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, 1997
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 Organization) Identification No.)
5935 Seventh Avenue 53140
Kenosha, Wisconsin (ZIP Code)
(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
November 21, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $187,445,000.*
The number of shares of Common Stock outstanding as of November 21, 1997
was 3,235,830 shares.
Documents Incorporated by Reference:
None
* 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. 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.
The Company's executive office is located at 5935 Seventh Avenue,
Kenosha, WI 53140. The telephone number is (414) 658-4861.
Proposed Merger
On November 3, 1997, the Company entered into an Agreement and Plan of
Merger with Marshall & Ilsley Corporation, a Wisconsin corporation,
providing for the merger of the Company with and into Marshall & Ilsley
Corporation. The merger and related transactions are discussed in more
detail in "Management's Discussion and Analysis". Copies of the Agreement
and Plan of Merger and the related Stock Option Agreement have been filed
as exhibits to this Annual Report on Form 10-K.
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.
Additional factors that may cause actual results to differ materially from
those contemplated in the forward-looking statements include: interest
rate trends, the general economic climate in the Company's market area,
loan delinquency rates and legislative enactments or regulatory changes
which adversely affect the business of the Company and/or the Bank.
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.
Market Area
At September 30, 1997, 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 85,000 and is located in
southeastern Wisconsin approximately 40 miles south of Milwaukee,
Wisconsin and 55 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.
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, 1996 based on its own calculation using publicly
available data: Kenosha County, Wisconsin - 28%; Walworth County,
Wisconsin - 5%; Racine County, Wisconsin - less than 1%, Lake County,
Illinois - 1%, and Cook County, Illinois - less than 1%.
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
1993 1994 1995 1996 1997
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-
family (1) . . . . $292,093 69.97% $307,169 68.17% $399,467 72.90% $418,647 70.01% $378,701 64.42%
Multi-family . . . . 31,254 7.49 30,667 6.81 27,810 5.08 24,993 4.18 26,923 4.58
Commercial . . . . . 46,570 11.15 51,962 11.53 49,393 9.01 54,671 9.14 63,755 10.85
One- to four-family
construction (2) 8,532 2.04 12,185 2.70 11,057 2.02 7,598 1.27 5,148 0.88
Other construction and
land . . . . . . . 13,238 3.17 16,474 3.66 20,629 3.77 30,161 5.04 24,448 4.16
-------- ------ -------- ------- -------- ------ -------- ------ -------- ------
Total real estate loans 391,687 93.82 418,457 92.88 508,356 92.78 536,070 89.64 498,975 84.89
-------- ------ -------- ------- -------- ------ -------- ------ -------- ------
Other Loans:
Consumer loans:
Home equity . . . . 9,570 2.29 12,051 2.67 22,741 4.15 43,893 7.34 67,997 11.57
Student . . . . . . 2,341 0.56 3,010 0.67 3,613 0.66 4,040 0.68 4,307 0.73
Automobile . . . . . 906 0.22 565 0.13 1,020 0.19 1,553 0.26 1,662 0.28
Other consumer loans 3,857 0.92 4,030 0.89 1,323 0.24 1,732 0.29 2,503 0.43
Commercial business
loans . . . . . . . 9,142 2.19 12,436 2.76 10,853 1.98 10,691 1.79 12,429 2.10
-------- ------ -------- ------- -------- ------ -------- ------ -------- ------
Total other loans . . . 25,816 6.18 32,092 7.12 39,550 7.22 61,909 10.36 88,898 15.11
-------- ------ -------- ------- -------- ------ -------- ------ -------- ------
Gross loans receivable 417,503 100.00% 450,549 100.00% 547,906 100.00% 597,979 100.00% 587,873 100.00%
====== ======= ====== ====== ======
Add: Accrued interest 2,414 2,723 3,390 3,718 3,755
Less:
Undisbursed portion of
loan proceeds . . . (26,844) (19,119) (31,531) (30,100) (19,150)
Unamortized loan fees (2,482) (2,220) (2,017) (2,104) (859)
Allowance for losses on
loans . . . . . . . (4,937) (5,327) (5,271) (5,773) (5,797)
Allowance for
uncollected interest (859) (1,037) (195) (938) (563)
-------- ------- ------- ------- -------
Net deduction . . . (32,708) (24,980) (35,624) (35,197) (22,614)
-------- ------- ------- ------- -------
Total loans receivable,
net . . . . . . . . . $384,795 $425,569 $512,282 $562,782 $565,259
======== ======== ======== ======== ========
(1) Includes construction/permanent loans to persons intending to occupy
their homes upon the completion of construction totalling $37.3
million, $22.5 million, $46.7 million, $50.7 million and $31.8
million as of September 30, 1993, 1994, 1995, 1996 and 1997,
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, 1997. 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 Total
Four- Multi- Commercial Construction Commercial Loans
Maturing Family Family Real Estate and Land Business Consumer Receivable
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Within one year $7,658 $1,300 $22,217 $15,993 $5,667 $3,164 $55,999
After one year:
1 to 3 years 8,018 1,529 21,508 10,223 3,668 7,603 52,549
3 to 5 years 8,502 1,404 6,753 634 1,478 15,281 34,052
5 to 10 years 29,492 4,890 7,958 2,337 648 35,821 81,146
10 to 20 years 82,970 9,112 4,960 409 968 14,070 112,489
Over 20 years 242,061 8,688 359 - 530 251,638
-------- --------- --------- -------- -------- --------- ---------
Total due after
one year . . 371,043 25,623 41,538 13,603 6,762 73,305 531,874
-------- --------- --------- -------- -------- --------- ---------
Gross loan
receivable . $378,701 $26,923 $63,755 $29,596 $12,429 $76,469 $587,873
======== ========= ========= ========= ======== ========= ==========
Add: Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,755
Less: Undisbursed portion of loan proceeds . . . . . . . . . . . . . . . . . . . . . . . . (19,150)
Less: Unamortized loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (859)
Less: Allowance for losses on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,797)
Less: Allowance for uncollected interest . . . . . . . . . . . . . . . . . . . . . . . . . (563)
--------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $565,259
========
</TABLE>
The following table sets forth, at September 30, 1997, the dollar
amount of all loans due after September 30, 1998 and whether such loans
have fixed interest rates or adjustable interest rates.
Due after September 30, 1998
Fixed Adjustable Total
Real estate loans: (In thousands)
One- to four-family . . . $108,853 $262,190 $371,043
Multi-family . . . . . . . 9,928 15,695 25,623
Commercial real estate . . 26,877 14,661 41,538
Construction and land . . 10,192 3,411 13,603
--------- --------- ---------
Total real estate loans . 155,850 295,957 451,807
--------- --------- ---------
Other loans . . . . . . . . . 42,032 38,035 80,067
--------- --------- ---------
Total loans receivable . . $197,882 $333,992 $531,874
========= ========= =========
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, 1997, based on the above, the
Bank's regulatory loan-to-one-borrower limit was $10.7 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 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 requires title insurance on all
first mortgage loans secured by real estate and on second mortgage loans
with balances over $75,000.
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, 1997, $378.7 million, or
64.4%, 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, 1997, the Bank had $68.0
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, 1997, the Bank had approximately
$23.0 million of Non-index ARMs and $231.3 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, 1997, one- to four-family residential loans
included $31.8 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. 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, 1997, the Bank had (in addition to loans to
unconsolidated partnerships) 11 borrowers on multi-family and commercial
real estate loans that were indebted to the Bank in excess of $3.0 million
and 28 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 $8.9 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.
Substantially all of these loans are secured by properties located within
150 miles of 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, 1997, the Bank had $5.1 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, 1997, 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,
1997, 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, 1997, the Bank had two commercial business loans with
balances 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 longer than 60 days, 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, 1997, the Bank serviced
$218.6 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
1995 1996 1997
(in thousands)
Mortgage Loans (gross):
At beginning of period . . . . . . . $418,457 $508,356 $536,070
Business acquisitions . . . . . . . . 33,448 - -
Mortgage loan originations:
114,214
One- to four-family . . . . . . . . 170,377 190,749
Multi-family . . . . . . . . . . . . 4,807 525 7,888
Commercial real estate, other
construction and land . . . . . . . 62,499 78,224 39,833
-------- -------- --------
Total mortgage loans originations
and acquisitions . . . . . . . 214,968 249,126 238,470
-------- -------- --------
Mortgage loans purchased:
One- to four-family . . . . . . . . 9,929 - -
-------- -------- --------
Total mortgage loans purchased . 9,929 0 0
-------- -------- --------
Total mortgage loans originated
and purchased . . . . . . . . . 224,897 249,126 238,470
Principal repayments . . . . . . . . (116,918) (165,561) (154,146)
Transfers (to) from foreclosed
properties . . . . . . . . . . . . . (2,152) (748) 1,665
Sales of fixed rate loans . . . . . . (15,928) (55,103) (123,084)
-------- -------- --------
At end of period . . . . . . . . . . $508,356 $536,070 $498,975
======== ======== ========
Commercial Business Loans (gross):
At beginning of period . . . . . . . $12,436 $10,853 $10,691
Business acquisitions . . . . . . . . 95 - -
Commercial loans originated . . . . . 15,650 15,772 23,116
Principal repayments . . . . . . . . (17,328) (15,934) (21,378)
-------- -------- --------
At end of period . . . . . . . . . . $10,853 $10,691 $12,429
======== ======== ========
Consumer Loans (gross):
At beginning of period . . . . . . . . $19,656 $28,697 $51,218
Business acquisitions . . . . . . . . 3,638 - -
Consumer loans originated . . . . . . 22,091 44,622 58,489
Principal repayments . . . . . . . . (16,688) (22,101) (33,239)
-------- -------- --------
At end of period . . . . . . . . . . $28,697 $51,218 $76,468
======== ======== ========
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 15 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, 1996 and 1997.
<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,
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%
==== ===== ===== ==== ====== ===== ===== ===== =====
Delinquent loans
at September 30,
1997
Real estate:
One- to four-
family . . . 14 $813 0.21% 12 $1,796 0.47% 26 $2,609 0.68%
Multi-family and
commercial . 2 233 0.26 6 645 0.71 8 878 0.97
Construction and
land . . . . 2 78 0.32 1 283 1.16 3 361 1.48
Commercial
business . . . - - - 4 51 0.41 4 51 0.41
Consumer . . . . 6 63 0.08 20 385 0.50 26 448 0.58
----- ------ ----- ----- ----- -----
Total . . . . . . 24 $1,187 0.20% 43 $3,160 0.54% 67 $4,347 0.74%
===== ====== ===== ===== ===== ===== ===== ===== =====
</TABLE>
As of September 30, 1997, loans delinquent 60 days or more totalled
$4.3 million compared to $4.7 million as of September 30, 1996. As a
percent of total loans receivable, delinquencies decreased from 0.79% as
of September 30, 1996 to 0.74% as of September 30, 1997.
Foreclosed Properties. Foreclosed properties increased from $1.4
million as of September 30, 1996 to $1.8 million as of September 30, 1997.
As of September 30, 1997, there was one foreclosed property with a balance
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
1996 1997
(in thousands)
Non-performing loans:
One- to four-family . . . . . . . . . $574 $1,796
Commercial real estate . . . . . . . 708 646
Construction and land . . . . . . . . 1,774 283
Commercial business . . . . . . . . . 274 51
Consumer and other . . . . . . . . . 84 385
------- -------
Total non-performing loans . . . . . 3,414 3,161
------- -------
Foreclosed properties:
One- to four-family . . . . . . . . . 869 954
Commercial real estate . . . . . . . 534 839
Land . . . . . . . . . . . . . . . . - -
------- -------
Total foreclosed properties . . . . . 1,403 1,793
------- -------
Total non-performing assets . . . . . . 4,817 4,954
Non-performing assets not included in
classified assets due to adequate
collateral value:
One- to four-family loans . . . . . . (38) (18)
Commercial real estate loans . . . . - -
Consumer loans . . . . . . . . . . . (15) (30)
Foreclosed properties . . . . . . . . (631) (768)
Additional classified assets (not
considered non-performing):
One- to four-family loans . . . . . . 1,216 856
Multi-family loans . . . . . . . . . - 233
Consumer loans . . . . . . . . . . . 44 62
Commercial real estate loans . . . . 1,311 -
Construction and land . . . . . . . - 78
Commercial business . . . . . . . . . - -
------- -------
Total classified assets . . . . . . . . $6,704 $5,367
======= =======
Total classified assets decreased to $5.4 million as of September 30,
1997 from $6.7 million as of September 30, 1996.
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, 1997, management is not aware of any significant
potential problem loans which are not included in non-performing loans.
For the years ended September 30, 1997 and 1996, additional interest
income which would have been recorded had the non-performing loans been
current in accordance with their original terms amounted to $213,000 and
$265,000, 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 $73,000 and $103,000,
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, 1997.
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
as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1993 September 30, 1994
Percent of Percent of
Loans in Allowance Loans in
Allowance Total Each for Total Each
for Losses Loan Category to 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 . . . . . . . . . . $ 708 $300,625 72.01% $ 789 $319,355 70.88%
Multi-family and commercial . . . . . 3,377 91,062 21.81 3,556 99,103 22.00
Consumer loans . . . . . . . . . . . . . 320 16,674 3.99 330 19,656 4.36
Commercial business . . . . . . . . . . . 532 9,142 2.19 652 12,436 2.76
----- ------- ------- ------ ------- ------
Total . . . . . . . . . . . . . . . . . $4,937 $417,503 100.00% $5,327 $450,550 100.00%
====== ======= ======= ====== ======= ======
<CAPTION>
September 30, 1995 September 30, 1996 September 30, 1997
Percent of Percent of Percent
Loans in Loans in of Loans
Allowance Each Allowance Each Allowance in Each
for Total Category for Category for Total Category
Losses Loan to Total Losses Total Loan to Total Losses Loan to Total
on Loans Balances Loans on Loans Balances Loans on Loans Balances Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans:
One- to four-
family . . . . $1,262 $410,524 72.90% $1,782 $426,245 71.28% $1,361 $383,849 65.29%
Multi-family
and commercial 2,824 97,832 19.88 2,824 109,824 18.37 2,824 115,126 19.58
Consumer loans . 360 28,697 5.24 351 51,219 8.57 241 76,469 13.01
Commercial
business . . . . 825 10,853 1.98 816 10,691 1.78 1,371 12,429 2.12
------ ------- ------ ------ ------- ------ ------ ------- ------
Total . . . . . $5,271 $547,906 100.00% $5,773 $597,979 100.00% $5,797 $587,873 100.00%
====== ======= ====== ====== ======= ====== ====== ======= ======
</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
1995 1996 1997
(in thousands)
At beginning of period . . . $240,676 $351,599 $337,794
Business acquisitions . . . . 34,168 - -
Purchases . . . . . . . . . . 118,139 46,924 73,149
Principal repayments and (37,782) (59,016) (55,684)
amortization . . . . . . . .
Sales . . . . . . . . . . . . (9,459) - -
Market value adjustment . . . 5,857 (1,713) 2,953
-------- -------- --------
At end of period . . . . . . $351,599 $337,794 $358,212
======== ======== ========
The following table shows the carrying value of the Company's
mortgage-related securities by type:
<TABLE>
<CAPTION>
September 30
Type 1993 1994 1995 1996 1997
(in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities
held to maturity:
One- to four-family . . . . . $164,921 $ 29,201 $ 44,767 $ 11,011 $ 8,322
Multi-family . . . . . . . . 4,843 - - - -
Commercial real estate . . . 80 - - - -
------- ------- -------- -------- --------
169,844 29,201 44,767 11,011 8,322
Mortgage-related securities
held to maturity:
Fixed-rate CMOs (1-4 family) 35,610 69,633 107,700 132,246 166,880
Floating-rate CMOs (1-4
family) . . . . . . . . . . - - 43,606 39,224 51,571
Interest-only strips . . . . 91 - - - -
Principal-only strips . . . . 10,071 - - - -
CMO residual . . . . . . . . 23 - - - -
------- ------- -------- -------- --------
45,795 69,633 151,306 171,470 218,451
Mortgage-backed securities
One-to four-family . . . . . - 129,000 143,971 139,766 117,033
Multi-family . . . . . . . . - 2,213 1,060 321 300
------- ------- -------- -------- --------
- 131,213 145,031 140,087 117,333
Mortgage-related securities
available for sale:
CMOs (1-4 family) . . . . . . - - - 5,684 5,357
Interest-only strips . . . . - 3,948 2,738 2,815 2,194
Principal-only strips . . . . - 6,681 7,757 6,727 6,555
------- ------- -------- -------- --------
- 10,629 10,495 15,226 14,106
------- ------- -------- -------- --------
Total mortgage securities . . . $215,639 $240,676 $351,599 $337,794 $358,212
======= ======= ======== ======== ========
</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,
1997 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 are similar to the risks
involved in holding mortgage-backed securities. The risks relating to the
fixed-rate securities are that (1) 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) prepayment rates
on the underlying mortgage-backed securities will exceed projections
resulting in a shorter than expected life possibly during a period in
which the funds will have to be 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 rates 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 1997 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, 1997, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
and current borrowings) was 8.5% 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>
September 30
1995 1996 1997
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities . . . . . . . . $25,016 100.0% $29,385 100.0% $19,956 100.0%
------- ----- ------- ------ ------ -----
Total . . . . . . . . . . . $25,016 100.0% $29,385 100.0% $19,956 100.0%
======= ===== ======= ====== ====== =====
Other investments:
Demand deposits in other
financial institutions . . . $9,603 48.6% $17,715 65.3% $30,519 76.4%
Time deposits in other
financial institutions . . . 308 1.6 611 2.3 509 1.3
------- ------- ------- ------ -------- ------
Subtotal . . . . . . . . . . 9,911 50.2 18,326 67.6 31,028 77.7
FHLB stock . . . . . . . . . 9,848 49.8 8,796 32.4 8,918 22.3
------- ------- ------- ------ ------- ------
Total . . . . . . . . . . . . $19,759 100.0% $27,122 100.0% $39,946 100.0%
======= ======= ======= ====== ======= ======
</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, 1997
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) $19,956 $ - $ - $19,956 $19,956
======= ====== ======= ======= =======
Other investments:
Demand deposits in other
financial institutions . . . $ 30,519 $ - $ - $ 30,519 $30,519
Time deposits in other
financial institutions . . . 509 - - 509 509
-------- ------ -------- ------- -------
Total . . . . . . . . . . . $31,028 $ - $ - $31,028 $31,028
======= ====== ======= ======= =======
Total securities available for
sale and other investments . $50,984 $ - $ - $50,984 $50,984
======= ====== ======= ======= =======
Weighted average yield . . . . 6.34% 6.34%
===== =====
_________________________
(1) These securities contractually mature between one and five years from
September 30, 1997 but are classified as maturing in one year as they
are classified as available for sale.
</TABLE>
Subsidiaries
As of September 30, 1997, the Bank had three active wholly-owned
subsidiaries, Advantage Real Estate Services, Inc. ("ARES"), Advantage
Investments, Inc. ("AII") and Advantage Financial Services and Insurance,
Inc.("AFS&I").
As of September 30, 1997, ARES had investments in three partnerships,
Cranberry III Partnership, Geneva Professional Building Associates, and
Pleasantview Limited Partnership with book values of $786,000, $217,000
and $481,000, respectively. These partnerships have investments in real
estate. In addition to ARES' investment, the Company has a total of $5.7
million in adjustable-rate mortgage loans to the Cranberry III Partnership
as of September 30, 1997. 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, 1997,
AII's total investment in mortgage-related securities was $181.0 million
and its investment in U.S. government agency securities was $5.0 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 1997 fiscal
year were $610,000.
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 $89.3 million and $74.6 million in brokered certificates of
deposits as of September 30, 1996 and September 30, 1997, 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 1995 1996 1997
(In thousands)
below 4.00% . . . $2,141 $114 $815
4.00 - 5.99% . . 176,292 183,666 155,146
6.00 - 7.99% . . 122,341 115,153 139,818
8.00% and above . 1,668 552 414
------- ------- -------
$302,442 $299,485 $296,193
======= ======= =======
The following table presents, by various interest-rate intervals, the
amounts of long-term (one year and over) time deposits at September 30,
1997 maturing during the periods indicated.
<TABLE>
<CAPTION>
3.99% 4.00% 6.00% 8.00%
or to to and Percent
Less 5.99% 7.99% above Total of Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Accounts maturing in year
ending:
September 30, 1998 . . $609 $89,997 $61,517 $293 $152,416 51.5%
September 30, 1999 . . 206 42,488 23,028 121 65,843 22.2
September 30, 2000 . . 0 17,670 48,061 0 65,731 22.2
After September 30, 2000 0 4,991 7,212 - 12,203 4.1
---- ------- ------- ---- ------- -----
Total . . . . . . . . . . $815 $155,146 $139,818 $414 $296,193 100.0%
Percent of total . . . . 0.3% 52.4% 47.2% 0.1% 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, 1997 by time remaining to
maturity.
September 30,
1997
Maturities (In thousands)
October 1, 1997 through December 31, 1997 . . . $12,578
January 1, 1998 through March 31, 1998 . . . . 7,859
April 1, 1998 through June 30, 1998 . . . . . . 4,827
July 1, 1998 through September 30, 1998 . . . . 6,356
October 1, 1998 and after . . . . . . . . . . . 8,199
---------
$39,819
=========
The Bank's deposit base at September 30, 1997 included $391.9 million
of certificates of deposits with a weighted average interest rate of
5.79%. Of these certificates of deposit, $248.1 million will mature
during the 12 months ending September 30, 1998. 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
1995 1996 1997
(in thousands)
Maximum month-end balance:
FHLB borrowings . . . . . . . . . . $163,010 $175,910 $176,360
Securities sold under agreements to
repurchase . . . . . . . . . . . . 12,110 48,355 83,262
Average daily balance:
FHLB borrowings . . . . . . . . . . 150,484 165,131 164,710
Securities sold under agreements to
repurchase . . . . . . . . . . . . 4,289 19,779 72,105
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
1995 1996 1997
(in thousands)
FHLB borrowings . . . . . . . . . . . $163,010 $175,910 $176,360
Securities sold under agreements to
repurchase . . . . . . . . . . . . . 12,110 48,355 72,115
------- ------- -------
Total borrowings . . . . . . . . . . . $175,120 $224,265 $248,475
======= ======= =======
Weighted average interest rate of FHLB
borrowings . . . . . . . . . . . . . 6.20% 6.16% 6.44%
Weighted average interest rate of
securities sold under agreements to
repurchase . . . . . . . . . . . . . 5.77% 5.66% 5.77%
Employees
At September 30, 1997, the Company and its subsidiaries had a total of
271 full-time employees and 58 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.
Legislative Proposals
Several broad financial reform proposals were introduced in Congress in
1997 which, by their terms, could significantly affect federally chartered
savings institutions, including proposals which would eliminate the
federal thrift charter and require federal thrifts, such as the Bank, to
convert to national banks. Management of the Company is unable to predict
whether any such legislative proposal will be enacted into law in its
current form or with substantial modifications and, accordingly,
management cannot predict what impact, if any, such legislation may have
on the Company or the Bank.
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, 1997 was $103,000 (based upon the Bank's assets as of
March 31, 1997 of $1.01 billion and the current OTS assessment rate).
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.
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, 1997, the Bank had $74.6 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 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.
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.
Prior to January 1, 1997, 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, SAIF insurance premiums were 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, effective as of 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.
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.
As of September 30, 1997, the Bank had approximately $620 million of
deposit accounts covered by deposit insurance and was classified as well
capitalized and healthy.
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, 1997:
Risk-
Tangible Core based
Capital Capital Capital
(Dollars in thousands)
Bank's regulatory percentage 6.43% 6.43% 14.81%
Required regulatory percentage 1.50% 3.00% 8.00%
----- ------ ------
Excess regulatory percentage 4.93% 3.43% 6.81%
===== ====== ======
Bank's regulatory capital $65,339 $65,339 $71,121
Required regulatory capital 15,235 30,470 38,420
------ ------ ------
Excess regulatory capital $50,104 $34,869 $32,701
====== ====== ======
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, 1997, the Bank had $3.9 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, 1997, 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, 1997, the Bank excluded all of its $2.1 million investments in 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.
A savings association whose measured interest rate risk (IRR) exposure
exceeds 2% must deduct an IRR component in calculating its total capital
for purposes of determining whether it meets its risk-based capital
requirement. The IRR component 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, that would result from a
hypothetical 200 basis point increase or decrease (except when the 3-month
Treasury bond equivalent yield is less than 4%, in which case the decrease
will be one-half such Treasury rate) 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. NPV
is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. Management does not expect this rule to have
a material impact of the Bank.
Pursuant to FDICIA, in December 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, 1997, 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.
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. In May 1997, the OTS
proposed revisions to its liquidity regulations which are intended to
simplify and reduce the requirements thereunder. Among other changes, the
proposed amendments would (i) reduce the minimum average liquidity
requirement from 5% to 4% and (ii) eliminate the 1% short-term liquid
asset requirement. At September 30, 1997, the Bank was in compliance with
both liquidity requirements, with an average liquidity ratio of 8.5% and a
short-term liquidity ratio of 5.5%.
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, 1997, 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, 1997, the Bank's lending limit for loans-to-one-borrower
not fully secured by marketable collateral was $10.7 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, 1997, 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, 1997, 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, 1997,
the Bank had $176.4 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, 1997, the Bank had
$8.9 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 1997 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 November, 1996, was "satisfactory".
In 1995, the OTS and other federal financial supervisory agencies
issued a final revised regulation to implement the CRA. The revised
regulation, which became fully effective on July 1, 1997, eliminates the
twelve assessment factors under the prior regulation and substitutes a
performance based evaluation system. The Bank has not yet been evaluated
under the new 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.
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 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 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.
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.
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 engaged in
sufficient mortgage lending activity during fiscal year 1997 to be able to
postpone any recapture of its bad debt reserves until at least fiscal
1998. The Bank believes that it will engage in sufficient mortgage
lending activity during fiscal 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 determines 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, 1997, 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, were 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. This tax does not apply to the Bank
beginning for fiscal 1997.
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, 1994. 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, 1997.
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 64, 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 37 years. He has been
Chairman, President and Chief Executive Officer of the Company since its
inception in 1992.
John Stampfl, age 42, 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 49, 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 63, joined the Bank in 1985 as Vice President-
Mortgage Lending. Mr. Muth has been involved in banking in various
capacities for 44 years. He has been Vice President of the Company since
its inception in 1992.
David W. Adam, age 32, 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, 1997, 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, 1997 of the properties owned was $12.8 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
927 North Green Bay Road Owned 1996
Waukegan, 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
933 N. Mayfair Road Leased 1995
Wauwatosa, Wisconsin
1230 East Diehl Road, Suite 302 Leased 1995
Naperville, Illinois
Possible future branch site
12300 75th Street Owned 1989
Bristol, Wisconsin
Advantage Service Center
5942 6th Ave. Owned 1993
Kenosha, Wisconsin
Item 3. Legal Proceedings
As of September 30, 1997, 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, 1997,
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 Company's common stock is traded on The Nasdaq Stock Market under the
symbol AADV. The table below shows the reported high and low sales prices
of the common stock and dividends declared per share during the periods
indicated:
Cash
High Low Dividend
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 $32.35 $.080
Fiscal year 1997 . .
First quarter . . . . $33.00 $31.25 $.080
Second quarter . . . $41.50 $31.75 $.100
Third quarter . . . . $40.75 $36.50 $.100
Fourth quarter . . . $58.50 $38.00 $.100
See Note 11 of the Notes to Consolidated Financial Statements which
describes restrictions on dividend payments by the Bank.
As of September 30, 1997, the Company had approximately 2,700 shareholders
of record.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
of September 30
1993 1994 1995 1996 1997
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets . . . . . . . . . . . . $653,286 $741,307 $973,234 $1,016,386 $1,037,462
Loans receivable - net . . . . . . . 384,795 425,569 512,282 562,782 565,259
Mortgage-related securities . . . . . 215,639 240,676 351,599 337,794 358,211
Investment securities, certificates
of deposits and marketable equity
securities . . . . . . . . . . . . 10,805 12,213 29,969 35,040 29,746
Deposits . . . . . . . . . . . . . . 412,500 507,338 681,925 680,851 670,775
Borrowings . . . . . . . . . . . . . 145,160 135,810 175,120 224,265 248,475
Stockholders' equity . . . . . . . . 80,816 82,935 93,078 88,866 99,004
<CAPTION>
Year Ended September 30
1993 1994 1995 1996 1997
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income . . . . . . . . $45,918 $47,862 $67,516 $73,590 $76,667
Total interest expense . . . . . . . 24,249 24,954 39,376 43,765 45,714
------- ------- ------- ------- -------
Net interest income . . . . . . . 21,669 22,908 28,140 29,825 30,953
Provision for losses on loans . . . . 720 720 460 480 360
------- ------- ------- ------- -------
Net interest income after
provision for losses on loans . 20,949 22,188 27,680 29,345 30,593
------- ------- ------- ------- -------
Fees and service charges . . . . . . 1,483 1,807 2,668 5,135 5,275
Net gain on loans, securities and
other . . . . . . . . . . . . . . . 1,262 584 253 1,742 1,665
Other non-interest income . . . . . . 903 884 1,201 1,138 1,380
------- ------- ------- ------- -------
Total non-interest income . . . . 3,648 3,275 4,122 8,015 8,320
------- ------- ------- ------- -------
23,708 22,272
Non-interest expenses . . . . . . . . 13,078 13,834 19,133
Assessment to recapitalize Savings
Association Insurance Fund . . . . - - - 4,435 -
Writedown of intangible assets . . . - - - 4,720 -
------- ------- ------- ------- -------
Income before taxes . . . . . . . . . 11,519 11,629 12,669 4,497 16,641
Income taxes . . . . . . . . . . . . 4,354 4,289 4,518 1,464 5,953
------- ------- ------- ------- -------
Net income . . . . . . . . . . . . . $7,165 $7,340 $8,151 $3,033 $10,688
======= ======== ======== ======= =======
Earnings per share . . . . . . . . . $1.82 $1.96 $2.20 $0.83 $3.09
======= ======== ======== ======= =======
Earnings per share excluding non-
recurring items (1) . . . . . . . . $1.82 $1.96 $2.20 $2.39 $3.09
======= ======== ======== ======= =======
<CAPTION>
Year Ended September 30
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Other Data:
Interest rate spread information:
Average during year . . . . . . 3.19% 3.07% 2.92% 2.88% 2.85%
End of year . . . . . . . . . . 2.93% 2.87% 2.67% 2.78% 2.83%
Net interest margin (net interest
income divided by average
interest-earning assets) . . . 3.66% 3.46% 3.26% 3.19% 3.17%
Allowance for losses on loans to
non-performing loans . . . . . 79.71% 106.78% 219.00% 169.10% 183.4%
Non-performing assets to total
assets at end of year . . . . . 1.20% 0.79% 0.46% 0.48% 0.49%
Stockholders' equity to total
assets at end of year . . . . . 12.37% 11.19% 9.56% 8.74% 9.54%
Dividends declared per share . . - - $0.192 $0.304 $0.38
Dividend payout ratio (dividends
per share to earnings per share) - - 8.73% 36.63% 12.30%
Return on assets (ratio of net
income to average total assets) 1.16% 1.07% 0.91% 0.31% 1.05%
Return on stockholders' equity . 8.99% 8.88% 9.42% 3.20% 11.67%
Facilities at end of year:
Number of full-service offices 11 11 15 15 15
Number of loan production offices 3 4 5 5 5
(1) Excludes the following nonrecurring items--assessment to recapitalize
Savings Association Insurance Fund and writedown of intangible assets
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
Proposed Merger
On November 3, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Marshall & Ilsley Corporation, a
Wisconsin corporation ("M&I"), providing for the merger of the Company
with and into M&I (the "Merger"). The Merger Agreement provides that each
outstanding share of common stock, $.01 par value, of the Company
("Company Common Stock"), will be converted (other than certain shares
that will be cancelled as specified in the Merger Agreement) into the
right to receive 1.2 shares of common stock, $1.00 par value, of M&I ("M&I
Common Stock"), subject to adjustment in the event that the average
closing price of M&I Common Stock for the ten consecutive trading days
preceding the fifth business day prior to the effective time of the Merger
is above $61.67 per share or below $46.67 per share. The Merger is
structured as a pooling-of-interests for financial accounting purposes and
as a tax-free reorganization for shareholders of the Company. Completion
of the Merger is subject to certain conditions, including approval by the
shareholders of the Company, approval by the Federal Reserve Board, and
other conditions to closing customary in transactions of this type.
Management currently anticipates that the Merger will be completed in
early 1998.
Overview
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, 1997, 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 three 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, and (3) Advantage
Financial Services and Insurance, Inc., which is engaged in the business
of selling non-insured investments and insurance and providing financial
planning.
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, 1997 and
1996
General
Net income for the year ended September 30,1997 was $10.7 million, an
increase of $7.7 million over 1996 net income of $3.0 million. Net income
was lower in fiscal 1996 primarily due to 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. Without the
two one-time charges in 1996 mentioned above, net income for 1996 would
have been $8.8 million.
Net Interest Income
Total interest income was $76.7 million for the year ended September 30,
1997, an increase of $3.1 million, or 4.2%, compared to the year ended
September 30, 1996. This increase was primarily due to a $43.9 million
increase in average interest-earning assets in 1997 compared to 1996.
Average interest-earning assets increased to $977.5 million in 1997 from
$933.6 million in 1996.
The Company's average interest rate margin decreased slightly from 3.19%
in 1996 to 3.17% in 1997. This decrease in interest rate spread was due
primarily to competitive market pressures. Management believes that the
interest rate margin could continue to decline modestly during the 1998
fiscal year.
The components of net interest income fluctuated significantly during 1997
due to various rate and volume changes (see "Rate Volume Analysis" table).
The average yield on interest-earning assets decreased from 7.88% in 1996
to 7.84% in 1997.
Total interest expense increased by $1.9 million in 1997 compared to 1996.
The average cost of interest-bearing liabilities decreased slightly from
5.01% in 1996 to 4.99% in 1997.
Provision for Losses on Loans
The Company established provisions for losses on loans of $360,000 in
1997, compared to $480,000 in 1996. Nonperforming loans decreased from
$3.4 million as of September 30, 1996 to $3.2 million as of September 30,
1997. This resulted in an increase in the ratio of the allowance for loan
losses to nonperforming loans from 169% as of September 30, 1996 to 183%
as of September 30, 1997.
Non-interest Income
Non-interest income for 1997 totalled $8.3 million compared to $8.0
million in 1996. The largest increase in non-interest income was in
service charges on deposit accounts, which increased from $2.5 million in
1996 to $2.8 million in 1997 due primarily to an increase in checking
account activity. This increase was offset by a decrease in mortgage
brokerage commissions from $2.0 million in 1996 to $1.7 million in 1997.
Gains on sales of loans decreased from $876,000 in 1996 to $627,000 in
1997. Gains on securities available for sale increased from $866,000 in
1996 to $1.0 million in 1997. These gains relate to marketable securities
held by the Company which have increased in value during the last few
years.
Non-interest Expense
Non-interest expense decreased 32.2% from $32.9 million in 1996 to $22.3
million in 1997. Non-interest expense was higher in 1996 primarily due to
(1) the $4.4 million one-time special assessment to recapitalize the
SAIF, and (2) the $4.7 million writedown of intangible assets.
Non-interest expense before these one-time charges decreased 6.1%
from$23.7 million in 1996 to $22.3 million in 1997. This decrease relates
primarily to (1) a $1.6 million decrease in amortization of intangible
assets and (2) a $1.0 million decrease in FDIC premiums relating to a
decrease in the FDIC premium rate from 0.23% to 0.065% effective January
1, 1997. These decreases were partially offset by a $891,000 increase in
salaries and employee benefits relating primarily to growth in the
Company's business.
Occupancy expenses increased from $3.0 million in 1996 to $3.2 million in
1997. This increase was due primarily to the lease of new corporate
office space for a number of administrative departments beginning in March
1996.
Income Taxes
Federal and state income taxes increased from $1.5 million in 1996 to $6.0
million in 1997 due primarily to an increase in income before income taxes
from $4.5 million in 1996 to $16.6 million in 1997. The Company's
effective tax rate increased from 32.6% in 1996 to 35.8% in 1997 primarily
due to a change in state income taxes.
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 SAIF. 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 was due primarily to
competitive market pressures.
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.
Nonperforming 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 nonperforming 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. This increase was due to
the acquisition by the Bank of substantially all of the assets of
Financial Center of Illinois, Inc.(a mortgage brokerage company with
offices in Wauwatosa, Wisconsin and Naperville, Illinois) on August 21,
1995. 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 had increased in value from the time of purchase
to the time of sale.
Non-interest Expense
Non-interest expense increased 72.3% from $19.1 million in 1995 to $32.9
million in 1996. This increase was 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 the Financial Center of Illinois, Inc.
The legislation affecting the SAIF recapitalization was enacted on
September 30, 1996 and decreased the Bank's FDIC insurance premium from
0.230% to 0.064% of deposits effective January 1, 1997.
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. on December 16, 1994. The writedown reduced 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
lowered the cost of alternative sources of funds used to value the
intangible asset.
Occupancy expenses increased from $2.4 million in 1995 to $3.0 million in
1996 relating to occupancy expenses of the Financial Center of Illinois,
Inc. 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 the Financial
Center of Illinois, Inc. 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 primarily 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.
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
1995 1996 1997
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>
Interest-Earning Assets:
Loans receivable (1) $489,201 $40,649 8.31% $533,037 $45,038 8.46% $573,430 $48,275 8.42%
Mortgage-backed
securities . . . . . 189,239 13,430 7.10 170,838 12,092 7.08 139,207 9,853 7.08
Mortgage-related
securities . . . . . 137,206 9,978 7.27 172,487 12,566 7.29 200,159 14,666 7.33
------- ------ ----- ------- ------- ------ ------- ------ -----
Total mortgage
securities . . . . 326,445 23,408 7.17 343,325 24,658 7.18 339,366 24,519 7.22
U.S government and
agency securities . 19,317 1,466 7.59 26,958 2,070 7.68 23,411 1,523 6.51
Investment and other
securities . . . . . 19,339 1,368 7.07 21,103 1,206 5.71 32,559 1,758 5.40
FHLB stock . . . . . 9,602 625 6.51 9,183 618 6.73 8,700 592 6.80
------- ------ ----- ------- ------- ------ ------- ------ -----
863,904 67,516 7.82 933,606 73,590 7.88 977,466 76,667 7.84
------- ------ ----- ------- ------- ------ ------- ------ -----
Interest-Bearing
Liabilities:
Time deposits . . . . 402,735 22,379 5.56 418,496 24,065 5.75 399,128 22,833 5.72
Savings deposits and
NOW accounts (2) . . 238,871 7,220 3.02 263,072 7,757 2.95 272,826 7,640 2.80
------- ------ ----- ------- ------- ------ ------- ------ -----
Total deposits . . . 641,606 29,599 4.61 681,568 31,822 4.67 671,954 30,473 4.54
Advance payments by
borrowers for taxes
and insurance . . . 7,873 183 2.32 7,191 155 2.16 6,522 133 2.04
Borrowings . . . . . 155,216 9,486 6.11 185,503 11,408 6.15 236,815 14,869 6.28
Interest rate swaps
and caps . . . . . . N/A 108 N/A N/A 380 N/A N/A 239 N/A
------- ------ ----- ------- ------- ------ ------- ------ -----
804,695 39,376 4.89 874,262 43,765 5.01 915,291 45,714 4.99
------- ------ ----- ------- ------- ------ ------- ------ -----
Net interest income $28,140 $29,825 $30,953
====== ====== ======
Net interest rate spread
2.92% 2.88% 2.85%
===== ===== =====
Net earning assets . . $59,209 $59,344 $62,175
====== ======= =======
Net yield on average
interest-earning
assets . . . . . . . 3.26% 3.19% 3.17%
===== ====== =====
Average interest-earning
assets to average
interest-bearing
liabilities . . . . . 1.07 1.07 1.07
==== ==== ====
________________
(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
1995 vs. 1996 1996 vs. 1997
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable . . . . . . $3,694 $695 $4,389 $3,400 ($163) $3,237
Mortgage-backed securities . (1,302) (36) (1,338) (2,239) - (2,239)
Mortgage-related securities 2,570 18 2,588 2,028 72 2,100
------ ------ ------- ------- ------ -------
Total mortgage securities 1,268 (18) 1,250 (211) 72 (139)
U.S. government and agency
securities . . . . . . 586 30 616 (253) (294) (547)
Investments and other
securities . . . . . . 147 (309) (162) 615 (63) 552
FHLB stock . . . . . . . . . (32) 26 (6) (33) 7 (26)
------ ------ ------- ------- ------ -------
$5,663 $424 $6,087 $3,518 ($441) $3,077
====== ===== ====== ====== ===== ======
Interest-Bearing Liabilities:
Time deposits . . . . . . . $892 $801 $1,693 ($1,109) ($123) ($1,232)
Savings deposits and NOW
accounts . . . . . . . . . 709 (166) 543 330 (447) (117)
------ ------ ------- ------- ------ -------
Total deposits . . . . . . 1,601 635 2,236 (779) (570) (1,349)
Advance payments by borrowers
for taxes and insurance . (15) (13) (28) (14) (8) (22)
Borrowings . . . . . . . . . 1,863 59 1,922 3,217 244 3,461
Interest rate swaps . . . . 272 - 272 (141) - (141)
------ ------ ------- ------- ------ -------
$3,721 $681 $4,402 $2,283 ($334) $1,949
====== ====== ======= ======= ====== =======
Change in net interest income . $1,685 $1,128
====== ======
</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
1995 1996 1997
Weighted average yield on:
Loans receivable . . . 8.13% 8.22% 8.41%
Mortgage-backed
securities . . . . . . 7.06 7.12 7.08
Mortgage-related
securities . . . . . . 7.48 7.41 7.37
----- ------ ------
Total mortgage
securities . . . . . 7.26 7.28 7.27
U.S. government and
agency securities . . 6.70 6.20 6.48
Investments and other
securities . . . . . . 5.62 5.29 5.10
FHLB stock . . . . . . 6.25 6.75 6.75
----- ------ ------
Combined weighted
average yield on
interest-earning
assets . . . . . . . 7.70 7.75 7.82
Weighted average rate on:
Time deposits . . . . . 5.72 5.67 5.79
Savings deposits and
NOW accounts . . . . . 2.95 2.89 2.74
----- ------ ------
Total deposits . . . . 4.67 4.56 4.52
Advance payments by
borrowers for taxes and
insurance . . . . . . 2.32 2.16 2.04
Borrowings . . . . . 6.30 6.39 6.36
----- ------ ------
Combined weighted
average rate on
interest-bearing
liabilities 4.98 4.97 4.99
Net interest rate spread 2.72% 2.78% 2.83%
===== ===== =====
Financial Condition
General
Total consolidated assets of the Company increased 2.0% to $1.04 billion
as of September 30, 1997 from $1.02 billion as of September 30, 1996.
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 Federal Home Loan Bank ("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 largest source of funds from financing activities during the
year ended September 30, 1997 consisted of net proceeds of $23.8 million
from securities sold under agreements to repurchase. For the year ended
September 30, 1996, the largest source of funds from financing activities
was $36.2 million from securities sold under agreements to repurchase and
a $12.9 million net increase in notes payable to the FHLB. 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, 1996 and 1997, the Company originated and purchased loans in
the amounts of $309.5 million and $351.6 million, respectively. These
amounts include loans originated for sale. Purchases of mortgage
securities totalled $46.9 million and $73.1 million in fiscal years 1996
and 1997, respectively.
During fiscal years 1996 and 1997, the Company's investing activities were
funded by (1) principal repayments on loans and mortgage securities
totalling $264.2 million and $282.4 million, respectively, (2) proceeds
from the sale of loans totalling $55.1 million and $123.1 million,
respectively, (3) proceeds from sales and maturities of U.S. government
and agency securities available for sale of $4.5 million and $12.5
million, respectively, (4) proceeds from sales of marketable equity
securities of $2.1 million and $1.9 million, respectively, and (5)
proceeds from the financing activities discussed above.
The Bank is required to maintain minimum levels of liquid assets as
defined by regulations of the 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 9.5% and 8.5% at September 30, 1996 and 1997, 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, 1996 and
1997, cash and cash equivalents totalled $35.4 million and $42.9 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, 1997, the Company had outstanding loan origination
commitments of $20.3 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
$39.0 million and $29.4 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,
1997 totalled $248.1 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 1996 and 1997, the Company repurchased under its
stock repurchase programs a total of 173,255 shares and 125,894 shares,
respectively. The aggregate purchase price was $5.7 million and $4.2
million, respectively.
During fiscal years 1996 and 1997, the Bank made dividend payments to the
Company of $8.3 million and $8.8 million, respectively. During fiscal
years 1996 and 1997, the Company paid dividends to its shareholders of
$1.0 million and $1.2 million, respectively.
At September 30, 1997, 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, increased to $358.2 million as of September 30, 1997 from
$337.8 million as of September 30, 1996. Purchases of mortgage securities
totalled $46.9 million and $73.1 million in fiscal years 1996 and 1997,
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 an 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.
Loans Receivable
Loans receivable increased to $565.3 million as of September 30, 1997 from
$562.8 million as of September 30, 1996 as loan originations exceeded loan
repayments. One- to four-family residential first mortgage loans
represented 70.0% and 64.4% of total gross loans receivable as of
September 30, 1996 and 1997, respectively. Consumer loans (primarily
second mortgage loans) increased from 8.6% to 13.0% of total gross loans
receivable as of September 30, 1996 and 1997, respectively. Additional
information regarding loans receivable, non-performing loans and non-
performing assets is provided below.
Deposits
Deposit accounts decreased to $670.8 million as of September 30, 1997 from
$680.9 million as of September 30, 1996. This decrease was primarily the
result of a $14.7 million decrease in brokered deposits from $89.3 million
as of September 30, 1996 to $74.6 million as of September 30, 1997, offset
in part by internal growth in deposits, including interest credited, of
4.6 million.
Borrowings
Notes payable to FHLB increased slightly to $176.4 million as of September
30, 1997 from $175.9 million as of September 30, 1996.
Borrowings under securities sold under agreements to repurchase increased
to $72.1 million as of September 30, 1997 from $48.4 million as of
September 30, 1996. This increase was due to an increase in repurchase
agreements with local governmental units that are customers of the Bank.
LOAN PORTFOLIO COMPOSITION
Total loans, including loans held for sale, increased to $565.3 million as
of September 30, 1997 from $562.8 million as of September 30, 1996. The
components of this increase are summarized, by type of collateral, as
follows:
September 30 Increase
1996 1997 (Decrease)
(In thousands)
Real estate loans:
One- to four-family . . . . . . $418,647 $378,701 ($39,946)
One- to four-family construction 7,598 5,148 (2,450)
Multi-family . . . . . . . . . . 24,993 26,923 1,930
Commercial . . . . . . . . . . . 54,671 63,755 9,084
Other construction and land . . 30,161 24,448 (5,713)
-------- -------- ---------
Total real estate loans . . . 536,070 498,975 (37,095)
Other loans:
Home equity and second mortgage 43,893 67,997 24,104
Other consumer . . . . . . . . 7,325 8,472 1,147
Commercial business . . . . . 10,691 12,429 1,738
-------- -------- ---------
Total other loans . . . . . . 61,909 88,898 26,989
-------- -------- ---------
Gross loans receivable . . . . . . 597,979 587,873 (10,106)
Add: Accrued interest . . . . . . . 3,718 3,755 37
Less: Net items to loans
receivable . . . . . . . (38,915) (26,369) 12,546
-------- -------- ---------
Total loans receivable . . . . . $562,782 $565,259 $2,477
======== ======== =========
Total loans receivable increased by $2.5 million during fiscal 1997. One-
to four-family residential mortgage loans decreased by $39.9 million, or
9.5%, during fiscal 1997 due primarily to customers with adjustable-rate
mortgage loans exercising their option to convert to fixed rate loans
which were then sold by the Bank into the secondary market. One- to four-
family residential mortgage loans include permanent loans to individuals
for construction of single-family residences (which they will occupy upon
completion of construction) totalling $50.7 million and $31.8 million as
of September 30, 1996 and 1997, respectively.
One- to four-family construction loans decreased by $2.5 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 $9.1 million during fiscal 1997
as the Company continued to increase its lending to small businesses and
professionals in the Company's market area.
Other construction and land loans decreased by $5.7 million during fiscal
1997. These loans are primarily secured by commercial construction
projects (usually multi-family and condominium projects) in the Company's
market area.
Home equity and fixed-rate second mortgage loans increased by $24.1
million in 1997 as the Company continued its emphasis on growth in
consumer lending. This growth in consumer loans is expected to continue
in the future.
Commercial business loans increased by $1.7 million during fiscal 1997.
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) increased slightly to $5.0 million as of September 30, 1997
from $4.8 million as of September 30, 1996. 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
1993 1994 1995 1996 1997
(In thousands)
Non-performing loans:
One- to four-family $191 $867 $604 $666 $1,796
Commercial real
estate . . . . . . 5,565 3,666 1,685 616 646
Construction and land 40 280 - 1,774 283
Commercial business 316 70 105 274 51
Consumer and other . 81 106 13 84 385
------ ------ ------ ------ ------
Total non-
performing
loans . . . . 6,193 4,989 2,407 3,414 3,161
------ ------ ------ ------ ------
Foreclosed properties
and properties subject
to foreclosure:
One- to four-family 1,203 224 1,547 869 954
Commercial real
estate . . . . . . 429 662 533 534 839
Land . . . . . . . . - - - - -
------ ------ ------ ------ ------
Total foreclosed
assets . . . 1,632 886 2,080 1,403 1,793
------ ------ ------ ------ ------
Total non-performing
assets . . . . . . . $7,825 $5,875 $4,487 $4,817 $4,954
====== ====== ====== ====== ======
Total as a percentage of
total assets . . . . 1.20% 0.79% 0.46% 0.47% 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, 1997 based upon its
current evaluation of the factors discussed above. Net charge-offs
increased from net recoveries of $22,000 in 1996 to net charge-offs of
$336,000 in 1997.
A summary of activity in the allowance for losses on loans is as follows:
Year Ended September 30
1993 1994 1995 1996 1997
(Dollars In thousands)
Balance at beginning of
year . . . . . . . . . $4,204 $4,937 $5,327 $5,271 $5,773
Additions charged to
operations:
One- to four-family . 50 50 30 - -
Multi-family and
commercial real
estate . . . . . . . 526 526 60 - -
Consumer . . . . . . . 24 24 50 - 150
Commercial business . 120 120 320 480 210
------ ------ ------ ------ ------
720 720 460 480 360
Additions from loan
purchases and mergers:
One- to four-family . - - 469 - -
Multi-family and
commercial real
estate . . . . . . . - - 49 - -
------ ------ ------ ------ ------
- - 518 - -
Recoveries:
One- to four-family . 25 31 14 40 26
Multi-family and
commercial real estate - 61 - - -
Consumer . . . . . . . 6 6 12 22 1
Commercial business . 13 - 12 1 444
------ ------ ------ ------ ------
44 98 38 63 471
Charge-offs:
One- to four-family . (6) - (40) (29) (447)
Multi-family and
commercial real
estate . . . . . . . - (408) (841) - -
Consumer . . . . . . . (25) (20) (32) (8) (261)
Commercial business . - - (159) (4) (99)
------ ------ ------ ------ ------
(31) (428) (1,072) (41) (807)
------ ------ ------ ------ ------
Net recoveries (charge-
offs) . . . . . . . . 13 (330) (1,034) 22 (336)
------ ------ ------ ------ ------
Balance at end of year . $4,937 $5,327 $5,271 $5,773 $5,797
====== ====== ====== ====== ======
Ratio of net charge-offs
to average loans
outstanding during the
year . . . . . . . . . 0.00% 0.08% 0.20% 0.00% 0.06%
====== ====== ====== ====== ======
Allowance for losses on
loans to non-performing
loans . . . . . . . . 79.7% 106.8% 219.0% 169.1% 183.4%
====== ====== ====== ====== ======
Allowance for losses on
loans to total loans at
end of year . . . . . 1.28% 1.25% 1.03% 1.03% 1.03%
====== ====== ====== ====== ======
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 used interest rate swaps 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, 1997, total interest-bearing assets maturing or repricing
within one year exceeded total interest-bearing liabilities maturing or
repricing in the same period by $6.1 million, representing a positive
one-year gap of 0.6% of total assets. This gap compares to a negative
one-year gap of $46.7 million, or 4.6% of total assets, as of September
30, 1996. This change relates primarily to the fact that the Company has
sold almost of all its fixed-rate residential loans for the last several
years and has purchased no fixed-rate mortgage securities for several
years. Management considers its gap position as of September 30, 1997 to
be acceptable.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997 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 accounts . . . 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, certain assets, such as ARM loans, have features which limit
changes in interest rates on a short-term basis and over the life of the
asset.
<TABLE>
CONSOLIDATED GAP ANALYSIS AS OF SEPTEMBER 30, 1997
<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 . . . . . . $44,222 $67,048 $43,249 $62,211 $216,730
Mortgage securities . . . . 74,708 121,731 57,896 32,660 286,995
------- ------- ------- ------- -------
118,930 188,779 101,145 94,871 503,725
Adjustable-rate loans
receivables and mortgage
securities:
Loans receivable . . . . . . 276,462 68,029 7,073 430 351,994
Advances to unconsolidated
partnerships . . . . . . . 3,649 2,071 - - 5,720
Mortgage securities . . . . 70,547 669 - - 71,216
------- ------- ------- ------- -------
350,658 70,769 7,073 430 428,930
Investment securities and other 41,445 16,980 1,477 - 59,902
------- ------- ------- ------- -------
Total interest-earning
assets . . . . . . . $511,033 $276,528 $109,695 $95,301 $992,557
======= ======== ======= ======= =======
Interest-bearing liabilities:
Deposits . . . . . . . . . . . $356,619 $221,934 $38,974 $53,248 $670,775
Borrowings . . . . . . . . . . 141,082 98,793 2,240 6,360 248,475
Advance payments by borrowers
for taxes and insurance 7,187 - - - 7,187
------- ------- ------- ------- -------
Total interest-bearing
liabilities . . . . . $504,888 $320,727 $41,214 $59,608 $926,437
======= ======== ======= ======= =======
Interest-earning assets less
interest-bearing liabilities $6,145 ($44,199) $68,481 $35,693 $66,120
====== ======== ======= ======= =======
Cumulative interest rate
sensitivity gap . . . . . . $6,145 ($38,054) $30,427 $66,120 $66,120
====== ======== ======= ======= =======
Cumulative interest rate
sensitivity gap as a
percentage of total assets . 0.6% (3.7%) 2.9% 6.4%
===== ===== ===== =====
</TABLE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives
to mitigate its credit risk, relying instead on loan review and an
adequate loan loss reserve (see Management's Discussion and Analysis of
Financial Condition and Results of Operation).
Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by the Company's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The
ALCO monitors and considers methods of managing interest rate risk by
monitoring changes in net portfolio value ("NPV") and net interest income
under various interest rate scenarios. The ALCO attempts to manage the
various components of the Company's balance sheet to minimize the impact
of sudden and sustained changes in interest rates on NPV and net interest
income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate
risk exposure is measured using interest rate sensitivity analysis to
determine the Company's change in NPV in the event of hypothetical changes
in interest rates and interest liabilities. If potential changes to NPV
and net interest income resulting from hypothetical interest rate swings
are not within the limits established by the Board, the Board may direct
management to adjust its asset and liability mix to bring interest rate
risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, shorten the effective
maturities of certain interest-earning assets, and increase the effective
maturities of certain interest-bearing liabilities. 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 used interest rate swaps to reduce its exposure to changes in
interest rates.
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in NPV of its cash flows
from assets, liabilities and off-balance sheet items in the event of a
range of assumed changes in market interest rates. NPV represents the
market value of portfolio equity and is equal to the market value of
assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in
market rate sensitive instruments in the event of sudden and sustained
increases and decreases in market interest rates ranging from one hundred
to four hundred basis points. The Company's Board of Directors has
adopted an interest rate risk policy which establishes maximum decreases
in the NPV ranging from 15% to 60% in the event of sudden and sustained
increases and decreases in market interest rates. The following table
presents the Company's projected change in NPV for the various rate shock
levels as of September 30, 1997 and the Board's established limitations
relating thereto. All market rate sensitive instruments presented in this
table are classified as either held to maturity or available for sale.
The Company has no trading securities.
<TABLE>
<CAPTION>
Percent Change
Change in Market Value of Actual Board
Interest Rates Portfolio Equity Change Actual Limit
<S> <C> <C> <C> <C>
400 basis point rise $81,266,000 $(25,363,000) 24% 60%
300 basis point rise 89,568,000 (17,061,000) 16% 45%
200 basis point rise 97,100,000 (9,529,000) 9% 30%
100 basis point rise 103,121,000 (3,508,000) 3% 15%
Base Scenario 106,629,000 0 0% 0%
100 basis point decline 106,998,000 369,000 1% 15%
200 basis point decline 102,955,000 (3,674,000) 3% 20%
300 basis point decline 95,143,000 (11,486,000) 11% 25%
400 basis point decline 85,820,000 (20,809,000) 20% 30%
</TABLE>
The preceding table indicates that at September 30, 1997, in the event of
a sudden and sustained increase or decrease in prevailing market interest
rates, the Company's NPV would be expected to decrease. At September 30,
1997, the Company's estimated changes in NPV were within the targets
established by the Board of Directors.
NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposits decay, and should not be
relied upon as indicative of actual future results. Further, the
computations do not contemplate any actions the ALCO could undertake in
response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of the NPV. Certain assets, such as adjustable-rate loans,
which represent one of the Company's primary loan products, have features
which restrict changes in interest rates on a short-term basis and over
the life of the assets. In addition, the proportion of adjustable-rate
loans in the Company's portfolio could decrease in future periods if
market interest rates remain at or decrease below current levels due to
refinance activity. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly
from those assumed in the NPV. Finally, the ability of many borrowers to
repay their adjustable-rate mortgage loans may decrease in the event of
interest rate increases.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors . . . Page 53
Consolidated Statements of Financial Condition as of
September 30, 1996 and 1997 . . . . . . . . . . . . . Page 54
Consolidated Statements of Income for each year in the
three-year period ended September 30, 1997 . . . . . Page 55
Consolidated Statements of Stockholders' Equity for
each year in the three-year period ended
September 30, 1997 . . . . . . . . . . . . . . . . . Page 56
Consolidated Statements of Cash Flows for each year in
the three-year period ended September 30, 1997 . . . Page 57
Notes to Consolidated Financial Statements . . . . . . Page 60
<PAGE>
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, 1996 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the
Company at September 30, 1996 and 1997, and the consolidated results of
its operations and cash flows for each of the three years in the period
ended September 30, 1997 in conformity with generally accepted accounting
principles.
October 31, 1997
Milwaukee, Wisconsin
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
September 30
ASSETS 1996 1997
Cash and cash equivalents (includes
interest earning deposits of
$17,714,761 - 1996; $30,518,837-
1997) . . . . . . . . . . . . . . . . $35,445,646 $42,908,363
Certificates of deposit (approximates
market value) . . . . . . . . . . . 611,067 508,664
U.S. government and agency securities
available for sale (at market value) 29,385,356 19,956,301
Mortgage-backed securities available
for sale (at market value) . . . . . 140,086,665 117,332,556
Mortgage-backed securities held to
maturity (market value $11,159,367 -
1996; $8,421,309-1997) . . . . . . . . 11,011,238 8,321,934
Mortgage-related securities available
for sale (at market value) . . . . . . 15,226,120 14,105,718
Mortgage-related securities held to
maturity (market value of
$172,913,430 - 1996; $222,150,681 -
1997) . . . . . . . . . . . . . . 171,470,022 218,450,643
Marketable equity securities available
for sale (at market value) . . . . . . 5,043,091 9,281,261
Loans held for sale . . . . . . . . . 3,056,000 4,907,212
Loans receivable - net . . . . . . . . 559,725,640 560,352,039
Foreclosed properties and properties
subject to foreclosure - net . . . . 1,403,440 1,792,677
Investments in and advances to
unconsolidated partnerships . . . . 7,397,416 7,204,387
Office properties and equipment . . . 12,531,601 12,756,398
Federal Home Loan Bank stock - at cost 8,795,600 8,918,000
Accrued interest on investments and
mortgage-related securities . . . . . 2,640,672 2,515,698
Deferred income taxes . . . . . . . . . 2,641,659 -
Intangible assets . . . . . . . . . . . 6,902,259 5,860,052
Prepaid expenses and other assets . . . 3,012,020 2,290,536
------------- -------------
$1,016,385,512 $1,037,462,439
============= =============
LIABILITIES
Deposits . . . . . . . . . . . . . . . $680,850,865 $670,775,364
Notes payable to Federal Home Loan Bank 175,910,000 176,360,000
Securities sold under agreements to
repurchase . . . . . . . . . . . . . 48,355,457 72,115,303
Advance payments by borrowers for taxes
and insurance . . . . . . . . . . . . 8,496,925 7,187,361
Accrued interest on deposit accounts . 3,711,995 2,825,851
Accrued interest on notes payable and
other borrowings . . . . . . . . . . 1,377,204 2,607,869
Deferred income tax . . . . . . . . . . - 2,226,660
Other liabilities . . . . . . . . . . . 8,419,561 2,898,434
Accrued income taxes . . . . . . . . . 397,102 1,461,468
------------ ------------
Total liabilities . . . . . . . . 927,519,109 938,458,310
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:
3,326,768 - 1996; 3,235,830 - 1997 . 33,000 33,000
Additional paid-in capital . . . . . . 37,751,499 38,536,160
Loan to Employee Stock Ownership Plan . (1,704,941) (1,405,470)
Unearned restricted stock awarded . . . (894,777) (839,055)
Treasury stock, at cost: 798,102 shares
- 1996; 888,950 - 1997 . . . . . . . . (17,627,105) (21,319,434)
Unrealized gain (loss) on securities
available for sale . . . . . . . . . (699,857) 2,667,084
Retained earnings . . . . . . . . . . 72,008,584 81,331,844
------------- -------------
Total stockholders' equity . . . . 88,866,403 99,004,129
Commitments and contingent liabilities
(see note 14) . . . . . . . . . . . .
------------- -------------
$1,016,385,512 $1,037,462,439
============= =============
See accompanying notes to consolidated financial statements.
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30
1995 1996 1997
Interest income:
Interest on loans . . . . $40,649,023 $45,037,786 $48,275,124
Interest on
mortgage-related
securities . . . . . . . 23,407,834 24,658,171 24,518,920
Interest and dividends on
investment securities . 2,305,959 2,897,154 2,405,839
Other interest income . . 1,152,621 996,962 1,466,945
----------- ----------- -----------
Total interest income . . . 67,515,437 73,590,073 76,666,828
Interest expense:
Interest on deposits . . 29,598,632 31,821,842 30,473,315
Interest on notes payable
and other borrowings . . 9,777,075 11,943,590 15,240,188
----------- ----------- -----------
Total interest expense . 39,375,707 43,765,432 45,713,503
----------- ----------- -----------
Net interest income . . . 28,139,730 29,824,641 30,953,325
Provision for losses on
loans . . . . . . . . . . 460,000 480,000 360,000
----------- ----------- -----------
Net interest income after
provision for losses on
loans . . . . . . . . . . 27,679,730 29,344,641 30,593,325
Non-interest income:
Loan fees and service
charges . . . . . . . . 508,614 659,828 783,525
Mortgage brokerage
commissions . . . . . . . 234,803 2,009,193 1,700,755
Service charges on deposit
accounts . . . . . . . . 1,924,993 2,466,310 2,790,423
Gain on sales of loans -
net . . . . . . . . . . 107,513 875,830 627,446
Net realized gain on
securities available for
sale . . . . . . . . . . 145,000 866,070 1,037,848
Equity in net income of
unconsolidated
partnerships . . . . . . 116,335 113,685 178,610
Other . . . . . . . . . . 1,084,969 1,024,137 1,201,819
------------ ------------ -----------
Total non-interest income 4,122,227 8,015,053 8,320,426
Non-interest expenses:
Salaries and employee
benefits . . . . . . . . 8,200,652 10,014,275 10,905,060
Occupancy . . . . . . . . 2,397,697 2,985,996 3,239,517
Data processing . . . . . 590,938 655,837 728,589
Advertising . . . . . . . 530,953 533,066 698,127
Federal deposit insurance
premiums . . . . . . . . 1,323,680 1,595,462 647,775
Assessment to recapitalize
Savings Association
Insurance Fund of FDIC - 4,434,589 -
Writedown of intangible
assets . . . . . . . . . - 4,719,529 -
Amortization of intangible
assets . . . . . . . . . 2,062,530 2,611,780 1,042,207
Professional services . . 380,987 540,674 469,104
Other . . . . . . . . . . 3,645,987 4,772,125 4,542,044
------------- ------------- -------------
Total non-interest
expenses . . . . . . . . 19,133,424 32,863,333 22,272,423
------------- ------------- -------------
Income before income taxes 12,668,533 4,496,361 16,641,328
Income taxes . . . . . . . 4,517,548 1,463,824 5,953,449
------------- ------------- -------------
Net income . . . . . . . . $8,150,985 $3,032,537 $10,687,879
============= ============= =============
Earnings per share (Note 1) $2.20 $0.83 $3.09
===== ===== =====
See accompanying notes to consolidated financial statements.
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Unearned Gain (Loss)
Additional Restricted on Securities
Common Paid-in Retained Treasury Loan Stock Available
Stock Capital Earnings Stock to ESOP Awarded for Sale Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30,
1994 . . . . $33,000 $37,004,174 $63,221,297 $(10,027,931) $(2,497,791) $(1,075,464) $(3,722,622) $82,934,663
Net income . . --- --- 8,150,985 --- --- --- --- 8,150,985
Awards of
restricted
stock . . . . --- 105,511 --- --- --- (105,511) --- ---
Purchase of
treasury stock
(162,591
shares) . . . --- --- --- (3,781,661) --- --- --- (3,781,661)
Exercise of
stock options
(115,315
shares) . . . --- 139,441 (463,940) 1,458,135 --- --- --- 1,133,636
Dividends paid --- --- (665,120) --- --- --- --- (665,120)
Repayment of
ESOP loan . . --- --- --- --- 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 . . . . . --- 512 1,598 57 --- --- --- 2,167
--------- ---------- ---------- ----------- --------- -------- ------- ----------
Balance at
September 30,
1995 . . . . 33,000 37,249,638 70,244,820 (12,351,400) (1,985,803) (886,606) 774,844 93,078,493
Net income . . - - 3,032,537 - - - - 3,032,537
Awards of
restricted
stock . . . . - 342,098 - - - (140,557) - 201,541
Purchase of
treasury stock
(173,255
shares) . . . - - - (5,729,530) - - - (5,729,530)
Exercise of
stock options
(35,891
shares) . . . - 159,763 (223,543) 453,825 - - - 390,045
Dividends paid - - (1,045,230) - - - - (1,045,230)
Repayment of
ESOP loan . . - - - - 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 . . . . 33,000 37,751,499 72,008,584 (17,627,105) (1,704,941) (894,777) (699,857) 88,866,403
Net income . . - - 10,687,879 - - - - 10,687,879
Awards of
restricted
stock . . . . - 466,819 - - - (155,472) - 311,347
Purchase of
treasury stock
(125,894
shares) . . . - - - (4,185,066) - - - (4,185,066)
Exercise of
stock options
(34,956
shares) . . . - 317,842 (128,149) 492,737 - - - 682,430
Dividends paid - - (1,236,470) - - - - (1,236,470)
Repayment of
ESOP loan . . - - - - 299,471 - - 299,471
Amortization of
unearned
restricted
stock . . . . - - - - - 211,194 - 211,194
Unrealized gain
on securities
available for -
sale . . . . . - - - - - 3,366,941 3,366,941
--------- ---------- ---------- ----------- ---------- -------- ------- ----------
Balance at
September 30,
1997 . . . . $33,000 $38,536,160 $81,331,844 ($21,319,434) ($1,405,470) ($839,055) $2,667,084 $99,004,129
========= ========== ========== =========== ========== ======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30
1995 1996 1997
Operating activities:
Net income . . . . . . . . $8,150,985 $3,032,537 $10,687,879
Adjustments to reconcile
net income to net cash
provided by operating
activities
Provision for losses on
loans . . . . . . . . . 460,000 480,000 360,000
Provision for
depreciation . . . . . . 912,397 1,085,360 1,369,030
Writedown of intangible
assets . . . . . . . . . - 4,719,529 -
Amortization of
intangible assets . . . 2,062,530 2,611,780 1,042,207
Equity in net income of
unconsolidated
partnerships . . . . . . (116,335) (113,685) (178,610)
Net loss (gain) on sale
of foreclosed properties (140,721) (10,794) 90,747
Net amortization of
discount and premiums on
mortgage securities . . (785,634) (816,812) (708,347)
Increase (decrease) in
deferred income taxes . 1,620,723 (4,157,935) 2,732,466
Increase (decrease) in
accrued income taxes . . 243,187 (668,768) 1,064,366
Decrease (increase) in
interest receivable . . (408,757) (266,448) 109,093
Increase (decrease) in
interest payable . . . . 1,574,886 (408,534) 344,521
Loans originated for sale (17,349,224) (55,754,049) (95,740,854)
Proceeds from sale of
loans . . . . . . . . . 15,928,424 55,103,049 93,889,642
Receipt of FHLB stock
dividend . . . . . . . . (149,400) - -
Amortization of cost of
restricted stock benefit
plan . . . . . . . . . . 294,369 132,386 211,194
Increase (decrease) in
accrued FDIC SAIF
special assessment . . . - 4,434,589 (4,434,589)
Other . . . . . . . . . . (3,599,256) (1,091,778) (1,693,475)
---------- ---------- ----------
Net cash provided by
operating activities . . 8,698,174 8,310,427 9,145,270
Investing activities:
Proceeds from maturities
of certificates of
deposit . . . . . . . . 914,598 198,000 102,706
Proceeds from sale and
maturity of U.S.
government and agency
securities available for
sale . . . . . . . . . . 36,326,805 4,500,000 12,500,000
Proceeds from sale of
marketable equity
securities . . . . . . . 435,750 2,088,713 1,934,877
Proceeds from sale of
mortgage-backed
securities available for
sale . . . . . . . . . . 9,459,280 - -
Proceeds from sale of
FHLB stock . . . . . . . - 1,477,600 677,600
Purchases of certificates
of deposit . . . . . . . (202,474) (500,820) -
Purchase of U.S.
government and agency
securities available for
sale . . . . . . . . . . (6,008,203) (9,000,000) (3,000,000)
Purchase of FHLB stock . - (425,600) (800,000)
Purchases of mortgage
loans . . . . . . . . . (9,929,250) - -
Loans transferred to held
for sale and sold . . . - - 29,194,553
Purchases of mortgage-
related securities held
to maturity . . . . . . (88,527,687) (44,888,700) (73,148,108)
Purchases of mortgage-
backed securities held
to maturity . . . . . . (4,874,040) - -
Principal repayments on
mortgage-related
securities held to
maturity . . . . . . . . 12,322,954 18,930,463 26,695,410
Principal repayments on
mortgage-backed
securities held to
maturity . . . . . . . . 4,080,032 3,151,987 2,948,927
Loan principal repayments 163,171,984 204,629,823 226,027,966
Loans originated . . . . (201,912,372) (253,766,609) (255,900,375)
Principal repayments on
loan to ESOP . . . . . . 511,988 280,863 299,471
Purchases of marketable
equity securities . . . (1,553,187) (2,785,453) (3,631,618)
Purchases of mortgage-
backed securities
available for sale . . . (24,737,402) (2,035,207) -
Principal repayments on
mortgage-backed
securities available for
sale . . . . . . . . . 21,257,261 35,708,578 25,319,336
Principal repayments on
mortgage-related
securities available for
sale . . . . . . . . . . 707,853 1,742,150 1,366,393
Proceeds from sale of
foreclosed properties . 1,098,902 1,435,313 1,184,664
Investments in and
advances to
unconsolidated
partnerships . . . . . . - (2,690,555) -
Principal repayments on
loans to unconsolidated
partnerships . . . . . . 166,907 178,500 247,635
Cash distribution from
unconsolidated partner-
ship . . . . . . . . . . 50,000 100,000 124,004
Additions to office
properties and equipment (740,142) (3,070,369) (1,593,827)
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 . . . . . . . (107,259,096) (44,741,323) (9,450,386)
Financing activities:
Net increase (decrease)
in deposit accounts . . 67,652,253 (1,074,018) (10,075,501)
Proceeds from notes
payable to the Federal
Home Loan Bank . . . . . 41,000,000 64,500,000 51,000,000
Repayment of notes
payable to the Federal
Home Loan Bank . . . . . (14,400,000) (51,600,000) (50,550,000)
Net increase in
securities sold under
agreements to repurchase 9,709,637 36,245,820 23,759,846
Net increase (decrease)
in advance payments by
borrowers for taxes and
insurance . . . . . . . 546,332 (2,161,009) (1,309,564)
Proceeds from exercise of
stock options . . . . . 994,252 230,304 364,588
Dividends paid . . . . . (665,120) (1,045,230) (1,236,470)
Purchase of treasury
stock . . . . . . . . . . (3,781,661) (5,729,530) (4,185,066)
------------ ------------ -----------
Net cash provided by
financing activities . . 101,055,693 39,366,337 7,767,833
------------ ------------ -----------
Increase in cash and cash
equivalents . . . . . . . 2,494,771 2,935,441 7,462,717
Cash and cash equivalents:
At beginning of year . . . 30,015,434 32,510,205 35,445,646
----------- ------------ -----------
At end of year . . . . . . $32,510,205 $35,445,646 $42,908,363
=========== ============ ===========
Supplemental disclosures of
cash flow information:
Interest paid (including
amounts credited to
deposit accounts) . . . $37,787,908 $44,173,966 $45,368,982
Income taxes paid . . . . 2,195,556 4,889,068 2,156,615
Supplemental schedule of
noncash investing
activities:
Loans receivable
transferred to (from)
foreclosed properties . 2,152,524 (747,536) (1,664,648)
Securities transferred
from held-to-maturity to
available for sale . . . - 37,300,000 -
See accompanying notes to consolidated financial statements.
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
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 Statement of Financial
Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114). SFAS No. 114 requires that
impaired loans be measured at the present value of expected future cash
flows 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
statement were not significantly impacted by the adoption of SFAS 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 Statement of
Financial Accounting Standards No. 122 entitled "Accounting for Mortgage
Servicing Rights," (SFAS No. 122) 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. SFAS 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 SFAS No. 122
had the effect of increasing net income for fiscal years 1996 and 1997
by approximately $400,000 and $450,000, respectively.
Loans held for sale - Loans held for sale are carried at the lower of
aggregate cost or market.
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 prepaymenr 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 1996 or 1997.
(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. Costs 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 $1,826,000 and $1,440,000 as of September 30, 1996 and
1997, 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 $5,076,000 and
$4,420,000 as of September 30, 1996 and 1997, 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. ("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 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.
Stock based compensation - The Company adopted the provisions of Statement
of Financial Accounting Standards No. 123 entitled "Accounting for Stock-
Based Compensation" (SFAS No. 123) as of October 1, 1996. SFAS No. 123
establishes accounting and disclosure requirements using a fair value
based method of accounting for stock-based compensation plans. As
permitted under the provisions of SFAS No. 123, the Company elected to
continue to recognize compensation expense using the intrinsic value-based
method of valuing stock options as contained in Accounting Principles
Board Opinion No. 25. For fiscal 1997, the Company determined that the
effect on net income and earnings per share of using the fair value based
method of accounting defined in SFAS No. 123 applied on a pro forma basis
for awards granted since July 1, 1995 under employee stock-based
compensation plans was not material.
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 1995, 1996 and 1997 was
3,706,235, 3,661,833 and 3,463,502, 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.
Accounting for transfers and servicing of financial assets and
extinguishments of liabilities - In June 1996, Statement of Financial
Accounting Standards No. 125 entitled "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS
No. 125) was issued. This statement, among other provisions, applies a
"financial-components approach" that focuses on control, whereby an entity
recognizes the sale of financial and servicing assets when control has
been surrendered, and de-recognizes liabilities when extinguished. SFAS
No. 125 provides consistent standards of distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This statement, effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after
December 31, 1996, was applied prospectively. In December 1996, the FASB
reconsidered certain provisions of SFAS No. 125 and issued Statement of
Financial Accounting Standards No. 127, entitled "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125, an
amendment of FASB Statement No. 125" (SFAS No. 127), which defers until
December 31, 1997, the effective date of implementation for transactions
related to repurchase agreements, dollar roll repurchase agreements,
securities lending and similar transactions. All provisions of SFAS No.
125 continue to be applied prospectively, with earlier or retroactive
application not permitted. Management of the Company does not believe
that the adoption of SFAS No. 127 will have a material effect on the
Company's financial position, liquidity or results of operations.
Reclassifications - Certain amounts in the 1995 and 1996 financial
statements have been reclassified to conform to the 1997 presentations.
Pending accounting changes -
(1) Earnings per share: In February 1997, the FASB issued Statement of
Financial Accounting Standards No. 128, entitled "Earnings Per Share"
(SFAS No. 128). This statement establishes standards for computing and
presenting earnings per share (EPS) and simplifies the standards for
computing earnings per share previously found in Accounting Principles
Board Opinion No. 15, "Earnings Per Share." SFAS No. 128 supersedes
Accounting Principles Board Opinion No. 15 and its interpretations and
supersedes or amends other accounting pronouncements related to present
computations of EPS. The statement replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation
with equal prominence of basic and diluted EPS for income from continuing
operations and for net income on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
The provisions of SFAS No. 128 are effective for financial statements for
both interim and annual periods ending after December 15, 1997, with all
prior periods EPS data restated to conform with SFAS No. 128. Basic
earnings per share for the fiscal years 1995, 1996 and 1997 would have
been $2.36, $0.88 and $3.29, respectively. Diluted earnings per share for
the fiscal years 1995, 1996 and 1997 would have been $2.20, $0.83 and
$3.05, respectively.
(2) Disclosure of information about capital structure: In February
1997, the FASB issued Statement of Financial Accounting Standards No. 129
entitled "Disclosure of Information About Capital Structure" (SFAS No.
129). This statement basically consolidates disclosure requirements found
in other previously existing accounting literature regarding capital
structure. SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997, and since it contains no changes in the
disclosure requirements, such adoption will not have a material effect on
the Company's current capital structure disclosures.
(3) Reporting comprehensive income: In June 1997, the FASB issued
Statement of Financial Accounting Standards No. 130 entitled "Reporting
Comprehensive Income" (SFAS No. 130). This statement establishes
standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Comprehensive income is
the total of reported net income and all other revenues, expenses, gains
and losses that under generally accepted accounting principles bypass
reported net income. SFAS No. 130 requires that comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements with the aggregate amount of
comprehensive income reported in that same financial statement. SFAS No.
130 permits the statement of changes in stockholders' equity to be used to
meet this requirement. Companies are encouraged, but not required, to
display the components of other comprehensive income below the total for
net income in the statement of operations or in a separate statement of
comprehensive income. Companies are also required to display the
cumulative total of other comprehensive income for the period as a
separate component of equity in the statement of financial position.
This statement is effective for fiscal years beginning after December 15,
1997, with earlier application permitted. Companies are also required to
report comparative totals for comprehensive income in interim reports.
Management of the Company has not determined the period in which to adopt
the provisions of this statement.
(4) Disclosures about segments of an enterprise and related
information: In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 entitled "Disclosures About Segments of an
Enterprise and Related Information" (SFAS No. 131). This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and utilizes the "management approach" for segment reporting.
The management approach is based on the way that the chief operating
decision maker organizes segments within a company for making operating
decisions and assessing performance. Reportable segments are based on any
manner in which management disaggregates its company such as by products
and services, geography, legal structure and management structure. SFAS
No. 131 requires disclosures for each segment that are similar to those
required under current standards with the addition of quarterly disclosure
requirements and more specific and detailed geographic disclosures
especially by countries as opposed to broad geographic regions. This
statement also requires descriptive information about the way the
operating segments were determined, the products/services provided by the
operating segments, the differences between the measurements used in
reporting segment information and those used in the general purpose
financial statements, and the changes in the measurement of segment
amounts from period to period.
The provisions of SFAS No. 131 are effective for fiscal years beginning
December 15, 1997, with earlier application permitted. SFAS No. 131 does
not need to be applied to interim statements in the initial year of
application but such comparative information will be required in interim
statements for the second year. Comparative information for earlier years
must be restated in the initial year of application. Management of the
Company has not determined the period in which to adopt the provisions of
this statement.
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, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost at Gross Gross Value at
September 30 Unrealized Unrealized September 30
1996 Gains Losses 1996
<S> <C> <C> <C> <C>
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 maturity . . . . . . . . $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 . . . . . $4,431,768 $675,767 $64,464 $5,043,091
=========== ========= ========== ===========
U.S government and agency
securities available for sale:
U.S. Treasury notes . . . . . $2,998,607 $1,664 $8,083 $2,992,188
Federal Home Loan Bank notes 7,935,356 62,859 2,389 7,995,826
Federal National Mortgage
Association notes . . . . . 3,493,830 11,482 - 3,505,312
Federal Farm Credit notes . . 1,998,536 39,589 - 2,038,125
Federal Home Loan Mortgage
Corp. notes . . . . . . . . 1,993,963 4,318 - 1,998,281
Sallie Mae notes . . . . . . 1,419,079 7,490 - 1,426,569
----------- --------- ------- -----------
$19,839,371 $127,402 $10,472 $19,956,301
=========== ========= ======= ===========
Mortgage-backed securities
available for sale . . . . . $116,349,132 $1,590,742 $607,318 $117,332,556
=========== ========= ======= ===========
Mortgage-backed securities held
to maturity. . . . . . . . . . $8,321,934 $112,896 $13,521 $8,421,309
=========== ========= ======= ===========
Mortgage-related securities
available for sale:
Interest only strips backed by
FNMA MBS . . . . . . . . . . $1,576,636 $617,790 $ - $2,194,426
Principal only strips backed
by FNMA MBS . . . . . . . . 7,153,619 102,277 682,871 6,573,025
A-rated whole loan CMO . . . 4,692,896 96,126 - 4,789,022
AAA-rated FHLMC CMO . . . . . 562,417 - 13,172 549,245
----------- --------- -------- -----------
$13,985,568 $816,193 $696,043 $14,105,718
=========== ========= ======== ===========
Mortgage-related securities
held to maturity:
CMOs backed by FNMA/FHLMC MBS $97,750,808 $1,822,023 $217,710 $99,355,121
AAA- and AA-rated whole loan
CMOs . . . . . . . . . . . 120,699,579 2,344,783 248,802 122,795,560
----------- --------- ------- -----------
$218,450,387 $4,166,806 $466,512 $222,150,681
=========== ========= ======== ===========
Marketable equity securities
available for sale . . . . . $6,128,529 $3,173,131 $20,399 $9,281,261
=========== ========= ======= ==========
The amortized cost and estimated market values of U.S. government and
agency securities available for sale at September 30, 1997 by contractual
maturity, are shown below.
Estimated
Amortized Market
Cost Value
Due in one year or less . . . . . . . . . $1,991,190 $2,003,438
Due after one year through five years . . 17,848,181 17,952,863
---------- ----------
$19,839,371 $19,956,301
========== ==========
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 were $2,088,713 and
$1,934,877 for fiscal 1996 and 1997, respectively . Gross gains of
$866,070 and $1,037,848 were realized on those sales for fiscal 1996 and
1997, respectively.
Accrued interest on investments and mortgage securities consists of:
September 30
1996 1997
Certificates of deposit . . . . . . . . . . . $ 1,027 $ 1,071
U.S. Government and agency securities . . . . 387,168 229,247
Mortgage securities . . . . . . . . . . . . . 2,252,477 2,285,380
---------- ----------
$2,640,672 $2,515,698
========== ==========
4. Loans receivable
Loans receivable, including loans held for sale, consist of:
September 30
1996 1997
First mortgage loans:
One- to four-family residential . . . $418,646,211 $378,701,477
Multi-family . . . . . . . . . . . . 24,993,017 26,923,038
Commercial real estate . . . . . . . 54,671,293 63,755,361
One- to four-family residential spec
construction . . . . . . . . . . . . 7,598,430 5,148,277
Other construction and land . . . . . 30,160,649 24,447,585
----------- -----------
536,069,600 498,975,738
Other loans:
Home equity and second mortgage . . . 43,893,371 67,996,673
Education . . . . . . . . . . . . . . 4,039,550 4,307,204
Automobile . . . . . . . . . . . . . 1,553,137 1,662,553
Other consumer . . . . . . . . . . . 1,732,221 2,501,883
Commercial business loans . . . . . . 10,691,062 12,429,365
----------- -----------
61,909,341 88,897,678
----------- -----------
Total gross loans receivable . . . . . 597,978,941 587,873,416
Add: Accrued interest on all loans . . 3,718,382 3,754,653
Less:
Undisbursed portion of loan proceeds (30,099,538) (19,149,988)
Unamortized loan fees . . . . . . . . (2,104,405) (858,614)
Allowance for loan losses . . . . . . (5,773,354) (5,796,842)
Allowance for uncollected interest . (938,386) (563,374)
----------- -----------
(35,197,301) (22,614,165)
----------- -----------
$562,781,640 $565,259,251
=========== ===========
As of September 30, 1997, 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
1996 1997
Real estate owned . . . . . . . . . . . $1,034,703 $1,568,918
Real estate judgments subject to
redemption . . . . . . . . . . . . . 368,737 223,759
---------- ----------
$1,403,440 $1,792,677
========== ==========
6. Allowance for losses on loans
A summary of the activity in the allowance for losses on loans follows:
September 30
1995 1996 1997
Balance at beginning of
year . . . . . . . . . . $5,327,515 $5,271,182 $5,773,354
Additions from loan
purchases . . . . . . . 517,798 - -
Provisions . . . . . . . . 460,000 480,000 360,000
Charge-offs . . . . . . . . (1,072,115) (39,975) (807,973)
Recoveries . . . . . . . . 37,984 62,147 471,461
--------- --------- ---------
Balance at end of year . . $5,271,182 $5,773,354 $5,796,842
========= ========= =========
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
1996 1997
Cost:
Land and improvements . . . . . . . $2,349,393 $2,361,411
Office buildings . . . . . . . . . . 9,399,227 9,868,976
Furniture and equipment . . . . . . 9,116,848 8,830,159
---------- ----------
20,865,468 21,060,546
Less allowances for depreciation . . . (8,333,867) (8,304,148)
---------- ----------
$12,531,601 $12,756,398
========== ==========
8. Deposit accounts
Deposit accounts are summarized as follows:
September 30
1996 1997
Amount Rate Amount Rate
Checking accounts:
Noninterest bearing $31,345,513 0.00% $34,967,734 0.00%
Interest-bearing . 50,322,957 1.81 48,506,401 1.55
Variable rate money
market accounts 147,038,443 3.92 155,016,308 3.92
Regular savings
accounts . . . . 43,010,687 2.50 40,378,028 1.98
Certificate
accounts (by
original
maturity):
One year or less . 140,487,605 5.28 134,693,723 5.41
One to two years . 95,289,041 5.80 93,122,979 5.76
Two to three years 94,304,153 5.81 86,551,604 6.09
Three to four years 49,092,040 6.07 47,965,892 6.19
Four to five years 27,644,036 6.00 26,861,399 5.99
Five or more years 2,316,390 6.54 2,711,296 6.33
----------- ----- ----------- -----
Total
certificates . 409,133,265 5.67 391,906,893 5.79
----------- ----- ----------- -----
$680,850,865 4.55% $670,775,364 4.52%
=========== ===== =========== =====
Deposit accounts with individual balances greater than $100,000 totaled
$87,676,000 and $93,266,486 at September 30, 1996 and 1997, respectively.
Aggregate annual maturities of certificate accounts at September 30, 1997
were as follows:
Matures during year
ending September 30:
1998 . . . . . . . . . . . . . . . . . $248,128,557
1999 . . . . . . . . . . . . . . . . . . 65,843,581
2000 . . . . . . . . . . . . . . . . . . 65,731,484
2001 . . . . . . . . . . . . . . . . . . 8,264,815
2002 . . . . . . . . . . . . . . . . . . 3,009,981
Thereafter . . . . . . . . . . . . . . . 928,475
-----------
$391,906,893
===========
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 1996 1997
Year Ending Weighted Weighted
September 30 Rate Amount Rate Amount
1997 . . . . . . . . 5.37% $50,550,000 - % $ -
1998 . . . . . . . . 6.45 59,000,000 6.42 69,000,000
1999 . . . . . . . . 6.42 56,925,000 6.41 61,925,000
2000 . . . . . . . . 6.44 6,835,000 6.31 36,835,000
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
2007 . . . . . . . . - - 6.91 6,000,000
----------- -----------
6.15% $175,910,000 6.43% $176,360,000
=========== ===========
At September 30, 1997, $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 5.87% and 5.67% at
September 30, 1996 and 1997, respectively, and generally mature within
twelve months after the fiscal year-end. The securities underlying the
agreements, as summarized below, are held in safekeeping.
September 30
1996 1997
FHLMC mortgage-backed securities . . . . . $42,485,232 $50,827,442
FNMA mortgage-backed securities . . . . . . 8,738,500 4,800,918
Collaterized mortgage obligations . . . . . 22,133,917 32,302,752
Accrued interest . . . . . . . . . . . . . 444,748 516,403
----------- -----------
Total book value (approximates market
value) . . . . . . . . . . . . . . . . . . $73,802,397 $88,447,515
=========== ===========
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, 1997, that the Bank meets all capital adequacy requirements to which
it is subject.
As of September 30, 1997, the most recent notification from the Office of
Thrift Supervision ("OTS") 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>
<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, 1997:
Total Capital to Risk-Weighted
Assets . . . . . . . . . . . . $71,121 14.81% $38,420 8.00% $48,026 10.00%
Tier 1 Capital to Risk-Weighted
Assets . . . . . . . . . . . . 65,339 13.61% 19,210 4.00% 28,815 6.00%
Tier 1 Capital to Adjusted Total
Assets . . . . . . . . . . . . 65,339 6.43% 30,470 3.00% 50,874 5.00%
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%
</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, 1997, 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
1995 1996 1997
Current:
Federal . . . . . . $3,000,755 $5,377,588 $2,845,124
State . . . . . . . 78,952 129,357 266,707
--------- --------- ---------
3,079,707 5,506,945 3,111,831
Deferred:
Federal . . . . . . 1,381,170 (3,578,723) 2,656,897
State . . . . . . . 56,671 (464,398) 184,721
---------- ---------- ----------
1,437,841 (4,043,121) 2,841,618
---------- ---------- ----------
$4,517,548 $1,463,824 $5,953,449
========== ========== ==========
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
Year Ended September 30
1995 1996 1997
Income before income taxes . . . $12,668,533 $4,496,361 $16,641,328
========== ========== ==========
Tax at federal statutory
rate of 34% . . . . . . . . . $4,307,301 $1,528,763 $5,658,052
Add (deduct) effect of:
State income taxes (net of
federal income tax benefit) 89,511 (221,127) 297,942
Amortization of goodwill . . . 113,973 137,265 131,253
Tax exempt interest-net . . . (6,436) (7,287) (6,021)
Low income housing tax credit - - (81,400)
Other . . . . . . . . . . . . 13,199 26,210 (46,377)
---------- ---------- ----------
Provision for income taxes . . . $4,517,548 $1,463,824 $5,953,449
========== ========== ==========
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
1996 1997
Deferred tax assets:
Allowance for losses on loans . . . . . . $1,115,048 $1,241,783
Accrued expenses deducted on a cash basis
for tax purposes . . . . . . . . . . . . 2,142,966 739,855
Deferred loan fees . . . . . . . . . . . . 372,571 38,041
Reserve for uncollected interest . . . . . 328,553 197,435
State income taxes . . . . . . . . . . . . 386,999 227,048
Unrealized losses on securities available
for sale . . . . . . . . . . . . . . . . 425,085 -
Other . . . . . . . . . . . . . . . . . . 175,836 5,438
---------- ----------
Total deferred tax assets . . . . . . . 4,947,058 2,449,600
Valuation allowance . . . . . . . . . . . (254,354) (254,354)
---------- ----------
Adjusted deferred tax assets . . . . . . 4,692,704 2,195,246
Deferred tax liabilities:
Differences between book and tax
depreciation . . . . . . . . . . . . . . (585,423) (657,662)
Income of partnerships . . . . . . . . . . (243,090) (304,332)
Recognition of discounts/premiums (related
to acquisitions) . . . . . . . . . . . . (997,773) (997,956)
FHLB dividends . . . . . . . . . . . . . . (224,759) (277,445)
Originated mortgage servicing rights . . . - (473,745)
Unrealized gains on securities available
for sale . . . . . . . . . . . . . . . . - (1,710,766)
---------- ----------
Total deferred tax liabilities . . . . . (2,051,045) (4,421,906)
---------- ----------
Total net deferred tax asset (liability) . . $2,641,659 ($2,226,660)
========= ==========
13. Officer, director and employee plans
Employees' Profit-Sharing and Savings Retirement Plan ("401k plan"): The
Company has a trusteed profit-sharing plan for all employees meeting
minimum eligibility requirements. Under this 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 through employer contributions
to the Employee Stock Ownership Plan discussed below. No employer
contributions have been made to the 401(k) plan since 1991.
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, 1994 . . . 356,686 $10.07
Granted . . . . . . . . . . . 31,938 $25.14
Conversion of acquired company
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
Granted . . . . . . . . . . . 16,726 $31.58
Forfeited . . . . . . . . . . (2,000) $34.00
Exercised . . . . . . . . . . (34,956) $10.43
--------- ------
Balance September 30, 1997 . . . 325,354 $13.34
========= ======
Options to purchase 299,999 shares were exercisable as of September 30,
1997.
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 $366,589, $ 347,594
and $312,280 in fiscal years 1995, 1996 and 1997, respectively. These
amounts include the amounts allocated to employer matching contributions
under the 401(k) plan.
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,
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
Granted . . . . . . . 6,501 $33.12
-------- ------
Balance September 30, 1997 129,456 $12.90
======== ======
The contribution to the BIPs is being amortized to compensation expense as
the Bank's employees become vested in those shares. Amortization expense
was $294,369, $132,386 and $211,194 for fiscal years 1995, 1996, and 1997,
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 nonperformance 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:
1996 1997
Commitments to originate mortgage loans:
Fixed-rate (average rate of 7.62%-
1997) . . . . . . . . . . . . . . $1,119,500 $3,720,200
Adjustable-rate . . . . . . . . . . . $7,401,310 $4,498,321
Unused lines of credit:
Home equity (adjustable-rate) . . . . $27,592,918 $39,008,824
Commercial loans (fixed-rate) . . . . $28,080,000 $29,356,595
Interest rate swaps--notional amount (pay
fixed rate, receive floating rate):
Maturing 1997 . . . . . . . . . . . . $30,000,000 $ --
Maturing 1998 . . . . . . . . . . . . 10,000,000 10,000,000
Maturing 1999 . . . . . . . . . . . . --- 30,000,000
---------- ----------
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, 1997 amounted to $7,720,000.
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 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, 1997, the market value of interest-rate swaps was a negative
$170,109.
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, 1996 September 30, 1997
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents . . . . . . $35,445,646 $35,445,646 $42,908,363 $42,908,363
Certificates of deposit . . . . . . . 611,067 611,067 508,664 508,664
U.S. government and agency securities
available for sale . . . . . . . 29,385,356 29,385,356 19,956,301 19,956,301
Mortgage-backed securities available
for sale . . . . . . . . . . . . . 140,086,665 140,086,665 117,332,556 117,332,556
Mortgage-backed securities held to
maturity . . . . . . . . . . . . . 11,011,238 11,159,367 8,321,934 8,421,309
Mortgage-related securities available
for sale . . . . . . . . . . . . . 15,226,120 15,226,120 14,105,718 14,105,718
Mortgage-related securities held to
maturity . . . . . . . . . . . . . 171,470,022 172,913,430 218,450,643 222,150,681
Marketable equity securities . . . . 5,043,091 5,043,091 9,281,261 9,281,261
Loans held for sale . . . . . . . . . 3,056,000 3,056,000 4,907,212 4,907,212
Loans receivable:
First mortgage loans . . . . . . . 494,452,348 502,024,395 467,930,645 472,849,646
Consumer loans . . . . . . . . . . 50,863,848 51,574,813 76,237,377 76,768,349
Commercial business loans . . . . 10,691,062 10,731,328 12,429,365 12,588,234
Accrued interest receivable . . . 3,718,382 3,718,382 3,754,653 3,754,653
----------- ----------- ----------- -----------
559,725,640 568,048,918 560,352,040 565,960,882
Mortgage servicing rights . . . . . . 630,512 724,268 1,353,558 1,353,558
Federal Home Loan Bank stock . . . . 8,795,600 8,795,600 8,918,000 8,918,000
Accrued interest on investments and
mortgage securities . . . . . . . 2,640,672 2,640,672 2,515,698 2,515,698
----------- ----------- ------------- -------------
$983,127,629 $993,136,200 $1,008,911,948 $1,018,320,203
=========== =========== ============= =============
FINANCIAL LIABILITIES
Deposits:
NOW accounts . . . . . . . . . . . $81,668,470 $81,668,470 $83,474,135 $83,474,135
Variable rate money market
deposits . . . . . . . . . . . 147,038,443 147,038,443 155,016,308 155,016,308
Regular savings accounts . . . . . 43,010,687 43,010,687 40,378,028 40,378,028
Certificates of deposit . . . . . 409,133,265 410,443,753 391,906,893 392,663,715
----------- ----------- ----------- -----------
680,850,865 682,161,353 670,775,364 671,532,186
Notes payable to Federal Home Loan 175,910,000 175,848,137 176,360,000 177,122,765
Bank . . . . . . . . . . . . . . .
Securities sold under agreement to
repurchase . . . . . . . . . . . . 48,355,457 48,419,656 72,115,303 72,048,397
Accrued interest on deposit accounts 3,711,995 3,711,995 2,825,851 2,825,851
Accrued interest on borrowings . . . 1,377,204 1,377,204 2,607,869 2,607,869
Interest rate swaps . . . . . . . . . - 183,641 - 170,109
----------- ----------- ----------- -----------
$910,205,521 $911,701,986 $924,684,387 $926,307,177
=========== =========== =========== ===========
</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, 1996 and 1997 and the condensed statements of income and cash flows
for the years ended September 30, 1996 and 1997 for the Company only
should be read in conjunction with the consolidated financial statements
and the notes thereto.
Statements of Financial Condition
Advantage Bancorp, Inc.
September 30
Assets 1996 1997
Cash and cash equivalents deposited in Bank $11,971,650 $10,362,754
Certificates of deposit . . . . . . . . . . 11,067 8,664
Marketable equity securities available for
sale . . . . . . . . . . . . . . . . . . 5,043,091 9,281,261
U.S. agency securities available for sale . 500,514 501,719
Loans to Cranberry III Partnership . . . . - 5,719,736
Mortgage-backed securities available for
sale . . . . . . . . . . . . . . . . . . 306,110 222,263
Mortgage-related securities available for
sale . . . . . . . . . . . . . . . . . . 3,216,380 3,210,143
Equity in net assets of subsidiaries . . . 69,348,903 71,937,377
Accrued interest on investments and
mortgage securities . . . . . . . . . . 17,465 16,720
Other assets . . . . . . . . . . . . . . . - 66,856
----------- ------------
$90,415,180 $101,327,493
=========== ============
Liabilities
Other liabilities . . . . . . . . . . . . . $307,015 $193,439
Deferred income taxes . . . . . . . . . . . 106,676 1,253,164
Accrued income taxes . . . . . . . . . . . 240,309 37,706
Payable to Bank - unearned restricted stock 894,777 839,055
---------- ----------
Total liabilities . . . . . . . . . 1,548,777 2,323,364
Stockholders' Equity
Common stock . . . . . . . . . . . . . . . 33,000 33,000
Additional paid-in capital . . . . . . . . 37,751,499 38,536,160
Loan to Employee Stock Ownership Plan . . (1,704,941) (1,405,470)
Unearned restricted stock awarded . . . . . (894,777) (839,055)
Unrealized gain (loss) on securities
available for sale . . . . . . . . . . . (699,857) 2,667,084
Treasury stock . . . . . . . . . . . . . . (17,627,105) (21,319,434)
Retained earnings . . . . . . . . . . . . . 72,008,584 81,331,844
----------- -----------
Total stockholders' equity . . . . . 88,866,403 99,004,129
----------- -----------
$90,415,180 $101,327,493
=========== ===========
Statements of Income
Advantage Bancorp, Inc.
Year Ended September 30
1995 1996 1997
Interest and dividend income:
Interest income from
deposits in Bank . . . . . $467,569 $583,889 $440,639
Interest on mortgage
securities . . . . . . . . 249,254 155,054 178,708
Interest on loans to
Cranberry III Partnership - - 356,602
Interest on loan to Employee
Stock Ownership Plan . . . 206,962 167,052 138,209
Other interest and dividends 87,562 197,952 207,256
--------- --------- ---------
Total interest and dividend
income . . . . . . . . . . 1,011,347 1,103,947 1,321,414
Non-interest income:
Equity in net income of Bank
and its subsidiaries . . . 7,602,935 2,247,751 9,654,843
Gain on sale of securities 145,000 973,848 604,393
--------- --------- ----------
Total non-interest income . 7,747,935 3,221,599 10,259,236
--------- --------- ----------
8,759,282 4,325,546 11,580,650
Non-interest expense . . . . 291,138 576,867 210,477
--------- --------- ----------
Income before income taxes . 8,468,144 3,748,679 11,370,173
Income taxes . . . . . . . . 317,159 716,142 682,294
--------- --------- ----------
Net income . . . . . . . . . $8,150,985 $3,032,537 $10,687,879
========= ========= ==========
<TABLE>
<CAPTION>
Statements of Cash Flows
Advantage Bancorp, Inc.
Year Ended September 30
1995 1996 1997
<S> <C> <C> <C>
Operating activities:
Net income . . . . . . . . . . . $8,150,985 $3,032,537 $10,687,879
Less equity in earnings of the
Bank and its subsidiaries (7,602,935) (2,247,751) (9,654,843)
Decrease in interest receivable 164,816 2,972 743
Increase in deferred income
taxes . . . . . . . . . . . - - 24,940
Increase (decrease) in accrued
income taxes . . . . . . . . (114,813) 471,342 (202,603)
Net amortization of discount on
securities . . . . . . . . . (248,382) (117,738) (165,493)
Other . . . . . . . . . . . . . 297,950 254,703 (233,795)
-------- --------- --------
Net cash provided by operating
activities . . . . . . . . . . . 647,621 1,396,065 456,828
Investing activities:
Dividends from Bank . . . . . . 21,250,000 8,250,000 8,750,000
Proceeds from sale of marketable
equity securities . . . . . 435,750 2,088,713 1,934,877
Principal repayments on loans to
Cranberry III Partnership . . - - 188,607
Principal repayments on
mortgage-related securities 366,046 514,598 428,094
Principal repayments on
mortgage-backed securities . - 156,669 89,751
Proceeds from maturities of U.S.
Government securities . . . - 500,000 -
Purchase of loans to Cranberry
III Partnership from Bank . - - (5,908,343)
Purchase of marketable
securities available for sale (1,553,188) (2,785,453) (3,631,618)
Principal repayments on loan to
Employee Stock Ownership Plan 511,988 280,862 299,471
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 . . . . . . (2,835,309) 9,005,389 2,150,839
Financing activities:
Proceeds from exercise of stock
options . . . . . . . . . . 994,252 230,303 492,737
Dividends paid . . . . . . . . . (665,120) (1,045,230) (1,236,470)
Purchase of treasury stock . . . (3,781,661) (5,729,530) (4,185,066)
Other . . . . . . . . . . . . . - 223,529 712,236
----------- ----------- -----------
Net cash used in financing
activities . . . . . . . . . . . (3,452,529) (6,320,928) (4,216,563)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . (5,640,217) 4,080,526 (1,608,896)
Cash and cash equivalents at
beginning of period . . . . . . 13,531,341 7,891,124 11,971,650
---------- ----------- -----------
Cash and cash equivalents at end of
period . . . . . . . . . . . . . $7,891,124 $11,971,650 $10,362,754
========== =========== ===========
</TABLE>
17. Investments in and advances to unconsolidated partnerships
The Company held the following investments in and advances to
unconsolidated partnerships:
September 30
1996 1997
Cranberry III Partnership (50% ownership
interest) . . . . . . . . . . . . . . . $6,710,667 $6,506,033
Geneva Professional Building Associates
(75% ownership interest) . . . . . . . 182,378 217,088
Pleasantview Limited Partnership (55%
ownership interest) . . . . . . . . . . 504,371 481,266
--------- ---------
$7,397,416 $7,204,387
========= =========
Cranberry III Partnership owns a 264-unit apartment complex. Condensed
financial statements of this partnership are as follows:
CRANBERRY III PARTNERSHIP
BALANCE SHEETS (Unaudited)
September 30
1996 1997
ASSETS
Land, buildings and furniture-net . . . $7,190,381 $6,971,270
Other assets . . . . . . . . . . . . . 790,447 879,194
--------- ---------
$7,980,828 $7,850,464
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage payable to the Bank or
Company . . . . . . . . . . . . . . . 5,967,370 5,719,736
Other liabilities . . . . . . . . . . . 456,422 446,458
Partners' capital:
Advantage Bank . . . . . . . . . . . 778,518 842,135
Other partners . . . . . . . . . . . 778,518 842,135
--------- ---------
$7,980,828 $7,850,464
========= =========
STATEMENTS OF INCOME (Unaudited)
Year Ended September 30
1995 1996 1997
Rental and other income . . . . . $1,699,053 $1,748,315 $1,747,536
Rental expense . . . . . . . . . 725,631 810,585 716,272
--------- --------- ---------
973,422 937,730 1,031,264
Depreciation . . . . . . . . . . 230,978 221,449 219,111
Interest expense . . . . . . . . 555,376 551,640 484,919
--------- --------- ---------
Net income . . . . . . . . . . . $187,068 $164,641 $327,234
========= ========= =========
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, 1997 of $257,566. Operating
results in 1995, 1996 and 1997 yielded cash flows of $50,373, $51,518 and
$62,418 after payment of financing costs, respectively.
Pleasantview Limited Partnership owns a 30-unit apartment complex which
is funded by a mortgage loan from an unrelated financial institution with
an outstanding balance at September 30, 1997 of $912,000. Pleasantview
began operations in June 1996 and had net income before depreciation of
$69,983 for the period ended September 30, 1997. 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
1995 1996 1997
Statement of financial
condition information:
Mortgage loans held for sale $2,405,000 $3,056,000 $4,907,212
========= ========= =========
Mortgage servicing rights . $ - $630,512 $1,353,558
========= ========= =========
Statement of income
information:
Loan servicing fees . . . . $376,475 $387,715 $404,205
========= ========= =========
Gain on sales of mortgage
loans held for sale . . . $107,513 $875,830 $627,446
========= ========= =========
Amortization of mortgage
servicing rights . . . . $ - $42,567 $80,778
========= ========= =========
Statement of cash flow
information:
Mortgage loans originated
for sale . . . . . . . . . $17,349,224 $55,754,049 $95,740,854
Sales of mortgage loans
originated for sale . . . . $15,928,424 $55,103,049 $93,889,642
Loans serviced for investors (primarily FNMA and FHLMC) were $147,313,000,
$179,183,000 and $218,564,785 at September 30, 1995, 1996 and 1997,
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 reduced FDIC insurance premiums
for SAIF members from a rate of 23 cents to a rate of 6.4 cents for every
$100 of deposts . The new law imposed 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.
20. Merger Agreement with Marshall & Ilsley Corporation
On November 3, 1997, the Company signed a definitive merger agreement with
Marshall & Ilsley Corporation providing for the merger of the Company with
and into Marshall & Ilsley Corporation. Subject to the satisfaction of
certain conditions and the approval of shareholders and regulatory
agencies, the Company anticipates the merger will be completed during
March or April 1998.
QUARTERLY DATA
The following table sets forth the Company's unaudited quarterly income
and expense data for fiscal years 1996 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Dec. 31 March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30
1995 1996 1996 1996 1996 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income . . $18,398 $18,150 $18,380 $18,704 $19,151 $18,790 $19,184 $19,542
Interest expense . 10,997 10,789 10,797 11,224 11,453 11,287 11,386 11,588
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 7,401 7,361 7,583 7,480 7,698 7,503 7,798 7,954
Provision for losses
on loans . . . . 120 120 100 140 80 100 90 90
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
losses on loans . 7,281 7,241 7,483 7,340 7,618 7,403 7,708 7,864
Gain on sale of
assets . . . . . 744 359 224 415 422 280 457 506
Other non-interest
income . . . . . 1,390 1,647 1,658 1,578 1,651 1,551 1,649 1,804
------- ------- ------- ------- ------- ------- ------- -------
Total non-interest
income . . . . . 2,134 2,006 1,882 1,993 2,073 1,831 2,106 2,310
Assessment to
recapitalize SAIF - - - 4,435 - - - -
Writedown of
intangible assets - - - 4,720 - - - -
Other non-interest
expense . . . . . 5,830 5,716 5,910 6,253 5,794 5,315 5,543 5,620
------- ------- ------- ------- ------- ------- ------- -------
Total non-interest
expenses . . . 5,830 5,716 5,910 15,408 5,794 5,315 5,543 5,620
-------- -------- ------- -------- -------- ------- -------- --------
Income before income
taxes . . . . . . 3,585 3,531 3,455 (6,075) 3,897 3,919 4,271 4,554
Income taxes . . . 1,305 1,292 1,266 (2,400) 1,444 1,382 1,490 1,637
------- ------- ------- ------- ------- ------- ------- -------
Net income . . . . $2,280 $2,239 $2,189 ($3,675) $2,453 $2,537 $2,781 $2,917
======== ======== ======= ======== ======== ======= ======== ========
Earnings per share $0.62 $0.60 $0.60 ($1.02) $0.70 $0.73 $0.81 $0.85
===== ===== ===== ===== ===== ===== ===== =====
Earnings per share
excluding
nonrecurring items
(1) . . . . . . . $0.62 $0.60 $0.60 $0.56 $0.70 $0.73 $0.81 $0.85
==== ==== ==== ==== ==== ==== ==== ====
(1) The information for quarter ended September 30, 1996, excludes the
one-time assessment to recapitalize the SAIF and the writedown of
intangible assets.
</TABLE>
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
The following sets forth certain information, as of September 30, 1997,
about each member of the Board of Directors. Unless otherwise indicated,
each person has served in the principal occupation noted below for at
least the past five years.
Ben-Ami Chemerow, 71, retired in 1996 as Chairman of the Board of the
Leader Store, a retail clothing store which formerly operated in Kenosha,
Wisconsin. Mr. Chemerow has been a director of the Bank since 1975 and a
director of the Company since its inception in 1991. His term as director
of the Company expires at the 1998 annual meeting of shareholders..
Paul P. Gergen, 64, has served as President, Chief Executive Officer and
Chairman of the Board of the Company since its inception in 1991, as
President and Chief Executive Officer of the Bank since 1984 and as
Chairman of the Board of Directors of the Bank since 1987. Mr. Gergen is
a licensed attorney and a Certified Public Accountant. His term as
director of the Company expires at the year 2000 annual meeting of
shareholders.
Rita Petretti, 55, is Vice President of Petretti Builders and Developers
located in Kenosha, Wisconsin and is a licensed real estate broker. She
has been a director of the Bank and the Company since April 1996. Her
term as director of the Company expires at the 1999 annual meeting of
shareholders.
Eugene Snarski, 70, is a licensed attorney practicing in Waukegan,
Illinois. Mr. Snarski served as a director of North Chicago Federal
Savings and Loan Association prior to its merger with the Bank in 1989.
Mr. Snarski has been a director of the Company since its inception in
1991. His term as director of the Company expires at the year 2000 annual
meeting of shareholders.
Dennis Troha, 51, has been President of ATC Leasing, Inc., a fixed asset
leasing company, located in Kenosha, Wisconsin since 1994. He previously
was President of Jupiter Corp. Transportation Systems, Inc., a trucking
company, located in Kenosha, Wisconsin. He has been a director of the
Bank and the Company since November 1996. His term as director of the
Company expires at the 1998 annual meeting of shareholders.
Michael Wells, 55, is Chairman of the Board and President of Frank L.
Wells Co., a manufacturer of wire machinery located in Kenosha, Wisconsin.
Mr. Wells has been a director of the Bank since 1979 and a director of the
Company since its inception in 1991. His term as a director of the
Company expires at the 1999 annual meeting of shareholders.
Information regarding the executive officers of the Company and the Bank
is included under the heading "Business" in Part I of this Annual Report
on Form 10-K.
Item 11. Executive Compensation
The following table sets forth certain information concerning
compensation paid for the last three fiscal years to the Company's Chief
Executive Officer and the only other executive officer whose total salary
and bonus exceeded $100,000 in fiscal 1997. The amounts reflected in the
table were paid by the Bank for services rendered to the Bank. Officers
of the Company do not receive any additional compensation for serving in
such capacities. The persons named in the table are sometimes referred to
herein as the "named executive officers."
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Long-Term
Compensation (1) Compensation
Awards
Restricted All
Name and Stock Other
Principal Position Year Salary Bonus Awards(2) Compensation(3)
<S> <C> <C> <C> <C> <C>
Paul P. Gergen 1997 $336,090 $113,000 $113,000 $18,646
Chairman, President and Chief 1996 312,146 139,000 140,000 32,685
Executive Officer of the Company 1995 312,146 120,000 109,000 1,875
and the Bank
John W. Stampfl 1997 141,703 17,500 17,500 18,276
Secretary, Treasurer and Chief 1996 130,521 30,000 30,000 32,685
Financial Officer of the Company and 1995 129,691 25,000 25,000 1,875
Senior Vice President-Finance,
Treasurer and Secretary of the Bank
(1) Certain personal benefits provided by the Bank to the named
executive officers are not included in the table. The aggregate
amount of such benefits for either officer did not exceed 10% of
the sum of such officer's salary and bonus in each respective
year.
(2) The amounts in the table reflect the market value on the date of
grant of restricted shares of Common Stock awarded under the
BIPs. The number of shares of restricted Common Stock held by
the named executive officers and the market value of such shares
as of September 30, 1997 were as follows: Mr. Gergen, 17,635
shares ($1,005,195), and Mr. Stampfl, 3,518 shares ($200,526).
Holders of shares of restricted Common Stock under the Advantage
Bancorp, Inc. Bank Incentive Plans ("BIPs") are entitled to
receive dividends on such shares if any dividends are paid.
(3) Consists of Bank contributions to the Advantage Bancorp, Inc.
Employee Stock Ownership Plan ("ESOP").
</TABLE>
Directors' Compensation
Directors' Fees. Directors of the Company who are not officers receive
a retainer of $750 per month. Directors of the Bank, who are not
officers, likewise receive a monthly retainer of $750. Non-officer
directors of the Company and/or the Bank also receive a fee of $250 per
committee meeting attended. Directors of the Company and the Bank who are
officers of either the Company or the Bank receive no additional
compensation for serving as directors.
Stock Options. Under the 1996 Director Stock Option Plan, each newly-
elected director who is not a full-time employee of the Company or the
Bank and who has not previously served on the Board of either the Company
or the Bank, receives (assuming such individual is elected to the Board of
the Directors of both the Company and the Bank) an automatic grant of
options to purchase 14,726 shares of the Company's Common Stock as of the
date of his or her election. Each such option has a per share price equal
to the market value of a share of Common Stock on the date of the grant
and has a ten-year term. On election to the Board, Mr. Troha received
options to purchase 14,726 shares of Common Stock at a per share exercise
prices of $31.25.
Deferred Compensation. Under the Company's director deferred
compensation program, each director has the option of deferring all or a
specified portion of certain fees payable to the director for services
rendered to the Company and/or the Bank (hereinafter referred to as
"Director's Fees"). At the time such Director's Fees would otherwise be
payable in cash, each participating director's deferred account is
credited in book entry form with the number of shares of Common Stock the
amount of deferred Director's Fees would have purchased based upon the
average of the high and low sales price of the Common Stock on that day.
Distribution of a participating director's account balance in cash
commences within 60 days after the end of the calendar year in which the
director's death occurs, or in which the director resigns, retires or is
removed from office. Directors have the option of electing a single lump
sum payment or payments in a specified number of annual installments. The
amount of a participating director's deferred account balance is
determined by multiplying the number of shares credited to the deferred
account by the average of the high and low sales price of the Common Stock
on the business day immediately preceding distribution of such director's
account balance.
Employment Agreements
The Bank has entered into three-year employment agreements with Messrs.
Gergen and Stampfl. The employment agreements provide for an annual
salary in an amount not less than the officer's current salary. The
employment agreements provide for an initial term of three years and are
automatically extended for one year at each anniversary date, provided
there is a satisfactory performance review of the employee, or until
either the Bank or the employee gives written notice to the contrary. The
agreements provide for termination upon the employee's death, for cause or
in certain events specified by the regulations of the Office of Thrift
Supervision. The employment agreements are terminable by the employee
upon 90 days notice to the Bank.
The agreements provide for the payment of an amount equal to the
employee's salary for the remainder of the agreement term plus health
benefits in the event employment is terminated without cause and a change
in control payment, as described below, is not applicable. The agreements
provide for payment to the employee of 299% of annual salary in the event
there is a change in control of the Company, and where employment
terminates involuntarily in connection with such a change in control or
within 12 months thereafter; provided that the total amount payable to the
employee in the event of a change in control shall not exceed three times
the employee's annual salary. Such termination payment is provided on a
similar basis to the employee in connection with the voluntary termination
of employment, where the change in control was at any time opposed by the
Board. The agreements provide, among other things, for participation in
an equitable manner in employee benefits applicable to executive
personnel.
Pursuant to the terms of the Agreement and Plan of Merger dated as of
November 3, 1997 by and between Advantage Bancorp, Inc. and Marshall &
Ilsley Corporation, Messrs. Gergen and Stampfl have each entered into an
agreement with Marshall & Ilsley Corporation to amend the terms of their
respective employment agreements with the Company to clarify certain terms
of the agreements.
Salary Continuation Agreements
During 1987, the Bank entered into salary continuation agreements with
Messrs. Gergen and Stampfl. In general, the agreements provide for the
payment of an annual retirement benefit (in an annual amount of
approximately $42,000 for Mr. Gergen and $22,000 for Mr. Stampfl) for up
to 25 years after retirement at age 65 provided that the employee remains
available for consulting services. The agreements also provide that the
employee's designated beneficiary receive a death benefit in the event the
employee dies before receiving the full retirement benefit. In the event
the employee voluntarily resigns from his employment with the Bank prior
to age 65, the amount of the payments are reduced on a generally pro-rata
basis.
Stock Options
The Company has in effect stock option plans pursuant to which options
to purchase Common Stock may be granted to key employees (including
officers) of the Company and its subsidiaries. No stock options were
granted to or exercised by the named executive officers under the
Company's stock option plans during fiscal 1997.
The following table sets forth information regarding the fiscal year-end
value of unexercised options held by the named executive officers.
Value of Unexercised
Nunber of Securities In-the-Money
Underlying Unexercised Options at
Options at Fiscal Fiscal Year-End
Name (All Exercisable) (All Exercisable)(1)
Paul Gergen 90,625 $4,331,875
John Stampfl 54,463 $2,589,784
(1) The dollar values are calculated by determining the difference
between the fair market value of the underlying Common Stock and the
exercise price of the options.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of November 21, 1997
regarding beneficial ownership of Common Stock by (i) each director, (ii)
each of the executive officers, and (iii) all of the directors and
executive officers of the Company as a group. The table also sets forth
certain information as to those other persons believed by management to be
beneficial owners of more than 5% of the outstanding shares of Common
Stock as of November 21, 1997.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership
Voting Power Investment Power Aggregate
Number % of
Name of Beneficial Owner Sole Shared Sole Shared of Shares Class
<S> <C> <C> <C> <C> <C> <C>
MANAGEMENT AND DIRECTORS
Paul Gergen . . . . . . . . . 152,256 33,581 160,375 0 185,837(1) 5.59%
John Stampfl . . . . . . . . 57,981 30,011 69,763 7,919 87,992(2) 2.67%
Ben-Ami Chemerow . . . . . . 20,605 0 20,605 0 20,605(3) (8)
Rita Petretti . . . . . . . . 14,826 0 14,826 0 14,826(3) (8)
Eugene Snarski . . . . . . . 32,565 0 32,565 0 32,565(3)(4) (8)
Dennis Troha . . . . . . . . 15,114 0 15,114 0 15,114(3) (8)
Michael Wells . . . . . . . . 23,002 0 23,002 0 23,002(3) (8)
All directors and executive
officers as a group (12
persons) . . . . . . . . . . 386,977 121,915 426,091 25,811 508,891(5) 14.08%
OTHER BENEFICIAL OWNERS
Advantage Bancorp, Inc.
Employee Stock Ownership
Plan and Trust("ESOP") . . . 152,768 177,232 152,768 177,232 330,000(6) 10.20%
5935 Seventh Avenue
Kenosha, WI 53140
Advantage Bancorp, Inc.
Employees' Profit-Sharing
and Savings Retirement Plan
and Trust ("Savings Plan") . . 0 183,877 0 183,877 183,877(7) 5.68%
5935 Seventh Avenue
Kenosha, WI 53140
Marshall & Ilsley
Corporation . . . . . . . . . 0 0 0 0 634,930(9) 16.6%
770 North Water Street
Milwaukee, WI 53202
(1) Includes a total of 90,625 shares subject to stock options
granted under the Advantage Bancorp, Inc. 1991 Stock Option and
Incentive Plan (the "1991 Stock Option Plan") which were
exercisable on November 21, 1997 and 17,634 restricted shares
granted under the Bank Incentive Plan and Trusts ("BIPs") over
which the holder has sole voting but no investment power. Mr.
Gergen's address is 5935 Seventh Avenue, Kenosha, Wisconsin 53140.
(2) Includes a total of 54,463 shares subject to stock options
granted under the 1991 Stock Option Plan which were exercisable
on November 21, 1997 and 3,518 restricted shares granted under
the BIPs over which the holder has sole voting but no investment
power.
(3) Includes 14,726 shares (7,363 shares for Mr. Snarski) which may
be acquired by each outside director pursuant to exercisable
options under the 1991 Stock Option Plan and the 1996 Non-
Employee Director Stock Option Plan.
(4) Includes 3,625 shares held in a spousal trust and spousal IRA
over which Mr. Snarski has disclaimed beneficial ownership.
(5) Includes an aggregate of 269,578 shares subject to options
granted under the 1991 Stock Option Plan and the 1996 Non-
Employee Director Stock Option Plan which were exercisable on
November 21, 1997 and 25,176 restricted shares granted under the
BIPs over which the holders have sole voting but no investment
power.
(6) The Personnel Committee of the Board administers the ESOP. EMJAY
Corporation is the trustee for the ESOP (the "ESOP Trustee") as
approved by the Board. The Personnel Committee may instruct the
ESOP Trustee regarding investment of funds contributed to the
ESOP. The ESOP Trustee, subject to its fiduciary duty, must vote
all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. As of the September
30, 1997, 177,232 shares of Common Stock were released for
allocation to participating employees. Under the ESOP,
unallocated shares held in the suspense account will be voted by
the ESOP Trustee, subject to its fiduciary duty, in a manner
calculated to most accurately reflect the instructions it has
received from the participants regarding allocated shares.
(7) The Plan Administration Committee, appointed by the Board,
administers the Savings Plan. EMJAY Corporation is the trustee
for the Savings Plan (the "Savings Plan Trustee") as approved by
the Board. The Plan Administration Committee may instruct the
Savings Plan Trustee regarding investment of funds contributed to
the Savings Plan. The Savings Plan Trustee, subject to its
fiduciary duty, must vote all shares held in the Savings Plan in
accordance with the instructions of the participating employees.
(8) Less than one percent (1%) of shares outstanding.
(9) Marshall & Ilsley Corporation ("M&I") and the Company entered into a
Stock Option Agreement dated as of November 3, 1997 pursuant to which
the Company granted an option (the "Option") to M&I to purchase up to
643,930 shares of Common Stock (subject to adjustment, but in no
event in excess of 19.9% of the issued and outstanding shares of
Common Stock), at an exercise price of $56.00 per share. The Option
is exercisable upon the occurrence of certain triggering and exercise
events generally relating to competing transactions for control of
the Company. None of such events has occurred as of the date of
filing of this Annual Report on Form 10-K.
</TABLE>
Item 13. Certain Relationships and Related Transactions
Since the beginning of the 1997 fiscal year, certain directors and
executive officers of the Company and the Bank have entered into new loans
or had loans outstanding with the Bank. Pursuant to the Bank's current
policy, all such loans were made in the ordinary course of business and on
substantially (except as disclosed below) the same terms and conditions
(including interest rates and collateral) as those of comparable
transactions prevailing at the time, and do not involve more than the
normal risk of collectability or present other unfavorable features. All
loans outstanding during such period to immediate family members of
directors and executive officers of the Company and the Bank were also
made in accordance with such terms.
The Bank has made nine loans to a non-profit organization involved in
rehabilitating low-income housing. Mr. Gergen serves as a director and
officer of this non-profit organization. Mr. Gergen has personally
guaranteed one of these loans with a balance of $30,000 as of September
30, 1997. This loan is a line of credit and bears interest at a rate of
prime plus one percent. The highest amount outstanding on this loan since
October 1, 1996 was $30,000. The total balance of all nine loans was
$642,000 as of September 30, 1997. All loans made to this non-profit
organization were made in the ordinary course of business and under terms
substantially the same as those of comparable transactions prevailing at
the time and do not involve more than the normal risk of collectability or
present other unfavorable risks.
The Bank has also made a loan to another non-profit organization which
provides services to inner city residents. Mr. Gergen serves as a
director and officer of this non-profit organization. Mr. Gergen has
personally guaranteed this loan. This loan is a line of credit and bears
interest at 8.50%. The highest amount oustanding on this loan since
October 1, 1997 was $20,000 and there was no balance outstanding at
September 30, 1997.
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 31, 1997 are incorporated herein by reference to Item 8 of
this Annual Report on Form 10-K:
Consolidated Balances Sheets as of September 30, 1996 and 1997
Consolidated Statements of Income for each year in the three-year
period ended September 30, 1997
Consolidated Statements of Stockholders' Equity for each year in the
three-year period ended September 30, 1997
Consolidated Statements of Cash Flows for each year in the three-year
period ended September 30, 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(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. 2 Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession:
2.1 Agreement and Plan of Merger, dated as of November 3, 1997,
between Marshall & Ilsley Corporation and Advantage Bancorp, Inc.
(incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, dated November 3, 1997,
and filed on November 4, 1997)
2.2 Stock Option Agreement, dated as of November 3, 1997, between
Marshall & Ilsley Corporation and Advantage Bancorp, Inc.
(incorporated herein by reference to Exhibit 2.2 to the
Registrant's Current Report on Form 8-K, dated November 3, 1997,
and filed on November 4, 1997)
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* Amendment of Employment Agreement, dated as of November 3,
1997, between Advantage Bancorp, Inc., Advantage Bank, F.S.B.,
Paul P. Gergen and Marshall & Ilsley Corporation (incorporated
herein by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K, dated November 3, 1997, and filed on
November 4, 1997)
10.8* Amendment of Employment Agreement, dated as of November 3,
1997, between Advantage Bancorp, Inc., Advantage Bank, F.S.B.,
John Stampfl and Marshall & Ilsley Corporation (incorporated
herein by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K, dated November 3, 1997, and filed on
November 4, 1997)
10.9* 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)
10.10* 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)
10.11* 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)
10.12* 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 Form10-K for the
fiscal year ended September 30, 1994 filed on December 27,
1994)
10.13* 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)
10.14* 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)
10.15* 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:
Primary Fully 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 1997 is as follows:
Primary Fully
Diluted
1. Net income . . . . . . . . . . . . . . . $10,687,879 $10,687,879
========== ==========
2. Weighted average common shares outstanding 3,252,389 3,252,389
3. Common stock equivalents due to dilutive
effect of stock options . . . . . . . . 211,113 250,632
---------- ----------
4. Total weighted average common shares and
equivalents outstanding . . . . . . . . 3,463,502 3,503,021
========== ==========
5. Earnings per share . . . . . . . . . . . $3.09 $3.05
===== =====
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) and Advantage Financial Services and Insurance, Inc. (incorporated
in Wisconsin).
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 31, 1997, with respect
to the consolidated financial statements of Advantage Bancorp, Inc.
included in the Annual Report (Form 10-K) for the year ended September 30,
1997.
Exhibit No. 27. Financial Data Schedule (Edgar version only)
(b) Forms 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1997.
<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 4, 1997
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 4, 1997
By: /s/ Robert J. Muth
Robert Muth
Senior Vice President
Date: December 4, 1997
By: /s/ John Stampfl
John Stampfl
Chief Financial Officer
Secretary-Treasurer
Date: December 4, 1997
By: /s/ Ben-Ami Chemerow
Ben-Ami Chemerow
Director
Date: December 4, 1997
By: /s/ Rita Petretti
Rita Petretti
Director
Date: December 4, 1997
By: /s/ Eugene Snarski
Eugene Snarski
Director
Date: December 4, 1997
By: /s/ Dennis Troha
Dennis Troha
Director
Date: December 4, 1997
By: /s/ Michael Wells
Michael Wells
Director
Date: December 4, 1997
<PAGE>
INDEX TO ATTACHED EXHIBITS
Advantage Bancorp, Inc.
Form 10-K
Year Ended September 30, 1997
Exhibit No. Exhibit Description
23 Consent of Independent Auditors
27 Financial Data Schedule (Edgar version only)
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 31, 1997, 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, 1997
/s/ Ernst & Young LLP
Ernst & Young LLP
December 3, 1997
Milwaukee, Wisconsin
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ADVANTAGE BANCORP. INC. AS OF AND
FOR THE TWELVE MONTHS ENDED SEPTEMBEER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 42,908
<INT-BEARING-DEPOSITS> 509
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<INVESTMENTS-HELD-FOR-SALE> 160,676
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<TOTAL-ASSETS> 1,037,462
<DEPOSITS> 670,775
<SHORT-TERM> 72,115
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<LONG-TERM> 176,360
0
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<COMMON> 38,569
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