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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 YEA