<PAGE>
UNITED STATES
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 (FEE REQUIRED)
For the fiscal year ended March 31, 1996
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition report from to __________________ to _______________
Commission File Number 0-20006
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ANCHOR BANCORP WISCONSIN INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1726871
- --------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
25 West Main Street
Madison, Wisconsin 53703
------------------------
(Address of principal executive office)
Registrant's telephone number, including area code (608) 252-8700
--------------
Securities registered pursuant to Section 12 (b) of the Act
Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, par value $.10 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 or 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 the Form 10-K
or any amendment to this Form 10-K. [ ]
Based upon the $34.50 closing price of the registrant's common stock as
of June 7, 1996, the aggregate market value of the 4,357,246 shares of the
registrant's common stock deemed to be held by non-affiliates of the
registrant was: $150.3 million. Although directors and executive officers
of the registrant and certain of its employee benefit plans were assumed to
be "affiliates" of the registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
As of June 7, 1996, 4,849,742 shares of the registrant's common stock were
outstanding.
Documents Incorporated by Reference
Part II:
Portions of Anchor BanCorp Wisconsin Inc.'s 1996 Annual Report to
Stockholders.
Part III:
Portions of definitive proxy statement for the 1996 Annual Meeting of
Stockholders.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Anchor BanCorp Wisconsin Inc. (the "Corporation") 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 banking subsidiary, AnchorBank, S.S.B. (the "Bank"). On July
15, 1992, the Bank converted from a state-chartered mutual savings
institution to a stock savings institution. As part of the conversion, the
Corporation acquired all of the outstanding common stock of the Bank. The
Corporation created a non-banking subsidiary in February 1996, Investment
Directions, Inc. ("IDI"), which has invested in a limited partnership
located in Austin, Texas.
The Bank was organized in 1919 as a Wisconsin-chartered savings
institution. As a state-chartered savings institution, 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"), the FDIC and the Wisconsin Commissioner of Savings and
Loan ("Commissioner"), and is subject to the periodic reporting
requirements of the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, as amended ("Exchange Act"). The Bank is
also regulated by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") relating to reserves required to be maintained
against deposits and certain other matters. See "Regulation."
The Bank blends an interest in the consumer and small business markets
with the willingness to expand its numerous checking, savings and lending
programs to meet customers' changing financial needs. The Bank offers
checking, savings, money market accounts, mortgages, home equity and other
consumer loans, student loans, credit cards, annuities and related consumer
financial services. The Bank also offers banking services to businesses,
including checking accounts, lines of credit, secured loans and commercial
real estate loans.
The Bank has five wholly-owned subsidiaries. Anchor Insurance Services,
Inc. ("AIS") offers a full line of insurance products, securities and
annuities to the Bank's customers and other members of the general public.
ADPC II, LLC ("ADPC II") was created in September 1996 to improve and
manage a multi-family property acquired by foreclosure. ADPC Corporation
("ADPC") was engaged in developing land in Arizona into saleable
single-family lots, which have since been sold. Anchor Investment
Corporation ("AIC") is an operating subsidiary which is located in and
formed under the laws of the State of Nevada. AIC was formed for the purpose
of managing a portion the Bank's investment portfolio (primarily
mortgage-related securities). Anchor Financial Corp. ("AFC") is engaged
primarily in nationwide equipment leasing and financing activities. AFC
ceased originating new leases in 1991 and is presently winding down its
operations. All of the subsidiaries, except AIC, are Wisconsin corporations.
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On June 30, 1995, the Corporation acquired American Equity BanCorp
("American") of Stevens Point, Wisconsin. In the acquisition, 474,753
shares of the Corporation's common stock at a fair market value of $15.7
million were issued to American's stockholders. Upon closing, American's
wholly-owned subsidiary, American Equity Bank, F.S.B., was merged into the
Bank as a branch office. American was merged into the Corporation. The
transaction was accounted for as a purchase. American had total assets,
deposits and stockholders' equity of $102.4 million, $65.3 million and $9.4
million, respectively.
MARKET AREA
The Bank's primary market area consists of the metropolitan area of
Madison, Wisconsin, the suburban communities of Dane County, Wisconsin and
southern Wisconsin as well as contiguous counties in Iowa and Illinois. As
of March 31, 1996, the Bank conducted business from its headquarters and main
office in Madison, Wisconsin and 32 other full-service offices and three loan
origination offices.
The economy of Dane County is characterized by diversified industries,
major medical facilities, state, federal and university governmental bodies,
as well as a sound agricultural base. It is estimated that the population of
Dane County increased by 13.5% from 1980 to 1990, which was more than three
times the percentage increase for the entire State of Wisconsin.
Madison is one of a few cities in the United States which houses both the
State capitol and the major university of the state university system--The
University of Wisconsin-Madison. In addition, Madison Area Technical
College, a part of the highly regarded Wisconsin Vocational Education System,
Edgewood College, a Catholic liberal arts college and Madison Junior College
of Business, a nationally-recognized business college, are located in the
Madison metropolitan area. Major non-governmental employers in Dane County
include Cuna Mutual Insurance Company, American Family Insurance Company and
Oscar Mayer Foods Corporation.
COMPETITION
The Bank is subject to extensive competition from other savings
institutions as well as commercial banks and credit unions in both attracting
and retaining deposits and in real estate and other lending activities.
Competition for deposits also comes from money market funds, bond funds,
corporate debt and government securities. Competition for the origination of
real estate loans comes principally from other savings institutions,
commercial banks and mortgage banking companies. Competition for consumer
loans is primarily from other savings institutions, commercial banks,
automobile manufacturers and their financing subsidiaries, consumer finance
companies and credit unions.
The principal factors which are used to attract deposit accounts and
distinguish one financial institution from another include rates of return,
types of accounts, service fees, convenience of office locations, and other
services. The primary factors in competing for loans are interest rates,
loan fee charges, timeliness and quality of service to the borrower.
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FINANCIAL RATIOS
Year Ended March 31,
---------------------------------------
1996 1995 1994
---- ---- ----
Return on average assets 0.88% 1.00% 1.00%
Return on average equity 12.13 13.45 12.89
Average equity to average assets 7.24 7.41 7.74
Dividend payout ratio 11.76 8.51 8.28
Net interest margin 3.18 3.60 3.64
LENDING ACTIVITIES
GENERAL. At March 31, 1996, the Corporation's net loans held for
investment totalled $1.361 billion, representing approximately 78% of its
$1.755 billion of total assets at that date. Approximately 80% of the
Corporation's total loans held for investment at March 31, 1996 were secured
by first liens on real estate.
The Bank's primary lending emphasis is on the origination of
single-family residential loans secured by properties located primarily in
Wisconsin, with adjustable-rate loans generally being originated for
inclusion in the Bank's loan portfolio and fixed-rate loans generally being
originated for sale into the secondary market. 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.
The non-real estate loans originated by the Bank consist of a variety of
consumer loans and commercial business loans. At March 31, 1996, the
Corporation's total loans held for investment included $257.5 million of
consumer loans and $30.7 million of commercial business loans.
LOAN PORTFOLIO COMPOSITION. The table on the following page presents
information concerning the composition of the Corporation's consolidated
loans held for investment at the dates indicated.
3
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<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ------------------ ------------------ ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Mortgage loans:
Single-family residential $ 745,170 51.97% $ 716,212 55.83% $ 618,647 55.25% $493,105 50.35% $455,978 47.68%
Multi-family residential 162,432 11.33 141,401 11.02 142,750 12.75 173,979 17.76 182,604 19.09
Commercial real estate 139,918 9.76 123,438 9.62 129,196 11.54 121,419 12.40 140,781 14.72
Construction 77,187 5.38 66,519 5.19 50,691 4.53 34,699 3.54 24,473 2.56
Land 21,077 1.47 13,644 1.06 8,280 0.74 4,223 0.43 6,292 0.66
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Total mortgage loans 1,145,784 79.91 1,061,214 82.72 949,564 84.81 827,425 84.48 810,128 84.71
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Consumer loans:
Second mortgage
and home equity 140,302 9.78 111,725 8.71 84,922 7.58 68,689 7.01 54,286 5.68
Education 88,674 6.18 69,264 5.40 52,289 4.67 48,457 4.95 45,752 4.78
Other 28,481 1.99 18,997 1.48 13,587 1.21 13,598 1.39 16,538 1.73
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Total consumer loans 257,457 17.95 199,986 15.59 150,798 13.46 130,744 13.35 116,576 12.19
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Commercial business loans:
Loans 30,352 2.12 20,272 1.58 16,195 1.45 13,378 1.37 11,150 1.17
Lease receivables 363 0.02 1,467 0.11 3,154 0.28 7,859 0.80 18,450 1.93
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Total commercial
business loans 30,715 2.14 21,739 1.69 19,349 1.73 21,237 2.17 29,600 3.10
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Gross loans receivable 1,433,956 100.00% 1,282,939 100.00% 1,119,711 100.00% 979,406 100.00% 956,304 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Contras to loans:
Undisbursed loan proceeds (46,493) (25,980) (27,950) (18,465) (11,263)
Allowance for loan losses (22,807) (22,429) (22,119) (18,437) (14,751)
Unearned loan fees (2,453) (2,000) (1,966) (1,291) (1,038)
Discount on loans purchased (1,005) (1,151) (195) (379) (618)
Unearned interest (118) (272) (536) (1,640) (3,620)
---------- ---------- ---------- -------- --------
Total contras to loans (72,876) (51,832) (51,694) (40,212) (31,290)
---------- ---------- ---------- -------- --------
Loans receivable, net $1,361,080 $1,231,107 $1,068,017 $939,194 $925,014
</TABLE>
4
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The following table shows, at March 31, 1996, the scheduled contractual
maturities of the Corporation's consolidated gross loans held for investment,
as well as the dollar amount of such loans which are scheduled to mature
after one year which have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
MULTI-FAMILY
RESIDENTIAL
AND
SINGLE-FAMILY COMMERCIAL CONSTRUCTION COMMERCIAL
RESIDENTIAL REAL ESTATE AND LAND CONSUMER BUSINESS
LOANS LOANS LOANS LOANS LOANS
------------- ------------ ------------ -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
In one year or less $ 33,701 $ 36,598 $69,863 $ 42,861 $11,687
After one year through five years 93,907 44,724 4,218 121,604 9,724
After five years 617,562 221,851 24,183 92,992 9,304
-------- -------- ------- -------- -------
$745,170 $303,173 $98,264 $257,457 $30,715
-------- -------- ------- -------- -------
-------- -------- ------- -------- -------
Interest rate term on amounts due
after one year:
Fixed $125,367 $29,197 $ 2,161 $111,288 $18,689
-------- -------- ------- -------- -------
-------- -------- ------- -------- -------
Adjustable $586,102 $237,378 $26,240 $103,308 $ 339
-------- -------- ------- -------- -------
-------- -------- ------- -------- -------
</TABLE>
SINGLE-FAMILY RESIDENTIAL LOANS. Historically, savings associations,
such as the Bank, have concentrated their lending activities on the
origination of loans secured primarily by first mortgage liens on
owner-occupied, existing single-family residences. At March 31, 1996,
$745.2 million of the Bank's total loans held for investment consisted of
single-family residential loans, substantially all of which are conventional
loans, which are neither insured or guaranteed by a federal or state agency.
The Bank has emphasized single-family residential loans which provide
for periodic adjustments to the interest rate since the early 1980s. The
adjustable-rate loans currently emphasized by the Bank have up to 30-year
maturities and terms which permit the Bank to annually increase or decrease
the rate on the loans at its discretion, subject to a limit of 1% per
adjustment and an aggregate 5% adjustment over the life of the loan. The
Bank also originates, to a much lesser extent, adjustable-rate loans with
terms which provide for annual adjustment to the interest rate in accordance
with changes in a designated index, which generally are subject to a limit of
2% per adjustment and an aggregate 5% adjustment over the life of the loan.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms
of the loan, thereby increasing the potential for default. At the same time,
the marketability of the underlying property may be adversely affected by
higher interest rates. The Bank believes that these risks, which have not
had a material adverse effect on the Bank to date, generally are less than
the risks associated with holding fixed-rate loans in an increasing interest
rate environment. At March 31, 1996, approximately $601.5 million or
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80.7% of the Corporation's permanent single-family residential loans held for
investment consisted of loans with adjustable interest rates.
The Bank continues to originate long-term, fixed-rate mortgage loans,
including conventional, Federal Housing Administration ("FHA"), Federal
Veterans Administration ("VA") and Wisconsin Housing and Economic
Development Authority ("WHEDA") loans, in order to provide a full range of
products to its customers. The Bank generally sells current production of
these loans with terms of 20 years or more to the Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"),
WHEDA and other institutional investors, while keeping some of the 15-year
term loans in its portfolio. The Bank retains the right to service
substantially all loans that it sells.
At March 31, 1996, approximately $143.7 million or 19.3% of the
permanent single-family residential loans in the Corporation's loans held for
investment consisted of loans which provide for fixed rates of interest.
Almost 70% of these loans have original terms of 15 years or less. Although
these loans generally provide for repayments of principal over a fixed period
of 10 to 30 years, it is the Bank's experience that because of prepayments
and due-on-sale clauses, such loans generally remain outstanding for a
substantially shorter period of time.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE. During the 1980s,
the Bank emphasized the origination and purchase of loans secured by
multi-family residences and commercial real estate located within and outside
of Wisconsin in order to diversify the type and geographic location of its
loan portfolio. Such loans also were emphasized because they generally have
adjustable rates and shorter terms than single-family residential loans, thus
increasing the sensitivity of the loan portfolio to changes in interest
rates, as well as providing higher fees and rates than single-family
residential loans. At March 31, 1996, the Corporation had $162.4 million of
loans secured by multi-family residential real estate and $140.0 million of
loans secured by commercial real estate. The Bank generally limits the
origination of such loans to its own primary market area, except to
facilitate the sale or resolution of certain remaining foreclosed properties
outside its market area.
The Bank's multi-family residential loans are primarily secured by
apartment buildings and commercial real estate loans are primarily secured by
office buildings, industrial buildings, warehouses, small retail shopping
centers and various special purpose properties, including motels, restaurants
and nursing homes.
Although terms vary, multi-family residential and commercial real estate
loans generally have maturities of 15 to 30 years, as well as balloon
payments, and terms which provide that the interest rates thereon may be
adjusted annually at the Bank's discretion, subject to an initial fixed-rate
for a one to three year period and an annual limit of 1% to 1.5% per
adjustment, with no limit on the amount of such adjustments over the life of
the loan.
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Pursuant to a program of loan income enhancement adopted by the Bank in
the mid-1980s, from time to time the Bank pledged mortgage-backed securities
or issued letters of credit to support revenue bonds (the "Bonds") issued
on behalf of borrowers to finance multi-family residential and commercial
developments, with the Bank receiving initial and annual enhancement fees.
Due to the quality of the security, the Bonds were given the highest rating
by independent rating agencies and the Bonds were sold (with the Bond
proceeds going to the borrower) at a lower interest rate than would be
available without the additional security provided by collateral pledged by
the Bank. The Bank receives an annual guaranty fee up to 1.5% of the
guaranty balance and, at March 31, 1996, the Bank had pledged a total of $3.8
million of mortgage-backed securities to secure the repayment of $2.6 million
of Bonds.
In the event that the third party borrower defaults on principal or
interest payments on the Bonds, the Bank is required to either pay the amount
in default or acquire the then outstanding bonds. The Bank may foreclose on
the underlying real estate to recover amounts in default. The Bank does not
anticipate entering into any new agreements.
Multi-family residential and commercial real estate lending (including
the provision of credit supports for revenue bonds which finance such
lending, as discussed above) generally is considered to involve a higher
degree of risk than single-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
group of related borrowers. In addition, the payment experience on loans
secured by existing income-producing properties is typically dependent on the
successful operation of the related real estate project and thus may be
subject to a greater extent to adverse conditions in real estate markets or
in the economy generally. The Bank generally attempts to limit these risks
by, among other things, adopting what management believes are conservative
underwriting standards and lending primarily in its market area.
CONSTRUCTION AND LAND LOANS. Historically, the Bank has been an active
originator of loans to construct residential and commercial properties
("construction loans"), and to a lesser extent, loans to acquire and
develop real estate for the construction of such properties ("land loans").
At March 31, 1996, construction loans amounted to $77.2 million of the
Corporation's total loans held for investment. Of this amount, $46.7 million
and $9.4 million was represented by loans for the construction of
single-family and multi-family residences, respectively. Land loans amounted
to $21.1 million at March 31, 1996.
The Bank's construction loans generally have terms of six to 12 months,
fixed interest rates and fees which are due at the time of origination and at
maturity if the Bank does not originate the permanent financing on the
constructed property. Loan proceeds are disbursed in increments as
construction progresses and as inspections by the Bank's in-house appraiser
warrant. Land acquisition and development loans generally have the same
terms as construction loans, but may have longer maturities than such loans.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, owner-occupied
real estate because of the uncertainties
7
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of construction, including the possibility of costs exceeding the initial
estimates and the need to obtain a tenant or purchaser if the property will
not be owner-occupied, which similarly can be affected by adverse conditions
in real estate markets or in the general economy.
CONSUMER LOANS. The Bank offers consumer loans in order to provide a
full range of financial services to its customers. At March 31, 1996, $257.5
million of the Corporation's consolidated total loans held for investment
consisted of consumer loans. Consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more risk
than mortgage loans because of the type and nature of the collateral and, in
certain cases, the absence of collateral. These risks are not as prevalent
in the case of the Bank's consumer loan portfolio, however, because of the
high percentage of insured home equity loans which are underwritten in a
manner such that they result in a lending risk which is substantially similar
to single-family residential loans and secured education loans. Despite the
risks inherent in consumer lending, the Corporation's net charge-offs on
consumer loans as a percentage of gross loans has been minimal.
The largest component of the Corporation's consumer loan portfolio are
second mortgage and home equity loans, which amounted to $140.3 million or
54.5% of consumer loans at March 31, 1996. The Bank has placed additional
emphasis on its home equity loan program in recent years to respond to
changes in federal income tax laws. The primary home equity loan product has
an adjustable interest rate which is linked to the prime interest rate and is
secured by a mortgage, either a primary or a junior lien, on the borrower's
residence. A fixed-rate home equity product is also offered.
Due to the Bank's proximity to the University of Wisconsin,
approximately 34.4% of its consumer loans at March 31, 1996 consisted of
education loans, which generally are made for a maximum of $2,500 per year
for undergraduate studies and $5,000 per year for graduate studies and are
either due within six months of graduation or repaid on an installment basis
after graduation. Education loans generally have interest rates which adjust
monthly in accordance with a designated index. Both the principal amount of
an education loan and interest thereon generally are guaranteed by the Great
Lakes Higher Education Corporation, which generally obtains reinsurance of
its obligations from the U.S. Department of Education. Education loans may
be sold to the Student Loan Marketing Association or to other investors.
However, the Bank's practice has been to retain these in its portfolio.
The remainder of the Corporation's consumer loan portfolio consists of
deposit account secured loans and loans which have been made for a variety of
consumer purposes. These include credit extended through credit cards issued
by the Bank pursuant to an agency arrangement under which the Bank generally
is responsible for 45% of the profit or losses from such activities. At
March 31, 1996, the Bank's approved credit card lines and the outstanding
credit pursuant to such lines amounted to $16.6 million and $2.6 million,
respectively.
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<PAGE>
COMMERCIAL BUSINESS LOANS AND LEASES. The Bank originates loans for
commercial, corporate and business purposes, including issuing letters of
credit. At March 31, 1996, commercial business loans amounted to $30.7
million or 2.1% of the Corporation's total loans held for investment.
The largest component of the Corporation's commercial business loan
portfolio is comprised of loans for a variety of purposes and generally is
secured by various equipment, machinery and other corporate assets. These
loans amounted to $30.4 million at March 31, 1996. Commercial business loans
generally have terms of five years or less and interest rates which float in
accordance with a designated prime lending rate. Substantially all of such
loans are secured and backed by the personal guarantees of the principals of
the borrower.
The remainder of the Corporation's commercial business loan portfolio is
equipment lease receivables, which amounted to $363,000 at March 31, 1996.
Most of these receivables were originated by a subsidiary of the Bank, AFC,
and are primarily secured by telephone and computer equipment. The Bank
currently is winding down the operations of AFC because of the higher level
of risk associated with this type of lending activity. At March 31, 1996,
the Corporation's equipment lease portfolio included $47,000 of
non-performing leases, and $309,000 of the Corporation's allowance for loan
losses was allocated to its equipment lease portfolio. See
"Business--Subsidiaries."
FEE INCOME FROM LENDING ACTIVITIES. Loan origination and commitment
fees and certain direct loan origination costs are being deferred and the net
amounts amortized as an adjustment of the related loan's yield.
The Bank also receives other fees and charges relating to existing
mortgage loans, which include prepayment penalties, late charges and fees
collected in connection with a change in borrower or other loan
modifications. Other types of loans also generate fee income for the Bank.
These include annual fees assessed on credit card accounts, transactional
fees relating to credit card usage and late charges on consumer loans.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Bank's loan originations
come from a number of sources. Residential mortgage loan originations are
attributable primarily to depositors, walk-in customers, referrals from real
estate brokers and builders and direct solicitations. Commercial real estate
loan originations are obtained by direct solicitations and referrals.
Consumer loans are originated from walk-in customers, existing depositors and
mortgagors and direct solicitation. Student loans are originated from
solicitation of eligible students and from walk-in customers.
Applications for all types of loans are obtained at the Bank's five
regional lending offices, certain of its branch offices and three loan
origination facilities. Loans may be approved by members of the Loan
Committee within designated limits. Depending on the type and amount of the
loans, one or more signatures of the members of the Senior Loan Committee
also may be required. At least three signatures of members of the Senior
Loan Committee are required to
9
<PAGE>
approve (i) all loans over $250,000 and all loans secured by properties over
eight units and (ii) loans over $750,000 and up to $1.0 million, provided
that the President is one of the approving members. Loans in excess of $1.0
million may be committed by the Senior Loan Committee, subject in all cases
to the prior approval of the Board of Directors of the Bank.
The Bank's general policy is to lend up to 80% of the appraised value of
the property securing a single-family residential loan (referred to as the
loan-to-value ratio). The Bank will lend more than 80% of the appraised value
of the property, but generally will require that the borrower obtain private
mortgage insurance in an amount intended to reduce the Bank's exposure to 80%
or less of the appraised value of the underlying property. At March 31,
1996, the Bank had approximately $14.0 million of loans which had a
loan-to-value ratio of greater than 80% and did not have private mortgage
insurance for the portion of the loan above such amount.
Property appraisals on the real estate and improvements securing the
Bank's single-family residential loans are made by the Bank's staff or
independent appraisers approved by the Bank's Board of Directors. Appraisals
are performed in accordance with federal regulations and policies.
The Bank's underwriting criteria generally require that multi-family
residential and commercial real estate loans have loan-to-value ratios which
amount to 80% or less and debt coverage ratios of at least 110%. The Bank
also generally obtains personal guarantees on its multi-family residential
and commercial real estate loans from the principals of the borrowers, as
well as appraisals of the security property from independent appraisal firms.
The portfolio of commercial and multi-family residential loans is
reviewed on a continuing basis (annually for most loans of $500,000 or more)
to identify any potential risks that exist in regard to the property
management, financial criteria of the loan, operating performance,
competitive marketplace and collateral valuation. The credit analysis
function of the Bank is responsible for identifying and reporting credit risk
quantified through a loan rating system and making recommendations to
mitigate credit risk in the portfolio. These and other underwriting standards
are documented in written policy statements, which are periodically updated,
and approved by the Bank's Board of Directors.
The Bank generally obtains title insurance policies on most first
mortgage real estate loans it originates. If title insurance is not obtained
or is unavailable, the Bank obtains an abstract of title and title opinion.
Borrowers must obtain hazard insurance prior to closing and, when required by
the United States Department of Housing and Urban Development, flood
insurance. Borrowers may be required to advance funds, with each monthly
payment of principal and interest, to a loan escrow account from which the
Bank makes disbursements for items such as real estate taxes, hazard
insurance premiums and mortgage insurance premiums as they become due.
The Bank encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on secured
properties. Certain states may also impose liens with higher priorities
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<PAGE>
than first mortgages on properties to recover funds used in such efforts.
Although the foregoing environmental risks are more usually associated with
industrial and commercial loans, environmental risks may be substantial for
residential lenders, like the Bank, since environmental contamination may
render the secured property unsuitable for residential use. In addition, the
value of residential properties may become substantially diminished by
contamination of nearby properties. In accordance with the guidelines of
FNMA and FHLMC, appraisals for single-family homes on which the Bank lends
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 of such
properties prior to closing 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.
The Bank has been actively involved in the secondary market since the
mid-1980s and generally originates single-family residential loans under
terms, conditions and documentation which permit sale to FHLMC, FNMA and
other investors in the secondary market, such as WHEDA, the Wisconsin
Department of Veterans Affairs and other financial institutions. The Bank
sells substantially all of the fixed-rate, single-family residential loans
with terms over 15 years it originates in order to decrease the amount of
such loans in its loan portfolio, as well as all of the FHA and VA loans
originated. The Bank's sales are usually made through forward sales
commitments. The Bank attempts to limit any interest rate risk created by
forward commitments by limiting the number of days between the commitment and
closing, charging fees for commitments, and limiting the amounts of its
uncovered commitments at any one time. Forward commitments to cover closed
loans and loans with rate locks to customers range from 70% to 90% of
committed amounts. The Bank also periodically has used its loans to
securitize mortgage-backed securities.
The Bank generally continues to collect payments on conventional loans
which it sells to others as they become due, to inspect the security
property, to make certain insurance and tax advances on behalf of borrowers
and to otherwise service such loans. The Bank recognizes a servicing fee
when the related loan payments are received. At March 31, 1996, the Bank was
servicing $874.1 million of loans for others. The Bank sells all of the
FHA/VA loans originated by it on a servicing-released basis.
Although the Bank purchased larger multi-family residential and
commercial real estate loans secured by properties located outside of its
market area during the early to mid-1980s in order to obtain assets with
higher yields and shorter maturities than are generally provided by
single-family residential loans, the Bank in more recent years generally has
not been an active purchaser of these types of loans because of sufficient
loan demand in its market area. The Bank has been involved in the purchase of
certain loans and participations (the majority secured by single-family
residences) as part of the Resolution Trust Corporation's (the "RTC")
auctions. During the year ended March 31, 1996, the Bank purchased $2.4
million of loans from the RTC, which was net of $245,600 in loan discount.
Servicing of loans or loan participations purchased
11
<PAGE>
by the Bank generally is performed by the seller, with a portion of the
interest being paid by the borrower retained by the seller to cover servicing
costs. At March 31, 1996, approximately $30.1 million of mortgage loans were
being serviced for the Bank by others.
The following table shows the Corporation's consolidated total loans
originated, purchased, sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of year(1) $1,285,903 $1,136,253 $1,002,803
Loans originated for investment(2):
Single-family residential 159,525 152,781 263,804
Multi-family residential 15,792 14,419 26,264
Commercial real estate 38,440 19,780 42,211
Construction and land 116,556 102,123 65,717
Consumer 141,820 114,825 91,634
Commercial business 23,913 11,094 11,369
---------- ---------- ----------
Total originations 496,046 415,022 500,999
---------- ---------- ----------
Loans purchased for investment:
Single-family residential 2,480 9,173 210
Multi-family residential 4,500 252 --
Commercial real estate 939 1,440 596
American Equity purchase 85,244 -- --
---------- ---------- ----------
Total purchases 93,163 10,865 806
---------- ---------- ----------
Total originations and purchases 589,209 425,887 501,805
Repayments (338,847) (249,619) (361,500)
Transfers of loans to held for sale (99,345) (13,040) --
---------- ---------- ----------
Net activity in loans held for investment 151,017 163,228 140,305
---------- ---------- ----------
Loans originated for sale(2):
Single-family residential 180,055 81,711 411,945
American Equity purchase 5,969 -- --
Transfers of loans from held for investment 99,345 13,040 --
Sales of loans (177,593) (108,329) (403,704)
Loans converted into mortgage-backed securities (96,772) -- (15,096)
---------- ---------- ----------
Net activity in loans held for sale 11,004 (13,578) (6,855)
---------- ---------- ----------
Gross loans receivable at end of year(1) $1,447,924 $1,285,903 $1,136,253
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes loans held for sale and loans held for investment.
(2) Refinancings of loans held in the Corporation's consolidated loan portfolio
amounted to $99.1 million, $27.4 million and $359.6 million during the
years ended March 31, 1996, 1995 and 1994, respectively.
12
<PAGE>
DELINQUENCY PROCEDURES. Delinquent and problem loans are a normal part
of any lending business. When a borrower fails to make a required payment by
the 15th day after which the payment is due, the loan is considered
delinquent and internal collection procedures generally are instituted. The
borrower is contacted to determine the reason for the delinquency and
attempts are made to cure the loan. In most cases, deficiencies are cured
promptly. 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, when deemed
necessary, initiate foreclosure proceedings.
A decision as to whether and when to initiate foreclosure proceedings is
based upon 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 deficiencies. If
foreclosed on, the property is sold at a public sale and the Bank will
generally bid an amount reasonably equivalent to the lower of the fair value
of the foreclosed property or the amount of judgment due the Bank. A
judgment of foreclosure for residential mortgage loans will normally provide
for the recovery of all sums advanced by the mortgagee including, but not
limited to, insurance, repairs, taxes, appraisals, post-judgment interest,
attorneys' fees, costs and disbursements.
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 carried at the lower of carrying or estimated
fair value at the date of acquisition, with charge-offs, if any, charged to
the allowance for loan losses prior to transfer to foreclosed property. 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 fair value. Remaining gain or loss on the
ultimate disposal of the property is included in operations.
LOAN DELINQUENCIES. Loans are placed on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed
to be insufficient to warrant further accrual. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. As a matter of policy, the Bank does not accrue interest on
loans past due more than 90 days.
The interest income that would have been recorded during fiscal 1996 if
the Corporation's non-accrual loans at the end of the period had been current
in accordance with their terms during the period was $153,000. The amount of
interest income which was attributable to these loans and included in
interest income during fiscal 1996 was $35,000.
13
<PAGE>
The following table sets forth information relating to delinquent loans
of the Corporation and their relation to the Corporation's total loans held
for investment at the dates indicated.
March 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
% Of % Of % Of
Total Total Total
Days Past Due Balance Loans Balance Loans Balance Loans
- ------------- ------- ----- ------- ----- ------- -----
(Dollars In Thousands)
30 to 59 days $5,776 0.40% $2,696 0.21% $ 8,258 0.74%
60 to 89 days 789 0.06 1,099 0.09 884 0.08
90 days and over 1,890 0.13 2,493 0.19 2,464 0.22
------ ---- ------ ---- ------- ----
Total $8,455 0.59% $6,288 0.49% $11,606 1.04%
------ ---- ------ ---- ------- ----
------ ---- ------ ---- ------- ----
There were no non-accrual loans with a carrying value of $1.0 million or
more at March 31, 1996. For additional discussion of the Corporation's asset
quality, see Management's Discussion - Financial Condition Non-Performing
Assets in the Corporation's Annual Report to Stockholders, filed as an
exhibit hereto. See also Notes 1 and 5 to the Consolidated Financial
Statements.
FORECLOSED PROPERTIES. Set forth below is a brief description of the
Corporation's foreclosed property which had a net carrying value of $1.0
million or more at March 31, 1996.
HOTEL AND OFFICE BUILDING, GARDEN GROVE, CALIFORNIA. At March 31, 1996,
the Corporation's foreclosed properties included a participation interest in
a first mortgage loan secured by a hotel and office building complex located
in Garden Grove, California. The Corporation's share of the loan amounted to
$3.4 million at March 31, 1996. The owners filed for bankruptcy and the Bank
is awaiting a proposed repayment plan.
APARTMENT COMPLEX, ELM GROVE, WISCONSIN. At March 31, 1996, the
Corporation's foreclosed properties also included a $2.2 million loan which
is secured by an apartment complex in Elm Grove, Wisconsin. Phase I studies
of the environmental impact indicated a need for a Phase II study based on
the history of the property which the Bank is pursuing. The Bank believes
any cleanup needed will be partially reimbursed by the Petroleum
Environmental Cleanup Fund, although there can be no assurance in this
regard. The Bank also believes that in the event of any remaining
environmental cleanup liability that it will pursue reimbursement from the
adjoining land owner, which is believed to have caused the contamination. As
a result, the Bank does not anticipate incurring any cost at this time.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in
connection with examinations of insured associations, OTS 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
14
<PAGE>
distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses
make collection or liquidation in full highly questionable and improbable, on
the basis of currently existing facts, conditions, and values. An asset
classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another
category designated special mention also must be established and maintained
for assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification as substandard, doubtful
or loss but do possess credit deficiencies or potential weaknesses deserving
management's close attention.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount.
Classified assets include non-performing assets plus other loans and
assets, including contingent liabilities, meeting the criteria for
classification. Non-performing assets include loans and foreclosed
properties which are not performing under all material contractual terms of
the original notes.
As of March 31, 1996, the Bank's classified assets consisted of $12.6
million of loans and foreclosed properties classified as substandard, net of
specific reserves, and no loans classified as special mention, doubtful or
loss. At March 31, 1995, substandard assets amounted to $16.0 million and no
loans were classified as special mention, doubtful or loss.
ALLOWANCE FOR LOSSES. A provision for losses on loans and foreclosed
properties is provided when a loss is probable and can be reasonably
estimated. The allowance is established by charges against operations in the
period in which those losses are identified.
The Bank establishes general allowances based on the amount and types of
loans in its loan portfolio and the amount of its classified assets. In
addition the Bank monitors and uses standards for these allowances which
depend on the nature of the classification and loan and location of the
security property.
Additional discussion on the allowance for losses at March 31, 1996 has
been presented as part of the discussion of Allowance for Loan and
Foreclosure Losses in Management's Discussion, which is contained in the
Corporation's Annual Report to Stockholders, filed as an exhibit hereto.
SECURITIES - GENERAL
Management determines the appropriate classification of securities at
the time of purchase. Securities are classified as held to maturity when the
Corporation has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
15
<PAGE>
Securities are classified as trading when the Corporation actively buys and
sells securities in order to make a profit. Trading securities are carried
at fair value, with unrealized holding gains and losses included in the
income statement.
Securities not classified as held to maturity or trading are classified
as available for sale. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. At March 31, 1996 and 1995
balances of stockholders' equity were reduced by $82,000 and $458,000 (net of
$55,000 and $305,000 in deferred income taxes), respectively, to reflect the
change in net unrealized loss on holding securities classified as available
for sale. There were no securities designated as trading during the three
years ending March 31, 1996.
In October 1995, the Financial Accounting Standards Board ("FASB")
approved a modification of Statement of Financial Accounting Standards
("SFAS") No. 115, wherein from November 15, 1995 through December 31, 1995,
the Corporation had the opportunity to reconsider its classifications of
investment and mortgage-related securities as held to maturity, trading, or
available for sale. Accordingly, the Corporation chose to reclassify certain
mortgage-backed securities from held to maturity to available for sale. At
the date of transfer, the amortized cost of the mortgage-backed securities
was $90.4 million. The unrealized gain on those securities was $684,000,
which is included in stockholders' equity net of income tax effect of
$274,000.
MORTGAGE-RELATED SECURITIES
The Corporation purchases mortgage-related securities to supplement loan
production and to provide collateral for borrowings. The Corporation invests
in mortgage-backed securities which are insured or guaranteed by FHLMC, FNMA,
or the Government National Mortgage Association ("GNMA") and in
mortgage-derivative securities backed by FHLMC, FNMA and GNMA mortgage-backed
securities.
At March 31, 1996, the amortized cost of the Corporation's
mortgage-backed securities held to maturity amounted to $83.0 million and
included $65.2 million, $13.3 million and $4.5 million which are insured or
guaranteed by FHLMC, FNMA and GNMA, respectively. The GNMA securities are
the only adjustable-rate securities included in securities held to maturity.
The fair value of the Corporation's mortgage-backed securities available
for sale amounted to $103.0 million at March 31, 1996, of which $18.3 million
are five- and seven-year balloon securities, $81.4 million are 15- and
30-year securities and $3.3 million are adjustable-rate securities.
Mortgage-backed securities increase the quality of the Corporation's
assets by virtue of the insurance or guarantees of federal agencies that back
them, require less capital under risk-based regulatory capital requirements
than non-insured or guaranteed mortgage loans, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or
other
16
<PAGE>
obligations of the Corporation. At March 31, 1996, $78.7 million of the
Corporation's mortgage-backed securities available for sale were pledged to
secure various obligations of the Bank.
The following table sets forth the activity in the Corporation's
mortgage-backed securities during the periods indicated.
Year Ended March 31,
----------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Mortgage-backed securities at
beginning of year (1) $123,358 $145,687 $200,474
Held to maturity:
Purchases 3,025 8,355 33,758
Transfers to available for sale (90,376) -- --
Available for sale:
Purchases 5,531 2,497 12,282
Acquired in exchange of loans 96,772 -- 15,096
Transfers from held to maturity 90,376 -- --
Sales (9,107) (888) (31,730)
Repayments and other (33,574) (32,293) (84,193)
-------- -------- --------
Mortgage-backed securities at
end of year (1) $186,005 $123,358 $145,687
-------- -------- --------
-------- -------- --------
- ------------------------
(1) Includes mortgage-backed securities held to maturity and available for sale
and does not include mortgage-derivative securities, discussed below.
Management believes that certain mortgage-derivative securities
represent an attractive alternative relative to other investments due to the
wide variety of maturity and repayment options available through such
investments and due to the limited credit risk associated with such
investments. The Bank's mortgage-derivative securities are made up of
collateralized mortgage obligations ("CMOs"), including CMOs which qualify as
Real Estate Mortgage Investment Conduits ("REMIC") under the Internal Revenue
Code of 1986, as amended ("Code") and are scheduled to mature within five
years. At March 31, 1996, the amortized cost of the Corporation's
mortgage-derivative securities held to maturity amounted to $27.7 million.
The fair value of the mortgage-derivative securities available for sale
amounted to $7.3 million at the same date.
17
<PAGE>
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
1996, classified by term to maturity. The balance is at amortized cost for
held-to-maturity securities and at fair value for available-for-sale
securities.
<TABLE>
<CAPTION>
One to Five Years Six to Ten Years Over Ten Years
------------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Balance Yield Balance Yield Balance Yield Total
-------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Mortgage-derivative securities $ 7,255 5.62% $ -- --% $ -- --% $ 7,255
Mortgage-backed securities 19,236 6.29 21,323 6.76 62,454 6.73 103,013
-------- ---- ------- ---- ------- ---- --------
26,491 6.11 21,323 6.76 62,454 6.73 110,268
-------- ---- ------- ---- ------- ---- --------
Held to maturity:
Mortgage-derivative securities 25,293 5.61 2,445 6.35 -- -- 27,738
Mortgage-backed securities 49,019 5.94 24,573 7.71 9,400 6.85 82,992
-------- ---- ------- ---- ------- ---- --------
74,312 5.83 27,018 7.59 9,400 6.85 110,730
-------- ---- ------- ---- ------- ---- --------
Mortgage-related securities $100,803 5.90% $48,341 7.22% $71,854 6.75% $220,998
-------- ---- ------- ---- ------- ---- --------
-------- ---- ------- ---- ------- ---- --------
</TABLE>
Due to repayments of the underlying loans, the actual maturities of
mortgage-related securities are expected to be substantially less than the
scheduled maturities.
For additional information regarding the Corporation's mortgage-related
securities, see the Corporation's Consolidated Financial Statements,
including note 4 thereto.
INVESTMENT SECURITIES
In addition to lending activities and investments in mortgage-related
securities, the Corporation conducts other investment activities on an
ongoing basis in order to diversify assets, limit interest rate risk and
credit risk and meet regulatory liquidity requirements. Investment decisions
are made by authorized officers in accordance with policies established by
the respective boards of directors.
The Corporation's policy does not permit investment in non-investment
grade bonds and permits investment in various types of liquid assets
permissible for the Bank under OTS regulations, which include U.S. Government
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to limitations
on investment grade securities, the Corporation also invests in corporate
debt securities from time to time.
The table on the following page sets forth information regarding the
amortized cost and fair values of the Corporation's investment securities at
the dates indicated.
18
<PAGE>
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available For Sale:
U.S. Government and federal
agency obligations $20,498 $20,333 $13,733 $13,347 $10,472 $10,284
Mutual funds 9,059 9,058 10,185 10,185 10,497 10,497
Corporate stock and other 791 850 -- -- -- --
------- ------- ------- ------- ------- -------
30,348 30,241 23,918 23,532 20,969 20,781
Held To Maturity:
U.S. Government and federal
agency obligations 2,500 2,503 -- -- -- --
Certificates of deposit 96 96 100 100 -- --
------- ------- ------- ------- ------- -------
2,596 2,599 100 100 -- --
------- ------- ------- ------- ------- -------
Total investment securities $32,944 $32,840 $24,018 $23,632 $20,969 $20,781
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
The following table shows the amortized cost, fair value and yield of
the Corporation's investment securities by contractual maturity at
March 31, 1996.
<TABLE>
<CAPTION>
Available For Sale Held To Maturity
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
--------- ------- ----- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 9,059 $ 9,058 5.42% $ 96 $ 96 6.08%
Due after one year through five years 20,598 20,433 5.96 2,500 2,503 6.66
Corporate stock 691 750 -- -- -- --
-------- ------- ------ ------
$30,348 $30,241 $2,596 $2,599
-------- ------- ------ ------
-------- ------- ------ ------
</TABLE>
For additional information regarding the Corporation's securities, see
the Corporation's Consolidated Financial Statements, including Note 3 thereto.
The Bank is required by the OTS to maintain liquid assets at minimum
levels which vary from time to time and which amounted to 5.0% at March 31,
1996. The Bank's liquidity ratio was 11.3% as of March 31, 1996.
SOURCES OF FUNDS
GENERAL. Deposits are a major source of the Bank's funds for lending
and other investment activities. In addition to deposits, the Bank derives
funds from loan and mortgage-related securities principal repayments and
prepayments, maturities of investment securities, sales of loans and
securities, interest payments on loans and securities, advances from the FHLB
and, from time to time, repurchase agreements and other borrowings. Loan
repayments and interest payments are a relatively stable source of funds,
while deposit inflows
19
<PAGE>
and outflows and loan prepayments are significantly influenced by general
interest rates, economic conditions and competition. Borrowings may be used
on a short-term basis to compensate for reductions in the availability of
funds from other sources. They also may be used on a longer term basis for
general business purposes, including providing financing for lending and
other investment activities and asset/liability management strategies.
DEPOSITS. The Bank's deposit products include passbook savings
accounts, demand accounts, NOW accounts, money market deposit accounts and
certificates of deposit ranging in terms of 42 days to seven years. Included
among these deposit products are Individual Retirement Account certificates
and Keogh retirement certificates, as well as negotiable-rate certificates of
deposit with balances of $100,000 or more ("jumbo certificates").
The Bank's deposits are obtained primarily from residents of Wisconsin.
The Bank has entered into agreements with certain brokers which will provide
funds for a specified fee. At March 31, 1996, the Bank had $20.5 million in
brokered deposits.
The Bank attracts deposits through a network of convenient office
locations by utilizing a detailed customer sales and service plan and by
offering a wide variety of accounts and services, competitive interest rates
and convenient customer hours. Deposit terms offered by the Bank vary
according to the minimum balance required, the time period the funds must
remain on deposit and the interest rate, among other factors. In determining
the characteristics of its deposit accounts, consideration is given to the
profitability to the Bank, matching terms of the deposits with loan products,
the attractiveness to customers and the rates offered by the Bank's
competitors.
The following table sets forth the activity in the Corporation's
deposits during the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $1,092,120 $1,061,262 $1,057,678
Net increase (decrease) before interest credited 29,041 (3,482) (33,089)
Interest credited 48,914 34,340 36,673
Purchase of American Equity 64,803 -- --
---------- ---------- ----------
Net increase in deposits 142,758 30,858 3,584
---------- ---------- ----------
Ending balance $1,234,878 $1,092,120 $1,061,262
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
20
<PAGE>
The following table sets forth the amount and maturities of the
Corporation's certificates of deposit at March 31, 1996.
<TABLE>
<CAPTION>
Over Six Over Over Two
Months One Year Years Over
Six Months Through Through Through Three
Interest Rate and Less One Year Two Years Three Years Years Total
- ------------- -------- -------- --------- ----------- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
3.00% to 4.99% $102,901 $ 7,682 $ 1,448 $ 236 $ 100 $122,367
5.00% to 6.99% 182,963 265,009 196,229 33,039 28,705 705,945
7.00% to 8.99% 4,871 3,331 8,856 36 405 17,499
-------- -------- -------- ------- ------- --------
$290,735 $286,022 $206,533 $33,311 $29,210 $845,811
-------- -------- -------- ------- ------- --------
-------- -------- -------- ------- ------- --------
</TABLE>
At March 31, 1996, the Corporation had $68.5 million of jumbo
certificates, of which $11.6 million are scheduled to mature within three
months, $7.3 million in over three months through six months, $38.5 million
in over six months through 12 months and $11.1 million in over 12 months.
BORROWINGS. From time to time the Bank obtains advances from the FHLB,
which generally are secured by capital stock of the FHLB required to be held
by the Bank and by certain of the Bank's mortgage loans. See "Regulation."
Such advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. The FHLB may
prescribe the acceptable uses for these advances, as well as limitations on
the size of the advances and repayment provisions.
From time to time the Bank enters into repurchase agreements with
nationally recognized primary securities dealers. Repurchase agreements are
accounted for as borrowings by the Bank and are secured by mortgage-backed
securities. The Bank has utilized this source of funds during the year ended
March 31, 1996 and may continue to do so in the future.
The Corporation has a short-term loan payable obtained for a specific
investment purpose. The loan is payable in quarterly installments, with
interest at the lender's prime rate payable monthly. ADPC II has a mortgage
on the multi-family property it owns. Principal and interest payments are
due monthly, with the final payment due in October 2005. See Note 9 to the
Corporation's Consolidated Financial Statements for more information on
borrowings.
21
<PAGE>
The following table sets forth the outstanding balance and weighted
average interest rate for the Corporation's borrowings (short-term and
long-term) at the dates indicated.
March 31,
--------------------------------------------------------
1996 1995 1994
------------------ ------------------ ----------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
------- -------- ------- --------- ------- -------
(Dollars In Thousands)
FHLB advances $316,869 5.69% $274,500 5.71% $186,750 4.72%
Repurchase agreements 47,582 5.32 5,600 6.72 -- --
Other loans payable 7,031 9.94 -- -- -- --
The following table sets forth information relating to the Corporation's
short-term (maturities of one year or less) borrowings at the dates and for
the periods indicated.
March 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Maximum month-end balance:
FHLB advances $177,500 $152,000 $69,750
Repurchase agreements 72,850 5,600 --
Other loans payable 5,998 -- --
Average balance:
FHLB advances 161,939 95,832 48,769
Repurchase agreements 35,352 467 --
Other loans payable 917 -- --
SUBSIDIARIES
INVESTMENT DIRECTIONS, INC. IDI is a wholly-owned non-banking subsidiary
of the Corporation formed in February 1996, which has invested in a limited
partnership located in Austin, Texas.
ANCHOR INSURANCE SERVICES, INC. AIS is a wholly-owned subsidiary of the
Bank which offers a full line of insurance products, securities and annuities
to its customers and members of the general public. For the year ended March
31, 1996, AIS had a net loss of $30. The Bank's investment in AIS amounted
to $139,000 at March 31, 1996.
ADPC II, LLC. ADPC II is a wholly-owned subsidiary of the Bank (99%
ownership) and ADPC (1% ownership) formed in September 1995, which is engaged
in the improvement and management of a multi-family property. This former
foreclosed property was acquired from ADPC as a result of the reorganization
plan from the bankruptcy proceedings. ADPC II obtained a $2.0 million loan
from the Bank for renovations, all of which has now been sold to private
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investors in the secondary market. The Bank's investment in ADPC II at March
31, 1996 amounted to $1.6 million. ADPC II had a net loss of $74,000 for the
year ended March 31, 1996.
ADPC CORPORATION. ADPC is a wholly-owned subsidiary of the Bank which
was engaged in the development of land in Arizona into saleable single-family
lots. The development of land and sale of lots was completed during fiscal
year 1996. ADPC also sold its multi-family foreclosed property to ADPC II.
The Bank's investment in ADPC at March 31, 1996 amounted to $528,000. ADPC
had net income of $215,000 for the year ended March 31, 1996.
ANCHOR INVESTMENT CORPORATION. AIC is an operating subsidiary of the
Bank which was incorporated in March 1993. AIC, which is located in the
State of Nevada, was formed for the purpose of managing a portion of the
Bank's investment portfolio (primarily mortgage-backed securities). As an
operating subsidiary, AIC's results of operations are combined with the
Bank's for financial and regulatory purposes. The Bank's investment in AIC
amounted to $140.2 million at March 31, 1996. AIC had net income of $6.1
million for the year ended March 31, 1996. The Bank had outstanding notes to
AIC of $24.0 million at March 31, 1996, with a weighted average rate of 8.56%
and maturities during the next six months.
ANCHOR FINANCIAL CORP. AFC is a wholly-owned subsidiary of the Bank
which is engaged primarily in nationwide leasing and financing activities.
AFC ceased originating new leases in 1991 because of the relatively poor
payment experience of a portion of its lease portfolio and is presently
winding down its operations. For the year ended March 31, 1996, AFC had net
income of $102,000. The Bank's investment in AFC amounted to $265,000 at
March 31, 1996.
EMPLOYEES
The Bank had 499 full-time employees and 161 part-time employees at March
31, 1996. The Bank promotes equal employment opportunity and considers its
relationship with its employees to be good. The employees are not
represented by a collective bargaining unit.
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REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Corporation and the Bank. The
description of these laws and regulations, as well as descriptions of laws
and regulations contained elsewhere herein, does not purport to be complete
and is qualified in its entirety by reference to applicable laws and
regulations.
From time to time there are changes in applicable laws and regulations.
In 1995, there were several bills introduced in the U.S. Congress which would
affect the banking and savings industries. The Corporation currently is
unable to predict whether these proposals will be enacted into law and, if
so, any resulting impact on the Corporation or the Bank.
THE CORPORATION
The Corporation is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Corporation 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 Corporation and its non-savings association subsidiaries which permits
the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association. In addition, the
Corporation is subject to the examination and supervision by the
Commissioner. The Commissioner is authorized to prohibit by order the
activities of a savings and loan holding company which, among other things,
the Commissioner feels endangers the safety of the savings and loan
association or is contrary to the public interest. The Commissioner is
empowered to direct the operations of the savings and loan association and
its holding company until the order is complied with and may prohibit
dividends from the savings and loan association to its holding company during
such period.
As a unitary savings and loan holding company, the Corporation generally
is not subject to activity restrictions as long as the Bank is in compliance
with the Qualified Thrift Lender ("QTL") Test. See "Qualified Thrift
Lender Requirement."
The Corporation must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Interstate acquisitions
generally are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
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THE BANK
The Bank is a state chartered savings institution, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad state and
federal regulation and oversight by the OTS and the FDIC extending to all
aspects of its operations. The Bank is a member of the FHLB of Chicago and
is subject to certain limited regulation by the Federal Reserve Board. The
Bank is a member of the Savings Association Insurance Fund ("SAIF") and the
deposits of the Bank are insured by the FDIC. As a Wisconsin-chartered
institution, the Bank is also subject to regulation, examination and
supervision by the Commissioner.
FEDERAL AND STATE REGULATION OF SAVINGS ASSOCIATIONS. The OTS has
extensive authority over the operations of all insured savings associations.
In addition, the Bank is subject to regulation and supervision by the
Commissioner. As part of this authority, the Bank is required to file
periodic reports with the OTS and the Commissioner and is subject to periodic
examinations by the OTS, the Commissioner and the FDIC. Examinations by the
Commissioner are usually conducted jointly with the OTS. When these
examinations are conducted by the OTS, the Commissioner or the FDIC, the
examiners may require the Bank to provide for higher general or specific loan
loss allowances. The last regular joint examination of the Bank by the OTS
and the Commissioner was as of February 29, 1996. The FDIC was included in a
joint examination as of November 30, 1992.
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS. A schedule of fees
has also been established for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be
paid on a semi-annual basis, is computed upon the savings association's total
assets, including consolidated subsidiaries, as reported in the association's
latest quarterly thrift financial report. Savings associations that (unlike
the Bank) are classified as "troubled" (i.e., having a supervisory rating
of "4" or "5" or subject to a conservatorship) are required to pay a 50%
premium over the standard assessment. The Bank's semi-annual OTS assessment
for the six months ending June 30, 1996 was $147,000.
Wisconsin-chartered institutions are also required to pay an annual state
assessment. Under Wisconsin law, the fee cannot exceed 12 cents per $1,000
of assets or fraction thereof, as of the close of the preceding calendar
year. In addition to an annual fee, each Wisconsin-chartered institution is
subject to examination fees. The Bank's assessment for the year ending June
30, 1996 was $68,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the
Corporation, and their affiliated parties such as directors, officers,
employees, agents and certain other persons providing services to the Bank or
the Corporation. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and
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regulations and 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
Commissioner has similar enforcement authority over the Bank and the
Corporation.
In addition, the investment and lending authority of the Bank is
prescribed by federal and state laws and regulations, and the Bank is
prohibited from engaging in any activities not permitted by such laws and
regulations. The Bank is in compliance with each of these restrictions.
The Bank's permissible loans-to-one-borrower lending limit under federal
law is to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At March 31, 1996, the Bank had no loans to one borrower which exceeded the
15% or $16.2 million limitation. A broader limitation (the lesser of $30
million or 30% of unimpaired capital and surplus) is provided, under certain
circumstances and subject to OTS approval, for loans to develop domestic
residential housing units. In addition, the Bank may provide purchase money
financing for the sale of any asset without regard to the
loans-to-one-borrower limitation so long as no new funds are advanced and the
Bank is not placed in a more detrimental position than if it had held the
asset. Under Wisconsin law, the aggregate amount of loans that an
association may make to any one borrower may not exceed 5% of the aggregate
of an association's mortgage, consumer and commercial assets, except as
otherwise authorized by the Commissioner. The Bank is in compliance with
these loans-to-one-borrower limitations.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member
of the SAIF, which along with the Bank Insurance Fund ("BIF"), is one of
the two insurance funds administered by the FDIC. Savings deposits are
insured up to $100,000 per insured member (as defined by law and regulation)
by the FDIC and such insurance is backed by the full faith and credit of the
United States Government. As 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 the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has
the authority to initiate enforcement actions against savings associations,
after giving the OTS an opportunity to take such action, and may terminate
the 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.
The annual assessment for SAIF members for deposit insurance for the
period from January 1, 1991 through December 31, 1992 was equal to .23% of
insured deposits, which was payable on a semi-annual basis. Recent
legislation eliminated limitations in increases in federal deposit insurance
premiums and authorized the FDIC to increase the assessment rates to the
extent necessary to protect the SAIF (as well as the BIF). Under current
FDIC regulations,
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institutions are assigned to one of three capital groups which are based
solely on the level of an institution's capital - "well capitalized,"
"adequately capitalized," and "undercapitalized" - which are defined in
the same manner as the regulations establishing the prompt corrective action
system under Section 38 of the FDIA. These three groups are then divided
into three subgroups which reflect varying levels of supervisory concern,
from those which are considered to be healthy to those which are considered
to be of substantial supervisory concern. The matrix so created results in
nine assessment risk classifications, with rates ranging from .23% for well
capitalized, healthy institutions to .31% for undercapitalized institutions
with substantial supervisory concerns. As of March 31, 1996, the insurance
premiums for the Bank amounted to .23% of insured deposits.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved
the required reserve ratio, and, as discussed below, the FDIC recently
substantially reduced the average deposit insurance premium paid by
BIF-insured banks to a level substantially below the average premium paid by
savings institutions.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for
BIF member institutions to zero basis points (subject to a $2,000 minimum)
for institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
Accordingly, in the absence of further legislative action, SAIF members such
as the Bank will be competitively disadvantaged as compared to commercial
banks by the resulting premium differential.
Recently, the U.S. House of Representatives and U.S. Senate have actively
considered legislation which would eliminate the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio. For additional information, see Note
15 to the Consolidated Financial Statements included in Item 15 hereof.
FDIC regulations 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. The Bank meets the definition of a "well capitalized" institution and
therefore may accept brokered deposits without restriction. At March 31,
1996, the Bank had $20.5 million in brokered deposits.
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REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as the Bank, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible
capital requirement, a core capital requirement and a risk-based capital
requirement applicable to such savings associations. FIRREA mandated that
these capital requirements 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
associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock and related surplus and minority
interest in the equity accounts of fully consolidated subsidiaries. In
addition, all intangible assets, other than a limited amount of purchased
mortgage servicing rights (in no event exceeding the amount of tangible
capital), must be deducted from tangible capital.
The capital standards require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus up to 25% of certain other intangibles
which meet certain separate salability and market valuation tests. The OTS
has issued notice of a proposed regulation that would require all but the
most highly rated savings institutions to maintain a minimum core capital
ratio of between 4% and 5%. The Bank had a ratio of core capital to total
assets of 6.10% at March 31, 1996.
The OTS risk-based capital requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital,
for purposes of the risk-based capital requirement, equals the sum of core
capital plus supplementary capital (which, as defined, includes the sum of,
among other items, certain permanent and maturing capital instruments that do
not qualify as core capital and general loan and lease loss allowances up to
1.25% of risk-weighted assets) less certain deductions. The amount of
supplementary capital that may be used to satisfy the risk-based requirement
is limited to the extent of core capital, and OTS regulations require the
maintenance of a minimum ratio of core capital to total risk-weighted assets
of 4.0%. At March 31, 1996, the Bank met all capital requirements on a fully
phased-in basis. (See Note 10 to the Corporation's Consolidated Financial
Statements, which is incorporated herein by reference.) In determining the
amount of risk-weighted assets, all assets, including certain off-balance
sheet items, are multiplied by a risk-weight based on the risks inherent in
the type of assets as determined by the OTS.
In August 1993, the OTS adopted a final rule incorporating an interest
rate risk component into the risk-based capital regulation. Under the rule,
an institution with a greater than "normal" level of interest rate risk is
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution is required to maintain additional capital in order to
comply with the risk-based capital requirement. An institution with a
greater than normal interest rate risk is defined as an institution that
would suffer a loss of net portfolio value exceeding 2.0% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease (with
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certain minor exceptions) in interest rates. The interest rate risk
component is calculated, on a quarterly basis, as one-half of the difference
between an institution's measured interest rate risk and the market value of
its assets multiplied by 2.0%. The final rule is effective as of January 1,
1994, subject however, to a two quarter "lag" time between the reporting
date of the data used to calculate an institution's interest rate risk and
the effective date of each quarter's interest rate risk component. Thus, an
institution with greater than normal risk would not have been subject to any
deduction from total capital until July 1, 1994 (based on the calculation of
the interest rate risk component using data as of December 31, 1993).
However, in October 1994, the Director of the OTS indicated that it would
waive the capital deductions for institutions with a greater than "normal"
risk until the OTS publishes an appeal process. In August 1995, the OTS
issued Thrift Bulletin No. 67 which allows eligible institutions to request
an adjustment to their interest rate risk component as calculated by the OTS,
or to request to use their own models to calculate their interest rate
component. The OTS also indicated that it will delay invoking its interest
rate risk rule requiring institutions with above normal interest rate risk
exposure to adjust their regulatory capital requirement until new procedures
are implemented and evaluated. The OTS has not yet established an effective
date for the capital deduction. Management does not believe that the OTS'
adoption of an interest rate risk component to the risk-based capital
requirement will have a material effect on the Bank.
Under current OTS policy, savings associations must value securities
available for sale at amortized cost for regulatory purposes. This means
that in computing regulatory capital, savings associations add back any
unrealized losses and deduct any unrealized gains, net of income taxes, on
securities reported as a separate component to stockholders' equity under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against any association that fails to meet
its capital requirements (an "undercapitalized association"). The OTS may
grant to an undercapitalized association an exemption from the various
sanctions or penalties for failure to meet its capital requirements (other
than appointment of a conservator or receiver and the mandatory growth
restrictions) through the association's submission of and compliance with an
approved capital plan. If the plan is not approved, the association
generally will be prohibited from making capital distributions, increasing
its assets or making any loans and investments without OTS approval and must
comply with other limits imposed by the OTS.
Any undercapitalized association is also subject to possible enforcement
actions by the OTS or the FDIC. Such actions could include a capital
directive, a cease-and-desist order, civil money penalties or the
establishment of restrictions on all aspects of the association's operations.
The OTS also could impose harsher measures, such as the appointment of a
receiver or conservator or a forced merger into another institution. The
grounds for appointment of a conservator or receiver include substantially
insufficient capital and losses or likely losses that will deplete
substantially all capital with no reasonable prospect for replenishment of
capital without federal assistance.
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Wisconsin-chartered associations are required to maintain a net worth
ratio of at least 6.0%. Under this provision, an association's "net worth
ratio" is defined as a ratio, expressed as a percentage of assets,
calculated by subtracting liabilities from assets, adding to the resulting
difference unallocated general loan loss allowances, and dividing the sum by
the association's assets. The rule authorizes the Commissioner to require an
association to maintain a higher level of net worth if the Commissioner
determines that the nature of the association's operations entails a risk
requiring greater net worth to ensure the association's stability. A failure
to comply with such requirements authorizes the Commissioner to direct the
association to adhere to a plan, which can include various operating
restrictions, in order to restore the association's net worth to required
levels. At March 31, 1996, the Bank was in compliance with this net worth
requirement with a ratio of 7.44%.
LIMITATION ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory (or total)
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its
mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other transactions charged
to the capital account. Under the rule, a savings institution is classified
as a tier 1 institution, a tier 2 institution or a tier 3 institution
depending on its level of regulatory capital both before and after giving
effect to a proposed capital distribution. A tier 1 institution (i.e., one
that both before and after a proposed capital distribution has net capital
equal to or in excess of its fully phased-in regulatory capital requirement)
may make capital distributions during any calendar year equal to 100% of its
net income for the year-to-date period plus 50% of the amount by which the
association's total capital exceeds its fully phased-in capital requirement
(the "capital surplus"), as measured at the beginning of the calendar year.
The Bank meets the requirements for a tier 1 association.
A tier 2 institution (i.e., one that both before and after a proposed
capital distribution has net capital equal to its then-applicable minimum
capital requirement) may make distributions not exceeding 75% of net income
over the most recent four-quarter period.
A tier 3 institution (i.e., one that either before or after a proposed
capital distribution fails to meet its then-applicable minimum capital
requirement) may not make any capital distributions without the prior written
approval of the OTS or the OTS may prohibit a capital distribution.
Tier 2 associations proposing to make a capital distribution within the
safe harbor provisions and tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution.
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On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, the
"tiered" approach described above would be replaced and institutions would
be permitted to make capital distributions that would not result in their
capital being reduced below the level required to remain "adequately
capitalized," as defined in the OTS regulations. Under the proposal,
savings associations which are held by a savings and loan holding company
would continue to be required to provide advance notice of the capital
distribution to the OTS. The Bank does not believe that the proposal will
adversely affect its ability to make capital distributions if it is adopted
substantially as proposed.
Unless prior approval of the Commissioner is obtained, the Bank may not
pay a dividend or otherwise distribute any profits if it fails to maintain
its required net worth ratio either prior to, or as a result of, such
distribution.
QUALIFIED THRIFT LENDER REQUIREMENT. All savings associations, including
the Bank, are required to meet a QTL test to avoid certain restrictions on
their operations. Currently, a savings institution will be a QTL if the
savings institution's qualified thrift investments continue to equal or
exceed 65% of the institution's portfolio assets on a monthly average basis
in nine out of every 12 months. Subject to certain exceptions, qualified
thrift investments generally consist of housing related loans and investments
and certain groups of assets, such as consumer loans, to a limited extent.
The term "portfolio assets" means the savings institution's total assets
minus goodwill and other intangible assets, the value of property used by the
savings institution to conduct its business and liquid assets held by the
savings institution in an amount up to 20% of its total assets. As of March
31, 1996, the Bank was in compliance with the QTL test.
OTS regulations provide that any savings institution that fails to meet
the definition of a QTL must either convert to a bank charter, other than a
savings bank charter, or limit its future investments and activities
(including branching and payments of dividends) to those permitted for both
savings institutions and national banks. Additionally, any such savings
institution that does not convert to a bank charter will be ineligible to
receive further FHLB advances and, beginning three years after the loss of
QTL status, will be required to repay all outstanding FHLB advances and
dispose of or discontinue any preexisting investment or activities not
permitted for both savings institutions and national banks. Further, within
one year of the loss of QTL status, the holding company of a savings
institution that does not convert to a bank charter must register as a bank
holding company and will be subject to all statutes applicable to bank
holding companies.
LIQUIDITY. Under applicable federal regulations, savings institutions
are required to maintain an average daily balance of liquid assets (including
cash, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and highly rated commercial paper, securities of certain
mutual funds and specified United States Government, state or federal agency
obligations) equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposits plus short-term borrowings. This
liquidity requirement may be changed
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from time to time by the Director of the OTS to any amount within the range
of 4% to 10% depending upon economic conditions and the deposit flows of
member institutions, and currently is 5%.
Savings institutions are also required to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1%)
of the total of the average daily balance of its net withdrawable deposits
and short-term borrowings. At March 31, 1996, the Bank was in compliance
with these liquidity requirements.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on
terms as favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions are restricted to a percentage of
the association's capital. Affiliates of the Bank include the Corporation
and any company which is under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Bank's subsidiaries are not deemed affiliates; however, the
OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Chicago, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. The FHLBs provide a
central credit facility for member savings institutions. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to member (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 regulation and oversight
of the Federal Housing Finance Board. All advances from the FHLB are
required to be fully secured by sufficient collateral as determined by the
FHLB. In addition, all long-term advances are required to provide funds for
residential home financing.
As a member, the Bank is required to own shares of capital stock in the
FHLB of Chicago. At March 31, 1996, the Bank owned $16.0 million in FHLB
stock, which is in compliance with this requirement. The Bank has received
substantial dividends on its FHLB stock. The dividend for fiscal 1996
amounted to $1.2 million as compared to $787,000 for fiscal 1995.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to low- and moderately-priced housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and
could continue to do so in the future. These contributions could also have
an adverse effect on the value of FHLB stock in the future. A reduction in
value of the Bank's FHLB stock may result in a charge to the Corporation's
earnings.
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FEDERAL RESERVE SYSTEM. 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 Super NOW checking accounts) and non-personal time deposits. At March
31, 1996, the Bank was in compliance with these requirements. These reserves
may be used to satisfy liquidity requirements imposed by the Director of the
OTS. Because required reserves must be maintained in the form of cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve Board regulations, however,
require savings institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
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TAXATION
FEDERAL
The Corporation files a consolidated federal income tax return on behalf
of itself, the Bank and its subsidiaries on a fiscal tax year basis. Income
and expense are reported on the liability method of accounting.
Savings institutions, such as the Bank, are generally taxed in the same
manner as other corporations. Unlike other corporations, however, qualifying
savings institutions that meet certain definitional tests relating to the
composition of assets and other conditions prescribed by the Internal Revenue
Code of 1986, as amended (the "Code"), are allowed to establish a reserve for
bad debts and each tax year are permitted, within specified formula limits,
to deduct additions to that reserve. The amount of the bad debt reserve
deduction for "non-qualifying loans" is 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) may be computed
under either the experience method or the percentage of taxable income method
(based on an annual election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") is
8%. The percentage bad debt deduction thus computed is reduced by the amount
permitted as a deduction for non-qualifying loans under the experience
method. The availability of the percentage of taxable income method permits
qualifying savings associations to be taxed at a lower effective federal
income tax rate than that applicable to corporations generally (approximately
32.2% assuming the maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally
must include existing reserves in income over a four year period. No
representation can be made as to whether the Bank will meet the 60% test for
subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot 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
34
<PAGE>
and reserves at the beginning of the year. It is not expected that these
limitations would be a limiting factor in the foreseeable future.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's
regular taxable income with certain adjustments and tax preference items,
less any available exemption. The alternative minimum tax is imposed to the
extent it exceeds the corporation's regular income tax, and net operating
losses can offset no more than 90% of alternative minimum taxable income. For
taxable years beginning after 1986 and before 1996, corporations, including
savings associations such as the Bank, are also subject to an environmental
tax equal to 0.12% of the excess of alternative minimum taxable income for
the taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2 million.
Earnings appropriated to a savings institution's bad debt reserves and
deducted for federal income tax purposes may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad
debt losses). As of March 31, 1996, the Bank's bad debt reserves for tax
purposes totaled approximately $31.3 million.
Recently, there have been various legislative proposals in the U.S.
Congress which provided for the repeal of the percentage bad debt reduction
provision of the Code. The proposed legislation would have required the Bank
to recapture for tax purposes (i.e. take into income) over a six-year period
the excess of the balance of its bad debt reserves as of December 31, 1995
over the balance of such reserves as of December 31, 1987. Deferred taxes
have been provided on this amount and as a result, adoption of this
legislation as currently proposed would have an insignificant impact on the
consolidated financial statements of the Corporation. Management currently
is unable to predict whether any legislation regarding the repeal of the bad
debt reduction will be adopted.
The consolidated federal income tax returns of the Bank and its
subsidiaries through March 31, 1992 are closed to examination by the Internal
Revenue Service due to the expiration of the statute of limitations.
The State of Wisconsin imposes a corporate franchise tax measured by the
separate Wisconsin taxable income of each of the members. The current
corporate 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
35
<PAGE>
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. The separate Wisconsin state income tax returns of
the members of the Bank's group through March 31, 1991 are closed to
examination by the Wisconsin Department of Revenue due to the expiration of
the statute of limitations.
The Bank also has an operating subsidiary (AIC) located in Nevada which
manages a portion of the Bank's investment portfolio. The income of AIC is
only subject to taxation in Nevada, which currently does not impose a
corporate income or franchise tax.
ITEM 2. PROPERTIES
At March 31, 1996, The Bank conducted its business from its headquarters
and main office at 25 West Main Street, Madison, Wisconsin and 32 other
deposit-taking offices located primarily in southcentral and southwest
Wisconsin. The Bank owns 23 of its deposit-taking offices, leases the land on
which four such offices are located, and leases the remaining 6
deposit-taking offices. In addition, the Bank leases offices for three loan
origination facilities. The leases expire between 1996 and 2005. The
aggregate net book value at March 31, 1996 of the properties owned or leased,
including headquarters, properties and leasehold improvements, was $12.4
million. See Note 7 to the Corporation's Consolidated Financial Statements,
filed as an exhibit hereto, for information regarding the premises and
equipment. The following tables set forth the location of the Corporation's
banking and other offices.
MADISON, WISCONSIN OFFICES: 6501 Monona Drive
Monona, Wisconsin
25 West Main Street
Madison, Wisconsin 4702 East Towne Boulevard
Madison, Wisconsin
302 North Midvale Boulevard
Madison, Wisconsin 2000 Atwood Avenue
Madison, Wisconsin (2)
2929 North Sherman Avenue
Madison, Wisconsin (1) DANE COUNTY OFFICES:
216 Cottage Grove Road 1516 West Main Street
Madison, Wisconsin (1) Sun Prairie, Wisconsin
5750 Raymond Road 6200 Century Avenue
Madison, Wisconsin (2) Middleton, Wisconsin (1)
333 South Westfield Road 300 East Main Street
Madison, Wisconsin (1) Mount Horeb, Wisconsin
36
<PAGE>
420 West Verona Avenue 500 East Walworth Avenue
Verona, Wisconsin Delavan, Wisconsin
705 North Main Street 606 Highway 69
Oregon, Wisconsin New Glarus, Wisconsin (2)
601 South Main Street 2215 Holiday Drive
DeForest, Wisconsin Janesville, Wisconsin
204A-1 South Century Avenue 150 North Ludington Street
Waunakee, Wisconsin (2) Columbus, Wisconsin
1720 Highway 51 187 South Central Avenue
Stoughton, Wisconsin Richland Center, Wisconsin
316 West Spring Street
SURROUNDING AREA OFFICES: Dodgeville, Wisconsin
1712 12th Street 102 South Rock Avenue
Monroe, Wisconsin Viroqua, Wisconsin
80 South Court Street 640 Division Street
Platteville, Wisconsin Stevens Point, Wisconsin
106 West Oak Street 1101 Post Road
Boscobel, Wisconsin (2) Plover, Wisconsin (2)
100 West Racine Street
Janesville, Wisconsin LENDING ONLY OFFICES:
600 East Blackhawk Avenue 772 Main Street, Suite 204
Prairie du Chien, Wisconsin Lake Geneva, Wisconsin (2)
708 North Madison Street 1775 Witzel Avenue
Lancaster, Wisconsin Oshkosh, Wisconsin (2)
302 Bay Street 2711 North Mason Street
Chippewa Falls, Wisconsin Appleton, Wisconsin (2)
- -------------------------
(1) Land is leased.
(2) Building and land is leased.
37
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management of the Corporation to be immaterial to the financial condition and
results of operations of the Corporation. See "Management's Discussion"
on page 18 of the Registrant's 1996 Annual Report to Stockholders filed as an
exhibit hereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended March 31, 1996, no
matters were submitted to a vote of security holders through a solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Common Stock Information" on page
45 of the 1996 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears under "Management's Discussion"
on page 6 of the Registrant's 1996 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The above-captioned information appears under "Management's Discussion"
on pages 8-18 of the Registrant's 1996 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of Anchor BanCorp Wisconsin Inc.
and its subsidiary, together with the report thereon by Ernst & Young LLP,
appear on pages 20-44 of the Registrant's 1996 Annual Report to Stockholders
and are incorporated herein by reference.
Information with respect to the Employee Stock Option Plan ("ESOP") in
Note 11 is supplemented with the following. During the year ended March 31,
1996, the ESOP released 97,493 shares to the plan participants with a value
of $3.0 million. As of March 31, 1996, there remained 80,021 shares with a
value of $2.7 million which are scheduled to be released in the year ending
March 31, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers is
incorporated herein by reference to pages 2-5 to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 23, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated
herein by reference to pages 8-12 to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on July 23, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to pages 5-8 to the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on July 23, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related
transactions is incorporated herein by reference to pages 16-17 to the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on July 23, 1996.
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 Corporation and
its subsidiaries, together with the report thereon of Ernst & Young LLP,
dated April 24, 1996, appearing in the 1996 Annual Report to Stockholders are
incorporated herein by reference:
Consolidated Balance Sheets at March 31, 1996 and 1995.
Consolidated Statements of Income for each year in the three-year
period ended March 31, 1996.
39
<PAGE>
Consolidated Statements of Stockholders' Equity for each year in
the three-year period ended March 31, 1996.
Consolidated Statements of Cash Flows for each year in the
three-year period ended March 31, 1996.
Notes to Consolidated Financial Statements.
The remaining information appearing in the Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly
provided herein.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(a)(3) EXHIBITS
The following exhibits are either filed as part of this Report on Form
10-K or are incorporated herein by reference:
EXHIBIT NO. 3. CERTIFICATE OF INCORPORATION AND BYLAWS:
3.1 Articles of Incorporation of Anchor BanCorp Wisconsin Inc.
(incorporated herein by reference to Exhibit 3.1
of Registrant's Form S-1, Registration Statement, filed
on March 19, 1992, as amended, Registration No. 46536
("Form S-1")).
3.2 Bylaws of Anchor BanCorp Wisconsin Inc. (incorporated
herein by reference to Exhibit 3.2 of Registrant's Form S-1).
EXHIBIT NO. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS:
4 Form of Common Stock Certificate (incorporated herein
by reference to Exhibit 4 of Registrant's Form S-1).
EXHIBIT NO. 10. MATERIAL CONTRACTS:
10.1 Anchor BanCorp Wisconsin Inc. Retirement Plan
(incorporated herein by reference to Exhibit 10.1 of
Registrant's Form S-1).
40
<PAGE>
10.2 Anchor BanCorp Wisconsin Inc. 1992 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.2 of
Registrant's Form S-1).
10.3 Anchor BanCorp Wisconsin Inc. 1992 Director's Stock
Option Plan (incorporated herein by reference to
Exhibit 10.3 of Registrant's Form S-1).
10.4 Anchor BanCorp Wisconsin Inc. Management Recognition
Plans (incorporated herein by reference to Exhibit 10.4
of Registrant's Form S-1).
10.5 Anchor BanCorp Wisconsin Inc. Employee Stock Ownership
Plan (incorporated herein by reference to Exhibit 10.5
of Registrant's Form S-1).
10.6 Employment Agreement among the Corporation, the Bank
and Douglas J. Timmerman (incorporated by reference to
Exhibit 10.6 of Registrant's Form 10-K for the year
ended March 31, 1995).
10.7 Deferred Compensation Agreement between the Corporation
and Douglas J. Timmerman, as amended (incorporated by
reference to Exhibit 10.7 of Registrant's Form S-1) and
form of related Deferred Compensation Trust Agreement,
as amended (incorporated by reference to Exhibit 10.7
of Registrant's Form 10-K for the year ended March 31, 1994).
10.8 1995 Stock Option Plan for Non-Employee Directors
(incorporated by reference to the Registrant's proxy
statement filed on June 16, 1995).
10.9 1995 Stock Incentive Plan (incorporated by reference to
the Registrant's proxy statement filed on June 16, 1995).
10.10 Employment Agreement among the Corporation, the Bank and J.
Anthony Cattelino (incorporated by reference to Exhibit 10.10
of Registrant's Form 10-K for the year ended March 31, 1995).
10.11 Employment Agreement among the Corporation, the Bank and
Michael W. Helser (incorporated by reference to Exhibit 10.11
of Registrant's Form 10-K for the year ended March 31, 1995).
10.12 Severance Agreement among the Corporation, the Bank and
Ronald R. Osterholz (incorporated by reference to Exhibit 10.12
of Registrant's Form 10-K for the year ended March 31, 1995).
10.13 Severance Agreement among the Corporation, the Bank and David L.
Weimert (incorporated by reference to Exhibit 10.13 of
Registrant's Form 10-K for the year ended March 31, 1995).
41
<PAGE>
10.14 Severance Agreement among the Corporation, the Bank and
Donald F. Bertucci (incorporated by reference to Exhibit 10.14
of Registrant's Form 10-K for the year ended March 31, 1995).
10.15 Anchor BanCorp Wisconsin Inc. Directors' Deferred Compensation
Plan (incorporated by reference to Exhibit 10.9 of Registrant's
Form S-1).
10.16 Anchor BanCorp Wisconsin Inc. Annual Incentive Bonus Plan
(incorporated by reference to Exhibit 10.10 of Registrant's
Form S-1).
10.17 AnchorBank, S.S.B. Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.11 of Registrant's
Form 10-K for the year ended March 31, 1994).
10.18 AnchorBank, S.S.B. Excess Benefit Plan (incorporated by
reference to Exhibit 10.12 of Registrant's Form 10-K for the
year ended March 31, 1994).
The Corporation's management contracts or compensatory plans or arrangements
consist of Exhibits 10.1-10.18 above.
EXHIBIT NO. 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
The statement re: computation of per share earnings for fiscal year 1996 is
as follows:
Primary Fully Diluted
----------- -------------
1. Net Income $14,506,953 $14,506,953
----------- -----------
----------- -----------
2. Weighted average common shares
outstanding 5,116,709 5,116,709
3. Common stock equivalents due to dilutive
effect of stock options 224,943 252,337
----------- -----------
4. Total weighted average common shares and
equivalents outstanding 5,341,652 5,369,046
----------- -----------
----------- -----------
5. Earnings per share $ 2.72 $ 2.70
----------- -----------
----------- -----------
EXHIBIT NO. 13. 1996 ANNUAL REPORT TO STOCKHOLDERS
The 1996 Annual Report to Stockholders is attached as an exhibit to this
Report. Portions of the 1996 Annual Report to Stockholders have been
incorporated by reference into this Form 10-K, as indicated under Part II
above.
42
<PAGE>
EXHIBIT NO. 21. SUBSIDIARIES OF THE REGISTRANT
Subsidiary information is incorporated herein by reference to "Part I,
Item 1, Business-General" and "Part I, Item 1, Business-Subsidiaries."
EXHIBIT NO. 23. CONSENT OF ERNST & YOUNG LLP
The consent of Ernst & Young LLP is included herein as an exhibit to
this Report.
EXHIBIT NO. 27. FINANCIAL DATA SCHEDULE
The Financial Data Schedule is included herein as an exhibit to
this Report.
(b) FORMS 8-K
None
(c) EXHIBITS
Exhibits to the Form 10-K required by Item 601 of Regulation S-K are
attached or incorporated herein by reference as stated in the Index to
Exhibits.
(d) FINANCIAL STATEMENTS EXCLUDED FROM ANNUAL REPORT TO SHAREHOLDERS PURSUANT
TO RULE 14A3(b)
Not applicable
43
<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.
ANCHOR BANCORP WISCONSIN INC.
By: /s/ Douglas J. Timmerman
------------------------------------
Douglas J. Timmerman
Chairman of the Board, President
and Chief Executive Officer
Date: May 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<C> <C>
By: /s/ Douglas J. Timmerman By: /s/ Michael W. Helser
--------------------------------------- -----------------------------------------
Douglas J. Timmerman Michael W. Helser
Chairman of the Board, President Treasurer and Chief Financial Officer
and Chief Executive Officer (principal financial and
(principal executive officer) accounting officer)
Date: May 28, 1996 Date: May 28, 1996
</TABLE>
44
<PAGE>
<TABLE>
<S> <C>
By: /s/ Robert C. Buehner By: /s/ Greg M. Larson
--------------------------------------- -----------------------------------------
Robert C. Buehner Greg M. Larson
Director Director
Date: May 28, 1996 Date: May 28, 1996
By: /s/ Arlie M. Mucks, Jr. By: /s/ Pat Richter
--------------------------------------- -----------------------------------------
Arlie M. Mucks, Jr. Pat Richter
Director Director
Date: May 28, 1996 Date: May 28, 1996
By: /s/ Bruce A. Robertson By: /s/ Holly Cremer Berkenstadt
--------------------------------------- -----------------------------------------
Bruce A. Robertson Holly Cremer Berkenstadt
Director Director
Date: May 28, 1996 Date: May 28, 1996
By: /s/ Donald D. Kropidlowski
---------------------------------------
Donald D. Kropidlowski
Director
Date: May 28, 1996
</TABLE>
45
<PAGE>
INDEX TO EXHIBITS
Page
EXHIBIT NO. 3. CERTIFICATE OF INCORPORATION AND BYLAWS --
Incorporated herein by reference.
EXHIBIT NO. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS --
Incorporated herein by reference.
EXHIBIT NO. 10. MATERIAL CONTRACTS --
Incorporated herein by reference.
EXHIBIT NO. 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 42
Included herewith.
EXHIBIT NO. 13. 1996 ANNUAL REPORT TO STOCKHOLDERS 47
Filed herewith.
EXHIBIT NO. 21. SUBSIDIARIES OF THE REGISTRANT --
Incorporated herein by reference.
EXHIBIT NO. 23. CONSENT OF ERNST & YOUNG LLP 97
Filed herewith.
EXHIBIT NO. 27 FINANCIAL DATA SCHEDULE 98
Filed herewith.
46
<PAGE>
1996 ANCHOR BANCORP WISCONSIN INC. ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Selected Financial Highlights . . . . . . . . . . . . . . . . . . . . . . .2
President's Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Management's Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . .6
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 25
Corporate Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Board of Directors/Officers. . . . . . . . . . . . . . . . . . . . . . . . 46
Office/Subsidiary Locations. . . . . . . . . . . . . . . . . . . . . . . . 47
1
<PAGE>
CORPORATE PROFILE
- ------------------------------------------------------------------------------
Anchor BanCorp Wisconsin Inc. (the "Corporation") was incorporated as a holding
company on March 18, 1992, and went public July 15, 1992. Headquartered in
Madison, Wisconsin, its wholly-owned bank subsidiary is AnchorBank, S.S.B. (the
"Bank"). The $1.8 billion consumer-oriented bank is state chartered and is one
of Wisconsin's largest thrifts.
Founded in 1919, the Bank blends an interest in the consumer and small business
markets with the willingness to expand its numerous checking, savings and
lending programs to meet customers' changing financial needs. With 33
full-service and three lending-only facilities, the Bank serves approximately
96,000 households in 26 Wisconsin cities located primarily in southern and
western Wisconsin. The Bank has approximately 660 full- and part-time employees.
The Bank offers checking, savings, money market accounts, mortgages, home equity
and other consumer loans, student loans, credit cards, annuities and related
consumer financial services. The Bank also offers banking services to
businesses, including checking accounts, lines of credit, secured loans and
commercial real estate loans.
SELECTED FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AT OR FOR YEAR ENDED MARCH 31,
-------------------------------------------------
PERCENT
1996 (1) 1995 CHANGE
-------------------------------------------------
(Dollars In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
OPERATING RESULTS:
Net interest income $ 50,743 $ 50,586 0.3%
Net income 14,507 14,417 0.6
- --------------------------------------------------------------------------------
PER SHARE (2):
Earnings:
Primary $ 2.72 $ 2.68 1.5%
Fully diluted 2.70 2.66 1.5
Book value 24.00 21.96 9.3
Cash dividends paid 0.32 0.23 39.1
- --------------------------------------------------------------------------------
FINANCIAL CONDITION:
Total assets $1,754,556 $1,510,917 16.1%
Loans receivable held for
investment, net 1,361,080 1,231,107 10.6
Mortgage-related securities 220,998 160,401 37.8
Deposits 1,240,958 1,098,210 13.0
Borrowings 371,482 280,100 32.6
Stockholders' equity 118,402 111,187 6.5
Shares outstanding (2) 4,934,350 5,063,830 (2.6)
- --------------------------------------------------------------------------------
SIGNIFICANT RATIOS FOR THE YEAR (3):
Yield on earning assets 7.87% 7.46% 5.5%
Cost of funds 4.96 4.11 20.7
Interest rate spread 2.91 3.35 (13.1)
Net interest margin 3.18 3.60 (11.7)
Return on assets 0.88 1.00 (12.0)
Return on equity 12.13 13.45 (9.8)
Equity to assets 7.24 7.41 (2.3)
Non-interest expenses to assets 2.24 2.28 (1.8)
- --------------------------------------------------------------------------------
SIGNIFICANT RATIOS AT YEAR END:
Net interest spread 2.90% 3.00% (3.3)%
Non-performing assets to total assets 0.59 0.69 (14.5)
Stockholders' equity to total assets 6.75 7.36 (8.3)
(1) Reflects the acquisition of American Equity BanCorp Inc. of Stevens Point,
Wisconsin, in June, 1995 under the purchase method of accounting.
(2) Per share data and shares outstanding have been adjusted to reflect a
5-for-4 stock split distributed in October, 1995.
(3) Based on average daily balances.
2
<PAGE>
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
I am pleased to report our Company's results for this past fiscal year. As
you know, our goal was profitable growth. We reached that goal. Earnings set
a record for the fourth year in a row and our total [photo omitted] assets
grew 16.1%. We attained those results through a merger and growth in our
consumer product lines. We expected to maintain our deposit base and we did.
In addition, we once again experienced an increase in our core deposits. We
are a growing financial institution serving an economically strong market
through a system of well-positioned branches.
Now let's look at how we achieved our success.
[BAR GRAPH OMITTED]
FINANCIAL PERFORMANCE As you know, I pay close attention to increasing
shareholder value. Our primary earnings per share increased from $2.68 last year
to $2.72 as of March 31, 1996, adjusted for the 5-for-4 stock split distributed
in October, 1995. The Board of Directors authorized the repurchase of
outstanding shares from time to time to further increase shareholder value,
book value increased from $21.96 to $24.00. The Board approved an increase in
our dividend from $.08 to $.10 per share per quarter effective in May, 1996.
This was the fourth increase since becoming a public company. Net income set
another record, increasing from $14.4 million to $14.5 million for the year.
[BAR GRAPH OMITTED]
The Company's non-interest expenses to average assets ratio declined for the
third straight year. This year it went from 2.28% to 2.24%.
As stockholders, your investment continues to grow. We consistently get positive
feedback from many of the people who analyze our Company's stock. Our growth
reflects the improved health of our industry and continued growth in the markets
we serve.
[BAR GRAPH OMITTED]
3
<PAGE>
PRESIDENT'S MESSAGE (CONT'D)
- --------------------------------------------------------------------------------
[BAR GRAPH OMITTED]
SOLID GROWTH/QUALITY ASSETS AnchorBank is the market leader in both the dollar
volume and the number of mortgages produced in Dane County, Wisconsin. Dane
County is one of the fastest growing counties in Wisconsin and has had extremely
low unemployment for the past five years. We grew 8.0% in mortgages while
focusing on generating quality assets. We have been successful in our mission --
our non-performing assets to total assets ratio is .59%, down from .69% at March
31, 1995. Our consumer loans outstanding also showed continued strength. They
grew 32.6% last fiscal year and 28.7% this fiscal year. We continue to solicit
customers and potential customers via direct mail -- offering them a variety of
ways to get the money they need when, where and how they want it.
MARKET STRATEGIES As intended, we strengthened our branch network this past
year. We are very interested in maintaining our mix of urban, suburban and rural
markets in central and southern Wisconsin where we can efficiently generate
funds. In June, 1995, we expanded into the Stevens Point area via a merger with
American Equity BanCorp. Almost immediately, we opened a second office in the
Stevens Point area, in Plover's Econofoods grocery store. Those offices
complement our other offices in central Wisconsin.
[BAR GRAPH OMITTED]
We continue, as well, to improve our presence in Dane County. We opened an
office in Stoughton, Wisconsin, in June, 1995 to serve this fast-growing market.
We combined two offices on Madison's west side in order to give us better
efficiency and increase convenience for our customers.
4
<PAGE>
PRESIDENT'S MESSAGE (CONT'D)
- --------------------------------------------------------------------------------
TARGET HOUSEHOLDS We saw a significant increase in the number of households
served this past year. New households were generated with the merger of American
Equity as well as with checking and consumer loan promotions. We continue to
target potential customers whose product needs meet our goal of improving our
asset/liability mix. Our yield on earning assets improved from 7.46% to 7.87%
during the year. On the liability side, we continue to focus on our goal of
increasing core deposit accounts. The number of checking accounts grew 23% from
1995 to 1996.
LOOKING AHEAD What we are doing is working. We are focusing additional effort
on higher margin lending activities, while continuing to generate quality
assets. Our strength is "people-oriented" loans - mortgages, consumer loans and
small business loans. Building strong customer relationships and providing
outstanding customer service is key to increasing market share in our target
consumer markets. We have the advantage of an extensive branch network in which
we can promote both lending and retail savings products. Our objectives remain
focused on safety and soundness, profitability and growth.
[BAR GRAPH OMITTED]
On behalf of the Board, management and staff at Anchor, we thank
you for your continued trust and support.
Sincerely,
/S/ Douglas J. Timmerman
Douglas J. Timmerman
President
5
<PAGE>
MANAGEMENT'S DISCUSSION
FIVE-YEAR SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT OR FOR YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996(1) 1995 1994 1993 1992
---------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Earnings per share (2):
Primary $ 2.72 $ 2.68 $ 2.32 $ 1.72 $ N/A
Fully diluted 2.70 2.66 2.32 1.70 N/A
Interest income 125,721 104,884 97,306 105,088 116,093
Interest expense 74,978 54,298 49,539 57,208 78,731
Net interest income 50,743 50,586 47,767 47,880 37,362
Provision for loan losses 475 1,580 4,348 7,415 7,765
Non-interest income 9,259 7,508 11,106 11,560 10,111
Non-interest expenses 37,061 33,033 32,788 34,221 30,821
Income taxes 7,959 9,064 8,265 6,938 3,103
Net income 14,507 14,417 13,472 10,866 5,784
Total assets 1,754,556 1,510,917 1,380,276 1,297,408 1,265,179
Investment securities 32,837 23,632 20,781 13,833 13,918
Mortgage-related securities 220,998 160,401 187,710 238,465 184,489
Loans receivable held for
investment, net 1,361,080 1,231,107 1,066,945 939,194 925,014
Deposits 1,240,958 1,098,210 1,065,741 1,062,903 1,149,738
Notes payable to FHLB 316,869 274,500 186,750 111,000 41,000
Other borrowings 54,613 5,600 - - -
Stockholders' equity 118,402 111,187 105,137 101,987 52,351
Shares outstanding (2) 4,934,350 5,063,830 5,394,269 5,937,500 N/A
Book value per share
at end of period (2) 24.00 21.96 19.49 17.18 N/A
Dividend payout ratio (2) 11.76% 8.58% 8.19% 2.79% N/A%
Yield on earning assets 7.87 7.46 7.42 8.41 9.44
Cost of funds 4.96 4.11 4.04 4.86 6.51
Interest rate spread 2.91 3.35 3.38 3.55 2.93
Net interest margin 3.18 3.60 3.64 3.83 3.04
Return on average assets 0.88 1.00 1.00 0.84 0.45
Return on average equity 12.13 13.45 12.89 12.29 11.52
Average equity to average assets 7.24 7.41 7.74 6.86 3.94
</TABLE>
(1) In June, 1995, the Corporation acquired American Equity BanCorp Inc.
("American") of Stevens Point, Wisconsin, through an exchange of stock.
This transaction was accounted for as a purchase, with the results of
operations being included in the consolidated financial statements since
the date of acquisition.
(2) As adjusted for a five-for-four stock split as of October 27, 1995.
Per share data for fiscal 1992 are not applicable because
the Corporation was not a public company until July 15, 1992.
6
<PAGE>
MANAGEMENT'S DISCUSSION
QUARTERLY DATA
- --------------------------------------------------------------------------------
The following table sets forth the Corporation's unaudited quarterly income and
expense data for the two years ended March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1996 1995 1995 1995(1) 1995 1994 1994 1994
------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $28,182 $27,296 $26,731 $25,227 $24,489 $23,879 $22,346 $21,235
Securities 4,617 5,048 5,057 3,563 3,136 3,308 3,277 3,214
------------------------------------------------------------------------------------------------
Total interest income 32,799 32,344 31,788 28,790 27,625 27,187 25,623 24,449
Interest expense:
Deposits 14,526 14,674 13,853 12,297 11,243 10,123 9,863 9,709
Borrowings and other 5,270 4,881 5,142 4,335 4,014 3,979 2,998 2,369
------------------------------------------------------------------------------------------------
Total interest expense 19,796 19,555 18,995 16,632 15,257 14,102 12,861 12,078
------------------------------------------------------------------------------------------------
Net interest income 13,003 12,789 12,793 12,158 12,368 13,085 12,762 12,371
Provision for loan losses -- 150 150 175 403 449 377 351
------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 13,003 12,639 12,643 11,983 11,965 12,636 12,385 12,020
Service charges on loans
and deposits 1,529 1,553 1,554 1,295 1,307 1,296 1,298 1,301
Net gain (loss) on sale of
loans and securities 267 224 242 159 89 (109) 18 (128)
Other non-interest income 815 567 519 535 517 640 635 644
------------------------------------------------------------------------------------------------
Total non-interest income 2,611 2,344 2,315 1,989 1,913 1,827 1,951 1,817
Compensation 4,972 4,864 4,866 4,365 4,035 4,304 4,364 4,338
Other non-interest expenses 4,818 4,626 4,533 4,017 4,364 3,926 3,883 3,819
------------------------------------------------------------------------------------------------
Total non-interest expenses 9,790 9,490 9,399 8,382 8,399 8,230 8,247 8,157
------------------------------------------------------------------------------------------------
Income before income taxes 5,824 5,493 5,559 5,590 5,479 6,233 6,089 5,680
Income taxes 2,063 1,947 1,968 1,981 2,088 2,387 2,351 2,238
------------------------------------------------------------------------------------------------
Net income $ 3,761 $ 3,546 $ 3,591 $ 3,609 $ 3,391 $ 3,846 $ 3,738 $ 3,442
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Earnings Per Share (2):
Primary $ 0.72 $ 0.65 $ 0.65 $ 0.70 $ 0.65 $ 0.72 $ 0.68 $ 0.62
Fully diluted 0.72 0.65 0.65 0.70 0.65 0.72 0.68 0.62
</TABLE>
(1) In June, 1995, the Corporation acquired American through an exchange of
stock. This transaction was accounted for as a purchase, with the results
of operations being included in the consolidated financial statements since
the date of acquisition.
(2) Per share data for all periods have been adjusted to reflect the 5-for-4
stock split distributed in October, 1995.
7
<PAGE>
MANAGEMENT'S DISCUSSION
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
COMPARISON OF YEARS ENDED MARCH 31, 1996 AND 1995
- --------------------------------------------------------------------------------
GENERAL Net income increased to $14.5 million in fiscal 1996 from $14.4 million
in fiscal 1995. The returns on average assets and average stockholders' equity
for fiscal 1996 were 0.88% and 12.13%, respectively, as compared to 1.00% and
13.45%, respectively, for fiscal 1995.
The major components of the increase in earnings for fiscal 1996, as compared to
fiscal 1995, were (i) an increase of $1.8 million in non-interest income, (ii) a
decrease of $1.1 million in provision for loan losses and (iii) a decrease of
$1.1 million in income taxes, which were partially offset by an increase of $4.0
million in non-interest expenses.
NET INTEREST INCOME Net interest income increased by $157,000 during fiscal
1996. The average balances of interest-earning assets and interest-bearing
liabilities increased to $1.598 billion and $1.511 billion in fiscal 1996,
respectively, from $1.407 billion and $1.321 billion, respectively, in fiscal
1995. The average balance increases were partially due to the American Equity
BanCorp Inc. ("American") acquisition in June, 1995 (refer to Note 2 to the
Corporation's Consolidated Financial Statements for additional discussion). The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased to 1.06 for fiscal 1996 from 1.07 for fiscal 1995. The average yield
on interest-earning assets (7.87% in fiscal 1996 versus 7.46% in fiscal 1995)
increased, as did the average cost on interest-bearing liabilities (4.96% in
fiscal 1996 versus 4.11% in fiscal 1995). The net interest margin decreased
to 3.18% for fiscal 1996 from 3.60% for fiscal 1995 and the interest rate spread
decreased to 2.91% from 3.35% for fiscal 1996 and 1995, respectively. These
factors are reflected in the analysis of changes in net interest income, arising
from changes in the volume of interest-earning assets, interest-bearing
liabilities and the rates earned and paid on such assets and liabilities. The
analysis indicates that the increases in the volume of interest-earning assets
and interest-bearing liabilities increased net interest income in fiscal 1996 by
approximately $5.1 million. Offsetting this increase, in part, was a $5.0
million decrease in net interest income caused by the combination of rate and
rate/volume changes.
PROVISION FOR LOAN LOSSES Provision for loan losses decreased $1.1 million to
$475,000 for fiscal 1996 from $1.6 million for fiscal 1995, reflecting a lower
level of charge-offs experienced in fiscal 1996. The Corporation's allowance
for loan losses increased to $22.8 million, or 1.59% of loans held for
investment, at March 31, 1996, from $22.4 million, or 1.75%, respectively, at
March 31, 1995. For further discussion of the allowance for loan losses, see
"Allowance for Loan and Foreclosure Losses."
NON-INTEREST INCOME Non-interest income increased $1.8 million to $9.3
million for fiscal 1996 compared to $7.5 million for fiscal 1995 as a net
result of several factors. Net gain (loss) on sale of loans increased from a
loss of $83,000 in fiscal 1995 to a gain of $645,000 in fiscal 1996. The
increase was due to an increase in the volume of sales of loans during the
period. Service charges on deposits increased $600,000 in fiscal 1996 as
compared to fiscal 1995 due to an increase in demand deposit fees due in part
to the increase in demand deposit accounts from the American acquisition.
Net gain (loss) on sale of securities increased from a loss of $47,000 in
fiscal 1995 to a gain of $247,000 in fiscal 1996 due to an increase in the
volume of sales of securities during the period. Loan servicing income
increased $297,000 due to increased volume of loans serviced for others.
Other non-interest income increased $146,000 for fiscal 1996 due to increased
partnership earnings on partnerships which are less than 50% owned and
accounted for under the equity method. These increases were partially offset
by a decrease of $312,000 in insurance commissions during fiscal 1996 as a
result of large decreases in annuity sales.
NON-INTEREST EXPENSES Non-interest expenses increased $4.0 million for
fiscal 1996 compared to 1995 as a net result of several factors.
Compensation increased $2.0 million for fiscal 1996 due to the combination of
increases in staff, salaries and benefits as a result of additional offices
and new benefit plans. Furniture, equipment and occupancy expense increased
$693,000 primarily due to increased depreciation and other costs from
additional offices. Other expenses increased $926,000 during fiscal 1996 due
to increases in robbery loss, goodwill amortization, demand deposit expenses,
postage and TYME transaction fees. Data processing expense increased
$348,000 mainly due to costs associated with buying out a servicing contract
of American.
INCOME TAXES Income tax expense decreased $1.1 million for fiscal 1996 as
compared to fiscal 1995. The effective tax rate for fiscal 1996 was 35.43% as
compared to 38.60% for fiscal 1995. The decrease in the tax rate in the current
year was due to an adjustment for excess deferred taxes during the year. See
Note 12 to the Consolidated Financial Statements.
COMPARISON OF YEARS ENDED MARCH 31, 1995 AND 1994
- --------------------------------------------------------------------------------
GENERAL Net income increased to $14.4 million in fiscal 1995 from $13.5 million
in fiscal 1994. The returns on average assets and average stockholders' equity
for fiscal 1995 were 1.00% and 13.45%, respectively, as compared to 1.00% and
12.89%, respectively, for fiscal 1994.
The major components of the increase in earnings for fiscal 1995, as compared to
fiscal 1994, were (i) an increase of $2.8 million in net interest income and
(ii) a decrease of $2.8 million in provision for loan losses, which were
partially offset by (i) a decrease of $3.6 million in non-interest income and
(ii) an increase of $800,000 in income taxes.
8
<PAGE>
MANAGEMENT'S DISCUSSION
RESULTS OF OPERATIONS (CONT'D)
- --------------------------------------------------------------------------------
NET INTEREST INCOME Net interest income increased by $2.8 million during
fiscal 1995 due to increases in the volume of interest-earning assets and
interest-bearing liabilities, which offset the effects of a decrease in the
Corporation's interest rate spread. The average balances of interest-earning
assets and interest-bearing liabilities increased to $1.407 billion and $1.321
billion, respectively, in fiscal 1995, from $1.311 billion and $1.226 billion,
respectively, in fiscal 1994. The ratio of average interest-earning assets to
average interest-bearing liabilities stayed the same at 1.07 for fiscal 1995
and 1994. The average yield on interest-earning assets (7.46% in fiscal 1995
versus 7.42% in fiscal 1994) increased, as did the average cost on
interest-bearing liabilities (4.11% in fiscal 1995 versus 4.04% in fiscal
1994). The net interest margin decreased to 3.60% for fiscal 1995 from 3.64%
for fiscal 1994 and the interest rate spread decreased to 3.35% from 3.38% for
fiscal 1995 and 1994, respectively. These factors are reflected in the
analysis of changes in net interest income arising from changes in the volume
of interest-earning assets and interest-bearing liabilities and the rates
earned and paid on such assets and liabilities. The analysis indicates that
the increases in the volume of interest-earning assets and interest-bearing
liabilities increased net interest income in fiscal 1995 by approximately $4.0
million. Offsetting this increase in part was a $1.2 million decrease in net
interest income caused by the combination of rate and rate/volume changes.
PROVISION FOR LOAN LOSSES Provision for loan losses decreased $2.8 million to
$1.6 million for fiscal 1995 from $4.3 million for fiscal 1994, reflecting a
lower level of charge-offs experienced in fiscal 1995. The Corporation's
allowance for loan losses increased to $22.4 million, or 1.75% of loans held for
investment, at March 31, 1995, from $22.1 million, or 1.98%, respectively, at
March 31, 1994. For further discussion of the allowance for loan losses, see
"Allowance for Loan and Foreclosure Losses."
NON-INTEREST INCOME Non-interest income decreased $3.6 million to
$7.5 million for fiscal 1995 compared to $11.1 million for fiscal 1994 as a
net result of several factors. Net gain (loss) on sale of loans decreased from
a gain of $3.2 million in fiscal 1994 to a loss of $83,000 in fiscal 1995. The
decline was due to a decrease in the volume of sales of loans and the
increase in rates during the period. Loan servicing income decreased
$124,000 in fiscal 1995 as compared to fiscal 1994 due to reduced spreads
from serviced loans. Net gain (loss) on sale of securities decreased from a
gain of $99,000 in fiscal 1994 to a loss of $47,000 in fiscal 1995. Other
non-interest income decreased $434,000 due in part to reduced prepayment fees
on loans and other loan fees. The reductions were partially offset by an
increase of $300,000 in service charges on deposits in fiscal 1995 as
compared to 1994, which was due to an increase in demand deposit fees.
NON-INTEREST EXPENSES Non-interest expenses increased $245,000 for fiscal 1995
compared to 1994 as a net result of several factors. Compensation increased
$300,000 for fiscal 1995 due to the increased cost of benefits, including dental
insurance and two new deferred compensation plans. Federal insurance premiums
increased $350,000 for fiscal 1995 due to a one-time refund of past premiums in
fiscal 1994. Furniture and equipment expense increased $280,000 primarily due
to increased depreciation on new computer equipment purchases. These increases
were partially offset by a $1.1 million decrease in net cost of operations of
foreclosure properties due to (i) decreased net cost of operations of $500,000,
(ii) decreased provision for losses of $275,000 and (iii) increased profit on
sales of $350,000.
INCOME TAXES Income tax expense increased $800,000 for fiscal 1995 as compared
to fiscal 1994. The effective tax rate for fiscal 1995 was 38.60% as compared
to 38.02% for fiscal 1994. See Note 12 to the Consolidated Financial
Statements.
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-BEARING LIABILITIES AND
INTEREST RATE SPREAD AND MARGIN The table on the following page shows the
Corporation's average balances, interest, average rates, the spread between
the combined average rates earned on interest-earning assets and average cost
of interest-bearing liabilities, the average net interest margin, computed as
net interest income as a ratio of average interest-earning assets, and the
ratio of average interest-earning assets to average interest-bearing
liabilities, the average net interest margin, computed as net interest income
as a ratio of average interest-earning assets, and the ratio of average
interest-earning assets to average interest-bearing liabilities for the years
indicated. Balances of interest-sensitive assets and liabilities arising from
the fiscal 1996 acquisition are included from the date of acquisition. The
average balances are derived from average daily balances.
9
<PAGE>
MANAGEMENT'S DISCUSSION
AVERAGE BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans(2) $1,047,092 $ 82,798 7.91% $ 999,008 $ 75,434 7.55% $ 898,025 $ 69,981 7.79%
Consumer loans 236,767 22,010 9.30 171,700 14,679 8.55 140,100 11,798 8.42
Commercial business loans 25,040 2,628 10.50 19,155 1,836 9.58 18,857 1,702 9.03
----------------------- --------------------- ---------------------
Total loans receivable(1) 1,308,899 107,436 8.21 1,189,863 91,949 7.73 1,056,982 83,481 7.90
Mortgage-related securities(2) 221,135 14,152 6.40 174,013 10,637 6.11 208,375 11,812 5.67
Investment securities(2) 41,168 2,490 6.05 22,781 1,198 5.26 18,634 942 5.06
Interest-bearing deposits 8,694 488 5.61 7,201 313 4.35 16,954 502 2.96
Federal Home Loan Bank stock 17,204 1,155 6.71 12,782 787 6.16 9,687 569 5.87
----------------------- --------------------- ---------------------
Total interest-earning assets 1,597,100 125,721 7.87 1,406,640 104,884 7.46 1,310,632 97,306 7.42
Non-interest-earning assets 54,330 39,567 39,301
---------- ---------- ----------
Total assets $1,651,430 $ 1,446,207 $ 1,349,933
---------- ---------- ----------
---------- ---------- ----------
INTEREST-BEARING LIABILITIES
Demand deposits $ 218,811 4,577 2.09 $ 191,667 3,062 1.60 $ 197,345 3,716 1.88
Regular passbook savings 107,707 2,498 2.32 116,946 2,674 2.29 117,473 3,083 2.62
Certificates of deposit 847,113 48,275 5.70 757,617 35,202 4.65 744,744 34,616 4.65
----------------------- --------------------- ---------------------
Total deposits 1,173,631 55,350 4.72 1,066,230 40,938 3.84 1,059,562 41,415 3.91
Notes payable and other
borrowings 324,123 19,148 5.91 240,792 12,871 5.35 154,632 7,457 4.82
Other 13,064 480 3.67 13,763 489 3.55 12,076 667 5.52
----------------------- --------------------- ---------------------
Total interest-bearing
liabilities 1,510,818 74,978 4.96 1,320,785 54,298 4.11 1,226,270 49,539 4.04
--------------- --------------- --------------
Non-interest-bearing
liabilities 21,013 18,264 19,178
--------- --------- ---------
Total liabilities 1,531,831 1,339,049 1,245,448
Stockholders' equity 119,599 107,158 104,485
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,651,430 $ 1,446,207 $ 1,349,933
---------- ---------- ----------
---------- ---------- ----------
Net interest income/
interest rate spread(3) $ 50,743 2.91% $ 50,586 3.35% $ 47,767 3.38%
--------------- --------------- --------------
--------------- --------------- --------------
Net interest-earning assets $ 86,282 $ 85,855 $ 84,362
---------- ---------- ----------
---------- ---------- ----------
Net interest margin 3.18% 3.60% 3.64%
---- ---- ----
---- ---- ----
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 1.06 1.07 1.07
---- ---- ----
---- ---- ----
</TABLE>
(1) The average balances of loans receivable include non-accrual loans.
(2) Includes assets held and available for sale.
(3) The interest rate spread at March 31, 1996, 1995 and 1994 amounted to
2.90%, 3.00% and 3.36%, respectively.
10
<PAGE>
MANAGEMENT'S DISCUSSION
RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------
The most significant impact on the Corporation's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of earning dollars in loans and investments, compared to the volume of
interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods.
The following table shows the relative contribution of the changes in average
volume and average interest rates on changes in net interest income for the
periods indicated. Information is provided with respect to (i) effects on
interest income attributable to changes in rate (changes in rate multiplied by
prior volume), (ii) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate) and (iii) changes in rate/volume
(changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
-----------------------------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
-----------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans(1) $ 3,562 $ 3,631 $ 171 $ 7,364 $(2,172) $ 7,869 $ (244) $ 5,453
Consumer loans 1,282 5,563 486 7,331 179 2,662 40 2,881
Commercial business loans 174 564 54 792 105 27 2 134
-----------------------------------------------------------------------------------------------
Total loans receivable 5,018 9,758 711 15,487 (1,888) 10,558 (202) 8,468
Mortgage-related securities(1) 500 2,880 135 3,515 925 (1,947) (153) (1,175)
Investment securities(1) 180 967 145 1,292 38 210 8 256
Interest-bearing deposits 91 65 19 175 235 (289) (135) (189)
Federal Home Loan Bank stock 71 272 25 368 27 182 9 218
-----------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets 5,860 13,942 1,035 20,837 (663) 8,714 (473) 7,578
INTEREST-BEARING LIABILITIES
Demand deposits 947 434 134 1,515 (563) (107) 16 (654)
Regular passbook savings 38 (211) (3) (176) (397) (14) 2 (409)
Certificates of deposit 7,973 4,158 942 13,073 (12) 598 0 586
-----------------------------------------------------------------------------------------------
Total deposits 8,958 4,381 1,073 14,412 (972) 477 18 (477)
Notes payable and other borrowings 1,354 4,454 469 6,277 809 4,155 450 5,414
Other 17 (25) (1) (9) (238) 93 (33) (178)
-----------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 10,329 8,810 1,541 20,680 (401) 4,725 435 4,759
-----------------------------------------------------------------------------------------------
Net change in net interest
income $(4,469) $ 5,132 $ (506) $ 157 $ (262) $ 3,989 $ (908) $ 2,819
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
(1) Includes assets held and available for sale.
11
<PAGE>
MANAGEMENT'S DISCUSSION
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
On an unconsolidated basis, the Corporation had cash equivalents of $1.9 million
and loans and real estate held for development and sale of $11.5 million at
March 31, 1996. Principal and interest payments are a predictable source of
funds, but funds from sales of real estate are unpredictable. During fiscal
1996, the Bank made dividend payments of $13.8 million to the Corporation. The
Bank is subject to certain regulatory limitations relative to its ability to pay
dividends to the Corporation. Management believes that the Corporation will not
be adversely affected by these dividend limitations and that projected future
dividends from the Bank will be sufficient to meet the Corporation's liquidity
needs. In addition to dividends from the Bank, the Corporation also could sell
capital stock or debt issues through the capital markets as alternative sources
of funds.
The Bank's primary sources of funds are principal and interest payments on loans
receivable and mortgage-related securities, sales of mortgage loans originated
for sale, Federal Home Loan Bank ("FHLB") advances, deposits and other
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 Bank is required by the Office of Thrift Supervision ("OTS") to maintain
specified levels of liquid investments in qualifying types of U.S. Government
and agency securities and other investments. This requirement, which may be
varied by the OTS, is based upon a percentage of deposits and short-term
borrowings. The required percentage is currently 5.0%. At March 31, 1996 and
1995, the Bank's liquidity ratio was 11.3% and 10.8%, respectively.
Operating activities resulted in a net cash inflow of $16.2 million. Operating
cash flows for fiscal 1996 included earnings of $14.5 million and $178.2 million
realized from the sale of mortgage loans held for sale, less $180.1 million
disbursed for loans originated for sale.
Investing activities in fiscal 1996 resulted in a net cash outflow of $126.9
million. Primary investing activities resulting in cash outflows were $82.0
million for the purchase of securities and $146.2 million for the increase in
net loans receivable. The most significant cash inflows from investing
activities were principal payments of $44.7 million received on mortgage-related
securities, as well as $59.7 million from the proceeds of sales of securities
available for sale.
Financing activities resulted in a net cash inflow of $125.5 million including
a net increase in deposits of $78.0 million, a net increase in borrowings of
$65.0 million and a cash outflow of $19.8 million for treasury stock purchases.
At March 31, 1996, the Corporation had outstanding commitments to originate
$35.5 million of loans, commitments to extend funds to or on behalf of customers
pursuant to lines and letters of credit of $51.4 million, $3.8 million of loans
sold with recourse to the Corporation in the event of default by the borrower
and $2.6 million of financial guarantees provided to holders of certain
industrial revenue bonds. (See Note 13 to the Consolidated Financial
Statements.) Scheduled maturities of certificates of deposit during the twelve
months following March 31, 1996, amounted to $576.8 million and scheduled
maturities of borrowings during the same period totalled $231.1 million. The
Bank has entered into agreements with certain brokers which will provide blocks
of funds at specified interest rates for an identified fee. Management believes
adequate capital and borrowings are available from various sources to fund all
commitments to the extent required.
At March 31, 1996, the Bank's capital exceeded all capital requirements of the
State of Wisconsin and the OTS as mandated by federal law and regulations on
both a current and fully phased-in basis. See Note 10 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
GENERAL Total assets of the Corporation increased $243.6 million or 16.1% from
$1.51 billion at March 31, 1995 to $1.75 billion at March 31, 1996. The
American acquisition accounted for $102.4 million of the increase in total
assets. This increase was primarily funded by net increases in deposits of
$142.7 million and in borrowings of $91.4 million. These funds were generally
invested in loans receivable and mortgage-related securities.
MORTGAGE-RELATED SECURITIES Mortgage-related securities (both available for
sale and held to maturity) increased $60.6 million as a net result of (i)
securities acquired from American of $1.0 million, (ii) exchanges of $96.8
million of loans with the Federal Home Loan Mortgage Corporation for securities
backed by such loans, (iii) purchases of $17.1 million, (iv) principal
repayments and market value adjustments of $45.2 million and (v) sales of $9.1
million. Mortgage-related securities consisted of $186.0 million
mortgage-backed securities and $35.0 million mortgage-derivative securities at
March 31, 1996. See Notes 1 and 3 to the Consolidated Financial Statements.
In October, 1995, the Financial Accounting Standards Board ("FASB") approved a
modification of Statement of Financial Accounting Standards ("SFAS") No. 115
providing that from November 15, 1995, through December 31, 1995, the
Corporation had the one-time opportunity to reconsider its classification of
investment and mortgage-related securities as held to maturity, trading or
available
12
<PAGE>
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
for sale. Accordingly, on December 31, 1995, the Corporation chose to
reclassify certain mortgage-backed securities from held to maturity to available
for sale. At the date of transfer, the amortized cost of the mortgage-backed
securities was $90.4 million. The unrealized gain on those securities at the
time of transfer was $684,000, which is included in unrealized gains/losses
on securities available for sale, net, which is a component of stockholders'
equity. At March 31, 1996, unrealized losses on securities available for
sale, net, amounted to $728,000.
Since mortgage-related securities are asset-backed securities, they are subject
to inherent risks based upon the future performance of the underlying collateral
(i.e., mortgage loans) for these securities. Among these risks are prepayment
risk and interest rate risk. Should general interest rate levels decline, the
mortgage-related securities portfolio would be subject to (i) prepayments as
borrowers typically would seek to obtain financing at lower rates, (ii) a
decline in interest income received on adjustable-rate mortgage-related
securities, and (iii) an increase in fair value of fixed-rate mortgage-related
securities. Conversely, should general interest rate levels increase, the
mortgage-related securities portfolio would be subject to (i) a longer term to
maturity as borrowers would be less likely to prepay their loans, (ii) an
increase in interest income received on adjustable-rate mortgage-related
securities, (iii) a decline in fair value of fixed-rate mortgage-related
securities, and (iv) a decline in fair value of adjustable-rate mortgage-related
securities to an extent dependent upon the level of interest rate increases, the
time period to the next interest rate repricing date for the individual security
and the applicable periodic (annual and/or lifetime) cap which could limit the
degree to which the individual security could reprice within a given time
period.
LOANS RECEIVABLE Total loans (including loans held for sale) increased $141.0
million during fiscal 1996 from $1.234 billion at March 31, 1995, to $1.375
billion at March 31, 1996. The activity included (i) loans acquired from
American of $91.2 million, (ii) originations and purchases of $684.0 million,
(iii) sales of loans held for sale of $274.4 million, which included exchanges
of $96.8 million for mortgage-backed securities and (iv) principal repayments
and other reductions of $359.8 million. The components of the increase in total
loans, including loans held for sale, are summarized by type of loan as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
INCREASE
1996 1995 (DECREASE)
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
FIRST MORTGAGE LOANS:
Single-family residential $ 745,170 $ 716,212 $ 28,958
Multi-family residential 162,432 141,401 21,031
Commercial real estate 139,918 123,438 16,480
Construction and land 98,264 80,163 18,101
-------------------------------------
Total first mortgage loans 1,145,784 1,061,214 84,570
OTHER LOANS:
Second mortgage 140,302 111,725 28,577
Education 88,674 69,264 19,410
Commercial business and leases 30,715 21,739 8,976
Other consumer 28,481 18,997 9,484
-------------------------------------
Total other loans 288,172 221,725 66,447
-------------------------------------
Gross loans receivable 1,433,956 1,282,939 151,017
Less: Net items to loans receivable (72,876) (51,832) (21,044)
-------------------------------------
Net loans receivable $1,361,080 $1,231,107 $129,973
-------------------------------------
-------------------------------------
Loans held for sale $ 13,968 $ 2,964 $ 11,004
-------------------------------------
-------------------------------------
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
Mortgage loans increased $84.6 million during fiscal 1996 primarily as a result
of the acquisition of American. Also, as interest rates fell in fiscal 1996,
borrowers turned to fixed-rate financing. Long-term fixed-rate loans are
generally sold by the Corporation into the secondary market, which is reflected
in the increase in loans held for sale of $11.0 million and the increase in
loans sold during the period of $69.9 million compared to last year.
Consumer loans increased a total of $57.5 million in fiscal 1996 primarily due
to continued success in marketing promotions and new products. The majority of
this increase was in second mortgage loans, including home equity lines of
credit. Consumer loans are seldom sold in the secondary market. For
additional information, see Note 5 to the Consolidated Financial Statements.
NON-PERFORMING ASSETS Non-performing assets (consisting of non-accrual loans,
non-performing real estate held for development and sale, foreclosed properties
and repossessed assets) decreased to $10.3 million or 0.59% of total assets at
March 31, 1996, from $10.5 million or 0.69%, respectively, at March 31, 1995.
Non-performing assets are summarized as follows for the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Single-family residential $ 629 $ 833 $ 565 $ 2,273 $ 2,141
Multi-family residential - - 37 1,593 3,373
Commercial real estate 470 624 617 12,365 14,242
Construction and land 81 81 81 135 195
Consumer 202 219 333 297 138
Commercial business 508 736 831 984 1,399
---------------------------------------------------------------------
Total non-accrual loans 1,890 2,493 2,464 17,647 21,488
Real estate held for development and sale 2,319 857 2,767 4,916 -
Foreclosed properties and repossessed assets, net 6,077 7,116 5,294 2,052 8,661
---------------------------------------------------------------------
Total non-performing assets $ 10,286 $ 10,466 $ 10,525 $ 24,615 $ 30,149
---------------------------------------------------------------------
---------------------------------------------------------------------
Performing troubled debt restructurings $ 332 $ 335 $ 4,687 $ 10,011 $ 9,161
---------------------------------------------------------------------
---------------------------------------------------------------------
Total non-accrual loans to total loans 0.13% 0.19% 0.22% 1.80% 2.25%
Total non-performing assets to total assets 0.59 0.69 0.76 1.90 2.38
Allowance for loan losses to total loans 1.59 1.75 1.98 1.88 1.54
Allowance for loan losses to total
non-accrual loans 1,206.72 899.68 897.69 104.48 68.65
Allowance for loan and foreclosure losses
to total non-performing assets 228.70 221.82 213.42 75.43 55.17
</TABLE>
Non-accrual loans decreased $603,000 during fiscal 1996 with decreases occurring
in all categories. Loans are placed on non-accrual status when, in the judgment
of management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Corporation does not accrue interest on loans past
due more than 90 days.
Non-performing real estate held for development and sale increased $1.5
million during fiscal 1996 as a net result of (i) an increase of $900,000 due
to a multi-family residential property acquired by foreclosure and transferred
to a new Bank subsidiary for improvement and management, (ii) an increase of
$1.4 million in capitalized improvement costs on the above multi-family
property and (iii) a decrease of $857,000 due to the sale of single-family
lots in Arizona. In fiscal 1995, an interest in a limited partnership in San
Antonio, Texas, totalling $1.7 million was classified as non-performing real
extate held for development and sale. This investment subsequently was
reclassified to performing real extate held for development and sale, because
it was determined that htis partnership never met the criteria as
non-performing.
Foreclosed properties and repossessed assets decreased $1.0 million in fiscal
1996 primarily due to the transfer of a $900,000 foreclosed property into a Bank
subsidiary described above. There were two properties in this classification
with a carrying value of greater than $1.0 million. The first was a hotel and
office building in Garden Grove, California. The Bank's share of the net
carrying value of this property amounted to $3.4 million at March 31, 1996.
14
<PAGE>
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
The owners have filed for bankruptcy. The second property was an apartment
complex in Elm Grove, Wisconsin, which formerly secured a $2.2 million loan.
Phase I studies of the environmental impact indicated a need for a Phase II
study based on the history of the property, which the Bank is pursuing. The
Bank believes any cleanup which may be necessary will be partially reimbursed by
the Petroleum Environmental Cleanup Fund, although there can be no assurance in
this regard.
ALLOWANCES FOR LOAN AND FORECLOSURE LOSSES The Corporation's loan portfolio,
foreclosed properties, repossessed assets, loans sold with recourse and off-
balance sheet financial guarantees are evaluated on a continuing basis to
determine the necessity for additions to the allowances for losses and the
related balance in the allowances. These evaluations consider several factors
including, but not limited to, general economic conditions, collateral value,
loan portfolio composition, loan delinquencies, prior loss experience,
anticipated loss of interest and management's estimation of future potential
losses. The evaluation of the allowance for loan losses includes a review of
known loan problems as well as potential loan problems based upon historical
trends and ratios. Foreclosed properties are recorded at the lower of carrying
or fair value with charge-offs, if any, charged to the allowance for loan
losses prior to transfer to foreclosed property. The fair value is primarily
based on appraisals, discounted cash flow analysis (the majority of which are
based on current occupancy and lease rates) and pending offers. A summary of
the activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 22,429 $ 22,119 $ 18,437 $ 14,751 $ 15,830
Acquired bank's allowance 550 - - - -
Provision:
Mortgage 88 1,308 3,189 6,760 4,249
Consumer 182 185 134 87 145
Commercial business 205 87 1,025 568 3,371
---------------------------------------------------------------------
Total provision 475 1,580 4,348 7,415 7,765
---------------------------------------------------------------------
Charge-offs:
Mortgage (439) (1,460) (2,607) (2,749) (6,416)
Consumer (104) (36) (67) (65) (103)
Commercial business (455) (309) (948) (1,343) (2,726)
---------------------------------------------------------------------
Total charge-offs (998) (1,805) (3,622) (4,157) (9,245)
---------------------------------------------------------------------
Recoveries:
Mortgage 298 374 2,809 253 209
Consumer 10 17 14 23 4
Commercial business 43 144 133 152 188
---------------------------------------------------------------------
Total recoveries 351 535 2,956 428 401
---------------------------------------------------------------------
Net charge-offs (647) (1,270) (666) (3,729) (8,844)
---------------------------------------------------------------------
Allowance at end of year $ 22,807 $ 22,429 $ 22,119 $ 18,437 $ 14,751
---------------------------------------------------------------------
---------------------------------------------------------------------
Net charge-offs to average loans
held for sale and for investment (0.05)% (0.11)% (0.06)% (0.38)% (0.89)%
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
The fiscal 1996 provision for loan losses totalled $475,000 as compared to $1.6
million in fiscal 1995. The provision for loan losses for fiscal years 1996
and 1995 remain at significantly lower levels compared to earlier years when
the Bank's charge-off experience from certain portfolio segments required
larger allowances. Those segments were largely multi-family real estate loans
secured by properties in states other than Wisconsin and leases receivable.
The Corporation substantially ceased extending credit in those segments since
the late 1980's. The result of this activity was to retain the allowance for
loan losses at a level considered appropriate by management based on historical
experience, the volume and type of lending conducted, the status of past due
principal and interest payments, general economic conditions and other factors
related to the collectibility of the loan portfolio. Based on current levels
of delinquencies and the current components of loans receivable, management
anticipates 1997 provisions to be similar to those of 1996.
The table below shows the Corporation's total allowance for loan losses and the
allocation to the various categories of loans held for investment at the dates
indicated.
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL
LOANS BY LOANS BY LOANS BY LOANS BY LOANS BY
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
---------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $ 200 0.03% $ 15 -% $ 54 0.01% $ 215 0.04% $ 288 0.06%
Multi-family residential 263 0.16 365 0.26 427 0.30 721 0.41 959 0.53
Commercial real estate 476 0.34 916 0.74 917 0.71 1,931 1.59 872 0.63
Construction and land 4 - 87 0.11 107 0.18 107 0.27 - -
Unallocated mortgage 20,054 1.75 19,186 1.81 18,841 1.98 13,709 1.66 10,299 1.27
---------------------------------------------------------------------------------------------------
Total mortgage loans 20,997 1.83 20,569 1.94 20,346 2.14 16,683 2.02 12,418 1.53
Consumer 802 0.31 645 0.32 479 0.32 398 0.30 354 0.30
Commercial business 1,008 3.28 1,215 5.59 1,294 6.69 1,356 6.39 1,979 6.69
---------------------------------------------------------------------------------------------------
Total allowance for loan
losses $ 22,807 1.59% $22,429 1.75% $22,119 1.98% $18,437 1.88% $14,751 1.54%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
A summary of the activity in the allowance for losses on foreclosed properties
follows. The provision for losses on such properties is included in the
consolidated statements of income in "Net cost of operations of foreclosure
properties."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 787 $ 343 $ 130 $ 1,882 $ 11,895
Provision 200 950 1,225 1,400 750
Charge-offs (270) (506) (1,012) (3,152) (10,763)
---------------------------------------------------------------------
Allowance at end of year $ 717 $ 787 $ 343 $ 130 $ 1,882
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
The fiscal 1996 provision for foreclosure losses totalled $200,000 as compared
to $950,000 for fiscal 1995. Charge-offs declined by $236,000 during the
fiscal year. The Corporation conducts ongoing evaluations of the adequacy of
the allowance for losses, which are based on amounts of foreclosed properties,
recent appraisals, discounted cash flows or pending offers.
Although management believes that the March 31, 1996, allowances for loan and
foreclosed property losses are adequate based upon the current evaluation of
loan delinquencies, non-performing assets, charge-off trends, economic
conditions and other factors, there can be no assurance that future adjustments
to the allowance will not be necessary. Management also continues to pursue all
practical and legal methods of collection, repossession and disposal, as well as
adhering to high underwriting standards in the origination process, in order to
continue to maintain strong asset quality.
DEPOSITS Deposits increased $142.7 million during fiscal 1996 to $1.241
billion, of which $64.9 million was a result of the American acquisition. The
majority of the remaining increase was due to a new market yield demand deposit
account. The weighted average cost of deposits increased to 4.67% at fiscal
year-end 1996 compared to 4.40% at fiscal year-end 1995.
16
<PAGE>
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
BORROWINGS FHLB advances increased $42.4 million during fiscal 1996 to fund the
increased loan activity. At March 31, 1996, advances totalled $316.9 million
with an average interest rate of 5.69%. Reverse repurchase agreements increased
$42.0 million during fiscal 1996 as management diversified its borrowings.
Other loans payable increased $7.0 million resulting from the Corporation and
subsidiary borrowings. For additional information, see Note 9 to the
Consolidated Financial Statements.
STOCKHOLDERS' EQUITY Stockholders' equity at March 31, 1996, was $118.4
million, or 6.75% of total assets, compared to $111.2 million and 7.36%,
respectively, at March 31, 1995. Stockholders' equity increased as a result
of (i) additions due to the American acquisition of $12.5 million, (ii) net
income of $14.5 million, (iii) the repayment of ESOP borrowings of $928,000,
(iv) the exercise of stock options of $306,000, (v) the vesting of recognition
plan shares of $246,000 and (vi) the tax benefit from certain stock options of
$272,000, which were partially offset by (i) the purchase of treasury stock of
$19.8 million, (ii) the payment of cash dividends of $1.7 million and (iii) the
recording of the net unrealized loss on available-for-sale securities of
$82,000.
REGULATORY ISSUES Legislation has been proposed to recapitalize the Savings
Association Insurance Fund through a one-time special assessment. For
additional information on this and other related issues, see Note 15 to the
Consolidated Financial Statements.
ASSET AND LIABILITY MANAGEMENT The primary function of asset and liability
management is to provide liquidity and maintain an appropriate balance between
interest-earning assets and interest-bearing liabilities within specified
maturities and/or repricing dates. Interest rate risk is the imbalance between
interest-earning assets and interest-bearing liabilities at a given maturity or
repricing date, and is commonly referred to as the interest rate gap (the
"gap"). A positive gap exists when there are more assets than liabilities
maturing or repricing within the same time frame. A negative gap occurs when
there are more liabilities than assets maturing or repricing within the same
time frame.
The Corporation's strategy for asset and liability management is to maintain an
interest rate gap that minimizes the impact of interest rate movements on the
net interest margin. As part of this strategy, the Corporation sells
substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, invests in adjustable-rate
or medium-term, fixed-rate, single-family residential mortgage loans, invests in
medium-term mortgage-related securities and invests in consumer loans which
generally have shorter terms to maturity and higher and/or adjustable interest
rates.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates and/or
shorter terms to maturity than conventional single-family residential loans.
Long-term, fixed-rate, single-family mortgage loans originated for sale in the
secondary market are generally committed for sale at the time the interest rate
is locked with the borrower. As such, these loans pose little interest rate
risk to the Corporation.
Although management believes that its asset/liability management strategies
reduce the potential effects of changes in interest rates on the Corporation's
operations, material and prolonged changes in interest rates would adversely
affect the Corporation's operations.
The Corporation's cumulative net gap position at March 31, 1996, for one year
or less was a positive 4.60% of total assets. The calculation of a gap
position requires management to make a number of assumptions as to when an
asset or liability will reprice or mature. Management believes that its
assumptions approximate actual experience and considers them reasonable,
although the actual amortization and repayment of assets and liabilities
may vary substantially.
17
<PAGE>
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
The following table summarizes the Corporation's interest rate sensitivity gap
position as of March 31, 1996.
<TABLE>
<CAPTION>
MORE THAN MORE THAN
WITHIN ONE TO THREE TO MORE THAN
ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
--------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans (1) (2):
Fixed $ 96,850 $ 71,926 $ 26,202 $ 18,405 $ 213,383
Variable 623,666 264,449 10,581 - 898,696
Consumer loans (1) 171,680 60,988 19,754 4,833 257,255
Commercial business loans (1) 25,989 4,218 - - 30,207
Mortgage-related securities (3) 105,190 82,840 22,318 10,650 220,998
Investment securities and other
interest-earning assets (3) 16,584 7,680 16,808 - 41,072
--------------------------------------------------------------------------
Total $ 1,039,959 $ 492,101 $ 95,663 $ 33,888 $ 1,661,611
--------------------------------------------------------------------------
--------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits (4) $ 727,182 $ 326,967 $ 69,692 $ 39,824 $ 1,163,665
Borrowings 232,113 139,320 49 - 371,482
--------------------------------------------------------------------------
Total $ 959,295 $ 466,287 $ 69,741 $ 39,824 $ 1,535,147
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Interest sensitivity gap $ 80,664 $ 25,814 $ 25,922 $ (5,936) $ 126,464
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cumulative interest sensitivity gap $ 80,664 $ 106,478 $ 132,400 $ 126,464
---------------------------------------------------------
---------------------------------------------------------
Cumulative interest sensitivity gap
as a percent of total assets 4.60% 6.07% 7.55% 7.21%
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
(1) Balances have been reduced for (i) undisbursed loan proceeds, which
aggregated $46.5 million, and (ii) non-accrual loans, which amounted to
$1.9 million.
(2) Includes $14.0 million of loans held for sale spread throughout the
periods.
(3) Includes $140.5 million of securities available for sale spread throughout
the periods.
(4) Does not include $71.2 million of demand accounts because they are
non-interest-bearing. Also does not include accrued interest payable,
which amounted to $6.1 million. Projected decay rates for demand deposits
and passbook savings were provided by the OTS.
LITIGATION The Bank is involved in litigation relating to alleged structural
deficiencies of a property located in Vero Beach, Florida. The Bank contracted
for the completion of this property after it was acquired by foreclosure and
converted it into a condominium complex. In January, 1993, the Bank and the
Homeowners Association which represents the condominium owners entered into a
settlement agreement which covers various repairs totalling $500,000 which the
Corporation accrued in September, 1992 and paid in January, 1993, as well as
repairs which are related to the post-tension cable system, an estimated amount
of which was accrued by the Corporation in September, 1993 but has not yet been
paid. Three lawsuits have been filed against the Bank in connection with the
foregoing by various owners of condominiums in the complex and the Homeowners
Association. During fiscal 1996, one trial involving an individual homeowner
was finished, of which the result relieved the Bank of any claim for punitive
and/or general damages, but provided the owner with recision (return of the unit
to the Bank). The Bank is currently considering the alternatives of appeal
and/or negotiated settlement. Based on the outcome of the above described case
and the evaluation of the accruals by the Corporation to date, management does
not believe that the remaining litigation will have a material adverse effect on
the Corporation and the Bank beyond amounts previously provided for.
18
<PAGE>
CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Changes in Stockholders' Equity. . . . . . . . 22
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 25
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . . 44
Management and Audit Committee Report. . . . . . . . . . . . . . . . . . . 44
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1995
------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 35,454 $ 26,096
Federal funds sold 7,525 2,769
Interest-bearing deposits 710 -
------------------------
Cash and cash equivalents 43,689 28,865
Securities available for sale:
Investment securities 30,241 23,532
Mortgage-related securities 110,268 36,571
Securities held to maturity:
Investment securities (fair value of $2.6 million
and $100,000, respectively) 2,596 100
Mortgage-related securities
(fair value of $109.9 million
and $120.4 million, respectively) 110,730 123,830
Loans receivable, net:
Held for sale 13,968 2,964
Held for investment 1,361,080 1,231,107
Foreclosed properties and repossessed assets, net 6,077 7,116
Real estate held for development and sale 13,640 2,581
Office properties and equipment 18,906 17,206
Federal Home Loan Bank stock-at cost 16,019 16,007
Accrued interest on investments and loans 11,549 9,182
Prepaid expenses and other assets 15,793 11,856
------------------------
Total assets $ 1,754,556 $ 1,510,917
------------------------
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,240,958 $ 1,098,210
Advance payments by borrowers for taxes and insurance 7,938 8,751
Notes payable to Federal Home Loan Bank 316,869 274,500
Reverse repurchase agreements 47,582 5,600
Other loans payable 7,031 -
Other liabilities 15,776 12,669
------------------------
Total liabilities 1,636,154 1,399,730
------------------------
------------------------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding - -
Common stock, $.10 par value, 20,000,000 shares
authorized, 6,249,662 shares issued 625 625
Additional paid-in capital 50,086 47,638
Retained earnings 100,191 88,094
Less: Treasury stock (1,315,312 shares and
1,186,170 shares, respectively) (29,298) (21,790)
Deferred compensation due employees (928) (1,200)
Common stock purchased by recognition plans (1,546) (1,534)
Unrealized losses on securities available for
sale, net of tax (728) (646)
------------------------
Total stockholders' equity 118,402 111,187
------------------------
------------------------
Total liabilities and stockholders' equity $ 1,754,556 $ 1,510,917
------------------------
------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
INTEREST INCOME:
Loans $107,436 $ 91,949 $83,481
Mortgage-related securities 14,152 10,637 11,812
Investment securities 3,645 1,985 1,511
Interest-bearing deposits 488 313 502
-------------------------------------------
Total interest income 125,721 104,884 97,306
INTEREST EXPENSE:
Deposits 55,350 40,938 41,415
Notes payable and other borrowings 19,148 12,871 7,457
Other 480 489 667
-------------------------------------------
Total interest expense 74,978 54,298 49,539
-------------------------------------------
Net interest income 50,743 50,586 47,767
Provision for loan losses 475 1,580 4,348
-------------------------------------------
Net interest income after provision for loan losses 50,268 49,006 43,419
NON-INTEREST INCOME:
Loan servicing income 2,741 2,444 2,568
Service charges on deposits 3,175 2,577 2,280
Insurance commissions 700 1,012 928
Net gain (loss) on sale of loans 645 (83) 3,192
Net gain (loss) on sale of securities 247 (47) 99
Other 1,751 1,605 2,039
-------------------------------------------
Total non-interest income 9,259 7,508 11,106
NON-INTEREST EXPENSES:
Compensation 19,067 17,041 16,719
Occupancy 2,800 2,511 2,492
Federal insurance premiums 2,669 2,458 2,108
Furniture and equipment 2,557 2,153 1,870
Data processing 2,133 1,785 1,690
Marketing 1,576 1,659 1,509
Net cost of operations of foreclosure properties 127 220 1,351
Other 6,132 5,206 5,049
-------------------------------------------
Total non-interest expenses 37,061 33,033 32,788
-------------------------------------------
Income before income taxes 22,466 23,481 21,737
Income taxes 7,959 9,064 8,265
-------------------------------------------
Net income $ 14,507 $ 14,417 $13,472
-------------------------------------------
-------------------------------------------
EARNINGS PER SHARE (1):
Primary $ 2.72 $ 2.68 $ 2.32
Fully diluted 2.70 2.66 2.32
</TABLE>
(1) As adjusted for a five-for-four stock split as of October 27, 1995.
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFERRED COMMON STOCK
ADDITIONAL COMPENSATION PURCHASED BY NET
COMMON PAID-IN RETAINED TREASURY DUE RECOGNITION UNREALIZED
STOCK(1) CAPITAL(1) EARNINGS STOCK EMPLOYEES PLANS LOSSES TOTAL
--------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1993 $ 625 $ 47,280 $ 62,933 $ (4,451) $ (2,400) $ (2,000) $ - $ 101,987
Net income - - 13,472 - - - - 13,472
Purchase of treasury stock
(580,044 shares)(1) - - - (10,201) - - - (10,201)
Exercise of stock options - - (236) 531 - - - 295
Cash dividend ($.19 per
share)(1) - - (1,088) - - - - (1,088)
Recognition plan shares vested - - - - - 236 - 236
Tax benefit from stock
related compensation - 24 - - - - - 24
Adjustment for grants in
recognition plan - 16 - - - (16) - -
Repayment of ESOP borrowings - - - - 600 - - 600
Unrealized losses on
available-for-sale securities,
net of tax of $125,000 - - - - - - (188) (188)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1994 625 47,320 75,081 (14,121) (1,800) (1,780) (188) 105,137
Net income - - 14,417 - - - - 14,417
Purchase of treasury stock
(363,751 shares)(1) - - - (8,149) - - - (8,149)
Exercise of stock options - - (214) 480 - - - 266
Cash dividend ($.23 per
share)(1) - - (1,190) - - - - (1,190)
Recognition plan shares vested - - - - - 246 - 246
Tax benefit from stock
related compensation - 318 - - - - - 318
Repayment of ESOP borrowings - - - - 600 - - 600
Change in unrealized losses on
available-for-sale securities,
net of tax of $305,000 - - - - - - (458) (458)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1995 625 47,638 88,094 (21,790) (1,200) (1,534) (646) 111,187
Net income - - 14,507 - - - - 14,507
Purchase of treasury stock
(640,749 shares)(1) - - - (19,756) - - - (19,756)
Exercise of stock options - - (758) 1,064 - - - 306
Cash dividend ($.32 per
share)(1) - - (1,652) - - - - (1,652)
Recognition plan shares vested - - - - - 246 - 246
Tax benefit from stock
related compensation - 272 - - - - - 272
Repayment of ESOP borrowings - - - - 928 - - 928
Purchase of American Equity - 2,187 - 11,184 (656) (258) - 12,457
Stock split fractional shares - (11) - - - - - (11)
Change in unrealized losses on
available-for-sale securities,
net of tax of $55,000 - - - - - - (82) (82)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1996 $ 625 $ 50,086 $ 100,191 $ (29,298) $ (928) $ (1,546) $ (728) $ 118,402
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
(1) As adjusted for a five-for-four stock split as of October 27, 1995.
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,507 $ 14,417 $ 13,472
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans and real estate 675 2,530 5,573
Provision for depreciation and amortization 1,885 1,599 1,373
Loans originated for sale (180,055) (81,711) (411,945)
Proceeds from sales of loans held for sale 178,238 108,329 406,896
Net loss (gain) on sales of loans and securities (892) 130 (3,291)
Decrease (increase) in accrued interest receivables (2,367) (1,638) 1,329
Increase (decrease) in accrued interest payable 442 2,187 (436)
Increase (decrease) in accounts payable 2,392 (2,067) 71
Other 1,410 (6,095) (3,334)
----------------------------------------------------
Net cash provided by operating activities 16,235 37,681 9,708
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale 50,562 18,104 18,895
Proceeds from maturities of investment
securities 8,125 1,996 3,000
Purchase of investment securities available
for sale (62,646) (23,093) (29,465)
Purchase of investment securities held to
maturity (2,500) (100) -
Proceeds from sales of mortgage-related
securities available for sale 9,107 890 31,840
Purchase of mortgage-related securities
available for sale (5,340) (3,498) (13,561)
Purchase of mortgage-related securities
held to maturity (11,561) (15,149) (55,895)
Principal collected on mortgage-related
securities 44,734 44,256 104,187
Net increase in loans receivable (146,808) (185,462) (138,396)
Purchase of office properties and equipment (2,485) (2,809) (2,313)
Sales of office properties and equipment 214 87 218
Sales of real estate 3,407 6,313 6,956
Purchase of real estate held for sale (10,374) (1,655) -
Increase in capitalized expense on real estate (1,368) (496) (3,295)
----------------------------------------------------
Net cash used by investing activities (126,933) (160,616) (77,829)
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
(In Thousands)
FINANCING ACTIVITIES
Increase in deposits $ 77,955 $ 30,858 $ 3,584
Increase (decrease) in advance payments by
borrowers for taxes and insurance (813) 778 882
Proceeds of notes payable to Federal Home
Loan Bank 407,250 368,350 151,750
Repayment of notes payable to Federal Home
Loan Bank (391,195) (280,600) (76,000)
Increase in securities sold under agreements
to repurchase 41,982 5,600 -
Increase in other loans payable 7,031 - -
Treasury stock purchased (19,756) (8,149) (10,201)
Sale of treasury stock for American purchase 3,486 - -
Reissuance of treasury stock for options 306 266 296
Payments of cash dividends to stockholders (1,652) (1,190) (1,088)
Cash repayment of ESOP borrowing 928 600 600
----------------------------------------------------
Net cash provided by financing activities 125,522 116,513 69,823
----------------------------------------------------
Increase (decrease) in cash and cash equivalents 14,824 (6,422) 1,702
Cash and cash equivalents at beginning of year 28,865 35,287 33,585
----------------------------------------------------
Cash and cash equivalents at end of year $ 43,689 $ 28,865 $ 35,287
----------------------------------------------------
----------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 74,536 $ 52,111 $ 49,975
Income taxes 8,370 9,248 10,132
Non-cash transactions:
Mortgage loans transferred to loans held for sale 2,573 13,040 -
Loans transferred to foreclosed properties 1,614 6,680 6,297
Mortgage loans converted into mortgage-backed securities 96,772 - 15,096
Mortgage-related securities transferred to
available for sale (at amortized cost) 90,376 - 40,887
Investment securities transferred to available
for sale (at amortized cost) - - 3,969
American Equity BanCorp purchase:
Investment securities available for sale (2,390) - -
Mortgage-related securities available for sale 954 - -
Loans held for sale (5,969) - -
Loans receivable (85,244) - -
Office properties and equipment (1,314) - -
Federal Home Loan Bank stock (1,346) - -
Other assets (4,022) - -
Deposits 64,803 - -
Notes payable to Federal Home Loan Bank 26,314 - -
Other liabilities 1,038 - -
Treasury stock issued 7,698 - -
Other stockholders' equity 1,273 - -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BUSINESS Anchor BanCorp Wisconsin Inc. (the "Corporation") is a Wisconsin
corporation incorporated in March, 1992 for the purpose of becoming a savings
and loan holding company for AnchorBank, S.S.B. (the "Bank"), a wholly-owned
subsidiary. On July 15, 1992, the Bank converted from a mutual to a stock
form of ownership and the Corporation completed its initial public offering.
The Bank provides a full range of financial services to individual customers
through its branch locations in Wisconsin. The Bank is subject to competition
from other financial institutions and other financial service providers. The
Corporation and its subsidiary also are subject to the regulations of certain
federal and state agencies and undergo periodic examinations by those
regulatory authorities. The Corporation created a non-banking subsidiary in
fiscal 1996, Investment Directions, Inc., which has invested in a limited
partnership located in Austin, Texas.
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts and operations of the Corporation, the Bank and the
Bank's subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated. Investments in joint ventures
and other less than 50% owned partnerships, which are not material, are
accounted for on the equity method. Partnerships over 50% ownership are
consolidated, with significant intercompany accounts eliminated.
The average number of shares outstanding for 1995 and 1994 has been adjusted to
reflect the five-for-four stock split distributed in October, 1995. Cash
dividends per share were also restated.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses, the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans, as well as the valuation of intangible assets,
investments, mortgage-related securities and mortgage servicing rights. In
connection with the determination of the allowance for loan losses and real
estate owned, management obtains independent appraisals for significant
properties.
CASH AND CASH EQUIVALENTS The Corporation considers federal funds sold and
interest-bearing deposits that have original maturities of three months or less
to be cash equivalents.
INVESTMENT AND MORTGAGE-RELATED SECURITIES HELD TO MATURITY AND AVAILABLE FOR
SALE Securities are classified as held to maturity when the Corporation has the
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Securities not classified as held to
maturity are classified as available for sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of stockholders' equity. At March 31, 1996 and
1995, the balances of stockholders' equity were decreased by $82,000 and
$458,000, net of $55,000 and $305,000 in deferred income taxes. See Notes 3 and
4. No securities are held by the Corporation in a trading account.
In October, 1995, the Financial Accounting Standards Board ("FASB") approved a
modification of Statement of Financial Accounting Standards ("SFAS") No. 115,
wherein from November 15, 1995, through December 31, 1995, the Corporation had
the opportunity to reconsider its classifications of investment and
mortgage-related securities as held to maturity, trading, or available for
sale. Accordingly, on December 31, 1995, the Corporation chose to reclassify
certain mortgage-backed securities from held to maturity to available for sale.
At the date of transfer, the amortized cost of the mortgage-backed securities
was $90,376,000. The unrealized gain on those securities was $684,000, which is
included in stockholders' equity net of income tax effect of $274,000.
The amortized cost of securities classified as held to maturity or available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity, or in the case of mortgage-related securities, over the estimated life
of the security. Such amortization is included in interest income from the
related security.
Realized gains and losses, and the decline in value judged to be other than
temporary, are included in "Net gain (loss) on sale of securities" in the
consolidated statements of income. The cost of securities sold is based on the
specific identification method.
LOANS HELD FOR SALE Loans held for sale generally consist of current
production of certain fixed-rate mortgage loans and certain adjustable-rate
mortgage loans which are carried at the lower of aggregate cost or market
value. Fees received from the borrower and direct costs to originate are
deferred and recorded as an adjustment of the sales price. Any premium or
discount recorded at the time of sale (reflecting the present value of the
difference between the contractual interest rate of the loans sold and the
yield to the investor, adjusted for an estimated normal servicing fee) is
recognized in loan servicing income over the
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
estimated lives of the related loans using the level yield method adjusted
periodically for prepayments. The servicing fee on loans sold to and serviced
for others is recognized when the related loan payments are received.
INTEREST ON LOANS Interest on loans is recorded using the accrual method.
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of principal and interest is deemed to be insufficient
to warrant further accrual. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from income. Interest
received on non-accrual loans generally is either applied against principal or
reported as interest income, according to management's judgment as to the
collectibility of principal. Generally, loans are restored to accrual status
when the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt. Allowances of $868,000 and $331,000 were established at March 31, 1996
and 1995, respectively, for interest on non-accrual status loans.
LOAN FEES AND DISCOUNTS Loan origination and commitment fees and certain
direct loan origination costs are deferred and the net amount is amortized as
an adjustment to the related loans' yield. The Corporation is amortizing these
amounts, as well as discounts on purchased loans, using the level yield method,
adjusted for prepayments, over the contractual life of the related loans.
FORECLOSED PROPERTIES AND REPOSSESSED ASSETS Real estate (which was acquired
by foreclosure or by deed in lieu of foreclosure) and other repossessed assets
are carried at the lower of cost or fair value, less estimated selling
expenses. Costs relating to the development and improvement of the property
are capitalized; holding period costs are charged to expense. Gains on sales
are recognized based on the carrying value when the earnings process is
substantially complete. Losses on sales not previously provided for are
recognized upon closing of the sale.
ALLOWANCE FOR LOSSES Allowances for losses on loans, lease receivables,
foreclosed properties and repossessed assets are established when a loss is
probable and can be reasonably estimated. Management's evaluation of loss
considers various factors including, but not limited to, general economic
conditions, the level of troubled assets, expected future cash flows, loan
portfolio composition, prior loss experience, estimated sales price of the
collateral and holding and selling costs. The evaluation is inherently
subjective as it requires material estimates including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
susceptible to significant change. Management believes that the allowances for
losses on loans, lease receivables, foreclosed properties and re-possessed
assets are adequate. While management uses available information to recognize
losses, future additions to the allowances may be necessary based on changes in
economic conditions.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE Real estate held for development and
sale includes investments in partnerships which purchased land and other
property and also an investment in multi-family residential property. These
investments are carried at the lower of initial cost plus capitalized
development period costs and interest, less accumulated depreciation, or
estimated fair value.
OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are recorded at
cost and include expenditures for new facilities and items that substantially
increase the useful lives of existing buildings and equipment. Expenditures for
normal repairs and maintenance are charged to operations as incurred. When
properties are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recorded in income.
DEPRECIATION AND AMORTIZATION The cost of office properties and equipment is
being depreciated principally by the straight-line method over the estimated
useful lives of the assets. The cost of leasehold improvements is being
amortized on the straight-line method over the lessor of the term of the
respective lease or estimated economic life.
POSTRETIREMENT EMPLOYEE BENEFIT A limited number of former officers and
directors are provided certain post-retirement health care insurance benefits.
The Corporation has established an accrual representing the present value of
these benefits. The amount of this accrual is reported in "Other liabilities"
on the consolidated balance sheet and is insignificant to current operations
and cumulative earnings.
INCOME TAXES The Corporation provides for income taxes using the liability
method. Under this method, financial statement provisions are made in the
income tax expense accounts for deferred taxes applicable to income and expense
items reported in different periods than for income tax purposes. This policy
also requires that deferred tax assets and liabilities be adjusted regularly to
amounts estimated to be receivable or payable based on current tax law and the
Corporation's tax status. Consequently, tax expense in future years may be
impacted by changes in tax rates and return limitations.
EARNINGS PER SHARE Primary and fully diluted earnings per share are based on
the weighted average number of common shares outstanding during each period and
common equivalent shares (using the treasury stock method) outstanding at the
end of each period. The Corporation's common equivalent shares consist entirely
of stock options. The resulting number of shares used in
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
computing primary earnings per share for the years ended March 31, 1996, 1995
and 1994 is 5,341,652, 5,387,000 and 5,806,000, respectively. The resulting
number of shares used in computing fully diluted earnings per share for the
years ended March 31, 1996, 1995 and 1994 is 5,369,046, 5,412,000 and 5,815,000,
respectively.
PENDING ACCOUNTING CHANGE SFAS No. 122, "Accounting For Mortgage Servicing
Rights, an Amendment of SFAS No. 65," is being adopted prospectively effective
April 1, 1996. SFAS No. 122 requires the cost of originating mortgage servicing
rights to be capitalized separately from the cost of originating a loan, when a
definitive plan to sell or securitize the loan and retain the mortgage servicing
rights exists. Once recorded, mortgage servicing rights are amortized in
proportion to expected net servicing income. The effect of this adoption will
depend on the volume of loan sales which is affected by future interest rate
levels and other factors.
RECLASSIFICATIONS Certain 1995 and 1994 accounts have been reclassified to
conform to the 1996 presentations.
NOTE 2 - BUSINESS COMBINATIONS
- -------------------------------------------------------------------------------
On June 30, 1995, the Corporation acquired American Equity BanCorp ("American")
of Stevens Point, Wisconsin. In the acquisition, 474,753 shares of the
Corporation's common stock were issued to American stockholders based upon an
exchange ratio of .976 shares of the Corporation's common stock for each
outstanding share of American's common stock. Upon closing, American's
wholly-owned subsidiary, American Equity Bank, F.S.B. ("American Bank") was
merged into the Bank as a branch office. American was merged into the
Corporation. The transaction was accounted for as a purchase. The assets and
liabilities of American were recorded at their estimated fair value at the date
of acquisition; results of operations were included in the Consolidated
Statement of Income since July 1, 1995. Prior to purchase accounting entries,
American had total assets, deposits and stockholders' equity of $102.4 million,
$65.3 million and $9.4 million, respectively.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and fair values of investment securities are as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
AT MARCH 31, 1996:
Available for Sale:
U.S. Government and federal agency obligations $20,498 $ 70 $(235) $20,333
Mutual funds 9,059 -- (1) 9,058
Corporate stock and other 791 59 -- 850
--------------------------------------------------
$30,348 $129 $(236) $30,241
--------------------------------------------------
--------------------------------------------------
Held to Maturity:
U.S. Government and federal agency obligations $ 2,500 $ 5 $ (2) $ 2,503
Certificates of deposit 96 -- -- 96
--------------------------------------------------
$ 2,596 $ 5 $ (2) $ 2,599
--------------------------------------------------
--------------------------------------------------
AT MARCH 31, 1995:
Available for Sale:
U.S. Government and federal agency obligations $13,733 $ 59 $(445) $13,347
Mutual funds 10,185 -- -- 10,185
--------------------------------------------------
$23,918 $ 59 $(445) $23,532
--------------------------------------------------
--------------------------------------------------
Held to Maturity:
Certificates of deposit $ 100 $ -- $ -- $ 100
--------------------------------------------------
--------------------------------------------------
</TABLE>
Proceeds from sales of investment securities available for sale during the
years ended March 31, 1996, 1995 and 1994 were $50,562,000, $18,104,000 and
$18,895,000, respectively. Gross gains of $31,000, zero and $48,000 were
realized on those sales in the respective periods. Gross losses of $28,000,
$44,000 and $95,000 were also realized in the respective periods.
The amortized cost and fair value of investment securities by contractual
maturity at March 31, 1996, are shown below (in thousands). Actual
maturities may differ from contractual maturities because issuers have the
right to call or prepay obligations with or without call or prepayment
penalties.
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------
Due in one year or less $ 9,059 $ 9,058 $ 96 $ 96
Due after one year through five years 20,598 20,433 2,500 2,503
Corporate stock 691 750 -- --
--------------------------------------
$30,348 $30,241 $2,596 $2,599
--------------------------------------
--------------------------------------
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - MORTGAGE-RELATED SECURITIES
- -------------------------------------------------------------------------------
The amortized cost and fair values of mortgage-related securities are as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
AT MARCH 31, 1996:
Available for Sale:
Mortgage-derivative securities $ 7,362 $ -- $ (107) $ 7,255
Mortgage-backed securities 104,013 234 (1,234) 103,013
--------------------------------------------------
- - $111,375 $234 $(1,341) $110,268
--------------------------------------------------
--------------------------------------------------
Held to Maturity:
Mortgage-derivative securities $ 27,738 $ 20 $ (578) $ 27,180
Mortgage-backed securities $ 82,992 458 (773) $ 82,677
--------------------------------------------------
$110,730 $478 $(1,351) $109,857
--------------------------------------------------
--------------------------------------------------
AT MARCH 31, 1995:
Available for Sale:
Mortgage-derivative securities $ 11,758 $ 1 $ (206) $ 11,553
Mortgage-backed securities 25,504 19 (505) 25,018
--------------------------------------------------
$ 37,262 $ 20 $ (711) $ 36,571
--------------------------------------------------
--------------------------------------------------
Held to Maturity:
Mortgage-derivative securities $ 25,490 $ -- $ (932) $ 24,558
Mortgage-backed securities 98,340 45 (2,569) 95,816
---------------------------------------------------
$123,830 $ 45 $(3,501) $120,374
---------------------------------------------------
---------------------------------------------------
</TABLE>
Proceeds from sales of mortgage-related securities available for sale during the
years ended March 31, 1996, 1995 and 1994 were $9,107,000, $890,000 and
$31,840,000, respectively. Gross gains of $248,000, $1,000 and $166,000 were
realized on those sales in the respective periods. Gross losses of $4,000,
$4,000 and $20,000 were also realized in the respective periods.
Mortgage-related securities are backed by governmental agencies, including the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association and the Government National Mortgage Association. Mortgage-
derivative securities are made up of real estate mortgage investment conduits
with estimated average lives of five years or less.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE
- -------------------------------------------------------------------------------
Loans receivable held for investment consist of the following (in thousands):
MARCH 31,
--------------------------
1996 1995
--------------------------
First mortgage loans:
Single-family residential $ 745,170 $ 716,212
Multi-family residential 162,432 141,401
Commercial real estate 139,918 123,438
Construction 77,187 66,519
Land 21,077 13,644
--------------------------
1,145,784 1,061,214
Second mortgage loans 140,302 111,725
Education loans 88,674 69,264
Commercial business loans and leases 30,715 21,739
Credit cards and other consumer loans 28,481 18,997
--------------------------
1,433,956 1,282,939
Less:
Undisbursed loan proceeds 46,493 25,980
Allowance for loan losses 22,807 22,429
Unearned loan fees 2,453 2,000
Discount on purchased loans 1,005 1,151
Unearned interest 118 272
--------------------------
72,876 51,832
--------------------------
$1,361,080 $1,231,107
--------------------------
--------------------------
Loans serviced for investors approximated $874,081,000, $732,414,000 and
$693,749,000 at March 31, 1996, 1995 and 1994, respectively. These loans are
not reflected in the consolidated financial statements.
A summary of the activity in the allowance for loan losses follows (in
thousands):
YEAR ENDED MARCH 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Balance at beginning of year $ 22,429 $ 22,119 $ 18,437
Acquired bank's allowance 550 -- --
Provisions 475 1,580 4,348
Charge-offs (998) (1,805) (3,622)
Recoveries 351 535 2,956
--------------------------------------
Balance at end of year $ 22,807 $ 22,429 $ 22,119
--------------------------------------
--------------------------------------
A substantial portion of the Bank's loans are collateralized by real estate in
and around Dane County, Wisconsin. Accordingly, the ultimate collectibility of
a substantial portion of the loan portfolio is susceptible to changes in market
conditions in that area.
Impaired loans as defined under SFAS No. 114 are immaterial and no separate
disclosure was deemed necessary.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
- -------------------------------------------------------------------------------
Foreclosed properties, repossessed assets and properties subject to redemption
are summarized as follows (in thousands):
MARCH 31,
--------------
1996 1995
---------------
Foreclosed properties and repossessed assets $ 786 $ 483
Properties subject to redemption 6,008 7,420
---------------
6,794 7,903
Less allowance for losses 717 787
---------------
$6,077 $7,116
---------------
---------------
The summary of the activity in the allowance for losses follows (in thousands):
YEAR ENDED MARCH 31,
------------------------------
1996 1995 1994
------------------------------
Balance at beginning of year $ 787 $ 343 $ 130
Provision 200 950 1,225
Charge-offs (270) (506) (1,012)
------------------------------
Balance at end of year $ 717 $ 787 $ 343
------------------------------
------------------------------
Provision for losses on foreclosed properties and repossessed assets are
included in "Net cost of operations of foreclosure properties" in the
consolidated statements of income.
NOTE 7 - OFFICE PROPERTIES AND EQUIPMENT
- --------------------------------------------------------------------------------
Office properties and equipment are summarized as follows (in thousands):
MARCH 31,
-----------------
1996 1995
-----------------
Land and land improvements $ 3,951 $ 3,395
Office buildings 15,623 13,931
Furniture and equipment 14,180 12,136
Leasehold improvements 2,084 2,106
Parking ramp 1,573 1,573
Property for future expansion 126 317
-----------------
37,537 33,458
Less allowance for depreciation and amortization 18,631 16,252
-----------------
$18,906 $17,206
-----------------
-----------------
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEPOSITS
- -------------------------------------------------------------------------------
Deposits are summarized as follows (dollars in thousands):
MARCH 31,
----------------------------------------
1996 1995
----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------------------------------------
Negotiable order of withdrawal
("NOW") accounts:
Non-interest-bearing $ 71,213 --% $ 46,529 --%
Interest-bearing 53,852 1.50 52,209 1.50
Variable rate 14,721 1.99 12,661 1.79
--------- ---------
139,786 0.79 111,399 0.91
Variable rate insured money
market accounts 143,189 4.15 64,635 2.68
Passbook accounts 106,092 2.30 105,001 2.28
Certificates of deposit:
3.00% to 4.99% 122,367 4.79 368,419 4.52
5.00% to 6.99% 705,945 5.81 349,201 5.57
7.00% to 8.99% 17,499 7.18 93,465 7.27
--------- ----------
845,811 5.69 811,085 5.29
--------- ---------
1,234,878 4.67% 1,092,120 4.40%
---- ----
---- ----
Accrued interest on deposits 6,080 6,090
---------- ----------
$1,240,958 $1,098,210
---------- ----------
---------- ----------
A summary of annual maturities of certificates of deposit follows (in
thousands):
MATURES DURING YEAR ENDED MARCH 31, AMOUNT
- --------------------------------------------------------------------------------
1997 $576,757
1998 206,533
1999 33,311
Thereafter 29,210
--------
$845,811
--------
--------
At March 31, 1996 and 1995, certificates of deposit with balances greater than
or equal to $100,000 amounted to $68,525,000 and $40,043,000, respectively.
These deposits had scheduled maturity dates as follows (in thousands):
MARCH 31,
-----------------------
1996 1995
-----------------------
Three months or less $11,588 $12,293
Over three through six months 7,324 6,316
Over six through twelve months 38,547 13,163
Over twelve months 11,066 8,271
-----------------------
$68,525 $40,043
-----------------------
-----------------------
Interest expense on deposits consists of the following (in thousands):
YEAR ENDED MARCH 31,
--------------------------------
1996 1995 1994
--------------------------------
NOW accounts $ 1,126 $ 1,110 $ 1,364
Variable rate insured money market accounts 3,451 1,952 2,352
Passbook accounts 2,498 2,674 3,083
Certificates of deposit 48,275 35,202 34,616
--------------------------------
$55,350 $40,938 $41,415
--------------------------------
--------------------------------
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - BORROWINGS
- -------------------------------------------------------------------------------
The Bank enters into sales of securities (primarily mortgage-backed
securities) under agreements to repurchase the securities ("reverse repurchase
agreements"). These agreements are treated as financings with the obligations
to repurchase securities reflected as a liability and the dollar amount of
securities underlying the agreements remaining in the asset accounts. The
securities underlying the agreements are held by the counter-party brokers in
the Bank's account. At March 31, 1996 and 1995, liabilities recorded under
agreements to repurchase the identical securities were $47,582,000 and
$5,600,000, respectively. The reverse repurchase agreements had a
weighted-average interest rate of 5.32% and 6.72% at March 31, 1996 and 1995,
respectively, and mature within one year of the fiscal year-end. Based upon
month-end balances, securities sold under agreements to repurchase averaged
$35,352,000 and $467,000 during 1996 and 1995, respectively. The maximum
outstanding at any month-end was $72,850,000 and $5,600,000 during 1996 and
1995, respectively. The agreements were collateralized by mortgage-backed
securities available for sale with market values of $72,747,000 and $6,046,000
at March 31, 1996 and 1995, respectively.
Federal Home Loan Bank ("FHLB") advances and other loans payable consist of the
following (dollars in thousands):
MARCH 31, 1996 MARCH 31, 1995
---------------------------------------------------------
MATURES DURING WEIGHTED WEIGHTED
YEAR ENDED MARCH 31, AMOUNT RATE AMOUNT RATE
---------------------------------------------------------
FHLB advances: 1996 $ -- --% $132,750 5.67%
1997 177,500 5.71 99,000 5.94
1998 109,370 5.75 25,250 5.41
1999 29,950 5.34 17,500 5.14
2000 49 5.78 -- --
Other loans payable 1997 5,998 10.08 -- --
Subsidiary mortgage 2005 1,033 9.13 -- --
------- --------
$323,900 5.78% $274,500 5.71%
----------------------------------
----------------------------------
The Bank is required to maintain unencumbered first mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the FHLB as collateral. In addition, these notes are collateralized by FHLB
stock of $16,019,000 at March 31, 1996.
Other loans payable are payable in quarterly installments ranging from $500,000
to $1,500,000. Interest at the lender's prime rate is payable monthly. Under
the terms of the indenture relating to the loan, the ability of the Corporation
to incur additional indebtedness is limited under certain circumstances. The
indenture does not limit the ability of the Bank to incur indebtedness. The
subsidiary mortgage is payable in principal and interest payments beginning in
June, 1996 at an initial interest rate of 9.125% which is fixed for three years.
The final maturity date is October, 2005.
NOTE 10 - STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The Board of Directors declared a five-for-four stock split of the Corporation's
common stock to stockholders of record on October 13, 1995, payable on October
27, 1995. This stock split was effected in the form of a 25% stock dividend by
the distribution of shares. The par value of the common stock remained at
$0.10.
The Board of Directors of the Corporation is authorized to issue preferred stock
in series and to establish the voting powers, other special rights of the shares
of each such series and the qualifications and restrictions thereof. Preferred
stock may rank prior to the common stock as to dividend rights, liquidation
preferences or both, and may have full or limited voting rights. Under
Wisconsin state law, preferred stockholders would be entitled to vote as a
separate class or series in certain circumstances, including any amendment which
would adversely change the specific terms of such series of stock or which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. No preferred stock has been issued.
Under federal law and regulations, the Bank is required to meet certain
tangible, core and risk-based capital requirements. Tangible capital generally
consists of stockholders' equity minus certain intangible assets. Core capital
generally consists of tangible capital plus qualifying intangible assets. The
risk-based capital requirements address credit risk related to both recorded and
off-balance sheet commitments and obligations. As a state-chartered savings
institution, the Bank is also subject to the minimum regulatory capital
requirements of the State of Wisconsin.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
The following table summarizes the Bank's capital ratios and the ratios required
by The Office of Thrift Supervision ("OTS") and the State of Wisconsin at March
31, 1996 (dollars in thousands):
<TABLE>
<CAPTION> STATE OF
TANGIBLE CORE RISK-BASED WISCONSIN
CAPITAL CAPITAL CAPITAL CAPITAL
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Bank's stockholder's equity $ 107,822 $ 107,822 $ 107,822 $ 107,822
Adjustment for SFAS No. 115 capital component 763 763 763 --
Goodwill and other (2,598) (2,598) (2,757) --
Allowable unallocated general loss allowance -- -- 13,345 21,546
-----------------------------------------------------------
Total regulatory capital 105,987 105,987 119,173 129,368
Required amount 26,070 52,141 84,758 104,392
-----------------------------------------------------------
Excess $ 79,917 $ 53,846 $ 34,415 $ 24,976
-----------------------------------------------------------
Regulatory capital ratio 6.10% 6.10% 11.25% 7.44%
Required ratio 1.50 3.00 8.00 6.00
-----------------------------------------------------------
Excess 4.60% 3.10% 3.25% 1.44%
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
The OTS has adopted a final rule, which was effective in 1994, disallowing any
new core deposit intangibles, acquired after the rule's effective date, from
counting as regulatory capital. Core deposit intangibles acquired prior to the
effective date have been grandfathered for purposes of this rule. The OTS also
has proposed to increase the minimum required core capital ratio from the
current 3.00% to a range of 4.00% to 5.00% for all but the most healthy
financial institutions. The OTS has added an interest rate risk calculation
such that an institution with a measured interest rate risk exposure, as
defined, greater than specified levels must deduct an interest rate risk
component when calculating the OTS risk-based capital. Final implementation of
this rule was pending at March 31, 1996. Management does not believe these
rules will significantly impact the Bank's ability to meet the capital
requirements.
Under the terms of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the Bank is further subject to the prompt corrective action
("PCA") provisions of FDICIA. Under FDICIA, thrift institutions are assigned,
based upon regulatory capital ratios and other subjective supervisory criteria,
to one of five PCA categories, ranging from "well capitalized" to "critically
undercapitalized." Institutions assigned to the three lowest categories are
subject to PCA sanctions by the OTS. PCA sanctions include, among other items,
additional restrictions on dividends and capital distributions. As of March 31,
1996, management believes that the Bank had capital in excess of the
requirements to be a "well capitalized" institution under the PCA provisions of
FDICIA.
Applicable rules and regulations of the OTS impose limitations on dividends paid
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 amount is 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 (i) 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
(ii) 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. In addition, as a result of
the PCA provisions of FDICIA, the OTS has indicated that it intends to review
existing regulations on dividends to determine whether amendments are necessary
based on such provisions. In the interim, the OTS has indicated that it intends
to determine the permissibility of dividends consistent with the PCA provisions
of FDICIA.
Unlike the Bank, the Corporation is not subject to these regulatory restrictions
on the payment of dividends to its stockholders. However, the source of its
future corporate dividends may depend upon dividends from the Bank.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
The Corporation maintains a defined contribution plan that covers substantially
all employees with more than one year of service and who are at least 21 years
of age. Participating employees may contribute up to 18% (8% before tax and 10%
after tax) of their compensation. The Corporation must match the amounts
contributed by each participating employee up to 2% of the employee's
compensation and 25% of each employee's contributions up to the next 4% of
compensation. The Corporation may also contribute additional amounts at its
discretion. The Corporation's contribution was $307,000, $272,000 and $249,000
for the years ended March 31, 1996, 1995 and 1994, respectively.
In conjunction with the Bank's conversion, the Corporation formed an Employee
Stock Ownership Plan ("ESOP"). The ESOP covers substantially all employees with
more than one year of employment and who are at least 21 years of age. The ESOP
borrowed $3,000,000 from the Corporation to purchase 375,000 common shares
issued in the conversion. The Bank will make scheduled cash contributions to
the ESOP sufficient to service the amount borrowed. Shares are released based
on the ratio of the current year principal and interest paid on the ESOP loan
to the total principal and interest estimated to be due for the remaining
life of the loan, applied against the remaining unreleased shares. Any
discretionary contributions to the ESOP and the shares calculated to be
released from the suspense account are allocated among participants on the
basis of compensation. Forfeitures are reallocated among remaining
participating employees. The unpaid balance of the ESOP loan is reflected as
a reduction of stockholders' equity in the Corporation's consolidated balance
sheets. During fiscal 1996, as part of the acquisition of American, the
Corporation acquired the existing ESOP of American, originally established by
American in 1992. The plan's 36,791 shares and $656,426 in debt were merged
into the existing ESOP. The ESOP plan expense for the fiscal years 1996, 1995
and 1994 was $1,074,000, $746,000 and $740,000, which was the amount of
principal ($928,000, $600,000 and $600,000, respectively) and interest
($146,000, $146,000 and $140,000, respectively) due on the ESOP
debt as of March 31, 1996, 1995 and 1994, respectively. The dividends on ESOP
shares were used to purchase additional shares to be allocated under the
plan. The number of shares allocated to participants is determined based on
the annual contribution plus any shares purchased from dividends received
during the year.
The activity in the number of ESOP shares follows (1995 and 1994 shares have
been restated for the stock split):
YEAR ENDED MARCH 31,
----------------------------
1996 1995 1994
----------------------------
Balance at beginning of year 377,475 379,238 376,161
Additional shares purchased 36,791 2,225 3,077
Shares distributed for terminations -- (276) --
Sale of shares for cash distributions (4,625) (3,712) --
----------------------------
Balance at end of year 409,641 377,475 379,238
Allocated shares included above 329,620 236,752 162,092
----------------------------
Unreleased shares 80,021 140,723 217,146
----------------------------
----------------------------
The Corporation also formed four Management Recognition Plans ("MRPs") which
acquired a total of 4% of the shares of common stock in the conversion. The
Bank contributed $2,000,000 to the MRPs to enable the MRP trustee to acquire a
total of 250,000 shares of common stock in the conversion. Of these shares,
1,200 shares and 1,625 shares were awarded during the years ended March 31, 1996
and 1994, respectively, to employees in management positions in order to provide
them with a proprietary interest in the Corporation in a manner designed to
encourage such employees to remain with the Corporation. There were no
additional grants during the year ended March 31, 1995. The $2,000,000
contributed to the MRPs is being amortized to compensation expense as the Bank's
employees become vested in the awarded shares, which is generally over five
years. During fiscal 1996, as part of the acquisition of American, the
Corporation acquired the existing MRP of American, originally established by
American in 1992. The plan was merged into one of the existing MRPs. The amount
amortized to expense was $287,000, $246,000 and $238,000 for the years ended
March 31, 1996, 1995 and 1994, respectively. Shares becoming vested during
the years ended March 31, 1996, 1995 and 1994 and distributed to the
employees totalled 30,041, 30,041 and 29,500, respectively. The remaining
unamortized cost of the MRPs, which is comparable to deferred compensation,
is reflected as a reduction of stockholders' equity.
The Corporation also has stock option plans under which shares of common stock
are reserved for the grant of both incentive and non-incentive stock options to
directors, officers and employees. The Corporation follows the intrinsic value
method of accounting. Therefore, because the plan provides that option prices
will not be less than the fair market value of the stock at the grant date, no
compensation expense is recorded as a result of these options. The date on
which the options are first exercisable is determined by a committee of the
Board of Directors of the Corporation. The options expire no later than ten
years from the grant date.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLANS (CONT'D)
- --------------------------------------------------------------------------------
A summary of stock options activity follows:
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------------------------------
Balance at April 1, 1993 363,125 $ 8.00
Granted 26,063 17.60
Exercised (36,813) 8.00
Cancelled --
--------------------------------
Balance at March 31, 1994 352,375 8.00 - $17.60
Granted 64,688 21.60 - 22.10
Exercised (33,313) 8.00
Cancelled --
--------------------------------
Balance at March 31, 1995 383,750 8.00 - 22.10
Granted 210,270 8.20 - 26.10
Exercised (36,851) 8.00 - 14.76
Cancelled (3,750) 8.00 - 26.10
--------------------------------
Balance at March 31, 1996 553,419 $ 8.00 - $26.10
--------------------------------
--------------------------------
During the years ended March 31, 1996 and 1995, 260,329 shares and 94,781 shares
were exercisable, respectively. At March 31, 1996, options for 479,250 shares
were available for future grants.
During the year ended March 31, 1994, the Corporation adopted two deferred
compensation plans to benefit certain executives of the Corporation and the
Bank. The first plan provides for contributions by both the participant and the
Corporation equal to the amounts in excess of limitations imposed by the
Internal Revenue Code amendment of 1986. The expense associated with this plan
for fiscal 1996, 1995 and 1994 was $134,000, $184,000 and $108,000,
respectively. The second plan provides for contributions by the Corporation to
supplement the participant's retirement. The expense associated with this plan
for fiscal 1996, 1995 and 1994 was $534,000, $133,000 and $100,000,
respectively.
NOTE 12 - INCOME TAXES
- --------------------------------------------------------------------------------
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns.
The Bank qualifies under provisions of the Internal Revenue Code which permit as
a deduction from taxable income allowable bad debt deductions which, in prior
years, significantly exceeded actual losses and the financial statement loan
loss provisions. Amounts accumulated in excess of the base year level, as
defined by the Internal Revenue Service, are treated as temporary timing
differences. The amount of the base year reserves is considered to meet the
indefinite reversal criteria of Accounting Principle Board Opinion No. 23,
"Accounting for Income Taxes -- Special Areas," and, accordingly, is not
subject to deferred taxes. The Bank's base year tax bad debt reserves are
approximately $28,245,000. Income taxes of approximately $11,300,000 would be
imposed if the Bank were to use these reserves for any purpose other than to
absorb bad debt losses.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES (CONT'D)
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes consists of the following (in
thousands):
YEAR ENDED MARCH 31,
----------------------------------
1996 1995 1994
----------------------------------
Current:
Federal $ 6,629 $ 8,869 $ 8,751
State 1,038 1,458 1,419
----------------------------------
7,667 10,327 10,170
Deferred:
Federal 276 (1,076) (1,635)
State 16 (187) (270)
----------------------------------
292 (1,263) (1,905)
----------------------------------
$ 7,959 $ 9,064 $ 8,265
----------------------------------
----------------------------------
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
YEAR ENDED MARCH 31,
----------------------------------
1996 1995 1994
----------------------------------
Income before income taxes $ 22,466 $ 23,481 $ 21,737
----------------------------------
Income tax expense at federal statutory
rate of 35% $ 7,863 $ 8,218 $ 7,608
State income taxes, net of federal income
tax benefits 725 791 756
Reduction in valuation allowance (600) -- --
Other (29) 55 (99)
----------------------------------
Income tax provision $ 7,959 $ 9,064 $ 8,265
----------------------------------
----------------------------------
Deferred income tax assets and liabilities 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 Corporation's deferred tax assets
(liabilities) are as follows (in thousands):
MARCH 31,
-----------------------
1996 1995
-----------------------
Deferred tax assets:
Allowances for losses $ 8,313 $ 8,328
Other 2,185 2,300
-----------------------
Total deferred tax assets 10,498 10,628
Valuation allowance (638) (1,238)
-----------------------
Adjusted deferred tax assets 9,860 9,390
Deferred tax liabilities:
Other (1,233) (1,042)
-----------------------
Total deferred tax assets $ 8,627 $ 8,348
-----------------------
-----------------------
A valuation allowance has been recognized to offset deferred tax assets related
to state net operating loss carryforwards of subsidiaries and other timing
differences. When the deferred benefits are realized, the reduction of the
valuation allowance will be used to reduce current tax expense for that period.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, loans sold
with recourse against the Corporation and financial guarantees which involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract amounts of
those instruments reflect the extent of involvement and exposure to credit loss
the Corporation has in particular classes of financial instruments. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk are as
follows (in thousands):
MARCH 31,
-----------------------
1996 1995
-----------------------
Commitments to extend credit:
Fixed rate (6.70% to 8.40% at March 31, 1996) $ 22,100 $ 2,900
Adjustable rate 13,400 14,100
Unused lines of credit:
Home equity 19,500 11,700
Credit cards 14,000 6,000
Commercial 6,600 8,500
Letters of credit 11,300 7,100
Loans sold with recourse 3,800 4,500
Financial guarantees written 2,570 8,250
Commitments to extend credit and unused lines of credit are agreements to
lend to a customer as long as there is no violation of any condition
established in the contract. Letters of credit commit the Corporation to
make payments on behalf of customers when certain specified future events
occur. Commitments and letters of credit generally have fixed expiration
dates or other termination clauses and may require payment of a fee. As some
such commitments expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case-by-case
basis. With the exception of credit card lines of credit, the Corporation
generally extends credit only on a secured basis. Collateral obtained
varies, but consists primarily of single-family residences and
income-producing commercial properties. Fixed-rate loan commitments expose
the Corporation to a certain amount of interest rate risk if market rates of
interest substantially increase during the commitment period. Similar risks
exist relative to loans classified as held for sale, which totalled
$13,968,000 and $2,964,000 at March 31, 1996 and 1995, respectively. This
exposure, however, is mitigated by the hedge of firm commitments to sell the
majority of the fixed-rate loans. Commitments outstanding to sell mortgage
loans within 60 days at March 31, 1996 and 1995 amounted to $20,170,000 and
$3,000,000, respectively.
Loans sold to investors with recourse to the Corporation met the underwriting
standards of the investor and the Corporation at the time of origination. In
the event of default by the borrower, the investor may resell the loans to the
Corporation at par value. As the Corporation expects relatively few such loans
to become delinquent, the total amount of loans sold with recourse does not
necessarily represent future cash requirements. Collateral obtained on such
loans consists primarily of single-family residences.
Financial guarantees represent agreements whereby, for an annual fee, certain
of the Bank's mortgage-backed securities are pledged as collateral for
industrial development revenue bonds, which were issued by municipalities to
finance commercial or multi-family real estate owned by third parties. In
the event the third party borrowers default on principal or interest payments
on the bonds, the Bank is required to either pay the amount in default or
acquire the then outstanding bonds. The Bank may foreclose on the underlying
real estate to recover amounts in default. Management has considered these
agreements in its review of the adequacy of the allowances for losses. At
March 31, 1996, certain mortgage-backed securities with carrying values of
approximately $3.8 million were held by the trustees as collateral for these
bonds totalling $2.6 million. The bond agreements have expiration dates of
September, 1996.
Except for the above-noted commitments to originate and/or sell mortgage loans
in the normal course of business, the Corporation and the Bank have not
undertaken the use of off-balance sheet derivative financial instruments for any
purpose.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Disclosure of fair value information about financial instruments, for which
it is practicable to estimate that value, is required, whether or not
recognized in the balance sheets. 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 markets and, in many cases, could
not be realized in immediate settlement of the instruments. Certain
financial instruments and all non-financial instruments are excluded from
the disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not necessarily represent the underlying value of the
Corporation.
The Corporation does not routinely measure the market value of financial
instruments because such measurements represent point-in-time estimates of
value. It is generally not the intent of the Corporation to liquidate and
therefore realize the difference between market value and carrying value and
even if it were, there is no assurance that the estimated market values could be
realized. Thus, the information presented is not particularly relevant to
predicting the Corporation's future earnings or cash flows.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST: The carrying amounts reported
in the balance sheets approximate those assets' and liabilities' fair values.
INVESTMENT AND MORTGAGE-RELATED SECURITIES: Fair values for investment 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: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for loans held for sale are based on outstanding sale
commitments or quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics.
The fair value of fixed-rate residential mortgage loans held for investment,
commercial real estate loans, rental property mortgage loans and consumer and
other loans and leases are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. For construction loans, fair values are based on
carrying values due to the short-term nature of the loans.
Due to the lack of practicability, the fair value of mortgage loan servicing
rights has not been determined and is not presented below.
FEDERAL HOME LOAN BANK STOCK: FHLB stock is carried at cost which is its
redeemable (fair) value since the market for this stock is limited.
DEPOSITS: The fair values disclosed for NOW accounts, passbook accounts and
variable rate insured money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
The fair values of fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies current incremental interest rates
being offered on certificates of deposit to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit.
BORROWINGS: The fair value of the Corporation's borrowings are estimated using
discounted cash flow analysis, based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS: Fair value of the Corporation's
off-balance-sheet instruments (lending commitments and unused lines of credit)
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements, the counterparties' credit
standing and discounted cash flow analyses. The fair value of these
off-balance-sheet items approximates the recorded amounts of the related fees
and is not material at March 31, 1996 and 1995.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)
- --------------------------------------------------------------------------------
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------
1996 1995
----------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 43,689 $ 43,689 $ 28,865 $ 28,865
Securities available for sale:
Investment securities $ 30,241 $ 30,241 $ 23,532 $ 23,532
Mortgage-related securities $ 110,268 $ 110,268 $ 36,571 $ 36,571
Securities held to maturity:
Investment securities $ 2,596 $ 2,599 $ 100 $ 100
Mortgage-related securities $ 110,730 $ 109,857 $ 123,830 $ 120,374
Loans held for sale $ 13,968 $ 14,268 $ 2,964 $ 3,263
Loans receivable:
First mortgage $ 1,096,066 $ 1,080,445 $ 1,032,047 $ 1,021,945
Consumer 257,210 243,387 199,984 185,112
Commercial business and leases 30,611 30,611 21,505 21,505
----------------------------------------------------------------
$ 1,383,887 $ 1,354,443 $ 1,253,536 $ 1,228,562
----------------------------------------------------------------
----------------------------------------------------------------
Federal Home Loan Bank stock $ 16,019 $ 16,019 $ 16,007 $ 16,007
Accrued interest receivable $ 11,550 $ 11,550 $ 9,182 $ 9,182
Deposits:
NOW accounts $ 139,786 $ 139,786 $ 111,399 $ 111,399
Variable rate insured money market accounts 143,189 143,189 64,635 64,635
Passbook accounts 106,092 106,092 105,001 105,001
Certificates of deposit 845,811 849,793 811,085 808,281
----------------------------------------------------------------
$ 1,234,878 $ 1,238,860 $ 1,092,120 $ 1,089,316
----------------------------------------------------------------
----------------------------------------------------------------
Notes payable to Federal Home Loan Bank $ 316,869 $ 315,691 $ 274,500 $ 269,545
Reverse repurchase agreements $ 47,582 $ 47,564 $ 5,600 $ 5,588
Other loans payable $ 7,031 $ 7,031 $ -- $ --
Accrued interest payable $ 7,859 $ 7,859 $ 7,417 $ 7,417
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - REGULATORY ISSUES
- --------------------------------------------------------------------------------
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") as administered by the Federal Deposit Insurance Corporation
("FDIC"). Deposit insurance premiums to both the SAIF and the Bank Insurance
Fund ("BIF") of the FDIC were identical when both funds were created in 1989,
with an eight cent differential between the premiums paid by well-capitalized
institutions and the premiums paid by under-capitalized institutions (23
cents to 31 cents per $100 of assessable deposits). Deposit insurance
premiums for the SAIF and the BIF, which insures deposits in national and
state-chartered banks, are set to facilitate each fund achieving its
designated reserve ratio. In August, 1995, the FDIC determined that the BIF
had achieved its designated reserve ratio and lowered BIF deposit insurance
premium rates for all but the riskiest institutions. Effective January 1,
1996, BIF deposit insurance premiums for well-capitalized banks were further
reduced to the statutory minimum of $2,000 per institution per year. Because
the SAIF remains significantly below its designated reserve ratio, SAIF
deposit insurance premiums were not reduced and remain at 0.23% to 0.31% of
deposits, based upon an institution's supervisory evaluations and capital
levels. The current discrepancy in deposit insurance premiums between the
BIF and the SAIF could place the Bank at a competitive disadvantage to BIF
insured institutions.
The current financial condition of the SAIF has resulted in proposed
legislation to recapitalize the SAIF through a one-time special assessment
(of approximately 80 cents to 85 cents per $100 of assessable SAIF deposits
as of March 31, 1995) and in legislation to then merge the SAIF into the BIF.
If the special assessment is enacted, a special one-time assessment of
approximately $5.5 million, net of tax effect, would be imposed on the Bank.
After the special assessment, it is expected that the SAIF would achieve its
designated reserve ratio and that SAIF premium rates would then become
comparable to BIF rates. The proposed legislation also contemplates a merger
of the SAIF into the BIF, which would require separate legislation. The
Corporation is unable to predict whether this legislation will be enacted or
the amount or applicable retroactive date of any one-time assessment or the
rates that would then apply to assessable SAIF deposits.
Legislation has also been proposed that may result in the Corporation
becoming regulated at the holding company level by the Federal Reserve Board
rather than by the OTS. Regulation by the Federal Reserve Board could
subject the Corporation to capital requirements that are not currently
applicable to the Corporation as a holding company under OTS regulation and
may result in statutory limitations on the type of business activities in
which the Corporation may engage at the holding company level, which business
activities currently are not restricted. The Corporation is unable to
predict whether such legislation will be enacted.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS (in thousands):
MARCH 31,
----------------------
1996 1995
----------------------
ASSETS
Cash and cash equivalents $ 1,865 $ 7,710
Investment in subsidiaries 110,275 95,397
Securities available for sale:
Investment securities 850 931
Mortgage-related securities 7 1,763
Investment securities held to maturity 96 100
Loans receivable, net 7,588 3,905
Real estate held for development and sale 3,958 1,724
Prepaid expenses and other assets 271 1,342
----------------------
$ 124,910 $ 112,872
----------------------
----------------------
LIABILITIES
Loans payable $ 4,998 $ --
Payable to subsidiary-recognition plan 1,306 1,534
Other liabilities 204 151
----------------------
Total liabilities 6,508 1,685
STOCKHOLDERS' EQUITY
Common stock 625 625
Additional paid-in capital 50,086 47,638
Retained earnings 101,191 88,094
Less: Treasury stock (29,298) (21,790)
Deferred compensation due employees (928) (1,200)
Common stock purchased by recognition plan (1,546) (1,534)
Unrealized losses, net of tax (728) (646)
----------------------
Total stockholders' equity 118,402 111,187
----------------------
$ 124,910 $ 112,872
----------------------
----------------------
CONDENSED STATEMENTS OF INCOME
(in thousands):
YEAR ENDED MARCH 31,
---------------------------
1996 1995 1994
---------------------------
Interest income $ 713 $ 675 $ 678
Interest expense 43 -- --
---------------------------
Net interest income 670 675 678
Equity in net income from subsidiaries 13,978 14,058 13,113
Non-interest income 527 207 146
---------------------------
15,175 14,940 13,937
Non-interest expenses 313 265 224
---------------------------
Income before income taxes 14,862 14,675 13,713
Income taxes 355 258 241
---------------------------
Net income $14,507 $14,417 $13,472
---------------------------
---------------------------
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONT'D)
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1996 1995 1994
-----------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,507 $ 14,417 $ 13,472
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in net income of subsidiaries (13,978) (14,058) (13,113)
Other 1,041 (1,161) 163
-----------------------------
Net cash provided (used) by operating activities 1,570 (802) 522
INVESTING ACTIVITIES
Principal collected on mortgage-backed securities 282 232 762
Purchase of securities available for sale (887) -- (7,068)
Proceeds from sales of securities available for sale 2,619 -- 8,185
Purchase of securities held to maturity -- (100) --
Net decrease (increase) in loans receivable (3,683) 170 (1,355)
Dividends from subsidiary 13,805 13,802 6,481
Purchase of real estate held for sale (1,875) (1,655) --
Purchase of subsidiary stock (2,500) -- --
-----------------------------
Net cash provided in investing activities 7,761 12,449 7,005
FINANCING ACTIVITY
Increase in other loans payable 4,998 -- --
Purchase of treasury stock (19,756) (8,149) (10,201)
Exercise of stock options 306 266 296
Cash dividend paid (1,652) (1,190) (1,088)
Repayment of ESOP borrowings 928 600 600
-----------------------------
Net cash used by financing activities (15,176) (8,473) (10,393)
-----------------------------
Increase (decrease) in cash and cash equivalents (5,845) 3,174 (2,866)
Cash and cash equivalents at beginning of year 7,710 4,536 7,402
-----------------------------
Cash and cash equivalents at end of year $ 1,865 $ 7,710 $ 4,536
-----------------------------
-----------------------------
</TABLE>
43
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Anchor BanCorp Wisconsin Inc.
We have audited the accompanying consolidated balance sheets of Anchor
BanCorp Wisconsin Inc. and subsidiaries (the "Corporation") as of March 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1996. These financial statements are the responsibility of
the Corporation'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 Corporation at
March 31, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
April 24, 1996
Milwaukee, Wisconsin
MANAGEMENT AND AUDIT COMMITTEE REPORT
- --------------------------------------------------------------------------------
Management is responsible for the preparation, content and integrity of the
financial statements and all other financial information included in this annual
report. The financial statements have been prepared in accordance with
generally accepted accounting principles.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance as to the integrity of financial records and the protection
of assets. The system of internal controls includes written policies and
procedures, proper delegation of authority, organizational division of
responsibilities and the careful selection and training of qualified personnel.
In addition, the internal auditors and independent auditors periodically test
the system of internal controls.
Management recognizes that the cost of a system of internal controls should not
exceed the benefits derived and that there are inherent limitations to be
considered in the potential effectiveness of any system. However, management
believes that the system of internal controls provides reasonable assurances
that financial transactions are recorded properly to permit the preparation of
reliable financial statements.
The Audit Committee of the Board of Directors is composed of outside directors
and has the responsibility for the recommendation of the independent auditors
for the Corporation. The committee meets regularly with the independent
auditors and internal auditors to review the scope of their audits and audit
reports and to discuss any action to be taken. The independent auditors and the
internal auditors have free access to the Audit Committee.
/s/ D. Timmerman /s/ Arlie M. Mucks, Jr.
Douglas J. Timmerman Arlie M. Mucks, Jr.
President and Chief Executive Officer Chairman, Audit Committee
/s/ Michael W. Helser April 24, 1996
Michael W. Helser
Treasurer and Chief Financial Officer
44
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS The Annual Meeting of Stockholders of Anchor
BanCorp Wisconsin Inc. will be held at 2 p.m. on July 23, 1996, at the Holiday
Inn-East Towne, 4402 E. Washington Avenue, Madison, WI 53704. All stockholders
are cordially invited.
STOCKHOLDER INFORMATION Inquiries regarding account status, dividend payments,
stock transfers, lost certificates, change of ownership and change of address
should be addressed to the Corporation's transfer agent. Please call or write
them at:
Firstar Trust Company
Corporate Trust Investor Services Unit
615 East Michigan
P.O. Box 2077
Milwaukee, WI 53201
(414) 276-3737, or (800) 637-7549
FORM 10-K REPORT Individuals interested in receiving single copies of the
Corporation's Annual Report or the Form 10-K for fiscal 1996 as filed with the
Securities and Exchange Commission should write to Anchor BanCorp Wisconsin
Inc., Investor Relations Department, P.O. Box 8999, Madison, WI 53708-8999.
Securities analysts, portfolio managers and other interested parties seeking
information about the Corporation should contact Anchor BanCorp Wisconsin Inc.,
William Klein, Vice President - Investor Relations, P.O. Box 8999, Madison, WI
53708-8999 or call (608) 252-1810.
COMMON STOCK INFORMATION Anchor BanCorp Wisconsin Inc.
Trading: NASDAQ Stock Market (OTC), NASDAQ symbol ABCW. The Wisconsin State
Journal's abbreviation is AncBWis.
Common shares outstanding at March 31, 1996: 4,934,350
Approximate registered stockholders of record at March 31, 1996: 2,100
The table below show the reported high and low sale prices of common stock and
cash dividends paid per share of common stock during the periods indicated in
fiscal 1996 and 1995. The data in the table have been adjusted for the
five-for-four stock split which was paid on October 27, 1995.
MARKET PRICE CASH
QUARTER ENDED HIGH LOW DIVIDEND
- --------------------------------------------------------------------------------
March 31, 1996 $36.250 $33.250 $0.080
December 31, 1995 36.250 30.900 0.080
September 30, 1995 31.400 25.800 0.080
June 30, 1995 30.200 23.600 0.080
March 31, 1995 31.000 23.400 0.060
December 31, 1994 24.200 21.000 0.060
September 30, 1994 25.600 21.800 0.060
June 30, 1994 22.200 17.600 0.048
45
<PAGE>
ANCHOR BANCORP WISCONSIN INC. BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
DOUGLAS J. TIMMERMAN ARLIE M. MUCKS, JR.
Chairman Special Events Coordinator
Anchor BanCorp Wisconsin Inc. University of Wisconsin-
Madison, Wisconsin Madison, Wisconsin
ROBERT C. BUEHNER PAT RICHTER
Former Executive Vice President and Athletic Director
General Counsel University of Wisconsin-
Provident Savings and Loan Madison, Wisconsin
Retired
Madison, Wisconsin
HOLLY CREMER BERKENSTADT BRUCE A. ROBERTSON
Secretary-Treasurer and Director Former Vice President
Wisconsin Cheeseman, Inc. and AnchorBank, S.S.B.
President Retired
Scott's, Inc. Columbus, Wisconsin
Sun Prairie, Wisconsin
GREG M. LARSON DONALD D. KROPIDLOWSKI
President Senior Vice President
Demco, Inc. AnchorBank, S.S.B.
Madison, Wisconsin Stevens Point, Wisconsin
ANCHOR BANCORP WISCONSIN INC. OFFICERS
- --------------------------------------------------------------------------------
DOUGLAS J. TIMMERMAN
President and
Chief Executive Officer
J. ANTHONY CATTELINO
Vice President and
Secretary
MICHAEL W. HELSER
Treasurer and
Chief Financial Officer
46
<PAGE>
ANCHORBANK, S.S.B.
OFFICE/SUBSIDIARY LOCATIONS
- -------------------------------------------------------------------------------
MADISON OFFICES:
Atwood
2000 Atwood Avenue
Madison, WI 53704
(608) 246-3515
Capitol Square
25 W. Main Street
Madison, WI 53703
(608) 252-8700
Cottage Grove Road
216 Cottage Grove Road
Madison, WI 53716
(608) 221-6550
East Towne
4702 East Towne Blvd.
Madison, WI 53704
(608) 246-3500
Hilldale
302 N. Midvale Blvd.
Madison, WI 53705
(608) 231-5252
Meadowood
5750 Raymond Road
Madison, WI 53711
(608) 275-7979
Monona
6501 Monona Drive
Monona, WI 53716
(608) 221-6555
Sherman Plaza
2929 N. Sherman Avenue
Madison, WI 53704
(608) 246-3505
West Towne
333 S. Westfield Road
Madison, WI 53717
(608) 833-4900
DANE COUNTY OFFICES:
DeForest
601 S. Main Street
DeForest, WI 53532
(608) 846-4701
Middleton
6200 Century Avenue
Middleton, WI 53562
(608) 831-3330
Mount Horeb
300 E. Main Street
Mount Horeb, WI 53572
(608) 437-3011
Oregon
705 N. Main Street
Oregon, WI 53575
(608) 835-5702
Stoughton
1720 Highway 51
Stoughton, WI 53589
(608) 877-4100
Sun Prairie
1516 W. Main Street
Sun Prairie, WI 53590
(608) 837-5181
Verona
420 W. Verona Avenue
Verona, WI 53593
(608) 845-6716
Waunakee
204A-1 S. Century Avenue
Waunakee, WI 53597
(608) 849-5041
SURROUNDING AREA OFFICES:
Boscobel
106 W. Oak Street
Boscobel, WI 53805
(608) 375-5062
Chippewa Falls
302 Bay Street
Chippewa Falls, WI 54729
(715) 723-4414
Columbus
150 N. Ludington Street
Columbus, WI 53925
(414) 623-3140
Delavan
500 E. Walworth Avenue
Delavan, WI 53115
(414) 728-3456
Dodgeville
316 W. Spring Street
Dodgeville, WI 53533
(608) 935-9356
Janesville
100 W. Racine Street
Janesville, WI 53545
(608) 752-7886
Janesville
2215 Holiday Drive
Janesville, WI 53545
(608) 756-2600
Lancaster
708 N. Madison Street
Lancaster, WI 53813
(608) 723-7601
Monroe
1712 12th Street
Monroe, WI 53566
(608) 325-7161
New Glarus
606 Highway 69
New Glarus, WI 53574
(608) 527-5248
Platteville
80 S. Court Street
Platteville, WI 53818
(608) 348-9556
Plover
1101 Post Road
Plover, WI 54467
(715) 345-2370
Prairie du Chien
600 E. Blackhawk Avenue
Prairie du Chien, WI 53821
(608) 326-2444
Richland Center
187 S. Central Avenue
Richland Center, WI 53581
(608) 647-6136
Stevens Point
640 Division Street
Stevens Point, WI 54481
(715) 344-8080
Viroqua
102 S. Rock Avenue
Viroqua, WI 54665
(608) 637-3142
LENDING-ONLY OFFICES:
Appleton
2711 N. Mason Street
Appleton, WI 54914
(414) 733-5554
Lake Geneva
772 Main Street, Suite 204
Lake Geneva, WI 53147
(414) 248-3020
Oshkosh
1775 Witzel Avenue
Oshkosh, WI 54901
(414) 233-4040
SUBSIDIARIES:
ADPC Corporation
25 W. Main Street
Madison, WI 53703
(608) 252-8700
ADPC II LLC
25 W. Main Street
Madison, WI 53703
(608) 252-8700
Anchor Financial Corp.
25 W. Main Street
Madison, WI 53703
(608) 252-8700
Anchor Insurance Services, Inc.
302 N. Midvale Blvd.
Madison, WI 53705
(608) 232-2700
Anchor Investment Corporation
3800 Howard Hughes Parkway,
Suite 1560
Las Vegas, NV 89109
(702) 735-1811
Investment Directions, Inc.
25 W. Main Street
Madison, WI 53703
(608) 252-8700
47
<PAGE>
[LOGO]
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-52666) pertaining to the 1992 Stock Incentive Plan and
Retirement Plan of Anchor BanCorp Wisconsin, Inc. of our report dated April
24, 1996, with respect to the consolidated financial statements of Anchor
BanCorp Wisconsin, Inc. incorporated by reference in the Annual Report (Form
10-K) for the year ended March 31, 1996.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
June 24, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 34,454
<INT-BEARING-DEPOSITS> 710
<FED-FUNDS-SOLD> 7,525
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 140,509
<INVESTMENTS-CARRYING> 113,326
<INVESTMENTS-MARKET> 112,455
<LOANS> 1,433,956
<ALLOWANCE> 22,807
<TOTAL-ASSETS> 1,754,556
<DEPOSITS> 1,240,958
<SHORT-TERM> 231,080
<LIABILITIES-OTHER> 23,714
<LONG-TERM> 140,402
0
0
<COMMON> 50,711
<OTHER-SE> 67,691
<TOTAL-LIABILITIES-AND-EQUITY> 1,754,556
<INTEREST-LOAN> 107,436
<INTEREST-INVEST> 17,797
<INTEREST-OTHER> 488
<INTEREST-TOTAL> 125,721
<INTEREST-DEPOSIT> 55,250
<INTEREST-EXPENSE> 74,978
<INTEREST-INCOME-NET> 50,743
<LOAN-LOSSES> 475
<SECURITIES-GAINS> 247
<EXPENSE-OTHER> 37,061
<INCOME-PRETAX> 22,466
<INCOME-PRE-EXTRAORDINARY> 22,466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,507
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.70
<YIELD-ACTUAL> 7.87
<LOANS-NON> 1,890
<LOANS-PAST> 0
<LOANS-TROUBLED> 332
<LOANS-PROBLEM> 12,552
<ALLOWANCE-OPEN> 22,429
<CHARGE-OFFS> 998
<RECOVERIES> 351
<ALLOWANCE-CLOSE> 22,807
<ALLOWANCE-DOMESTIC> 22,807
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 21,545
</TABLE>
