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State Financial Services Corporation
10708 W. Janesville Road
P.O. Box 467
Hales Corners, WI 53130-0467
(414) 425-1600
FAX (414) 425-8939
March 18, 1996
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
RE: Form 10-K Annual Report
State Financial Services Corporation - Commission File No. 0-18166
To Whom It May Concern:
Filed herewith pursuant to Rule 13a-1 and Regulation S-T is State Financial
Services Corporation's Form 10-K for the fiscal year ending December 31, 1995.
Pursuant to Rule 13a-1, a wire transfer in the amount of $250.00 has been
made to the Securities and Exchange Commission in care of Mellon Bank (ABA #
043000261) in payment of the required filing fee. Please charge our account
0000745614 for this fee.
Certain information is incorporated by reference in the enclosed Form 10-K
from Registrant's Annual Report to Shareholders for the year ended December 31,
1995 and the Definitive Proxy Statement for the Registrant's Annual Meeting to
be held on April 24, 1996. This electronic submission of Form 10-K includes
copies (in electronic format) of the exhibits incorporated by reference therein.
A paper copy of State Financial Services Corporation's glossy 1995 Annual Report
to Shareholders is being sent to the above-referenced address for your files.
Also included with this electronic submission pursuant to Part 232.401 of
Regulation S-T is a Financial Data Schedule as of and for the period ended
December 31, 1995.
The financial statements contained in Registrant's 1995 Annual Report do
not reflect a change from the preceding year in any accounting principle or
practice in the method of applying such principles or practices with the
exception of Registrant's adoption effective January 1, 1995 of Financial
Accounting Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan."
Very truly yours,
/s/ Michael A. Reindl
Michael A. Reindl
Senior Vice President, Controller, and Chief Financial Officer
[ARTICLE] 9
[RESTATED] NO
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[CASH] 16,107,613
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 6,540,309
[INVESTMENTS-HELD-FOR-SALE] 18,857,758
[INVESTMENTS-CARRYING] 44,225,970
[INVESTMENTS-MARKET] 44,683,716
[LOANS] 185,754,168
[ALLOWANCE] 2,711,362
[TOTAL-ASSETS] 285,037,201
[DEPOSITS] 246,217,833
[SHORT-TERM] 3,300,160
[LIABILITIES-OTHER] 2,076,341
[LONG-TERM] 1,061,844
[COMMON] 264,912
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 32,116,111
[TOTAL-LIABILITIES-AND-EQUITY] 285,037,201
[INTEREST-LOAN] 15,833,190
[INTEREST-INVEST] 3,216,002
[INTEREST-OTHER] 314,111
[INTEREST-TOTAL] 19,363,303
[INTEREST-DEPOSIT] 7,029,954
[INTEREST-EXPENSE] 7,336,142
[INTEREST-INCOME-NET] 12,027,161
[LOAN-LOSSES] 190,000
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 9,459,655
[INCOME-PRETAX] 4,858,427
[INCOME-PRE-EXTRAORDINARY] 3,279,427
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 3,279,427
[EPS-PRIMARY] 1.36
[EPS-DILUTED] 1.36
[YIELD-ACTUAL] 5.44
[LOANS-NON] 1,386,000
[LOANS-PAST] 2,000
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 614,000
[ALLOWANCE-OPEN] 1,982,941
[CHARGE-OFFS] 308,994
[RECOVERIES] 112,838
[ALLOWANCE-CLOSE] 2,711,362
[ALLOWANCE-DOMESTIC] 2,711,362
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
Allowance for loan losses increased $734,577 in third quarter 1995 due to the
inclusion of the acquired allowance related to the Company's acquisition of the
former Waterford Bancshares, Inc.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [Fee Required] For the transition period from to
---- ----
Commission File Number 0-18166
STATE FINANCIAL SERVICES CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1489983
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130
-----------------------------------------------------------
(Address and zip code of principal executive offices)
(414) 425-1600
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.10 par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 12, 1996 was approximately $28,176,912, based on the
following assumptions: (1) the market value of the Common Stock of $14.375 per
share which was equal to the closing price on the Nasdaq Stock Market on March
12, 1996; and (2) 1,960,133 shares of Common Stock held by nonaffiliates as of
March 12, 1996.
Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.
As of March 12, 1996, there were 2,650,101 shares of the Registrant's $0.10
par value Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II incorporate certain information by reference from
Registrant's Annual Report to Shareholders for the fiscal year ended
December 31, 1995, the ("Annual Report") which is filed as an Exhibit to
this Report.
Part III incorporates information by reference from Registrant's definitive
Proxy Statement relating to Registrant's 1996 Annual Meeting of
Shareholders (the "Proxy Statement") which is filed as an Exhibit to this
Report.
The Exhibits incorporate certain exhibits by reference from (1)
Registrant's Form S-1 Registration Statement filed under the Securities Act
of 1933, Registration No. 33-31517, dated October 11, 1989 and the
following amendments to said Registration Statement: Amendment No. 1 dated
December 6, 1989 and Amendment No. 2 dated March 16, 1990; (2) Amendment
No. 3 to Registrant's S-4 Registration Statement filed under the Securities
Act of 1933, Registration No. 33-46280, dated May 3, 1992; (3) Registrant's
report on Form 8-K dated June 19, 1992 filed under the Securities Exchange
Act of 1934; (4) Amendment No. 2 to Registrant's S-4 Registration Statement
filed under the Securities Act of 1933, Registration No. 33-59665, dated
July 18, 1995; and (6) Registrant's Annual Report on Form 10-K filed under
the Securities Exchange Act of 1934 for the years ended December 31, 1991,
1992, 1993, and 1994.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
INDEX
PART I Page
------ ----
Item 1. BUSINESS 1
Item 2. PROPERTIES 10
Item 3. LEGAL PROCEEDINGS 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 11
Item 6. SELECTED FINANCIAL DATA 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION RESULTS OF OPERATIONS 11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 11
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 12
Item 11. EXECUTIVE COMPENSATION 12
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 12
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 13
SIGNATURES Signature Page
EXHIBITS FILED AS PART OF FORM 10-K Exhibit Index
PART I
------
State Financial Services Corporation, together with its consolidated
subsidiaries is hereinafter referred to as the "Company", "SFSC", or
"Registrant". SFSC is a bank holding company which owns State Financial Bank
("SFB") and State Financial Bank - Waterford ("SFB - Waterford")
(collectively referred to as the "Banks"). SFB is the entity resulting from
the merger in June 1994 of the Company's previous four banks, State Bank,
Hales Corners ("State Bank"); University National Bank ("University");
Edgewood Bank ("Edgewood"); and Eastbrook State Bank ("Eastbrook") into State
Bank's charter. In 1995, SFSC acquired all of the outstanding common stock of
the former Waterford Bancshares, Inc., the parent bank holding company of
Waterford Bank, in exchange for a combination of the Company's common stock,
cash and installment notes. Waterford Bancshares, Inc. was merged into the
Company's wholly owned subsidiary, WBAC, Inc. and the name Waterford Bank was
changed to State Financial Bank - Waterford. The Company operates SFB -
Waterford as a separate banking subsidiary.
ITEM 1. BUSINESS.
- ------- --------
GENERAL
SFSC is a Wisconsin corporation headquartered in Hales Corners, Wisconsin.
The Company is a bank holding company which owns and operates State Financial
Bank with seven full-service locations and State Financial Bank - Waterford.
Four of SFB's offices, Hales Corners, Greenfield, Glendale, and Milwaukee are
located in Milwaukee County, Wisconsin, the most populous county in the state.
Three of SFB's offices; Brookfield, Muskego, and Waukesha are located in
Waukesha County, Wisconsin which is immediately west of Milwaukee County. In
addition, SFB also operates two loan production offices providing lending
outlets to Milwaukee's central city. Waterford is located in northwestern
Racine County, Wisconsin which is immediately south of Milwaukee County. The
Company was organized in 1984 to become a holding company for the former State
Bank. In 1985, State Financial completed its first bank acquisition by
purchasing the former University, located on the northeast side of Milwaukee.
The acquisition of the former Edgewood in Greenfield, Wisconsin was completed in
1987. In 1988, the former University acquired the deposit liabilities and
various fixed assets of the branch facility of St. Francis Savings Bank, SSB
located at 2650 North Downer Avenue in Milwaukee. This was the first
acquisition of a thrift facility by a bank in Wisconsin. In 1990, State
Financial acquired 4.9% of the former Eastbrook, a newly chartered bank located
in Brookfield, Wisconsin. State Financial acquired the remaining capital stock
of the former Eastbrook in 1992, making it the fourth bank in the holding
company. In 1993, the former Eastbrook acquired the deposit liabilities and
various fixed assets of the branch facility of North Shore Savings, FSB located
at 400 E. Broadway in Waukesha, Wisconsin. In 1994, the SFB opened two limited
service loan production offices serving Milwaukee's central city to provide
borrowers in those areas easier access to the SFB's lending products. In 1995,
SFSC acquired all of the outstanding common stock of the former Waterford
Bancshares, Inc., the parent bank holding company of Waterford Bank, in exchange
for a combination of the Company's common stock, cash and installment notes.
Waterford Bancshares, Inc. was merged into the Company's wholly owned
subsidiary, WBAC, Inc. The Company operates SFB - Waterford as a separate
banking subsidiary.
BUSINESS STRATEGY. SFSC is strongly committed to community banking and
places a high degree of emphasis on developing full service banking
relationships with its business and retail customers. To capitalize on
management's knowledge of its immediate market, each office is operated with
substantial independence, supported by centralized administrative and
operational functions to promote efficiency while permitting the management
responsible for each office the flexibility to concentrate on customer service
and business development in its own unique market area. To be an effective
community bank, SFSC believes the decision-making process must stem primarily
from the Banks in their credit decisions and array of products. SFSC believes
the empowerment of the day-to-day decision making to the individual office
locations remains critical to its success as an effective community banking
organization.
The Banks seeks to develop and enhance full-service banking relationships
through a systematic calling program directed at both existing customers and
referral sources from its customer base, attorneys, accountants and business
people. The officers and employees of the Banks are actively involved in a
variety of civic, charitable and community organizations both as an additional
referral source and as service to their respective communities.
PRODUCTS AND SERVICES. Through the Banks, SFSC provides a broad range of
services to individual and commercial customers. These services include
accepting demand, savings and time deposits, including regular checking
accounts, NOW accounts, money market account, certificates of deposit,
individual retirement accounts and club accounts. The Banks also offers a
variety of annuity and insurance products through its in-house securities
representative. The Banks' lending products include secured and unsecured
commercial, mortgage, construction and consumer term loans on both a fixed and
variable rate basis. Historically, the terms on these loans range from one
month to five years and are retained in the Banks' portfolio. The Banks also
provide lines of credit to commercial accounts and to individuals through home
equity and credit card plans. The Banks also originate residential real estate
loans in the form of fifteen and thirty year fixed rate first mortgages, selling
these originations in the secondary mortgage market service released.
COMPETITION AND MARKET ENVIRONMENT. SFB's' offices are located in the
Milwaukee and Waukesha metropolitan area and experience substantial competition
from other financial institutions including savings banks, credit unions, non-
bank lenders, and consumer finance companies, many of which are substantially
larger than the SFB. Within a short distance of SFB, there are numerous other
financial institutions. Waterford's office is located in the town of Waterford
and experiences substantial competition from other financial institutions
including other banks, savings banks, and consumer finance companies located in
Waterford and surrounding communities. The Banks compete for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations, hours, and other services. The Banks competes for loan
originations primarily through the interest rates and loan fees they charge, the
efficiency and quality of services they provide borrowers, and the variety of
their products. Factors affecting competition include the general and local
economic conditions and current interest rate levels. Management believes that
recent changes in the local banking industry, including mergers and
consolidations involving both commercial and thrift institutions, have resulted
in a decrease in the level of competition for small to medium sized business
customers in the Banks' market areas.
EMPLOYEES. At December 31, 1995, the Company and the Banks employed 100
full-time and 50 part-time employees. The Company considers its relationships
with its employees to be excellent. Each employee who meets the eligibility
requirements is entitled to participate in the employee benefit plans of the
Company and the Banks, which include plans for group life, accidental death and
dismemberment, medical, dental, and long-term disability income insurances;
pension, 401(k), and an Employee Stock Ownership Plan ("ESOP"). Further
information regarding executive compensation and the Company's benefit plans is
incorporated by reference from the Company's definitive Proxy Statement. See
Item 11 of this Form 10-K.
THE BANKS AND OTHER SUBSIDIARIES
At December 31, 1995, the SFB (consolidated with its subsidiaries; see
"SFB - Other Subsidiaries") had total assets of $237.0 million, net loans of
$157.8 million, total deposits of $211.0 million, stockholders' equity of $21.8
million, net income of $3.5 million, and return on average assets of 1.52%. At
December 31, 1995, SFB Waterford (consolidated with its subsidiary; see "SFB -
Waterford - Other Subsidiaries') had total assets of $43.3 million, net loans
of $25.3 million, total deposits of $35.4 million, stockholders' equity of $6.8
million, net income of $0.1 million, and annualized return on average assets of
0.5%. SFB -Waterford's net income and annualized return on average assets
represent Waterford's results from the date of its acquisition by the Company
(August 24, 1995) to December 31, 1995.
STATE FINANCIAL BANK. State Financial Bank was organized as a state
banking association under the laws of the State of Wisconsin in 1910 under the
name State Bank, Hales Corners. In June 1994, the bank's name was changed to
State Financial Bank in connection with the merger of the Company's banks into
State Bank's charter. SFB conducts business through seven full-service offices
and two loan production offices located in Milwaukee and Waukesha Counties. It
is engaged in the general commercial and consumer banking business and provides
full-service banking to individuals and businesses including the acceptance of
deposits to demand, time, and savings accounts and the servicing of such
accounts; commercial, consumer, and mortgage lending; and such other banking
services as are usual and customary for commercial banks. SFB also sells
annuities, insurance products, and other investments through two in-house
representatives. At December 31, 1995, SFB, consolidated with its subsidiaries,
comprised 83.2% of SFSC's consolidated total assets. The following tables set
forth SFB's full-service and loan production office locations.
FULL-SERVICE OFFICES - STATE FINANCIAL BANK
- -------------------------------------------
Year Acquired by
Community Address Year Originated State Financial
- --------- ------- --------------- ---------------
Hales Corners 10708 West Janesville Road 1910
Muskego S76 W17655 Janesville Road 1968
Milwaukee 2650 North Downer Avenue 1971 1985
Greenfield 4811 South 76th Street 1978 1987
Glendale 7020 North Port Washington Road 1990
Brookfield 12600 West North Avenue 1990 1992
Waukesha 400 East Broadway 1977 1993
Organized de novo by SFB or a predecessor thereof.
LOAN PRODUCTION OFFICES - STATE FINANCIAL BANK
- ----------------------------------------------
Community Address Year Originated
- --------- ------- ---------------
Milwaukee 2314 South 27th Street 1994
Milwaukee 2200 North 12th Street 1994
Organized de novo by SFB.
SFB Other Subsidiaries. SFB has two wholly owned subsidiary corporations
which are consolidated into its operations. Hales Corners Investment
Corporation is a subsidiary created to manage the majority of SFB's investment
portfolio to enhance the overall return on SFB's investment securities. Hales
Corners Development Corporation is a subsidiary which owns the real estate
related to the Hales Corners and Muskego offices, seven commercial and
residential rental properties located adjacent to the Hales Corners office, one
residential rental property in Greenfield, and a vacant piece of land in New
Berlin held as a potential branch site.
State Financial Bank - Waterford. State Financial Bank - Waterford was
organized as a state banking association under the laws of the State of
Wisconsin in 1906 under the name Waterford Bank. SFSC acquired the common stock
of the former Waterford Bank's parent holding company, Waterford Bancshares,
Inc. in exchange for a combination of the Company's common stock, cash, and
installment notes. Waterford Bancshares, Inc. was merged into the company's
wholly owned subsidiary, WBAC, Inc. Following the acquisition, the Company
changed Waterford Bank's name to State Financial Bank - Waterford to connect the
bank's identity to SFSC. SFB - Waterford operates as a separate banking
subsidiary of SFSC from its principal office located at 217 North Milwaukee
Street, Waterford, Wisconsin. SFB - Waterford is engaged in general commercial
and consumer banking, including the acceptance of deposits to demand, time, and
savings accounts and the servicing of such accounts; commercial, consumer, and
mortgage lending; and such other banking services as are usual and customary for
commercial banks. At December 31, 1995, SFB - Waterford, consolidated with its
subsidiary, comprised 15.2% of SFSC's consolidated total assets.
SFB - Waterford Other Subsidiary. SFB - Waterford has a wholly owned
subsidiary, Waterford Investment Corporation, formed in 1995 to manage the
majority of SFB - Waterford's investment portfolio to enhance the overall return
on the bank's investment securities.
SUPERVISION AND REGULATION
SFSC and the Banks are subject to regulation under both federal and state
law. To the extent that the information given below consists of summaries of
statutory provisions, it is qualified in its entirety by reference to the
statutory provisions described.
BANK HOLDING COMPANY REGULATION. SFSC and WBAC, each Wisconsin
corporations, are bank holding companies subject to the federal Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"), and is registered
with the Board of Governors of the Federal Reserve Bank ("FRB"). The Holding
Company Act requires prior approval of the FRB before a bank holding company can
(1) acquire, directly or indirectly, ownership or control of more than five
percent (5%) of the voting stock of a bank; (2) acquire substantially all of the
assets of a bank; (3) merge or consolidate with another bank holding company; or
(4) expand its services to include other services closely related to banking.
If the effect of a proposed acquisition, merger or consolidation may be to
substantially lessen competition or tend to create a monopoly, the FRB cannot
approve the acquisition unless it finds that the anticompetitive effects of the
acquisition, merger or consolidation are clearly outweighed by the convenience
and needs of the community to be served.
With certain limited exceptions, the Holding Company Act requires bank
holding companies to divest themselves of direct or indirect ownership or
control of the voting shares of companies which are neither banks nor bank
holding companies. A bank holding company is also prohibited, with limited
exceptions, from acquiring direct or indirect ownership or control of more than
five percent (5%) of the voting shares of any company which is not a bank, and
from engaging directly or indirectly in activities not closely related to
banking or managing or controlling banks. An exception to this prohibition
permits ownership of the shares of a company, the activities of which the FRB,
after due notice and opportunity for hearing, has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Notwithstanding this exception, the Financial Institutions Regulatory
and Interest Rate Control Act of 1978 ("FIRA"), authorizes the FRB to require
the divestiture of any nonbank activities where the FRB has reasonable cause to
believe that the ownership of such subsidiary or the carrying on of such
activities constitutes a serious risk to the financial safety, soundness, or
stability of a bank holding company subsidiary bank and is inconsistent with
sound banking principles or with the purpose of the Holding Company Act or with
the Financial Institutions Supervisory Act of 1966. If ordered, such
divestiture or termination would have to be consummated within 180 days or such
longer period as the FRB should direct.
A bank holding company is not permitted to acquire more than five percent
(5%) of the voting shares of banks located in another state unless the
acquisition of a state bank by an out-of-state bank holding company is
specifically authorized by the statutes of the state in which such bank is
located. Further, under Section 106 of the 1970 amendments to the Holding
Company Act and the FRB's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or the lease or sale of property or the
furnishing of services.
The Federal Change in Bank Control Act generally requires the prior
approval of the FRB of any proposed transaction in which a party would (a) be
acquiring at least 25 percent of any class of voting securities of a bank
holding company (such as SFSC and WBAC), or (b) would, after the transaction,
own, control, or hold with power to vote 10 percent or more (but less than 25
percent) of any class of voting securities of the institution, if (I) such
institution has registered securities under Section 12 of the Exchange Act; or
(ii) no other person will own a greater percentage of that class of voting
securities immediately after the transaction. The Company's Common Stock is
registered under Section 12 of the Exchange Act.
SFSC and WBAC, Inc. are required to file with the FRB an annual report of
its operations and the operations of its subsidiaries and significant
affiliates. SFSC and the Banks may also be examined by the FRB.
BANK REGULATION. The Banks are affected by the credit policies of other
monetary authorities, including the FRB, which regulate the national supply of
bank credit. Such regulation influences overall growth of bank loans,
investments and deposits and may also affect interest rates charged on loans and
paid on deposits. The monetary policies of the FRB have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future.
The Banks' deposits are insured under the provisions of the Federal Deposit
Insurance Act and they are, therefore, subject to regulation by the FDIC. The
Banks are Wisconsin state chartered banks which are not members of the Federal
Reserve System ("non-member banks") and are supervised and examined by the
Wisconsin Commissioner of Banking ("Wisconsin Commissioner") and the Federal
Deposit Insurance Corporation ("FDIC").
The Federal Deposit Insurance Act requires that the appropriate regulatory
authority (the FDIC in the case of state non-member bank such as State Financial
Bank) approve any merger and/or consolidation by or with an insured bank, as
well as the establishment or relocation of any bank or branch office.
Transactions between a bank and its holding company are subject to various
restrictions imposed by state and federal regulatory agencies. Such
transactions include loans and other extensions of credit, purchases of
securities, and payments of fees or other distributions.
The FDIC also supervises compliance with the provisions of FIRA. FIRA
places restrictions on loans to executive officers and persons owning or
controlling more than ten percent of the voting shares of a member bank's stock
and to officers, directors or controlling persons of a bank holding company
controlling such member bank. Under these restrictions, the aggregate amount of
loans to each such executive officer or controlling person, aggregated with
loans to any company controlled by, or any political or campaign committee for
the benefit of or controlled by, such officer or person, may not exceed the
statutory limits on loans to a single borrower (ten percent of paid in and
unimpaired capital stock plus ten percent of unimpaired surplus).
FIRA also provides that any loans to a bank officer, executive officer (as
defined to include holding company directors and executive officers) or
controlling person, aggregated with loans to that individual's controlled
companies or political or campaign committees in excess of $25,000, must be
approved in advance by majority vote of the Banks' board of directors, with the
interested party abstaining. A controlling person of a bank will be deemed to
control another company only if that individual: (1) owns, controls or has the
power to vote twenty-five percent or more of the company voting stock; (2)
controls the election of a majority of the company's directors; or (3) has the
power to exercise a controlling influence over the company's management or
policy. In addition, loans to directors, executive officers or controlling
persons must be made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons, and such loans must not involve more than the normal risk of
repayment or present other unfavorable features.
The foregoing provisions relating to loans to executive officers, directors
and controlling shareholders are made applicable to state non-member banks and
national banks under federal law and regulation.
FIRA authorizes the appropriate federal bank regulatory agency to assess
civil penalties against banks and individuals participating in the affairs of
banks for violations of limitations on such loans to insiders and affiliates.
Such penalties could amount to $1,000 per day for each violation.
For purposes of each of these insider provisions, an officer, director, or
controlling person of a bank holding company controlling an FDIC-insured bank
will be deemed to be an officer, director or controlling person of the insured
bank.
FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989
("FIRREA"). FIRREA, which was enacted into law in August 1989, significantly
expands the regulatory and enforcement powers of all Federal regulatory agencies
over the institutions which they regulate. FIRREA significantly expanded the
grounds upon which a receiver or conservator may be appointed by the applicable
regulatory agency without consent of or notice to the institution. This
authority enhances the ability of regulatory authorities to engage in "early
intervention"to take control of an institution even though it may not yet be
insolvent. Included in the new grounds are "having substantially insufficient
capital,"the incurrence or likely incurrence of losses that will deplete all
or substantially all of the institution's capital and no reasonable prospect for
the capital to be replenished without federal assistance, and a violation of law
or regulations which is likely to weaken the condition of the institution.
Other provisions of FIRREA which affect commercial banks and bank holding
companies include immediate authority to acquire healthy or capital-impaired
thrift institutions and elimination of cross-marketing restrictions on bank
holding companies which own thrift institutions. FIRREA also requires banks in a
multibank holding company (such as SFSC) to indemnify the federal deposit
insurance fund against losses it incurs with respect to their affiliated banks,
which in effect makes the equity investment of a bank holding company in its
healthy banks available to the FDIC to assist the holding company's failed or
failing bank subsidiaries.
FIRREA significantly increases the enforcement authority of federal banking
regulators. It allows the FDIC to suspend an institution's federal deposit
insurance coverage on 10 days prior notice and it increases the FDIC's civil
money penalty authority to $25,000 per day per violation or to $1 million per
day where such conduct is in "reckless disregard for the safety and soundness
of the institution."Authority to impose such penalties is extended to failures
to file, the filing of false reports of condition or refusal to permit a
regulatory examination. Standards for imposition of penalties and cease and
desist orders would be lowered and the range of persons subject to them
broadened. Criminal penalties would also be increased and forfeiture would be
made available as a sanction for bank property which represents the proceeds of
a criminal violation of certain banking statutes.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT ("FDICIA"). In
December 1991 FDICIA was enacted, substantially revising the Banks regulatory
and funding provisions of the Federal Deposit Insurance Act and several other
important federal banking statutes. In general, FDICIA includes provisions,
among others, to: (I) increase the FDIC's line of credit with the U.S. Treasury
in order to provide the FDIC with additional funds to cover the losses of
federally insured banks; (ii) reform the deposit insurance system, including the
implementation of risk-based deposit insurance premiums; (iii) establish a
format for closer monitoring of financial institutions and to enable prompt
corrective action by banking regulators when a financial institution begins to
experience financial difficulty; (iv) establish five capital levels for
financial institutions pursuant to the prompt corrective action guidelines (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized) that would impose more
scrutiny and restrictions on less capitalized institutions; (v) require the
banking regulators to set operational and managerial standards for all insured
depository institutions and their holding companies; including, under certain
circumstances, limits on excessive compensation to executive officers,
directors, employees and principal stockholders, and establish standards for
loans secured by real estate; (vi) adopt certain accounting reforms and require
annual on-site examinations of federally insured institutions and the ability to
require independent audits for banks and thrifts; (vii) revise risk-based
capital standards to ensure that they (a) take adequate account of interest-rate
changes, concentration of credit risk and the risks of nontraditional
activities, and (b) reflect the actual performance and expected risk of loss of
multi-family mortgages; and (viii) restrict state-chartered banks from engaging
in activities not permitted for national banks unless they are adequately
capitalized and have FDIC approval. Further, FDICIA permits the FDIC to make
special assessments on insured depository institutions, in amounts determined by
the FDIC to be necessary to give it adequate assessment income to repay amounts
borrowed from the U.S. Treasury and other sources or for any other purposes the
FDIC deems necessary. FDICIA also grants authority to the FDIC to establish
semiannual assessment rates on Bank Insurance Fund ("BIF") and Savings
Association Insurance Fund ("SAIF") member banks so as to maintain these funds
at the designated reserve ratios. In addition, FDICIA removed the previous
limit that restricted the FDIC to only two increases in deposit insurance
premiums each year; therefore, the FDIC may adopt an increase at any time. The
FDIC has adopted a new risk-based premium schedule for deposits insured under
the BIF, which includes the Banks' deposits. The new schedule took effect in
September, 1995 (retroactively effected to June, 1995) when the FDIC determined
that the BIF had reached its required ratio of 1.25% of insured deposits. Like
the existing system, the new assessments are based on a combination of a bank's
capital condition and supervisory evaluations. Under the new assessment
schedule, the risk-based premiums for well-capitalized institutions receiving
satisfactory or greater supervisory ratings were reduced to 4 basis points for
each $100 of deposits compared to the previous 23.5 basis points per each $100
of deposits. Due to BIF funding remaining in excess of 1.25% of insured FDIC
deposits, the FDIC further reduced the assessment rate for well-capitalized
institutions receiving satisfactory or greater supervisory ratings to 0 basis
points per each $100 of deposits (subject to a $2,000 minimum annual premium)
effective January 1, 1996.
Pursuant to their statutory mandate, the banking regulators adopted
regulations concerning certain of the provisions of FDICIA. Uniform prompt
corrective action rules became effective on December 19, 1992. Generally, these
rules establish five prompt corrective action capital categories, with certain
requirements and limitations imposed on certain of these categories. Generally
as a bank's capital ratios decrease, it becomes subject to a series of
increasingly restrictive actions, including, if an institution is found to be
critically undercapitalized, a restriction on the payment of principal or
interest on the institution's subordinated debt. In order to qualify for the
"well capitalized" category, an institution must have total risk-based capital
in excess of 10.0%, Tier 1 risk-based capital in excess of 6.0%, Tier 1 leverage
capital in excess of 5.0% and not be subject to any capital order or directive.
Future legislative proposals, possibly including substantial restructuring
and modernization of financial institution regulations, could, if implemented,
have a dramatic effect on both the costs of doing business and the competitive
factors facing the Banking industry. In addition, the various banking
regulatory agencies may propose additional rules and regulations to implement
and enforce existing legislation or establish new requirements. The precise
terms or timing of any new legislative or regulatory proposals that might be
adopted cannot be predicted by SFSC. Therefore, SFSC is unable to determine as
of this date the effect, if any, such proposals would have on its financial
condition or future operations.
REGULATORY CAPITAL REQUIREMENTS. In 1990, the Federal Reserve implemented
additional capital requirements calling for risk weights to be assigned to on-
and-off balance sheet items in arriving at risk-adjusted total assets.
Effective December 19, 1992, the FRB, the FDIC and the OCC have established five
capital levels for financial institutions under its prompt corrective action
regulations, as follows: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." This framework is intended to supplement existing
supervisory authority and does not limit the regulator's exiting authority under
other statutes or regulations to address capital deficiencies or other
violations of law. A well capitalized bank or bank holding company must satisfy
certain percentage tests and not by subject to any regulatory capital order or
directive. To be considered well capitalized, a bank or bank holding company
must have a Tier 1 leverage ratio in excess of 5.0%, a Tier 1 risk-based capital
ratio in excess of 6.0% and a total risk-based capital ratio in excess of 10.0%.
At December 31, 1995, the Company the Banks meet the definition of "well-
capitalized"institutions.
The following table presents the Bank's Tier 1 leverage ratio, Tier 1 risk-
based capital ratio, and total risk-based capital ratio as of December 31, 1995,
compared to the minimum requirements for these ratios and the applicable "well-
capitalized"standards. The risk-based capital ratios are based upon Tier 1
capital (which does not include any addition for the allowance for loans losses)
and total risk-based capital (which considers the allowance for loans losses as
capital to the extent of 1.5% of risk-weighted assets). The Company's
consolidated capital ratios can be found in the Annual Report under the caption
"Capital Resources."
Regulatory Requirements
-----------------------
State State Financial
Well- Financial Bank -
Minimum Capitalized Bank Waterford
------- ----------- ---- ---------
Tier 1 leverage ratio 3.00% 5.00% 9.08% 13.63%
Tier 1 risk-based capital ratio 4.00 6.00 13.03 22.80
Total risk-based capital ratio 8.00 10.00 14.24 24.08
COMMUNITY REINVESTMENT ACT OF 1977 ("CRA"). Under CRA, a bank's
applicable regulatory authority (the FDIC or the OCC) is required to assess the
record of each financial institution which it regulates to determine if the
institution meets the credit needs of its entire community, including low and
moderate-income neighborhoods served by the institution, and to take that record
into account in its evaluation of any application made by such institution for,
among other things, approval of the acquisition or establishment of a branch or
other deposit facility, an office relocation, a merger or the acquisition of
shares of capital stock of another financial institution. The regulatory
authority prepares written evaluations of an institution's record of meeting the
credit needs of its entire community and assigns a rating.
SFB has been reviewed for compliance with CRA by the applicable regulatory
authority; receiving a "satisfactory" rating for its compliance with CRA. SFB
- - Waterford has been reviewed for compliance with CRA by the applicable
regulatory authority; receiving an "outstanding" rating for its compliance
with CRA.
DIVIDEND LIMITATIONS. Wisconsin state banks may declare and pay dividends
out of undivided profits after all expenses, losses, required reserves, taxes,
interest and any required transfers to a surplus fund required under state law.
Wisconsin business corporations, such as SFSC, may pay dividends out of
unreserved and unrestricted earned surplus, provided they do not render the
corporation insolvent.
Federal regulators have authority to prohibit a bank from engaging in what
in their opinion constitutes an unsafe or unsound practice in conducting its
business, including the payment of dividends.
BRANCHING. State banks may establish branches anywhere in Wisconsin (or in
any other state with the additional approval of that state's regulator). The
establishment of a new branch or the closing of a branch requires regulatory
approval.
INTERSTATE OPERATIONS. In May 1986, the Wisconsin Interstate Banking Act
was enacted, which authorizes acquisitions of banks and savings and loan
associations in an interstate region consisting of Wisconsin, Illinois, Indiana,
Iowa, Kentucky, Michigan, Minnesota, Missouri and Ohio, provided reciprocal
legislation is in effect in the other state.
Effective September 29, 1995, Wisconsin adopted new legislation which
repealed the former provisions on interstate acquisitions of banks effective
January 1, 1987. The previous statute dealt with interstate acquisitions of
Wisconsin banks or bank holding companies by bank holding companies located
within eight additional regional states (Illinois, Indiana, Iowa, Kentucky,
Michigan, Minnesota, Missouri, and Ohio). Under the old statue, a Wisconsin
bank could acquire an interest in or merge with one or more "regional" banks,
and a Wisconsin bank holding company could acquire an interest in or merge with
one or more regional banks or bank holding companies in the defined eight state
region. Banks and bank holding companies in the eight state region could also
undertake acquisitions and mergers involving Wisconsin banks and bank holding
companies. Exercise of these powers by the regional entities was conditioned on
compliance with the statutes of the regional state and subject to the approval
and regulation by the Wisconsin Commissioner, who could disapprove of any
acquisition found not to be in the best interest of the public, or failing to
meet other statutory procedures. In addition, regional banks or holding
companies could not acquire an entity unless that entity had been in existence
for at least five years.
Under the new statute effective September 29, 1995, future acquisitions of
Wisconsin banks by companies located outside the eight-state region are now
subject to the prior approval of the Wisconsin Commissioner as well as other
limiting provisions of the new statute. This expanded coverage was adopted in
response to federal legislation enacted in 1994 which authorized nationwide
interstate acquisitions of banks by bank holding companies, effective the same
date as the adoption of the new Wisconsin statute. The new statute continues
the requirement that in-state banks acquired by out-of-state holding companies
must have been in existence and continuous operation for at least five years.
Such provision is not applicable to intrastate acquisitions. The new law also
prohibits acquisitions that would result in a state-wide deposit concentration
of thirty percent or more.
Wisconsin's previous statute included a provision authorizing the merger of
in-state banks with regional state banks. Such provision was omitted from the
new statute. Under the federal interstate banking legislation enacted in 1995,
interstate bank mergers will generally not be permissible until June 1, 1997,
subject to provisions permitting individual states to either "opt-in" or
"opt-out" prior to that date. Accordingly, cross border bank mergers are not
covered under the new law and are not presently authorized for Wisconsin banks,
but may be the subject of future legislation.
OTHER REGULATION. The activities and operations of the Banks are subject
to a number of other federal and state laws and regulations, including, among
others, state usury and consumer credit laws, the federal Truth-In-Lending Act
and Regulation Z, the federal Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, antiredlining legislation, the antitrust laws and,
in certain respects, federal and state securities laws.
CROSS REFERENCE TO ANNUAL REPORT
Certain information required by Industry Guide 3 is included in the
Management's Discussion and Analysis included with the Annual Report and is
incorporated herein by reference per the following schedule.
Annual Report
Guide 3 Heading Annual Report Heading Page Number
--------------- --------------------- -----------
I Distribution of Assets,
Liabilities and
Stockholders' Equity;
Interest Rates and
Interest Differential Income Statement Analysis 3
II Investment Portfolio Investment Activities 10
III Loan Portfolio Lending Activities 8
IV Summary of Loan Risk Elements in the
Loss Experience Loan Portfolio 9
V Deposits Deposits 12
VI Return on Equity and Assets Income Statement Analysis
and Capital Resources 7,14
The following schedule of projected loan losses by category for the period
January 1, 1996 through December 31, 1996, required by Industry Guide 3 is not
included in Management's Discussion and Analysis in the Annual Report (dollars
in thousands).
Charge-offs Recoveries Net
----------- ---------- ---
Commercial $135 $15 $120
Installment 105 20 85
Real estate 63 5 58
Other 72 7 65
---- --- ----
TOTAL $375 $47 $328
ITEM 2. PROPERTIES
- -------- ----------
The following table sets forth the locations of the Company's full-service
banking offices.
Owned/ Lease
Office Address Sq. Feet Leased Expires
- ------ ------- -------- ------ -------
Hales Corners 10708 W. Janesville Road 37,000 Owned n/a
Muskego S76 W17655 Janesville Road 2,680 Owned n/a
Milwaukee 2650 N. Downer Avenue 3,000 Leased 2000
Greenfield 4811 S. 76th Street 9,000 Leased 2007
Glendale 7020 N. Port Washington Road 7,500 Leased 2010
Brookfield 12600 W. North Avenue 4,800 Owned n/a
Waukesha 400 E. Broadway 3,300 Owned n/a
Waterford 217 N. Milwaukee Street 10,100 Owned n/a
Property is owned by SFB's wholly owned subsidiary, Hales Corners
Development Corporation.
SFB leases this property from Edgewood Plaza Joint Venture. See "Item 1.
Election of Directors-Certain Transactions and Other Relationships with
Management Principal Shareholders"in the Company's Proxy Statement for further
information. SFB subleases space to two other occupants of Edgewood Plaza. The
first sublease covers approximately 1,700 square feet of the floor space of
Edgewood Plaza under a lease which expires on November 30, 1997. The other
sublease covers approximately 2,500 square feet of the floor space of Edgewood
Plaza under a lease which expires on December 27, 1997. In 1993, SFB executed
an extension of its lease with Edgewood Plaza which extends the SFB's lease
through December, 2007. Under the terms of this extension, SFB will lease
approximately 4,100 square feet of the floor space of Edgewood Plaza. The
reduction in space under the lease extension is related to Edgewood Plaza's
assumption of the space currently sublet by SFB to the two aforementioned
tenants of Edgewood Plaza.
SFB subleases approximately 1,200 square feet of its space in Glendale
to a third party.
The following table sets forth the locations of the Company's loan
production offices.
Office Address Sq. Feet Owned/Leased Lease Term
- ------ ------- -------- ------------ ----------
Milwaukee 2314 South 27th Street 100 Leased month to month
Milwaukee 2200 North 12th Street 100 Leased month to month
ITEM 3. LEGAL PROCEEDINGS
- -------- -----------------
From time to time, the Company and the Banks are party to legal proceedings
arising out of their general lending activities and other operations. However,
there are no pending legal proceedings to which the Company or the Banks are a
party, or to which their property is subject, which, if determined adversely to
the Company, would individually or in the aggregate have a material adverse
effect on its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------- ---------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- -------- --------------------------------------------------------------------
The information contained under the caption "Investor Information"
beginning on page 31 of the Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- -------- -----------------------
The information contained under the caption "Selected Consolidated
Financial Data"appearing on page 2 of the Annual Report is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The information contained under this caption beginning on page 3 of the
Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------- -------------------------------------------
The Consolidated Financial Statements beginning on page 16 of the Annual
Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICER OF THE REGISTRANT
- -------- -------------------------------------------------
The information contained under the captions "Item 1. Election of
Directors-Directors"and "Executive Officers" in the Proxy Statement is
incorporated herein by reference.
PART 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information contained under the caption "Item 1. Election of
Directors-Compensation of Executive Officers"in the Proxy Statement is
incorporated herein by reference.
PART 12. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND BENEFICIAL
- -------- -------------------------------------------------------------------
OWNERS
- ------
The information contained under the caption "Item 1. Election of
Directors-Security Ownership of Management and Certain Beneficial Owners" in
the Proxy Statement is incorporated herein by reference.
PART 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information contained under the caption "Item 1. Election of
Directors-Certain Transactions and Other Relationships with Management and
Principal Shareholders"in the Proxy Statement is incorporated herein by
reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) Documents filed:
1. Financial Statements. The following Consolidated Financial Statements
---------------------
of the Company and subsidiaries, included in the Annual Report of the Registrant
to its shareholders for the year ended December 31, 1995, are incorporated by
reference in Item 8:
Annual Report
Page #
------
Report of independent auditors 15
Consolidated balance sheets -
December 31, 1995 and 1994 16
Consolidated statements of income -
Years ended December 31, 1995, 1994, and 1993 17
Consolidated statements of stockholders' equity -
Years ended December 31, 1995, 1994, and 1993 18
Consolidated statements of cash flows -
Years ended December 31, 1995, 1994, and 1993 19
Notes to Consolidated Financial Statements 20
2. Financial Statement Schedules. Schedules to the Consolidated
------------------------------
Financial Statements required by Article 9 of Regulation S-X are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. Exhibits. See Exhibit Index, included as the last pages of this
---------
report, which is incorporated herein by reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the fourth
quarter of the fiscal year under this report.
(c) Exhibits:
See Exhibit Index, which is filed with this Form 10-K following the
signature page and is incorporated herein by reference.
(d) Financial Statement Schedules:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
By: /s/ Michael J. Falbo
--------------------
Michael J. Falbo, President and Chief Executive Officer
Date: March 12, 1996
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. The Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PRINCIPAL EXECUTIVE OFFICERS
/s/ Jerome J. Holz
- -------------------------
Jerome J. Holz Chairman of the Board and Vice President March 12, 1996
/s/ Michael J. Falbo
- -------------------------
Michael J. Falbo President and Chief Executive Officer March 12, 1996
/s/ Michael A. Reindl
- -------------------------
Michael A. Reindl Senior Vice President, Controller,
and Chief Financial Officer March 12, 1996
DIRECTORS
/s/ Jerome J. Holz
- -------------------------
Jerome J. Holz Director March 12, 1996
/s/ Michael J. Falbo
- -------------------------
Michael J. Falbo Director March 12, 1996
/s/ Richard A. Horn
- -------------------------
Richard A. Horn Director March 12, 1996
/s/ Barbara E. Holz-Weis
- -------------------------
Barbara E. Holz-Weis Director March 12, 1996
- -------------------------
Robert R. Spitzer Director March 12, 1996
/s/ David M. Stamm
- -------------------------
David M. Stamm Director March 12, 1996
STATE FINANCIAL SERVICES CORPORATION
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED December 31, 1995
NOTE: To maintain a set of exhibit reference numbers consistent with
Registrant's prior filings under the Securities Act of 1933 and the
Securities Act of 1934, Registrant has intentionally omitted exhibit
reference numbers which pertain to exhibits which are no applicable or in
effect. Except as specifically noted below, all of the exhibits
identified are filed herewith.
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of the Registrant as Amended and Restated
effective April 21, 1993.
3.2 Bylaws of Registrant, as amended and restated effective February 24,
1993.
10.1 Lease between SFB (formerly State Bank, Hales Corners) and Hales
Corners Development Corporation (10708 West Janesville Road, Hales
Corners, Wisconsin).
10.2 Lease between SFB (formerly State Bank, Hales Corners) and Hales
Corners Development Corporation (S76 W17655 Janesville Road, Muskego,
Wisconsin).
10.3 Lease between SFB (formerly Edgewood Bank) and Edgewood Plaza Joint
Venture (4811 South 76th Street, Greenfield, Wisconsin).
10.6 Lease between SFB (formerly University National Bank) and Northeast
Corporate Center (7020 North Port Washington Road, Milwaukee,
Wisconsin).
10.7 Deferred Compensation Agreement between Registrant and Jerome J. Holz
dated December 6, 1980.
10.10 Employee Stock Ownership Plan and Employee Stock Ownership Trust
Agreement.
10.13 Lease between SFB (formerly University National Bank) and Downer
Investments (2650 North Downer Avenue, Milwaukee, Wisconsin)
10.14 Agreement and Plan of Reorganization between Registrant and Eastbrook
State Bank, dated January 22, 1992, as amended and restated.
10.15 Branch Purchase and Assumption Agreement between Eastbrook State Bank
and North Shore Bank, FSB, dated December 29, 1992.
10.16 Agreement and Plan of Merger By and Among Registrant, WBAC, Inc., and
Waterford Bancshares, Inc. Dated April 12, 1995.
13 Registrant's Annual Report to security holders for the fiscal year
ended December 31, 1995.
22 Subsidiaries of Registrant.
24 Consent of Ernst & Young LLP.
99.1 State Financial Services Corporation 1990 Stock Option/Stock
Appreciation Rights and Restricted Stock Plan for Key Officers
and Employees, as amended on March 10, 1993.
99.2 State Financial Services Corporation 1990 Director Stock Option Plan,
as amended March 10, 1993.
99.3 State Financial Services Corporation Supplemental Executive Retirement
Plan for Michael J. Falbo effective November 22, 1994.
99.4 Registrant's Proxy Statement relating to its Annual Meeting of
Shareholders to be held on April 24, 1996.
Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1992.
Incorporated by reference from Registrant's registration statement on Form
S-1, Registration Number 33-31517 (the "Form S-1") (dated October 11, 1989).
Incorporated by reference from Amendment No. 1 to the Form S-1 (dated
December 6, 1989).
Incorporated by reference from Amendment No.2 to the Form S-1 (dated March
6, 1989).
Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1991.
Incorporated by reference from Exhibit 2.1 to Amendment No. 3 to
Registrant's registration statement on Form S-4, Registration Number 33-46280,
dated May 3, 1992.
Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1993.
Incorporated by reference from Amendment No. 2 to the Form S-4 (dated July
18, 1995).
Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1994.
The issuer, State Financial Services Corporation, will furnish a copy of
any exhibit described above upon request and upon reimbursement to the issuer of
its reasonable expenses of furnishing such exhibit, which shall be limited to a
photocopying charge of $0.25 per page and, if mailed to the requesting party,
the cost of first-class postage.
EXHIBIT 13
STATE FINANCIAL SERVICES CORPORATION
1995 ANNUAL REPORT
PROFILE:
In 1995, State Financial Services Corporation (the "Company") based in Hales
Corners, Wisconsin became a multi bank holding company with the acquisition of
the former Waterford Bancshares in August. The Company owns and operates State
Financial Bank ("SFB") with seven offices located in the Milwaukee and
Waukesha areas and State Financial Bank-Waterford ("Waterford") with one
office in Waterford (collectively referred to as the "Banks").
Each of our member banks is built on the traditions of community banking.
This is more a statement of commitment than of size. The Company believes not
only in superior customer service but in rolling up our sleeves and becoming
involved in the community. Employees from all areas of SFB and Waterford
volunteer their time and talents to assist where we can in the neighborhoods we
serve.
At December 31, 1995, the Company had total assets of $285,037,000, total
loans of $185,754,000, total deposits of $246,218,000, and total equity of
$32,381,000. The Company's stock is traded on the Nasdaq Stock Market under the
symbol "SFSW."
In an ever changing industry with broader reaching competition and escalating
uses of technologically based delivery systems, SFB and Waterford remain
committed to providing the products and services our customers need without
losing sight of the "person" in personalized service. The Company and the
Banks focus on PUTTING PEOPLE FIRST.
TABLE OF CONTENTS
Letter to Shareholders................................... page 1
Selected Consolidated Financial Data..................... page 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... page 3
Report of Management..................................... page 15
Report of Independent Auditors........................... page 15
Consolidated Balance Sheets.............................. page 16
Consolidated Statements of Income........................ page 17
Consolidated Statements of Stockholders Equity........... page 18
Consolidated Statements of Cash Flow..................... page 19
Notes to Consolidated Financial Statements............... page 20
Investor Information..................................... page 32
Directors and Officers................................... inside back cover
LETTER TO THE SHAREHOLDERS
A Road Map to Success:
Dear Stockholders:
As we mapped out the direction of State Financial Services Corporation for
1995 we set goals which were challenging yet attainable. We're pleased to
report we not only achieved those goals but surpassed them. Record earnings in
1995 have enabled us to increase the cash return to our stockholders for the
seventh consecutive year. The road to this success has been paved with
opportunity, hard work, and diligence.
In 1995, we reported net income of $3,279,000 for a 1.33% return on average
assets and an 11.22% return on average equity. Total assets were $285,037,000
at December 31, 1995, a $59.9 million increase from year end 1994. Our desire
is to increase assets through a combination of internal growth and acquisitions.
We are pleased to report successes in both of these areas during 1995.
Internally, assets increased $19.4 million or 8.6% over year end 1994. In an
intensely competitive market, we are elated with the efforts put forth by our
employees which produced 1995's internal growth results. Community banking and
personal service go hand in hand at State Financial Services Corporation. Our
1995 internal growth results reinforce the belief that our community banking
opportunities will not only continue, but will flourish as we reinforce in the
marketplace the foundations on which State Financial Services Corporation and
its member banks are built - personal attention and quality of service.
Acquisitions also played an important role in our 1995 asset growth. In
August, we completed the acquisition of Waterford Bank which added $40.5 million
to our consolidated asset base. This acquisition pointed toward immediate
opportunity in Waterford for State Financial Services Corporation. The signs of
success in Waterford were readily apparent. As we expected, this acquisition
proved to be an ideal compliment to the State Financial Services team of
community banks. The blending of the two entities steered our stockholders in a
positive direction with no dilution in stock value realized after the purchase.
Established in 1906, Waterford Bank was also built on the tradition of community
banking. We wish to continue the community banking traditions established by
Waterford Bank, augmenting these traditions with enhancements in data processing
systems which will improve the delivery of products and services to the
Waterford area. The outlook for our newest addition is quite favorable.
This past year we built new avenues to improved products and services for
customers while providing your company greater income potential and greater
efficiencies. Our Secondary Mortgage Market Program was implemented.
Previously long term financing requests were referred to an outside company.
Now we have the ability to process these requests in house. We are optimistic
regarding our initial success and look toward promising growth in this area.
Automation was the next step in our continuous drive to improve. In 1995, we
installed new computer hardware and software designed to enhance the level of
service our personal bankers and loan officers provide our customers. Expanded
automation allows us to maximize efficiency of operations while improving
service delivery to our customers. Each of our State Financial Bank offices is
now equipped with enhanced tools to ensure our customers receive the maximum
benefit from their relationship with our organization.
A new delivery system was also made available to our customers with the
introduction of the Access Line. Through the Access Line, our customers now
have the ability to use the telephone to access their account information 24-
hours a day, 365 days a year. While it is important to provide the services our
customers need and want, we have approached the era of technology as
enhancements to, and not replacements of, our traditional personal service. Our
focus is always on people. Personalized customer service has been the reason
for our success as a community bank and will continue to be the foundation upon
which State Financial Services Corporation is built. Merging new technology
with our traditions of superior personal service is vital as we map out new
routes to product delivery.
With experience from the past and our eyes set toward the future, we're
encouraged about the roads not yet taken for State Financial Services
Corporation. We are in the process of formally updating our long range plan,
charting the future course of our organization. The focus of this update is to
maximize the opportunities presented by an increasingly aggressive marketplace.
We temper our enthusiasm for past success with the knowledge that competition
remains strong. No longer do we simply look next door but to distances far
reaching our own market area to monitor the financial industry landscape. We're
confident the community banking niche for State Financial Services Corporation
and its member banks will become even more defined and rewarding in the years to
come as we blend the opportunities presented by technological enhancements with
our traditions of personalized service.
With the continued support of our stockholders, the wisdom of our directors,
and the commitment of our staff, we enthusiastically approach another year with
the conviction to compete in an ever changing industry without losing focus of
providing quality service. State Financial Services Corporation and its member
banks, WE ALWAYS PUT PEOPLE FIRST.
Sincerely,
/s/J.J. Holz /s/Michael J. Falbo
J.J. Holz Michael J. Falbo
Chairman of the Board President and Chief Executive Officer
STATE FINANCIAL SERVICES CORPORATION
MANAGEMENT'S DISCUSSION
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of State Financial
Services Corporation (hereinafter referred to as the "Company") and its
subsidiaries on a consolidated basis for the last five years (dollars in
thousands, except per share data):
As of or for the year ended December 31,
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
CONDENSED INCOME STATEMENT:
Total interest income
(taxable equivalent) $19,782 $15,701 $14,820 $14,871 $16,315
Total interest expense 7,336 4,773 4,853 5,972 7,885
------- ------- ------- ------- -------
Net interest income 12,446 10,928 9,967 8,899 8,430
Provision for loan losses 190 120 147 133 240
Other income 2,481 2,438 2,234 2,045 2,051
Other expenses 9,460 8,956 8,437 7,767 7,397
------- ------- ------ ----- -----
Net income before
income taxes 5,277 4,290 3,617 3,044 2,844
Income taxes 1,579 1,010 876 562 408
Less taxable equivalent
adjustment 419 473 466 399 386
--- --- --- --- ---
Net income $ 3,279 $ 2,807 $ 2,275 $ 2,083 $ 2,050
------- ------- ------- ------- -------
PER SHARE DATA:
Net income $ 1.36 $ 1.21 $ 1.06 $ 1.31 $ 1.35
Cash dividends declared 0.39 0.35 0.33 0.28 0.27
Book value 12.23 10.98 10.43 9.90 8.85
BALANCE SHEET TOTALS (AT PERIOD END):
Total assets 285,037 225,175 226,124 202,977 179,251
Loans, net of unearned
discount 185,754 143,813 130,254 119,930 113,390
Allowance for loan losses 2,711 1,983 2,084 2,051 1,990
Deposits 246,218 197,401 199,768 182,297 160,810
Long-term debt 1,062 115 228 2,905 3,076
Stockholders' equity 32,381 26,169 24,756 16,593 13,504
FINANCIAL AND REGULATORY RATIOS:
Asset growth 26.58% (0.42)% 11.40% 13.24% 2.93%
Return on average assets 1.33 1.27 1.09 1.10 1.18
Return on average equity 11.22 11.02 10.33 13.90 16.16
Dividend payout ratio 29.50 29.12 31.78 24.22 17.75
Tier 1 risk-based
capital ratio 16.06 17.60 16.62 11.70 11.35
Leverage ratio 10.95 11.75 10.79 8.31 7.50
Allowance for loan losses to
non-performing loans 195.32 150.68 97.79 111.89 106.30
Non-performing assets
to total assets 0.65 0.68 0.95 1.14 1.37
Net charge-offs to
average loans 0.12 0.16 0.09 0.32 0.35
---- ---- ---- ---- ----
Amounts include balances and results of operations of WBAC, Inc. and its
subsidiary Waterford Bank since the effective date of its acquisition by the
Company on August 24, 1995, the former Eastbrook State Bank since the
effective date of its acquisition by the Company on July 16, 1992, and the
acquisition of customer deposits and fixed assets in August, 1993. See Note 2
to the Consolidated Financial Statements.
Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Company's historical experience, is used in the
conversion of tax-exempt interest income to a taxable-equivalent basis.
All per share information presented in this report has been retroactively
restated to give effect to a 20% stock dividend, declared in January, 1996,
and to give effect to a 20% stock dividend, declared in March 1993, as if both
had occurred as of January 1, 1991.
The information in this table is retroactively restated to give effect to
the plan of common stock reclassification, which occurred on June 10, 1992,
as if it had occurred as of January 1, 1991.
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited income and expense data on a
quarterly basis for the periods indicated (dollars in thousands, except per
share data).
1995 1994
-------------------------- --------------------------
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
----- ---- ---- ---- ----- ---- ---- ----
Interest income $5,513 $5,010 $4,506 $4,334 $4,057 $3,873 $3,726 $3,572
Interest expense 2,211 1,969 1,695 1,461 1,272 1,160 1,143 1,198
----- ----- ----- ----- ----- ----- ----- -----
Net interest income 3,302 3,041 2,811 2,873 2,785 2,713 2,583 2,374
Provision for
loan losses 52 48 45 45 30 30 30 30
Other income 625 655 605 596 590 667 613 568
Other expense 2,467 2,348 2,303 2,342 2,189 2,276 2,254 2,237
----- ----- ----- ----- ----- ----- ----- -----
Income before taxes 1,408 1,300 1,068 1,082 1,156 1,074 912 675
Income taxes 440 437 354 348 210 335 275 190
--- --- --- --- --- --- --- ---
Net income $ 968 $ 863 $ 714 $ 734 $ 946 $ 739 $ 637 $ 485
------ ------ ------ ------ ------ ------ ------ ------
Net income
per share $ 0.37 $ 0.36 $ 0.31 $ 0.32 $ 0.41 $ 0.32 $ 0.28 $ 0.20
Dividends per share 0.10 0.10 0.10 0.09 0.09 0.09 0.08 0.08
---- ---- ---- ---- ---- ---- ---- ----
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion is intended as a review of the significant factors
affecting the Company's financial condition and results of operations as of and
for the year ended December 31, 1995, as well as providing comparisons with
previous years. This discussion should be read in conjunction with the
Consolidated Financial Statements and accompanying notes and the selected
financial data presented elsewhere in this annual report.
On August 24, 1995, the Company acquired Waterford Bank ("Waterford"). On
July 16, 1992, the Company acquired the former Eastbrook State Bank
("Eastbrook") which is now SFB's Brookfield office. Because both of these
acquisitions were accounted for as purchases, the results of Waterford and
Eastbrook are included in the Company's results from their respective
acquisition dates. Accordingly, the Company's Consolidated Statements of
Income, and related schedules in Management's Discussion and Analysis of
Financial Condition and Results of Operations include Waterford results from
August 24 through December 31, 1995. Eastbrook results are included for the
full years 1995, 1994, and 1993. Operating results presented for the year ended
December 31, 1992 include Eastbrook's results from July 16 through December 31.
In August, 1993 the Company acquired the deposits and certain fixed assets of
a competing financial institution's Waukesha office in a transaction accounted
for as a purchase (the "Waukesha Office"). Accordingly, the financial results
associated with this acquisition are included in the Company's results from the
date of acquisition.
The Company's Balance Sheet Analysis in Management's Discussion and Analysis
of Financial Condition and Results of Operations include Waterford at December
31, 1995; the Waukesha Office at December 31, 1995, 1994, and 1993; and
Eastbrook at December 31, 1995, 1994, 1993, and 1992. Any balance sheet
information presented for years prior to 1995 does not include figures for
Waterford. Any balance sheet information presented for years prior to 1993 does
not include figures for the Waukesha Office. Any balance sheet information
presented for years prior to 1992 does not include figures for Eastbrook.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income equals the difference between interest earned on assets
and the interest paid on liabilities and is a measurement of the Company's
effectiveness in managing its interest rate sensitivity. In 1995, the Company's
taxable-equivalent net interest income increased $1,518,000 (13.9%) to
$12,446,000. Average interest-earning assets increased $26,290,000 (13.0%) in
1995. The Waterford acquisition increased the Company's average interest-
earning assets by $13,294,000 with the remaining increase the result of asset
growth at State Financial Bank in 1995. Due to volume increases and changes in
the composition of the Company's asset base, the Company's taxable-equivalent
net interest income improved $1,563,000 in 1995. Changes in interest rates
resulted in increased interest income and interest expense during 1995 as fixed
rate maturities on both sides of the balance sheet upwardly repriced. The
combined impact of changing interest rates on the Company's taxable equivalent
net interest income was a modest $45,000 decrease for the year due to the
Company's well-matched interest-sensitive position during the year.
The increased volume in and changing composition of the Company's interest-
earning assets were the keys to the Company's improved net interest margin in
1995. Due to strong loan demand throughout the year, the percentage of
interest-earning assets deployed in loans continued to increase in 1995.
Average loans outstanding increased $27,673,000 (20.3%) due to the loan growth
at State Financial Bank ($18,494,000) and the acquisition of Waterford
($9,179,000). As a result of these increases, the Company's average loans, as
a percentage of average interest-earning assets, increased to 71.6% for the
year ended December 31, 1995 compared to 67.3% for the year ended December 31,
1994. Loans historically are the Company's highest yielding asset category.
By increasing the level of interest-earning assets deployed in loans, the
Company improved its yield on interest-earning assets to 8.64% for the year
ended December 31, 1995 from 7.75% for the year ended December 31, 1994.
The volume and composition changes of the Company's interest-earning assets
were sufficient to keep pace with increased cost of funds during 1995 to
maintain the Company's net interest margin. The Company's cost of funds
increased to 4.24% in 1995 from 3.11% in 1994. Changes in the composition of
interest-bearing liabilities and intense deposit competition, which resulted in
higher deposit rates in 1995, were the main reasons for the increased funding
cost. As deposit rates have increased in 1995, depositors have shifted balances
into higher cost time deposit categories. In 1995, average time deposits
accounted for 33.7% of the Company's average interest-bearing liabilities
compared to 31.6% in 1994. Additionally, the continued popularity of the
Company's Money Market Index Account, introduced in October, 1994, attracted
balances to this higher paying deposit product increasing the Company's cost of
funds. Average Now and money market accounts represented 38.5% of the Company's
average interest-bearing liabilities in 1995 compared to 34.5% in 1994. As a
result of these changes, the net interest earnings and interest rate spread
declined to 4.40% in 1995 from 4.64% in 1994. However, the interest-earning
asset volume increases and composition changes were sufficient to offset the
narrower spread, improving the Company's net yield on interest-earning assets
(net interest margin) to 5.44% in 1995 from 5.39% in 1994.
For the year ended December 31, 1994, the taxable-equivalent net interest
income increased $961,000 (9.6%) compared to the year ended December 31, 1993.
The increase was primarily due to asset volume increases resulting from the full
year's inclusion of the Waukesha office acquired in August, 1993.
The following table sets forth average balances, related interest income and
expenses, and effective interest yields and rates for the years ended December
31, 1995, 1994, and 1993 (dollars in thousands):
1995 1994 1993
-------------------- ----------------- -----------
AVERAGE YIELD/% AVERAGE Yield/% Average Yield/%
BALANCE INTEREST RATE BALANCE Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
ASSETS
Interest-earning-assets:
Loans $163,909 $15,897 9.70% $136,236 $12,153 8.92% $122,315 $11,151 9.12%
Taxable investment securities 44,722 2,527 5.65% 42,519 2,126 5.00% 41,663 2,239 5.37%
Tax-exempt investment securities 14,735 1,044 7.09% 18,211 1,196 6.57% 14,812 1,124 7.59%
Federal funds sold 5,502 314 5.71% 5,612 226 4.03% 10,622 306 2.88%
----- --- ---- ------ ----- ---- ------- ------ ----
Total interest-earning-assets 228,868 19,782 8.64% 202,578 15,701 7.75% 189,412 14,820 7.82%
------- ------ ---- ------- ------ ---- ------- ------ ----
Non-interest-earning assets:
Cash and due from banks 12,179 12,948 13,591
Premises and equipment, net 4,541 4,604 4,697
Other assets 4,187 3,129 3,080
Less allowance for loan losses (2,278) (2,073) (2,070)
------- ------- -------
TOTAL $247,497 $221,186 $208,710
------- ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts $ 66,520 $ 2,562 3,85% $ 52,963 $ 1,303 2.46% $ 54,251 $ 1,346 2.48%
Savings deposits 42,790 1,184 2.77% 51,871 1,314 2.53% 47,526 1,371 2.88%
Time deposits 58,322 3,283 5.63% 48,509 2,134 4.40% 45,451 2,037 4.48%
Notes payable 314 20 6.37% 0 0 0.00% 897 72 8.03%
Mortgage payable 66 7 10.61% 176 17 9.66% 296 27 9.12%
Federal funds purchased 427 28 6.56% 0 0 0% 0 0 0%
Securities sold under
agreement to repurchase 4,490 252 5.61% 102 5 4.90% 10 0 nmf
------- ----- ---- ------- ----- ---- ------- ----- -------
Total interest-bearing liabilities 172,929 7,336 4.24% 153,621 4,773 3.11% 148,431 4,853 3.27%
------- ----- ---- ------- ----- ----- ------- ----- ------
Non-interest-bearing liabilities:
Demand deposits 43,555 40,852 37,083
Other 1,781 1,246 1,162
------- ------- -------
Total liabilities 218,265 195,719 186,676
------- ------- -------
Stockholders' equity 29,232 25,467 22,034
------- ------- -------
TOTAL $247,497 $221,186 $208,710
------- ------- -------
Net interest earning and
interest rate spread $12,446 4.40% $10,928 4.64% $ 9,967 4.55%
------ ---- ------ ---- ------ ----
Net yield on
interest-earning assets 5.44% 5.39% 5.26%
---- ---- ----
For the purposes of these computations, nonaccrual loans are included in the daily average loan amounts outstanding.
Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received
from borrowers whose loans were removed from nonaccrual during the period indicated.
Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented.
Not meaningful.
The following table presents the amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-
bearing liabilities (dollars in thousands). The table distinguishes between the
changes related to average outstanding balances (changes in volume holding the
initial rate constant) and the changes related to average interest rates
(changes in average rate holding the initial balance constant). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to change due to volume and change due to rate.
1995 COMPARED TO 1994 1994 Compared to 1993
INCREASE/(DECREASE) DUE TO Increase/(Decrease) Due to
-------------------------- ------------------------
VOLUME RATE NET Volume Rate Net
------ ---- --- ------ ---- ---
Interest earned on:
Loans $2,617 $1,127 $3,744 $1,251 $(249) $1,002
Taxable investment
securities 114 287 401 45 (158) (113)
Tax-exempt investment
securities (241) 89 (152) 236 (164) 72
Federal funds sold (4) 92 88 (175) 95 (80)
----- ----- ----- ----- ----- -----
Total interest-earning
assets 2,486 1,595 4,081 1,357 (476) 881
Interest paid on:
NOW and money market
accounts 393 866 1,259 (32) (11) (43)
Savings deposits (245) 116 (129) 118 (175) (57)
Time deposits 482 666 1,148 134 (37) 97
Notes payable, mortgage
payable,
and securities sold
under agreement
to repurchase 293 (8) 285 (73) (4) (77)
----- ----- ----- ----- ------ -----
Total interest-bearing
liabilities 923 1,640 2,563 147 (227) (80)
----- ----- ----- ----- ----- -----
Net interest income $1,563 $ (45) $1,518 $1,210 $ (249) $ 961
----- ----- ----- ----- ----- -----
Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose loans
were removed from nonaccrual during the period indicated.
Taxable-equivalent adjustments are made in calculating interest income
using a 34% rate for all years presented.
PROVISION FOR LOAN LOSSES
The provision for loan losses which is charged to earnings is determined as a
result of a quarterly analysis of the Company's loan portfolio, including the
amount of net charge-offs incurred during the period, collateral value, the
remaining balance in the allowance, and management's analysis of risk inherent
in the portfolio. Management's risk analysis incorporates loan classifications
assigned by lending personnel and as the result of examinations conducted by the
Company's internal loan review officer. The Company's lending personnel and
internal loan review officer review all significant nonhomogeneous loans for
adverse situations that may affect the borrower's ability to repay. If it
appears probable that the borrower will be unable to make scheduled principal
and interest payments, an allowance is established based on the difference
between the carrying value and the anticipated cash flows discounted at the
loan's initial effective interest rate or the fair value of the collateral for
collateral dependent loans. For homogeneous loans, the allowance is based on
the loan classification and historical loss experience for each classification.
The provisions for loan losses were $190,000, $120,000, and $147,000 for the
years ended December 31, 1995, 1994, and 1993, respectively. The increased
provisions in 1995 were the result of increased provisions at SFB ($60,000) to
reflect the general increase in the level of loans outstanding and the addition
of Waterford and its provisions ($10,000) since the date of acquisition.
OTHER INCOME
In 1995, other income increased $43,000 (1.8%), $29,000 of which was due to
the Waterford acquisition. Other income increased $204,000 (9.1%) in 1994 as
compared to 1993. The composition of other income is shown in the following
table (dollars in thousands).
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Service charges on deposit accounts $ 992 $1,068 $1,106
Merchant services 715 607 453
Building rent 223 240 199
ATM service charges 205 215 178
Investment securities losses 0 (10) 0
Other 346 318 298
----- ----- -----
Total other income $2,481 $2,438 $2,234
----- ----- -----
Service charges on deposit accounts decreased $76,000 (7.1%) in 1995 and
$38,000 (3.4%) in 1994. Declines in business service charges accounted for
$54,000 of the 1995 decline. The average earnings credit rate provided to
business accounts, a derivative of Treasury rates, increased in 1995 compared
to 1994 and was the main reason for the 1995 decline. The remaining decrease in
1995 service charges was related to decreases in personal service charge income,
resulting primarily from continued account consolidation, and decreased volume
in the amount of checks returned for insufficient funds and the resultant fees
therefrom. The decline in 1994 service charge income was mainly the result of a
greater number of customers taking advantage of additional methods available to
reduce service charges than in previous years resulting from the unification of
SFB's deposit products concurrent with the consolidation of the four previously
separate bank charters in June, 1994.
Merchant services are the fees the Company charges businesses for processing
credit card payments. Income in this category increased $108,000 (17.8%) in
1995 and $154,000 (34.0%) in 1994 due to volume increases and rate adjustments
in each respective year.
Building rent income decreased $17,000 (7.1%) in 1995 due to the Company's
assumption in August of additional office space previously leased to outside
tenants. In 1994, building rent income increased $41,000 (20.6%) due to the
full year's impact of rental income associated with new subleases entered into
during 1993 at both the Glendale and Greenfield office locations.
ATM service charges are the fees received from other institutions resulting
from their customers' usage of the Company's automated teller machines. As of
December 31, 1995, the Company owns eleven automated teller machines. In early
1995, the Company lost one of its high volume locations due to a business
closing. This machine was ultimately relocated to another location later in the
year, however the volume at this new location is currently below the volume at
the former location. As a result, ATM service charges declined $10,000 (4.7%)
in 1995. The increase of $37,000 (20.8%) in ATM service charges during 1994
relates to the installation of an additional machine and to increased usage of
the Company's existing machines during the year.
The Company incurred no gains or losses from investment security sales in
1995. The Company sold one investment security during 1994 at a loss of $10,000
in order to deploy the proceeds from the sale in alternative investments
yielding a higher return. The security sold was classified as available-for-
sale.
Other income increased $28,000 in 1995 due to the origination and sale of
secondary market mortgages and increased investment services commissions. In
third quarter 1995, the Company began directly originating fixed rate mortgage
loans and selling these loans and the related servicing to loan correspondents,
which accounted for approximately $19,000 of the increase in other income. The
addition of a second investment sales representative and increased sales volume
resulted in increased investment services commissions in 1995 of $30,000.
Offsetting these improvements was the absence of any sales of other real estate
in 1995 as compared to 1994 when the Company recorded a gain from an other real
estate sale. In 1994, other income increased $20,000 primarily due to increases
in the income reported from the sales of cashier's checks, money orders,
travelers' checks, and related products.
OTHER EXPENSES
Other expenses increased $504,000 (5.6%) for the year ended December 31, 1995
and $519,000 (6.2%) for the year ended December 31, 1994. The inclusion of
Waterford's results accounted for $422,000 of the other expense increase in
1995. The major components of other expenses are detailed in the following
table (dollars in thousands).
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Salaries and employee benefits $4,101 $3,633 $3,326
Net occupancy and equipment 1,805 1,715 1,640
Data processing 544 609 644
Legal and professional 327 289 301
Merchant services 620 519 393
Regulatory agency assessments 229 443 408
Other 1,834 1,748 1,725
----- ----- -----
Total other expenses $9,460 $8,956 $8,437
----- ----- -----
Salaries and employee benefits increased $468,000 (12.9%) in 1995. Of this
increase, $128,000 relates to the inclusion of Waterford's results in 1995.
Absent Waterford, salaries and employee benefits increased $340,000 (9.4%) in
1995 due to normal salary adjustments, a greater number of employees eligible
for pension benefits, increased medical insurance premiums, and increases in the
amounts awarded as management incentives. In 1994, salaries and employee
benefits increased $307,000 (9.2%). Of this increase, $59,000 relates to the
full-year inclusion of the Waukesha operation in the Company's 1994 results.
The remaining increase relates to normal salary adjustments, increased benefit
costs due to higher medical insurance premiums, and increases in the amounts
awarded as management incentives.
Occupancy and equipment expense increased $90,000 (5.2%) in 1995. The
Waterford acquisition added $126,000 in occupancy and equipment expense. The
resultant decline of $36,000 in comparable occupancy and equipment expense was
due to reduced real estate and personal property taxes, utilities, and equipment
repairs in 1995. In 1994, occupancy and equipment expense increased $75,000
(4.6%). The additional depreciation on the assets acquired with the Waukesha
office and depreciation on new equipment purchases during the year account for
$63,000 of the increase. The remaining increase of $12,000 was the result of
increased rent expense relating to rate adjustments on the Greenfield office
space and increased expenses for general equipment repairs, maintenance, and
service contracts offset by reduced real estate tax expense during the year.
Data processing expense decreased $65,000 (10.7%) and $35,000 (5.4%) in 1994
due to the Company's renegotiation of its contract with its service provider in
midyear 1994.
Legal and professional fees increased $38,000 (13.1%) in 1995, $35,000 of
which was due to the inclusion of Waterford. Exclusive of Waterford, legal and
professional fees have increased a modest $3,000 as the Company's consistent
level of non-performing assets resulted in consistent legal and professional
expenditures for collection efforts. In 1994, legal and professional fees
decreased $12,000 (4.0%) due to the decline in the Company's non-performing
assets and collection actions related thereto.
Merchant services expense results from providing the Company's business
customers the ability to accept credit cards in payment for goods and services.
The $101,000 (19.5%) increase in 1995 and the $126,000 (32.1%) increase in 1994
were the results of increases in the volume of business customers utilizing this
service and rate adjustments enacted by the Company's service provider during
each year. These increases are consistent with the increases in merchant
services income included in other income in 1995 and 1994.
Regulatory agency assessments represent the premiums paid for FDIC insurance
of the Company's deposits. Effective June, 1995, the FDIC reduced its
assessment rate for deposit insurance resulting in a $214,000 decline in the
Company's regulatory agency assessment for the year. Regulatory agency
assessments increased $35,000 in 1994 due to increased average deposits
outstanding resulting from the full year inclusion of the Waukesha office and
general deposit growth during the year.
Other expenses increased $86,000 in 1995, however exclusive of the Waterford
expenses included in 1995's results, other expenses decreased $27,000 primarily
due to reduced office supply and marketing costs during the year. In 1994,
other expenses increased $23,000 primarily related to increased office supply
expenses associated with the consolidation of the banks.
INCOME TAXES
The Company's consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities and loans. The
Company recorded provisions for income taxes of $1,579,000, $1,010,000, and
$876,000 in 1995, 1994, and 1993, respectively. The increase in income tax
expense in 1995 was due to a $1,042,000 increase in the Company's income before
taxes and the fact that the Company did not realize the level of tax loss carry
forward benefits in 1995 as it did in 1994. In 1995, the Company realized
approximately $38,000 of tax loss carry forward benefits to offset current tax
expense compared to approximately $170,000 in 1994. Exclusive of these
benefits, the Company's effective tax rate was 33.3% in 1995 compared to 30.9%
in 1994. The increased tax rate was fundamentally the result of reduced tax-
exempt income and increased nondeductible expenses in 1995 as compared to 1994.
NET INCOME AND DIVIDENDS
For the years ended December 31, 1995, 1994, and 1993, the Company reported
net income of $3,279,000, $2,807,000, and $2,275,000, respectively. The
improvements in the Company's net income in 1995 represent an improvement in the
overall operating results of the Company as measured by the return on average
assets and return on average equity. In 1995, the Company reported a return on
average assets of 1.33% compared to 1.27% in 1994. Return on average equity for
1995 was 11.22% compared to 11.02% in 1994. For the years ended December 31,
1995, 1994, and 1993, the Company paid aggregate dividends of $967,000,
$818,000, and $720,000. Dividends increased in 1995 due to a $0.04 per share
increase in the dividend rate and a greater number of average shares outstanding
in 1995 compared to 1994 due to the additional shares issued in the Waterford
acquisition. The 1994 increase in dividends paid was the result of a $0.02 per
share increase in the per share dividend rate and a greater number of average
shares outstanding during the year.
Bar chart depicting the following:
RETURN ON ASSETS 1995 1994 1993
- ---------------- ---- ---- ----
1.33% 1.27% 1.09%
Bar chart depicting the following:
RETURN ON EQUITY 1995 1994 1993
- ---------------- ---- ---- ----
11.22% 11.02% 10.90%
Bar chart depicting the following:
EARNINGS AND DIVIDENDS PER SHARE 1995 1994 1993
- -------------------------------- ---- ---- ----
DIVIDENDS $0.39 $0.35 $0.33
EARNINGS 1.36 1.21 1.06
BALANCE SHEET ANALYSIS
The composition of assets and liabilities are generally the result of
strategic management decisions influenced by market forces. At December 31,
1995 and 1994, the Company reported total assets of $285,037,000 and
$225,175,000, respectively. Of the $59,862,000 increase in total assets between
1995 and 1994, $40,500,000 was due to the Waterford acquisition with the
remainder due to internal growth at State Financial Bank throughout the year and
growth at Waterford since the acquisition date.
LENDING ACTIVITIES
The Company's largest single asset category continues to be loans. The
Company's gross loans, as a percentage of total deposits, were 75.4% at December
31, 1995 compared to 72.9% at December 31, 1994. The following table shows the
Company's loan portfolio composition on the dates indicated (dollars in
thousands).
At December 31,
---------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Commercial $ 46,323 $ 39,231 $ 39,375 $ 37,438 $ 34,784
Real Estate 105,139 75,909 62,896 54,979 48,734
Installment 21,997 19,157 17,055 16,730 18,681
Other 12,295 11,516 10,928 10,783 11,191
------- ------- ------- ------- -------
Total Loans $185,754 $145,813 $130,254 $119,930 $113,390
------- ------- ------- ------- -------
Bar chart depicting the following:
LOAN PORTFOLIO COMPOSITION 1995 1994 1993
- -------------------------- ---- ---- ----
Other $12,295 $11,516 $10,928
Installment 21,997 19,157 17,055
Commercial 46,323 39,231 39,375
Real Estate 105,139 75,909 62,896
Total loans outstanding at the end of 1995 increased $39,941,000 (27.4%). The
Waterford acquisition accounted for $25,168,000 of this increase. The remaining
increase of $14,773,000 (10.1%) was the result of strong loan demand at State
Financial Bank throughout the year. Categorically, the largest increase came in
real estate loans, increasing in total $29,230,000 (38.5%). Real estate loans
increased $18,835,000 from the Waterford acquisition and $10,395,000 (13.7%)
from internal growth at State Financial Bank and comprise 56.6% of the Company's
gross loan portfolio at December 31, 1995. Approximately 48.0% of the real
estate loan growth at State Financial Bank was in loans secured by commercial
real estate due to strong loan demand during 1995. The Company's commercial
real estate loans are generally secured by owner occupied improved property such
as office buildings, warehouses, small manufacturing operations, and retail
facilities located in the Company's primary market areas. The borrower's
credit-worthiness and the economic feasibility and cash flow ability of the
project are fundamental concerns in the Company's commercial real estate
lending. Loans secured by commercial property are generally larger and involve
greater risks than residential mortgage loans because payments on loans secured
by commercial property are dependent upon the successful operation and
management of these properties or businesses. As a result, properties securing
such loans are likely to be subject to the local real estate market and general
economic conditions. The Company generally writes commercial real estate loans
on maturities up to five years although the total amortization period may be as
long as twenty years, amortized monthly.
The remaining real estate loan increase at State Financial Bank was the result
of increases in residential real estate from both first mortgage loans written
on balloon notes (generally up to three year maturities with amortization
periods up to twenty-five years) and additional balances outstanding on home
equity credit lines due to continued marketing emphasis in these product lines.
The Company's real estate loans, like all of the Company's loans, are
underwritten according to its written loan policy. The loan policy sets forth
the term, debt service capacity, credit extension, and loan to value guidelines
which the Company considers acceptable to recognize the level of risk associated
with each specific loan category. The following table sets forth the percentage
composition of the underlying collateral supporting the Company's real estate
loans as of December 31, 1995.
COMMERCIAL REAL ESTATE 37.62%
1-4 FAMILY FIRST LIENS ON RESIDENTIAL REAL ESTATE 36.93
MULTIFAMILY RESIDENTIAL 10.92
1-4 FAMILY JUNIOR LIENS ON RESIDENTIAL REAL ESTATE
(INCLUDING HOME EQUITY LINES OF CREDIT) 9.47
CONSTRUCTION, LAND DEVELOPMENT, AND FARMLAND 5.06
Commercial loans increased $7,092,000 (18.1%) in total and $3,032,000 (7.7%)
exclusive of the commercial loans acquired with Waterford, due to increased
commercial loan demand at State Financial Bank and comprise 24.9% of the
Company's total loan portfolio at December 31, 1995. Commercial loans are also
underwritten according to the Company's loan policy which sets forth the amount
of credit which can be extended based upon the borrower's cash flow, debt
service capacity, and discounted collateral value. Commercial loans are
typically made on the basis of the borrower's ability to make repayment from the
cash flow of the business. As a result, the availability of funds for the
repayment of commercial loans may be dependent on the success of the business
itself, which, in turn, is likely to be dependent upon the general economic
environment. In recognition of this risk, the Company emphasizes current credit
file documentation, capacity to repay the loan, adequacy of the borrower's
capital as well as an evaluation of the industry conditions affecting the
borrower. The Company's commercial loans are typically secured by the
borrower's business assets such as inventory, accounts receivable, fixtures,
and equipment. Generally, commercial loans carry the personal guaranties of the
principals.
Installment loans increased $2,840,000 (14.8%) in total and $733,000 (3.8%)
exclusive of Waterford due to an increase in indirect auto loans resulting from
the Company's development efforts in that area. At December 31, 1995,
installment loans comprise 11.8% of the Company's loan portfolio.
Other loans increased $779,000 (6.8%) due to the acquisition of Waterford
($165,000) and additional credit card balances outstanding at State Financial
Bank.
The following table shows the maturity of loans (excluding residential
mortgages on one-to-four-family residences, installment loans, and lease
financing) outstanding as of December 31, 1995 (dollars in thousands). Also
provided are the amounts due after one year classified according to the
sensitivity to changes in interest rates.
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
COMMERCIAL $29,392 $16,829 $2,163 $ 48,384
REAL ESTATE 24,821 31,209 1,579 57,609
------ ------ ----- -------
$54,213 $48,038 $3,742 $105,993
------ ------ ----- -------
LOANS MATURING AFTER ONE YEAR WITH:
FIXED INTEREST RATES $36,426 $ 569
VARIABLE INTEREST RATES 11,612 3,173
------ -----
$48,038 $3,742
------ -----
RISK ELEMENTS IN THE LOAN PORTFOLIO
Certain risks are inherent in the lending function. These risks include a
borrower's subsequent inability to pay, insufficient collateral coverage, and
changes in interest rates. The Company attempts to reduce these risks by
adherence to a written set of loan policies and procedures. Included in these
policies and procedures are underwriting practices covering debt-service
coverage, loan-to-value ratios, and loan term. Evidence of a specific repayment
source is required on each credit extension, with documentation of the
borrower's repayment capacity. Generally, this repayment source is the
borrower's cash flow, which must demonstrate the ability to service the debt
based upon historical results and conservative projections of future
performance.
Management maintains the allowance for loan losses (the "Allowance") at a
level considered adequate to provide for future loan losses. The Allowance is
increased by provisions charged to earnings, and is reduced by charge-offs, net
of recoveries. At December 31, 1995, the Allowance was $2,711,000, an increase
of $728,000 from the balance at December 31, 1994. Substantially all of this
increase was due to the amount of Allowance acquired with Waterford. Exclusive
of Waterford, the Allowance decreased $6,000 due to the amount of net charge-
offs in excess of loan loss provisions charged to earnings during the year.
The determination of Allowance adequacy is based upon a quarterly evaluation
of the Company's loan portfolio by the internal loan review officer and
management. These evaluations consider a variety of factors, including, but not
limited to, general economic conditions, loan portfolio size and composition,
previous loss experience, the borrower's financial condition, collateral
adequacy, the level of non-performing loans, and management's estimation of
future losses. As a percentage of total loans, the allowance was 1.5% at the
end of 1995 compared to 1.4% at the end of 1994. Based on its analyses,
management considers the Allowance adequate to recognize the risk inherent in
the consolidated loan portfolio at December 31, 1995.
The balance of the Allowance and actual loan loss experience for the last five
years is summarized in the following table (dollars in thousands).
Year ended December 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Balance at beginning of period $1,983 $2,084 $2,051 $1,990 $2,152
Charge-offs:
Commercial 70 115 102 209 253
Real estate 82 59 32 108 145
Installment 82 68 30 78 128
Other 75 38 65 124 72
--- --- --- --- ---
Total charge-offs 309 280 229 519 598
--- --- --- --- ---
Recoveries:
Commercial 58 18 31 59 118
Real estate 12 0 36 24 19
Installment 34 24 29 53 49
Other 9 17 19 9 10
--- --- --- --- ---
Total recoveries 113 59 115 145 196
--- --- --- --- ---
Net charge-offs 196 221 114 374 402
Balance of acquired allowance at
date of acquisition 734 0 0 302 0
Additions charged to operations 190 120 147 133 240
----- ----- ----- ----- -----
Balance at end of period $2,711 $1,983 $2,084 $2,051 $1,990
----- ----- ----- ----- -----
Ratios:
Net charge-offs to average
loans outstanding 0.12% 0.16% 0.09% 0.32% 0.35%
Net charge-offs to total allowance 7.23 11.14 5.47 18.24 20.20
Allowance to year end loans
outstanding 1.46 1.36 1.60 1.71 1.76
---- ---- ---- ---- ----
When in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on nonaccrual status. At the time
a loan is classified as nonaccrual, interest previously credited to income in
the current year is reversed and interest income accrued in the prior year is
charged to the Allowance. With the exception of credit cards, the Company does
not recognize income on loans past due 90 days or more.
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Bar chart depicting the following:
ALLOWANCES FOR POSSIBLE LOAN LOSES $2,711 $1,983 $2,084 $2,051 $1,990
- ----------------------------------
Bar chart depicting the following:
ALLOWANCES TO NON-PERFORMING LOANS 195.32% 150.68% 97.79% 111.89% 106.30%
- ----------------------------------
Bar chart depicting the following:
NON-PERFORMING LOANS TO TOTAL LOANS 0.75% 0.90% 1.64% 1.53% 1.65%
- -----------------------------------
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
At or for the year ended December 31,
-------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Nonaccrual loans $1,386 $1,311 $2,100 $1,818 $1,851
Accruing loans past due 90 days
or more 2 5 31 15 21
Restructured loans 0 0 0 0 0
----- ----- ----- ----- -----
Total non performing and
restructured loans 1,388 1,316 2,131 1,833 1,872
----- ----- ----- ----- -----
Other real estate owned 460 219 28 481 589
----- ----- ----- ----- -----
Total non-performing assets $1,848 $1,535 $2,159 $2,314 $2,461
----- ----- ----- ----- -----
Ratios:
Non-performing loans to
total loans 0.75% 0.90% 1.64% 1.53% 1.65%
Allowance to non-performing
loans 195.32 150.68 97.79 111.89 106.30
Non-performing assets to
total assets 0.65 0.68 0.95 1.14 1.37
Interest income that would
have been recorded
under original terms $ 207 $ 229 $ 244 $ 173 $ 270
Interest income recorded
during the period 100 89 182 203 269
--- --- --- --- ---
Effective January 1, 1995, the Company adopted Financial Accounting Standards
Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan"
("Statement No. 114"). Under the new standard, the 1995 allowance for loan
losses related to loans that are identified for evaluation in accordance with
Statement No. 114 is primarily based on the fair value of the collateral for
certain collateral dependent loans. For certain noncollateral dependent loans,
the Allowance is established based on the expected cash flows discounted at the
loan's initial effective interest rate. Prior to 1995, the allowance for loan
losses related to these loans was based on undiscounted cash flows or the fair
value of the collateral for collateral dependent loans. At December 31, 1995,
the Company identified approximately $1,356,000 in loans which are considered
impaired. These loans are included as part of the nonaccrual loans set forth in
the table above and represent 0.7% of the Company's gross loan portfolio. Based
upon the analysis of the underlying collateral value of these loans and the low
percentage of these loans in relation to the gross loan portfolio, management
believes the allowance is adequately funded to provide for the inherent risk
associated with these loans.
At December 31, 1995, there were no loans to borrowers where available
information would indicate that such loans were likely to later be included as
nonaccrual, impaired (as defined in Statement No. 114), past due, or
restructured, with the exception of three loans approximating $614,000 which
could be included as nonaccrual during the first quarter of 1996.
INVESTMENT ACTIVITIES
Investment securities comprise the second largest component of the Company's
earning assets. In 1994, the Company adopted Financial Accounting Standards
Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities "("Statement No. 115"). In conformity with Statement No. 115,
debt securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that the Company
does not have either the positive intent and/or the ability to hold to maturity
and all marketable equity securities must be classified as available-for-sale or
trading and carried at their respective fair market value. Unrealized holding
gains and losses on securities classified as available-for-sale, net of related
tax effects, are carried as a component of stockholders' equity. See note 4 to
the Consolidated Financial Statements for more information.
Total investment securities outstanding at December 31, 1995 increased
$4,716,000. The Waterford acquisition added $10,526,000 to the Company's
consolidated investment portfolio. Exclusive of the Waterford acquisition,
total investment securities at December 31, 1995 decreased $5,810,000 as the
Company continued to utilize proceeds from maturing investments to fund loan
growth during the year. The following table presents the combined amortized
cost of the Company's held-to-maturity and available-for-sale investment
securities on the dates indicated (dollars in thousands).
At December 31,
---------------
1995 1994 1993
---- ---- ----
U.S. Treasury securities and obligations
of U.S. government agencies $27,389 $22,950 $18,509
Obligations of states and
political subdivisions 16,337 14,575 18,144
Mortgage-related securities 17,281 20,015 21,509
Other securities 2,250 1,001 2,475
------ ------ ------
TOTAL $63,257 $58,541 $60,637
------ ------ ------
Bar chart depicting the following:
INVESTMENT PORTFOLIO COMPOSITION 1995 1994 1993
- -------------------------------- ---- ---- ----
Other $ 2,250 $ 1,001 $ 2,475
State and Political 16,337 14,575 18,144
Mortgage Related 17,281 20,015 21,509
Treasuries and Agencies 27,389 22,950 18,509
The composition of the Company's investment securities has been influenced by
the general market conditions prevalent during 1995 and the composition of
Waterford's acquired portfolio. U.S. Treasury securities and obligations of
U.S. government agencies increased $4,439,000 in 1995. Approximately $7,372,000
of Waterford's investment portfolio consisted of U.S. Treasury securities and
obligations of U.S. government agencies. Exclusive of Waterford, outstanding
balances invested in U.S. Treasury securities and obligations of U.S. government
agencies reflected a net decrease of $2,933,000 as the Company redeployed these
funds in loans. At December 31, 1995, U.S. Treasury securities and obligations
of U.S. government agencies comprise 43.3% of the Company's investment portfolio
compared to 39.2% at December 31, 1994.
During 1995, balances in mortgage-related securities decreased $2,734,000 due
to principal pay downs received during the year and the Company's decision not
to purchase additional mortgage-related investments due to limited availability
of these investments in 1995 and the lack of sufficient spread over U.S.
Treasury securities and obligations of U.S. government agencies. The Company's
mortgage-related securities represent the remaining balances outstanding on
fixed-rate collateralized-mortgage obligations ("CMO's") purchased between
1991 and 1993. All of these purchases were one-to-four family residential
mortgage securities issued by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). To avoid
exposure to prepayments, wide market value fluctuations, and recoverability, the
Company purchased only the conservative early traunches of the respective CMO's.
These investments closely resemble treasury securities in their shorter
maturities, marketability, and repayment predictability and accordingly are the
least volatile to the impact of market interest rate fluctuations. At December
31, 1995, the remaining average life of the Company's mortgage-related
securities was approximately one year. Due to the short remaining assumed
maturities of these investments and its experience with these investments,
management does not consider the Company to be exposed to significant interest
rate risk or recoverability related to these investments. At December 31, 1995,
mortgage-related securities accounted for 27.3% of the Company's investment
portfolio compared to 34.2% at December 31, 1994.
Obligations of states and political subdivisions increased $1,762,000 at
December 31, 1995 compared to December 31, 1994. The Waterford acquisition
brought $3,017,000 of new balances in this investment category. Exclusive of
the acquisition, investments in the obligations of states and political
subdivisions decreased $1,255,000 due to net maturities in the Company's
portfolio and the use of these net proceeds to fund loan growth. At December
31, 1995, obligations of states and political subdivisions accounted for 25.8%
of the Company's investment portfolio compared to 24.9% at December 31, 1994.
The increased percentage of the consolidated portfolio invested in obligations
of states and political subdivisions was due to the relatively higher proportion
of Waterford's acquired portfolio invested in these products.
The maturities and weighted-average yields of the Company's investment
securities at December 31, 1995 are presented in the following table (dollars in
thousands). Taxable-equivalent adjustments (using a 34% rate) have been made in
calculating the yields on obligations of states and political subdivisions.
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
-------- ---------- --------- ---------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ----- ------ ----- ------ -----
U.S. TREASURY SECURITIES
AND OBLIGATIONS OF
U.S. GOVERNMENT
AGENCIES $ 9,217 5.81% $17,516 6.44% $ 656 7.45% $ 0 0.00%
OBLIGATIONS OF
STATES AND
POLITICAL
SUBDIVISIONS 4,422 6.88% 9,574 7.01% 808 8.20% 1,533 9.81%
MORTGAGE-RELATED
SECURITIES 9,454 4.94% 7,827 5.25% 0 0.00% 0 0.00%
OTHER SECURITIES 1,750 5.97% 0 0.00% 400 7.11% 100 10.00%
------ ---- ------ ---- ----- ---- ----- -----
TOTAL $24,843 5.68% $34,917 5.13% $1,864 7.70% $1,633 9.82%
------ ---- ------ ---- ----- ---- ----- -----
At December 31, 1995, the Company had $458,000 in unrealized gains on its
held-to-maturity securities and $173,000 in unrealized losses on its available-
for-sale securities. Unrealized gains and losses on investment securities are
the result of changes in market interest rates and the relationship of the
Company's investments to those rates for comparable maturities. Unrealized
gains generally result from the interest rates on the Company's portfolio of
investment securities exceeding market rates for comparable maturities.
Conversely, unrealized losses generally result from the interest rates on the
Company's portfolio of investment securities falling below market rates for
comparable maturities. If material, unrealized losses could negatively impact
the Company's future performance as earnings from these investments would be
less than alternative investments currently available and may not provide as
wide a spread between earnings and funding costs. At December 31, 1995, the
unrealized losses represent 0.9% of the portfolio of available-for-sale
securities and management does not consider them material.
DEPOSITS
Deposits are the Company's principal source of funding. Deposit inflows and
outflows are significantly influenced by general interest rates, money market
conditions, market competition, and the overall condition of the economy. For
the year ended December 31, 1995, total average deposits increased $16,992,000
(8.7%). Approximately $11,759,000 of this increase was due to the inclusion of
Waterford's average deposits since the date of acquisition (August 24, 1995).
The remaining average deposit increase of $5,233,000 (2.7%) was due to average
deposit growth at State Financial Bank during 1995.
The following table sets forth the average amount of and the average rate paid
by the Company on deposits by deposit category (dollars in thousands).
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
AVERAGE AVERAGE Average Average Average Average
AMOUNT RATE Amount Rate Amount Rate
------------- ------------- --------------
Non-interest-bearing
demand deposits $ 43,555 0.00% $ 40,852 0.00% $ 37,083 0.00%
NOW and money
market deposits 66,520 3.85 52,963 2.46 54,251 2.48
Savings 42,790 2.77 51,871 2.53 47,526 2.88
Time deposits 58,322 5.63 48,509 4.40 45,451 4.48
------- ---- ------- ---- ------- ----
TOTAL $211,187 3.33% $194,195 2.45% $184,311 2.58%
------- ---- ------- ---- ------- ----
Bar chart depicting the following:
AVERAGE DEPOSIT PORTFOLIO COMPOSITION 1995 1994 1993
- ------------------------------------- ---- ---- ----
Demand 43,555 40,852 37,083
Savings 42,790 51,871 47,526
Time 58,322 48,509 45,451
Now and Money Market 66,520 52,963 54,251
NOW and money market deposits continue as the Company's fastest growing
deposit category. Average NOW and money market deposits increased $13,557,000
(25.6%) for the year ended December 31, 1995. Approximately $2,765,000 of this
increase was due to the Waterford acquisition. The remaining increase of
$10,792,000 (20.4%) was mainly due to increases in money market balances related
to the continued popularity of the Company's Money Market Index Account
introduced at State Financial Bank in October, 1994. This product was
introduced to protect the Company's deposit base and was in response to local
competition which introduced similar products during 1994. The Company
considers the Money Market Index Account a very competitive product in the
market place due to its variable interest rate tied to the IBC/Donoghue money
market index. Prior to the acquisition, Waterford did not offer the Money
Market Index Account with its deposit products. Due to the product's success
and popularity at State Financial Bank, it was introduced at Waterford in
September, 1995. As of December 31, 1995, the account had attracted
approximately $1,000,000 of balances at Waterford. At December 31, 1995,
average NOW and money market balances are the Company's largest deposit
category, representing 31.5% of average total deposits compared to 27.3% at
December 31, 1994.
Average time deposit balances increased $9,813,000 (20.2%) for the year ended
December 31, 1995 compared to the year ended December 31, 1994. Approximately
$4,728,000 of this average growth was the result of the Waterford acquisition
with the remainder due to internal time deposit growth at State Financial Bank.
The general increase in market interest rates offered on time deposit products
during 1995 resulted in depositors transferring funds out of lower yielding
savings instruments into certificates of deposit. Additionally, the Company
undertook aggressive marketing efforts in this product line during 1995 to
attract new customer relationships. The combination of these factors resulted
in the average growth during 1995 in this deposit category. At December 31,
1995, average time deposits represent 27.6% of average total deposits compared
to 25.0% at December 31, 1994.
Due to the general increase in market interest rates on deposits in 1995,
average savings balances declined $9,081,000 (17.5%) for the year ended December
31, 1995. Exclusive of the average Waterford savings balances, average savings
balances declined $12,013,000 (23.2%) as depositors deployed those funds in
accounts yielding a higher return, primarily money market accounts and time
deposits. The Company believes that the introduction of the Money Market Index
Account and the competitive time deposit rates offered during 1995 on special
nine and eighteen month term certificates of deposit were instrumental in
retaining the majority of the savings balance decline in other deposit
categories with the Company. Average savings balances represent 20.3% of
average total deposits at December 31, 1995 compared to 26.7% at December 31,
1994.
For the year ended December 31, 1995, average non-interest bearing demand
deposits increased $2,703,000 (6.6%) in total and $1,369,000 (3.4%) exclusive of
the Waterford acquisition. This increase was the combined result of increased
average balances from existing customers and cultivation of additional account
relationships during the year. At December 31, 1995, non-interest bearing
demand deposits represent 20.6% of the Company's average deposit portfolio
compared to 21.0% at December 31, 1994.
Maturities of time certificates of deposit and other time deposits of $100,000
or more outstanding at December 31, 1995 are summarized as follows (dollars in
thousands).
3 MONTH OR LESS $3,163
OVER 3 THROUGH 6 MONTHS 1,676
OVER 6 THROUGH 12 MONTHS 2,637
OVER 12 MONTHS 2,354
-----
TOTAL $9,830
-----
Approximately 3.4% of the Company's total assets at December 31, 1995 are
supported by time deposits with balances in excess of $100,000 as compared to
2.5% at December 31, 1994. The Company's dependence on large balance time
deposits to fund its asset base has historically been approximately one third to
one half of the large liability funding dependence exhibited by its peer group.
LIQUIDITY
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest-sensitive
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of depositors and borrowers.
The Company's primary funding sources are deposits, loan principal repayments,
and maturities of loans and investment securities. Contractual maturities and
amortizations of loans and investments are a predictable funding source, whereas
deposit flows and loan prepayments are impacted by market interest rates,
economic conditions, and competition.
For the year ended December 31, 1995, the Company's financing activities
provided net cash of $22,060,000, primarily from deposit growth of $15,772,000
due to increased marketing efforts, the issuance of $3,202,000 in common stock
and $1,062,000 in installment notes to consummate the Waterford acquisition, and
proceeds from securities sold under repurchase agreements of $3,000,000 to
accommodate local municipalities. For the year ended December 31, 1994,
financing activities required $2,874,000 in cash to mainly fund $2,367,000 in
deposit contraction resulting from run-off of promotional time deposits
attracted in late 1993.
The Company's primary investment activity is loan origination. For the years
ended December 31, 1995 and December 31, 1994, the Company generated $14,969,000
and $15,781,000 in new loan originations, respectively. For the year ended
December 31, 1995, loan originations were funded by maturing investment
securities and cash provided by financing activities resulting from deposit
growth. Additionally, investing activities for the year ended December 31, 1995
included the net effect of the Waterford acquisition ($4,271,000) financed by
the issuance of common stock and installment notes as previously discussed. In
1994, loan originations were primarily funded by cash provided by operations,
maturing investment securities and contraction in the level of cash and cash
equivalents.
Cash and cash equivalents are generally the Company's most liquid assets. The
Company's level of operating, financing, and investing activities during a given
period impact the resultant level of cash and cash equivalents reported. The
Company had liquid assets of $28,518,000 and $16,197,000 as of December 31, 1995
and 1994, respectively. Liquid assets in excess of necessary cash reserves are
generally invested in short-term investments such as federal funds sold and
commercial paper.
INTEREST RATE SENSITIVITY
Interest rate risk is an inherent part of the banking business as financial
institutions gather deposits and borrow other funds to finance earning assets.
Interest rate risk results when repricing of rates paid on deposits and other
borrowings do not coincide with the repricing of interest-earning assets.
Interest rate sensitivity management seeks to avoid fluctuating net interest
margins and to enhance consistent growth of net interest income through periods
of changing interest rates. The following table shows the estimated maturity
and repricing structure of the Company's interest-earning assets and interest-
bearing liabilities for three different independent and cumulative time
intervals as of December 31, 1995 (dollars in millions). Nonmaturing deposit
categories, including savings, NOW, and money market deposits are assumed to
reprice along the following schedule - 10% within 0-30 days; 20% within 31-90
days, and 30% within 91 days to one year. Assumptions regarding prepayment and
withdrawal rates are based upon industry experience and management believes such
assumptions to be reasonable. The table does not necessarily indicate the
impact general interest rate movements may have on the Company's net interest
income as the actual repricing experience of certain assets and liabilities,
such as loan prepayments and deposit withdrawals, is beyond the Company's
control. As a result, certain assets and liabilities may reprice at intervals
different than the maturities assumed in the following table given the general
movement in interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
TOTAL
0-30 31-90 91-365 0-365
DAYS DAYS DAYS DAYS
---- ---- ---- ----
ASSETS
LOANS
FIXED $ 5.7 $ 7.5 $ 39.2 $ 52.4
VARIABLE 50.4 0.0 0.0 50.4
INVESTMENT 8.5 4.2 21.5 34.2
FEDERAL FUNDS 6.5 0.0 0.0 6.5
---- ---- ---- -----
TOTAL $71.1 $ 11.7 $60.7 $143.5
---- ---- ---- -----
LIABILITIES
SAVINGS & NOW DEPOSITS $ 6.5 $ 13.1 $19.6 $ 39.2
TIME DEPOSITS 6.5 10.4 43.9 60.8
MONEY MARKET DEPOSITS 5.7 11.5 17.2 34.4
---- ----- ----- -----
TOTAL $18.7 $ 35.0 $ 80.7 $134.4
---- ----- ----- -----
INTEREST SENSITIVITY GAP $52.4 $(23.3) $ (20.0) $ 9.1
CUMULATIVE GAP 52.4 29.1 9.1 9.1
CUMULATIVE GAP AS A
PERCENTAGE OF TOTAL
EARNING ASSETS 20.3% 11.3% 3.5% 3.5%
---- ---- --- ---
At December 31, 1995, interest-sensitive assets and interest-sensitive
liabilities subject to repricing within one year, as a percentage of total
assets were 50.3% and 47.2% , respectively. Variable rate and maturing fixed
rate loans are the primary interest-sensitive assets repricing within one year.
On the funding side of the balance sheet time deposits are the single largest
funding source subject to repricing in the coming year. The table above
demonstrates the Company is asset-sensitive at December 31, 1995, which would
normally indicate that the Company "s net interest margin would improve if rates
increased and deteriorate if interest rates decreased.
CAPITAL RESOURCES
Total stockholders' equity increased $6,212,000 in 1995, $1,413,000 in 1994,
and $8,163,000 in 1993. The 1995 increase was the result of the additional
stock issued to complete the Waterford acquisition, net earnings retention, and
reductions in the tax effected net unrealized holding losses on securities
available-for-sale. The increase in 1994 was mainly due to net earnings
retention, reduced by the tax effected net unrealized holding losses on
securities available-for-sale as of December 31, 1994. The increase in 1993 was
primarily the result of $6,766,000 of net proceeds received from the Company's
public stock offering in that year. The remaining increase in 1993
stockholders' equity was primarily the result of net earnings retention. The
following table illustrates historical internal growth trends for the years
indicated.
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Return on assets 1.3% 1.3% 1.1%
Return on equity 11.2 11.0 10.3
Earnings retained 70.5 70.9 68.2
Dividend payout ratio 29.5 29.1 31.8
Average equity to average assets 11.8 11.5 10.6
Asset growth 26.6 (0.4) 11.4
---- --- ----
The Company is pursuing a policy of continued asset growth. In order to
maintain appropriate ratios of equity to total assets, a corresponding level of
capital growth must be achieved. Historically, capital growth has come
primarily from internal sources through increased earnings and a conservative
dividend policy. In addition, capital during 1995 increased as the result of
stock issued in the acquisition of Waterford and in 1993 through funds attracted
in the capital markets resulting from a public stock offering. The Company's
dividend policy considers stockholders' desire for current income and the
Company's need to provide internal capital growth through earnings retention.
The percentage of 1995 earnings retained remained consistent with 1994.
Dividends paid by the Banks to the Company are used primarily to fund
stockholders' dividends and for additional working capital.
There are certain regulatory constraints which affect the Company's capital
levels. In 1990, the Federal Reserve Board implemented additional capital
requirements calling for risk weights to be assigned to on-and-off balance sheet
items in arriving at risk-adjusted total assets. Effective December 19, 1992,
the bank regulators established five capital level definitions for financial
institutions: "well-capitalized," "adequately-capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." A well-capitalized bank or bank holding company must
satisfy certain percentage tests and not be subject to any regulatory capital
directive. The following table sets forth the Company's capital levels and
ratios at December 31, 1995, including the Tier 1 leverage ratio, and risk-based
capital ratios based upon Tier 1 capital (which does not include any addition
for the allowance for loan losses) and total risk-based capital (which considers
the allowance for loan losses as capital to the extent of 1.25% of risk-weighted
assets). Additionally, the table sets forth the comparative levels and ratios
of minimum capital and a "well-capitalized" institution as defined by the
regulators (dollars in thousands):
REGULATORY REGULATORY
MINIMUM WELL-CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
------ ----------- -----------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------------- ---------------- ------------------
TIER 1 LEVERAGE $30,684 11.0% $8,409 3.0% $14,015 5.0%
TIER 1 RISK-BASED
CAPITAL 30,684 16.1% 7,677 4.0% 11,516 6.0%
RISK-BASED CAPITAL 33,076 17.3% 15,355 8.0% 19,193 10.0%
------ ---- ------ --- ------ ----
For each capital ratio, the Company exceeds the requirements of a well-
capitalized institution. There are certain regulatory constraints which affect
the Company's capital levels. See Note 12 to the Consolidated Financial
Statements for additional explanation of these regulatory constraints.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of changes in the relative purchasing power of
money over time impacted by inflation. The impact of inflation is reflected in
the Company's other expenses which tend to rise during periods of general
inflation. The majority of the Company's assets and liabilities are monetary in
nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Consequently, interest rates have a greater impact on the Company's performance
than do the general levels of inflation. Management believes the most
significant impact on the Company's financial results is its ability to react to
interest rate changes and endeavors to maintain an essentially balanced position
between interest sensitive assets and liabilities in order to protect against
wide fluctuations in the Company's net interest margin.
PENDING ACCOUNTING CHANGES
Pending accounting changes for 1996 are set forth in detail as Note 1 to the
Notes to the Consolidated Financial Statements contained herein.
REPORT OF MANAGEMENT
The management of State Financial Services Corporation is responsible for the
preparations and integrity of the Consolidated Financial Statements and other
financial information included in this annual report. The financial statements
have been prepared in accordance with generally accepted accounting principles
and include amounts that are based upon informed judgments and estimates by
management. The other financial information in this annual report is consistent
with the financial statements.
The Company maintains a system of internal accounting controls. Management
believes that the internal accounting controls provide reasonable assurance that
transactions are executed and recorded in accordance with Company policy and
procedures and that the accounting records may be relied on as a basis for
preparation of the financial statements and other financial information.
The Company's independent auditors were engaged to perform an audit of the
Consolidated Financial Statements, and the auditor's report expresses their
opinion as to the fair presentation of the consolidated financial statements in
conformity with generally accepted accounting principles.
The Audit Committee of the Board of Directors, comprised of directors who are
not employees of the Company, meets periodically with management, the internal
auditors, and the independent auditors to discuss the adequacy of the internal
accounting controls. Both the independent auditors and the internal auditors
have full and free access to the Audit Committee.
/s/Michael J. Falbo
Michael J. Falbo
President and Chief Executive Officer
/s/Michael A. Reindl
Michael A. Reindl
Senior Vice President, Controller, and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
State Financial Services Corporation
We have audited the accompanying consolidated balance sheets of State
Financial Services Corporation and subsidiaries (the Company) as of December 31,
1995 and 1994, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1995 and 1994, and the consolidated results of their operations and
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investment securities in 1994.
/s/Ernst & Young LLP
January 19, 1996
STATE FINANCIAL SERVICES CORPORATION FINANCIAL STATEMENTS
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
-----------
1995 1994
---- ----
ASSETS
Cash and due from banks $ 16,107,613 $ 11,195,006
Federal funds sold 6,540,309 4,001,864
Other short-term investments 5,870,000 1,000,000
----------- -----------
Cash and cash equivalents 28,517,922 16,196,870
Investment securities:
Held-to-maturity (fair value of
$44,683,716 - 1995 and
$34,215,671 - 1994) 44,225,970 34,901,412
Available-for-sale (at fair value) 18,857,758 22,567,332
Loans (net of allowance for loan losses
of $2,711,362 - 1995
and $1,982,941 - 1994) 183,042,806 143,830,316
Premises and equipment 4,897,071 4,434,350
Accrued interest receivable 2,046,426 1,436,468
Other assets 3,449,248 1,808,134
----------- -----------
$285,037,201 $225,174,882
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY)
Deposits:
Demand $ 52,173,476 $ 46,782,692
Savings 65,470,981 66,365,935
Time deposits in excess of $100,000 9,401,308 5,708,129
Other time deposits 119,172,068 78,544,408
----------- -----------
Total deposits 246,217,833 197,401,164
Notes payable 1,061,844 115,364
Securities sold under agreement
to repurchase 3,300,160 300,000
Accrued expenses and other liabilities 875,689 554,718
Accrued interest payable 1,200,652 634,742
----------- -----------
Total liabilities 252,656,178 199,005,988
Stockholders' equity:
Preferred stock, $1 par value; authorized -
100,000 shares; issued and
outstanding - none -- --
Common stock, $.10 par value; authorized -
10,000,000 shares; issued and outstanding -
2,649,119 shares in 1995 and
2,382,814 shares in 1994 264,912 198,568
Additional paid-in capital 28,568,137 18,030,527
Retained earnings 4,187,224 9,215,542
Net unrealized holding loss on
securities available-for-sale (114,357) (708,361)
Guaranteed ESOP obligation (524,893) (567,382)
----------- -----------
Total stockholders' equity 32,381,023 26,168,894
----------- -----------
$285,037,201 $225,174,882
----------- -----------
See accompanying notes
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31
----------------------
1995 1994 1993
---- ---- ----
Interest income:
Loans $15,833,190 $12,086,365 $11,066,214
Investment securities:
Taxable 2,526,579 2,125,903 2,239,093
Tax-exempt 689,423 789,312 741,643
Federal funds sold 314,111 226,224 306,259
---------- ---------- ----------
Total interest income 19,363,303 15,227,804 14,353,209
Interest expense:
Deposits 7,029,954 4,750,979 4,753,539
Notes payable and
other borrowings 306,188 21,702 99,716
---------- ---------- ---------
Total interest expense 7,336,142 4,772,681 4,853,255
---------- ---------- ---------
Net interest income 12,027,161 10,455,123 9,499,954
Provision for loan losses 190,000 120,000 147,000
---------- ---------- ---------
Net interest income after
provision for loan losses 11,837,161 10,335,123 9,352,954
Other income:
Service charges on
deposit accounts 992,218 1,067,748 1,105,776
ATM service charges 204,694 214,920 177,949
Merchant services 715,137 607,545 453,132
Building rent 222,567 239,600 198,955
Investment securities
gains/(losses), net - (10,290) 237
Other 346,305 318,483 298,700
--------- --------- ---------
2,480,921 2,438,006 2,234,749
Other expenses:
Salaries and employee benefits 4,100,998 3,633,297 3,326,049
Net occupancy expense 770,545 782,805 780,636
Equipment rentals,
depreciation and maintenance 1,034,867 932,452 859,007
Data processing 544,499 609,349 644,121
Legal and professional 326,555 289,357 301,461
ATM fees 193,546 210,465 223,411
Merchant services 619,952 519,063 393,211
Regulatory agency assessments 228,768 442,884 408,075
Postage and courier 220,020 186,937 193,709
Office supplies 193,479 222,179 171,993
Advertising 160,546 202,095 197,372
Other 1,065,880 925,297 937,482
--------- --------- ---------
9,459,655 8,956,180 8,436,527
--------- --------- ---------
Income before income taxes 4,858,427 3,816,949 3,151,176
Income taxes 1,579,000 1,010,000 876,000
--------- --------- ---------
Net income $ 3,279,427 $ 2,806,949 $ 2,275,176
--------- --------- ---------
Net income per common
and common equivalent
share $ 1.36 $ 1.21 $ 1.06
---------- ---------- ----------
See accompanying notes
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized Guaranteed
Common Paid-in Retained Loss on ESOP
Stock Capital Earnings Securities Obligation Total
----- ------- -------- ---------- ---------- -----
Balances at
January 1, 1993 $139,675 $ 11,177,614 $5,674,039 $ -
$(398,507) $16,592,821
Net income - - 2,275,176 - - 2,275,176
Issuance of 5,596
shares of common
stock under 1990
Stock Plans 560 56,882 - - - 57,442
Issuance of 200
shares relating to 20%
stock dividend on
above Plans 20 2,980 (3,000) - - -
Issuance of 575,000
shares of
common stock 57,500 6,708,854 - - - 6,766,354
Cash dividends -
common stock - - (720,116) - - (720,116)
Reduction of guaranteed
ESOP obligation - - - - 51,500 51,500
Increase in guaranteed
ESOP obligation - - - - (267,500) (267,500)
------- ---------- --------- --------- --------- ----------
Balances at
December 31, 1993 197,755 17,946,330 7,226,099 - (614,507) 24,755,677
Net Income - - 2,806,949 - - 2,806,949
Issuance of 8,130 shares of common
stock under 1990 Stock Plans 813 84,197 - - - 85,010
Cash dividends - common stock - - (817,506) - - (817,506)
Investments fair value adjustment -
net of tax effect of $363,872 - - - (708,361) - (708,361)
Reduction in guaranteed
ESOP obligation - - - - 47,125 47,125
------- ---------- --------- --------- --------- ----------
Balances at December 31, 1994 198,568 18,030,527 9,215,542 (708,361) (567,382) 26,168,894
Net Income - - 3,279,427 - - 3,279,427
Issuance of 214,871 shares of common
stock in acquisition 21,487 3,180,741 - - - 3,202,228
Issuance of 7,258 shares of common
stock under 1990 Stock Plans 726 63,645 - - - 64,371
Cancellation of 208 shares of common
stock under 1990 Stock Plans (21) (2,891) - - - (2,912)
Cash dividends - common stock - - (967,478) - - (967,478)
Change in fair value of investments -
net of tax effect of $304,960 - - - 594,004 - 594,004
Reduction in guaranteed
ESOP obligation - - - - 42,489 42,489
Issuance of 441,520 shares of common
stock for 20% stock dividend 44,152 7,296,115 (7,340,267) - - -
------- ---------- ---------- -------- -------- ----------
Balances at December 31, 1995 $264,912 $28,568,137 $4,187,224 $(114,357) $(524,893) $32,381,023
See accompanying notes.
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
----------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES
Net income $3,279,427 $2,806,949 $2,275,176
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 190,000 120,000 147,000
Provision for depreciation 594,884 616,576 553,727
Amortization of investment securities
premiums and accretion of
discounts, net 100,748 165,908 190,134
Amortization of goodwill 64,148 29,711 29,711
Deferred income taxes (97,000) (92,000) (184,000)
Amortization of branch
acquisition premium 29,665 29,665 9,888
(Increase) decrease in
interest receivable (371,613) (171,909) 2,156
Increase in interest payable 434,212 49,243 39,594
Realized investment securities
(gains) losses - 10,290 (237)
Other (58,171) 13,184 761,412
--------- --------- ---------
Net cash provided by
operating activities 4,166,300 3,577,617 3,824,561
INVESTING ACTIVITIES
Proceeds from sales, maturity or principal
payments of held-to-maturity
investment securities 17,302,800 12,412,091 19,905,449
Purchases of held-to-maturity
investment securities (17,023,829) (13,874,294) (31,082,768)
Purchases of securities
available-for-sale (1,688,561) (9,078,694) -
Maturities and sales of
securities available-for-sale 7,118,938 12,460,795 -
Net increase in loans before
business acquisitions (14,968,956) (15,780,632) (10,437,465)
Net purchases of premises and equipment (372,144) (325,057) (588,795)
Business acquisitions, net of
cash and cash equivalents
acquired of $2,427,440 - 1995
and $72,729 in 1993:
Loans (24,433,534) - -
Investment securities
held-to-maturity (9,686,714) - -
Investment securities
available-for-sale (839,402) - -
Premises and equipment (685,461) - (195,000)
Goodwill (1,446,346) - -
Branch acquisition premium - - (148,325)
Deposits 33,044,661 - 11,136,845
Other, net (226,958) - 57,118
----------- ----------- ----------
Net cash used by investing
activities (13,905,506) (14,185,791) (11,352,941)
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31
----------------------
1995 1994 1993
---- ---- ----
FINANCING ACTIVITIES
Net increase (decrease) in
deposits before business acquisitions $15,772,008 $ (2,367,243) $ 6,334,709
Repayment of notes payable (115,364) (112,515) (2,677,113)
Proceeds of notes payable 1,061,844 - -
Net (increase) decrease in guaranteed
ESOP obligation 42,489 47,125 (216,000)
Net proceeds from securities sold
under agreements to repurchase 3,000,160 300,000 -
Cash dividends (967,478) (817,506) (720,116)
Issuance of common stock in acquisition 3,202,228 - -
Issuance of common stock in
public offering - - 6,766,354
Proceeds from exercise of stock options 64,371 76,610 44,192
----------- ----------- ----------
Net cash provided (used) by
financing activities 22,060,258 (2,873,529) 9,532,026
---------- ----------- ----------
Increase (decrease) in cash and
cash equivalents 12,321,052 (13,481,703) 2,003,646
Cash and cash equivalents at
beginning of year 16,196,870 29,678,573 27,674,927
---------- ---------- ----------
Cash and cash equivalents at end of year $28,517,922 $16,196,870 $29,678,573
---------- ---------- ----------
Supplementary information:
Interest paid $ 6,901,920 $ 4,701,736 $ 4,813,661
Income taxes paid 1,719,247 1,017,276 957,495
Non-cash transactions:
Investment securities transferred
to available-for-sale portfolio - 27,059,267 -
Issuance of common stock under
1990 Stock Plans, net (2,912) 8,400 13,500
See accompanying notes.
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The accounting policies followed by State Financial Services Corporation (the
Company) and the methods of applying those principles which materially affect
the determination of its financial position, cash flows or results of operations
are summarized below.
ORGANIZATION
The Company and its wholly owned subsidiaries, State Financial Bank, WBAC,
Inc. and its subsidiary, State Financial Bank - Waterford (acquired August 24,
1995) (collectively, the Banks) provide a full range of financial services to
customers through their branch locations in Milwaukee, Waukesha and Racine
counties in Wisconsin. The Banks are subject to competition from other financial
institutions and are also subject to the regulations of certain federal and
State of Wisconsin agencies and undergo periodic examinations by those
regulatory authorities.
CONSOLIDATION
The Consolidated Financial Statements include the accounts of the parent
company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ 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 and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and the valuation of foreclosed properties, management obtains
independent appraisals for significant properties.
INVESTMENT SECURITIES
Through December 31, 1993, investment securities were stated at amortized
cost, adjusted for the level-yield amortization of premiums and accretion of
discounts. Management determined the appropriate classification of securities at
the time of purchase. If the Bank had the intent and ability to hold securities
until maturity, they were classified as held-to-maturity and carried at
amortized historical cost. All of the Company's securities at December 31, 1993,
were classified as held-to-maturity.
As of January 1, 1994, the Company changed its method of accounting for
investments. Securities are classified as held-to-maturity, trading or
available-for-sale. As of January 1, 1994 and subsequent periods, management
determines the appropriate classification of securities at the time of purchase.
In accordance with the standard, prior period financial statements have not been
restated to reflect the change in accounting principle. The balance of
stockholders' equity as of January 1, 1994, was decreased by $33,518 (net of
$17,267 in deferred income taxes) to reflect the net unrealized holding losses
on securities classified as available-for-sale previously carried at amortized
cost or lower of cost or market.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are carried at amortized cost.
Debt securities that the Company does not have a positive intent and ability
to hold to maturity are classified as available-for-sale and are carried at
estimated fair value, with unrealized gains and losses, net of tax, reported as
a separate component of equity.
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 calculated using the level-
yield method, adjusted for prepayments, and is included in interest income from
investments. Realized gains and losses, and declines in value judged to be other
than temporary are included in net securities gains and losses. The cost of
securities is based on the specific identification method.
INTEREST ON LOANS
Interest income on loans is accrued and credited to operations based on the
principal amount outstanding. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest
and/or when, in the opinion of management, full collection is unlikely. When
interest accruals are discontinued, unpaid interest credited to income in the
current year is reversed and interest accrued in the prior year is charged to
the allowance for loan losses. Management may elect to continue the accrual of
interest when the loan is in the process of collection and the fair value of
collateral is sufficient to cover the principal balance and accrued interest.
Interest received on nonaccrual loans is either applied against principal or
reported as interest income according to management's judgment regarding the
collectibility of principal. Generally, loans are restored to accrual status
when the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
LOAN FEES AND RELATED COSTS
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amounts are amortized as an adjustment of the related
loan's yield. The Company is generally amortizing these amounts using the level-
yield method over the contractual life of the related loans. Fees related to
stand-by letters of credit are recognized over the commitment period.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio; past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio; adverse situations that may affect
the borrower's ability to repay; the estimated value of any underlying
collateral and other relevant factors. The allowance is increased by provisions
charged to earnings and reduced by charge-offs, net of recoveries.
As of January 1, 1995, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 114, "Accounting by Creditors for Impairment of a
Loan."Statement No. 114 only applies to the Company's nonhomogeneous loan
portfolios, including certain commercial and multifamily and commercial loans. A
nonhomogeneous loan is considered impaired when there is serious doubt about
further collectibility of principal and interest, even though the loan is
performing. Under the new standard, the 1995 allowance for loan losses related
to loans that are identified for evaluation in accordance with Statement No. 114
is based on discounted cash flows using the loan's initial effective rate or the
fair value of the collateral for certain collateral dependent loans. Prior to
1995, the allowance for loan losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans. There was no effect on the financial statements as of January
1, 1995, as a result of the adoption of this accounting policy.
A substantial portion of the Banks' loans are to customers located in
Southeastern Wisconsin. Accordingly, the ultimate collectibility of a
substantial portion of the Banks' loan portfolio is susceptible to changes in
market conditions in that area.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation. The provision for depreciation is computed using both
accelerated and straight-line methods over the estimated useful lives of the
respective assets.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average common and
common equivalent (if dilutive) shares outstanding, as restated, to give effect
to the January 23, 1996 and March 11, 1993 stock dividends. The weighted average
number of shares used was 2,414,629 in 1995, 2,328,668 in 1994 and 2,147,053 in
1993.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income tax assets and liabilities are adjusted regularly to amounts estimated to
be receivable or payable based on current tax law and the Company's tax status.
Consequently, tax expense in future years may be impacted by changes in tax
rates and tax return limitations.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers cash and
due from banks and investment securities with maturities of three months or less
at the time of acquisition as cash and cash equivalents.
PENDING ACCOUNTING CHANGES
In 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets To Be Disposed of,"and Statement No.
122, "Accounting for Mortgage Servicing Rights, an Amendment of Statement 65."
The Company must adopt these new standards no later than the year ending
December 31, 1996.
Statement No. 121 requires impairment losses to be recounted for long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amount. The impairment loss is measured by comparing the fair value of the asset
to its carrying amount. The Company does not expect the adoption of this
standard to be material.
Statement No. 122, which must be adopted prospectively, requires the cost of
originating mortgage servicing rights to be capitalized separately from the cost
of originating a loan when a definitive plan to sell or securitize loans and
retain the mortgage servicing rights exists. Once recorded, mortgage servicing
rights are amortized in proportion to expected net servicing income. The Company
does not expect the impact of the adoption of this standard to be material.
RECLASSIFICATIONS
Certain balances have been reclassified in 1993 and 1994 to conform to their
presentation in 1995.
2. ACQUISITION OF WATERFORD BANCSHARES, INC.
On August 24, 1995, the Company completed its acquisition of Waterford
Bancshares, Inc. (Bancshares). Bancshares was the parent bank holding company of
Waterford Bank, Waterford, Wisconsin. Bancshares was merged into the Company's
wholly owned subsidiary, WBAC, Inc. (WBAC). In connection with the acquisition,
the Company issued 257,845 shares of its common stock with a value of $3,322,000
(net of acquisitions costs to date totaling $120,000), $1,061,844 in two-year
installment notes, and $2,260,401 in cash in exchange for the outstanding common
stock of Bancshares. The acquisition was recorded using purchase accounting.
WBAC's consolidated financial condition has been included in the Company's
consolidated balance sheet as of December 31, 1995, and WBAC's consolidated
results of operations have been reflected in the Company's consolidated
statements of income beginning as of the acquisition date.
On a pro forma basis, the pro forma net income and net income per common and
common equivalent share for the years ended December 31, 1995 and 1994, after
giving effect to the Bancshares' acquisition as if it occurred on January 1,
1994 are as follows.
Year ended December 31
----------------------
1995 1994
---- ----
Total income $22,402,091 $20,498,537
Net income 3,354,652 2,660,428
Net income per common and
common equivalent share 1.29 1.03
3. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Banks are required to maintain reserve balances with the Federal Reserve
Bank. The average amount of reserve balances for the year ended December 31,
1995, was approximately $1,468,500.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investments in debt securities
follow:
HELD-TO-MATURITY
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DECEMBER 31, 1995: COST GAINS LOSSES FAIR VALUE
- ----------------- ---- ----- ------ ----------
U.S. TREASURY SECURITIES
AND OBLIGATIONS OF U.S.
GOVERNMENT AGENCIES $27,388,783 $436,277 $( 12,887) $27,812,173
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS 16,337,187 130,967 ( 51,251) 16,416,903
OTHER SECURITIES 500,000 5,750 ( 51,110) 454,640
---------- ------- --------- ----------
$44,225,970 $572,994 $(115,248) $44,683,716
---------- ------- --------- ----------
December 31, 1994:
- -----------------
U.S. Treasury securities
and obligations of U.S.
government agencies $20,026,354 $ 145 $ (328,500) $19,697,999
Obligations of states and
political subdivisions 14,575,058 17,580 (328,596) 14,264,042
Other securities 300,000 - (46,370) 253,630
---------- ------ --------- ----------
$34,901,412 $ 17,725 $(703,466) $34,215,671
---------- ------ ---------- ----------
AVAILABLE-FOR-SALE
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DECEMBER 31, 1995: COST GAINS LOSSES FAIR VALUE
- ----------------- ---- ----- ------ ----------
U.S. TREASURY SECURITIES
AND OBLIGATIONS OF U.S.
GOVERNMENT AGENCIES $ - $ - $ - $ -
MORTGAGE-BACKED SECURITIES 17,281,336 $ 2,771 (176,040) 17,108,067
OTHER SECURITIES 1,749,691 $ - - 1,749,691
---------- ------- --------- ----------
$19,031,027 $ 2,771 $(176,040) $18,857,758
---------- ------- --------- ----------
December 31, 1994:
- -----------------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 2,923,987 $ - $ (4,131) $ 2,919,856
Mortgage-backed securities 20,014,440 - (1,068,102) 18,946,338
Other securities 701,138 - - 701,138
---------- ------ ---------- ----------
$23,639,565 $ - $(1,072,233) $22,567,332
---------- ------ ---------- ----------
The amortized cost and estimated fair value of investment securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers or issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
HELD-TO-MATURITY
ESTIMATED
AMORTIZED COST FAIR VALUE
-------------- ----------
DUE IN ONE YEAR OR LESS $13,638,820 $13,688,190
DUE AFTER ONE YEAR THROUGH FIVE YEARS 27,090,563 27,382,307
DUE AFTER FIVE YEARS THROUGH TEN YEARS 1,863,663 1,893,245
DUE AFTER TEN YEARS 1,632,924 1,719,974
---------- ----------
$44,225,970 $44,683,716
---------- ----------
AVAILABLE-FOR-SALE
ESTIMATED
AMORTIZED COST FAIR VALUE
-------------- ----------
DUE IN ONE YEAR OR LESS $11,204,028 $11,127,005
DUE AFTER ONE YEAR THROUGH FIVE YEARS 7,826,999 7,730,753
---------- ----------
$19,031,027 $18,857,758
---------- ----------
Proceeds from sales of investments in debt and marketable equity available-
for-sale securities during 1995 were $829,805. No gain or loss was realized on
the 1995 sales. In 1994, proceeds from sales of investments in debt and
marketable equity available-for-sale securities were $4,475,035. Gross losses of
$10,290 and no gains were realized on the 1994 sales. Due to the Company's
adoption of SFAS No. 115 effective January 1, 1994, no debt and marketable
equity securities were classified as available-for-sale prior to January 1,
1994. In 1993, proceeds from sales of investments in debt and marketable equity
securities were $250,154. Gross gains of $237 and no losses were realized on the
1993 sales.
At December 31, 1995 and 1994, investment securities with a carrying value of
$12,164,239 and $3,108,372, respectively, were pledged as collateral to secure
public deposits and for other purposes.
5. LOANS
A summary of loans outstanding at December 31, 1995 and 1994, follows:
1995 1994
---- ----
Commercial $ 46,322,568 $ 39,231,465
Consumer 21,997,489 19,157,076
Real estate mortgage 105,139,120 75,908,918
Other 12,294,991 11,515,798
----------- -----------
$185,754,168 $145,813,257
----------- -----------
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three years ended December
31, 1995 are as follows:
1995 1994 1993
---- ---- ----
Balance at beginning of year $1,982,941 $2,084,467 $2,050,762
Allowance from acquired bank 734,577 - -
Provision for loan losses 190,000 120,000 147,000
Charge- offs (308,994) (280,856) (228,601)
Recoveries 112,838 59,330 115,306
--------- --------- ---------
Net charge-offs (196,156) (221,526) (113,295)
--------- --------- ---------
Balance at end of year $2,711,362 $1,982,941 $2,084,467
--------- --------- ---------
Total nonaccrual loans were $1,386,000 and $1,311,000 at December 31, 1995 and
1994, respectively.
7. LOANS TO RELATED PARTIES
In the ordinary course of business, loans are granted to related parties,
which include bank officers, principal shareholders, directors and entities in
which such persons are principal shareholders. Loans outstanding at December 31,
1995 and 1994 to such related parties were approximately $5,841,000 and
$5,711,000, respectively. During 1995, approximately $1,121,000 of new loans
were made and repayments totaled approximately $991,000. Loans to related
parties were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than the normal risk of
collectibility.
8. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1995 and 1994, is as
follows:
1995 1994
---- ----
Buildings $ 4,328,973 $3,262,325
Furniture and equipment 4,483,867 3,696,978
Leasehold improvements 1,565,679 1,444,080
---------- ---------
10,378,519 8,403,383
Less accumulated depreciation 6,351,073 4,857,103
---------- ---------
4,027,446 3,546,280
Land 869,625 888,070
---------- ---------
$ 4,897,071 $4,434,350
---------- ---------
9. NOTES PAYABLE
Notes payable at December 31, 1995, consist of notes payable to shareholders
of the former Waterford Bancshares, due on September 19, 1997. These notes were
issued as part of the Company's acquisition of Waterford which was approved by
Waterford's shareholders at the special shareholder meeting held on August 23,
1995. Notes payable at December 31, 1994, consist solely of a mortgage note
payable, which was prepaid in 1995.
The Company has a $1,000,000 line of credit available through June 1, 1996, at
the prime rate (8.25% at December 31, 1995). As of December 31, 1995, no amounts
are outstanding on the line.
10. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory money purchase pension plan covering
substantially all employees who meet certain minimum age and service
requirements. Annual contributions are fixed based on compensation of
participants. The Company's contribution to the pension plan for each
participant is an amount equal to 4% of the participant's total eligible
compensation plus an additional 2% of the participant's eligible compensation in
excess of $20,000. The Company's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes. Company
contributions are made annually at the discretion of the board of directors and
amounted to $112,493 in 1995, $94,320 in 1994 and $104,773 in 1993. Plan assets
are invested in a diversified portfolio of high quality debt and equity
investments.
In 1990, the Company formed an Employees' Stock Ownership Plan (ESOP) for the
benefit of employees meeting certain minimum age and service requirements.
Company contributions to the ESOP trust, which was established to fund the plan,
are made on a discretionary basis and are expensed to operations in the year
accrued ($69,957 in 1995, $65,196 in 1994 and $50,434 in 1993). The number of
shares released to participants is determined based on the annual contribution
amount plus any dividends paid on unallocated shares divided by the market price
of the stock at the contribution date.
The activity in the number of unearned ESOP shares follows:
1995 1994 1993
---- ---- ----
Balance at beginning of year 50,955 58,613 41,050
Shares committed to be released (8,961) (7,658) (6,437)
Additional shares purchased - - 24,000
------ ------ ------
Balance at end of year 41,994 50,955 58,613
------ ------ ------
At December 31, 1995, the fair value of unearned ESOP shares is $603,664.
The cost of the unearned ESOP shares has been shown as a reduction of
stockholders' equity.
11. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return basis and
remit to the Company amounts determined to be currently payable or realize the
benefit they would be entitled to on such a basis. The Company and subsidiaries
file separate state income tax returns.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
1995 1994 1993
---- ---- ----
Current:
Federal $1,434,000 $1,024,000 $ 864,000
State 253,000 78,000 196,000
--------- --------- ---------
1,687,000 1,102,000 1,060,000
--------- --------- ---------
Deferred (credit):
Federal ( 85,000) (74,000) (136,000)
State ( 23,000) (18,000) ( 48,000)
--------- -------- ---------
(108,000) (92,000) (184,000)
--------- -------- ---------
$1,579,000 $1,010,000 $ (876,000)
--------- --------- ---------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities of December 31, 1995 and 1994,
are as follows:
1995 1994
---- ----
Deferred tax assets:
Allowance for loan losses $ 720,000 $ 415,000
Federal net operating loss carry forward 245,000 278,000
State net operating loss carry forward 254,000 243,000
Unrealized loss on investment securities 59,000 363,000
Accumulated depreciation 178,000 49,000
Other 189,000 381,000
--------- ---------
1,645,000 1,729,000
Valuation allowance for deferred tax assets (499,000) (521,000)
--------- ---------
Deferred tax assets 1,146,000 1,208,000
Deferred tax liabilities - other 138,000 293,000
Purchase accounting adjustments 300,000 -
--------- ---------
Net deferred tax assets $ 708,000 $ 915,000
--------- ---------
The income tax expense differs from that computed at the federal statutory
corporate tax rate as follows:
1995 1994 1993
---- ---- ----
Income before income taxes $4,858,497 $3,816,986 $3,150,746
--------- --------- ---------
Income tax expense at the
federal statutory rate of 34% $1,651,889 $1,297,775 $1,071,254
Increase (decrease) resulting from:
Tax-exempt interest income (263,000) (302,000) (299,000)
State income taxes, net of
federal income tax benefit 164,000 111,000 95,000
Decrease in valuation allowance
for deferred tax assets (22,000) (170,000) (34,000)
Other 48,111 73,225 42,746
--------- --------- --------
$1,579,000 $1,010,000 $ 876,000
--------- --------- --------
At December 31, 1995, the Company had federal net operating loss carry
forwards of approximately $720,000 and state net operating loss carry forwards
of approximately $4,877,000. These carry forwards which are subject to an annual
limitation of approximately $100,000 are available to reduce future tax expense
through the year ending December 31, 2008.
12. RESTRICTIONS ON SUBSIDIARIES' DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Company from its assets, which are mainly provided
by dividends from the Banks. However, certain restrictions exist regarding the
ability of the Banks to transfer funds to the Company in the form of cash
dividends, loans or advances. Approval of the regulatory authorities is required
to pay dividends in excess of certain levels of the Banks' retained earnings.
As of December 31, 1995, the Banks had net retained earnings of $5,898,000,
which are available for distribution to the Company as dividends without prior
regulatory approval.
Under Federal Reserve Bank regulations, the Banks are limited as to the amount
it may loan to its affiliates, including the Company, unless such loans are
collateralized by specified obligations. At December 31, 1995, the maximum
amount available for transfer from the Banks to the Company in the form of loans
approximated 8% of consolidated net worth.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Loan commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments on
behalf of customers when certain specified future events occur. Both
arrangements have credit risk essentially the same as that involved in extending
loans to customers and are subject to the Company's normal credit policies.
Collateral is obtained based on management's credit assessment of the customer.
The Company's maximum exposure to credit loss for loan commitments (unfunded
loans and unused lines of credit) and standby letters of credit outstanding at
December 31, 1995 were $29,058,000 and $1,147,000, respectively. All such
arrangements expire in 1996. Loan commitments and standby letters of credit were
$28,249,000 and $1,381,000, respectively, at December 31, 1994.
14. LEASES
The Company rents space for banking facilities under operating leases. Certain
leases include renewal options and provide for the payment of building operating
expenses and additional rentals based on adjustments due to inflation. Rent
expense under operating leases totaled approximately $382,000, $416,000 and
$406,000, in 1995, 1994 and 1993, respectively.
Future minimum payments under noncancellable operating leases with initial
terms of one year or more consisted of the following at December 31, 1995:
1996 $ 324,000
1997 324,000
1998 274,000
1999 276,000
2000 282,000
Thereafter 2,209,000
---------- ---------
$3,689,000
---------
Minimum rentals for 1996 and 1997 include $156,000 per year (1998 and 1999
include $106,000) relative to space used by the Bank which is leased from a
partnership, two partners of which are also directors of the Company. Minimum
payments have not been reduced by minimum sublease payments of $84,000 due in
the future under noncancellable subleases.
15. STOCKHOLDERS' EQUITY, STOCK PLANS AND OPTIONS
The Company's board of directors adopted the 1990 Stock Option/Stock
Appreciation Rights and Restricted Stock Plan for Key Officers and Employees,
and the 1990 Director Stock Option Plan, (collectively, the 1990 Stock Plans).
The Company has reserved 253,821 shares of its common stock as of December 31,
1995, for the exercise of options and issuance of shares under the 1990 Stock
Plans. Options are exercisable at a price equal to the fair market value of the
shares at the time of the grant. Options must be exercised within ten years
after grant.
A summary of restricted stock and stock option transactions follows, as
restated, to give effect to the January 23, 1996 and March 11, 1993, stock
dividends.
Number of
Shares of Number Total
Restricted of Stock Number
Stock Price Options Price of Shares
----- ----- ------- ----- ---------
Balance at
January 1, 1993 15,120 $7.29-$9.90 82,008 $5.56-$9.90 97,128
Granted 1,200 11.04 840 11.04 2,040
Vested restricted stock (4,464) 7.29-9.90 - - (4,464)
Exercised - - (5,755) 6.08-7.29 (5,755)
Canceled - - (421) 7.29 (421)
------ - ------- ---- -------
Balance at
December 31, 1993 11,856 7.29-11.04 76,672 5.56-11.04 88,528
Granted 720 11.67 15,624 14.00 16,344
Vested restricted stock (360) 9.90 - - (360)
Exercised - - (9,036) 5.56-7.29 (9,036)
Canceled - - (360) 5.56-7.29 (360)
------ - ------- --------- -------
Balance at
December 31, 1994 12,216 9.90-11.67 82,900 5.56-11.67 95,116
GRANTED - - 1,560 13.33 1,560
VESTED RESTRICTED STOCK (4,214) 7.29-11.67 - - (4,214)
EXERCISED - - (8,710) 7.29-9.73 (8,710)
CANCELED (250) 11.67 (544) 7.29-11.04 (794)
------- ----- ------- ---------- -------
BALANCE AT
DECEMBER 31, 1995 7,752 $7.29-$11.67 75,206 $7.29-$13.33 82,958
----- ------------ ------- ------------ ------
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 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. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The Company does not routinely measure the market value of financial
instruments such as is required by SFAS No. 107, because such measurements
represent point-in-time estimates of value. It is not the intent of the Company
to liquidate and therefore realize the difference between market value and
carrying value and, even if it were, there is no assurance that the estimated
market values could be realized. Thus, the information presented is not
particularly relevant to predicting the Company's future earnings or cash flows.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD AND OTHER SHORT-TERM INVESTMENTS
The carrying amounts reported in the balance sheet for cash, federal funds
sold and other short-term investments approximate those assets' fair values.
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices, where
available.
LOANS RECEIVABLE
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
commercial real estate loans and fixed rate mortgage, consumer and other loans
are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality.
DEPOSITS
The fair values disclosed for interest and noninterest checking accounts,
savings accounts and money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
The fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
of the outstanding certificates of deposit.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amounts reported in the balance sheet for accrued interest
receivable and payable approximate their fair values.
NOTES PAYABLE
The carrying values of the Company's notes payable approximate fair value.
OFF-BALANCE-SHEET INSTRUMENTS
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and generally
require payment of a fee. As a consequence, the estimated fair value of the
commitments is approximately equal to the related fee received, which is
nominal.
The carrying amounts and fair values of the Company's financial instruments
consist of the following at December 31, 1995 and 1994:
1995 1994
---- ----
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------------------ -------------------
Cash and due from banks $16,107,613 $16,107,613 $11,195,006 $11,195,006
Federal funds sold 6,540,309 6,540,309 4,001,864 4,001,864
Other short-term investments 5,870,000 5,870,000 1,000,000 1,000,000
Investment securities 63,083,728 63,541,474 57,468,744 56,783,003
Accrued interest receivable 2,046,426 2,046,426 1,436,468 1,436,468
Loans 185,754,168 185,918,182 145,813,257 144,121,723
Deposits 246,217,833 246,539,940 197,401,164 197,040,341
Notes payable 1,061,844 1,061,844 115,364 115,364
Accrued interest payable 1,200,652 1,200,652 634,742 634,742
17. STATE FINANCIAL SERVICES CORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
December 31
-----------
1995 1994
---- ----
ASSETS
Cash and due from banks $ 835,202 $ 417,588
Other short-term investments 1,500,000 1,000,000
---------- ----------
Cash and cash equivalents 2,335,202 1,417,588
Investments:
Available-for-sale - 2,919,856
Held-to-maturity 2,277,587 1,773,002
Investment in State Financial Bank 21,799,499 20,000,979
Investment in WBAC, Inc. 6,777,188 -
Recoverable income taxes 500,741 352,525
Other assets 319,213 152,304
---------- ----------
Total assets $34,009,430 $26,616,254
---------- ----------
LIABILITIES
Accrued expenses and other liabilities $ 566,563 $ 447,360
Note payable 1,061,844 -
STOCKHOLDERS' EQUITY:
Common stock 264,912 198,568
Additional paid-in capital 28,568,137 18,030,527
Retained earnings 4,187,224 9,215,542
Unrealized loss on securities
available-for-sale (114,357) (708,361)
Less guaranteed ESOP obligation (524,893) (567,382)
---------- ----------
Total stockholders' equity 32,381,023 26,168,894
---------- ----------
Total liabilities and
stockholders' equity $34,009,430 $26,616,254
---------- ----------
See accompanying notes
STATEMENTS OF INCOME
Year ended December 31
----------------------
1995 1994 1993
---- ---- ----
Income:
Dividends $2,250,000 $2,050,000 $2,106,847
Interest 336,693 198,618 123,089
Management fees 681,313 662,226 579,831
Other 28 11,171 -
--------- --------- ---------
3,268,034 2,922,015 2,809,767
Expenses:
Interest 68,243 41,726 82,577
Other 1,313,680 1,263,808 1,034,702
--------- --------- ---------
1,381,923 1,305,534 1,117,279
--------- --------- ---------
Income before income tax credit
and equity
in undistributed net
income of subsidiaries 1,886,111 1,616,481 1,692,488
Income tax credit 110,515 149,714 195,612
--------- --------- ---------
1,996,626 1,766,195 1,888,100
Equity in undistributed net
income (excess of net
income of subsidiaries
over dividends) 1,282,801 1,040,754 387,076
--------- --------- ---------
Net Income $3,279,427 $2,806,949 $2,275,176
--------- --------- ---------
STATEMENTS OF CASH FLOWS
Year ended December 31
----------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES
Net income $3,279,427 $2,806,949 $2,275,176
Adjustments to reconcile
net income to net cash
provided by operating activities:
Equity in undistributed income (1,282,801) (1,040,754) (387,076)
Deferred income taxes 2,000 17,883 (40,300)
Other (96,976) 175,622 1,125
--------- --------- ---------
Net cash provided by
operating activities 1,901,650 1,959,700 1,848,925
INVESTING ACTIVITIES
Decrease (increase) in other assets (104,358) 18,932 (405,367)
Purchase of investment securities (3,626,904) (4,839,263) (5,775,000)
Maturities of investment securities 6,049,000 4,417,667 1,500,000
Acquisition of/additional
investment in subsidiaries (6,702,316) - (1,000,000)
----------- --------- -----------
Net cash used by investing
activities (4,384,578) (402,664) (5,680,367)
FINANCING ACTIVITIES
Proceeds of notes payable 1,061,844 - -
Repayment of notes payable - - (1,976,250)
Net increase (decrease) in
guaranteed ESOP obligation 42,489 47,125 (216,000)
Cash dividends (967,478) (817,506) (720,115)
Proceeds from issuance of common stock - - 7,475,000
Costs of public offering - - (708,646)
Costs associated with acquisition (119,677) - -
Issuance of common stock in
acquisition 3,321,905 - -
Proceeds from exercise of
stock options 64,371 76,610 43,942
Issuance (cancellation) of
restricted stock (2,912) 8,400 13,500
--------- --------- ---------
Net cash provided (used) by
financing activities 3,400,542 (685,371) 3,911,431
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents 917,614 871,665 79,989
Cash and cash equivalents at
beginning of year 1,417,588 545,923 465,934
--------- --------- ---------
Cash and cash equivalents at
end of year $2,335,202 $1,417,588 $ 545,923
--------- --------- ---------
Noncash transactions -
Issuance of common stock under
1990 Stock Plans, net $ (2,912) $ 8,400 $ 13,500
INVESTOR INFORMATION
THE STOCK DIVIDEND
As of January 23, 1996, there were 2,208,559 shares of Common Stock
outstanding. On January 24, 1996, the Company declared a 20% stock dividend to
be paid on February 29, 1996 to stockholders of record as of February 14, 1996
(the "Stock Dividend"). Upon the payment of the Stock Dividend, there will be
2,650,270 shares of common stock issued and outstanding (subject to minor
adjustment for the issuance of cash in lieu of fractional shares). Unless
otherwise indicated, information contained in this Annual Report gives effect to
the Stock Dividend.
MARKET PRICE AND DIVIDENDS FOR COMMON STOCK
At March 1, 1996, there were approximately 709 stockholders of record and 622
estimated additional beneficial stockholders for an approximate total of 1,331
stockholders of the Company's Common Stock.
Holders of Common Stock are entitled to receive dividends as may be declared
by the Company's Board of Directors and paid from time to time out of funds
legally available therefore. The Company's ability to pay dividends depends
upon the receipt of dividends from the Banks. The Banks' ability to pay
dividends is regulated by banking statutes. The declaration of dividends by the
Company is discretionary and will depend on operating results, financial
condition, regulatory limitations, tax considerations, and other factors. See
Note 12 to the Consolidated Financial Statements for information concerning
restrictions on the payment of dividends. Although the Company has regularly
paid dividends since its inception in 1984, there can be no assurance that such
dividends will be paid in the future.
The following table sets forth the historical market price of and dividends
declared with respect to Common Stock since January 1, 1994. All figures have
been restated to give effect to the Stock Dividend as if it had occurred as of
January 1, 1994.
Quarter Ended High Price Low Price Cash Dividend
------------- ---------- --------- -------------
MARCH 31, 1995 $12.50 $11.25 $0.092
JUNE 30, 1995 12.71 11.67 0.100
SEPTEMBER 30, 1995 14.38 12.08 0.100
DECEMBER 31, 1995 15.21 13.33 0.100
March 31, 1994 $11.46 $ 9.38 $0.083
June 30, 1994 11.46 9.38 0.083
September 30, 1994 12.92 10.83 0.092
December 31, 1994 12.92 11.25 0.092
----------------- ----- ----- -----
STOCK LISTING
State Financial Services Corporation's Common Stock is traded on the Nasdaq
Stock Market ("Nasdaq") under the symbol "SFSW." Nasdaq is a highly-
regulated electronic securities market comprised of competing Market Makers
whose trading is supported by a communications network linking them to quotation
dissemination, trade reporting, and order execution systems. This market also
provides specialized automation services for screen-based negotiations of
transactions, on-line comparison of transactions, and a range of informational
services tailored to the needs of the securities industry, investors, and
issuers. Nasdaq is operated by The Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the National Association of Securities Dealers, Inc.
The Company's stock appears in the WALL STREET JOURNAL, THE MILWAUKEE
JOURNAL/SENTINEL, and other publications usually as State Financial.
DIVIDEND REINVESTMENT PLAN
The Company has a Dividend Reinvestment Plan (the "DRP") for the benefit of
all stockholders. The DRP is administered by Firstar Trust Company. Under
the DRP, registered stockholders of the Company can elect to have their
dividends reinvested to purchase additional shares of the Company's Common
Stock. To receive information on the DRP, please contact Michael A. Reindl,
Senior Vice President, Controller, and Chief Financial Officer, State Financial
Services Corporation, 10708 West Janesville Road, Hales Corners, Wisconsin
53130, or call (414) 425-1600.
FORM 10-K
The Company's annual report on Form 10-K for the year ended December 31, 1995
as filed with the Securities and Exchange Commission is available upon request
without charge to stockholders of record. Please contact Michael A. Reindl,
Senior Vice President, Controller, and Chief Financial Officer, State Financial
Services Corporation, 10708 West Janesville Road, Hales Corners, Wisconsin
53130, or call (414) 425-1600.
ANNUAL MEETING
The annual meeting of stockholders of State Financial Services Corporation
will be held at 4:00 P.M. (CDT) on Wednesday, April 24, 1996 at Tuckaway Country
Club, 6901 West Drexel Avenue, Franklin, Wisconsin.
MARKET MAKERS
Robert W. Baird & Company, Inc., Milwaukee, Wisconsin
Frederick and Company, Inc., Milwaukee, Wisconsin
Carl M. Hennig, Inc., Oshkosh, Wisconsin
Herzog, Heine, Geduld, Inc., New York, New York
Howe Barnes Investments, Inc., Chicago, Illinois
Principal Financial Securities, Inc., Chicago, Illinois
M.A. Schapiro & Company, Inc., New York, New York
INVESTOR INFORMATION
Financial Information
Michael A. Reindl,
Senior Vice President, Controller, and Chief Financial Officer
State Financial Services Corporation
10708 West Janesville Road
Hales Corners, Wisconsin 53130
(414) 425-1600
Independent Auditors
Ernst & Young LLP
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
Transfer Agent
Firstar Trust Company Investor Services
615 East Michigan Avenue
Milwaukee, Wisconsin 53202
(800) 637-7549
(414) 276-3737
Corporate Legal Counsel
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, S.C.
1000 North Water Street
Milwaukee, Wisconsin 53202
Directors and Officers
STATE FINANCIAL SERVICES CORPORATION
DIRECTORS
Jerome J. Holz - Chairman of the Board and President,
Holz Motors, Inc.; Chairman of the Board, State
Financial Services Corporation
Michael J. Falbo - President and Chief Executive Officer,
State Financial Services Corporation
Richard A. Horn - President, Horn Brothers, Inc.
Barbara Holz-Weis - Owner, Barb's Green House Florist
David M. Stamm - President, George Webb Corporation
Robert R. Spitzer - President Emeritus, Milwaukee
School of Engineering
OFFICERS
Jerome J. Holz - Chairman of the Board, Vice President
Michael J. Falbo - President and Chief Executive Officer
Michael A. Reindl - Senior Vice President, Controller and Chief
Financial Officer
James J. Bartoszek - Secretary/Treasurer
Donna M. Bembenek - Vice President and Director of Marketing
Barbara J. Smith - Assistant Vice President
Annette F. Esteves - Assistant Vice President and Assistant Controller
Donald J. Buechler - Loan Review and Compliance Officer
Diana Le Blanc - Auditor
Rosalie C. Plautz - Administrative Officer
STATE FINANCIAL BANK
DIRECTORS
Bruce Arbit
Gordon Banerian
John B. Beckwith
President-South Unit
Wayne Boldt
Ethel M. Bourque
Jerome E. Cesarz
Michael J. Falbo
Vice Chairman and CEO
Michael Green
Jerome J. Holz
Chairman of the Board
Richard A. Horn
Judy Holz-Stathas
Barbara Holz-Weis
Philip F. Hudson
President-North Unit
Roger H. Kriete
Peyton A. Muehlmeier
Salvatore Sendik
Robert R. Spitzer
David M. Stamm
Dr. Charles Wilson,
Secretary
Cyril Zvonar
OFFICERS
Gerilyn J. Arndt
James J. Bartoszek
John B. Beckwith
David J. Byrge
Kathleen A. Eusebio
Michael J. Falbo
Debra K. Fiedler
Mary P. Fraser
Joyce M. Goodman
Robert L. Hoepfner
Jerome J. Holz
Philip F. Hudson
David P. Johnson
Robert W. Kaiser
Ronald I Kaminsky
Lucy C. Korbitz
Thomas M. Lilly
Barbara A. Marx
Rosalie C. Plautz
John R. Rinderle
Marcy L. Schneider
Rose A. Shebesta
Carol A. Sommer
Jack J. Spoerl
John C. Walch
STATE FINANCIAL BANK OFFICE LOCATIONS
Brookfield (414) 789-9003
Greenfield (414) 281-2500
Muskego (414) 679-2800
Glendale (414) 351-7400
Hales Corners (414) 425-1600
Waukesha (414) 544-1750
Milwaukee/University (414) 961-5800
STATE FINANCIAL BANK - WATERFORD
DIRECTORS
Oliver DeHart
Chairman of the Board
Michael J. Falbo
Jerome J. Holz
Frances M. Koukol
John Mamerow
Charles M. Noll
Director Emeritus
Jeryl M. Sturino
President and CEO
Gary Schildt
OFFICERS
Dawn M. Brossard
Frances M. Koukol
Frances M. Morrical
Jeryl M. Sturino
Telephone (414) 534-3151
Deposits in State Financial Bank and State Financial Bank - Waterford are FDIC
insured up to $100,000.
EXHIBIT 22
SUBSIDIARIES OF SFSC SERVICES CORPORATION
SUBSIDIARY NAME STATE OF INCORPORATION
- --------------- ----------------------
State Financial Bank Wisconsin
Hales Corners Development Corporation Wisconsin
Hales Corners Investment Corporation Nevada
WBAC, Inc. Wisconsin
State Financial Bank - Waterford Wisconsin
Waterford Investment Corporation Nevada
Subsidiary of State Financial Bank
Subsidiary of WBAC, Inc.
Subsidiary of State Financial Bank - Waterford
EXHIBIT 24
We consent to the incorporation by reference in this Annual Report (Form
10-K) of State Financial Services Corporation of our report dated January 19,
1996, included in the 1995 Annual Report to the shareholders of State Financial
Services Corporation.
/s/ Ernst & Young, LLP
Milwaukee, Wisconsin
March 18, 1996
EXHIBIT 99.4
STATE FINANCIAL SERVICES CORPORATION
March 15, 1996
Dear Shareholder:
You are cordially invited to attend the 1996 Annual Meeting of the
Shareholders of State Financial Services Corporation. The 1996 Annual Meeting
will be held at 4:00 P.M. Central Time on Wednesday, April 24, 1996 at Tuckaway
Country Club, 6901 West Drexel Avenue, Franklin, Wisconsin.
Information about the meeting, including a description of the matters on
which the shareholders will act, is contained in the attached Notice of Annual
Meeting and Proxy Statement. Directors and officers of State Financial Services
Corporation as well as a representative from Ernst & Young LLP, the Company's
independent auditors, will be present at the meeting to respond to any questions
that shareholders may have.
WE ENCOURAGE YOU TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU PLAN TO
ATTEND, WE ASK THAT YOU COMPLETE, SIGN, AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT IN THE ENVELOPE PROVIDED SO THAT YOUR VOTE CAN BE COUNTED AT THE
MEETING.
On behalf of the Board of Directors and the employees of State Financial
Services Corporation, I wish to extend my gratitude for your continued support
of our organization.
Sincerely,
/s/ Michael J. Falbo
Michael J. Falbo
President and Chief Executive Officer
10708 WEST JANESVILLE ROAD HALES CORNERS, WISCONSIN 53130
(414) 425-1600
STATE FINANCIAL SERVICES CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 24, 1996
TO THE SHAREHOLDERS OF STATE FINANCIAL SERVICES CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of State
Financial Services Corporation ("SFSC" or the "Company") will be held on
April 24, 1996, at 4:00 P.M., Central Time, at Tuckaway Country Club, 6901 West
Drexel Avenue, Franklin, Wisconsin for the following purposes:
1. To elect two directors for three-year terms expiring in 1999;
2. To ratify the appointment of Ernst & Young LLP as independent auditors
for the fiscal year ending December 31, 1996; and
3. To transact any other business that may properly come before the
meeting.
These items are more fully described in the Proxy Statement which
accompanies this Notice.
Shareholders of record at the close of business on March 8, 1996 will be
entitled to vote at the meeting and any adjournment thereof.
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE MEETING. SHARE-
HOLDERS WHO DO NOT EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON ARE REQUESTED
TO SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. IF YOU LATER
FIND THAT YOU MAY BE PRESENT AT THE MEETING OR FOR ANY OTHER REASON DESIRE TO
REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED.
By Order of the Board of Directors
/s/ Michael J. Falbo
MICHAEL J. FALBO,
President and Chief Executive Officer
March 15, 1996
STATE FINANCIAL SERVICES CORPORATION
10708 WEST JANESVILLE ROAD
HALES CORNERS, WISCONSIN 53130
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 24, 1996
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of State
Financial Services Corporation ("SFSC" or the "Company") in connection with
the solicitation of proxies by the Board of Directors of SFSC for use at the
Annual Meeting of the shareholders of SFSC to be held at 4:00 P.M. Central Time
on April 24, 1996 at Tuckaway Country Club, 6901 West Drexel Avenue, Franklin,
Wisconsin (the "Meeting"), or any adjournment thereof.
PURPOSES OF THE MEETING. At the Meeting, shareholders will consider and
vote upon two matters: (1) the election of two directors for three year terms
expiring in 1999; (2) the proposal to ratify the appointment of Ernst & Young
LLP as independent auditors for the fiscal year ending December 31, 1996.
PROXY SOLICITATION. The cost of soliciting proxies will be borne by the
Company. The Company expects to solicit proxies primarily by mail. Proxies may
also be solicited personally and by telephone by members of management of the
Company. Proxy Statements and Proxies will be mailed to shareholders on
approximately March 15, 1996.
QUORUM AND VOTING INFORMATION. As of March 8, 1996, the record date for
the Meeting, there were issued and outstanding 2,650,101 shares of the Company's
Common Stock. At the Meeting, a quorum will exist with respect to each matter
to be voted upon if a majority of the votes entitled to be cast thereon is
represented in person or by proxy. The vote necessary to elect the directors
nominated or to approve the proposals to be acted upon is described in detail
under the specific proposals. See "Item 1. Election of Directors - Voting
Information." In addition, shareholders should be aware that no matter to be
acted upon at the Meeting is dependent upon the approval of any other matter.
Only shareholders of record at the close of business on March 8, 1996 are
entitled to vote at the Meeting or at any adjournment thereof.
PROXIES AND REVOCATION OF PROXIES. A Proxy in the accompanying form, which
is properly executed, duly returned to the Company and not revoked, will be
voted in accordance with instructions contained therein. In the event that any
matter which is not described in this Proxy Statement properly comes before the
Meeting, the accompanying form of Proxy authorizes the persons appointed as
proxies thereby ("Proxyholders") to vote on such matter in their sole
discretion. At the present time, management knows of no other matters which are
to come before the Meeting. See "Item 3. Other Matters." If no instructions
are given with respect to any particular matter to be acted upon, a Proxy will
be voted in favor of such matter. Each such Proxy granted may be revoked at any
time before it is voted by filing with the Secretary of the Company a written
notice of revocation, by delivering to the Company a duly executed proxy bearing
a later date, or by attending the Meeting and voting in person.
STOCK DIVIDEND. On January 24, 1996, the Company declared a 20% stock
dividend (the "Stock Dividend") to be paid on February 29, 1996 to
shareholders of record as of the close of business on February 14, 1996. The
effect of the Stock Dividend is that a shareholder will receive a certificate
for one additional share for every five shares of the Company's Common Stock
owned by the shareholder as of the record date of the Stock Dividend.
Fractional shares will not be issued. Cash will be delivered in lieu of
fractional shares in an amount based upon the market price of the Company's
Common Stock on February 14, 1996. Certain information contained in the
Company's Annual Report to Shareholders delivered herewith (see "Annual
Report"below) and all per share information set forth in this Proxy Statement
has been restated to give effect to the Stock Dividend.
SHAREHOLDER PROPOSALS. There are no shareholder proposals on the agenda
for the Meeting. In order to be considered for inclusion in the agenda for the
1997 Annual Meeting, a shareholder proposal must be received by the Company no
later than November 21, 1996. Shareholder proposals should be sent to the
Company's principal offices by certified mail, return receipt requested, and
should be addressed to the Secretary of the Company.
ANNUAL REPORT. The Company's Annual Report to Shareholders, including
audited financial statements for the year ended December 31, 1995, although not
a part of this Proxy Statement, is delivered herewith.
ITEM 1. ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS AND THE NOMINEES. The Board of Directors of the
Company currently consists of six persons, divided into three classes, each
consisting of two directors elected to serve three year terms. The Board of
Directors is recommending that two individuals, Jerome J. Holz and David M.
Stamm, be elected to directors positions at the Meeting, each for a term
expiring on the date of the Company's annual meeting to be held in 1999 or until
their respective successors are duly elected. Messrs. Holz and Stamm have
previously served as directors. See "Directors" below for further
information.
VOTING INFORMATION. Unless otherwise directed, the shares represented by
all properly executed Proxies will be voted by the Proxyholders "FOR" the
election of Mr. Holz and Mr. Stamm. Management does not expect that either Mr.
Holz or Mr. Stamm will be unable to serve as director, but if that should occur
for any reason prior to the Meeting, the Proxyholders reserve the right to vote
for another person of their choice. The vote necessary to elect the directors
nominated is governed by Section 180.0728(1) of the Wisconsin Business
Corporation Law, which provides that directors are elected by "plurality" of
the votes cast. This means that the number of nominees corresponding to the
number of seats on a board of directors to be filled at a shareholders' meeting
who receive the highest number of votes shall be elected. In the case of the
Meeting, the two nominees who receive the highest number of votes for their
election as directors will be the persons elected to the two director positions
to be filled at the Meeting. See "Introduction - Quorum and Voting
Information."
DIRECTORS. The following sets forth, with respect to the nominees and each
director who will continue to serve after the date of the Meeting, his/her name,
age, principal occupation for the last five years, the year in which he/she
first became a director of the Company or a predecessor thereof, the year in
which his/her current term as director will expire, and directorships in other
business corporations. SFSC is a bank holding company which owns State
Financial Bank ("SFB") and State Financial Bank - Waterford ("Waterford")
(collectively referred to as the "Banks"). SFB is the entity resulting from
the consolidation of in June, 1994 of SFSC's four previously separate banks
[State Bank, Hales Corners ("SBHC"), University National Bank ("UNB"),
Edgewood Bank ("EB"), and Eastbrook State Bank ("ESB")] into SBHC's charter.
References to SFB prior to June, 1994 are synonymous with SBHC prior to the
consolidation of the banks. In 1984, SFSC was formed as the parent holding
company of the former SBHC. SFSC acquired UNB in 1985, EB in 1987, and ESB in
1992. SFSC acquired Waterford in 1995 and continues to operate it as a separate
banking subsidiary. Each of the directors of the Company is also a director of
SFB. Messrs. Holz and Falbo are also directors of Waterford.
CURRENT
DIRECTOR TERM
NAME AGE POSITIONS HELD SINCE EXPIRES
- ---- --- -------------- ----- ------------
Jerome J. Holz 68 Chairman of the Board and
Vice President of SFSC;
Chairman of the Board of SFB;
Director of Waterford 1984 1996
Michael J. Falbo 46 President, Chief
Executive Officer, and
Director of SFSC; Vice
Chairman and Chief Executive
Officer of SFB; Director
of Waterford 1984 1998
Richard A. Horn 71 Director of SFSC and State
Financial Bank 1984 1997
Robert R. Spitzer 73 Director of SFSC and State
Financial Bank 1990 1998
David M. Stamm 47 Director of SFSC and State
Financial Bank 1993 1996
Barbara E. Holz-Weis 40 Director of SFSC and State
Financial Bank 1993 1997
On the date of the annual shareholders' meeting to be held in the year
indicated.
JEROME J. HOLZ serves as Chairman of the Board and Vice President of SFSC.
In these capacities, he consults on a regular basis with management of SFSC and
the Banks concerning matters of strategic planning, business development, and
company policies. Mr. Holz is also Chairman of the Board of State Financial
Bank. He has been a director of SFSC since its organization in 1984 , a
director of SFB since 1960, and a director of Waterford since August, 1995. Mr.
Holz is Chairman of the Board and President of Holz Motors, Inc., an automobile
dealership with locations in Hales Corners and Watertown, Wisconsin.
MICHAEL J. FALBO has been President and Chief Executive Officer of SFSC
since 1984. Mr. Falbo is Vice Chairman and Chief Executive Officer of SFB. Mr.
Falbo has been a director of SFSC since its organization in 1984, a director of
SFB since 1983, and a director of Waterford since August, 1995.
RICHARD A. HORN is President of Horn Bros., Inc., a retail feed, seed, and
fertilizer firm located in Muskego, Wisconsin. Mr. Horn has been a director of
SFSC since 1984 and a director of SFB since 1971. Mr. Horn serves on the Stock
Option and Audit Committees and is also a member of the Administrative Board of
the Company's Employee Stock Ownership Plan ("ESOP").
ROBERT R. SPITZER is the retired President of the Milwaukee School of
Engineering, Milwaukee, Wisconsin. Mr. Spitzer has been a director of SFSC and
of SFB since 1990. Mr. Spitzer is also a director of Kikkoman Foods,
Incorporated. Mr. Spitzer serves on the Stock Option and Audit Committees and
is also a member of the Administrative Board of the Company's ESOP.
DAVID M. STAMM is President of the George Webb Corporation, a franchise
restaurant operation with locations in southeastern Wisconsin. Mr. Stamm has
been a director of SFSC since 1993 and of SFB since 1992. Mr. Stamm serves on
the Stock Option Committee and is a member of the Administrative Board of the
Company's ESOP.
BARBARA E. HOLZ-WEIS is the owner of Barb's Greenhouse Florist, a retail
full-service flower shop in Hales Corners, Wisconsin. Mrs. Holz-Weis has been a
director of SFSC since 1993 and of SFB since 1981. Mrs. Holz-Weis serves on the
Stock Option Committee and is also a member of the Administrative Board of the
Company's ESOP.
BOARD COMMITTEES. The Board of Directors has the following committees:
STOCK OPTION COMMITTEE. The Stock Option Committee administers the
Company's Stock Option Plans, including the exercise of discretionary authority
concerning the granting of options and Restricted Stock under the 1990 Stock
Option/Stock Appreciation Rights and Restricted Stock Plan for Key Officer and
Employees (the "Officer "SOP"). See "Compensation of Executive Officers -
Stock Options." The Stock Option Committee is comprised of Messrs. Horn,
Spitzer, and Stamm, and Mrs. Holz-Weis. The Stock Option committee met one time
during 1995.
AUDIT COMMITTEE. The Audit Committee reviews the reports of independent
auditors, selects or recommends the selection of independent auditors, reviews
the adequacy of internal controls of the Company and reviews any related-party
transactions. The Audit Committee is comprised of Messrs. Horn and Spitzer.
The Audit Committee met one time during 1995.
OTHER COMMITTEES. The Company has no nominating or similar committee of
the Board of Directors and has no established procedure for the consideration of
nominees recommended by shareholders. Certain other functions, such as the
establishment of compensation policies and the determination of executive
officer compensation, are performed by the Board of Directors acting as a
committee of the whole.
EXECUTIVE OFFICERS. Information is provided below with respect to the
executive officers of SFSC who are not directors. Each executive officer is
elected annually by the Board of Directors and serves for one year or until
his/her successor is appointed.
CURRENT POSITION
NAME AGE POSITIONS HELD HELD SINCE
- ---- --- -------------- ----------
James J. Bartoszek 43 Secretary/Treasurer of SFSC;
Senior Vice President and Cashier
of State Financial Bank 1994
John B. Beckwith 42 President, State Financial Bank
South Unit 1994
Philip F. Hudson 63 President, State Financial
Bank North Unit 1994
Michael A. Reindl 36 Senior Vice President, Controller,
and Chief Financial Officer of SFSC 1995
Jeryl M. Sturino 36 President, State Financial
Bank - Waterford 1995
JAMES J. BARTOSZEK has been Secretary/Treasurer of SFSC since 1993 and
Senior Vice President and Cashier of the SFB since June 1994. From June 1993
until June 1994, Mr. Bartoszek served as Vice President and Cashier of SFB.
From April until June 1993, Mr. Bartoszek served as Vice President of SFB.
From July 1991 until April 1993, Mr. Bartoszek was a Vice President of Tri-City
National Banks, Oak Creek, Wisconsin. From April 1989 until July 1991, Mr.
Bartoszek was an Assistant Vice President of Commercial Lending for Norwest
Banks, Wisconsin (formerly First Interstate Banks, Wisconsin). From April 1988
through April 1989, Mr. Bartoszek was the Loan Review Officer of SFSC. From
July 1985 until April 1988, Mr. Bartoszek was a Vice President of the former EB.
Prior to joining EB, Mr. Bartoszek was a field examiner for the Federal Deposit
Insurance Corporation.
JOHN B. BECKWITH has been President of the South Unit of State Financial
Bank since June, 1994. In this capacity, Mr. Beckwith is responsible for the
operation of SFB's offices located in Hales Corners, Muskego, and Greenfield,
Wisconsin. From June 1991 to June 1994, Mr. Beckwith was President of and Chief
Executive Officer of SBHC (currently SFB's Hales Corners and Muskego offices).
Mr. Beckwith was a director of SBHC from June 1991 to June 1994. Since June
1994, he has served as a director of SFB. Prior to June 1991, he had been
Executive Vice President of SBHC since February 1990. Mr. Beckwith had been
Vice President of the Firstar (formerly known as First Wisconsin National Bank
of Milwaukee) in the commercial lending and branch management areas from 1988
until February 1990 and in the international financial marketing area from 1985
until 1988.
PHILIP F. HUDSON has been President of the North Unit of State Financial
Bank since June, 1994. In this capacity, Mr. Hudson is responsible for the
operation of SFB's offices located in Milwaukee, Glendale, Brookfield, and
Waukesha, Wisconsin. From November 1990 to June 1994, Mr. Hudson was President
and Chief Executive Officer of SFSC's then separate subsidiary bank, UNB
(currently SFB's Milwaukee and Glendale offices). Mr. Hudson also served in
these capacities from 1975 until June 1987. From June 1987 to the present, Mr.
Hudson has been Chairman of Environmental Rental Systems, Inc., which rents
safety equipment, and President of Casper Environmental Systems, Inc. an air
filtration equipment manufacturer. Mr. Hudson was a director of the former UNB
from 1975 to 1987 and from 1990 to 1994. He has served as a director of SFB
since June 1994.
MICHAEL A. REINDL has been Senior Vice President, Controller, and Chief
Financial Officer of SFSC since November 1995. From June 1993 through November
1995, Mr. Reindl was Vice President, Controller, and Chief Financial Officer of
SFSC. From August 1990 through June 1993, Mr. Reindl was Vice President and
Controller of SFSC. From December 1989 through August 1990, Mr. Reindl was Vice
President of SFSC's then independent subsidiary bank, EB (currently SFB's
Greenfield office), and from January 1988 through December 1989, he served as
Assistant Vice President and Cashier of EB. Mr. Reindl was Auditor of SFSC from
1984 through January 1988.
JERYL M. STURINO has been President and Chief Executive Officer and a
director of Waterford since September 1995. From June 1994 through September
1995, Mrs. Sturino served as Senior Vice President and Senior Loan Officer of
SFB. Mrs. Sturino joined SFB (then known as SBHC) in August 1988 as a
Commercial Loan Officer, was promoted to Vice President in November 1990, and
served in that capacity until June 1994 when she was promoted to Senior Vice
President of SFB. Prior to joining SFB, Mrs. Sturino was employed as a credit
analyst at Firstar Bank (formerly First Wisconsin National Bank of Milwaukee).
COMPENSATION OF DIRECTORS. Effective January 1, 1993, SFB established a
policy that no employee of SFSC or the Banks may receive director fees for
serving on the Board of Directors of SFB. This same policy became effective for
service on the Company's Board of Directors effective January 1, 1994.
Accordingly, Messrs. Holz, Falbo, Beckwith, and Hudson, and Mrs. Sturino, who
are employees of SFSC, SFB, and/or Waterford and who also serve as directors of
SFB and/or Waterford, did not receive any director fees in connection with their
respective director positions for services rendered in that capacity in 1995.
DIRECTORS FEES.
SFSC Directors. Directors of the Company (other than Messrs. Holz and
Falbo) are paid a quarterly retainer of $1,562.50 and $1,562.50 for each
quarterly Board meeting attended. In 1995, Directors Horn, Spitzer, Stamm, and
Holz-Weis were each paid $12,500 for their services as directors. During 1995,
the Board met 5 times and no director attended less than 75% of the meetings.
SFB Directors. Messrs. Holz, Falbo, Horn, Spitzer, Stamm, Beckwith, and
Hudson, and Mrs. Holz-Weis are directors of SFB and also serve on one or more
committees of SFB's Board of Directors. In 1995, directors of SFB (other than
Messrs. Holz, Falbo, Beckwith, and Hudson) were paid a retainer of $300 per
quarter, $150 for each Board meeting attended, $150 for each Executive Committee
meeting attended, and $100 for each Committee meeting attended.
Waterford Directors. Messrs. Holz and Falbo, and Mrs. Sturino are
directors of Waterford and also serve on one or more committee's of Waterford's
Board of Directors. Subsequent to Waterford's acquisition by SFSC on August 24,
1995, directors of Waterford (other than Messrs. Holz and Falbo, and Mrs.
Sturino) were paid a retainer of $300 per month and $150 for each Board meeting
attended.
DIRECTOR STOCK OPTIONS. The 1990 Director Stock Option Plan (the
"Director SOP") was established for the benefit of directors of SFSC and SFB.
Employees of the Company and SFB who also serve as directors of the Company
and/or SFB are not eligible to participate in the Director SOP as they
participate in the 1990 Stock Option/Stock Appreciation Rights and Restricted
Stock Plan for Key Officers and Employees (the "Officer SOP"). The Director
SOP provides for the granting of Non-Qualified Stock Options ("NSOs") to
purchase shares of the Company's Common Stock and is administered by the Stock
Option Committee of the Board of Directors. Under the Director SOP, the option
price must be equal to the fair market value of the shares on the date of grant.
Each new director of the Company is granted 2,400 options upon his or her
initial election, and an additional 1,200 options upon his or her first
reelection to the Company's Board of Directors. Each person who is elected to a
Bank Board of Directors for the first time will receive 1,200 options upon his
or her initial election, and an additional 600 options upon his or her first
reelection.
Options will expire no later than ten years after the date of grant. An
optionee does not recognize any taxable income at the time an NSO is granted,
nor will the Company be entitled to a tax deduction at that time. If an NSO is
exercised, the optionee must recognize an amount of ordinary income equal to the
fair market value of the shares purchased (as of the date of exercise) minus the
exercise price. The Company is then entitled to a tax deduction equal to the
amount of ordinary income recognized by the optionee. The optionee's basis in
the shares acquired upon the exercise of an NSO is equal to the fair market
value at the time of exercise. Upon a subsequent sale or other disposition of
the shares in a taxable transaction, the optionee will have a capital gain (or
loss) equal to the difference between his or her basis and the sale proceeds.
No options were granted under the Director SOP to SFSC directors during
1995. The following table presents the value of unexercised options held by the
Company's directors at December 31, 1995 who are not also Named Executive
Officers, (as defined below).
DIRECTOR OPTIONS VALUE TABLE
Number of Securities In-the-Money
Underlying Unexercised Options at
Options at Fiscal Year Fiscal Year
NAME End (#) End ($)
- ---- ------------ -----------------
Richard A. Horn 7,200 $48,991
Robert R. Spitzer 1,800 8,055
David M. Stamm 6,480 20,094
Barbara E. Holz-Weis 6,120 24,010
All options are exercisable at December 31, 1995.
The dollar values are calculated by determining the difference
between the market value of the underlying Common Stock at December 31, 1995
($14.375) and the exercise price of the options.
DIRECTORS OF OTHER SUBSIDIARIES. Messrs. Holz, Falbo, Horn, Spitzer,
Stamm, Beckwith, and Hudson, and Mrs. Holz-Weis are also directors of Hales
Corners Development Corporation, a wholly-owned subsidiary of SFB, but received
no directors fees during 1995 for serving on that Board. Messrs. Falbo and
Reindl are directors of Hales Corners Investment Corporation and Waterford
Investment Corporation, each a wholly-owned Nevada-chartered subsidiary of SFB
and Waterford, respectively, but received no directors fees during 1995 for
serving on those Boards.
COMPENSATION OF EXECUTIVE OFFICERS.
SUMMARY COMPENSATION INFORMATION. The following table sets forth the
annual and long-term compensation for the Company's Chief Executive Officer and
the other executive officers of the Company and the Banks whose total salaries
and bonuses exceeded $100,000 in 1995, as well as the respective compensation
paid to each individual during the Company's last three fiscal years. The
persons named in the table are sometimes referred to herein as the "Named
Executive Officers."
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
RESTRICTED
OTHER ANNUAL STOCK STOCK LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------- ---- --- --- --- --- --- --- ---
Michael J. Falbo 1995 225,000 100,000 -0- -0- -0- 10,500 35,476
President and CEO - State Financial 1994 205,000 85,000 -0- -0- -0- -0- 32,964
Services Corporation 1993 172,600 75,000 12,500 -0- -0- 10,500 20,953
Jerome J. Holz 1995 190,000 90,000 -0- -0- -0- 10,500 16,276
Chairman of the Board - State 1994 174,000 75,000 -0- -0- -0- -0- 17,063
Financial Services Corporation 1993 145,600 63,000 12,500 -0- -0- 10,500 19,140
John B. Beckwith
President - State Financial Bank 1995 103,000 30,000 -0- -0- -0- 5,250 13,831
South Unit 1994 96,000 25,000 -0- -0- -0- -0- 12,181
1993 90,000 20,000 -0- -0- -0- 2,625 9,435
Philip F. Hudson
President - State Financial Bank 1995 121,000 17,500 -0- -0- -0- 3,563 14,442
North Unit 1994 114,000 12,500 -0- -0- -0- 3,563 12,679
1993 108,000 7,500 -0- -0- -0- 3,563 10,185
For Messrs. Falbo, Beckwith, and Hudson, the amount represents the bonus earned in the respective year but paid in the
following year. For Mr. Holz, the bonus was earned and paid in the respective year.
Other Annual Compensation represents directors fees paid in connection with their service on the respective boards of
the Company and SFB. Effective January 1, 1993, the Company and SFB established a policy that no employee of the Company or SFB
may receive director fees for serving on the Board of Directors of SFB. The amount disclosed for Messrs. Falbo and Holz for 1993
represents the fees paid for their service on the Company's Board of Directors in 1993. Effective January 1, 1994, a director of
the Company, who is also an employee of the Company or SFB, will no longer receive director fees for his or her service on the
Company's Board of Directors.
Represents value of the award on the date of grant based on the fair market value of the Company's common stock as of
that date.
Represents vesting of restricted shares previously granted under the Officer SOP.
All Other Annual Compensation consists of contributions to the ESOP and the Pension Plan made on behalf of the Named
Executive Officers by the Company. The amounts reported for Mr. Falbo in 1995 and 1994 also include the contributions made to the
Supplemental Executive Retirement Plan adopted in each respective year.
EMPLOYEE STOCK OWNERSHIP PLAN. In 1990, SFSC adopted an Employee Stock
Ownership Plan ("ESOP") for the benefit of certain employees of SFSC and its
subsidiaries. SFSC shareholders approved the ESOP in 1990. The ESOP covers
substantially all employees of SFSC and its subsidiaries who have attained age
21 and have completed at least one year of service. Contributions to the ESOP
are made in amounts established in the discretion of the Company's Board of
Directors. Amounts contributed are intended to be sufficient to amortize any
loans to the ESOP. Shares of the Company's Common Stock will be allocated to
the accounts of participants during each plan year, generally in accordance with
the amounts contributed by SFSC and SFB. An ESOP participant's interest in the
ESOP will be paid on the participant's death, disability, retirement, or
termination of employment. Each participant becomes vested in 20% of his/her
account balance after two years of service and an additional 20% of the account
balance vests each subsequent year of service until the participant becomes
fully vested after six years. Past service is recognized for vesting purposes.
The ESOP holds 106,096 shares of Common Stock. These shares are held in
the name of an independent trustee. Messrs. Horn, Spitzer, and Stamm, and Mrs.
Holz-Weis are members of the Administrative Board of the ESOP ("ESOP Board").
As of March 8, 1996, of the 106,096 shares held for the ESOP by the independent
ESOP trustee, 64,102 had been allocated to ESOP participants' accounts and
41,994 remained unallocated. The ESOP provides that the independent trustee
must vote shares allocated to a participants' account in accordance with the
direction of the participant. The ESOP Board directs voting by the independent
trustee, and may also direct the disposition of unallocated shares. The ESOP
Board does not have the power to vote or direct the vote, or to dispose of or
direct the disposition of, shares which have been allocated to participants'
accounts. See "Security Ownership of Management and Certain Beneficial
Owners."
The ESOP may acquire additional shares of Common Stock through purchases of
outstanding shares on the open market or directly from SFSC. The timing and
amount of future purchases and borrowings will be affected by various factors,
including regulatory policies, the market price of Common Stock, prevailing
interest rates, and the number of participating subsidiaries. No additional
shares were purchased by the ESOP in 1995.
MONEY PURCHASE PENSION PLAN. The Board of Directors of SFSC has adopted
the State Financial Services Corporation and Subsidiaries Money Purchase Plan
("Pension Plan") for the benefit of certain employees of SFSC and its
subsidiaries. The Pension Plan is a tax qualified defined contribution plan
pursuant to which SFSC's contributions are fixed based upon the compensation of
each participant. For each participant, SFSC's contribution to the Pension Plan
is an amount equal to four percent (4%) of the participant's total compensation
and an additional two percent (2%) of the participant's compensation in excess
of $20,000. The Pension Plan may also accept rollover contributions from
employees. Messrs. Holz, Falbo, and Reindl are trustees of the Pension Plan.
A participant's account balance becomes 20% vested after completion of two
years of service. Thereafter, a participant's account balance vests 20% each
year until the participant becomes 100% vested after six years of service. A
participant becomes 100% vested in his account balance in the event of death,
disability, or retirement. Normal retirement age under the Pension Plan is 65.
Upon retirement, a participant's account balance may be distributed to him/her
pursuant to his/her election of one of a number of alternative methods of
distribution.
401(K) PLAN. SFSC and the Banks also have a Section 401(k) profit sharing
plan ("401(k) Plan"). All employees who are at least 21 years old are
eligible to participate. Participants can defer between 2% and 15% of their
compensation. Participants may also contribute up to an additional 10% of their
compensation on a nontax-deferred basis. Contributions may be invested at the
participant's discretion in one of several different funds which have been
selected by an administrative committee which includes Messrs. Falbo, Reindl,
and Bartoszek. Amounts accumulated are payable upon termination of an
employee's employment, at the normal retirement age, upon death or permanent
disability, pursuant to a variety of payment options. There are no employer
contributions to the 401(k) Plan.
DEFERRED COMPENSATION AGREEMENT. SFB has a Deferred Compensation
Agreement with Jerome J. Holz dated December 9, 1980, pursuant to which SFB is
obligated to pay Mr. Holz $1,000 per month for 120 months following termination
of his employment. Payments will commence upon Mr. Holz's voluntary
termination, his involuntary termination for reasons other than cause (as
defined in the agreement), or upon his death or permanent disability. In the
event that Mr. Holz dies before receiving all payments, the balance of the
payments will be made to Mr. Holz's designated beneficiary or heirs. SFB's
obligations under this plan are insured.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In 1994, the Board of Directors of
SFSC adopted the Supplemental Executive Retirement Plan ("Supplemental Plan")
to supplement the benefits received by Mr. Falbo under the Company's qualified
retirement plans. Due to restrictions imposed by the Internal Revenue Service,
SFSC cannot contribute the same percentage of compensation on behalf of Mr.
Falbo that it can contribute on behalf of other employees. As a result, SFSC
makes a limited contribution to its qualified retirement plans on Mr. Falbo's
behalf. SFSC adopted the Supplemental Plan to supplement the benefits received
by Mr. Falbo under the Company's qualified benefit plans. Mr. Falbo's right to
participate in the Supplemental Plan is effective with the adoption of the
Supplemental Plan. His right to participate in the Supplemental Plan ceases at
the earlier of his termination of employment or the date the Supplemental Plan
is terminated by SFSC.
Pursuant to the Supplemental Plan, SFSC contributes on behalf of Mr. Falbo
an amount equal to 12% of his compensation in excess of the compensation limits
stated under the Internal Revenue Code of 1986 section 401(a)(17) for that year.
Interest on the contributions made to Mr. Falbo's account is credited annually
at a rate equal to the annual interest earnings for the Pension Plan.
Benefits under the Supplemental Plan will begin to be made to Mr. Falbo at
the termination of his employment or his retirement. The form in which benefits
are paid to Mr. Falbo is determined by his age at the time of his termination or
retirement. If Mr. Falbo's employment terminates on or after the date he
attains age 65, benefits will be paid beginning the month following his
termination or retirement and monthly thereafter until the final payment is made
in the month he attains age 80. If Mr. Falbo terminates employment on or after
age 55, but before age 65, SFSC will begin paying Mr. Falbo's accumulated
benefits in monthly installments beginning the first month following his
termination and monthly thereafter until the final payment is made in the month
he attains age 65. If Mr. Falbo dies after termination but before receipt of
all benefits under the plan, the remaining benefits will be paid in installments
to his spouse over the remaining term of the plan, as applicable. In the event
Mr. Falbo dies without a spouse or his widow dies before completion of the
installment payments, the unpaid benefits will be paid to his or, if
applicable, his widow's estate in a lump sum. If Mr. Falbo terminates
employment prior to age 55, SFSC will pay the amount credited on his behalf
under the plan as a lump sum. Mr. Falbo's benefits under the Supplemental Plan
will be fully and completely forfeited in the event he is terminated for cause.
If Mr. Falbo dies before age 65 and before beginning to receive benefits
under the Supplemental Plan, his surviving spouse, or if there is no surviving
spouse his estate, shall be entitled to a lump sum benefit equal to the greater
of one million dollars or the amount credited on Mr. Falbo's behalf under the
Supplemental Plan. The Company's obligations under this plan are insured.
STOCK OPTIONS The Officer SOP was established for the benefit of key
salaried employees of the Company and any subsidiary thereof, including SFB.
The Officer SOP is administered by the Stock Option Committee of the Board of
Directors. The Officer SOP provides for the granting of incentive stock options
("ISOs") within the meaning of Section 422 of the Internal Revenue Code, NSOs,
stock appreciation rights ("SARs"), and Restricted Stock as described below.
The Stock Option Committee will also determine the number of shares of Common
Stock subject to options, the option price and the time or times when each
option will first become exercisable, in whole or in part.
The Stock Option Committee may grant SARs and Restricted Stock to key
salaried employees and may determine whether such grant shall be considered an
alternative right to an option under the Officer SOP. The grant of a SAR
entitles the holder to receive cash in an amount equivalent to the difference
between the fair market value of the Common Stock on the day of exercise and the
price established on the date of the granting of the SAR. The grant of
Restricted Stock entitles the holder to all of the rights of stock ownership,
including the right to vote and receive dividends, subject to a risk of
forfeiture if the holder's employment is terminated within a certain period of
time under specified circumstances. All restrictions on Restricted Stock lapse
upon a "change in control" of SFSC, as defined in the Officer SOP.
The exercise price of ISOs granted under the Officer SOP will not be less
than 100% of the fair market value of the shares on the date of grant of the
option. For NSOs, the option price shall not be less than 85% of the fair
market value of the shares on the grant date. The maximum option term is ten
years for ISOs. The Board of Directors may amend the Officer SOP or discontinue
it, but may not take action to alter any previously granted option. Further,
the shareholders must approve any amendment to the Officer SOP that would
increase the number of options available, decrease the option price, extend the
term of the Officer SOP, or extend the period within which to exercise options.
The following table summarizes options exercised during 1995 and presents
the value of unexercised options held by the Named Executive Officers at
December 31, 1995. No stock options, SARs, or Restricted Stock were granted to
the Named Executive Officers under the Officer SOP in 1995.
OFFICER OPTIONS EXERCISED AND VALUE TABLE
Number of Securities In-the-Money
Shares Value Underlying Unexercised Options at
Acquired Realized Options at Fiscal Year Fiscal Year
NAME on Exercise (#) ($) End (#) End ($)
- ---- --------------- --- ------- -------
Michael J. Falbo 2,808 19,890 5,616 $39,780
Jerome J. Holz 2,160 15,300 4,320 30,600
John B. Beckwith 864 6,120 1,728 12,240
Philip F. Hudson 288 1,339 3,456 19,123
Values are calculated by subtracting the exercise price from the fair market value of the stock as of December 31, 1995
($14.375).
All options are exercisable at December 31, 1995.
The dollar values are calculated by determining the difference between the market value of the underlying Common Stock at
December 31, 1995 and the exercise price of the options.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth, as of March 8, 1996, for the director-nominees,
directors continuing in office, the Named Executive Officers (see "Compensation of Executive Officers"), and all directors and
executive officers as a group, the number of shares of Common Stock, stock options, and shares of Restricted Stock beneficially
owned and the percentage of such shares to the total number of shares outstanding.
SUBJECT TO PERCENT OF
DIRECTLY OR STOCK RESTRICTED SHARES
NAME INDIRECTLY OPTIONS STOCK TOTAL OUTSTANDING
- ---- ----------- -------- ------ ----- -----------
Jerome J. Holz 437,069 4,320 1,440 442,829 16.7%
Richard A. Horn 46,717 7,200 -0- 53,917 2.0
Robert R. Spitzer 8,426 1,800 -0- 10,226 *
David M. Stamm 8,646 6,480 -0- 15,126 *
Barbara E. Holz-Weis 38,897 6,120 -0- 45,017 1.7
Michael J. Falbo 37,189 5,616 2,160 44,965 1.7
John B. Beckwith 7,741 1,728 1,080 10,549 *
Philip F. Hudson 5,348 3,456 1,080 9,884 *
All Directors and Executive Officers
as a group (11 persons) including
the above-named individuals 644,543 38,153 7,272 689,968 25.7%
Includes shares owned directly by each individual and the group, as well as shares owned indirectly (for example as
trustee of a trust); also includes for those individuals who were Participants in the ESOP that number of shares of Common Stock
which were allocated to such individual's ESOP account as of March 8, 1996, and with respect to which that individual has voting
rights under the provisions of the ESOP.
Shares subject to stock options which have not yet been exercised but which are exercisable within 90 days of March 8,
1996.
Held by the Secretary of SFSC on behalf of the above-named individuals as participants in the Officer SOP.
Percentage of total number of shares of Common Stock outstanding. Assumes, for each individual owning options and for
the group, the exercise of that number of options which are included in the total number of shares. Asterisk denotes less than 1%
ownership.
Messrs. Horn, Spitzer, Stamm, and Holz-Weis are members of the Administrative Board of the ESOP ("ESOP Board"). As of
March 8, 1996, 106,096 shares were held for the ESOP by the independent ESOP trustee, of which 64,102 had been allocated to ESOP
participants' accounts and 41,994 remained unallocated. The ESOP provides that the independent ESOP trustee must vote shares
allocated to a participant's account in accordance with the direction of the participant. The ESOP Board directs voting by the
independent Trustee, and may also direct the disposition of unallocated shares. The ESOP Board does not have the power to vote or
direct the vote, or to dispose of or direct the disposition of, shares which have been allocated to participants' accounts. To
avoid duplication, the individual totals reported in the above table for Messrs. Horn, Spitzer, and Stamm, and Mrs. Holz-Weis do
not reflect the 41,994 unallocated shares of which they are deemed to share beneficial ownership as members of the ESOP Board;
however, the total for all directors and executive officers as a group does include the 41,994 unallocated shares. If the 41,994
unallocated shares deemed to be beneficially owned (as a result of such shared voting and dispositive power) by Messrs. Horn,
Spitzer, and Stamm, and Mrs. Holz-Weis as members of the ESOP Board are included in each of their individual totals, the
resulting total numbers of shares and the percentages of Common Stock beneficially owned by each of them on an individual basis
would be as follows: Richard A. Horn, 95,911 shares (3.6% of the total shares outstanding) ; Robert R. Spitzer, 52,220 shares
(2.0% of the total shares outstanding); David M. Stamm, 57,120 shares (2.2% of the total shares outstanding); and Barbara E.
Holz-Weis, 87,011 shares (3.3% of the total shares outstanding).
BENEFICIAL OWNERS. The only person known to SFSC to be the "beneficial
owner"(defined in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934) of more than 5% of the outstanding shares of Common Stock as of March
8, 1996, is the following:
Number of Percent of
Name and Business Address Shares Class
- ------------------------- ------ -----
Jerome J. Holz 442,829 16.7%
10708 West Janesville Road
Hales Corners, WI 53130
CERTAIN TRANSACTIONS AND OTHER RELATIONSHIPS WITH MANAGEMENT AND PRINCIPAL
SHAREHOLDERS
INDEBTEDNESS OF MANAGEMENT. Some of the executive officers and directors
of SFSC are, and have been during the preceding three fiscal years, customers of
SFB, and some of the officers and directors of SFB are direct or indirect
owners of 10% or more of corporations which are, or have been in the past,
customers of SFB. As such customers, they have had transactions in the ordinary
course of business (including interest rates and collateral on loans) as those
prevailing at the time for comparable transactions with nonaffiliated persons.
In the opinion of management of SFSC, none of the transactions involved more
than the normal risk of collectability or presented any other unfavorable
features. At December 31, 1995, SFB had $5,841,000 in loans outstanding to the
directors and executive officers of SFSC, which amount represented 18.0% of
total shareholders' equity at that date. A substantial portion of these
outstanding loans were commercial loans from SFB to Holz Motors, Inc., which is
owned by Jerome J. Holz, who is Chairman of the Board and Vice President of
SFSC, and Holz Motors' affiliated entities; to Horn Bros., Inc., of which
Richard A. Horn, a director of SFSC, is President; and to George Webb
Corporation, of which David M. Stamm, a director of SFSC, is President.
EDGEWOOD PLAZA. SFB leases approximately 8,900 square feet of floor space
in Edgewood Plaza, an office building located at 4811 South 76th Street,
Greenfield, Wisconsin, pursuant to the terms of a lease agreement dated
December 20, 1982, and amended June 14, 1993, between SFB and Edgewood Plaza
Joint Venture. Edgewood Plaza Joint Venture is a Wisconsin general partnership
that includes as partners Jerome J. Holz and Richard A. Horn who are directors
of SFSC. The term of the lease will end December 27, 1997. The rent includes a
base rent of approximately $156,000 per year, plus additional rent equal to
increases in operating expenses over those incurred during the base year of
1983. The base rent may be adjusted every three years by an amount equal to 25%
of the base rent multiplied by increases in the Consumer Price Index during the
preceding period. Currently, the total rent payable is approximately $208,000
per year. SFB subleases space to two other occupants of Edgewood Plaza. The
first sublease covers approximately 1,700 square feet of the floor space of
Edgewood Plaza under a lease which expires on November 30, 1995. Under the
terms of this sublease, SFB receives annual rent of approximately $26,000. The
other sublease covers approximately 2,535 square feet of the floor space of
Edgewood Plaza under a lease which expires on December 27, 1997. Under the
terms of this sublease, SFB receives annual rent of approximately $48,400. In
1993, Edgewood executed an extension of its lease with Edgewood Plaza which
extends Edgewood's lease through December, 2007. Under the terms of this
extension, SFB will lease approximately 4,100 square feet of floor space from
Edgewood Plaza. The reduction in space under the lease extension is related to
Edgewood Plaza's assumption of the space which SFB currently subleases to other
occupants of Edgewood Plaza.
ITEM 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Ernst & Young LLP as
independent auditors to audit the books, records, and accounts of the Company
and its subsidiaries for the year ending December 31, 1996, and proposes that
the shareholders ratify such appointment. Ernst & Young LLP acted as
independent auditors for the year ended December 31, 1995. A representative of
Ernst & Young LLP is expected to attend the Meeting, will have the opportunity
to make a statement, and will be available to respond to appropriate questions.
The vote necessary to ratify the appointment of independent auditors is
governed by Section 180.0725(3) of the Wisconsin Business Corporation Law, which
provides that a matter will be approved if a quorum is present an the number of
votes cast in favor of the matter exceed the number of votes cast in opposition
thereto. Accordingly, a shareholder will be deemed "present" at the Meeting
by proxy because the shareholder has returned a proxy (even if the proxy card
contains no instructions as to voting with respect to the ratification of the
appointment of independent auditors, abstains from voting thereon, or
constitutes a broker "non-vote" with respect thereto). However, unless the
shareholder votes "for" or "against" the ratification of the appointment of
independent auditors, the shareholder's vote will not be counted. See
"Introduction - Quorum and Voting Information."
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR
THE FISCAL YEAR ENDING DECEMBER 31, 1996.
ITEM 3. OTHER MATTERS
The matters referred to in the foregoing Notice of Meeting and Proxy
Statement are, as far as the Board of Directors knows, the only matters which
will be presented for consideration at the Meeting. If any other matters
properly come before the Meeting, the Proxyholders named in the accompanying
Proxy will vote on them in accordance with their best judgment exercising the
authority conferred thereby.
By Order of the Board of Directors
/s/ Michael J. Falbo
MICHAEL J. FALBO,
President and Chief Executive Officer
March 15, 1996.