======
</TABLE>
The following table presents, by various interest rate
categories, the amounts of certificate accounts outstanding at
September 30, 1996, 1995 and 1994, and the periods to maturity of the
certificate accounts outstanding at September 30, 1996.
<PAGE> 76
<TABLE>
<CAPTION>
Period of Maturity
At September 30, From September 30, 1996
----------------------------- ----------------------------------
(In Thousands)
Within One to
1996 1995 1994 One Year Three Years Total
---- ---- ---- -------- ----------- -----
Certificate of deposit accouts:
<S> <C> <C> <C> <C> <C> <C>
3.99% or less $ - 143 2,869 $ - - -
4.00% to 4.99% 4,387 2,341 11,687 2,086 2,301 4,387
5.00% to 5.99% 12,104 7,474 2,973 11,933 171 12,104
6.00% to 6.99% 231 10,187 200 231 - 231
7.00% to 7.99% - - 42 - - -
8.00% to 8.99% - - 17 - - -
------ ------ ------ ------ ------ ------
$16,722 20,145 17,788 $14,250 2,472 16,722
====== ====== ====== ====== ===== ======
</TABLE>
BORROWINGS AND OTHER FINANCING TRANSACTIONS. The Bank's other
available sources of funds include notes payable to the FHLB-Chicago
and collateralized borrowings. As a member of FHLB-Chicago, the Bank
is required to own capital stock in and is authorized to apply for
borrowings from the FHLB-Chicago. Each FHLB credit program has its
own interest rate, which may be fixed or variable, and a range of
maturities. The FHLB-Chicago may prescribe the acceptable uses for
these borrowings, as well as limitations on the amount and repayment
provisions. The Bank has rarely borrowed funds in the past, although
it will continue to monitor use of this source in the future. At
September 30, 1996 the Bank had no outstanding borrowings from the
FHLB-Chicago because the Bank had a high level of liquidity.
FEDERAL TAXATION
GENERAL. The following discussion of tax matters is intended to
be a summary of the material tax rules applicable to the Bank and does
not purport to be a comprehensive description of all applicable tax
rules.
The Bank and First Ozaukee report their income on a fiscal year
basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's reserve for bad
debts discussed below.
BAD DEBT RESERVES. Savings institutions, such as the Bank, which
meet certain definitional tests primarily relating to their assets and
the nature of their business ("qualifying thrifts"), are permitted to
establish a reserve for bad debts and to make annual additions
thereto, which additions may, within specified formula limits, be
deducted in arriving at their taxable income. Effective for tax years
beginning after December 31, 1995, institutions will be required to
recapture into taxable income over a six year period the portion of
the tax bad debt reserve that exceeds the 1987 tax year level. The
Bank will be permitted to make additions to the tax bad debt reserve
using the experience method.
<PAGE> 77
Earnings that have been appropriated for bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to
pay cash dividends to First Ozaukee without the payment of income
taxes by the Bank at the then current income tax rate on the amount
deemed distributed, which would include the amount of any federal
income taxes attributable to the distribution. Thus, any dividends to
First Ozaukee that would reduce amounts appropriated (to the Bank's
bad debt reserves and deducted for federal income tax purposes) could
create a tax liability for the Bank. The Bank does not intend to pay
dividends that would result in a recapture of its bad debt reserves.
DISTRIBUTIONS. To the extent that (i) the Bank's reserve for
losses on qualifying real property loans exceeds the amount that would
have been allowed under an experience method, and (ii) the Bank makes
"non-dividend distributions" to shareholders that are considered to
result in distributions from the excess bad debt reserve or the
supplemental reserve for losses on loans ("Excess Distribution"), then
an amount based on the amount distributed will be included in the
Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current or accumulated earnings
and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of the
Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserves.
The amount of additional taxable income created from an Excess
Distribution is an amount that when reduced by the tax attributable to
the income is equal to the amount of the distribution. Thus, if
certain portions of the Bank's accumulated tax bad debt reserve are
used for any purpose other than to absorb qualified bad debt losses,
such as for the payment of dividends or other distributions with
respect to the Bank's capital stock (including distributions upon
redemption or liquidation), approximately one and one-half times the
amount so used would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of
state taxes). See "--Regulation" for limits on the payment of
dividends by the Bank.
CORPORATE ALTERNATIVE MINIMUM TAX. For taxable years beginning
after December 31, 1986, the Internal Revenue Code imposes an
alternative minimum tax ("AMT") on a corporation's alternative minimum
taxable income ("AMTI") which is imposed at a rate of 20%. The excess
of the bad debt reserve deduction using the percentage of taxable
income method, over the deduction that would have been allowable under
an experience method, is treated as a preference item for purposes of
computing the AMTI. Only 90% of AMTI can be offset by net operating
losses. For taxable years beginning after December 31, 1989, the
adjustment to AMTI based on book income will be an amount equal to 75%
of the amount by which a corporation's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). In addition, for
taxable years beginning after December 31, 1986, and before January 1,
1996, an environmental tax of 0.12% of the excess of AMTI (with
certain modifications) over $2.0 million is imposed on corporations,
including the Bank, whether or not an AMT is due. The Bank is not
subject to the environmental tax and does not expect to be subject to
the AMT.
<PAGE> 78
STATE TAXATION. The Bank is subject to franchise taxes at a rate
of 7.9% imposed by the State of Wisconsin. Wisconsin taxable income is
generally similar to federal taxable income except that interest from
state and municipal obligations is taxable, no deduction is allowed
for state income taxes, and net operating losses may be carried
forward but not back. Wisconsin law does not provide for filing of
consolidated income tax returns.
REGULATION
The Bank consummated its conversion from a mutual to a stock
savings bank on October 21, 1994. Therefore, the ensuring discussion
involves regulations as they apply to stock savings banks.
The Bank is a Wisconsin-chartered stock savings bank and its
deposit accounts are insured up to applicable limits by the FDIC under
SAIF. The Bank is subject to extensive regulation by the
Commissioner, as its chartering agency, and by the FDIC, as its
deposit insurer and principal federal regulator. The lending and
investment authority of the Bank is prescribed by Wisconsin law and
regulations, as well as applicable federal law and regulations, and
the Bank is prohibited from engaging in any activities not permitted
by such law and regulations. First Ozaukee is a one-bank holding
company subject to regulatory oversight by the Federal Reserve Board
and the SEC.
WISCONSIN SAVINGS BANK REGULATION. The Commissioner has adopted
regulations governing the regulation and supervision of
Wisconsin-chartered savings banks which became effective March 1,
1994.
EXAMINATIONS AND ASSESSMENTS. As a Wisconsin-chartered stock
savings bank, the Bank is subject to regulation and supervision by the
Commissioner. The Bank is required to file periodic reports with and
is subject to periodic examinations at least once every 18-month
period by the Commissioner. Savings banks are required by the
Commissioner's regulations to pay examination fees and annual
assessments to fund the supervisory operations of the Commissioner.
INVESTMENTS. Under Wisconsin law, the Bank is authorized to
make, invest in, sell, purchase, participate or otherwise deal in
mortgage loans or interests in mortgage loans without geographic
restriction, including loans made on the security of residential and
commercial property. Savings banks may lend funds, on a secured or
unsecured basis, for commercial or consumer purposes, provided that
aggregate commercial loans do not exceed 10% of the savings bank's
total assets and aggregate consumer loans do not exceed 10% of the
savings bank's total assets. Subject to certain limited exceptions,
savings banks may not make a loan secured by a first lien mortgage in
an amount in excess of 90% of the fair market value of the real estate
security.
Savings banks also may invest funds in certain types of debt and
equity securities, including obligations of federal, state and local
governments and agencies. Investment in debt securities of local
governmental units may not exceed 50% of capital and temporary
borrowings of any local governmental unit maturing within one year
from the date of issue may not exceed 60% of capital. Investment in
<PAGE> 79
short-term commercial paper issued by a financial institution,
corporation or other borrower must have a maturity of two to 270 days
and be rated in one of the four highest categories by a nationally
recognized rating service.
Subject to the prior approval of the Commissioner and compliance
with capital requirements, savings banks may invest in residential
housing development projects or in the stock of a corporation that
owns one or more of such projects and is a wholly owned subsidiary of
a financial institution, provided that investment in any one project
does not exceed 15% of capital and the aggregate investment in such
projects does not exceed 50% of capital.
Under the Commissioner's regulations, savings banks may invest in
service corporations or subsidiaries with the prior approval of the
Commissioner and subject to the condition that the service corporation
or subsidiary engages in only those activities pre-approved by the
Commissioner, agrees to be audited annually by a certified public
accountant, agrees to bear the expense of all examinations and audits
conducted by the Commissioner, and agrees not to enter into a business
venture, directly, or indirectly with an officer, director or employee
of the savings bank. Under the Commissioner's regulations, a savings
bank's investment in a service corporation or subsidiary is broadly
defined to include: acquisition of capital stock; partnership or joint
venture capital contributions; mortgage loans, commercial loans, loan
guarantees and letters of credit; liability for the debt of a
partnership or joint venture; or any other obligation for direct or
contingent payment of a service corporation or subsidiary's debt. The
Bank does not have any subsidiary operations.
The lending and investment powers of Wisconsin savings banks also
are limited by FDIC regulations and other federal law and regulations.
See "--Restrictions Upon State-Chartered Banks".
LOANS TO ONE BORROWER. Wisconsin-chartered savings banks may
make loans and extensions of credit, both direct and indirect, to one
borrower in amounts up to 15% of capital plus an additional 10% for
loans fully secured by readily marketable collateral. In addition,
savings banks may make loans to one borrower for any purpose in an
amount not to exceed $500,000, or to develop domestic residential
housing units in an amount not to exceed the lesser of $30 million or
30% of capital, provided certain conditions are satisfied. If the
collateral securing an outstanding loan falls below 100% of the total
amount of the loan or extension of credit or otherwise does not
conform to the foregoing loans-to-one borrower limitations, a savings
bank must bring such loan into conformance within 15 business days
unless a judicial proceeding or other extraordinary occurrence
prevents the savings bank from taking action. At September 30, 1996,
the Bank did not have any loans which exceeded the loans-to-one
borrower limitations.
QUALIFIED THRIFT REQUIREMENT. As a Wisconsin-chartered savings
bank, the Bank must qualify for and maintain a level of qualified
thrift investments equal to 60% of its assets as prescribed in Section
7701(a)(19) of the Code. At September 30, 1996, the Bank maintained
82.55% of its assets in qualified thrift investments and therefore met
the qualified thrift requirement.
<PAGE> 80
DIVIDEND LIMITATIONS. A savings bank which meets its regulatory
capital requirement may declare dividends on capital stock based upon
net profits, provided that its paid-in surplus equals its capital
stock. If the paid-in surplus of the savings bank does not equal its
capital stock, the board of directors may not declare a dividend
unless at least 10% of the net profits of the preceding half year in
the case of quarterly or semi-annual dividends, or 10% of the net
profits of the preceding year in case of annual dividends, has been
transferred to paid-in surplus. In addition, prior approval of the
Commissioner is required before dividends exceeding 50% of profits for
any calendar year may be declared and before a dividend may be
declared out of retained earnings. Under the Commissioner's
regulations, a savings bank which has converted from mutual to stock
form also is prohibited from paying a dividend on its capital stock if
the effect thereof would cause the regulatory capital of the savings
bank to be reduced below the amount required for its liquidation
account.
LIQUIDITY. Under the Commissioner's regulations, savings banks
are required to maintain an average daily balance of liquid assets
(including cash, certain time deposits, certain banker's acceptances,
certain corporate debt securities and highly rated commercial paper,
securities of certain mutual funds and specified United States
government, state or federal agency obligations) of not less than 8%
of its average daily balance during the preceding calendar month of
its net withdrawable accounts plus its short-term borrowings. In
addition, the regulations require savings banks to maintain an average
daily balance of short-term liquid assets of not less than 1% of the
average daily balance during the preceding calendar month of its net
withdrawable accounts plus its short-term borrowings. On September
30, 1996, the Bank's liquidity ratio as defined under the
Commissioner's regulations was 54.05%.
PROMPT CORRECTIVE REGULATORY ACTION. The Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") establishes a system
of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, federal bank
regulators are required to take certain supervisory actions with
respect to undercapitalized institutions, the severity of which
depends upon the institution's degree of capitalization. Generally,
FDICIA requires federal bank regulators to appoint a receiver or
conservator for an institution that is critically undercapitalized.
FDICIA authorizes federal bank regulators to specify the ratio of
tangible capital to assets at which an institution becomes critically
undercapitalized and requires that the ratio be no less than 2% of
total assets.
On September 15, 1992, the FDIC adopted a final rule to implement
the prompt corrective action provisions of FDICIA. Under the
regulations, an insured institution that is not subject to an order or
written directive to meet or maintain a specific capital level will be
deemed "well capitalized" if it also has a total risk-based capital
ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6.0% or
greater, and a leverage ratio of 5.0% or greater. An "adequately
capitalized" institution is an insured institution that does not meet
the definition of well capitalized and has (i) a total risk-based
capital ratio of 8.0% or greater, a Tier 1 capital risk-based ratio
of 4.0% or greater, and a leverage ratio of 4.0% or greater (or 3.0%
<PAGE> 81
or greater if the institution has a composite 1 CAMEL rating). An
insured institution that has total capital to risk-based assets of
less than 8.0%, core capital to risk-based assets of less than 4.0%,
or a leverage ratio that is less than 4.0%, would be considered
"undercapitalized". An insured institution that has total capital to
risk-based assets of less than 6.0%, core capital to risk-based assets
of less than 3.0%, or a leverage ratio that is less than 3.0%, would
be considered "significantly undercapitalized" and an insured
institution that has tangible capital to assets ratio equal to or less
than 2.0% would be deemed "critically undercapitalized".
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends,
making any other capital distribution or paying a management fee to a
controlling person. Undercapitalized institutions are subject to
certain mandatory supervisory actions, including increased monitoring,
required capital restoration planning and growth and acquisition
restrictions. The filing of a capital restoration plan, which must be
guaranteed by any parent holding company, also is required.
Significantly undercapitalized institutions face even more severe
restrictions, requiring the institution to raise additional capital;
restricting transactions between the institution and its affiliates;
restricting interest rates paid on deposits; requiring the institution
to accept an offer to be acquired by another institution or company;
and requiring the institution to terminate, reduce or alter any
activity posing excessive risk to the institution. The Bank currently
exceeds all applicable regulatory capital requirements and therefore
is not subject to prompt correction action.
BROKERED DEPOSITS; INTEREST RATE LIMITATIONS. FDIC regulations
promulgated under FDICIA govern the acceptance of brokered deposits by
insured depository institutions. The capital position of an
institution determines whether and with what limitations an
institution may accept brokered deposits. A "well-capitalized"
institution (one that significantly exceeds specified capital rations)
may accept brokered deposits without restriction. "Undercapitalized"
institutions (those that fail to meet minimum regulatory capital
requirements) may not accept brokered deposits and "adequately
capitalized" institutions (those that are not "well-capitalized" or
"undercapitalized") may only accept such deposits with the consent of
the FDIC. "Adequately capitalized" institutions may apply for a
waiver by letter to the FDIC. An institution that is not "well
capitalized", even if meeting minimum capital requirements, may not
solicit brokered or other deposits by offering interest rates that are
significantly higher than the relevant local or national rate as
determined under the regulations. The Bank is a "well-capitalized"
institution and therefore may accept brokered deposits without
restrictions. At September 30, 1996, the Bank had no brokered
deposits.
UNIFORM LENDING STANDARDS. Under FDICIA, federal bank regulators
are required to adopt uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real
estate or made for the purpose of financing the construction of a
building or other improvements to real estate. Savings institutions
and savings banks must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit
secured by liens or interests in real estate or made for the purpose
<PAGE> 82
of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards, prudent
underwriting standards (including loan-to-value limits) that are clear
and measurable, loan administration procedures and documentation,
approval and reporting requirements. The real estate lending polices
must reflect consideration of the Interagency Guidelines for Real
Estate Lending Policies adopted by federal bank regulators. The Bank
has adopted and maintains such policies.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA required federal bank
regulators to prescribe operational and managerial standards for all
insured depository institutions and depository institution holding
companies relating to internal controls, information systems and audit
systems; loan documentation; credit underwriting; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The
compensation standards would prohibit employment contracts,
compensation or benefit arrangements, stock option plans, fee
arrangements or other compensatory arrangements that would provide
excessive compensation, fees or benefits or could lead to material
financial loss. In addition, federal bank regulators were required to
prescribe standards relating to asset quality, earnings and stock
valuation that the regulators determined to be appropriate.
On September 23, 1994, the Riegle Act (the "Riegle Act") was
enacted. The Riegle Act amended Section 39 of the FDI Act: (1) To
authorize the federal bank regulators to establish safety and
soundness standards by regulation or by guideline for all insured
depository institutions; (2) to give the regulators greater
flexibility in prescribing asset quality and earnings standards; and
(3) to eliminate the requirement that standards prescribed under
Section 39 apply to depository institution holding companies.
On July 10, 1995, federal bank regulators adopted Interagency
Guidelines Establishing Standards for Safety and Soundness (the
"Guidelines") and also adopted a final rule establishing deadlines for
submission and review of safety and soundness compliance plans.
Federal bank regulators are authorized, but not required, to request a
compliance plan for failure to satisfy the safety and soundness
standards set out in the Guidelines. An institution must file a
compliance plan within 30 days of a request to do so from the
institution's primary federal regulators. Regulators expect to
request a compliance plan from an institution whose failure to meet
one or more of the standards is of such severity that it could
threaten the safe and sound operation of the institution.
With respect to internal controls, information systems and
internal audit systems of institutions, the Guidelines prescribe the
functions that adequate internal controls and information systems must
be able to perform, rather than providing the types of controls or
systems that must be present in every case. Each institution is
required to have an internal audit system that provides for adequate
testing and review of internal controls and information systems.
The Guidelines do not specify in detail what loan documentation
must contain; documentation practices would be evaluated based upon
each institution's ability to: make informed decisions and assess risk
on an ongoing basis; identify the purpose of the loan and assess the
ability of the borrower to repay the indebtedness in a timely manner;
<PAGE> 83
insure that any claim against a borrower is legally enforceable;
demonstrate appropriate administration and monitoring of the loan; and
take account of the size and complexity of the loan. The Guidelines
establish general parameters of safe and sound credit underwriting
practices, and require each institution to establish and maintain
prudent credit underwriting practices commensurate with the size of
the institution and the nature and scope of its lending activities.
With respect to interest rate risk management, the Guidelines
require institutions to manage interest rate risk in a manner
appropriate to the size of the institution and the complexity of its
assets and liabilities. Larger institutions that are exposed to
significant interest rate risk would be expected to maintain a more
formal system for the measurement and management of such risk.
Further, an institution is required to base its asset growth on a plan
that reflects consideration of: (i) the source, volatility and use of
the funds that support asset growth; (ii) any increase in credit risk
or interest rate as a result of growth; and (iii) the effect of growth
on the institution's capital.
The Guidelines also require an institution to base its asset
growth on a plan that fully considers the source of an institution's
growth, the risks presented by such growth, and the effect of growth
on the institution's capital. Regulators will evaluate asset growth
against an institution's overall strategic plan for growth.
In addition, the Guidelines would require that each institution
maintain safeguards to prevent the payment of compensation, fees, or
benefits that are excessive or could lead to material financial loss.
Compensation that is unreasonable or disproportionate to the service
actually performed by the institution being compensated would be
considered excessive. In making such a determination, the federal
regulators would consider all relevant factors, including the
compensation history of the individual and other individuals with
comparable expertise at the institution, the financial condition of
the institution, comparable compensation packages at comparable
institutions, and any connection between an individual and any
wrongdoing at the institution.
The final rule does not set forth any standards related to asset
quality and earnings in the final Guidelines. Federal regulators
intend to add revised asset quality and earnings standards to the
Guidelines after receiving comments and finalizing such standards.
The federal regulators also concluded that establishing stock
valuation standards for publicly traded institutions is not
appropriate. Regulators intend to continue the existing practice of
augmenting overall examinations and ongoing monitoring of
publicly-traded institutions through the review of stock price
changes, market price to book value ratios, bond ratings and other
indicators of the market's assessment of an institution's performance.
The Bank believes that its operational and managerial standards
substantially comply with a standards set forth in the Guidelines and
that compliance with the Guidelines will therefore not impose a
significant burden on Bank operations.
<PAGE> 84
RESTRICTIONS UPON STATE-CHARTERED BANKS
FDICIA added a new Section 24 to the Federal Deposit Insurance
Act of 1950 ("FDI Act") which generally limits the activities and
equity investments of FDIC-insured state-chartered banks and their
subsidiaries to those permissible for federally chartered national
banks and their subsidiaries, unless such activities and investments
are specifically exempted by Section 24 or consented to by the FDIC.
Regulations governing equity investments of banks generally
prohibit certain equity investments and require divestiture of such
investments by December 19, 1996. Section 24 provides an exception
for investments in common and preferred stocks listed on a national
securities exchange or the shares of registered investment companies
by a bank if (1) the bank held such types of investments during the
14-month period from September 30, 1990 through November 26, 1991, (2)
the state in which the bank is chartered permitted such investments as
of September 30, 1991, and (3) the bank notifies the FDIC and obtains
approval from the FDIC to make or retain such investments. Upon
receiving such FDIC approval, an Institution's investment in such
equity securities will be subject to an aggregate limit up to its core
capital. Section 24 also contains an exception for certain
majority-owned subsidiaries. Banks holding impermissible equity
investments that do not receive FDIC approval must submit to the FDIC
a plan for divesting such investments as quickly and as prudently as
possible. The Bank does not hold any impermissible equity
investments.
Insured savings banks must obtain the FDIC's prior approval
before directly, or indirectly through a majority-owned subsidiary,
engaging "as principal" in any activity that is not permissible for a
national bank unless certain exceptions apply. An "activity
permissible for a national bank" includes any activity that is
authorized for a national bank under the National Bank Act (12 U.S.C.
21 et seq.) or any other statute, as well as activities recognized as
permissible in regulations issued by the Office of Comptroller of
Currency (the "OCC"), official circulars or bulletins issued by the
OCC, or any order or written interpretation issued by the OCC.
However, in order for a state bank to conduct an activity as principal
without the FDIC's consent, the activity must be conducted in the same
manner in which a national bank is authorized to conduct the activity.
Under the activity regulations, FDIC-supervised state banks will not
be permitted to directly engage in commercial ventures or any
insurance underwriting activity other than as such activities are
permissible for a national bank or a national bank subsidiary or
except for certain limited insurance underwriting activities. In
addition, the activity regulations provide that state banks which meet
all regulatory capital requirements may engage in certain activities
that are not permissible for national banks which are deemed not to
present a significant risk to the insurance fund, including
guaranteeing certain obligations of others, activities which the
Federal Reserve Board has found to be closely related to banking and
certain securities activities conducted through subsidiaries. The
FDIC will not approve an activity it determines would present a
significant risk to FDIC insurance funds. Bank activities are of a
type permissible under FDICIA.
<PAGE> 85
As a SAIF-insured, state-chartered savings bank which was
formerly a state-chartered savings association, the Bank was subject
to certain restrictions which are imposed by federal law on
state-chartered savings associations, including a prohibition against
engaging in activities (other than as agent for its customers) that
are not permissible for a federally chartered savings association or
engaging in activities authorized for federally chartered
associations, but to a greater extent than authorized for federally
chartered associations, unless the association met its fully phased-in
capital requirements and the FDIC determined that the activity will
not pose a significant risk to the deposit insurance fund. Effective
December 8, 1993, the FDIC amended its regulations to delete certain
provisions requiring SAIF-insured state banks to continue to comply
with certain restrictions applicable to state-chartered savings
associations. The effect of such amendment is to treat SAIF-insured
state banks and Bank Insurance Fund ("BIF") member state banks the
same rather than subject such institutions to additional restrictions
based on insurance fund membership.
CAPITAL MAINTENANCE. FDIC-insured institutions are required to
follow certain capital adequacy guidelines which prescribe minimum
levels of capital and require that institutions meet certain
risk-based and leverage capital requirements. Under the FDIC capital
regulations, the Bank is required to meet the following capital
standards: (i) "Tier 1 capital" in an amount not less than 3% of total
assets; (ii) "Tier 1 capital" in an amount not less than 4% of
risk-weighted assets; and (iii) "total capital" in an amount not less
than 8% of risk-weighted assets.
FDIC-insured institutions in the strongest financial and
managerial condition (with a composite rating of "1" under the Uniform
Financial Institutions Rating System established by the Federal
Financial Institutions Examination Council) are required to maintain
"Tier 1 capital" equal to at least 3% of total assets (the "leverage
limit" requirement). For all other FDIC-insured institutions, the
minimum leverage limit requirement is 3% of total assets plus at least
an additional 100 to 200 basis points. Tier 1 capital is defined to
include the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus), and
minority interests in consolidated subsidiaries, minus all intangible
assets (other than qualifying servicing rights). An institution that
fails to meet the minimum leverage limit requirement must file a
capital restoration plan with the appropriate FDIC regional director
that details the steps it will take to reach capital compliance. At
September 30, 1996, the Bank's ratio of Tier 1 capital to total assets
was 17.16% or 13.16% in excess of the minimum leverage limit
requirement.
FDIC-insured institutions also are required to adhere to certain
risk-based capital guidelines which are designed to provide a measure
of capital more sensitive to the risk profiles of individual banks.
Under the risk-based capital guidelines, capital is divided into two
tiers: core (Tier 1) capital, as defined above, and supplementary
capital (Tier 2). Tier 2 capital is limited to 100% of core capital
and includes cumulative perpetual preferred stock, mandatory
convertible securities, subordinated debt, intermediate preferred
stock and allowance for possible loan and lease losses. Allowance for
possible loan and lease losses includable in supplementary capital is
<PAGE> 86
limited to a maximum of 1.25% of risk-weighted assets. Total capital
is the sum of Tier 1 and Tier 2 capital. The risk-based capital
framework assigns balance sheet assets to one of four broad risk
categories which are assigned risk-weights ranging from 0% to 100%
based primarily on the degree of credit risk associated with the
obligor. Off-balance sheet items are converted to an on-balance sheet
"credit equivalent" amount utilizing certain conversion factors. The
weighted sum of the four risk-weighted categories equals risk-weighted
assets. At September 30, 1996, the Bank's Tier 1 capital to
risk-weighted assets was 33.77%, or 29.77% in excess of the FDIC
requirement and the Bank's total capital to risk-weighted assets was
34.56% or 26.56% in excess of the FDIC requirement.
In addition, Wisconsin-chartered savings banks are required to
maintain a minimum capital to assets ratio of 6% and must maintain
total capital necessary to ensure the continuation of insurance of
deposit accounts by the FDIC. If the Commissioner determines that the
financial condition, history, management or earning prospects of a
savings bank are not adequate, the Commissioner may require a higher
minimum capital level for the savings bank. If a savings bank's
capital ratio falls below the required level, the Commissioner may
direct the savings bank to adhere to a specific written plan
established by the Commissioner to correct the savings bank's capital
deficiency, as well as a number of other restrictions on the savings
bank's operations, including a prohibition on the declaration of
dividends by the savings bank's board of directors. At September 30,
1996, the Bank's total capital, as calculated under Wisconsin law, was
$5.9 million or 18.40% of total assets, which was 12.40% in excess of
the required amount.
INSURANCE OF DEPOSITS. The Bank is required to pay assessments
based on a percentage of its insured deposits to the FDIC for
insurance of its deposits by the SAIF. Under the Federal Deposit
Insurance Act, the FDIC is required to set semi-annual assessments for
SAIF-insured institutions to maintain the designated reserve ratio of
the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to
be justified for that year by circumstances raising a significant risk
of substantial future losses to the SAIF.
Under the FDIC's risk-based assessment system, the assessment
rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory
evaluations. Based on the data reported to regulators the date
closest to the last day of the seventh month preceding the semi-annual
assessment period, institutions are assigned to one of three capital
groups -- well capitalized, adequately capitalized or undercapitalized
-- using the same percentage criteria as under the prompt corrective
action regulations. See "--Regulation--Prompt Corrective Regulatory
Action." Within each capital group, institutions are assigned to one
of three subgroups on the basis of supervisor evaluations by the
institution's primary supervisory authority and such other information
as the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund. Subgroup
A consists of financially sound institutions with only a few minor
weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant
<PAGE> 87
deterioration of the institution and increased risk of loss to the
deposit insurance fund. Subgroup C consists of institutions that pose
a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. The assessment rate ranges from
0.23% of deposits for well capitalized institutions in Subgroup A to
0.31% of deposits for undercapitalized institutions in Subgroup C
while assessments for over 90% of the BIF members had been the
statutory minimum of $2,000. Recently enacted legislation provided
for a one-time assessment of 65.7 basis points of insured deposits as
of March 31, 1995, that fully capitalized the SAIF and had the effect
of reducing future SAIF assessments. Accordingly, although the
special assessment resulted in a one-time charge to the Bank of
approximately $178,000 pretax and $108,000 net of tax effect, the
recapitalization of the SAIF had the effect of reducing the Bank's
future deposit insurance premiums to the SAIF. Under the recently
enacted legislation, both BIF and SAIF members will be assessed an
amount for the FICO Bond payments. BIF members will be assessed
approximately 1.3 basis points while the SAIF rate will be
approximately 6.4 basis points until January 1, 2000. At that time,
BIF and SAIF members will begin pro rata sharing of the payment at an
expected rate of 2.43 basis points.
SAIF members are generally prohibited from converting to the
status of members of the Bank Insurance Fund ("BIF") administered by
the FDIC or merging with or transferring assets to a BIF member before
the date on which the SAIF meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. The FDIC, however, may approve
such a transaction in the case of a SAIF member in default or if the
transaction involves an insubstantial portion of the deposits of each
participant. In addition, mergers, transfers of assets and
assumptions of liabilities may be approved by the appropriate bank
regulator so long as deposit insurance premiums continue to be paid to
the SAIF for deposits attributable to the SAIF members plus an
adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository
institution participating in a SAIF to BIF conversion transaction is
required to pay an exit fee to SAIF and an entrance fee to BIF. A
savings association may adopt a commercial bank or savings bank
charter if the resulting bank remains a SAIF member.
The FDIC has proposed a rule that would lower the regular semi-
annual SAIF assessment rates by establishing a base assessment rate
schedule ranging from 4 to 31 basis points effective October 1, 1996.
The rule widens the range between the lowest and highest assessment
rates among healthy and trouble institutions with the intent of
creating an incentive for savings institutions to control risk-taking
behavior. The rule also prevents the FDIC from collecting more funds
than needed to maintain the SAIF's capitalization at 1.25% of insured
deposits.
Under law, the FDIC may not impose semi-annual assessments which
would cause it to collect more funds than are necessary to maintain
the SAIF's designated reserve ratio. As a result, the base assessment
rate schedule will be immediately modified in two ways. The first
modification, applying to institutions such as certain BIF members and
SAIF-member banks that do not pay assessments to the FICO, reduces the
base assessment rate by 4 basis points for a range from 0 to 27 basis
points. The second modification sets a special interim rate schedule
<PAGE> 88
from 18 to 27 basis points for the period from October 1, 1996 to
December 31, 1996 to SAIF-member savings associations that pay
assessments to the FICO. After December 31, 1996, the special interim
rates would terminate and these institutions would also pay the base
assessment rate as reduced by the 4 basis point adjustment. Any
excess funds collected by the FDIC in the last six months of 1996
would be refunded or credited, with interest to the institution.
RESTRICTIONS ON LOANS TO AND TRANSACTIONS WITH INSIDERS AND
AFFILIATES. In accordance with Section 22(h) of the Federal Reserve
Act of 1913, as amended ("Federal Reserve Act"), Federal Reserve Board
regulations limited the total amount a savings bank may lend to its
executive officers, directors, principal shareholders and their
related interests (collectively referred to herein as "affiliated
persons"). Generally, an affiliated person may borrow an aggregate
amount not exceeding 15% of a savings bank's unimpaired capital and
unimpaired surplus on an unsecured basis and an additional 10% on a
secured basis. FDICIA also set a limit on the aggregate amount a
depository institution may lend to affiliated persons as a class to an
amount not exceeding the institution's unimpaired capital and
unimpaired surplus. The Federal Reserve Board was authorized to make
an exception to this aggregate limit for banks with deposits of less
than $100 million in cases where an exception was determined to be
important to avoid constricting the availability of credit in small
communities or to attract directors to such banks. By final rule
issued February 24, 1994, the Federal Reserve Board will permit the
extension of credit by small adequately capitalized banks to
affiliated persons in an amount up to 200% of unimpaired capital and
unimpaired surplus in such cases.
To implement changes made to Section 22(h) by the Housing and
Community Development Act of 1992, the Federal Reserve Board amended
its implementing regulations, effective May 3, 1993, to provide for
certain exceptions from the definition of "extension of credit" that
pose a minimal risk to institutions, including extensions of credit
secured by obligations fully guaranteed by the federal government,
unconditional takeout commitments or guarantees of any U.S. agency,
department or wholly owned corporation, or a segregated deposit
account at the institution. Further, pursuant to the final rule
issued February 24, 1994, the Federal Reserve Board amended the
definition of "extension of credit" in several respects. First, the
Federal Reserve Board amended the "tangible economic benefit" rule to
clarify that the rule does not apply to an arms-length extension of
credit by a bank to a third party where the proceeds of the credit are
used to finance the bona fide acquisition of property, goods or
services from an insider or an insider's related interest. Second, an
"extension of credit" will no longer include a discount of promissory
notes, bills of exchange, conditional sales contracts or similar
paper, which are made without recourse. Finally, the Federal Reserve
Board has increased to $15,000 the threshold above which standard
credit card loans to insiders would be counted as "extensions of
credit".
In addition, the Commissioner's regulations establish
restrictions on loans and other transactions with the Bank's
affiliated persons. All loans to affiliated persons must be made in
the "ordinary course of business" involving not more than the "normal
risks of collectibility" and not exceeding the loan amount which would
<PAGE> 89
be available to members of the general public of similar credit
status, must be secured by the principal residence of the affiliated
person or deposit accounts maintained at the Bank and must be approved
by a majority of the Bank's disinterested directors. Interest rates
on loans to affiliated persons must be equal to or greater than the
Bank's current cost of funds, except that the interest rate of a loan
secured by a deposit account must be at least 1% above the rate of
return on the deposit account. Extensions of credit to affiliated
persons for commercial purposes, in the aggregate, may not exceed
$100,000.
FDIC-insured state-chartered savings banks must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and
23B") relating to transactions with affiliates in the same manner and
to the same extent as if the savings bank were a Federal Reserve
member bank. Generally, Sections 23A and 23B limit the extent to
which an insured institution or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of
such institution's capital and surplus, plus an aggregate limit on all
such transactions with affiliates to an amount equal to 20% of such
capital and surplus, and require that all transactions be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, the purchase of assets,
issuance of a guaranty and similar other types of transactions. The
Commissioner, for safety and soundness reasons, may impose more
stringent restrictions on savings banks but may not exempt
transactions from or otherwise abridge Sections 23A and 23B.
Exemptions from 23A and 23B may be granted only by the Federal Reserve
Board.
Unless prior approval of the Commissioner is obtained, a savings
bank may not purchase, lease or acquire a site for an office building
or an interest in real estate from an affiliated person, including a
stockholder owning more than 10% of its capital stock, or from any
firm, corporation, entity for family in which an affiliated person or
10% stockholder has a direct or indirect interest. The Bank has not
been significantly affected by such restrictions on loans to and
transactions with affiliates.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
of 1977, as amended (the "CRA"), as implemented by FDIC regulations,
the Bank has a continuing and affirmative obligation consistent with
safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion
to develop the types of products and services it believes are best
suited to its particular community. The CRA requires the FDIC, in
connection with examination of a bank, to assess the institution's
record of meeting the credit needs of its community and to take such
record into account in its evaluation of certain applications by such
institution. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") amended the CRA to require,
effective July 1, 1990, public disclosure of an institution's CRA
rating and require the primary regulator to provide a written
evaluation of an institution's performance.
<PAGE> 90
On May 4, 1995, the federal banking regulators adopted a final
rule ("Final CRA Rule") governing compliance with CRA. The Final CRA
Rule eliminates the previous CRA regulation's 12 assessment factors
and substitutes a performance based evaluation system. The Final CRA
Rule was phased in over a period of time and became fully effective by
July 1, 1997. Under the Final CRA Rule, an institution's performance
in meeting the credit needs of its entire community, including low-
and moderate-income areas, as required by the CRA, is generally
evaluated under three assessment tests relating to lending, investment
and service.
The lending test analyzes lending performance using five
criteria: (i) the number and amount of loans in the institution's
assessment area, (ii) the geographic distribution of lending,
including the proportion of lending in the assessment area, the
dispersion of lending in the assessment area, and the number of amount
of loans in low-, moderate-, middle-, and upper-income areas in the
assessment area, (iii) borrower characteristics, such as the income
level of individual borrowers and the size of businesses or farms,
(iv) the number and amount, as well as the complexity and
innovativeness of an institution's community development lending and
(v) the use of innovative or flexible lending practices in a safe and
sound manner to address the credit needs of low- or moderate-income
individuals or areas.
The investment test analyzes investment performance using four
criteria: (i) the dollar amount of qualified investments, (ii) the
innovativeness or complexity of qualified investments, (iii) the
responsiveness of qualified investments to credit and community
development needs and (iv) the degree to which the qualified
investments made by the institution are not routinely provided by
private investors.
The service test analyzes service performance using six criteria:
(i) the institution's branch distribution among low-, moderate-,
middle- and upper-income areas, (ii) its record of opening and closing
branches, particularly in low- and moderate-income areas, (iii) the
availability and effectiveness of alternative systems for delivering
retail banking services, (iv) the rate of services provided in low-,
moderate-, middle-, and upper-income areas and extent to which those
services are tailored to meet the needs of those areas, (v) the extent
to which the institution provides community development services, and
(vi) the innovativeness and responsiveness of community development
services provided.
Financial institutions with assets of less than $250 million, or
a financial institution with assets of less than $250 million that is
a subsidiary of a holding company with assets of less than $1 billion,
will be evaluated under a streamlined assessment method based
primarily on its lending record. The streamlined test considers an
institution's loan-to-deposit ratio adjusted for seasonal variation
and special lending activities, its percentage of loans and other
lending related businesses and farms of different sizes, the
geographic distribution of its loans, and its record of taking action,
if warranted, in response to written complaints. In lieu of being
evaluated under the three assessment tests or the streamlined test, a
financial institution can adopt a "strategic plan" and elect to be
evaluated on the basis of achieving the goals and benchmarks outlined
<PAGE> 91
in the strategic plan. Based upon a review of the Final CRA Rule,
management of First Ozaukee does not anticipate that the new CRA
regulations will adversely affect the Bank.
FEDERAL RESERVE SYSTEM. Regulation D, promulgated by the Federal
Reserve Board, imposes reserve requirements on all depository
institutions, including savings banks and savings institutions, which
maintain transaction accounts or non-personal time deposits. Checking
accounts, NOW accounts and certain other types of accounts that permit
payments or transfers to third parties fall within the definition of
transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain
money market deposit accounts) at a savings institution. A depository
institution must maintain average daily reserves equal to 3% of the
first $54.0 million of net transaction accounts and an initial reserve
of 01.6 million, plus 10% of net transaction accounts in excess of
054.0 million. In addition, the first $4.2 million of otherwise
reservable liabilities are exempt from the reserve requirement. These
percentages and threshold are subject to adjustment by the Federal
Reserve Board. The Bank satisfies its reserve requirements on an
on-going basis by maintaining average balances of vault cash and
non-interest bearing reserve deposits with the FHLB-Chicago (which are
passed through to the Federal Reserve Board) which in total are
greater than or equal to its required daily average balance.
Thrift institutions also have authority to borrow from the
Federal Reserve Bank "discount window," but Federal Reserve Board
policy generally requires thrift institutions to exhaust all sources
before borrowing from the Federal Reserve System. The Bank had no
discount window borrowings as of September 30, 1996.
FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank
System, consisting of 12 FHLBs, is under the jurisdiction of the
Federal Housing Finance Board ("FHFB"). The designated duties of the
FHFB are to supervise the FHLBs; ensure that the FHLBs carry out their
housing finance mission; ensure the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure
that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Chicago, is required to acquire
an hold shares of capital stock in the FHLB-Chicago in an amount equal
to the greater of (i) 1% of the aggregate outstanding principal amount
of residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or (ii) 1/20 of its
advances (borrowings) from the FHLB-Chicago. The Bank is in
compliance with this requirement with an investment in FHLB-Chicago
stock of $152,000 at September 30, 1996.
Among other benefits, the FHLBs provide a central credit facility
primarily for member institutions. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the
FHLB-Chicago. At September 30, 1996, the Bank had no advances from
the FHLB-Chicago.
<PAGE> 92
HOLDING COMPANY REGULATION
FEDERAL REGULATION. First Ozaukee applied for the prior approval
of the Federal Reserve Board, at the Federal Reserve Bank of Chicago
(the "Reserve Bank"), to become a registered bank holding company
pursuant to the BHC Act by acquiring all of the common stock of the
Bank to be issued in connection with the Conversion. On July 22,
1994, the Reserve Bank advised First Ozaukee its application would not
be acted on by the Reserve Bank pursuant to delegated authority from
the Federal Reserve Board, and the application would be acted upon by
the Federal Reserve Board under a 60-day review process. The Federal
Reserve Board approved the application on August 17, 1994.
First Ozaukee is subject to examination, regulation and periodic
reporting under the BHC Act, as administered by the Federal Reserve
Board. The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies on a consolidated basis,
substantially similar to those of the FDIC for the Bank. First
Ozaukee's total and Tier 1 capital significantly exceed such capital
adequacy requirements.
First Ozaukee is required to obtain the prior approval of the
Federal Reserve Board to acquire all, or substantially all, of the
assets of any bank or bank holding company. Prior Federal Reserve
Board approval will be required for First Ozaukee to acquire direct or
indirect ownership or control of any voting securities of any bank or
bank holding company if, after giving effect to such acquisition, it
would, directly or indirectly, own or control more than 5% of any
class of voting shares of such bank or bank holding company. In
addition to the approval of the Federal Reserve Board, before any bank
acquisition can be completed, prior approval thereof also may be
required to be obtained from other agencies having supervisory
jurisdiction over the bank to be acquired, including the Commissioner.
First Ozaukee, unless it meets certain capital and regulatory
requirements, is required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more
of First Ozaukee's consolidated net worth. The Federal Reserve Board
may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would
violate any law, regulation, Federal Reserve Board order or directive,
or any condition imposed by, or written agreement with the Federal
Reserve Board.
The status of First Ozaukee as a registered bank holding company
under the BHC Act does not exempt it from certain federal and state
laws and regulations applicable to corporations generally, including
without limitation, certain provisions of the federal securities laws.
In addition, a bank holding company generally is prohibited from
engaging in, or acquiring direct or indirect control of any company
engaged in, non-banking activities. One of the principal exceptions
to this prohibition is for activities found by the Federal Reserve
Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the principal
<PAGE> 93
activities the Federal Reserve Board has determined by regulation to
be so closely related to banking are: (i) making or servicing loans;
(ii) performing certain data processing services; (iii) providing
discount brokerage services; (iv) acting as fiduciary, investment or
financial advisor; (v) leasing personal or real property; (vi) making
investments in corporations or projects designed primarily to promote
community welfare; and (vii) acquiring and/or operating a savings and
loan association.
Under FIRREA, depository institutions are liable to the FDIC for
losses suffered or anticipated by the FDIC in connection with the
default of a commonly controlled depository institution or any
assistance provided by the FDIC to such an institution in danger of
default. This law would have potential applicability if First Ozaukee
ever acquired as a separate subsidiary a depository institution in
addition to the Bank.
The Federal Reserve Board's "Policy Statement on Cash Dividends
Not Fully Covered by Earnings" sets forth guidelines a bank holding
company should follow when establishing its dividend policy. In
general, the policy statement provides that dividends should be paid
only out of current earnings and only if the prospective rate of
earnings retention by the bank holding company appears consistent with
its capital needs, asset quality and overall financial condition. The
Federal Reserve Board policy also requires that a bank holding company
serve as a source of financial strength to its subsidiary banks by
standing ready to use available resources to provide adequate capital
funds to those banks during periods of financial stress or adversity.
These policies could affect the ability of First Ozaukee to pay cash
dividends.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal
Reserve Act on any extension of credit to, or purchase of assets from,
or letter of credit on behalf of, the bank holding company or its
subsidiaries, and on the investment in or acceptance of stocks or
securities of such holding company or its subsidiaries as collateral
for loans. In addition, provisions of the Federal Reserve Act and
Federal Reserve Board regulations limit the amounts of, and establish
required procedures and credit standards with respect to, loans and
other extensions of credit to officers, directors and principal
shareholders of the Bank, First Ozaukee, any subsidiary of First
Ozaukee and related interests of such persons. See "--Capital
Maintenance--Restrictions on Loans to and Transactions with Insiders
and Affiliates." Moreover, subsidiaries of bank holding companies are
prohibited from engaging in certain tie-in arrangements (with First
Ozaukee or any of its subsidiaries) in connection with any extension
of credit, lease or sale of property or furnishing of services.
First Ozaukee and its subsidiary, the Bank, will be affected by
the monetary and fiscal policies of various agencies of the United
States government, including the Federal Reserve System. In view of
changing conditions in the national economy and in the money markets,
it is impossible for management of First Ozaukee to accurately predict
future changes in monetary policy or the effect of such changes on the
business or financial condition of First Ozaukee.
<PAGE> 94
STATE SAVINGS BANK HOLDING COMPANY REGULATION. In addition to
the Federal Reserve Board bank holding company regulations, a bank
holding company that owns or controls, directly or indirectly, more
than 25% of the voting securities of a state savings bank also is
subject to regulation as a savings bank holding company by the
Commissioner. The Commissioner has not yet issued proposed
regulations governing savings bank holding companies.
ACQUISITION OF THE HOLDING COMPANY. Under the federal Change in
Bank Control Act of 1978, as amended ("CBCA"), a notice must be
submitted to the Federal Reserve Board if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of
the First Ozaukee Common Stock outstanding, unless the Federal Reserve
Board has found that the acquisition will not result in a change in
control of First Ozaukee. Under the CBCA, the Federal Reserve Board
has 60 days within which to act on such notices, taking into
consideration certain factors, including the financial and managerial
resources of the acquiror, the convenience and needs of the
communities served by First Ozaukee and the Bank, and the antitrust
effects of the acquisition. Under the BHC Act, any company would be
required to obtain approval from the Federal Reserve Board before it
may obtain "control" of First Ozaukee within the meaning of the BHC
Act. Control generally is defined to mean the ownership or power to
vote 25% or more of any class of voting securities of First Ozaukee or
the ability to control in any manner the election of a majority of
First Ozaukee's directors.
REGULATORY AND CRIMINAL ENFORCEMENT PROVISIONS. FIRREA contains
several changes to existing regulatory and criminal enforcement
provisions. The major applicable provisions: expand the reach of the
depository institution regulatory agencies' civil enforcement
authority to include, in addition to directors, officers employees and
agents, any "institution-affiliated party" of a depository
institution; clarify and enhance the authority of the agencies to
order restitution or reimbursement in a cease-and-desist order; unify
removal provisions by the regulators and allow the agencies to proceed
with a removal or prohibition action when an institution has been
harmed without requiring the agencies to quantify the harm or
prejudice; authorize the agencies to take enforcement actions against
culpable institution-affiliated parties who depart from an
institution, within six years of the departure date; increase the
maximum amount for civil money penalties from an institution, within
six years of the departure date; increase the maximum amount for civil
money penalties ("CMPs") and expand the grounds for imposing them;
increase the criminal penalty to $1 million and five years'
imprisonment for violations of a removal order; impose a three-tier
level of CMPs for both failure to file or the late filing of call
reports and other information and filing any false or misleading
report or information; permit the FDIC to take particular enforcement
actions against savings banks; require publication of formal
enforcement orders issued by the agencies; shorten the period from 120
days to 30 days for agency notice for termination of deposit
insurance; and increase to 20 years the maximum prison term for the
banking-related offenses in the Federal Criminal Code.
FEDERAL SECURITIES LAWS. First Ozaukee filed with the SEC a
registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), for the registration of the First Ozaukee
<PAGE> 95
Common Stock issued pursuant to the Conversion. Upon completion of
the Conversion, First Ozaukee Common Stock was registered with the SEC
under the Exchange Act. First Ozaukee is subject to the information,
proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
The registration under the Securities Act of the shares of the
First Ozaukee Common Stock does not cover the resale of such shares.
Shares of First Ozaukee Common Stock purchased by persons who are not
affiliates of First Ozaukee may be resold without registration.
Shares purchased by an affiliate of First Ozaukee are subject to the
resale restrictions of Rule 144 under the Securities Act. If First
Ozaukee meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of First Ozaukee who complies
with the other conditions of Rule 144 (including those that require
the affiliated sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of First
Ozaukee Common Stock, or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
EMPLOYEES
At June 30, 1997, First Ozaukee, on a consolidated basis, had
11 full-time employees and three part-time employees. First Ozaukee's
employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
PROPERTIES
The Bank conducts its operations through two offices located in
Cedarburg and Grafton, Wisconsin. Management believes the Bank's
current facilities are adequate to meet present needs. A listing of
the Bank's offices is as follows:
Net Book Value
Year Owned or of Property at
Location Opened Leased September 30, 1996
-------- ------ ------------ ------------------
(In Thousands)
Cedarburg Home Office 1923 Owned $230
W61 N526 Washington Avenue
Cedarburg, WI 53012
Grafton Office 1991 Owned 268
1650 9th Avenue ---
Grafton, WI 53024
Total Net Book Value of 498
office buildings and
improvements
Furniture, fixtures and equipment 49
Vehicles 25
---
Total $572
===
<PAGE> 96
LEGAL PROCEEDINGS
Other than as described below, the Bank is not involved in any
pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business, which in the aggregate
involve amounts that are believed by management to be immaterial to
the financial condition of the Bank.
The Bank has been named by the Wisconsin Department of Natural
Resources as a potentially responsible party with respect to soil and
groundwater contamination beneath and adjacent to the Bank's Cedarburg
home office. The Bank has engaged an independent environmental
engineering firm, Key Environmental Services, Inc., to replace the
prior firm, Northern Environmental. Key Environmental has prepared a
review and evaluation of remediation alternatives. Based on their
study, they have provided the Bank with a range of estimated costs for
the remediation. Key Environmental has also indicated it is highly
probable that the Bank will be eligible for Petroleum Environmental
Cleanup Fund ("PECFA") reimbursement over the PECFA deductible of
$15,000 plus 2% of costs over $200,000, which the Bank expects to
meet. Based on information from Key Environmental, the Bank has
booked $252,500 (midpoint of the cost range) as a liability and an
expense and also booked a receivable of $252,500 from PECFA for the
expense recovery. Environmental expenses not recoverable from PECFA,
excluding related legal fees, were $8,700 for the year ended September
30, 1996.
<PAGE> 97
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Ozaukee has no significant assets other than the common
stock of the Bank, cash and cash equivalents, securities and the loan
to the ESOP. First Ozaukee's principal business is the business of
the Bank. Therefore, the information in this section relates to the
Bank and its operations. The business of the Bank is that of a
financial intermediary consisting primarily of attracting deposits
from the general public and using such deposits to originate mortgage
loans secured by one-to-four-family residences and, to a lesser
extent, commercial and agricultural real estate loans, and consumer
loans. The Bank's revenues are derived principally from interest
earned on loans and, to a lesser extent, from interest earned on
investments. The operations of the Bank are influenced significantly
by general economic conditions and by policies of financial
institution regulatory agencies, including the FDIC. The Bank's cost
of funds is influenced by interest rates on competing investments and
general market interest rates. Lending activities are affected by the
demand for financing of real estate and other types of loans, which in
turn is affected by the interest rates at which such financing may be
offered.
The Bank's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans and
investments and the average rate paid on deposits, as well as the
relative amounts of such assets and liabilities. The Bank, as other
financial institutions, is subject to interest rate risk to the degree
that its interest-bearing liabilities mature or reprice at different
times, or on a different basis, than its interest-earning assets.
MANAGEMENT STRATEGY
Management's strategy has focused on maintaining the Bank's
strong capital position through controlled growth, while continuing to
provide quality customer service. The Bank has sought to implement
this strategy by emphasizing deposits as its primary source of funds,
originating one-to-four-family mortgage loans in its market area, and
investing in mortgage-backed securities and investment securities.
Financial highlights and operating strategies of the Bank include the
following:
. ASSET QUALITY. The Bank focuses on high asset quality in both
its lending activities and investment portfolio. Nonperforming
assets were .29% and .23% of total assets at September 30, 1996
and 1995. The Bank has had no charge-off of loans in recent
years.
. RESIDENTIAL MORTGAGE LENDING EMPHASIS. The Bank has historically
focused its loan origination activities on adjustable rate
residential mortgage loans (AMLs). Beginning in 1993, the Bank
expanded its emphasis to include originations and sales of fixed
rate mortgage loans. The program was very successful in 1993.
However, because of a substantial increase in competition for
loans, the Bank had limited success with this program in recent
years.
<PAGE> 98
. PROFITABILITY AND CAPITAL STRENGTH. The Bank has historically
maintained capital ratios substantially higher than required by
Federal insurance regulations or state law. At September 30,
1996, the Bank had a Tier 1 risk-based capital ratio of over 33%
and Tier 1 leverage ratio of more than 17%. The Bank's Tier 1
risk-based capital ratio is more than eight times the required
amount, while the Bank's Tier 1 leverage ratio is more than four
times the amount required.
Although the Bank has historically been profitable, 1996 included
many new factors which resulted in the first net loss since the
early 1980's. The conversion to stock form enabled First Ozaukee
to increase its net interest income. However, the stock benefit
plan expenses and costs of operating as a public company have
been substantial. First Ozaukee has taken steps to reduce such
costs. First Ozaukee adopted the Incentive Plan, effective
November 7, 1995, which is similar to plans of other publicly
traded thrift institutions. Because of the vesting schedule of
the plan, which vests one-third of the shares upon adoption of
plan, First Ozaukee was required to expense over 60% of the
shares in the year ended September 30, 1996. Incentive Plan
expense for the year was $193,822. Incentive Plan expense for
the year ended September 30, 1997 is expected to be substantially
lower because fewer shares are expected to be vested.
Legislation was enacted September 30, 1996 to recapitalize the
SAIF fund. The Bank paid a non-recurring special assessment of
approximately $178,000. Future recurring SAIF assessments are
expected to be lower than those in recent years.
. INTEREST RATE RISK MANAGEMENT. Since the early 1980's, the
Bank's business plan has included investing significantly in
corporate debt securities, in addition to its investment in
mortgage-backed securities. This diversified portfolio enables
the Bank to provide and maintain high liquidity levels; maintain
a balance of high quality, diversified investments; and manage
the interest rate risk of the Bank. The Bank typically sells its
15-year and 30-year fixed rate loans to improve its gap position
by shortening the maturity of its assets. In addition, the Bank
has attempted to reduce its interest rate risk by originating ARM
loans for retention in its loan portfolio and by selling most of
the fixed rate loans it originates. Management believes this
strategy has reduced its net income over the past few years due
to lower initial yields on the ARM loans in comparison to longer
term fixed rate investments. However, management believes that
reducing its exposure to interest rate fluctuations tends to
reduce the volatility of the Bank's net interest income over the
long term.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are cash receipts from
deposits, loan repayments by borrowers, proceeds from maturing
securities, and net income. The Bank has an agreement with the FHLB
of Chicago to provide cash advances, should the Bank need additional
funds.
<PAGE> 99
The Bank is required to maintain minimum amounts of capital to
total "risk-weighted" assets, as defined by the banking regulators.
At March 31, 1997, the Bank is required to have a minimum 3% Tier 1
capital to total assets, a minimum 4% Tier 1 capital to risk-weighted
assets ratio and a minimum 8% of qualifying total capital to risk-
weighted assets ratio. The Bank's actual ratios at that date were
18.1%, 35.6% and 36.5%, respectively. Wisconsin-chartered savings
banks are also required to maintain a minimum capital to assets ratio
of 6%. The Bank's capital exceeds all minimum standards required by
federal and state regulations. See note 11 of the Notes to the
Audited Consolidated Financial Statements for capital amounts at
September 30, 1996.
For regulatory purposes, liquidity is measured as a ratio of cash
and certain investments to withdrawable deposits. The minimum level
of liquidity required by regulation is presently 8%. The Bank's
liquidity ratio at September 30, 1996 was approximately 54%. The Bank
maintains a higher level of liquidity than required by regulation as a
matter of management philosophy in order to more closely match
interest-sensitive assets with interest-sensitive liabilities.
The Bank had $14.3 million in certificates due within one year
and $8.1 million in other deposits without specific maturity at
September 30, 1996. Management estimates that most of the deposits
will be retained or replaced by new deposits.
Assets decreased from $38.2 million at September 30, 1995 to
$34.0 million at September 30, 1996. Competition for customer
deposits was fierce during 1996. Deposits decreased from $29.5
million at September 30, 1995 to $25.0 million at September 30, 1996.
Management chose to price deposits to maintain interest margins,
rather than match or beat interest rates offered by other financial
institutions or competing financial products such as mutual funds and
bonds. The Bank was successful in increasing the loans receivable
portfolio from $13.7 million in 1995 to $16.3 million in 1996.
Prepaid expenses and other assets increased primarily as a result of
recording a receivable of $252,500 relating to environmental clean-up
costs. Other liabilities includes the same amount based on an
independent study. See note 13 of Notes to Consolidated Financial
Statements for further information.
Deposit outflows and the increase in loans receivable were funded
principally by sales and maturities of investment securities. Accrued
interest receivable on loans increased due to a higher portfolio
balance. Other liabilities at September 30, 1996 also increased due
to a provision for a special assessment of the SAIF of $178,000.
Commitments to originate loans are legally binding agreements to
lend to the Bank's customers. Commitments to originate adjustable-
rate loans at September 30, 1996 and March 31, 1997, which generally
expire in 90 days or less, were $713,000 and $1,049,000, respectively.
Commitments to fund the unused portion of home equity and credit card
lines of credit totaled $1,075,000 at September 30, 1996 and
$1,238,000 at March 31, 1997.
<PAGE> 100
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
The following table presents for the years indicated the total
dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No
tax equivalent adjustments were made. All average balances are
monthly average balances. Nonaccruing loans have been included in the
table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------
----------
1996 1995 1994
---- ---- ----
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $15,443 1,287 8.33% 13,016 1,085 8.34% 14,231 1,208 8.49%
Mortgage-backed securities 3,972 243 6.12% 4,626 282 6.10% 4,420 267 6.04%
Securities and other
interest-earning assets 15,869 1,008 6.35% 17,593 1,106 6.29% 15,602 730 4.68%
Federal Home Loan Bank Stock 160 11 6.88% 167 11 6.59% 212 13 6.13%
------ ----- ------ ----- ------ -----
Total interest-earning assets 35,444 2,549 7.19% 35,402 2,484 7.02% 34,465 2,218 6.44%
------ ----- ------ ----- ------ -----
Interest-bearing liabilities:
Deposits 28,074 1,359 4.84% 28,432 1,295 4.55% 31,206 1,194 3.83%
Advances from borrowers for
taxes and insurance 248 5 2.02% 249 5 2.01% 296 7 2.36%
------ ----- ------ ----- ------ ------
Total interest-bearing
liabilities $28,322 1,364 4.82% 28,681 1,300 4.53% 31,502 1,201 3.81%
------ ----- ------ ----- ------ ------
Net interest income before
provision for loan losses $ 1,185 1,184 1,017
===== ===== ======
Interest rate spread 2.37% 2.49% 2.63%
==== ==== ====
Net earning assets $ 7,122 6,721 2,963
====== ====== ======
Net yield on average 3.34% 3.34% 2.95%
interest-earning assets ==== ==== ====
Ratio of average interest- 125.15% 123.43% 109.41%
earning ====== ====== ======
assets to average interest-
bearing liabilities
</TABLE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding
changes in interest income and interest expense of First Ozaukee for
the years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes in
<PAGE> 101
volume (changes in volume multiplied by prior year's rate) and rates
(changes in rate multiplied by prior year's volume).
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Due to Increase (Decrease) Due To
-------------------------- --------------------------
(Dollars in Thousands)
Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ -----
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ - 202 202 (21) (102) (123)
Mortgage-backed securities 1 (40) (39) 2 13 15
Securities and other
interest-earning assets 12 (110) (98) 274 102 376
Federal Home Loan Bank Stock - - - 1 (3) (2)
--- --- -- --- --- ---
Total interest- earning assets 13 52 65 256 10 266
--- --- --- --- --- ---
Interest expense:
Deposits 80 (16) 64 189 (88) 101
Advances from borrowers for - - - (1) (1) (2)
taxes and insurance --- --- --- --- --- ---
Total interest-bearing 80 (16) 64 188 (89) 99
liabilities --- --- --- --- --- ---
Net interest income $ 1 167
=== ===
</TABLE>
FINANCIAL CONDITION AT MARCH 31, 1997
Proceeds from maturing, and sale of, securities available for
sale were used to fund loans and increase cash and cash equivalents.
Loans increased from $16.3 million at September 30, 1996 to $20.8
million at March 31, 1997 due to the purchase of fixed-rate, single-
family loans. Accrued interest receivable on securities, certificates
of deposit and mortgage-backed securities decreased due to lower
portfolio balances. Accrued interest receivable on loans increased
due to timing of interest receipts. Advances from borrowers for taxes
and insurance decreased as a result of seasonal factors. Real estate
taxes are paid on behalf of customers in December of each year. Other
liabilities decreased as a result of the payment of the SAIF special
assessment and certain other accrual items.
COMPARISON OF RESULTS OF OPERATIONS OF THREE MONTHS ENDED MARCH 31,
1997 TO THREE MONTHS ENDED MARCH 31, 1996
NET INCOME. First Ozaukee incurred a net loss of $92,000 for the
three months ended March 31, 1996 compared to net earnings of $26,000
for the three months ended March 31, 1997. Net income increased from
a loss of $128,000 for the six months ended March 31, 1996 to income
of $28,000 for the six months ended March 31, 1997. The primary
reasons for the improvement in net income were due to higher net
interest income, lower compensation expense related to the Incentive
Plan, lower Federal insurance premiums and lower professional expenses
offset by lower noninterest income and higher income taxes.
<PAGE> 102
NET INTEREST INCOME. Net interest income increased from $278,000
for the three months ended March 31, 1996 to $338,000 for the three
months ended March 31, 1997. Net interest income increased from
$567,000 for the six months ended March 31, 1996 to $625,000 for the
six months ended March 31, 1997. Interest income on loans increased
due to a higher average balance, while interest income on securities
decreased due to a lower average balance. Loans receivable, which
carry higher interest rates than other interest-earning assets,
increased while securities decreased. Components of interest income
change from time to time due to the availability and interest rates of
loans, securities and other interest-bearing assets. Interest expense
on deposits decreased as a result of a lower average balance.
Deposits at March 31, 1997 were $26.3 million compared to $29.6
million at March 31, 1996.
PROVISION FOR LOAN LOSSES. Provision for loan losses is based
upon management's consideration of economic conditions which may
affect the ability of borrowers to repay the loans. Management also
reviews individual loans for which full collectibility may not be
reasonably assured and considers, among other matters, the risks
inherent in the Bank's portfolio and the estimated fair value of the
underlying collateral. This evaluation is ongoing and results in
variations in the Bank's provision for loan losses. Nonperforming
loans amounted to $124,000 and $100,000 at March 31, 1997 and
September 30, 1996. As a result of this evaluation, the Bank's
provision for loan losses for the three and six months ended March 31,
1996 amounted to $4,000 and $9,000, respectively. Provisions of
$5,000 and $9,000 were recorded for the three and six months ended
March 31, 1997, respectively.
NONINTEREST INCOME. Noninterest income decreased from $24,000
for the three months ended March 31, 1996 to $9,000 for the three
months ended March 31, 1997. Noninterest income decreased from
$56,000 for the six months ended March 31, 1996 to $21,000 for the six
months ended March 31, 1997. These decreases were due to lower gains
on sale of securities available for sale. Gain on sale of securities
available for sale is not a stable source of income and no assurance
can be given that the Bank will generate such gains in the future.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased from $401,000 for the three months ended March 31,
1996 to $309,000 for the three months ended March 31, 1997. General
and administrative expenses decreased from $781,000 for the six months
ended March 31, 1996 to $604,000 for the six months ended March 31,
1997. Decreases in the 1997 periods were due to lower compensation
and benefits, professional services and deposit insurance premiums.
Compensation and benefits decreased due to the immediate vesting of
one-third of the Incentive Plan shares upon adoption of the plan on
November 7, 1995. The remaining shares vest on subsequent anniversary
dates. Compensation expense for stock awarded under this plan is
recognized over the vesting periods. Compensation and benefits also
decreased due to the employment of one less officer in 1997 than in
1997. Professional services were reduced substantially from $133,000
for the six months ended March 31, 1996 to $83,000 for the six months
ended March 31, 1997. Professional fees in the 1996 periods include
initial services for stock benefit plans and assistance with periodic
securities filings. Management expects recurring professional fees to
be reduced from the 1996 level. Deposit insurance premiums decreased
<PAGE> 103
as a result of the recapitalization of the SAIF. Recurring federal
insurance premiums are expected to be paid at an annual rate of 6.48
basis points of assessable deposits effective January 1, 1997.
Stationery, communications and other operating expenses includes
$6,000 for the environmental remediation expenses not recoverable from
the Petroleum Environmental Cleanup Fund.
INCOME TAXES. Income taxes fluctuated due to the level of income
before income taxes.
COMPARISON OF RESULTS OF OPERATIONS OF THE YEAR ENDED SEPTEMBER 30,
1996 TO THE YEAR ENDED SEPTEMBER 30, 1995
NET EARNINGS (LOSS). Net earnings decreased from $109,000 for
the year ended September 30, 1995 to a net loss of $237,000 for the
year ended September 30, 1996. The decrease in net earnings was due
to expenses associated with the stock benefit plans, and substantially
higher legal, audit, examination and accounting fees.
INTEREST AND DIVIDEND INCOME. Interest and dividend income
increased from $2,484,000 for the year ended September 30, 1995 to
$2,549,000 for the year ended September 30, 1996. While the average
balance of interest-earning assets was virtually unchanged from 1995
to 1996, the average yield increased from 7.02% in 1995 to 7.19% in
1996. Average loans increased from $13.0 million in 1995 to $15.4
million in 1996. Average interest rates on loans receivable were
virtually identical. Sales and maturities of securities were
reinvested, in part, in loans which bear higher interest rates.
Interest on securities and other interest-earning assets and mortgage-
backed securities ("MBS's") decreased due to lower average balances.
Components of interest income vary from time to time based on the
availability, quality and interest rates of loans, securities, cash
equivalents and MBS's.
INTEREST EXPENSE. Interest expense increased from $1,300,000 for
the year ended September 30, 1995 to $1,364,000 for the year ended
September 30, 1996. The increase was due primarily to the very
competitive environment for certificates of deposit in the Bank's
market area. The average rate for all interest-bearing liabilities
increased from 4.53% in 1995 to 4.82% in 1996.
NET INTEREST INCOME. Net interest income was virtually unchanged
increasing from $1,184,000 for 1995 to $1,185,000 for 1996. The ratio
of average interest-earning assets to average interest-bearing
liabilities increased from 123.43% for 1995 to 125.15% for 1996, in
part, due to the effect of the sale of common stock. The interest
rate spread decreased from 2.49% for 1995 to 2.37% for 1996 due
primarily to a higher weighted-average rate paid on deposits.
PROVISION FOR LOAN LOSSES. Provision for loan losses was $18,000
for 1995 and 1996. The Bank did not charge-off any loans in either
year. The provision for loan losses was based upon management's
consideration of existing and anticipated economic conditions which
may affect the ability of borrowers to repay the loans. The provision
is also based on an 19% increase in the loan portfolio from $13.7
million at September 30, 1995 to $16.3 million at September 30, 1996.
Management also reviews individual loans for which full collectibility
may not be reasonably assured and considers, among other matters, the
<PAGE> 104
risks inherent in the Bank's portfolio and the estimated fair value of
the underlying collateral. This evaluation is ongoing and results in
variations in the Bank's provision for loan losses.
NONINTEREST INCOME. Noninterest income increased from $77,000
for 1995 to $85,000 for 1996 due primarily to higher gains on sales of
securities available for sale in 1996 than in 1995. In 1995, the Bank
recognized a gain on sale of fixed assets of $27,000. Such gains are
not stable sources of income and no assurance can be given that the
Bank or First Ozaukee will realize gains on securities or fixed assets
in the future.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased from $1,070,000 for 1995 to $1,614,000 for 1996.
Compensation and benefits increased from $441,000 for 1995 to $708,000
for 1996 due primarily to the implementation of the Bank's ESOP plan
and the Incentive Plan. ESOP and Incentive Plan expenses were $42,000
and $194,000, respectively for 1996 compared to none for 1995. Under
generally accepted accounting principles, expense of the ESOP is
affected by changes in the market price of the First Ozaukee Common
Stock and ESOP shares committed to be released. Federal insurance
premiums increased from $68,000 for 1995 to $245,000 for 1996 due to a
non-recurring special assessment by the SAIF for $178,000 in 1996.
The special assessment, which was paid in November, 1996, will result
in substantially lower recurring premiums effective January 1, 1997.
Other expenses increased in 1996 due to higher indirect loan expenses
and a full year of expenses of operating as a public company. Legal,
audit, examination and accounting fees increased from $147,000 for
1995 to $231,000 for 1996 due to initial fees incurred with
implementation of stock benefit plans and First Ozaukee's first annual
meeting. Management has taken steps to reduce such fees in the
future.
INCOME TAXES. Income taxes decreased from $64,000 for 1995 to a
credit of $125,000 for 1996 as a result of lower earnings before
income taxes.
COMPARISON OF RESULTS OF OPERATION OF THE YEAR ENDED SEPTEMBER 30,
1995 TO THE YEAR ENDED SEPTEMBER 30, 1994
NET EARNINGS. Net earnings decreased from $131,000 for the year
ended September 30, 1994 to $109,000 for the year ended September 30,
1995. The decrease in net earnings was due to higher compensation and
benefits, and substantially higher legal, audit, examination and
accounting fees, offset by higher net interest income.
INTEREST AND DIVIDEND INCOME. Interest and dividend income
increased from $2,218,000 for the year ended September 30, 1994 to
$2,484,000 for the year ended September 30, 1995. The average balance
of interest-earning assets increased by $937,000, while the average
yield increased from 6.44% in 1994 to 7.02% in 1995. Average loans
decreased from $14.2 million in 1994 to $13.0 million in 1995.
Average interest rates on loans receivable decreased from 8.49% for
1994 to 8.34% for 1995. Interest on securities and other interest-
earning assets and MBS's increased due to higher average balances and
rates. Components of interest income vary from time to time based on
the availability, quality and interest rates of loans, securities,
cash equivalents and MBS's.
<PAGE> 105
INTEREST EXPENSE. Interest expense increased from $1,201,000 for
the year ended September 30, 1994 to $1,300,000 for the year ended
September 30, 1995. The increase was due primarily to the very
competitive environment for certificates of deposit in the Bank's
market area. The average rate for all interest-bearing liabilities
increased from 3.81% in 1994 to 4.53% in 1995.
NET INTEREST INCOME. Net interest income increased from
$1,017,000 for 1994 to $1,184,000 for 1995. The ratio of average
interest-earning assets to average interest-bearing liabilities
increased from 109.41% for 1994 to 123.43% for 1995, in part, due to
the effect of the sale of common stock. The interest rate spread
decreased from 2.63% for 1994 to 2.49% for 1995 due primarily to a
higher weighted-average rate paid on deposits.
PROVISION FOR LOAN LOSSES. Provision for loan losses was $18,000
for 1994 and 1995. The Bank did not charge-off any loans in either
year. The provision for loan losses was based upon management's
consideration of existing and anticipated economic conditions which
may affect the ability of borrowers to repay the loans. Management
also reviews individual loans for which full collectibility may not be
reasonably assured and considers, among other matters, the risks
inherent in the Bank's portfolio and the estimated fair value of the
underlying collateral. This evaluation is ongoing and results in
variations in the Bank's provision for loan losses.
NONINTEREST INCOME. Noninterest income decreased from $78,000
for 1994 to $77,000 for 1995. In 1995, the Bank recognized a gain on
sale of fixed assets of $27,000, and in 1994 the Bank recognized a
gain on sale of mortgage loans of $27,000. Such gains are not stable
sources of income and no assurance can be given that the Bank or First
Ozaukee will realize gains in the future.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased from $902,000 for 1994 to $1,070,000 for 1995.
Compensation and benefits increased from $388,000 for 1994 to $441,000
for 1995 due to higher compensation and employee benefits. Federal
insurance premiums decreased from $74,000 for 1994 to $68,000 for 1995
due to a lower level of deposits. Legal, audit, examination and
accounting fees increased from $28,000 for 1994 to $147,000 for 1995
due to initial fees incurred with implementation of stock benefit
plans and operating as a public company.
INCOME TAXES. Income taxes increased from $44,000 for 1994 to
$64,000 for 1995 as a result of non-recurring credits to tax expense
of $17,000 in 1994.
IMPACT OF INFLATION. The financial statements and related data
presented herein have been prepared in accordance with generally
accepted accounting principles which require the measurement of
financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation
on the operations of the Bank is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As
a result, interest rates, generally, have a more significant impact on
a financial institution's performance than does inflation. Interest
<PAGE> 106
rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services. In the current interest
rate environment, liquidity and the maturity structure of the Bank's
assets and liabilities are critical to the maintenance of acceptable
performance levels.
OTHER MATTERS
As of the date of this Proxy Statement, the First Ozaukee Board
is not aware of any matters other than those described in this Proxy
Statement which will be presented for action at the Special Meeting.
If other matters are presented, proxies will be voted in accordance
with the best judgment of the proxy holders.
INDEPENDENT AUDITORS
The First Ozaukee Board has appointed Meier, Clancy, George &
Co., an independent certified public auditing firm, to audit the
consolidated financial statements of First Ozaukee for the fiscal year
ending September 30, 1997, and the shareholders of First Ozaukee have
ratified such appointment. A representative of Meier, Clancy, George
& Co. is expected to be present at the Special Meeting, will have an
opportunity to make a statement if he or she desires to do so and will
be available to respond to questions raised at the Special Meeting
relating to Meier, Clancy, George & Co.'s function as independent
auditor.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the
1998 Annual Meeting of shareholders must be received at the main
office of First Ozaukee no later than August 25, 1997. If such
proposal is in compliance with all of the requirements of Rule 14a-8
promulgated under the Exchange Act, it will be included in the proxy
statement issued for the 1998 Annual Meeting of Shareholders, which
will be held subject to completion of the Merger. It is urged that
any such proposal be sent by certified mail, return receipt requested.
After consummation of the Merger, CIB will be the sole shareholder of
First Ozaukee and, as such, will be the sole entity entitled to attend
and vote at the 1998 Annual Meeting.
<PAGE> 107
INDEX TO FINANCIAL STATEMENTS
PAGE
----
FIRST OZAUKEE CAPITAL CORP.
Audited Financial Statements
----------------------------
Independent Auditors' Report . . . . . . . . . . . . . . . . 108
Consolidated Statements of Financial Condition at
at September 30, 1996 and 1995 . . . . . . . . . . . . 109-110
Consolidated Statements of Income for the years
ended September 30, 1996, 1995 and 1994 . . . . . . . . 111
Consolidated Statements of Changes in Stockholders'
Equity for the years ended September 30, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . 113
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994 . . . . . . . . . . . 114
Notes to Consolidated Financial Statements . . . . . . . . . 116
Unaudited Financial Statements
------------------------------
Consolidated Statements of Financial Condition at
March 31, 1997 and September 30, 1996 . . . . . . . . . 150
Consolidated Statements of Income for the periods
ended March 31, 1997 and 1996 . . . . . . . . . . . . . 151-152
Consolidated Statements of Cash Flows for the
periods ended March 31, 1997 and 1996 . . . . . . . . . 153-154
Note to Consolidated Financial Statements . . . . . . . . . 154
<PAGE> 108
INDEPENDENT AUDITOR'S REPORT
Board of Directors
First Ozaukee Capital Corp.
Cedarburg, Wisconsin
We have audited the accompanying consolidated statements of
financial condition of FIRST OZAUKEE CAPITAL CORP. as of September 30,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for the three years in the period
ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of FIRST OZAUKEE CAPITAL CORP. as of September 30, 1996 and 1995, and
the results of its operations and its cash flows for each of the three
years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
/s/ Meier, Clancy, George & Co. LLP
Certified Public Accountants
October 23, 1996
Brookfield, Wisconsin
<PAGE> 109
FIRST OZAUKEE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
----------------------------------
1996 1995
-------------- --------------
(Dollars in thousands
except share and per
share amounts)
<S> <C> <C>
ASSETS $ 526
Cash $ 712
Cash equivalent interest-bearing deposits 199 158
--------- ---------
Total cash and cash equivalents 725 870
Securities held-to-maturity:
Debt securities (market value of $1,992 at September 30, 1996;
$13,662 at September 30, 1995) 1,997 13,587
Mortgage-backed securities (market value of $3,582 at
September 30, 1996; $4,147 at September 30, 1995) 3,721 4,248
Securities available-for-sale:
Debt securities, at market value 9,857 4,506
Accrued interest on investments and mortgage-backed securities 308 312
Loans held for sale - -
Loans receivable - net 16,341 13,747
Accrued interest receivable on loans 75 57
Foreclosed properties and properties subject to foreclosure - net - -
Office properties and equipment 572 606
Federal Home Loan Bank stock - at cost 152 168
Prepaid expenses and other assets 300 5
--------- ---------
Total assets $ 34,048 $38,151
========= =========
LIABILITIES AND EQUITY
Deposit accounts $ 24,962 $ 29,508
Advance payment by borrowers for taxes and insurance 373 396
Federal and state income taxes:
Current (8) (134)
Deferred (24) 103
Other liabilities 559 83
-------- ---------
Total liabilities 25,862 29,956
--------- ---------
Commitments and contingencies - -
--------- ---------
See accompaning Notes to Consolidated Financial Statements.
<PAGE> 110
FIRST OZAUKEE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
---------------------------------
1996 1995
-------------- --------------
(Dollars in thousands
except share and per
share amounts)
Stockholders' Equity:
Preferred stock - par value $1 per share; authorized
2,000,000 shares; issued and outstanding, none - -
Common stock - par value $1 per share; authorized
4,000,000 shares; issued and outstanding 627,477 shares
at September 30, 1996, 603,345 September 30, 1995 627 603
Additional paid-in capital 4,032 3,735
Unearned ESOP compensation (217) (241)
Unearned BIP compensation (111) -
Unrealized gain on securities available-for-sale net
of applicable deferred income taxes 4 10
Retained earnings, substantially restricted 3,851 4,088
--------- ---------
Total stockholders' equity 8,186 8,195
--------- ---------
Total liabilities and stockholders' equity $ 34,048 $ 38,151
========= =========
</TABLE>
See accompaning Notes to Consolidated Financial Statements.
<PAGE> 111
FIRST OZAUKEE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1996 1995 1994
------------ ------------ -------------
(In thousands except per share)
INTEREST AND DIVIDEND INCOME:
<S> <C> <C> <C>
Interest on mortgage loans $ $ $
1,129 956 1,085
Interest on other loans 158 129 123
Interest on investment securities
and other interest-earning assets 1,008 1,106 730
Interest on government agency
mortgage-backed securities 243 282 267
Dividends on Federal Home Loan Bank stock 11 11 13
--------- --------- ---------
Total interest and dividends 2,549 2,484 2,218
--------- --------- ---------
INTEREST EXPENSE:
Deposits 1,359 1,295 1,194
Escrows/borrowed funds 5 5 7
--------- --------- ---------
Total interest expense 1,364 1,300 1,201
--------- --------- ---------
Net interest income 1,185 1,184 1,017
Provision for loan losses 18 18 18
--------- --------- ---------
Net interest income after provision
for loan losses 1,167 1,166 999
--------- --------- ---------
NONINTEREST INCOME:
Other fees and service charges 5 4 4
Gain on sale of securities available for sale 47 8 -
Gain on call of securities held to maturity 8 10 -
Gain on sale of fixed assets - 27 -
Gain on sale of mortgage loans 3 - 27
Deposit account fees and service charges 10 9 9
Rental income 9 11 26
Other income 3 8 12
--------- --------- ---------
Total noninterest income 85 77 78
--------- --------- ---------
</TABLE>
See accompaning Notes to Consolidated Financial Statements.
<PAGE> 112
FIRST OZAUKEE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
1996 1995 1994
----------- ----------- ------------
(In thousands)
GENERAL AND ADMINISTRATIVE EXPENSES:
<S> <C> <C> <C>
Compensation and benefits 708 441 388
Occupancy and insurance 160 169 175
Advertising and promotional 10 25 25
Federal insurance premiums 67 68 74
SAIF special assessment 178 - -
Stationery, communications and other
operating expenses 119 94 86
Directors' fees 25 24 22
Expenses of directors, officers and
employees 8 9 9
Data processing fees 99 93 95
Legal, audit, examination and accounting
fees 231 147 28
Environmental remediation expenses 9 - -
--------- --------- ----------
Total general and administrative
expenses 1,614 1,070 902
--------- --------- ---------
Income (loss) before income taxes (362) 173 175
--------- --------- ---------
INCOME TAXES:
Current (1) 10 62
Deferred (124) 54 (18)
--------- --------- ---------
Total income tax expense (benefit) (125) 64 44
--------- --------- ---------
Net income (loss) (237) 109 131
========= ========= =========
Earnings (loss) per share $ (0.40) $ 0.19 $ N/A
========= ========= =========
</TABLE>
See accompaning Notes to Consolidated Financial Statements.
<PAGE> 113
FIRST OZAUKEE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gains
(Losses) on
Shares Addi- Unearned Unearned Available-
of tional ESOP BIP For-Sale
Common Common Paid-In Compen- Compen- Securities, Retained
Stock Stock Capital sation sation Net Earnings Total
------ ------ ------- -------- --------- ----------- -------- -----
(In thousands, except shares of common stock)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 - $ - $ - $ - $ - $ - $3,848 $3,848
Net income - - - - - - 131 131
------- ------ ------ ------ ------ ------- ------- ------
-
Balance at September 30, 1994 - - - - - - 3,979 3,979
Issuance of common stock
(October 21, 1994) 603,345 603 3,735 (241) - - - 4,097
Net income - - - - - - 109 109
Market value adjustment -
FAS 115, net of
deferred taxes - - - - - 10 - 10
------- ------ ------ ------ ------ ------- ------ ------
-
Balance at September 30, 1995 603,345 603 3,735 (241) - 10 4,088 8,195
Net income (loss) - - - - - - (237) (237)
Issuance of stock for
Business Incentive Plan (BIP)
24,132 24 279 - (303) - - -
Amortization of BIP awards - - - - 192 - - 192
Amortization of ESOP awards - - 18 24 - - - 42
Change in unrealized gain
(loss) on securities
available for sale, net - - - - - (6) - (6)
of deferred taxes ------- ------ ------ ------ ------ ------- ------ ------
Balance at September 30, 1996 627,477 $ 627 $4,032 $ (217) $ (111) $ 4 $3,851 $8,186
======= ====== ====== ====== ======= ======= ====== ======
</TABLE>
See accompaning Notes to Consolidated Financial Statements.
<PAGE> 114
FIRST OZAUKEE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------
1996 1995 1994
------------- ------------- ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (237) $ 109 $ 131
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities
Provision for depreciation 45 46 52
Stock incentive plan (BIP) compensation 192 - -
ESOP expense 42 - -
Provision for loan losses - net 18 18 18
Amortization of premiums and discounts - net (90) 10 133
Increase (decrease) in income taxes payable 126 (67) 27
Provision for (reduction of) deferred
income taxes (125) 60 (18)
Loans originated for sale (288) - (1,323)
Sales of loans originated for sale or
available for sale 291 - 1,708
(Gain) loss on sale of loans (3) - (27)
(Increase) decrease in interest receivable (15) (78) 5
(Gain) loss on sale of office property - (27) -
(Gain) loss on sale of securities
available for sale (47) (8) -
(Gain) loss on call of securities held to
to maturity (8) (10) -
Net increase (decrease) in other liabilities 477 18 (8)
Increase (decrease) in deferred income (13) 9 (30)
FHLB stock by dividend - (3) -
Net (increase) decrease in prepaid expenses
and other assets (252) 174 4
--------- --------- ---------
Net cash provided (used) by operating
activities 113 251 672
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of FHLB stock 16 - 91
Proceeds from maturities of investment
securities 3,770 3,560 3,250
Proceeds from sale of investment securities
available for sale 8,216 1,008 -
Proceeds from call of investment securities
held to maturity 1,000 500 -
Purchase of investment securities (6,610) (8,976) (8,394)
(Increase) decrease in loans and leases (2,599) (1,250) 4,197
Principal payments collected on mortgage-backed
securities 530 632 515
Purchase of mortgage-backed securities - - (2,984)
</TABLE>
See accompaning Notes to Consolidated Financial Statements.
<PAGE> 115
FIRST OZAUKEE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
1996 1995 1994
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Purchase of fixed assets (11) (21) (137)
Proceeds from sale of office property - 136 -
--------- --------- ---------
Net cash provided (used) by investing activities 4,312 (4,411) (3,462)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other borrowings 300 300 -
Increase (decrease) in advances from
borrowers for taxes and insurance (23) (10) (141)
Increase (decrease) in deposit accounts (4,547) (3,632) 628
Net proceeds from issuance of common stock - 4,097 (176)
Repayment of other borrowings (300) (300) -
-------- --------- ---------
Net cash provided (used by (4,570) 455 311
financing activities --------- --------- ---------
Increase (decrease) in cash and (145) (3,705) (2,479)
cash equivalents
CASH AND CASH EQUIVALENTS - Beginning of period 870 4,575 7,054
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 725 $ 870 $ 4,575
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest on borrowings $ - $ - $ -
Interest on deposit accounts 162 151 204
Income taxes paid (refunded) (125) 141 34
Conversion costs included in other assets - 176 -
netted against additional paid-in capital
Loans held for sale transferred from portfolio - - 126
Unrealized net gain (loss) on securities (6) 10 N/A
available for sale, net of income tax
Transfers of securities held to maturity 10,430 - -
to available for sale
</TABLE>
ACCOUNTING POLICIES NOTE: Cash equivalents include demand deposits
at other financial institutions and the Federal Home Loan Bank.
See accompaning Notes to Consolidated Financial Statements.
<PAGE> 116
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
--------
First Ozaukee Capital Corp. ("FOCC") provides a full range
of financial services through its wholly-owned insured
banking subsidiary, First Ozaukee Savings Bank ("FO Bank").
FO Bank provides retail financial services to the
communities it serves through two full-service offices, both
of which are located in Ozaukee County, Wisconsin. FO
Bank's primary market area consists of Ozaukee and
Washington Counties, and the northerly portion of Milwaukee
County. FOCC and its subsidiary are subject to competition
from other financial institutions. FOCC and its subsidiary
also are subject to the regulations of certain federal
agencies and undergo periodic examinations by those
regulatory authorities.
Basis of Financial Statement Presentations
------------------------------------------
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and
include the accounts of FOCC and FO Bank. Significant
intercompany accounts and transactions have been eliminated.
Investments in joint ventures, which are not material, are
accounted for on the equity method.
In preparing financial statements, management is required to
make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those
estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans as well as the
valuation of intangible assets. In connection with the
determination of the allowance for loan losses and real
estate owned, management obtains independent appraisals for
significant properties.
Risks and Uncertainties
-----------------------
The Bank's operations are affected by interest rate risk,
credit risk, market risk and regulations by the FDIC. The
Bank is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice more rapidly,
or on a different basis, than its interest-earning assets.
To better control the impact of changes in interest rates,
the Bank has sought to improve the match between asset and
liability maturities or repricing periods and rates by
<PAGE> 117
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
emphasizing the origination of one to three year adjustable
rate mortgage loans, offering certificates of deposit with
terms of up to five years and maintaining a securities
portfolio with laddered maturities of up to five years.
Credit risk is the risk of default on the Bank's loan
portfolio that results from the borrowers' inability or
unwillingness to make contractually required payments.
Market risk reflects changes in the value of collateral
underlying loans receivable and the valuation of real estate
held by the Bank. The Bank is subject to periodic
examination by regulatory agencies which may require the
Bank to record increases in the allowances based on their
evaluation of available information. There can be no
assurance that the Bank's regulators will not require
further increases to the allowances.
Investment and Mortgage-Related Securities
Held-to-Maturity and Available-for-Sale
------------------------------------------
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities
are classified as held-to-maturity when FOCC has the
positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at
amortized cost.
Debt securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale
securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported as a separate
component of stockholders' equity beginning October 1, 1994.
No securities are held by FOCC in a trading account.
The amortized cost of debt securities classified as
held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts to
maturity, or in the case of mortgage-related securities,
over the estimated life of the security. Such amortization
is included in interest income from the related security.
Interest and dividends are included in interest income from
the related securities. Realized gains and losses and
declines in value judged to be other-than-temporary are
included in net securities gains (losses). Gains and losses
are determined using the specific identification method.
Short-term securities include certificates of deposit,
commercial paper, banker's acceptances and similar
instruments. FOCC considers its interest-earning deposits
which have original maturities of three months or less to be
cash equivalents.
<PAGE> 118
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Loans
-------------------
Effective October 1, 1995, FO Bank adopted the provisions of
SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures."
Specific valuation allowances are established for impaired
loans for the difference between the loan amount and the
fair value of collateral less estimated selling costs. FO
Bank considers a loan to be impaired when, based on current
information and events, it is probable that FO Bank will be
unable to collect all amounts due according to the
contractual terms of the loan agreement on a timely basis.
The types of loans for which impairment is measured under
SFAS No. 114 and 118 include nonaccrual income property
loans (excluding those loans included in the homogenous
portfolio which are collectively reviewed for impairment),
large, nonaccrual single family loans and troubled debt
restructurings. Such loans are generally placed on
nonaccrual status at the point they become contractually
delinquent more than 90 days. Impairment losses are
recognized through an increase in the allowance for loan
losses. See note 5.
Interest and Fees on Loans
--------------------------
Interest on loans is recorded using the accrual method.
Allowances ($4,000, $3,000, and $1,000 as of September 30,
1996, 1995, and 1994, respectively) are established for
uncollected interest on nonaccrual loans. Generally, a loan
is classified as nonaccrual and the accrual of interest on
such loan is discontinued when the contractual payment of
principal or interest has become more than 90 days past due
or management has serious doubts about further collecti-
bility of principal or interest, even though the loan
currently is performing. When a loan is placed on
nonaccrual status, accrued but unpaid interest is reversed.
Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance
with the contractual terms for a reasonable period of time
and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amounts
amortized as an adjustment to the related loan's yield. FO
Bank is amortizing these amounts, using the level yield
method, over the contractual life of the related loans.
Such deferred fees are recorded as income upon prepayment of
the related loans.
<PAGE> 119
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FO Bank has net deferred loan fees of $40,000, $51,000, and
$42,000 as of September 30, 1996, 1995, and 1994,
respectively.
Loans held for Sale
-------------------
Loans held for sale generally consist of current production
of certain fixed-rate first mortgage loans which are
recorded at the lower of individual loan cost or market
value. Fees received from the borrower are deferred and
recorded as an adjustment of the sales price. Servicing on
loans sold to date has not been retained. There were no
loans held for sale at September 30, 1996 and 1995.
Foreclosed Properties and Properties Subject to Foreclosure
-----------------------------------------------------------
Property acquired in settlement of loans is recorded at the
lower of the related principal balance upon foreclosure or
its fair value less estimated selling costs. Costs of
developing and improving such properties are capitalized.
Expenses related to holding such real estate, net of rental
and other income, are charged against income as incurred. A
provision for estimated losses is to be recorded when it is
known that the fair value less estimated selling costs is
less than the carrying value. There were no properties in
foreclosure at September 30, 1996, 1995, and 1994.
Provision for Estimated Losses on Loans and Properties
------------------------------------------------------
Allowances for losses are available to absorb losses
incurred on loans receivable and foreclosed real estate held
for sale and represents additions charged to expense, less
net charge-offs. In determining the allowance for losses to
be maintained, management evaluates current economic
conditions, past loss and collection experience, fair value
of the underlying collateral and risk characteristics of the
loan portfolio and foreclosed real estate held for sale.
Management believes that allowances for losses on loans
receivable and foreclosed real estate are adequate.
Office Properties and Equipment
-------------------------------
Land, buildings and equipment are stated at cost. Buildings
are depreciated on the straight-line method. Equipment is
depreciated on a combination of the straight-line and
declining balance methods. Improvements which are
betterments to the assets are capitalized and depreciated
over their remaining useful lives. Repairs are charged to
income at the time incurred. Estimated lives are forty
<PAGE> 120
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years for the office buildings and five to ten years for
furniture and equipment.
Income Taxes
------------
FOCC and FO Bank file a consolidated cash basis federal
income tax return and separate cash basis state income tax
returns. Financial statement provisions are made in the
income tax expense accounts for deferred taxes applicable to
income and expense items reported in different periods than
for income tax purposes.
FOCC accounts for income taxes using the liability method.
Deferred income tax assets and liabilities are adjusted
regularly to amounts estimated to be receivable or payable
based on current tax law and FOCC's tax status.
Consequently, tax expense in future years may be impacted by
changes in tax rates and tax return limitations.
Earnings Per Share
------------------
Earnings per share are based on the weighted average number
of common shares outstanding during each period and common
stock equivalent shares, using the treasury share method.
ESOP shares that are committed to be released are considered
to be outstanding. Primary and fully diluted earnings per
share are the same. The common stock equivalents consist
entirely of stock options. The resulting weighted average
number of shares used in computing earnings per share for
the year ended September 30, 1996 is 587,374 shares of
common stock.
Earnings per share of common stock for the year ended
September 30, 1995, were computed based on consolidated net
income and weighted average outstanding shares of common
stock computed as if FOCC's initial public offering had
taken place on October 1, 1994. In this computation, net
income was not adjusted for the additional income which
could have been earned had the net proceeds from the
offering been available for investment as of October 1,
1994. The resulting weighted average number of shares of
common stock is 573,178.
Earnings per share are not presented for the year ended
September 30, 1994, as FOCC first issued stock on October
21, 1994.
<PAGE> 121
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Changes
------------------
In May 1993, the FASB issued Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." As
permitted under the Statement, FOCC elected to adopt the
provisions of the new standard as of October 1, 1994. In
accordance with Statement No. 115, prior period financial
statements have not been restated to reflect the change in
accounting principle.
New Accounting Pronouncements
-----------------------------
In March 1995, the FASB issued Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS 121 requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. However, SFAS 121 does not apply to financial
instruments, mortgage and other servicing rights or deferred
tax assets. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. The adoption of SFAS 121
will have no material impact on FOCC's financial statements.
In May 1995, the FASB issued Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), "Accounting for
Mortgage Servicing Rights, an amendment to Statement of
Financial Accounting Standards No. 65." SFAS 122 requires
an institution that purchases or originates mortgage loans
and sells or securitizes those loans with servicing rights
retained to allocate the total cost of the mortgage loans to
the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair
values. In addition, institutions are required to assess
impairment of the capitalized mortgage servicing portfolio
based on the fair value of those rights on a
stratum-by-stratum basis with any impairment recognized
through a valuation allowance for each impaired stratum.
Capitalized mortgage servicing rights should be stratified
based upon one or more of the predominate risk
characteristics of the underlying loans such as loan type,
size, note rate, date of origination, term and/or geographic
location. SFAS 122 is effective for fiscal years beginning
after December 15, 1995. The adoption of SFAS 122 will have
no material impact on FOCC's financial statements. SFAS 122
will be superseded by SFAS 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities," described below, effective January 1, 1997.
The FASB issued SFAS No. 123 ("Accounting for Stock-Based
Compensation") in October 1995 relative to financial
accounting and reporting standards for stock-based employee
<PAGE> 122
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation plans. SFAS No. 123 is effective for fiscal
years beginning after December 15, 1995. The Statement
defines a fair-value based method of accounting for employee
stock options or similar equity instruments and encourages
all entities to adopt that method of accounting for all
employee stock compensation plans. However, the Statement
also allows an entity to continue to measure compensation
cost for these plans using an intrinsic value-based method
of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25"). Entities electing to retain
the accounting treatment under APB No. 25 must make pro
forma footnote disclosures of net income and earnings per
share as if the fair-value based method of accounting
defined in this statement has been applied. Management has
not decided which method it will elect.
In June 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statement focuses on
the issues of accounting for transfers and servicing of
financial assets, extinguishments of liabilities and
financial assets subject to prepayment. SFAS No. 125 is
effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December
31, 1996. The provisions of this statement for financial
assets subject to prepayment is effective for financial
assets held on or acquired after January 1, 1997. SFAS
No. 125 is not expected to have a material impact on the
financial position or results of operations of FOCC.
Reclassifications
-----------------
Certain prior year items have been reclassified to conform
to current year presentation.
NOTE 2 INVESTMENT SECURITIES AVAILABLE FOR SALE
The carrying value (amortized cost) and estimated market
values of investment securities available-for-sale are as
follows:
<PAGE> 123
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1995
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- -------------- ------------
<S> <C> <C> <C> <C>
(In thousands)
U. S. Treasury obligations and
obligations of U. S. agencies $ 7,097 $ 3 $ 3 $ 7,097
Corporate debt securities -
investment grade 2,753 13 6 2,760
----------- ----------- ----------- -----------
Total $ 9,850 $ 16 $ 9 $ 9,857
=========== =========== =========== ===========
September 30, 1995
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- -------------- ------------
(In thousands)
U. S. Treasury obligations and $ 4,490 $ 17 $ 1 $ 4,506
obligations of U. S. agencies ----------- ----------- ----------- -----------
Total $ 4,490 $ 17 $ 1 $ 4,506
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of investment
securities available-for-sale by contractual maturity are
shown below. Expected maturities will differ from
contractual maturities on those securities where the
borrowers may have the right to call or prepay obligation
with or without call or prepayment penalties.
During December 1995, FOCC transferred approximately
$10,430,000 of debt securities from held to maturity to
available for sale under a recent interpretation of SFAS No.
115. The net unrealized gains of these securities at the
transaction date amounted to approximately $105,000.
<PAGE> 124
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual maturities are as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------
1996 1995
----------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Within one year or no maturity $ 3,861 $ 3,862 $ - $ -
Greater than one year but less 5,989 5,995 4,490 4,506
than five years
Greater than five years but less - - - -
than ten years
Greater than ten years - - - -
----------- ----------- ----------- -----------
Total $ 9,850 $ 9,857 $ 4,490 $ 4,506
=========== =========== ============ ===========
</TABLE>
Detail of investment securities available-for-sale that were sold
or called follows:
<TABLE>
<CAPTION>
Proceeds
from Gross Gross
Sale/Call Gains Losses
----------- ------- --------
(In thousands)
<S> <C> <C> <C>
Year Ended
September 30, 1996 $ 8,216 $ 47 $ -
September 30, 1995 1,008 8 -
</TABLE>
NOTE 3 INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost and estimated market values of investment
securities held-to-maturity are as follows:
<PAGE> 125
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- -------------- -------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
U. S. Treasury obligations and
obligations of U. S. agencies $ 1,997 $ - $ 5 $ 1,992
============= ============= ============= ===========
September 30, 1995
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- -------------- -------------- --------------
(In thousands)
Corporate debt securities -
investment grade $ 7,696 $ 43 $ 24 $ 7,715
U. S. Treasury obligations and
obligations of U. S. agencies 5,891 56 - 5,947
------------- ------------- ------------ ------------
$ 13,587 $ 99 $ 24 $ 13,662
============= ============= ============ ============
(/TABLE>
The amortized cost and estimated market value of investment
securities held-to-maturity by contractual maturity are
shown below. Expected maturities will differ from
contractual maturities on those securities where the
borrowers may have the right to call or prepay obligation
with or without call or prepayment penalties.
<PAGE> 126
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual maturities are as follows:
</TABLE>
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------
1996 1995
----------------------------- ------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Within one year or no maturity $ - $ - $ 3,714 $ 3,703
Greater than one year but less 1,997 1,992 9,873 9,959
than five years
Greater than five years but less - - - -
than ten years
Greater than ten years - - - -
------------ ------------ ------------- -------------
Total $ 1,997 $ 1,992 $ 13,587 $ 13,662
============= ============ ============= ============
</TABLE>
Detail of investment securities held-to-maturity that were
called follows:
<TABLE>
Proceeds
from Gross Gross
Call Gains Losses
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Year Ended
September 30, 1996 $ 1,000 $ 8 $ -
September 30, 1995 500 10 -
</TABLE>
NOTE 4 MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
Mortgage-backed securities held-to-maturity consist of the
following:
<PAGE> 127
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1996
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Particpation Certificates:
GNMA $ 27 $ - $ 1 $ 26
FHLMC 2,317 - 87 2,230
FNMA 1,377 - 51 1,326
------------- ------------ ------------ ------------
$ 3,721 $ - $ 139 $ 3,582
============= ============ ============ ============
September 30, 1995
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ --------------- -------------- -------------
(In thousands)
Participation Certificates:
GNMA $ 62 $ 1 $ - $ 63
FHLMC 2,615 5 66 2,554
FNMA $ 1,571 - 41 1,530
----------- ------------- ------------ ------------
$ 4,248 $ 6 $ 107 $ 4,147
============ ============= =========== ============
(/TABLE>
There were no sales of mortgage-backed securities during the years
ended September 30, 1996 and 1995. Mortgage-backed securities are
classified as held-to-maturity.
<PAGE> 128
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 LOANS RECEIVABLE
Loans receivable are summarized as follows:
(TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995
------------- --------------
(In thousands)
<S> <C> <C>
First mortgage - one-to-four family $ 9,331 $ 8,681
First mortgage - residential construction 1,347 2,470
First mortgage - multi-family 1,945 908
Commercial real estate/non-residential 2,321 1,881
Home equity 1,737 899
Home improvement - -
Credit card 19 17
Savings account 11 11
Other consumer 374 393
----------- -----------
Total loans 17,085 15,260
----------- -----------
Less
Undisbursed portion of loan proceeds 563 1,336
Unearned interest 3 7
Deferred loan fees 40 51
Reserve for uncollected interest 4 3
Allowance for loan losses 134 116
----------- -----------
744 1,513
----------- -----------
Loans receivable - net $ 16,341 $ 13,747
=========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1996 1995 1994
---------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 116 $ 98 $ 80
Provisions charges to income 18 18 18
Charge-offs and recoveries - net - - -
----------- ----------- ----------
Balance at end of year $ 134 $ 116 $ 98
=========== =========== =========
</TABLE>
FO Bank did not have any specific allowance for loan losses
at September 30, 1996, 1995, and 1994. FO Bank's policy is
<PAGE> 129
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to set up a specific loss allowance when it becomes evident
that a specific loan would be disposed of at a loss.
At September 30, 1996 and 1995, FO Bank had nonaccrual loans
of approximately $100,000 and $87,000, respectively. If
interest on these loans had been recognized at the original
interest rates, interest income would have increased
approximately $8,800 and $7,400 in year ended September 30,
1996 and 1995, respectively. FO Bank has no commitments to
loan additional funds to the borrowers of nonaccrual loans.
There were no impaired loans under SFAS No. 114 and No. 118
at September 30, 1996.
In the ordinary course of business, FO Bank has and expects
to continue to have transactions, including borrowings, with
its officers and directors. In the opinion of management,
such transactions were on substantially the same terms,
including interest rates and collateral, as those prevailing
at the time of comparable transactions with other persons
and did not involve more than a normal risk of
collectibility or present any other unfavorable features to
FO Bank. Loans to such borrowers, which in the aggregate
exceeded $60,000 at September 30, 1996 are summarized as
follows:
Balance, beginning of year $ 323,303
Payments (32,552)
Borrowings 75,233
---------
Balance, end of year $ 365,984
=========
FO Bank's lending activity is concentrated within a small
geographic area of Wisconsin surrounding FO Bank. Although
FO Bank has a diversified portfolio, a substantial portion
of its debtors' ability to honor their contracts is
dependent upon the general economic conditions of the area.
NOTE 6 ACCRUED INTEREST ON INVESTMENTS AND MORTGAGE-BACKED
SECURITIES
Accrued interest on investments and mortgage-backed
securities is summarized as follows:
<PAGE> 130
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30,
------------------------------
1996 1995
------------- -------------
(In thousands)
<S> <C> <C>
Investments and mortgage-backed securities:
Investments and interest-bearing deposits $ 286 $ 288
Mortgage-backed securities 19 21
Federal Home Loan Bank stock 3 3
----------- ------------
$ 308 $ 312
============ =============
</TABLE>
NOTE 7 OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment, at cost, follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
1996 1995
------------- -------------
(In thousands)
<S> <C> <C>
Land and land improvements $ 105 $ 105
Office buildings and improvements 598 598
Furniture, fixtures and equipment 308 297
Vehicles 40 40
------------- -------------
1,051 1,040
Accumulated depreciation and
amortization (479) (434)
------------- -------------
$ 572 $ 606
============== ==============
(/TABLE>
Depreciation charged to operations totaled $45,000, $46,000, and
$52,000 for the years ended September 30, 1996, 1995, and 1994,
respectively.
<PAGE> 131
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 DEPOSIT ACCOUNTS
Deposits are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
---------- --------- ---------- --------- ----------- -----------
(Dollars in thousands)
Demand accounts:
<S> <C> <C> <C> <C> <C> <S>
Non-interest-bearing $ 270 1.09% - % $ 231 0.79% - %
NOW 1,165 4.69 2.65 1,566 5.34 2.62
Money market 2,669 10.74 4.00 2,809 9.57 3.96
Passbook 4,016 16.17 2.75 4,598 15.67 2.78
--------- ------- -------- -------
Total demand accounts 8,120 32.69 3.06 9,204 31.37 3.04
--------- ------- -------- -------
Certificate accounts:
One to six months 4,144 16.68 5.14 4,470 15.23 6.18
12 to 20 months 7,418 29.86 5.40 8,119 27.66 6.12
24 to 36 months 4,728 19.03 5.50 7,029 23.95 5.39
38 to 60 months 4 0.02 4.80 4 0.01 4.80
60-90 months - - - - - -
Jumbo 428 1.72 5.30 523 1.78 5.50
--------- ------- -------- -------
Total certificates 16,722 67.31 5.36 20,145 68.63 5.86
--------- ------- -------- -------
Total deposit accounts 24,842 100.00% 4.61 29,349 100.00% 4.98
======= =======
Accrued interest 120 159
--------- --------
Total deposits $ 24,962 $ 29,508
========== ========
</TABLE>
<PAGE> 132
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposit accounts have scheduled maturity dates as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending Fiscal Year Ending
September 30, 1996 September 30, 1995
---------------------------------- -------------------------------
Amount Percent Amount Percent
--------------- --------------- --------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Demand $ 8,120 32.69% $ 9,204 31.36%
Contractual One Year 14,250 57.36 17,904 61.00
Contractual Two Year 1,608 6.47 1,776 6.05
Contractual Three Year 864 3.48 465 1.59
Contractual Four Year - - - -
Contractual Five Year and after - - - -
------------- ---------- ------------ ----------
$ 24,842 100.00% $ 29,349 100.00%
============= ========= ============== ===========
</TABLE>
Deposit accounts with individual balances greater than
$100,000 totaled $427,733, $523,008, and $948,117 at
September 30, 1996, 1995, and 1994, respectively.
Interest expense on deposit accounts consist of the
following:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Passbook and certificate accounts $ 1,215 $ 1,142 $ 1,040
MMDA/Super NOW accounts 110 112 112
NOW accounts 34 41 42
-------------- -------------- --------------
$ 1,359 $ 1,295 $ 1,194
============== ============== ==============
</TABLE>
NOTE 9 NOTES PAYABLE AND OTHER BORROWINGS
FO Bank had no notes payable or other borrowings at
September 30, 1996 or 1995.
When FO Bank does opt to take advances from the Federal Home
Loan Bank, it will be required to maintain unencumbered
mortgage loans in its portfolio aggregating at least 170% of
the amount of outstanding advances from the Federal Home
Loan Bank as collateral. In addition, advances would be
collateralized by all Federal Home Loan Bank stock.
<PAGE> 133
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 INCOME TAXES
Income tax expense (benefit) in the statements of income
consist of the following components:
<TABLE>
<CAPTION>
Federal State Total
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Year ended September 30, 1996
Current $ (6) $ 5 $ (1)
Deferred (92) (32) (124)
------------ ----------- ------------
$ (98) $ (27) $ (125)
============= ============ ============
Year ended September 30, 1995
Current $ 4 $ 6 $ 10
Deferred 44 10 54
------------- ------------ ----------
$ 48 $ 16 $ 64
============= ============ ==========
Year ended September 30, 1994
Current $ 46 $ 16 $ 62
Deferred (15) (3) (18)
------------- ------------ -----------
$ 31 $ 13 $ 44
============= ============ ============
</TABLE>
At September 30, 1996, FOCC has, for federal consolidated
purposes, a Sec 179 deduction carryover of $8,933 which can
be carried forward indefinitely. FOCC has a Wisconsin net
operating loss of $118,600 which, if unused expires in 2011.
Actual income tax expense differs from the "expected" income
tax expense, computed by applying the statutory federal
corporate tax rate to income before income taxes as follows:
<PAGE> 134
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------
1996 1995 1994
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Federal taxes at statutory rates
(34.0%-1996, 29.7%-1995, and 29.7%-1994) $ (123) $ 51 $ 52
State income taxes - net of federal
income tax benefit (19) 9 9
Increase (decrease) resulting from
Increase deferred tax liability -
prior year tax bad debt reserve 21 - -
Prior year tax refunds - - (4)
Other - net (4) 4 (13)
-------------- -------------- -------------
Provision for income taxes $ (125) $ 64 $ 44
============== ============== =============
</TABLE>
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at September 30, 1996 and 1995 are presented
below:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
(In thousands)
<S> <C> <C>
Deferred tax assets (tax effected):
Loan valuation allowance - book $ 53 $ 46
Loan fees 10 11
Accrued SAIF special assessment premium 70 -
Accrued BIP compensation expense 36 -
ESOP tax/book deduction 3 -
Accrual to cash basis difference - other 80 59
---------- ----------
Total gross deferred tax assets 252 116
Less valuation allowance - -
---------- ----------
Net deferred tax assets 252 116
---------- ----------
<PAGE> 135
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 1995
---------- ----------
(In Thousands)
Deferred tax liabilities (tax effected):
FHLB bank stock dividend 12 13
Excess tax depreciation 12 12
Market valuation adjustment (FASB 115) 3 6
Post 9/30/87 tax bad debt deduction subject to recapture 25 25
Accrual to cash basis difference 176 163
---------- ----------
Total 228 219
---------- ----------
Net deferred tax liability $ 24 $ (103)
========== ==========
Net change $ (127) $ 60
Less FASB 115 portion netted against equity 3 (6)
---------- ----------
Deferred tax expense $ (124) $ 54
========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
FO Bank qualifies under provisions of the Internal Revenue
Code which permit as a deduction from taxable income
allowable bad debt deductions which, particularly in prior
years, significantly exceed actual experience and the
financial statement loan loss provisions. At September 30,
1996, FO Bank's tax bad debt reserves are approximately
$1,625,000. Upon the adoption of Statement No. 109, FO Bank
was required to establish a deferred tax liability for the
excess of its tax bad debt reserves over the balance at the
close of the base year (September 30, 1987). The amount of
the base year reserves is considered to meet the indefinite
reversal criteria of Accounting Principle Board Opinion
No. 23, "Accounting for Income Taxes - Special Area," and
accordingly is not subject to deferred taxes. FO Bank's
base year tax bad debt reserves are approximately
$1,561,000. The amount of the unrecognized deferred tax
liability at September 30, 1996, was approximately $609,000.
Due to recently passed tax legislation, FO Bank will be
required to recapture the excess of its tax bad debt
reserves over its tax bad debt reserves as of the end of its
base year of $64,000. This post base year tax bad debt
reserve will be required to be recaptured over a six-year
period starting with FO Bank's tax year beginning October 1,
1996. The Bank may be able to defer commencement of the
recapture payments for two years under certain
<PAGE> 136
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
circumstances. The post base year tax bad debt reserve has
been included in FO Bank's computation of its deferred tax
liabilities.
NOTE 11 STOCKHOLDERS' EQUITY
On November 16, 1993, the Board of Directors adopted a Plan
of Conversion to convert from a state-chartered mutual
savings bank to a state-chartered stock savings bank with
the concurrent formation of a holding company. On October
21, 1994, FOCC issued 603,345 shares of common stock to
effect the conversion, the net proceeds of which were
$4,338,395, representing the gross sales price of
$4,826,760, reduced by $488,365 of costs associated with the
conversion. Simultaneously, the Holding Company invested
$1,927,861 to acquire 1,000 shares, all of the issued
capital stock, of FO Bank. Five percent of the conversion
stock has been allocated to FO Bank's newly-established
ESOP. The Holding Company has provided the financing to the
ESOP for the acquisition of this stock.
At the time of the conversion, FO Bank has established a
"Liquidation Account" in an amount equal to its net worth as
of the latest date of the financial statements. The amount
of the Liquidation Account was determined to be $3,984,869.
In the event of a complete liquidation, and only in such an
event, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account, in
the proportionate amount of the then-current adjusted
balance for deposits then held, before any liquidation
distribution may be made with respect to the stockholder.
Except for the repurchase of stock and payment of dividends
by FO Bank, the existence of the liquidation account will
not restrict use or application of stockholders' equity.
As a stock savings bank, FO Bank may not declare or pay a
cash dividend on its common stock if the effect would cause
its net worth to be reduced below the amount required for
the liquidation account or the stockholders' equity
requirement imposed by the FDIC or the State of Wisconsin.
If all fully phased-in capital requirements continue to be
met, FO Bank may declare or pay a cash dividend on its
common stock in an amount that does not exceed the excess of
net earnings for the fiscal year in which the dividend is
declared plus one-half of the surplus over the fully
phased-in capital requirements. Regulatory approval is
required to pay dividends in excess of these limitations.
Effective May 31, 1993, FO Bank, as a state chartered stock
savings bank, is subject to regulation by the FDIC and the
Commissioner. FDIC regulations set forth certain capital
standards that require banks to have a minimum 3% tier 1
capital to total assets ratio, a minimum 4% tier 1 capital
to risk-weighted assets ratio and a minimum 8% qualifying
total capital to risk-weighted assets ratio. Wisconsin-
<PAGE> 137
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
chartered savings banks also are required to maintain a
minimum capital to assets ratio of 6%, and must maintain
total capital necessary to ensure the continuation of
insurance of deposit accounts by the FDIC. FO Bank's
regulatory capital exceeds all minimum standards required
under the FDIC regulations and Wisconsin law.
The following table summarizes the differences between the
Company's stockholders' equity and the Bank's regulatory
capital at September 30, 1996:
<TABLE>
<CAPTION>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage State of
Capital Capital Ratio Wisconsin
---------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Total consolidated stockholders'
equity $ 8,186 8,186 8,186 8,186
Holding Company stockholders' equity
not available for regulatory
purposes (2,438) (2,438) (2,438) (2,438)
General loss allowances 134 134
Unrealized gain on securities (4) (4) (4) -
available for sale ------- --------- -------- ----------
$ 5,744 $ 5,878 $ 5,744 $ 5,882
======== ========= ======== ==========
</TABLE>
In connection with the insurance of its deposits by the
Federal Deposit Insurance Corporation, the Bank is required
to maintain a minimum level of capital. Also, Wisconsin
chartered savings banks are required to meet minimum capital
levels of 6%. The following table summarizes the Bank's
capital requirements and ratios:
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------------------------------------------------------
Required Ratios
Actual Amount Excess Actual Required Excess
------ -------- ------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based $5,744 $ 680 $ 5,064 33.77% 4.00% 29.77%
capital
Total risk-based 5,878 1,360 4,518 34.56 8.00 26.56
capital
Tier 1 leverage ratio 5,744 1,192 4,552 17.16 4.00 13.16
State of Wisconsin 5,882 1,918 3,964 18.40 6.00 12.40
</TABLE>
The Bank's capital exceeds all of the fully phased-in capital
requirements imposed by federal and Wisconsin law and regulation.
<PAGE> 138
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 OFFICER, DIRECTOR, AND EMPLOYEE BENEFIT PLANS
Insurance Plans
---------------
All full-time employees of FO Bank are eligible for
comprehensive health insurance commencing upon the
completion of two full months of employment with FO Bank.
After two full months of employment, full-time employees are
covered as a group for life insurance. The Bank pays 100%
of the cost of health insurance for single coverage and 100%
of the cost of health insurance for family coverage for
executive officers of FO Bank and members of the Board of
directors of FO Bank. FO Bank pays the equivalent of the
cost of single coverage health insurance for its employees'
family health insurance coverage. FO Bank pays the entire
cost of life insurance for all employees. The total
insurance expense under all insurance plans was $40,800,
$45,600, and $38,900 for the years ended September 30, 1996,
1995, and 1994.
Money Purchase Pension Plan
---------------------------
FO Bank maintains the First Ozaukee Savings Bank Money
Purchase Pension Plan (the "Pension Plan"), a tax qualified
defined contribution plan covering all eligible employees.
Employees are eligible to participate after completing a
twelve-month period of 1,000 or more hours of employment and
attaining age 21. Each plan year, FO Bank contributes up to
15% (percentage based on Sec 415 limitations) of each
participants' salary to the Pension Plan on behalf of those
participants who have completed 1,000 hours of service
during the plan year and are employed at the end of the plan
year. Benefits generally become 20% vested after two years
of service, 40% vested after three years of service, 60%
vested after four years of service, 80% vested after five
years of service and 100% vested after six years of service.
Participants also become 100% vested on death, disability or
attainment of age 65. Distributions from the Pension Plan
are made upon termination of service in an annuity, a lump
sum or in installments over a period not to exceed the
greater of the life expectancy of the participant or the
life expectancy of the joint survivor of the participant and
his designated beneficiary. Under the Pension Plan, a
separate account is established for each participating
employee. FO Bank's policy is to fund pension costs
accrued. The total pension expense was $27,800, $35,600,
and $22,200 for the years ended September 30, 1996, 1995,
and 1994.
<PAGE> 139
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan
-----------------------------
FO Bank has established for eligible employees of FO Bank
the First Ozaukee Savings Bank Employee Stock Ownership Plan
(the "ESOP") which became effective upon consummation of the
Conversion. As part of the Conversion, the ESOP borrowed
funds from the Holding Company to purchase 5% of the Common
Stock issued in the Conversion, or 30,167 shares of Common
Stock. Collateral for the loan is the Common Stock
purchased by the ESOP. FO Bank makes scheduled cash
contributions to the ESOP which are equal to the ESOP's debt
service less dividends on unallocated ESOP shares used to
repay the ESOP loan. The loan will be repaid principally
from FO Bank's cash contributions and dividends to the ESOP
over a period of ten years. The interest rate payable on
the ESOP loan is 8%. Shares purchased by the ESOP will be
held in a suspense account for allocation among participants
as the loan is repaid.
Generally accepted accounting principles ("GAAP") require
that any borrowing by the ESOP be reflected as a liability
on FO Bank's statement of financial condition. Since the
Holding Company funded the ESOP debt, the debt has been
eliminated through consolidation and no loan or liability is
reflected on the Holding Company's consolidated financial
statements.
Contributions to the ESOP and shares released from the
suspense account in an amount proportional to the repayment
of principal and interest on the ESOP loan will be allocated
among participants on the basis of compensation in the year
of allocation. Dividends on allocated ESOP shares will be
paid to participants of the ESOP. Shares awarded under the
ESOP will become 20% vested after two years of service, 40%
vested after three years of service, 60% vested after four
years of service, 80% vested after five years of service,
and 100% vested after six years of service. Participants
also become 100% vested upon death, disability or attainment
of age 65. Forfeitures will be reallocated among the
remaining participating employees in the same proportion as
contributions. Benefits may be payable upon death,
retirement, early retirement, disability or separation from
service. Benefits may be paid either in shares of Common
Stock or in cash. In accordance with SOP 93-6, FO Bank
reports compensation expense, as shares are committed to be
released from collateral, equal to the average fair value of
the ESOP shares committed to be released. Dividends on
allocated ESOP shares will be charged to stockholders'
equity. Dividends on unallocated ESOP shares will be
reported as a reduction of debt or of accrued interest
payable. Expense for the ESOP was $42,200 for the year
ended September 30, 1996 and none for years ended September
30, 1995 and 1994. The ESOP shares as of September 30 were
as follows:
<PAGE> 140
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Allocated shares - -
Shares released for allocation 3,017 -
Unreleased shares 27,150 30,167
-------- --------
Total ESOP shares 30,167 30,167
======== ========
Fair value of unreleased shares at
September 30 $ 391,978 $ 384,629
========== =========
</TABLE>
Business Incentive Plan (BIP)
-----------------------------
The Business Incentive Plan (BIP) of FOCC was adopted on
November 7, 1995 to enable FOCC to reward and retain key
officers of the Bank. A total of 24,132 shares of common
stock were issued to be reserved for this plan. One-third
of the shares became vested on date of adoption, one-third
will vest on November 7, 1996, and the remaining one-third
will vest on November 7, 1997. Compensation expense for
stock awarded under this plan is recorded over the vesting
periods, and totaled $193,822 for the year ended September
30, 1996. Since the Plan was adopted during the current
year, there are no expenses for the years ended September
30, 1995 and 1994.
Stock Option Plans
------------------
The 1995 Stock Option Plan of FOCC was adopted on November
7, 1995. A total of 60,334 shares of common stock were
authorized to be reserved for the grant of both incentive
and nonincentive stock options to officers and directors.
The option exercise price is equal to the fair market value
of the common stock on the date of the grant ($12.44 on
November 7, 1995). The option term cannot exceed ten years.
The nonincentive stock options (24,132 shares) to directors
vested one-third on November 7, 1995, and will vest
one-third on November 7, 1996, and one-third on November 7,
1997. The incentive stock options (36,202 shares) to
officers vest ratably over four and a half years, with 8,038
shares vested on November 7, 1995.
<PAGE> 141
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock option transactions for
the year ended September 30, 1996:
Number Per
of Shares Share
Initial grant date - November 7, 1995 60,334 $ 12.44
Exercised - N/A
Outstanding at September 30, 1996 60,334 $ 12.44
========
Of the 60,334 stock options outstanding at September 30,
1996, 16,082 are currently eligible for exercise.
NOTE 13 CONTINGENCIES
-------------
Legal Proceedings
-----------------
FOCC and FO Bank are not involved in any pending legal
proceedings other than routine legal proceedings occurring
in the ordinary course of business, which in the aggregate
involve amounts that are believed by management to be
immaterial to the financial condition of FOCC and FO Bank.
Soil and Groundwater Contamination
----------------------------------
FO Bank has been named by the Wisconsin Department of
Natural Resources ("WDNR") as a potentially responsible
party with respect to soil and groundwater contamination
beneath and adjacent to FO Bank's Cedarburg home office. FO
Bank has engaged an independent environmental engineering
firm, Key Environmental Services, Inc., to replace the prior
firm, Northern Environmental. Key Environmental has
prepared a review and evaluation of remediation
alternatives. Based on their study, they have provided the
Bank with a range of estimated costs for the remediation.
Key Environmental has also indicated that it is highly
probable that FO Bank will be eligible for Petroleum
Environmental Cleanup Fund ("PECFA") reimbursement over the
PECFA deductible of $15,000 plus 2% of costs over $200,000
which FO Bank expects to meet. Based on information from
Key Environmental, FO Bank has booked $252,500 (midpoint of
the cost range) as a liability and an expense and also
booked a receivable of $252,500 from PECFA for the expense
recovery. Environmental expenses (not recoverable from
PECFA), excluding related legal fees that are reported
separately, were $8,700, $0, and $0 for the years ended
September 30, 1996, 1995, and 1994.
<PAGE> 142
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement No. 107, ("Disclosures about Fair Value of
Financial Instruments"), requires disclosure of fair value
information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable
to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using
present value or other valuation techniques. Those
techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be
realized in immediate settlement of the instrument.
Statement No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented do not necessarily represent the underlying value
of First Ozaukee Capital Corp. It is generally not the
intent of First Ozaukee Capital Corp. to liquidate and
therefore realize the difference between market value and
carrying value, and, even if it were, there is no assurance
that the estimated market values could be realized. Thus,
the information presented is not particularly relevant to
predicting First Ozaukee Capital Corp.'s future earnings or
cash flows.
The following methods and assumptions were used by First
Ozaukee Capital Corp. in estimating its fair value
disclosures for financial instruments:
Cash and Short-term Investments
-------------------------------
The carrying values approximate the fair values for these
assets.
Securities Available for Sale,
Investments, and Mortgage-Backed Securities
-------------------------------------------
Fair values are based on quoted market prices, where
available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
Federal Home Loan Bank Stock
----------------------------
Federal Home Loan Bank stock is carried at cost, which is
redeemable value, since the market for this stock is
limited.
<PAGE> 143
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans
-----
Fair values are based on quoted market prices for loans with
similar financial characteristics.
Deposits
--------
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, NOW accounts,
money market, and checking accounts, is the amount payable
on demand at the reporting date. The fair value of fixed
rate time deposits is calculated using discounted cash flows
applying interest rates currently being offered on similar
certificates.
Off-Balance Sheet Instruments
-----------------------------
Fair values for off-balance-sheet lending commitments are
based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standings. Since
this amount is immaterial, no amounts for fair value are
presented.
The carrying amounts and estimated fair value of financial
instruments at September 30, 1996 were as follows:
Estimated
Carrying Fair
Amount Value
-------- -----------
(In thousands)
Financial Assets
Cash and cash equivalents $ 725 $ 725
Federal Home Loan Bank stock 152 152
Securities available for sale 9,857 9,857
Securities held to maturity 1,997 1,992
Mortgage-backed securities 3,721 3,582
Loans receivable 16,341 16,468
Financial Liabilities
Deposits:
Demand accounts 8,120 8,120
Certificates 16,722 16,690
NOTE 15 SPECIAL FEDERAL DEPOSIT INSURANCE ASSESSMENT
A special one-time Federal Deposit Insurance Assessment was
assessed against the Bank as of September 30, 1996, the date
of enactment of legislation by U. S. Congress to
recapitalize the Savings Association Insurance Fund. The
assessment is 65.7 cents per $100 of deposits on March 31, 1995.
<PAGE> 144
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Bank, this amounted to a charge against earnings of
$178,000. The after-tax impact on earnings amounted to
$108,000. Starting in 1997, deposit insurance premiums are
expected to decrease by approximately 72% due to the
recapitalization of the insurance fund.
NOTE 16 LEASE COMMITMENTS
FO Bank leases a mailing machine under a lease expiring in
2001. Minimum rental commitments under the noncancelable
operating lease are as follows:
September 30,
1996
-------------
One year $ 1,250
Two years 1,250
Three years 1,250
Four years 1,250
Five years (final) 350
----------
$ 5,350
===========
Rental expenses under operating leases were
$175, $0, and $0 for years ending September 30, 1996,
1995 and 1994, respectively.
NOTE 17 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
FOCC 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 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 statements of financial condition. The contract amounts
reflect the extent of involvement FOCC has in the particular
class of financial instrument. FOCC's maximum exposure to
credit loss for commitments to extend credit is represented
by the contract amount of those instruments.
Financial instruments whose contract amounts represent
credit risk are as follows:
<PAGE> 145
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
------------------------------
1996 1995
------------ -----------
(In thousands)
Commitments to extend credit
Fixed rate $ - $ -
Adjustable 713 80
Unused equity lines of credit 953 639
Unused credit card line of credit 122 126
Performance standby letter of credit - -
----------- -----------
$ 1,788 $ 845
=========== ===========
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and
generally require payment of a fee. As some commitments
expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash
requirements. FOCC evaluates the creditworthiness of each
customer on a case by case basis. FOCC generally extends
credit only on a secured basis. Collateral obtained varies,
but consists primarily of one-to-four family residences.
Commitments to extend credit on a fixed-rate basis expose
FOCC to a certain amount of interest rate risk if market
rates of interest substantially increase during the
commitment period.
NOTE 18 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENT
The following condensed statements of financial condition
and condensed statements of income and cash flows for the
periods then ended for First Ozaukee Capital Corp. should be
read in conjunction with the consolidated financial
statements and the notes thereto.
<PAGE> 146
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 30,
------------------------------
1996 1995
---------- -------------
(In thousands)
Cash and cash equivalents $ 164 $ 114
Investment securities held-to-maturity 1,997 1,996
Investment in subsidiary 5,748 5,762
Loan to ESOP 224 241
Other assets 65 82
----------- -----------
Total assets $ 8,198 $ 8,195
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 12 $ -
Stockholders' equity 8,186 8,195
----------- ---------
Total liabilities and stockholders' equity $ 8,198 $ 8,195
=========== ========
<PAGE> 147
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period of
October 21
1994
Year Ended Through
September 30, September 30,
1996 1995
------------- --------------
(In thousands)
<S> <C> <C>
Interest on investments $ 133 $ 131
Interest on loan to ESOP 17 18
Equity in net income (loss) of bank (51) 87
Gain on called securities held-to-maturity 8 10
------- -------
Total income 107 246
Other expenses 440 118
------- -------
Income before provision
for income taxes (333) 128
Provision for income taxes (96) 19
------- -------
Net income $ (237) $ 109
======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Period of
October 21
1994
Year Ended Through
September 30, September 30,
1996 1995
-------------- ------------
(In thousands)
Cash Flows from Operating Activities:
Net income (loss) $ (237) $ 109
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Equity in net (income) loss of bank 51 (87)
Stock Incentive Plan (BIP) compensation 192 -
Amortization of premiums and discounts -
net (2) (5)
Gain on call of investment securities (8) -
held-to-maturity
Decrease (increase) in other assets 17 (58)
Increase (decrease) in liabilities 12 (24)
--------- ----------
Net cash provided (used) by operating activities 25 (65)
--------- ----------
</TABLE>
<PAGE> 148
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Period of
October 21, 1994
Year Ended Through
September 30, September 30,
1996 1995
------------- ------------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase stock of subsidiary - (1,928)
Purchase of investment securities held-to-maturity (1,500) (2,490)
Purchase of investment securities 1,508 500
held-to-maturity
Payment on ESOP loan/loan to ESOP 17 (241)
------- -------
Net cash provided (used) by investing activities 25 (4,159)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock - 4,338
------- -------
Net cash provided by financing - 4,338
activities ------- -------
Net increase in cash and cash equivalents 50 114
Cash and cash equivalents at beginning 114 -
------- -------
Cash and cash equivalents at end $ 164 $ 114
======= =======
</TABLE>
<PAGE> 149
FIRST OZAUKEE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30,
1995 1996 1996 1996
--------- --------- -------- ----------
(In thousands except per share amounts)
<S> <C> <C> <C>
Interest and dividend income $ 641 $ 622 $ 647 $ 639
Interest expense 352 344 352 316
----------- ---------- --------- --------
Net interest income 289 278 295 323
Provision for loan losses 5 4 5 4
----------- ---------- --------- --------
Net interest income after
provision for loan losses 284 274 290 319
Non-interest income 32 24 15 14
Non-interest expense 380 401 295 538
----------- ---------- --------- --------
Income (loss) before income taxes (64) (103) 10 (205)
Income taxes (28) (11) (3) (83)
----------- ----------- ---------- --------
Net income (loss) $ (36) $ (92) $ 13 $ (122)
========= ======== ======== =======
</TABLE>
The following schedule is a summary of earnings per share and market
information during the year ended September 30, 1996. No dividends
were declared on the shares of common stock during the year ended
September 30, 1996.
<TABLE>
<CAPTION>
Dec. 31, March 31, June 30, Sept. 30,
1995 1996 1996 1996
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Earnings per share $ (0.06) $ (0.15) $ 0.02 $ (0.21)
Market information
Trading range
High 13-3/4 15 15 15-1/2
Low 11-5/8 12-1/2 14 13-3/4
Close 12-1/4 15 14-1/4 14-7/16
</TABLE>
<PAGE> 150
FIRST OZAUKEE CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
--------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,380 725
Securities:
Available for sale, at market value (amortized cost of
$4,995 and $9,850, respectively) 4,963 9,857
Held to maturity at amortized cost (market value of
$1,975 and $1,992, respectively) 1,997 1,997
Stock in Federal Home Loan Bank, at cost 152 152
Mortgage-backed securities held to maturity, at amortized cost
(market value of $3,350 and $3,582, respectively) 3,508 3,721
Loans receivable, net 20,841 16,341
Premises and equipment, net 563 572
Accrued interest receivable:
Securities, certificates of deposit and mortgage-backed
securities 176 308
Loans receivable 95 75
Other assets 306 300
-------- -------
Total assets $ 34,981 34,048
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 26,313 24,962
Advances from borrowers for taxes and insurance 116 373
Other liabilities 326 559
Income taxes payable (39) (32)
-------- --------
Total liabilities 26,716 25,862
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, 2,000,000 shares
authorized; shares issued - none - -
Common stock, $1.00 par value; 4,000,000 shares
authorized; 627,477 shares issued and outstanding 627 627
Additional paid-in capital 4,041 4,032
Unearned ESOP compensation (205) (217)
Unearned BIP compensation (58) (111)
Unrealized gain (loss) on securities available for sale, net (19) 4
Retained earnings - substantially restricted 3,879 3,851
-------- -------
Total stockholders' equity 8,265 8,186
-------- -------
Total liabilities and stockholders' equity $ 34,981 34,048
========= =======
</TABLE>
See accompanying note to consolidated financial statements.
<PAGE> 151
FIRST OZAUKEE CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited)
<C> <C> <C> <C> <C>
Interest and dividend income:
Loans receivable $ 449 309 814 605
Mortgage-backed securities 54 61 110 125
Securities 130 252 286 533
------- ------- ------- -------
Total interest income 633 622 1,210 1,263
------- ------- ------- -------
Interest expense:
Deposits 295 343 583 693
Escrows and borrowed funds - 1 2 3
------- ------- ------- -------
Total interest expense 295 344 585 696
------- ------- ------- -------
Net interest income 338 278 625 567
Provision for loan losses 5 4 9 9
------- ------- ------- -------
Net interest income after provision for
loan losses 333 274 616 558
------- ------- ------- -------
Noninterest income:
Other fees and service charges 2 1 6 2
Deposit account fees and service charges 2 3 4 5
Gain (loss) on sale of securities available
for sale 1 16 5 42
Gain (loss) on sale of loans receivable - - - 1
Rental income 3 2 5 4
Other 1 2 1 2
------- ------- -------- --------
Total noninterest income 9 24 21 56
------- ------- -------- --------
</TABLE>
<PAGE> 152
FIRST OZAUKEE CAPITAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited)
General and administrative expenses:
<S> <C> <C> <C> <C>
Compensation and benefits 149 185 303 395
Occupancy and insurance expense 46 47 83 86
Data processing fees 24 27 51 52
Federal insurance premiums 4 17 4 34
Directors' fees 7 7 14 13
Legal, auditing, examination and
accounting fees 41 80 83 133
Advertising and promotion 5 3 8 7
Stationery, communications and other
operating expenses 35 35 58 61
-------- -------- -------- --------
Total general and administrative expenses 311 401 604 781
-------- -------- -------- --------
Income (loss) before income taxes 31 (103) 33 (167)
Income taxes 5 (11) 5 (39)
-------- -------- -------- --------
Net income (loss) $ 26 (92) 28 (128)
======== ========= ======== ========
Net income (loss) per share $ .04 (.16) .05 (.22)
======== ========= ======== ========
Weighted-average shares outstanding 602,763 582,121 597,701 577,577
======== ========= ======== ========
Dividends per share $ .00 .00 .00 .00
======== ========= ======== ========
</TABLE>
See accompanying note to consolidated financial statements.
<PAGE> 153
FIRST OZAUKEE CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
--------------------
1997 1996
----- ----
(UNAUDITED)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 28 (128)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation expense 23 23
Provision for loan losses 9 9
Gain on sale of securities available for sale (5) (42)
Gain on sale of loans receivable - (1)
ESOP expense 21 20
BIP expense 53 101
Amortization of premiums (discounts), net on securities and MBS (1) (48)
Loans originated for sale - (110)
Proceeds from sale of loans - 111
Decrease (increase) in:
Accrued interest receivable 112 23
Other assets (6) (8)
Increase (decrease) in:
Other liabilities (233) 45
Income taxes payable 9 84
-------- --------
Net cash provided by (used for) operating activities 10 79
-------- --------
Cash flows from investing activities:
Loans originated and purchased, net of principal collections on loans (4,509) (1,393)
Principal collections on mortgage-backed securities held to maturity 213 287
Securities:
Available for sale:
Purchased (2,497) (2,110)
Proceeds from sale 2,747 508
Proceeds from maturity or call 4,610 5,234
Held to maturity:
Purchased (999) (1,000)
Proceeds from sale 1,000 -
Proceeds from maturity or call - 1,750
Purchase of premises and equipment (14) (10)
Proceeds from redemption of FHLB stock - 16
--------- ---------
Net cash provided by (used for) investing activities 551 3,282
--------- ---------
<PAGE> 154
FIRST OZAUKEE CAPITAL CORP. AND SUBSIDIARY
SIX MONTHS ENDED
MARCH 31,
--------------------
1997 1996
----- ----
(UNAUDITED)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits 1,351 108
Advances from borrowers for taxes and insurance (257) (262)
Proceeds from advance from FHLB - 500
Repayment of advance from FHLB - (500)
--------- ----------
Net cash provided by (used for) financing activities 1,094 (154)
--------- ----------
Net increase (decrease) in cash and cash equivalents 1,655 3,207
Cash and cash equivalents at beginning of period 725 870
--------- ----------
Cash and cash equivalents at end of period $ 2,380 4,077
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits $ 583 693
Interest on escrows and borrowed funds 2 3
Income taxes 6 -
Noncash investing activity - transfer of securities from
held to maturity to available for sale $ - 10,430
See accompanying note to consolidated financial statements.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The information contained in the accompanying consolidated
financial statements is unaudited. In the opinion of
management, the financial statements contain all adjustments
(none of which were other than normal recurring entries)
necessary for a fair statement of the results of operations
for the interim periods. The results of operations for the
interim periods are not necessarily indicative of the
results which may be expected for the entire fiscal year.
These consolidated financial statements should be read in
conjunction with the audited consolidated financial
statements of First Ozaukee for the year ended September 30,
1996 set forth on pages F-1 through F-37 of this Proxy
Statement.
<PAGE> 155
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
Between
CENTRAL ILLINOIS BANCORP, INC.
an Illinois corporation
and
FIRST OZAUKEE CAPITAL CORP.
a Wisconsin corporation
Dated as of April 25, 1997
<PAGE> 156
TABLE OF CONTENTS
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . 158
1.1 THE MERGER . . . . . . . . . . . . . . . . . . . . 158
1.2 ADJUSTMENT TO MERGER PRICE . . . . . . . . . . . . 159
1.3 PAYING AGENT . . . . . . . . . . . . . . . . . . . 161
1.4 FUNDING OF PAYING AGENT . . . . . . . . . . . . . 162
1.5 CLOSING; EFFECTIVE TIME . . . . . . . . . . . . . 162
1.6 STOCK OPTIONS . . . . . . . . . . . . . . . . . . 163
ARTICLE II STATEMENTS OF ESSENTIAL FACTS CONCERNING FIRST
OZAUKEE . . . . . . . . . . . . . . . . . . . . . 163
2.1 ORGANIZATION, GOOD STANDING AND AUTHORITY . . . . 163
2.2 ORGANIZATIONAL DOCUMENTS; MINUTES AND STOCK
RECORDS . . . . . . . . . . . . . . . . . . . . . 163
2.3 CAPITALIZATION OF FIRST OZAUKEE . . . . . . . . . 164
2.4 FINANCIAL STATEMENTS AND OTHER REPORTS . . . . . . 165
2.5 REPORTS TO REGULATORS . . . . . . . . . . . . . . 165
2.6 SEC REPORTS . . . . . . . . . . . . . . . . . . . 166
2.7 UNDISCLOSED LIABILITIES . . . . . . . . . . . . . 166
2.8 LOAN PORTFOLIO . . . . . . . . . . . . . . . . . . 166
2.9 NO ADVERSE CHANGES . . . . . . . . . . . . . . . . 167
2.10 CONDUCT OF BUSINESS IN NORMAL COURSE . . . . . . . 167
2.11 PROPERTIES AND ASSETS . . . . . . . . . . . . . . 167
2.12 INSURANCE . . . . . . . . . . . . . . . . . . . . 168
2.13 LITIGATION AND COMPLIANCE WITH LAWS . . . . . . . 168
2.14 CONFLICT OF INTEREST TRANSACTIONS . . . . . . . . 169
2.15 MATERIAL CONTRACTS . . . . . . . . . . . . . . . . 169
2.16 NO DEFAULTS . . . . . . . . . . . . . . . . . . . 170
2.17 ADDITIONAL SCHEDULES . . . . . . . . . . . . . . . 170
2.18 TAXES . . . . . . . . . . . . . . . . . . . . . . 171
2.19 EMPLOYEE COMPENSATION AND BENEFIT PLANS . . . . . 171
2.20 AUTHORIZATION OF TRANSACTIONS . . . . . . . . . . 172
2.21 ENVIRONMENTAL SUITS AND PROCEEDINGS . . . . . . . 173
2.22 CONTAMINATED PROPERTIES . . . . . . . . . . . . . 174
2.23 CHANGE IN BUSINESS RELATIONSHIPS . . . . . . . . . 174
2.24 BROKER'S AND FINDER'S FEES . . . . . . . . . . . . 174
2.27 ENVIRONMENTAL REMEDIATION . . . . . . . . . . . . 175
ARTICLE III STATEMENTS OF ESSENTIAL FACTS CONCERNING BUYER . . 175
3.1 CORPORATE EXISTENCE . . . . . . . . . . . . . . . 175
3.2 FINANCIAL STATEMENTS AND OTHER REPORTS . . . . . . 175
3.3 AUTHORIZATION OF TRANSACTIONS . . . . . . . . . . 176
3.4 BROKER'S AND FINDER'S FEES . . . . . . . . . . . . 176
3.5 FINANCIAL RESOURCES . . . . . . . . . . . . . . . 176
3.6 EMPLOYEE COMPENSATION AND BENEFIT PLANS . . . . . 177
ARTICLE IV ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . 177
4.1 CONDUCT OF BUSINESS OF FIRST OZAUKEE . . . . . . . 177
4.2 CONDUCT OF BUSINESS OF BUYER . . . . . . . . . . . 179
4.3 ACCESS TO INFORMATION . . . . . . . . . . . . . . 179
4.4 FIRST OZAUKEE SHAREHOLDERS' MEETING . . . . . . . 180
4.5 REASONABLE EFFORTS . . . . . . . . . . . . . . . . 180
4.6 REGULATORY APPROVALS . . . . . . . . . . . . . . . 180
4.7 BUSINESS RELATIONS AND PUBLICITY . . . . . . . . . 181
4.8 LOAN REVIEW . . . . . . . . . . . . . . . . . . . 181
4.9 CIBAC SHAREHOLDER APPROVAL . . . . . . . . . . . . 181
<PAGE> 157
4.10 NO CONDUCT INCONSISTENT WITH THIS AGREEMENT . . . 181
4.11 BOARD OF DIRECTORS' NOTICES, MINUTES, ETC . . . . 181
4.12 CONFIDENTIAL INFORMATION . . . . . . . . . . . . . 182
4.13 MAINTENANCE OF CAPITAL LEVELS . . . . . . . . . . 182
4.14 NO CONTROL OF FIRST OZAUKEE BY BUYER . . . . . . . 182
4.15 EMPLOYMENT AGREEMENTS . . . . . . . . . . . . . . 182
4.16 EMPLOYEES . . . . . . . . . . . . . . . . . . . . 182
4.17 INDEMNIFICATION AND DIRECTORS' AND OFFICERS'
LIABILITY INSURANCE . . . . . . . . . . . . . . . 183
4.18 BOARD OF DIRECTORS OF FOCC AND FOSB . . . . . . . 183
4.19 OFFICER AND DIRECTOR LOANS . . . . . . . . . . . . 184
4.20 EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . 184
4.21 OBLIGATIONS TO BAIRD AND SHW . . . . . . . . . . . 186
4.22 CEDARBURG FACILITY . . . . . . . . . . . . . . . 186
4.23 PROXY STATEMENT . . . . . . . . . . . . . . . . . 186
4.24 FINANCING . . . . . . . . . . . . . . . . . . . . 187
ARTICLE V CONDITIONS PRECEDENT . . . . . . . . . . . . . . . 187
5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER . . . 187
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF FOCC . . . 191
ARTICLE VI SURVIVAL . . . . . . . . . . . . . . . . . . . . . 193
ARTICLE VII GENERAL PROVISIONS . . . . . . . . . . . . . . . . 194
7.1 FURTHER ASSURANCES . . . . . . . . . . . . . . . . 194
7.2 EXPENSES . . . . . . . . . . . . . . . . . . . . . 194
7.3 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . 194
7.4 TERMINATION . . . . . . . . . . . . . . . . . . . 195
7.5 RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . 195
7.6 CANCELLATION FEE . . . . . . . . . . . . . . . . . 196
7.7 NOTICES . . . . . . . . . . . . . . . . . . . . . 196
7.8 GOVERNING LAW . . . . . . . . . . . . . . . . . . 197
7.9 SPECIFIC PERFORMANCE . . . . . . . . . . . . . . . 197
7.10 COUNTERPARTS . . . . . . . . . . . . . . . . . . . 197
7.11 SEVERABILITY . . . . . . . . . . . . . . . . . . . 197
7.12 HEADINGS . . . . . . . . . . . . . . . . . . . . . 198
7.13 ENTIRE AGREEMENT; AMENDMENT . . . . . . . . . . . 198
7.14 THIRD-PARTY BENEFICIARY RIGHTS . . . . . . . . . . 198
Exhibit A Plan of Merger
Exhibit B Form of Consulting Agreement with Russell S. Jones
Exhibit C Form of Employment Agreement with Mary E. Lammers
DISCLOSURE SCHEDULES
<PAGE> 158
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (this
"Agreement") is made and entered into as of the 25th day of April,
1997, by and among Central Illinois Bancorp, Inc., an Illinois
corporation ("Buyer"), and First Ozaukee Capital Corp., a Wisconsin
corporation ("FOCC").
WHEREAS, the respective Boards of Directors of Buyer and
FOCC have approved the merger of CIB Acquisition Corporation
("CIBAC"), a Wisconsin corporation and wholly-owned subsidiary of
Buyer, with and into FOCC (the "Merger"); and
WHEREAS, each of Buyer and FOCC believes that the
proposed Merger, and the exchange of the shares of FOCC common stock,
$1.00 par value ("FOCC Common Stock"), for cash in the manner provided
in this Agreement and the Plan of Merger, a copy of which is attached
hereto as EXHIBIT A (the "Plan of Merger"), is desirable and in the
best interests of its respective shareholders; and
WHEREAS, Buyer owns 100 percent of the issued and
outstanding capital stock of CIBAC, a Wisconsin corporation, and FOCC
owns 100 percent of the issued and outstanding capital stock of First
Ozaukee Savings Bank, a Wisconsin state-chartered savings bank
("FOSB"). (FOCC and FOSB are collectively referred to herein as
First Ozaukee.)
NOW THEREFORE, in consideration of the premises and the
mutual representations, warranties, covenants, agreements and
conditions herein contained, the parties hereto covenant and agree as
follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions
of this Agreement and the Plan of Merger, and pursuant to the
provisions of the Wisconsin Business Corporation Law (the "WBCL"), the
Bank Holding Company Act of 1956, as amended (the "BHC Act") and
Chapter 214 of the Wisconsin Statutes Annotated, at the Effective Time
(as defined in Section 1.5 hereof), CIBAC shall be merged with and
into FOCC pursuant to the terms and conditions set forth herein and
FOCC shall be the surviving corporation (the "Surviving Corporation").
The parties agree that FOCC and CIBAC will execute
a Plan of Merger substantially in the form attached hereto as EXHIBIT
A which provides for the terms of the Merger and mode of carrying the
same into effect.
Following the Effective Time, FOCC shall be the
Surviving Corporation, shall be considered the same business and
corporate entity as each merging corporation, and shall have the other
properties, liabilities and attributes as provided by the WBCL. As
set forth in the Plan of Merger, pursuant to the Merger:
(a) the Articles of Incorporation of FOCC as in
effect immediately prior the Effective Time, shall be, from and after
<PAGE> 159
the Effective Time, the Articles of Incorporation of FOCC as the
Surviving Corporation;
(b) the By-Laws of FOCC in effect immediately
prior to the Effective Time shall be, from and after the Effective
Time, the By-Laws of FOCC as the Surviving Corporation;
(c) each share of FOCC Common Stock ("FOCC
Shares") issued and outstanding immediately prior to the Effective
Time, other than FOCC Shares, the holders of which have validly
demanded appraisal of such shares pursuant to Subchapter XIII of the
WBCL ("Subchapter XIII") and shall not have voted such shares in favor
of the Merger ("Dissenting Shares"), and FOCC Shares, if any, that are
owned by Buyer immediately prior to the Merger, shall be converted by
virtue of the Merger, automatically and without action on the part of
the holder thereof, into the right to receive $15.10 per share for
each FOCC Share (the "Merger Price"), as adjusted as of the Effective
Time pursuant to Section 1.2 of this Agreement, payable by Buyer, in
cash, without any interest thereon from the Effective Time until the
time of payment, at the Effective Time or such date thereafter as
certificates shall be surrendered in accordance with Section 1.3 of
this Agreement.
(d) FOCC Shares that are not voted for adoption
of the Merger and with respect to which the holders thereof have taken
all necessary action as of the Effective Time to perfect their
shareholder appraisal rights in accordance with the applicable
provisions of the WBCL shall not be converted into the right to
receive the Merger Price at or after the Effective Time unless and
until the holder of such shares withdraws the demand for appraisal of
their shares or otherwise becomes ineligible to pursue appraisal
rights under the WBCL.
(e) each common share of CIBAC issued and
outstanding immediately prior to the Effective Time shall be converted
into one validly issued, fully-paid and nonassessable share of common
stock of FOCC.
(f) the holders of Dissenting Shares shall have
the rights provided by Subchapter XIII and no others.
(g) the officers and directors of the Surviving
Corporation shall be as set forth in the Plan of Merger, attached
hereto as EXHIBIT A.
1.2 ADJUSTMENT TO MERGER PRICE.
(a) The capital of FOCC shall be calculated in
accordance with generally accepted accounting principles ("GAAP") as
of the last business day of the month prior to the Closing Date and,
together with the adjustments contemplated by Sections 1.2(b) and (c),
shall constitute the base capital ("Base Capital") for purposes of
determining any adjustment to the Merger Price. Five (5) business
days prior to Closing there shall commence an investigatory period
during which Buyer shall conduct a review of the books and records of
FOCC and FOSB for the purposes of making the necessary adjustments to
the capital of FOCC, if any.
<PAGE> 160
(b) Base Capital shall reflect the following
adjustments:
(i) A securities dealer unaffiliated with
First Ozaukee or Buyer or their subsidiaries, officers or directors
(the "Independent Dealer") and reasonably acceptable to First Ozaukee
shall be retained by Buyer (at Buyer's expense) to calculate the
unrealized gain or loss (i.e., the aggregate market value less the
book value, net of taxes calculated at 39%) (the "Mark to Market
Adjustment") of those securities of First Ozaukee listed in SCHEDULE
1.2 (which consist of all securities owned by First Ozaukee and
designated by First Ozaukee as "Held to Maturity") as of the close of
business on the business day prior to the date of this Agreement (the
"Signing Adjustment") and then again on the business day prior to the
Closing Date (the "Closing Adjustment"). The same Independent Dealer
shall calculate the Signing Adjustment and Closing Adjustment, and it
shall employ the same methodology to calculate the Mark to Market
Adjustment on both dates. If the Closing Adjustment is more negative
than the Signing Adjustment, then the Base Capital shall be decreased
by an amount equal to the difference between (A) the Signing
Adjustment and (B) the Closing Adjustment. If the Closing Adjustment
is equal to the Signing Adjustment, then no adjustment shall be made
to Base Capital under this Section 1.2(b)(i).
(ii) The Base Capital shall be reduced by the
amount of Unreimbursable Expenses incurred and estimated to be
incurred by First Ozaukee before and after the Closing Date, but not
yet accrued, relating to the environmental remediation and the
environmental liabilities, contingent or otherwise, associated with
the FOSB office located at W61 N526 Washington Avenue, Cedarburg,
Wisconsin ("Cedarburg Facility"). For purposes of this Agreement,
Unreimbursable Expenses shall include all costs and expenses arising
out of, relating to or associated with the environmental remediation
and the environmental liabilities, contingent or otherwise, associated
with the Cedarburg facility that are not eligible for reimbursement
from PECFA pursuant to the laws and regulations governing PECFA. The
estimation of Unreimbursable Expenses shall be determined in the sole
discretion of an environmental consultant designated by Buyer and
reasonably acceptable to First Ozaukee. Buyer shall be responsible
for all costs and expenses associated with retaining the environmental
consultant herein provided.
(c) The following adjustments shall not be
deducted from capital in the calculation of Base Capital (and if
previously deducted from capital shall be added back to Base Capital):
(i) Mr. Russell S. Jones' severance payment
to be paid by First Ozaukee prior to Closing in the maximum amount of
$185,968 and all tax benefits associated therewith, as provided in
Section 5.1(j) hereof.
(ii) Amounts payable to Mr. Jones pursuant to
his post merger consulting agreement, as provided in Section 5.1(j)
hereof, including such amounts to be paid to or on behalf of Mr. Jones
or his spouse to obtain post-retirement primary and/or supplemental
health insurance, and all tax benefits associated therewith.
<PAGE> 161
(iii) Professional fees expensed or due
and payable to Robert W. Baird & Co. Incorporated ("Baird") in regard
to the Fairness Opinion fee, transaction fee and related out-of-pocket
expenses and any amounts due or to become due to Schiff Hardin & Waite
("SHW"), all in the maximum amount of $170,000.
(iv) Accounting and/or tax adjustments which
relate to the termination of the First Ozaukee Capital Corp. Incentive
Plan, the cashing out of the stock options under the First Ozaukee
Capital Corp. Option Plan and reversal of the ESOP contra equity
account.
In the event the amounts set forth in clauses (i)
and (iii) of this Section 1.2(c) exceed the stated maximum dollar
amounts, Base Capital shall be reduced on a dollar for dollar basis by
such amount which exceeds the stated maximum.
(d) In the event the Base Capital as calculated
pursuant to Section 1.2(a) is less than $8,113,000, the Merger Price
shall be reduced by an amount equal to the difference between
$8,113,000 and Base Capital, divided by 687,811 shares ("Decreased
Adjusted Merger Price"). Provided, however, if Base Capital as
calculated pursuant to Section 1.2(a) is below $8,113,000 by an
amount that results in a Decreased Adjusted Merger Price of less than
$15.05 per share, Buyer in its sole discretion may:
(i) substitute $15.05 in place of the $15.10
Merger Price in Section 1.1(c); or
(ii) present FOCC with its calculation of a
Decreased Adjusted Merger Price below $15.05 and First Ozaukee shall
have the option, in its sole discretion, of accepting that Decreased
Adjusted Merger Price and completing the Merger or terminating the
Agreement.
(e) If the Closing Adjustment is more positive
than the Signing Adjustment by an amount greater than $114,000, then
the Merger Price or the Decreased Adjusted Merger Price, as the case
may be, shall be increased by the amount by which the Closing
Adjustment is more positive than the Signing Adjustment less $114,000,
divided by 687,811 shares ("Increased Adjusted Merger Price"). In the
event the Closing Adjustment is not more positive than the Signing
Adjustment by an amount greater than $114,000, then there shall be no
increase to the Merger Price. Provided however, if the Increased
Adjusted Merger Price is greater than $15.15 per share, FOCC in its
sole discretion may:
(i) substitute $15.15 in place of the $15.10
Merger Price in Section 1.1(c); or
(ii) present Buyer with its calculation of an
Increased Adjusted Merger Price greater than $15.15, and Buyer shall
have the option, in its sole discretion, of accepting that Increased
Adjusted Merger Price and completing the Merger or terminating the
Agreement.
1.3 PAYING AGENT. Prior to the Effective Time, Buyer
shall designate a paying agent, which shall be a state or national
<PAGE> 162
bank unaffiliated with Buyer and having a place of business in the
Central Business District of Milwaukee ("Paying Agent"), to pay to the
shareholders of FOCC the cash to which they are entitled pursuant to
the Merger. As soon as practicable after Buyer shall have received
all regulatory approvals referred to in Section 5.1(d) hereof
(irrespective of the expiration of any waiting periods) and the
shareholders of FOCC shall have approved the Merger in accordance with
the WBCL, the Paying Agent shall deliver a transmittal form, in form
and substance satisfactory to FOCC, to each holder of FOCC Shares
(other than Buyer) advising such holder of the procedure for
surrendering the share certificates to the Paying Agent for payment.
After the Effective Time and upon the surrender of a certificate
evidencing FOCC Shares, the holder shall be paid by check, without
interest thereon, the amount of cash to which he is then entitled
hereunder. Until so surrendered and exchanged, each certificate shall
represent solely the right to receive the cash, without interest, into
which it shall have been converted pursuant to Section 1.1 hereof, and
the Paying Agent shall not be required to pay the holder thereof the
cash into which such certificate shall have been converted; provided
that procedures allowing for payment with respect to lost or destroyed
certificates against receipt of customary and appropriate
certifications and indemnity shall be provided. Notwithstanding
anything in this Section 1.3 or elsewhere in this Agreement to the
contrary, no party hereto shall be liable to a former holder of FOCC
Shares for any cash delivered to a public official pursuant to
applicable escheat or abandoned property laws.
1.4 FUNDING OF PAYING AGENT. Buyer shall irrevocably
deposit with the Paying Agent at the Effective Time, by wire, or other
acceptable means, the total amount of funds required to be paid at the
Effective Time pursuant to Sections 1.1 and 1.2 hereof for exchanges
in accordance with this Agreement.
1.5 CLOSING; EFFECTIVE TIME. The closing of the
transactions contemplated by this Agreement and the Plan of Merger
(the "Closing") shall take place at 10:00 a.m., local time, at a place
mutually agreeable to the parties on the first business day following
the last business day of the preceding month as mutually agreeable to
by the parties hereto (the "Closing Date"), which date shall be (i)
not later than thirty-five (35) days after the later of (a) the
approval of the Agreement and Plan of Merger by the shareholders of
FOCC, or (b) the approval of the transactions contemplated by this
Agreement and the Plan of Merger by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") and any other
regulatory agencies or regulatory authorities; as applicable, and all
waiting periods after such approvals have expired, or (ii) such later
date as may be agreed to by the parties in writing (the entities in
the foregoing clause (b) being referred to herein collectively as the
"Regulatory Authorities" and individually as a "Regulatory
Authority"). At the Closing the parties shall each deliver to the
other evidence of the satisfaction of the conditions to the Merger as
may reasonably be required (including materials required to be
delivered under Article V) and shall execute, deliver and cause to be
filed with the Wisconsin Secretary of State the Articles of Merger.
The Merger shall be effective on the date and at the time (the
"Effective Time") the Articles of Merger become effective in
accordance with the provisions of the WBCL.
<PAGE> 163
1.6 STOCK OPTIONS. Each holder of an option to
acquire FOCC Shares ("Option") awarded under the First Ozaukee Capital
Corp. 1995 Stock Option Plan (the "FOCC Option Plan"), which is
outstanding on the date hereof and remaining outstanding at the
Effective Time shall receive from Buyer, as of the Effective Time,
whether or not the Option is then exercisable under the terms of the
FOCC Option Plan, a cash payment in an amount equal to the product of
(i) the number of FOCC Shares subject to such Option at the Effective
Time, and (ii) the amount, if any, by which the Merger Price exceeds
the exercise price per share of such Option, net of any cash that must
be withheld under federal and state income and employment tax
requirements. Such cash payments shall be in consideration of, and
shall result in, the settlement and cancellation of all such Options.
As a condition to the receipt of a cash payment in cancellation of all
such Options, each option holder shall execute a cancellation
agreement in form and substance reasonably satisfactory to Buyer.
ARTICLE II
STATEMENTS OF ESSENTIAL FACTS CONCERNING FIRST OZAUKEE
This Agreement is entered into by Buyer upon the
understanding, and First Ozaukee represents and warrants, that the
following Statements of Essential Facts, being the only
representations or warranties made to Buyer by or on behalf of First
Ozaukee in connection with the transactions contemplated by this
Agreement and the exhibits and schedules hereto, are true and correct
on the date of this Agreement and as of the Closing:
2.1 ORGANIZATION, GOOD STANDING AND AUTHORITY.
(a) FOCC is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Wisconsin, is duly licensed or qualified to do business and is in good
standing in all jurisdictions where its ownership of properties and
assets or the conduct of its business requires it to be so qualified
or licensed and has the corporate power and authority to own all of
its properties and assets and to carry on its business as it is now
being conducted. FOCC is a duly registered bank holding company
under the BHC Act. Except with regard to FOSB, FOCC does not own or
control any voting stock or equity securities of any other entity.
(b) FOSB is a Wisconsin state-chartered savings
bank duly organized, validly existing and in good standing under the
laws of the State of Wisconsin, is duly qualified to do business and
is in good standing in all jurisdictions where its ownership or
leasing of properties or the conduct of its business requires it to be
so qualified and has the corporate power and authority to own or lease
its properties and assets and to carry on its business as it is now
being conducted. FOSB is a member in good standing of the Federal
Home Loan Bank System. The deposits of FOSB are insured up to the
applicable limits by the FDIC through the Savings Association
Insurance Fund. FOSB does not own or control any voting stock or
equity securities of any other entity.
2.2 ORGANIZATIONAL DOCUMENTS; MINUTES AND STOCK
RECORDS. SCHEDULE 2.2 contains a copy of the Articles of
Incorporation and By-Laws of FOCC and the Articles of Incorporation
<PAGE> 164
and By-Laws of FOSB, in each case as amended to the date hereof.
First Ozaukee has provided Buyer such other documents relating to the
authority of FOCC and FOSB to conduct their business as Buyer has
requested. All such documents are true, complete and correct copies
of the original documents. The stock register and minute books of
FOCC and FOSB, copies of which have been provided to Buyer, are
complete and correct in all material respects and accurately reflect
all meetings, consents and other actions of the organizers,
incorporators, shareholders and stockholders (as the case may be),
Board of Directors and committees of the Board of Directors of FOCC
and FOSB and all transactions in the capital stock of FOCC and FOSB,
occurring since FOCC's initial organization.
2.3 CAPITALIZATION OF FIRST OZAUKEE.
(a) The authorized capital stock of FOCC consists
of 4,000,000 shares of common stock, $1.00 par value per share, of
which 627,477 shares are issued and outstanding and 2,000,000 shares
of preferred stock, $1.00 par value per share, of which no shares are
issued and outstanding. These 627,477 shares are the only shares of
Common Stock, debt or equity securities of FOCC issued and
outstanding. 60,334 shares of common stock are reserved for issuance
upon the exercise of options issued under First Ozaukee's Option Plan
("FOCC Stock Options") of which 60,334 are subject to options
presently outstanding. Set forth on SCHEDULE 2.3 is a list of the
option holders, the date of the issuance of each FOCC Stock Option,
the number of shares subject to each FOCC Stock Option, the expiration
date of each FOCC Stock Option and the exercise price for each FOCC
Stock Option. The issued and outstanding shares of FOCC have been
duly and validly authorized and issued and are fully paid,
nonassessable and free of preemptive rights. Except for the aforesaid
options to purchase shares of FOCC Common Stock (which shall be
canceled pursuant to Section 1.6 hereof), and except for the rights of
Buyer under this Agreement, there are or will be at the Closing no
outstanding subscriptions, options, warrants, calls, commitments,
agreements, contracts or other rights in existence to purchase,
acquire or issue from FOCC any shares of capital stock, debt or other
equity securities of FOCC, or any other securities representing the
right to purchase or otherwise receive any shares of capital stock or
other debt or equity securities of FOCC, whether now or hereafter
authorized or issued. No capital stock or other security issued by
FOCC or FOSB has been issued in violation of, or without compliance
with, preemptive rights of their respective shareholders.
(b) The authorized capital stock of FOSB consists
of 4,000,000 shares of common stock, $1.00 par value per share, of
which 1000 shares are issued and outstanding and 2,000,000 shares of
preferred stock, $1.00 par value per share, of which no shares are
issued and outstanding. These 1000 shares are the only shares of
common stock, debt or equity securities of FOSB issued and
outstanding. FOCC owns all of the issued and outstanding shares of
capital stock of FOSB, free and clear of any liens, charges,
encumbrances and security interests whatsoever, and all of such shares
are duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. Except for the rights of
Buyer under this Agreement, there are and will be at the Closing no
outstanding subscriptions, options, warrants, calls, commitments,
agreements, contracts or other rights in existence to purchase,
<PAGE> 165
acquire or issue from FOSB any shares of capital stock, debt or
equity securities representing the right to purchase or otherwise
receive any shares of capital stock, debt or equity securities of
FOSB, whether now or hereafter authorized or issued.
2.4 FINANCIAL STATEMENTS AND OTHER REPORTS. The
financial condition of FOSB is reflected in the consolidated financial
statements of FOCC. FOCC has furnished, or will furnish prior to the
Closing when such reports become available, Buyer true and complete
copies of the following financial statements and reports of FOCC and
FOSB:
(a) Consolidated Statements of Financial
Condition, Statements of Income, Statements of Cash Flows and
Statements of Stockholders' Equity of FOCC at and for the years ended
September 30, 1996, 1995, 1994 and 1993;
(b) First Ozaukee's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission (the "SEC") for the
years ended September 30, 1996, 1995 and 1994 and First Ozaukee's
Quarterly Report on Form 10-QSB filed with the SEC for each quarter
following September 30, 1996 and ended through the last quarter prior
to the Closing.
(c) Call Reports filed with the Federal Deposit
Insurance Corporation and the Wisconsin Department of Financial
Institutions or its predecessors for the fiscal years ended September
30, 1996 and 1995; and
(d) Consolidated Statements of Financial
Condition and Statements of Income prepared by FOCC for the interim
period from October 1, 1996 and ended through the last month prior to
the Closing (subsections 2.4 (a-d) collectively, the "First Ozaukee
Financial Statements").
The First Ozaukee Financial Statements described
in clause (a) above are audited, comply with and have been prepared in
accordance with GAAP applied on a consistent basis, and, together with
the notes thereto, present fairly the financial position of FOCC at
the dates shown and the results of operations for the periods then
ended. The interim financial statements described in clause (d) are
unaudited, comply with and have been prepared in accordance with GAAP
applied on a consistent basis, and present fairly the financial
position of FOCC.
To the best of First Ozaukee's knowledge, the
books and records of First Ozaukee are true and correct and accurately
reflect the financial condition of First Ozaukee. The information
contained in the First Ozaukee Financial Statements described in
clauses (b), (c) and (d) above, do not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein not
misleading. All costs and expenses reasonably estimated to be
incurred by First Ozaukee shall be paid or accrued on or prior to the
Closing Date.
2.5 REPORTS TO REGULATORS. Since January 1, 1991,
First Ozaukee has timely filed all material reports, registrations and
<PAGE> 166
statements, together with any amendments required to be made with
respect thereto required to be filed with (i) the Federal Reserve
Board, (ii) the Office of Thrift Supervision ("OTS"), (iii) the
Wisconsin Department of Financial Institutions and its predecessor,
and (iv) any other financial institution regulatory authority
(collectively the "FOCC Regulatory Reports"). FOCC and FOSB have paid
all fees and assessments due and payable in connection with the FOCC
Regulatory Reports. As of their respective dates, such FOCC
Regulatory Reports complied in all material respects with the
statutes, rules and regulations in force or promulgated by the
applicable regulatory authority with which they were filed and did not
contain any untrue statements of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading. First Ozaukee has provided to Buyer copies
of all such reports, registrations and statements. Except for normal
examinations conducted by regulatory agencies in the regular course of
the business of First Ozaukee, no regulatory agency has initiated any
proceeding or, to the best knowledge of First Ozaukee no regulatory
agency has indicated that it is considering initiating an
investigation into the business or operations of First Ozaukee since
January 1, 1991. There is no material unresolved violations of laws
or regulations of any regulatory agency with respect to any report or
statement relating to any examinations of First Ozaukee.
2.6 SEC REPORTS. FOCC has provided to Buyer copies of
each (a) final registration statement, prospectus, report, schedule
and definitive proxy statement filed by FOCC with the SEC pursuant to
the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (collectively the "Securities Acts") since
January 1, 1991 (collectively the "FOCC SEC Filings") and (b)
communication mailed by FOCC to its shareholders since January 1,
1991, and no such registration statement, prospectus, report,
schedule, proxy, statement or communication contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances in which they were
made, not misleading. As of their respective filing and effective
dates, the FOCC SEC filings complied in all material respects with the
published rules and regulations of the SEC with respect thereto since
January 1, 1991. FOCC has timely filed all reports, registration
statements and other documents required to be filed by it under the
Securities Acts.
2.7 UNDISCLOSED LIABILITIES. First Ozaukee has no
liabilities, whether accrued, absolute, contingent or otherwise, and
whether due or to become due, existing or arising out of any
transaction or state of facts existing on or prior to the date hereof
except (a) as fully disclosed, reflected or reserved against in the
First Ozaukee Financial Statements, (b) as and to the extent arising
under contracts, commitments, transactions or circumstances identified
in this Agreement or the schedules or exhibits provided for herein,
and (c) as and to the extent incurred in the ordinary course of
business since September 30, 1996.
2.8 LOAN PORTFOLIO. Except as disclosed on SCHEDULE
2.8, the loans contained in the loan portfolio of FOSB are evidenced
by promissory notes or other evidences of indebtedness, which, with
<PAGE> 167
all ancillary security documents, constitute, valid and binding
obligations of FOSB and each of the other parties thereto enforceable
in accordance with their terms except as limited by applicable
bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors' rights and remedies generally and by
applicable laws or principles of equity which may affect the
availability of equitable remedies. First Ozaukee has provided Buyer
with a true and correct Loan Portfolio Report which sets forth the
current status of each loan, including, but not limited to, the
outstanding principal and interest, payment history, whether any
defaults have occurred, the nature and basis for any renewals, loan
modifications or any other agreements which materially altered or
changed the terms of the loan when it was originated or purchased, and
any and all collection efforts or loan workouts engaged in by First
Ozaukee. To the best of First Ozaukee's knowledge, except as
disclosed on SCHEDULE 2.8, none of such loans is subject to any
defense, set-off or counterclaim of any party liable thereon and all
such loans which are secured, as evidenced by the ancillary security
documents, are so secured by valid and enforceable liens. FOSB's
reserve for loan losses has been calculated in accordance with prudent
and customary banking practices and is adequate to reflect the risk
inherent in FOSB's loan portfolio.
2.9 NO ADVERSE CHANGES. Other than as specifically
disclosed in this Agreement, the First Ozaukee Financial Statements,
the schedules or exhibits provided for herein, or any other writing
delivered to Buyer, since September 30, 1996, First Ozaukee has not
incurred any liability of any nature whatsoever (whether absolute,
accrued, contingent or otherwise and whether due or to become due)
that, either alone or when combined with all similar liabilities, had,
or could reasonably be expected to have, a material adverse effect on
First Ozaukee, nor occurred any material adverse change or any
condition, event, circumstance, fact or occurrence (other than changes
resulting from or attributable to (i) changes in laws, regulations and
GAAP or interpretations, or (ii) general economic or competitive
conditions) that may reasonably be expected to result in a material
adverse change in First Ozaukee's business, income, assets,
liabilities or financial condition.
2.10 CONDUCT OF BUSINESS IN NORMAL COURSE. The
business of First Ozaukee has, since September 30, 1995, been
conducted only in the ordinary and usual course consistent with past
practice.
2.11 PROPERTIES AND ASSETS. The assets reflected in
the most recent of the First Ozaukee Financial Statements or
identified in this Agreement or the schedules or exhibits provided for
herein include substantially all of the assets owned by First Ozaukee,
except for those subsequently disposed of for fair value or otherwise
abandoned or disposed of as worthless in the ordinary course of
business. First Ozaukee has a valid right to use or a valid leasehold
interest in, all real property used by it in the conduct of its
business as it is now being conducted, subject to no mortgage, pledge,
lien, option, conditional sale agreement, encumbrance, security
interest, title exceptions or restrictions or claim or charge of any
kind except for (i) liens for taxes not yet due and payable,
(ii) rights of other parties under leases or other arrangements by
which First Ozaukee uses such real property, and (iii) minor
<PAGE> 168
imperfections of title none of which is substantial in amount,
materially detracts from the value or impairs First Ozaukee's present
use of the property. To the best of First Ozaukee's knowledge, all
material certificates, licenses, and permits required for the lawful
use and occupancy of such real property by First Ozaukee, have been
obtained and are in full force and effect. Except as disclosed on
SCHEDULE 2.11, all material tangible personal property owned by First
Ozaukee, or used by it in its business and necessary for the operation
of its business, is in good working condition, normal wear and tear
excepted free and clear of all liens and encumbrances.
2.12 INSURANCE. SCHEDULE 2.12 sets forth a complete
and correct list of all policies of insurance and bonds in which First
Ozaukee is named as an insured party, which otherwise relate to or
cover any assets, properties, premises, operations and personnel of
First Ozaukee or which is owned or carried by First Ozaukee and any
claims pending with regard to such policies and bonds. First Ozaukee
has in full force and effect the policies of insurance and bonds set
forth in SCHEDULE 2.12 and same are commercially reasonable and
adequate for the operations of First Ozaukee. There has been no
notice given by any party of interest in or to any such policies
claiming any breach or violation of any provisions thereof,
disclaiming or denying any coverage thereof, or canceling or
threatening cancellation of any such insurance contracts.
2.13 LITIGATION AND COMPLIANCE WITH LAWS. First
Ozaukee and FOSB's institution-affiliated parties (as defined in 12
U.S.C. Section 1813(u)) with respect to participation in the affairs
of First Ozaukee, are each in compliance with all material applicable
federal, state, county and municipal laws and regulations (a) that
regulate or are concerned in any way with the business of banking or
acting as a fiduciary, including, but not limited to those laws and
regulations relating to the investment of funds, the taking of
deposits, the extension of credit, the collection of interest, and the
location and operation of banking facilities, or (b) that otherwise
relate to or affect the business or assets of FOSB or the assets
owned, used or occupied by it. Except as disclosed in SCHEDULE 2.13,
(i) there are no claims, actions, suits, orders,
proceedings or governmental or regulator investigations pending, or,
to the knowledge of First Ozaukee, threatened against First Ozaukee,
or FOSB's institution-affiliated parties (in their capacities as such)
with respect to their participation in the affairs of First Ozaukee,
at law or in equity, or before any federal, state, municipal,
administrative or other governmental authority or court, or before any
arbitrator or arbitration panel, whether by contract or otherwise; and
(ii) except as set forth in SCHEDULE 2.13, there
is no decree, judgment, order, supervisory agreement, extraordinary
supervisory letter, commitment letter, consent agreement or memorandum
of understanding entered into or in existence against or restraining
FOCC or FOSB, or any of FOSB's institution-affiliated parties with
respect to their participation in the affairs of First Ozaukee from
taking any actions of any kind in connection with the business of
First Ozaukee or FOSB, as the case may be. First Ozaukee has not been
advised by, nor has it received from any regulatory authority any
notice or, to the knowledge of First Ozaukee, threat of enforcement
actions or that any regulatory authority is considering or requesting
<PAGE> 169
any regulatory agreement, and it has no basis for believing that any
such notice or, to the knowledge of First Ozaukee, threat not
otherwise disclosed to Buyer is contemplated.
2.14 CONFLICT OF INTEREST TRANSACTIONS. Except as
reflected in SCHEDULE 2.14, no executive officer or director of First
Ozaukee, or holder of 10% or more of the common stock of First
Ozaukee, or any member of the immediate family of any such person has,
since September 30, 1995, been involved in any transaction with First
Ozaukee (excluding transactions in deposit accounts) which involves an
amount in excess of $15,000 or has been involved in any other material
transaction with First Ozaukee or has had loans or any commitment to
loan outstanding from FOSB involving in excess of $15,000.
2.15 MATERIAL CONTRACTS. SCHEDULE 2.15 sets forth a
Schedule of Material Contracts, and completely and accurately lists or
describes the following material contracts, commitments or
arrangements (whether written or oral) under which First Ozaukee is
obligated:
(a) All consulting arrangements, and contracts
for professional and other services, including those under which First
Ozaukee performs services for others, that are not terminable by First
Ozaukee without damages or penalty with thirty (30) days notice;
(b) All leases of real estate or personal
property, exclusive of leases of personal property whereunder total
annual rentals are, in each instance, less than $5,000 or wherein the
aggregate exceeds $20,000;
(c) All contracts, commitments and agreements for
the purchase, acquisition, development, sale or disposition of real or
personal property, exclusive of conditional sales contracts and
security agreements for the acquisition of personal property
whereunder total future payments are, in each instance, less than
$5,000 or wherein the aggregate exceeds $20,000;
(d) All employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974
("ERISA")) under which First Ozaukee or FOSB has or may have any
obligation ("First Ozaukee ERISA Plans"), and all employment
contracts, all other employee compensation arrangements, all severance
agreements and all other bonus, deferred compensation, pension,
retirement, profit sharing, stock option, stock purchase, stock
appreciation and other employee benefit plans, formal or informal,
under which First Ozaukee or FOSB has or may have any obligation
("First Ozaukee non-ERISA Plans" and, together with the First Ozaukee
ERISA Plans, the "First Ozaukee Benefit Plans");
(e) All outstanding loans, loan commitments,
credit agreements, conditional sales contracts, title retention
agreements or security agreements relating to money borrowed by First
Ozaukee, letters of credit or other financial accommodations,
including modification or amendments thereof, extended by FOSB for the
benefit of others wherein the total loan and/or commitment of FOSB
exceeds $100,000;
(f) All union and other labor contracts;
<PAGE> 170
(g) All agreements, contracts, mortgages, loans,
deeds of trust, leases, commitments, indentures, notes, instruments
and other arrangements, which are with officers or directors of the
First Ozaukee, any Affiliates of First Ozaukee within the meaning of
Section 23A of the Federal Reserve Act, or any record or beneficial
owner of 10% or more of the common stock of First Ozaukee, excepting
any ordinary and customary banking relationships that comply with
applicable banking regulations;
(h) All loans from FOSB held by officers,
directors or employees of FOCC or FOSB;
(i) All agreements, loans, contracts, leases,
guarantees, letters of credit, lines of credit or commitments of First
Ozaukee not referred to elsewhere in this section which: involve
payment by First Ozaukee of more than $5,000 individually; involve
payment based on profits of First Ozaukee; or relate to the future
purchase of goods or services in excess of the requirements of its
business at current levels or for normal operating purposes, were not
made in the ordinary course of business; and
(j) Each other material contract to which First
Ozaukee is a party or under which it is obligated made other than in
the usual or ordinary course of business and which is not terminable
by First Ozaukee without damages or penalty with thirty (30) days
notice.
Except as disclosed on SCHEDULE 2.15, and except with
regard to loans made by FOSB in the ordinary course of its business,
to the best of First Ozaukee's knowledge there are no other material
contracts, commitments or arrangements (whether written or oral) under
which First Ozaukee is obligated wherein the aggregate commitment of
First Ozaukee exceeds $25,000.
2.16 NO DEFAULTS. To the best of First Ozaukee's
knowledge, all material contracts, commitments or arrangements of
First Ozaukee set forth on SCHEDULE 2.15 are valid and in full force
and effect. To the best of its knowledge, First Ozaukee has fulfilled
and taken all action reasonably necessary to date to enable it to
fulfill when due, all material obligations under all contracts,
commitments and arrangements to which it is a party; and there are no
material defaults and no events have occurred that, with the lapse of
time or election of any other party, will become material defaults by
it under any such contracts, commitments or arrangements.
2.17 ADDITIONAL SCHEDULES. The following additional
schedules are attached hereto:
(a) SCHEDULE 2.17(a) is a Real Estate SCHEDULE
describing all real estate owned by or in which First Ozaukee has any
interest, or which is the subject of pending foreclosure proceedings
by First Ozaukee, indicating in each case whether such real estate is
improved and the nature of any material encumbrances, defects of title
or environmental conditions of which First Ozaukee has knowledge; and
(b) SCHEDULE 2.17(b) is a Securities SCHEDULE of
all investment securities owned by First Ozaukee.
<PAGE> 171
2.18 TAXES.
(a) No application for extension of time for
filing any tax return or consent to any extension of time for filing
any tax return or consent to any extension of the period of
limitations applicable to the assessment or collection of any tax is
in effect with respect to First Ozaukee, and all tax returns and
information returns required to be filed by First Ozaukee with the
United States or any state or local government unit have been, and
until the Closing will have been, timely filed. First Ozaukee has
duly paid all taxes due and is not delinquent in the payment of any
taxes claimed to be due by any taxing authority and adequate
provisions for taxes have been made on its books. None of First
Ozaukee's federal or state income tax returns is being examined by the
appropriate federal or state agency. First Ozaukee has not received
any notice of any proposed deficiency for any duty, tax, assessment or
governmental charge, and there are no pending claims with respect
thereto. First Ozaukee is not a member of any consolidated group for
purposes of the Internal Revenue Code of 1986, as amended (the
"Code").
(b) Amounts withheld by FOCC and FOSB from their
employees for all prior periods comply in all material respects with
the tax withholding provisions of applicable federal, state and local
laws. Federal, state, county and local returns which are accurate and
complete in all material respects have been filed by First Ozaukee for
all periods for which returns were due with respect to income tax
withholding, Social Security and unemployment taxes, except where
failure to do so would not have a material adverse effect on First
Ozaukee. There are no tax liens upon any property or assets of First
Ozaukee except liens for current taxes not yet due.
(c) First Ozaukee has not been required to
include in income any adjustment pursuant to Section 481 of the Code
by reason of a voluntary change in accounting method initiated by
First Ozaukee, and the Internal Revenue Service has not initiated or
proposed any such adjustment or change in accounting method. Except
as set forth in the First Ozaukee Financial Statements, First Ozaukee
has not entered into a transaction which is being accounted for as an
installment obligation under Section 453 of the Code, which would be
reasonably likely to have a material adverse effect on First Ozaukee.
(d) As used in this Agreement, the term "tax" or
"taxes" means all federal, state, county, local, and foreign income,
excise, gross receipts, ad valorem, profits, gains, property, sales,
transfer, use, payroll, employment, severance, withholding, duties,
intangibles, franchise, and other taxes, charges, levies or like
assessments together with all penalties and additions to tax and
interest thereon.
2.19 EMPLOYEE COMPENSATION AND BENEFIT PLANS.
(a) Each of the First Ozaukee Benefit Plans has
been administered, in all material respects, in compliance with its
terms and the requirements of applicable law. First Ozaukee does not
maintain any First Ozaukee Benefit Plan nor has it entered into any
document, plan or agreement, other than the First Ozaukee Option Plan,
the First Ozaukee Capital Corp. Incentive Plan ("First Ozaukee
<PAGE> 172
Incentive Plan") and employment agreements with Russell S. Jones and
Mary E. Lammers, which contains, directly or indirectly, any change in
control provisions that would cause an increase or acceleration of
benefits or benefit entitlements to officers, directors, employees or
former officers, directors or employees of First Ozaukee or their
respective beneficiaries, or other event that would cause an increase
in liability to First Ozaukee as a result of the transactions
contemplated by this Agreement. First Ozaukee does not have and has
not had any First Ozaukee Benefit Plans which are subject to Title IV
of ERISA. Neither First Ozaukee nor any of its affiliates, its
employees, directors or agents, or any fiduciary, has violated Section
406 of ERISA or engaged in any "Prohibited Transaction" (as defined in
Section 4975(c)(1) of the Code) with respect to any First Ozaukee
ERISA Plan. Each First Ozaukee ERISA Plan that is intended to be
qualified under Section 401 and related provisions of the Code is the
subject of a determination letter from the Internal Revenue Service to
the effect that it is so qualified under the Code and its related
funding vehicle is tax-exempt, under Section 501 of the Code. No
matter is pending relating to any First Ozaukee Benefit Plan before
any court or governmental agency. Neither First Ozaukee, nor any of
its affiliates is, or has ever been, obligated to contribute to a
multiemployer plan (as defined in Section 3(37) of ERISA). Except as
required pursuant to the Consolidated Omnibus Budget Reconciliation
Act of 1985 and Section 4980B of the Code or as reflected on SCHEDULE
2.19 delivered pursuant hereto, neither First Ozaukee, nor any other
party on behalf of First Ozaukee, has any obligation or commitment to
provide health, disability, or life insurance or similar welfare
benefits to former employees or members of their families.
(b) Except as otherwise provided herein, as of
the Closing, each of the First Ozaukee Benefit Plans shall be fully
funded and terminated.
2.20 AUTHORIZATION OF TRANSACTIONS.
(a) The execution, delivery and performance of
this Agreement by FOCC have been duly authorized by the Board of
Directors of FOCC. Subject to approval by the shareholders of FOCC as
contemplated by Section 5.1(e) hereof and regulatory approval, FOCC
has full corporate power to execute, deliver and perform this
Agreement and the Plan of Merger and to consummate the transactions
herein and therein contemplated, and such execution, delivery and
performance do not violate any provisions of the Articles of
Incorporation or By-Laws of FOCC or FOSB or any orders, agreements or
directives to which FOCC or FOSB is a party or is otherwise bound.
Except for the regulatory approvals referred to in Section 5.1(d),
approval of shareholders referred to in Section 5.1(e) hereof, or
consents, if any, to be obtained pursuant to Section 5.1(i) hereof, no
consent of any regulatory authority or other person is required to be
obtained by FOCC in order to permit FOCC to perform its obligations
hereunder or to permit consummation of the Merger.
(b) Except as disclosed in SCHEDULE 2.20, neither
the execution and delivery of this Agreement by FOCC, the consummation
by FOCC of the transactions contemplated hereby, nor the compliance by
FOCC with any of the terms or provisions hereof will violate, conflict
with, result in a breach of any provision of or the loss of any
benefit under, constitute a default (or an event which, with notice or
<PAGE> 173
lapse of time, or both, would constitute a default) under, result in
termination of or a right of termination or cancellation under,
accelerate the performance required by, or result in the creation of
any lien, pledge, security interest, charge or other encumbrance upon
any of the respective properties or assets of First Ozaukee under, any
of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which First Ozaukee is a party, or by
which FOCC, FOSB or any of their respective properties or assets may
be bound or affected, except for those events which, either
individually or in the aggregate, will not have or be reasonably
likely to have a material adverse affect on First Ozaukee.
2.21 ENVIRONMENTAL SUITS AND PROCEEDINGS.
(a) Neither FOCC nor FOSB have been or is in
violation of or liable under any Environmental Law, except as set
forth on SCHEDULE 2.21(a).
(b) None of the loan portfolio properties and
other properties owned by FOCC or FOSB has been or is in violation of
any Environmental Law and neither FOCC nor FOSB are liable for any
such violations except as set forth on SCHEDULE 2.21(b).
(c) There are no actions, suits, demands,
notices, claims, investigations or proceedings pending or threatened
relating to the liability of the loan portfolio properties and other
properties owned by FOCC or FOSB under any Environmental Law,
including without limitation any notices, demand letters or requests
for information from any federal or state environmental agency
relating to any such liabilities under or violations of Environmental
Law, except as set forth on SCHEDULE 2.21(c).
(d) Set forth in SCHEDULE 2.21(d) are copies of
all final and draft studies, reports, updates or results of any
investigations regarding the Cedarburg facility or surrounding
properties prepared by or on behalf of First Ozaukee.
(e) To the best of First Ozaukee's knowledge,
identified on SCHEDULE 2.21(e) are all investigations regarding the
Cedarburg facility or surrounding properties prepared or conducted by
any person. First Ozaukee has provided copies of all final and draft
studies, reports, updates or results of investigations regarding the
Cedarburg facility or surrounding properties prepared or conducted by
any person not included in SCHEDULE 2.21(d) in its possession to
Buyer.
(f) For purposes of this Agreement, the following
terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local
law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction
or agreement with any governmental entity relating to (1) the
protection, preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, ground water,
drinking water supply, surface soil, subsurface soil, plant and animal
life or any other natural resource), and/or (2) the use, storage,
<PAGE> 174
recycling, treatment, generation, transportation, processing,
handling, labelling, production, release or disposal of hazardous
substances. The term "Environmental Law" includes without limitation
(1) the Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), according to 42 U.S.C. Section
9601, et seq.; the Resource Conservation and Recovery Act, as amended
42 U.S.C. Section 6901, et seq.; the Clean Air Act, as amended, 42
U.S.C. Section 7401, et seq.; the Federal Water Pollution Control Act, as
amended, 33 U.S.C. Section 1251, et seq.; the Toxic Substances Control
Act, as amended, 15 U.S.C. Section 9601, et seq.; the Emergency
Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et
seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300(f), et seq.;
and all comparable state and local laws, and (2) any common law
(including without limitation common law that may impose strict
liability) that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or
exposure to any hazardous substance.
"Hazardous Substance" means any substance presently
listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous, or otherwise regulated, under any
Environmental Law, whether by type or by quantity, including any
material containing any such substance as a component. "Hazardous
Substances" shall include without limitation petroleum or any
derivative or byproduct thereof, asbestos, radioactive material and
polychlorinated biphenyls.
The term "loan portfolio properties and other properties
owned" means those properties owned, leased, operated, or held by
First Ozaukee as a fiduciary for the account of others, or which
collateralize any outstanding loan or line of credit, whether or not
such loan or line of credit is or has been in default.
2.22 CONTAMINATED PROPERTIES.
(a) Except as disclosed in SCHEDULE 2.22, none of
the properties owned or leased by First Ozaukee or, to the knowledge
of First Ozaukee, held by First Ozaukee as a fiduciary for the account
of others, or which collateralize any outstanding material loan or
line of credit, whether or not such loan or line of credit is or has
been in default, is contaminated with any Hazardous Substances.
(b) To the knowledge of First Ozaukee, except as
disclosed in SCHEDULE 2.22, First Ozaukee neither is nor may it be
deemed to be an "owner or operator" of a "facility" or "vessel" which
owns, possesses, transports, generates, or disposes of a "hazardous
substance" as these terms are defined in CERCLA.
2.23 CHANGE IN BUSINESS RELATIONSHIPS. Except as
described in SCHEDULE 2.23, First Ozaukee has no knowledge, whether on
account of this Agreement or otherwise, that any customer, agent,
representative or supplier intends to discontinue, diminish, or change
its relationships with First Ozaukee, the effect of which would be
materially adverse to First Ozaukee's business.
2.24 BROKER'S AND FINDER'S FEES. Neither First Ozaukee
nor any of their respective officers or directors has employed any
broker or finder, nor has incurred any obligation or liability,
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contingent or otherwise, for any brokerage commission or finder's fee
or like compensation in respect of the transactions contemplated
hereunder except for fees and expenses that may be owed to Baird for
investment banking services.
2.25 FIRST OZAUKEE OFFICERS. SCHEDULE 2.25 lists the
names and positions of all officers of FOCC and FOSB and the person to
whom such officers report.
2.26 POST RETIREMENT WELFARE BENEFIT PROGRAM. Set
forth in SCHEDULE 2.26 is a copy of The First Ozaukee Post Retirement
Welfare Benefit Program. Mr. Russell S. Jones is the only corporate
officer of First Ozaukee who has at least twenty-five years of service
with First Ozaukee and who has any vested rights under the First
Ozaukee Post Retirement Welfare Benefit Program.
2.27 ENVIRONMENTAL REMEDIATION. Set forth in SCHEDULE
2.27 is a copy of the acknowledgment letter from the Wisconsin
Department of Commerce (WDCOM) confirming that costs associated with
the remediation of Hazardous Substances at the Cedarburg Facility are
eligible for reimbursement from PECFA pursuant to the laws and
regulations governing PECFA.
ARTICLE III
STATEMENTS OF ESSENTIAL FACTS CONCERNING BUYER
This Agreement is entered into by FOCC upon the
understanding, and Buyer represents and warrants, that the following
Statements of Essential Facts, being the only representations or
warranties made to First Ozaukee by or on behalf of Buyer in
connection with the transactions contemplated by this Agreement and
the exhibits and schedules hereto are true and correct on the date of
this Agreement:
3.1 CORPORATE EXISTENCE. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Illinois, has the corporate power and authority to own its
property and assets and to carry on its business as now being
conducted. On or prior to the Closing, Buyer will be duly qualified
as a foreign corporation in the State of Wisconsin, and will be
qualified to engage in business as a foreign corporation in any other
state or jurisdiction where the properties and assets owned, leased or
operated or the business conducted by it requires such qualification
and the failure to so qualify would have a material adverse affect on
the business of Buyer.
3.2 FINANCIAL STATEMENTS AND OTHER REPORTS. Buyer has
furnished FOCC true and complete copies of the following financial
statements and reports of Buyer and its financial institution
subsidiary or subsidiaries, as the case may be:
(a) Consolidated Statements of Financial
Condition, Statements of Income, Statements of Cash Flow and
Statements of Stockholders' Equity at and for the years ended December
31, 1996, 1995, 1994 and 1993 (collectively, "Buyer Financial
Statements"); and
<PAGE> 176
(b) Consolidated Statement of Financial Condition
and Statements of Income at and for the three months ended March 31,
1997.
(c) Call Reports filed with the FDIC for the
fiscal years ended December 31, 1996, 1995 and 1994.
The Buyer Financial Statements described in clause
(a) are audited and have been prepared in accordance with GAAP applied
on a consistent basis, and, together with the notes thereto, present
fairly the financial position of Buyer at the dates shown and the
results of operations for the periods then ended. The interim
financial statements described in clause (b) are unaudited, comply
with and have been prepared in accordance with GAAP applied on a
consistent basis, and present fairly the financial position of Buyer.
The information contained in the reports described
in clauses (b) and (c) above do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein not
misleading.
3.3 AUTHORIZATION OF TRANSACTIONS. The execution,
delivery and performance of this Agreement by Buyer have been duly
authorized by the Board of Directors of Buyer, this being the only
authorization required under Buyer's Articles of Incorporation, its
By-Laws, or governing statutes. Buyer has full corporate power to
execute, deliver and perform this Agreement and to consummate the
transactions herein contemplated, and such execution, delivery and
performance do not violate any provisions of the Articles of
Incorporation of Buyer, its By-Laws, or any orders, agreements or
directives to which Buyer is a party or is otherwise bound. Except
for the regulatory approvals referred to in Section 5.2(c) hereof, and
the approvals of the Board of Directors of CIBAC and of the sole
shareholder of CIBAC referred to in Section 5.2(g) hereof, no consent
of any regulatory authority or other person is required to be obtained
by Buyer in order to permit Buyer to perform its obligations hereunder
or to permit consummation of the Merger.
3.4 BROKER'S AND FINDER'S FEES. Neither Buyer, nor
any of its respective officers or directors has employed any broker or
finder nor has incurred any obligation or liability, contingent or
otherwise, for any brokerage commission or finder's fee or like
compensation in respect of the transactions contemplated hereunder.
3.5 FINANCIAL RESOURCES. Buyer has the financial
wherewithal, whether by using its internal funds, external financing,
or both, to perform its obligations under this Agreement. Buyer and
its subsidiaries are, and will be following the Merger, in compliance
with all applicable capital, debt and financial and non-financial
criteria of state and federal banking agencies having jurisdiction
over them. Buyer has no knowledge of any facts or conditions
applicable to it or its subsidiaries that would reasonably lead Buyer
to believe the Merger will not be approved by the Federal Reserve
Board and other state and federal banking agencies having
jurisdiction.
<PAGE> 177
3.6 EMPLOYEE COMPENSATION AND BENEFIT PLANS. Each of
the Buyer's employee benefit plans (as defined in Section 3(3) of
ERISA) under which Buyer has or may have any obligation ("Buyer ERISA
Plans"), and all employment contracts, all other employee compensation
arrangements, all severance agreements and all other bonus, deferred
compensation, pension, retirement, profit sharing, stock option, stock
purchase, stock appreciation and other employee benefit plans, funded
or unfunded, under which Buyer has or may have any obligation ("non-
ERISA Plans," and, together with Buyer ERISA Plan, the "Buyer Benefit
Plans") has been administered, in all material respects, in compliance
with its terms and the requirements of applicable law. Buyer does not
have and has not had any Buyer Benefit Plans which are subject to
Title IV of ERISA. Neither Buyer nor any of its affiliates, its
employees, directors or agents, or any fiduciary, has violated Section
406 of ERISA or engaged in any "Prohibited Transaction" (as defined in
Section 4975(c)(1) of the Code) with respect to any Buyer ERISA Plan.
Except as set forth on the SCHEDULE 3.6, the SCHEDULE of Plan
Liabilities, each Buyer ERISA Plan that is intended to be qualified
under Section 401 and related provisions of the Code is the subject of
a determination letter from the Internal Revenue Service to the effect
that it is so qualified under the Code and its related funding vehicle
is tax-exempt, under Section 501 of the Code. No matter is pending
relating to any Buyer Benefit Plan before any court or governmental
agency. Neither Buyer, nor any of its affiliates is, or has ever
been, obligated to contribute to a multiemployer plan (as defined in
Section 3(37) of ERISA). Except as required pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985 and Section
4980B of the Code or as reflected on SCHEDULE 3.6 delivered pursuant
hereto, neither Buyer, nor any other party on behalf of Buyer, has any
obligation or commitment to provide health, disability, or life
insurance or similar welfare benefits to former employees or members
of their families.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 CONDUCT OF BUSINESS OF FIRST OZAUKEE. Between the
date hereof and the Closing Date, the business of First Ozaukee shall
be conducted in the usual, regular and ordinary course consistent in
all material respects with prudent banking practices and First Ozaukee
shall use reasonable efforts to preserve intact its reputation and
business relationships with suppliers, customers, employees and others
having business relationships with First Ozaukee. Without limiting
the foregoing, without the prior written consent of Buyer;
(a) no change shall be made in the Articles of
Incorporation or By-Laws of FOCC or FOSB or in the number of issued
and outstanding FOCC Shares or Stock Options except for changes
resulting from exercise of existing Stock Options in accordance with
their terms;
(b) no bonuses shall be awarded or paid to any
officer or employee of First Ozaukee and the compensation of officers
and employees of First Ozaukee shall not be increased;
(c) no loans, or renewals or restructurings of
loans for $200,000 or more (including aggregation of loans to any one
customer or related entities) shall be made by FOSB except in the
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ordinary course of business and consistent in all material respects
with prudent banking practices and policies and applicable rules and
regulations or regulatory authorities with respect to amount, terms,
security and quality of the borrower's credit;
(d) no dividends or other distributions shall be
declared or paid by First Ozaukee nor shall First Ozaukee adjust,
split, combine or reclassify any capital stock; nor directly or
indirectly redeem, purchase or otherwise acquire any of its shares of
capital stock or grant any appreciation rights, if any, or grant any
individual or corporation or other entity any right to acquire any
shares of its capital stock, or issue any additional shares of capital
stock, preferred stock, debt or other equity securities except
pursuant to the exercise of the stock options identified on SCHEDULE
2.3;
(e) First Ozaukee shall use its best efforts to
maintain its present insurance and bond coverage in respect of its
properties, assets and business;
(f) First Ozaukee shall make no investment either
by purchase of stock or securities (other than investment securities
allowed pursuant to clause (h) of this Section 4.1), contributions to
capital, property transfers, or purchase any property or assets of any
other individual, corporation or other entity in excess of $10,000;
(g) except for transactions in the ordinary course
of business consistent with past practice, First Ozaukee shall not
enter into, terminate or extend any material contract or agreement, or
make any change in any of its material leases or contracts, other than
renewals of contracts and leases, and then only if such changes do not
materially alter the terms of the agreement;
(h) First Ozaukee shall neither purchase nor
designate any existing or additional securities as "Held to Maturity",
purchase any security with a maturity in excess of six months, nor
restructure or materially change its investment securities portfolio
through purchases, sales or otherwise, or the manner in which the
portfolio is classified or reported unless otherwise required by GAAP;
(i) no significant changes outside the ordinary
course of business shall be made in the general nature of the business
conducted by First Ozaukee, including but not limited to the
investment or use of its assets, the liabilities it incurs, or the
facilities it operates;
(j) no employment, consulting or other similar
agreements shall be entered into by First Ozaukee;
(k) except as provided herein, First Ozaukee shall
not fail to terminate all First Ozaukee Benefit Plans prior to the
Closing;
(l) First Ozaukee shall not fail to timely file
all required tax returns with, and make or accrue all payments to all
applicable taxing authorities and will not make any application for or
<PAGE> 179
consent to any extension of time for filing any tax return or any
extension of the period of limitations applicable thereto;
(m) First Ozaukee shall not incur any expense
outside the ordinary course of its business, nor make or incur any
expenditure for fixed assets, in excess of $15,000 for any single
item, or $30,000 in the aggregate, or enter into any leases of fixed
assets having an aggregate annual rental in excess of $30,000;
(n) First Ozaukee shall not sell, transfer,
mortgage, encumber or otherwise dispose of any of its properties or
assets to any individual, corporation, or other entity, or cancel,
release or assign any indebtedness to any such person or any claims
held by such person, nor incur any liabilities or obligations, make
any commitments or disbursements or acquire any property or asset,
make any contract or agreement, or engage in any transaction, except
in the ordinary course consistent in all material respects with
prudent banking practices;
(o) First Ozaukee shall not engage or agree to
engage in any "covered transaction" within the meaning of Sections 23A
or 23B of the Federal Reserve Act (without regard to applicability of
any exemptions contained in said Section 23A);
(p) no changes of a material nature shall be made
in First Ozaukee's accounting procedures, methods, policies or
practices or the manner in which they conduct their respective
businesses and maintain their records;
(q) First Ozaukee shall not accept, renew or
purchase any brokered deposits, nor accept, renew or purchase public
funds in excess of 5% of the total deposits of FOSB.
4.2 CONDUCT OF BUSINESS OF BUYER. Between the date
hereof and the Closing Date, the business of Buyer shall be conducted
(and Buyer shall cause the business of its subsidiaries to be
conducted) in the usual and ordinary course consistent in all material
respects with prudent banking practices and in a manner that will not
materially adversely affect Buyer's ability to obtain all necessary
regulatory approvals for the transactions contemplated hereby or
Buyer's ability to perform its obligations under this Agreement.
4.3 ACCESS TO INFORMATION. To the extent permissible
under law, First Ozaukee will (a) give Buyer and its officers,
employees, accountants, counsel and other representatives full access
to further information (including, but not limited to, books, records,
contracts, commitments, files, correspondence, tax work papers and
audit work papers) with respect to First Ozaukee (other than records,
files, correspondence and findings of the Board of Directors related
to the possible sale of First Ozaukee); (b) supply to Buyer and its
officers, employees, accountants, counsel and other representatives,
as soon as they become available, all reports on loans and investments
of First Ozaukee, month-end prepared balance sheets and profit and
loss statements, internal and external audit reports and such other
reports of First Ozaukee that Buyer may reasonably request; and (c)
supply to Buyer a copy of each final registration statement,
prospectus, report, schedule and definitive proxy statement and other
document filed or received by it pursuant to the requirements of the
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Securities Acts and regulatory authorities. Buyer will use such
information solely for the purpose of conducting business, legal and
financial reviews of First Ozaukee and for such other purposes as may
be related to this Agreement, and Buyer will, and will direct all of
its agents, employees and advisors to, maintain the confidentiality of
all such information. Pending the Closing, representatives of Buyer
shall, during normal business hours and on reasonable advance notice
to First Ozaukee, be given full access to First Ozaukee's properties,
records and business activities and afforded the opportunity to
observe its business activities and consult with its directors and
officers regarding the same on an ongoing basis (without limiting the
foregoing, to verify compliance by First Ozaukee with all terms of
this Agreement), provided that the foregoing do not interfere with the
business operations of First Ozaukee.
4.4 FIRST OZAUKEE SHAREHOLDERS' MEETING. As soon as
practicable after Buyer's application to the Board of Governor's of
the Federal Reserve System for approval to acquire control of First
Ozaukee has been accepted as informationally complete, FOCC shall call
and hold a special meeting of its shareholders to act upon and
consider this Agreement and the Plan of Merger and the transactions
therein contemplated in accordance with its Articles of Incorporation,
its By-Laws, and the applicable statutes of the State of Wisconsin.
FOCC, acting through its Board of Directors, shall recommend to its
shareholders that they vote their shares in favor of the Merger and
the transactions herein contemplated, and FOCC shall reflect such
recommendations in any proxy statement mailed to its shareholders,
unless FOCC shall have received an unsolicited offer from a third
party where the Board of Directors of FOCC reasonably believes its
fiduciary duties require a different recommendation.
4.5 REASONABLE EFFORTS. The parties to this Agreement
agree to use their reasonable efforts in good faith to satisfy the
various conditions to the Closing and to consummate the Merger as soon
as practicable. Neither of the parties hereto shall take any action
that is intended or may reasonably be expected to result in a breach
of the terms of this Agreement; any of its representations or
warranties contained herein or in the schedules or exhibits provided
for herein to be or become untrue; in any of the conditions set forth
in Article V not being satisfied; or which would adversely effect the
ability of Buyer to obtain any necessary regulatory approvals .
4.6 REGULATORY APPROVALS. Buyer, as soon as is
reasonably practical, will take all appropriate actions necessary to
obtain the regulatory approvals referred to in Section 5.1(d) hereof,
and First Ozaukee will cooperate fully in the process of obtaining all
such approvals. Without limiting the foregoing, within 30 days after
the date of this Agreement, Buyer will submit initial applications
necessary to obtain the regulatory approvals referred to in Section
5.1(d) hereof. In the event First Ozaukee fails to provide necessary
information required by Buyer to complete the initial applications in
a timely fashion, the 30 day time period provided herein shall be
extended by a reasonable period of time. Buyer will provide First
Ozaukee on a timely basis with copies of all applications or notices
submitted to any regulatory authority, and all comments and
correspondence sent or received with respect thereto.
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4.7 BUSINESS RELATIONS AND PUBLICITY. First Ozaukee
will use reasonable efforts to preserve its reputation and
relationships with suppliers, clients, depositors, customers,
employees and others having business relations with First Ozaukee. No
press release or other communication in connection with or relating to
this Agreement or the transactions contemplated hereby (other than
communications with appropriate regulatory authorities) shall be
issued or made without the prior mutual consent of the parties hereto;
provided, however, that either party may release information in
connection with or relating to this Agreement or the transactions
contemplated hereby if, in the opinion of counsel, the release of such
information is required, or as otherwise may be required by law;
provided, further, that prior to the release of any such information,
the releasing party shall first notify the other party of the reason
for the release of the information and the information to be released.
4.8 LOAN REVIEW. Prior to the Closing, Buyer shall be
entitled to review First Ozaukee's loan portfolio, and shall be
furnished with full information regarding the status of each loan
contained therein (including, but not limited to, the payment history,
whether any defaults have occurred, the nature and basis for any
renewals, loan modifications or any agreements which materially
altered or changed the terms of the loan when it was originated or
purchased, and any and all collection efforts or loan workouts engaged
in by First Ozaukee), as of a date not more than thirty (30) days
prior to the Closing Date.
4.9 CIBAC SHAREHOLDER APPROVAL. Buyer, as the entity
that will be the owner of all of the outstanding shares of capital
stock of CIBAC, shall cause this Agreement and the Plan of Merger to
be approved in accordance with the WCBL.
4.10 NO CONDUCT INCONSISTENT WITH THIS AGREEMENT.
After the date of this Agreement, First Ozaukee shall not permit or
authorize any of its officers, directors, shareholders or employees,
or any investment banker, attorney, accountant, agent or other
representative of First Ozaukee to directly or indirectly solicit,
invite, entertain, encourage, facilitate, participate in or undertake
any discussions for the purpose of merging or consolidating First
Ozaukee with any other person, entity or group or causing First
Ozaukee to sell any of its assets or any shares of its capital stock
to any other person, entity or group or to issue or grant any options
or rights to purchase shares of any class of its stock to any other
person, entity or group or causing the liquidation of First Ozaukee,
nor shall First Ozaukee enter into any agreement to accomplish any of
the foregoing, except (i) upon the termination of this Agreement
pursuant to Section 7.4(g) hereof; (ii) with the prior written consent
of Buyer; (iii) pursuant to a written direction from any regulatory
authority; or (iv) upon First Ozaukee receiving an unsolicited
bonafide offer from a third party where the Board of Directors of FOCC
reasonably believes that its fiduciary duties require it to enter into
discussions with such party.
4.11 BOARD OF DIRECTORS' NOTICES, MINUTES, ETC. First
Ozaukee shall transmit to Buyer on a prompt and timely basis copies of
all notices, minutes, consents and other materials that First Ozaukee
provides its directors to the extent permissible under law other than
materials relating to this Agreement, the Plan of Merger, or the
<PAGE> 182
transactions contemplated thereby; provided, however, that Buyer
agrees to hold in confidence and trust and to act in a fiduciary
manner with respect to all information so provided.
4.12 CONFIDENTIAL INFORMATION. First Ozaukee and Buyer
each covenants that, in the event the transactions contemplated in
this Agreement are not consummated, each will keep in strict
confidence, except as required by law, and return all documents
containing any information concerning the properties, business and
assets of the other party that may have been obtained in the course of
negotiations or examination of the affairs of the other party either
prior or subsequent to the execution of this Agreement (other than
such information as shall be in the public domain or otherwise
ascertainable from public or sources that are not bound by
confidentiality obligations in favor of First Ozaukee).
4.13 MAINTENANCE OF CAPITAL LEVELS. Buyer, its
financial institution subsidiary or subsidiaries and First Ozaukee
shall maintain at least the minimum capital levels as required by
Regulatory Authorities. Buyer shall use its best efforts to take no
action to cause (i) the Regulatory Authorities to disapprove the
transactions contemplated by this Agreement and the Plan of Merger, or
(ii) the transactions contemplated by this Agreement and the Plan of
Merger to fail to satisfy the standards of the Regulatory
Authorities.
4.14 NO CONTROL OF FIRST OZAUKEE BY BUYER. Other then
as set forth herein, until the Effective Time, the management of First
Ozaukee and the authority to establish and implement its business
policies shall reside solely in First Ozaukee's officers and Board of
Directors.
4.15 EMPLOYMENT AGREEMENTS. First Ozaukee shall not
take any action to amend or extend the current employment agreements
of Mr. Russell S. Jones and Ms. Mary E. Lammers without the prior
written consent of Buyer.
4.16 EMPLOYEES.
(a) In the event Buyer terminates any employee of
First Ozaukee (other than Mr. Russell S. Jones and Ms. Mary E.
Lammers, whose severance benefits will be provided for in written
employment and/or consulting agreements), within twelve (12) months
after the Effective Time, and for a reason other than "Cause" (as
defined below), Buyer shall provide lump sum cash severance payments
to such employee at the time of termination in the following amounts:
(i) non-officer -- 1/2 month per full year of service, maximum 3
months current monthly salary; and (ii) officer --1 month per full
year of service, maximum 6 months current monthly salary. In
computing such severance payments for regular part-time employees,
their per month compensation shall be based on one-twelfth of the
actual number of hours worked by any such employee during the fiscal
year ended September 30, 1996.
For purposes of this Agreement, "Cause" shall mean
termination based upon: (i) an employee's willful or continued
failure to perform substantially his or her duties with Buyer (other
than as a result of incapacity due to physical or mental condition),
<PAGE> 183
or (ii) an employee's willful commission of misconduct that is or such
that it may be materially injurious to Buyer, monetarily or otherwise,
or (iii) an employee's conviction for a felony offense. For purposes
of this paragraph, no act, or failure to act, on the employee's part,
shall be considered "willful" unless done, or omitted to be done,
without good faith and without reasonable belief that the act or
omission was in the best interest of Buyer.
(b) Except as otherwise provided herein, Buyer
and the Surviving Corporation shall not be responsible for the payment
of any other obligations of First Ozaukee to its employees.
(c) All employees of First Ozaukee shall be paid
prior to the Effective Time for all wages, accrued but unpaid bonuses,
accrued vacation time and all accrued and vested benefits.
(d) First Ozaukee agrees to cooperate with
Buyer regarding the manner in which the existing employees of First
Ozaukee are notified of the execution of this Agreement. First
Ozaukee shall announce the transactions contemplated by this Agreement
at a meeting of its employees at which representatives of Buyer shall
be allowed to be present and answer questions. First Ozaukee shall
render reasonable assistance to Buyer in regard to employment of any
of the First Ozaukee employees.
4.17 INDEMNIFICATION AND DIRECTORS' AND OFFICERS'
LIABILITY INSURANCE. Buyer agrees that from and after the Effective
Time it shall indemnify and hold harmless each present and former
director and officer of FOCC and FOSB (the "Indemnified Parties"), to
the extent as provided in the Articles of Incorporation of FOCC as in
effect at the time of Closing but in no event greater than those
prescribed by law or any bank regulatory authority, against any costs
or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs")
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective Time
that are related in whole or in part to his or her capacity as a
director or officer of First Ozaukee, whether asserted or claimed
prior to, at or after the Effective Time, to the full extent permitted
under applicable law (and First Ozaukee shall advance expenses as
incurred to the full extent permitted under applicable law, provided
the person to whom expenses are advanced provides, an undertaking to
repay such advances if it is ultimately determined that such person is
not entitled to indemnification). Prior to the Closing Date, First
Ozaukee shall purchase at its own expense by single (one-time) premium
tail directors' and officers' liability insurance coverage (of at
least the same coverage and amounts, and containing terms which are
not materially less advantageous than the policy in force on the date
of this Agreement and more fully described on SCHEDULE 2.12) for three
(3) years from the Effective Time for present and former directors and
officers for matters existing or occurring prior to, at or after the
Effective Time.
4.18 BOARD OF DIRECTORS OF FOCC AND FOSB. At the
Effective Time, all Directors of FOCC and FOSB shall resign by
submitting letters of resignation to Buyer, and shall be replaced by
Directors selected by Buyer.
<PAGE> 184
4.19 OFFICER AND DIRECTOR LOANS. Subject to
restrictions of applicable regulations and law, the loans from FOSB
currently held by officers and directors and employees of FOSB will
not be affected by the transactions contemplated hereby.
4.20 EMPLOYEE BENEFIT PLANS.
(a) Buyer agrees to continue to provide employees
of First Ozaukee employed by the Surviving Corporation on or after the
Effective Time (the "First Ozaukee Employees") with compensation that
is no less favorable to that in effect as of the Effective Time, and
terms of employment which are substantially comparable to those
provided to other similarly situated employees of Buyer. Buyer shall
allow such employees to participate in, and obtain those benefits
afforded to other similarly situated employees of Buyer pursuant to
the terms and conditions of such benefit programs.
(b) Prior to the Effective Time, First Ozaukee
and its representatives shall take all necessary action to terminate
the First Ozaukee Savings Bank Employee Stock Ownership Plan (the
"First Ozaukee ESOP"); including, but not limited to, amending the
First Ozaukee ESOP to provide that no more contributions shall be made
thereto and that any new employees as of the Effective Time shall not
become participants. Within thirty (30) days of the date of this
Agreement in anticipation of such termination, First Ozaukee and its
representatives shall apply for and use their best efforts to obtain a
favorable Final Determination Letter from the Internal Revenue Service
(IRS) for a determination that the termination of the ESOP does not
effect its prior qualified status.
The loan between FOCC and the First Ozaukee ESOP
(the "ESOP Loan") shall be repaid in full with cash received by the
First Ozaukee ESOP from the Paying Agent for the FOCC Shares in the
amount equal to the Merger Price multiplied by the number of
unallocated shares held by the First Ozaukee ESOP, and any unallocated
portion of the consideration remaining after such repayment shall be
allocated to the accounts of those First Ozaukee Employees who are
participants and beneficiaries and such other participants and
beneficiaries, if any (such individuals hereafter, the "ESOP
Participants"), in accordance with the terms of the First Ozaukee ESOP
as amended with respect to such termination. All ESOP Participants
shall fully vest and have a nonforfeitable interest in their accrued
benefits under the First Ozaukee ESOP.
As soon as practicable after the receipt of a
letter from the IRS as to the tax qualified status of the First
Ozaukee ESOP upon its termination under Section 401(a) and 4975(e) of
the Code (the "Final Determination Letter"), distributions of the
benefits under the First Ozaukee ESOP shall be made to the ESOP
Participants. The remaining proceeds related to the unallocated
shares after the payment of the ESOP loan shall be allocated to the
ESOP Participants to the extent permitted by the Internal Revenue Code
(IRC). Any amounts not allocated shall be held unallocated in a
suspense account. The Surviving Corporation may continue the ESOP for
a period of time not to exceed the transition period allowed by IRC
Section 410(b)(6)(C). Also, if assets must be held in suspense, the
Plan will be continued until such assets can be allocated, for a
period not to exceed the allowed transition period. At the end of
<PAGE> 185
this period, if any unallocated assets must still be held in suspense,
the ESOP may be merged into another qualified plan sponsored by Buyer
or the surviving company. During the transition period, the ESOP may
not be amended, except to make such changes as are required to
maintain its tax qualified status, or to terminate or merge the Plan.
Employees of the Buyer or surviving company who were not Participants
as of the Effective Date, shall not be allowed to become Participants
on or after the Effective Date.
In the event that First Ozaukee and its respective
representatives, prior to the Effective Time, and Buyer and its
representatives after the Effective Time, reasonably determine that
the First Ozaukee ESOP cannot obtain a favorable final determination
letter, or that the amounts held therein cannot be so applied,
allocated or distributed without causing the First Ozaukee ESOP to
lose its qualified status, First Ozaukee prior to the Effective Time
and Buyer after the Effective Time shall take such action as they may
reasonably determine with respect to the distribution of benefits to
the ESOP participants, provided that the assets of the First Ozaukee
ESOP shall be held or paid for the benefit of the ESOP participants
and further that in no event shall any portion of the amounts held in
the First Ozaukee ESOP revert directly or indirectly to First Ozaukee
or any affiliate thereof, or to Buyer or any affiliate thereof.
(c) Prior to the Effective Time, First Ozaukee
shall take all necessary action to terminate the First Ozaukee Savings
Bank Money Purchase Pension Plan (the "First Ozaukee Pension Plan");
including, but not limited to, amending the First Ozaukee Pension Plan
to provide that for periods beginning on and after May 1, 1997, no
further contributions shall be made thereto, no new employees shall
become Participants and that all Participants thereto shall fully vest
and have a nonforfeitable interest in their accrued benefits under the
First Ozaukee Pension Plan.
Within thirty (30) days of this Agreement, in
anticipation of such termination and distribution, First Ozaukee and
its representatives shall apply for and use their best efforts to
obtain a favorable Final Determination Letter from the IRS. Prior to
Closing, the First Ozaukee Pension Plan shall be fully funded and no
further contribution thereto shall be required by the successor
corporation or Buyer.
In the event that First Ozaukee and its
representatives prior to the Effective Time, and Buyer and its
representatives after the Effective Time, reasonably determine that
the First Ozaukee Pension Plan cannot obtain a favorable Final
Determination Letter, or that the amounts held therein cannot be so
applied, allocated or distributed without causing the First Ozaukee
Pension Plan to lose its qualified status, First Ozaukee prior to the
Effective Time and Buyer after the Effective Time shall take such
action as they may reasonably determine with respect to the
distribution of benefits to the First Ozaukee Pension Plan
Participants ("Pension Plan Participants"), provided that the assets
of the First Ozaukee Pension Plan shall be held or paid for the
benefit of the Pension Plan Participants and further that in no event
shall any portion of the amounts held in the First Ozaukee Pension
Plan revert directly or indirectly to First Ozaukee or any affiliate
thereof, or to Buyer or any affiliate thereof.
<PAGE> 186
(d) Prior to Closing, First Ozaukee shall
terminate the First Ozaukee Post-Retirement Welfare Benefit Program
and terminate all of its obligations to provide death benefits to
employees, officers and directors, and no payments of any kind shall
be made on account of such termination. Buyer shall be under no
obligation to continue any life insurance plans, programs or health
insurance benefits to officers of First Ozaukee. Buyer will pay Mr.
Russell S. Jones $315.00 ($240.00 allocated to Mrs. Maija Jones and
$75.00 allocated to Mr. Jones) per month for 48 consecutive months
following the Closing Date and $150.00 per month ($75.00 allocated to
Mrs. Jones and $75 allocated to Mr. Jones) thereafter until Mr. Jones
attains age 80 as reimbursement for the purchase of primary and/or
supplemental health insurance coverage. In the event that Mr. Jones
becomes deceased prior to attaining age 80, or Mrs. Jones become
deceased prior to Mr. Jones attaining age 80, the allocated portion of
the payments provided herein shall cease with respect to the deceased.
(e) To the extent allowable by Buyer's Plan,
certain expenses incurred by each First Ozaukee employee for health
benefits shall be counted during Buyer's Plan year for purposes of
such employees deductible and co-payment limitations under Buyer's
plan.
(f) Buyer acknowledges and agrees that First
Ozaukee and FOSB shall be permitted to take whatever action they deem
to be reasonably necessary to provide that all Options or awards
granted under the FOCC Option Plan and the First Ozaukee Incentive
Plan, and all account balances under the First Ozaukee ESOP and First
Ozaukee Pension Plan, shall be fully vested, nonforfeitable, paid and
satisfied in full and terminated as of the Effective Time. All awards
under the First Ozaukee Incentive Plan that have been granted prior to
the Effective Time shall be considered outstanding First Ozaukee
Shares as of the Effective Time.
4.21 OBLIGATIONS TO BAIRD AND SHW. All professional
fees, costs and expenses payable to Baird and SHW shall be paid in
full or accrued by First Ozaukee prior to Closing.
4.22 CEDARBURG FACILITY. First Ozaukee shall
immediately undertake, and conclude as diligently as possible, a full
and complete soil and groundwater environmental assessment of the
Cedarburg facility and forthwith commence soil and groundwater
remediation necessary to obtain a site closure letter satisfactory to
Buyer in its sole discretion. In the event that First Ozaukee has not
received a site closure letter satisfactory to Buyer in its sole
discretion prior to the Closing Date then, pursuant to Section 1.2 of
this Agreement, the Base Capital shall be adjusted pursuant to Section
1.2(b)(ii).
4.23 PROXY STATEMENT. Buyer acknowledges that it will
be required to provide certain information to First Ozaukee and
cooperate with First Ozaukee in the preparation of a proxy statement
relating to the approval of this Agreement and Plan of Merger by the
FOCC shareholders. First Ozaukee shall provide for Buyer's review
those portions of any such proxy statement incorporating information
provided to First Ozaukee by Buyer. Except as to the accuracy of the
information provided by Buyer to First Ozaukee, if any, First Ozaukee
<PAGE> 187
shall have the sole and exclusive responsibility for the preparation
and content of the proxy statement.
4.24 FINANCING. Buyer will have available at the
Effective Time, or such date thereafter as certificates shall be
surrendered in accordance with Section 1.3 of this Agreement, cash to
provide all funds necessary to pay the Merger Price.
ARTICLE V
CONDITIONS PRECEDENT
5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER.
Unless the conditions are waived by Buyer, all obligations of Buyer
under this Agreement are subject to the fulfillment, prior to or at
the Closing, of each of the following conditions:
(a) STATEMENTS OF ESSENTIAL FACTS; PERFORMANCE OF
AGREEMENTS. The Statements of Essential Facts contained in Article II
of this Agreement and all representations and warranties of First
Ozaukee contained herein or in the First Ozaukee Financial Statements
or in any schedules or exhibits delivered by First Ozaukee or on its
behalf to Buyer pursuant to this Agreement shall have been true and
correct in all material respects as of this date and shall be true and
correct in all material respects at the Closing as though made on the
Closing Date, in each case to the reasonable satisfaction of Buyer,
and First Ozaukee shall have performed all covenants and agreements
herein required to be performed by it on or prior to the Closing.
(b) DUE DILIGENCE. Commencing five (5) business
days prior to the Closing, Buyer shall commence a three (3) business
day investigatory due diligence examination of First Ozaukee. First
Ozaukee shall provide Buyer full and complete access to all aspects of
the business of First Ozaukee, including, but not limited to all
books, records, contracts, commitments, correspondence, reports,
properties and assets of First Ozaukee and with the full and complete
cooperation of First Ozaukee, their officers, directors, agents and
representatives at the facilities of First Ozaukee. No investigation
by Buyer shall affect the representations and warranties of First
Ozaukee set forth herein.
(c) CLOSING CERTIFICATE. Buyer shall have
received a certificate signed by the President and another duly
authorized officer of First Ozaukee and dated as of the Closing Date,
certifying in such detail as Buyer may reasonably request as to the
fulfillment of the conditions to the obligations of Buyer as set forth
in this Agreement.
(d) REGULATORY AND OTHER APPROVALS. Buyer shall
have obtained all consents and approvals of all regulatory agencies
and other authorities having jurisdiction over this transaction
necessary to complete the transactions contemplated by this Agreement
and the Plan of Merger upon such terms and conditions, if any, as are
satisfactory to Buyer in its reasonable judgment, all required waiting
periods shall have expired, and there shall have been no motion for
rehearing or appeal from such approval or commencement of any suit or
action by any governmental authority seeking to enjoin the transaction
provided for herein or to obtain other relief with respect thereto.
<PAGE> 188
(e) APPROVAL OF MERGER AND DELIVERY OF MERGER
AGREEMENT. The Merger Agreement and the transactions contemplated
therein shall have been approved by the shareholders of FOCC in
accordance with the WBCL and the Articles of Incorporation and By-Laws
of First Ozaukee and the proper officers of First Ozaukee shall have
executed and delivered to Buyer and CIBAC copies of the Plan of Merger
in form suitable for filing with the Wisconsin Department of Financial
Institutions as part of the Articles of Merger.
(f) NO LITIGATION. No suit or other action shall
have been instituted or threatened seeking to enjoin the consummation
of the transactions contemplated hereby, or by the Plan of Merger, or
to obtain other relief in connection with this Agreement or the
transactions contemplated hereby or thereby (including, but not
limited to, substantial damages) which reasonably could be expected to
result in the issuance of an order enjoining such transactions or
result in a determination that First Ozaukee has failed to comply with
applicable legal requirements of a material nature in connection with
the transactions contemplated herein or in the Plan of Merger or
actions preparatory thereto. No statute, rule, regulation, order,
injunction or decree shall have been enacted, entered, promulgated or
enforced by any governmental entity which prohibits, restricts or
makes illegal consummation of the transactions contemplated hereby, or
of the Merger.
(g) OPINION OF COUNSEL. Buyer shall have
received the opinion of Schiff Hardin & Waite, special counsel for
First Ozaukee, dated as of the Closing Date, and in form and substance
satisfactory to Buyer and its counsel to the effect that:
(i) FOCC is a corporation validly existing
under the laws of the State of Wisconsin. FOCC is registered as a
bank holding company under the BHC Act.
(ii) FOSB is a validly existing Wisconsin
state-chartered savings bank.
(iii) The authorized capital stock of
FOCC is (i) 4,000,000 shares of common stock, $1.00 par value per
share, of which 627,477 shares are issued and outstanding as of the
Closing Date, and (ii) 2,000,000 shares of preferred stock, $1.00 par
value per share, of which, as of the Closing Date, no shares were
issued and outstanding. To the best knowledge of counsel, FOCC owns
all of the issued and outstanding stock of FOSB.
(iv) The execution, delivery, and performance
of this Agreement and the Plan of Merger, and the transactions
contemplated herein and therein have been duly authorized by the Board
of Directors and the shareholders of FOCC, these being the only
authorizations required under its Articles of Incorporation, its By-
Laws, and the statutes of the State of Wisconsin. This Agreement
constitutes the legal, valid and binding obligations of First Ozaukee
enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors generally and to general principles of equity.
(v) The execution, delivery and performance
of this Agreement do not violate any provisions of the Articles of
<PAGE> 189
Incorporation or By-Laws of FOCC or FOSB or, to the best knowledge of
counsel, any material contract or agreement by which First Ozaukee is
bound or any law, rule, regulation or, to the best knowledge of
counsel, any written order to which First Ozaukee is subject.
(vi) To the best knowledge of counsel, there
are no material claims, actions, suits, or proceedings pending or
threatened against First Ozaukee which depart from the ordinary,
routine litigation incident to the kind of business carried on by
First Ozaukee which might reasonably be expected to have a material
adverse effect on First Ozaukee.
(vii) To the best knowledge of counsel,
there are no actions, suits or proceedings pending or threatened
against First Ozaukee to enjoin consummation of the Merger or to
obtain other relief (other than payment to dissenting shareholders) in
connection with this Agreement, the Plan of Merger, or the
transactions contemplated hereby or thereby.
In rendering the foregoing opinion, such counsel
may rely on certificates of corporate officers or governmental
officials as to factual matters.
(h) NO ADVERSE CHANGES. Between the date of this
Agreement and the Closing Date, the business of First Ozaukee shall
have been conducted in the ordinary course consistent in all material
respects with prudent banking practices, and there shall not have
occurred any material adverse change or any condition, event,
circumstance, fact or occurrence (other than general economic or
competitive conditions) that may be expected to result in a material
adverse change in First Ozaukee's business, income, assets,
liabilities or financial condition. FOCC and FOSB shall not have been
made a party to, or threatened with any actions, suits, proceedings or
litigation which, in the opinion of Buyer will have or is likely to
have a material adverse affect on the financial condition, assets or
business of First Ozaukee.
(i) CONSENTS. To the extent required by law or
contractual terms, First Ozaukee shall have obtained the written
consent to the Merger of other parties to leases or other contracts,
commitments or arrangements to which First Ozaukee is a party.
(j) EMPLOYMENT AGREEMENTS AND SEVERANCE PAYMENT.
First Ozaukee, Buyer, CIBAC and Mr. Russell S. Jones, President and
Chief Executive Officer of First Ozaukee and FOSB, and Ms. Mary E.
Lammers, Secretary of First Ozaukee and Vice President of FOSB, shall
have entered into new consulting and/or employment agreements in the
form of EXHIBITS B and C hereto, and Mr. Jones and Ms. Lammers and
First Ozaukee shall have mutually cancelled all existing employment,
compensation and/or severance agreements between Mr. Jones and Ms.
Lammers and FOSB and/or FOCC. Furthermore, First Ozaukee shall have
paid on or before Closing the $185,968 severance payment to Mr. Jones.
(k) DISSENTING SHARES. Shareholders holding no
more than twelve percent (12%) of the FOCC Shares (i) shall not have
validly demanded appraisal of such shares pursuant to Subchapter XIII
prior to or at the meeting of shareholders of FOCC at which the Merger
<PAGE> 190
was submitted to a vote, and (ii) shall not have voted such shares in
favor of the Merger at such meeting.
(l) FAIRNESS OPINION. Baird shall have delivered
to Buyer, as of the date of any proxy statement used to solicit
shareholder approval of the Merger Agreement, its opinion to the
effect that the Merger is fair, from a financial point of view, to the
shareholders of FOCC, and such opinion shall not have been withdrawn,
amended or modified in any material respect at or prior to the
Closing.
(m) BENEFIT PLAN TERMINATION. Notwithstanding
anything to the contrary herein, First Ozaukee shall have fully funded
and terminated the First Ozaukee Post-Retirement and Welfare Benefit
Plan, the FOCC Option Plan and the First Ozaukee Incentive Plan, and
First Ozaukee shall have provided evidence to the satisfaction of
Buyer's counsel concerning same. First Ozaukee shall have fully
funded the First Ozaukee Pension Plan and First Ozaukee and its
representatives shall have used their best efforts to obtain a
favorable Final Determination Letter from the IRS with regard to the
termination of the First Ozaukee Pension Plan and First Ozaukee ESOP
Plan. First Ozaukee shall have terminated any of its obligations to
provide death benefits to employees, officers and/or directors, and no
payments of any kind will be made on account of such termination, and
each such covered employee, officer and/or director shall deliver a
letter agreement acceptable to Buyer agreeing to the termination of
any right to death benefits.
(n) SALE OF VEHICLE. First Ozaukee shall have
sold the 1997 Cadillac DeVille (the "Vehicle") for no less than its
fair market value. The fair market value shall be the average of the
trade in value and the retail value of the Vehicle as printed in the
most recent issue of the N.A.D.A. Official Used Car Guide prior to
sale, including all additions and deductions applicable to the
vehicle.
(o) ENVIRONMENTAL. First Ozaukee (1) shall have
delivered to Buyer a site closure letter satisfactory to Buyer in its
sole discretion with regard to the Cedarburg facility and First
Ozaukee shall have expensed or accrued all Unreimbursable Expenses
associated with the environmental remediation of the Cedarburg
facility; or, as the case may be, (2) Buyer shall have obtained from
its environmental consultant hired pursuant to Section 1.2(b)(ii) an
opinion satisfactory to Buyer that, as of the Closing Date, the total
of the Unreimbursable Expenses incurred and estimated to be incurred
by First Ozaukee, excluding amounts previously accrued or expensed,
relating to the environmental remediation and the environmental
liabilities, contingent or otherwise, relating to the Cedarburg
facility shall not exceed Fifty Thousand Dollars ($50,000) and the
adjustments shall have been made to Base Capital and the Merger Price
as provided in Section 1.2(b)(ii) and 1.2(d) of this Agreement. First
Ozaukee shall have also delivered to Buyer, in a form satisfactory to
Buyer, the letter from WDCOM as referenced in Section 2.27 hereof.
(p) REQUIRED FILINGS. First Ozaukee shall have
made all filings with the SEC and the regulatory agencies required or
necessitated by the consummation of the transactions contemplated by
this Agreement.
<PAGE> 191
(q) REGULATORY VIOLATIONS. First Ozaukee shall
have provided documentation to the satisfaction of Buyer's counsel
evidencing resolution of any and all violations of all applicable
Regulations, including the payment of all sums due and owing as a
result of such violations and any penalties, fines and assessments
related thereto.
(r) MERGER PRICE AND BASE CAPITAL ADJUSTMENTS.
The adjustments to the Base Capital and the Merger Price, if any are
required, pursuant to Section 1.2 of this Agreement shall have been
made.
(s) OTHER DOCUMENTS. Buyer shall receive at the
Closing all such other documents, certificates or instruments as it
may have reasonably requested evidencing compliance by First Ozaukee
with the terms of this Agreement.
(t) TAXES. First Ozaukee shall not have taken
any action which impedes, impairs or prevents Buyer's ability to
obtain the maximum tax benefits resulting from the adjustments not
included in Base Capital pursuant to Section 1.2(c)(i-iv), but
excluding actions in the normal course of business consistent with
past conduct, actions required by laws and actions required by this
Agreement.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF FOCC.
Unless the conditions are waived by FOCC, all obligations of FOCC
under this Agreement and under the Plan of Merger, are subject to the
fulfillment, prior to or at Closing, of each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES OF BUYER;
PERFORMANCE OF AGREEMENTS. The Statements of Essential Facts
contained in Article III of this Agreement and the representations and
warranties of Buyer contained herein and in any schedules or exhibits
delivered by Buyer or on its behalf to FOCC pursuant to this Agreement
shall have been true and correct in all material respects as of this
date and shall be true and correct in all material respects at the
Closing as though made on the Closing Date, in each case to the
reasonable satisfaction of FOCC, and Buyer shall have performed all
agreements herein required to be performed by it on or prior to the
Closing.
(b) CLOSING CERTIFICATE. FOCC shall have
received a certificate signed by a duly authorized officer of Buyer
and dated as of the Closing Date, certifying in such detail as FOCC
may reasonably request, as to the fulfillment of the conditions to the
obligations of FOCC as set forth in this Agreement.
(c) REGULATORY AND OTHER APPROVALS. Buyer shall
have duly obtained all regulatory approvals necessary to complete the
transactions contemplated by this Agreement and the Plan of Merger
upon such terms and conditions, if any, as are satisfactory to FOCC in
its reasonable judgment, all required waiting periods shall have
expired, and there shall have been no motion for rehearing or appeal
from such approval or commencement of any suit or action by any
governmental authority seeking to enjoin the transaction provided for
herein or to obtain other relief with respect thereto.
<PAGE> 192
(d) FAIRNESS OPINION. Baird shall have delivered
to the Board of Directors of FOCC, as of the date of the Proxy
Statement used to solicit shareholder approval of the Merger
Agreement, its opinion to the effect that the Merger is fair, from a
financial point of view, to the shareholders of FOCC, and such opinion
shall not have been withdrawn, amended or modified in any material
respect at or prior to the Closing.
(e) NO LITIGATION. No suit or other action shall
have been instituted or threatened seeking to enjoin the consummation
of the transactions contemplated hereby or by the Plan of Merger, or
to obtain other relief in connection with this Agreement or the
transactions contemplated hereby or thereby (including, but not
limited to, substantial damages) which reasonably could be expected to
result in the issuance of an order enjoining such transactions; or
result in a determination that Buyer has failed to comply with
applicable legal requirements of a material nature in connection with
the transactions contemplated herein or in the Plan of Merger or
actions preparatory thereto.
(f) OPINION OF COUNSEL. FOCC shall have
received the opinion of Brashear & Ginn, counsel for Buyer and CIBAC,
dated as of the Closing Date, in form satisfactory to FOCC and its
counsel to the effect that:
(i) Buyer is a corporation validly existing
under the laws of the State of Illinois, and is duly qualified to do
business and is in good standing in the State of Wisconsin. Buyer is
registered as a bank holding company under the BHC Act.
(ii) CIBAC is a validly existing Wisconsin
corporation.
(iii) The execution, delivery, and
performance of this Agreement and the Plan of Merger, and the
transactions contemplated herein and therein have been duly authorized
by the Board of Directors of Buyer and the sole shareholder of CIBAC,
these being the only authorizations required under its Articles of
Incorporation, its By-Laws, and the statutes of the State of Illinois.
This Agreement and the Plan of Merger constitute the legal, valid and
binding obligations of Buyer enforceable in accordance with their
respective terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors
generally and to general principles of equity.
(iv) The execution, delivery and performance
of this Agreement and the Plan of Merger do not violate any provisions
of the Articles of Incorporation or By-Laws of Buyer or any contract
or agreement known to counsel by which Buyer is bound or any law,
rule, regulation or, or to counsel's knowledge, order to which Buyer
is subject.
(v) The execution, delivery and performance
of the Plan of Merger do not violate any provisions of the Articles of
Incorporation or By-Laws of CIBAC or any contract or agreement known
to counsel by which CIBAC is bound or any law, rule, regulation or, to
counsel's knowledge, order of which CIBAC is subject.
<PAGE> 193
(vi) To the best of counsel's knowledge,
there are no material claims, actions, suits or proceedings pending or
threatened against Buyer or CIBAC which depart from the ordinary,
routine litigation incident to the kind of business carried on by
Buyer or CIBAC which might reasonably be expected to have a material
adverse effect on Buyer or CIBAC.
(vii) To the best knowledge of counsel,
there are no actions, suits or proceedings known to such counsel,
after reasonable inquiry, pending or threatened against Buyer or CIBAC
to enjoin consummation of the Merger or to obtain other relief (other
than payment to dissenting shareholders) in connection with this
Agreement, the Plan of Merger, or the transaction contemplated hereby
or thereby. In rendering the foregoing opinion, such counsel may rely
on certificates of corporate officers or governmental officials as to
factual matters.
(g) APPROVAL OF MERGER AND DELIVERY OF MERGER
AGREEMENT. The Merger Agreement and the transactions contemplated
therein shall have been approved by the Board of Directors and sole
shareholder of CIBAC in accordance with governing statutes and the
respective Articles of Incorporation and By-Laws of each of Buyer and
CIBAC. The proper officers of each of Buyer and CIBAC shall have
executed copies of Plan of Merger in form suitable for filing with the
Wisconsin Department of Financial Institutions as part of the Articles
of Merger.
(h) EMPLOYMENT AGREEMENTS AND SEVERANCE PAYMENT.
First Ozaukee, Buyer, CIBAC and Mr. Russell S. Jones and Ms. Mary E.
Lammers shall have entered into new employment and/or consulting
agreements in the form of EXHIBITS B and C hereto, and Mr. Jones, Ms.
Lammers and First Ozaukee shall have mutually cancelled all existing
employment, compensation and/or severance agreements between Mr. Jones
and Ms. Lammers and FOSB.
(i) OTHER DOCUMENTS. First Ozaukee shall have
received at the Closing all such other documents, certificates or
instruments as it may have reasonably requested evidencing compliance
by Buyer with the terms of this Agreement.
ARTICLE VI
SURVIVAL
6.1 Except for agreements of the parties that are
specifically provided by this Agreement or the Plan of Merger to be
performed after the Closing Date (including agreements contained in
Article I and in Sections 7.1 and 7.2 hereof), all statements,
representations and warranties made herein, in the Plan of Merger, or
in connection therewith or with the transactions contemplated thereby,
by either party or any of its respective agents, employees,
representatives, officers, directors or shareholders shall not survive
the Closing. Except as provided in Section 7.2 and 7.5 hereof, the
sole remedy available to any party in connection with any breach,
inaccuracy or failure of any such statement, representation, warranty,
condition or agreement shall be to terminate this Agreement in
accordance with Section 7.4 hereof (unless this Agreement specifically
provides a different remedy) without further liability or obligation,
and without limiting the foregoing, no party shall have any cause of
<PAGE> 194
action of any nature against the other party, or any of its agents,
employees, representatives, officers, directors or shareholders in
respect of such breach, inaccuracy or failure.
ARTICLE VII
GENERAL PROVISIONS
7.1 FURTHER ASSURANCES. Each of the parties hereto
agrees that at any time and from time to time after the Closing it
will cause to be executed and delivered to any party such further
instruments or documents as such other party may reasonably require to
give effect to the transactions contemplated hereby.
7.2 EXPENSES. Each of the parties to this Agreement
shall bear the costs and expenses incurred by it in connection with
this Agreement and the transactions contemplated hereby; provided,
however, that:
(i) in the event this Agreement is
terminated by Buyer pursuant to Section 7.4(c) or (d) excepting for
nonfulfillment or waiver of Section 5.1(d) or by FOCC pursuant to
Section 7.4(g) hereof, then FOCC shall reimburse Buyer in an amount
not to exceed $100,000 for the out-of-pocket expenses, subject to
verification thereof, it has incurred in furtherance of this Agreement
and the transactions contemplated herein, including, but not limited
to, reasonable fees of professionals engaged for such purpose by or on
behalf of Buyer; provided, however, that in the event such third party
acquisition is not consummated and Buyer subsequently enters into an
acquisition agreement with First Ozaukee, Buyer shall refund to First
Ozaukee any and all expenses First Ozaukee shall have paid to Buyer
pursuant to this Section 7.2.
(ii) in the event this Agreement is
terminated by FOCC pursuant to Section 7.4(c) or (d), excepting for
nonfulfillment or waiver of Section 5.2(c, d and h), Buyer shall
reimburse First Ozaukee in an amount not to exceed $100,000 for out-
of-pocket expenses, subject to verification thereof, it has incurred
in furtherance of this Agreement and the transactions contemplated
herein, including, but not limited to, reasonable fees of
professionals engaged for such purposes by or on behalf of FOCC;
(iii) nothing herein contained shall require
one party to pay the other reimbursement of expenses in connection
with the Merger as a result of termination of this Agreement pursuant
to Section 7.4(e) or (f); and
(iv) all costs and expenses reasonably
estimated to be incurred by First Ozaukee shall be either paid or
accrued for on or prior to the Closing Date.
7.3 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the respective heirs,
successors, assigns and personal representations of the parties
hereto; provided, however, that no party may assign this Agreement
without the written consent of the other parties, and except that
Buyer may assign this Agreement to any wholly-owned subsidiary of
Buyer if Buyer remains fully responsible for the performance of its
<PAGE> 195
obligations hereunder and such assignment shall not, in the reasonable
judgment of FOCC, adversely affect regulatory approval of the
transactions contemplated by this Agreement.
7.4 TERMINATION. This Agreement may be terminated
(a) at any time by agreement of Buyer and FOCC, (b) by either Buyer or
FOCC if the Closing has not occurred by December 1, 1997, or such
later date agreed to by Buyer and FOCC; provided that in the event
Buyer shall have applied for all of the regulatory approvals referred
to in Section 5.1(d) hereof prior to such date but the required
waiting periods therefor shall not have expired, this Agreement will
not terminate pursuant to this Section 7.4(b) until ten (10) days
after all required waiting periods shall have expired without any
motion for rehearing or appeal, (c) by either Buyer or FOCC at the
Closing if any of the conditions precedent to the obligations of such
terminating party contained in Article V hereof shall not have been
fulfilled or waived, (d) by either Buyer or FOCC if a material breach
or default shall be made by the other party in the observance or in
the due and timely performance of any of its covenants or agreements
herein contained and such default shall not have been fully cured
within a reasonable time, but in no event more than twenty days, after
written notice specifying the alleged default shall have been given,
(e) by FOCC if it refuses to accept the Decreased Adjusted Merger
Price presented by Buyer pursuant to Section 1.2(d)(ii), (f) by Buyer
if it refuses to accept the Increased Adjusted Merger Price presented
by FOCC pursuant to Section 1.2(e)(ii), (g) by FOCC if the Board of
Directors determines that its fiduciary duties require it to accept an
unsolicited offer from a third party and the Buyer shall have elected
not to exercise its right of first refusal pursuant to Section 7.5
hereof, or (h) by FOCC upon the first to occur of:
(i) thirty days after the application or
notice required to be filed by Buyer for approval of the transactions
contemplated by this Agreement has been denied and is not subject to
further appeal or an appeal is not then being diligently pursued in
good faith, or
(ii) July 31, 1997, if on such date all
applications or notices required to be filed with any governmental
authority are not then pending (and have not been pending for a period
of more than 30 days) before such authority, other than any such
applications or notices approved on or prior to July 31, 1997. For
purposes of the preceding sentence "pending" shall mean an application
or notice procedure or process with a governmental authority which
Buyer is diligently pursuing in good faith. In the event of
termination of this Agreement as provided in the preceding sentence
and except as otherwise provided in Sections 7.2, 7.4, 7.5 or Article
VI, there shall be no liability hereunder on the part of Buyer or
First Ozaukee or their respective agents, employees, representatives,
officers, directors or shareholders.
7.5 RIGHT OF FIRST REFUSAL. In the event that prior
to the consummation of the transactions contemplated by this Agreement
FOCC Board of Directors receives an unsolicited third party offer to
(a) acquire beneficial or record ownership of at least a majority of
the outstanding FOCC Shares, (b) acquire all or substantially all of
First Ozaukee's assets, or (c) engage in a merger, consolidation,
recapitalization or other business combination with such third party,
<PAGE> 196
First Ozaukee shall deliver to Buyer written notice of such proposed
acquisition which shall contain a description of the principal terms
of the proposed acquisition (the "Proposal"), including the purchase
price (payment of which shall be subject only to satisfaction of
customary closing conditions and the receipt of all necessary
regulatory approvals), the time and place of closing of such
acquisition, and all other material terms of the proposed acquisition.
Within 21 days after delivery of the Proposal, Buyer shall notify
First Ozaukee as to whether or not it intends to exercise its right of
first refusal hereunder. In the event a Proposal contains purchase
price consideration other than cash and First Ozaukee and Buyer cannot
agree upon the appropriate cash equivalent, First Ozaukee and Buyer
shall select an investment banker mutually agreeable to each of them
for purposes of valuing any non-cash consideration contained in the
Proposal. First Ozaukee and Buyer shall each pay one-half of the fees
and expenses of any such investment banker.
For a period of 30 days after delivery of the
Proposal (or such longer time period as may be required to obtain all
necessary regulatory approvals or, with respect to any financial
commitments Buyer requires to consummate the acquisition, such longer
period as shall be reasonably necessary and negotiated by the
parties), Buyer shall have the sole and exclusive right to acquire
First Ozaukee for the consideration and on such other terms and
conditions stated in the Proposal (or in the case of non-cash
consideration, as determined in the manner heretofore described). In
the event Buyer determines not to exercise its right of first refusal
hereunder, Buyer shall remain entitled to the remedies set forth in
Section 7.2 hereof in accordance with the terms thereof.
7.6 CANCELLATION FEE.
(a) In the event Buyer breaches sections 4.24 of
this Agreement and First Ozaukee elects to terminate this Agreement
pursuant to Section 7.4(d), Buyer shall make a cash payment to First
Ozaukee in an amount equal to $300,000.
(b) In the event Buyer is unable to obtain the
necessary regulatory approvals in order to complete the Merger, due to
a determination by the Federal Reserve Board or other regulatory
authority that Buyer (or its financial institution subsidiary or
subsidiaries) would have inadequate capital upon consummation of the
proposed Merger, Buyer shall make a cash payment to First Ozaukee in
an amount equal to $300,000.
(c) In the event First Ozaukee terminates the
Agreement pursuant to Section 7.4(g), First Ozaukee shall make a cash
payment to Buyer in an amount equal to $300,000.
The cancellation fee set forth in this Section 7.6 shall
be in addition to any expenses one party is obligated to pay to the
other under Section 7.2 of this Agreement.
7.7 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed given (a) when
delivered personally; (b) the second business day after being
deposited in the United States mail registered or certified (return
receipt requested); (c) the first business day after being deposited
<PAGE> 197
with Federal Express or any other recognized national overnight
courier service; or (d) on the business day on which it is sent and
received by facsimile, in each case to the parties at the following
addresses (or at such other address for a party as shall be specified
by like notice):
(a) If to Buyer or CIBAC addressed to:
J. Michael Straka
CENTRAL ILLINOIS BANCORP, INC.
2913 West Kirby Avenue
Champaign, IL 61821
Tel. No. (217) 355-0900
with a copy to:
Donald J. Straka, Esq.
BRASHEAR & GINN
800 Farnam Plaza
1623 Farnam Street
Omaha, Nebraska 68102-2106
Tel. No. (402) 348-1000
(b) If to First Ozaukee, addressed to:
Russell S. Jones
President and Chief Executive Officer
First Ozaukee Capital Corp.
W61 N526 Washington Avenue
Cedarburg, Wisconsin 53012
Tel. No. (414) 377-0750
with a copy to:
Christopher J. Zinski, Esq.
Schiff Hardin & Waite
7200 Sears Tower
Chicago, Illinois 60606
Tel. No. (312) 258-5548
7.8 GOVERNING LAW. This Agreement shall be governed
by, and construed and enforced in accordance with, the internal laws
of the State of Wisconsin, without giving effect to the conflict of
laws principles thereof.
7.9 SPECIFIC PERFORMANCE. The parties agree that
there is no adequate remedy at law for breach of the obligations
contained in this Agreement and the Plan of Merger, and agree that
such obligations shall be enforceable by specific performance and
injunctive relief, without the need to post bond, in the event of such
breach.
7.10 COUNTERPARTS. This Agreement may be executed in
any number of counterparts, and each such executed counterpart will be
an original instrument.
7.11 SEVERABILITY. In the event that any provisions of
this Agreement or any portion thereof shall be finally determined to
<PAGE> 198
be unlawful or unenforceable, such provision or portion thereof shall
be deemed to be severed from this Agreement, and every other
provision, and any portion of a provision, that is not invalidated by
such determination, shall remain in full force and effect. To the
extent that a provision is deemed unenforceable by virtue of its scope
but may be made enforceable by limitation thereof, such provision
shall be enforceable to the fullest extent permitted under the laws
and public policies of the State whose laws are deemed to cover
enforceability. It is declared to be the intention of the parties
that they would have executed the remaining provisions without
including any that may be declared unenforceable.
7.12 HEADINGS. Descriptive headings appearing in this
Agreement are for convenience only and will not be deemed to explain,
limit or amplify any of the provisions hereof.
7.13 ENTIRE AGREEMENT; AMENDMENT. This Agreement, with
its exhibits and the schedules delivered pursuant to it, sets forth
the entire understanding of the parties and supersedes all prior
agreements, arrangements and communications, whether oral or written.
This Agreement may only be modified or amended by an agreement in
writing signed by Buyer and First Ozaukee.
7.14 THIRD-PARTY BENEFICIARY RIGHTS. This Agreement
shall not confer upon any party not a party hereto any rights or
remedies hereunder, except as provided in Sections 1.6, 4.16(a), 4.17
and 4.20.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the day and year hereinabove first written.
FIRST OZAUKEE CAPITAL CORP.
By: /s/ Russell S. Jones
--------------------------
Title: President and CEO
CENTRAL ILLINOIS BANCORP, INC.
By: /s/ J. Michael Straka
---------------------------
Title: President and CEO
<PAGE> 199
APPENDIX B
PLAN OF MERGER
BETWEEN
CIB ACQUISITION CORPORATION
AND
FIRST OZAUKEE CAPITAL CORP.
UNDER THE ARTICLES OF INCORPORATION OF
FIRST OZAUKEE CAPITAL CORP.
This Plan of Merger (this "Plan") is made and entered
into this 8th day of July, 1997, by and between CIB ACQUISITION
CORPORATION (hereinafter called "CIBAC") and FIRST OZAUKEE CAPITAL
CORP. (hereinafter called "First Ozaukee" or, where appropriate, the
"Resulting Corporation").
RECITALS
A. CIBAC is a corporation duly organized and existing
under the laws of the State of Wisconsin. As of the date of
consummation of the merger, CIBAC will have capital stock outstanding
of $100, consisting of 100 shares of no-par common stock.
B. First Ozaukee is a corporation duly organized and
existing under the laws of the State of Wisconsin. The authorized
capital stock of First Ozaukee consists of 4,000,000 shares of common
stock, $1.00 par value per share, of which 627,477 shares are issued
and outstanding and 2,000,000 shares of preferred stock, $1.00 par
value per share, of which no shares are issued and outstanding.
C. Pursuant to an Agreement and Plan of
Reorganization, dated as of April 25, 1997 (the "Agreement and Plan of
Reorganization"), between First Ozaukee and Central Illinois Bancorp.,
Inc., an Illinois corporation (the "Buyer"), Buyer has agreed to
acquire through CIBAC, its wholly-owned subsidiary, all of the issued
and outstanding shares of common stock of First Ozaukee in accordance
with the terms and conditions set forth therein and herein.
D. The Resulting Corporation will have capital stock
outstanding of $627,577, divided into 627,577 shares of issued and
outstanding common stock, $1.00 par value per share, surplus of
approximately $5,228,523, and undivided profits and reserves (based
upon the March 31, 1997, reports of condition and income of First
Ozaukee and the information provided in Recital "A" above) of
approximately $3,798,000.
E. The board of directors of each of CIBAC and First
Ozaukee (the "Merging Corporations") deem it advisable to merge the
Merging Corporations under the Articles of Incorporation of First
Ozaukee and the name of "First Ozaukee Capital Corp.," subject to the
terms and conditions set forth in this Agreement and in accordance
<PAGE> 200
with applicable laws of the United States and the State of Wisconsin.
A majority of the board of directors of each of the Merging
Corporations has approved such merger (the "Merger") and authorized
the execution and adoption of this Plan.
NOW THEREFORE, in consideration of the premises and of
the agreements, covenants and conditions hereinafter contained, the
Merging Corporations agree as follows:
ARTICLE I
THE MERGER
1.1 RESULTING CORPORATION. Subject to the terms and
conditions set forth herein, CIBAC shall be merged into, and under the
Articles of Incorporation of, First Ozaukee pursuant to the provisions
of, and with the effect provided in, the Wisconsin Business
Corporation Law, and First Ozaukee shall be the corporation resulting
from such merger (the "Resulting Corporation"). The name of the
Resulting Corporation shall be "First Ozaukee Capital Corp." and the
present designated corporate headquarters of First Ozaukee at W61 N526
Washington Avenue, Cedarburg, Wisconsin shall be the designated
headquarters of the Resulting Corporation.
1.2 EFFECTIVE TIME. As soon as is reasonably
practicable after the date hereof, this Plan shall be submitted to the
Wisconsin Department of Financial Institutions as part of the Articles
of Merger, pursuant to Section 180.1105 of the WBCL. This Plan (or an
unexecuted form of this Plan) also shall be submitted to the
shareholders of each of the Merging Corporations for approval and
adoption of the Merger as provided for by Section 180.1103 of the
WBCL. The Merger shall become effective on the date on which the
Articles of Merger become effective (the "Effective Time") pursuant to
Section 180.1105(2) of the WBCL.
1.3 ARTICLES OF INCORPORATION. The Articles of
Incorporation of First Ozaukee as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation of the
Resulting Corporation.
1.4 BY-LAWS. The By-Laws of First Ozaukee, as in
effect as of the Effective Time, shall be the By-Laws of the Resulting
Corporation until the same shall be thereafter altered, amended or
repealed in accordance with said By-Laws, the Articles of
Incorporation of the Resulting Corporation, and applicable law.
1.5 DIRECTORS AND OFFICERS. As of the Effective Time,
the directors of the Resulting Corporation shall consist of the
following persons:
J. Michael Straka
William J. Blake
Jerry D. Maahs
Andrew A. Vallozzi
Steven T. Klitzing
As of the Effective Time, the officers of the Resulting Corporation
shall consist of the following persons:
<PAGE> 201
President and Chief Executive Officer: J. Michael Straka
Secretary and Treasurer: Steven T. Klitzing
ARTICLE II
EFFECT OF MERGER
2.1 CORPORATE EXISTENCE. As of the Effective Time,
the corporate existences of each of the Merging Corporations shall,
with the full effect provided for in the WBCL, be merged into and
continued in the Resulting Corporation under the Articles of
Incorporation of First Ozaukee. The Resulting Corporation shall be
considered the same business and corporate entity as each of the
Merging Corporations, with all the property, rights, powers, duties
and obligations of each of the Merging Corporations except as affected
by the laws of the State of Wisconsin and by the Articles of
Incorporation and By-Laws of the Resulting Corporation. The separate
existence of CIBAC shall cease except to the extent provided by
applicable law.
2.2 RIGHTS AND LIABILITIES OF THE RESULTING
CORPORATION. The Resulting Corporation shall be liable for all
liabilities of each of the Merging Corporations, and all rights,
franchises and interests of each of the Merging Corporations in and to
every species of property, real, personal and mixed, and chooses in
action thereunto belonging, shall be deemed to be transferred to and
vested in the Resulting Corporation without any deed or other
transfer, and the Resulting Corporation, without any order or other
action on the part of any court or otherwise, shall hold and enjoy the
same and all rights of property, franchises, and interests, including
appointments, designations and nominations and all other rights and
interests as trustee, executor, administrator, registrar or transfer
agent of stocks and bonds, guardian, assignee, receiver, and in every
other fiduciary capacity, in the same manner and to the same extent as
such rights of property, franchises and interests were held and
enjoyed by each of the Merging Corporations. Any reference to any of
the Merging Corporations in any writing, whether executed or taking
effect before or after the Merger, shall be deemed a reference to the
Resulting Corporation if not inconsistent with the other provisions of
such writing.
2.3 EFFECTIVENESS OF PRIOR CORPORATE ACTS AND
AUTHORIZATIONS. All corporate acts, plans, policies, contracts,
approvals and authorizations of each of the Merging Corporations,
their respective shareholders, boards of directors, committees elected
or appointed by their boards of directors, officers and agents, which
were valid and effective immediately prior to the Effective Time,
shall be taken for all purposes as the acts, plans, policies,
contracts, approvals and authorizations of the Resulting Corporation
and shall be as effective and binding thereon as the same were with
respect to any of the Merging Corporations.
ARTICLE III
TREATMENT OF AND PAYMENT FOR STOCK
3.1 TREATMENT OF SHARES. At the Effective Time, by
virtue of the Merger and without any action on the part of the holders
of such shares of stock,
<PAGE> 202
(a) each share of no-par common stock, of
CIBAC issued and outstanding immediately prior to the Effective Time shall
be converted into one validly issued, fully-paid and nonassessable
share of the common stock of First Ozaukee.
(b) each share of common stock, $1.00 par value
per share, of First Ozaukee ("First Ozaukee Share") issued and
outstanding immediately prior to the Effective Time, other than First
Ozaukee Shares, the holders of which have validly demanded appraisal
of such shares pursuant to Subchapter XIII of the WBCL and shall not
have voted such shares in favor of the Merger, and First Ozaukee
Shares that are owned by Buyer immediately prior to the Merger, shall
be converted into the right to receive $15.10 in cash as may be
adjusted as of the Effective Time pursuant to Section 1.2 of the
Agreement and Plan of Reorganization (the "Merger Price").
(c) Each holder of an option pursuant to the
First Ozaukee Capital Corp. 1995 Stock Option Plan (the "First Ozaukee
Option Plan") outstanding on the date hereof and remaining outstanding
at the Effective Time shall receive from Buyer, as of the Effective
Time, whether or not the option is then exercisable, a cash payment in
an amount equal to the product of (i) the number of First Ozaukee
Shares subject to such option at the Effective Time, and (ii) the
excess, if any, of the Merger Price MINUS the exercise price per share
of such option, net of any cash which must be withheld under federal
and state income and employment tax requirements. Such cash payments
shall be in consideration of, and shall result in, the settlement and
cancellation of all such options. As a condition to the receipt of a
cash payment in cancellation of all such options, each option holder
shall execute a cancellation agreement in form and substance
reasonably satisfactory to Buyer.
(d) Until surrendered, certificates representing
First Ozaukee Shares will represent only the right to receive payment
of the Merger Price hereunder, without interest, and no holder of any
such certificates shall have any further rights as a shareholder of
First Ozaukee.
3.2 MANNER OF EXCHANGE. Upon surrender to the paying
agent as designated by Buyer of certificates representing shares of
capital stock of First Ozaukee, the holder of such option or shares
shall be paid by check the amount to which such holder is entitled
pursuant to Section 3.1 hereof.
3.3 DISSENTERS' RIGHTS. Any shareholder of First
Ozaukee who (i) files written objection to the Merger prior to or at
the meeting of shareholders of First Ozaukee at which this Plan is
submitted to a vote, (ii) does not vote in favor of the Merger at such
meeting, and (iii) makes written payment demand on the Resulting
Corporation not fewer than thirty (30) nor more than sixty (60) days
after the date on which the Resulting Corporation delivered a written
dissenters' notice to the dissenting shareholder, shall be entitled to
receive from the Resulting Corporation the fair value of the shares
held by such shareholder, subject to and in accordance with the
provisions of the WBCL, provided such shareholder shall have complied
with all applicable provisions of law.
<PAGE> 203
3.4 CONDITIONS PRECEDENT. Effectuation of the Merger
herein provided for is conditioned upon:
(a) approval of this Plan and the Merger by all
governmental and regulatory authorities and agencies with jurisdiction
over this transaction; and
(b) approval of this Plan by vote of the
shareholders of CIBAC and First Ozaukee as required by law; and
(c) procurement of all other consents and
approvals, and satisfaction of all other requirements prescribed by
law, which are necessary for consummation of the Merger.
ARTICLE IV
GENERAL PROVISIONS
4.1 POST-MERGER AGREEMENTS. Each of the Merging
Corporations hereby appoints the Resulting Corporation to be its true
and lawful attorney for the purpose of taking, in its name, place and
stead, any and all actions that the Resulting Corporation deems
necessary or advisable to vest in the Resulting Corporation title to
all property or rights of each of the Merging Corporations or
otherwise to effect the purposes of this Agreement, and each of the
Merging Corporations hereby grants to said attorney full power and
authority to take all actions necessary to effect those purposes,
including the power to execute, in its name, place and stead, such
further assignments or assurances in law necessary or advisable to
vest in the Resulting Corporation title to all property and rights of
each of the Merging Corporations.
4.2 TERMINATION. Anything herein to the contrary
notwithstanding, in the event the Agreement and Plan of Reorganization
shall have been terminated pursuant to Section 7.4 thereof, this Plan
shall automatically terminate.
4.3 AMENDMENT. This Plan may not be amended except by
an instrument in writing signed on behalf of each of the Merging
Corporations; provided, however that after this Plan has been approved
by the shareholders of the Merging Corporations, no such amendment
shall affect the rights of such shareholders in a manner which is
materially adverse to the interests of such shareholders.
4.4 CAPTIONS. The captions in this Plan have been
inserted for convenience only and shall not be considered a part of or
affect the construction or interpretation of any provision of this
Plan.
4.5 COUNTERPARTS. This Plan may be executed in any
number of counterparts, each of which when so executed shall
constitute an original, but all of which together shall constitute one
and the same instrument.
<PAGE> 204
IN WITNESS WHEREOF, each of the Merging Corporations has
caused this Plan to be executed by its duly authorized officers and
its corporate seal to be affixed hereto as of the date first above
written.
CIB ACQUISITION CORPORATION
By: /s/ J. Michael Straka
____________________________________
Its: President
FIRST OZAUKEE CAPITAL CORP.
By: /s/ Russell S. Jones
_________________________________________
Its President and Chief Executive Officer
<PAGE> 205
APPENDIX C
July 9, 1997
Board of Directors
First Ozaukee Capital Corp.
W61 N526 Washington Avenue
Cedarburg, WI 53012
Gentlemen:
First Ozaukee Capital Corp. (the "Company"), has entered
into an Agreement and Plan of Reorganization (the "Agreement") with
Central Illinois Bancorp, Inc. ("Buyer"). Pursuant to the Agreement,
at the Effective Time (as defined in the Agreement), Buyer will
acquire through merger between a newly formed subsidiary of Buyer and
the Company (the "Merger") each outstanding share of common stock, par
value $1.00 per share ("Company Common Stock") of the Company (other
than shares held by Buyer or holders of Dissenting Shares (as defined
in the Agreement)) and each share of Company Common Stock will be
converted solely into the right to receive $15.10 in cash, without
interest thereon, subject to adjustment as set forth in the Agreement
(the "Merger Price").
You have requested our opinion as to the fairness, from
a financial point of view, of the Merger Price to the holders of
Company Common Stock (other than Buyer and its affiliates).
Robert W. Baird & Co. Incorporated ("Baird"), as part of
its investment banking business, is engaged in the evaluation of
businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes.
In conducting our investigation and analysis and in
arriving at our opinion herein, we have reviewed such information and
taken into account such financial and economic factors as we have
deemed relevant under the circumstances. In that connection, we have,
among other things: (i) reviewed certain internal information,
primarily financial in nature, including projections, concerning the
business and operations of the Company furnished to us for purposes of
our analysis, as well as publicly available information including but
not limited to the Company's recent filings with the Securities and
Exchange Commission (the "SEC"); (ii) reviewed the Agreement in the
form presented to the Company's Board of Directors; (iii) compared
the historical market prices and trading activity of Company Common
Stock with those of certain other publicly traded companies we deemed
relevant; (iv) compared the financial position and operating results
of the Company with those of other publicly traded companies we deemed
relevant; and (v) compared the financial terms of the Merger with
<PAGE> 206
Board of Directors
First Ozaukee Capital Corp.
July 9, 1997
Page 2
the financial terms of certain other business combinations we deemed
relevant. We have held discussions with members of the Company's
senior management concerning the Company's historical and current
financial condition and operating results, as well as the future
prospects of the Company. As a part of our engagement, we were
requested to and did solicit third party indications of interest in
acquiring all or any part of the Company. We have also considered
such other information, financial studies, analysis and investigations
and financial, economic and market criteria which we deemed relevant
for the preparation of this opinion.
In arriving at our opinion, we have assumed and relied
upon the accuracy and completeness of all of the financial and other
information that was publicly available or provided us by or on behalf
of the Company, and have not been engaged to independently verify any
such information. We have assumed, with your consent, (i) that all
material assets and liabilities (contingent or otherwise, known or
unknown) of the Company are as set forth in the Company's financial
statements and (ii) the Merger will be accounted for using the
purchase method of accounting. We have also assumed that the
financial forecasts examined by us were prepared on reasonable bases
reflecting the best available estimates and good faith judgments of
the Company's senior management as to future performance of the
Company. In conducting our review, we have not undertaken nor
obtained an independent evaluation or appraisal of any of the assets
or liabilities (contingent or otherwise) of the Company nor have we
made a physical inspection of the properties or facilities of the
Company. Our opinion necessarily is based upon economic, monetary and
market conditions as they exist and can be evaluated on the date
hereof, and does not predict or take into account any changes which
may occur, or information which may become available, after the date
hereof.
Our opinion has been prepared at the request and for the
information of the Board of Directors of the Company, and shall not be
used for any other purpose or disclosed to any other party without the
prior written consent of Baird; provided however, that this letter may
be reproduced in full in the proxy statement to be provided to the
holders of Company Common Stock in connection with the Merger. This
opinion does not address the relative merits of the Merger and any
other potential transactions or business strategies considered by the
Company's Board of Directors, and does not constitute a recommendation
to any shareholder of the Company as to how any such shareholder
should vote with respect to the Merger. Baird has acted as financial
advisor to the Company and will receive a fee for rendering this
opinion.
In the ordinary course of our business, we may from time
to time trade the securities of the Company for our own account or the
accounts of our customers and, accordingly, may at any time hold long
or short positions in such securities. Baird is a market maker for
the Company Common Stock.
<PAGE> 207
Board of Directors
First Ozaukee Capital Corp.
July 9, 1997
Page 3
Based upon and subject to the foregoing, we are of the
opinion that, as of the date hereof, the Merger Price is fair, from a
financial point of view, to the holders of Company Common Stock (other
than Buyer and its affiliates).
Very truly yours,
ROBERT W. BAIRD & CO. INCORPORATED
By: /s/ Steven Kent
-----------------------
Its: Managing Director
<PAGE> 208
APPENDIX D
WISCONSIN DISSENTERS' RIGHTS
180.1301. DEFINITIONS
In ss. 180.1301 to 180.1331:
(1) "Beneficial shareholder" means a person who is a beneficial owner
of shares held by a nominee as the shareholder.
(1m) "Business combination" has the meaning given in s. 180.1130(3).
(2) "Corporation" means the issuer corporation or, if the corporate
action giving rise to dissenters' rights under s. 180.1302 is a merger
or share exchange that has been effectuated, the surviving domestic
corporation or foreign corporation of the merger or the acquiring
domestic corporation or foreign corporation of the share exchange.
(3) "Dissenter" means a shareholder or beneficial shareholder who is
entitled to dissent from corporate action under s. 180.1302 and who
exercises that right when and in the manner required by ss. 180.1320
to 180.1328.
(4) "Fair value", with respect to a dissenter's shares other than in a
business combination, means the value of the shares immediately before
the effectuation of the corporate action to which the dissenter
objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable. "Fair
value", with respect to a dissenter's shares in a business
combination, means market value, as defined in s. 180.1130(9)(a) 1 to
4.
(5) "Interest" means interest from the effectuation date of the
corporate action until the date of payment, at the average rate
currently paid by the corporation on its principal bank loans or, if
none, at a rate that is fair and equitable under all of the
circumstances.
(6) "Issuer corporation" means a domestic corporation that is the
issuer of the shares held by a dissenter before the corporate action.
180.1302. RIGHT TO DISSENT
(1) Except as provided in sub. (4) and s. 180.1008(3), a shareholder
or beneficial shareholder may dissent from, and obtain payment of the
fair value of his or her shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the issuer corporation
is a party if any of the following applies:
1. Shareholder approval is required for the merger by s. 180.1103 or
by the articles of incorporation.
2. The issuer corporation is a subsidiary that is merged with its
parent under s. 180.1104.
<PAGE> 209
(b) Consummation of a plan of share exchange if the issuer
corporation's shares will be acquired, and the shareholder or the
shareholder holding shares on behalf of the beneficial shareholder is
entitled to vote on the plan.
(c) Consummation of a sale or exchange of all, or substantially all,
of the property of the issuer corporation other than in the usual and
regular course of business, including a sale in dissolution, but not
including any of the following:
1. A sale pursuant to court order.
2. A sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale.
(d) Except as provided in sub. (2), any other corporate action taken
pursuant to a shareholder vote to the extent that the articles of
incorporation, bylaws or a resolution of the board of directors
provides that the voting or nonvoting shareholder or beneficial
shareholder may dissent and obtain payment for his or her shares.
(2) Except as provided in sub. (4) and s. 180.1008(3), the articles of
incorporation may allow a shareholder or beneficial shareholder to
dissent from an amendment of the articles of incorporation and obtain
payment of the fair value of his or her shares if the amendment
materially and adversely affects rights in respect of a dissenter's
shares because it does any of the following:
(a) Alters or abolishes a preferential right of the shares.
(b) Creates, alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares.
(c) Alters or abolishes a preemptive right of the holder of shares to
acquire shares or other securities.
(d) Excludes or limits the right of the shares to vote on any matter
or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights.
(e) Reduces the number of shares owned by the shareholder or
beneficial shareholder to a fraction of a share if the fractional
share so created is to be acquired for cash under s. 180.0604.
(3) Notwithstanding sub. (1)(a) to (c), if the issuer corporation is a
statutory close corporation under ss. 180.1801 to 180.1837, a
shareholder of the statutory close corporation may dissent from a
corporate action and obtain payment of the fair value of his or her
shares, to the extent permitted under sub. (1)(d) or (2) or s.
180.1803, 180.1813(1)(d) or (2)(b), 180.1815(3) or 180.1829(1)(c).
(4) Except in a business combination or unless the articles of
incorporation provide otherwise, subs. (1) and (2) do not apply to the
holders of shares of any class or series if the shares of the class or
series are registered on a national securities exchange or quoted on
the national association of securities dealers, inc., automated
<PAGE> 210
quotations system on the record date fixed to determine the
shareholders entitled to notice of a shareholders meeting at which
shareholders are to vote on the proposed corporate action.
(5) Except as provided in s. 180.1833, a shareholder or beneficial
shareholder entitled to dissent and obtain payment for his or her
shares under ss. 180.1301 to 180.1331 may not challenge the corporate
action creating his or her entitlement unless the action is unlawful
or fraudulent with respect to the shareholder, beneficial shareholder
or issuer corporation.
180.1303. DISSENT BY SHAREHOLDERS AND BENEFICIAL SHAREHOLDERS
(1) A shareholder may assert dissenters' rights as to fewer than all
of the shares registered in his or her name only if the shareholder
dissents with respect to all shares beneficially owned by any one
person and notifies the corporation in writing of the name and address
of each person on whose behalf he or she asserts dissenters' rights.
The rights of a shareholder who under this subsection asserts
dissenters' rights as to fewer than all of the shares registered in
his or her name are determined as if the shares as to which he or she
dissents and his or her other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on his or her behalf only if the beneficial shareholder
does all of the following:
(a) Submits to the corporation the shareholder's written consent to
the dissent not later than the time that the beneficial shareholder
asserts dissenters' rights.
(b) Submits the consent under par. (a) with respect to all shares of
which he or she is the beneficial shareholder.
180.1320. NOTICE OF DISSENTERS' RIGHTS
(1) If proposed corporate action creating dissenters' rights under s.
180.1302 is submitted to a vote at a shareholders' meeting, the
meeting notice shall state that shareholders and beneficial
shareholders are or may be entitled to assert dissenters' rights under
ss. 180.1301 to 180.1331 and shall be accompanied by a copy of those
sections.
(2) If corporate action creating dissenters' rights under s. 180.1302
is authorized without a vote of shareholders, the corporation shall
notify, in writing and in accordance with s. 180.0141, all
shareholders entitled to assert dissenters' rights that the action was
authorized and send them the dissenters' notice described in s.
180.1322.
180.1321. NOTICE OF INTENT TO DEMAND PAYMENT
(1) If proposed corporate action creating dissenters' rights under s.
180.1302 is submitted to a vote at a shareholders' meeting, a
shareholder or beneficial shareholder who wishes to assert dissenters'
rights shall do all of the following:
<PAGE> 211
(a) Deliver to the issuer corporation before the vote is taken written
notice that complies with s. 180.0141 of the shareholder's or
beneficial shareholder's intent to demand payment for his or her
shares if the proposed action is effectuated.
(b) Not vote his or her shares in favor of the proposed action.
(2) A shareholder or beneficial shareholder who fails to satisfy sub.
(1) is not entitled to payment for his or her shares under ss.
180.1301 to 180.1331.
180.1322. DISSENTERS' NOTICE
(1) If proposed corporate action creating dissenters' rights under s.
180.1302 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders and
beneficial shareholders who satisfied s. 180.1321.
(2) The dissenters' notice shall be sent no later than 10 days after
the corporate action is authorized at a shareholders' meeting or
without a vote of shareholders, whichever is applicable. The
dissenters' notice shall comply with s. 180.0141 and shall include or
have attached all of the following:
(a) A statement indicating where the shareholder or beneficial
shareholder must send the payment demand and where and when
certificates for certificated shares must be deposited.
(b) For holders of uncertificated shares, an explanation of the extent
to which transfer of the shares will be restricted after the payment
demand is received.
(c) A form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the
proposed corporate action and that requires the shareholder or
beneficial shareholder asserting dissenters' rights to certify whether
he or she acquired beneficial ownership of the shares before that
date.
(d) A date by which the corporation must receive the payment demand,
which may not be fewer than 30 days nor more than 60 days after the
date on which the dissenters' notice is delivered.
(e) A copy of ss. 180.1301 to 180.1331.
180.1323. DUTY TO DEMAND PAYMENT
(1) A shareholder or beneficial shareholder who is sent a dissenters'
notice described in s. 180.1322, or a beneficial shareholder whose
shares are held by a nominee who is sent a dissenters' notice
described in s. 180.1322, must demand payment in writing and certify
whether he or she acquired beneficial ownership of the shares before
the date specified in the dissenters' notice under s. 180.1322(2)(c).
A shareholder or beneficial shareholder with certificated shares must
also deposit his or her certificates in accordance with the terms of
the notice.
<PAGE> 212
(2) A shareholder or beneficial shareholder with certificated shares
who demands payment and deposits his or her share certificates under
sub. (1) retains all other rights of a shareholder or beneficial
shareholder until these rights are canceled or modified by the
effectuation of the corporate action.
(3) A shareholder or beneficial shareholder with certificated or
uncertificated shares who does not demand payment by the date set in
the dissenters' notice, or a shareholder or beneficial shareholder
with certificated shares who does not deposit his or her share
certificates where required and by the date set in the dissenters'
notice, is not entitled to payment for his or her shares under ss.
180.1301 to 180.1331.
180.1324. RESTRICTIONS ON UNCERTIFICATED SHARES
(1) The issuer corporation may restrict the transfer of uncertificated
shares from the date that the demand for payment for those shares is
received until the corporate action is effectuated or the restrictions
released under s. 180.1326.
(2) The shareholder or beneficial shareholder who asserts dissenters'
rights as to uncertificated shares retains all of the rights of a
shareholder or beneficial shareholder, other than those restricted
under sub. (1), until these rights are canceled or modified by the
effectuation of the corporate action.
180.1325. PAYMENT
(1) Except as provided in s. 180.1327, as soon as the corporate action
is effectuated or upon receipt of a payment demand, whichever is
later, the corporation shall pay each shareholder or beneficial
shareholder who has complied with s. 180.1323 the amount that the
corporation estimates to be the fair value of his or her shares, plus
accrued interest.
(2) The payment shall be accompanied by all of the following:
(a) The corporation's latest available financial statements, audited
and including footnote disclosure if available, but including not less
than a balance sheet as of the end of a fiscal year ending not more
than 16 months before the date of payment, an income statement for
that year, a statement of changes in shareholders' equity for that
year and the latest available interim financial statements, if any.
(b) A statement of the corporation's estimate of the fair value of the
shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under s.
180.1328 if the dissenter is dissatisfied with the payment.
(e) A copy of ss. 180.1301 to 180.1331.
<PAGE> 213
180.1326. FAILURE TO TAKE ACTION
(1) If an issuer corporation does not effectuate the corporate action
within 60 days after the date set under s. 180.1322 for demanding
payment, the issuer corporation shall return the deposited
certificates and release the transfer restrictions imposed on
uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the issuer corporation effectuates the corporate action,
the corporation shall deliver a new dissenters' notice under s.
180.1322 and repeat the payment demand procedure.
180.1327. AFTER-ACQUIRED SHARES
(1) A corporation may elect to withhold payment required by s.
180.1325 from a dissenter unless the dissenter was the beneficial
owner of the shares before the date specified in the dissenters'
notice under s. 180.1322(2)(c) as the date of the first announcement
to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent that the corporation elects to withhold payment
under sub. (1) after effectuating the corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and
shall pay this amount to each dissenter who agrees to accept it in
full satisfaction of his or her demand. The corporation shall send
with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a
statement of the dissenter's right to demand payment under s. 180.1328
if the dissenter is dissatisfied with the offer.
180.1328. PROCEDURE IF DISSENTER DISSATISFIED WITH PAYMENT OR OFFER
(1) A dissenter may, in the manner provided in sub. (2), notify the
corporation of the dissenter's estimate of the fair value of his or
her shares and amount of interest due, and demand payment of his or
her estimate, less any payment received under s. 180.1325, or reject
the offer under s. 180.1327 and demand payment of the fair value of
his or her shares and interest due, if any of the following applies:
(a) The dissenter believes that the amount paid under s. 180.1325 or
offered under s. 180.1327 is less than the fair value of his or her
shares or that the interest due is incorrectly calculated.
(b) The corporation fails to make payment under s. 180.1325 within 60
days after the date set under s. 180.1322 for demanding payment.
(c) The issuer corporation, having failed to effectuate the corporate
action, does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares within 60 days
after the date set under s. 180.1322 for demanding payment.
(2) A dissenter waives his or her right to demand payment under this
section unless the dissenter notifies the corporation of his or her
demand under sub. (1) in writing within 30 days after the corporation
made or offered payment for his or her shares. The notice shall
comply with s. 180.0141.
<PAGE> 214
180.1330. COURT ACTION
(1) If a demand for payment under s. 180.1328 remains unsettled, the
corporation shall bring a special proceeding within 60 days after
receiving the payment demand under s. 180.1328 and petition the court
to determine the fair value of the shares and accrued interest. If
the corporation does not bring the special proceeding within the 60-
day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall bring the special proceeding in the circuit
court for the county where its principal office or, if none in this
state, its registered office is located. If the corporation is a
foreign corporation without a registered office in this state, it
shall bring the special proceeding in the county in this state in
which was located the registered office of the issuer corporation that
merged with or whose shares were acquired by the foreign corporation.
(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain unsettled parties to the
special proceeding. Each party to the special proceeding shall be
served with a copy of the petition as provided in s. 801.14.
(4) The jurisdiction of the court in which the special proceeding is
brought under sub. (2) is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. An appraiser has
the power described in the order appointing him or her or in any
amendment to the order. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the special proceeding is entitled
to judgment for any of the following:
(a) The amount, if any, by which the court finds the fair value of his
or her shares, plus interest, exceeds the amount paid by the
corporation.
(b) The fair value, plus accrued interest, of his or her shares
acquired on or after the date specified in the dissenter's notice
under s. 180.1322(2)(c), for which the corporation elected to withhold
payment under s. 180.1327.
180.1331. COURT COSTS AND COUNSEL FEES
(1)(a) Notwithstanding ss. 814.01 to 814.04, the court in a special
proceeding brought under s. 180.1330 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court and shall assess the costs against
the corporation, except as provided in par. (b).
(b) Notwithstanding ss. 814.01 and 814.04, the court may assess costs
against all or some of the dissenters, in amounts that the court finds
to be equitable, to the extent that the court finds the dissenters
acted arbitrarily, vexatiously or not in good faith in demanding
payment under s. 180.1328.
<PAGE> 215
(2) The parties shall bear their own expenses of the proceeding,
except that, notwithstanding ss. 814.01 to 814.04, the court may also
assess the fees and expenses of counsel and experts for the respective
parties, in amounts that the court finds to be equitable, as follows:
(a) Against the corporation and in favor of any dissenter if the court
finds that the corporation did not substantially comply with ss.
180.1320 to 180.1328.
(b) Against the corporation or against a dissenter, in favor of any
other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously or not in
good faith with respect to the rights provided by this chapter.
(3) Notwithstanding ss. 814.01 to 814.04, if the court finds that the
services of counsel and experts for any dissenter were of substantial
benefit to other dissenters similarly situated, the court may award to
these counsel and experts reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
<PAGE>
<PAGE> 216
REVOCABLE PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
OF FIRST OZAUKEE CAPITAL CORP.
The undersigned hereby appoint(s) Frank M. Kennedy and Harry J.
Sanders, or either of them, as proxies for the undersigned, with full
power of substitution, to vote all the shares of common stock of First
Ozaukee Capital Corp. ("First Ozaukee") that the undersigned would be
entitled to vote if personally present at the Special Meeting of
Shareholders to be held at the Cedarburg Cultural Center, W62 N546
Washington Avenue, Cedarburg, Wisconsin, on August 6, 1997, at 10:00
a.m. local time, or at any adjournments or postponements thereof.
Said proxies are directed to vote as instructed on the matters set
forth below and otherwise at their discretion. Receipt of the
Notice of the Special Meeting and Proxy Statement are hereby acknowledged.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTIONS ARE
GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2 SET FORTH
BELOW. ---
DETATCH BELOW AND RETURN USING THE ENVELOPE PROVIDED
1. Proposal to approve the Agreement and Plan of Reorganization
between First Ozaukee and Central Illinois Bancorp, Inc. and the
related Plan of Merger between First Ozaukee and CIB Acquistion
Corporation, as more fully described in the accompanying Proxy
Statement.
FOR ______ AGAINST ______ ABSTAIN ______
2. Proposal to adjourn the Special Meeting in the event that First
Ozaukee's management should determine that such adjournment is in
the best interests of First Ozaukee and its shareholders, as
more fully described in the accompanying Proxy Statement.
FOR ______ AGAINST ______ ABSTAIN ______
Please sign exactly as your name appears on your stock
certificate and fill in the date. If your shares are held jointly,
all joint owners must sign. If you are signing as an executor,
administrator, trustee, guardian, custodian or corporate officer,
please give your full title as such.
Dated: ___________, 1997 ___________________________
Signature of Shareholder
___________________________
Signature of Shareholder
(if held jointly)
</TABLE>
