Back to GetFilings.com
1
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 EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997 [Fee required]
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No 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 20, 1998 was approximately $73,236,030, based on the
following assumptions: (1) the market value of the Common Stock of $26.125 per
share which was equal to the closing price on the Nasdaq Stock Market on March
20, 1998; and (2) 2,803,293 shares of Common Stock held by nonaffiliates as of
March 20, 1998.
Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.
As of March 20, 1998, there were 3,872,743 shares of the Registrant's
$0.10 par value Common Stock issued and outstanding.
2
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, 1997, (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 1997 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; (5) Registrant's report
on Form 8-k dated January 14, 1998 filed under the Securities Exchange
Act of 1934; and (6) Registrant's Annual Report on Form 10-K filed under
the Securities Exchange Act of 1934 for the years ended December 31,
1992, 1993, 1994, 1995, and 1996.
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]
3
INDEX
PART I Page
--------------------------------------------------- -------------
Item 1. BUSINESS 1
Item 2. PROPERTIES 6
Item 3. LEGAL PROCEEDINGS 7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
---------------------------------------------------
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 8
Item 6. SELECTED FINANCIAL DATA 8
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION RESULTS OF OPERATIONS 8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 8
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 8
PART III
---------------------------------------------------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 9
Item 11. EXECUTIVE COMPENSATION 10
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 10
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 10
PART IV
---------------------------------------------------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 11
SIGNATURES Signature Page
EXHIBITS FILED AS PART OF FORM 10-K Exhibit Index
4
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"), State Financial Bank - Waterford ("SFB - Waterford"), and Richmond
Bank ("Richmond") (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 subsequently dissolved. Waterford Bank was renamed State Financial Bank -
Waterford and is operated as a separate banking subsidiary of the Company. In
1997, SFSC acquired all of the outstanding common stock of Richmond Bancorp,
Inc., the parent holding company of Richmond Bank and Richmond Financial
Services, Inc. in exchange for cash.
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, State Financial Bank - Waterford, and
Richmond Bank, each with two full-service office locations. 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 a loan production office providing lending outlets to
Milwaukee's central city. SFB - Waterford has offices in Waterford and
Burlington, each of which are located in Racine County, Wisconsin. Richmond
Bank has offices in Richmond, Illinois which is located in McHenry County, and
Libertyville, Illinois which is located in Lake 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 a competing savings institution 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.
In 1993, the former Eastbrook acquired the deposit liabilities and various
fixed assets of the branch facility of a competing savings institution located
at 400 E. Broadway in Waukesha, Wisconsin. SFB also operates a limited service
loan production office serving Milwaukee's central city to provide 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. The Company operates SFB -
Waterford as a separate banking subsidiary. In 1997, SFSC completed its cash
acquisition of Richmond Bancorp, Inc., the parent holding company of Richmond
Bank and Richmond Financial Services, Inc.
FORWARD-LOOKING STATEMENTS
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the
forward-looking statements. Factors which could cause such a variance to occur
include, but are not limited to, changes in interest rates, levels of consumer
bankruptcies, customer loan and deposit preferences, and other general economic
conditions.
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.
1
5
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 a 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 Company also offers a
variety of annuity and insurance products through the Banks' in-house
securities representatives and through two new subsidiaries resulting from the
acquisition of Richmond Bancorp, Inc. - Richmond Financial Services, Inc. and
State Financial Insurance Agency. 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's portfolio.
The Banks also provide lines of credit to commercial accounts and to
individuals through home equity and credit card plans. Through its subsidiary
State Financial Mortgage Company, SFSC also originates residential real estate
loans in the form of adjustable and long-term 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, Wisconsin metropolitan areas 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. There are numerous financial institutions
within a short distance of each of SFB's offices. SFB - Waterford's offices are
located in the towns of Waterford and Burlington, Wisconsin and experience
substantial competition from other financial institutions including other
banks, savings banks, credit unions, and consumer finance companies located in
their respective and surrounding communities. Richmond's offices are located in
Richmond and Libertyville, Illinois and experience substantial competition from
other financial institutions including other banks, savings banks, credit
unions, and consumer finance companies located in their respective and
surrounding communities. The Banks compete for deposits principally by offering
depositors a variety of deposit programs, convenient office locations, banking
hours, 24 hour account access through telephone and personal computer delivery
systems, and other services. The Banks compete 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 continued 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, 1997, the Company and the Banks employed 131
full-time and 62 part-time employees. The Company considers its relationships
with its employees to be good. 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, 1997, the SFB (consolidated with its subsidiaries; see
"SFB - Other Subsidiaries") had total assets of $274.0 million, net loans of
$181.5 million, total deposits of $243.0 million, stockholders' equity of $23.2
million, net income of $4.3 million, and return on average assets of 1.66%. At
December 31, 1997, SFB Waterford (consolidated with its subsidiary; see "SFB -
Waterford - Other Subsidiaries") had total assets of $51.2 million, net loans
of $32.7 million, total deposits of $45.7 million, stockholders' equity of $5.2
million, net income of $0.4 million, and annualized return on average assets of
0.87%. At December 31, 1997, Richmond Bancorp, Inc. (consolidated with its
subsidiary; see "Richmond Bancorp, Inc. - Other Subsidiaries") had total assets
of $93.4 million, net loans of $50.3 million, total deposits of $79.9 million,
and stockholders' equity of $10.9 million. No net income is included in the
Company's consolidated operating results for the year ended December 31, 1997
as the purchase acquisition of Richmond was consummated on December 31, 1997.
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
the former State Bank's charter. SFB conducts business through seven
2
6
full-service offices located in Milwaukee and Waukesha Counties and a loan
production office located in Milwaukee's central city. SFB 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, 1997, SFB, consolidated with its subsidiaries, comprised 65.3%
of SFSC's consolidated total assets. The following table sets forth SFB's
full-service and loan production office locations.
STATE FINANCIAL BANK OFFICE LOCATIONS
Year Acquired by
Community Address Year Originated State Financial
- --------- ------- --------------- ----------------
Hales Corners 10708 West Janesville Road 1910 (1)
Muskego S76 W17655 Janesville Road 1968 (1)
Milwaukee 2650 North Downer Avenue 1971 1985
Milwaukee (2) 2460 North 6th Street 1994 (1)
Greenfield 4811 South 76th Street 1978 1987
Glendale 7020 North Port Washington Road 1990 (1)
Brookfield 12600 West North Avenue 1990 1992
Waukesha 400 East Broadway 1977 1993
- ------------
(1) Organized de novo by SFB or a predecessor thereof.
(2) Loan Production Office
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, eight commercial and
residential rental properties located adjacent to the Hales Corners office and
vacant 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 subsequently dissolved.
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 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 -
Waterford also sells annuities, insurance products, and other investments
through two in-house representatives. At December 31, 1997, SFB- Waterford,
consolidated with its subsidiary, comprised 12.1% of SFSC's consolidated total
assets. The following table sets forth SFB - Waterford's full-service office
locations.
STATE FINANCIAL BANK - WATERFORD OFFICE LOCATIONS
Year Acquired by
Community Address Year Originated State Financial
- --------- ------- --------------- ----------------
Waterford 217 North Milwaukee Street 1906 1995
Burlington 1050 Milwaukee Avenue 1997 (1)
- ------------
(1) Organized de novo by SFB - Waterford.
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.
3
7
STATE FINANCIAL MORTGAGE COMPANY. In December, 1996, the Company formed a
new wholly owned subsidiary corporation, State Financial Mortgage Company
("SFMC"). SFMC was formed to expand the origination of secondary market real
estate mortgages on behalf of the Company and the Banks. SFMC commenced
operation effective January 1, 1997.
RICHMOND BANK. Richmond was organized as a state banking association under
the laws of the State of Illinois in 1920. In 1997, SFSC acquired the common
stock of Richmond's parent bank holding company, Richmond Bancorp, Inc. in
exchange for cash. Post-acquisition, Richmond Bancorp, Inc. operates as a
wholly-owned subsidiary of the Company and is the parent owner of Richmond and
Richmond Financial Services, Inc. Richmond 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. Richmond also sells annuities through Richmond Financial
Services, Inc., another subsidiary of Richmond Bancorp, Inc., and insurance
products through its subsidiary State Financial Insurance Agency (see "Richmond
- - Other Subsidiary and Affiliated Organization"). At December 31, 1997,
Richmond consolidated with its parent holding company Richmond Bancorp, Inc.,
its affiliate Richmond Financial Services, Inc., and its subsidiary State
Financial Insurance Agency, comprised 22.2% of SFSC's consolidated total
assets. The following table sets forth Richmond's full-service office
locations.
RICHMOND BANK OFFICE LOCATIONS
Year Acquired by
Community Address Year Originated State Financial
- --------- ------- --------------- ----------------
Richmond 10910 Main Street 1920 1997
Libertyville 1509 North Milwaukee Avenue 1992 1997
RICHMOND BANK - AFFILIATED ORGANIZATION AND OTHER SUBSIDIARY. Richmond has
an affiliated organization, Richmond Financial Services, Inc. which provides a
variety of brokerage services including the sale of annuities, stocks, bonds,
and other investment products to its customer base and customers of Richmond.
Prior to its acquisition by SFSC, Richmond Financial Services, Inc. also
engaged in the sale of numerous lines of insurance products to individuals and
businesses. Concurrent with the acquisition, Richmond formed State Financial
Insurance Agency as a wholly owned subsidiary to assume the insurance
activities previously operated under Richmond Financial Services, Inc.
SUPERVISION AND REGULATION
Bank holding companies and financial institutions are highly regulated at
both the federal and state level. Numerous statutes affect the business of SFSC
and the Banks. As a bank holding company, SFSC's business activities are
regulated by the Federal Reserve Board ("FRB") under the Bank Holding Company
Act of 1956 (the "Act") which imposes various requirements and restrictions on
its operations. As part of the this supervision, SFSC files periodic reports
with and is subject to periodic examination by the FRB. The Act requires the
FRB's prior approval before SFSC may acquire direct or indirect ownership or
control of more than five percent of the voting shares of any bank or bank
holding company. The Act limits the activities of SFSC and its banking and
nonbanking subsidiaries to the business of banking and activities closely
related or incidental to banking.
SFB and SFB - Waterford are state, non-member banks, chartered in
Wisconsin and as such are supervised and examined by the Wisconsin Department
of Financial Institutions Division of Banking and the Federal Deposit Insurance
Corporation ("FDIC"). Richmond is a state, non-member bank chartered in
Illinois and as such is supervised and examined by the Illinois Department of
Banking and the FDIC. Additionally, the Banks' deposits are insured by the FDIC
and are subject to the provisions of the Federal Deposit Insurance Act.
In recent years Congress has enacted significant legislation which has
substantially changed the federal deposit insurance system and the regulatory
environment in which depository institutions and their holding companies
operate. The enforcement powers of the federal regulatory agencies responsible
for supervisory authority over SFSC and the Banks have significantly increased
as a result of legislation such as the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), the Comprehensive Thrift and Bank Fraud
Prosecution and Taxpayer Recovery Act of 1990 and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). Certain parts of such
legislation, most notably those which increase deposit insurance assessments,
authorize further increases to recapitalize the Bank Insurance Fund and the
Savings Association Insurance Funds which affect the cost of doing business for
depository institutions and their holding companies. FIRREA also provides that
4
8
all commonly controlled FDIC insured depository institutions may be held liable
for any loss incurred by the FDIC resulting from a failure of, or any
assistance given by the FDIC, to any commonly controlled institutions. Federal
regulatory agencies have implemented provisions of FDICIA with respect to
taking prompt corrective action when a depository institution's capital fails
to meet certain defined levels. FDICIA established five capital categories
ranging from "critically undercapitalized" to "well capitalized." A depository
institution's failure to maintain a capital level within the top two categories
will result in specific actions from the federal regulatory agencies. These
actions could include the inability to pay dividends, restriction of new
business activity, prohibiting bank acquisitions, asset growth limitations and
other restrictions on a case by case basis. Additionally, FDICIA implemented a
risk related assessment system for FDIC insurance premiums based, among other
things, on the depository institution's capital adequacy. At December 31, 1997,
SFSC and the Banks each met the "well-capitalized" definition of capital
adequacy.
The Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Efficiency Act") contains provisions which amended the Bank Holding
Company Act to allow an adequately-capitalized and adequately-managed bank
holding company to acquire a bank located in another state. Effective June 1,
1997, the Efficiency Act will also allow interstate branching.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the FRB as it attempts to control the money
supply and credit availability in order to influence economic activity.
Monetary policy changes have previously had a significant effect on operating
results of financial institutions and are expected to have such an effect in
the future. No prediction can be made as to possible future changes in interest
rates, deposit levels, and loan demand, or their effect on the business and
earnings of SFSC and the Banks.
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, Income Statement Analysis 8
Liabilities and Stockholders'
Equity; Interest Rates and
Interest Differential
II Investment Portfolio Investment Activities 17
III Loan Portfolio Lending Activities 14
IV Summary of Loan Loss Experience Risk Elements in the Loan Portfolio 16
V Deposits Deposits 19
VI Return on Equity and Assets Selected Consolidated Financial Data 6 and 21
and Capital Resources
The following schedule of projected loan losses by category for the period
January 1, 1998 through December 31, 1998, 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 $125 $ 9 $116
Installment 235 58 177
Real estate 125 11 114
Other 73 10 63
---- --- ----
TOTAL $558 $88 $470
==== === ====
5
9
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are
denominated in U.S. currency with no specific foreign exchange exposure. The
Company has a limited number of agricultural loans and accordingly has no
significant exposure to changes in commodity prices. Any impacts that changes
in foreign exchange rates and commodity prices would have on interest rates are
assumed to be insignificant.
Interest rate risk ("IRR") is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting this risk
can be an important source of profitability and shareholder value, however
excessive levels of IRR can significantly impact the Company's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to interest rate changes
includes assessing both the adequacy of the management process used to monitor
and control IRR and the organization's quantitative exposure level. When
assessing the IRR management process, the Company seeks to ensure that
appropriate policies, procedures, management information systems, and internal
controls are in place to maintain IRR at prudent levels with consistency and
continuity. Evaluating the quantitative level of IRR exposure requires the
Company to assess the existing and potential future effects of changes in
interest rates on its consolidated financial condition, including capital
adequacy, earnings, liquidity, and where appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller of
the Currency and the FDIC, adopted a Joint Agency Policy Statement on IRR,
effective June 26, 1996. The policy statement provides guidance to examiners
and bankers on sound practices for managing IRR, which forms the basis for an
ongoing evaluation of the adequacy of IRR management at institutions under
their respective supervision. The policy statement also outlines fundamental
elements of sound management that have been identified in prior Federal Reserve
guidance and discusses the importance of these elements in the context of
managing IRR. Specifically, the guidance emphasizes the need for active board
of director and senior management oversight and a comprehensive risk management
process which effectively identifies, measures, and controls IRR.
Financial institutions derive their income primarily form the excess of
interest collected over interest paid. The rates of interest an institution
earns on its assets and owes on its liabilities generally are established
contractually for a period of time. Since market interest rates change over
time, an institution is exposed to lower profit margins (or losses) if it
cannot adapt to interest rate changes. For example, assume that an
institution's assets carry intermediate or long-term fixed rates and that those
assets are funded with short-term liabilities. If market interest rates rise by
the time that the short-term liabilities must be refinanced, the increase in
the institution's interest expense on its liabilities may not be sufficiently
offset if assets continue to earn at the contractual long-term fixed rates.
Accordingly, an institution's profits could decrease on existing assets because
the institution will either have lower net interest income or, possibly, higher
net interest expense. Similar risks exist when assets are subject to
contractual interest rate ceilings, or rate sensitive assets are funded by
longer-term fixed-rate liabilities in a decreasing rate environment.
An institution might use various techniques to minimize IRR. One approach
used by the Company is to periodically analyze its assets and liabilities and
make future financing and investment decisions based on payment streams,
interest rates, contractual maturities, and estimate sensitivity to actual or
potential market interest rate changes. Such activities fall under the broad
definition of asset/liability management. The Company's primary asset/liability
management technique is the measurement of its asset/liability gap which is
defined as the difference between the cash flow amounts of interest-sensitive
assets and liabilities that will be refinanced or repriced over a given time
period. For example, if the asset amount to be repriced exceeds the
corresponding liability amount subject to repricing for a given day, month,
year, or longer period, the institution is in an asset-sensitive gap position.
In this situation, net interest income would increase if market interest rates
rose and conversely decrease if market interest rates fell. Alternatively, if
more liabilities than assets will reprice, the institution is in a
liability-sensitive position. Accordingly, net interest income would decline
when rates rose and improve when rates fell. Also, these examples assume that
interest rate changes for assets and liabilities are of the same magnitude,
whereas actual interest rate changes generally differ in magnitude for assets
and liabilities.
Several ways an institution can manage IRR include selling existing assets
or repaying certain liabilities; matching repricing periods for new assets and
liabilities for example by, shortening terms of new loans or investments; and
hedging existing assets, liabilities, or anticipated transactions. An
institution might also invest in more complex financial instruments intended to
hedge or otherwise change IRR. Interest rate swaps, futures contracts, options
on futures, and other such derivative financial instruments are often used for
this purpose. Because these instruments are sensitive to interest rate changes,
they require management expertise to
6
10
be effective. The Company has not purchased derivative financial instruments in
the past and does not presently intend to purchase such instruments.
Financial institutions are also subject to prepayment risk in falling
interest rate environments. For example, mortgage loans and other financial
assets may be prepaid by a debtor so that the debtor may refund its obligations
at new, lower interest rates. Prepayments of assets carrying higher rates
reduce the Company's interest income and overall asset yields. Certain portions
of an institution's liabilities may be short-term or due on demand, while most
of its assets may be invested in long-term loans or investments. Accordingly,
the Company seeks to have in place sources of cash to meet short-term demands.
These funds can be obtained by increasing deposits, borrowing, or selling
assets. Also, Federal Home Loan Bank advances and short-term borrows provide
additional sources of liquidity for the Company.
The following table sets forth information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997. The Company had no derivative financial instruments, or trading
portfolio, as of that date. The expected maturity date values for loans,
receivable, mortgage backed securities, and investment securities were
calculated adjusting the underlying instrument's contractual maturity date for
prepayment expectations. Expected maturity date values for interest-bearing
core deposits were not based upon estimates of the period over which the
deposits would be outstanding, but rather the opportunity for repricing.
Similarly, with respect to its variable rate instruments, the Company believes
that repricing dates, as opposed to maturity dates are more relevant in
analyzing the value of such instruments and are reported as such in the
following table. Company borrows are also reported based on conversion or
repricing dates.
QUANTITATIVE DISCLOSURES OF MARKET RISK
Fair Value
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
------ ------ ------ ------ ------ ---------- ------- ----------
Rate sensitive assets:
Fixed interest rate loans 64,483 49,636 43,523 15,312 16,652 11,135 200,741 201,815
Average interest rate 9.19% 6.07% 9.35% 9.27% 8.88% 7.44% 9.08%
Variable interest rate loans 42,654 5,605 3,747 2,069 3,323 9 681 67,079 67,079
Average interest rate 9.62% 9.52% 9.65% 9.56% 9.37% 9.37% 9.56%
Fixed interest rate securities 19,672 10,069 17,231 23,867 8,110 14,960 93,909 95,463
Average interest rate 6.00% 6.47% 6.41% 6.20% 6.64% 7.09% 6.40%
Rate sensitive liabilities:
Savings & interest-bearing 173,614 --- --- --- --- --- 173,614 173,614
checking 3.60% --- --- --- --- --- 3.60%
Average interest rate
Time deposits 93,041 18,537 6,408 1,395 5,327 --- 124,708 125,285
Average interest rate 5.70% 6.49% 6.47% 7.50% 7.19% --- 5.94%
Variable interest
rate borrows 10,150 --- --- --- --- --- 10,150 10,150
Average interest rate 5.50% --- --- --- --- --- 5.50%
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
7
11
ITEM 2. PROPERTIES
The following table sets forth the locations of the Company's full-service
banking offices.
Office Address Sq. Feet Owned/Leased Lease Expires
- ------------------- -------------------------- -------- ------------ --------------
Hales Corners (1,2) 10708 W. Janesville Road 37,000 Owned n/a
Muskego (1) S76 W17655 Janesville Road 2,680 Owned n/a
Milwaukee 2650 N. Downer Avenue 3,000 Leased 2000
Milwaukee (3) 2460 North 6th Street 100 Leased month to month
Greenfield (4) 4811 S. 76th Street 9,000 Leased 2007
7020 N. Port Washington
Glendale (5) 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
Burlington 1050 Milwaukee Avenue 6,300 Leased 2006
Richmond (6) 10910 Main Street 16,030 Owned n/a
Libertyville (7) 1509 N. Milwaukee Avenue 2,690 Leased 2006
1. Property is owned by SFB's wholly owned subsidiary, Hales Corners
Development Corporation.
2. SFB subleases approximately 4,300 square feet of its space in Hales
Corners to outside third parties.
3. Loan production office.
4. 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.
5. SFB subleases approximately 1,200 square feet of its space in Glendale to
a third party.
6. Richmond leases approximately 2,400 square feet of its space to outside
third parties.
7. Richmond leases this property from Upland Farms, an entity owned by a
director of Richmond, Charles F. Wonderlic.
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.
8
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information contained under the caption "Investor Information"
beginning on the inside back cover 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 4 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 5 of the
Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements beginning on page 21 of the Annual
Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
9
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The information contained under the caption "Item 1. Election
of Directors--Directors" in the Proxy Statement is incorporated herein by
reference.
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.
PRINCIPAL POSITION
NAME AGE POSITIONS HELD HELD SINCE
- ---- --- ---------------------------------------------------- ------------------
John B. Beckwith 44 President, SFB; Senior Vice President of SFSC 1994
Philip F. Hudson 66 Senior Vice President of SFSC 1998
Daniel L. Westrope 48 Chairman of the Board and CEO, Richmond; Senior Vice 1988
President, SFSC
Thomas M. Lilly 38 President, SFBW 1998
Michael A. Reindl 38 Senior Vice President, Controller, and Chief 1995
Financial Officer; Secretary/Treasurer of SFSC; and
Secretary of SFB
JOHN B. BECKWITH has been President of SFB since January, 1998 and is
responsible for the bank's overall operation and performance. From June 1994 to
December 1997, Mr. Beckwith was President of SFB's South Unit responsible for
the operation and performance of SFB's offices located in Hales Corners,
Muskego, and Greenfield, Wisconsin. From June 1991 to June 1994, Mr. Beckwith
was President 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 he joined the
Company in 1990. Mr. Beckwith has also served as Senior Vice President of SFSC
since November, 1997.
PHILIP F. HUDSON is Senior Vice President of SFSC responsible for
strategic operational and acquisition activities of the Company and the Banks.
From June, 1994 through December, 1997, Mr. Hudson was President of SFB's North
Unit responsible for the operation and performance of SFB's offices located in
Milwaukee, Glendale, Brookfield, and Waukesha, Wisconsin. From 1990 to 1994,
Mr. Hudson was President and Chief Executive Officer of the Company's then
separate subsidiary bank, UNB (currently SFB's Milwaukee and Glendale offices).
Mr. Hudson previously served as UNB's President and Chief Executive Officer
from 1975 to 1987. 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
and as a director of Richmond since January, 1998.
DANIEL L. WESTROPE joined the Company in February, 1998 as Chairman of the
Board and Chief Executive Officer of Richmond Bank and is responsible for the
bank's overall operation and performance. Mr. Westrope is also a Senior Vice
President of SFSC providing input into the Company's investment banking
activities. Prior to joining the Company, Mr. Westrope was employed as an
investment banker with Principal Financial Securities, Inc., Chicago, Illinois
(now known as Everen Securities, Inc.) from 1995 through February, 1998, and as
an investment banker and research analyst with Howe Barnes Investments, Inc.,
Chicago, Illinois from 1994 to 1995. Prior to 1994, Mr. Westrope was an officer
of the Federal Reserve Bank of Chicago.
THOMAS M. LILLY has been President and Chief Executive Officer and a
director of SFBW since January, 1998. From June 1994 through December 1997, Mr.
Lilly served as Senior Vice President of SFB. Mr. Lilly joined the Company in
1985, serving in a variety of lending and management capacities at SFB's Hales
Corners and Greenfield offices. Mr. Lilly has also served as President of
SFSC's wholly-owned subsidiary, State Financial Mortgage Company since its
inception in December, 1996.
10
14
MICHAEL A. REINDL has served as the Company's Senior Vice President,
Controller, and Chief Financial Officer since November 1995. In January 1997,
Mr. Reindl was also named Secretary/Treasurer of SFSC and Secretary of SFB.
From June 1993 through November 1997, 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. Mr. Reindl joined
the Company in 1984.
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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
11
15
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, 1997, are incorporated by reference in Item 8:
Annual Report
Page #
-------------
Report of independent auditors 23
Consolidated balance sheets --
December 31, 1997 and 1996 24
Consolidated statements of income --
Years ended December 31, 1997, 1996, and 1995 25
Consolidated statements of stockholders' equity --
Years ended December 31, 1997, 1996, and 1995 26
Consolidated statements of cash flows --
Years ended December 31, 1997, 1996, and 1995 27
Notes to Consolidated Financial Statements 28
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. The Company filed a
report on Form 8-K on January 14, 1998 and Amendment No. 1 thereto
on March 13, 1998 in regards to its acquisition of Richmond
Bancorp, Inc. and its subsidiaries.
(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.
12
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
By: /s/ Michael J. Falbo
----------------------------------------------------------
Michael J. Falbo, President and Chief Executive Officer
Date: March 23, 1998
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 Chairman of the Board and Vice
- ------------------ President March 23, 1998
Jerome J. Holz
/s/ Michael J. Falbo
- -------------------- President and Chief Executive Officer March 23, 1998
Michael J. Falbo
/s/ Michael A. Reindl Senior Vice President, Controller,
- --------------------- and Chief Financial Officer March 23, 1998
Michael A. Reindl
DIRECTORS
/s/ Jerome J. Holz
- ------------------ Director March 23, 1998
Jerome J. Holz
/s/ Michael J. Falbo
- -------------------- Director March 23, 1998
Michael J. Falbo
/s/ Richard A. Horn
- ------------------- Director March 23, 1998
Richard A. Horn
/s/ Barbara E. Holz-Weis
- ------------------------ Director March 23, 1998
Barbara E. Holz-Weis
/s/ Robert R. Spitzer
- --------------------- Director March 23, 1998
Robert R. Spitzer
/s/ David M. Stamm
- ------------------ Director March 23, 1998
David M. Stamm
signature page
17
STATE FINANCIAL SERVICES CORPORATION
----------------------
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED December 31, 1997
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. (7)
3.2 Bylaws of Registrant, as amended and restated effective January 27,
1998.
10.1 Lease between SFB (formerly State Bank, Hales Corners) and Hales
Corners Development Corporation (10708 West Janesville Road, Hales
Corners, Wisconsin). (2)
10.2 Lease between SFB (formerly State Bank, Hales Corners) and Hales
Corners Development Corporation (S76 W17655 Janesville Road, Muskego,
Wisconsin). (3)
10.3 Lease between SFB (formerly Edgewood Bank) and Edgewood Plaza Joint
Venture (4811 South 76th Street, Greenfield, Wisconsin). (3)
10.6 Lease between SFB (formerly University National Bank) and Northeast
Corporate Center (7020 North Port Washington Road, Milwaukee,
Wisconsin). (3)
10.7 Deferred Compensation Agreement between Registrant and Jerome J. Holz
dated December 6, 1980. (3)
10.10 Employee Stock Ownership Plan and Employee Stock Ownership Trust
Agreement. (4)
10.13 Lease between SFB (formerly University National Bank) and Downer
Investments (2650 North Downer Avenue, Milwaukee, Wisconsin) (5)
10.14 Agreement and Plan of Reorganization between Registrant and Eastbrook
State Bank, dated January 22, 1992, as amended and restated. (6)
10.15 Branch Purchase and Assumption Agreement between Eastbrook State Bank
and North Shore Bank, FSB, dated December 29, 1992. (1)
10.16 Agreement and Plan of Merger By and Among Registrant, WBAC, Inc., and
Waterford Bancshares, Inc. dated April 12, 1995. (8)
10.17 Lease between SFB-Waterford and Mangold Investments, LLP (1050 North
Milwaukee Avenue, Burlington, Wisconsin)(11)
10.18 Agreement and Plan of Merger By and Among Registrant, RBI, Inc. and
Richmond Bancorp, Inc. (10)
10.19 Lease between Richmond and Upland Farms (1509 North Milwaukee Avenue,
Libertyville, Illinois).
13 Registrant's Annual Report to security holders for the fiscal year
ended December 31, 1997.
21 Subsidiaries of Registrant.
18
23 Consent of Ernst & Young LLP.
23.1 Opinion of McGladrey & Pullen, LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for the year ended December 31, 1996
27.3 Restated Financial Data Schedule for the year ended December 31, 1995
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. (1)
99.2 State Financial Services Corporation 1990 Director Stock Option Plan,
as amended March 10, 1993. (1)
99.3 State Financial Services Corporation Supplemental Executive Retirement
Plan for Michael J. Falbo effective November 22, 1994. (9)
99.4 Registrant's Proxy Statement relating to its Annual Meeting of
Shareholders to be held on April 23, 1997.
99.5 State Financial Services Corporation 1998 Stock Incentive Plan
(1) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1992.
(2) Incorporated by reference from Registrant's registration statement on
Form S-1, Registration Number 33-31517 (the "Form S-1") (dated October
11, 1989).
(3) Incorporated by reference from Amendment No. 1 to the Form S-1 (dated
December 6, 1989).
(4) Incorporated by reference from Amendment No.2 to the Form S-1 (dated
March 6, 1989).
(5) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1991.
(6) 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.
(7) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1993.
(8) Incorporated by reference from Amendment No. 2 to the Form S-4 (dated
July 18, 1995).
(9) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1994.
(10) Incorporated by reference from Registrant's Report on Form 8-K (dated
January 14, 1998).
(11) Incorporated by reference from Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1996.
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.