Federal Deposit
Insurance Corporation

FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: West Bend Savings Bank West Bend, Wisconsin

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Indirectly Engage as Principal Through a Majority-Owned Subsidiary in Real Estate Investment Activities That May Not Be Permissible for a Subsidiary of a National Bank

STATEMENT

Pursuant to the provisions of section 24 of the Federal Deposit Insurance Act, West Bend Savings Bank, West Bend, Wisconsin ("Bank"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank requests the FDIC's consent to continue to indirectly engage as principal in real estate investment activities through Citizens Financial Services Corporation (the "Subsidiary"), a wholly-owned subsidiary of the Bank. The Subsidiary acquires, holds, develops, and sells affordable residential real estate, and has acquired and holds several commercial real estate properties.

The real estate investment activities which are the subject of this application may not be permissible activities for a national bank or a subsidiary of a national bank. Subsidiaries of state-chartered, FDIC-insured banks may not engage as principal in an activity prohibited to subsidiaries of nationally-chartered banks unless they obtain consent from the FDIC. Consent may not be granted unless the Bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the deposit insurance fund. The Wisconsin Administrative Code authorizes these activities. Since 1971, the Subsidiary has purchased residential real estate for the purpose of enhancing the availability of affordable housing stock. Since 1982, the Subsidiary has constructed model and pre-sold affordable houses. More recently, the Subsidiary has acquired commercial properties for various purposes. The Bank intends to continue its activities which promote affordable housing in its market area.

Real estate investment risk can be generally characterized as higher than that for most traditional bank investments, such as loans or debt securities. Investments in real estate can be quite risky because there is a high degree of uncertainty of returns on invested funds. The cyclical downturn in the real estate market in the late 1980's and early 1990's, and the impact of that downturn on financial institutions, provide an illustration of the market risk presented by real estate investment. Real estate markets are, for the most part, localized, investments are normally not securitized, financial information flow is often poor, and markets are generally not very liquid. In addition, real estate investment can increase interest rate risk, optimum investment periods are typically long-term, and real estate is subject to specialized risks such as environmental liability. The experience and expertise of management are critical factors, and there is much anecdotal evidence to suggest that the lack of adequate management creates a significant level of risk of loss.

Due to these risks, real estate investment activities appear suitable to a bank only on a very limited scale and under restrictive conditions designed to control the various risks posed to the bank and the deposit insurance fund.

The Board of Directors ("Board") of the FDIC has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the Bank. The Board has also considered the risks associated with owning and developing the particular properties held by the Subsidiary.

In determining if a significant risk to the deposit insurance fund exists in the proposal, the Board evaluated the specifics of the Bank's application. In evaluating this application, the Board considered the types of real estate investment activity proposed to determine if the activity is suitable for an insured depository institution. The Board reviewed the proposed subsidiary structure and its management policies and practices to determine if the Bank is adequately protected from litigation risk. The Board analyzed capital adequacy to ensure that the Bank first devotes sufficient capital to its more traditional banking activities. Capital adequacy was determined by the Bank's "consolidated" and "bank only" leverage and risk-based capital ratios, with all investments in the Subsidiary excluded from the "bank only" capital calculation. The Board evaluated limitations on investment in the activities in order to assure that the maximum risk exposure to the Bank is. acceptable. The Board reviewed the need for restrictions relating to extensions of credit to third parties for Subsidiaryrelated activities to protect the Bank from concentrations of risk. The Board reviewed the need for restrictions on transactions in which insiders are involved to protect the Bank from potential insider abuse. The Board reviewed the need to prohibit the conditioning of loans on the purchase of real estate from the Subsidiary and the need to restrict the extending of credit by the Bank to third parties for the purpose of acquiring real estate from the Subsidiary to prevent undesirable tying relationships and to ensure that sound credit underwriting is maintained. Having reviewed these areas, the Board is imposing conditions for prudential reasons due to the volatility and other risks which are inherent in the subject real estate investment activity, as well as to mitigate any potential insider conflicts of interest and to reduce risk to the deposit insurance fund.

The Subsidiary has significant experience in real estate investment, as it has owned residential real estate since 1971. These real estate investment activities have been profitable and have benefited the community by increasing the availability of low- and moderate-income housing. The Board has determined that the Bank's financial condition and management are satisfactory, but that it is appropriate to limit the Bank to the level of real estate investment activity presently held. This is consistent with the amount requested under the Bank's application.

The Bank is in compliance with applicable capital standards and meets the definition of "well capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations. The Bank's total investment in the Subsidiary, which consists of equity and extensions of credit, represents 17.4 percent of Tier 1 capital and 1.4 percent of the Bank's total assets as of September 30, 1995.

In order to ensure that the Bank's capital is sufficient to support both traditional banking activities and real estate investment activities, the Board will require that the Bank's capital, after deducting the Bank's total investment in the Subsidiary, equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations.

In order to promote the concept that real estate investment activities should be conducted in a separately and adequately . capitalized subsidiary and to ensure that the appropriate deposit insurance fund is adequately compensated for, and sufficiently protected from, additional risk in the event that "bank only" capital levels fall below "well capitalized" levels, the Bank's capital category for purposes of Prompt Corrective Action will be determined, and the Bank's risk-adjusted deposit insurance premium will be assessed, based on "bank only" capital ratios, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325.

To help ensure that all transactions pertaining to these activities are conducted in a safe and sound manner, the Board will require that transactions relating to the real estate investment activities comport with the restrictions of sections 23A and 23B of the Federal Reserve Act to the same extent as though the Subsidiary were an affiliate of the Bank as defined under sections 23A and 23B, except that the Bank's total investment in real estate shall not be subject to the 10 percent limit on covered transactions with one affiliate, and the collateral requirements and investment limitations of section 23A shall not apply to loans made by the Bank to third parties to finance bona fide purchases of real estate from the Subsidiary provided such loans are consistent with safe and sound banking practices, do not involve more than the normal degree of risk of repayment, and are extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for other comparable transactions.

For the reasons outlined above, the Board of Directors has concluded that the continuation of the real estate investment activities does not pose a significant risk to the deposit insurance fund, provided that certain conditions are observed, and therefore, approval of the application, subject to conditions in the Order, is warranted.

THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION

FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: West Bend Savings Bank West Bend, Wisconsin

ORDER

The Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") has fully considered all available facts and information relevant to section 24 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831a, and Part 362 of the FDIC's Rules and Regulations, 12 C.F.R. Part 362, relating to an application by West Bend Savings Bank, West Bend, Wisconsin ("Bank"), for consent to continue to indirectly engage as principal through Citizens Financial Services Corporation ("Subsidiary"), a wholly-owned subsidiary, in activities that may not be permissible for a subsidiary of a national bank. The Board of Directors, having found that the Bank is in compliance with applicable capital standards, and that the activities, with certain conditions imposed, do not appear to pose a significant risk to the deposit insurance fund, has concluded the application should be approved subject to certain conditions.

Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by the Bank for consent to continue to indirectly engage as principal through its Subsidiary in activities that may not be permissible for a subsidiary of a national bank be and the same hereby is approved, subject to the following conditions. The word Subsidiary as used herein shall apply to any and all subsidiaries, now existing or hereafter created, which engage in the activities for which the Bank, through this application, requires FDIC approval.

1. The Bank and the Subsidiary shall take the necessary actions to establish, and the Subsidiary shall operate in a manner so as to ensure, a separate corporate existence as a majority-owned subsidiary which:

a.) is adequately capitalized,

b.) is physically separate and distinct in its operations from the operations of the Bank,

c.) maintains separate accounting and other corporate records,

d.) observes separate formalities such as separate board of directors' meetings,

e.) maintains a board of directors with one or more, independent knowledgeable outside directors and management expertise capable of conducting activities in a safe and sound manner

f.) contracts with the Bank for any service on terms and conditions comparable to those available to or from independent entities, and

g.) conducts business pursuant to separate policies and procedures designed to inform customers and prospective customers of the Subsidiary that the Subsidiary is a separate organization from the Bank, including the placement of specific language on any debt instrument or contract with a third party disclosing that the Bank itself is not responsible for payment or performance.

2. The Bank's Real Estate Investments, as defined below, shall be limited to an amount not to exceed 17.5 percent of the Bank's Tier 1 capital.

3. The Bank's real estate activities shall be limited to the type of activities described in the Bank's application, dated May 24, 1995, and any New Real Estate Investment Activity, as defined below, planned to be conducted by the Subsidiary, with the exception of development of the Jackson-Old Church Square property discussed under paragraph (5), must first be approved under the application procedures of Part 362.

4. The Bank's capital level, after deducting all Real Estate Investments in the Subsidiary, shall equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations.

5. The Bank shall provide a development plan to the Regional Director of the FDIC's Division of Supervision should the Bank choose to develop the Jackson-Old Church Square property itself. If the Regional Director has not objected to the development plan within 45 days, the Bank may proceed within the parameters of paragraphs (2), (3), and (4).

6. The Bank shall provide an investment plan to the Regional Director of the FDIC's Division of Supervision on an annual basis that indicates the extent of the Bank's planned investments in the Subsidiary, and the manner in which concentration and diversification of risk issues within the Subsidiary will be addressed. If the Regional Director has not objected to the investment plan within 45 days, the Bank may proceed within the parameters of paragraphs (2), (3), and (4).

7. The Bank shall, on a quarterly basis, perform the capital adequacy calculations described in paragraph (4) for the purpose of ascertaining its capital level, and in the event the Bank falls below the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations, the Bank shall notify the FDIC within 15 days and submit to the FDIC an acceptable plan for restoring capital to a level required for a "well capitalized" institution.

8. Henceforth, notwithstanding Parts 325 and 327 of the FDIC's Rules and Regulations, 12 C.F.R. Parts 325 and 327, the Bank's capital category for purposes of Prompt Corrective Action and the Bank's risk-adjusted deposit insurance premium shall be calculated based on the Bank's capital after deducting all Real Estate Investments, except that such deductions shall not be used to determine whether the Bank is "critically undercapitalized" as defined under Part 325.

The Bank shall not:

(a) condition any loan on the purchase or rental of real estate from the Subsidiary, or

(b) extend credit to any borrower to acquire real estate from the Subsidiary unless it is consistent with safe and sound banking practices and does not involve more than the normal degree of risk of repayment, and the credit is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for other comparable transactions.

10. Transactions relating to the Bank's indirect real estate activities shall comport with the restrictions of sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. §§ 371c and 371c-1, to the same extent as though the Subsidiary were an affiliate of the Bank as defined in sections 23A and 23B, except that the Bank's total investment in real estate shall not be subject to the 10 percent limit on covered transactions with one affiliate. In addition, End Loans, defined below, shall not:

(a) be subject to the 130 percent collateral margin requirement of section 23A, or

(b) be subject to the 10 percent or 20 percent aggregate limits on covered transactions in section 23A.

11. The Bank shall not engage directly, or indirectly through the Subsidiary, in any activity or transaction relating to the Bank's indirectly owned real estate which involves insiders or their related interests without the prior written consent of the Regional Director of the FDIC's Division of Supervision.

12. Before the consummation of a transaction between the Subsidiary and any of the Bank's customers, any potential conflicts of interest shall be identified, be appropriately resolved, and be clearly disclosed to the board of directors and documented in the board's minutes.

13. The consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. The Bank shall notify the FDIC of any significant change in facts or circumstances. The FDIC's action is conditioned on its ability to alter, suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.

Definitions. Except as otherwise set forth in this Order, capitalized terms used herein shall have the meaning set forth below:

(a) "Real Estate Investment" means the Bank's investment in the Subsidiary, including, equity interests in the Subsidiary, debt obligations of the Subsidiary held by the Bank, Bank guarantees of debt obligations issued by the Subsidiary and held by others, extensions of credit or commitments of credit from the Bank to the Subsidiary, and any extensions of credit to any third parties for the purpose of making a direct investment in the Subsidiary or an investment in any real estate asset in which the Subsidiary has an interest. However, Real Estate Investment shall not include End Loans.

(b) "End Loan" means any loan made by the Bank to a third party for the purpose of financing the bona fide sale of a Subsidiary asset and which meets the requirements of paragraph 9(b) of this Order.