<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
<TABLE>
<S> <S>
(MARK ONE)
[X] ANNUAL REPORT UNDER TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
Commission File Number: 1-10743
MIDWEST FEDERAL FINANCIAL CORP.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
WISCONSIN 39-1725856
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1159 EIGHTH STREET, BARABOO, WISCONSIN 53913
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (608) 356-7771
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934, during the 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. [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and contained, to the best of the
Registrant's knowledge, in definitive proxy or other information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. Yes [X] No [ ]
The registrant's revenues for the fiscal year ended December 31, 1996 were
$17,250,242.
As of March 14, 1997, there were issued and outstanding 1,621,629 shares of
the registrant's voting common stock, which is listed for trading on the Nasdaq
"SmallCap" Market under the symbol "MWFD." The aggregate market value of the
voting stock held by non-affiliates of the registrant, based on the average of
the bid and ask prices of the registrant's common stock as quoted on the Nasdaq
on March 14, 1997 was $23,374,943 (1,335,711 shares at $17.50 per share). The
Baraboo Federal Bank, FSB Employee Stock Ownership Plan is considered a
non-affiliate for the purpose of determining the aggregate market value of the
Registrants' outstanding voting stock.
================================================================================
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
1. Notice and Proxy Statement for the 1997 Annual Meeting of Stockholders
to be held on April 24, 1997. (Part III)
Transitional Small Business Format (check one): YES
- ------ NO x
FORM 10-KSB TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
Part I
Item 1 Description of Business..................................... 1
Item 2 Description of Properties................................... 28
Item 3 Legal Proceedings........................................... 29
Item 4 Submission of Matters to a Vote of Security Holders......... 29
Part II
Item 5 Market for Common Equity and Related Stockholder Matters.... 29
Item 6 Management's Discussion and Analysis........................ 31
Item 7 Financial Statements........................................ 38
Part III
Item 8 Changes in and Disagreements with Accountants............... 58
Item 9 Directors and Executive Officers of the Registrant.......... 58
Item
10 Executive Compensation...................................... 58
Item Security Ownership of Certain Beneficial Owners and
11 Management.................................................. 58
Item
12 Certain Relationships and Related Transactions.............. 59
Item
13 Exhibits and Reports on Form 8-K............................ 59
Signatures............................................................ 60
</TABLE>
<PAGE> 3
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Midwest Federal Financial Corp. ("Midwest Federal" or the "Corporation"), a
Wisconsin corporation, became the unitary savings and loan holding company for
Baraboo Federal Bank, FSB ("Baraboo Federal" or the "Bank") upon the Bank's
conversion from a federal mutual savings bank to a federal stock savings bank
("Conversion") on June 30, 1992. At December 31, 1996, the Corporation had
consolidated total assets of $196.3 million and consolidated stockholders'
equity of $16.9 million. Midwest Federal's main business activity is holding the
stock of the Bank. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to the Bank
and its subsidiaries.
The Bank commenced operations in 1934 as a federally chartered mutual
savings bank. At December 31, 1996, the Bank had total assets, deposits and
stockholders' equity of $194.6 million, $153.0 million and $15.0 million,
respectively. The Bank conducts its business through its main office and two
limited service offices located in Baraboo, Wisconsin and six full service
offices located in Sauk Prairie, Portage, Lodi, Kingston, and Dalton, Wisconsin.
The Kingston and Dalton branches were purchased in December 1994. A Trust
department was developed and started operations in December 1994, offering a
full line of personal trust services.
The Bank provides its customers with a full array of community banking
services. The Bank is primarily engaged in the business of attracting deposits
from the general public and originating mortgage loans which are secured by one-
to four-family residential properties. To a lesser extent, the Bank originates
loans secured by commercial real estate and multi-family properties and
commercial business and consumer loans.
The Bank has historically been a traditional lender on owner occupied, one-
to four-family residential properties located in its primary market area. At
December 31, 1996, $61.5 million, or 41.8%, of the Bank's $144.2 million loan
portfolio, consisted of loans secured by one- to four-family residential
properties. The Bank's focus on residential lending has resulted in relatively
low loan delinquencies compared to other SAIF-insured associations in Wisconsin
and Illinois, the states included in the OTS Chicago District. At December 31,
1996, the Bank's nonperforming assets totaled $401,633, or .21% of its total
assets which compares favorably to other SAIF-insured associations in the OTS
Chicago District.
Since 1988, management has significantly increased the Bank's portfolio of
first mortgage loans on commercial and multi-family residential real estate,
principally in the Bank's primary market area. Collectively, such loans have
increased from $5.5 million, or 10.7% of the Bank's loan portfolio at September
30, 1988, to $41.4 million, or 28.1% of the Bank's loan portfolio at December
31, 1996. While this lending generally provides greater yields than residential
mortgage lending and has a positive effect on the Bank's one-year interest
sensitivity gap, it involves a significantly higher degree of credit risk.
In an effort to make the yields on its loan portfolio and investments more
able to adjust to changes in interest rates and to improve net income in other
ways, the Bank has implemented the following strategy: (i) the origination of
adjustable-rate residential mortgage loans ("ARMs") for the Bank's portfolio,
(ii) the origination and sale of long-term, fixed-rate mortgage loans in the
secondary mortgage market, and (iii) the origination of shorter term
multi-family residential, commercial real estate, commercial business and
consumer loans. At December 31, 1996, the Bank's loan portfolio contained $73.6
million of ARMs or 50.0% of its total loan portfolio.
At December 31, 1996, the Bank's tangible, core and risked-based capital
percentages were 7.46%, 7.46% and 11.71%, respectively, amounts significantly in
excess of the OTS current requirements of 1.5% of total assets, 3.0% of total
assets and 8.0% of risk weighted assets, respectively. Management attributes its
strong capital position to a conservative lending philosophy through its focus
in past years on the origination of loans secured by one- to four-family
residential properties which has resulted in historically low levels of loan
delinquencies and charge-offs.
The executive offices of the Corporation and Bank are located at 1159
Eighth Street, Baraboo, Wisconsin and the telephone number is (608) 356-7771.
1
<PAGE> 4
LENDING ACTIVITIES
General. Historically, the principal lending activity of the Bank has been
the origination of residential real estate loans for the purpose of constructing
or financing one- to four-family residential properties. The Bank's strategy has
been to focus its loan origination activity on loans subject to periodic
repricing, such as ARMs, and loans with relatively short maturities, such as
multi-family residential, commercial real estate, commercial business and
consumer loans.
In an effort to make its interest-earning assets more interest rate
sensitive, the Bank in the early 1980s implemented a policy of originating
adjustable rate, one- to four-family residential and commercial loans for its
portfolio. Since 1988, it has significantly increased its originations and
purchases of commercial real estate and multi-family residential loans. At
December 31, 1996, the Bank's loan portfolio consisted of $61.5 million of one-
to four-family residential real estate loans, or 41.1% of its total portfolio,
$41.8 million of commercial and multi-family real estate loans, or 28.1% of its
total loan portfolio. At December 31, 1996, $73.6 million, or 50.0% of the
Bank's total loan portfolio, consisted of ARMs with original maturities of 30
years or less. Furthermore, in 1987, the Bank implemented a policy of
originating long-term, fixed-rate real estate loans for sale in the secondary
loan market. In response to regulatory changes, which permitted federally
chartered thrift institutions to make consumer loans, in 1981 the Bank began
actively originating secured and unsecured consumer loans. Consumer loans are
generally for terms of five years or less and at December 31, 1996 consumer
loans amounted to $29.8 million, or 20.3% of the Bank's total gross loan
portfolio. At December 31, 1996, the Bank's commercial business loans which it
began writing in 1989, consisted of $10.6 million, or 7.2% of its loan
portfolio. At December 31, 1996, the Bank also had $3.9 million of construction
loans, constituting 2.6% of its loan portfolio.
Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan
Mortgage loans:
Residential one- to four-family (1)... $ 61,465 41.8% $ 59,170 47.0% $ 58,131 49.4%
Multi-family.......................... 6,532 4.4 7,329 5.8 6,933 5.9
FHA and VA............................ 0 0 9 0 13 0
Commercial............................ 34,864 23.7 18,083 14.4 14,880 12.7
Construction.......................... 3,912 2.6 4,661 3.7 6,030 5.1
-------- ----- -------- ----- -------- -----
Total mortgage loans.......... 106,773 72.5 89,252 70.9 85,987 73.1
Other loans:
Commercial business loans............. 10,643 7.2 10,796 8.6 9,818 8.4
Home equity and second mortgage
loans.............................. 13,347 9.1 12,172 9.7 9,534 8.1
Education Loans....................... 1,171 0.8 711 0.5 626 0.5
Other Consumer Loans.................. 15,265 10.4 12,936 10.3 11,616 9.9
Total other loans.................. 40,426 27.5 36,615 29.1 31,594 26.9
-------- ----- -------- ----- -------- -----
Total loans........................ $147,199 100.0% $125,867 100.0% $117,581 100.0%
======== ===== ======== ===== ======== =====
Less:
Undisbursed loan proceeds............. $ 1,518 $ 1,620 $ 2,545
Unearned income (Deferred costs)...... (60) 1 32
Allowance for possible loan losses.... 1,539 1,321 1,186
-------- -------- --------
Net loans receivable.......... $144,202 $122,925 $113,818
======== ======== ========
</TABLE>
- ---------------
(1) Includes construction loans converted to permanent loans
2
<PAGE> 5
LOAN MATURITY
The following table shows the contractual maturity of the Bank's loan
portfolio at December 31, 1996. Loans that have adjustable rates are shown as
being due in the period during which the last payment is due. Demand loans which
have no schedule for repayment and no stated maturity are reported as due in one
year or less. The table does not include estimated prepayments or scheduled
principal amortization.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
ONE-TO-FOUR COMMERCIAL/ COMMERCIAL
FAMILY MULTI-FAMILY CONSTRUCTION NON-RESIDENTIAL BUSINESS CONSUMER TOTAL
----------- ------------ ------------ --------------- ---------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within one year.... $47.0 $3.2 $3.9 $22.7 $ 5.3 $10.9 $ 93.0
After one year:
One to five
years......... 12.9 2.8 0 11.4 4.6 17.8 49.5
Over five
years......... 1.6 .5 0 .8 .7 1.1 4.7
Total due after one
year............... 14.5 3.3 0 12.2 5.3 18.9 54.2
----- ---- ---- ----- ----- ----- ------
Total amounts due.... $61.5 $6.5 $3.9 $34.9 $10.6 $29.8 $147.2
===== ==== ==== ===== ===== ===== ======
</TABLE>
The following table sets forth at December 31, 1996, the dollar amount of
all loans due after December 31, 1997, and whether such loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1997
-----------------------------
FIXED ADJUSTABLE TOTAL
------ ----------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One-to-four family.................................. $ 4.2 $10.3 $14.5
Multi-family........................................ 2.1 1.2 3.3
Commercial/nonresidential........................... 10.5 1.7 12.2
Commercial business................................. 5.3 0 5.3
Consumer loans........................................ 18.9 0 18.9
----- ----- -----
Gross loans receivable................................ $41.0 $13.2 $54.2
===== ===== =====
</TABLE>
One- to Four-Family Residential Loans. The primary lending activity of the
Bank has been the granting of mortgage loans to enable borrowers to purchase
existing homes or to construct new single-family homes. Management believes that
this policy of focusing on single-family residential mortgage loans has been
successful in contributing to interest income while keeping delinquencies and
losses to a minimum. The Bank's real estate loan portfolio also includes loans
on two- to four-family dwellings. At December 31, 1996, approximately $61.5
million, or 41.8%, of the Bank's total loan portfolio consisted of loans secured
by one- to four-family residential real estate.
The Bank offers two types of ARMs which are originated for an initial
period of one or three years: (i) a one-year ARM which adjusts annually with a
maximum upward adjustment of 2% per year and a 6% maximum adjustment over the
life of the loan, and (ii) a three-year ARM which adjusts annually after the
initial three years with a maximum upward adjustment of 2% per year and a 6%
maximum adjustment over the life of the loan. The Bank's ARMs do not provide for
negative amortization. The one-year and three-year ARMs are tied to the weekly
average U.S. Treasury Bill Index.
The Bank underwrites ARMs based on the borrower's ability to repay the loan
assuming a rate two hundred basis points higher than the initial rate on the ARM
and that such rate remained constant during the loan term. As a result, the
potential for a substantial increase in interest payments on ARMs decreases the
likelihood of delinquencies and defaults.
The Bank also originates long-term, fixed-rate loans under guidelines
established by the FHLMC, which facilitates the sale of such loans to FHLMC or
the Federal National Mortgage Association ("FNMA") in the secondary market. The
Bank's long-term, fixed-rate loans are originated with terms of between 10 to 30
years,
3
<PAGE> 6
amortized on a monthly basis with principal and interest due each month. Fixed
rate loans are generally sold within 30 days from the closing-date, with
servicing maintained by the Bank.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on fixed-rate residential mortgage loans and ARMs to 80% or less of the lesser
of the appraised value or purchase price of the underlying residential property.
The loan-to-value ratio, maturity and other provisions of the loans made by the
Bank are generally reflected in the policy of making less than the maximum loan
permissible under federal regulations, in accordance with established lending
practices, market conditions and underwriting standards maintained by the Bank.
Loans originated with a loan-to-value ratio above 80% require private mortgage
insurance. The Bank requires title insurance or a legal opinion on all mortgage
loans originated.
To supplement lending activities, the Bank has invested in residential
mortgage-backed securities during recent years. Although such securities are
held for investment, they can serve as collateral for borrowings and, through
repayments, as a source for liquidity. For information regarding the carrying
and market values of the Bank's mortgage-backed securities portfolio, see Note 3
to Notes to Consolidated Financial Statements. To supplement originations, the
Bank has also, from time to time, purchased residential loans. See "-- Mortgage-
Backed Securities" and "-- Loan Originations and Purchases."
Construction Loans. At December 31, 1996 the Bank had $3.9 million or 2.6%
of total loans in construction loans on single-family residences. Construction
loans generally have a term of six months or less and are usually tied to a
commitment by the Bank to provide permanent financing during the six month
period. The interest rate charged by the Bank on construction loans is indexed
to the Bank's cost of funds rate and varies depending on the terms of the loan
and the loan amount. At December 31, 1996, the Bank had no construction loans
accounted for on a non-accrual basis.
Commercial Real Estate Loans. The Bank's permanent commercial real estate
loans are secured primarily by improved property such as motels, office
buildings, manufacturing, restaurants, production and retail operations located
in the Bank's primary market area. Commercial real estate loans totaled $34.9
million, or 23.7% of the Bank's total loan portfolio at December 31, 1996. Many
of these loans are to business operations which have begun business in the last
three years. The Bank originates permanent loans on commercial real estate up to
80% of the appraised value. Currently, it is the Bank's philosophy to originate
commercial real estate loans only to selected borrowers known to the Bank and on
properties in its market area. These loans generally have prepayment schedules
based upon a 10 to 25 year constant payment amortization but may have a 10 year
final maturity (balloon payment) and are currently originated with a variable
interest rate indexed to the Prime as posted in The Wall Street Journal.
At December 31, 1996, the Bank had no commercial real estate loans
accounted for on a nonaccrual basis.
Commercial real estate loans in the portfolio were generally made in
amounts up to $1.0 million. Of primary concern in commercial real estate lending
is the borrower's creditworthiness and the feasibility and cash flow potential
of the project. Loans secured by income properties are generally larger and
involve greater risks than residential mortgage loans because payments on loans
secured by income properties are often dependent on successful operation or
management of the properties. As a result, repayment of such loans may be
subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy. Although many thrift
institutions have had material adverse loss experience in commercial real estate
lending, the Bank has sustained few losses, and those losses were not
significant relative to the size of the entire commercial real estate loan
portfolio or the mortgage loan portfolio at the time. However, since the Bank
has significantly increased its commercial real estate lending in the past three
years and problems with such loans often take time to develop, there is no
assurance that the Bank's favorable loan loss experience will continue.
Multi-Family Residential Loans. The Bank also originates loans secured by
multi-family dwelling units (more than four units). At December 31, 1996, the
Bank had a total of $6.5 million of loans, or 4.4% of the Bank's total loan
portfolio, secured by multi-family dwelling units located primarily in the
Bank's primary market area. Many of these loans are on apartment complexes which
have begun operations in the last three
4
<PAGE> 7
years. Multi-family real estate loans are generally originated at 80% of the
appraised value of the property or selling price, whichever is less, and are
generally originated for one to 25 year terms with the principal amortized on a
basis up to 30 years. Loans secured by multi-family residential real estate are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. The credit risks associated with multi-family
residential loans are very similar to the risks associated with commercial real
estate loans. See "-- Commercial Real Estate Loans" and "-- Non-Performing
Assets." At December 31, 1996, the Bank had no multi-family residential loans
accounted for on a non-accrual basis.
Consumer Loans. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to 35% of an
institution's assets. In addition, a federal thrift has lending authority above
the 35% category for certain consumer loans, such as home equity loans, property
improvement loans, and loans secured by savings accounts. The Bank has
originated consumer loans since 1981. The Bank originates consumer loans in
order to provide a wide range of financial services to its customers and because
the shorter terms and normally higher interest rates on such loans help maintain
a profitable spread between its average loan yield and its cost of funds.
At December 31, 1996, the Bank's consumer loan portfolio totaled $29.8
million, or 20.3%, of the total gross loan portfolio. The consumer loan
portfolio is comprised of automobile loans, unsecured personal notes, education
loans, home equity and second mortgage loans, VISA and Mastercard loans and
loans secured by savings accounts.
The Bank makes home equity and second mortgage loans on a simple interest
installment basis, normally secured by underlying residential or, occasionally,
other real estate. Home equity and second mortgage loan terms generally do not
exceed 10 years. Home equity and second mortgage loans at December 31, 1996 were
$13.3 million or 9.1% of the loan portfolio.
The Bank originates education loans, primarily to persons whose families
are customers of the Bank. The Bank normally sells these loans prior to
commencement of monthly repayment after the borrower finishes school.
In connection with consumer loan applications, the Bank receives the
borrower's income statement and reviews a credit bureau report. In addition, the
relationship of the loan to the value of the collateral is considered. All
automobile loan applications are reviewed and approved by the Bank. The Bank
reviews the credit report of the borrower as well as the value of the collateral
securing the loan.
The Bank intends to continue to emphasize the origination of consumer
loans. Consumer loans tend to be originated at higher interest rates than
conventional residential mortgage loans, but also tend to have a higher risk of
default than residential mortgage loans. Based upon statistics provided by the
FHLB of Chicago, management of the Bank believes that its loan loss experience
in connection with its consumer loan portfolio is favorable in comparison to
industry averages. See "-- Non-Performing Assets" for information regarding the
Bank's loan loss experience and reserve policy. At December 31, 1996, the Bank
had $44,622 of consumer loans accounted for on a non-accrual basis.
Commercial Business Loans. Federal thrift institutions are permitted to
make secured or unsecured loans for commercial, corporate, business or
agricultural purposes up to 20% of such institution's assets but amounts in
excess of 10% may be used only for small business loans. See "REGULATION AND
SUPERVISION -- Recent Legislative and Regulatory Developments."
The Bank has been making commercial business loans since 1989 on both a
secured and unsecured basis with terms which generally do not exceed five years.
The majority of these loans have interest rates which adjust with changes in the
Bank's cost of funds. The Bank's non-real estate commercial loans primarily
consist of short-term loans for working capital purposes, seasonal loans, lines
of credit, inventory loans and equipment loans. The Bank customarily requires a
personal guaranty of payment by the principals of any borrowing entity and
reviews the financial statements and income tax returns of the guarantors. At
December 31, 1996, the Bank had approximately $10.6 million outstanding in
commercial business loans, which represented approximately 7.2% of its total
gross loan portfolio. At December 31, 1996, the Bank had no commercial business
loans accounted for on a non-accrual basis.
5
<PAGE> 8
Mortgage Loan Solicitation and Processing. Loan originations are derived
from a number of sources such as realtors, builders, existing customers and
referrals. Upon receipt of a loan application, a credit report is ordered to
verify specific information relating to the loan applicant's employment, income
and credit standing. In the case of a real estate loan, an appraisal of the real
estate intended to secure the proposed loan is undertaken by an independent
appraiser approved by the Bank in accordance with OTS regulations. Fee
appraisers are used for all projects and reviewed appraisals are required for
major nonresidential loans. The mortgage loan documents used by the Bank conform
to standards imposed by the FNMA and the FHLMC.
Each loan officer has a designated loan approval limit. Loans in excess of
that limit must be approved by the Loan Committee of the Board of Directors. All
loans, where the aggregate outstanding loan balances to the borrower exceed
$200,000, require the approval of the Board of Directors.
The Bank's policy is to require borrowers to obtain certain types of
insurance to protect its interest in the collateral securing the loan. The Bank
requires a title insurance policy or legal opinion insuring that the Bank has a
valid first lien on the mortgaged real estate. Fire and casualty insurance is
also required on collateral for loans. Flood insurance is required when
applicable. The Bank requires escrow for taxes and insurance on all loans
insured by private mortgage insurance.
Loan Sales and Purchases. Loans are originated to meet or exceed the
applicable underwriting requirements of the FNMA, FHLMC, Government National
Mortgage Association ("GNMA"), Veterans Administration ("VA"), the Great Lakes
Higher Education Corporation, Student Loan Marketing Association ("Sallie Mae"),
and the Wisconsin Department of Veteran Affairs ("WDVA").
The Bank maintains mortgage documentation on private loans as required to
sell the loans to FNMA, FHLMC or private institutions. Loan sales over the past
five years have been whole loan sales, servicing retained and non-recourse to
FHLMC and WDVA. Loans sold have been fixed rate monthly payment loans. Loans
originated under the Wisconsin Housing and Economic Development Authority
("WHEDA") first time home buyer program have been sold on a whole loan basis to
WHEDA on a non-recourse basis with servicing released. The sale of loans in the
secondary mortgage market reduces the Bank's risk that the interest rates paid
to depositors will escalate while the bank holds long-term, fixed rate loans in
its portfolio. It also allows the Bank to continue to make loans when savings
flows decline or funds are not otherwise available.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total loans at beginning of period......................... $125,867 $117,581 $ 88,282
Loans originated........................................... 84,225 63,655 65,100
Loans purchased............................................ 1,611 644 10,599
Loans sold................................................. (28,754) (11,776) (11,935)
Loans principal repayments and non-cash changes............ (35,750) (44,237) (34,465)
-------- -------- --------
Total gross loans at end of period............... $147,199 $125,867 $117,581
======== ======== ========
</TABLE>
Loan Commitments. The Bank issues commitments for fixed and adjustable
rate single-family residential mortgage loans conditioned upon the occurrence of
certain events. Such commitments are made in writing on specified terms and
conditions and are honored for up to 45 days from approval, depending on the
type of transaction. The Bank had outstanding net loan commitments of
approximately $12.8 million at December 31, 1996 consisting of commitments to
extend credit ($2.8 million) and unused credit card, home equity, commercial and
overdraft lines of credit ($10.0 million). See Note 10 to Notes to Consolidated
Financial Statements.
Loan Origination and Other Fees. The Bank, in most instances, receives
loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan which are charged to the
borrower for funding the loan. The Bank usually charges origination fees of 1%
to 2% on one- to four-family residential real estate loans, long-term commercial
real estate loans and residential
6
<PAGE> 9
construction loans. Current accounting standards require fees received for
originating loans to be deferred and amortized into interest income over the
life of the loan. Deferred fees associated with loans that are sold are
recognized as income at the time of sale.
The Bank also receives loan servicing fees on the loans it sells and on
which it retains the servicing responsibilities.
Mortgage-Backed Securities. At December 31, 1996, the Bank had $15.6
million of mortgage-backed securities outstanding, or 9.6%, of the Bank's total
loan and mortgage-backed securities portfolio, all of which were held as
available for sale. These mortgage-backed securities have an average estimated
remaining life ranging from three to five years. These mortgage-backed
securities may be used as collateral for borrowings and through repayments, as a
source of liquidity. Mortgage-backed securities offer yields above those
available for investments of comparable credit quality and duration and they are
qualifying thrift investments under the Qualified Thrift Lender ("QTL") test.
See "REGULATION AND SUPERVISION -- Recent Legislation and Regulatory
Developments -- Relaxation of the Qualified Thrift Lender Test."
The following table sets forth the changes in the Bank's mortgage-backed
securities portfolio for the periods stated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Beginning Balance at Cost............................. $11,406 $10,870 $13,361
Purchases............................................. 8,894 5,204 906
Sales................................................. (2,102) (3,348) (813)
Monthly repayments.................................... (2,340) (1,271) (2,513)
Net Discount/(premium) Amortization................... (31) (49) (71)
------- ------- -------
Sub-total............................................. 15,827 11,406 10,870
FAS 115 Adjustment.................................... (224) (46) (601)
------- ------- -------
Ending Market Value................................... $15,603 $11,360 $10,269
======= ======= =======
</TABLE>
Delinquencies. The Bank's collection procedures provide for a series of
contacts with delinquent borrowers. If the delinquency continues, more formal
efforts are made to contact the delinquent borrower. If a one- to four-family
residential or commercial real estate loan continues in a delinquent status for
90 days or more, the Bank generally initiates foreclosure proceedings. In
certain instances, however, the Bank may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Non-Performing Assets. Loans are reviewed on a regular basis and a reserve
for uncollectible interest is established on loans where collection is
questionable, generally when such loans become 90 days delinquent. Loan balances
that relate to interest amounts reserved as uncollectible are considered to be
on a nonaccrual basis. Typically, payments received on a nonaccrual loan are
applied to the outstanding principal and interest as determined at the time of
collection of the loan.
7
<PAGE> 10
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods shown, the
Bank had no troubled debt restructured loans within the meaning of SFAS 15. For
the periods indicated, there were no accruing loans which were contractually
past due 90 days or more.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Loans Accounted for on a Nonaccrual Basis
Real Estate --
Residential............................................ $156 $ 49 $ 14
Consumer............................................... 45 164 63
Commercial............................................. 0 16 0
---- ---- ----
Total Loans Accounted for on a Nonaccrual Basis... 201 229 77
Real Estate in Judgement.................................... 146 62 41
Real Estate Owned........................................... 55 0 0
---- ---- ----
Total Non-Performing Assets....................... $402 $291 $118
==== ==== ====
Total Loans Delinquent
90 Days or More to Net Loans.................... .14% .24% .07%
Total Loans Delinquent
90 Days or more to Total Assets................. .10% .16% .05%
Total Non-Performing Assets to Total Assets....... .21% .16% .10%
Total Non-Performing Loans to Total Loans......... .13% .23% .07%
</TABLE>
The OTS regulations require that each insured institution review and
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, 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 must 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 on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. The regulations have also created a new special mention category,
described as assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require the institution to
establish 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. A portion of general loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
At December 31, 1996, 1995 and 1994, the aggregate amounts of the Bank's
classified assets, and of the Bank's general and specific loss allowances and
charge-offs for the periods then ended, were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Substandard Assets....................................... $ 402 $ 291 $ 77
General Loss Allowances.................................. 1,539 1,321 1,186
Specific Loss Allowances................................. -- -- --
Charge-Offs.............................................. 117 45 38
</TABLE>
8
<PAGE> 11
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired, the unpaid principal balance of the
related loan plus foreclosure costs are compared to the property's appraised
value. The property is then written down to the lower of cost or net realizable
value with any adjustments made through the establishment of a specific reserve.
At December 31, 1996, the Bank had $55,000 in real estate owned.
Allowance for Loan Losses. The Bank's management evaluates the need to
establish reserves against losses on loans and other assets each year based on
estimated losses on specific loans and on any real estate held for sale or
investment when a finding is made that a loss becomes estimatable and probable.
Such evaluation includes a review of all loans for which full collectibility may
not be reasonably assured and considers, among other matters, the estimated
market value of the underlying collateral of problem loans, prior loss
experience, economic conditions and overall portfolio quality. These provisions
for losses are charged against earnings in the year they are established. The
Bank established provisions for losses on loans for the years ended December 31,
1996, 1995 and 1994 of $317,500, $165,000 and $108,000 respectively.
The Bank has increased its allowance for loan losses since fiscal year
1989. The Bank's allowance for loan losses and the allowance as a percentage of
the Bank's total loans at December 31, 1996, 1995 and 1994 were $1,538,580,
1.05%; $1,320,734, 1.05%; and $1,185,883, 1.03%, respectively.
Prior to 1988 the Bank's lending strategy had been concentrated almost
exclusively on one- to four-family mortgage lending. Since the installation of
new management in 1988, consistent with the Bank's mission to become a full
service community bank, the Bank's strategy has been diversified to include
various types of non-residential mortgages and consumer loans. This
diversification has been designed to increase earnings and reduce interest rate
risk. See "-- Lending Strategy." Since 1988, management has significantly
increased the Bank's portfolio of first mortgage loans on commercial and
multi-family residential real estate, principally in the Bank's primary market
area. Collectively, the amount of such loans and the amount of such loans as a
percentage of the Bank's total loan portfolio at December 31, 1996, 1995, and
1994 were $41.4 million, or 28.1%; $25.4 million, or 20.2%; $21.8 million or
18.5%.
Based on past experience and future expectations, management feels that
loan loss reserves are adequate. However, the Bank's increased lending in the
multi-family residential and commercial real estate areas is relatively recent
and there is no assurance that current loss reserves will be adequate to cover
losses in connection with these or other loans due to unforeseen future
developments.
9
<PAGE> 12
LOAN LOSS ALLOWANCE ANALYSIS
The following table sets forth an analysis of the Bank's gross allowance
for possible loan losses for the periods indicated. Where specific loan loss
reserves have been established, any difference between the loss reserve and the
amount of loss realized has been charged or credited to current income.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance at Beginning of Period............................ $1,321 $1,186 $ 897
Provisions for Loan Losses.................................. 318 165 108
Charge-Offs
Residential One- to Four-Family........................... -- -- --
Automobile Loans.......................................... 45 43 27
Other..................................................... 72 2 11
------ ------ ------
Total Charge-Offs......................................... 117 45 38
------ ------ ------
Recoveries................................................ 17 15 19
------ ------ ------
Net Charge-Offs........................................... 100 30 19
------ ------ ------
Acquired Branches' Allowance.............................. -- -- 200
------ ------ ------
Balance at End of Period.......................... $1,539 $1,321 $1,186
====== ====== ======
Ratio of Allowance to Total Loans at the End of the
Period.................................................... 1.05% 1.05% 1.03%
Ratio of Allowance to Non-Performing Assets at the End of
the Period................................................ 383.1% 453.9% 1005.1%
Ratio of net Charge-Offs to Average Loans Outstanding During
the Period................................................ .02% .03% .02%
</TABLE>
LOAN LOSS ALLOWANCE BY CATEGORY
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1996 1995 1994
------ ------ ------
AMOUNT AMOUNT AMOUNT
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real Estate -- Mortgage
1-4 Family Residential.................................... 152 $ 113 $ 92
5+ Family Residential..................................... 33 37 35
Commercial................................................ 341 175 143
Commercial/Agricultural..................................... 217 229 169
Consumer.................................................... 202 135 124
Other....................................................... 15 11 11
Unallocated................................................. 579 621 612
------ ------ ------
Total Allowance for Loan Losses................... $1,539 $1,321 $1,186
====== ====== ======
</TABLE>
INVESTMENT ACTIVITIES
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the Federal Home Loan Bank ("FHLB") of Chicago, certificates of
deposit of federally insured institutions, certain bankers' acceptances and
federal funds. Subject to various restrictions, such savings institutions may
also invest a portion of their assets in commercial paper, corporate debt
securities and mutual funds, the assets of which conform to the investments that
federally chartered savings institutions are otherwise authorized to make
directly. Savings institutions are also required to maintain minimum levels of
liquid assets which vary from time to time. See "REGULATION AND
10
<PAGE> 13
SUPERVISION -- Federal Savings Association Regulation -- Federal Home Loan Bank
System." The Bank may decide to increase its liquidity above the required levels
depending upon the availability of funds and comparative yields on investments
in relation to return on loans.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets and is also permitted to make certain other securities
investments. The balance of the Bank's investments in short-term securities in
excess of regulatory requirements reflects management's response to the
significantly increasing percentage of deposits with short maturities. At
December 31, 1996, the Bank's regulatory liquidity was 13.02%, which exceeds the
required 5%. It is the intention of management to hold securities with short
maturities in the Bank's investment portfolio in order to enable the Bank to
match more closely the interest-rate sensitivities of its assets and
liabilities.
Investment strategies are reviewed by the Bank's Interest Rate Risk
Committee, which meets quarterly and consists of Messrs. Gunderson, Dipple,
Jenks, Wegner and Carter. The Investment Committee acts within policies
established by the Board of Directors. At the time of purchasing securities,
management determines whether they have the intent and ability to hold the
security until maturity or if it will be held as available for sale. At December
31, 1996, the Bank's investment portfolio available for sale totaled
approximately $34.3 million and consisted of U.S. Government and agency
obligations, and state and political subdivision securities and mortgage-backed
securities. For more information, see the following table, Note 3 of the
consolidated financial statements and mortgage-backed securities under Lending
Activities.
INVESTMENT SECURITIES ANALYSIS
The following table sets forth the Bank's investment securities portfolio
at amortized cost and estimated market values at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------
1996 1995
------------------------------------------------------------ -----------------------------------
GROSS GROSS ESTIMATED PERCENTAGE GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET OF AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES VALUE PORTFOLIO COST GAINS LOSSES
--------- ---------- ---------- --------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available for
Sale
U.S. Government and
agency securities... $11,908 $ 31 $130 $11,809 63.1% $20,487 $242 $--
Obligation of State
and political
subdivisions........ 5,576 94 6 5,664 30.3 2,876 64 12
Other................. -- -- -- -- -- 0 24 --
Equity securities --
common stock........ 1,159 88 3 1,244 6.6 886 33 --
------- ---- ---- ------- ------ ------- ---- ---
Total........... $18,643 $213 $139 $18,717 100.00% $24,249 $363 $12
======= ==== ==== ======= ====== ======= ==== ===
Securities Held to
Maturity
U.S. Government and
agency securities... $ 1,100 -- $ 7 $ 1,093 100.0% $ 2,095 $ 17 --
======= ==== ==== ======= ====== ======= ==== ===
<CAPTION>
AT DECEMBER 31,
----------------------
1995
----------------------
ESTIMATED PERCENTAGE
MARKET OF
VALUE PORTFOLIO
--------- ----------
<S> <C> <C>
Securities Available for
Sale
U.S. Government and
agency securities... $20,729 84.3%
Obligation of State
and political
subdivisions........ 2,928 11.9
Other................. 24 0.1
Equity securities --
common stock........ 919 3.7
------- -----
Total........... $24,600 100.0%
======= =====
Securities Held to
Maturity
U.S. Government and
agency securities... $ 2,112 100.0%
======= =====
</TABLE>
SUBSIDIARY ACTIVITIES
Federally chartered savings institutions generally may invest up to 3% of
their assets in service corporations, plus an additional 2%, if for community
purposes. The Bank's investment in its service corporation at December 31, 1996
did not exceed the limits applicable to federal savings banks.
The Bank had one wholly-owned service corporation, B.F. Financial Services,
Incorporated ("B.F. Financial"), which was incorporated in 1989 under the laws
of Wisconsin. At December 31, 1996, B.F. Financial had total assets of $97,568.
For the year ended December 31, 1996, B.F. Financial recorded net income of
$44,817. B.F. Financial offers full service brokerage products. The operations
of B.F. Financial are included in the Bank's consolidated financial statements.
11
<PAGE> 14
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
General. Deposits and loan repayments are the major source of the Bank's
funds for lending and other investment purposes. Loan repayments are a
relatively stable source of funds, while deposit inflows and out flows and loan
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within the Bank's primary
market area through the offering of a broad selection of deposit instruments,
including NOW accounts, money market accounts, regular savings accounts,
certificates of deposit and retirement savings plans. Deposit account terms
vary, according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit accounts, the Bank considers the rates offered by its
competition, profitability to the Bank, matching deposit and loan products and
its customer preferences and concerns. The Bank generally reviews its deposit
mix and pricing weekly.
DEPOSIT BALANCES
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at December 31, 1996.
<TABLE>
<CAPTION>
MINIMUM PERCENTAGE OF
TERM CATEGORY AMOUNT TOTAL BALANCE DEPOSITS
---- -------- -------- -------------- ---------
(IN THOUSANDS, EXCEPT MINIMUM AMOUNT)
<S> <C> <C> <C> <C>
None............................. Super NOW accounts $1,500 0.98% $ 1,501
None............................. NOW accounts 500 6.08 9,276
None............................. Savings accounts N/A 7.38 11,255
None............................. Money market accounts 2,500 20.14 30,711
None............................. Non-interest checking VARI 8.66 13,204
CERTIFICATES OF DEPOSIT
7-28 days........................ Fixed-term,
fixed-rate 500 0.84 1,284
90 days.......................... Fixed-term,
fixed-rate 500 1.43 2,179
4-6 months....................... Fixed-term,
fixed-rate 500 3.42 5,212
7-12 months...................... Fixed-term,
fixed-rate 500 12.08 18,418
13-24 months..................... Fixed-term,
fixed-rate 500 14.74 22,475
25-48 months..................... Fixed-term,
fixed-rate 500 16.04 24,461
49-120 months.................... Fixed-term,
fixed-rate 500 2.44 3,722
VARIABLE......................... Jumbo certificates 99,000 5.77 8,794
------ --------
100.00% $152,492
====== ========
</TABLE>
12
<PAGE> 15
DEPOSIT FLOW
The following table sets forth the balances of deposits in the various
types of accounts offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF INCREASE OF INCREASE OF INCREASE
AMOUNT TOTAL (DECREASE) AMOUNT TOTAL (DECREASE) AMOUNT TOTAL (DECREASE)
-------- ------- ---------- -------- ------- ---------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing...... $ 13,204 8.66% $ (70) $ 13,274 9.31% $ 3,305 $ 9,969 7.94% $ 2,634
NOW checking.............. 9,276 6.08 2,355 6,921 4.85 315 6,606 5.26 2,727
Super NOW checking........ 1,501 0.98 (163) 1,664 1.17 69 1,595 1.27 54
Savings accounts.......... 11,255 7.38 (23,812) 35,067 24.59 10,973 24,094 19.19 10,998
Money market deposit...... 30,711 20.14 27,473 3,238 2.27 (2,534) 5,772 4.59 (1,103)
Fixed-rate certificates
which mature in:
1 year.................. 55,828 36.61 3,956 51,872 36.38 (5,307) 57,179 45.51 9,687
2 years................. 21,410 14.04 6,636 14,774 10.36 1,095 13,679 10.89 (2,139)
3 years................. 6,874 4.51 (6,420) 13,294 9.32 8,245 5,049 4.02 1,942
Certificate maturing
thereafter............ 2,433 1.60 (54) 2,487 1.75 806 1,681 1.33 1,241
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total............. $152,492 100.00% $ 9,901 $142,591 100.00% $ 16,967 $125,624 100.00% $ 26,041
======== ====== ======== ======== ====== ======== ======== ====== ========
</TABLE>
TIME DEPOSITS BY RATES
The following table sets forth the dollar amount of certificates of deposit
in the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(DOLLAR IN THOUSANDS)
<S> <C> <C> <C>
Below 3.00%................................................. $ 0 $ 111 $ 38
3.00 - 3.99%................................................ 2,399 1,264 15,190
4.00 - 4.99%................................................ 3,475 9,653 18,606
5.00 - 5.99%................................................ 48,399 31,223 24,311
6.00 - 6.99%................................................ 29,820 37,185 18,561
7.00% and over.............................................. 2,452 3,091 882
------- ------- -------
Total............................................. $86,545 $82,427 $77,588
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
at December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT DUE
----------------------------------------------------------------------------
PERCENT OF TOTAL
LESS THAN 1-2 2-3 3-4 AFTER CERTIFICATE
ONE YEAR YEARS YEARS YEARS 4 YEARS TOTAL ACCOUNTS
--------- ------- ------ ------ ------- ------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Below 3.00%................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.00%
3.00 - 3.99%.................. 2,389 3 7 0 0 2,399 2.77
4.00 - 4.99%.................. 3,195 136 4 5 135 3,475 4.02
5.00 - 5.99%.................. 35,826 9,554 3,007 11 1 48,399 55.92
6.00 - 6.99%.................. 13,706 11,406 3,852 430 426 29,820 34.46
7.00% and over................ 713 310 4 1,388 37 2,452 2.83
------- ------- ------ ------ ---- ------- -------
Total............... $55,829 $21,409 $6,874 $1,834 $599 $86,545 100.00%
======= ======= ====== ====== ==== ======= =======
</TABLE>
13
<PAGE> 16
The following table sets forth the deposit activities of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.......................................... $142,591 $125,624 $ 99,583
-------- -------- --------
Net increase before interest credited...................... 4,772 12,545 23,464
Interest credited.......................................... 5,128 4,422 2,577
-------- -------- --------
Net increase in savings deposits........................... 9,900 16,967 26,041
-------- -------- --------
Ending Balance............................................. $152,491 $142,591 $125,624
======== ======== ========
</TABLE>
In the unlikely event the Bank is liquidated, depositors will be entitled
to full payment of their deposit accounts prior to any payment being made to the
shareholder of the Bank which will be the Holding Company. Substantially all of
the Bank's depositors are residents of Wisconsin.
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank may rely upon advances from the FHLB of Chicago to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The FHLB
of Chicago has served as one of the Bank's primary borrowing sources. Advances
from the FHLB of Chicago are typically secured by the Bank's first mortgage
loans. At December 31, 1996, the Bank had $24.8 million of advances from the
FHLB of Chicago. At December 31, 1996, the Bank was eligible to borrow up to
$61.9 million from the FHLB of Chicago. See Note 7 to Notes to Consolidated
Financial Statements.
The FHLB functions as a central reserve bank providing credit for savings
and loan associations and savings banks and certain other member financial
institutions. As a member, the Bank is required to own capital stock in the FHLB
of Chicago and is authorized to apply for advances on the security of such stock
and certain of its mortgage loans, provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several different
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based either
on a fixed percentage of an institution's net worth or on the FHLB's assessment
of the institution's creditworthiness. The FHLB determines specific lines of
credit for each member institution.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average rate paid on:
Securities sold under agreements to repurchase............ -- -- --
Commercial paper.......................................... -- -- --
Other short-term borrowings............................... 5.76% 6.65% 4.62%
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding at any month
end:
Securities sold under agreements to repurchase...... $ -- $ -- $ --
Commercial paper.................................... -- -- --
Other short-term borrowings......................... 27,600 17,600 14,500
Approximate average short-term borrowings outstanding
with respect to:
Securities sold under agreements to repurchase...... -- -- --
Commercial paper.................................... -- -- --
Other short-term borrowings......................... 18,192 9,068 9,577
Approximate weighted average rate paid on:(1)
Securities sold under agreements to repurchase...... -- -- --
Commercial paper.................................... -- -- --
Other short-term borrowings......................... 5.76% 6.65% 4.62%
</TABLE>
- ---------------
(1) Computed using the weighted rates of each individual transaction.
COMPETITION
The Bank is the largest locally headquartered financial institution,
including commercial banks and other thrift institutions, in its primary market
area, based on its total assets of $194.6 million at December 31, 1996. The Bank
is the only thrift institution based in Baraboo. The Bank faces strong
competition in the attraction of savings deposits (its primary source of
lendable funds) and in the origination of loans. Its most direct competition for
savings deposits and loans has historically come from other thrift institutions
and from commercial banks located in its primary market area. Particularly in
times of high interest rates, the Bank has faced additional significant
competition for investors' funds from short-term money market securities and
other corporate and government securities. The Bank's competition for loans
comes principally from other thrift institutions, commercial banks, mortgage
banking companies and mortgage brokers.
PERSONNEL
As of December 31, 1996, the Bank had 69 full-time employees and 18
part-time employees. The employees are not represented by a collective
bargaining agreement. The Bank believes its relationship with its employees are
good.
REGULATION AND SUPERVISION
GENERAL
The Savings Bank is chartered under federal law by the OTS. It is a member
of the FHLB System, and its deposit accounts are insured up to legal limits by
the FDIC under the SAIF. The OTS is charged with overseeing and regulating the
Savings Bank's activities and monitoring its financial condition. This
regulatory framework sets parameters for the Savings Bank's activities and
operations and grants the OTS extensive discretion with regard to its
supervisory and enforcement powers and examination policies. The Savings Bank
files periodic reports with the OTS concerning its activities and financial
condition, must obtain OTS approval prior to entering into certain transactions
or initiating new activities, and is subject to periodic examination by the OTS
to evaluate the Savings Bank's compliance with various regulatory requirements.
The Corporation is a savings and loan holding company and, like the Savings
Bank, is subject to regulation by the OTS. As part of this regulation, the
Corporation is required to file certain reports with, and is subject to periodic
examination by, the OTS.
15
<PAGE> 18
RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS
During calender year 1996, several new laws and regulations were adopted
that affect savings associations like the Savings Bank.
Deposit Insurance Reform Legislation. The SAIF and the Bank Insurance Fund
(the "BIF") were required by law to achieve and maintain a ratio of insurance
reserves to total insured deposits equal to 1.25 percent. The BIF reached this
required reserve ratio during 1995, while some predictions indicated the SAIF
would not reach this target until the year 2002. The SAIF had not grown as
quickly as the BIF for many reasons, but in large part because almost half of
SAIF premiums had to be used to retire bonds issued by the Financing Corporation
("FICO Bonds") in the late 1980's to recapitalize the Federal Savings and Loan
Insurance Corporation.
Until 1995, the SAIF and BIF deposit insurance premium rate schedules had
been identical. But in-mid 1995, the FDIC issued final rules modifying its
assessment rate schedules for SAIF and BIF member institutions. Under the
revised schedule, SAIF members continued to pay assessments ranging from $0.23
to $0.31 per $100 of deposits, while BIF members paid assessments ranging from
zero to $0.27 per $100 of deposits. But the majority of BIF members paid only
the $2,000 minimum annual premium. Thrift industry representatives argued that
this significant premium differential caused savings associations to operate at
a competitive disadvantage to their BIF-insured bank counterparts.
On September 30, 1996, President Clinton signed the Deposit Insurance Funds
Act of 1996 ("DIFA") that was part of the omnibus spending bill enacted by
Congress at the end of its 1996 session. DIFA mandated that the FDIC impose a
special assessment on the SAIF-assessable deposits of each insured depository
institution at a rate applicable to all such institutions that the FDIC
determined would cause the SAIF to achieve its designated reserve ratio of 1.25
percent as of October 1, 1996. The assessment was based on the amount of
SAIF-insured deposits owned by each institution as of March 31, 1995, the record
date established in the original drafts of the legislation. DIFA allowed the
FDIC to exempt any insured institution that it determined to be weak from paying
the special assessment if the FDIC determined that the exemption would reduce
the risk to the SAIF.
DIFA provides that the FDIC may not set semiannual assessments with respect
to SAIF or BIF in excess of the amount needed to maintain the 1.25 percent
designated reserve ratio or, if the reserve ratio is less than the designated
reserve ratio, to increase the reserve ratio to the designated reserve ratio.
"Oakar" banks (i.e., BIF-member banks holding SAIF deposits) are eligible
for a 20 percent discount from the special assessment with respect to the
SAIF-insured deposits they own, provided the ratio of SAIF-insured deposits to
total deposits they owned as of June 30, 1995 was 50 percent or, in some cases,
75 percent. Some "Sasser" banks (i.e., SAIF-member banks that converted to state
savings banks or commercial banks) are also eligible for this reduced assessment
rate.
On October 10, 1996, the FDIC adopted a final rule governing the payment of
the SAIF special assessment. The FDIC imposed a special assessment in the amount
of 65.7 basis points, which is less than the 85-95 basis points estimated during
the early stages of the law's enactment in 1995. The SAIF special assessment was
due by November 27, 1996. The Savings Bank's portion of this special assessment
amounted to $727,890 on a pre-tax basis. The Savings Bank paid this amount to
the FDIC during its fiscal third quarter ended September 30, 1996, as mandated
by the Financial Accounting Standards Board that ruled that the SAIF special
assessment should be recorded as an ordinary non-interest expense for the
quarter ended September 30, 1996 for calender year reporting institutions. DIFA
also confirmed that the special assessment is tax deductible.
In response to the recapitalization of the SAIF, the FDIC announced on
December 11, 1996 that deposit insurance rates for most savings associations
insured under the SAIF would be lowered to zero effective January 1, 1997.
BIF-insured institutions would also no longer have to pay the $2,000 minimum for
deposit insurance, thereby equalizing deposit premiums for savings associations
and banks.
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Merger of SAIF and BIF. DIFA mandates the merger of the SAIF and BIF,
effective January 1, 1999, but only if no insured depository institution is a
savings association on that date. The combined deposit insurance fund will be
called the "Deposit Insurance Fund", or "DIF".
FICO Bond Payments. Before DIFA, federal regulators and thrift industry
trade groups were predicting that a default would occur on the FICO Bonds as
early as 1998, as SAIF-assessable deposits continued to decline. DIFA amends The
Federal Home Loan Bank Act to impose the FICO assessment against both SAIF and
BIF deposits beginning after December 31, 1996. But the assessment imposed on
insured depository institutions with respect to any BIF-assessable deposit will
be assessed at a rate equal to one-fifth of the rate (approximately 1.3 basis
points) of the assessments imposed on insured depository institutions with
respect to any SAIF-assessable deposit (approximately 6.7 basis points). The
FICO assessment for 1996 was paid entirely by SAIF-insured institutions.
BIF-insured banks will pay the same FICO assessment as SAIF-insured institutions
beginning as of the earlier of December 31, 1999 or the date as of which the
last savings association ceases to exist.
Deposit Shifting. DIFA provides that until the earlier of December 31,
1999 or the date as of which the last savings association ceases to exist, the
Office of the Comptroller of the Currency (the "OCC"), the FDIC, the Board of
Governors of the Federal Reserve System, and the OTS will take appropriate
actions, including enforcement actions and denial of applications, to prevent
insured depository institutions from facilitating or encouraging the shifting of
deposits from SAIF-assessable deposits to BIF-assessable deposits for the
purpose of evading the assessments imposed on insured depository institutions
with respect to SAIF-assessable deposits.
Bad Debt Recapture. The Small Business Job Protection Act of 1996, signed
by President Clinton on August 20, 1996, removed a significant tax obstacle for
savings associations that desire to become commercial banks. It also eliminated
a potential impediment to business combinations between banks and thrifts and
the creation of a new depository institution charter.
Before this new law, savings associations that converted to commercial
banks had to change their method of accounting for bad debt reserves, which
forced a recapture of the savings association's untaxed bad debt reserves into
taxable income. Under prior law, savings associations were allowed to use the
reserve method for establishing bad debt reserves. This meant in recent years
they could deduct up to 8 percent of their taxable income each year as a charge
for bad debts, regardless of their actual loan loss experience. Since the
1950's, this deduction has steadily declined from its initial rate of 100
percent. These annual deductions resulted in significant tax savings for savings
associations and an accumulation by savings associations of untaxed income.
Under the new law, a savings association's base-year reserves established
before 1988 will not be taxed should it convert to a commercial bank. But
reserves created after 1987 would be recaptured into taxable income ratably over
six years (beginning with the first tax year after December 31, 1995) whether or
not a savings association converts to a commercial bank. Recapture of post-1987
reserves may be deferred until after January 1, 1998 if the savings association
maintains a high level of residential loan originations. In the future, all
savings associations must account for bad debts under tax rules applicable to
commercial banks.
Relaxation of the Qualified Thrift Lender Test. In September 1996, the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 became law (the
"Economic Growth Act of 1996"). In the past, savings associations were required
to satisfy a qualified thrift lender test ("QTL" test) by maintaining 65 percent
of their portfolio assets (defined as all assets minus intangible assets,
property used by the association in conducting its business and liquid assets
equal to 20% of total assets) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) on a monthly basis in nine out of every twelve
months.
The Economic Growth Act of 1996 liberalized the QTL test for savings
associations by permitting them to satisfy a similar-but-different 60 percent
asset test under the Internal Revenue Code. Alternatively, savings associations
may meet the QTL test by satisfying a more liberal 65 percent asset test that
allows an institution to include small business, credit card and education loans
as qualified investments for purposes of the test. Furthermore, consumer loans
now count as qualified thrift investments up to 20 percent of portfolio assets.
On
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November 27, 1996, OTS issued an interim final rule that implements provisions
of the Economic Growth Act of 1996, including the amended QTL test.
Increased Commercial and Consumer Lending Authority. Before the Economic
Growth Act of 1996, federal savings associations were able to lend up to 10
percent of their assets in commercial business loans (i.e., secured or unsecured
loans for commercial, corporate, business, or agricultural purposes) and,
subject to OTS approval for a higher amount, up to 400 percent of their capital
in commercial real estate loans. In addition, federal savings associations were
permitted to make consumer loans (i.e., loans for personal, family or household
purposes) in an amount not to exceed 35 percent of their assets.
The Economic Growth Act of 1996 amended the commercial-lending-asset limit
by increasing the ceiling from 10 percent to 20 percent, but provides that
amounts in excess of 10 percent may be used only for small business loans.
Moreover, the new law exempts credit card and educational loans from any
percentage of asset limitations applicable to consumer loans. The interim final
rule issued by the OTS on November 27, 1996, defines a "small business loan" as
one which meets the Small Business Administration size eligibility standards.
This definition also applies for purposes of the new QTL test.
Effective October 30, 1996, the OTS (as part of its regulatory streamlining
project) amended its lending regulations for federal savings associations to
remove the requirement that commercial loans made at the service corporation
level be aggregated with the 10 percent of assets limit on commercial lending.
Charter Overhaul. Proposals to eliminate the savings association charter
have been considered by the U.S. Congress several times in recent years. DIFA
mandates that the Secretary of the Treasury conduct a study of all issues which
the Secretary considers to be relevant with respect to the development of a
common charter for all insured depository institutions and the abolition of
separate and distinct charters between banks and savings associations.
The Secretary of the Treasury must submit a report to the Congress on or
before March 31, 1997, containing the findings and conclusions of the Secretary
in connection with this study. The report must include a detailed analysis of
each issue the Secretary considers relevant to the subject of the study,
recommendations of the Secretary with regard to the establishment of a common
charter for insured depository institutions and such recommendations for
legislative and administrative action as the Secretary determines to be
appropriate to implement the recommendations of the Secretary.
Regulatory Relief for Thrifts and Banks. The Economic Growth Act of 1996
included dozens of changes to financial institution laws granting regulatory
relief to financial institutions (including savings associations) and
simplifying and streamlining the regulatory application process with respect to
certain transactions. Many existing laws were affected by the new legislation,
including the Truth in Lending Act (the "TILA"), the Real Estate Settlement
Procedures Act, the Truth in Savings Act, the Fair Credit Reporting Act, the
Home Mortgage Disclosure Act and Fair Lending, among others. In particular, the
new law expands the definition of a small depository institution that qualifies
for an extended examination cycle (18 rather than 12 months) to include
institutions with assets of $250 million (as opposed to the former $175 million
asset threshold).
Environmental Liability Reform. On September 30, 1996, President Clinton
signed into law amendments to the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA"). These amendments provide relief for
lenders in connection with their liability for environmental contamination in
making and administering loans.
Overhaul of Thrift Conflict of Interest, Corporate Opportunity and
Corporate Governance Rules. For several years the OTS has been engaged in an
extensive review of its regulations to identify regulations that are obsolete
and areas where regulatory streamlining is appropriate. This review has
culminated in several substantial revisions to OTS regulations. In 1996, the OTS
issued final regulations streamlining its regulations in the areas of lending
and investment authority, corporate governance, subsidiaries and equity
investments and conflicts of interest, among others. As a result of this
project, many OTS regulations have been removed to the OTS Thrift Activities
Handbook.
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New Thrift Subsidiary and Equity Investment Rules. On December 18, 1996,
the OTS issued a final rule updating and streamlining its regulations governing
subsidiary and equity investments. The regulation recasts operating subsidiaries
and service corporations as "subordinate organizations," revises the list of
permissible activities for service corporations, confirms federal preemption of
state law regarding the activities of operating subsidiaries and clarifies the
application process for establishing subordinate organizations. The new rule
also codifies the authority of a federal savings association to invest in
certain pass-through investments, such as limited partnerships and mutual funds.
FEDERAL-SAVINGS-ASSOCIATION REGULATION
Business Activities. The activities of savings associations are governed
by the Home Owners' Loan Act, as amended (the "HOLA"), and, in certain respects,
the Federal Deposit Insurance Act (the "FDI Act"). The HOLA and the FDI Act were
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"). FIRREA was enacted for the purpose of resolving problem savings
associations, establishing a new thrift insurance fund, reorganizing the
regulatory structure applicable to savings associations, and imposing bank-like
standards on savings associations. FDICIA, among other things, requires that
federal banking regulators intervene promptly when a depository institution
experiences financial difficulties, mandates the establishment of a risk-based
deposit insurance assessment system and requires imposition of numerous
additional safety and soundness operational standards and restrictions. FIRREA
and FDICIA both contain provisions affecting numerous aspects of the operations
and regulations of federally-insured savings associations and empowers the OTS
and the FDIC, among other agencies, to promulgate regulations implementing its
provisions.
Branching. A federally-chartered savings association, like the Savings
Bank, can establish branches in any state or states in the United States and its
territories, subject to a few exceptions. The exercise by the OTS of its
authority to permit interstate branching by federal savings associations is
preemptive of any state law purporting to address the subject of branching by a
federal savings association.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the national bank limits regarding loans to one borrower. Generally,
savings associations may not make a loan or extend credit to a single or related
group of borrowers in excess of 15 percent of the association's unimpaired
capital and surplus, where the borrowing is not fully secured by
readily-marketable collateral. An additional amount may be lent, equal to 10
percent of the association's unimpaired capital and surplus, if such additional
borrowing is secured by readily-marketable collateral at least equal to the
amount of such additional funds. [At December 31, 1996, the Savings Bank had no
outstanding loans or commitments that exceeded the loans to one borrower limit
at the time made or committed.]
Brokered Deposits. Well-capitalized savings associations that are not
troubled are not subject to brokered deposit limitations. Adequately-capitalized
associations are able to accept, renew or roll over brokered deposits but only
(i) with a waiver from the FDIC and (ii) subject to the limitation that they do
not pay an effective yield on any such deposit that exceeds by more than (a) 75
basis points the effective yield paid on deposits of comparable size and
maturity in such association's normal market area for deposits accepted in its
normal market area or (b) 120 basis points of the current yield on similar
maturity U.S. Treasury obligations or, in the case of any deposit at least half
of which is uninsured, 130 percent of such Treasury yield. Undercapitalized
associations are not permitted to accept brokered deposits and may not solicit
deposits by offering an effective yield that exceeds by more than 75 basis
points the prevailing effective yields on insured deposits of comparable
maturity in the association's normal market area or in the market area in which
such deposits are being solicited. [The Savings Bank is not presently soliciting
brokered deposits.]
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings associations and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured association. Civil penalties cover a wide range
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of violations and actions. Criminal penalties for most financial association
crimes include fines and imprisonment. In addition, regulators have substantial
discretion to impose enforcement action on an association that fails to comply
with its regulatory requirements, particularly with respect to amounts of
capital. Possible enforcement action ranges from requiring the preparation of a
capital plan or imposition of a capital directive to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS enforcement action be
taken with respect to a particular savings association. If action is not taken
by the Director, the FDIC has authority to take enforcement action under certain
circumstances.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
paid on a semi-annual basis is computed based upon the savings association's
total assets, including consolidated subsidiaries, as reported in the
association's latest quarterly thrift financial report.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB
System, which consists of 12 regional FHLB's. The FHLB provides a central credit
facility primarily for member associations. The Savings Bank, as a member of the
FHLB-Chicago, is required to acquire and hold shares of capital stock in that
FHLB in an amount at least equal to 1 percent of the aggregate principal amount
of its unpaid residential mortgage loans and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the
FHLB-Chicago, whichever is greater. The Savings Bank is in compliance with this
requirement, with an investment in FHLB-Chicago stock at December 31, 1996, of
$1.4 million. FHLB advances must be secured by specified types of collateral and
may be obtained only for the purpose of purchasing or funding new residential
housing finance assets.
OTS Capital Requirements. The OTS capital regulations require savings
associations to meet three capital standards: a 1.5 percent tangible capital
standard, a 3 percent leverage ratio (or core capital ratio) and an 8 percent
risk-based capital standard.
Tangible capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
earnings, certain nonwithdrawable accounts and pledged deposits of mutual
savings associations, and minority interests in equity accounts of fully
consolidated subsidiaries, less intangible assets (other than certain mortgage
servicing rights) and certain equity and debt investments in nonqualifying
subsidiaries (as hereinafter defined).
Core capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
minority interests in equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations,
certain amounts of goodwill resulting from prior regulatory accounting
practices, less intangible assets (other than certain mortgage servicing rights)
and certain equity and debt investments in nonqualifying subsidiaries.
The OTS capital regulation requires that in meeting the leverage ratio,
tangible and risk-based capital standards, savings associations must deduct
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank (a "nonqualifying subsidiary"). [At December 31, 1996, the
Savings Bank did not own a nonqualifying subsidiary.]
In April 1991, the OTS issued a proposal to amend its regulatory capital
regulation to establish a 3 percent leverage ratio (defined as the ratio of core
capital to adjusted total assets) for associations in the strongest financial
and managerial condition, with a 1 CAMEL Rating (the highest rating of the OTS
for savings associations). For all other associations, the minimum core capital
leverage ratio would be 3 percent plus at least an additional 100 to 200 basis
points. In determining the amount of additional capital under the proposal, the
OTS would assess both the quality of risk management systems and the level of
overall risk in each individual association through the supervisory process on a
case-by-case basis. Associations that failed the new leverage ratio would be
required to file with the OTS a capital plan that details the steps they would
take to reach compliance. [If enacted in final form as proposed, management does
not believe that the proposed regulation would have a material effect on the
Savings Bank.]
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Although the OTS has not adopted this regulation in final form, generally a
savings association that has a leverage capital ratio of less than 4 percent
will be deemed to be "undercapitalized" under the OTS prompt corrective action
regulations and consequently can be subject to various limitations on
activities.
The OTS' risk-based capital standard requires that savings associations
maintain a ratio of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8 percent. In calculating
total capital, a savings association must deduct reciprocal holdings of
depository institution capital instruments, all equity investments and that
portion of land loans and nonresidential construction loans in excess of 80
percent loan-to-value ratio and its interest rate risk component (as discussed
below), in addition to the assets that must be deducted in calculating core
capital. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of 0
percent to 100 percent, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed above
under the 3 percent leverage standard. The components of supplementary capital
include cumulative preferred stock, long-term perpetual preferred stock, mutual
capital certificates, certain nonwithdrawable accounts and pledged deposits,
certain net worth certificates, income capital certificates, certain perpetual
subordinated debt, mandatory convertible subordinated debt, certain
intermediate-term preferred stock, certain mandatorily redeemable preferred
stock and allowance for loan and lease losses (up to 1.25 percent of
risk-weighted assets). Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25 percent. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100 percent
of core capital. At December 31, 1996, the Savings Bank met each of its capital
requirements.
FDICIA required that the OTS (and other federal banking agencies) revise
risk-based capital standards, with appropriate transition rules, to ensure that
they take account of interest rate risk, concentration of risk and the risks of
nontraditional activities.
The OTS' interest rate risk component became effective on January 1, 1994.
Under the rule, savings associations with "above normal" interest rate risk
exposure would be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200-basis point increase or decrease in market interest rates
(except when the three-month Treasury bond equivalent yield falls below 4%, then
the decrease would be equal to one-half of that Treasury rate) divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
component in calculating its total capital under the risk-based capital rule.
The interest rate risk component is an amount equal to one-half of the
difference between the association's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Savings associations with
assets of less than $300 million and risk-based capital ratios in excess of 12%
are not subject to the interest rate risk component. The rule also provides that
the Director of the OTS may waive or defer an association's interest rate risk
component. The OTS has postponed the date that the risk component will first be
deducted from an institution's total capital to allow, among other things, the
OTS to evaluate the interest rate risk proposals issued by the other banking
agencies.
Liquidity. The Savings Bank is required to maintain an average daily
balance of liquid assets (e.g., cash, accrued interest on liquid assets, certain
time deposits, savings accounts, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to not less
than a specified percentage of the average daily balance of its net withdrawal
deposit accounts plus short-term borrowings. This liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4 percent
to 10 percent depending upon economic conditions and the savings flows of member
associations; this requirement is currently 5 percent. OTS regulations also
require each member savings association to maintain an average
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daily balance of short-term liquid assets at a specified percentage (currently 1
percent) of the average daily balance of its net withdrawable deposit accounts
and borrowings. The OTS may initiate enforcement actions for failure to meet
these liquidity requirements. [The Savings Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.]
Insurance of Deposit Accounts. FDICIA required the FDIC to establish a
risk-based assessment system for insured depository associations that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities. Under the rule, the FDIC assigns an association to one
of three capital categories consisting of (i) well capitalized, (ii) adequately
capitalized or (iii) undercapitalized, and one of three supervisory
subcategories. The supervisory subgroup to which an association is assigned is
based on a supervisory evaluation provided to the FDIC by the association's
primary federal regulator and information which the FDIC determines to be
relevant to the association's financial condition and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the association's state supervisor). An association's assessment rate depends
on the capital category and supervisory category to which it is assigned. There
are nine assessment risk classifications (i.e., combinations of capital groups
and supervisory subgroups) to which different assessment rates are applied.
Assessment rates range from 23 basis points for an association in the highest
category (i.e., well-capitalized and healthy) to 31 basis points for an
association in the lowest category (i.e., undercapitalized and of substantial
supervisory concern).
Limitation on Capital Distributions. The OTS regulations impose
limitations upon all capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another association in a cash-out merger and other distributions
charged against capital. The regulations establish three tiers of associations.
An association that exceeds all fully phased-in capital requirements before and
after the proposed capital distribution ("Tier 1 Association") and has not been
advised by the OTS that it is in need of more than normal supervision, could,
after prior notice but without the approval of the OTS, make capital
distributions during a calendar year up to the higher of (a) 100 percent of its
net income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year or (b) 75
percent of its net reserve over the most recent four-quarter period. Any
additional capital distributions would require prior regulatory approval. In
computing the association's permissible percentage of capital distributions,
previous distributions made during the prior four quarter period must be
included. [As of December 31, 1996, the Savings Bank met the requirements of a
Tier 1 Association.] In the event the Savings Bank's capital fell below its
fully phased-in requirement or the OTS notified it that it was in need of more
than normal supervision, the Savings Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any association, which would otherwise be
permitted by regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Moreover, under the OTS prompt
corrective action regulations, the Savings Bank would be prohibited from making
any capital distribution if, after the distribution, the Savings Bank would
have, (i) total risk-based capital ratio of less than 8 percent, (ii) Tier 1
risk-based capital ratio of less than 4 percent, or (iii) a leverage ratio of
less than 4 percent or has a leverage ratio that is less than 3 percent if the
association is rated composite 1 under the CAMEL rating system in the most
recent examination of the association and is not experiencing or anticipating
significant growth.
Community Reinvestment. The OTS, the FDIC, the Federal Reserve Board and
the OCC have jointly issued a final rule (the "Final Rule") under the Community
Reinvestment Act (the "CRA"). The Final Rule eliminates the existing CRA
regulation's twelve assessment factors and substitutes a performance based
evaluation system. The Final Rule will be phased in over a period of time and
become fully effective by July 1, 1997. Under the Final Rule, an institution's
performance in meeting the credit needs of its entire community, including low-
and moderate-income areas, as required by the CRA, will generally be evaluated
under three tests: the "lending test," the "investment test," and the "service
test."
The lending test analyzes lending performance using five criteria: (i) the
number and amount of loans in the institution's assessment area, (ii) the
geographic distribution of lending, including the proportion of lending in the
assessment area, the dispersion of lending in the assessment area, and the
number and amount of loans in low-, moderate-, middle-, and upper-income areas
in the assessment area, (iii) borrower
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characteristics, such as the income level of individual borrowers and the size
of businesses or farms, (iv) the number and amount, as well as the complexity
and innovativeness of an institution's community development lending and (v) the
use of innovative or flexible lending practices in a safe and sound manner to
address the credit needs of low- or moderate-income individuals or areas. The
investment test analyzes investment performance using four criteria: (i) the
dollar amount of qualified investments, (ii) the innovativeness or complexity of
qualified investments, (iii) the responsiveness of qualified investments to
credit and community development needs, and (iv) the degree to which the
qualified investments made by the institution are not routinely provided by
private investors. The service test analyzes service performance using six
criteria: (i) the institution's branch distribution among low-, moderate-,
middle-, and upper-income areas, (ii) its record of opening and closing
branches, particularly in low- and moderate-income areas, (iii) the availability
and effectiveness of alternative systems for delivering retail banking services,
(iv) the range of services provided in low-, moderate-, middle- and upper-income
areas and extent to which those services are tailored to meet the needs of those
areas, (v) the extent to which the institution provides community development
services, and (vi) the innovativeness and responsiveness of community
development services provided.
An independent financial institution with assets of less than $250 million,
or a financial institution with assets of less than $250 million that is a
subsidiary of a holding company with assets of less than $1 billion, will be
evaluated under a streamlined assessment method based primarily on its lending
record. The streamlined test considers an institution's loan-to-deposit ratio
adjusted for seasonal variation and special lending activities, its percentage
of loans and other lending related activities in the assessment area, its record
of lending to borrowers of different income levels and businesses and farms of
different sizes, the geographic distribution of its loans, and its record of
taking action, if warranted, in response to written complaints. In lieu of being
evaluated under the three assessment tests or the streamlined test, a financial
institution can adopt a "strategic plan" and elect to be evaluated on the basis
of achieving the goals and benchmarks outlined in the strategic plan.
Transactions with Related Parties. The Savings Bank's authority to engage
in transactions with related parties or "affiliates," (i.e., any company that
controls or is under common control with an association) including the
Corporation and its non-savings-association subsidiaries or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Subsidiaries of a savings association are generally exempted from the
definition of "affiliate." Section 23A limits the aggregate amount of
transactions with any individual affiliate to 10 percent of the capital and
surplus of the savings association and also limits the aggregate amount of
transactions with all affiliates to 20 percent of the savings association's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in the FRA and the
purchase of low quality assets from affiliates is generally prohibited. Section
23B provides that certain transactions with affiliates, including loans and
asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
non-affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to non-
affiliated companies. Notwithstanding Sections 23A and 23B, FIRREA prohibits any
savings association from lending to any affiliate that is engaged in activities
that are not permissible for bank holding companies under Section 4(c) of the
Bank Holding Company Act ("BHC Act"). Further, no savings association may
purchase the securities of any affiliate other than a subsidiary.
The Savings Bank's authority to extend credit to executive officers,
directors and 10 percent shareholders, as well as such entities such persons
control are currently governed by Section 22(g) and 22(h) of the FRA and
Regulation O promulgated by the Federal Reserve Board. Among other things, these
regulations require such loans to be made on terms substantially similar to
those offered to unaffiliated individuals, place limits on the amount of loans
the Savings Bank may make to such persons based, in part, on the Savings Bank's
capital position, and require certain approval procedures to be followed. OTS
regulations, with the exception of minor variations, apply Regulation O to
savings associations.
Prompt Corrective Regulatory Action. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized associations.
Under this system, the OTS is required to take certain
23
<PAGE> 26
supervisory actions against undercapitalized associations, the severity of which
depends upon the association's degree of undercapitalization. Generally, subject
to a narrow exception, FDICIA requires the OTS to appoint a receiver or
conservator for an association that is critically undercapitalized. FDICIA
authorizes the OTS to specify the ratio of tangible equity to assets at which an
association becomes critically undercapitalized and requires that ratio be no
less than 2 percent of assets.
Under OTS regulations, a savings association is considered to be
undercapitalized if it has risk-based capital of less than 8 percent or has a
Tier 1 risk-based capital ratio that is less than 4 percent or has a leverage
ratio that is less than 4 percent or has a leverage ratio less than 3 percent if
the savings association is rated composite 1 under the CAMEL rating system in
the most recent examination of the association. A savings association that has
risk-based capital less than 6 percent or a Tier 1 risk-based capital ratio that
is less than 3 percent or a leverage ratio that is less than 3 percent would be
considered to be "significantly undercapitalized." A savings association that
has a tangible equity to total assets ratio equal to or less than 2 percent
would be deemed to be "critically undercapitalized." Generally, a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. In addition, numerous mandatory
supervisory actions become immediately applicable to the association, including,
but not limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. In addition, the OTS could issue a
capital directive to the savings association that includes additional
discretionary restrictions on the savings association.
Real Estate Lending Standards. The OTS and the other federal banking
agencies have uniform regulations prescribing real estate lending standards. The
OTS regulation requires each savings association to establish and maintain
written internal real estate lending standards consistent with safe and sound
banking practices and appropriate to the size of the institution and the nature
and scope of its real estate lending activities. The policy must also be
consistent with accompanying OTS guidelines, which include maximum loan-to-value
ratios for the following types of real estate loans: raw land (65 percent), land
development (75 percent), nonresidential construction (80 percent), improved
property (85 percent) and one- to four-family residential construction (85
percent). Owner-occupied one- to four-family mortgage loans and home equity
loans do not have maximum loan-to-value ratio limits, but those with a
loan-to-value ratio at origination of 90 percent or greater are to be backed by
private mortgage insurance or readily marketable collateral. Institutions are
also permitted to make a limited amount of loans that do not conform to the
proposed loan-to-value limitations so long as such exceptions are appropriately
reviewed and justified. The guidelines also list a number of lending situations
in which exceptions to the loan-to-value standard are justified.
Standards for Safety and Soundness. As required by FDICIA and subsequently
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, the federal banking regulators adopted interagency guidelines establishing
standards for safety and soundness for depository institutions on matters such
as internal controls, loan documentation, credit underwriting, interest-rate
risk exposure, asset growth, compensation and other benefits and asset quality
and earnings (the "Guidelines"). The agencies expect to request a compliance
plan from an institution whose failure to meet one or more of the standards is
of such severity that it could threaten the safe and sound operation of the
institution. FDIC regulations enacted under FDICIA also require all depository
institutions to be examined annually by the banking regulators (but see,
"Regulatory Relief for Thrifts and Banks") and depository institutions having
$500 million or more in total assets to have an annual independent audit, an
audit committee comprised solely of outside directors, and to hire outside
auditors to evaluate the institution's internal control structure and procedures
and compliance with laws and regulations relating to safety and soundness. The
FDIC, in adopting the regulations, reiterated its belief that every depository
institution, regardless of size, should have an annual independent audit and an
independent audit committee.
Financial Management Requirements. FDICIA imposes new financial reporting
requirements on all depository institutions with assets of more than $500
million, their management, and their independent auditors. It also establishes
new rules for the composition, duties and authority of such institutions' audit
committees and boards of directors. Among other things, all such depository
institutions will be required to prepare and make available to the public annual
reports on their financial condition and management (including statements of
managements' responsibility for the financial statements, internal controls and
24
<PAGE> 27
compliance with certain federal banking laws and regulations relating to safety
and soundness, and an assessment by management of the effectiveness of the
institution's internal controls and procedures and the institution's compliance
with such laws and regulations). The institution's independent public
accountants are required to attest to these management assessments. Each such
institution is also required to have an audit committee composed of independent
directors.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), non-personal time deposits (those
which are transferable or held by a person other than a natural person) with an
original maturity of less than one and one-half years and certain money market
accounts. The Federal Reserve Board regulations generally require that reserves
of 3% must be maintained against aggregate transaction accounts of $52 million
or less (subject to adjustment by the Federal Reserve Board) and an initial
reserve of $1.6 million plus 10 percent (subject to adjustment by the Federal
Reserve Board between 8 percent and 14 percent) against that portion of total
transaction accounts in excess of $52 million. The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. [The Savings Bank is in
compliance with the foregoing requirements.]
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements by the OTS.
Because required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce the Savings Bank's interest-earning assets.
FHLB System members are also authorized to borrow from the Federal Reserve
"discount window," but Federal Reserve Board regulations require institutions to
exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Corporation is considered a non-diversified, savings and loan holding
company within the meaning of the HOLA, has registered as a savings and loan
holding company with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Corporation and its non-savings association subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from (i) acquiring control of,
or acquiring by merger or purchase of assets, another savings association or
holding company thereof, without prior written approval of the OTS; (ii)
acquiring or retaining, with certain exceptions, more than 5 percent of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or (iii) acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
As a unitary savings and loan holding company, the Corporation generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that its savings association subsidiary continues
to satisfy the QTL test. Upon any acquisition by the Corporation of another
SAIF-insured institution (other than the Corporation), a federal savings bank
insured by the BIF, or a state-chartered BIF-insured savings bank meeting the
QTL test that is deemed to be a savings institution by OTS, except for a
supervisory acquisition, the Corporation would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA, as amended by the
25
<PAGE> 28
FIRREA, limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the BHC Act, subject to the
prior approval of the OTS, and activities in which multiple savings and loan
holding companies were authorized by regulation to engage in on March 5, 1987.
Such activities include mortgage banking, consumer finance, operation of a trust
company, and certain types of securities brokerage. The services and activities
in which multiple holding companies were authorized to engage in on March 5,
1987 generally correspond to the activities which are permitted for service
corporations of federally-chartered savings institutions.
FEDERAL AND STATE TAXATION
Federal Taxation. Thrift institutions are subject to provisions of the
Code, in the same general manner as other corporations. However, institutions
such as the Bank which meet certain definitional tests and other conditions
prescribed by the Code may benefit from certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. For purposes of the bad debt reserve deduction, loans are separated
into "qualifying real property loans," which generally are loans secured by
certain interests in real property, and "nonqualifying loans," which are all
other loans. The bad debt reserve deduction with respect to qualifying real
property loans may be based upon (a) actual loss experience, or (b) a percentage
of taxable income before such deduction.
The Bank, which files its federal income tax returns on a fiscal year
basis, has generally elected to use the method which results in the greatest
deduction for federal income tax purposes. The Bank has historically elected to
use the percentage of taxable income method.
The amount of the bad debt deduction that a thrift institution may claim
with respect to additions to its reserve for bad debts is subject to certain
limitations. First, the full deduction is available only if at least 60% of the
institution's assets fall within certain designated categories. Second, under
the percentage of taxable income method the bad debt deduction attributable to
"qualifying real property loans" cannot exceed the greater of (i) the amount
deductible under the experience method or (ii) the amount which, when added to
the bad debt deduction for non-qualifying loans, equals the amount by which 12%
of the sum of the total deposits and the advance payments by borrowers for taxes
and insurance at the end of the taxable year exceeds the sum of the surplus,
undivided profits, and reserves at the beginning of the taxable year. Third, the
amount of the bad debt deduction attributable to qualifying real property loans
computed using the percentage of taxable income method is permitted only to the
extent that the institution's reserve for losses on qualifying real property
loans at the close of the taxable year does not exceed 6% of such loans
outstanding at such time. These limitations are not expected to restrict the
Bank from making the maximum addition to its bad debt reserve.
On August 20, 1996, the President of the United States signed the Small
Business Job Protection Act of 1996 ("the Act"). The Act repealed the reserve
method of accounting for bad debts by thrift institutions, effective for taxable
years beginning after December 31, 1995. Thrift institutions such as the Bank
with less than $500 million in assets are now required to use the experience
method. The Act also grants partial relief from the bad debt reserve "recapture"
which occurs in connection with the change in method of accounting. The pre-1988
reserves are not required to be included in income in connection with the change
in method of accounting. In addition, the Act suspends recapture of post-1987
reserves for a period of two years, conditioned on the institution's compliance
with certain residential loan requirements. Institutions can meet this
residential loan requirement if the principal amount of residential loans made
during a taxable year was not less than the "base amount" for such year. The
base amount is determined on an institution-by-institution basis, and
constitutes the average of the principal amounts of residential loans made by an
institution during the six most recent taxable years. Notwithstanding the
foregoing, institutions will be required to pay for recaptured post-1987 bad
debt reserves ratably over a six-year period starting in 1998. Since provisions
for deferred income tax have been provided for on post-1987 bad debt reserves,
there will not be any additional income tax expense to the Bank on recapture.
Earnings appropriated to the Bank's bad debt reserve and claimed as a tax
deduction will not be allowable for the payment of cash dividends or for
distribution to shareholders (including distributions made on
26
<PAGE> 29
dissolution or liquidation), without payment of federal income taxes on such
dividends or distributions by the Bank at the then current tax rates on the
amount deemed removed. The Bank would include not only the amount actually
distributed, but would also be increased (subject to certain limitations) by the
amount of the tax payable by reason of such distribution.
State Income Taxation. The State of Wisconsin imposes a tax on the
Wisconsin Taxable income of corporations, including savings institutions, at the
rate of 7.9%. Wisconsin taxable income is generally similar to federal taxable
income except that interest from state and municipal obligations is taxable, no
deduction is allowed for state income taxes, and net operating losses may be
carried forward but not back. Wisconsin law does not provide for filing of
consolidated state income tax returns.
The Bank's income tax returns have not been audited. As of December 31,
1996, there are no outstanding issues with the Internal Revenue Service
regarding the Bank's income tax returns. The Bank's state excise tax returns
have not been audited by the State of Wisconsin over the past five fiscal years.
For information regarding federal income taxes payable by the Bank, see Note 9
of the Notes to the Consolidated Financial Statements.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Corporation as of December 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gary E. Wegner............................. 47 President and Chief Executive Officer
Dean C. Carter............................. 39 Chief Financial Officer
Scott D. Huedepohl......................... 34 Vice President
Nancy L. Bilz.............................. 38 Secretary
</TABLE>
The following table sets forth certain information with respect to the
executive officers of the Bank as of December 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gary E. Wegner............................. 47 President and Chief Executive Officer
Scott D. Huedepohl......................... 34 Executive Vice President
Todd Cegelski.............................. 35 Senior Vice President -- Commercial Lending
Melvin Bindl............................... 47 Sr. Vice President/Bank Manager
Dean C. Carter............................. 39 Vice President, Operations, Secretary
Kenneth E. Knerzer......................... 46 Vice President -- Lending
Patricia M. Schultz........................ 43 Vice President -- Lending
Jeff Schlender............................. 36 Vice President/Bank Manager
Nancy L. Bilz.............................. 38 Controller
John Seitz................................. 40 Vice President
</TABLE>
Gary E. Wegner joined the Bank as President, Chief Executive Officer and a
Director in 1988. Prior to joining the Bank, Mr. Wegner was Executive Vice
President and Chief Operating Officer of M&I Tri-County Bank, Marshfield,
Wisconsin.
Scott D. Huedepohl joined the Bank as Vice President and Portage Branch
Manager in 1991. From 1987 and prior to joining the Bank, Mr. Huedepohl was Vice
President and Senior Loan Officer at First National Bank and Trust of Baraboo.
Mr. Huedepohl is currently Executive Vice President.
Todd Cegelski joined Baraboo Federal in October of 1992 as bank manager of
the Sauk Prairie office and was promoted to Sr. Vice President -- Commercial
Lending in December, 1996.
Melvin Bindl joined the Bank in December of 1995 as Sr. Vice President and
Manager of the two Portage banking facilities. Bindl joins Baraboo Federal with
over 20 years of commercial banking experience with the First National Bank of
Portage.
27
<PAGE> 30
Dean Carter joined the Bank in 1991 as an internal auditor. From 1986 and
prior to joining the Bank, Mr. Carter was Senior Auditor with Valley
Bancorporation. Mr. Carter is currently Vice President of Operations and
Secretary.
Kenneth E. Knerzer joined the Bank in 1974 as Vice President -- Lending.
Patricia M. Schultz joined the Bank as Vice President -- Lending in 1989.
From 1983 and prior to joining the Bank, Mrs. Schultz was Vice President and
Branch Manager at Western Federal Savings, Sparta, Wisconsin.
Jeff Schlender joined Baraboo Federal in October 1994 as Assistant Vice
President -- Retail Manager of the Baraboo offices. Jeff was promoted to Vice
President and Manager of the Baraboo retail offices in December of 1995.
Nancy L. Bilz joined Baraboo Federal in September 1994 as Controller for
the organization. From 1984 and prior to joining the Bank, Mrs. Bilz was Audit
Manager with Valley Bancorporation and Marshall & Illsley Corporation.
John Seitz joined Baraboo Federal Bank in January 1995 as Assistant Manager
of the Portage offices. From 1979 and prior to joining the Bank, Mr. Seitz was
Vice President and Cashier with the First National Bank of Portage.
ITEM 2. DESCRIPTIONS OF PROPERTIES
The following table sets forth the location of the Bank's offices and other
facilities as well as certain additional information relating to these offices
and facilities as of December 31, 1996.
<TABLE>
<CAPTION>
TOTAL NET BOOK OWNED/
LOCATION INVESTMENT VALUE LEASED
-------- ---------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Corporate Office:........................................... $1,625 $1,016 Owned
1159 Eighth Street
Baraboo, Wisconsin
Portage Branch Office:...................................... 703 388 Owned
611 E. Wisconsin
Portage, Wisconsin
Sauk Prairie Branch Office:................................. 416 353 Owned
525 Water Street
Sauk Prairie, Wisconsin
Limited Service Office:..................................... 164 59 Owned
128 Fourth Avenue
Baraboo, Wisconsin
Limited Service Office:..................................... 144 74 Leased
615 Highway 136
West Baraboo, Wisconsin
Lodi Branch Office.......................................... 924 729 Owned
613 N. Main Street
Lodi, Wisconsin
Portage North Branch Office:................................ 1,150 1,066 Owned
2851 New Pinery Road
Portage, Wisconsin
Kingston Branch Office:..................................... 310 285 Owned
120 N. South Street
Kingston, Wisconsin
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
TOTAL NET BOOK OWNED/
LOCATION INVESTMENT VALUE LEASED
-------- ---------- -------- ------
<S> <C> <C> <C>
Limited Service Office...................................... 46 42 Owned
509 N. Main Street
Dalton, Wisconsin
</TABLE>
The Bank uses the services of an independent data processing system to
process customer records and monetary transactions, post deposit and general
ledger entries and record activity in installment lending, loan servicing and
loan originations.
The net book value of the Bank's investment in office, properties and
equipment totaled $4.0 million at December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS
Although the Bank is, from time to time, involved in various legal
proceedings in the normal course of business, there are no material pending
legal proceedings to which the Corporation or the Bank or any subsidiary is a
party, or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
CORPORATE DATA
<TABLE>
<S> <C>
CORPORATE OFFICE PRINCIPAL SUBSIDIARY
1159 Eighth Street Baraboo Federal Bank, FSB
Baraboo, Wisconsin 53913-0450 Baraboo, Wisconsin
(608) 356-7771
</TABLE>
29
<PAGE> 32
STOCK INFORMATION
The Common Stock of Midwest Federal Financial Corp. trades on the Nasdaq
"SmallCap" Market under the symbol "MWFD." The number of shareholders of record
as of February 28, 1997, is 439.
This table shows market price information of, and cash dividends paid on
the Company's common stock. The prices given represent high and low prices on
the Nasdaq "SmallCap" Market.
<TABLE>
<CAPTION>
1994 HIGH LOW DIVIDEND
- ---- ------ ------ --------
<S> <C> <C> <C>
First Quarter............................................... $ 6.17 $ 6.17 2.9c
Second Quarter.............................................. $ 6.34 $ 6.17 2.9c
Third Quarter............................................... $ 6.67 $ 6.34 2.9c
Fourth Quarter.............................................. $ 6.67 $ 6.34 2.9c
</TABLE>
<TABLE>
<CAPTION>
1994 HIGH LOW DIVIDEND
- ---- ------ ------ --------
<S> <C> <C> <C>
First Quarter............................................... $ 6.34 $ 6.25 3.2c
Second Quarter.............................................. $ 8.13 $ 6.25 3.3c
Third Quarter............................................... $ 9.13 $ 8.13 3.3c
Fourth Quarter.............................................. $ 9.75 $ 9.13 3.3c
</TABLE>
<TABLE>
<CAPTION>
1995 HIGH LOW DIVIDEND
- ---- ------ ------ --------
<S> <C> <C> <C>
First Quarter............................................... $11.50 $ 9.75 3.8c
Second Quarter.............................................. $16.00 $11.00 3.8c
Third Quarter............................................... $18.75 $15.25 7.5c
Fourth Quarter.............................................. $24.75 $18.00 7.5c
</TABLE>
Cash dividends paid per share and common stock prices for prior periods
have been restated to reflect a three-for-two stock split effected in the form
of a dividend, executed May 1995, and a two-for-one stock split effected in the
form of a dividend, executed in May 1996.
<TABLE>
<S> <C> <C>
REGISTRAR AND TRANSFER
AGENT INDEPENDENT AUDITORS SPECIAL LEGAL COUNSEL
Firstar Trust McGladrey & Pullen, LLP Schiff Hardin & Waite
P.O. Box 1077 Madison, Wisconsin Chicago, Illinois
Milwaukee, Wisconsin 53201
Investor Services number
800-637-7549
</TABLE>
STOCKHOLDER INQUIRIES AND AVAILABILITY OF FORM 10-KSB
A copy of this Form 10-KSB as filed with the Securities and Exchange
Commission is available to stockholders free of charge upon written request to:
Midwest Federal Financial Corp.
Attn: Investor Relations
1159 Eighth Street, P.O. Box 450
Baraboo, Wisconsin 53913-0450
(608) 356-7771
30
<PAGE> 33
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table sets forth selected consolidated historical financial
data for the Company at the dates and during the periods indicated. This
information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................................................ $196,300 $177,164 $150,966
Loans receivable............................................ 144,201 122,925 113,818
Cash, interest-bearing deposits and investments............. 42,395 45,134 29,767
Deposits.................................................... 152,491 142,591 125,624
Stockholders' equity........................................ 16,904 16,541 14,795
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- --------
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING DATA:
Interest income............................................. $14,937 $12,501 $8,950
Interest expense............................................ 7,776 6,578 4,343
------- ------- ------
Net interest income......................................... 7,161 5,923 4,607
Provision for loan losses................................... 318 165 108
------- ------- ------
Net interest income after provision for loan losses......... 6,843 5,758 4,499
Gains on sale of loans and securities....................... 675 516 264
Other non-interest income................................... 1,639 1,415 965
Non-interest expense........................................ 6,329 4,862 3,711
------- ------- ------
Income before provision for income taxes.................... 2,828 2,827 2,017
Provision for income taxes.................................. 881 1,040 738
------- ------- ------
Net income.................................................. $ 1,947 $ 1,787 $1,279
======= ======= ======
Total earnings per share.......................... $ 1.12 $ 1.01 $ .70
======= ======= ======
</TABLE>
31
<PAGE> 34
The table below sets forth certain performance ratios of the Company for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
KEY OPERATING RATIOS:
Return on assets (net income divided by average assets)..... 1.05%(1) 1.11% 0.98%
Return on average equity (net income divided by average
equity)................................................... 11.74(2) 11.34 8.54
Average equity to average assets............................ 9.04 9.81 11.47
Interest rate spread (difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities)............................. 3.67 3.43 3.22
Net interest margin (net interest income as a percentage of
average interest-earning assets).......................... 4.16 3.97 3.77
Non-interest expense to average assets...................... 3.40(3) 3.03 2.85
Average interest-earning assets to interest-bearing
liabilities............................................... 111.00 112.00 115.00
Allowance for loan losses to total loans at end of period... 1.05 1.06 1.03
Net charge-offs to average outstanding loans during the
period.................................................... 0.02 0.03 0.02
Ratio of nonperforming assets to total assets............... 0.21 0.16 0.10
</TABLE>
- ---------------
(1) Before special FDIC assessment 1.30%
(2) Before special FDIC assessment 14.13%
(3) Before special FDIC assessment 3.01%
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding............................. 2,531 2,451 2,344
Deposit accounts.......................................... 27,306 26,673 24,942
Number of offices......................................... 9 9 8
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Bank is primarily engaged in the business of attracting deposits from
the general public and using such deposits, together with other funding sources,
to originate or invest in residential and commercial mortgage loans and, to a
lesser extent, construction, commercial business and consumer loans and
securities issued by governmental agencies. The Bank's revenues are derived
principally from interest earned on loans and to a lesser extent, from interest
earned on investment and mortgage-backed securities and noninterest income. The
Bank's cost of funds is influenced by interest rates on competing investments
and general market interest rates. Lending activities are affected by the demand
of financing of real estate and other types of loans, which in turn is affected
by the interest rates at which such financing may be offered. Because the Bank
is primarily dependent on net interest margin (interest income from loans and
investments minus interest expense on deposit accounts and borrowings) for
earnings, the focus of the Bank's planning has been to devise and employ
strategies that provide a stable, positive spread between the yield on earning
assets and the cost of interest-bearing liabilities in order to maximize the
dollar amount of net interest income. Additionally, the Bank has been
emphasizing noninterest income for the past three years to minimize its
dependence on the interest margin.
The operations of the Bank are influenced significantly by general economic
conditions and by policies of its primary regulatory authorities, the Office of
Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation
("FDIC").
32
<PAGE> 35
LENDING STRATEGY
The Bank's lending strategy is to provide full service community banking to
include the following types of loans: One to four family first mortgage loans
(41.8% of total loans receivable as of December 31, 1996), Commercial real
estate and multi-family loans (38.1% of total loans), Construction loans (2.7%
of total loans), consumer loans (20.3% of total loans), and Commercial business
loans (7.2% of total loans). This positioning as a full service community bank
has been directed by the Bank's management team, which has a significant amount
of commercial banking experience. The diversification of the Bank's loan
portfolio into consumer and commercial lending is designed to increase earnings
and reduce interest rate risk by emphasizing shorter maturities and loans
floating with prime rate. The Bank's lending policies have resulted in a high
quality loan portfolio as evidenced by the ratio of non-performing assets to
total assets of .20%.
Because of regulatory requirements, the Bank remains primarily a
residential lender, however, it will also continue to diversify its loan
portfolio by careful consumer, commercial business and selected commercial real
estate lending.
ASSET AND LIABILITY MANAGEMENT
The Bank's exposure to interest rate risk results from the difference in
amounts and maturities of interest-bearing liabilities and interest-earning
assets, and also from the volatility of interest rates. The Bank has adopted
various strategies intended to minimize the adverse effect of interest rate risk
on its future operations by more closely matching the repricing frequency of its
assets and liabilities at a level determined to be prudent by management. This
Asset/Liability Management Policy generally seeks to match the repricing
intervals and maturities of interest earning assets and interest bearing
liabilities.
At December 31, 1996, total interest earning assets repricing within one
year exceeded total interest bearing liabilities in the same period by $26.7
million, representing a negative cumulative one year interest rate sensitivity
gap equal to 13%. Certain strategies can be employed to reduce the cumulative
gap, extend it, or move it from positive to negative. The strategies used
typically depend on management's best forecast of future interest rates. During
1996, management increased gap to maximize interest income.
The Bank's lending strategies are designed to enhance the interest rate
sensitivity of the loan portfolio and interest income. These strategies are as
follows:
Originate Fixed-Rate Loans Only for Sale. The Bank generally sells its
fixed rate loans within 30 days from the loan closing date with servicing
retained by the Bank.
Originate Adjustable-Rate 1-4 Family Residential Mortgage Loans for the
Bank's Portfolio. The Bank currently offers one and three year ARMs both of
which are tied to the One Year Treasury Bill Index. At December 31, 1996, the
Bank had $73.6 million of ARMs, or 50% of the Bank's loan portfolio. The
origination of ARMs makes the Bank's loan portfolio more interest rate
sensitive, and will result in more income in an increasing rate environment, all
other variables being equal.
Continued Emphasis on Commercial Business and Consumer Lending. The Bank's
consumer loan portfolio has grown to $29.8 million, or 20.3% of the Bank's loan
portfolio as of December 31, 1996, and the Bank's commercial business loan
portfolio was $10.6 million or 7.2% of the total loan portfolio. The Bank's
consumer lending activities include automobile loans, home equity and second
mortgage loans and education loans. The Bank's commercial lending activities
include equipment term loans, agriculture loans, and working capital lines of
credit secured by accounts receivable and inventory. Consumer and commercial
business loans generally have higher rates than loans secured by real estate,
but involve higher risks of default and subsequent losses.
Originate Multi-Family Residential and Commercial Real Estate Loans. The
Bank's multi-family and commercial real estate loan portfolio has grown to $41.4
million, or 28.1% of total loans as of December 31, 1996. These loans are
secured primarily by properties located in our market area. Commercial and
multi-family residential real estate loans generally carry higher rates of
interest and are more interest rate sensitive, but involve higher risks of
default.
33
<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities) and, to a
lesser extent, sales of mortgage loans, sales or maturing of investment
securities, mortgage-backed securities, and short-term investments and
operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions, and competition. The
Bank attempts to price its deposits to meet its asset/liability objectives
discussed above, consistent with local market conditions. Excess balances are
invested in overnight funds. In addition, The Bank borrows funds from the
Federal Home Loan Bank of Chicago.
Federal regulations have historically required the Bank to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5.0% of net
withdrawable savings deposits and current borrowings. Liquid assets for purposes
of this ratio include cash, certain time deposits, U.S. Government and corporate
securities and other obligations generally having remaining maturities of less
than five years. The Bank has historically maintained its liquidity ratio at a
level in excess of that required. At December 31, 1996, the Bank's liquidity
ratio was 13.02%.
The primary investing activity of the Bank is lending. During the year
ended December 31, 1996, the Bank originated and purchased $84.2 million of
loans. These originations and purchases were primarily funded by proceeds from
the sale of loans, principal repayments on loans, and an increase of deposits
and borrowed funds.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected loan sales,
(iii) expected deposits flows, and (iv) yields available on interest-bearing
deposits. Excess liquidity is invested generally in interest-bearing overnight
deposits and other short-term government and agency obligations. If the Bank
requires funds beyond its ability to generate them internally, it has additional
borrowing capacity with the Federal Home Loan Bank and collateral eligible for
repurchase agreements.
The Bank anticipates that it will have sufficient funds available to meet
current loan commitments. At December 31, 1996, the Bank had outstanding
commitments to originate loans of $2,839,138 and unused lines of credit
outstanding of $9,856,408. See Note 10 of the Notes to Consolidated Financial
Statements.
Certificates of deposit scheduled to mature in one year or less at December
31, 1996, totaled $55.1 million. Based upon management's experience and
familiarity with the customers involved and the Bank's pricing policy relative
to that of its perceived competitors, management believes that a significant
portion of such deposits will remain with the Bank.
As a federally chartered stock savings bank, the Bank's capital consists
primarily of accumulated retained earnings, and outstanding stock. At December
31, 1996, the Bank's stockholders' equity totaled $14.5 million.
Under FIRREA, the capital requirements applicable to all savings
institutions, including the Bank, have been substantially increased; however,
the Bank is in full compliance with its capital requirements. See Note 11 of the
Notes to Consolidated Financial Statements.
EFFECT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering the changes in
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations of the Bank is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
34
<PAGE> 37
FINANCIAL CONDITION
Total assets increased $19.1 million or 10.8%, from $177.2 million at
December 31, 1995, to $196.3 million at December 31, 1996. This increase is
primarily reflected in increases in loans receivable of $21.3 million or 17.3%.
The increase was funded primarily by increases in deposits of $9.9 million or
6.9%, and increases in Federal Home Loan Bank Borrowings of $8.8 million or 55%.
Loan growth for the year 1996 was primarily in commercial mortgage loans.
Commercial mortgage loans increased by $16.4 million or 90.6%, due to new
personnel and market opportunities, much of it in our Portage market. Deposit
growth would not keep pace with loan growth in 1996 without significant
increases in cost of funds so Federal Home Loan Bank borrowings were employed.
FHLB-Chicago advances have been increasingly used by the Bank due to
attractive rates as compared to local market rates. Additionally, FHLB advances
are more efficient to obtain and terms can be easily matched to loan repricing
and maturity periods.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 compared to December 31, 1995
General. This information should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Form 10-KSB.
Net income for fiscal year 1996 was $1,946,699 compared to $1,787,230 in
1995, an increase of $159,469 or 8.9%. Increases in interest income were due to
growth of interest earning assets, and increases in loan fees and profit on sale
of loans were offset by the special FDIC SAIF assessment of $727,890.
Net Interest Income. Net interest income increased by $1.3 million or
22.0% from $5.9 million to $7.2 million. Total interest income increased by
19.5% or $2.4 million in 1996 when compared to 1995.
Interest from mortgage loans increased by $1.5 million and interest from
other loans has increased by $.3 million. The interest on investments
securities, mortgage backed securities and FHLB stock has increased by $.5
million. The increase in total interest income is a result of an increase in
market rates and corresponding yields ($1.5 million), and growth in interest
earning assets ($.9 million).
Interest paid on deposits increased by 9.8% from $6.1 million in 1995 to
$6.7 million in 1996. The increase in deposit interest expense is due to
increased market rates ($.1 million), and growth in deposit balances ($.5
million). Interest paid on borrowed funds increased 115% or $.6 million. This
increase is due to the increased use of borrowed funds to fund loans and
investments.
Provision for Loan Losses. The provision for loan losses increased from
$165,000 in 1995 to $317,500 in 1996, due primarily to an increase in commercial
mortgage loans. Management periodically reviews loans and foreclosed properties
to determine whether the estimated realizable value of the related asset is less
than the carrying amount. In making such determinations, consideration is given
to estimated sales price, refurbishing costs, and direct holding and selling
costs. When a loss is anticipated, an allowance for the estimated loss is
provided. In addition, general loss allowances are established in excess of
identifiable losses. This allowance is based on the Bank's own loss experience,
that of the financial services industry, and management's ongoing assessment of
the credit risk inherent in the portfolio.
Other Income and Expenses. Total non-interest income increased by 21.1% to
$2.3 million for 1996 from $1.9 million in 1995. This increase consisted of a
$192,511 increase in deposit fee income, a $273,213 increase in gains on sale of
loans, and $81,431 increase in other income. Increases in loan fee income and
gains on sale of loans is due to increased activity in originating fixed rate,
saleable, 1-4 family mortgages. Increases in deposit income result from
increased transaction volume. The increase in other income is primarily from
sales of nondeposit products.
Total operating expenses increased by 28.6% to $6.3 million for 1996 from
$4.9 million in 1995. The primary reason for this increase is the $727,890
special FDIC SAIF assessment described under "REGULATION
35
<PAGE> 38
AND SUPERVISION". Increases in salaries occupancy and other expense are related
to growth in loans and loan originations.
Taxes. Income taxes decreased by $159,000 or 15.3% from $1,040,000 in 1995
to $881,000 in 1996.
CONSOLIDATED AVERAGE BALANCE SHEETS
FISCAL YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- --------------------------------------
AVERAGE AVERAGE
OUTSTANDING INTEREST AVERAGE OUTSTANDING INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE BALANCE EARNED/PAID YIELD/RATE
----------- ----------- ---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans............. $ 96,098 $ 8,844 9.20% $ 86,403 $ 7,352 8.51%
Non mortgage loans......... 38,865 3,637 9.36 34,373 3,313 9.64
-------- ------- ---- -------- ------- ----
Total loans.............. 134,963 12,481 9.25 120,776 10,665 8.83
======== ======= ==== ======== ======= ====
Mortgage-backed
securities............... 15,141 993 6.56 9,261 585 6.32
Investment and other
securities............... 21,717 1,392 6.41 17,451 1,199 6.87
Federal Home Loan Bank
stock...................... 1,038 71 6.84 749 52 6.94
-------- ------- ---- -------- ------- ----
Total interest-earning
assets................ 172,859 14,937 8.64 148,237 12,501 8.43
======== ======= ==== ======== ======= ====
Non-interest earning assets..... 13,053 12,403
-------- ------- ---- -------- ------- ----
Total assets.................. $185,912 $160,640
======== ======= ==== ======== ======= ====
Liabilities and Equity
Deposits:
Non-interest bearing DDA...... $ 12,532 $ 0 0 $ 10,542 $ 0 0%
Interest bearing DDA.......... 12,694 370 2.91 11,097 286 2.58
Savings deposits.............. 122,956 6,358 5.17 111,914 5,805 5.19
-------- ------- ---- -------- ------- ----
Total deposits............. $148,182 $ 6,728 4.54 $133,553 $ 6,091 4.56
======== ======= ==== ======== ======= ====
Borrowings...................... 18,192 1,048 5.76 8,159 487 5.97
Total interest-bearing
liabilities................ $153,442 $ 7,776 5.07 $131,170 $ 6,578 5.01
======== ======= ==== ======== ======= ====
Other liabilities............... 2,739 3,173
-------- ------- ---- -------- ------- ----
Total liabilities............. $169,113 $144,885
======== ======= ==== ======== ======= ====
Equity........................ 16,799 15,755
-------- ------- ---- -------- ------- ----
Total liabilities and equity.... $185,912 $160,640
======== ======= ==== ======== ======= ====
</TABLE>
RESULTS OF OPERATIONS
Year Ended December 31, 1995 compared to December 31, 1994
General. This information should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Annual Report.
Net income for fiscal year 1995 was $1,787,230 compared to $1,278,619 in
1994, an increase of $508,611 or 39.8%. The increase was due primarily to growth
in assets of 17.4%, increases in gains on sales of securities, and GIC bond
recoveries.
Net Interest Income. Net interest income increased by $1.3 million or
28.3% from $4.6 million to $5.9 million. Total interest income increased by
39.7% or $3.55 million in 1995 when compared to 1994.
36
<PAGE> 39
Interest from mortgage loans increased by $1.9 million and interest from
other loans has increased by $1.4 million. The interest on investments
securities, mortgage backed securities and FHLB stock has increased by $197,030.
The increase in total interest income is a result of an increase in market rates
and corresponding yields ($2.1 million), and growth in interest earning assets
($1.5 million). Interest paid on deposits increased by 56.4% from $3.9 million
in 1994 to $6.1 million in 1995. The increase in deposit interest expense is due
to increased market rates ($3.4 million), and growth in deposit balances ($.5
million). Interest paid on borrowed funds increased from $453,926 in 1994 to
$486,632 in 1995. This increase is due to the increased use of borrowed funds to
fund loans and investments.
Provision for Loan Losses. The provision for loan losses increased from
$108,000 in 1994 to $165,000 in 1995, due primarily to an increase in
nonmortgage loans. Management periodically reviews loans and foreclosed
properties to determine whether the estimated realizable value of the related
asset is less than the carrying amount. In making such determinations,
consideration is given to estimated sales price, refurbishing costs, and direct
holding and selling costs. When a loss is anticipated, an allowance for the
estimated loss is provided. In addition, general loss allowances are established
in excess of identifiable losses. This allowance is based on the Bank's own loss
experience, that of the financial services industry, and management's ongoing
assessment of the credit risk inherent in the portfolio.
Other Income and Expenses. Total non-interest income increased by 57.1% to
$1.9 million for 1995 from $1.2 million in 1994. This increase consisted of a
$88,901 increase in loan fee income, a $156,491 increase in deposit fee income,
a $220,907 increase in gains on sale of investments, a $31,242 increase in gains
on sale of loans, and $204,159 increase in other income. Increases in loan fee
income and gains on sale of loans is due to increased activity in originating
fixed rate, saleable, 1-4 family mortgages. Increases in deposit income result
from increased transaction volume.
Total operating expenses increased by 30.8% to $4.9 million for 1995 from
$3.71 million in 1994. The primary reason for these increases is the addition of
branch offices. Branches were acquired in mid December 1994 in Kingston and
Dalton, Wisconsin, and a second office was opened in Portage in April 1995.
Additionally, 1995 was the first year for our trust department and its
associated costs, and a training department was added in 1995.
Taxes. Income taxes increased by $302,000 or 40.9% from $738,000 in 1994
to $1,040,000 in 1995, which is a result of the change in pre-tax income.
37
<PAGE> 40
ITEM 7. FINANCIAL STATEMENTS
The financial statements contained in the Annual Report which are listed
under Item 13 herein are incorporated herein by reference.
Wipfli Ullrich Bertelson CPAs Logo
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Midwest Federal Financial Corp.
Baraboo, Wisconsin
We have audited the accompanying consolidated statements of financial
condition of MIDWEST FEDERAL FINANCIAL CORP. And Subsidiary (the Company) as of
December 31, 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MIDWEST
FEDERAL FINANCIAL CORP. And Subsidiary as of December 31, 1995 and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Wipfli Ullrich Bertelson, CPAs
January 26, 1996
Wausau, Wisconsin
38
<PAGE> 41
LETTERHEAD OF MCGLADREY & PULLEN, LLP
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Midwest Federal Financial Corp.
Madison, Wisconsin
We have audited the accompanying consolidated statement of financial
condition of Midwest Federal Financial Corporation and its subsidiary as of
December 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Midwest Federal Financial Corporation and its subsidiary as of December 31,
1996, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for mortgage servicing rights in 1996.
MCGLADREY & PULLEN, LLP
Baraboo, Wisconsin
January 24, 1997
39
<PAGE> 42
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 6,874,107 $ 6,479,903
Other interest bearing deposits............................. 100,000 598,999
Securities held to maturity (fair value 1996 $1,093,240;
1995 $2,112,022).......................................... 1,100,000 2,095,025
Securities available for sale............................... 34,320,832 35,959,873
Loans held for sale......................................... 527,446 847,155
Loans, net of allowance for loan losses
1996 $1,538,580; 1995 $1,320,734.......................... 144,201,689 122,925,422
Accrued interest receivable................................. 1,512,342 1,397,062
Premises and equipment, net................................. 4,030,183 4,012,669
Other assets................................................ 3,633,424 2,847,985
------------ ------------
$196,300,023 $177,164,093
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing................................... $ 13,204,354 $ 13,273,632
Interest bearing....................................... 139,287,113 129,316,882
------------ ------------
152,491,467 142,590,514
Borrowed funds............................................ 24,800,000 16,000,000
Advance payments by borrowers -- escrow accounts.......... 141,893 176,921
Accrued interest payable and other liabilities............ 1,962,987 1,855,346
------------ ------------
179,396,347 160,622,781
------------ ------------
Commitments, Contingencies and Credit Risk
Stockholders' Equity
Common stock, par value $.01 per share, 3,000,000 shares
authorized, 2,069,998 shares issued, outstanding
1,620,379 and 1,632,880 shares respectively............ 20,700 10,350
Additional paid-in capital................................ 6,495,310 6,500,960
Retained earnings, substantially restricted............... 14,507,322 13,162,529
Unrealized gain (loss) on securities available for sale,
net.................................................... (94,600) 187,600
Loan to ESOP.............................................. (350,142) (419,142)
Treasury stock, at cost 449,619 and 437,118 shares
respectively.............................................. (3,674,914) (2,900,985)
------------ ------------
16,903,676 16,541,312
------------ ------------
$196,300,023 $177,164,093
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE> 43
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Interest income
Mortgage loans......................................... $ 8,843,747 $ 7,351,969 $5,425,222
Other loans............................................ 3,637,411 3,313,143 1,879,357
Securities:
taxable............................................. 1,937,605 1,424,232 1,226,009
exempt from federal income taxes.................... 212,147 180,030 189,556
Other.................................................. 305,719 231,715 229,682
----------- ----------- ----------
14,936,629 12,501,089 8,949,826
----------- ----------- ----------
Interest expense
Deposits............................................... 6,727,993 6,090,900 3,889,255
Borrowed funds......................................... 1,047,610 486,632 453,926
----------- ----------- ----------
7,775,603 6,577,532 4,343,181
----------- ----------- ----------
Net interest income............................ 7,161,026 5,923,557 4,606,645
Provision for loan losses................................ 317,500 165,000 108,000
----------- ----------- ----------
Net interest income after provision for loan
losses....................................... 6,843,526 5,758,557 4,498,645
----------- ----------- ----------
Other income
Loan service fees and charges.......................... 280,004 330,313 241,412
Deposit service fees and charges....................... 804,389 611,878 455,387
Securities gains (losses), net......................... 241,159 355,534 134,627
Net gain on sale of loans.............................. 433,481 160,268 129,026
Other.................................................. 554,580 473,149 268,990
----------- ----------- ----------
2,313,613 1,931,142 1,229,442
----------- ----------- ----------
Other expenses
Salaries and employee benefits......................... 2,861,523 2,411,682 1,834,854
Occupancy expenses..................................... 749,525 674,491 563,950
Office operating expenses.............................. 576,713 679,982 559,594
Federal deposit insurance premiums..................... 267,135 263,390 227,245
SAIF assessment........................................ 727,890
Other.................................................. 1,146,654 832,924 525,825
----------- ----------- ----------
6,329,440 4,862,469 3,711,468
----------- ----------- ----------
Income before income taxes..................... 2,827,699 2,827,230 2,016,619
Income tax expense....................................... 881,000 1,040,000 738,000
----------- ----------- ----------
Net income..................................... $ 1,946,699 $ 1,787,230 $1,278,619
=========== =========== ==========
Earnings per share of common stock....................... $ 1.12 $ 1.01 $ .70
=========== =========== ==========
Weighted average number of shares outstanding............ 1,743,021 1,773,758 1,824,984
=========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE> 44
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
ADDITIONAL SECURITIES
COMMON PAID-IN RETAINED AVAILABLE LOAN TO TREASURY
STOCK CAPITAL EARNINGS FOR SALE, NET ESOP STOCK
------- ---------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993..................... $ 6,900 $6,495,310 $10,570,351 $ $(562,005) $(1,443,906)
Net income................. 1,278,619
Net unrealized gain on
securities available for
sale as of January 1,
1994..................... 408,000
Purchase of treasury
stock.................... (832,282)
Exercise of stock
options.................. (35,391) 80,741
Repayment of ESOP loan..... 73,863
Net change in unrealized
gains and losses on
securities available for
sale, net................ (1,048,468)
Dividends ($.23 per
share)................... (196,841)
------- ---------- ----------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1994..................... 6,900 6,495,310 11,616,738 (640,468) (488,142) (2,195,447)
Net income................. 1,787,230
3-for-2 stock split in the
form of a dividend....... 3,450 (3,450)
Purchase of treasury
stock.................... (784,098)
Exercise of stock
options.................. 5,650 (20,084) 78,560
Repayment of ESOP loan..... 69,000
Net change in unrealized
gains and losses on
securities available for
sale, net................ 828,068
Dividends ($.26 per
share)................... (217,905)
------- ---------- ----------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1995..................... 10,350 6,500,960 13,162,529 187,600 (419,142) (2,900,985)
Net income................. 1,946,699
Purchase of treasury
stock.................... (1,061,435)
Exercise of stock
options.................. (5,650) (165,879) 287,506
Repayment of ESOP loan..... 69,000
Net change in unrealized
gains and losses on
securities available for
sale, net................ (282,200)
2-for-1 stock split in the
form of a dividend....... 10,350 (10,350)
Dividends ($.30 per
share)................... (425,677)
------- ---------- ----------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1996..................... $20,700 $6,495,310 $14,507,322 $ (94,600) $(350,142) $(3,674,914)
======= ========== =========== =========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE> 45
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income............................................ $ 1,946,699 $ 1,787,230 $ 1,278,619
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 373,545 332,422 250,820
Amortization....................................... 87,211 87,099
Net amortization (accretion) of bond premiums and
discounts........................................ 23,839 20,483 58,578
Provision for loan losses.......................... 317,500 165,000 108,000
Securities (gains) losses.......................... (241,159) (355,543) (134,627)
Gain on sale of loans.............................. (433,481) (160,268) (129,026)
Origination of loans held for sale................. (21,430,945) (12,459,204) (11,261,630)
Proceeds from sale of loans held for sale.......... 22,184,135 11,935,817 12,064,226
Deferred income taxes.............................. (101,000) 25,000 35,000
Increase in accrued interest receivable and other
assets........................................... (715,930) (1,192,165) (1,429,979)
Increase in accrued interest payable and other
liabilities...................................... 41,181 487,601 292,692
------------ ------------ ------------
Net cash provided by operating activities..... 2,051,595 673,472 1,132,673
------------ ------------ ------------
Cash Flows From Investing Activities
Net (increase) decrease in other interest bearing
deposits........................................... 498,999 (201,999) 1,379,638
Purchases of securities held to maturity.............. (2,094,800)
Proceeds from maturities of securities held to
maturity........................................... 1,000,000
Purchases of securities available for sale............ (19,856,503) (29,650,902) (5,517,261)
Proceeds from sales of securities available for
sale............................................... 16,692,415 13,202,255 3,196,949
Proceeds from maturities of securities available for
sale............................................... 4,560,274 5,672,817 3,012,795
Net increase in loans................................. (21,524,767) (9,203,245) (28,132,951)
Purchases of premises and equipment................... (391,059) (819,939) (1,180,993)
------------ ------------ ------------
Net cash (used in) investing activities....... (19,020,641) (23,095,813) (27,241,823)
------------ ------------ ------------
Cash Flows From Financing Activities
Net increase in deposits.............................. 9,900,953 16,966,991 26,040,804
Net increase in borrowings............................ 8,800,000 7,000,000 2,500,000
Net decrease in advance payments by borrowers for
escrow............................................. (35,028) (8,126) (13,728)
Purchase of treasury stock............................ (1,061,435) (784,098) (832,282)
Proceeds from exercise of stock options............... 115,977 64,126 45,350
Dividends paid........................................ (357,217) (213,103) (224,214)
------------ ------------ ------------
Net cash provided by financing activities..... 17,363,250 23,025,790 27,515,930
------------ ------------ ------------
Increase in cash and cash equivalents......... 394,204 603,449 1,406,780
Cash and cash equivalents:
Beginning............................................. 6,479,903 5,876,454 4,469,674
------------ ------------ ------------
Ending................................................ $ 6,874,107 $ 6,479,903 $ 5,876,454
============ ============ ============
Supplemental Cash Flow Information
Cash payments for:
Interest........................................... $ 7,693,271 $ 6,498,897 $ 4,061,660
Income taxes....................................... 1,162,778 859,832 720,436
Supplemental Schedule of Noncash Financing Activities
Common stock transferred to Company as payment for
stock options exercised............................ 99,900
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE> 46
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Midwest Federal Financial Corp. (the Company) is the
holding company for Baraboo Federal Bank, FSB (the Bank). The holding company
owns all of the outstanding stock of the Bank and holds various investment
securities. The Bank is a federally chartered stock savings bank offering
traditional banking services through nine locations in central Wisconsin. The
Bank's wholly-owned subsidiary, BF Financial, Inc. offers full service brokerage
services.
A summary of the Company's significant accounting policies follows:
Use of Estimates: The preparation of financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Basis of Consolidation: The accompanying consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiary, Baraboo
Federal Bank, FSB, and the Bank's wholly-owned subsidiary, BF Financial, Inc.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and
cash equivalents includes cash on hand and amounts due from banks (including
cash items in process of clearing). Cash flows from loans, deposits, federal
funds purchased and sold and other interest bearing deposits are reported net.
Securities Held to Maturity: Securities classified as held to maturity are
those debt securities the Company has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs, or changes
in general economic conditions. These securities are carried at cost, adjusted
for amortization of premiums and accretion of discounts, computed by the
interest method over their contractual lives.
Securities Available for Sale: Securities classified as available for sale
are those debt securities that the Company intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Available for sale securities are
carried at fair value. Unrealized gains or losses, net of the related deferred
tax effect, are reported as increases or decreases in stockholders' equity.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Loans Held for Sale: Mortgage loans originated and intended for sale are
carried at the lower of aggregate cost or estimated market value and consist of
certain fixed-rate, first mortgage loans that will be sold in the secondary
market.
Loans and Allowance for Loan Losses: Loans are stated at the amount of
unpaid principal, less the allowance for loan losses and net deferred loan
origination fees.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. Impaired loans are measured based on the present value of expected
future
44
<PAGE> 47
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
Interest on loans is accrued daily on the outstanding balances. For
impaired loans, accrual of interest is discontinued either when reasonable doubt
exists as to the full, timely collection of interest or principal or when a loan
becomes contractually past due by 90 days or more with respect to interest or
principal. At that time, any accrued but uncollected interest is reversed, and
additional income is recorded only to the extent that payments are received and
the collection of principal is reasonably assured.
Certain loan origination fees, commitment fees and direct loan origination
costs are being deferred and the net amounts amortized as an adjustment of the
related loan's yield.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed principally by accelerated
and straight-line methods over the estimated useful lives of the assets.
Income Taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Fair Value of Financial Instruments: The following methods and assumptions
were used by the Bank in estimating the fair value of its financial instruments:
Cash and Cash Equivalents and Other Interest Bearing Deposits: The
carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents approximate fair value.
Securities Held to Maturity and Available for Sale: Fair values for
all 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 Held for Sale: Fair values are based on quoted market prices of
similar loans sold on the secondary market.
Loans: For variable-rate loans that reprice frequently and that have
experienced no significant change in credit risk, fair values are based on
carrying values. Fair values for all other loans are estimated based on
discounted cash flows, using interest rates currently being offered for
loans with similar terms to borrowers with similar credit quality.
Deposits: Fair values disclosed for demand deposits equal their
carrying amounts, which represent the amount payable on demand. The
carrying amounts for variable-rate money market accounts and certificates
of deposit approximate their fair values at the reporting date. Fair values
for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered
on certificates to a schedule of aggregate expected monthly maturities on
time deposits.
Borrowed Funds: The fair values of fixed-rate, long-term borrowings
(other than deposits) are based on discounted cash flows using interest
rates currently being offered on similar borrowings with similar terms and
similar credit quality. The fair values of all short-term borrowings
approximate their carrying amounts.
45
<PAGE> 48
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued Interest Receivable and Payable: The fair values of both
accrued interest receivable and payable approximate their carrying amounts.
Off-balance Sheet Instruments: Fair values for off-balance sheet
instruments (letters of credit and lending commitments) are based on quoted
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties'
credit standing.
Since the majority of the Company's off-balance sheet instruments
consist of nonfee-producing, variable-rate commitments, the Company has
determined they do not have a distinguishable fair value.
Earnings Per Share: Earnings per share are based on the weighted average
number of common shares outstanding during each period and common stock
equivalent shares, using the treasury share method. The weighted average number
of shares have been adjusted for a two-for-one and three-for-two stock split
effected in the form of a dividend during 1996 and 1995, respectively. Primary
and fully diluted earnings per share are the same. The Company's common stock
equivalents consist entirely of stock options.
Mortgage Servicing Rights: The Bank adopted Financial Accounting Standards
Board Statement No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights,"
effective January 1, 1996. SFAS 122 requires the Bank to record an asset for
mortgage servicing rights when it sells mortgages and retains the servicing, and
amortize the asset in proportion to, and over the period of, estimated net
servicing revenues. The Bank recorded an asset for mortgage servicing rights of
approximately $220,000 and related amortization of approximately $18,000.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities: In April 1996, the Financial Accounting
Standards Board issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" (SFAS No. 125).
SFAS No. 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. A transfer of financial assets in which
the transferor surrenders control over those assets is accounted for as a sale
to the extent that consideration other than beneficial interest in the
transferred assets is received in exchange. SFAS No. 125 also establishes
standards on the initial recognition and measurement of servicing assets and
other retained interests and servicing liabilities, and their subsequent
measurement.
SFAS No. 125 requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
in certain circumstances in which the secured party has taken control of those
assets. In addition, SFAS No. 125 requires that a liability be derecognized only
if the debtor is relieved of its obligation through payment to the creditor or
by being legally released from being the primary obligor under the liability
either judicially or by the creditor.
SFAS No. 125 is effective for transactions occurring after December 31,
1996, except for secured borrowings and collateral for which the effective date
is December 15, 1997. The Company believes the adoption of SFAS No. 125 will not
have a material impact on its consolidated financial statements.
Reclassifications: Certain amounts in these consolidated financial
statements for prior years have been reclassified to conform to the 1996
presentations without any effect on stockholders' equity or net income.
NOTE 2. RESTRICTIONS ON CASH AND CASH EQUIVALENTS
The Bank is required to maintain reserve balances, in cash or on deposit
with the Federal Reserve Bank, based upon a percentage of deposits. The total
required reserve balance as of December 31, 1996 was approximately $506,000.
46
<PAGE> 49
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the consolidated
statements of financial condition according to management's intent. The carrying
amount of securities and their approximate fair values at December 31 are shown
below.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
December 31, 1996
U.S. Government and agency securities.... $ 1,100,000 $ 440 $ 7,200 $ 1,093,240
=========== ======== ======== ===========
December 31, 1995:
U.S. Government and agency securities.... $ 2,095,025 $ 16,997 $ $ 2,112,022
=========== ======== ======== ===========
SECURITIES AVAILABLE FOR SALE:
December 31, 1996:
U.S. Government and agency securities.... $11,907,933 $ 30,599 $129,628 $11,808,904
State and municipal securities........... 5,576,226 94,514 6,373 5,664,367
Mortgage-backed and related securities... 15,827,399 46,298 270,410 15,603,287
Equity securities........................ 1,158,874 87,975 2,575 1,244,274
----------- -------- -------- -----------
$34,470,432.. $259,386 $408,986 $34,320,832
=========== ======== ======== ===========
December 31, 1995:
U.S. Government and agency securities.... $20,486,905 $242,154 $ 11 $20,729,048
State and municipal securities........... 2,875,769 87,957 11,356 2,952,370
Mortgage-backed and related securities... 11,405,698 37,303 83,447 11,359,554
Equity securities........................ 885,901 33,000 918,901
----------- -------- -------- -----------
$35,654,273 $400,414 9$4,814... $35,959,873
=========== ======== ======== ===========
</TABLE>
Gross realized gains and losses on securities available for sale were as
follows at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Gross gains........................................ $376,612 $482,842 $139,519
Gross losses....................................... 135,453 127,308 4,892
</TABLE>
47
<PAGE> 50
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled maturities of securities held for maturity and securities
available for sale (other than equity securities) at December 31, 1996, were as
follows:
<TABLE>
<CAPTION>
SECURITIES HELD TO SECURITIES AVAILABLE FOR
MATURITY SALE
------------------------ --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less......... $ $ $ 39,977 $ 40,060
Due from one to five years...... 600,000 599,940 5,556,931 5,593,000
Due from five to ten years...... 500,000 493,300 8,334,105 8,267,824
Due after ten years............. 3,553,146 3,572,387
---------- ---------- ----------- -----------
1,100,000 1,093,240 17,484,159 17,473,271
Mortgage-backed and related
securities.................... 15,827,399 15,603,287
Equity securities............... 1,158,874 1,244,274
---------- ---------- ----------- -----------
$1,100,000 $1,093,240 $34,470,432 $34,320,832
========== ========== =========== ===========
</TABLE>
For purposes of this maturity table, mortgage-backed securities are not
scheduled by year of maturity since actual maturities may differ from
contractual maturities because the mortgages underlying the securities may be
called or repaid without penalties.
Securities carried at approximately $11,663,311 at December 31, 1996 and
$7,645,618 at December 31, 1995, were pledged to secure public deposits and for
other purposes required or permitted by law.
On January 1, 1994, the Bank changed its method of accounting for debt and
equity securities in accordance with Statement on Financial Accounting Standard
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The
January 1, 1994 balance of stockholders' equity was increased by $408,000, net
of the related income tax effect of $261,000, to recognize the net unrealized
holding gain on securities at that date.
NOTE 4. LOANS
The composition of net loans as of December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Commercial real estate.................................... $ 35,245,601 $ 18,082,781
Residential real estate................................... 66,615,603 66,507,510
Construction.............................................. 4,911,600 4,661,327
Consumer installment...................................... 16,435,287 13,648,225
Home equity............................................... 13,347,187 12,171,585
Commercial................................................ 10,643,378 10,796,197
------------ ------------
147,198,656 125,867,625
Less:
Undisbursed loan proceeds............................... 1,458,387 1,621,469
Allowance for loan losses............................... 1,538,580 1,320,734
------------ ------------
$144,201,689 $122,925,422
============ ============
</TABLE>
48
<PAGE> 51
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the allowance for loan losses for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning................................. $1,320,734 $1,185,883 $ 897,158
Provision charged to operations.................. 317,500 165,000 108,000
Recoveries of amounts charged off................ 17,986 14,963 19,208
Amounts charged off.............................. (117,640) (45,112) (38,483)
Acquired branches' allowance..................... 200,000
---------- ---------- ----------
Balance, ending.................................... $1,538,580 $1,320,734 $1,185,883
========== ========== ==========
</TABLE>
Loans serviced for others are not included in the accompanying consolidated
statements of financial condition. The unpaid principal balances of these loans
were approximately $64,948,000 and $49,020,000 at December 31, 1996 and 1995,
respectively.
There were commitments outstanding of $800,396 to sell loans at December
31, 1996.
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment and the total accumulated depreciation as of
December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land and land improvements.................................. $ 525,707 $ 394,250
Buildings................................................... 3,323,538 3,316,502
Furniture and equipment..................................... 2,076,661 1,824,095
---------- ----------
5,925,906 5,534,847
Less accumulated depreciation............................... 1,895,723 1,522,178
---------- ----------
$4,030,183 $4,012,669
========== ==========
</TABLE>
NOTE 6. DEPOSITS
The composition of deposits as of December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Demand deposits........................................... $ 13,204,352 $ 13,273,632
NOW and money market accounts............................. 41,486,975 11,823,170
Savings deposits.......................................... 11,255,467 35,066,268
Time certificates, $100,000 or more....................... 22,026,085 18,742,008
Other time certificates................................... 64,518,588 63,685,436
------------ ------------
$152,491,467 $142,590,514
============ ============
</TABLE>
At December 31, 1996, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
1997...................................................... $55,828,136
1998...................................................... 21,409,896
1999...................................................... 6,873,887
2000...................................................... 1,834,543
2001...................................................... 457,861
Thereafter.................................................. 140,350
-----------
$86,544,673
===========
</TABLE>
49
<PAGE> 52
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. BORROWED FUNDS
At December 31, 1996, the Bank had a $5,800,000 advance outstanding under
an open line of credit and $19,000,000 advanced on various notes payable with
varying maturities between January and July 1997. At December 31, 1995, the Bank
had a $10,000,000 advance outstanding under an open line of credit and
$6,000,000 advanced on various notes payable maturing between July 1996 and
1997. All borrowings were obtained from the Federal Home Loan Bank and are
collateralized by certain mortgage loans and Federal Home Loan Bank stock. The
interest rate on the open line of credit is .45 percent above the Federal Home
Loan Bank daily investment rate, 5.31 percent at December 31, 1996 and 1995,
respectively. The interest rates on the various notes payable were from 5.51 to
5.99 percent at December 31, 1996 and 5.87 to 5.99 percent at December 31, 1995.
NOTE 8. INCOME TAXES
The net cumulative effects of the primary temporary differences are shown
in the following table:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred directors fees................................... $146,000 $124,000
Securities available for sale............................. 63,000
Allowance for loan losses................................. 349,000 203,000
Other..................................................... 166,000 74,000
-------- --------
724,000 401,000
-------- --------
Deferred tax liabilities:
Securities available for sale............................. 116,000
Premises and equipment.................................... 215,000 172,000
Mortgage servicing rights................................. 80,000
Other..................................................... 111,000 75,000
-------- --------
406,000 363,000
-------- --------
$318,000 $ 38,000
======== ========
</TABLE>
No valuation allowance was considered necessary.
The provision for income taxes charged to operations for the years ended
December 31, 1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- --------
<S> <C> <C> <C>
Current tax expense.............................. $ 982,000 $1,015,000 $703,000
Deferred tax expense............................. (101,000) 25,000 35,000
--------- ---------- --------
$ 881,000 $1,040,000 $738,000
========= ========== ========
</TABLE>
50
<PAGE> 53
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income for the years
ended December 31, 1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- --------
<S> <C> <C> <C>
Computed "expected" tax expense.................. $ 961,500 $ 961,300 $685,700
Increase (decrease) in income taxes resulting
from:
State income taxes, net of federal
benefits.................................. 155,500 155,800 110,200
Tax-exempt interest income.................. (72,700) (53,100) (58,300)
Other....................................... (163,300) (24,000) 400
--------- ---------- --------
$ 881,000 $1,040,000 $738,000
========= ========== ========
</TABLE>
NOTE 9. EMPLOYEE BENEFIT PLANS
At December 31, 1996, the Company has a stock-based compensation plan,
which is described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation costs
were charged against income in 1996, 1995 and 1994. Had compensation cost for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under this plan consistent with the method
of FASB Statement 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported.................................. $1,946,699 $1,787,230 $1,278,619
Pro forma.................................... 1,946,699 1,610,230 1,278,619
Earnings per share:
As reported.................................. 1.12 1.01 .70
Pro forma.................................... 1.12 0.91 .70
</TABLE>
Following is a summary of stock option transactions for the three years
ended December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF AVERAGE PRICE
SHARES PER SHARE
------- -------------
<S> <C> <C>
Outstanding at January 1, 1994.............................. 143,864 3.33
Exercised................................................. (13,604) 3.33
-------
Outstanding at December 31, 1994............................ 130,260 3.33
Granted................................................... 60,030 7.17
Exercised................................................. (11,664) 4.68
-------
Outstanding at December 31, 1995............................ 178,626 4.85
Exercised................................................. (51,800) 4.17
-------
Outstanding at December 31, 1996............................ 126,826 4.68
=======
</TABLE>
All stock options outstanding at December 31, 1996 are currently eligible
for exercise. At December 31, 1996, 88,200 shares were outstanding at $3.33 per
share and 44,626 shares were outstanding at $7.17 per share. All shares of
common stock under the stock option plans have been granted as of December 31,
1996. All outstanding options expire in 2002.
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers substantially all employees. The ESOP originally borrowed $690,000 from
Midwest Federal Financial Corp. and purchased 207,000 shares of Company common
stock. The loan is to be repaid at $17,250 quarterly plus interest at the Bank's
prime rate (8.25 percent at December 31, 1996) with a ten year amortization.
Annual contributions to
51
<PAGE> 54
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the ESOP in the amount of $69,000 are required. Additional contributions can be
made at the discretion of the Board of Directors. All dividends received by the
ESOP are used to pay debt service. The ESOP shares initially were pledged as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year. The debt of the ESOP is recorded as debt and the
shares pledged as collateral are reported as unearned ESOP shares in the
statement of financial position. As shares are released from collateral, the
Company reports compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings-per share (EPS)
computations. Dividends on allocated ESOP shares are recorded as a reduction of
debt and accrued interest. ESOP compensation expense was $102,130, $95,106, and
$85,962 for 1996, 1995 and 1994, respectively. The ESOP shares as of December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Allocated shares............................................ $ 83,262 $ 62,316
Shares released for allocation.............................. 20,700 20,946
Unreleased shares........................................... 103,038 123,738
---------- ----------
Total ESOP shares................................. 207,000 207,000
========== ==========
Fair value of unreleased shares............................. $1,777,406 $1,206,446
========== ==========
</TABLE>
NOTE 10. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
Financial Instruments With Off-Balance Sheet Risk: The Bank is 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 and standby letters of credit.
They involve, to varying degrees, elements of credit risk in excess of the
amounts recognized on the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other parties to the financial instruments for these commitments is represented
by the contractual amounts of those instruments. The Bank uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
These commitments were as follows as of December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Commitments to extend credit............................... $ 2,839,138 $ 990,750
Standby letters of credit.................................. 133,500 228,536
Unused lines of credit..................................... 9,856,408 6,411,124
----------- ----------
$12,829,046 $7,630,410
=========== ==========
</TABLE>
Commitments to Extend Credit: Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. If deemed necessary upon extension of
credit, the amount of collateral obtained is based on management's credit
evaluation of the party. Collateral held varies, but may include accounts
receivable, debt and equity investments, inventory, property and equipment, and
income-producing commercial properties.
Standby Letters of Credit: Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Collateral held varies as specified above and is required in instances which the
Bank deems necessary.
52
<PAGE> 55
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contingencies: In the normal course of business, the Bank is involved in
various legal proceedings. In the opinion of management, any liability resulting
from proceedings, pending or threatened, at December 31, 1996, would not have a
material adverse effect on the consolidated financial statements.
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK:
Concentration by Geographic Location -- The Bank provides several
types of loans to its customers including residential, commercial, and
consumer loans. Lending activities are conducted with customers in a wide
variety of industries as well as with individuals with a wide variety of
credit requirements. The Bank has a concentration of loans in the hotel
industry in the south central Wisconsin area. Credit risk tends to be
geographically concentrated in that the majority of the Bank's customer
base is located within south central Wisconsin.
Concentration of Securities -- The Bank's investment in state and
municipal securities consist of securities located primarily in the State
of Wisconsin.
NOTE 11. RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends that
may be declared without prior regulatory approval. At December 31, 1996,
approximately $4,172,000 of retained earnings were available for dividend
declaration without regulatory approval.
The Company is not subject to these regulatory restrictions on the payment
of dividends to its stockholders. However, the source of future dividends
available to stockholders may depend on the dividends from the Bank.
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
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of December 31, 1996, that the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
53
<PAGE> 56
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------------------- -------------------
AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Tangible Capital (to Tangible Assets):
Baraboo Federal Bank, FSB................................. 14,481,000 7.5% 2,911,000 1.5%
Core Capital (to Tangible Assets):
Baraboo Federal Bank, FSB................................. 14,481,000 7.5% 5,822,000 3.0%
Total Capital (to Risk-Weighted Assets):
Baraboo Federal Bank, FSB................................. 16,020,000 11.7% 10,942,000 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Baraboo Federal Bank, FSB................................. 14,481,000 10.6% 5,471,000 4.0%
Tier 1 Capital (to Average Assets):
Baraboo Federal Bank, FSB................................. 14,481,000 7.9% 7,371,000 4.0%
</TABLE>
At the time of the conversion of the Bank from a mutual institution to a
federally chartered stock savings bank in 1992, an amount equal to the Bank's
total net worth in its latest consolidated statement of financial condition
appearing in the final prospectus is considered to be a "liquidation account".
The liquidation account is for the benefit of eligible deposit account holders
who continue to maintain their deposit accounts in the Bank. In the unlikely
event of a complete liquidation of the Bank, each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account, in the proportionate amount of the then-current adjusted
balance for deposit accounts held, before any distribution may be made with
respect to the Bank's capital stock. The Bank may not declare or pay a cash
dividend to the Company, or repurchase any of its capital stock if the effect
thereof would cause the net worth of the Bank to be reduced below the amount
required for the liquidation account.
The Bank has qualified under provision of the Internal Revenue Code which
permit as a deduction for taxable income an allowance for bad debts which
differs from the provision for such losses charged to income. Accordingly,
retained earnings as of December 31, 1996, included approximately $3,180,000 for
which no provision for federal income taxes has been made. If, in the future,
this portion of retained earnings is used for any purpose other than to absorb
bad debt losses, or if the Bank fails to meet certain definitional tests,
federal income taxes may be imposed at the then applicable rates.
NOTE 12. TRANSACTIONS WITH RELATED PARTIES
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with officers and directors,
including their families and companies of which they are principal owners
(related parties), all of which have been, in the opinion of management, on the
same terms, including interest rates and collateral, as those prevailing at the
time of comparable transactions with nonrelated parties.
Aggregate loan transactions with related parties for the years ended
December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Balance, beginning.......................................... $2,622,057 $2,332,086
New loans................................................. 815,302 504,844
Repayments................................................ (323,580) (214,873)
---------- ----------
Balance, ending............................................. $3,113,779 $2,622,057
========== ==========
</TABLE>
54
<PAGE> 57
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents..... $ 6,874,107 $ 6,874,107 $ 7,078,902 $ 7,078,902
Other interest bearing
deposits................... 100,000 100,000 598,999 598,999
Securities.................... 35,420,832 35,414,072 38,054,898 38,071,895
Loans held for sale........... 527,446 527,446 847,155 847,155
Loans......................... 144,201,689 143,735,674 122,925,422 124,109,076
Accrued interest receivable... 1,512,342 1,512,342 785,172 785,172
Financial Liabilities:
Deposits...................... 152,491,467 152,943,472 142,590,513 142,956,864
Borrowed funds................ 24,800,000 24,806,000 16,000,000 16,032,000
Accrued interest payable...... 618,637 618,637 657,696 657,696
Unrecognized Financial
Instruments:
Commitments to extend credit
</TABLE>
The estimated fair value of fee income on letters of credit at December 31,
1996 and 1995 is insignificant. Loan commitments on which the committed interest
rate is less than the current market rate are also insignificant at December 31,
1996 and 1995.
The Bank assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Bank's financial instruments will change when interest rate levels
change and that change may be either favorable or unfavorable to the Bank.
Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new loans and deposits and
by investing in securities with terms that mitigate the Bank's overall interest
rate risk.
55
<PAGE> 58
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. MIDWEST FEDERAL FINANCIAL CORP CONDENSED FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash........................................................ $ 251,446 $ 158,208
Securities available for sale............................... 1,244,274 918,901
Investment in bank.......................................... 15,030,655 14,437,945
Notes receivable -- bank.................................... 400,000
Other assets................................................ 530,245 755,037
----------- -----------
Total assets...................................... $17,056,620 $16,670,091
=========== ===========
Accrued dividends payable................................... $ 121,529 $ 53,069
Other liabilities........................................... 31,415 75,710
Total stockholders' equity.................................. 16,903,676 16,541,312
----------- -----------
Total liabilities and stockholders' equity........ $17,056,620 $16,670,091
=========== ===========
</TABLE>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income............................................ $ 86,061 $ 160,467 $ 131,477
Dividend income............................................ 900,000 900,000 1,300,000
Equity in undistributed net income of bank................. 912,310 708,265 (82,579)
Other income............................................... 231,146 173,405 1,805
---------- ---------- ----------
Total income..................................... 2,129,517 1,942,137 1,350,703
Other expense.............................................. 277,400 96,907 41,084
---------- ---------- ----------
Income before provision for income taxes................... 1,852,117 1,845,230 1,309,619
Provision (benefit) for income taxes....................... (94,582) 58,000 31,000
---------- ---------- ----------
Net income....................................... $1,946,699 $1,787,230 $1,278,619
========== ========== ==========
</TABLE>
56
<PAGE> 59
MIDWEST FEDERAL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income.......................................... $ 1,946,699 $ 1,787,230 $ 1,278,619
Adjustments to reconcile net income to net cash used
in operating activities:
Equity in net income of bank..................... (1,812,310) (1,608,265) (1,217,421)
Gain on sale of securities....................... (212,879) (140,586)
Net amortization................................. 21,133
(Increase) decrease in other assets.............. 224,792 (553,512) (178,759)
Increase (decrease) in other liabilities......... (44,295) 54,810 4,901
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................ 102,007 (460,323) (91,527)
----------- ----------- -----------
Cash Flows From Investing Activities
Dividend received from bank......................... 900,000 900,000 277,343
Payment received on loan to ESOP.................... 69,000 69,000 73,863
(Increase) decrease in loan to subsidiary........... 400,000 (250,000) 1,050,000
Purchase of securities available for sale........... (1,173,874) (1,478,151) (577,375)
Proceeds from sale of securities available for
sale............................................. 1,098,780 1,117,211 200,000
Proceeds from maturity of securities available for
sale............................................. 1,001,524
----------- ----------- -----------
Net cash provided by investing activities... 1,293,906 1,359,584 1,023,831
----------- ----------- -----------
Cash Flows From Financing Activities
Dividends paid...................................... (357,217) (213,103) (224,214)
Purchase of treasury stock.......................... (1,061,435) (784,098) (832,282)
Proceeds from the exercise of stock options......... 115,977 64,126 45,350
----------- ----------- -----------
Net cash used in financing activities....... (1,302,675) (933,075) (1,011,146)
----------- ----------- -----------
Net increase (decrease) in cash....................... 93,238 (33,814) (78,842)
Cash, beginning....................................... 158,208 192,022 270,864
----------- ----------- -----------
Cash, end............................................. $ 251,446 $ 158,208 $ 192,022
=========== =========== ===========
</TABLE>
57
<PAGE> 60
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 4, 1996, the Registrant dismissed Wipfli Ullrich Bertelson CPAs
("Wipfli") as the Registrant's certifying accountants. In connection with
Wipfli's report on the Registrant's consolidated financial statements for the
two most recent fiscal years ended December 31, 1994 and 1995, such reports did
not contain an adverse opinion or disclaimer opinion, nor were the reports
modified as to uncertainty, audit scope, or accounting principles.
Wipfli's dismissal was approved by Registrant's Board of Directors. During
the Registrant's two most recent fiscal years and any subsequent interim period
through the date of dismissal, there were no disagreements or "reportable
events" with Wipfli, whether or not resolved, on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of Wipfli, would have
caused it to make reference to the subject of such disagreement in connection
with its reports.
The Registrant formally engaged McGladrey & Pullen, LLP on October 4, 1996
as its new certifying accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information contained under the section captioned "Election of
Directors" in the Corporation's definitive proxy statement for the Corporation's
1997 Annual Meeting of Stockholders to be held on April 24, 1997, ("Proxy
Statement") is incorporated herein by reference. Information concerning the
executive officers of the Corporation is included under separate caption in Part
I of this Form 10-KSB. The Corporation believes that the Directors, Officers,
and 10% Shareholders have complied with all applicable requirements of Section
16(a) of the Exchange Act of 1934 during the fiscal year ended December 31,
1996.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the section captioned "Election of
Directors" -- "Renumeration of Executive Officer" in the Proxy Statement is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Principal Holders Thereof" of the
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Management" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge by
any person of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
58
<PAGE> 61
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section captioned "Election of Directors" "Transactions with Management"
of the Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) The Consolidated Financial Statements and Auditors' Report, listed
below, are included in Part II, Item 8 and incorporated herein by reference.
1. Independent Auditors' Reports.
2. Consolidated Statements of Financial Condition at December 31, 1996
and 1995.
3. Consolidated Statement of Income for the Years Ended December 31,
1996, 1995 and 1994.
4. Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994.
5. Consolidated Statements of Cash Flows for the Years Ended December
31, 1996, 1995 and 1994.
6. Notes to Consolidated Financial Statements.
(a)(2) All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated Financial
Statements.
(a)(3) EXHIBITS
<TABLE>
<S> <C> <C> <C>
Exhibit No. 3.1 -- Articles of Incorporation of Registrant
Exhibit No. 3.2 -- By-Laws of Registrant
Exhibit No. 4 -- Form of Common Stock Certificate
Exhibit No. 10.1 -- Stock Option Plan
Exhibit No. 10.2 -- Employment Agreements between Registrant and Gary E. Wegner,
President and CEO, and agreement of other "named executive
officer"
Exhibit No. 11 -- Computation of Earnings Per Share (attached as Exhibit 11)
Exhibit No. 21 -- Subsidiaries of the Registrant
Exhibit No. 24.1 -- Consent of Independent Certified Public Accountants
</TABLE>
A copy of the exhibits listed can be obtained by writing to Dean C. Carter,
Chief Financial Officer, Midwest Federal Financial, P.O. Box 450, Baraboo,
Wisconsin 53913
(b) A report Form 8-K was filed October 11, 1996, for notification of
change of accountants. Effective October 4, 1996, the Corporation changed
accountants from Wipfli Ullrich Bertelson CPAs to McGladrey & Pullen, LLP. There
were no disagreements with Wipfli Ullrich Bertelson CPAs in the last 24 months.
An amendment to Form 8-K was filed October 22, 1996.
59
<PAGE> 62
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDWEST FEDERAL FINANCIAL CORP.
<TABLE>
<S> <C>
Date: March 19, 1997 By: /s/ GARY E. WEGNER
--------------------------------------------------------
Gary E. Wegner
President and Chief Executive Officer
(Principal Executive Officer)
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GARY E. WEGNER President and Chief March 19, 1997
- ----------------------------------------------------- Executive Officer
Gary E. Wegner (Principal Executive
Officer)
/s/ DEAN C. CARTER Chief Financial Officer March 19, 1997
- ----------------------------------------------------- (Principal Financial and
Dean C. Carter Accounting Officer)
/s/ GEORGE F. MCARTHUR Chairman of the Board March 19, 1997
- ----------------------------------------------------- and a Director
George F. McArthur
/s/ ROBERT J. SCHWARZ Vice Chairman of the Board March 19, 1997
- ----------------------------------------------------- and a Director
Robert J. Schwarz
/s/ ALBERT R. DIPPEL Director March 19, 1997
- -----------------------------------------------------
Albert R. Dippel
/s/ DAVID M. GUNDERSON Director March 19, 1997
- -----------------------------------------------------
David M. Gunderson
/s/ JOHN D. JENKS Director March 19, 1997
- -----------------------------------------------------
John D. Jenks
/s/ DR. JAMES D. MATHERS Director March 19, 1997
- -----------------------------------------------------
Dr. James D. Mathers
</TABLE>
* Each of the above signatures is affixed as of March 19, 1997
60
<PAGE> 1
EXHIBIT NO. 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <S> <C>
1. Net Income.................................................. $1,946,699
2. Weighted average common shares outstanding.................. 1,619,699
3. Common stock equivalents due to dilute effect of stock 123,322
options...................................................
4. Total weighted average common shares and equivalents 1,743,021
outstanding...............................................
5. Earnings per share.......................................... $ 1.12
</TABLE>
Primary and fully diluted earnings per share are the same.
61
<PAGE> 1
EXHIBIT 13
1996 ANNUAL REPORT
TO STOCKHOLDERS
Midwest Federal Financial Corp. is a holding company, the principal
subsidiary of which is Baraboo Federal Bank, FSB. The company's common stock is
traded on the NASDAQ small-capitalization market under the symbol "MWFD".
Baraboo Federal is a federally chartered savings bank originally chartered
in 1934. The Bank provides its customers with a full array of community banking
services. The Bank is the largest independent financial institution in its
primary market area of Sauk Prairie, Portage, Lodi, Kingston, Dalton, and
Baraboo, Wisconsin. The Bank is primarily engaged in the business of attracting
deposits from the general public and originating consumer loans, mortgage loans
and loans secured by commercial real estate, multi-family properties, and
commercial business including agricultural loans. The Bank also offers
alternative investments (not insured by FDIC) and trust services.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Total Return Performance .................... 2
Letter to Shareholders ...................... 3-6
Midwest Federal Board ....................... 7
Baraboo Federal Board ....................... 8
Officers & Management ....................... 9
Selected Consolidated Financial Statements .. 10-11
Corporate Data .............................. 12
</TABLE>
1
<PAGE> 2
Bar Graph comparing the Total Return Performance of Midwest Federal Financial
Corp., NASDAQ - Total US and SNL All Banks and Thrifts and Index.
<TABLE>
<CAPTION>
Period Ending
---------------------------------------------------------
Index 7/8/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Midwest Federal Financial Corp. 100.00 113.99 158.21 152.92 263.53 460.85
NASDAQ - Total US 100.00 122.46 140.58 137.41 194.33 239.04
SNL All Banks and Thrifts Index 100.00 113.93 126.43 123.63 192.48 266.79
(1) Assumes $100.00 invested on July 8, 1992
</TABLE>
2
<PAGE> 3
LETTER TO SHAREHOLDERS
Dear Shareholders:
Congratulations again. During 1995, shareholders of Midwest Federal Financial
Corp. realized a 69% increase in price. We celebrated that increase at our
1996 annual meeting and discussed what could be done for an encore. 1996
turned out to be a very good year. Shareholders realized a 79% total return
including dividends. CONGRATULATIONS!
Total assets at December 31, 1996, were $196.3 million, up 11% from the December
31, 1995, figure of $177.2 million. Deposits were $152.4 million at year end
1996 compared with $142.6 million at year end 1995, up 6.9%. Net loans were
$144.2 million on December 31, 1996, up 17% over the year ending 1995 total of
$122.9 million. Baraboo Federal Bank, the principal subsidiary of Midwest
Federal, continues to be the largest independent financial institution in its
market area.
1996 will be remembered as the year that Congress passed legislation to fully
fund the Savings Association Insurance Fund (SAIF). This funding came in the
form of a one-time assessment which affected all SAIF insured FDIC depository
institutions. The legislation was signed into law by President Clinton on
September 30, 1996. We are delighted that this refunding of the SAIF is behind
us.
The one-time assessment reduced our FDIC insurance cost from an annual charge
of 23.4 basis points to 6.4 basis points per one hundred dollars of insured
deposits. This reduction in deposit insurance cost will allow us to better
compete for retail deposits in our market place. We believe the decrease in
insurance costs should fall to the bottom line in 1997 increasing earnings by
approximately $.13 per share pre-tax.
Net income, before the one-time charge, for the 12 months ending December 31,
1996, totaled a record $2.408 million or $1.38 per share versus $1.787 million
or $1.01 per share for 1995. This is an increase in total net income of 35%.
Net income after the charge totaled $1.947 million or
3
<PAGE> 4
$1.12 per share. The after charge net income represents a record for Midwest
Federal Financial Corp. Return on average equity, exclusive of the one-time
FDIC assessment was 14.5%, inclusive was 11.8%. ROAE for 1995 was 11.34%.
Return on average assets, exclusive of the one-time FDIC assessment was 1.30%,
inclusive was 1.05%. ROAA for 1995 was 1.11%. Interest rate spread was 3.67%
in 1996, up from 3.43% in 1995. Net interest margin increased from 3.97% in
1995 to 4.16% in 1996. For an in depth discussion of the Bank's financial
performance, please refer to the proxy and 10-KSB under the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
You can tell from the 1996 operating results that we enjoyed a very substantial
year from an income and growth prospective. I continue to give credit to our
Board of Directors, our Management Team, and all of our employees for our
positive results. Over and over we note that people make the difference. I
thank everyone at Baraboo Federal for their dedication.
Baraboo Federal Bank hired a consulting firm in 1996 to look at our management
structure. We had not changed our traditional vertical management structure in
spite of 73% growth over the past four years. We felt it was time for an
outside review. We believe the results of that study will be very positive for
Baraboo Federal and Midwest Federal almost immediately. A reorganization
recommendation calls for a more horizontal management structure, centralizing
loan processing and providing more centralized support in the personal banking
and teller areas. This plan allows us to be able to better determine current
and future staffing needs and should provide for more consistency in our
operations from location to location. A major benefit is that we are freeing
up some of our best sales people to be able to do what they do best and that is
service our customers. The centralization of our loan area is nearly complete
and the installation of a Wide Area Network (WAN) is just about to start. We
feel these technological expenses are investments in Midwest's future.
Loan growth continued very strong in 1996, up 17% over year end 1995 totals. On
a percentage basis, our fastest growth area was in the commercial mortgage area,
followed by commercial
4
<PAGE> 5
non-mortgage, consumer and residential mortgage. We continue to believe that
we are being conservative in our underwriting of these commercial lending
opportunities. This is an area of expertise in our bank and a market which is
not over-served in our market areas. We continue to have more home loans in
our portfolio than anything else, but the diversity into commercial and
consumer has produced the yields which are allowing our interest income to
increase to record levels. Asset quality remains outstanding as evidenced by
our non-performing assets to total assets ratio of .21% and net charge-offs to
average outstanding loans of .02%. We continue to maintain a healthy allowance
for loan losses to total loans of 1.05%.
The acquisition of retail deposits is becoming more and more challenging. With
the stock market as hot as it has been and money pouring into mutual funds by
the billions, it is no small wonder why funds acquisition has become a problem.
Some could argue that the banking industry has brought this problem on to
ourselves by not being competitive with our deposit rates. Baraboo Federal is
satisfied with our 6.9% growth in deposits in a year when, for the most part,
we were paying 23 basis points more for FDIC insurance than our commercial bank
competition. Retail deposit growth is very competitive in our market areas.
This is another reason to be involved in commercial lending which gives us the
opportunity to acquire business deposits which tend to be priced lower than
retail CDs. Our deposit growth has been 93% over the past four years.
We have a stated goal of earning 15% on average equity. In 1996, exclusive of
the one-time FDIC assessment, we achieved an ROAE of 14.5%, 11.34% inclusive
the assessment. I am proud of coming that close to an important investor's
benchmark and am confident that 1997 should be the year we achieve our goal.
I am pleased to report to you that our Trust Department grew to over $15.0
million in managed assets after just two years in business. The Trust
Department of our bank has opened doors for us that we would not have had access
to without Trust services. I am confident there will be many more opportunities
to grow in the Trust area as the baby boomers change from consumers to
accumulators. Trust Officer, Darlene Steinhorst, and her staff have done a
wonderful job with that area of the bank.
5
<PAGE> 6
Gross revenues in the Alternative Investment area rose 55% to over $187,000. I
was complaining about mutual fund growth earlier as I discussed funds
acquisition but watch me change my tune as I glowingly report on the success of
our Alternative Investment area. Here is an important customer service and
profit center with as much potential as any area of the bank.
People, people, people, I've said it every time I've reported to you that
people, our bank employees, make the difference. We have devoted many company
dollars toward training and I believe no better investment can be made. The
employee, however, is the only one who can take that training and use it to
serve customers as no other bank in our area serves customers. We have been
fortunate to find these quality people (it is getting more difficult) and I give
them all the credit for our success. Our Management Team is motivated and
excited about our growth and performance. Our Officer Group of fifteen people
at Baraboo Federal averages 37 2/3 years old, has an average length of
employment with us of just over five years and 80% of them have a Commercial
Banking background. As one of our market makers once said about us, "MWFD is
not just another small-town thrift waiting for things to happen. It is a
customer focused, high quality community bank that just happens to be chartered
as a thrift."
1997 will bring more new services to our customers. Our voice response system
is currently receiving between 2,000 and 2,500 calls per week and we look for
that to increase. We're on the Internet (http.www.bfba.com) with a home page
working with the local realtors and home buyers. We have established a
commercial customer courier service and we look for that service to really take
off. We are about to introduce our Bank Link Commercial Cash Management
Software to allow our commercial customers the opportunity to better manage
their cash. We look to install the Freddie Mac Loan Prospector Program into
our system in 1997. This will allow us to give home loan approvals within
minutes of taking an application. That application will be able to be taken
and approved from the customers kitchen table in late 1997 or early 1998. We
look forward to being able to offer home banking on the Internet as soon as the
all important security and confidentially issues are assured. Eight plus years
ago when I arrived at Baraboo Federal, we had
6
<PAGE> 7
one PC in the bank sitting in the back of the bookkeeping area with a yellowish
cover carefully placed over it. Now with over 90 employees, we have more PCS
than people. This is a bank which believes that it can control its own
destiny.
Midwest Federal Financial Corp. continues to pursue relationships with
well-managed community banks which would allow Midwest Federal shareholders to
realize enhanced value. We have had opportunities to look at situations but
have not been able to find anything which would accomplish our goals. We
believe profitable growth, both internally and externally, remains essential.
I wish to thank the shareholders of Midwest Federal for your support and
confidence in our company. We look forward to another successful year in 1997.
Sincerely,
Gary E. Wegner
President and CEO
7
<PAGE> 8
DIRECTORS OF MIDWEST FEDERAL FINANCIAL CORP.
[PICTURE OF MIDWEST FEDERAL BOARD OF DIRECTORS]
George F. McArthur
Chairman of the Board of the Corporation and Bank;
Vice President of McArthur Towels, Inc.,
Baraboo, Wisconsin
Robert J. Schwarz
Vice Chairman of the Board of the
Corporation and Bank; Retired,
Prairie du Sac, Wisconsin
Gary E. Wegner
President and C.E.O.
of the Corporation and the President & CEO
of the Bank
Baraboo, Wisconsin
John D. Jenks
President and Chief Executive Officer of
Equity Cooperative Livestock Sales,
Baraboo, Wisconsin
Albert R. Dippel
Retired,
Baraboo, Wisconsin
David M. Gunderson
President of Gunderson Construction Co.
Portage, Wisconsin
Dr. James D. Mathers
Private Practitioner with Medical
Associates, S.C.,
Baraboo, Wisconsin
8
<PAGE> 9
BARABOO FEDERAL BOARD
[PICTURE OF BARABOO FEDERAL BOARD OF DIRECTORS]
George F. McArthur
Chairman of the Board of the Corporation and
Bank; Vice President of McArthur Towels, Inc.,
Baraboo, Wisconsin
1967*
Robert J. Schwarz
Vice Chairman of the Board of the Corporation and Bank; Retired
Prairie du Sac, Wisconsin
1975*
Gary E. Wegner
President of the Corporation and President & C.E.O.
of the Bank
Baraboo, Wisconsin
1988*
Scott D. Huedepohl
Vice President of MWFD and Executive Vice President and Director of BFB
Baraboo, Wisconsin 1995*
John D. Jenks
President and Chief Executive Officer of Equity
Cooperative Livestock Sales,
Baraboo, Wisconsin
1978*
Albert R. Dippel
Retired,
Baraboo, Wisconsin
1979*
David M. Gunderson
President of Gunderson Construction Co.
Portage, Wisconsin
1990*
Dr. James Mathers
Practitioner with Medical Associates, S.C.,
Baraboo, Wisconsin
1992*
*Indicates year became a Board Member.
9
<PAGE> 10
OFFICERS OF MIDWEST FEDERAL FINANCIAL CORP. (MWFD)
& BARABOO FEDERAL BANK, F.S.B. (BFB)
Gary E. Wegner
President and C.E.O.
of MWFD and BFB
Scott D. Huedepohl
Vice President of MWFD,
Executive Vice President
and Director of BFB
Melvin Bindl
Senior Vice President
of BFB
Todd M. Cegelski
Senior Vice President
of BFB
Herbert Lallemont
Senior Vice President
of BFB
Dean C. Carter
C.F.O. of MWFD and
Vice President of
Operations and
Secretary of BFB
Nancy Bilz
Secretary of MWFD
Controller of BFB
Kenneth E. Knerzer
Vice President
of BFB
Jeff Schlender
Vice President
of BFB
John Seitz
Vice President
of BFB
Mike Hamilton
Assistant Vice President
of BFB
Scott Sommers
Assistant Vice President
of BFB
Darlene Steinhorst
Assistant Vice President
and Trust Officer
of BFB
Julie Vieth
Assistant Vice President
of BFB
10
<PAGE> 11
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated historical financial data
for the Company at the dates and during the periods indicated. This
information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
(Dollars in Thousands)
FINANCIAL CONDITION DATA: 1996 1995 1994
<S> <C> <C> <C>
Total assets $196,300 $177,164 $150,966
Loans receivable 144,201 122,925 113,818
Cash, interest-bearing deposits, investments and
mortgage-backed securities 42,395 45,134 29,767
Deposits 152,491 142,591 125,624
Stockholders' equity 16,904 16,541 14,795
For the Years Ended December 31,
----------------------------------------------------
(Dollars in thousands except per share amounts)
1996 1995 1994
OPERATING DATA:
<S> <C> <C> <C>
Interest and divided income $ 14,937 $ 12,501 $ 8,950
Interest expense 7,776 6,578 4,343
-------- -------- --------
Net interest income 7,161 5,923 4,607
Provision for loan losses 318 165 108
-------- -------- --------
Net interest income after provision for loan losses 6,843 5,758 4,499
Gains on sale of loans and securities 675 516 264
Other non-interest income 1,639 1,415 965
Non-interest expense 6,329 4,862 3,711
-------- -------- --------
Income before provision for income taxes 2,828 2,827 2,017
Provision for income taxes 881 1,040 738
-------- -------- --------
Net income $ 1,947 $ 1,787 $ 1,279
======== ======== ========
Total earnings per share $ 1.12 $ 1.01 $ .70
======== ======== ========
</TABLE>
11
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA CONT'D
The table below sets forth certain performance ratios of the Company for the
periods indicated.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1996 1995 1994
KEY OPERATING RATIOS:
<S> <C> <C> <C>
Return on assets (net income divided by average assets) 1.05%(1) 1.11% 0.98%
Return on average equity (net income divided by average
equity) 11.74%(2) 11.34% 8.54%
Average equity to average assets 9.04% 9.81% 11.47%
Interest rate spread (difference between average yield
on interest-earning assets and average cost of
interest-bearing liabilities) 3.67% 3.43% 3.22%
Net interest margin (net interest income as a percentage
of average interest-earning assets) 4.16% 3.97% 3.77%
Non-interest expense to average assets 3.40%(3) 3.03% 2.85%
Average interest-earning assets to interest-bearing
liabilities 111% 112% 115%
Allowance for loan losses to total loans at end of period 1.05% 1.06% 1.03%
Net charge-offs to average outstanding loans during the
period .02% .03% .02%
Ratio of nonperforming assets to total assets .21% .16% .10%
(1) Before special FDIC assessment 1.30%
(2) Before special FDIC assessment 14.13%
(3) Before special FDIC assessment 3.01%
At December 31,
-----------------------------
1996 1995 1994
OTHER DATA:
<S> <C> <C> <C>
Number of:
Real estate loans outstanding 2,531 2,451 2,344
Deposit accounts 27,306 26,673 24,942
Number of offices 9 9 8
</TABLE>
12
<PAGE> 13
CORPORATE DATA
CORPORATE OFFICE PRINCIPAL SUBSIDIARY
1159 Eighth Street Baraboo Federal Bank, FSB
Baraboo, Wisconsin 53913-0450 Baraboo, Wisconsin
(608) 356-7771
STOCK INFORMATION
The Common Stock of Midwest Federal Financial Corp. trades on the NASDAQ
SmallCap Market tier of The NASDAQ Stock Market under the symbol "MWFD." The
number of registered shareholders of record as of February 28, 1997, is 439.
This table shows market price information of and cash dividends paid of the
Company's common stock. The prices given represent high and low bid prices on
the NASDAQ System.
<TABLE>
<CAPTION>
1994 HIGH LOW DIVIDEND
- ----------------------------------------
<S> <C> <C> <C>
First Quarter $ 6.17 $ 6.17 2.9cent
Second Quarter $ 6.34 $ 6.17 2.9cent
Third Quarter $ 6.67 $ 6.34 2.9cent
Fourth Quarter $ 6.67 $ 6.34 2.9cent
<CAPTION>
1995 HIGH LOW DIVIDEND
- ----------------------------------------
<S> <C> <C> <C>
First Quarter $ 6.34 $ 6.25 3.2cent
Second Quarter $ 8.13 $ 6.25 3.3cent
Third Quarter $ 9.13 $ 8.13 3.3cent
Fourth Quarter $ 9.75 $ 9.13 3.3cent
<CAPTION>
1996 HIGH LOW DIVIDEND
- ----------------------------------------
<S> <C> <C> <C>
First Quarter $11.50 $ 9.75 3.8cent
Second Quarter $16.00 $11.00 3.8cent
Third Quarter $18.75 $15.25 7.5cent
Fourth Quarter $24.75 $18.00 7.5cent
</TABLE>
Cash dividends paid per share and common stock prices for prior periods have
been restated to reflect a 3 for 2 stock split effected in the form of a
dividend, executed May 1995, and a 2 for 1 stock split effected in the form of
a dividend, executed in May 1996.
REGISTRAR AND TRANSFER AGENT INDEPENDENT AUDITORS SPECIAL LEGAL COUNSEL
Firstar Trust McGladrey & Pullen, LLP Schiff, Hardin & Waite
P.O. Box 1077 Madison, Wisconsin Chicago, Illinois
Milwaukee, Wisconsin 53201
Investor Services number
1-800-637-7549
Stockholder Inquiries and Availability of Form 10-KSB
A copy of Midwest Federal Financial Corp.'s Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission is available to stockholders free
of charge upon written request to:
Midwest Federal Financial Corp.
Attn: Investor Relations
1159 Eighth Street, P.O. Box 450
Baraboo, Wisconsin 53913-0450
(608) 356-7771
13
<PAGE> 14
MISSION STATEMENT
Midwest Federal Financial Corp., through its principal subsidiary, Baraboo
Federal Bank, FSB, will promote wise management of money emphasizing home
ownership, and provide consumer related loans and other financial services
including commercial loans to existing and potential customers within our area
communities.
We will delight our customers by providing these products with above
average personnel, from modern facilities, in an efficient, professional and
friendly manner.
We will maintain an active presence in the communities in which we conduct
business.
Our success will be measured by the increasing share of customers who
regard us as their primary Financial Institution.
CUSTOMER SERVICE HOTLINE 1-800-559-7788
IN BARABOO 355-3893
BARABOO
1159 8th Street
P.O. Box 450
Baraboo, WI 53913
(608) 356-7771
WESTDAYL PLAZA
615 Hwy. 12
Baraboo, WI 53913
(608) 356-7661
128 4th St.
Baraboo, WI 53913
(608) 356-7044
LODI
713 N. Main Street
P.O. Box 137
Lodi, WI 53555
(608) 592-3884
SAUK-PRAIRIE
525 Water Street
P.O. Box 28
Sauk City, WI 53583
(608) 643-8501
PORTAGE
2851 New Pinery Rd.
Portage, WI 53901
(608) 742-5555
611 East Wisconsin Street
Portage, WI 53901
(608) 742-5365
KINGSTON
120 N. South Street
Kingston, WI 53939
(414) 394-3544
DALTON
509 Main Street
Dalton, WI 53926
(414) 394-3544
14
<PAGE> 1
EXHIBIT 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Midwest Federal Financial Corp.:
We consent to incorporation by reference in the subject registration
statement on Form S-8 filed July 1992 and Form S-3 filed March 6, 1997, of our
report dated January 24, 1997, relating to the consolidated statement of
financial condition of Midwest Federal Financial Corp. and subsidiary as of
December 31, 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the year ended December 31, 1996, which
report appears in the December 31, 1996, annual report on Form 10-KSB of Midwest
Federal Financial Corp.
McGladrey & Pullen, LLP
Madison, Wisconsin
March 20, 1997
62
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,874
<SECURITIES> 35,521
<RECEIVABLES> 146,268
<ALLOWANCES> 1,539
<INVENTORY> 0
<CURRENT-ASSETS> 192,270
<PP&E> 5,926
<DEPRECIATION> 1,896
<TOTAL-ASSETS> 196,300
<CURRENT-LIABILITIES> 179,396
<BONDS> 0
21
0
<COMMON> 0
<OTHER-SE> 16,883
<TOTAL-LIABILITY-AND-EQUITY> 196,300
<SALES> 0
<TOTAL-REVENUES> 17,250
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,329
<LOSS-PROVISION> 318
<INTEREST-EXPENSE> 6,844
<INCOME-PRETAX> 2,828
<INCOME-TAX> 881
<INCOME-CONTINUING> 1,947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,947
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
</TABLE>
