SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______________ to
_______________
Commission file number: 0-19794
ADVANTAGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1714425
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
53140
5935 Seventh Avenue (ZIP Code)
Kenosha, Wisconsin
(Address of principal executive offices)
Registrant's telephone number, including area code: (414) 658-4861
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 Exchange Act
of 1934 during the preceding 12 months (or for such shorter period 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 ____
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 .
Based upon the closing price of the registrant's common stock as of
December 6, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $96,743,000.*
The number of shares of Common Stock outstanding as of December 6, 1996
was 3,290,168 shares.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV - Portions of the Annual Report to Shareholders for the
fiscal year ended September 30, 1996 are incorporated by reference into
Parts II and IV hereof.
PART III - Portions of the Proxy Statement for the 1997 Annual Meeting of
Shareholders to be held on January 30, 1997 are incorporated by reference
into Part III hereof.
* For purposes of this calculation, all executive officers and directors
of the registrant and its bank subsidiary are considered to be affiliates.
<PAGE>
PART 1
Item 1. Business
General
Advantage Bancorp, Inc. (the "Company") is a registered savings and
loan holding company incorporated under the laws of the State of
Wisconsin and is engaged in the savings and loan business through its
wholly-owned subsidiary, Advantage Bank, FSB (the "Bank").
The Bank was organized in 1902 as a Wisconsin-chartered savings
institution. Effective December 31, 1993, the Bank changed to a federal
savings bank charter. This change did not have a material effect on the
business of the Bank or the Company. The Bank's deposits are insured up
to the maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Home Loan Bank
of Chicago ("FHLB"), and is regulated by the Office of Thrift Supervision
("OTS") and the FDIC. The Bank is also regulated by the Board of
Governors of the Federal Reserve System relating to reserves required to
be maintained against deposits and certain other matters. See
"REGULATION."
As a consumer oriented financial institution, the Bank offers a range
of retail banking services to residents of its market area. The Bank is
principally engaged in the business of attracting deposits from the
general public and using such deposits to originate residential loans in
its primary market area. The Bank also originates commercial real estate,
multi-family, construction, consumer and commercial business loans. In
addition, the Bank also invests in mortgage-related securities, investment
securities, certificates of deposit and short-term liquid assets. Finally,
the Bank offers, through a subsidiary, certain securities brokerage
services and insurance products to its customers.
On December 16, 1994, the Company acquired Amity Bancshares, Inc.
("Amity") and its wholly owned subsidiary Amity Federal Bank for Savings
("Amity Federal") for approximately $24.8 million in cash. In the
transaction, Amity was ultimately merged with and into the Company and
Amity Federal was merged with and into the Bank. Pro forma results of
operations for 1994 and 1995, assuming the acquisition had occurred at
October 1, 1993, would not differ materially from previously reported
results of the Company.
The Company's executive office is located at 5935 Seventh Avenue,
Kenosha, WI 53140. The telephone number is (414) 658-4861.
Market Area
At September 30, 1996, the Bank conducted business from 15 branch
offices located in Kenosha County and Walworth County, Wisconsin and Lake
County and Cook County, Illinois. The Bank also has mortgage loan
origination offices located in Kenosha, Racine and Wauwatosa, Wisconsin
and Grayslake, Naperville and Tinley Park, Illinois.
Kenosha has a population of approximately 80,000 and is located in
southeastern Wisconsin approximately 30 miles south of Milwaukee,
Wisconsin and 50 miles north of Chicago, Illinois. The Bank has
historically focused its operations in Kenosha County, Wisconsin. The Bank
expanded its operations to Walworth County, Wisconsin in 1973, to Lake
County, Illinois in 1988 and to Cook County, Illinois in 1994.
In recent years, the Kenosha area economy has expanded due to the
aggressive marketing of local industrial parks and the solicitation of
businesses from northern Illinois. In addition, Lake County, Illinois has
grown rapidly as a result of the northward expansion of the Chicago
metropolitan area. Walworth County, and particularly Lake Geneva, is
well-established as a leading vacation area in the Midwest. Cook County
includes the City of Chicago which is the third largest city in the United
States.
While the Bank intends to continue to focus its business operations
on its primary market area, the Bank will also consider expansion
opportunities as they present themselves, particularly in the Bank's
primary market area and contiguous markets.
Competition
The Bank faces extensive competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
other savings institutions, commercial banks and mortgage bankers who also
make loans in the Bank's primary market area. The Bank competes for loans
principally on the basis of the interest rates and loan fees it charges,
the types of loans it originates and the quality of services it provides
to borrowers.
The Bank faces substantial competition in attracting deposits from
other savings institutions, commercial banks, securities firms, money
market mutual funds, other mutual funds, credit unions and other
investment vehicles. The ability of the Bank to attract and retain
deposits depends on its ability to provide investment opportunities that
satisfy the requirements of investors as to rate of return, liquidity,
risk and other factors. The Bank competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business
hours and a customer oriented staff.
The Bank estimates its market share of insured savings deposits to be
as follows as of June 30, 1995 based on its own calculation using publicly
available data: Kenosha County, Wisconsin - 27%; Walworth County,
Wisconsin - 5%; Racine County, Wisconsin - less than 1%, Lake County,
Illinois - 1%, and Cook County, Illinois - less than 1%.
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of
1995. These forward-looking statements can generally be identified as
such because the context of the statement will include words such as the
Company "believes," "anticipates," "expects," or other words of similar
import. Similarly, statements that describe the Company's future plans,
objectives or goals are also forward-looking statements. Such forward-
looking statements are subject to certain risks and uncertainties which
are described in close proximity to such statements and which could cause
actual results to differ materially from those currently anticipated.
Shareholders, potential investors and other readers are urged to consider
these factors in evaluating the forward-looking statements and are
cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included herein are only made as of the
date of this Annual Report on Form 10-K and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
Lending Activities
General. The principal lending activity of the Bank is originating
first mortgage loans secured by owner-occupied one- to four-family
residential properties located in its primary market area. In addition, in
order to increase the yield and interest rate sensitivity of its
portfolio, the Bank also originates commercial real estate, multi-family,
construction, consumer and commercial business loans in its primary market
area.
Loan Portfolio Composition. The following table presents information
concerning the composition of the Bank's loan portfolios in dollar amounts
and in percentages as of the dates indicated. The table includes loans
held for sale but does not include advances to unconsolidated
partnerships.
<TABLE>
<CAPTION>
Loan Portfolio Composition: September 30
1992 1993 1994
Amount Percent Amount Percent Amount Percent
Real Estate Loans: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family (1) . . . . . . . . . $261,558 69.34% $292,093 69.97% $307,169 68.17%
Multi-family . . . . . . . . . . . . . . . 31,921 8.46 31,254 7.49 30,667 6.81
Commercial . . . . . . . . . . . . . . . . 36,351 9.64 46,570 11.15 51,962 11.53
One- to four-family construction (2) . . 9,546 2.53 8,532 2.04 12,185 2.70
Other construction and land . . . . . . . . 11,568 3.07 13,238 3.17 16,474 3.66
------- ------- ------- ------- ------- -------
Total real estate loans . . . . . . . . . . . 350,944 93.04 391,687 93.82 418,457 92.88
------- ------- ------- ------ ------- -------
Other Loans:
Consumer loans:
Home equity . . . . . . . . . . . . . . . 8,388 2.22 9,570 2.29 12,051 2.67
Student . . . . . . . . . . . . . . . . . 1,943 0.52 2,341 0.56 3,010 0.67
Automobile . . . . . . . . . . . . . . . . 1,215 0.32 906 0.22 565 0.13
Other consumer loans . . . . . . . . . . . 3,634 0.96 3,857 0.92 4,030 0.89
Commercial business loans . . . . . . . . . 11,074 2.94 9,142 2.19 12,436 2.76
--------- ------- -------- -------- -------- -------
Total other loans . . . . . . . . . . . . . . 26,254 6.96 25,816 6.18 32,092 7.12
--------- ------- -------- -------- -------- -------
Gross loans receivable . . . . . . . . . . . 377,198 100.00% 417,503 100.00% 450,549 100.00%
====== ======== =======
Add: Accrued interest . . . . . . . . . . . 2,536 2,414 2,723
Less:
Undisbursed portion of loan
proceeds . . . . . . . . . . . . . . . . . (21,463) (26,844) (19,119)
Unamortized loan fees . . . . . . . . . . . (2,650) (2,482) (2,220)
Allowance for losses on loans . . . . . . . (4,204) (4,937) (5,327)
Allowance for uncollected
interest . . . . . . . . . . . . . . . . . (457) (859) (1,037)
--------- -------- ---------
Total additions/deductions . . . . . . . . (26,238) (32,708) (24,980)
--------- -------- ---------
Total loans receivable, net . . . . . . . . . $350,960 $384,795 $425,569
======== ======== =======
<CAPTION>
Loan Portfolio Composition: September 30
1995 1996
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family (1) . . . . . . . . . . $399,467 72.90% $418,647 70.01%
Multi-family . . . . . . . . . . . . . . . . 27,810 5.08 24,993 4.18
Commercial . . . . . . . . . . . . . . . . . 49,393 9.01 54,671 9.14
One- to four-family construction (2) . . . 11,057 2.02 7,598 1.27
Other construction and land . . . . . . . . . 20,629 3.77 30,161 5.04
-------- ------ -------- ------
Total real estate loans . . . . . . . . . . . . 508,356 92.78 536,070 20.33
-------- ------ -------- ------
Other Loans:
Consumer loans:
Home equity . . . . . . . . . . . . . . . . 22,741 4.15 43,893 7.34
Student . . . . . . . . . . . . . . . . . . 3,613 0.66 4,040 0.68
Automobile . . . . . . . . . . . . . . . . . 1,020 0.19 1,553 0.26
Other consumer loans . . . . . . . . . . . . 1,323 0.24 1,732 0.29
Commercial business loans . . . . . . . . . . 10,853 1.98 10,691 1.79
------- ------ -------- ------
Total other loans . . . . . . . . . . . . . . . 39,550 7.22 61,909 10.36
------- ----- -------- ------
Gross loans receivable . . . . . . . . . . . . 547,906 100.00% 597,979 100.00%
======= =======
Add: Accrued interest . . . . . . . . . . . . 3,390 3,718
Less:
Undisbursed portion of loan
proceeds . . . . . . . . . . . . . . . . . . (31,531) (30,100)
Unamortized loan fees . . . . . . . . . . . . (2,017) (2,104)
Allowance for losses on loans . . . . . . . . (5,271) (5,773)
Allowance for uncollected
interest . . . . . . . . . . . . . . . . . . (195) (938)
-------- --------
Total additions/deductions . . . . . . . . . (35,624) (35,197)
-------- --------
Total loans receivable, net . . . . . . . . . . $512,282 $562,782
======== ========
(1) Includes construction/permanent loans to persons intending to occupy
their homes upon the completion of construction totalling $30.3
million, $37.3 million, $22.5 million, $46.7 million and $50.7
million as of September 30, 1992, 1993, 1994, 1995 and 1996,
respectively.
(2) Consists of short-term balloon construction loans to builders and
developers who intend to sell the homes upon completion of
construction.
</TABLE>
The following schedule illustrates the maturity of the Bank's loan
portfolio at September 30, 1996. The schedule does not reflect scheduled
principal amortizations, projected repayments, or the period to repricing
for adjustable rate loans. This schedule is based on contractual maturity
dates since, under the Bank's "rollover" policy, the Bank does not
automatically rollover balloon notes at maturity but reserves the right to
demand payment in full based on its evaluation of the borrower, collateral
and other material factors.
<TABLE>
<CAPTION>
Real Estate Loans Other Loans
One- to Commercial Construction Total
Four- Multi- Real and Commercial Loans
Maturing Family Family Estate Land Business Consumer Receivable
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Within one year . . . $9,428 $364 $15,257 $11,973 $4,340 $1,323 $42,685
After one year:
1 to 3 years . . . 9,769 2,010 21,500 12,528 3,586 3,978 53,371
3 to 5 years . . . 6,595 678 3,931 7,379 1,730 8,668 28,981
5 to 10 years . . 23,035 2,120 5,029 5,588 944 31,409 68,125
10 to 20 years . . 105,149 8,181 8,032 291 91 5,840 127,584
Over 20 years . . 264,671 11,640 922 - - 277,233
-------- -------- -------- --------- --------- --------- ---------
Total due after one
year . . . . . . . 409,219 24,629 39,414 25,786 6,351 49,895 555,294
-------- ------ ------- ------- -------- ------- ---------
Gross loan receivable $418,647 $24,993 $54,671 $37,759 $10,691 $51,218 597,979
======== ======= ======= ======= ======= =======
Add: Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,718
Less: Undisbursed portion of loan proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,100)
Less: Unamortized loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,104)
Less: Allowance for losses on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,773)
Less: Allowance for uncollected interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (938)
--------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $562,782
========
</TABLE>
The following table sets forth, at September 30, 1996, the dollar
amount of all loans due after September 30, 1997 and whether such loans
have fixed interest rates or adjustable interest rates.
Due after September 30, 1997
Fixed Adjustable Total
Real estate loans: (In thousands)
One- to four-family . . . $121,528 $287,691 $409,219
Multi-family . . . . . . . 6,807 17,822 24,629
Commercial real estate . . 19,399 20,015 39,414
Construction and land . . 8,720 17,066 25,786
-------- -------- --------
Total real estate loans . 156,454 342,594 499,048
Other loans . . . . . . . . . 26,180 30,066 56,246
-------- -------- --------
Total loans receivable . . $182,634 $372,660 $555,294
======= ======= =======
Lending - General
Under federal law and regulations, the aggregate amount of loans that
the Bank is permitted to make to any one borrower is generally limited to
15% (25% if the security for such a loan has a "readily ascertainable"
value or 30% for certain residential development loans) of unimpaired
capital and surplus. At September 30, 1996, based on the above, the
Bank's regulatory loan-to-one-borrower limit was $9.6 million. On the same
date, the Bank had no loans to one borrower which had aggregate balances
in excess of this limit.
Loan applications are initially considered and approved at various
levels of authority, depending on the type, amount and loan-to-value ratio
of the loan. Mortgage loans up to $400,000 are approved by designated
employees and officers. Mortgage loans in excess of $400,000 and up to $1
million are approved by a Loan Committee consisting of the President,
the Senior Vice President-Mortgage Lending, the Senior Vice President-
Finance and the Vice President-Commercial Lending. Mortgage loans in
excess of $1 million must be approved by the Board of Directors of the
Bank. Commercial business loans in excess of $250,000 must be approved by
the President. Commercial business loans in excess of $350,000 and up to
$1 million must be approved by the Loan Committee. Commercial business
loans in excess of $1 million must be approved by the Board of Directors
of the Bank. Certain higher risk commercial loans, such as loans to
restaurants and motels, must be approved by the Board of Directors of the
Bank if the balance exceeds $100,000.
All of the Bank's lending is subject to its written,
nondiscriminatory underwriting standards and to loan origination
procedures. Decisions on loan applications are made on the basis of
detailed applications and property valuations (consistent with the Bank's
written appraisal policy) by independent appraisers. The loan applications
are designed primarily to determine the borrower's ability to repay and
the more significant items on the application are verified through use of
credit reports, financial statements, tax returns, and/or confirmations
from third parties.
The Bank requires evidence of marketable title and lien position as
well as title insurance on all loans secured by real property and requires
fire and extended coverage casualty insurance in amounts at least equal to
the principal amount of the loan or the value of improvements on the
property, depending on the type of loan. The Bank may also require flood
insurance to protect the property securing its interest.
The Bank encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may
become liable for the costs of cleaning up hazardous material found on
security properties. Although environmental risks are more usually
associated with industrial and commercial loans, environmental risks may
be substantial for residential loans since environmental contamination may
render the residential properties unsuitable for residential use. In
addition, the value of residential properties may become substantially
diminished by contamination of nearby properties. In accordance with
secondary mortgage market guidelines, appraisals for single-family loans
include comments on environmental influences and conditions. The Bank
attempts to control its exposure to environmental risks with respect to
loans secured by larger properties by monitoring available information on
hazardous waste disposal sites and requiring environmental inspections on
such properties prior to disbursing the loan. No assurance can be given,
however, that the value of properties securing loans in the Bank's
portfolio will not be adversely affected by the presence of hazardous
materials or that future changes in federal or state laws will not
increase the Bank's exposure to liability for environmental cleanup.
One- to Four-Family Residential Real Estate Lending
The cornerstone of the Bank's lending program has long been the
origination of permanent loans secured by mortgages on owner-occupied one-
to four-family residences. At September 30, 1996, $418.6 million, or 70.0%
of the Bank's loan portfolio consisted of permanent loans on one- to
four-family residences. Substantially all of the residential loans
originated by the Bank are secured by properties located in the Bank's
primary market area.
The Bank originates a variety of different types of residential loans
including various types of one- to four-family residential adjustable rate
mortgage loans ("ARMs") and fixed rate loans with 30 year and shorter
contractual maturities.
The Bank's ARMs are fully amortizing loans with contractual
maturities of up to 30 years. The interest rates on the ARMs are subject
to adjustment at stated intervals. A substantial portion of the Bank's
ARMs have interest rates which adjust annually. Some of the Bank's ARMs
have been originated with fixed rates for the first three or five years
with adjustable rates thereafter. At September 30, 1996, the Bank had
$107.7 million of ARMs which will adjust annually after a specified period
after origination and which had more than 12 months remaining until the
next repricing date.
Prior to 1988, substantially all of the Bank's ARMs carried interest
rates which were subject to annual adjustment by the Bank on a
discretionary basis ("Non-index ARMs"). Since 1988, the Bank has
originated ARMs with interest rates which are reset to a stated margin
over an index based on yields for one year U.S. Treasury Securities
("Treasury ARMs"). At September 30, 1996, the Bank had approximately
$26.8 million of Non-index ARMs and $254.2 million of Treasury ARMs in its
mortgage loan portfolio.
The Bank's ARMs generally establish limits on the amount of the
periodic interest rate changes. Decreases or increases in the interest
rate of the Bank's Treasury ARMs are generally limited to between 1% and
2% at any adjustment date with a lifetime cap that applies over the entire
term of the loan. Annual interest rate increases on Non-index ARMs are
limited to 1% per year, calculated on a cumulative basis from the loan
origination date. The Bank's delinquency experience on its ARMs has
generally been similar to its experience on fixed rate residential loans.
Most of the Bank's ARMs originated after 1987 are convertible into
fixed-rate loans at the market rate at the time of conversion.
The Bank evaluates both the borrower's ability to make principal,
interest and escrow payments and the value of the property that will
secure the loan. The Bank originates residential mortgage loans with
loan-to-value ratios of up to 97%. On any mortgage loan exceeding an 80%
loan-to-value ratio at the time of origination, the Bank generally
requires private mortgage insurance in an amount intended to reduce the
Bank's exposure to 75% or less of the appraised value of the underlying
property.
The Bank's residential mortgage loans usually include "due-on-sale"
clauses, which are provisions giving the Bank the right to declare a loan
immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage. The Bank enforces
due-on-sale clauses to the extent permitted under applicable law.
As of September 30, 1996, one- to four-family residential loans
included $50.7 million of permanent loans to individuals for the
construction of their primary residences. These loans require only the
payment of interest during the construction phase and thereafter have
rates and terms which are similar to those of any one- to four-family
residential loans offered by the Bank. The interest rate and loan term is
established at the time the construction loan commitment is made. These
loans are underwritten pursuant to the same guidelines used for
originating other one- to four-family residential loans.
Multi-Family and Commercial Real Estate Lending
In order to enhance the yield on, and decrease the average term to
maturity of, its assets, the Bank originates permanent multi-family and
commercial real estate loans on a wide variety of different types of
properties.
The Bank has originated both adjustable and fixed rate multi-family
and commercial real estate loans, although most current originations have
either adjustable rates or fixed rates with terms to maturity of five
years or less. Rates on the Bank's adjustable rate multi-family and
commercial real estate loans generally adjust in a manner consistent with
the Bank's residential ARMs.
Multi-family and commercial real estate loans are generally written
in amounts of up to 80% of the appraised value of the underlying property.
Appraisals on properties securing multi-family and commercial real estate
loans originated by the Bank are performed by an independent appraiser
selected by the Bank. All appraisals on multi-family and commercial real
estate loans are reviewed by the Bank's management. In addition, the
Bank's underwriting procedures require verification of the borrower's
credit history, income and financial statements, banking relationships,
references and income projections for the property. Borrowers are
generally personally liable for all or a portion of their multi-family and
commercial real estate loans.
At September 30, 1996, the Bank had (in addition to loans to
unconsolidated partnerships) 12 borrowers on multi-family and commercial
real estate loans that were indebted to the Bank in excess of $3.0 million
and 22 other borrowers with total loan balances in excess of $1.0 million.
On the same date, the Bank's largest group of multi-family and commercial
real estate loans to one borrower had an aggregate balance of
$10.1 million consisting of loans secured by land and condominiums.
Substantially all of the Bank's multi-family residential and
commercial real estate loans are secured by properties located within 150
miles of the Bank's headquarters.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences.
This greater risk is due to several factors, including the concentration
of principal in a limited number of loans and borrowers, the effects of
general economic conditions on income-producing properties, and the
difficulty of evaluating and monitoring these types of loans. Furthermore,
the repayment of loans secured by multi-family and commercial real estate
is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced (for example,
if leases are not obtained or renewed), the borrower's ability to repay
the loan may be impaired. Nevertheless, the Bank's delinquency experience
on its multi-family and commercial real estate loans has been generally
satisfactory to date.
The Bank generally obtains annual cashflow statements from borrowers
for multi-family and commercial real estate loans in excess of $1 million.
These statements are analyzed to determine the quality of the loan.
Construction and Land Lending
The Bank makes construction loans to builders and developers for the
construction of one- to four-family residences and other types of
properties. The Bank also makes loans for the acquisition of land. The
Bank has not purchased any construction or land loans or made any such
loans on properties more than 100 miles from the Bank's headquarters.
The Bank offers short-term construction balloon loans to builders for
the construction of one- to four-family residences. These loans generally
have terms from 12 to 24 months and carry fixed rates of interest. At
September 30, 1996, the Bank had $ 7.6 million of loans to builders for
the construction of one- to four-family residences.
Most of the Bank's construction and land loans to developers and
builders (for properties other than one- to four-family residences) have
been originated with terms of three years or less. Construction and land
loans are generally made in amounts up to a maximum loan-to-value ratio of
80% based upon an independent appraisal. Some of the Bank's construction
and land loans provide an interest reserve for the payment of interest and
fees from the loan proceeds. The Bank also obtains personal guarantees for
substantially all of its construction and land loans. The Bank reviews the
personal financial statements of its borrowers and guarantors on
construction and land loans. At September 30, 1996, the Bank had five
construction and land loans with balances in excess of $1 million.
The Bank's construction and land loan agreements generally provide
that loan proceeds are disbursed in increments as construction progresses.
The amount of each disbursement is based on the construction cost estimate
of an independent architect, engineer or qualified inspector who inspects
the project in connection with each disbursement request. The Bank
periodically reviews the progress of the underlying construction project.
Construction and land loans are obtained principally through
continued business from developers and builders who have previously
borrowed from the Bank as well as walk-in customers, broker referrals and
direct solicitations of builders. The application process includes a
submission to the Bank of plans, specifications and costs of the project
to be constructed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the current
appraised value of the property to be constructed and/or the costs of
construction (including the value of the land).
Construction and land lending generally affords the Bank an
opportunity to receive interest at rates higher than those obtainable from
residential lending and to receive higher origination and other loan fees.
In addition, construction and land loans are generally made with
adjustable rates of interest and/or for relatively short terms.
Nevertheless, construction and land lending to persons other than owner-
occupants is generally considered to involve a higher level of credit risk
than one- to four-family residential lending because loan amounts are
larger, and the effects of general economic conditions on construction
projects, real estate developers and managers can be substantial.
The nature of these loans is such that they are more difficult to
evaluate and monitor. The Bank's risk of loss on a construction or land
loan is dependent largely upon the accuracy of the initial estimate of the
property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the project may have a value which is insufficient to assure
full repayment of the loan. Because defaults in repayment may not occur
during the construction period, it may be difficult to identify problem
loans at an early stage. When loan payments become due, the cash flow from
the property may not be adequate to service the debt. In such cases, the
Bank may be required to modify the terms of the loan. At September 30,
1996, the Bank was not aware of any material cash flow or other problems
on any of its construction and land loans.
Commercial Business Lending
The Bank's commercial business loans include secured and unsecured
loans. These loans are for a broad variety of purposes including working
capital, accounts receivable, inventory, equipment and acquisitions. The
Bank has no agricultural, energy or foreign loans.
Most of the Bank's commercial business loans have terms to maturity
of five years or less or they have adjustable interest rates. At
September 30, 1996, the Bank had only one commercial business loan with a
balance in excess of $500,000.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her
employment and other income and which are secured by real property with a
value that tends to be more easily ascertainable, commercial business
loans typically are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of commercial business loans may
be substantially dependent on the success of the business itself (which is
likely to be dependent upon the general economic environment.) The Bank's
commercial business loans are sometimes, but not always, secured by
business assets, such as accounts receivable, equipment and inventory as
well as real estate. However, the collateral securing the loans may
depreciate over time, may be difficult to appraise, and may fluctuate in
value based on the success of the business.
The Bank recognizes the generally increased risks associated with
commercial business lending. The Bank's commercial business lending policy
emphasizes (1) credit file documentation, (2) analysis of the borrower's
character, (3) analysis of the borrower's capacity to repay the loan, (4)
adequacy of the borrower's capital and collateral, and (5) evaluation of
the industry conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of the
Bank's credit analysis. The Bank plans to continue to expand its
commercial business lending, subject to market conditions.
The Bank generally obtains annual financial statements from borrowers
for commercial business loans. These statements are analyzed to monitor
the quality of the loan.
Consumer Lending
Management believes that offering consumer loan products helps to
expand the Bank's customer base and create stronger ties to its existing
customer base. In addition, consumer loans generally have shorter terms to
maturity (or have adjustable interest rates) and carry higher interest
rates than residential mortgage loans. For these reasons, the Bank has
increased its consumer lending in recent years.
The Bank offers a variety of secured consumer loans, including home
equity loans, automobile loans, education loans and loans secured by
savings deposits. In addition, the Bank also offers home improvement loans
and unsecured consumer loans.
Consumer loan terms vary according to the type of collateral, term of
the loan and creditworthiness of the borrower. The Bank offers both
open-end and closed-end credit. Open-end credit is extended through home
equity lines of credit. This credit line product generally bears interest
at a variable rate tied to the prime rate of interest.
The underwriting standards employed by the Bank for consumer loans
include (1) obtaining the borrower's credit score from an independent,
nationally-recognized credit-scoring firm, (2) a determination of the
applicant's payment history on previous debts, and (3) an assessment of
the borrower's ability to meet payments on the proposed loan along with
the applicant's existing obligations. Although creditworthiness of the
applicant is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral, if any, in relation
to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or
secured by rapidly depreciable assets such as automobiles. In such cases,
any repossessed collateral for defaulted consumer loans may not provide
adequate sources of repayment for the outstanding loan balances as a
result of the greater likelihood of damage to or depreciation of the
collateral. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application
of various federal and state laws, including federal and state bankruptcy
and insolvency laws, may limit the amount which can be recovered on such
loans. Although the level of delinquencies in the Bank's consumer loan
portfolio has generally been low, there can be no assurance that
delinquencies will remain low in the future.
Originations, Purchases and Sales of Loans
The Bank originates real estate and other loans through internal loan
production personnel located in the Bank's offices and through independent
companies known as third-party originators. Walk-in customers and
referrals from real estate brokers and builders are also important sources
of loan originations.
Consistent with the Bank's asset/liability management strategy, the
Bank sells all of its 30 year fixed-rate loan originations and varying
portions of its 15 year fixed-rate loan originations in the secondary
market. The Bank's sales are usually made through forward sales
commitments. The Bank attempts to limit any interest rate risk related to
its origination of fixed rate loans by limiting the number of days between
the loan commitment and the forward sales commitment, charging fees for
loan commitments, and attempting to match its fixed rate loan commitments
to customers with forward sales commitments.
When loans are sold, the Bank generally retains the responsibility
for servicing the loan. At September 30, 1996, the Bank serviced
$179.2 million of loans for others, principally the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association.
The following table shows the loan origination, business acquisition,
purchase, sale and repayment activities of the Bank for the periods
indicated.
Year Ended September 30
1994 1995 1996
(In thousands)
Mortgage Loans (gross):
At beginning of period . . . . . . $391,687 $418,457 $508,356
Business acquisitions . . . . . . . - 33,448 -
Mortgage loan originations:
One- to four-family . . . . . . . 136,970 114,214 170,377
Multi-family . . . . . . . . . . . 10,004 4,807 525
Commercial real estate, other
construction and land . . . . . 28,806 62,499 78,224
------- ------- -------
Total mortgage loans
originations and acquisitions 175,780 214,968 249,126
------- ------- -------
Mortgage loans purchased:
One- to four-family . . . . . . . 4,755 9,929 -
Multi-family . . . . . . . . . . . - - -
Commercial real estate . . . . . . - - -
-------- ------- --------
Total mortgage loans purchased 4,755 9,929 0
-------- ------- --------
Total mortgage loans originated
and purchased . . . . . . . . 180,535 224,897 249,126
Principal repayments . . . . . . . (106,471) (116,918) (165,561)
Transfers (to) from foreclosed
properties . . . . . . . . . . . . 184 (2,152) (748)
Sales of fixed rate loans . . . . . (47,478) (15,928) (55,103)
-------- -------- --------
At end of period . . . . . . . . . $418,457 $508,356 $536,070
======== ======== ========
Commercial Business Loans (gross):
At beginning of period . . . . . . $9,142 $12,436 $10,853
Business acquisitions . . . . . . . - 95 -
Commercial loans originated . . . . 16,017 15,650 15,772
Commercial loans purchased . . . . - - -
Commercial loans sold . . . . . . . - - -
Principal repayments . . . . . . . (12,723) (17,328) (15,934)
------- -------- --------
At end of period . . . . . . . . . $12,436 $10,853 $10,691
======= ======== =======
Consumer Loans (gross):
At beginning of period . . . . . . $16,674 $19,656 $28,697
Business acquisitions . . . . . . . - 3,638 -
Consumer loans originated . . . . . 15,504 22,091 44,622
Principal repayments . . . . . . . (12,522) (16,688) (22,101)
------- ------- -------
At end of period . . . . . . . . . $19,656 $28,697 $51,218
======= ======= =======
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the delinquency to be cured
by contacting the borrower. In the case of residential loans, a late
notice is sent 15 days after the due date. If the delinquency is not cured
by the 30th day, contact with the borrower is made by phone. Additional
written and oral contacts are made with the borrower between 30 and
60 days after the due date.
In the event a loan payment is past due for more than 30 days, it is
classified as a delinquent loan. In such cases, the Bank regularly reviews
the loan status, the condition of the property, and circumstances of the
borrower. Based upon the results of its review, the Bank may negotiate and
accept a repayment program with the borrower, accept a voluntary deed in
lieu of foreclosure, or initiate foreclosure proceedings. If foreclosed
on, real property is sold at a public sale and the Bank may bid on the
property to protect its interest. A decision as to whether and when to
initiate foreclosure proceedings is based on such factors as the amount of
the outstanding loan in relation to the original indebtedness, the extent
of delinquency, and the borrower's ability and willingness to cooperate in
curing the delinquency.
Delinquent consumer loans are handled in a generally similar manner,
except that initial contacts are made when the payment is 10 days past due
and personal contacts are made when the loan becomes more than 20 days
past due.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as foreclosed property until it is sold. When
property is acquired, it is recorded at the lower of cost or estimated
fair value at the date of acquisition, and any writedown resulting
therefrom is charged to expense. Upon acquisition, all costs incurred in
maintaining the property are expensed. Costs relating to the development
and improvement of the property, however, are capitalized to the extent of
net realizable value.
Loan Delinquencies. The following tables set forth the Bank's loan
delinquencies by type, by amount and by percentage of loan category at
September 30, 1995 and 1996.
<TABLE>
<CAPTION>
60-89 Days Delinquent Delinquent 90 days and over Total Delinquent Loans
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Delinquent loans at
September 30, 1995
Real estate:
One- to four-family 4 $350 0.09% 6 $604 0.15% 10 $954 0.24%
Multi-family and
commercial . . . . 1 214 0.28 4 1,685 2.18 5 1,899 2.46
Construction and land 1 177 0.56 - - - 1 177 0.56
Commercial business . 3 94 0.87 3 105 0.97 6 199 1.84
Consumer . . . . . . 9 61 0.21 2 13 0.05 11 74 0.26
---- ---- ---- ----- ---- -----
Total . . . . . . . . 18 $896 0.16% 15 $2,407 0.44% 33 $3,303 0.60%
==== ==== ==== ==== ===== ==== ==== ===== ====
Delinquent loans at
September 30, 1996
Real estate:
One- to four-family 10 $935 0.22% 17 $574 0.14% 27 $1,509 0.36%
Multi-family and
commercial . . . . 4 352 0.44 4 708 0.89 8 1,060 1.33
Construction and land
- - - 7 1,774 4.70 7 1,774 4.70
Commercial business . - - - 5 274 2.56 5 274 2.56
Consumer . . . . . . 8 14 0.03 8 84 0.16 16 98 0.19
---- ----- ---- ----- ---- -----
Total . . . . . . . . 22 $1,301 0.22% 41 $3,414 0.57% 63 $4,715 0.79%
==== ===== ==== ==== ===== ==== ==== ===== ====
</TABLE>
As of September 30, 1996, loans delinquent 60 days or more totalled
$4.7 million compared to $3.3 million as of September 30, 1995. As a
percent of total loans receivable, delinquencies increased from 0.60% as
of September 30, 1995 to 0.79% as of September 30, 1996.
Foreclosed Properties. Foreclosed properties decreased from $2.1
million as of September 30, 1995 to $1.4 million as of September 30, 1996.
As of September 30, 1996, there were no foreclosed properties with
individual balances over $400,000.
Classification of Assets. Federal regulations require that each
savings institution classify its own assets on a regular basis. In
addition, in connection with examinations of savings institutions, OTS and
FDIC examiners have authority to identify problem assets and, if
appropriate, require them to be classified. There are three
classifications for problem assets: Substandard, Doubtful and Loss.
Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of Substandard assets, with the additional
characteristics that the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
Loss is considered uncollectible and of such little value that continuance
as an asset of the institution is not warranted. The regulations have also
created a Special Mention category, consisting of assets which do not
currently expose a savings institution to a sufficient degree of risk to
warrant classification, but do possess credit deficiencies or potential
weaknesses deserving management's close attention.
Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for losses on loans. If an asset,
or portion thereof, is classified as Loss, the institution must either
establish specific allowances for losses on loans in the amount of 100% of
the portion of the asset classified Loss, or charge off such amount. If an
institution does not agree with an examiner's classification of an asset,
it may appeal this determination to the District Director of the OTS.
Classified assets include non-performing assets plus other loans and
assets which meet the criteria for classification. Non-performing assets
include loans which are not performing under all material contractual
terms of the original notes and foreclosed properties. The Bank does not
accrue interest on non-performing assets.
Loans are placed into non-accrual (non-performing) status when they
are contractually delinquent more than 90 days, or earlier if warranted
based on management's assessment of the loan. Interest accrued and unpaid
at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
Classified assets, including non-performing assets, are set forth in
the following table.
September 30
1995 1996
(In thousands)
Non-performing loans:
One- to four-family . . . . . . . . . $604 $574
Commercial real estate . . . . . . . 1,685 708
Construction and land . . . . . . . . - 1,774
Commercial business . . . . . . . . . 105 274
Consumer and other . . . . . . . . . 13 84
----- -----
Total non-performing loans . . . . . 2,407 3,414
----- -----
Foreclosed properties:
One- to four-family . . . . . . . . . 1,547 869
Commercial real estate . . . . . . . 533 534
Land . . . . . . . . . . . . . . . . - -
----- -----
Total foreclosed properties . . . . . 2,080 1,403
----- -----
Total non-performing assets . . . . . . 4,487 4,817
Non-performing assets not included in
classified assets due to adequate
collateral value:
One- to four-family loans . . . . . . (4) (38)
Commercial real estate loans . . . . - -
Consumer loans . . . . . . . . . . . - (15)
Foreclosed properties . . . . . . . . (875) (631)
Additional classified assets (not
considered non-performing):
One- to four-family loans . . . . . . 1,053 1,216
Multi-family loans . . . . . . . . . 208 -
Consumer loans . . . . . . . . . . . 11 44
Commercial real estate loans . . . . 1,891 1,311
Construction and land . . . . . . . 177 -
Commercial business . . . . . . . . . 222 -
----- -----
Total classified assets . . . . . . . . $7,170 $6,704
===== =====
Total classified assets decreased to $6.7 million as of September 30,
1996 from $7.2 million as of September 30, 1995.
As of September 30, 1996, classified assets included one group of
loans with an aggregate balance in excess of $1,000,000. This group of
loans consists of seven loans to a builder with an aggregate balance of
$1.8 million secured by single-family residences in a Chicago suburban
subdivision.
Any loans classified for regulatory purposes as Loss, Doubtful,
Substandard or Special Mention that have not been included in non-
performing loans do not (1) represent or result from trends or
uncertainties which management reasonably expects will materially impact
future operating results, liquidity or capital resources, or (2) represent
material credits about which management is aware of any information which
causes management to have serious doubt as to the ability of such borrower
to comply with the loan repayment terms.
As of September 30, 1996, management is not aware of any significant
potential problem loans which are not included in non-performing loans.
For the years ended September 30, 1996 and 1995, additional interest
income which would have been recorded had the non-performing loans been
current in accordance with their original terms amounted to $265,000 and
$698,000, respectively. These amounts were not included in the Bank's
income for these periods. The amounts that were included in interest
income on such loans for these periods was $103,000 and $29,000,
respectively.
Allowance for losses on loans: Management has considered the Bank's
delinquent loans, non-performing loans, and classified assets in
establishing its allowance for losses on loans as of September 30, 1996.
The allowance reflects management's evaluation of the risks inherent in
the Bank's loan portfolio and the collectibility of the delinquent loans
and non-performing loans. Although the Bank maintains its allowance at a
level which it considers adequate to provide for potential losses, there
can be no assurances that such losses will not exceed the estimated
amounts or that higher provisions will not be necessary in the future.
The distribution of the allowance for losses on loans by type of loan
is shown on the following page.
Distribution of the Bank's allowance for losses on loans: (dollars in
thousands)
<TABLE>
<CAPTION>
September 30, 1992 September 30, 1993
Percent of Percent of
Loans in Loans in
Allowance Total Each Allowance Total Each
for Losses Loan Category to for Losses Loan Category to
on Loans Balances Total Loans on Loans Balances Total Loans
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family . . . . . . . . . $ 639 $271,104 71.87% $ 708 $300,625 72.01%
Multi-family and commercial . . . . 2,851 79,840 21.17 3,377 91,062 21.81
Consumer loans . . . . . . . . . . . . 315 15,180 4.02 320 16,674 3.99
Commercial business . . . . . . . . . . 399 11,074 2.94 532 9,142 2.19
----- ------- ------ ----- ------- ------
Total . . . . . . . . . . . . . . . . $4,204 $377,198 100.00% $4,937 $417,503 100.00%
===== ======= ====== ===== ======= ======
<CAPTION>
September 30, 1994 September 30, 1995
Percent of Percent of
Allowance Total Loans in Each Allowance Total Loans in Each
for Losses Loan Category to for Losses Loan Category to
on Loans Balances Total Loans on Loans Balances Total Loans
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four- family . $ 789 $319,355 70.88% $1,262 $410,524 72.90%
Multi-family and
commercial . . . . . 3,556 99,103 22.00 2,824 97,832 19.88
Consumer loans . . . . . 330 19,656 4.36 360 28,697 5.24
Commercial business . . . 652 12,436 2.76 825 10,853 1.98
------ ------- ------ ----- ------- ------
Total . . . . . . . . . $5,327 $450,550 100.00% $5,271 $547,906 100.00%
====== ======= ====== ===== ======= ======
<CAPTION>
September 30, 1996
Percent of
Allowance Total Loans in Each
for Losses Loan Category to
on Loans Balances Total Loans
<S> <C> <C> <C>
Real estate loans:
One- to four- family . $1,782 $426,245 71.28%
Multi-family and
commercial . . . . . 2,824 109,824 18.37
Consumer loans . . . . . 351 51,219 8.57
Commercial business . . . 816 10,691 1.78
----- ------- ------
Total . . . . . . . . . $5,773 $597,979 100.00%
===== ======= ======
</TABLE>
Investment Activities - General
The Company's investment policy provides for a held-to-maturity
portfolio, an available-for-sale portfolio, and a trading portfolio.
Securities purchased for the held-to-maturity portfolio are made with the
intent to hold until maturity. This portfolio is accounted for on an
amortized cost basis. Securities in the available-for-sale portfolio are
accounted for at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders'
equity. All U.S. government and agency securities are currently held in
the available-for-sale portfolio. The Company does not presently hold any
securities in its trading portfolio.
Investment Activities - Mortgage Securities
The Bank purchases mortgage securities to supplement loan production
and to provide collateral for borrowings.
The following table shows purchases and repayments of mortgage
securities:
Year Ended September 30
1994 1995 1996
(In thousands)
At beginning of period . . $215,639 $240,676 $351,599
Business acquisitions . . . - 34,168 -
Purchases . . . . . . . . . 119,040 118,139 46,924
Principal repayments and (88,015) (37,782) (59,016)
amortization . . . . . .
Sales . . . . . . . . . . . - (9,459) -
Market value adjustment . . (5,988) 5,857 (1,713)
------- ------- -------
At end of period . . . . . $240,676 $351,599 $337,794
======= ======= =======
The following table shows the carrying value of the Company's
mortgage-related securities by type:
<TABLE>
<CAPTION>
September 30
Type 1992 1993 1994 1995 1996
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities held
to maturity:
One- to four-family . . . . . . $139,207 $164,921 $ 29,201 $ 44,767 $ 11,011
Multi-family . . . . . . . . . 5,760 4,843 - - -
Commercial real estate . . . . 1,547 80 - - -
------- ------- ------- ------- ------
146,514 169,844 29,201 44,767 11,011
Mortgage-related securities held
to maturity:
Fixed-rate CMOs (1-4 family) 40,958 35,610 69,633 107,700 132,246
Floating-rate CMOs (1-4 family) - - - 43,606 39,224
Interest-only strips . . . . . 234 91 - - -
Principal-only strips . . . . . 1,282 10,071 - - -
CMO residual . . . . . . . . . 81 23 - - -
------- ------- ------- ------- -------
42,555 45,795 69,633 151,306 171,470
Mortgage-backed securities
One-to four-family . . . . . . - - 129,000 143,971 139,766
Multi-family . . . . . . . . . - - 2,213 1,060 321
------- ------ ------- ------- ------
- - 131,213 145,031 140,087
Mortgage-related securities
available for sale:
CMOs (1-4 family) . . . . . . . - - - - 5,684
Interest-only strips . . . . . - - 3,948 2,738 2,815
Principal-only strips . . . . . - - 6,681 7,757 6,727
------- ------ ------- ------- ------
- - 10,629 10,495 15,226
------- ------ ------- ------- ------
Total mortgage securities . . . . $189,069 $215,639 $240,676 $351,599 $337,794
======= ======= ======= ======= =======
</TABLE>
Mortgage-backed securities: Almost all of the Company's
mortgage-backed securities are either (1) one- to four-family mortgage
securities issued by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA"), or the
Federal Home Loan Mortgage Corporation ("FHLMC"); or (2) one- to four-
family mortgage securities with at least an AA rating from a national
rating agency. Accordingly, management believes that most of the Company's
mortgage-backed securities are generally resistant to credit problems.
Mortgage-related securities: All except one of the Company's
mortgage-related securities are either (1) derived from (and therefore
backed by) mortgage-backed securities issued by GNMA, FNMA or FHLMC; or
(2) have at least a AA rating from a national rating agency and are
backed by one- to four-family residential mortgage loans. The only
exception is a floating-rate CMO with a net book value of $4.7 million at
September 30, 1996 which has an A rating.
The CMO mortgage securities consist of (1) short-term, primarily
sequential pay class, fixed-rate securities with projected average lives
as of the date of purchase of between two and four years, and (2) floating
rate securities for which the rate is based on a predetermined margin over
the London Interbank Borrowing Rate (LIBOR) with a lifetime cap. The
risks involved in holding these securities is similiar to the risks
involved in holding mortgage-backed securities. The risks relating to the
fixed-rate securities are (1) that prepayment rates on the underlying
mortgage-backed securities will be less than projected resulting in a
longer than expected life probably during a period in which market
interest rates have increased (extension risk), and (2) that prepayment
rates on the underlying mortgage-backed securities will exceed projections
resulting in a shorter than expected life probably during a period in
which the funds will have to reinvested at lower market interest rates
(prepayment risk and reinvestment risk). The risks relating to the
floating-rate securities include (1) that market rates will exceed the
lifetime cap, and (2) that the index used to determine the rate on the
security will change in a manner different than the Company's short-term
cost of funds.
Interest-only strip mortgage securities receive only the interest
portion of the payments received by the underlying mortgage-backed
securities. The risk involved in holding interest-only strips is that the
underlying mortgage-backed securities will prepay at a faster rate than
originally projected. Faster prepayments reduce the yield and the market
value of the strip since less interest is received over the life of the
security. The Company has purchased interest-only strips to protect
against increases in interest rates, since interest-only strip securities
increase in value if prepayments decrease, which generally occurs if
interest ates increase.
Principal-only strip mortgage securities receive only the principal
portion of the payments received by the underlying mortgage-backed
securities. The risk involved in holding a principal-only strip is that
the underlying mortgage-backed securities will prepay at a slower rate
than originally projected. This reduces the yield rate on the strip since
the principal payments are received over a longer time period. The
Company has purchased principal-only strips to protect against prepayment
risk and reinvestment risk since these securities increase in value if
prepayments increase, which generally occurs if interest rates decrease.
Investment Activities - Other
In addition to lending activities and investments in mortgage
securities, the Company and the Bank conduct other investment activities
on an ongoing basis in order to diversify assets, limit interest rate risk
and credit risk, and to meet regulatory liquidity requirements.
Investment decisions are made by authorized officers in accordance with
policies established by the respective Boards of Directors.
The Company and the Bank normally invest in high quality short- and
medium-term investments, primarily interest-bearing deposits of insured
banks and U.S. government and agency securities. Under their investment
policies, the Company and the Bank may also invest in high-grade corporate
bonds, mutual funds, repurchase agreements, federal funds, high-grade
commercial paper, banker's acceptances, municipal and state government
obligations, financial futures contracts, foreign bank CDs, and asset-
backed securities. No such investments were made during 1996 but they may
be made in the future, depending on market conditions.
The Bank is required by federal regulations to maintain a minimum
amount of liquid assets that must be invested in specified securities.
Cash flow projections are regularly reviewed and updated to assure that
adequate liquidity is provided. As of September 30, 1996, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
and current borrowings) was 9.5% compared to the OTS requirement of 5.0%.
The following table sets forth the composition of the Company's other
investments at the dates indicated.
<TABLE>
<CAPTION>
At September 30
1994 1995 1996
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities . . . . . . . . . . . $ 8,857 100.0% $25,016 100.0% $29,385 100.0%
------ ------ ------- ----- ------ -----
Total . . . . . . . . . . . . . $ 8,857 100.0% $25,016 100.0% $29,385 100.0%
====== ====== ====== ===== ====== =====
Other investments:
Demand deposits in other financial
institutions . . . . . . . . . . $19,029 67.0% $9,603 48.6% $17,715 48.6%
Time deposits in other financial
institutions . . . . . . . . . . 427 1.5 308 1.6 611 2.3
------ ------ ------ ----- ------ -----
Subtotal . . . . . . . . . . . . 19,456 68.5 9,911 50.2 18,326 50.2
FHLB stock . . . . . . . . . . . 8,941 31.5 9,848 49.8 8,796 32.4
------- ------ ------ ----- ------ -----
Total . . . . . . . . . . . . . . $28,397 100.0% $19,759 100.0% $27,122 100.0%
======= ====== ====== ===== ====== =====
</TABLE>
The composition and contractual maturities (except for securities
available for sale, which are classified as maturing in one year) of the
available for sale portfolio and the investment portfolio, excluding FHLB
stock, is indicated in the following table.
<TABLE>
<CAPTION>
At September 30, 1996
Total
Less Than 1 to 10 Over 10 Carrying Market
1 Year Years Years Value Value
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government securities and
federal agency obligations(1) $29,385 $ - $ - $29,385 $ 29,385
====== ===== ====== ====== =======
Other investments:
Demand deposits in other
financial institutions . . . . $ 17,715 $ - $ - $ 17,715 $17,715
Time deposits in other financial
institutions . . . . . . . . . 511 100 - 611 611
------ ---- ------ ------- ------
Total . . . . . . . . . . . . $18,226 $100 $ - $18,326 $18,326
====== ==== ====== ======= ======
Total securities available for
sale and other investments . . $47,611 $100 $ - $47,711 $47,711
====== ==== ====== ====== ======
Weighted average yield . . . . . 6.89% 6.89%
===== ====
_________________________
(1) $20.8 million of such securities contractually mature between one and
five years from September 30, 1996 but are classified as maturing in
one year as they are available for sale.
</TABLE>
Subsidiaries
As of September 30, 1996, the Bank had four active wholly-owned
subsidiaries, Advantage Real Estate Services, Inc. ("ARES"), Advantage
Investments, Inc. ("AII"), Advantage Financial Services and Insurance,
Inc.("AFS&I"), and Advantage Financial Center, Inc.("AFC"). The Bank also
had one inactive subsidiary, Amity Service Corporation, which formerly
engaged in insurance sales.
As of September 30, 1996, ARES had investments in three partnerships,
Cranberry III Partnership, Geneva Professional Building Associates, and
Pleasantview Limited Partnership with book values of $743,000 and
$182,000, and $504,000, respectively. These partnerships have investments
in real estate. In addition to ARES' investment, the Bank has a total of
$6.0 million in adjustable-rate mortgage loans to the Cranberry III
Partnership as of September 30, 1996. These loans are guaranteed by the
individual partners in a percentage equal to their percentage interest in
the partnership.
ARES owns a 50% interest in the Cranberry III Partnership, which owns
a 264 unit apartment complex located in Kenosha. The other partners in
this project are two real estate professionals. A corporation owned by
these individuals is acting as operating manager on the project. Occupancy
is in excess of 90%.
ARES owns a 77% interest in Geneva Professional Building Associates,
which owns a medical office building in Lake Geneva, Wisconsin.
AII is a Nevada corporation formed in December, 1992 to hold and
manage certain investments in mortgage-related securities. At September
30, 1996, AII's total investment in mortgage-related securities was
$181.2 million. These investments are not subject to state income tax
because Nevada has no state income tax.
AFS&I is a Wisconsin corporation which is engaged in the business of
selling non-insured investments and insurance and providing financial
planning. Total commissions generated by the AFS&I for the 1996 fiscal
year were $596,000.
AFC began business on August 21, 1995 after the Bank completed the
cash purchase of substantially all of the assets of The Financial Center
of Illinois, Inc. AFC has offices in Wauwatosa (Milwaukee area),
Wisconsin and Naperville (Chicago area), Illinois and is engaged in the
business of mortgage brokerage. Total fees and commissions generated by
AFC for the 1996 fiscal year were $2.2 million.
Sources of Funds
General. The Bank's primary sources of funds are deposits, principal
and interest payments on loans receivable and mortgage-related securities,
reverse repurchase agreements and FHLB borrowings.
Deposits. The Bank attracts both short-term and long-term deposits
from the Bank's primary market area by offering a wide assortment of
accounts and rates. The Bank offers regular passbook accounts, NOW
accounts, money market accounts, fixed-rate certificates of deposits with
varying maturities and individual retirement accounts. Deposit account
terms vary based on the type of account.
In setting rates for deposits, the Bank regularly evaluates (1) the
cost of borrowing funds, (2) rates offered by competing institutions,
(3) its investment and lending opportunities, and (4) its liquidity
position. In order to decrease the volatility of its deposits, the Bank
imposes early withdrawal penalties on its certificates of deposit. The
Bank had $108.7 million and $89.3 million in brokered certificates of
deposits as of September 30, 1995 and September 30, 1996, respectively.
The following table presents, by various interest-rate intervals, the
Bank's long-term (one year and over) time deposits as of the dates
indicated.
September 30
Interest rate 1994 1995 1996
(In thousands)
below 4.00% . . . . $13,191 $2,141 $114
4.00 - 5.99% . . . 134,623 176,292 183,666
6.00 - 7.99% . . . 47,824 122,341 115,153
8.00% and above . . 8,573 1,668 552
-------- ------- --------
$204,211 $302,442 $299,485
======== ======= =======
The following table presents, by various interest-rate intervals, the
amounts of long-term (one year and over) time deposits at September 30,
1996 maturing during the periods indicated.
<TABLE>
<CAPTION>
3.99% 4.00% 6.00% 8.00% Percent
or to to and of
Less 5.99% 7.99% above Total Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Accounts maturing in year
ending:
September 30, 1997 . . . . $94 128,480 $48,709 $143 $177,426 59.2%
September 30, 1998 . . . . 0 36,325 47,666 292 84,283 28.2
September 30, 1999 . . . . 20 13,233 7,631 117 21,001 7.0
After September 30, 1999 . 0 5,628 11,147 - 16,775 5.6
---- ------- ------- ---- ------- -----
Total . . . . . . . . . . . . $114 $183,666 $115,153 $552 $299,485 100.0%
==== ======= ======= ==== ======= =====
Percent of total . . . . . . 0.0% 61.3% 38.5% 0.2% 100.0%
=== ==== ==== === =====
</TABLE>
The following table presents the maturities of the Bank's time
deposits in amounts of $100,000 or more at September 30, 1996 by time
remaining to maturity.
September 30,
1996
Maturities (In thousands)
October 1, 1996 through December 31, 1996 . . . . $ 430
January 1, 1997 through March 31, 1997 . . . . . 5,346
April 1, 1997 through June 30, 1997 . . . . . . . 3,151
July 1, 1997 through September 30, 1997 . . . . . 3,053
October 1, 1997 and after . . . . . . . . . . . . 4,414
------
$16,394
======
The Bank's deposit base at September 30, 1996 included $409.2 million
of certificates of deposits with a weighted average interest rate of
5.67%. Of these certificates of deposit, $287.1 million will mature
during the 12 months ending September 30, 1997. The Company will seek to
retain these deposits consistent with its long-term objective of
maintaining acceptable interest rate spreads. Depending upon interest
rates existing at the time such certificates mature, the Bank's cost of
funds may be significantly affected by the maturity of these certificates.
Sources of Funds - Borrowings
The Bank's other available sources of funds include borrowings from
the FHLB and reverse repurchase agreements.
As a member of the FHLB, the Bank is required to own capital stock in
the FHLB and is authorized to apply for borrowings from the FHLB. FHLB
credit programs have a wide range of terms and maturities, and rates may
be fixed or variable. The FHLB may prescribe the acceptable uses for these
borrowings, as well as limitations on the size of the advances and
repayment provisions.
The Bank has also entered into sales of securities under agreements
to repurchase ("reverse repurchase agreements") with securities dealers
and other institutions. Reverse repurchase agreements are accounted for as
borrowings by the Bank and are generally secured by mortgage-backed
securities. The proceeds of these transactions are used to meet cash flow
needs of the Bank. Certain risks are associated with the use of reverse
repurchase agreements, including the possibility that additional
collateral will be required in the event the value of the collateral falls
and the possibility that these short-term agreements may not be renewed
upon their expiration.
The following table sets forth the maximum month-end balance and the
average daily balance of FHLB borrowings and securities sold under
agreements to repurchase.
Year Ended September 30
1994 1995 1996
(In Thousands)
Maximum month-end balance:
FHLB borrowings . . . . . . . . . $172,810 $163,010 $175,910
Securities sold under agreements to
repurchase . . . . . . . . . . . 2,850 12,110 48,355
Average daily balance:
FHLB borrowings . . . . . . . . . 149,577 150,484 165,131
Securities sold under agreements to
repurchase . . . . . . . . . . . 2,333 4,289 19,779
The following table sets forth certain information as to the Bank's
FHLB borrowings and securities sold under agreements to repurchase as of
the dates indicated.
September 30
1994 1995 1996
(Dollars in thousands)
FHLB borrowings . . . . . . . . . . $133,410 $163,010 $175,910
Securities sold under agreements to
repurchase . . . . . . . . . . . 2,400 12,110 48,355
------- ------- -------
Total borrowings . . . . . . . . . $145,160 $175,120 $224,265
======= ======= =======
Weighted average interest rate of
FHLB borrowings . . . . . . . . . 5.70% 6.20% 6.16%
Weighted average interest rate of
securities sold under agreements
to repurchase . . . . . . . . . . 4.90% 5.77% 5.66%
Employees
At September 30, 1996, the Company and its subsidiaries had a total
of 262 full-time employees and 48 part-time employees. None of the these
employees are represented by any collective bargaining group. Management
considers its employee relations to be excellent.
REGULATION
General
The Bank is a federally-chartered savings institution, the deposits
of which are federally insured (up to applicable regulatory limits) by the
FDIC. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all aspects of its operations. The Bank's primary
federal regulator is the OTS. The Bank is a member of the Federal Home
Loan Bank of Chicago ("FHLB Chicago") and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). As the savings and loan holding company of the
Bank, the Company also is subject to regulation by the OTS.
Federal Regulation of Savings Banks
The OTS has extensive regulatory and supervisory authority over the
operations of all insured savings institutions, including the Bank. This
regulation and supervision establishes a comprehensive framework of
activities in which the Bank can engage and is intended primarily for the
protection of the deposit insurance fund and depositors. It also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in the laws and regulations governing the operations of the Bank
could have an adverse impact on the Bank and its operations.
The OTS also has enforcement authority over all savings institutions
and their holding companies, including the Bank and the Company, and their
affiliated parties. This enforcement authority includes, among other
things, the ability to assess civil money penalties, issue cease-and-
desist or removal orders and initiate injunctive actions. In general,
these enforcement actions may be initiated for violations of laws or
regulations or for unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS
is required.
The Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted, the examiners may, among other things, require
the Bank to provide for higher general or specific loan loss allowances or
write down the value of certain assets. The last regular examination of
the Bank by the OTS was as of June 30, 1996 and the last examination by
the FDIC was as of January 31, 1990.
The OTS assesses all savings institutions to fund the operations of
the OTS. The general assessment, to be paid on a semi-annual basis, is
computed upon a savings institution's total assets, including consolidated
subsidiaries, as reported in the institution's latest Quarterly Thrift
Financial Report. The Bank's OTS assessment for the six-month period
ended December 31, 1996 was $101,000 (based upon the Bank's assets as of
March 31, 1996 of $979 million and the current OTS assessment rate).
Recent Federal Legislative Developments
Deposits of the Bank are currently insured by the FDIC under the
Savings Association Insurance Fund ("SAIF"). The FDIC also maintains the
Bank Insurance Fund ("BIF"), which primarily insures the deposits of
commercial banks (and some state savings banks). Applicable law requires
that the SAIF and BIF each achieve and maintain a ratio of insurance
reserves to total insured deposits equal to 1.25%. The BIF reached this
1.25% reserve level in 1995, and the FDIC thereafter reduced BIF premiums
for most banks. As a result of such reduction, the highest-rated BIF-
insured institutions pay the statutory annual minimum of $2,000 for FDIC
insurance. Premium rates for other BIF-insured institutions currently
range from $0.03 to $0.27 per $100 of deposits.
Prior to September 30, 1996, SAIF-member institutions paid deposit
insurance premiums based on a schedule of $0.23 to $0.31 per $100 of
deposits, creating a substantial disparity between SAIF and BIF deposit
insurance premiums. On September 30, 1996 President Clinton signed into
law the Deposit Insurance Funds Act of 1996 (the "1996 Deposit Insurance
Act") which, among other things, provided for the recapitalization of the
SAIF through a one-time special assessment of approximately 65.7 basis
points on the amount of deposits held by each SAIF-insured institution as
of March 31, 1995. The one-time special assessment payable by the Bank as
of September 30, 1996, was $4.4 million.
As a result of the recapitalization of the SAIF by the special
assessment, it is expected that SAIF insurance premiums will be
substantially reduced, effective as of January 1, 1997, with the highest
rated SAIF-insured institutions, such as the Bank, paying the statutory
minimum of $2,000 plus 6.4 basis points for payment of the FICO
obligations referenced below, thereby eliminating the disparity between
the premiums paid by SAIF and BIF members of equivalent rating (except for
the differential in the FICO portion of the premiums as described below).
The 1996 Deposit Insurance Act also provided for full pro rata
sharing by SAIF and BIF institutions, beginning no later than January 1,
2000, of the debt service obligation on bonds issued by the federally
chartered Financing Corporation ("FICO") to fund the thrift rescue plan of
the late 1980's, and until such time the premiums for BIF and SAIF will
include a portion for FICO bond debt service of 1.3 and 6.4 basis points,
for BIF and SAIF respectively, beginning January 1, 1997. The 1996
Deposit Insurance Act further provides that the BIF and SAIF will be
merged on January 1, 1999 if bank and savings association charters are
merged into a single federal charter by that date, in which case full pro-
rata sharing of the FICO obligation will commence on that date. The
Department of the Treasury is directed to provide Congress with a report
on re-chartering by March 31, 1997.
See "Federal and State Taxation" below for a discussion of 1996
legislation affecting the taxation of savings associations.
Business Activities
The activities of savings associations are governed by the Home
Owner's Loan Act of 1933, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act"). The HOLA and the
FDI Act were amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FIRREA and FDICIA contain
provisions affecting numerous aspects of the operations and regulation of
federally-insured savings institutions and empower the OTS and the FDIC,
among other agencies, to promulgate regulations implementing the
provisions thereof. Because some of the provisions of FDICIA are still in
the process of being implemented through the adoption of regulations by
the various federal banking agencies, the Bank cannot yet fully assess the
effect of these provisions on its operations.
The federal banking statutes as amended by FIRREA and FDICIA (1)
restrict the solicitation of brokered deposits by troubled savings
associations that are not well-capitalized, (2) prohibit the acquisition
of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans
secured by non-residential real property to 400% of capital, (4) permit
savings and loan holding companies to acquire up to 5% of the voting
shares of non-subsidiary savings associations or savings and loan holding
companies without prior approval, (5) permit bank holding companies to
acquire healthy savings associations, and (6) require the federal banking
agencies to establish, by regulation, standards for extension of credit
secured by real estate lending. Under HOLA, the Bank does have the
authority to make (i) non-conforming loans (loans in excess of the
specific limitations of HOLA) not exceeding 5.0% of its total assets, and
(ii) construction loans without security for the purpose of financing what
is expected to be residential property not to exceed, in the aggregate,
the greater of total capital or 5.0% of its total assets. To assure
repayment of such loans, the Bank relies substantially on the borrower's
general credit standing, personal guarantees and projected future income
on the properties.
Brokered Deposits; Interest Rate Limitations
FDIC regulations promulgated under FDICIA govern the acceptance of
brokered deposits by insured depository institutions. The capital
position of an institution determines whether and with what limitations an
institution may accept brokered deposits. A "well capitalized"
institution (one that significantly exceeds specified capital ratios) may
accept brokered deposits without restriction. "Undercapitalized"
institutions (those that fail to meet minimum regulatory capital
requirements) may not accept brokered deposits and "adequately
capitalized" institutions (those that are not "well capitalized" or
"undercapitalized") may only accept such deposits with the consent of the
FDIC. "Adequately capitalized" institutions may apply for a waiver by
letter to the FDIC. An institution that is not "well capitalized," even
if meeting minimum capital requirements, may not solicit brokered or other
deposits by offering interest rates that are significantly higher than the
relevant local or national rate as determined under the regulations. The
Bank meets the definition of a "well capitalized" institution and,
therefore, may accept brokered deposits without restriction. At September
30, 1996, the Bank had $89.3 million of brokered deposits.
Uniform Lending Standards
Under FDICIA, federal bank regulators are required to adopt uniform
regulations prescribing standards for extensions of credit that are
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real
estate. Under current regulations, savings institutions must adopt and
maintain written policies that establish appropriate limits and standards
for extensions of credit that are secured by liens on or interests in real
estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards (including loan-to-value limits)
that are clear and measurable, loan administration procedures and
documentation, approval and reporting requirements. The real estate
lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies that have been adopted by federal bank
regulators.
Standards for Safety and Soundness
As required by FDICIA and subsequently amended by the Riegle
Community Development and Regulatory Improvement Act of 1994, the OTS and
other federal banking regulators have adopted interagency guidelines
establishing standards for safety and soundness for depository
institutions on matters such as internal controls and audit systems, loan
documentation, credit underwriting, interest-rate risk exposure, asset
growth, asset quality, earnings and compensation and other benefits. The
agencies may request a compliance plan from any institution which fails to
meet one or more of the standards.
Branching by Federally Chartered Banks
OTS rules permit nationwide branching by federally chartered savings
institutions to the extent permitted by federal statute, subject to OTS
supervisory clearance. This permits institutions with interstate networks
to diversify their loan portfolios and lines of business. OTS authority
preempts any state law purporting to regulate branching by federal savings
institutions. However, subject to certain exceptions, federal law
continues to prohibit branching which would result in formation of a
multiple savings and loan holding company controlling savings institutions
in more than one state, unless the statutory law of the additional state
specifically authorizes acquisition of its state-chartered institutions by
state-chartered institutions or their holding companies in the state where
the acquiring institution or holding company is located.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF deposit insurance fund of the FDIC.
Savings deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
government. In its capacity as an insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of, and to
require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC insured institution from engaging in any activity that the FDIC
determines by regulation or order to pose a serious risk to the FDIC.
Under the FDI Act and FIDICIA, the FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action, and may terminate an institution's
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition. Management does not know of any practice, condition or
violation of the Bank that could lead to termination of deposit insurance
for the accounts of the Bank.
FDICIA required the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC has adopted a
risk-based assessment system under which all insured depository
institutions are placed into one of nine assessment risk classifications
and assessed insurance premiums based upon their level of capital and
supervisory evaluation. The FDIC assigns an institution to one of three
capital categories consisting of (i) well capitalized, (ii) adequately
capitalized or (iii) undercapitalized, and one of three supervisory
subcategories. The supervisory subgroup to which an association is
assigned is based on a supervisory evaluation provided to the FDIC by the
association's primary federal regulator and information which the FDIC
determines to be relevant to the association's financial condition and the
risk posed to the deposit insurance funds (which may include, if
applicable, information provided by the association's state supervisor).
An association's assessment rate depends on the capital category and
supervisory category to which it is assigned.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less
than the designated reserve ratio of 1.25% of SAIF insured deposits. In
setting these increased assessments, the FDIC must seek to restore the
reserve ratio to that designated reserve level, or such higher reserve
ratio as established by the FDIC. In addition, under FDICIA, the FDIC may
impose special assessments on SAIF members to repay amounts borrowed from
the United States Treasury or for any other reason deemed necessary by the
FDIC. The 1996 Deposit Insurance Act described above imposed a one time
assessment (approximately .657% of SAIF deposits as of March 31, 1995) on
SAIF insured institutions such as the Bank in order to cause the SAIF to
achieve the designated reserve ratio of 1.25% of SAIF insured deposits.
See "Recent Federal Legislative Developments" above.
As of September 30, 1996, the Bank had approximately $630 million of
deposit accounts covered by deposit insurance and was classified as well
capitalized and healthy. For the year ended on such date, the Bank paid
an annual insurance premium of .23% of deposits. However, as a result of
the 1996 Deposit Insurance Act, effective as of January 1, 1997, the
insurance premium rate for SAIF members will be reduced to (i) the
statutory minimum premium of $2,000 annually for the most highly-rated
institutions and (ii) approximately 0.03% to 0.27% of insured deposits for
the remaining institutions (plus, in each case, .064% for payment of the
FICO obligations).
On October 5, 1994 the FDIC issued an "Advance Notice of Proposed
Rulemaking" pursuant to which the FDIC is soliciting comments on whether
the deposit-insurance assessment base currently provided for in the FDIC's
assessment regulations should be redefined. Under current law insurance
premiums paid to the FDIC are calculated by multiplying the institution's
assessment base (which equals total domestic deposits, as adjusted for
certain elements) by its assessment rate. Based on the risk-based deposit
insurance system, developments in the financial services industry, changes
in the activities of depository institutions and other factors, the FDIC
seeks comments on whether the assessment base should be redefined. The
FDIC has stated that review of the definition of "assessment base" does
not signal any intent to change the total dollar amount of assessments
collected, but that such redefinition may impact the assessments paid on
an institution-by-institution basis. Until final regulations are adopted
affecting the definition of an institution's assessment base, management
of the Company cannot predict what impact such regulation may have on Bank
operations.
Regulatory Capital Requirements
Federally-insured savings institutions, such as the Bank, are
required to maintain certain minimum levels of regulatory capital. The
OTS has established three different capital standards: (i) a 1.5%
"tangible capital" standard; (ii) a 3% "leverage ratio" (or core capital
ratio); and (iii) an 8% "risk-based capital" standard. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose
capital requirements in excess of these standards on individual
institutions on a case-by-case basis. Savings institutions must meet all
of the standards in order to comply with the capital requirements.
The following table summarizes the Bank's capital ratios and the
ratios required by OTS federal regulations at September 30, 1996:
Risk-
Tangible Core based
Capital Capital Capital
(Dollars in thousands)
Bank's regulatory percentage 5.72% 5.72% 13.48%
Required regulatory percentage 1.50% 3.00% 8.00%
------- ------- ------
Excess regulatory percentage 4.22% 2.72% 5.48%
====== ====== ======
Bank's regulatory capital $57,440 $57,440 $63,199
Required regulatory capital 15,065 30,129 37,495
------ ------ ------
Excess regulatory capital $42,375 $27,311 $25,704
====== ====== ======
The capital standards established by the OTS require tangible capital
of at least 1.5% of adjusted total assets (as defined by regulation).
Tangible capital generally includes common stockholders' equity (including
retained earnings) and certain noncumulative perpetual preferred stock and
related surplus, less equity and debt investments in subsidiaries which
are not "includable" subsidiaries. For this purpose all subsidiaries
engaged solely in activities permissible for national banks or engaged
solely in mortgage banking or in certain other activities solely as agent
for its customers are "includable" subsidiaries. The Bank's wholly-owned
subsidiary, Advantage Real Estate Services,Inc., is not an includable
subsidiary and, accordingly, its assets are not included in the Bank's
assets and capital for purposes of determining the Bank's regulatory
capital. In addition, all intangible assets, other than a limited amount
of mortgage servicing rights, must be deducted from tangible capital. At
September 30, 1996, the Bank had $5.5 million in intangible assets (net of
applicable income tax effect) relating to the acquisition of branch
deposits which is a deduction from capital for regulatory purposes.
The OTS capital standards also require core capital equal to at least
3% of adjusted total assets. Core capital generally consists of tangible
capital plus certain intangible assets, including mortgage servicing
rights and purchased credit card relationships (subject to certain
valuation and other percentage limitations). As a result of the prompt
corrective action provisions of FDICIA and OTS regulations thereunder
discussed below, however, a savings association must maintain a core
capital ratio of at least 4% to be considered adequately capitalized
unless it is rated a composite 1 (the highest rating) under the "CAMEL"
rating system for savings institutions, in which case it is allowed to
maintain a 3% core capital ratio.
The OTS risk-based capital standard requires savings institutions to
have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital (subject to certain exclusions described below)
and supplementary capital, minus the amount of its interest rate risk
("IRR") component discussed below. Supplementary capital consists of
certain types of subordinated debt, certain nonwithdrawable accounts and
certain other capital instruments that do not qualify as core capital and
a portion of an institution's general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement
only up to the amount of core capital. At September 30, 1996, the Bank
had not issued any capital instruments that qualified as supplementary
capital and had $5.8 million of general valuation loan and lease loss
allowances included in supplementary capital.
Certain exclusions from capital and assets are required to be made
for the purpose of calculating total capital, in addition to the
adjustments required for calculating core capital. Such exclusions
consist of equity investments (as defined by regulation) and that portion
of land loans and nonresidential construction loans in excess of an 80%
loan-to-value ratio and reciprocal holdings of qualifying capital
instruments. At September 30, 1996, the Bank excluded all of its $7.4
million investments in, and loans to, its unconsolidated partnerships for
this purpose.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, are multiplied by a risk weight
ranging from 0% to 100%, as assigned by the OTS capital regulation, based
on the risks OTS believes are inherent in the type of asset.
The OTS has issued a final regulation that would require a savings
institution with "above normal" interest rate risk exposure to deduct from
its total capital, for purposes of determining compliance with such
requirement, an interest rate risk (IRR) component. The IRR exposure for
savings institutions is an amount equal to the product of (i) 50% of the
difference between its measured interest-rate risk exposure and 2%,
multiplied by (ii) the estimated economic value of its total assets. This
exposure is a measure of the potential decline in the Net Portfolio
Value("NPV") of a savings institution, greater than 2% of the present
value of its assets, that would result from a hypothetical 200 basis point
increase or decrease in market interest rates (whichever results in a
lower NPV) divided by the estimated economic value of assets (calculated
in accordance with certain OTS guidelines). The OTS will calculate
changes in an institution's NPV from data submitted by the institution in
a schedule to its Quarterly Thrift Financial Report. Net Portfolio Value
is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The effective date of this new requirement
has not yet been established. Management does not expect this rule to
have a material impact of the Bank.
Pursuant to FDICIA, in December of 1994 the federal banking agencies,
including the OTS, also adopted final regulations authorizing the agencies
to require a depository institution to maintain additional total capital
to account for concentration of credit risk and the risk of non-
traditional activities, as well as an institution's ability to monitor and
control such risks. While no quantitative measure will be generally
applicable, the OTS is given authority to require individual institutions
to maintain higher capital levels than those required under the
quantitative tests described above, based upon such institution's
particular concentration of credit risk and risks arising from
nontraditional activities, as identified by OTS from time to time.
Management does not believe that the Bank has any concentrations of credit
or is a engaged in any non-traditional activities which in either case are
likely to cause the OTS to require the Bank to maintain additional capital
under this regulation.
Prompt Corrective Action Requirements
FDICIA establishes a system of prompt corrective action to resolve
the problems of undercapitalized institutions. Under this system, federal
bank regulators are required to take certain supervisory actions with
respect to undercapitalized institutions, the severity of which depends
upon the institution's degree of capitalization. FDICIA establishes the
following 5 capital categories: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized." Generally, subject to narrow exceptions,
FDICIA requires federal bank regulators to appoint a receiver or
conservator for an institution that is critically undercapitalized and
prohibits such institution from making any payment of principal or
interest on its subordinated debt. FDICIA authorizes federal bank
regulators to specify the ratio of tangible capital to assets at which an
institution becomes critically undercapitalized and requires that ratio to
be no less than 2% of total assets.
Under OTS regulations, an institution is deemed to be
"undercapitalized" if it has a total risk-based capital ratio of less than
8%, a Tier 1 risk-based capital ratio of less than 4% or (generally) a
leverage ratio of less than 4%. An institution which has a total risk-
based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of
less than 3% or a leverage ratio of less than 3% is deemed to be
"significantly undercapitalized", and an institution which has a ratio of
tangible equity (as defined in the regulations) to total assets that is
equal to or less than 2% is deemed to be "critically undercapitalized".
In addition, the OTS is effectively authorized to downgrade an institution
to a lower capital category than the institution's capital ratios would
otherwise indicate, based upon safety and soundness considerations, such
as when the institution has received a less-than-satisfactory examination
rating for asset quality, management, earnings or liquidity under the
OTS's "CAMEL" rating system for savings institutions.
Subject to limited exceptions, savings institutions are prohibited
from declaring dividends, making any other capital distribution or paying
management fees to controlling persons if, after giving effect thereto,
the institution would be undercapitalized. Undercapitalized institutions
are also subject to certain mandatory supervisory actions, including
increased monitoring, required capital restoration planning and restricted
growth, and acquisition and branching restrictions. Significantly and
critically undercapitalized institutions face even more severe
restrictions.
At September 30, 1996, the Bank was "well capitalized" as defined
under the OTS regulations and, accordingly, was not subject to the
foregoing limitations and restrictions placed upon undercapitalized
institutions.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions and requirements on
savings institutions with respect to their ability to pay dividends or
make other capital distributions (such as stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible
debt and other transactions charged to the capital account).
The OTS utilizes a three-tiered approach to permit savings
institutions, based on their capital level and supervisory condition, to
make capital distributions. Generally, an institution that before and
after the proposed distribution meets or exceeds its "fully phased in
capital requirements" (a "Tier 1 institution") and has not been informed
by OTS that it is in need of more than normal supervision, may, after 30
days prior notice to but without the approval of the OTS, make capital
distributions during any calendar year equal to the higher of (a) 100% of
its net income for the year-to-date plus the amount that would reduce by
50% its "surplus capital ratio" (the percentage by which the institution's
ratio of total capital to assets exceeds the ratio of its fully phased-in
capital requirement to assets) at the beginning of the calendar year or
(b) 75% of its net income over the most recent four-quarter period. Any
additional capital distributions would require prior regulatory approval.
The Bank currently meets the requirements for a Tier 1 institution and has
not been notified of a need for more than normal supervision. In the
event the Bank were to fail to satisfy such standards, its ability to make
capital distributions would be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their current minimum capital
requirements but do not meet their fully phased-in capital requirements,
may make capital distributions up to 75% of their net income for the most
recent four-quarter period after notice is given to the OTS and no
objection is made by the OTS within a 30-day period. Tier 3 institutions,
which are institutions that do not meet current minimum capital
requirements, that propose to make a capital distribution, and Tier 1 and
Tier 2 institutions which propose to make a capital distribution in excess
of the noted safe harbor levels described above, must obtain OTS approval
prior to making such a distribution.
In December, 1994, the OTS issued a proposed regulation intended to
simplify the current capital distribution regulation by replacing the
"tiered" approach to allowing savings associations to make capital
distributions with one that limits capital distributions to amounts that
would permit savings associations to remain "adequately capitalized."
Relying on the previously promulgated "prompt corrective action"
regulatory standards, an institution would be considered "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or
greater; a Tier 1 risk-based capital ratio of 4.0% or greater; and a
leverage ratio of 4.0% or greater (or of 3.0% or greater, if it was rated
composite "1" after its most recent examination). Under the proposal,
associations would not be permitted to make capital distributions that
would cause capital to fall below the level required to remain adequately
capitalized. Until final regulations revising the capital distribution
rules are enacted, management cannot predict what impact, if any, such
revised regulations will have on the operations of the Bank.
Liquidity
Each savings institution, including the Bank, is required to maintain
an average daily balance of liquid assets for each calendar month equal to
a certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and short-term borrowings for the
immediately preceding calendar month. This average liquidity requirement
may be changed from time to time by the OTS (between 4% and 10%),
depending upon economic conditions and deposit flows of all savings
institutions. At the present time, the minimum average liquidity
requirement is 5%. In addition, the average daily balance of short term
liquid assets (e.g., cash, certain time deposits, certain bankers
acceptances and short-term United States Treasury obligations) must
currently constitute at least 1% of an institution's average daily balance
of net withdrawable deposit accounts and current borrowings for the
preceding calendar month. Monetary penalties may be imposed for a
violation of either liquidity ratio requirement. At September 30, 1996,
the Bank was in compliance with both liquidity requirements, with an
average liquidity ratio of 9.5% and a short-term liquidity ratio of 5.9%.
Qualified Thrift Lender Test
All savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings institution to maintain at
least 65% of its portfolio assets (which consist of total assets less (i)
intangibles, (ii) properties used to conduct the savings institution's
business and (iii) liquid assets not exceeding 20% of total assets) in
qualified thrift investments on a monthly average for nine out of every
twelve months on a rolling basis. As of September 30, 1996, the Bank was
in compliance with the QTL requirements.
Generally, qualified thrift investments consist of loans to purchase,
construct or improve residential housing, home equity loans and mortgage-
related securities secured by residential housing, small business loans,
credit card loans and student loans, as well as certain obligations of the
FDIC and stock in any Federal Home Loan Bank. Certain other loans and
investments may be included up to a maximum aggregate limit of 20% of
portfolio assets.
Any savings institution that fails to meet the QTL test must either
convert to a national bank charter (and pay the applicable exit and
entrance fees involved in converting from one insurance fund to another)
or become subject to numerous operating restrictions.
Loans-to-One-Borrower Limit
Under the HOLA, savings associations are subject to maximum loans-to-
one-borrower limits applicable to national banks. In general, a savings
institution may make loans-to-one-borrower in an amount up to the greater
of $500,000 or 15% of the institution's unimpaired capital and unimpaired
surplus (plus an additional 10% of its unimpaired capital and unimpaired
surplus for loans fully secured by certain readily marketable collateral).
At September 30, 1996, the Bank's lending limit for loans-to-one-borrower
not fully secured by marketable collateral was $9.6 million. Under the
HOLA, a broader limitation (the lesser of $30 million or 30% of unimpaired
capital and unimpaired surplus) is provided under certain circumstances
and subject to OTS approval, for loans to develop domestic residential
housing units. In addition, under HOLA as limited by OTS regulation, a
savings institution may provide purchase money mortgage financing in
connection with the sale by it of real property acquired in satisfaction
of debts previously contracted in good faith without regard to the loans-
to-one-borrower limitation provided that no new funds are advanced and the
institution is not placed in a more detrimental position than if it had
held the property. As of September 30, 1996, the Bank is in compliance
with these loans-to-one-borrower limitations.
Transactions with Affiliates; Loans to Insiders
Transactions between savings institutions and their affiliates are
governed by Sections 23A and 23B of the Federal Reserve Act. With certain
limited exceptions, an affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with
the savings institution. In a holding company context, the parent holding
company of a savings institution (such as the Company) and any companies
which are controlled by such parent holding company are affiliates of the
savings institution. Generally, Sections 23A and 23B (i) limit the extent
to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates of 20% of capital stock
and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of
a guarantee and other similar types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may
(a) loan or otherwise extend credit to an affiliate, except for an
affiliate which engages only in activities which are permissible for bank
holding companies, or (b) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for
affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans by savings institutions to executive officers,
directors and principal stockholders of the institution and their related
interests ("insiders"). Under Section 22(h), loans to an insider of a
savings institution (other than a stockholder of which the savings
institution is a subsidiary) or to a director, executive officer or
greater than 10% stockholder of the company that controls the savings
institution, and certain affiliated interests of any such person, may not
exceed, together with all other outstanding loans to such person and
affiliated interests of such person, the institution's loans-to-one-
borrower limit. Section 22(h) also requires that loans to insiders be
made on substantially the same terms offered in, and applying underwriting
policies and procedures no less stringent than those applied to,
comparable transactions with persons who are not insiders or employees and
requires prior approval of a majority of the institution's board (with the
interested party abstaining) for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders, and directors, executive officers and greater than 10%
shareholders of a company that controls the savings institution and their
related interests, cannot exceed the institution's unimpaired capital and
surplus.
Federal Reserve System
Regulation D of the Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts, (primarily checking, NOW and certain
other accounts that permit payments or transfers to third parties) and
non-personal time deposits (including certain money market deposit
accounts). These reserve levels are subject to adjustment from time to
time by the Federal Reserve Board. At September 30, 1996, the Bank was in
compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy liquidity requirements that may be imposed by the OTS.
See "Liquidity."
Federal Home Loan Bank System members such as the Bank are authorized
to borrow from the Federal Reserve Bank "discount window," but Federal
Reserve Board regulations require institutions to exhaust other reasonable
alternative sources of funds, including FHLB borrowings, before borrowing
from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB Chicago, which is one of 12 regional
FHLBs that administer the home financing credit function of savings
institutions throughout the United States. Each FHLB serves as a reserve
or central bank for its members within its assigned region. The FHLB
makes loans to members (i.e. advances) in accordance with policies and
procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All loans from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In
addition, all long-term loans may be made only for the purpose of
providing funds for residential home financing. At September 30, 1996,
the Bank had $175.9 million in advances from the FHLB Chicago.
As a member of the FHLB Chicago, the Bank is required to purchase and
maintain stock in the FHLB Chicago. At September 30, 1996, the Bank had
$8.8 million in FHLB stock, which satisfied this requirement. In past
years, the Bank has received dividends on its FHLB stock. The dividend
rate on such FHLB stock in fiscal 1996 was 6.75%.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and affordable
housing projects. These contributions may adversely affect the level of
dividends paid by FHLBs to their members and could also result in the
FHLBs imposing a higher rate of interest on advances to their members.
Any such reduction in dividends paid or increase in the rate charged on
advances could have an adverse affect on the Bank's net interest income
and the value of FHLB Chicago stock held by the Bank. A reduction in
value of the Bank's FHLB stock may result in a corresponding reduction in
the Bank's stockholders' equity.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority
over the Company and its non-savings institution subsidiaries, which
authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings bank. The
regulations of the OTS are primarily concerned with the safety and
soundness of the institutions under its jurisdiction rather than the
protection of such institutions' stockholders.
As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions. However, if the Company were to
acquire control of another savings institution and hold it as a separate
subsidiary, the Company would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings institution) would
become subject to such activity restrictions unless such other
institutions each qualified as a QTL and were acquired in a supervisory
acquisition. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may
commence or continue for more than a limited period of time after becoming
a multiple savings and loan holding company or subsidiary thereof, any
business activity, except upon prior notice to, and no objection by, the
OTS, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by
or acquired from a subsidiary savings institution; (iv) holding or
managing properties used or occupied by a subsidiary savings institution;
(v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
savings and loan holding companies; or (vii) unless the Director of the
OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the FRB as permissible
for bank holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in
by a multiple savings and loan holding company.
If the Bank were to fail the QTL test, the Company would have to
obtain the approval of the OTS prior to continuing, directly or through
its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure, the Company would have to
register as, and would become subject to, the restrictions applicable to
bank holding companies. The activities authorized for a bank holding
company are more limited than are the activities authorized for a unitary
or multiple savings and loan holding company.
The Company must obtain approval from the OTS before acquiring
control of more than 5% of the voting shares of any other SAIF-insured
institution or savings and loan holding company. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings institutions in more than one state. However,
such interstate acquisitions are permitted based on specific state
statutory authorization in the state of the target institution or in a
supervisory acquisition of a failing savings institution.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, a savings institution has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes
are best suited to its particular community, consistent with the CRA. The
CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its
evaluation of certain applications by such institution. An institution is
assigned one of four overall ratings: "outstanding", "satisfactory",
"needs improvement" or "substantial noncompliance". The CRA also requires
all institutions to make their CRA ratings available to the public. The
Bank's latest CRA rating, received in August, 1994, was "outstanding".
In 1995, the OTS and other federal financial supervisory agencies
issued a final revised regulation to implement the CRA. The revised
regulation, which will be phased in over a period of time and become fully
effective on July 1, 1997, eliminates the twelve assessment factors under
the prior regulation and substitutes a performance based evaluation
system.
Pursuant to the revised regulation, an institution's performance in
meeting the credit needs of its entire community, as required by the CRA,
will generally be evaluated under three tests: the "lending test"; the
"investment test"; and the "service test".
The lending test analyzes lending performance using five criteria:
(i) the number and amount of loans in the institution's assessment area,
(ii) the geographic distribution of lending, including the proportion of
lending in the assessment area, the dispersion of lending in the
assessment area, and the number and amount of loans in low-, moderate-,
middle- and upper-income areas in the assessment area, (iii) borrower
characteristics, such as the income level of individual borrowers and the
size of businesses or farms, (iv) the number and amount, as well as the
complexity and innovativeness, of an institution's community development
lending and (v) the use of innovative or flexible lending practices in a
safe and sound manner to address the credit needs of low- or moderate-
income individuals or areas. The investment test analyzes investment
performance using four criteria: (i) the dollar amount of qualified
investments, (ii) the innovativeness or complexity of qualified
investments, (iii) the responsiveness of qualified investments to credit
and community development needs, and (iv) the degree to which the
qualified investments made by the institution are not routinely provided
by private investors. The service test analyzes service performance using
six criteria: (i) the institution's branch distribution among low-,
moderate-, middle-, and upper-income areas, (ii) its record of opening and
closing branches, particularly in low- and moderate- income areas,
(iii) the availability and effectiveness of alternative systems for
delivering retail banking services, (iv) the range of services provided in
low-, moderate-, middle- and upper-income areas and extent to which those
services are tailored to meet the needs of those areas, (v) the extent to
which the institution provides community development services, and
(vi) the innovativeness and responsiveness of community development
services provided.
Small institutions, which are defined as institutions with less than
$250 million in total assets which are either independent or are
affiliates of a holding company with banking and thrift assets of less
than $1 billion, will continue to be evaluated under a streamlined
assessment method that would exempt them from new data collection and
reporting requirements.
As an alternative to the lending, service and investment tests, an
institution may submit to the OTS for approval its own "strategic plan",
developed with community input, describing in detail the manner in which
it proposes to meet its CRA obligations. If the plan is approved by OTS
and the institution has operated under the plan for at least one year, the
institution will be evaluated based upon its achieving the goals and
benchmarks outlined in the plan.
Institutions not eligible for the small institution streamlined
assessment method are required to collect and report data on a variety of
matters, including originations and purchases of home mortgage, small
business and small farm loans, and certain information on community
development loans. Collection of information on consumer loans is
optional.
The data collection requirements under the revised regulation became
effective January 1, 1996, with the reporting requirements to be effective
January 1, 1997. Evaluations under the lending, investment and service
tests will generally begin July 1, 1997, although evaluations under the
small institution performance standards, which will not utilize newly
required data, began January 1, 1996.
The OTS is required to prepare annually and make available to the
public individual CRA Disclosure Statements for each reporting thrift
institution. Each institution must place its CRA Disclosure Statement in
its public file within three days of receipt of the Statement from the
OTS. Each institution is required to maintain one copy of its public file
in each state in which it has its main office or a branch.
Management does not believe that the revised CRA regulations will
materially impact the operations of the Bank.
Federal Securities Law
The common stock of the Company is registered with the Securities
Exchange Commission under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company is, therefore, subject
to the periodic reporting, proxy solicitation and tender offer rules,
insider trading restrictions and other requirements under the Exchange
Act.
Shares of Company common stock held by persons who are affiliates
(generally officers, directors and principal shareholders) of the Company
may not be sold without registration under the Securities Act of 1933, as
amended, unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is, subject to certain limitations, able to sell
in the public market, without registration, a limited number of shares in
any three-month period.
Federal and State Taxation
For fiscal 1996 and prior years, Savings associations such as the
Bank that met certain definitional tests relating to the composition of
assets and other conditions prescribed by the Internal Revenue Code of
1986, as amended (the "Code"), were permitted to establish reserves for
bad debts and to make annual additions thereto which could, within
specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction for "non-qualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) was
computed under either the experience method or the percentage of taxable
income method (based on an annual election). The percentage of specially
computed taxable income that was used to compute a savings association's
bad debt reserve deduction under the percentage of taxable income method
(the "percentage bad debt deduction") was 8.0%. The percentage bad debt
deduction thus computed was reduced by the amount permitted as a deduction
for non-qualifying loans under the experience method.
For fiscal 1996 and prior years, if an association's specified assets
(generally, loans secured by residential real estate or deposits,
educational loans, cash and certain government obligations) constituted
less than 60% of its total assets, the association could not deduct any
addition to a bad debt reserve and generally was required to include
existing reserves in income over a four year period. The Bank has
historically met this 60% test. Under the percentage of taxable income
method, the percentage bad debt deduction could not exceed the amount
necessary to increase the balance in the reserve for "qualifying real
property loans" to an amount equal to 6% of such loans outstanding at the
end of the taxable year or the greater of (i) the amount deductible under
the experience method or (ii) the amount which when added to the bad debt
deduction for "non-qualifying loans" equals the amount by which 12% of the
amount comprising savings accounts at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year. At
September 30, 1996, the 6% and 12% limitations did not restrict the
percentage bad debt deduction available to the Bank.
Effective for fiscal 1997 and future years, the Small Business Job
Protection Act of 1996 (the "Job Protection Act") was enacted on August
10, 1996 and eliminates the percent-of-taxable-income method for computing
additions to a savings association's tax bad debt reserves. The Job
Protection Act requires all savings associations to recapture, over a six
year period, all or a portion of their tax bad debt reserves added since
the last taxable year beginning before January 1, 1988. Taxes have been
provided in the financial statements for this recapture. The Job
Protection Act allows a savings association to postpone the recapture of
bad debt reserves for up to two years if the institution meets a minimum
level of mortgage lending activity during those years. The Bank believes
that it will engage in sufficient mortgage lending activity during fiscal
years 1997 and 1998 to be able to postpone any recapture of its bad debt
reserves until fiscal 1999.
Effective for fiscal 1997 and future years, under the Job Protection
Act, the Bank will determine additions to its tax bad debt reserves using
the same method as a commercial bank of comparable size, and, if the Bank
were to decide to convert to a commercial bank charter, such conversion
would not cause any additional tax liability.
As of September 30, 1996, retained earnings included approximately
$22.4 million for which no provision for income tax has been made. This
essentially represents pre-1988 accumulated bad debt deductions. Income
taxes would be imposed at the then-applicable rates if the Bank were to
use these reserves for any other purpose or were to no longer qualify as a
bank. The income tax liability on this $22.4 million would approximate
$8.5 million.
In addition to the regular income tax, corporations, including
savings associations such as the Bank, generally are subject to a minimum
tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference
items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and
net operating losses can offset no more than 90% of alternative minimum
taxable income. For taxable years beginning after 1986 and before 1996,
corporations, including savings associations such as the Bank, are also
subject to an environmental tax equal to 0.12% of the excess of
alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
The Company and its subsidiaries file a consolidated federal income
tax return on a fiscal year basis using the accrual method of accounting.
Savings associations, such as the Bank, that file federal income tax
returns as part of a consolidated group are required by applicable
Treasury regulations to reduce their taxable income for purposes of
computing the percentage bad debt deduction for losses attributable to
activities of the non-savings association members of the consolidated
group that are functionally related to the activities of the savings
association member.
The Company and its subsidiaries were last audited by the IRS with
respect to its consolidated federal income tax return for the year ended
September 30, 1984. With respect to years examined by the IRS, either all
deficiencies have been satisfied or sufficient reserves have been
established to satisfy asserted deficiencies. In the opinion of
management, any examination of still open returns (including returns of
subsidiaries and predecessors of, or entities merged into, the Bank) would
not result in a deficiency which could have a material adverse effect on
the consolidated financial condition of the Company.
Wisconsin Taxation. Wisconsin imposes a corporate franchise tax on
the Wisconsin taxable income of the Company and its subsidiaries. The
current corporate franchise tax rate imposed by Wisconsin is 7.9%.
Wisconsin taxable income is substantially similar to federal taxable
income except that no deduction is allowed for state income taxes paid.
The current bad-debt deduction for Wisconsin income tax purposes is the
same as the deduction permitted for federal income tax purposes.
Wisconsin does not allow the carryback of a net operating loss to prior
taxable years. Thus, any net operating loss for state income tax purposes
must be carried forward to offset income in future years. The Wisconsin
corporate franchise tax is deductible for purposes of computing federal
taxable income.
Illinois Taxation. Illinois imposes a corporate income tax on the
Illinois taxable income of the Company and its subsidiaries. For Illinois
income tax purposes, the Bank is taxed at a rate equal to 7.3% of Illinois
taxable income. For these purposes, Illinois taxable income generally
means federal taxable income, subject to certain adjustments (including
the addition of interest income on state and municipal obligations and the
exclusion of interest income on United States Treasury obligations). The
exclusion of income on United States Treasury obligations has the effect
of substantially reducing Illinois taxable income.
Executive Officers of the Registrant
The following table sets forth certain information with respect to
the executive officers of the Company and the Bank as of September 30,
1996.
Name Position With Company
Paul P. Gergen Chairman, President and Chief
Executive Officer of the Company and
the Bank
John Stampfl Treasurer, Secretary and Chief
Financial Officer of the Company and
Treasurer, Secretary and Senior Vice
President-Finance of the Bank
William K. Koeper Senior Vice President-Retail Banking
and Development of the Bank
Robert J. Muth Senior Vice President of the Company
and Senior Vice President-Mortgage
Lending of the Bank
David W. Adam Senior Vice President-Information
Systems of the Bank
The following information as to the business experience during the
past five years is supplied with respect to the above executive officers.
Paul P. Gergen, age 63, joined the Bank in 1984 as President and
Chief Executive Officer. Mr. Gergen is a licensed attorney and CPA and
has been involved in banking in various capacities for 36 years. He has
been Chairman, President and Chief Executive Office of the Company since
its inception in 1992.
John Stampfl, age 41, joined the Bank in 1984 as Vice President-
Finance. He is a licensed CPA. He has been Treasurer, Secretary and
Chief Financial Officer of the Company since its inception in 1992.
William K. Koeper, age 48, joined the Bank in 1991 as Vice President-
Marketing and Development. From 1988 to 1991, he was Dean of Business at
Gateway Technical College, Kenosha, Wisconsin.
Robert J. Muth, age 62, joined the Bank in 1985 as Vice President-
Mortgage Lending. Mr. Muth has been involved in banking in various
capacities for 43 years. He has been Vice President of the Company since
its inception in 1992.
David W. Adam, age 31, joined the Bank in 1988 as Financial Analyst,
became Vice President-Information Systems in 1994 and became Senior Vice
President-Information Systems in 1996. He is a licensed CPA.
Item 2. Properties
At September 30, 1996, the Bank operated through fifteen full-service
savings institution offices and three mortgage loan origination limited
offices located in Wisconsin and Illinois. The aggregate book value at
September 30, 1996 of the properties owned was $12.5 million. The
following table sets forth the location of the Bank's offices.
Owned or Date
Location Leased Acquired/Leased
Executive Offices and Home Office:
5935 Seventh Avenue Owned 1960
Kenosha, Wisconsin
5125 6th Avenue Leased 1996
Kenosha, Wisconsin
Branch Offices:
7535 Pershing Boulevard Owned 1968
Kenosha, Wisconsin
410 Broad Street Owned 1973
Lake Geneva, Wisconsin
4235 52nd Street Owned 1975
Kenosha, Wisconsin
25100 75th Street Owned 1989
Paddock Lake, Wisconsin
8035 22nd Avenue Owned 1980
Kenosha, Wisconsin
3747 Grand Avenue Leased 1991
Gurnee, Illinois
1011 14th Street Owned 1989
North Chicago, Illinois
3401 80th Street Leased 1993
Kenosha, Wisconsin
2811 18th Street Leased 1991
Kenosha, Wisconsin
2580 Sheridan Road Owned 1991
Zion, Illinois
5914-75th Street Leased 1994
Kenosha, Wisconsin
2406 South Green Bay Road Leased 1994
Racine, Wisconsin
7151 West 159th Street Owned 1995
Tinley Park, Illinois
4900 West 87th Street Owned 1995
Burbank, Illinois
Loan Origination Offices:
4015-80th Street Leased 1993
Kenosha, Wisconsin 53142
100 N. Atkinson Road Leased 1993
Grayslake, Illinois
4900 Spring Street Leased 1994
Racine, Wisconsin
Possible future branch site
12300 75th Street Owned 1989
Bristol, Wisconsin
Advantage Service Center
5942 6th Ave. Owned 1993
Kenosha, Wisconsin
Advantage Financial Center, Inc.
933 N. Mayfair Road Leased 1995
Wauwatosa, Wisconsin
1230 East Diehl Road, Suite 302 Leased 1995
Naperville, Illinois
Item 3. Legal Proceedings
As of September 30, 1996, there were no pending legal proceedings
which in the aggregate involve amounts which are believed by management to
be material to the Company on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended September 30,
1996, no matters were submitted to a vote of security holders through a
solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information contained on page 56 of the 1996 Annual Report to
Shareholders (filed as an exhibit hereto) under the caption "Stock Price
Information" and the information contained on page 39 of the 1996 Annual
Report to Shareholders in Note 11 of the Notes to Consolidated Financial
Statements which describes restrictions on dividend payments by the Bank
is incorporated herein by reference.
Item 6. Selected Financial Data
The table on page 6 captioned "Selected Consolidated Financial
Information" of the 1996 Annual Report to Shareholders (filed as an
exhibit hereto) is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained on pages 7 to 22 under the caption
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" of the 1996 Annual Report to Shareholders (filed an an
exhibit hereto) is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated statements of financial condition of the Company and
its subsidiaries as of September 30, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the years in the three-year period ended September 30, 1996, along
with the related notes to consolidated financial statements and the report
of Ernst & Young LLP, independent certified public accountants, are
incorporated herein by reference from pages 25 through 50 of the Company's
1996 Annual Report to Shareholders (filed as an exhibit hereto). The
information under the caption "Quarterly Data" is also incorporated herein
by reference from page 23 of the Company's 1996 Annual Report to
Shareholders (filed as an exhibit hereto).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the directors of the Company is included in the
Company's Proxy Statement for the Annual Meeting to be held on January 30,
1997, under the heading "Election of Directors" on pages 3 through 7, and
the information included therein is incorporated herein by reference.
Information regarding the executive officers of the Company and the Bank
is included under "Part I. Business" of this report.
Item 11. Executive Compensation
Information regarding compensation of executive officers and
directors is included in pages 5 through 7 of the Company's Proxy
Statement for the Annual Meeting to be held on January 30, 1997, which
pages are incorporated herein by reference; provided, however, that the
section entitled "Report on Executive Compensation" shall not be deemed to
be incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
and management is included in the Company's Proxy Statement for the Annual
Meeting to be held on January 30, 1997, under the headings "Security
Ownership of Certain Beneficial Owners" on pages 2 through 3, and the
information included therein is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions
is included in the Company's Proxy Statement for the Annual Meeting to be
held on January 30, 1997, under the heading "Officer, Director and
Employee Loans" on page 12 and the information included therein is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Company and
its subsidiaries, together with the report thereon of Ernst & Young LLP,
dated October 25, 1996, appearing in the 1996 Annual Report to
Shareholders are incorporated herein by reference:
Page Number in
1996 Annual
Report to
Shareholders
Report of Ernst & Young LLP, Independent Auditors . . 25
Consolidated Statements of Financial Condition at
September 30, 1995 and 1996 . . . . . . . . . . 26
Consolidated Statements of Income for each year in the
three-year period ended September 30, 1996 . . . 27
Consolidated Statements of Stockholders' Equity for
each year in the three-year period ended
September 30, 1996 . . . . . . . . . . . . . . . 28
Consolidated Statements of Cash Flows for each year in
the three-year period ended September 30, 1996 . 29
Notes to Consolidated Financial Statements . . . . . 31
The remaining information appearing in the Annual Report to
Shareholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are either filed as part of this Report on
Form 10-K or are incorporated herein by reference:
Exhibit No. 3. Certificate of Incorporation and Bylaws:
3.1 Articles of Incorporation of Advantage Bancorp, Inc.
(incorporated herein by reference to Exhibit 3.1 of
Registrant's Form S-1 Registration Statement, as amended,
filed on December 11, 1991, Registration No. 33-44492)
3.2 Bylaws of Advantage Bancorp, Inc. (incorporated herein by
reference to Exhibit 3.2 of Annual Report on Form 10-K for
the fiscal year ended September 30, 1994 filed on December
27, 1994)
Exhibit No. 10. Material Contracts:
10.1* Advantage Bancorp, Inc. 1991 Stock Option and Incentive
Plan (incorporated herein by reference to Exhibit 4.1 of
Registrant's Form S-8 Registration Statement, filed on
December 30, 1993, Registration No. 33-73664)
10.2* Advantage Bancorp, Inc. 1995 Equity Incentive Plan
(incorporated herein by reference to Exhibit 10.2 of Annual
Report on Form 10-K for the fiscal year ended September 30,
1994 filed on December 27, 1994)
10.3* Advantage Bancorp, Inc. Employees' Profit-Sharing and
Savings Retirement Plan (incorporated herein by reference
to Exhibit 10.2 of Registrant's Form S-1 Registration
Statement, as amended, filed on December 11, 1991,
Registration No. 33-44492)
10.4* Advantage Bancorp, Inc. Bank Incentive Plan and Trust
(incorporated herein by reference to Exhibit B to the Proxy
Statement for the First Annual Meeting of Shareholders held
on January 19, 1993)
10.5* Advantage Bancorp, Inc. Employee Stock Ownership Plan
(incorporated herein by reference to Exhibit 10.4 of
Registrant's Form S-1 Registration Statement, as amended,
filed on December 11, 1991, Registration No. 33-44492)
10.6* Employment Agreement between the Bank and Paul P. Gergen;
Employment Agreement between the Bank and John Stampfl
(incorporated herein by reference to Exhibit 10.5 of
Registrant's Form S-1 Registration Statement, as amended,
filed on December 11, 1991, Registration No. 33-44492)
10.7* Advantage Bank, FSB Executive Salary Continuation Agreement
with Paul P. Gergen dated March 13, 1987 (incorporated
herein by reference to Exhibit 10.6 of Annual Report on
Form 10-K for the fiscal year ended September 30, 1993
filed on December 27, 1993)
10.8* Advantage Bank, FSB Executive Salary Continuation Agreement
with John Stampfl dated December 30, 1987 (incorporated
herein by reference to Exhibit 10.7 of Annual Report on
Form 10-K for the fiscal year ended September 30, 1993
filed on December 27, 1993)
10.9* Description of Advantage Bank, FSB Senior Officer Incentive
Compensation Program (incorporated by reference to Exhibit
10.9 of Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 filed on December 27, 1994)
10.10* 1994 Amendments to the Advantage Bancorp, Inc. Employees'
Profit-Sharing and Savings Retirement Plan (incorporated by
reference to Exhibit 10.10 of Annual Report on Form 10-K
for the fiscal year ended September 30, 1994 filed on
December 27, 1994)
10.11* Amity Bancshares, Inc. 1991 Stock Option and Incentive Plan
(incorporated herein by reference to Exhibit 4.1 of
Registrant's Form S-8 Registration Statement filed on
February 6, 1995, Registration No. 33-89114)
10.12* Advantage Bancorp, Inc. 1996 Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 4.1 of
the Registrant's Form S-8 Registration Statement filed on
May 3, 1996, Registration No. 333-4444)
10.13* Form of Director Deferred Compensation Agreement
(incorporated by reference to Exhibit 10.13 of Registrant's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1995 filed on December 26, 1995)
* A management contract or compensatory plan or arrangement.
Exhibit No. 11. Statement re: Computation of Per Share Earnings
The statement regarding computation of per share earnings for fiscal
year 1996 is as follows:
Fully
Primary Diluted
1. Net income . . . . . . . . . . . . . $ 3,032,537 $ 3,032,537
========= =========
2. Weighted average common shares
outstanding . . . . . . . . . . . . . 3,433,886 3,433,886
3. Common stock equivalents due to
dilutive effect of stock options . . 227,947 222,461
---------- ----------
4. Total weighted average common shares
and equivalents outstanding . . . . . 3,661,833 3,656,347
========== ==========
5. Earnings per share . . . . . . . . . $0.83 $0.83
===== =====
The statement regarding computation of per share earnings for fiscal
year 1995 is as follows:
Fully
Primary Diluted
1. Net income . . . . . . . . . . . . . . . $ 8,150,985 $ 8,150,985
========= =========
2. Weighted average common shares
outstanding . . . . . . . . . . . . . . . 3,451,743 3,451,743
3. Common stock equivalents due to dilutive
effect of stock options . . . . . . . . . 254,493 257539
--------- ---------
4. Total weighted average common shares and
equivalents outstanding . . . . . . . . . 3,706,236 3,709,282
========= =========
5. Earnings per share . . . . . . . . . . . $2.20 $2.20
===== =====
Exhibit No. 13. 1996 Annual Report to Shareholders.
Portions of the 1996 Annual Report to Shareholders that have been
incorporated by reference herein are included as Exhibit 13.
Exhibit No. 21. Subsidiaries of the registrant.
As of the date of this Annual Report the only subsidiary of the
Company is Advantage Bank, FSB, which is a federally-chartered savings
bank.
The subsidiaries of the Bank are Advantage Real Estate Services, Inc.
( incorporated in Wisconsin), Advantage Investments, Inc.(incorporated in
Nevada), Advantage Financial Services and Insurance, Inc. (incorporated
in Wisconsin), Advantage Financial Center, Inc. (incorporated in
Wisconsin) and Amity Service Corporation (incorporated in Illinois).
Exhibit No. 23. Consent of Independent Auditors
Consent of Independent Auditors to the incorporation by reference in
the Registration Statements (Form S-8 Nos. 33-73664, 33-89114, 33-
46975, 333-4444 and 333-4448) pertaining to the Advantage Bancorp,
Inc. 1991 Stock Option and Incentive Plan, the Amity Bancshares, Inc.
Stock Option Plan and Incentive Plan, the Advantage Bancorp, Inc.
Employees' Profit Sharing and Savings Retirement Plan, the Advantage
Bancorp, Inc. 1996 Non-Employee Director Stock Option Plan, and the
Advantage Bancorp, Inc. 1995 Equity Incentive Plan, of auditors'
report dated October 25, 1996, with respect to the consolidated
financial statements of Advantage Bancorp, Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended
September 30, 1996.
Exhibit No. 27. Financial Data Schedule (Edgar version only)
Exhibit No. 99. Proxy Statement for 1997 Annual Meeting
The Company's Proxy Statement for the Annual Meeting to be held on
January 30, 1997 has been filed with the Securities and Exchange
Commission and is incorporated by reference herein as an Exhibit to this
Annual Report on Form 10-K. Portions of the Proxy Statement have been
incorporated herein by reference. Except to the extent specifically
incorporated by reference, the Proxy Statement is not deemed to be filed
with the SEC as part of this Annual Report on Form 10-K.
(b) Forms 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Advantage Bancorp, Inc.
(registrant)
By: /s/ Paul P. Gergen
Paul P. Gergen
Chairman of the Board
Director
Date: December 20, 1996
Pursuant to the requirements of the Securities 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.
By: /s/ Paul P. Gergen
Paul P. Gergen
Chairman of the Board
Chief Executive Officer
President
Date: December 20, 1996
By: /s/ Robert J. Muth
Robert Muth
Senior Vice President
Date: December 20, 1996
By: /s/ John Stampfl
John Stampfl
Chief Financial Officer
Secretary-Treasurer
Date: December 20, 1996
By: /s/ Ben-Ami Chemerow
Ben-Ami Chemerow
Director
Date: December 20, 1996
By: /s/ Rita Petretti
Rita Petretti
Director
Date: December 20, 1996
By: /s/ Eugene Snarski
Eugene Snarski
Director
Date: December 20, 1996
By: /s/ Dennis Troha
Dennis Trohai
Director
Date: December 20, 1996
By: /s/ Michael Wells
Michael Wells
Director
Date: December 20, 1996
<PAGE>
INDEX TO ATTACHED EXHIBITS
Advantage Bancorp, Inc.
Form 10-K
Year Ended September 30, 1996
Exhibit No. Exhibit Description
13 Portions of the 1996 Annual Report to Share-
holders
23 Consent of Independent Auditors
27 Financial Data Schedule (Edgar version only)
Advantage Bancorp, Inc.
Form 10-K
Year Ended September 30, 1996
Exhibit 13 - Portions of 1996 Annual Report to Shareholders
<PAGE>
[Page 6 of the 1996 Annual Report]
<TABLE>
SELECTED CONSOLIDATED FINANCIAL
INFORMATION
ADVANTAGE BANCORP, INC.
<CAPTION>
As of September 30
1992 1993 1994 1995 1996
Selected Financial Condition Data: (In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets . . . . . . . . . . . . . $591,533 $653,286 $741,307 $973,234 $1,016,386
Loans receivable - net . . . . . . . . 350,960 384,795 425,569 512,282 562,782
Mortgage-related securities . . . . . . 189,069 215,639 240,676 351,599 337,794
Investment securities, certificates of
deposits and marketable equity
securities . . . . . . . . . . . . . 13,049 10,805 12,213 29,969 35,040
Deposits . . . . . . . . . . . . . . . 402,881 412,500 507,338 681,925 680,851
Borrowings . . . . . . . . . . . . . . 95,460 145,160 135,810 175,120 224,265
Stockholders' equity . . . . . . . . . 79,199 80,816 82,935 93,078 88,866
<CAPTION>
Year Ended September 30
1992(1) 1993 1994 1995 1996
Selected Operations Data: (In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Total interest income . . . . . . . . . $41,918 $45,918 $47,862 $67,516 $73,590
Total interest expense . . . . . . . . 23,679 24,249 24,954 39,376 43,765
------ ------ ------ ------ ------
Net interest income . . . . . . . . 18,239 21,669 22,908 28,140 29,825
Provision for losses on loans . . . . . 820 720 720 460 480
------ ------ ------ ------ ------
Net interest income after provision
for losses on loans . . . . . . . 17,419 20,949 22,188 27,680 29,345
------ ------ ------ ------ ------
Fees and service charges . . . . . . . 1,178 1,483 1,807 2,668 5,135
Net gain on loans, securities and
other . . . . . . . . . . . . . . . . 769 1,262 584 253 1,742
Other non-interest income . . . . . . . 904 903 884 1,201 1,138
------ ------ ------ ------ ------
Total non-interest income . . . . . 2,851 3,648 3,275 4,122 8,015
------ ------ ------ ------ ------
Non-interest expenses . . . . . . . . . 11,864 13,078 13,834 19,133 23,708
Assessment to recapitalize Savings
Association Insurance Fund . . . . . . - - - - 4,435
Writedown of intangible assets . . . . - - - - 4,720
------ ------ ------ ------ ------
Income before taxes . . . . . . . . . . 8,406 11,519 11,629 12,669 4,497
Income taxes . . . . . . . . . . . . . 3,318 4,354 4,289 4,518 1,464
------ ------ ------ ------ ------
Net income . . . . . . . . . . . . . . $5,088 $7,165 $7,340 $8,151 $3,033
===== ===== ===== ===== =====
Earnings per share . . . . . . . . . . $1.22 $1.82 $1.96 $2.20 $0.83
==== ==== ==== ==== ====
Earnings per share excluding non-
recurring items (2) . . . . . . . . . $1.22 $1.82 $1.96 $2.20 $2.39
==== ==== ==== ==== ====
<CAPTION>
Year Ended September 30
Other Data: 1992(1) 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Interest rate spread information:
Average during year . . . . . . . . . 3.24% 3.19% 3.07% 2.92% 2.88%
End of year . . . . . . . . . . . . . 3.16% 2.93% 2.87% 2.67% 2.78%
Net interest margin (net interest income
divided by average interest-earning
assets) . . . . . . . . . . . . . . . 3.76% 3.66% 3.46% 3.26% 3.19%
Allowance for losses on loans to
non-performing loans . . . . . . . . 90.87% 79.71% 106.78% 219.00% 169.10%
Non-performing assets to total assets at
end of year . . . . . . . . . . . . . 0.98% 1.20% 0.79% 0.46% 0.48%
Stockholders' equity to total assets at
end of year . . . . . . . . . . . . . 13.31% 12.37% 11.19% 9.56% 8.74%
Dividends declared per share . . . . . - - - $0.192 $0.304
Dividend payout ratio (dividends per
share to earnings per share) . . . . - - - 8.73% 36.63%
Return on assets (ratio of net income to
average total assets) . . . . . . . . 1.00% 1.16% 1.07% 0.91% 0.31%
Return on stockholders' equity . . . . 8.16% 8.99% 8.88% 9.42% 3.20%
Facilities at end of year:
Number of full-service offices . . . 10 11 11 15 15
Number of loan production offices . . 1 3 4 5 5
<FN>
(1) Includes operations of Advantage Bancorp, Inc. commencing March 20,
1992 (date business began).
(2) Excludes the following nonrecurring items--assessment to recapitalize
SAIF and writedown of intangible assets
</TABLE>
<PAGE>
[Pages 7 to 22 of the 1996 Annual Report]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Advantage Bancorp, Inc. (the "Company") is the holding company and owner
of 100% of the common stock of Advantage Bank FSB (the "Bank"), a
federally-chartered stock savings institution. In this discussion and
analysis, reference to the operations and financial condition of the
Company includes the operations and financial condition of the Bank and
its subsidiaries.
The Company's business currently consists of the business of the Bank. As
a consumer-oriented financial institution, the Company offers a range of
retail banking services to residents in its market area. The Company is
principally engaged in the business of attracting deposits from the
general public and investing those deposits, along with funds generated
from operations and borrowings, by originating residential loans in its
primary market area and investing in those loans. The Company also
originates commercial real estate, multi-family, construction, consumer
and commercial business loans. The Company also invests in mortgage-
related securities and other investments. Finally, the Company offers, on
an agency basis, certain securities brokerage services and insurance
products to its customers.
At September 30, 1996, the Company operated 15 full-service offices
located in Kenosha County, Lake Geneva and Racine, Wisconsin and Lake
County and Cook County, Illinois. The Company also operates mortgage loan
origination offices in Kenosha, Racine and Wauwatosa, Wisconsin and
Grayslake and Naperville, Illinois. Deposits with the Bank are insured up
to the maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is subject to regulation by the Office of
Thrift Supervision (the "OTS") and the FDIC.
The Bank has four active subsidiaries: (1) Advantage Real Estate Services,
Inc., which invests in real estate through three partnerships, (2)
Advantage Investments, Inc., a Nevada corporation, which manages certain
investments in mortgage-related securities, (3) Advantage Financial
Services and Insurance, Inc., which is engaged in the business of selling
non-insured investments and insurance and providing financial planning,
and (4) Advantage Financial Center, Inc., which provides mortgage
brokerage services.
The Company's results of operations are dependent primarily on net
interest income, which is the difference between the interest income
earned on its loans, mortgage-related securities and other investment
portfolios, and its cost of funds, consisting of interest paid on its
deposits and borrowings. The Company's operating results are also
affected to a lesser extent by gains or losses on the sale of investment
securities, loans and real estate.
The Company's operating expenses principally consist of employee
compensation, occupancy expenses, federal insurance premiums and other
general and administrative expenses. The Company's results of operations
are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
policies and actions of regulatory authorities.
The Company's basic mission is to serve its local communities while
earning a profit for its shareholders. In seeking to accomplish this
mission, management has adopted a business strategy designed to (1)
maintain the Bank's capital well in excess of regulatory requirements, (2)
manage the Company's vulnerability to changes in interest rates, (3)
maintain the Company's high asset quality, (4) control operating expenses,
and (5) take advantage of loan and deposit growth opportunities in the
Company's primary market area as well as contiguous areas.
Management has attempted to achieve these goals by focusing on (1)
origination of adjustable rate one- to four-family mortgage loans ("ARM
loans"), (2) origination of commercial real estate, multi-family,
consumer, construction and commercial business loans, (3) increasing the
Company's core deposit base, and (4) acquisition of deposits and loans
from other financial institutions.
Results of Operations -- Comparison of Years Ended September 30, 1996 and
1995
General
Net income for the year ended September 30,1996 was $3.0 million, a
decrease of $5.2 million over 1995 net income of $8.2 million. This
decrease in net income resulted primarily from a $4.7 million write-down
of intangible assets and a $4.4 million one-time assessment to
recapitalize the Savings Association Insurance Fund ("SAIF") of the FDIC.
For a further discussion of these one-time charges, see "Non-interest
Expense" below.
Without the two one-time charges mentioned above, net income for 1996
would have been $8.8 million, a 7.4% increase over 1995 net income of $8.2
million.
Net Interest Income
Total interest income was $73.6 million for the year ended September 30,
1996, an increase of $6.1 million, or 9.0%, compared to the year ended
September 30, 1995. This increase was primarily due to a $69.7 million
increase in average interest-earning assets in 1996. Average interest-
earning assets increased to $933.6 million in 1996 from $863.9 million in
1995.
The Company's average interest rate margin decreased from 3.26% in 1995 to
3.19% in 1996. The decrease in interest rate spread is due primarily to
competitive market pressures. Management currently believes that the
interest rate margin could continue to decline modestly during the 1997
fiscal year. The Company's long-term strategy is to maintain or increase
its margin by increasing its commercial and consumer loans, which have
higher margins (and greater credit risk) than mortgage loans.
The components of net interest income fluctuated significantly during 1996
due to various rate and volume changes (see "Rate Volume Analysis" table).
The average yield on interest-earning assets increased from 7.82% in 1995
to 7.88% in 1996.
Total interest expense increased by $4.4 million in 1996 compared to 1995.
The average cost of interest-bearing liabilities increased from 4.89% in
1995 to 5.01% in 1996.
Provision for Losses on Loans
The Company established provisions for losses on loans of $480,000 in
1996, generally comparable to the 1995 provision of $460,000. Non-
performing loans increased from $2.4 million as of September 30, 1995 to
$3.4 million as of September 30, 1996. This resulted in a decrease in the
ratio of the allowance for loan losses to non-performing loans from 219%
as of September 30, 1995 to 169% as of September 30, 1996.
Non-interest Income
Non-interest income for 1996 totalled $8.0 million compared to $4.1
million in 1995. Mortgage brokerage commissions increased $1.8 million
from $235,000 in 1995 to $2.0 million in 1996. These commissions were
earned by Advantage Financial Center, Inc. ("AFC"), a wholly-owned
subsidiary of the Bank. AFC began business on August 21, 1995 after the
Bank completed the cash purchase of substantially all of the assets of
Financial Center of Illinois, Inc.. AFC has offices in Milwaukee,
Wisconsin and Naperville, Illinois. Service charges on deposit accounts
increased from $1.9 million in 1995 to $2.5 million in 1996 due primarily
to an increase in checking accounts.
Gains on sales of loans increased from $108,000 in 1995 to $876,000 in
1996. This increase resulted primarily from an increase in the volume of
fixed-rate loan sales from $15.9 million in 1995 to $55.1 million in 1996
relating to an increase in fixed-rate loan originations due to lower
market interest rates during 1996.
Gains on securities available for sale increased from $145,000 in 1995 to
$866,000 during 1996. These gains relate to marketable equity securities
held by the Company which increased in value during the last few years.
Non-interest Expense
Non-interest expense increased 72.3% from $19.1 million in 1995 to $32.9
million in 1996. This increase is primarily due to (1) the $4.4 million
one-time special assessment to recapitalize the SAIF, (2) the $4.7
million writedown of intangible assets, and (3) a $1.8 million increase in
salaries and employee benefits relating primarily to the addition of the
employees of AFC.
The legislation affecting the SAIF recapitalization was enacted on
September 30, 1996 and will decrease the Bank's FDIC insurance premium
from 0.230% to 0.064% of deposits effective January 1, 1997. Management
estimates that this premium reduction will save the Bank approximately
$1.1 million per year on a pre-tax basis, assuming that deposits remain
relatively stable and interest rates on deposits do not increase due to
the premium reduction.
The $4.7 million write-down of intangible assets related primarily to the
core deposit intangible asset arising from the acquisition of Amity
Bancshares, Inc. ("Amity") on December 16, 1994. The writedown brings the
book value of the intangible asset to fair value based on a calculation of
the present value of estimated future cashflows associated with the
deposits. This writedown was necessitated by a faster-than-projected
rolloff of acquired deposits and lower-than-projected market interest
rates which has lowered the cost of alternative sources of funds used to
value the intangible asset.
Occupany expenses increased from $2.4 million in 1995 to $3.0 million in
1996 relating to occupany expenses of AFC and the lease of new corporate
office space for administrative departments beginning in March 1996.
Other non-interest expenses increased from $3.6 million in 1995 to $4.8
million in 1996 primarily due to operating expenses of AFC and other
growth in the Bank's business.
Income Taxes
Federal and state income taxes decreased from $4.5 million in 1995 to $1.5
million in 1996 due in part to the decrease in net income associated with
the one-time charges described above. The Company's effective tax rate
decreased from 35.7% in 1995 to 32.6% in 1996 primarily relating to a
decrease in state income taxes.
Results of Operations -- Comparison of Years Ended September 30, 1995 and
1994
General
Net income for the year ended September 30, 1995 was $8.2 million, an
increase of $900,000 over 1994 net income of $7.3 million. This increase
in net income resulted primarily from a $5.2 million increase in net
interest income and a $848,000 increase in non-interest income. The
increase in net interest income was partially offset by an $5.3 million
increase in non-interest expense.
Net Interest Income
Total interest income was $67.5 million for the year ended September 30,
1995, an increase of $19.6 million, or 40.9%, compared to the year ended
September 30, 1994. This increase was primarily due to a $198.4 million
increase in average interest-earning assets in 1995. Average interest-
earning assets increased to $863.9 million in 1995 from $661.2 million in
1994.
The $198.4 million increase in average interest-earning assets primarily
related to the acquisition of Amity, which had assets of $141.2 million as
of December 16, 1994, the date of acquisition.
The Company's average interest rate margin decreased from 3.46% in 1994 to
3.26% in 1995. The decrease in interest rate spread was due primarily to
competitive market pressures.
The components of net interest income fluctuated significantly during 1995
due to various rate and volume changes (see "Rate Volume Analysis" table).
The average yield on interest-earning assets increased from 7.24% in 1994
to 7.81% in 1995.
Total interest expense increased by $14.4 million in 1995 compared to
1994. This increase resulted in part from an increase in interest-bearing
liabilities resulting from the Amity acquisition. The average cost of
interest-bearing liabilities increased from 4.17% from 1994 to 4.89% in
1995.
Provision for Losses on Loans
The Company established provisions for losses on loans of $460,000 in
1995, a decrease of $260,000 compared to the 1994 provision of $720,000.
The provision decreased because non-performing loans decreased from $5.0
million as of September 30, 1994 to $2.4 million as of September 30, 1995.
This resulted in an increase in the ratio of the allowance for loan losses
to nonperforming loans from 107% as of September 30, 1994 to 219% as of
September 30, 1995.
Non-interest Income
Non-interest income for 1995 totalled $4.1 million compared to $3.3
million in 1994. Service charges on deposit accounts increased from $1.3
million in 1994 to $1.9 million in 1995 due primarily to an increase in
checking accounts, including the increase relating to the Amity
acquisition. Mortgage brokerage commissions were $235,000 in 1995; there
were no brokerage commissions in 1994. These commissions were earned by
AFC which began business on August 21, 1995 after the Bank completed the
cash purchase of substantially all of the assets of Financial Center of
Illinois, Inc.
Gains on sales of loans decreased from $584,000 in 1994 to $108,000 in
1995. This decrease resulted from a decrease in the volume of fixed-rate
loan sales from $47.5 million in 1994 to $15.9 million in 1995 relating to
a decrease in fixed-rate loan originations due to market conditions.
Non-interest Expense
Non-interest expense increased 38.4% from $13.8 million in 1994 to $19.1
million in 1995. The largest single increase in non-interest expense was
a $1.6 million increase in amortization of intangible assets relating
almost entirely to the Amity acquisition. Salaries and employee benefits
increased $1.5 million, or 22%. This increase related primarily to the
addition of new personnel relating to the acquisitions of Amity and AFC
and the opening of new supermarket branches in Kenosha and Racine,
Wisconsin during the quarter ended December 31, 1994.
Other non-interest expenses increased 55.4% from $2.3 million in 1994 to
$3.6 million in 1995 primarily due to the aforementioned acquisitions and
new branches.
Income Taxes
Federal and state income taxes increased from $4.3 million in 1994 to $4.5
million in 1995. The Company's effective tax rate decreased from 36.9% in
1994 to 35.7% in 1995 primarily relating to a decrease in state income
taxes.
CONSOLIDATED AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the
consolidated statements of financial condition and reflects the average
yield on assets and average costs of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or
expense by the average balance of assets and liabilities, respectively,
for the periods shown. Non-accruing loans are included in average
outstanding balance at a 0% rate. Interest earned includes fees which are
considered adjustments to yields. Average balances are derived from
average daily balances.
<TABLE>
<CAPTION>
September 30
1994 1995 1996
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Loans receivable (1) $408,875 $31,925 7.81% $489,201 $40,649 8.31% $533,037 $45,038 8.46%
Mortgage-backed
securities . . . . . 165,743 10,589 6.39 189,239 13,430 7.10 170,838 12,092 7.08
Mortgage-related
securities . . . . . 54,827 3,547 6.47 137,206 9,978 7.27 172,487 12,566 7.29
------- ------- ------- ------- ------- -------
Total mortgage
securities . . . . 220,570 14,136 6.41 326,445 23,408 7.17 343,325 24,658 7.18
U.S government and
agency securities . 10,353 704 6.80 19,317 1,466 7.59 26,958 2,070 7.68
Investment and other
securities . . . . . 12,827 582 4.54 19,339 1,368 7.07 21,103 1,206 5.71
FHLB stock . . . . . 8,541 515 6.03 9,602 625 6.51 9,183 618 6.73
------- ------- ------- ------- ------- -------
661,166 47,862 7.24 863,904 67,516 7.82 933,606 73,590 7.88
------- ------- ------- ------- ------- -------
Interest-Bearing
Liabilities:
Time deposits . . . . 247,573 11,766 4.75 402,735 22,379 5.56 418,496 24,065 5.75
Savings deposits and
NOW accounts (2) . . 192,439 4,524 2.35 238,871 7,220 3.02 263,072 7,757 2.95
------- ------- ------- ------- ------- -------
Total deposits . . . 440,012 16,290 3.70 641,606 29,599 4.61 681,568 31,822 4.67
Advance payments by
borrowers for taxes
and insurance . . . 6,648 250 3.76 7,873 183 2.32 7,191 155 2.16
Borrowings . . . . . 151,910 8,413 5.54 155,216 9,486 6.11 185,503 11,408 6.15
Interest rate swaps
and caps . . . . . . N/A - N/A N/A 108 N/A N/A 380 N/A
------- ------- ------- ------- ------- -------
598,570 24,953 4.17 804,695 39,376 4.89 874,262 43,765 5.01
------- ------- ------- ------- ------- -------
Net interest income $22,909 $28,140 $29,825
====== ====== ======
Net interest rate
spread . . . . . . . 3.07% 2.92% 2.88%
==== ==== ====
Net earning assets . . $62,596 $59,209 $59,344
====== ====== ======
Net yield on average
interest-earning
assets . . . . . . . 3.46% 3.26% 3.19%
==== ==== ====
Average
interest-earning
assets to average
interest-bearing
liabilities . . . . . 1.10 1.07 1.07
==== ==== ====
<FN>
________________
(1) Calculated net of deferred loan fees, loan discounts, loans in
process and allowance for losses on loans.
(2) Includes NOW and checking accounts with a zero interest rate.
</TABLE>
RATE VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the
changes related to changes in outstanding balances and those due to
changes in interest rates. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume (i.e., changes in volume multiplied
by the prior year's rate) and (2) changes in rate (i.e., changes in rate
multiplied by the prior year's balance). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately to the change due to volume and the
change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30
1994 vs. 1995 1995 vs. 1996
Increase Increase
(Decrease) (Decrease)
Due to Total Increase Due to Total Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable . . . . . . . $6,575 $2,149 $8,724 $3,694 $695 $4,389
Mortgage-backed securities . . 1,594 1,247 2,841 (1,302) (36) (1,338)
Mortgage-related securities . 5,941 490 6,431 2,570 18 2,588
------ ------ ------ ------ ------ ------
Total mortgage securities . 7,535 1,737 9,272 1,268 (18) 1,250
U.S. government and agency
securities . . . . . . . . 668 82 750 586 30 616
Investments and other
securities . . . . . . . . . 374 412 786 147 (309) (162)
(6)
FHLB stock . . . . . . . . . . 67 42 109 (32) 26
------ ----- ----- ----- ----- -----
$15,219 $4,422 $19,641 $5,663 $424 $6,087
====== ===== ====== ===== ==== =====
Interest-Bearing Liabilities:
Time deposits . . . . . . . . $8,355 $2,251 $10,606 $892 $801 $1,693
Savings deposits and NOW
accounts . . . . . . . . . . 1,234 1,456 2,690 709 (166) 543
----- ------ ------ ------ ----- -----
Total deposits . . . . . . . 9,589 3,707 13,296 1,601 635 2,236
Advance payments by borrowers
for taxes and insurance . . 63 (130) (67) (15) (13) (28)
Borrowings . . . . . . . . . . 186 887 1,073 1,863 59 1,922
Interest rate swaps . . . . . 108 - 108 272 - 272
------ ----- ------ ----- ---- -----
$9,946 $4,464 $14,410 $3,721 $681 $4,402
====== ===== ====== ====== ==== =====
Change in net interest income . . . . . . . . . . . . . . . . . . $5,231 $1,685
====== =====
</TABLE>
NET INTEREST SPREAD AT END OF PERIOD
The following table sets forth the weighted average yields on the
Company's interest-earning assets, the weighted average interest rates on
interest-bearing liabilities and the interest rate spread between the
weighted average yields and rates at the dates indicated.
Non-accruing loans have been included in the table as loans carrying a
zero yield. The yield rates do not reflect fees which are considered
adjustments to yield on loans receivable.
At September 30
1994 1995 1996
Weighted average yield on:
Loans receivable . . . . . . . . . . . . 7.70% 8.13% 8.22%
Mortgage-backed securities . . . . . . . 6.85 7.06 7.12
Mortgage-related securities . . . . . . . 6.93 7.48 7.41
---- ---- ----
Total mortgage securities . . . . . . . 6.88 7.26 7.28
U.S. government and agency securities . . 5.74 6.70 6.20
Investments and other securities . . . . 4.58 5.62 5.29
FHLB stock . . . . . . . . . . . . . . . 6.00 6.25 6.75
---- ---- ----
Combined weighted average yield on
interest-earning assets . . . . . . . 7.27 7.70 7.75
Weighted average rate on:
Time deposits . . . . . . . . . . . . . . 4.93 5.72 5.67
Savings deposits and NOW accounts . . . . 2.73 2.95 2.89
---- ---- ----
Total deposits . . . . . . . . . . . . . 4.06 4.67 4.56
Advance payments by borrowers for taxes
and insurance . . . . . . . . . . . . . 2.94 2.32 2.16
Borrowings . . . . . . . . . . . . . . . 5.69 6.30 6.39
---- ---- ----
Combined weighted average rate on
interest-bearing liabilities . . . . . 4.39 4.98 4.97
---- ---- ----
Net interest rate spread . . . . . . . . . 2.88% 2.72% 2.78%
==== ==== ====
FINANCIAL CONDITION
General
Total consolidated assets of the Company increased to $1.0 billion as of
September 30, 1996 from $973.2 million as of September 30, 1995 due to
internal growth.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans receivable and mortgage-related securities,
securities sold under agreement to repurchase (reverse repurchase
agreements) and FHLB borrowings. While maturities and scheduled
amortization of loans and mortgage-related securities are a predictable
source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and
competition. The Company utilizes particular sources of funds based upon
comparative costs and availability.
The Company's major sources of funds from financing activities during the
year ended September 30, 1996 consisted of net proceeds of $36.2 million
from securities sold under agreements to repurchase and a $12.9 million
net increase in notes payable to the FHLB. For the year ended September
30, 1995, the largest source of funds from financing activities was a
$67.7 million net increase in deposits, which included a net increase of
$25.2 million in brokered deposits. There was a net decrease of $19.4
million in brokered deposits during 1996 as the Company chose not to renew
maturing certificates of deposit since repurchase agreements had a lower
cost of funds.
The primary investing activities of the Company are the origination and
purchase of loans and the purchase of mortgage securities. During the
years ended September 30, 1995 and 1996, the Company originated and
purchased loans in the amounts of $229.2 million and $309.5 million,
respectively. These amounts include loans originated for sale. Purchases
of mortgage securities totalled $118.1 million and $46.9 million in fiscal
years 1995 and 1996, respectively. Purchases of mortgage securities
decreased in 1996 as the Company reinvested repayments on mortgage
securities in loans receivable.
During fiscal years 1995 and 1996, the Company's investing activities were
funded by (1) principal repayments on loans and mortgage securities
totalling $201.5 million and $264.2 million, respectively, (2) proceeds
from the sale of loans totalling $15.9 million and $55.1 million,
respectively, (3) proceeds from sales and maturities of U.S. government
and agency securities available for sale of $36.3 million and $4.5
million, respectively, (4) proceeds from sales of mortgage-backed
securities available for sale of $9.5 million and $0, respectively, (5)
proceeds from sales of marketable equity securities of $436,000 and $2.1
million, respectively, and (6) proceeds from the financing activities
discussed above.
The Bank is required to maintain minimum levels of liquid assets as
defined by regulations of the Office of Thrift Supervision ("OTS"). This
requirement, which may be varied at the direction of the OTS depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required percentage is currently
5.0%. The Bank's regulatory liquidity ratios were 7.0% and 9.5% at
September 30, 1995 and 1996, respectively.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels
of these assets are dependent on the Company's operating, financing and
investing activities during any given period. At September 30, 1995 and
1996, cash and cash equivalents totalled $32.5 million and $35.4 million,
respectively.
Excess funds are generally invested in short-term investments such as
interest-earning deposits or in mortgage securities. In the event that the
Company should require funds beyond its ability to generate them
internally, additional sources of funds are available through the use of
FHLB borrowings and reverse repurchase agreements.
At September 30, 1996, the Company had outstanding loan origination
commitments of $8.5 million and no commitments to purchase loans. The
Company also had extended to customers unused lines of credit under home
equity line of credit loans and commercial line of credit loans totalling
$27.6 million and $28.1 million, respectively. The Company anticipates
that it will have sufficient funds available to meet its current loan
commitments. Certificates of deposit held by depository customers of the
Company which are scheduled to mature in one year or less at September 30,
1996 totalled $287.1 million. Based on the Company's deposit withdrawal
experience, management believes that a significant portion of such
deposits will remain with the Company.
During fiscal years 1995 and 1996, the Company repurchased under its
stock repurchase programs a total of 162,591 shares and 173,255 shares,
respectively. The aggregate purchase price was $3.8 million and $5.7
million, respectively. As of September 30, 1996, there were 52,300 shares
remaining to be purchased relating to a stock repurchase program which
commenced June 11, 1996 and is to be completed by December 10, 1996.
During fiscal years 1995 and 1996, the Bank made dividend payments to the
Company of $21.3 million and $8.3 million, respectively. The 1995 total
includes a special dividend of $14.0 million which was used to finance the
Amity acquisition. During fiscal years 1995 and 1996, the Company paid
dividends to its shareholders of $665,000 and $1.0 million, respectively.
At September 30, 1996, the Bank's capital exceeded all of the capital
requirements of the OTS as mandated by federal law and regulations.
Mortgage Securities
Mortgage securities, which consist of mortgage-backed and mortgage-related
securities, decreased to $337.8 million as of September 30, 1996 from
$351.6 million as of September 30, 1995. Purchases of mortgage
securities totalled $118.1 million and $46.9 million in fiscal years 1995
and 1996, respectively. All purchases of mortgage securities were either
(1) one- to four-family residential mortgage securities issued by the
Federal National Mortgage Association (FNMA) or the Federal Home Loan
Mortgage Corporation (FHLMC), or (2) one- to four-family residential
mortgage securities with at least a AA rating from a national rating
agency. All purchases of mortgage-related securities were securities
backed by mortgage-backed securities of the type described in the previous
sentence.
On October 18, 1995, the Financial Accounting Standards Board (FASB)
declared a one-time "holiday" from November 1 to December 31, 1995 during
which companies could sell or transfer securities from their held-to-
maturity portfolios without calling into question their intent to hold
other debt securities to maturity in the future or their past financial
reporting. As of December 31, 1995, the Company reclassified
approximately $37.3 million in securities from held-to-maturity to
available-for-sale under this provision.
Loans Receivable
Loans receivable increased to $562.8 million as of September 30, 1996 from
$512.3 million as of September 30, 1995 as loan originations exceeded loan
repayments. One- to four-family residential first mortgage loans
represented 72.9% and 70.0% of total gross loans receivable as of
September 30, 1995 and 1996, respectively. This decrease was largely
offset by an increase in consumer loans (primarily second mortgage loans)
from 5.2% to 8.6% of total gross loans receivable as of September 30, 1995
and 1996, respectively. Additional information regarding loans receivable,
non-performing loans and non-performing assets is provided on the following
pages.
Deposits
Deposit accounts decreased to $680.9 million as of September 30, 1996 from
$681.9 million as of September 30, 1995. This decrease is the net effect
of (1) internal growth in deposits, including interest credited, totalling
$18.4 million, and (2) a $19.4 million decrease in brokered deposits from
$108.7 million as of September 30, 1995 to $89.3 million as of September
30, 1996.
Borrowings
Notes payable to FHLB increased to $175.9 million as of September 30, 1996
from $163.0 million as of September 30, 1995. This increase was due to
additional borrowings which were used to partially fund an increased
investment in mortgage securities and loans receivable.
Borrowings under securities sold under agreements to repurchase increased
to $48.4 million as of September 30, 1996 from $12.1 million as of
September 30, 1995. These increased borrowings were used to repay
maturing brokered certificates of deposit.
LOAN PORTFOLIO COMPOSITION
Total loans, including loans held for sale, increased to $562.8 million as
of September 30, 1996 from $512.6 million as of September 30, 1995.
The components of this increase are summarized, by type of collateral, as
follows:
September 30 Increase
1995 1996 (Decrease)
(in thousands)
Real estate loans:
One- to four-family . . . . . . $399,467 $418,647 $19,180
One- to four-family construction. 11,057 7,598 (3,459)
Multi-family . . . . . . . . . . 27,810 24,993 (2,817)
Commercial . . . . . . . . . . . 49,393 54,671 5,278
Other construction and land . . 20,629 30,161 9,532
------- ------- -------
Total real estate loans . . . 508,356 536,070 27,714
Other loans:
Home equity and second mortgage 22,741 43,893 21,152
Other consumer . . . . . . . . 5,956 7,325 1,369
Commercial business . . . . . 10,853 10,691 (162)
------- ------- -------
Total other loans . . . . . . 39,550 61,909 22,359
------- ------- -------
Gross loans receivable . . . . . . 547,906 597,979 50,073
Add: Accrued interest . . . . . 3,390 3,718 328
Less: Net items to loans
receivable . . . . . . . . (39,014) (38,915) 99
------- ------- ------
Total loans receivable . . . . . $512,282 $562,782 $50,500
======= ======= ======
Total loans receivable increased by $50.5 million, or 9.86%, during fiscal
1996.
One- to four-family residential mortgage loans increased by $19.2 million,
or 4.8%, during fiscal 1996 as the Company continued its emphasis on
single family loans. These loans include permanent loans to individuals
for construction of single-family residences (which they will occupy upon
completion of construction) totalling $46.7 million and $50.7 million as
of September 30, 1995 and 1996, respectively.
One- to four-family construction loans decreased by $3.5 million. These
loans are made to builders and developers for construction of single
family detached residences and condominiums in the Company's market area.
Commercial real estate loans increased by $5.3 million during fiscal
1996. These loans are made primarily to small businesses and
professionals in the Company's market area.
Other construction and land loans increased by $9.5 million during fiscal
1996 as the Company increased its loans secured by commercial construction
projects (primarily multi-family and condominium projects) in its market
area.
Home equity, second mortgage and other consumer loans increased by $22.4
million as the Company increased its emphasis on consumer lending during
fiscal 1996. This growth in consumer loans is expected to continue in the
future.
Commercial business loans decreased by $162,000 during fiscal 1996. These
loans are loans to businesses which are secured by property other than
real estate or are unsecured.
NON-PERFORMING ASSETS
Non-performing assets (consisting of non-performing loans and foreclosed
properties) were $4.8 million as of September 30, 1996 compared to $4.5
million as of September 30, 1995. The Company places loans into non-
performing and non-accrual status when loans are contractually delinquent
more than 90 days, or earlier if warranted based on management's
assessment of the loan. Non-performing assets are summarized as follows
for the dates indicated:
September 30
1992 1993 1994 1995 1996
(Dollars in Thousands)
Non-performing loans:
One- to four-family . . $885 $191 $867 $604 $666
Commercial real estate . 3,727 5,565 3,666 1,685 616
Construction and land . - 40 280 - 1,774
Commercial business . . - 316 70 105 274
Consumer and other . . . 15 81 106 13 84
------ ----- ----- ----- -----
Total non-performing
loans . . . . . . . 4,627 6,193 4,989 2,407 3,414
------ ----- ----- ----- -----
Foreclosed properties and
properties subject to
foreclosure:
One- to four-family . . 419 1,203 224 1,547 894
Commercial real estate . 731 429 662 533 534
Land . . . . . . . . . . 33 - - - -
------ ----- ----- ----- -----
Total foreclosed
assets . . . . . . 1,183 1,632 886 2,080 1,428
----- ----- ----- ----- -----
Total non-performing assets $5,810 $7,825 $5,875 $4,487 $4,842
===== ===== ===== ===== =====
Total as a percentage of
total assets . . . . . . 0.98% 1.20% 0.79% 0.46% 0.48%
==== ==== ==== ==== ====
ALLOWANCE FOR LOSSES ON LOANS
The Company establishes specific allowances for losses on loans when any
significant and permanent decline in value occurs. In addition, general
loss allowances are provided based on past experience and on prevailing
market conditions. Management's evaluation of loss considers various
factors including, but not limited to, fair value of the property, general
economic conditions, loan portfolio composition, prior loss experience,
estimated sales price, refurbishing costs, and holding and selling
costs.The evaluation of the allowance for losses on loans includes a
review of both known loan problems as well as a review of potential
problems based upon historical trends and ratios.
Management believes that the allowance for losses on loans is adequate as
of September 30, 1996 based upon its current evaluation of the factors
discussed above. Net charge-offs decreased from $1.0 million in 1995 to a
net recovery of $22,000 in 1996.
A summary of activity in the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
Year Ended September 30
1992 1993 1994 1995 1996
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year . $2,904 $4,204 $4,937 $5,327 $5,271
Additions charged to operations:
One- to four-family . . . . 100 50 50 30 -
Multi-family and commercial
real estate . . . . . . . 506 526 526 60 -
Consumer . . . . . . . . . . 34 24 24 50 -
Commercial business . . . . 180 120 120 320 480
------- ------ ------ ------ ------
820 720 720 460 480
Additions from loan purchases
and mergers:
One- to four-family . . . . 43 - - 469 -
Multi-family and commercial
real estate . . . . . . . 535 - - 49 -
------ ------ ------ ------ ------
578 - - 518 -
Recoveries:
One- to four-family . . . . 45 25 31 14 40
Multi-family and commercial
real estate . . . . . . . . - - 61 - -
Consumer . . . . . . . . . . 15 6 6 12 22
Commercial business . . . . 5 13 - 12 1
------ ------ ------ ------ ------
65 44 98 38 63
Charge-offs:
One- to four-family . . . . (28) (6) - (40) (29)
Multi-family and commercial
real estate . . . . . . . (123) - (408) (841) -
Consumer . . . . . . . . . . (12) (25) (20) (32) (8)
Commercial business . . . . - - - (159) (4)
------ ------ ------ ------- ------
(163) (31) (428) (1,072) (41)
------ ------ ------ ------- ------
Net recoveries (charge-offs) . (98) 13 (330) (1,034) 22
------ ------ ------ ------- ------
Balance at end of year . . . . $4,204 $4,937 $5,327 $5,271 $5,773
===== ===== ===== ===== =====
Ratio of net charge-offs to
average loans outstanding
during the year . . . . . . 0.03% 0.00% 0.08% 0.20% 0.00%
==== ==== ==== ==== ====
Allowance for losses on loans to
non-performing loans . . . . 90.9% 79.7% 106.8% 219.0% 169.1%
==== ==== ===== ===== =====
Allowance for losses on loans to
total loans at end of year . 1.20% 1.28% 1.25% 1.03% 1.03%
==== ==== ==== ==== ====
</TABLE>
ASSET / LIABILITY MANAGEMENT
The Company's asset/liability management program seeks to maximize net
income while managing the sensitivity of earnings to interest rate
fluctuations. By using a computer simulation model, the Company assesses
the effect of changing interest rates on the Company's projected future
profitability.
The Company uses a variety of tools to adjust its asset/liability
position. First, the Company has focused its residential lending on ARMs,
which generally reprice within one to three years. Second, the Company
has focused its non-residential lending on adjustable or floating rate
and/or short-term loans. Third, the Company has focused its investment
activities on short- and medium-term securities. Fourth, the Company has
attempted to maintain and increase its passbook and transaction deposit
accounts, which are considered to be relatively resistant to changes in
interest rates. Fifth, the Company has utilized long-term borrowings and
deposit marketing programs to adjust the term to repricing of its
liabilities. Sixth, the Company has, from time to time, used interest
rate swaps and caps to reduce its exposure to changes in interest rates.
The Company's asset/liability position may be analyzed by examining the
extent to which its assets and liabilities are "interest rate sensitive"
and by monitoring the interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the estimated
amount of interest-earning assets maturing or repricing within a specific
time period and the estimated amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the
amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds
the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap tends to adversely affect net interest
income while a positive gap tends to result in an increase in net interest
income. During a period of falling interest rates, a negative gap tends
to result in an increase in net interest income while a positive gap tends
to adversely affect net interest income. Management seeks to maintain a
relatively balanced gap position in order to limit the Company's exposure
to interest-rate risk.
At September 30, 1996, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-bearing assets maturing
or repricing in the same period by $46.7 million, representing a negative
one-year gap of 4.6% of total assets. This gap compares to a positive
one-year gap of $9.5 million, or 1.0% of total assets, as of September 30,
1995. Management considers its gap position as of September 30, 1996 to
be acceptable.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996 which the
Company estimates will reprice or mature in the future time periods
shown, based upon certain assumptions. Except as stated below, the amount
of assets and liabilities shown as repricing or maturing during a
particular period was determined based on the remaining term to repricing
or maturity of the asset or liability. Fixed rate loans and
mortgage-related securities are shown on the basis of management's
estimate of annual payments and prepayments based on contractual
amortization and forecasted prepayment rates. Loans and securities with
adjustable rates are shown as repricing in the period during which the
interest rates are next subject to change. The Company has assumed that
its passbook savings, money market and NOW accounts are withdrawn at the
following rates:
Within Over Over
One 1-3 3-5
Year Years Years
Passbook accounts 17% 26% 17%
Money market 79% 11% 5%
NOW accounts:
Interest bearing 37% 34% 9%
Non-interest bearing 41% 27% 14%
For purposes of the gap analysis, loans receivable is reflected after
deducting the undisbursed portion of loan proceeds and non-performing
loans. However, no deductions are made for the allowance for losses on
loans or unamortized loan origination fees.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. The Company's estimates for prepayments and
withdrawals are subject to changing economic circumstances (especially
changes in interest rates) and consumer behavior, both of which are beyond
the Company's control. As a result, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period may,
in fact, mature or reprice at different times or at different volumes. In
addition, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the changes in interest rates on
certain types of assets and liabilities may lag behind changes in market
rates. Additionally, certian assets, such as ARM loans, have features
which limit changes in interest rates on a short-term basis and over the
life.
CONSOLIDATED GAP ANALYSIS AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Amount Maturing or Repricing
Within Over 1-3 Over 3-5 Over 5 Total
One Year Years Years Years Amount
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate loans receivable and
mortgage securities:
Loans receivable . . . . . . $46,833 $76,898 $37,140 $36,130 $197,001
Mortgage securities . . . . 50,460 78,867 54,862 84,549 268,738
------ ------- ------- ------- -------
97,293 155,765 92,002 120,679 465,739
Adjustable-rate loans
receivables and mortgage
securities:
Loans receivable . . . . . . 260,496 99,262 10,903 218 370,879
Advances to unconsolidated
partnerships . . . . . . . 3,838 2,129 - - 5,967
Mortgage securities . . . . 68,598 458 - - 69,056
------- ------- ------- ------- ------
332,932 101,849 10,903 218 445,902
Investment securities and other 35,093 14,497 6,917 - 56,507
------- ------- ------- ------- -------
Total interest-earning
assets . . . . . . . . $465,318 $272,111 $109,822 $120,897 $968,148
======= ======= ======= ======= =======
Interest-bearing liabilities:
Deposits . . . . . . . . . . . $412,120 $172,964 $43,173 $52,594 $680,851
Borrowings . . . . . . . . . . 91,478 123,352 7,835 1,600 224,265
Advance payments by borrowers
for taxes and
insurance 8,420 - - - 8,420
------- ------- ------- ------- -------
Total interest-bearing
liabilities . . . . . . $512,018 $296,316 $51,008 $54,194 $913,536
======= ======= ======= ======= =======
Interest-earning assets less
interest-bearing liabilities ($46,700) ($24,205) $58,814 $66,703 $54,612
======= ======= ======= ======= =======
Cumulative interest rate
sensitivity gap . . . . . . ($46,700) ($70,905) ($12,091) $54,612 $54,612
======= ======= ======= ======= =======
Cumulative interest rate
sensitivity gap as a
percentage of total assets . (4.6%) (7.0%) (1.1%) 5.4%
======= ======= ======= =======
</TABLE>
<PAGE>
[Page 23 of the 1996 Annual Report]
QUARTERLY DATA
The following table sets forth the Company's unaudited quarterly income
and expense data for fiscal years 1995 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
Dec. 31 March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30
1994 1995 1995 1995 1995 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C>
Interest income . . . . . $14,264 $17,166 $17,824 $18,248 $18,398 $18,150 $18,380 $18,704
Interest expense . . . . 7,964 9,673 10,825 10,901 10,997 10,789 10,797 11,224
------ ------ ------ ------ ------ ------ ------ ------
Net interest income . . . 6,300 7,493 6,999 7,347 7,401 7,361 7,583 7,480
Provision for losses on
loans . . . . . . . . 180 120 40 120 120 120 100 140
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for losses on
loans . . . . . . . . 6,120 7,373 6,959 7,227 7,281 7,241 7,483 7,340
Gain on sale of assets . 20 8 167 58 744 359 224 415
Other non-interest income 820 886 955 1,208 1,390 1,647 1,658 1,578
------ ------ ------ ------ ------ ------ ------ ------
Total non-interest income 840 894 1,122 1,266 2,134 2,006 1,882 1,993
Assessment to
recapitalize
SAIF fund . . . . . . - - - - - - - 4,435
Writedown of intangible
assets . . . . . . . . - - - - - - - 4,720
Other non-interest
expense . . . . . . . 3,766 5,178 4,870 5,319 5,830 5,716 5,910 6,253
------ ------ ------ ------ ------ ------ ------ ------
Total non-interest
expenses . . . . . . 3,766 5,178 4,870 5,319 5,830 5,716 5,910 15,408
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes . . . . . 3,194 3,089 3,211 3,174 3,585 3,531 3,455 (6,075)
Income taxes (benefit) . 1,155 1,118 1,147 1,097 1,305 1,292 1,266 (2,400)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) . . . . $2,039 $1,971 $2,064 $2,077 $2,280 $2,239 $2,189 ($3,675)
===== ===== ===== ===== ===== ===== ===== ======
Earnings (loss) per share $0.54 $0.54 $0.56 $0.56 $0.62 $0.60 $0.60 ($1.02)
==== ==== ==== ==== ==== ==== ==== ====
Earnings per share
excluding nonrecurring
items (1) . . . . . . $0.54 $0.54 $0.56 $0.56 $0.62 $0.60 $0.60 $0.56
==== ==== ==== ==== ==== ==== ==== ====
<FN>
(1) For quarter ended September 30, 1996, excludes assessment to
recapitalize SAIF fund and writedown of intangible assets
</TABLE>
<PAGE>
[Pages 25 to 50 of the 1996 Annual Report]
Report of Ernst & Young LLP,
INDEPENDENT AUDITORS
The Board of Directors
Advantage Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of Advantage Bancorp, Inc. and subsidiaries ("the Company") as
of September 30, 1995 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Advantage
Bancorp, Inc. and subsidiaries at September 30, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for mortgage servicing rights
during the year ended September 30, 1996.
Ernst & Young LLP
October 25, 1996
Milwaukee, Wisconsin
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
September 30
ASSETS 1995 1996
Cash and cash equivalents (includes
interest earning deposits of
$9,602,982 - 1995; $17,714,761-
1996) . . . . . . . . . . . . . . . $32,510,205 $35,445,646
Certificates of deposit (approximates
market value) . . . . . . . . . . 308,247 611,067
U.S. government and agency securities
available for sale (at market value) 25,016,363 29,385,356
Mortgage-backed securities available
for sale (at market value) . . . . 145,030,586 140,086,665
Mortgage-backed securities held to
maturity (market value $45,663,035 -
1995; $11,159,367-1996) . . . . . . 44,766,566 11,011,238
Mortgage-related securities available
for sale (at market value) . . . . 10,495,782 15,226,120
Mortgage-related securities held to
maturity (market value of
$153,593,126 - 1995; $172,913,430 -
1996) . . . . . . . . . . . . . . 151,306,148 171,470,022
Marketable equity securities available
for sale (at market value) . . . . 4,644,340 5,043,091
Loans held for sale . . . . . . . . 2,405,000 3,056,000
Loans receivable - net . . . . . . . 509,877,127 559,725,640
Foreclosed properties and properties
subject to foreclosure - net . . . 2,080,423 1,403,440
Investments in and advances to
unconsolidated partnerships . . . 4,871,676 7,397,416
Office properties and equipment . . 10,546,592 12,531,601
Federal Home Loan Bank stock - at
cost . . . . . . . . . . . . . . . 9,847,600 8,795,600
Accrued interest on investments and
mortgage-related securities . . . . 2,702,495 2,640,672
Deferred income taxes . . . . . . . . - 2,641,659
Intangible assets . . . . . . . . . . 14,208,028 6,902,259
Prepaid expenses and other assets . . 2,616,954 3,012,020
----------- -------------
$973,234,132 $1,016,385,512
=========== =============
LIABILITIES
Deposits . . . . . . . . . . . . . . $681,924,883 $680,850,865
Notes payable to Federal Home Loan 163,010,000 175,910,000
Securities sold under agreements to
repurchase . . . . . . . . . . . . 12,109,637 48,355,457
Advance payments by borrowers for
taxes and insurance . . . . . . . . 10,657,934 8,496,925
Accrued interest on deposit accounts 4,526,628 3,711,995
Accrued interest on notes payable and
other borrowings . . . . . . . . . 971,105 1,377,204
Deferred income tax . . . . . . . . . 2,368,334 -
Other liabilities . . . . . . . . . . 3,406,431 8,419,561
Accrued income taxes . . . . . . . . 1,180,687 397,102
----------- -----------
Total liabilities . . . . . . . 880,155,639 927,519,109
STOCKHOLDERS' EQUITY
Serial preferred stock, $.01 par
value; authorized 5,000,000 shares;
none outstanding . . . . . . . . . - -
Common stock, $.01 par value;
authorized 10,000,000 shares; issued
4,124,780 shares; outstanding:
3,464,355 - 1995; 3,326,768 - 1996 33,000 33,000
Additional paid-in capital . . . . . 37,249,638 37,751,499
Loan to Employee Stock Ownership Plan (1,985,803) (1,704,941)
Unearned restricted stock awarded . . (886,606) (894,777)
Treasury stock, at cost: 660,645 (12,351,400) (17,627,105)
Unrealized gain (loss) on securities
available for sale . . . . . . . . 774,844 (699,857)
Retained earnings . . . . . . . . . 70,244,820 72,008,584
----------- -------------
Total stockholders' equity . . . 93,078,493 88,866,403
Commitments and contingent liabilities
(see note 14) . . . . . . . . . . .
----------- -------------
$973,234,132 $1,016,385,512
=========== =============
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended September 30
1994 1995 1996
<S> <C> <C> <C>
Interest income:
Interest on loans . . . . . . . . . . . $31,924,688 $40,649,023 $45,037,786
Interest on mortgage-related securities 14,136,099 23,407,834 24,658,171
Interest and dividends on investment
securities . . . . . . . . . . . . . . 1,308,750 2,305,959 2,897,154
Other interest income . . . . . . . . . 492,831 1,152,621 996,962
---------- ---------- ----------
Total interest income . . . . . . . . . . 47,862,368 67,515,437 73,590,073
Interest expense:
Interest on deposits . . . . . . . . . 16,290,120 29,598,632 31,821,842
Interest on notes payable and other
borrowings . . . . . . . . . . . . . . 8,663,381 9,777,075 11,943,590
---------- ---------- ----------
Total interest expense . . . . . . . . 24,953,501 39,375,707 43,765,432
---------- ---------- ----------
Net interest income . . . . . . . . . . 22,908,867 28,139,730 29,824,641
Provision for losses on loans . . . . . . 720,000 460,000 480,000
---------- ---------- ----------
Net interest income after provision for
losses on loans . . . . . . . . . . . . 22,188,867 27,679,730 29,344,641
Non-interest income:
Loan fees and service charges . . . . . 493,665 508,614 659,828
Mortgage brokerage commissions . . . . - 234,803 2,009,193
Service charges on deposit accounts . . 1,313,465 1,924,993 2,466,310
Gain on sales of loans - net . . . . . 583,956 107,513 875,830
Net realized gain on securities
available for sale . . . . . . . . . . - 145,000 866,070
Equity in net income of unconsolidated
partnerships . . . . . . . . . . . . . 96,171 116,335 113,685
Other . . . . . . . . . . . . . . . . . 787,113 1,084,969 1,024,137
----------- ---------- ----------
Total non-interest income . . . . . . . 3,274,370 4,122,227 8,015,053
Non-interest expenses:
Salaries and employee benefits . . . . 6,724,013 8,200,652 10,014,275
Occupancy . . . . . . . . . . . . . . . 1,930,210 2,397,697 2,985,996
Data processing . . . . . . . . . . . . 577,481 590,938 655,837
Advertising . . . . . . . . . . . . . . 361,745 530,953 533,066
Federal deposit insurance premiums . . 988,029 1,323,680 1,595,462
Assessment to recapitalize Savings
Association Insurance Fund of FDIC . - - 4,434,589
Writedown of intangible assets . . . . - - 4,719,529
Amortization of intangible assets . . . 496,445 2,062,530 2,611,780
Professional services . . . . . . . . . 409,930 380,987 540,674
Other . . . . . . . . . . . . . . . . . 2,345,863 3,645,987 4,772,125
---------- ---------- ----------
Total non-interest expenses . . . . . . 13,833,716 19,133,424 32,863,333
---------- ---------- ----------
Income before income taxes . . . . . . . 11,629,521 12,668,533 4,496,361
Income taxes . . . . . . . . . . . . . . 4,289,450 4,517,548 1,463,824
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . $7,340,071 $8,150,985 $3,032,537
========== ========== ==========
Earnings per share (Note 1) . . . . . . . $1.96 $2.20 $0.83
===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
<S> <C> <C> <C> <C>
Balance at September 30, 1993 . . $33,000 $36,701,497 $56,008,839 ($8,110,963)
Net income . . . . . . . . . . . --- --- 7,340,071 ---
Awards of restricted stock . . . --- 260,320 --- ---
Purchase of treasury stock
(102,500 shares) . . . . . . . --- --- --- (2,164,228)
Exercise of stock options (13,005 --- 42,357 (127,613) 247,260
shares) . . . . . . . . . . . .
Repayment of loan to ESOP . . . . --- --- --- ---
Amortization of unearned
restricted stock awarded . . . --- --- --- ---
Unrealized loss on securities
available for sale . . . . . . --- --- --- ---
------- ---------- ---------- -----------
Balance at September 30, 1994 . . 33,000 37,004,174 63,221,297 (10,027,931)
Net income . . . . . . . . . . . --- --- 8,150,985 ---
Awards of restricted stock . . . --- 105,511 --- ---
Purchase of treasury stock --- --- -- (3,781,661)
(162,591 shares) . . . . . . .
Exercise of stock options --- 139,441 (463,940) 1,458,135
(115,315) shares . . . . . . .
Dividends paid . . . . . . . . . --- --- (665,120) ---
Repayment of loan to ESOP . . . . --- --- --- ---
Amortization of unearned
restricted stock awarded . . . --- --- --- ---
Unrealized gain on securities
available for sale . . . . . . --- --- --- ---
Other . . . . . . . . . . . . . . --- 512 1,598 57
--------- ---------- ---------- -----------
Balance at September 30, 1995 . . 33,000 37,249,638 70,244,820 (12,351,400)
Net income . . . . . . . . . . . - - 3,032,537 -
Awards of restricted stock . . . - 342,098 - -
Purchase of treasury stock - - - (5,729,530)
(173,255 shares) . . . . . . .
Exercise of stock options (35,891 - 159,763 453,825
shares) . . . . . . . . . . . . (223,543)
Dividends paid . . . . . . . . . - - (1,045,230) -
Repayment of loan to ESOP - - - -
Amortization of unearned - - - -
restricted stock . . . . . . .
Unrealized loss on securities
available for sale . . . . . . - - - -
------- ---------- ---------- ----------
Balance at September 30, 1996 . . $33,000 $37,751,499 $72,008,584 ($17,627,105)
====== ========== ========== ==========
<CAPTION>
Unrealized
Unearned Gain (Loss)
Restricted on Securities
Loan Stock Available
to ESOP Awarded for Sale Total
<S> <C> <C> <C> <C>
Balance at September 30, 1993 . . ($2,730,595) ($1,085,842) --- $80,815,936
Net income . . . . . . . . . . . --- --- --- 7,340,071
Awards of restricted stock . . . --- (260,320) --- ---
Purchase of treasury stock
(102,500 shares) . . . . . . . --- --- --- (2,164,228)
Exercise of stock options (13,005
shares) . . . . . . . . . . . . --- --- --- 162,004
Repayment of loan to ESOP . . . . 232,804 --- --- 232,804
Amortization of unearned
restricted stock awarded . . . --- 270,698 --- 270,698
Unrealized loss on securities
available for sale . . . . . . --- --- (3,722,622) (3,722,622)
--------- --------- --------- ----------
Balance at September 30, 1994 . . (2,497,791) (1,075,464) (3,722,622) 82,934,663
Net income . . . . . . . . . . . --- --- --- 8,150,985
Awards of restricted stock . . . --- (105,511) --- ---
Purchase of treasury stock
(162,591 shares) . . . . . . . --- --- --- (3,781,661)
Exercise of stock options (115,315
shares) . . . . . . . . . . . . --- --- --- 1,133,636
Dividends paid . . . . . . . . . --- --- --- (665,120)
Repayment of loan to ESOP . . . . 511,988 --- --- 511,988
Amortization of unearned
restricted stock awarded . . . --- 294,369 --- 294,369
Unrealized gain on securities
available for sale . . . . . . --- --- 4,497,466 4,497,466
Other . . . . . . . . . . . . . . --- --- --- 2,167
--------- ---------- --------- ----------
Balance at September 30, 1995 . . (1,985,803) (886,606) 774,844 93,078,493
Net income . . . . . . . . . . . - - - 3,032,537
Awards of restricted stock . . . - (140,557) - 201,541
Purchase of treasury stock
(173,255 shares) . . . . . . . - - - (5,729,530)
Exercise of stock options (35,891
shares) . . . . . . . . . . . . - - - 390,045
Dividends paid . . . . . . . . . - - - (1,045,230)
Repayment of loan to ESOP 280,862 - - 280,862
Amortization of unearned
restricted stock . . . . . . . - 132,386 - 132,386
Unrealized loss on securities
available for sale . . . . . . - - (1,474,701) (1,474,701)
---------- --------- --------- ----------
Balance at September 30, 1996 . . ($1,704,941) ($894,777) ($699,857) $88,866,403
========= ======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended September 30
1994 1995 1996
<S> <C> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . $7,340,071 $8,150,985 $3,032,537
Adjustments to reconcile net income to
net cash provided by operating
activities
Provision for losses on loans . . . 720,000 460,000 480,000
Provision for depreciation . . . . 779,071 912,397 1,085,360
Writedown of intangible assets . . - - 4,719,529
Amortization of intangible assets . 496,445 2,062,530 2,611,780
Equity in net income of
unconsolidated partnerships . . . (96,171) (116,335) (113,685)
Net loss (gain) on sale of
foreclosed properties . . . . . . 3,818 (140,721) (10,794)
Net amortization of discount and
premiums on mortgage securities . 1,495,737 (785,634) (816,812)
Increase (decrease) in deferred
income taxes . . . . . . . . . . . - 1,620,723 (4,157,935)
Increase (decrease) in accrued
income taxes . . . . . . . . . . . (164,612) 243,187 (668,768)
Increase in interest receivable . . (43,602) (408,757) (266,448)
Increase (decrease) in interest
payable . . . . . . . . . . . . . 534,524 1,574,886 (408,534)
Loans originated for sale . . . . . (43,761,724) (17,349,224) (55,754,049)
Proceeds from sale of loans . . . . 47,477,928 15,928,424 55,103,049
Receipt of FHLB stock dividend . . - (149,400) -
Amortization of cost of restricted
stock benefit plan . . . . . . . . 270,698 294,369 132,386
Assessment to recapitalize Savings
Association Insurance Fund . . . . - - 4,434,589
Other . . . . . . . . . . . . . . . (2,104,137) (3,599,256) (1,091,778)
----------- ----------- -----------
Net cash provided by operating
activities . . . . . . . . . . . . 12,948,046 8,698,174 8,310,427
Investing activities:
Proceeds from maturities of
certificates of deposit . . . . . 594,000 914,598 198,000
Proceeds from sale and maturity of
U.S. Government and
securities available for sale . . 6,000,000 36,326,805 4,500,000
Proceeds from sale of marketable
equity securities . . . . . . . . - 435,750 2,088,713
Proceeds from sale of mortgage-
backed securities available for
sale . . . . . . . . . . . . . . . - 9,459,280 -
Proceeds from sale of FHLB stock . - - 1,477,600
Purchases of certificates of deposit (314,216) (202,474) (500,820)
Purchase of U.S. government and
agency securities available for
sale . . . . . . . . . . . . . . . (4,956,875) (6,008,203) (9,000,000)
Purchase of FHLB stock . . . . . . (1,567,500) - (425,600)
Purchases of mortgage loans . . . . (4,754,500) (9,929,250) -
Purchases of mortgage-related
securities held to maturity . . . (51,152,507) (88,527,687) (44,888,700)
Purchases of mortgage-backed
securities held to maturity . . . (29,989,121) (4,874,040) -
Principal repayments on
mortgage-related securities held to
maturity . . . . . . . . . . . . . 16,637,814 12,322,954 18,930,463
Principal repayments on mortgage-
backed securities held to
maturity . . . . . . . . . . . . . 374,434 4,080,032 3,151,987
Loan principal repayments . . . . . 123,943,311 163,171,984 204,629,823
Loans originated . . . . . . . . . (163,539,077) (201,912,372) (253,766,609)
Principal repayments on loan to ESOP 232,804 511,988 280,863
Purchases of marketable equity
securities . . . . . . . . . . . . (2,648,458) (1,553,187) (2,785,453)
Purchases of mortgage-backed
securities available for sale . . (35,230,650) (24,737,402) (2,035,207)
Purchases of mortgage-related
securities available for sale . . (2,667,375) - -
Principal repayments on mortgage-
backed securities available for
sale . . . . . . . . . . . . . . 62,568,594 21,257,261 35,708,578
Principal repayments on mortgage-
related securities available for
sale . . . . . . . . . . . . . . 6,938,495 707,853 1,742,150
Proceeds from sale of foreclosed
properties . . . . . . . . . . . . 557,824 1,098,902 1,435,313
Investments in and advances to
unconsolidated partnerships . . . - - (2,690,555)
Principal repayments on loans to
unconsolidated partnership . . . . 403,349 166,907 178,500
Cash distribution from
unconsolidated partnership . . . . 160,890 50,000 100,000
Additions to office properties and
equipment . . . . . . . . . . . . (1,179,264) (740,142) (3,070,369)
Business acquisition, net of cash
and cash equivalents acquired of
$5,727,802:
Loans receivable . . . . . . . . . - (37,181,491) -
Mortgage-backed securities . . . . - (34,168,133) -
U.S. government and agency
securities . . . . . . . . . . . - (45,543,011) -
Intangible assets . . . . . . . . - (14,722,843) -
Deposit accounts . . . . . . . . . - 106,934,528 -
FHLB advances . . . . . . . . . . - 3,000,000 -
Other - net . . . . . . . . . . . - 2,402,297 -
----------- ------------ ------------
Net cash used in investing activities (79,588,028) (107,259,096) (44,741,323)
Financing activities:
Net increase (decrease) in deposit
accounts . . . . . . . . . . . . . 94,838,096 67,652,253 (1,074,018)
Proceeds from notes payable to the
Federal Home Loan Bank . . . . . . 63,000,000 41,000,000 64,500,000
Repayment of notes payable to the
Federal Home Loan Bank . . . . . . (71,900,000) (14,400,000) (51,600,000)
Net increase (decrease) in
securities sold under agreements to
repurchase . . . . . . . . . . . . (450,000) 9,709,637 36,245,820
Net increase (decrease) in advance
payments by borrowers for taxes and
insurance . . . . . . . . . . . . 153,970 546,332 (2,161,009)
Proceeds from exercise of stock
options . . . . . . . . . . . . . 119,647 994,252 230,304
Dividends paid . . . . . . . . . . - (665,120) (1,045,230)
Purchase of treasury stock . . . . (2,164,228) (3,781,661) (5,729,530)
----------- ----------- -----------
Net cash provided by financing
activities . . . . . . . . . . . . 83,597,485 101,055,693 39,366,337
----------- ----------- -----------
Increase in cash and cash equivalents 16,957,503 2,494,771 2,935,441
Cash and cash equivalents:
At beginning of year . . . . . . . . 13,057,931 30,015,434 32,510,205
----------- ----------- -----------
At end of year . . . . . . . . . . . $30,015,434 $32,510,205 $35,445,646
=========== ========== ==========
Supplemental disclosures of cash flow
information:
Interest paid (including amounts
credited to deposit accounts) . . $24,418,977 $37,787,908 $44,173,966
Income taxes paid . . . . . . . . . 4,454,062 2,195,556 4,889,068
Supplemental schedule of noncash
investing activities:
Loans receivable transferred to
(from) foreclosed properties . . . (183,991) 2,152,524 (747,536)
Securities transferred from held-to-
maturity to available- for- sale . - - 37,300,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. Summary of significant accounting policies
Advantage Bancorp, Inc. (the "Company") is a Wisconsin corporation
incorporated in December 1991 for the purpose of becoming a savings and
loan holding company for Advantage Bank FSB (the "Bank"). On March 20,
1992, the Bank converted from a mutual to a stock form of ownership and
the Company completed its initial public offering selling 4,124,780 shares
at $9.20 per share. The Company acquired all of the issued and
outstanding capital stock of the Bank using a portion of the net proceeds
from the conversion.
Business - The Company provides a full range of financial services to
individual customers and small businesses through the Bank in Wisconsin
and Illinois. The Company is subject to competition from other financial
institutions. The Company and its subsidiaries are also subject to the
regulations of certain governmental agencies and undergoes periodic
examinations by those regulatory authorities.
Basis of financial statement presentation - The accounting and reporting
policies of the Company and its subsidiaries conform to generally accepted
accounting principles ("GAAP") and to general practices within the
financial services industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to
the determination of the allowance for losses on loans and the valuation
of real estate acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowance for loan
losses and the valuation of foreclosed properties, management obtains
independent appraisals for significant properties.
Principles of consolidation - The consolidated financial statements
include the accounts and operations of the Company, the Bank and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Bank's investments
in unconsolidated partnerships are accounted for using the equity method.
Interest on loans - Interest on loans is recorded as income in the period
earned. Allowances are established for accrued interest on loans on which
any payments are considered uncollectible.
Allowance for losses on loans - Specific allowances for losses on loans
are established when any significant and permanent decline in value
occurs. In addition, general loss allowances are provided based on past
experience and on prevailing market conditions. Management's evaluation of
loss considers various factors, including, but not limited to, fair value
of the property, general economic conditions, loan portfolio composition,
prior loss experience, estimated sales price, refurbishing costs, holding
costs and selling costs. Where loss is indicated, a specific allowance for
the estimated loss is provided or the uncollectible portion of the asset
is written off.
As of October 1, 1995, the Company adopted Financial Accounting Statement
No. 114, "Accounting by Creditors for Impairment of a Loan." Statement
No. 114 requires that impaired loans be measured at the present value of
expected future cashflows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The
Company's financial statements were not significantly impacted by the
adoption of Statement No. 114.
Loan fees - Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amounts are amortized as an
adjustment of the related loan's yield. The Bank is amortizing these
amounts using the level-yield method over the contractual life of the
related loans.
Sales of loans - As of October 1, 1995, the Company adopted Financial
Accounting Statement No. 122, "Accounting for Mortgage Servicing Rights,"
which requires that an allocation of costs be made between loans and their
related servicing rights for loans originated with a definitive plan to
sell or securitize these loans and retain the servicing rights. Statement
No. 122 requires entities to recognize a separate asset for servicing
rights which increases the gain on sale of loans when the servicing rights
are retained. Prior to October 1, 1995, costs were fully allocated to
the loan and servicing income was recognized as it was received over the
life of the loan. Adoption of Statement No. 122 had the effect of
increasing net income for fiscal year 1996 by approximately $400,000.
Mortgage servicing rights - The cost of mortgage servicing- rights is
amortized over the estimated life of the estimated net servicing revenue
using the level yield method. Impairment of mortgage servicing rights is
determined periodically based on the fair value of those rights. The
amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights exceed their fair value. The fair value of
mortgage servicing rights is based on the present value of estimated
future cashflows using current estimates of required market rates of
return, loan prepayment rates, servicing costs, fee income, investment
interest rates and other relevant factors.
Investments in debt and equity securities - Investments in equity
securities that have readily determinable fair values and investments in
debt securities are classified in one of three categories and accounted
for as follows:
(1) Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as "held-to-maturity
securities" and reported at amortized cost.
(2) Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as "trading
securities" and reported at fair value, with unrealized gains and losses
included in earnings. The Company had no trading securities during fiscal
year 1995 or 1996.
(3) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as "available-for-sale
securities" and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
stockholders' equity.
Management determines the appropriate classification for its securities at
the time of purchase.
As of December 31, 1995, the Company reclassified approximately $37.3
million in securities from held-to-maturity to available-for-sale under
the one-time opportunity allowed under the Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities, which was issued by the Financial Accounting Standards Board
("FASB") in November 1995. Under this Guide, a one-time reclassification
could be made without calling into question the propriety of the Company's
stated intent relating to these securities in prior or subsequent periods.
Foreclosed properties and properties subject to foreclosure - Real estate
owned (which was acquired by foreclosure or by deed in lieu of
foreclosure) and real estate in judgment are written down to their fair
value upon acquisition and are subsequently carried at the lower of cost
or net realizable value. Cost relating to the development and improvement
of property are capitalized; holding costs are charged to expense.
Office properties and equipment - Land is carried at cost. Buildings,
furniture and equipment are carried at cost, less accumulated
depreciation. The costs of buildings, furniture and equipment are
depreciated principally using the straight-line method over the estimated
useful lives of the assets.
Income taxes - Deferred income tax assets and liabilities are adjusted
regularly to amounts estimated to be receivable or payable based on
current tax law and the Company's tax status. Consequently, tax expense
in future years may be impacted by changes in tax rates and tax return
limitations.
Intangible assets - The cost in excess of net assets of acquired
businesses is being amortized on an accelerated basis over the lives of
the long-term assets acquired in the business combination. The cost in
excess of net assets of acquired businesses, net of accumulated
amortization, was $2,426,000 and $1,826,000 as of September 30, 1995 and
1996, respectively. Premiums resulting from the valuation of core
deposits acquired in business combinations and the purchase of branch
offices are being amortized on an accelerated basis over the estimated
lives of the deposits using the level- yield method. Core deposit
intangibles, net of accumulated amortization, were $11,864,000 and
$5,076,000 as of September 30, 1995 and 1996, respectively.
As of September 30, 1996, a $4,720,000 writedown of core deposit
intangibles was recorded. This writedown related primarily to the core
deposit intangible asset arising from the acquisition of Amity Bancshares,
Inc. on December 16, 1994. The writedown brings the book value of the
intangible asset to fair value based on a calculation of the present value
of estimated future cashflows associated with the deposits. This
writedown was necessitated by a faster-than-projected net withdrawals of
acquired deposits and lower-than-projected market interest rates which has
lowered the cost of alternative sources of funds used to value the
intangible.
Cash equivalents - The Company considers its demand deposits at other
financial institutions to be cash equivalents.
Interest rate swap agreements - The Company enters into interest rate
swap agreements as a means of managing its exposure to rising market
interest rates. The agreements involve the receipt of floating rate
amounts in exchange for the payment of fixed rate interest payments over
the life of the agreement without an exchange of the underlying principal
amount (the "notional amount"). The differential to be paid or received
on interest rate swaps entered into to reduce the impact of changes in
market interest rates is accrued as interest rates change and is
recognized over the life of the agreements as interest income or expense.
The fair value of the swap agreements are not recognized in the financial
statements.
Pending accounting changes - The Financial Accounting Standards Board
(FASB) issued SFAS No. 123 ("Accounting for Stock-Based Compensastion") in
October 1995 relating to stock-based employee compensation plans. SFAS No.
123 is effective for awards granted in years beginning after December 15,
1994, however, disclosures are not required until years beginning after
December 15, 1995. This Statement defines a fair value based method of
accounting for employee stock options or similar equity instruments.
However, the Statement allows an entity to continue to measure
compensation cost for these plans using an intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB
No. 25"). Entities electing to retain the accounting treatment under APB
No. 25 must make pro forma footnote disclosures of net income and earnings
per share as if the fair value based method of accounting defined in this
statement had been applied. Management has not decided which method it
will elect for the Company's fiscal year ending September 30, 1997.
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
which provides new accounting and reporting standards for sales,
securitization, and servicing of receivables and other financial assets
and extinguishments of liabilities. The provisions of the Statement are to
be applied to transactions occurring after December 31, 1996. Management
does not believe the Company will be significantly impacted by the
adoption of Statement No. 125.
Earnings per share - Earnings per share of common stock is based on the
weighted average number of shares of common stock and common stock
equivalents outstanding during the year. The resulting number of shares
used in computing earnings per share for fiscal 1994, 1995 and 1996 was
3,740,803, 3,706,235 and 3,661,833, respectively. Stock options are
regarded as common stock equivalents and are therefore considered in the
earnings per share calculations. Common stock equivalents are computed
using the treasury stock method.
Stock dividend - All per share amounts have been adjusted to reflect a
25% stock dividend paid as of February 23, 1996 in the form of a five-for-
four stock split.
Reclassifications - Certain amounts in the 1994 and 1995 financial
statements have been reclassified to conform to the 1996 presentations.
2. Business combinations
On December 16, 1994, the Company completed the acquisition of Amity
Bancshares, Inc. ("Amity") in a cash transaction for $25.0 million. The
transaction was accounted for as a purchase. Amity, based in Tinley Park,
Illinois, was the parent company of Amity Federal Bank for Savings. Amity
had total assets of $141.2 million as of December 16, 1994. This
acquisition resulted in the recording of a core deposit intangible of
$11.8 million and goodwill (unidentifiable intangible asset) of $2.6
million. The core deposit intangible is being amortized to expense on an
accelerated basis over the estimated life of the deposits. Goodwill is
being amortized to expense at a constant rate applied to the carrying
amount of the long-term interest-earning assets.
On August 21, 1995, the Company completed the cash purchase of
substantially all of the assets of The Financial Center of Illinois, Inc.,
a mortgage broker operating in the Chicago and Milwaukee metropolitan
areas. The purchase price was not material to the Company's consolidated
financial statements.
3. Investments in securities
The amortized cost and estimated market values of investment securities at
September 30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost at Gross Gross Value at
September 30 Unrealized Unrealized September 30
1995 Gains Losses 1995
<S> <C> <C> <C> <C>
U.S. government and agency securities
available for sale:
U.S. Treasury notes . . . . . . . . $1,488,519 $1,898 $1,276 $1,489,141
Federal Home Loan Bank notes . . . . 12,145,267 358,097 13,493 12,489,871
Federal National Mortgage Association
notes . . . . . . . . . . . . . . 6,445,975 95,745 - 6,541,720
Federal Farm Credit Notes . . . . . 1,996,867 59,070 - 2,055,937
Sallie Mae Notes . . . . . . . . . . 2,370,121 69,573 - 2,439,694
---------- ------- ------ ----------
$24,446,749 $584,383 $14,769 $25,016,363
========== ======= ====== ==========
Mortgage-backed securities available
for sale . . . . . . . . . . . . . . $145,005,106 $1,626,403 $1,600,923 $145,030,586
=========== ========= ========= ===========
Mortgage-backed securities held to
maturity . . . . . . . . . . . . . . $44,766,566 $940,759 $44,290 $45,663,035
=========== ======= ====== ==========
Mortgage-related securities available
Interest only strips backed by FNMA
MBS . . . . . . . . . . . . . . . $2,069,539 $669,309 $ - $2,738,848
Principal only strips backed by FNMA
MBS . . . . . . . . . . . . . . . 8,582,338 151,240 976,644 7,756,934
---------- ------- ------ ----------
$10,651,877 $820,549 $976,644 $10,495,782
========== ======= ======= ==========
Mortgage-related securities held to
maturity:
CMOs backed by FNMA/FHLMC
mortgage-backed securites . . . . $98,769,968 $1,681,904 $338,464 $100,113,408
AAA- and AA-rated whole loan CMOs . 52,536,180 1,167,535 223,997 53,479,718
----------- ---------- -------- -----------
$151,306,148 $2,849,439 $562,461 $153,593,126
=========== ========= ======= ===========
Marketable equity securities available $3,766,706 $907,688 $30,054 $4,644,340
========= ======= ====== =========
U.S government and agency securities
available for sale:
U.S. Treasury notes . . . . . . . . . $2,997,903 $ - $38,528 $2,959,375
Federal Home Loan Bank notes . . . . 12,388,116 98,621 24,425 12,462,312
Federal National Mortgage Association
notes . . . . . . . . . . . . . . . 7,510,349 23,972 10,685 7,523,636
Federal Farm Credit Notes . . . . . . 1,997,671 36,704 - 2,034,375
Federal Home Loan Mortgage Corp.
Notes . . . . . . . . . . . . . . . 1,989,803 - 9,933 1,979,870
Sallie Mae Notes . . . . . . . . . . 2,393,577 32,992 781 2,425,788
---------- --------- ------- ----------
$29,277,419 $192,289 $84,352 $29,385,356
========== ======== ======= ==========
Mortgage-backed securities available
for sale . . . . . . . . . . . . . . $142,359,026 $564,865 $2,837,226 $140,086,665
=========== ======== ========= ===========
Mortgage-backed securities held to $11,011,238 $151,302 $3,173 $11,159,367
=========== ======== ========= ==========
Mortgage-related securities available
for sale:
Interest only strips backed by FNMA
MBS . . . . . . . . . . . . . . . . $1,733,846 $1,081,127 $ - $2,814,973
Principal only strips backed by FNMA
MBS . . . . . . . . . . . . . . . . 7,873,451 109,782 1,255,757 6,727,476
A-rated whole loan CMO . . . . . . . 4,746,922 97,233 - 4,844,155
AAA-rated FHLMC CMO . . . . . . . . . 869,831 - 30,315 839,516
---------- --------- --------- ----------
$15,224,050 $1,288,142 $1,286,072 $15,226,120
========== ========= ========= ==========
Mortgage-related securities held
to maturity:
CMOs backed by FNMA/FHLMC MBS . . . . $52,773,160 $1,242,603 $302,219 $53,713,544
AAA- and AA-rated whole loan CMOs . 118,696,862 1,158,180 655,156 119,199,886
----------- --------- ------- -----------
$171,470,022 $2,400,783 $957,375 $172,913,430
=========== ========== ========= ===========
Marketable equity securities available
for sale . . . . . . . . . . . . . . $4,431,788 $675,767 $64,464 $5,043,091
========= ========= ======= ==========
</TABLE>
The amortized cost and estimated market values of U.S. government and
agency securities available for sale at September 30, 1996 by contractual
maturity, are shown below.
Estimated
Amortized Market
Cost Value
Due in one year or less . . $8,511,901 $8,540,000
Due after one year through
five years . . . . . . . 20,765,518 20,845,356
---------- ----------
$29,277,419 $29,385,356
========== ==========
Mortgage securities generally have long-term (15 to 30 year) contractual
maturities. However, actual maturities are usually less than contractual
maturities because borrowers have the right to call or prepay obligations
without call or prepayment penalties.
Proceeds from sales of securities available for sale during 1996 were
$2,088,713. Gross gains of $866,070 were realized on those sales in 1996.
Proceeds from sales of securities available for sale during 1995 were
$44,222,000 Gross gains of $145,000 were realized on those sales in
1995.
Accrued interest on investments and mortgage securities consists of:
September 30
1995 1996
Certificates of deposit . . . . . . . . $ 1,593 $ 1,027
U.S. Government and agency securities . 298,356 387,168
Mortgage securities . . . . . . . . . . 2,402,546 2,252,477
--------- ---------
$2,702,495 $2,640,672
========= =========
4. Loans receivable
Loans receivable, including loans held for sale, consist of:
September 30
1995 1996
First mortgage loans:
One- to four-family residential . . . $399,467,216 $418,646,211
Multi-family . . . . . . . . . . . . 27,809,937 24,993,017
Commercial real estate . . . . . . . 49,393,103 54,671,293
One- to four-family residential spec
construction . . . . . . . . . . . . 11,056,558 7,598,430
Other construction and land . . . . . 20,629,338 30,160,649
----------- -----------
508,356,152 536,069,600
Other loans:
Home equity and second mortgage . . . 22,740,984 43,893,371
Education . . . . . . . . . . . . . . 3,613,498 4,039,550
Automobile . . . . . . . . . . . . . 1,019,760 1,553,137
Other consumer . . . . . . . . . . . 1,323,144 1,732,221
Commercial business loans . . . . . . 10,853,080 10,691,062
----------- -----------
39,550,466 61,909,341
----------- ----------
Total gross loans receivable . . . . . 547,906,618 597,978,941
Add: Accrued interest on all loans . . 3,390,111 3,718,382
Less:
Undisbursed portion of loan proceeds (31,531,389) (30,099,538)
Unamortized loan fees . . . . . . . . (2,017,214) (2,104,405)
Allowance for loan losses . . . . . . (5,271,182) (5,773,354)
Allowance for uncollected interest . (194,817) (938,386)
----------- -----------
(35,624,491) (35,197,301)
----------- -----------
$512,282,127 $562,781,640
============ ===========
As of September 30, 1996, there were no loans that had been the subject of
a troubled debt restructuring.
5. Foreclosed properties and properties subject to foreclosure
Foreclosed properties and properties subject to foreclosure are summarized
as follows:
September 30
1995 1996
Real estate owned . . . . . . . . . . . . . $ 813,392 $1,034,703
Real estate judgments subject to redemption 1,267,031 368,737
---------- ----------
$2,080,423 $1,403,440
========= =========
6. Allowance for losses on loans
A summary of the activity in the allowance for losses on loans follows:
September 30
1994 1995 1996
Balance at beginning of year . . $4,936,736 $5,327,515 $5,271,182
Additions from loan purchases . . - 517,798 -
Provisions . . . . . . . . . . . 720,000 460,000 480,000
Charge-offs . . . . . . . . . . . (427,625) (1,072,115) (39,975)
Recoveries . . . . . . . . . . . 98,404 37,984 62,147
--------- --------- ---------
Balance at end of year . . . . . $5,327,515 $5,271,182 $5,773,354
========= ========= =========
A substantial portion of the Company's loans are collaterized by real
estate in southern Wisconsin and northern Illinois. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan
portfolio is susceptible to changes in market conditions in these
geographic areas. Management believes that the allowance for losses on
loans is adequate. While management uses available information to
recognize losses, future additions to the allowances may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Company's allowance for losses on loans. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments of information available to them at the time of their
examination.
7. Office properties and equipment
Office properties and equipment are summarized as follows:
September 30
1995 1996
Cost:
Land and improvements . . . . . . . . . . $2,139,021 $2,349,393
Office buildings . . . . . . . . . . . . . 8,127,499 9,399,227
Furniture and equipment . . . . . . . . . 7,529,846 9,116,848
---------- ----------
17,796,366 20,865,468
Less allowances for depreciation . . . . . . (7,249,774) (8,333,867)
---------- ----------
$10,546,592 $12,531,601
========== ==========
8. Deposit accounts
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
September 30
1995 1996
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Short-term deposits:
Checking accounts:
Non-interest bearing . . . . $27,158,407 0.00% $31,345,513 0.00%
Interest-bearing . . . . . . 48,250,637 2.22 50,322,957 1.81
Variable rate money market
accounts . . . . . . . . . . . 133,621,391 3.97 147,038,443 3.92
Regular savings accounts . . . . 48,323,290 2.50 43,010,687 2.50
Certificate accounts (by
original maturity):
One year or less . . . . . . 148,861,105 5.65 140,487,605 5.28
One to two years . . . . . . 94,757,504 5.48 95,289,041 5.80
Two to three years . . . . . 98,395,113 5.68 94,304,153 5.81
Three to four years . . . . . 50,409,349 6.08 49,092,040 6.07
Four to five years . . . . . . 29,974,284 6.25 27,644,037 6.00
Five or more years . . . . . . 2,173,803 7.12 2,316,390 6.54
----------- ----- ----------- -----
Total certificates . . . 424,571,158 5.72 409,133,265 5.67
----------- ----- ----------- -----
$681,924,883 4.67% $680,850,865 4.55%
=========== ===== =========== =====
</TABLE>
Deposit accounts with individual balances greater than $100,000 totaled
$73,824,000 and $87,676,000 at September 30, 1995 and 1996, respectively.
Aggregate annual maturities of certificate accounts at September 30, 1996
are as follows:
Matures during year ending
September 30:
1997 . . . . . . . . . . . . . . . $287,075,171
1998 . . . . . . . . . . . . . . . 84,282,517
1999 . . . . . . . . . . . . . . . 21,000,988
2000 . . . . . . . . . . . . . . . 13,139,619
2001 . . . . . . . . . . . . . . . 2,758,977
Thereafter . . . . . . . . . . . . 875,993
-----------
$409,133,265
===========
9. Notes payable to the Federal Home Loan Bank
Notes payable to the Federal Home Loan Bank consist of the following:
September 30
Matures During 1995 1996
Year Ending Weighted Weighted
September 30 Rate Amount Rate Amount
1996 . . . 6.31% $41,600,000 - % $ -
1997 . . . . 5.30 38,050,000 5.37 50,550,000
1998 . . . 6.84 29,000,000 6.45 59,000,000
1999 . . . . 6.36 45,925,000 6.42 56,925,000
2000 . . . . 6.33 5,835,000 6.44 6,835,000
2001 . . . . 6.64 1,000,000 6.64 1,000,000
2002 . . . . 7.76 1,240,000 7.76 1,240,000
2005 . . . . 8.45 360,000 8.45 360,000
----------- -----------
6.20% $163,010,000 6.15% $175,910,000
=========== ===========
At September 30, 1996, $28,500,000 of the above notes payable may be
repaid without a prepayment penalty at six- month intervals. All other
notes are subject to a prepayment penalty if they are repaid prior to
maturity.
The Bank is required to maintain as collateral unencumbered mortgage loans
and mortgage-related securities such that the outstanding notes payable
balance does not exceed 60% of the book value of this collateral. In
addition, these notes are collaterized by all Federal Home Loan Bank
stock.
10. Securities sold under agreements to repurchase
The Company enters into sales of securities under fixed- coupon agreements
to repurchase the identical securities (reverse repurchase agreements).
Fixed-coupon reverse repurchase agreements are treated as financings and
the obligations to repurchase securities sold are reflected as a liability
in the statement of financial condition. The dollar amount of securities
underlying the agreements remains in the asset accounts. The outstanding
agreements had a weighted average interest rate of 5.77% and 5.87% at
September 30, 1995 and 1996, respectively, and generally mature within six
months after the fiscal year-end. The securities underlying the
agreements, as summarized below, are held in safekeeping.
September 30
1995 1996
FHLMC mortgage-backed securities . . . . $6,682,464 $42,485,232
FNMA mortgage-backed securities . . . . . 6,864,061 8,738,500
Collaterized mortgage obligations . . . . - 22,133,917
Accrued interest . . . . . . . . . . . . 82,521 444,748
--------- ----------
Total book value (approximates market
value) . . . . . . . . . . . . . . . . $13,629,046 $73,802,397
========== ==========
11. Stockholders' equity
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to
adjusted total assets (as defined). Management believes, as of September
30, 1996, that the Bank meets all capital adequacy requirements to which
it is subject.
As of September 30, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table
below (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
Total capital to risk-weighted
assets . . . . . . . . . . . $63,199 13.48% $37,495 8.00% $46,868 10.00%
Tier 1 capital to risk-weighted
assets . . . . . . . . . . . 57,440 12.26% 18,747 4.00% 28,121 6.00%
Tier 1 capital to adjusted
total assets . . . . . . . . 57,440 5.72% 30,129 3.00% 50,215 5.00%
As of September 30, 1995:
Total capital to risk-weighted
assets . . . . . . . . . . . $70,281 16.52% $34,039 8.00% 42,549 10.00%
Tier 1 capital to risk-weighted
assets . . . . . . . . . . . 64,962 15.27% 17,020 4.00% 25,529 6.00%
Tier 1 capital to adjusted
total assets . . . . . . . . 64,962 6.79% 28,684 3.00% 47,807 5.00%
</TABLE>
Applicable rules and regulations of the OTS impose limitations on
dividends by the Bank. Within those limitations, certain "safe harbor"
dividends are permitted, subject to providing the OTS at least 30 days
advance notice. The safe harbor amounts are based upon an institution's
regulatory capital level. Thrift institutions which have capital in
excess of all capital requirements before and after the proposed dividend
are permitted to make capital distributions during any calendar year up to
the greater of (1) 100% of net income to date during the calendar year,
plus one-half of the surplus over such institution's capital requirements
at the beginning of the calendar year, or (2) 75% of net income over the
most recent four-quarter period. Additional restrictions would apply to
an institution which does not meet its capital requirement before or after
a proposed dividend.
Unlike the Bank, the Company is not subject to regulatory restrictions on
the payment of dividends to its shareholders. However, the source of its
future dividends may depend upon dividends from the Bank.
12. Income taxes
The Company and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. Provisions are made in the
income tax expense accounts for deferred taxes applicable to income and
expense items reported in different periods for financial statement
purposes than for income tax return purposes.
Prior to October 1, 1996, the Bank qualified under provisions of the
Internal Revenue Code which permitted as a deduction from taxable income
allowable bad debt deductions based on a percentage of taxable income
which significantly exceeded actual loss experience and the financial
statement loan loss provisions. At September 30, 1996, retained earnings
includes approximately $22,400,000 for which no provision for income tax
has been made. Income taxes would be imposed at the then-applicable rates
if the Bank were to use these reserves for any other purpose. The income
tax liability on this $22,400,000 would approximate $8,500,000.
The provision for income taxes consists of the following:
Year Ended September 30
1994 1995 1996
Current:
Federal . . . . . . . . . $3,883,310 $3,000,755 $5,377,588
State . . . . . . . . . . 520,957 78,952 129,357
---------- ---------- ----------
4,404,267 3,079,707 5,506,945
Deferred:
Federal . . . . . . . . . (65,763) 1,381,170 (3,578,723)
State . . . . . . . . . . (49,054) 56,671 (464,398)
---------- --------- ----------
(114,817) 1,437,841 (4,043,121)
---------- --------- ----------
$4,289,450 $4,517,548 $1,463,824
========== ========= ==========
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
Year Ended September 30
1994 1995 1996
Income before income taxes . . $11,629,521 $12,668,533 $4,496,361
========== ========== =========
Tax at federal statutory rate
of 34% . . . . . . . . . . . $3,954,037 $4,307,301 $1,528,763
Add (deduct) effect of:
State income taxes (net of
federal income tax benefit) 314,161 89,511 (221,127)
Amortization of goodwill . . 33,994 113,973 137,265
Tax exempt interest-net . . (13,442) (6,436) (7,287)
Other . . . . . . . . . . . 700 13,199 26,210
--------- ---------- ---------
Provision for income taxes . . $4,289,450 $4,517,548 $1,463,824
========= ========= =========
The components of the provision (credit) for deferred income taxes are as
follows:
Year ended September 30
1994 1995 1996
Allowance for losses on loans . ($151,207) ($206,430) ($128,801)
Accrued expenses . . . . . . . (72,422) 72,749 (1,867,562)
Deferred loan fees . . . . . . 72,182 75,876 333,454
Differences between book and tax
depreciation . . . . . . . . 22,000 65,632 98,752
Interest on collateralized
mortgage obligations . . . . 9,572 10,974 (175,509)
Recognition of
discounts/premiums (related
to business acquisitions) not
recognized for tax purposes 65,538 1,412,446 (1,843,199)
FHLB dividends paid in stock . - 3,446 50,941
Reserve for uncollected
interest . . . . . . . . . . (59,812) (111,892) 135,554
State income taxes . . . . . . - 56,670 (458,807)
Income of partnerships . . . . - 58,359 (12,127)
Other . . . . . . . . . . . . . (668) 11 (175,817)
--------- --------- ----------
($114,817) $1,437,841 ($4,043,121)
========= ========= ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of the Company's deferred tax assets (liabilities)
are as follows:
September 30
1995 1996
Deferred tax assets:
Allowance for losses on loans . . . . $986,247 $1,115,048
Accrued expenses deducted on a cash 275,404 2,142,966
basis for tax purposes . . . . . . .
Deferred loan fees . . . . . . . . . . 706,025 372,571
Reserve for uncollected interest . . . 464,107 328,553
State income taxes . . . . . . . . . . - 386,999
Unrealized losses on securities - 425,085
available for sale . . . . . . . . .
Other . . . . . . . . . . . . . . . . - 175,836
---------- ----------
Total deferred tax assets . . . . . 2,431,783 4,947,058
Valuation allowance . . . . . . . . . (254,354) (254,354)
---------- ----------
Adjusted deferred tax assets . . . . 2,177,429 4,692,704
Deferred tax liabilities:
Differences between book and tax (486,671) (585,423)
depreciation . . . . . . . . . . . .
Interest on collaterized mortgage (175,509) -
obligations . . . . . . . . . . . .
Income of partnerships . . . . . . . . (255,217) (243,090)
Recognition of discounts/premiums
(related to acquisitions) not (2,840,972) (997,773)
recognized for tax purposes . . . .
FHLB dividends paid in form of FHLB (173,788) (224,759)
stock . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . (71,808) -
Unrealized gains on securities (541,788) -
available for sale . . . . . . . . .
Other . . . . . . . . . . . . . . . . (10) -
---------- ----------
Total deferred tax liabilities . . . (4,545,763) (2,051,045)
---------- ----------
Total net deferred tax asset (liability) ($2,368,334) $2,641,659
========== ==========
13. Officer, director and employee plans
Profit-Sharing Plan: The Company has a trusteed profit-sharing plan for
all employees meeting minimum eligibility requirements. Profit-sharing
plan contributions, which are employer matching contributions, were
$31,120, $41,065 and $43,118 in 1994, 1995 and 1996, respectively. The
plan includes a provision which qualifies the plan under Section 401(k) of
the Internal Revenue Code. Under the plan, participants may elect to
defer a portion of their compensation (between 1% and 10%) and contribute
this amount to the plan. Employee contributions of up to 5% of
compensation are matched 25% by the Company.
Stock Option Plans: Under the Company's 1991 stock option plan, 1995
equity incentive plan and 1996 non-employee director stock option plan,
shares of common stock are reserved for the grant of both incentive and
non-incentive stock options to officers, key employees and directors. The
1991 and 1995 plans also provide for the issuance of restricted stock and
stock appreciation rights. All of the plans provide that option prices
will not be less than the fair market value of the stock at the grant
date. The date on which the options are first exercisable is determined
by the Personnel Committee of the Board of Directors. Options granted
under the 1991 and 1996 plans expire no later than ten years from the
grant date. Options granted under the 1995 plan have such terms as are
determined by the Personnel Committee, except that the term of an
incentive stock option may not exceed 10 years.
A summary of stock option transactions follows:
Number of Average Option
Shares Price Per Share
Balance September 30, 1993 . . . 345,941 $9.20
Granted . . . . . . . . . . . 23,750 $22.25
Exercised . . . . . . . . . . (13,005) $9.20
--------- --------
Balance September 30, 1994 . . . 356,686 $10.07
Granted . . . . . . . . . . . 31,938 $25.14
Conversion of Amity options to
Advantage options . . . . . 97,936 $6.26
Exercised . . . . . . . . . . (115,315) $8.62
--------- --------
Balance September 30, 1995 . . . 371,245 $10.82
Granted . . . . . . . . . . . 26,476 $32.42
Forfeited . . . . . . . . . . (16,250) $24.51
Exercised . . . . . . . . . . (35,887) $6.42
--------- --------
Balance September 30, 1996 . . . 345,584 $20.38
========= ========
Options to purchase 318,146 shares were exercisable as of September 30,
1996. As of that date, options for 608,392 shares were available for
future grant.
Employee Stock Ownership Plan ("ESOP"): The Company sponsors an ESOP
which covers substantially all employees with more than one year of
employment and who have attained the age of 21. In 1992, the ESOP
borrowed $3,036,000 from the Company to purchase 330,000 common shares of
the Company in the initial public offering. The Bank makes scheduled
discretionary cash contributions to the ESOP sufficient to service the
amount borrowed. The unpaid balance of the ESOP loan is reflected as a
reduction from stockholders' equity in the Company's consolidated
statements of financial condition. ESOP expense was $381,882, $366,589
and $347,594 in fiscal years 1994, 1995 and 1996, respectively.
Bank Incentive Plans: The Company has four Bank Incentive Plans ("BIPs")
which acquired a total of 4% of the shares of common stock in the initial
public offering. The Bank contributed $1,518,000 to the BIPs to enable
the BIP trustee to acquire a total of 165,000 shares of the common stock
in the initial public offering. Shares were awarded to employees in
management positions in order to provide them with a proprietary interest
in the Company in a manner designed to encourage such employees to remain
with the Company. A summary of shares granted under the BIPs follows:
Market Value of
Number of Stock at
Shares Date of Grant
Balance September 30, 1993 . . . 111,231 $9.20
Granted . . . . . . . . . . . 20,800 $21.92
Forfeited . . . . . . . . . . (2,660) $9.20
--------- -------
Balance September 30, 1994 . . . 129,371 $11.25
Granted . . . . . . . . . . . 8,116 $22.20
Forfeited . . . . . . . . . . (8,700) $10.34
--------- -------
Balance September 30, 1995 . . . 128,787 $12.00
Granted . . . . . . . . . . . 7,747 $27.35
Forfeited . . . . . . . . . . (13,579) $22.25
--------- ------
Balance September 30, 1996 122,955 $11.83
========= ======
The contribution to the BIPs is being amortized to compensation expense as
the Bank's employees become vested in those shares. Amortization expense
was $270,698, $294,369 and $132,386 for fiscal years 1994, 1995 and 1996,
respectively. The unamortized cost, which is comparable to deferred
compensation, is reflected as a reduction of stockholders' equity.
14. Financial instruments with off-balance sheet risk
The Company is a party to various financial instruments with off-balance
sheet risk in the normal course of business. These instruments include
commitments to extend credit and interest rate swaps used to manage its
interest rate risk. These instruments involve, in varying degrees,
elements of credit risk and interest rate risk in excess of the amounts
recorded in the consolidated financial statements. The contract amounts
of these instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend
credit and minimize interest rate risk is represented by the contractual
amount of those instruments. The Company uses the same credit policies in
making commitments as it does for on balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk are as
follows at September 30:
1995 1996
Commitments to originate mortgage loans:
Fixed-rate (average rate of 7.89%-1995) $1,799,300 $1,119,500
Adjustable-rate . . . . . . . . . . . . $9,405,300 $7,401,310
Unused lines of credit:
Home equity (adjustable-rate) . . . . . $17,980,000 $27,592,918
Commercial loans (fixed-rate) . . . . . $13,752,000 $28,080,000
Interest rate swaps--notional amount (pay
fixed rate, receive floating rate):
Maturing 1997 . . . . . . . . . . . . . $30,000,000 $30,000,000
Maturing 1998 . . . . . . . . . . . . . 10,000,000 10,000,000
---------- ----------
Total interest rate swaps . . . . . . . $40,000,000 $40,000,000
========== ==========
Commitments to originate mortgage loans are agreements to lend to
customers as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some
commitments expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis.
Collateral varies but consists primarily of one- to four-family residences
and income-producing commmercial properties.
Commitments to extend credit on a fixed-rate basis expose the Company to a
certain amount of interest-rate risk if market rates of interest
substantially increase during the commitment period. This exposure,
however, is mitigated by contracting for firm commitments to sell the
majority of these loans. Commitments outstanding to sell loans at
September 30, 1996 amounted to $3,320,000.
The Company enters into interest rate swaps to help manage its interest
rate risk. In these swaps, the Company agrees to exchange, at specified
intervals, the difference between fixed- and floating-interest amounts
calculated on an agreed-upon notional principal amount. Because the
Company tends to have interest-earning assets with a longer duration than
its interest-bearing liabilities, interest-rate swaps are used in which
the Company pays a fixed rate and receives a floating rate to reduce the
impact of changes in interest rates on the Company's net interest income.
The net amount payable or receivable from interest-rate swap agreements
is accrued as an adjustment to interest income.
The Company's current credit exposure on swaps is limited to the value of
interest-rate swaps that have become favorable to the Company. At
September 30, 1996, the market value of interest-rate swaps in a favorable
position was $22,000 while the net fair value of all interest-rate swaps
was a negative $184,000.
15. Fair value of financial instruments
The Company discloses fair value information about financial instruments,
whether or not recognized in the statements of financial condition, for
which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent
market data and, in many cases, could not be realized in immediate
settlement of the instrument. Certain financial instruments and all non-
financial instruments are excluded from this disclosure. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
It is not the Company's intent to liquidate and realize the difference
between market value and carrying value of its financial instruments. Even
if the Company's financial instruments were liquidated, there can be no
assurance that the estimated market values could be realized.
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for financial instruments:
Cash and cash equivalents, certificates of deposit and accrued interest:
The carrying amounts reported in the statements of financial condition
approximate the fair values of those assets and liabilities.
Investment and mortgage securities: Fair values for investment, mortgage-
backed and mortgage-related securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans receivable: The fair value of loans held for sale is based on
quoted market prices. The fair value of residential mortgage loans held
for investment, commercial real estate loans, commercial business loans,
consumer loans and other loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Mortgage servicing rights: Mortgage loan servicing rights, which
represent the Company's contractual right to service loans for others,
represent a distinct income producing intangible asset that could be
realized by selling those rights to another party. The Company's
consolidated balance sheet reflects only originated mortgage servicing
rights acquired after September 30, 1995. The Company has no purchased
servicing rights.
Federal Home Loan Bank stock: The fair value of Federal Home Loan Bank
stock is based on cost, which is also equal to its redeemable value.
Deposits: The fair value disclosed for NOW accounts, passbook accounts
and money market accounts is equal to the amount payable on demand (i.e.,
their carrying value). The fair value of fixed-rate certificates of
deposit is estimated using discounted cash flow calculations with the
discount rates equal to interest rates currently being offered by the
Company for certificates with similar terms and maturities.
Notes payable to Federal Home Loan Bank and Securities sold under
agreements to repurchase: The fair value of these borrowings is estimated
using discounted cash flow calculations with the discount rates equal to
interest rates currently being offered for borrowings with similar terms
and maturities.
The carrying amounts and fair values of the Company's financial
instruments consist of the following:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1996
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents . . . . . $32,510,205 $32,510,205 $35,445,646 $35,445,646
Certificates of deposit . . . . . . 308,247 308,247 611,067 611,067
U.S. government and agency
securities available for sale . 25,016,363 25,016,363 29,385,356 29,385,356
Mortgage-backed securities
available for sale . . . . . . . 145,030,586 145,030,586 140,086,665 140,086,665
Mortgage-backed securities held to
maturity . . . . . . . . . . . . 44,766,566 45,663,035 11,011,238 11,159,367
Mortgage-related securities
available for sale . . . . . . . 10,495,782 10,495,782 15,226,120 15,226,120
Mortgage-related securities held to
maturity . . . . . . . . . . . . 151,306,148 153,593,126 171,470,022 172,913,430
Marketable equity securities . . . 4,644,340 4,644,340 5,043,091 5,043,091
Loans held for sale . . . . . . . . 2,405,000 2,405,000 3,056,000 3,056,000
Loans receivable:
First mortgage loans . . . . . . 467,578,153 480,203,467 494,452,348 502,024,395
Consumer loans . . . . . . . . . 28,357,412 28,843,786 50,863,848 51,574,813
Commercial business loans . . . 10,551,451 10,582,856 10,691,062 10,731,328
Accrued interest receivable . . 3,390,111 3,390,111 3,718,382 3,718,382
----------- ----------- ----------- -----------
509,877,127 523,020,220 559,725,640 568,048,918
Mortgage servicing rights - - 630,512 724,268
Federal Home Loan Bank stock . . . 9,847,600 9,847,600 8,795,600 8,795,600
Accrued interest on investments and
mortgage securities . . . . . . 2,702,495 2,702,495 2,640,672 2,640,672
----------- ----------- ----------- -----------
$938,910,459 $955,236,999 $983,127,629 $993,136,200
=========== =========== =========== ===========
Financial Liabilitities
Deposits:
NOW accounts . . . . . . . . . . $75,409,044 $75,409,044 $81,668,470 $81,668,470
Variable rate money market
deposits . . . . . . . . . . 133,621,391 133,621,391 147,038,443 147,038,443
Regular savings accounts . . . . 48,323,290 48,323,290 43,010,687 43,010,687
Certificates of deposit . . . . 424,571,158 425,835,120 409,133,265 410,443,753
----------- ----------- ----------- -----------
681,924,883 683,188,845 680,850,865 682,161,353
Notes payable to Federal Home Loan
Bank . . . . . . . . . . . . . . . 163,010,000 163,385,634 175,910,000 175,848,137
Securities sold under agreement to
repurchase . . . . . . . . . . . . 12,109,637 12,109,637 48,355,457 48,419,656
Accrued interest on deposit
accounts . . . . . . . . . . . . . 4,526,628 4,526,628 3,711,995 3,711,995
Accrued interest on borrowings . . 971,105 971,105 1,377,204 1,377,204
Interest-rate swaps . . . . . . . . - 494,421 - 183,641
----------- ----------- ----------- -----------
$862,542,253 $864,676,270 $910,205,521 $911,701,986
=========== =========== =========== ===========
</TABLE>
The above table does not include any amount for the value of core deposit
intangibles. The above table also does not include off-balance sheet
items except interest-rate swaps (see Note 14) since the fair value of
these items is not significant.
16. Condensed parent company only financial statements
The following condensed statements of financial condition as of September
30, 1995 and 1996 and the condensed statements of income and cash flows
for the years ended September 30, 1995 and 1996 for the Company only
should be read in conjunction with the consolidated financial statements
and the notes thereto.
Advantage Bancorp, Inc.
Statements of Financial Condition
September 30
Assets 1995 1996
Cash and cash equivalents deposited in $7,891,124 $11,971,650
Bank . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . 10,247 11,067
Marketable equity securities available 4,644,340 5,043,091
for sale . . . . . . . . . . . . . . .
U.S. agency securities available for sale 1,006,875 500,514
Mortgage-backed securities available for
sale . . . . . . . . . . . . . . . . . 448,026 306,110
Mortgage-related securities available for
sale . . . . . . . . . . . . . . . . . 3,743,508 3,216,380
Equity in net assets of subsidiaries . . 76,274,199 69,348,903
Accrued interest on investments and
mortgage securities . . . . . . . . . 20,437 17,465
Prepaid income taxes . . . . . . . . . . 231,033 -
Other assets . . . . . . . . . . . . . . 1,427 -
---------- ----------
$94,271,216 $90,415,180
========== ==========
Liabilities
Other liabilities . . . . . . . . . . . . $33,690 $307,015
Deferred income taxes . . . . . . . . . . 272,427 106,676
Accrued income taxes . . . . . . . . . . - 240,309
Payable to Bank - unearned restricted
stock . . . . . . . . . . . . . . . . 886,606 894,777
--------- ---------
Total liabilities . . . . . . . . 1,192,723 1,548,777
========= =========
Stockholders' Equity
Common stock . . . . . . . . . . . . . . 33,000 33,000
Additional paid-in capital . . . . . . . 37,249,638 37,751,499
Loan to Employee Stock Ownership Plan . (1,985,803) (1,704,941)
Unearned restricted stock awarded . . . . (886,606) (894,777)
Unrealized gain (loss) on securities
available for sale . . . . . . . . . . 774,844 (699,857)
Treasury stock . . . . . . . . . . . . . (12,351,400) (17,627,105)
Retained earnings . . . . . . . . . . . . 70,244,820 72,008,584
---------- ----------
Total stockholders' equity . . . . 93,078,493 88,866,403
---------- ----------
$94,271,216 $90,415,180
========== ==========
<PAGE>
Statements of Income
Advantage Bancorp, Inc.
Year Ended September 30
1994 1995 1996
Interest and dividend income:
Interest income from deposits
in Bank . . . . . . . . . . $376,623 $467,569 $583,889
Interest on mortgage
securities . . . . . . . . . 158,039 249,254 155,054
Interest on loan to Employee
Stock Ownership Plan . . . . 165,026 206,962 167,052
Other interest and dividends 65,521 87,562 197,952
--------- --------- ----------
Total interest and dividend
income . . . . . . . . . . . 765,209 1,011,347 1,103,947
Non-interest income:
Equity in net income of Bank
and subsidiaries . . . . . . 6,966,458 7,602,935 2,247,751
Gain on sale of securities . - 145,000 973,848
--------- --------- ---------
Total non-interest income . . 6,966,458 7,747,935 3,221,599
--------- --------- ---------
7,731,667 8,759,282 4,325,546
Non-interest expense . . . . . 176,226 291,138 576,867
--------- --------- ---------
Income before income taxes . . 7,555,441 8,468,144 3,748,679
Income taxes . . . . . . . . . 215,370 317,159 716,142
--------- --------- ---------
Net income . . . . . . . . . . $7,340,071 $8,150,985 $3,032,537
========= ========= =========
<PAGE>
Statements of Cash Flows
Advantage Bancorp, Inc.
Year Ended September 30
1994 1995 1996
Operating activities:
Net income . . . . . . . . . $7,340,071 $8,150,985 $3,032,537
Less equity in earnings of the
Bank . . . . . . . . . . (6,966,458) (7,602,935) (2,247,751)
Decrease in interest receivable (1,446) 164,816 2,972
Increase (decrease) in accrued
income taxes . . . . . . . 9,972 (114,813) 471,342
Net amortization of discount on
securities . . . . . . . . (158,039) (248,382) (117,738)
Other . . . . . . . . . . . . (186,068) 297,950 254,703
--------- -------- ---------
Net cash provided by operating
activities . . . . . . . . . 38,032 647,621 1,396,065
Investing activities:
Dividends from Bank . . . . . 8,841,000 21,250,000 8,250,000
Proceeds from sale of
marketable equity securities - 435,750 2,088,713
Principal repayments on
mortgage-related securities 1,038,107 366,046 514,598
Principal repayments on
mortgage-backed securities - - 156,669
Proceeds from maturities of
U.S. government securities - - 500,000
Purchase of marketable
securities available for sale (2,648,458) (1,553,188) (2,785,453)
Principal repayments on loan to
Employee Stock Ownership Plan 232,804 511,988 280,862
Purchase of certificates of
deposit . . . . . . . . . . (10,061) - -
Business acquisition, net of
cash and cash equivalents
acquired of $1,243,515:
Investment in Bank . . . . - (22,371,397) -
Mortgage-backed securities
available for sale . . . . - (453,733) -
U.S. agency securities
available for sale . . . . - (970,937) -
Other - net . . . . . . . . - (49,838) -
--------- ----------- ---------
Net cash provided by (used in)
investing activities . . . . 7,453,392 (2,835,309) 9,005,389
Financing activities:
Proceeds from exercise of stock
options . . . . . . . . . . 119,647 994,252 230,303
Dividends paid . . . . . . . - (665,120) (1,045,230)
Purchase of treasury stock . (2,164,228) (3,781,661) (5,729,530)
Other . . . . . . . . . . . . - - 223,529
---------- ---------- ----------
Net cash used in financing
activities . . . . . . . . . (2,044,581) (3,452,529) (6,320,928)
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents . . . . 5,446,843 (5,640,217) 4,080,526
Cash and cash equivalents at
beginning of period . . . . . 8,084,498 13,531,341 7,891,124
---------- ---------- ----------
Cash and cash equivalents at end
of period . . . . . . . . . . $13,531,341 $7,891,124 $11,971,650
========== ========= ==========
17. Investments in and advances to unconsolidated partnerships
The Company held the following investments in and advances to
unconsolidated partnerships:
September 30
1995 1996
Cranberry III Partnership (50% ownership
interest) . . . . . . . . . . . . . . . . $4,716,291 $6,710,667
Geneva Professional Building Associates (75%
ownership interest) . . . . . . . . . . . 155,385 182,378
Pleasantview Limited Partnership (55%
ownership interest) . . . . . . . . . . . - 504,371
--------- ----------
$4,871,676 $7,397,416
========= =========
Cranberry III Partnership owns a 264-unit apartment complex. Condensed
financial statements of this partnership are as follows:
Cranberry III Partnerchip
Balance Sheets (Unaudited)
September 30
1995 1996
Assets
Land, buildings and furniture-net . . $7,411,833 $7,190,381
Other assets . . . . . . . . . . . . 776,702 790,447
--------- ---------
$8,188,535 $7,980,828
========= =========
Liabilities and Partners' Capital
Mortgage payable to the Bank . . . . 3,955,315 5,967,370
Other liabilities . . . . . . . . . . 2,640,824 456,422
Partners' capital:
Advantage Bank . . . . . . . . . . 796,198 778,518
Other partners . . . . . . . . . . 796,198 778,518
--------- ---------
$8,188,535 $7,980,828
========= =========
STATEMENTS OF INCOME (Unaudited)
Year Ended September 30
1994 1995 1996
Rental and other income . . . . $1,677,575 1,699,053 1,748,315
Rental expense . . . . . . . . 788,122 725,631 810,585
--------- --------- ---------
889,453 973,422 937,730
Depreciation . . . . . . . . . 233,020 230,978 221,449
Interest expense . . . . . . . 517,797 555,376 551,640
--------- -------- --------
Net income . . . . . . . . . . $138,636 $187,068 $164,641
======== ======= =======
The Geneva Professional Building Associates owns a medical office building
which is funded by a mortgage loan from an unrelated financial institution
with an outstanding balance at September 30, 1996 of $311,555. Operating
results in 1994, 1995 and 1996 yielded cash flows of $42,896, $50,373 and
$51,518 after payment of financing costs, respectively.
Pleasantview Limited Partnership owns an 30-unit apartment complex which
is funded by a mortgage loan from an unrelated financial institution with
an outstanding balance at September 30, 1996 of $794,000. Pleasantview
began operations in June 1996 and had net income of $19,000 for the period
ended September 30, 1996. The property qualifies for the low income
housing tax credit under the Internal Revenue Code.
18. Mortgage banking activities
Mortgage banking activities are summarized as follows:
At, or For the Year Ended,
September 30
1994 1995 1996
Statement of financial
condition information:
Mortgage loans held for sale $984,200 $2,405,000 $3,056,000
======= ========= =========
Mortgage servicing rights . . $ - $ - $630,512
======= ======== ========
Statement of income
information:
Loan servicing fees . . . . . $346,287 $376,475 $387,715
======= ======= =======
Gain on sales of mortgage
loans held for sale . . . . $583,957 $107,513 $875,830
======= ======= =======
Amortization of mortgage
servicing rights . . . . . . $ - $ - $42,567
======= ======= =======
Statement of cash flow
information:
Mortgage loans originated for
sale . . . . . . . . . . . . $43,761,724 $17,349,224 $55,754,049
Sales of mortgage loans
originated for sale . . . . $47,477,928 $15,928,424 $55,103,049
Loans serviced for investors (primarily FNMA and FHLMC) were $135,418,000,
$147,313,000 and $179,183,000 at September 30, 1994, 1995 and 1996,
respectively. These loans are not reflected in the consolidated financial
statements.
The Company originates mortgage loans which may be sold in the secondary
market or to other private investors if the loans do not meet the
Company's investment objectives. All loans are sold on a nonrecourse
basis and the servicing of these loans may or may not be retained by the
Company. Direct origination and servicing costs for mortgage banking
activities cannot be presented as these operations are integrated with and
not separable from the origination and servicing of portfolio loans, and,
as a result, cannot be accurately estimated.
19. Federal Legislation
On September 30, 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund (the SAIF) of the Federal Deposit Insurance
Corporation (FDIC), which insures deposits of thrifts such as the Bank.
Effective January 1, 1997, the new law reduces FDIC insurance premiums
for SAIF members from a rate of 23 cents to a rate of 6.4 cents for every
$100 of deposits . Management currently anticipates that this premium
reduction will save the Bank approximately $1,100,000 per year on a pre-
tax basis. The new law imposes on SAIF members a one-time assessment
payable in November 1996 equal to 65.7 basis points (0.657%) based on
insured deposits as of March 31, 1995. The Bank's one-time assessment of
$4,435,000 was expensed during the year ended September 30, 1996.
The new law also provides for the merger of the SAIF and the Bank
Insurance Fund (BIF) as of January 1, 1999 if there are no savings
associations (not including state savings banks) in existence on that
date, although it is silent on how rechartering will occur. The Treasury
Department is directed to report to Congress by March 31, 1997 with its
recommendations on a common charter for banks and savings institutions.
The Company expects that any change in charter of the Bank will not have a
material effect on the operations of the Bank or the Company.
<PAGE>
[Page 56 of the 1996 Annual Report]
Corporate Information
Stock Price Information
Advantage Bancorp, Inc.'s common stock is traded on The Nasdaq Stock
Market under the symbol AADV. The table below shows the reported high and
low sale prices of the common stock and the dividends declared per share
during the periods indicated.
Cash
High Low Dividend
Fiscal year 1995:
First quarter. . . . . . . . . $25.20 $22.20 $ -
Second quarter . . . . . . . . $23.80 $22.00 $.064
Third quarter. . . . . . . . . $24.20 $23.00 $.064
Fourth quarter . . . . . . . . $27.00 $23.90 $.064
Fiscal year 1996:
First quarter. . . . . . . . . $31.40 $26.00 $.064
Second quarter . . . . . . . . $35.00 $28.50 $.080
Third quarter. . . . . . . . . $35.50 $30.75 $.080
Fourth quarter . . . . . . . . $34.25 $32.25 $.080
For a description of restrictions on the ability of the Company to pay
dividends, see Note 11 of the Notes to the Consolidated Financial
Statements.
As of September 30, 1996, there were approximately 2,000 shareholders of
record.
Investor Information
Shareholders, investors and analysts interested in additional information
may contact:
Paul P. Gergen, President
or
John Stampfl, Chief Financial Officer
Advantage Bancorp, Inc.
5935 Seventh Avenue
Kenosha, WI 53140
(414) 658-4861
Annual Report on Form 10-K
Copies of the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission may be obtained without charge by
contacting:
Advantage Bancorp, Inc.
Att: Dorene Santarelli
5935 Seventh Avenue
Kenosha, WI 53140
(414) 658-5447
Annual Meeting of Shareholders
The Company's 1997 Annual Meeting of Shareholders will be held at 10:30
a.m. C.S.T. on January 30, 1997, at Gateway Technical College, 3520 30th
Avenue, Kenosha, Wisconsin. All shareholders are cordially invited to
attend.
Stock Transfer Agent
The Company's transfer agent, Firstar Trust Company, maintains all
shareholder records and can assist with stock transfer and registration,
address changes, enrollment in the dividend reinvestment plan, changes or
corrections in social security or tax identification numbers and Form 1099
tax reporting questions. If you have questions, please contact the stock
transfer agent at the address below:
Firstar Trust Company
Attn: Corporate Trust Department
615 E. Michigan Street
Milwaukee, WI 53202
(800) 637-7549
Corporate Headquarters
Advantage Bancorp, Inc.
5935 Seventh Avenue
Kenosha, WI 53140
Independent Auditors
Ernst & Young LLP
111 E. Kilbourn Avenue
Milwaukee, WI 53202
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8) pertaining to the Advantage Bancorp, Inc. 1991 Stock
Option and Incentive Plan, the Amity Bancshares, Inc. Stock Option Plan
and Incentive Plan, the Advantage Bancorp, Inc. Employees Profit Sharing
and Savings Retirement Plan, the Advantage Bancorp, Inc. 1996 Non-Employee
Director Stock Option Plan and the Advantage Bancorp, Inc. 1995 Equity
Incentive Plan, of our report dated October 25, 1996, with respect to the
consolidated financial statements of Advantage Bancorp, Inc. incorporated
by reference in the Annual Report (Form 10-K) for the year ended
September 30, 1996.
Ernst & Young LLP
December 20, 1996
Milwaukee, Wisconsin
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,731
<INT-BEARING-DEPOSITS> 18,326
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,741
<INVESTMENTS-CARRYING> 182,481
<INVESTMENTS-MARKET> 184,072
<LOANS> 568,555
<ALLOWANCE> 5,773
<TOTAL-ASSETS> 1,016,386
<DEPOSITS> 680,851
<SHORT-TERM> 83,978
<LIABILITIES-OTHER> 22,403
<LONG-TERM> 140,287
0
0
<COMMON> 37,784
<OTHER-SE> 51,082
<TOTAL-LIABILITIES-AND-EQUITY> 1,016,385
<INTEREST-LOAN> 45,038
<INTEREST-INVEST> 27,555
<INTEREST-OTHER> 997
<INTEREST-TOTAL> 73,590
<INTEREST-DEPOSIT> 31,822
<INTEREST-EXPENSE> 43,765
<INTEREST-INCOME-NET> 29,825
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 866
<EXPENSE-OTHER> 32,863
<INCOME-PRETAX> 4,496
<INCOME-PRE-EXTRAORDINARY> 4,496
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,033
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 3.19
<LOANS-NON> 3,414
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,271
<CHARGE-OFFS> 41
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 5,773
<ALLOWANCE-DOMESTIC> 5,773
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
