<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 (NO FEE REQUIRED)
For the fiscal year ended March 31, 1997
--------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________________ to ________________
Commission File Number 0-20006
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. /X/
Based upon the $43.125 closing price of the registrant's common stock as of
May 16, 1997, the aggregate market value of the 4,527,117 shares of the
registrant's common stock deemed to be held by non-affiliates of the registrant
was: $172.4 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 6, 1997, 4,527,117 shares of the registrant's common stock were
outstanding.
Documents Incorporated by Reference
Proxy Statement for the Annual Meeting of Stockholders to be held on July
22, 1997 (Part III, Items 10 to 13)
<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 also has a non-banking
subsidiary, Investment Directions, Inc. ("IDI"), which invests in limited
partnerships. IDI created a subsidiary in March 1997, Nevada Investment
Directions, Inc. ("NIDI"), which also invest in limited partnerships. NIDI is
organized in the state of Nevada.
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").
The Corporation 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 four 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") holds and develops
certain of the Bank's foreclosed properties. 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). All of
the Bank's subsidiaries, except AIC, are Wisconsin corporations.
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, 1997, the Bank conducted business from its headquarters and main
office in Madison, Wisconsin, 33 other full-service offices and two 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.
1
<PAGE>
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.
FINANCIAL RATIOS
The following table sets forth selected financial ratios of the corporation's
operations for the fiscal years indicated.
Year Ended March 31,
-----------------------------
1997 1996 1995
-----------------------------
Return on average assets 0.76% 0.88% 1.00%
Return on average equity 11.78 12.13 12.89
Average equity to average assets 6.42 7.24 7.41
Dividend payout ratio 16.67 11.76 8.58
Net interest margin 3.12 3.18 3.60
LENDING ACTIVITIES
GENERAL. At March 31, 1997, the Corporation's net loans held for
investment totalled $1.461 billion, representing approximately 78% of its $1.885
billion of total assets at that date. Approximately 77% of the Corporation's
total loans held for investment at March 31, 1997 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.
2
<PAGE>
The non-real estate loans originated by the Bank consist of a variety of
consumer loans and commercial business loans. At March 31, 1997, the
Corporation's total loans held for investment included $323.5 million of
consumer loans and $29.0 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
<PAGE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-----------------------------------------------------------------------------------------------
(Dollars in Thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 731,732 47.44% $ 745,170 51.97% $ 716,212 55.83% $618,647 55.25% $493,105 50.35%
Multi-family residential 164,729 10.68 162,432 11.33 141,401 11.02 142,750 12.75 173,979 17.76
Commercial real estate 171,186 11.10 139,918 9.76 123,438 9.62 129,196 11.54 121,419 12.40
Construction 106,536 6.91 77,187 5.38 66,519 5.18 50,691 4.53 34,699 3.54
Land 15,730 1.02 21,077 1.47 13,644 1.06 8,280 0.74 4,223 0.43
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total mortgage loans 1,189,913 77.15 1,145,784 79.90 1,061,214 82.72 949,564 84.81 827,425 84.48
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Consumer loans:
Second mortgage and home equity 176,348 11.43 140,302 9.78 111,725 8.71 84,922 7.58 68,689 7.01
Education 112,420 7.29 88,674 6.18 69,264 5.40 52,289 4.67 48,457 4.95
Other 34,682 2.25 28,481 1.99 18,997 1.48 13,587 1.21 13,598 1.39
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total consumer loans 323,450 20.97 257,457 17.95 199,986 15.59 150,798 13.46 130,744 13.35
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Commercial business loans:
Loans 29,012 1.88 30,352 2.12 20,272 1.58 16,195 1.45 13,378 1.37
Lease receivables 10 0.00 363 0.03 1,467 0.11 3,154 0.28 7,859 0.80
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total commercial business loans 29,022 1.88 30,715 2.14 21,739 1.69 19,349 1.73 21,237 2.17
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross loans receivable 1,542,385 100.00% 1,433,956 100.00% 1,282,939 100.00% 1,119,711 100.00% 979,406 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Contras to loans:
Undisbursed loan proceeds (54,002) (46,493) (25,980) (27,950) (18,465)
Allowance for loan losses (22,750) (22,807) (22,429) (22,119) (18,437)
Unearned loan fees (3,373) (2,453) (2,000) (1,966) (1,291)
Discount on loans purchased (748) (1,005) (1,151) (195) (379)
Unearned interest (89) (118) (272) (536) (1,640)
--------- ---------- ---------- ---------- ----------
Total contras to loans (80,962) (72,876) (51,832) (52,766) (40,212)
--------- ---------- ---------- ---------- ----------
Loans receivable, net $1,461,423 $1,361,080 $1,231,107 $1,066,945 $939,194
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
The following table shows, at March 31, 1997, 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 $ 31,759 $ 49,440 $ 100,313 $ 48,601 $ 12,593
After one year through
five years 94,664 46,323 4,106 140,567 12,217
After five years 605,309 240,152 17,847 134,282 4,212
--------- ---------- --------- ---------- ---------
$ 731,732 $ 335,915 $ 122,266 $ 323,450 $ 29,022
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
Interest rate terms on amounts
due after one year:
Fixed $ 90,290 $ 35,979 $ 670 $ 150,616 $ 16,240
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
Adjustable $ 609,683 $ 250,496 $ 21,283 $ 124,233 $ 189
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
</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, 1997, $731.7 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, 1997, approximately $624.2 million or 85.3% 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
5
<PAGE>
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, 1997, approximately $107.5 million or 14.7% 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 60% 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, 1997, the Corporation had $164.7 million of loans secured by multi-family
residential real estate and $171.2 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.
Multi-family residential and commercial real estate lending is generally
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, 1997, construction loans amounted to $106.5 million of the Corporation's
total loans held for investment. Of this amount, $44.3 million and $27.2
million was represented by loans for the construction of single-family and
multi-family residences, respectively. Land loans amounted to $15.7 million at
March 31, 1997.
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 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
6
<PAGE>
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, 1997, $323.5 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
The largest component of the Corporation's consumer loan portfolio are
second mortgage and home equity loans, which amounted to $176.3 million or 54.5%
of consumer loans at March 31, 1997. 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
$112.4 million or 34.8% of its consumer loans at March 31, 1997 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. The Bank sold
$1.4 million of these loans during fiscal 1997.
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,
1997, the Bank's approved credit card lines and the outstanding credit pursuant
to such lines amounted to $19.6 million and $2.9 million, respectively.
COMMERCIAL BUSINESS LOANS AND LEASES. The Bank originates loans for
commercial, corporate and business purposes, including issuing letters of
credit. At March 31, 1997, commercial business loans amounted to $29.0 million
or 1.9% of the Corporation's total loans held for investment. 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. 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 individuals of the business.
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
7
<PAGE>
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 two 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
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, 1997, the
Bank had approximately $11.9 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 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
8
<PAGE>
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, 1997, the Bank was servicing
$1.1 billion 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.
Servicing of loans or loan participations purchased by the Bank 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, 1997, approximately $25.4
million of mortgage loans were being serviced for the Bank by others.
9
<PAGE>
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,
---------------------------------------------------
1997 1996 1995
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of year(1) $ 1,447,924 $ 1,285,903 $ 1,136,253
Loans originated for investment(2):
Single-family residential 191,666 159,525 152,781
Multi-family residential 24,713 15,792 14,419
Commercial real estate 63,600 38,440 19,780
Construction and land 166,533 116,556 102,123
Consumer 190,584 141,820 114,825
Commercial business 17,715 23,913 11,094
----------- ----------- -----------
Total originations 654,811 496,046 415,022
----------- ----------- -----------
Loans purchased for investment:
Single-family residential 155 2,480 9,173
Multi-family residential 120 4,500 252
Commercial real estate 464 939 1,440
American Equity purchase - 85,244 -
----------- ----------- -----------
Total purchases 739 93,163 10,865
----------- ----------- -----------
Total originations and purchases 655,550 589,209 425,887
Repayments (420,698) (338,847) (249,619)
Transfers of loans to held for sale (126,423) (99,345) (13,040)
----------- ----------- -----------
Net activity in loans held for investment 108,429 151,017 163,228
----------- ----------- -----------
Loans originated for sale(2):
Single-family residential 96,996 180,055 81,711
American Equity purchase - 5,969 -
Transfers of loans from held for investment 126,423 99,345 13,040
Sales of loans (177,101) (177,593) (108,329)
Loans converted into mortgage-backed
securities (54,938) (96,772) -
----------- ----------- -----------
Net activity in loans held for sale (8,620) 11,004 (13,578)
----------- ----------- -----------
Gross loans receivable at end of year $ 1,547,733 $ 1,447,924 $ 1,285,903
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(1) Includes loans held for sale and loans held for investment.
(2) Refinancings of loans held in the Corporations's consolidated loan
portfolio amounted to $79.8 million, $99.1 million and $27.4 million during
the years ended March 31, 1997, 1996 and 1995, respectively.
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.
10
<PAGE>
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 1997 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 $654,000. The amount of
interest income which was attributable to these loans and included in interest
income during fiscal 1997 was $358,000.
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.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
DAYS PAST DUE BALANCE LOANS BALANCE LOANS BALANCE LOANS
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 3,144 0.20% $ 5,776 0.40% $ 2,696 0.21%
60 to 89 days 909 0.06 789 0.06 1,099 0.09
90 days and over 6,795 0.44 1,890 0.13 2,493 0.19
--------- ------ -------- ------ -------- ------
Total $ 10,848 0.70% $ 8,455 0.59% $ 6,288 0.49%
--------- ------ -------- ------ -------- ------
--------- ------ -------- ------ -------- ------
</TABLE>
There was one non-accrual loan with a carrying value of $2.5 million at
March 31, 1997. The loan represented a 26% participation, involving two other
lenders, in a 48 unit condominium project in Bloomington, Minnesota. Voluntary
foreclosure is sought by the Bank. For additional discussion of the
Corporation's asset quality, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition-Non-
Performing Assets" in Item 7 included herewith. See also Notes 1 and 5 to the
Consolidated Financial Statements in Item 8 included herewith.
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, 1997.
11
<PAGE>
APARTMENT COMPLEX, ELM GROVE, WISCONSIN. At March 31, 1997, the
Corporation's foreclosed properties 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 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, 1997, the Bank's classified assets consisted of $16.5
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, 1996, substandard assets amounted to $12.6 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, 1997 has
been presented as part of the discussion of Allowance for Loan and Foreclosure
Losses in Management's Discussion and Analysis, which is contained in in Item 7,
included herewith.
12
<PAGE>
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 carried at amortized cost. Securities are
classified as trading when the Corporation intends to actively buy and sell
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 carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. For the year ended March 31, 1997 and 1996
balances of stockholders' equity were reduced by $5,000 and $82,000 (net of
$59,300 and $55,000 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, 1997.
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, 1997, the amortized cost of the Corporation's mortgage-backed
securities held to maturity amounted to $129.1 million and included $69.7
million, $55.7 million and $3.7 million which are insured or guaranteed by FNMA,
FHLMC 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 $78.2 million at March 31, 1997, of which $11.4 million are
five- and seven-year balloon securities, $63.9 million are 15- and 30-year
securities and $2.9 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 obligations
of the Corporation. At March 31, 1997, $19.1 million of the Corporation's
mortgage-backed securities available for sale and $22.5 million mortgage-backed
securities held to maturity were pledged to secure various obligations of the
Bank.
13
<PAGE>
The following table sets forth the activity in the Corporation's
mortgage-backed securities during the periods indicated.
YEAR ENDED MARCH 31,
--------------------------------------
1997 1996 1995
--------------------------------------
(In Thousands)
Mortgage-backed securities at
beginning of year (1) $ 186,005 $ 123,358 $ 145,687
Held to maturity:
Purchases 14,509 3,025 8,355
Transfers to available for sale - (90,376) -
Available for sale:
Purchases 2,057 5,531 2,497
Acquired in exchange of loans 54,938 96,772 -
Transfers from held to maturity - 90,376 -
Sales (5,617) (9,107) (888)
Repayments and other (44,593) (33,574) (32,293)
--------- --------- ---------
Mortgage-backed securities at
end of year (1) $ 207,299 $ 186,005 $ 123,358
--------- --------- ---------
--------- --------- ---------
(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,
1997, the amortized cost of the Corporation's mortgage-derivative securities
held to maturity amounted to $31.0 million. The fair value of the
mortgage-derivative securities available for sale amounted to $2.1 million at
the same date.
14
<PAGE>
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
1997, 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 $ 2,141 6.17% $ - 0.00% $ - 0.00% $ 2,141
Mortgage-backed securities 11,331 6.23 12,525 6.82 54,303 6.72 78,159
--------- ---- -------- ---- --------- ---- ----------
13,472 6.22 12,525 6.82 54,303 6.72 80,300
--------- ---- -------- ---- --------- ---- ----------
Held To Maturity:
Mortgage-derivative securities 27,667 6.27 3,294 6.68 - 0.00 30,961
Mortgage-backed securities 46,841 6.21 23,631 7.56 58,668 6.57 129,140
--------- ---- -------- ---- --------- ---- ----------
74,508 6.23 26,925 7.45 58,668 6.57 160,101
--------- ---- -------- ---- --------- ---- ----------
Mortgage-related securities $ 87,980 6.23% $ 39,450 7.25% $ 112,971 6.64% $ 240,401
--------- ---- -------- ---- --------- ---- ----------
--------- ---- -------- ---- --------- ---- ----------
</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 3 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.
15
<PAGE>
The table below sets forth information regarding the amortized cost and
fair values of the Corporation's investment securities at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available For Sale:
U.S. Government and federal
agency obligations $ 26,877 $ 26,517 $ 20,498 $ 20,333 $ 13,733 $ 13,347
Mutual fund 6,068 6,066 9,059 9,058 10,185 10,185
Corporate stock and other 2,685 2,986 791 850 - -
--------- --------- --------- --------- --------- ----------
35,630 35,569 30,348 30,241 23,918 23,532
--------- --------- --------- --------- --------- ----------
Held To Maturity:
U.S. Government and federal
agency obligations 7,947 7,890 2,500 2,503 - -
Certificates of deposit - - 96 96 100 100
--------- --------- --------- --------- --------- ----------
7,947 7,890 2,596 2,599 100 100
--------- --------- --------- --------- --------- ----------
Total investment securities $ 43,577 $ 43,459 $ 32,944 $ 32,840 $ 24,018 $ 23,632
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
</TABLE>
The following table shows the amortized cost, fair value and yield of the
Corporation's investment securities by contractual maturity at March 31, 1997.
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------------
Due in one year or less $ 13,197 $ 13,186 $ - $ -
Due after one year through five years 19,748 19,397 7,947 7,890
Corporate stock 2,685 2,986 - -
-------- -------- ------- -------
$ 35,630 $ 35,569 $ 7,947 $ 7,890
-------- -------- ------- -------
-------- -------- ------- -------
For additional information regarding the Corporation's investment
securities, see the Corporation's Consolidated Financial Statements, including
Note 2 thereto included in Item 8.
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, 1997. The
Bank's liquidity ratio was 9.23% as of March 31, 1997.
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 and
outflows and loan prepayments are significantly influenced by general interest
rates, economic conditions and competition. Borrowings
16
<PAGE>
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, 1997, the Bank had $46.7 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 of 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,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $1,234,878 $1,092,120 $1,061,262
Net increase (decrease) before interest credited 17,728 29,041 (3,482)
Interest credited 52,092 48,914 34,340
Purchase of branch - 64,803 -
---------- ---------- ----------
Net increase in deposits 69,820 142,758 30,858
---------- ---------- ----------
Ending balance $1,304,698 $1,234,878 $1,092,120
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the amount and maturities of the Corporation's certificates of deposit at March
31, 1997.
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% $ 29,021 $ 702 $ 244 $ 102 $ - $ 30,069
5.00% to 6.99% 413,990 279,989 116,328 20,152 25,570 856,029
7.00% to 8.99% 4,249 8,756 47 169 245 13,466
---------- ---------- ---------- --------- --------- -----------
$ 447,260 $ 289,447 $ 116,619 $ 20,423 $ 25,815 $ 899,564
---------- ---------- ---------- --------- --------- -----------
---------- ---------- ---------- --------- --------- -----------
</TABLE>
17
<PAGE>
At March 31, 1997, the Corporation had $104.0 million of jumbo
certificates, of which $40.5 million are scheduled to mature within three
months, $19.7 million in over three months through six months, $35.0 million in
over six months through 12 months and $8.8 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, 1997 and may continue to do so in the future.
The Corporation has a short-term line of credit to fund IDI limited
partnership interest. The interest is based on Libor and is payable monthly and
each draw has a specified maturity. The final maturity of the line of credit is
in December 1997. 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 8 to the Corporation's Consolidated Financial Statements
for more information on borrowings.
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.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $ 374,165 5.74% $ 316,869 5.69% $ 274,500 5.71%
Repurchase agreements 39,335 5.43 47,582 5.32 5,600 6.72
Other loans payable 18,039 8.19 7,031 9.94 - 0.00
</TABLE>
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,
--------------------------------------
1997 1996 1995
--------------------------------------
(In Thousands)
Maximum month-end balance:
FHLB advances $ 281,500 $ 177,500 $ 152,000
Repurchase agreements 67,316 72,850 5,600
Other loans payable 18,039 5,998 -
Average balance:
FHLB advances 242,159 161,939 95,832
Repurchase agreements 63,189 35,352 467
Other loans payable 7,524 917 -
18
<PAGE>
SUBSIDIARIES
INVESTMENT DIRECTIONS, INC. IDI is a wholly-owned non-banking subsidiary
of the Corporation formed in February 1996, which has invested in various
limited partnerships. The Corporation's investment in IDI at March 31, 1997
amounted to $6.1 million. For the year ended March 31, 1997, IDI had a net
profit of $1.4 million.
NEVADA INVESTMENT DIRECTIONS, INC. NIDI is a wholly-owned non-banking
subsidiary of IDI formed in March 1997, which has invested in various limited
partnerships. NIDI was organized in the State of Nevada. IDI's investment in
NIDI at March 31, 1997 amounted to $6.0 million. For the year ended March 31,
1997, NIDI had a net profit of $42,000.
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,
1997, AIS had a net profit of $91,000. The Bank's investment in AIS amounted to
$80,000 at March 31, 1997. AIS paid a dividend to the Bank in fiscal 1997 of
$150,000.
ADPC II, LLC. ADPC II is a 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 investors in the
secondary market. The Bank's investment in ADPC II at March 31, 1997 amounted
to $1.4 million. ADPC II had a net loss of $235,000 for the year ended
March 31, 1997.
ADPC CORPORATION. ADPC is a wholly-owned subsidiary of the Bank which
holds and develops certain of the Bank's foreclosed properties. The Bank's
investment in ADPC at March 31, 1997 amounted to $1.8 million. ADPC had net
income of $68,000 for the year ended March 31, 1997.
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
$176.0 million at March 31, 1997. AIC had net income of $6.7 million for the
year ended March 31, 1997. The Bank had outstanding notes to AIC of $24.0
million at March 31, 1997, with a weighted average rate of 8.25% and maturities
during the next six months.
ANCHOR FINANCIAL CORP. AFC was a wholly-owned subsidiary of the Bank which
was dissolved on March 18, 1997.
EMPLOYEES
The Bank had 516 full-time employees and 157 part-time employees at March
31, 1997. 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.
19
<PAGE>
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.
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.
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
20
<PAGE>
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, 1997 was $159,000.
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, 1997 was
$59,000.
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 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.
During 1996, the OTS continued its comprehensive review of its regulations
to eliminate duplicative, unduly burdensome and unnecessary regulations
concerning lending and investments, corporate governance, subsidiaries and
equity investments, conflicts of interest and usurpation of corporate
opportunity. The OTS's revised lending and investments regulation generally
imposes general safety and soundness standards, and also provides that
commercial loans made by a service corporation of a savings association will be
exempted from an institutions's overall 10% limit on commercial loans. Such
regulations now allow an institution to use its own cost-of-funds index in
structuring adjustable rate mortgages, and eliminate percentage of assets
limitations on credit card lending.
The OTS also converted its policy statement on conflicts of interest to a
regulation that is intended to be based upon common law principles of "duty of
loyalty" and "duty of care." The new conflicts regulation provides that
directors, officers, employees, persons having the power to control the
management or policies of savings associations, and other persons who owe
fiduciary duties to savings institutions will be prohibited from advancing their
own personal or business interests, or those of others, at the expense of the
institutions they serve. The "appearance of a conflict of interest" standard
was removed from the scope of the revised rule. The OTS also clarified that
"persons having the power to control the management or policies of savings
associations" includes holding companies such as the Corporation. The OTS
corporate opportunity regulations and policy statements also were eliminated and
replaced with a standard similar to common law standards governing usurpation of
corporate opportunity. Significantly under the revised regulation, transfers of
a line of business within a holding company structure will not be deemed to be a
usurpation of corporate opportunity if an institution receives fair market
consideration for a line of business transferred to its holding company or its
affiliate. In such transactions, the OTS will generally defer to decisions made
by a holding company, subject to compliance with Section 23A or 23B of the
Federal Reserve Act and general safety and soundness principles.
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, 1997, 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
21
<PAGE>
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 Bank is required to pay assessments to the FDIC based on a percent of
its insured deposits for the insurance of its deposits by the SAIF. Under
Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated deposits or at a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances raising a significant risk of substantial future losses to
the SAIF.
Under the risk-based deposit insurance system adopted by the FDIC, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups - well capitalized, adequately capitalized, or
undercapitalized - using the same percentage criteria used under the prompt
corrective action regulations. Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on instituions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Bank incurred an after-tax expense of $4.6 million during
the quarter ended September 30, 1996.
The FDIC has proposed a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF and SAIF members will
be assessed at the same rate for FICO payments.
The 1996 legislation also contemplates the merger of the SAIF with the BIF,
which generally insures deposits in national and state-chartered banks. The
combined deposit insurance fund, which will be formed no earlier that January 1,
1999, will insure deposits at all FDIC insured depository institutions. As a
condition to the combined insurance fund, however, no insured depository
institution can be chartered as a savings association. The Secretary of the
Treasury is required to report to the Congress no later than March 31, 1997 with
respect to the
22
<PAGE>
development of a common charter for all insured depository institutions. Future
legislation also may result in the Corporation becoming regulated as a bank
holding company by the Federal Reserve Board rather than a savings and loan
holding company regulated 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 holding company level, at which business activities
currently are not restricted. The Corporation and the Bank are unable to
predict whether such legislation will be enacted.
The 1996 legislation also contained several provisions that could impact
operations of the Bank, including augmenting the Bank's commercial lending
authority by 10% of assets, provided that any loans in excess of 10% are used
for small business loans. Furthermore, the qualified thrift lender test that
the Bank must comply with was liberalized to provide that small business, credit
card and student loans can be included without any limit, and that the Bank can
qualify as a qualified thrift lender by meeting either the test set forth in the
Home Owners' Loan Act or under the definition of a domestic building and loan
association as defined under the Internal Revenue Code of 1986, as amended (The
"IRC").
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, 1997, the Bank
had $46.7 million in brokered deposits.
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 5.77% at March 31, 1997.
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, 1997,
the Bank met all capital requirements on a fully phased-in basis. (See Note 9
to the Corporation's Consolidated Financial
23
<PAGE>
Statements.) 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.
OTS policy imposes a limitation on the amount of net deferred tax assets under
SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets, reduced by any valuation allowances, in
excess of deferred tax liabilities.) Application of the limit depends on the
possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited: taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depend on an institution's future taxable
income (exclusive of reversing temporary differences and carryforwards), or its
tax-planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year of the quarter-end report date or 10% of core capital. The foregoing
considerations did not affect the calculation of the Bank's regulatory capital
at March 31, 1997.
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 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%. Although the final rule was originally scheduled to be
effective as of January 1994, the OTS has 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 appeal
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.
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
24
<PAGE>
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, 1997, the Bank was
in compliance with this net worth requirement with a ratio of 6.98%.
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.
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
25
<PAGE>
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, 1997, 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 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%. In May 1997, however, the OTS
proposed to amend its liquidity regulation to, among other things, provide that
a savings association shall maintain liquid assets of not less than 4% of the
amount of its liquidity base at the end of the preceding calendar quarter, as
well as to provide that each savings association must maintain sufficient
liquidity to ensure its safe and sound operation. Historically, the Bank has
operated in compliance with applicable liquidity requirements.
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, 1997, 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, 1997, the Bank owned $19.0 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 1997 amounted to $1.3
million as compared to $1.2 million for fiscal 1996.
26
<PAGE>
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.
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, 1997, 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.
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.
For taxable years beginning prior to January 1, 1996, a savings institution such
as the Bank that met certain definitional tests relating to the composition of
its assets and the sources of its income (a "qualifiying savings institution")
was permitted to establish reserves for bad debts and to claim annual tax
deductions for additions to such reserves. A qualifying savings institution was
permitted to make annual additions to such reserves based on the institution's
loss experience. Alternatively, a qualifying savings institution could elect,
on an annual basis, to use the "percentage of taxable income" method to compute
its addition to its bad debt reserve on qualifying real property loans
(generally, loans secured by an interest in improved real estate). The
percentage of taxable income method permitted the institution to deduct a
specified percentage of its taxable income before such deduction, regardless of
the institution's actual bad debt experience, subject to certain limitations.
From 1988 to 1995, the Bank has claimed bad debt deductions under the percentage
of taxable income method because that method produced a greater deduction than
did the experience method.
On August 20, 1996, President Clinton signed the Small Business Job Protection
Act (the "Act") into law. The legislation (i) repealed the reserve method of
accounting for bad debts for savings institutions effective for taxable years
beginning after 1995; (ii) provides for recapture of a portion of the reserves
existing at the close of the last taxable year beginning before January 1, 1996,
exempting pre-1988 bad debt deductions from recapture; and (iii) suspended for
two years post-1987 in bad debt deductions from recapture provided that a
savings institution meets a new home mortgage lending test. The legislation
exempted from recapture $30.0 million in pre-1988 bad debt deductions taken by
the Bank and will defer recapture of an additional $3.1 million subject to the
Bank's compliance with the new home mortgage lending test. See Note 11 to the
Consolidated Financial Statements for a discussion of the effect of this
legislation on the Bank. For its tax years beginning on or after January 1,
1996, the Bank will be required to account for its bad debts under the specific
charge-off method. Under this method, deductions may be claimed only as and to
the extent that loans become wholly or partially worthless.
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
27
<PAGE>
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, 1997, the Bank's bad debt reserves for tax purposes
totaled approximately $33.1 million.
The consolidated federal income tax returns of the Bank and its
subsidiaries through March 31, 1993 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 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, 1992 are closed to examination by
the Wisconsin Department of Revenue due to the expiration of the statute of
limitations.
The Corporation also has a non-banking subsidiary of IDI (NIDI) and the
Bank has an operating subsidiary (AIC) located in Nevada. The income of NIDI
and 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, 1997, The Bank conducted its business from its headquarters
and main office at 25 West Main Street, Madison, Wisconsin and 33 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 two loan origination
facilities. The leases expire between 1997 AND 2005. The aggregate net book
value at March 31, 1997 of the properties owned or leased, including
headquarters, properties and leasehold improvements, was $12.0
million. See Note 6 to the Corporation's Consolidated Financial Statements,
filed as Item 8 hereto, for information regarding the premises and equipment.
The following tables set forth the location of the Corporation's banking and
other offices.
28
<PAGE>
MADISON, WISCONSIN OFFICES: Stoughton, Wisconsin
25 West Main Street SURROUNDING AREA OFFICES:
Madison, Wisconsin
1712 12th Street
302 North Midvale Boulevard Monroe, Wisconsin
Madison, Wisconsin
80 South Court Street
2929 North Sherman Avenue Platteville, Wisconsin
Madison, Wisconsin (1)
106 West Oak Street
216 Cottage Grove Road Boscobel, Wisconsin (2)
Madison, Wisconsin (1)
100 West Racine Street
5750 Raymond Road Janesville, Wisconsin
Madison, Wisconsin (2)
600 East Blackhawk Avenue
333 South Westfield Road Prairie du Chien, Wisconsin
Madison, Wisconsin (1)
708 North Madison Street
6501 Monona Drive Lancaster, Wisconsin
Monona, Wisconsin
302 Bay Street
4702 East Towne Boulevard Chippewa Falls, Wisconsin
Madison, Wisconsin
500 East Walworth Avenue
2000 Atwood Avenue Delavan, Wisconsin
Madison, Wisconsin (2)
606 Highway 69
DANE COUNTY OFFICES: New Glarus, Wisconsin (2)
1516 West Main Street 2215 Holiday Drive
Sun Prairie, Wisconsin Janesville, Wisconsin
6200 Century Avenue 150 North Ludington Street
Middleton, Wisconsin (1) Columbus, Wisconsin
300 East Main Street 187 South Central Avenue
Mount Horeb, Wisconsin Richland Center, Wisconsin
420 West Verona Avenue 316 West Spring Street(2)
Verona, Wisconsin Dodgeville, Wisconsin
705 North Main Street 102 South Rock Avenue
Oregon, Wisconsin Viroqua, Wisconsin
601 South Main Street 640 Division Street
DeForest, Wisconsin Stevens Point, Wisconsin
204A-1 South Century Avenue 1101 Post Road
Waunakee, Wisconsin (2) Plover, Wisconsin (2)
1720 Highway 51 1492 W. South Park Ave.
29
<PAGE>
Oshkosh, WI 54903
1775 Witzel Avenue
LENDING ONLY OFFICES: Oshkosh, Wisconsin (2)
772 Main Street, Suite 204 2711 North Mason Street
Lake Geneva, Wisconsin (2) Appleton, Wisconsin (2)
(1) Land is leased.
(2) Building and land is leased.
30
<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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended March 31, 1997, 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
Common Stock
The Corporation's common stock is traded on the NASDAQ Stock Market. The
trading symbol is ABCW. As of March 31, 1997, there were approximately 2,000
stockholders of record which does not include stockholders holding their stock
in street name or nominee's name.
Quarterly Stock Price and Dividend Information
The table below shows 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 1997 and 1996. 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, 1997 $47.000 $35.500 $0.125
December 31, 1996 36.250 32.875 0.125
September 30, 1996 36.250 33.000 0.125
June 30, 1996 35.000 30.000 0.100
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
For information regarding restrictions on the payments of dividends, see
"Item 1. Business -- Regulation -- Limitations on Dividends and Other Capital
Distributions" in this report.
31
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY
AT OR FOR YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1997 1996(1) 1995 1994 1993
-----------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Earnings per share: (2)
Primary $ 2.85 $ 2.72 $ 2.68 $ 2.32 $ 1.72
Fully diluted 2.82 2.70 2.66 2.32 1.70
Interest income 140,604 125,721 104,884 97,306 105,088
Interest expense 85,137 74,978 54,298 49,539 57,208
Net interest income 55,467 50,743 50,586 47,767 47,880
Provision for loan losses 500 475 1,580 4,348 7,415
Non-interest income 17,197 9,259 7,508 11,106 11,560
Non-interest expenses 50,684 37,061 33,033 32,788 34,221
Income taxes 7,532 7,959 9,064 8,265 6,938
Net income 13,948 14,507 14,417 13,472 10,866
Total assets 1,884,983 1,754,556 1,510,917 1,380,276 1,297,408
Investment securities 43,516 32,837 23,632 20,781 13,833
Mortgage-related securities 240,401 220,998 160,401 187,710 238,465
Loans receivable held for
investment, net 1,461,423 1,361,080 1,231,107 1,066,945 939,194
Deposits 1,312,445 1,240,958 1,098,210 1,065,741 1,062,903
Notes payable to FHLB 374,165 316,869 274,500 186,750 111,000
Other borrowings 57,374 54,613 5,600 - -
Stockholders' equity 117,887 118,402 111,187 105,137 101,987
Shares outstanding (2) 4,581,347 4,934,350 5,063,830 5,394,269 5,937,500
Book value per share
at end of period (2) 25.73 24.00 21.96 19.49 17.18
Dividend paid per share (2) 0.48 0.32 0.23 0.19 0.05
Dividend payout ratio (2) 16.67% 11.76% 8.58% 8.19% 2.79%
Yield on earning assets 7.91 7.87 7.46 7.42 8.41
Cost of funds 4.99 4.96 4.11 4.04 4.86
Interest rate spread 2.92 2.91 3.35 3.38 3.55
Net interest margin 3.12 3.18 3.60 3.64 3.83
Return on average assets 0.76 0.88 1.00 1.00 0.84
Return on average equity 11.78 12.13 13.45 12.89 12.29
Average equity to average assets 6.42 7.24 7.41 7.74 6.86
</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.
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is designed to provide a more thorough discussion of
the Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED MARCH 31, 1997 AND 1996
GENERAL Net income decreased to $13.9 million in fiscal 1997 from $14.5 million
in fiscal 1996 primarily as a result of a one-time charge to recapitalize the
Savings Association Insurance Fund ("SAIF"). Exclusive of the after-tax effects
of a $7.7 million one-time charge to recapitalize the SAIF, net income for the
fiscal year ended March 31, 1997 increased to $18.5 million as compared to $14.5
million for the same period last year. The returns on average assets and
average stockholders' equity for fiscal 1997 were 0.76% and 11.78%,
respectively, as compared to 0.88% and 12.13%, respectively, for fiscal 1996.
These ratios exclusive of the SAIF assessment were 1.00% and 15.66%,
respectively.
The net components of this decrease in earnings for fiscal 1997, as compared to
fiscal 1996, were (i) an increase of $13.6 million in non-interest expenses
(including the SAIF assessment), (ii) an increase of $4.7 million in net
interest income and (iii) an increase of $7.9 million in non-interest income.
NET INTEREST INCOME Net interest income increased by $4.7 million during fiscal
1997 due to increases in the volume of interest-earning assets and interest-
bearing liabilities. The average balances of interest-earning assets and
interest-bearing liabilities increased to $1.78 billion and $1.71 billion in
fiscal 1997, respectively, from $1.60 billion and $1.51 billion, respectively,
in fiscal 1996. The ratio of average interest-earning assets to average
interest-bearing liabilities decreased to 1.04 for fiscal 1997 from 1.06 for
fiscal 1996. The average yield on interest-earning assets (7.91% in fiscal 1997
versus 7.87% in fiscal 1996) increased, as did the average cost on
interest-bearing liabilities (4.99% in fiscal 1997 versus 4.96% in fiscal 1996).
The net interest margin decreased to 3.12% for fiscal 1997 from 3.18% for fiscal
1996 and the interest rate spread increased to 2.92% from 2.91% for fiscal 1997
and 1996, 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 1997 by approximately $5.1 million. Offsetting this
increase, slightly, was a $400,000 decrease in net interest income caused by the
combination of rate and rate/volume changes.
PROVISION FOR LOAN LOSSES Provision for loan losses increased slightly from
$475,000 in fiscal 1996 to $500,000 in fiscal 1997, reflecting an increase in
charge-offs experienced in the consumer loan area in fiscal 1997. The
Corporation's allowance for loan losses remained the same at $22.8 million,
although such amount totaled 1.47% of loans held for investment at March 31,
1997, as compared to 1.59% of loans held for investment at March 31, 1996. For
further discussion of the allowance for loan losses, see "Financial Condition--
Allowance for Loan and Foreclosure Losses."
NON-INTEREST INCOME Non-interest income increased $7.9 million to $17.2 million
for fiscal 1997 compared to $9.3 million for fiscal 1996 as a result of several
factors. Other non-interest income increased $6.2 million for fiscal 1997 due to
increased partnership earnings on partnerships in which the Corporation and two
of its subsidiaries have invested. The partnerships (with 50% ownership) are
consolidated, with the minority interest reported in non-interest expenses.
Insurance commissions increased $666,000 in fiscal 1997 as compared to fiscal
1996 due to increased promotions. Net gain on sale of loans increased $580,000
in fiscal 1997 as compared to fiscal 1996 due to an increase in the volume of
sales of loans during the year.
NON-INTEREST EXPENSES Non-interest expenses increased $13.6 million for fiscal
1997 compared to 1996 as a result of several factors. The majority of the
increase was due to the one-time charge of $7.7 million associated with the
recapitalization of the SAIF during fiscal 1997. Compensation expense
increased $2.3 million for fiscal 1997 due to
33
<PAGE>
the combination of increases in staff, salaries and benefits as a result of
additional offices. Other expenses increased $3.1 million during fiscal 1997 due
to increases in the minority interest in net income of consolidated partnerships
as well as other partnership consolidated expenses.
INCOME TAXES Income tax expense decreased $427,000 for fiscal 1997 as compared
to fiscal 1996. The effective tax rate for fiscal 1997 was 35.07% as compared
to 35.43% for fiscal 1996. See Note 11 to the Consolidated Financial
Statements.
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 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 $1.60 billion and $1.51 billion in
fiscal 1996, respectively, from $1.41 billion and $1.32 billion, respectively,
in fiscal 1995. The average balance increases were partially due to the
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
"Financial Condition--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.
34
<PAGE>
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.
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 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.
35
<PAGE>
AVERAGE BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans (1) $ 1,134,195 $ 90,386 7.97% $ 1,047,092 $ 82,798 7.91% $ 999,008 $75,434 7.55%
Consumer loans 285,558 26,766 9.37 236,767 22,010 9.30 171,700 14,679 8.55
Commercial business loans 27,662 2,866 10.36 25,040 2,628 10.50 19,155 1,836 9.58
----------- --------- ----------- --------- ----------- -------
Total loans receivable (2) 1,447,415 120,018 8.29 1,308,899 107,436 8.21 1,189,863 91,949 7.73
Mortgage-related securities (1) 243,986 15,657 6.42 221,135 14,152 6.40 174,013 10,637 6.11
Investment securities (1) 52,659 2,898 5.50 41,168 2,490 6.05 22,781 1,198 5.26
Interest-bearing deposits 14,098 778 5.52 8,694 488 5.61 7,201 313 4.35
Federal Home Loan Bank stock 18,323 1,253 6.84 17,204 1,155 6.71 12,782 787 6.16
----------- --------- ----------- --------- ----------- -------
Total interest-earning assets 1,776,481 140,604 7.91 1,597,100 125,721 7.87 1,406,640 104,884 7.46
Non-interest-earning assets 68,284 54,330 39,567
----------- ----------- -----------
Total assets $ 1,844,765 $ 1,651,430 $ 1,446,207
----------- ----------- -----------
----------- ----------- -----------
INTEREST-BEARING LIABILITIES
Demand deposits $ 285,641 7,496 2.62 $ 218,811 4,577 2.09 $ 191,667 3,062 1.60
Regular passbook savings 102,420 2,349 2.29 107,707 2,498 2.32 116,946 2,674 2.29
Certificates of deposit 888,274 50,569 5.69 847,113 48,275 5.70 757,617 35,202 4.65
----------- --------- ----------- --------- ----------- -------
Total deposits 1,276,335 60,414 4.73 1,173,631 55,350 4.72 1,066,230 40,938 3.84
Notes payable and other borrowings 416,314 24,203 5.81 324,123 19,148 5.91 240,792 12,871 5.35
Other 14,061 520 3.70 13,064 480 3.67 13,763 489 3.55
----------- --------- ----------- --------- ----------- -------
Total interest-bearing liabilities 1,706,710 85,137 4.99 1,510,818 74,978 4.96 1,320,785 54,298 4.11
--------- ---- --------- ---- ------- ----
Non-interest-bearing liabilities 19,661 21,013 18,264
----------- ----------- -----------
Total liabilities 1,726,371 1,531,831 1,339,049
Stockholders' equity 118,394 119,599 107,158
----------- ----------- -----------
----------- ----------- -----------
Total liabilities and
stockholder's equity $ 1,844,765 $ 1,651,430 $ 1,446,207
----------- ----------- -----------
Net interest income/
interest rate spread (3) 55,467 2.92% $ 50,743 2.91% 50,586 3.35%
--------- ---- --------- ---- ------- ----
Net interest-earning assets $ 69,771 $ 86,282 $ 85,855
----------- ----------- -----------
Net interest margin 3.12% 3.18% 3.60%
---- ---- ----
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.04 1.06 1.07
---- ---- ----
</TABLE>
- ------------------------
(1) Includes assets held and available for sale.
(2) The average balances of loans receivable include non-accrual loans.
(3) The interest rate spread at March 31, 1997, 1996 and 1995 amounted to
2.92%, 2.90% and 3.00%, respectively.
36
<PAGE>
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,
-----------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------------------------------------------------------------------------
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) $ 647 $ 6,887 $ 54 $ 7,588 $ 3,562 $ 3,631 $ 171 $ 7,364
Consumer loans 183 4,535 38 4,756 1,282 5,563 486 7,331
Commercial business loans (34) 276 (4) 238 174 564 54 792
-------- -------- -------- -------- -------- -------- -------- --------
Total loans receivable 796 11,698 88 12,582 5,018 9,758 711 15,487
Mortgage-related securities (1) 39 1,462 4 1,505 500 2,880 135 3,515
Investment securities (1) (224) 695 (63) 408 180 967 145 1,292
Interest-bearing deposits (8) 303 (5) 290 91 65 19 175
Federal Home Loan Bank stock 21 76 1 98 71 272 25 368
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in income on
interest-earning assets 624 14,234 25 14,883 5,860 13,942 1,035 20,837
INTEREST-BEARING LIABILITIES
Demand deposits 1,165 1,398 356 2,919 947 434 134 1,515
Regular passbook savings (28) (122) 1 (149) 38 (211) (3) (176)
Certificates of deposit (49) 2,345 (2) 2,294 7,973 4,158 942 13,073
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits 1,088 3,621 355 5,064 8,958 4,381 1,073 14,412
Notes payable and other borrowings (305) 5,447 (87) 5,055 1,354 4,454 469 6,277
Other 3 37 - 40 17 (25) (1) (9)
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in expense on
interest-bearing liabilities 786 9,105 268 10,159 10,329 8,810 1,541 20,680
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net interest income $ (162) $ 5,129 $ (243) $ 4,724 $ (4,469) $ 5,132 $ (506) $ 157
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
(1) Includes assets held and available for sale.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation had cash equivalents of $1.4
million, securities of $2.0 million, and loans of $674,000 at March 31, 1997.
The Corporation provided loans to its non-bank subsidiary to invest in real
estate held for development and sale. Principal and interest payments are a
predictable source of funds, but funds from sales of real estate are
unpredictable. During fiscal 1997, the Bank made dividend payments of $11.5
million to
37
<PAGE>
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, as well as obtain loans from outside
banks.
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, 1997 and
1996, the Bank's liquidity ratio was 9.2% and 11.3%, respectively.
Operating activities resulted in a net cash inflow of $19.9 million. Operating
cash flows for fiscal 1997 included earnings of $13.9 million and $106.8 million
realized from the sale of mortgage loans held for sale, less $97.0 million
disbursed for loans originated for sale.
Investing activities in fiscal 1997 resulted in a net cash outflow of $140.0
million. Primary investing activities resulting in cash outflows were $90.0
million for the purchase of securities and $157.7 million for the increase in
net loans receivable. The most significant cash inflows from investing
activities were principal payments of $58.6 million received on mortgage-related
securities, as well as $45.4 million from the proceeds of sales of securities
available for sale.
Financing activities resulted in a net cash inflow of $114.5 million including a
net increase in deposits of $69.8 million, a net increase in borrowings of $60.1
million and a cash outflow of $14.2 million for treasury stock purchases.
At March 31, 1997, the Corporation had outstanding commitments to originate
$25.8 million of loans, commitments to extend funds to or on behalf of customers
pursuant to lines and letters of credit of $65.0 million, $2.1 million of loans
sold with recourse to the Corporation in the event of default by the borrower.
(See Note 13 to the Consolidated Financial Statements.) Scheduled maturities of
certificates of deposit during the twelve months following March 31, 1997,
amounted to $736.7 million and scheduled maturities of borrowings during the
same period totaled $316.2 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, 1997, 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 9 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
GENERAL Total assets of the Corporation increased $130.4 million or 7.4% from
$1.75 billion at March 31, 1996, to $1.88 billion at March 31, 1997. This
increase was primarily funded by net increases in deposits of $71.5 million and
in borrowings of $59.8 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 $19.4 million as a net result during the
year of (i) exchanges of $54.9 million of loans with the FNMA for securities
backed by such loans, (ii) purchases of $28.8 million, (iii) principal
repayments and market value adjustments of $58.5 million and (iv) sales of $5.6
million. Mortgage-related securities consisted of $207.3 million mortgage-
38
<PAGE>
backed securities and $33.1 million mortgage-derivative securities at March 31,
1997. See Notes 1 and 3 to the Consolidated Financial Statements.
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 net loans (including loans held for sale) increased
$91.7 million during fiscal 1997 from $1.38 billion at March 31, 1996, to $1.47
billion at March 31, 1997. The activity included (i) originations and purchases
of $752.5 million, (ii) sales of loans held for sale of $106.8 million, which
included exchanges of $54.9 million for mortgage-backed securities and (iii)
principal repayments and other reductions of $428.8 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
1997 1996 (DECREASE)
----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
FIRST MORTGAGE LOANS:
Single-family residential $ 731,732 $ 745,170 $ (13,438)
Multi-family residential 164,729 162,432 2,297
Commercial real estate 171,186 139,918 31,268
Construction and land 122,266 98,264 24,002
------------ ------------ ------------
Total first mortgage loans 1,189,913 1,145,784 44,129
OTHER LOANS:
Second mortgage 176,348 140,302 36,046
Education 112,420 88,674 23,746
Commercial business and leases 29,022 30,715 (1,693)
Credit card and other consumer loans 34,682 28,481 6,201
------------ ------------ ------------
Total other loans 352,472 288,172 64,300
------------ ------------ ------------
Gross loans receivable 1,542,385 1,433,956 108,429
Less: Net items to loans receivable (80,962) (72,876) (8,086)
------------ ------------ ------------
Net loans receivable $ 1,461,423 $ 1,361,080 $ 100,343
------------ ------------ ------------
------------ ------------ ------------
Loans held for sale $ 5,348 $ 13,968 $ (8,620)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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) increased to $13.8 million or 0.73% of total assets at
March 31, 1997 from $10.3 million or 0.59% of total assets at March 31, 1996.
Non-performing assets are summarized as follows for the dates indicated:
39
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Single-family residential $ 1,712 $ 629 $ 833 $ 565 $ 2,273
Multi-family residential 3,199 - - 37 1,593
Commercial real estate 778 470 624 617 12,365
Construction and land 58 81 81 81 135
Consumer 438 202 219 333 297
Commercial business 610 508 736 831 984
-------- -------- --------- -------- --------
Total non-accrual loans 6,795 1,890 2,493 2,464 17,647
Real estate held for development and sale 2,736 2,319 857 2,767 4,916
Foreclosed properties and repossessed assets, net 4,222 6,077 7,116 5,294 2,052
-------- -------- --------- -------- --------
Total non-performing assets $ 13,753 $ 10,286 $ 10,466 $ 10,525 $ 24,615
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
Performing troubled debt restructurings $ 329 $ 332 $ 335 $ 4,687 $ 10,011
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
Total non-accrual loans to total loans 0.44% 0.13% 0.19% 0.22% 1.80%
Total non-performing assets to total assets 0.73 0.59 0.69 0.76 1.90
Allowance for loan losses to total loans 1.47 1.59 1.75 1.98 1.88
Allowance for loan losses to total
non-accrual loans 334.81 1206.72 899.68 897.69 104.48
Allowance for loan and foreclosure losses
to total non-performing assets 173.26 228.70 221.82 213.42 75.43
</TABLE>
Non-accrual loans increased $4.9 million during fiscal 1997 primarily due to the
addition of a $2.5 million loan representing a 26% participation secured by a
48-unit condominium project in Bloomington, Minnesota. Voluntary foreclosure on
this project is sought by the Bank. Slight increases occurred in the other
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 $417,000
during fiscal 1997 as a result of an increase in capitalized improvement costs
on a multi-family residential property acquired by foreclosure and transferred
in fiscal 1996 to a Bank subsidiary for improvement and management.
Foreclosed properties and repossessed assets decreased $1.9 million in fiscal
1997 primarily due to the removal of the hotel and office building in Garden
Grove, California. This was due to a repayment plan from the bankruptcy which
required principal and interest payments. There was one property in this
classification with a carrying value of greater than $1.0 million which 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 and loans sold with recourse 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
40
<PAGE>
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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 22,807 $ 22,429 $ 22,119 $ 18,437 $ 14,751
Charge-offs:
Mortgage (222) (439) (1,460) (2,607) (2,749)
Consumer (483) (104) (36) (67) (65)
Commercial business (275) (455) (309) (948) (1,343)
-------- --------- --------- --------- ---------
Total charge-offs (980) (998) (1,805) (3,622) (4,157)
-------- --------- --------- --------- ---------
Recoveries:
Mortgage 250 298 374 2,809 253
Consumer 5 10 17 14 23
Commercial business 168 43 144 133 152
-------- --------- --------- --------- ---------
Total recoveries 423 351 535 2,956 428
-------- --------- --------- --------- ---------
Net charge-offs (557) (647) (1,270) (666) (3,729)
-------- --------- --------- --------- ---------
Provision 500 475 1,580 4,348 7,415
Acquired bank's allowance - 550 - - -
-------- --------- --------- --------- ---------
Allowance at end of year $ 22,750 $ 22,807 $ 22,429 $ 22,119 $ 18,437
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Net charge-offs to average loans
held for sale and for investment (0.04)% (0.05)% (0.11)% (0.06)% (0.38)%
---- ---- ---- ---- ----
</TABLE>
The fiscal 1997 provision for loan losses totaled $500,000 as compared to
$475,000 in fiscal 1996. The provision for loan losses for fiscal years 1997
and 1996 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.
41
<PAGE>
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,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------
% 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 $ 184 0.03% $ 200 0.03% $ 15 0.00% $ 54 0.01% $ 215 0.04%
Multi-family residential 379 0.23 263 0.16 365 0.26 427 0.30 721 0.41
Commercial real estate 645 0.38 476 0.34 916 0.74 917 0.71 1,931 1.59
Construction and land - - 4 - 87 0.11 107 0.18 107 0.27
Unallocated mortgage 19,003 1.60 20,054 1.75 19,186 1.81 18,841 1.98 13,709 1.66
-------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total mortgage loans 20,211 1.70 20,997 1.83 20,569 1.94 20,346 2.14 16,683 2.02
Consumer 1,169 0.36 802 0.31 645 0.32 479 0.32 398 0.30
Commercial business 1,370 4.72 1,008 3.28 1,215 5.59 1,294 6.69 1,356 6.39
-------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total allowance for
loan losses $ 22,750 1.47% $22,807 1.59% $22,429 1.75% $22,119 1.98% $18,437 1.88%
-------- ---- ------- ---- ------- ---- ------- ---- ------- ----
-------- ---- ------- ---- ------- ---- ------- ---- ------- ----
</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 (income) of operations of
foreclosure properties."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 717 $ 787 $ 343 $ 130 $ 1,882
Provision 500 200 950 1,225 1,400
Charge-offs (139) (270) (506) (1,012) (3,152)
-------- ------- ------- -------- --------
Allowance at end of year $ 1,078 $ 717 $ 787 $ 343 $ 130
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
</TABLE>
The fiscal 1997 provision for foreclosure losses totaled $500,000 as compared to
$200,000 for fiscal 1996. Charge-offs declined by $131,000 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, 1997, 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 $71.5 million during fiscal 1997 to $1.31 billion,
of which $53.8 million was in certificates of deposit. The remaining increase
was due to a new market yield demand deposit account. The weighted average cost
of deposits increased to 4.77% at fiscal year-end 1997 compared to 4.67% at
fiscal year-end 1996.
BORROWINGS FHLB advances increased $57.3 million during fiscal 1997 to fund the
increased loan activity. At March 31, 1997, advances totaled $374.2 million
with an average interest rate of 5.74%. Reverse repurchase agreements decreased
$8.2 million during fiscal 1997. Other loans payable increased $11.0 million
resulting from
42
<PAGE>
the Corporation and subsidiary borrowings. For additional information, see Note
8 to the Consolidated Financial Statements.
STOCKHOLDERS' EQUITY Stockholders' equity at March 31, 1997 was $117.9 million,
or 6.25% of total assets, compared to $118.4 million and 6.75% of total assets
at March 31, 1996. Stockholders' equity increased during the year as a result
of (i) net income of $13.9 million (ii) the repayment of ESOP borrowings of
$928,000, (iii) the exercise of stock options of $402,000, (iv) the vesting of
recognition plan shares of $300,000 and (v) the tax benefit from certain stock
options of $357,000, which were more than offset by (i) the purchase of treasury
stock of $14.2 million, (ii) the payment of cash dividends of $2.2 million and
(iii) the recording of the net unrealized loss on available-for-sale securities
of $5,000.
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 occasionally sells adjustable-rate loans at origination
to private investors.
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 involve 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, 1997, for one year or
less was a negative 0.68% 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.
43
<PAGE>
The following table summarizes the Corporation's interest rate sensitivity gap
position as of March 31, 1997.
<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 $ 97,192 $ 72,426 $ 25,891 $ 12,913 $ 208,422
Variable 713,332 202,461 5,949 - 921,742
Consumer loans (1) 214,864 80,392 27,756 - 323,012
Commercial business loans (1) 24,617 2,944 851 - 28,412
Mortgage-related securities (3) 103,364 95,881 28,625 12,531 240,401
Investment securities and other
interest-earning assets (3) 41,754 8,862 18,424 - 69,040
----------- ---------- --------- ---------- -----------
Total $ 1,195,123 $ 462,966 $ 107,496 $ 25,444 $ 1,791,029
----------- ---------- --------- ---------- -----------
----------- ---------- --------- ---------- -----------
Interest-bearing liabilities:
Deposits (4) $ 891,677 $ 231,728 $ 69,143 $ 41,614 $ 1,234,162
Borrowings 316,205 107,038 8,296 - 431,539
----------- ---------- --------- ---------- -----------
Total $ 1,207,882 $ 338,766 $ 77,439 $ 41,614 $ 1,665,701
----------- ---------- --------- ---------- -----------
----------- ---------- --------- ---------- -----------
Interest sensitivity gap $ (12,759) $ 124,200 $ 30,057 $ (16,170) $ 125,328
----------- ---------- --------- ---------- -----------
----------- ---------- --------- ---------- -----------
Cummulative interest sensitivity gap $ (12,759) $ 111,441 $ 141,498 $ 125,328
----------- ---------- --------- ----------
----------- ---------- --------- ----------
Cummulative interest sensitivity gap
as a percent of total assets (0.68)% 5.91% 7.51% 6.65%
---- ---- ---- ----
</TABLE>
(1) Balances have been reduced for (i) undisbursed loan proceeds, which
aggregated $54.0 million, and (ii) non-accrual loans, which amounted to
$6.8 million.
(2) Includes $5.3 million of loans held for sale spread throughout the periods.
(3) Includes $115.9 million of securities available for sale spread throughout
the periods.
(4) Does not include $70.4 million of demand accounts because they are non-
interest-bearing. Also does not include accrued interest payable, which
amounted to $7.7 million. Projected decay rates for demand deposits and
passbook savings were provided by the OTS.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . 46
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . 47
Consolidated Statements of Changes in Stockholders' Equity . . . . . 48
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . 49
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 51
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . 70
Management and Audit Committee Report. . . . . . . . . . . . . . . . 71
SUPPLEMENTAL DATA
Quarterly Financial Information. . . . . . . . . . . . . . . . . . . 72
45
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1997 1996
---------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 31,482 $ 35,454
Interest-bearing deposits 6,543 8,235
----------- -----------
Cash and cash equivalents 38,025 43,689
Securities available for sale:
Investment securities 35,569 30,241
Mortgage-related securities 80,300 110,268
Securities held to maturity:
Investment securities (fair value of $7.9 million and $2.6 million,
respectively) 7,947 2,596
Mortgage-related securities (fair value of $157.8 million and
$109.9 million, respectively) 160,101 110,730
Loans receivable, net:
Held for sale 5,348 13,968
Held for investment 1,461,423 1,361,080
Foreclosed properties and repossessed assets, net 4,222 6,077
Real estate held for development and sale 23,706 13,640
Office properties and equipment 18,662 18,906
Federal Home Loan Bank stock--at cost 18,981 16,019
Accrued interest on investments and loans 13,729 11,549
Prepaid expenses and other assets 16,970 15,793
----------- -----------
Total assets $ 1,884,983 $ 1,754,556
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,312,445 $ 1,240,958
Advance payments by borrowers for taxes and insurance 7,675 7,938
Federal Home Loan Bank and other borrowings 392,204 323,900
Reverse repurchase agreements 39,335 47,582
Other liabilities 15,437 15,776
----------- -----------
Total liabilities 1,767,096 1,636,154
----------- -----------
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 50,443 50,086
Retained earnings 110,735 100,191
Less: Treasury stock (1,668,315 shares and 1,315,312 shares,
respectively) (41,937) (29,298)
Deferred compensation due employees - (928)
Common stock purchased by recognition plans (1,246) (1,546)
Net unrealized losses on securities available for sale, net of tax (733) (728)
----------- -----------
Total stockholders' equity 117,887 118,402
----------- -----------
Total liabilities and stockholders' equity $ 1,884,983 $ 1,754,556
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
46
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 120,018 $ 107,436 $ 91,949
Mortgage-related securities 15,657 14,152 10,637
Investment securities 4,151 3,645 1,985
Interest-bearing deposits 778 488 313
--------- --------- ---------
Total interest income 140,604 125,721 104,884
INTEREST EXPENSE:
Deposits 60,414 55,350 40,938
Notes payable and other borrowings 24,203 19,148 12,871
Other 520 480 489
--------- --------- ---------
Total interest expense 85,137 74,978 54,298
--------- --------- ---------
Net interest income 55,467 50,743 50,586
Provision for loan losses 500 475 1,580
--------- --------- ---------
Net interest income after provision for loan losses 54,967 50,268 49,006
NON-INTEREST INCOME:
Loan servicing income 2,970 2,741 2,444
Service charges on deposits 3,679 3,175 2,577
Insurance commissions 1,366 700 1,012
Gain (loss) on sale of assets 1,241 892 (130)
Gain on sales of real estate 5,466 - -
Other 2,475 1,751 1,605
--------- --------- ---------
Total non-interest income 17,197 9,259 7,508
NON-INTEREST EXPENSES:
Compensation 21,352 19,067 17,041
Occupancy 3,171 2,800 2,511
Federal insurance premiums 2,201 2,669 2,458
Federal insurance special assessment 7,663 - -
Furniture and equipment 3,049 2,557 2,153
Data processing 2,164 2,133 1,785
Marketing 1,962 1,576 1,659
Net cost (income) of operations of foreclosure properties (128) 127 220
Other 9,250 6,132 5,206
--------- --------- ---------
Total non-interest expenses 50,684 37,061 33,033
--------- --------- ---------
Income before income taxes 21,480 22,466 23,481
Income taxes 7,532 7,959 9,064
--------- --------- ---------
Net income $ 13,948 $ 14,507 $ 14,417
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE
Primary $ 2.85 $ 2.72 $ 2.68
Fully diluted 2.82 2.70 2.66
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
47
<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 CAPITAL EARNINGS STOCK EMPLOYEES PLANS LOSSES TOTAL
----------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 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) - - - (8,149) - - - (8,149)
Exercise of stock options - - (214) 480 - - - 266
Cash dividend ($0.23 per share) - - (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 net 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) - - - (19,756) - - - (19,756)
Exercise of stock options - - (758) 1,064 - - - 306
Cash dividend ($0.32 per share) - - (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 net 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
Net income - - 13,948 - - - - 13,948
Purchase of treasury stock
(397,399 shares) - - - (14,221) - - - (14,221)
Exercise of stock options - - (1,180) 1,582 - - - 402
Cash dividend ($0.475 per share) - - (2,224) - - - - (2,224)
Recognition plan shares vested - - - - - 300 - 300
Tax benefit from stock
related compensation - 357 - - - - - 357
Repayment of ESOP borrowings - - - - 928 - - 928
Change in net unrealized
losses on available-for-sale
securities, net of tax of $60,000 - - - - - - (5) (5)
----- -------- -------- -------- -------- -------- ------ --------
Balance at March 31, 1997 $ 625 $ 50,443 $110,735 $(41,937) $ - $ (1,246) $ (733) $117,887
----- -------- -------- -------- -------- -------- ------ --------
----- -------- -------- -------- -------- -------- ------ --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
48
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 13,948 $ 14,507 $ 14,417
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans and real estate 1,000 675 2,530
Provision for depreciation and amortization 2,122 1,885 1,599
Loans originated for sale (96,996) (180,055) (81,711)
Proceeds from sales of loans held for sale 106,841 178,238 108,329
Net loss (gain) on sales of loans and securities (1,241) (892) 130
Increase in accrued interest receivable (2,180) (2,367) (1,638)
Increase in accrued interest payable 2,067 442 2,187
Increase (decrease) in accounts payable (1,821) 2,392 (2,067)
Other (3,882) 1,410 (6,095)
--------- --------- ---------
Net cash provided by operating activities 19,858 16,235 37,681
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 39,809 50,562 18,104
Proceeds from maturities of investment securities 11,099 8,125 1,996
Purchase of investment securities available for sale (55,328) (62,646) (23,093)
Purchase of investment securities held to maturity (5,949) (2,500) (100)
Proceeds from sales of mortgage-related securities 5,617 9,107 890
available for sale
Purchase of mortgage-related securities available for sale (2,057) (5,340) (3,498)
Purchase of mortgage-related securities held to maturity (26,725) (11,561) (15,149)
Principal collected on mortgage-related securities 58,554 44,734 44,256
Net increase in loans receivable (157,684) (146,808) (185,462)
Purchase of office properties and equipment (2,156) (2,485) (2,809)
Sales of office properties and equipment 324 214 87
Sales of real estate 15,767 3,407 6,313
Purchase of real estate held for sale (21,228) (10,374) (1,655)
Increase in capitalized expense on real estate (64) (1,368) (496)
--------- --------- ---------
Net cash used by investing activities (140,021) (126,933) (160,616)
</TABLE>
49
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Increase in deposit accounts $ 69,820 $ 77,955 $ 30,858
Increase (decrease) in advance payments by borrowers
for taxes and insurance (263) (813) 778
Proceeds of notes payable to Federal Home Loan Bank 525,496 407,250 368,350
Repayment of notes payable to Federal Home Loan Bank (468,200) (391,195) (280,600)
Increase (decrease) in securities sold under agreements (8,247) 41,982 5,600
to repurchase
Increase in other loans payable 11,008 7,031 -
Treasury stock purchased (14,221) (19,756) (8,149)
Cash acquired as a result of acquisition - 3,486 -
Reissuance of treasury stock for options 402 306 266
Payments of cash dividends to stockholders (2,224) (1,652) (1,190)
Cash repayment of ESOP borrowing 928 928 600
--------- --------- ---------
Net cash provided by financing activities 114,499 125,522 116,513
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (5,664) 14,824 (6,422)
Cash and cash equivalents at beginning of year 43,689 28,865 35,287
--------- --------- ---------
Cash and cash equivalents at end of year $ 38,025 $ 43,689 $ 28,865
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 83,070 $ 74,536 $ 52,111
Income taxes 7,648 8,370 9,248
Non-cash transactions:
Mortgage loans transferred to loans held for sale 126,423 2,573 13,040
Loans transferred to foreclosed properties 1,903 1,614 6,680
Mortgage loans held for investment converted into
mortgage-backed securities held to maturity 54,938 96,772 -
Mortgage-related securities transferred to
available for sale (at amortized cost) - 90,376 -
American Equity BanCorp purchase:
Loans held for sale - (5,969) -
Loans receivable - (85,244) -
Other - (17) -
Deposits - 64,803 -
Notes payable to Federal Home Loan Bank - 26,314 -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
50
<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. 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. (IDI), which
has invested in various limited partnerships. IDI created a wholly-owned
subsidiary in fiscal 1997, Nevada Investment Directions, Inc., ("NIDI"), which
has also invested in various limited partnerships.
On June 30, 1995, the Corporation acquired American Equity BanCorp ("American")
of Stevens Point, Wisconsin. Upon closing, American's wholly-owned subsidiary,
American Equity 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. American had total assets,
deposits and stockholders' equity of $102.4 million, $65.3 million and $9.4
million, respectively.
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, IDI and
their respective 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 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, 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, as well as the
valuation of intangible assets, investments, mortgage-related securities and
mortgage servicing rights.
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 that the Corporation has the intent and ability to hold to
maturity are classified as held-to-maturity securities and 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.
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.
51
<PAGE>
Discounts and premiums on investment and mortgage-backed securities are accreted
and amortized into interest income using the interest method over the estimated
remaining contractual life of the assets.
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 the current
originations of certain fixed-rate mortgage loans and certain adjustable-rate
mortgage loans and 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.
MORTGAGE SERVICING RIGHTS On April 1, 1996, the Corporation adopted SFAS No.
122, "Accounting for Mortgage Servicing Rights," which provides for the
recognition of loan servicing rights as an asset and when loans are sold with
servicing rights retained. The adoption of SFAS No. 122 resulted in an increase
in net income of $1,031,000 for the year ended March 31, 1997.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair values of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on predominant risk characteristics of the underlying loans which include
product type (i.e., fixed or adjustable) and interest rate bands. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.
INTEREST ON LOANS 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. 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 $670,000 and $1.2
million were established at March 31, 1997 and 1996, 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 amortized as an adjustment to the
related loan's 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 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. 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 maintained at a level believed
adequate by management to absorb losses in the respective portfolios.
Management's evaluation of the allowance for 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, holding and selling
costs and regulatory agencies. 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. 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 a multi-family residential property. These
investments are carried at the lower of cost plus capitalized development costs
and interest, less accumulated depreciation, or estimated fair value.
52
<PAGE>
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.
STOCK OPTIONS The Corporation has elected to follow Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Corporation's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
INCOME TAXES The Corporation provides for income taxes using the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
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 computing primary
earnings per share for the years ended March 31, 1997, 1996 and 1995 is
4,893,782, 5,341,652 and 5,387,000, respectively. The resulting number of shares
used in computing fully diluted earnings per share for the years ended March 31,
1997, 1996 and 1995 is 4,937,738, 5,369,046 and 5,412,000, respectively.
PENDING ACCOUNTING CHANGE The FASB has issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
which is effective for transfers occurring after December 31, 1996. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on a
consistent application of a financial-components approach that focuses on
control. The FASB subsequently issued SFAS No. 127, in December, 1996, which
provides for the deferral of the effective date of certain provisions of SFAS
No. 125. Management believes that the effect of adopting these statements will
not be material to the Corporation's financial condition or results of
operations.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted on December 31, 1997.
At that time, the Corporation will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the years ended March 31, 1997 and
1996 of $0.14 and $0.12 per share, respectively. The impact of SFAS No. 128 on
the calculation of fully diluted earnings per share for these years is not
expected to be material.
RECLASSIFICATIONS Certain 1996 and 1995 accounts have been reclassified to
conform to the 1997 presentations.
53
<PAGE>
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities are as follows (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------
<S> <C> <C> <C> <C>
AT MARCH 31, 1997:
Available for Sale:
U.S. Government and federal agency obligations $ 26,877 $ 15 $ (375) $ 26,517
Mutual funds 6,068 - (2) 6,066
Corporate stock and other 2,685 301 - 2,986
-------- ------ ------- --------
$ 35,630 $ 316 $ (377) $ 35,569
-------- ------ ------- --------
-------- ------ ------- --------
Held to Maturity:
U.S. Government and federal agency obligations $ 7,947 $ 1 $ (58) $ 7,890
-------- ------ ------- --------
-------- ------ ------- --------
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
-------- ------ ------- --------
-------- ------ ------- --------
</TABLE>
Proceeds from sales of investment securities available for sale during the years
ended March 31, 1997, 1996 and 1995 were $39,809,000, $50,562,000 and
$18,104,000, respectively. Gross gains of $16,000, $31,000 and zero were
realized on sales in 1997, 1996 and 1995, respectively. Gross losses of zero,
$28,000 and $44,000 were realized in 1997, 1996 and 1995, respectively.
The amortized cost and fair value of investment securities by contractual
maturity at March 31, 1997 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.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 13,197 $ 13,186 $ - $ -
Due after one year through five years 19,748 19,397 7,947 7,890
Corporate stock 2,685 2,986 - -
-------- -------- ------- --------
$ 35,630 $ 35,569 $ 7,947 $ 7,890
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
54
<PAGE>
NOTE 3 - MORTGAGE-RELATED SECURITIES
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.
The amortized cost and fair values of mortgage-related securities are as follows
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
AT MARCH 31, 1997:
Available for Sale:
Mortgage-derivative securities $ 2,164 $ - $ (23) $ 2,141
Mortgage-backed securities 79,234 168 (1,243) 78,159
--------- ------ -------- ---------
$ 81,398 $ 168 $ (1,266) $ 80,300
--------- ------ -------- ---------
--------- ------ -------- ---------
Held to Maturity:
Mortgage-derivative securities $ 30,961 $ 4 $ (403) $ 30,562
Mortgage-backed securities 129,140 342 (2,219) 127,263
--------- ------ -------- ---------
$ 160,101 $ 346 $ (2,622) $ 157,825
--------- ------ -------- ---------
--------- ------ -------- ---------
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
--------- ------ -------- ---------
--------- ------ -------- ---------
</TABLE>
Proceeds from sales of mortgage-related securities available for sale during the
years ended March 31, 1997, 1996 and 1995 were $5,617,000, $9,107,000 and
$890,000, respectively. No gains or losses were realized on sales of
mortgage-related securities in 1997. Gross gains of $248,000 and $1,000 were
realized on sales in 1996 and 1995, respectively. Gross losses of $4,000 and
$4,000 were realized in 1996 and 1995, respectively.
55
<PAGE>
NOTE 4 - LOANS RECEIVABLE
Loans receivable held for investment consist of the following (in thousands):
MARCH 31,
----------------------------
1997 1996
----------------------------
First mortgage loans:
Single-family residential $ 731,732 $ 745,170
Multi-family residential 164,729 162,432
Commercial real estate 171,186 139,918
Construction 106,536 77,187
Land 15,730 21,077
----------- -----------
1,189,913 1,145,784
Second mortgage loans 176,348 140,302
Education loans 112,420 88,674
Commercial business loans and leases 29,022 30,715
Credit card and other consumer loans 34,682 28,481
----------- -----------
1,542,385 1,433,956
Less:
Undisbursed loan proceeds 54,002 46,493
Allowance for loan losses 22,750 22,807
Unearned loan fees 3,373 2,453
Discount on purchased loans 748 1,005
Unearned interest 89 118
----------- -----------
80,962 72,876
----------- -----------
$ 1,461,423 $ 1,361,080
----------- -----------
----------- -----------
A summary of the activity in the allowance for loan losses follows (in
thousands):
YEAR ENDED MARCH 31,
-------------------------------------
1997 1996 1995
-------------------------------------
Balance at beginning of year $ 22,807 $ 22,429 $ 22,119
Acquired bank's allowance - 550 -
Provisions 500 475 1,580
Charge-offs (980) (998) (1,805)
Recoveries 423 351 535
--------- --------- ---------
Balance at end of year $ 22,750 $ 22,807 $ 22,429
--------- --------- ---------
--------- --------- ---------
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.
Mortgage loans serviced for others are not included in the consolidated balance
sheets. The unpaid principal balances of mortgage loans serviced for others were
approximately $1,101,211,000 and $847,081,000 at March 31, 1997 and 1996,
respectively.
Mortgage servicing rights, included in other assets, of $1,370,000, were
capitalized during the year ended March 31, 1997. A valuation reserve of
$113,000 has been established at March 31, 1997, for mortgage servicing right
strata in which amortized cost exceeded their fair value. Amortization of
mortgage servicing rights was $148,000 for the year ended March 31, 1997.
56
<PAGE>
NOTE 5 - FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties, repossessed assets and properties subject to redemption
had a cost of $5,300,000 and $6,794,000 at March 31, 1997 and 1996,
respectively. At March 31, 1997 and 1996, an allowance for losses of $1,078,000
and $717,000, respectively, related to these assets.
The summary of the activity in the allowance for losses follows (in thousands):
YEAR ENDED MARCH 31,
--------------------------------
1997 1996 1995
--------------------------------
Balance at beginning of year $ 717 $ 787 $ 343
Provision 500 200 950
Charge-offs (139) (270) (506)
------- ------ ------
Balance at end of year $ 1,078 $ 717 $ 787
------- ------ ------
------- ------ ------
Provision for losses on foreclosed properties and repossessed assets are
included in "Cost (income) from operations of foreclosure properties" in the
consolidated statements of income.
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands):
MARCH 31,
---------------------
1997 1996
---------------------
Land and land improvements $ 3,949 $ 3,951
Office buildings 17,292 17,322
Furniture and equipment 15,812 14,180
Leasehold improvements 2,141 2,084
-------- --------
39,194 37,537
Less allowance for depreciation and amortization 20,532 18,631
-------- --------
$ 18,662 $ 18,906
-------- --------
-------- --------
57
<PAGE>
NOTE 7 - DEPOSITS
Deposits are summarized as follows (in thousands):
MARCH 31,
-------------------------
1997 1996
-------------------------
Negotiable order of withdrawal ("NOW") accounts $ 136,040 $ 139,786
Money market accounts 168,970 143,189
Passbook accounts 100,124 106,092
Certificates of deposit 899,564 845,811
---------- ----------
1,304,698 1,234,878
Accrued interest 7,747 6,080
---------- ----------
$1,312,445 $1,240,958
---------- ----------
---------- ----------
A summary of annual maturities of certificates of deposit follows (in
thousands):
MATURES DURING YEAR ENDED MARCH 31, AMOUNT
- -------------------------------------------------------------------------------
1998 $ 736,707
1999 116,618
2000 20,424
2001 20,436
Thereafter 5,379
----------
$ 899,564
----------
----------
At March 31, 1997 and 1996, certificates of deposit with balances greater than
or equal to $100,000 amounted to $103,991,000 and $68,525,000, respectively.
NOTE 8 - BORROWINGS
The Bank enters into sales of 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, 1997 and
1996, liabilities recorded under agreements to repurchase were $39,335,000 and
$47,582,000, respectively. The reverse repurchase agreements had a
weighted-average interest rate of 5.43% and 5.32% at March 31, 1997 and 1996,
respectively, and mature within one year of the fiscal year-end. Based upon
month-end balances, securities sold under agreements to repurchase averaged
$63,189,000 and $35,352,000 during 1997 and 1996, respectively. The maximum
outstanding at any month-end was $67,316,000 and $72,850,000 during 1997 and
1996, respectively. The agreements were collateralized by mortgage-backed
securities available for sale and held to maturity with market values of
$40,609,471 and $72,747,000 at March 31, 1997 and 1996, respectively.
58
<PAGE>
Federal Home Loan Bank ("FHLB") advances and other loans payable consist of the
following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996
---------------------------------------------
MATURES DURING WEIGHTED WEIGHTED
YEAR ENDED MARCH 31, AMOUNT RATE AMOUNT RATE
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHLB advances: 1997 $ - - $ 177,500 5.71%
1998 268,370 5.73% 109,370 5.75
1999 79,950 5.73 29,950 5.34
2000 25,049 5.81 49 5.78
2001 796 6.24 - -
Other loans payable various 18,039 8.19 7,031 9.94
-------- ----------
$392,204 5.85% $ 323,900 5.78%
-------- ---- ---------- ----
-------- ---- ---------- ----
</TABLE>
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 $18,981,000 at March 31, 1997.
NOTE 9 - STOCKHOLDERS' EQUITY
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.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of core, tangible, and
risk-based capital. Management believes, as of March 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of March 31, 1997, the most recent notification from the Office of Thrift
Supervision categorizes the Bank as well capitalized under the framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum core, tangible, and risk-based capital ratios as set forth in
the following table. There have been no conditions or events since that
notification that management believes have changed the Bank's category. The
qualification results in a lower assessment of FDIC premiums and other benefits.
59
<PAGE>
The following table summarizes the Bank's capital ratios and the ratios required
by its regulators at March 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES OTS REQUIREMENTS
------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 1997:
Tangible capital
(to tangible assets) $ 106,206 5.77% $ 27,887 1.50% N/A N/A
Core leverage capital
(to adjusted tangible assets) 107,206 5.77 55,774 3.00 $ 92,956 5.00
Risk-based capital
(to risk-based assets) 121,429 10.69 90,882 8.00 113,602 10.00
Core leverage capital
(to risk-based assets) 107,206 9.44 45,441 4.00 68,161 6.00
AS OF MARCH 31, 1996:
Tangible capital
(to tangible assets) 105,987 6.10 26,070 1.50 N/A N/A
Core leverage capital
(to adjusted tangible assets) 105,987 6.10 52,141 3.00 $ 86,901 5.00
Risk-based capital
(to risk-based assets) 119,173 11.25 84,758 8.00 105,948 10.00
Core leverage capital
(to risk-based assets) 105,987 10.00 42,379 4.00 63,569 6.00
</TABLE>
The Bank may not declare or pay a cash dividend if such declaration and payment
would violate regulatory requirements. 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.
NOTE 10 - 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 matches 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 $335,000, $307,000 and $272,000
for the years ended March 31, 1997, 1996 and 1995, respectively.
The Corporation sponsors an Employee Stock Ownership Plan ("ESOP") which covers
substantially all employees with more than one year of employment and who are at
least 21 years of age. In 1992, the ESOP borrowed $3,000,000 from the
Corporation to purchase 375,000 common shares. The Bank repaid the borrowing
and all shares were released in 1997. Any discretionary contributions to the
ESOP and the shares calculated to be released from the suspense account have
been allocated among participants on the basis of compensation. Forefeitures
are reallocated among the remaining participating employees. 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 ESOP plan expense for the fiscal years 1997, 1996 and 1995 was
$1,003,000, $1,074,000 and $746,000, respectively.
60
<PAGE>
The activity in the ESOP shares is as follows:
YEAR ENDED MARCH 31,
-------------------------------------
1997 1996 1995
-------------------------------------
Balance at beginning of year 409,641 377,475 379,238
Additional shares purchased - 36,791 2,225
Shares distributed for terminations (7,105) - (276)
Sale of shares for cash distributions (7,358) (4,625) (3,712)
------- ------- -------
Balance at end of year 395,178 409,641 377,475
Allocated shares included above 395,178 329,620 236,752
------- ------- -------
Unreleased shares - 80,021 140,723
------- ------- -------
------- ------- -------
During 1992, the Corporation formed four Management Recognition Plans ("MRPs")
which acquired a total of 4% of the shares of common stock. 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. Of these shares, 2,800 shares and 1,200
shares were granted during the years ended March 31, 1997 and 1996,
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 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. During fiscal 1996, the existing MRP of American was merged into one of
the Corporation's MRPs. The amount amortized to expense was $334,000, $287,000
and $246,000 for the years ended March 31, 1997, 1996 and 1995, respectively.
Shares vested during the years ended March 31, 1997, 1996 and 1995 and
distributed to the employees totalled 32,841, 30,041 and 30,041 respectively.
The remaining unamortized cost of the MRPs is reflected as a reduction of
stockholders' equity.
The Corporation 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 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.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Corporation has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The
Corporation's pro forma net income and pro forma primary earnings per share for
fiscal 1997 and 1996 was not materially different from the net income and
primary earnings per share disclosed in the consolidated statements of income.
61
<PAGE>
A summary of stock options activity follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 553,419 $ 15.48 383,750 $ 10.99 352,375 $ 8.71
Granted 62,422 34.02 210,270 22.52 64,688 21.84
Exercised (44,397) 8.54 (36,851) 8.30 (33,313) 8.00
Foreited (1,460) 20.68 (3,750) 20.07 -
------- ------- ------- -
Outstanding at end of year 569,984 18.04 553,419 15.48 383,750 10.99
------- ------- -------
------- ------- -------
Options exerciseable at year-end 157,891 260,329 94,781
------- ------- -------
------- ------- -------
</TABLE>
The range of exercise prices of options exercisable at March 31, 1997 was $8.00
to $34.50. At March 31, 1997, options for 418,288 shares were available for
future grants. The weighted remaining contractual life of outstanding options
at the end of the year is 7 years.
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 1997, 1996 and 1995 was $358,000, $134,000 and $184,000,
respectively. The second plan provides for contributions by the Corporation to
supplement the participant's retirement. The expense associated with this plan
for fiscal 1997, 1996 and 1995 was $330,000, $534,000 and $133,000,
respectively.
NOTE 11 - INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns.
In prior years, the Bank qualified under provisions of the Internal Revenue Code
which permitted as a deduction from taxable income allowable bad debt deductions
which significantly exceeded actual losses and the financial statement loan loss
provisions. At March 31, 1997, retained earnings included approximately
$31,320,000 for which no provision for income tax has been made. Income taxes
of approximately $10,900,000 would be imposed if the Bank were to use these
reserves for any purpose other than to absorb bad debt losses.
62
<PAGE>
The provision (benefit) for income taxes consists of the following (in
thousands):
YEAR ENDED MARCH 31,
-----------------------------
1997 1996 1995
-----------------------------
Current:
Federal: $ 6,282 $ 6,629 $ 8,869
State 1,362 1,038 1,458
-------- -------- --------
7,644 7,667 10,327
Deferred:
Federal 321 276 (1,076)
State (433) 16 (187)
-------- -------- --------
(112) 297 (1,263)
-------- -------- --------
$ 7,532 $ 7,959 $ 9,064
-------- -------- --------
-------- -------- --------
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
YEAR ENDED MARCH 31,
--------------------------------
1997 1996 1995
--------------------------------
Income tax expense at federal statutory
rate of 35% $ 7,518 $ 7,863 $ 8,218
State income taxes, net of federal income
tax benefits 604 725 791
Reduction in valuation allowance (638) (600) -
Other 48 (29) 55
-------- -------- --------
Income tax provision $ 7,532 $ 7,959 $ 9,064
-------- -------- --------
-------- -------- --------
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.
63
<PAGE>
The significant components of the Corporation's deferred tax assets
(liabilities) are as follows (in thousands):
MARCH 31,
------------------------
1997 1996
------------------------
Deferred tax assests:
Allowances for losses $ 7,587 $ 8,313
Other 2,495 2,185
-------- --------
Total deferred tax assets 10,082 10,498
Valuation allowance - (638)
-------- --------
Adjusted deferred tax assets 10.082 9,860
Deferred tax liabilities:
Other (1,396) (1,233)
-------- --------
Total deferred tax liabilities (1,396) (1,233)
-------- --------
Total deferred tax assets $ 8,686 $ 8,627
-------- --------
-------- --------
NOTE 12 - 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,
------------------------
1997 1996
------------------------
Commitments to extend credit:
Fixed rate $ 12,200 $ 22,100
Adjustable rate 13,600 13,400
Unused lines of credit
Home equity 20,600 19,500
Credit cards 16,700 14,000
Commercial 13,900 6,600
Letters of credit 13,800 11,300
Loans sold with recourse 2,100 3,800
Financial guarantees written - 2,570
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
64
<PAGE>
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 $5,348,000
and $13,968,000 at March 31, 1997 and 1996, respectively. This exposure,
however, is mitigated by the existence of firm commitments to sell the majority
of the fixed-rate loans. Commitments to sell mortgage loans within 60 days at
March 31, 1997 and 1996 amounted to $15,462,000 and $20,170,000, 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.
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.
NOTE 13 - 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 consolidated 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 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.
MORTGAGE SERVICING RIGHTS: The fair value of mortgage servicing rights is
estimated using discounted cash flows based on a current market interest rate.
FEDERAL HOME LOAN BANK STOCK: The carrying amount of FHLB stock equals its fair
value because the shares can be resold to the FHLB or other member banks at
their carrying amount of $100 per share par amount.
65
<PAGE>
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, 1997 and 1996.
66
<PAGE>
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------
1997 1996
-------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash equivalents $ 38,025 $ 38,025 $ 43,689 $ 43,689
Securities available for sale:
Investment securities $ 35,569 $ 35,569 $ 30,241 $ 30,241
Mortgage-related securities $ 80,300 $ 80,300 $ 110,268 $ 110,268
Securities held to maturity:
Investment securities $ 7,947 $ 7,890 $ 2,596 $ 2,599
Mortgage-related securities $ 160,101 $ 157,825 $ 110,730 $ 109,857
Loans held for sale $ 5,648 $ 5,348 $ 13,968 $ 14,268
Loans receivable $ 1,484,173 $ 1,453,632 $ 1,383,887 $ 1,354,443
Mortgage servicing rights $ 1,221 $ 1,108 - -
Federal Home Loan Bank stock $ 18,981 $ 18,981 $ 16,019 $ 16,019
Accrued interest receivable $ 13,729 $ 13,729 $ 11,550 $ 11,550
Deposits $ 1,304,698 $ 1,306,557 $ 1,234,878 $ 1,238,860
Federal Home Loan Bank and other
borrowings $ 392,204 $ 389,848 $ 323,900 $ 322,722
Reverse repurchase agreements $ 39,335 $ 39,313 $ 47,582 $ 47,564
Accrued interest payable $ 9,926 $ 9,926 $ 7,859 $ 7,859
</TABLE>
67
<PAGE>
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS (in thousands):
MARCH 31,
---------------------
1997 1996
---------------------
ASSETS
Cash and cash equivalents $ 1,408 $ 1,865
Investment in subsidiaries 114,689 110,275
Securities available for sale 1,992 857
Investment securities held to maturity - 96
Loans receivable, net 674 7,588
Other 8,793 4,229
-------- --------
$127,556 $124,910
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable $ 8,500 $ 4,998
Other liabilities 1,169 1,510
-------- --------
Total liabilities 9,669 6,508
-------- --------
Total stockholders' equity 117,887 118,402
-------- --------
$127,556 $124,910
-------- --------
-------- --------
CONDENSED STATEMENTS OF INCOME (in thousands)
YEAR ENDED MARCH 31,
--------------------------------
1997 1996 1995
--------------------------------
Interest income $ 605 $ 713 $ 675
Interest expense 364 43 -
------- ------- --------
Net interest income 241 670 675
Equity in net income from subsidiaries 13,550 13,978 14,058
Non-interest income 722 527 207
------- ------- --------
14,513 15,175 14,940
Non-interest expenses 298 313 265
------- ------- --------
Income before income taxes 14,215 14,862 14,675
Income taxes 267 355 258
------- ------- --------
Net income $ 13,948 $ 14,507 $ 14,417
------- ------- --------
------- ------- --------
68
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 13,948 $ 14,507 $ 14,417
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in net income of subsidiaries (13,550) (13,978) (14,058)
Other (638) 1,041 (1,161)
-------- -------- --------
Net cash provided (used) by operating activities (240) 1,570 (802)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 99 - -
Purchase of investment securities available for sale (898) (791) -
Purchase of investment securities held to maturity - (96) -
Proceeds from sales of mortgage-related securities
available for sale - 2,619 -
Purchase of mortgage-related securities held to maturity - - (100)
Principal collected on mortgage-backed securities 2 282 232
Net decrease (increase) in loans receivable 594 (3,683) 170
Dividends from subsidiary 11,528 13,805 13,802
Other 70 (4,375) (1,655)
-------- -------- --------
Net cash provided by investing activities 11,395 7,761 12,449
FINANCING ACTIVITIES
Increase in other loans payable 3,502 4,998 -
Purchase of treasury stock (14,220) (19,756) (8,149)
Exercise of stock options 402 306 266
Cash dividend paid (2,224) (1,652) (1,190)
Repayment of ESOP borrowings 928 928 600
-------- -------- --------
Net cash used by financing activities (11,612) (15,176) (8,473)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (457) (5,845) 3,174
Cash and cash equivalents at beginning of year 1,865 7,710 4,536
-------- -------- --------
Cash and cash equivalents at end of year $ 1,408 $ 1,865 $ 7,710
-------- -------- --------
-------- -------- --------
</TABLE>
69
<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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended March 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young
April 29, 1997
Milwaukee, Wisconsin
70
<PAGE>
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/ Douglas J. Timmerman
Douglas J. Timmerman
President and Chief Executive Officer
/s/ Michael W. Helser
Michael W. Helser
Treasurer and Chief Financial Officer
/s/ Arlie M. Mucks, Jr.
Arlie M. Mucks, Jr.
Chairman, Audit Committee
April 29, 1997
71
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION
MAR 31, DEC 31, SEP 30, JUN 30, MAR 31, DEC 31, SEP 30, JUN 30,
1997 1996 1996 1996 1996 1995 1995 1995(1)
- -----------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $30,538 $30,140 $29,615 $29,725 $28,182 $27,296 $26,731 $25,227
Securities 4,919 5,679 5,422 4,566 4,617 5,048 5,057 3,563
------- ------- ------- ------- ------- ------- -------- --------
Total interest income 35,457 35,819 35,037 34,291 32,799 32,344 31,788 28,790
Interest expense:
Deposits 15,294 15,662 14,991 14,467 14,526 14,674 13,853 12,297
Borrowings and other 6,084 6,343 6,373 5,923 5,270 4,881 5,142 4,335
------- ------- ------- ------- ------- ------- -------- --------
Total interest expense 21,378 22,005 21,364 20,390 19,796 19,555 18,995 16,632
------- ------- ------- ------- ------- ------- -------- --------
Net interest income 14,079 13,814 13,673 13,901 13,003 12,789 12,793 12,158
Provision for loan losses 500 - - - - 150 150 175
------- ------- ------- ------- ------- ------- -------- --------
Net interest income after
provision for loan losses 13,579 13,814 13,673 13,901 13,003 12,639 12,643 11,983
Loan servicing income 751 763 752 704 708 696 711 626
Service charges on deposits 909 949 939 882 843 836 832 664
Net gain on sale of loans 370 447 251 157 21 223 242 159
Other non-interest income 1,066 2,659 3,372 2,226 1,039 589 530 540
------- ------- ------- ------- ------- ------- -------- --------
Total non-interest income 3,096 4,818 5,314 3,969 2,611 2,344 2,315 1,989
Compensation 5,292 5,335 5,193 5,532 4,972 4,864 4,866 4,365
Other non-interest expenses 4,044 5,975 14,114 5,199 4,818 4,626 4,533 4,017
------- ------- ------- ------- ------- ------- -------- --------
Total non-interest expenses 9,336 11,310 19,307 10,731 9,790 9,490 9,399 8,382
------- ------- ------- ------- ------- ------- -------- --------
Income (loss) before income taxes 7,339 7,322 (320) 7,139 5,824 5,493 5,559 5,590
Income taxes (benefit) 2,658 2,660 (390) 2,604 2,063 1,947 1,968 1,981
------- ------- ------- ------- ------- ------- -------- --------
Net income $ 4,681 $ 4,662 $ 70 $ 4,535 $ 3,761 $ 3,546 $ 3,591 $ 3,609
------- ------- ------- ------- ------- ------- -------- --------
------- ------- ------- ------- ------- ------- -------- --------
Earnings Per Share (2):
Primary $ 0.97 $ 0.97 $ 0.01 $ 0.90 $ 0.72 $ 0.65 $ 0.65 $ 0.70
Fully diluted 0.97 0.97 0.01 0.89 0.72 0.65 0.65 0.70
</TABLE>
(1) On 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
72
<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 3 to 8 to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 22, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated herein
by reference to pages 13 to 24 to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on July 22, 1997.
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 9 to 12 to the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on July 22, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions
is incorporated herein by reference to pages 24 to 26 to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 22, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Corporation and its
subsidiaries, together with the report thereon of Ernst & Young LLP, dated April
29, 1997 are incorporated herein by reference to Item 8 of this Annual Report on
Form 10-K:
Consolidated Balance Sheets at March 31, 1997 and 1996.
Consolidated Statements of Income for each year in the three-year period
ended March 31, 1997.
Consolidated Statements of Stockholders' Equity for each year in the
three-year period ended March 31, 1997.
Consolidated Statements of Cash Flows for each year in the three-year
period ended March 31, 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
73
<PAGE>
(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).
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).
74
<PAGE>
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).
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 1997 is as
follows:
PRIMARY FULLY DILUTED
----------------------------
1. Net income $ 13,948,054 $ 13,948,054
------------- -------------
------------- -------------
2. Weighted average common shares
outstanding 4,659,668 4,659,668
3. Common stock equivalents due to dilutive
effect of stock options 234,114 278,070
------------- -------------
4. Total weighted average common shares and
equivalents outstanding 4,893,782 4,937,738
------------- -------------
------------- -------------
5. Earnings per share $ 2.85 $ 2.82
------------- -------------
------------- -------------
75
<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.
(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)
Exhibit No. 27 Financial Data Schedule
76
<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 27, 1997
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.
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
and Chief Executive Officer Officer (principal financial and
(principal executive officer) accounting officer)
Date: May 27, 1997 Date: May 27, 1997
77
<PAGE>
By: /s/ Robert C. Buehner By: /s/ Greg M. Larson
----------------------- --------------------
Robert C. Buehner Greg M. Larson
Director Director
Date: May 27, 1997 Date: May 27, 1997
By: /s/ Arlie M. Mucks, Jr. By: /s/ Pat Richter
--------------------------- ----------------------------
Arlie M. Mucks, Jr. Pat Richter
Director Director
Date: May 27, 1997 Date: May 27, 1997
By: /s/ Bruce A. Robertson By: /s/ Holly Cremer Berkenstadt
--------------------------- -----------------------------
Bruce A. Robertson Holly Cremer Berkenstadt
Director Director
Date: May 27, 1997 Date: May 27, 1997
By: /s/ Donald D. Kropidlowski
----------------------------
Donald D. Kropidlowski
Director
Date: May 27, 1997
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
The statement re: computation of per share earnings for fiscal year 1997 is as
follows:
PRIMARY FULLY DILUTED
----------------------------
1. Net income $ 13,948,054 $ 13,948,054
------------- -------------
------------- -------------
2. Weighted average common shares
outstanding 4,659,668 4,659,668
3. Common stock equivalents due to dilutive
effect of stock options 234,114 278,070
------------- -------------
4. Total weighted average common shares and
equivalents outstanding 4,893,782 4,937,738
------------- -------------
------------- -------------
5. Earnings per share $ 2.85 $ 2.82
------------- -------------
------------- -------------
<PAGE>
EXHIBIT 23
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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended March 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young
April 29, 1997
Milwaukee, Wisconsin
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 31,482
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,543
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,869
<INVESTMENTS-CARRYING> 168,048
<INVESTMENTS-MARKET> 165,715
<LOANS> 1,542,385
<ALLOWANCE> 22,750
<TOTAL-ASSETS> 1,884,983
<DEPOSITS> 1,312,445
<SHORT-TERM> 316,205
<LIABILITIES-OTHER> 23,113
<LONG-TERM> 107,834
0
0
<COMMON> 51,068
<OTHER-SE> 66,819
<TOTAL-LIABILITIES-AND-EQUITY> 1,884,983
<INTEREST-LOAN> 120,018
<INTEREST-INVEST> 19,808
<INTEREST-OTHER> 778
<INTEREST-TOTAL> 140,604
<INTEREST-DEPOSIT> 60,414
<INTEREST-EXPENSE> 85,137
<INTEREST-INCOME-NET> 55,467
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 16
<EXPENSE-OTHER> 50,684
<INCOME-PRETAX> 21,480
<INCOME-PRE-EXTRAORDINARY> 21,480
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,948
<EPS-PRIMARY> 2.85
<EPS-DILUTED> 2.82
<YIELD-ACTUAL> 7.91
<LOANS-NON> 6,795
<LOANS-PAST> 0
<LOANS-TROUBLED> 329
<LOANS-PROBLEM> 12,705
<ALLOWANCE-OPEN> 22,807
<CHARGE-OFFS> 980
<RECOVERIES> 423
<ALLOWANCE-CLOSE> 22,750
<ALLOWANCE-DOMESTIC> 22,750
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 21,238
</TABLE>
