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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Fiscal Year Ended June 30, 1997 Commission File Number 0-22224
HALLMARK CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incorporation) (IRS Employer Identification No.)
7401 West Greenfield Avenue
West Allis, Wisconsin 53214
(Address and Zip Code of principal executive offices)
Registrant's telephone number: (414) 317-7100
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 $1.00 per share
---------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. YES [ ] NO [X]
As of September 23, 1997, there were issued and outstanding 1,581,250 and
1,442,950 shares of the Registrant's Common Stock, respectively. The aggregate
market value of the voting stock held by non-affiliates of the Registrant,
computed by reference to the average of the bid and asked price of such stock
as of September 9, 1997, was $31.7 million. Solely for purposes of this
calculation, all executive officers and directors of the Registrant are
considered to be affiliates; also included as "affiliate shares" are certain
shares held by various employee benefit plans where the trustees are directors
of the Registrant or are required to vote a portion of unallocated shares at
the direction of executive officers or directors of the Registrant. The
exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the Registrant that such person is
an affiliate of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K: Portions of the Proxy Statement for 1997 Annual Meeting
of Shareholders are incorporated by reference into Part III hereof.
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FORM 10-K TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Page
----
<S> <C>
Item 1 - Business ................................................................ 1
Item 2 - Properties .............................................................. 45
Item 3 - Legal Proceedings ....................................................... 46
Item 4 - Submission of Matters to a Vote of Security Holders ..................... 47
Part II
Item 5 - Market for the Registrant's Common Stock and Related Security
Holder Matters .......................................................... 48
Item 6 - Selected Consolidated Financial and Other Data .......................... 49
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 51
Item 8 - Financial Statements and Supplementary Data ............................. 69
Item 9 - Changes in and Disagreements with Accountants and Financial Disclosure .. 96
Part III
Item 10 - Directors and Executive Officers of the Registrant ...................... 96
Item 11 - Executive Compensation .................................................. 96
Item 12 - Security Ownership of Certain Beneficial Owners and Management .......... 96
Item 13 - Certain Relationships and Related Transactions .......................... 96
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K ......... 97
Signatures ........................................................................ 99
</TABLE>
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PART I.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K or future filings with the
Securities and Exchange Commission, in quarterly reports or press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, various words or phrases are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include words and phrases such as "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions and various other statements indicated herein with an
asterisk after such statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made, and to advise readers that various factors could affect
the Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected. Such factors
include, but are not limited to: (i) general market interest rates, (ii)
general economic conditions, (iii) legislative/regulatory changes, (iv)
monetary and fiscal policies of the U.S. Treasury and Federal Reserve, (v)
changes in the quality or composition of the Company's loan and investment
portfolios, (vi) demand for loan products, (vii) deposit flows, (viii)
competition, (ix) demand for financial services in the Company's markets, and
(x) changes in accounting principles, policies or guidelines.
The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.
ITEM 1. BUSINESS
GENERAL
Hallmark Capital Corp. (the "Company") was formed for the purpose of
owning all of the outstanding stock of West Allis Savings Bank (the "Bank")
issued in the mutual to stock conversion of the Bank (the "Conversion"). The
Company acquired all of the outstanding common stock of the Bank on December
30, 1993. The Bank is a Wisconsin state-chartered stock savings bank
headquartered in Milwaukee, Wisconsin.
In order to maximize shareholder value, the Company continues to pursue
a strategy of effectively utilizing the capital acquired in the Bank's
Conversion and the Company's initial public offering consummated in December
1993. The Company believes that its effective utilization of capital is best
achieved through the growth of the Company's business. Pursuant to the
Company's post-Conversion strategic plan, this growth is to be achieved through
the expansion of the Company's asset base and diversification of the Company's
portfolio into higher yielding assets, and is to be implemented in two stages.
In stage one, implemented in fiscal 1994 through the first half of fiscal 1997,
management focused on achieving a target asset size for the Company established
by the Board of Directors. In stage two, which commenced in the second half of
fiscal 1996 and will continue in fiscal 1998, management focused, and intends
to continue to focus, on portfolio diversification coupled with a moderate
increase in the rate of growth of the Company's asset base.
Commencing in fiscal 1994 and continuing through the first half of
fiscal 1997, the Company implemented the first stage of the strategy by
leveraging its capital base to achieve asset growth. The objective of the
first stage of the strategy was to reach a targeted asset size for the Company
established by the Board of Directors within a three-to-five year period
following the Conversion. The Company increased its asset size from $179.6
million at June 30, 1994 to $409.8 million at June 30, 1997. The Bank's
principal investment focus during the four-year post-Conversion period was to
originate and purchase mortgage loans (principally loans secured by one-to-four
family owner-occupied homes) and purchase mortgage-backed securities. The
asset growth was funded through significant increases in Federal Home Loan Bank
("FHLB") advances and other borrowings and increases in deposits, primarily
brokered and non-brokered wholesale deposits. Pursuit of the foregoing
strategy resulted in increases in the Company's net income, earnings per share,
return on average equity ("ROAE") and return on average assets ("ROAA") in
fiscal 1994, 1995 and 1996. Excluding the impact of the one-time industry-wide
SAIF assessment in fiscal 1997, pursuit of the strategy also resulted in
increases in the Company's net income, earnings per share, ROAE
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and ROAA for fiscal 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Starting in the latter half of fiscal 1996 and continuing in fiscal 1997,
the Company implemented the second stage of its post-Conversion plan in order
to continue to increase net income, earnings per share, ROAE and ROAA. This
strategy involved shifting the focus from asset growth to asset portfolio
diversification, while maintaining prudent capital and liquidity levels. This
was, and continues to be achieved by altering the composition of loans and
securities originated, purchased, sold and held in the total asset portfolio.
In particular, the Company focused and will focus on originating and purchasing
higher-yielding multi-family, commercial real estate and commercial business
loans secured by properties or assets located within the Company's primary
lending area (as defined herein), which will either replace or supplement the
lower-yielding one-to-four family mortgage loans and principal run-off from the
mortgage securities portfolio. The Company also evaluated opportunities to
purchase multi-family and commercial real estate loans or participation
interests in such loans secured by properties located outside the Company's
primary lending area. In fiscal 1997, the Company purchased an aggregate of
$5.4 million, or 1.9% of gross loans at June 30, 1997, of loans and
participation interests in loans originated by other lenders and secured by
properties located outside of the Company's primary lending area (as defined
herein). These loans and participation interests consisted primarily of
commercial real estate and commercial real estate construction loans. In the
second half of fiscal 1997, the Company also expanded its opportunities to
originate higher-yielding loans by establishing a new commercial lending
division which offers commercial/industrial real estate term loans, equipment
leasing, inventory/equipment/receivables financing, lines of credit, letters of
credit and SBA loan programs. Asset portfolio diversification in fiscal 1997
was funded through principal repayment cash flows from existing assets,
wholesale brokered and non-brokered deposits, retail deposits and FHLB
advances.
In fiscal 1998, the Company intends to continue the implementation of the
second phase of its strategic plan by slowing the rate of growth of its asset
base and continuing to focus on asset portfolio diversification.* This will
continue to be accomplished by increasing the origination and purchase of
multi-family real estate, commercial real estate and commercial/industrial
business loans, combined with the growth of the commercial lending division.*
The Company also intends to begin to increase sales of one-to-four family
mortgage loans in the secondary market, including selling seasoned and recently
originated one-to-four family mortgage loans in order to provide liquidity for
the funding of higher-yielding loan originations and purchases, increase
non-interest income and maintain adequate levels of capital.* The Company
anticipates that increased sales of one-to-four family loans will decrease the
proportion of the gross loan portfolio represented by such loans, will increase
non-interest income as a result of increased gains on the sales of such loans,
and will further lessen the Company's negative gap position as such loans are
replaced by higher-yielding, adjustable rate assets, including multi-family,
commercial real estate and commercial loans.* Portfolio diversification in
fiscal 1998 also will include continued purchases of loans or participation
interests in loans originated by other lenders both within and outside of its
primary lending area.* Loans purchased, or participation interests purchased,
which relate to properties located outside of the Company's primary lending
area will consist primarily of multi-family, commercial real estate,
multi-family construction and commercial real estate construction loans.* In
deciding whether or not to purchase a loan or participation interest in a loan
originated outside of the Company's primary lending area, management of the
Company has applied, and continues to apply, underwriting guidelines which are
at least as strict as those applicable to the origination of similar loans
within its primary lending area.
The Company intends to fund its asset portfolio diversification in fiscal
1998 by a combination of retail deposits, brokered deposits, borrowings, the
sale of one-to-four family mortgage loans in the secondary market, the maturity
and sale of mortgage-backed and related securities and FHLB advances.*
The increase in the level of the allowance for losses on loans during
fiscal 1997 was primarily the result of increases in the commercial, home
equity and commercial real estate loan portfolios. Loans secured by
multi-family and commercial real estate and commercial business assets
generally involve a greater degree of credit risk than one-to-four family loans
and carry larger balances. The increased credit risk is the result of several
factors, including concentration of principal in a limited number of loans and
borrowers, the effect of general economic conditions on income-producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Management anticipates that as the Company's volume of
multi-family and commercial/nonresidential real estate and commercial business
lending activity continues to increase, the Company will need to build a higher
level of
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allowance for loan losses established through a provision for loan losses,
which will have a negative effect on the Company's net income in the
short-term.* However, the Company believes that building the higher yielding
multi-family and commercial/nonresidential real estate components of its gross
loan portfolio will benefit the Company longer term, and should contribute to a
long-term improvement in the Company's net income and return on equity.*
Under regulations established for state savings banks by the Wisconsin
Department of Financial Institutions, Division of Savings Institutions ("DSI")
as implemented by the Administrator of the DSI, the Bank is limited in the
amount of multi-family, commercial real estate and commercial business loans it
can hold in its loan portfolio. This limit is currently 20% of the Bank's
total assets and may be increased with the approval of the DSI. At June 30,
1997, the Bank had $62.2 million of such loans in its portfolio with a current
limit based on the Bank's asset base of $82.1 million. Management anticipates
that as the Bank's multi-family, commercial real estate and commercial business
loan origination and purchase activity increases in fiscal 1998, the Bank will
be required to apply to the DSI to increase the limit to an amount in excess of
20% of the Bank's asset base.* While management believes it will be able to
obtain such DSI approval, there can be no assurances that if requested, the DSI
will approve an increase in such lending limit for the Bank, or at what lending
limit level such approval will be granted.
In addition, in fiscal 1998, the Company intends to continue increasing
the activities of its commercial lending division as another element of the
portfolio diversification strategy. The Company anticipates that the focus of
its commercial lending operation will be small business loans and anticipates
the division should generate approximately $10.0 million to $15.0 million in
commercial loans during its first full year of operation.* During the first
six months of operations ended June 30, 1997, the division originated $6.3
million in various commercial business loans secured by commercial assets. The
commercial lending operation initially is likely to have an adverse impact on
earnings as a result of anticipated additions to the Company's allowance for
loan losses. However, management believes that adding a commercial lending
component to its operations will benefit the Company longer term, and should
contribute to a long-term increase in net income and return on equity. It is
also anticipated that the commercial lending division will enhance the Bank's
core deposit base.*
MARKET AREA
The Bank offers a variety of retail deposit products and services
primarily in Milwaukee and Waukesha counties, Wisconsin. Of the Bank's total
deposits at June 30, 1997, 49.9% represented retail or core deposits obtained
from within the Milwaukee and Waukesha counties and 50.1% represented non-core
wholesale brokered and non-brokered deposits. The Bank also offers a variety
of mortgage loan products in the southern Wisconsin counties of Milwaukee,
Waukesha, Racine, Kenosha, Ozaukee, Washington, Sheboygan, Fond du Lac, Dodge,
Jefferson, Dane, Rock and Walworth ("primary lending area"). During fiscal
1996 and continuing in fiscal 1997, under authority granted by the Board of
Directors, management began to evaluate lending opportunities on a national
basis. Loans originated or purchased and participation interests purchased in
loans secured by collateral outside of the Bank's primary lending area, in
fiscal 1997, did not exceed 10% of the entire portfolio and primarily consisted
of commercial real estate and commercial real estate construction loans. In
fiscal 1998, management intends to continue to evaluate lending opportunities
on a national basis, and management will evaluate opportunities to purchase,
and may in fact purchase, one-to-four family, multi-family, and commercial real
estate construction and commercial real estate loans, or participation
interests in such loans originated by other lenders and secured by properties
located outside of the Company's primary lending area.
The Bank's main office is located at 7401 West Greenfield Avenue, West
Allis, Wisconsin. The City of West Allis is immediately west of the City of
Milwaukee, which is located on the western shore of Lake Michigan,
approximately 90 miles north of Chicago, Illinois. The Bank's main office is
approximately four miles west of downtown Milwaukee. The Bank, in addition to
its West Allis office, has two full-service branches, one in New Berlin and the
other in Greenfield, which are suburbs of Waukesha and Milwaukee counties,
respectively, and together account for approximately 23.8% of the Bank's total
deposits. The Bank also operates a limited-service office inside of a senior
community residence in West Allis. All of the Bank's locations are in areas
generally characterized as residential neighborhoods.
The City of Milwaukee is the largest city in Wisconsin, and the Milwaukee
metropolitan statistical area ("MSA") which includes Milwaukee, Waukesha,
Ozaukee and Washington counties, is the largest MSA within the
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State of Wisconsin. The MSA includes a diverse economic base, including
business, industry and agriculture. Major employers include Johnson Controls,
Inc, Harnischfeger Industries, Inc., Briggs and Stratton Corp.,
Harley-Davidson, Inc., A.O. Smith Corp., Allen-Bradley and Northwestern Mutual
Life Insurance Co., and the home offices of numerous other insurance companies
and financial institutions. Although the local economy was adversely impacted
by the reduction in the number of jobs in heavy industry in the late 1970's and
early 1980's, the addition of many service industry and small manufacturing
jobs has had a favorable impact upon the area's economy. The MSA has eleven
colleges and universities each with enrollments exceeding 1,000 students,
including Marquette University, the Milwaukee campus of the University of
Wisconsin. and Concordia University.
LENDING ACTIVITIES
GENERAL
The largest component of the Bank's gross loan portfolio, which totaled
$285.9 million at June 30, 1997, was first mortgage loans secured by
owner-occupied one-to-four family residences. At June 30, 1997, one-to-four
family owner-occupied mortgage loans totaled $153.6 million or 53.6% of gross
loans. Of the total one-to-four family mortgage loans, $81.1 million or 52.8%
were ARM loans. Of the remaining gross loans held at June 30, 1997, 9.7% were
multi-family mortgage loans, 8.8% were home equity loans, 7.6% were commercial
real estate loans, 6.1% were one-to-four family construction loans, 4.9% were
one-to-four family non-owner occupied mortgage loans, 3.4% were multi-family
construction loans, 2.6% were commercial construction and lot loans, 2.1% were
in various consumer loans and 1.2% were commercial business loans. The Bank
originates primarily ARM loans or fixed-rate loans which have short- and
intermediate-term maturities for its own loan portfolio. The Bank also offers
longer-term fixed-rate loans, some of which are sold to secondary market
investors within guidelines established by the Asset/Liability Committee. The
Bank's total loan portfolio increased for the year ended June 30, 1997
primarily because the Bank retained more originated loans, since such loans
currently carry a higher yield than comparable mortgage-backed and related
securities. During the fiscal year ended June 30, 1997, approximately $18.1
million of fixed-rate one-to-four family mortgage loans were originated and
purchased as compared to $33.7 million during fiscal year ended June 30, 1996.
The total amount of fixed-rate loans originated and purchased was $15.6 million
and $2.5 million, respectively, for fiscal 1997; and $22.8 million and $10.9
million, respectively, for fiscal year 1996. While the level of originations
of one-to-four family mortgage loans decreased slightly in fiscal 1997 compared
to fiscal 1996, purchases of one-to-four family mortgage loans (including
one-to-four family construction loans) decreased from $39.7 million in fiscal
1996 to $14.7 million in fiscal 1997. The reason for the decline in
one-to-four family originations and purchases was due to slower overall asset
growth in fiscal 1997 and the Company's strategy of asset portfolio
diversification. In particular, in lieu of purchasing additional one-to-four
family and multi-family mortgage loans, the Company focused on the origination
of a larger percentage of higher-yielding home equity,
commercial/non-residential, commercial real estate construction and commercial
business loans.
In fiscal 1998, the Company's business objectives are to profitably
utilize the Company's shareholders' equity and leverage the capital position of
the Company by continuing to implement a strategy of slower managed asset
growth as compared to the past four fiscal years. One of the Company's primary
goals is to increase the percentage size of its gross loan portfolio as
compared to the percentage size of its mortgage-backed and related investment
securities portfolio and within the gross loan portfolio, to increase the
percentage size of higher yielding loans secured by multi-family housing and
commercial real estate (both within and outside the Bank's primary lending
area), and commercial business assets, as compared to loans secured by
owner-occupied one-to-four family residences, both within and outside of the
Bank's primary lending area. In fiscal 1998, the Company also intends to
manage its capital and liquidity position and improve profitability by selling
a larger percentage of newly-originated one-to-four family mortgage loans in
the secondary market.* The Bank will continue to promote its home equity line
of credit product, the "flexLOAN" to increase the size of its home equity loan
portfolio. The Company believes it can continue to improve its return on
equity through managed asset growth and through an increase in the volume of
higher yielding multi-family and commercial real estate loans and commercial
non-real estate loans, and through the sale of one-to-four family mortgage
loans in the secondary market.
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Under regulations established for state savings banks by the DSI as
implemented by the Administrator of the DSI, the Bank is limited in the amount
of multi-family, commercial real estate and commercial business loans it can
hold in its loan portfolio. This limit is currently 20% of the Bank's total
assets and may be increased with the approval of the DSI. At June 30, 1997,
the Bank had $62.2 million of such loans in its portfolio with a current limit
based on the Bank's asset base of $82.1 million. Management anticipates that as
the Bank's multi-family, commercial real estate and commercial business loan
origination and purchase activity increases in fiscal 1998, the Bank will be
required to apply to the DSI to increase the limit to an amount in excess of
20% of the Bank's asset base.* While management believes it will be able to
obtain such DSI approval, there can be no assurances that if requested, the DSI
will approve an increase in such lending limit for the Bank, or at what lending
limit level such approval will be granted.
While the Company intends to continue to focus its efforts on originations
within its primary lending area, the Company will continue lending on
credit-worthy opportunities on a national basis. In fiscal 1998, the Company's
management will continue to evaluate and implement opportunities to purchase
one-to-four family, multi-family, commercial real estate loans and commercial
real estate construction loans, or participation interests in such loans,
originated by other lenders outside the Company's primary lending area.* The
Company does not intend to purchase commercial business loans, either within or
outside its primary lending area, or participation interests in such loans, in
fiscal 1998.* In deciding whether or not to purchase a loan or participation
interest in a loan originated outside of the Company's primary lending area,
management of the Company has applied, and intends to continue to apply
underwriting guidelines at least as strict as those applicable to the
origination of comparable loans within its market area. However, management of
the Company intends to continue to be cautious with loans secured by
multi-family and commercial real estate, as these types of loans generally
involve a greater degree of credit risk than one-to-four family loans and carry
larger balances. The increased credit risk is the result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effect of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. These risks may be increased with respect to loans secured by
properties located outside the Company's primary lending area due to the
increased difficulty of monitoring such loans.
As the Company's volume of multi-family, commercial real estate and
commercial business lending activity has increased, the Company has built a
higher level of allowance for loan losses, established through a provision for
loan losses, which has had a negative effect on the Company's net income in the
short term. However, the Company believes that building the higher yielding
multi-family, commercial real estate and commercial business components of its
gross loan portfolio will benefit the Company longer term, and should
contribute to a long-term improvement in the Company's return on equity.*
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COMPOSITION OF LOAN PORTFOLIO
The following table presents information concerning the composition of the
Bank's loan portfolio in dollar amounts and in percentages (before deduction
for loans in process, deferred fees and discounts and allowance for losses) as
of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------
1997 1996 1995
----------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One-to-four family:
Owner-occupied ..................................... $153,618 53.6% $146,022 58.7% $101,008 66.2%
Non-owner occupied ................................. 13,893 4.9 7,667 3.1 5,633 3.7
Home equity........................................... .. 25,297 8.8 19,349 7.8 11,888 7.8
Multi-family ............................................ 27,616 9.7 19,788 8.0 3,755 2.5
Commercial/nonresidential ............................... 21,693 7.6 5,488 2.2 1,297 0.8
One-to-four family construction ......................... 17,382 6.1 23,885 9.6 12,796 8.4
Multi-family construction ............................... 9,621 3.4 13,131 5.3 2,556 1.7
Other construction and land ............................. 7,385 2.6 6,491 2.6 3,858 2.5
-------- ------- -------- -------- -------- --------
Total real estate loans ............................ 276,505 96.7 241,821 97.3 142,791 93.6
CONSUMER AND OTHER LOANS:
Automobile .............................................. 1,195 0.4 1,774 0.7 2,327 1.5
Student ................................................. -- 0.0 -- 0.0 1,974 1.3
Credit card ............................................. 2,730 1.0 2,585 1.0 2,796 1.8
Other consumer loans .................................... 1,950 0.7 2,372 1.0 2,684 1.8
-------- ------- -------- -------- -------- --------
Total consumer loans ............................... 5,875 2.1 6,731 2.7 9,781 6.4
Commercial loans................................. ....... 3,471 1.2 - 0.0 - 0.0
Gross loans receivable .................................. 285,851 100.0% 248,552 100.0% 152,572 100.0%
-------- ------- -------- -------- -------- --------
ADD:
Accrued interest, net ................................... 1,694 1,287 784
LESS:
Loans in process ....................................... (11,998) (23,770) (10,099)
Deferred fees and discounts ............................ (197) (18) 28
Allowance for loan losses .............................. (1,762) (1,234) (953)
Allowance for uncollected interest ..................... (32) (10) (11)
-------- -------- --------
Total additions/deductions ........................ (12,295) (23,745) (10,251)
-------- -------- --------
Loans receivable, net ........................ $273,556 $224,807 $142,321
======== ======== ========
<CAPTION>
AT JUNE 30,
-----------------------------------
1994 1993
----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One-to-four family:
Owner-occupied ..................................... $72,411 65.8% $52,317 62.9%
Non-owner occupied ................................. 5,429 5.0 4,840 5.8
Home equity........................................... .. 9,810 8.9 7,035 8.5
Multi-family ............................................ 2,538 2.3 1,829 2.2
Commercial/nonresidential ............................... 1,675 1.5 1,747 2.1
One-to-four family construction ......................... 7,017 6.4 5,500 6.6
Multi-family construction ............................... -- 0.0 -- 0.0
Other construction and land ............................. 1,478 1.3 681 0.8
-------- ------- ------- -------
Total real estate loans ............................ 100,358 91.2 73,949 88.9
CONSUMER AND OTHER LOANS:
Automobile .............................................. 2,250 2.1 2,318 2.8
Student ................................................. 1,681 1.5 1,370 1.7
Credit card ............................................. 2,990 2.7 2,643 3.1
Other consumer loans .................................... 2,730 2.5 2,895 3.5
-------- ------- ------- -------
Total consumer loans ............................... 9,651 8.8 9,226 11.1
Commercial loans................................. ....... - 0.0 - 0.0
Gross loans receivable .................................. 110,009 100.0% 83,175 100.0%
-------- ------- ------- -------
ADD:
Accrued interest, net ................................... 523 422
LESS:
Loans in process ....................................... (4,618) (3,179)
Deferred fees and discounts ............................ (64) (246)
Allowance for loan losses .............................. (769) (652)
Allowance for uncollected interest ..................... (13) (5)
-------- -------
Total additions/deductions ........................ (4,941) (3,660)
-------- -------
Loans receivable, net ........................ $105,068 $79,515
======== =======
</TABLE>
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LOAN MATURITY
The following table shows the contractual maturity of the Bank's loan and
mortgage-backed and related securities portfolio at June 30, 1997. 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. Prepayments
and scheduled principal amortization on loans totaled $70.1 million, $38.7
million and $17.3 million for the years ended June 30, 1997, 1996 and 1995,
respectively. Management anticipates that if and when the Bank purchases
multi-family and commercial real estate loans, or participation interests in
such loans, there will not be a material impact on the contractual maturities
of the Bank's loan portfolio.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------------------------------------
ONE-TO-
ONE-TO- FOUR MULTI-
FOUR FAMILY HOME MULTI- FAMILY
FAMILY CONSTRUCTION EQUITY FAMILY CONSTRUCTION
------ ------------ ------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AMOUNTS DUE:
Within one year ..................... $ 13 $ 136 $ 759 $ 640 $ 503
After one year:
One to three years ................ 943 1,649 1,477 1,627 --
Three to five years ............... 1,720 -- 1,072 399 --
Five to ten years ................. 8,196 -- 21,069 4,194 1,080
Ten to 20 years ................... 47,421 -- 920 1,543 1,000
Over 20 years ..................... 109,218 15,597 -- 19,213 7,038
-------- ------- ------- ------- -------
Total due after one year ....... 167,498 17,246 24,538 26,976 9,118
-------- ------- ------- ------- -------
Total amounts due .............. 167,511 17,382 25,297 27,616 9,621
LESS:
Loans in process .................... (376) (6,701) -- -- (2,282)
Deferred fees and discounts ......... (179) -- -- -- --
Allowance for loan losses/
unrealized depreciation on
securities available-for-sale ....... (685) (69) (253) (190) (72)
-------- ------- ------- ------- -------
Loans receivable and mortgage-
backed and related securities, net .. $166,271 $10,612 $25,044 $27,426 $7,267
======== ======= ======= ======= =======
<CAPTION>
AT JUNE 30, 1997
-------------------------------------------------------------------------------
TOTAL
MORTGAGE-
BACKED
COMMERCIAL/ OTHER AND
NON- CONSTRUCTION/ RELATED
RESIDENTIAL LAND SECURITIES CONSUMER COMMERCIAL TOTAL
----------- ---- ----------- -------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AMOUNTS DUE:
Within one year ..................... $ 2,321 $2,691 $ 643 $3,305 $1,545 $ 12,556
After one year:
One to three years ................ 294 -- 1,874 885 933 9,682
Three to five years ............... 5,828 -- 3,645 602 940 14,206
Five to ten years ................. 11,959 1,032 3,785 375 53 51,743
Ten to 20 years ................... 701 3,662 17,041 708 -- 72,996
Over 20 years ..................... 590 -- 70,059 -- -- 221,715
------- ------ ------- ------ ------ --------
Total due after one year ....... 19,372 4,694 96,404 2,570 1,926 370,342
------- ------ ------- ------ ------ --------
Total amounts due .............. 21,693 7,385 97,047 5,875 3,471 382,898
LESS:
Loans in process .................... -- (2,639) -- -- -- (11,998)
Deferred fees and discounts ......... -- -- (121) -- (18) (318)
Allowance for loan losses/
unrealized depreciation on
securities available-for-sale ....... (198) (74) (115) (161) (60) (1,877)
------- ------ ------- ------ ------ --------
Loans receivable and mortgage-
backed and related securities, net .. $21,495 $4,672 $96,811 $5,714 $3,393 $368,705
======= ====== ======= ====== ====== ========
</TABLE>
The following table sets forth at June 30, 1997, the dollar amount of all
loans and mortgage-backed and related securities due after June 30, 1998, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1998
----------------------------------
FIXED ADJUSTABLE TOTAL
-------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One-to-four family ........................ $96,661 $70,837 $167,498
One-to-four family construction ........... 378 16,868 17,246
Home equity ............................... 3,464 21,074 24,538
Multi-family .............................. 3,682 23,294 26,976
Multi-family construction ................. -- 9,118 9,118
Commercial/nonresidential ................. 4,426 14,946 19,372
Other construction and land ............... -- 4,694 4,694
Consumer loans .................................. 2,570 -- 2,570
Commercial loans ................................ 1,926 -- 1,926
-------- ----------- --------
Gross loans receivable ................... 113,107 160,831 273,938
Mortgage-backed and related securities .......... 19,166 77,238 96,404
-------- ----------- --------
Gross loans receivable and
mortgage-backed and related securities .. $132,273 $238,069 $370,342
======== =========== ========
</TABLE>
-7-
<PAGE> 10
ONE-TO-FOUR FAMILY MORTGAGE LENDING
The majority of the Bank's historical lending activity has been the
origination of first mortgage loans secured by one-to-four family
owner-occupied residences located within the Bank's primary lending area. In
fiscal 1997, the Bank primarily purchased and originated one-to-four family
real estate loans secured by properties located within the Bank's primary
lending area. Of the $27.8 million in one-to-four family originations and
$6.3 million in purchases during fiscal year 1997, $361,000 or 1.0% of gross
one-to-four family originations and purchases were originated outside of the
primary lending area. The Company did not purchase any one-to-four family
mortgage loans secured by properties located outside its primary lending area.
One-to-four family loan purchases decreased 73.6% in fiscal 1997 compared to
fiscal 1996. The percentage decrease of one-to-four family purchased loans in
fiscal 1997 was consistent with the Company's strategic plan to diversify the
Bank's asset base into higher-yielding loans. The one-to-four family mortgage
loans purchased in fiscal 1997 were retained in the Bank's loan portfolio. The
purchased loans either were underwritten in accordance with the Bank's
underwriting guidelines or if the Bank's underwriting guidelines were not met,
other credit enhancements, such as loan repurchase agreements, were obtained
and approved in advance by the Board of Directors.
The Bank offers conventional fixed-rate mortgage loans and ARM loans with
maturity dates which typically range from 15 to 30 years. Substantially all of
the ARM loans are originated for the Bank's own loan portfolio. The Bank also
originates 15-year fixed-rate loans which primarily have been retained in the
Bank's portfolio in recent fiscal years. During the fiscal year ended June 30,
1997, the Bank originated and purchased $18.1 million in fixed-rate one-to-four
family mortgage loans. The Bank sold $10.6 million in fixed-rate one-to-four
family mortgage loans in fiscal 1997. Of the $10.6 million, $6.7 million were
seasoned 15-year fixed-rate loans from the Bank's portfolio and $3.9 million
were 30-year fixed-rate mortgage loans of which $1.2 million were
newly-originated Wisconsin Housing and Economic Development Authority ("WHEDA")
loans. The Bank had sold primarily all of its 30-year fixed loans in prior
years. During fiscal 1997, management decided it would sell a portion of the
fixed-rate loans originated and purchased to provide funds for adding higher
yielding loans to the portfolio. In fiscal 1998, the Bank intends to sell a
larger percentage of one-to-four family mortgage loans in the secondary market
as part of its strategy of asset portfolio diversification, slower asset
growth, and capital and liquidity management. Certain fixed-rate loans made
under special loan terms or programs, principally originated for purposes of
compliance with the Community Reinvestment Act are retained in the Bank's
portfolio. The Bank follows Federal Home Loan Mortgage Corporation ("FHLMC")
underwriting guidelines for its one-to-four family mortgage loans.
Due to the highly competitive banking environment in its primary lending
area, the Bank offers a variety of rates, fees, origination terms and mortgage
products. While the interest rate on a mortgage loan is a function of the
origination points charged, the Bank recently has originated loans primarily
without points.
Upon receipt of a completed mortgage application from a prospective
borrower, a credit report is ordered, an appraisal from an independent
third-party is obtained, income and other deposit information is verified, and,
as necessary, additional financial information is requested. The Bank requires
title insurance on all first mortgage loans. Borrowers must present evidence
of appropriate hazard insurance and flood insurance (if applicable) prior to
the closing. Borrowers are required to advance funds on a monthly basis,
together with payments of principal and interest, to a mortgage escrow account
from which the Bank makes disbursements for items such as real estate taxes,
hazard insurance, and in some cases, flood insurance. The lending policy of
the Bank restricts mortgage loan amounts to 80% of the lesser of the appraised
value or purchase price of the real estate to be mortgaged to the Bank. The
Bank makes mortgage loans in amounts up to 95% of the lesser of the appraised
value or purchase price, subject to the availability of private mortgage
insurance insuring the amount in excess of 80% of the appraised value or
purchase price. One exception to this policy is for ARM loans in which case
the Bank loans up to 90% of the appraised value or purchase price with the
appropriate private mortgage insurance. The Bank's underwriting department
reviews all the pertinent information and makes a credit decision for approval
or denial within established Bank policy guidelines. Utilizing the Bank's
current underwriting guidelines, a majority of one-to-four family loans were
outsourced to a contract underwriter, then reviewed by the Bank's internal
underwriter during fiscal 1997. The increase in outsourcing of one-to-four
family loans to a contract underwriter is consistent with the strategy to
contain the Bank's variable per loan origination costs. Recommendations to
deny applications based on underwriting considerations are reviewed by the
Bank's senior underwriter prior to a final loan denial. Summaries of all
one-to-four family mortgage loan applications are reviewed on a monthly basis
by the Board of Directors and the
-8-
<PAGE> 11
Loan Committee. Mortgage loans held in the Bank's loan portfolio generally
include due-on-sale clauses, which provide the Bank with the contractual right
to deem the loan immediately due and payable in the event the borrower
transfers the ownership of the property without the Bank's prior consent. The
Bank enforces the due-on-sale clauses of its mortgage loans.
The Bank makes loans under various governmental programs including WHEDA
and "First Time Home Buyer" programs offered through the City of Milwaukee and
the City of West Allis. The WHEDA and "First Time Home Buyer" programs
generally have lower down payment and less restrictive qualification ratios.
The WHEDA loans are serviced through WHEDA and originated for them, and the
"First Time Home Buyer" type mortgages generally are held in portfolio.
One-year ARM loans currently adjust a maximum of 2 percentage points per
year with a lifetime interest rate cap of 12.9%. Monthly payments of principal
and interest are adjusted when the interest rate adjusts to maintain full
amortization of the mortgage loan within the remaining term. The Bank also
offers one- and three-year ARM loans, which adjust annually after the initial
one- and three-year terms, and provide for an option to convert the ARM loan to
a fixed-rate loan at certain intervals upon the payment of a fee. The initial
rates offered on ARM loans fluctuate with general interest rate changes and are
determined by competitive conditions and the Bank's yield requirements. The
Bank primarily uses the one-year Constant Maturity United States Treasury index
to determine the interest rate payable upon the adjustment date of outstanding
ARM loans. Substantially all of the ARM loans contain a fixed-rate conversion
feature permitting conversion to a fixed rate for up to five years after
origination. Conversion terms are established at origination to permit the
Bank to sell the ARM loan to secondary market investors immediately upon
conversion to a fixed rate. From time to time, the Bank offers initial
interest rates on the ARM loans it originates below the fully indexed rate
(i.e., "teasers"). To minimize the associated risk with ARM loans, borrowers
are qualified at the higher of the initial offering rate or the fully-indexed
rate or higher. ARM loans generally pose different risks than fixed-rate
loans. In a rising interest rate environment, the underlying ARM loan payment
rises, increasing the potential for default, and the marketability of the
underlying property may be adversely affected. In a decreasing interest rate
environment, mortgagors tend to refinance to fixed-rate loans. The Bank's
delinquency experience on its ARM loans has been minimal.
Prior to the mid-1980s, the Bank originated ARM loans which carried
interest rates that were subject to annual adjustment by the Bank on a
discretionary basis ("non-index ARMs"). At June 30, 1997, the Bank had $4.1
million of non-index ARMs outstanding.
The Bank offers one- to three-year balloon payment loan programs for land
loans. Under these programs, the interest rate and monthly payment are fixed
for the initial term and, thereafter, provided certain conditions are met at
maturity, the loan would be either paid off in full or renewed at the
then-current rate.
Historically, the Bank has focused on residential mortgage loan
origination. As a result of mortgage origination emphasis, $22.4 million in
one-to-four family mortgage loans were originated for the fiscal year ended
June 30, 1995. For the fiscal year ended June 30, 1996, such loan originations
totaled $29.5 million, and $27.8 million for the fiscal year ended June 30,
1997. The Bank experienced an increase in residential loan origination during
fiscal 1996, compared to fiscal 1995, due to a greater level of refinanced
loans as a result of the lower interest rate environment. A decline in
originations was experienced in fiscal 1997 as interest rates increased during
the first half of the year, and as the Company shifted its focus to asset
diversification. Due to the Company's strategy to diversify its assets base
into higher-yielding loans in fiscal 1998, the origination and purchase of
one-to-four family mortgage loans is expected to continue at a decreased
level.*
HOME EQUITY LENDING
The Bank originates closed- and open-ended home equity loans, also
referred to as flexLOANS, secured by one-to-four family residences within its
market area. The closed-end home equity loans have fixed rates for periods of
up to fifteen years. Open-ended home equity loans are granted for up to a
ten-year term, renewable at the sole discretion of the Bank for up to
additional ten-year periods. The minimum periodic payment on open-ended home
equity loans is based on 1.5% for loans with combined loan-to-value ratios up
to 100% and interest-only on loans up to 80% combined loan-to-value ratios.
After an initial introductory interest rate which is set below the
fully-indexed
-9-
<PAGE> 12
rate, open-ended loans have an adjustable interest rate, currently set at the
prime rate plus 2%-3% for loans with combined loan-to-value ratios above 80%
and prime plus 1% for loans with combined loan-to-value ratios up to 80%.
Origination fees are charged on closed- and open-ended home equity loans. The
Bank reviews completed loan applications, receives a credit report, verifies
income and other financial data, and either uses the tax assessment of the
property as assessed by the local municipality or obtains a separate appraisal
of the property to determine the maximum amount it will loan on such property.
The Bank's delinquency experience on home equity loans has been minimal. At
June 30, 1995 and June 30, 1996, the Bank held $11.9 million and $19.3 million,
respectively, in outstanding home equity loans which represented 7.8% of total
loans at the end of each period. At June 30, 1997, home equity loans were
$25.3 million, or 8.8% of gross loans. The Bank intends to continue its effort
to increase flexLOAN portfolio totals in fiscal 1998 as part of its strategy to
diversify the loan portfolio into higher-yielding loans.
RESIDENTIAL CONSTRUCTION LENDING
The Bank became active in single-family owner-occupied construction loans
in the mid-1980s. Construction loans are made to individuals who have signed
construction contracts with a home builder and to a lesser extent, directly to
a home builder. Loan proceeds are disbursed through an insured title company
as residential construction progresses. These loans have loan-to-value ratios
not exceeding 95%. When the loan-to-value ratio exceeds 80%, private mortgage
insurance is required which insures payment of a portion of the principal
balance, reducing the Bank's exposure to 75% loan-to-value or less.
Single-family residential loans are structured to allow the borrower to pay
interest-only on the funds advanced during the first nine months of the loan.
Thereafter, the borrower is required to commence principal and interest
payments based on an amortization schedule of 351-months or fewer. The Bank's
single-family residential construction loan programs are primarily one- or
three-year ARM loans and occasionally fixed-rate loans amortized over a
351-month period after a nine-month period during which only interest payments
are required. To increase the volume of residential construction loan
activity, the Bank offers permanent financing on residential construction loans
which enables borrowers to avoid duplicate closing costs normally associated
with temporary financing during construction periods and permanent financing
upon completion of construction.
For the fiscal years ended June 30, 1995 and 1996, the Bank originated and
purchased $18.1 million and $30.5 million in residential construction loans,
respectively. For the fiscal year ended June 30, 1997, residential
construction loan originations and purchases totaled $20.6 million, of which
$8.3 million or 40.5% were purchased loans. In fiscal 1997, all originated and
purchased one-to-four family construction loans were secured by properties
located within the Bank's primary lending area. In fiscal 1998, the Bank
intends to evaluate opportunities to purchase, and may in fact purchase,
residential construction loans or participation interests in such loans,
originated by other lenders and secured by properties located outside of the
Bank's primary lending area.* Because most residential construction loans are
ARM loans, residential construction loans afford the Bank the opportunity to
increase the repricing frequency of its loan portfolio. The Bank also receives
yields on fixed-rate residential construction loans that are higher than those
obtainable on fixed-rate loans secured by existing residential properties.
While higher risks generally are associated with residential construction
lending because of the uncertainties involved in the construction process, the
Bank has taken precautions to reduce such risks by requiring private mortgage
insurance if the loan-to-value ratio exceeds 80%. All construction loans
originated by the Bank are underwritten according to the Bank's underwriting
guidelines. The Bank originates and purchases construction loans whereby
substantially all are provided permanent financing as a part of the original
loan agreement. The Bank has had minimal delinquent residential construction
loans to date.
MULTI-FAMILY LENDING
The Bank originates multi-family loans which it retains in its portfolio.
In recent years, the Bank has offered both ARM and fixed-rate multi-family
loans with terms up to 30 years for ARM loans and 15 years for fixed-rate
loans. The rates charged on the Bank's multi-family fixed rate and ARM loans
typically are slightly higher than those charged on loans secured by
one-to-four family residential properties. Multi-family ARM loans typically
adjust in a manner similar to that of the Bank's other ARM loans, although
generally at a slightly higher margin. An origination fee equal to 0.5% to
2.0% of the principal amount is usually charged on such loans. In fiscal 1997,
the Bank evaluated opportunities to increase its multi-family loan portfolio by
originating multi-family loans within its primary lending area and by
purchasing multi-family loans or participation interests in such loans, secured
by properties located both within and outside of its primary lending area.
However, the Bank did not purchase any
-10-
<PAGE> 13
multi-family loans or participation interests in such loans which were secured
by properties located outside of the Bank's primary lending area. In fiscal
1998, the Bank intends to continue to evaluate opportunities to purchase, and
may in fact purchase, multi-family loans or participation interest in such
loans, originated by other lenders outside of the Company's primary lending
area.*
Multi-family loans generally are underwritten in amounts of up to 80% of
the lesser of the appraised value or purchase price of the underlying property.
Appraisals on properties which secure multi-family loans are performed by an
independent appraiser designated by the Bank at the time the application is
submitted. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history, an analysis of the borrower's
income, personal financial statements and banking relationships and a review of
the property, including cash flow projections and historical operating results.
The Bank evaluates all aspects of multi-family lending to mitigate risk to the
extent possible. The Bank seeks to ensure that the property securing the loans
will generate sufficient cash flow to adequately cover operating expenses and
debt service payments. Individual guarantees for all multi-family loans
originated or purchased is part of the overall credit analysis whereby the Bank
strives to obtain such guarantees when possible. The Bank applies underwriting
guidelines to purchased multi-family loans (both within and outside of the
market area) which are at least as strict to those existing for multi-family
loans originated in the Bank's primary lending area.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loans may be impaired. The risk may be
increased on loans secured by properties located outside of the Bank's primary
market due to the decreased ability to actively monitor such properties.
Despite the risks inherent in multi-family real estate lending, the Bank's
delinquent multi-family loans as a percentage of gross loans has been minimal.
To the extent multi-family loans are purchased outside of the Company's primary
lending area, management will utilize local servicing of the originating lender
to attempt to mitigate the risks associated with this type of lending activity.
The Bank originated $1.4 million, $10.5 million and $7.3 million in
multi-family loans in fiscal years 1995, 1996 and 1997, respectively. In
fiscal 1997, the Bank purchased $500,000 of loans secured by multi-family
properties, as compared to $4.5 million in fiscal 1996.
MULTI-FAMILY CONSTRUCTION LENDING
In fiscal 1997, the Bank decreased its multi-family residential
construction lending activities. The primary reason for the decrease in
multi-family construction lending was a general decline in market demand for
such loans. For the fiscal years ended June 30, 1995, 1996 and 1997, the Bank
originated and purchased $2.6 million, $8.4 million and $4.5 million in
multi-family residential construction loans, respectively. All multi-family
construction loans purchased in fiscal 1997 were secured by properties located
within the Bank's primary lending area. In fiscal 1998, the Bank intends to
evaluate opportunities to purchase, and may in fact purchase, multi-family
construction loans, or participation interests in such loans secured by
properties located outside of the Bank's primary lending area.*
Multi-family construction loans typically offered by the Bank are ARM
loans amortized over 348 months after allowing for interest only payments
during a twelve month construction period. Loan proceeds are disbursed in
increments through an insured title company as construction of the project
progresses. The rates charged on the Bank's multi-family construction ARM
loans are typically higher than those charged on loans secured by one-to-four
family residential properties. Multi-family ARM loans typically adjust in a
manner similar to that of the Bank's other ARM loans, although generally at a
slightly higher margin. An origination fee of 1% to 2% of the principal amount
is usually charged on such loans.
-11-
<PAGE> 14
The loan to value on multi-family construction loans does not exceed 80%
of the lessor of the appraised value or purchase price of the property.
Appraisals on properties which secure multi-family loans are performed by an
independent appraiser designated by the Bank at the time the application is
submitted. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history, an analysis of the borrower's
income, personal and business financial statements, banking relationships and a
review of the property, including cash flow projections and historical
operating results. The Bank evaluates all aspects of multi-family construction
lending to mitigate risk to the extent possible. The Bank seeks to ensure that
the property securing the loans will generate sufficient cash flow to
adequately cover operating expenses and debt service payments. Individual
guarantees for all multi-family loans originated or purchased is part of the
overall credit analysis whereby the Bank strives to obtain such guarantees when
possible. The Bank originates and purchases construction loans whereby
substantially all are provided permanent financing as a part of the original
loan agreement.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family loans and carry larger loan
balances. The increased credit risk is the result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of monitoring these types of loans.
The risk may be increased on loans secured by properties located outside of the
Bank's primary lending area due to the decreased ability to actively monitor
such properties. While higher risks generally are associated with construction
lending because of the uncertainties involved in the construction process, the
Bank has taken precautions to reduce such risks by requiring the loan-to-value
ratio to not exceed 80%. Despite the risks inherent in multi-family
construction real estate lending, the Bank's delinquent multi-family
construction loans as a percentage of gross loans has been minimal.
COMMERCIAL REAL ESTATE LENDING
Prior to fiscal 1996, the Bank had minimal originations of commercial real
estate loans (i.e., loans secured by non-residential property). At June 30,
1997, the Bank held $21.7 million of such loans in its portfolio or 7.6% of
gross loans compared to $5.5 million or 2.2% of gross loans at June 30, 1996.
In fiscal 1997, the Bank originated and purchased $8.1 million of commercial
real estate loans, of which $4.8 million or 59.8% were loans originated or
purchased and secured by properties within the Bank's primary lending area, and
$3.3 million were participation interests in loans secured by properties
located outside of the Bank's primary lending area. The $3.3 million of
participation interests purchased outside of the Bank's primary lending area,
consisted of eight separate transactions with the largest transaction
aggregating $500,000 and most of the properties securing the loan
participations are located in the southeastern area of Minneapolis/St. Paul,
Minnesota. In fiscal 1998, the Bank intends to continue to actively pursue
opportunities to originate commercial real estate loans secured by properties
within its primary lending area and to purchase commercial real estate loans or
participation interests in loans secured by properties located both within and
outside of its primary lending area.
Commercial loans generally will be underwritten in amounts of up to 80% of
the lessor of the appraised value or purchase price of the underlying property.
Appraisals on properties which secure commercial real estate will be performed
by an independent appraiser designated by the lender at the time the
application is submitted. In addition, the Bank's underwriting procedures
require verification of the borrowers' credit history, an analysis of the
borrower's income, credit history, personal financial statements and banking
relationships and a review of the property, including cash flow projections,
historical operating results, property management experience and environmental
concerns. The Bank evaluates all aspects of commercial real estate lending to
mitigate risk to the extent possible. The Bank seeks to ensure that the
property securing the loans will generate sufficient cash flow to adequately
cover operating expenses and debt service payments. The Bank uses underwriting
guidelines for loans purchased outside its primary lending area which are at
least as strict as those guidelines for loans originated within its primary
lending area.
Loans secured by commercial real estate generally involve a greater degree
of credit risk than one-to-four family mortgage loans and carry larger loan
balances. This increased credit risk is a result of several factors, including
the concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income-producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. Payments on loans secured by commercial real estate also are
-12-
<PAGE> 15
often susceptible to adverse conditions in the real estate market or the
economy. The risk may be increased on loans secured by properties located
outside of the Bank's primary lending area due to the decreased ability to
actively monitor such properties. To the extent commercial loans are purchased
outside of the Company's primary lending area, management will utilize local
servicing of the originating lender to attempt to mitigate the risks associated
with this type of lending activity. Despite the risks inherent in commercial
real estate lending, the Bank's delinquent commercial real estate loans as a
percentage of gross loans has been minimal.
CONSUMER LENDING
The Bank originates a variety of other consumer loans, generally
consisting of automobile, motorcycle, boat, mobile home and credit card. At
June 30, 1995 and June 30, 1996, these other types of loans totaled $9.8
million and $6.7 million, respectively, or 6.4% and 2.7%, respectively, of
gross loans at those dates. The total at June 30, 1997 was $5.9 million, which
represented 2.1% of gross loans. Consumer loans generally have shorter terms
and higher interest rates than mortgage loans but generally involve more risk
than mortgage loans because of the type and nature of the collateral and, in
certain cases, the absence of collateral. Consumer loans generally are
dependent on the borrower's continuing financial stability and thus are more
likely to be affected by adverse personal circumstances. Often the loans are
secured by rapidly depreciable personal property, such as automobiles. Despite
the risks inherent in consumer lending, the Bank's delinquent consumer loans as
a percentage of gross loans has been minimal.
During fiscal 1996, the Bank sold its student loan portfolio and currently
refers student loan applications to external lenders. Management of the Bank
concluded it could employ its capital in higher yielding assets than student
loans.
OTHER CONSTRUCTION/LAND LENDING
In fiscal 1995, 1996 and 1997, respectively, the Bank originated or
purchased $3.9 million, $6.4 million and $12.6 million of commercial real
estate construction loans for commercial properties and residential real estate
land loans. These loans consist of adjustable rate mortgage loans originated
at prevailing market rates and participation interests in commercial real
estate construction loans originated by other lenders. Of the $12.6 million
originated or purchased in fiscal 1997, $10.6 million were originated
internally and, $9.7 million of the $10.6 million originated by the Bank
consisted of commercial real estate construction loans and $900,000 consisted
of residential land loans. Of the $2.0 million of loans purchased, $1.7
million were participation interests in commercial real estate construction
loans originated by other lenders and $300,000 consisted of residential land
loans. The $1.7 million of participation interests in commercial real estate
construction loans were secured by properties located outside the Bank's
primary lending area, primarily located in the southeastern area of
Minneapolis/St. Paul, Minnesota. In fiscal 1998, the Bank intends to continue
to pursue opportunities to originate commercial real estate construction loans
secured by properties within its primary lending area and to purchase such
loans secured by properties located both within and outside of its primary
lending area.*
While higher risks generally are associated with commercial real estate
construction lending because of the uncertainties involved in the construction
process and the impact of adverse conditions in the real estate market or the
economy, the Bank has taken precautions to reduce such risks by requiring the
loan-to-value ratio to not exceed 80% of the lesser of the appraised value or
purchase price of the underlying property. The risk may be increased on loans
secured by properties located outside of the Bank's primary market due to the
decreased ability to actively monitor such properties. The Bank evaluates all
aspects of commercial real estate construction lending. Appraisals on
properties which secure commercial loans are performed by an independent
appraiser. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history, an analysis of the borrower's
income, personal and business financial statements and banking relationships,
and a review of the property, including cash flow projections and historical
operating results. The Bank seeks to ensure that the property securing the
loans will generate sufficient cash flow to adequately cover operating expenses
and debt service payments. Individual guarantees for all commercial real
estate construction loans originated or purchased is part of the overall credit
analysis whereby the Bank attempts to obtain such guarantees when possible.
The Bank originates and purchases construction loans whereby substantially all
are provided permanent financing as a part of the original loan
-13-
<PAGE> 16
agreement. Despite the risks inherent in commercial real estate construction
and land lending, the Bank's delinquencies have been minimal.
COMMERCIAL BUSINESS LENDING
During fiscal 1997, the Bank hired three experienced commercial lenders to
staff the Bank's new commercial lending division which began operations during
the second half of fiscal 1997. Management believes the operation of the
commercial lending division is an effective way to implement the strategy of
asset portfolio diversification resulting in higher-yielding assets and a
higher level of net income. The commercial lending division originated $6.3
million in commercial business loans during fiscal 1997 and had outstanding
loans of $3.5 million at June 30, 1997. The commercial lending division will
originate loans collateralized by business equipment, inventory and trade
receivables. The transactions generally will be in the form of loans, leases,
lines of credit and letters of credit. Such transactions typically will be
structured as short-term with three-to-five year maturities and will be fixed
or adjustable rate. The Bank has not, does not intend to, originate or
purchase commercial business loans out of its primary lending area or purchase
such loans within its primary lending area.
Loans secured by commercial business assets generally involve a greater
degree of credit risk than one-to-four family mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of the general economic conditions on income producing
business assets and the increased difficulty of evaluating and monitoring these
types of loans. Also, the repayment of loans secured by commercial business
assets is typically dependent upon the successful operation of the business for
which the loan was made. The Bank and Board of Directors has taken precaution
to reduce such risk by establishing prudent loan underwriting guidelines and
loan-to-value ratios. Cash flows, both historical and future projections, of
the business and the value of the collateral are analyzed to give the Bank
assurance that the business will generate a sufficient level of cash flow to
cover ongoing business expenses and debt service. The loan-to-value ratios
vary depending on the type and liquidity of the collateral; and internal
controls and systems have been put in place to monitor collateral and other
financial aspects of these loans. A policy approved by the Board of Directors
has established three levels of underwriting approval with individual loan
officer authority up to $250,000, Senior Loan Committee up to $1.0 million, and
loans in excess of $1.0 million will require the approval of the Board of
Directors.
LOAN APPROVAL
The Bank's underwriters are authorized by the Board of Directors to
approve one-to-four residential real estate secured loans up to the maximum
loan amount of $400,000. Bank underwriters have the authority to approve +5
units multi-family loans to $400,000, home equity loans up to $75,000 and
consumer loans up to $30,000. Authority exceeding the aforementioned limits
are referred to the Senior Loan Committee and its limits are $100,000 for
consumer loans, $750,000 for one-to-four family, and $1.0 million for all
multi-family loans. A policy approved by the Board of Directors has established
three levels of underwriting approval with individual loan officer authority up
to $250,000, Senior Loan Committee up to $1.0 million, and loans in excess of
$1.0 million will require the approval of the Board of Directors. Loans
exceeding the authority limits of the Senior Loan Committee and all commercial
real estate loans must be approved by the full Board of Directors. All loans
approved pursuant to designated authority are confirmed monthly by the Loan
Committee. One-to-four family, multi-family and commercial real estate loans
purchased or participation interests in such loans purchased which are secured
by properties located outside of the Bank's primary lending area will be
underwritten pursuant to guidelines at least as strict as those guidelines
applicable to internal Bank loan originations.
ORIGINATIONS, PURCHASES AND SALES OF LOANS
Mortgage loans are originated from real estate brokers, builders,
developers, existing or past customers, residents of the local communities
located in the Bank's primary lending areas, and purchased from other lenders
from within and outside of the Bank's primary lending area. The Bank
advertises its mortgage products in newspapers, through direct mail and other
media in addition to using its loan officers to directly solicit potential
borrowers. The following table sets forth the Bank's loan originations and
loan purchases, sales and principal
-14-
<PAGE> 17
repayments for the periods indicated. Mortgage loans and mortgage-backed and
related securities held for sale are included in the totals.
In addition, in fiscal 1998, the Company intends to continue to evaluate
opportunities to purchase, and may in fact purchase, one-to-four family,
multi-family and commercial real estate loans, or participation interests in
such loans, originated by lenders and secured by properties located both within
and outside of the Company's primary lending area, due to the higher yields
associated with such lending activities. The Company also intends to sell a
larger percentage of one-to-four family mortgage loans which may be seasoned or
recently originated in the secondary market in fiscal 1998 to provide liquidity
for the funding of higher-yielding multi-family, commercial real estate and
commercial business loans.* The Company anticipates that increased sales of
one-to-four family loans will decrease the proportion of the gross loan
portfolio represented by such loans, will increase non-interest income as a
result of increased gains on the sales of such loans, and will further lessen
the Company's negative gap position as such loans are replaced by
higher-yielding, adjustable rate assets, including multi-family, commercial
real estate and commercial loans.*
-15-
<PAGE> 18
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
MORTGAGE LOANS (GROSS):
At beginning of period ................................................ $241,821 $142,791 $100,358
Mortgage loans originated:
One-to-four family ................................................. 27,781 29,476 22,441
One-to-four family construction .................................... 12,241 14,883 11,260
Home equity...................................................... .. 18,950 16,658 7,088
Multi-family ....................................................... 7,287 10,488 1,370
Multi-family construction .......................................... 1,810 7,359 2,556
Commercial/non-residential ......................................... 4,826 625 --
Other construction/land ............................................ 10,563 2,039 3,741
-------- -------- --------
Total mortgage loans originated .................................. 83,458 81,528 48,456
Mortgage loans purchased:
One-to-four family ................................................. 6,368 24,120 12,895
One-to-four family construction .................................... 8,345 15,625 6,823
Multi-family ....................................................... 500 4,476 --
Multi-family construction .......................................... -- 1,000 --
Commercial/non-residential ......................................... 3,250 2,000 --
Other construction/land ............................................ 2,029 4,374 176
-------- -------- --------
Total mortgage loans purchased ................................... 20,492 51,595 19,894
-------- -------- --------
Total mortgage loans originated and purchased ...................... 103,950 133,123 68,350
-------- -------- --------
Transfer of mortgage loans to foreclosed
real estate ...................................................... (54) (126) (24)
Principal repayments ............................................... (58,594) (30,452) (14,143)
Securitization of fixed-rate loans ................................. -- (2,512) (3,416)
Sales of fixed-rate loans .......................................... (10,618) (1,003) (8,334)
-------- -------- --------
At end of period ..................................................... $276,505 $241,821 $142,791
======== ======== ========
CONSUMER LOANS:
At beginning of period ................................................ $ 6,731 $ 9,781 $ 9,651
Consumer loans originated .......................................... 7,896 7,190 3,295
Principal repayments .................................................. (8,752) (8,225) (3,165)
Sale of student loans ................................................. -- (2,015) --
-------- -------- --------
At end of period ...................................................... $ 5,875 $ 6,731 $ 9,781
======== ======== ========
COMMERCIAL LOANS:
At beginning of period ................................................ $ -- $ -- $ --
Commercial loans originated ........................................ 6,262 -- --
Principal repayments ............................................... (2,791) -- --
-------- -------- --------
At end of period ...................................................... $ 3,471 $ -- $ --
======== ======== ========
MORTGAGE-BACKED AND RELATED SECURITIES:
At beginning of period ................................................ $115,258 $ 82,447 $ 45,540
Mortgage-backed and related
securities purchased ................................................ 731 69,483 46,105
Sales of mortgage-backed and related
securities .......................................................... (421) (14,083) (2,731)
Amortization and repayments ........................................... (19,041) (22,120) (6,685)
Market valuation allowance on available-for-sale
mortgage-backed securities ........................................... 284 (469) 218
-------- -------- --------
At end of period ...................................................... $ 96,811 $115,258 $ 82,447
======== ======== ========
</TABLE>
-16-
<PAGE> 19
SALE OF MORTGAGE LOANS
The Bank sells one-to-four family mortgage loans, on a non-recourse basis,
into the secondary market to the Federal Home Loan Mortgage Corporation
("FHLMC"), WHEDA and other private secondary market purchasers. The amount of
loans sold by the Bank is based upon market conditions and the Bank's
asset/liability strategy. The Bank sold $10.6 million in fixed-rate
one-to-four family mortgage loans in fiscal 1997. Of the $10.6 million, $6.7
million were seasoned 15-year fixed-rate loans from the Bank's portfolio and
$3.9 million were 30-year fixed-rate mortgage loans of which $1.2 million were
newly-originated WHEDA loans. The Bank had sold primarily all of its 30-year
fixed loans in prior years. During fiscal 1997, management decided it would
sell a portion of the fixed-rate loans originated and purchased to provide
funds for adding higher yielding loans to the portfolio. Certain fixed-rate
loans made under special loan terms or programs, principally originated for
purposes of compliance with the Community Reinvestment Act are retained in the
Bank's portfolio. The Bank follows Federal Home Loan Mortgage Corporation
("FHLMC") underwriting guidelines for its one-to-four family mortgage loans.
In fiscal 1998, management intends to sell a larger percentage of 30-year and
15-year fixed-rate mortgage loans to either FHLMC or private secondary market
purchasers as part of its strategy of portfolio diversification and in order to
continue to manage interest rate risk, control asset growth and provide
liquidity for the funding of higher-yielding multi-family, commercial real
estate and commercial business loans.
For the fiscal years ended June 30, 1997, 1996 and 1995, the Bank's
fixed-rate loan sales to private and governmental investors totaled $10.6
million, $1.0 million and $8.3 million, with associated gains of $95,000,
$18,000 and $23,000, respectively.
All mortgage loans are made and underwritten pursuant to the requirements
of and with commitments from secondary market investors. The Bank retains
servicing on loans sold to FHLMC, receiving a servicing fee, which represents
the difference between the contract rate on the loans sold and the yield at
which such loans are sold. The servicing spread earned by the Bank is
typically .25%. The Bank releases servicing on loans sold to private secondary
market purchasers. For the fiscal years ended June 30, 1997, 1996 and 1995,
the Bank's net service fees on loans sold into the secondary market totaled
$86,000, $103,000 and $94,000, respectively.
The Bank also acts as a conduit for loans sold to WHEDA. For those
borrowers who qualify under WHEDA guidelines, the Bank originates the loan for
a fee equal to 1% of the underlying loan amount and sells the loan to WHEDA, on
a non-recourse basis, servicing released.
PURCHASED LOANS
During the fiscal year ended June 30, 1997, the Bank purchased $20.5
million of mortgage loans compared to $51.6 million in fiscal 1996 and $19.9
million in fiscal 1995. Of the $20.5 million of mortgage loans purchased
during fiscal 1997, $4.9 million or 24.0% consisted of participation interests,
primarily in commercial construction, commercial real estate and multi-family
loans, and $15.6 million or 76.0% consisted of whole loans, primarily in
one-to-four family and one-to-four family construction mortgage loans, which
were serviced either by the Bank or others; furthermore, $5.3 million or 25.9%
of the mortgage loans purchased during fiscal 1997 were secured by properties
located outside of the Bank's primary lending area.
The purchase of mortgage loans decreased significantly during fiscal 1997,
primarily in the one-to-four family purchase and construction loan categories.
This decrease is due to the Company's strategy of slower asset growth, capital
and liquidity management, and asset portfolio diversification which shifts the
emphasis from the origination and purchase of lower-yielding one-to-four family
mortgage loans to multi-family, commercial real estate and business loans. In
fiscal 1998, the Bank intends to continue to purchase mortgage loans or
participation interests in loans originated by other lenders and secured by
properties located within and outside its primary lending area at levels
consistent with its strategy of asset portfolio diversification and capital
management.* In deciding whether or not to purchase a loan or participation
interest in a loan originated outside of the Company's primary lending area,
management has applied, and continues to apply, underwriting guidelines which
are at least as strict as those applicable to the origination of similar loans
within its primary lending area.
-17-
<PAGE> 20
LOAN ORIGINATION, SERVICING AND OTHER FEES
In addition to interest earned on loans, the Bank receives income through
fees in connection with loan originations, loan sales, loan modifications, late
payments and for miscellaneous services related to its loans, including loan
servicing. Income from these activities varies from period to period with the
volume and type of loans originated.
In connection with the origination of mortgage loans, the Bank charges
points for origination, commitment and discounts, and fees for processing and
closing in addition to requiring borrower reimbursement for out-of-pocket fees
for costs associated with obtaining independent appraisals, credit reports,
title insurance, private mortgage insurance and other items. Because of the
highly competitive mortgage market in which the Bank originates loans, the
point structure varies considerably, depending upon the type of mortgage loan
being made, its interest rate and other competitive factors. While origination
fees ranging from zero to two points generally have been quoted on mortgage
loans in recent years, most of the Bank's borrowers typically accept a slightly
higher interest rate and pay zero points. Commitment fees are paid by the
applicant at time of loan commitment, whereas the origination and discount fees
are paid at time of closing. Loan origination and commitment fees and certain
direct loan origination costs are deferred and the net amounts amortized as an
adjustment of the related loan's yield in accordance with Statement of
Financial Accounting Standard No. 91. These amounts are amortized to interest
income using the level yield method over the contractual life of the related
loans. Unamortized deferred net loan fees and (costs) totaled $196,000,
($19,000) and ($38,000) at June 30, 1997, 1996, and 1995, respectively. The
increase in unamortized deferred loan fees at June 30, 1997, primarily resulted
from the originations of loans with higher fees.
For loans sold to FHLMC, the Bank virtually always retains the
responsibility for servicing such loans. At June 30, 1997, the Bank serviced
$30.0 million of loans for others and received fee income of $86,000 for the
fiscal year ended June 30, 1997 in connection with loans serviced for others.
The contractual right to service mortgage loans that have been sold has an
economic value that, in accordance with GAAP, was generally not recognized as
an asset on the Bank's balance sheet. Beginning in fiscal 1997, mortgage
servicing rights on loans sold, where the servicing was retained by the Bank,
to secondary market investors totaled $74,000 and is included in gains on the
sale of loans. The mortgage servicing asset created will be amortized against
the servicing fee income stream in accordance with Financial Accounting
Standards No. 125. The value results from the future income stream of the
servicing fees, the availability of the cash balances associated with escrow
funds collected monthly for real estate taxes and insurance, the availability
of the cash from monthly principal and interest payments from the collection
date to the remittance date, and the ability of the servicer to cross-sell
other products and services. The actual value of a servicing portfolio is
dependent upon such factors as the age, maturity and prepayment rate of the
loans in the portfolio, the average dollar balance of the loans, the location
of the collateral property, the average amount of escrow funds held, the
interest rates and delinquency experience of the loans, the types of loans and
other factors.
DELINQUENCIES, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
DELINQUENT LOANS - RESIDENTIAL/CONSUMER LOANS
When a borrower fails to make a required payment by the end of the month
in which the payment is due, the Bank generally initiates collection
procedures. The Bank will send a late notice, and in most cases, delinquencies
are cured promptly; however, if a loan becomes delinquent for more than 60
days, the Bank contacts the borrower directly, to determine the reason for the
delinquency and to effect a cure, and where it believes appropriate, reviews
the condition of the property and the financial position of the borrower. At
that time, the Bank may: (i) accept a repayment program for the arrearage;
(ii) seek evidence of efforts by the borrower to sell the property; (iii)
request a deed in lieu of foreclosure; or (iv) initiate foreclosure
proceedings. When a loan secured by a mortgage is delinquent for three or more
monthly installments, the Bank generally will initiate foreclosure proceedings.
With respect to delinquencies on FHA, VA or other governmental loan program
mortgages, the Bank follows the appropriate notification and foreclosure
procedures prescribed by the respective agencies.
-18-
<PAGE> 21
On mortgage loans or loan participations purchased by the Bank, the Bank
receives monthly reports from its loan servicers with which it monitors the
loan portfolio. Based upon servicing agreements with the servicers of the
loan, the Bank relies upon the servicer to contact delinquent borrowers,
collect delinquent amounts and to initiate foreclosure proceedings, when
necessary, all in accordance with applicable laws, regulations and the terms of
the servicing agreements between the Bank and its servicing agents.
DELINQUENT LOANS - COMMERCIAL BUSINESS AND COMMERCIAL REAL ESTATE LOANS
When a borrower fails to make a required payment, the borrower is
typically contacted if the payment is not received within 10 business days of
the due date to collect the payment or determine the reason for the
delinquency. Unless previous arrangements have been made, the Bank will review
all necessary steps or actions to protect its lien or collateral position if
two payments are due and owing. The steps may include, but not be limited to,
loan forbearance, assignment of any rents, enforcement of any loan guarantees,
liquidation of any business collateral, and/or foreclosure of any real estate
collateral.
NON-PERFORMING ASSETS
Loans are placed on non-accrual status when, in the judgment of Bank
management, the probability of collection of principal or interest is deemed
insufficient to warrant further accrual of interest. The Bank discontinues the
accrual of interest on loans when the borrower is delinquent as to a
contractually due principal or interest payment by 90 days or more. When a
loan is placed on non-accrual status, all of the accrued interest on that loan
is reversed by way of a charge to interest income. Accrual of interest on a
non-accrual loan is resumed when all contractually past due payments are
current and when management believes the outstanding loan principal and
contractually due interest is no longer doubtful of collection. The Bank
discontinues the accrual of interest on loans more than 90 days past due, at
which time all accrued but uncollected interest is reversed by way of a charge
to interest income. Uncollected interest on credit card loans, however,
continues to accrue after 90 days of delinquency but is capitalized to the loan
balance monthly and reserved for in the Bank's allowance for loan losses.
Property acquired by the Bank as a result of a foreclosure is classified
as foreclosed properties. Foreclosed properties are recorded at the lower of
the unpaid principal balance of the related loan or fair value, less estimated
costs to sell. The amount by which the recorded loan balance exceeds the fair
value at the time a property is classified a foreclosed property is charged
against the allowance for loan losses. Any subsequent reduction in the fair
value of a foreclosed property, along with expenses incurred to maintain or
dispose of a foreclosed property, is charged against current earnings. At June
30, 1997, the Bank had one property in foreclosure.
Non-performing loans include loans placed on non-accrual status and
troubled debt restructurings. Non-performing assets include non-performing
loans and foreclosed properties. The following table sets forth non-performing
loans and assets:
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------
1997 1996 1995 1994 1993
----- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans 90 days or more past due ... $572 $64 $117 $-- $143
Non-accrual consumer loans 90 days or more past due ... 20 21 -- -- 13
Loans 90 days or more past due and still accruing(1) .. 31 22 26 217 55
Troubled debt restructuring ........................... -- -- -- -- --
----- -------- -------- -------- -----
Total non-performing loans ........................... 623 107 143 217 211
----- -------- -------- -------- -----
Total real estate owned and in judgment, net of
related allowance for losses ........................ 20 -- 24 26 10
----- -------- -------- -------- -----
Total non-performing assets ........................... $643 $107 $167 $243 $221
===== ======== ======== ======== =====
Total non-performing loans to gross loans receivable .. 0.22% 0.04% 0.09% 0.20% 0.25%
===== ======== ======== ======== =====
Total non-performing assets to total assets ........... 0.16% 0.03% 0.06% 0.14% 0.14%
===== ======== ======== ======== =====
</TABLE>
- ----------------------------
(1) The Bank discontinues the accrual of interest on loans more than 90 days
past due, at which time all accrued but uncollected interest is reversed
by way of a charge to interest income. Uncollected interest on credit
card loans, however, continues to accrue after 90 days of delinquency but
is capitalized to the loan balance monthly, and reserved for in the Bank's
allowance for loan losses. At June 30, 1997, total loans 90 days or more
past due and still accruing consisted of credit card loans in the amount
of $31,000.
-19-
<PAGE> 22
CLASSIFICATION OF ASSETS
The FDIC requires each federally insured bank to classify its assets on a
regular basis in accordance with the guidelines set forth in the FDIC Manual of
Examination Policies. In addition, in connection with examinations of insured
banks by the FDIC, FDIC examiners have authority to identify problem assets as
Substandard, Doubtful or Loss. Substandard assets have one or more
well-defined weaknesses that jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the bank will sustain some loss
if the deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, highly questionable and improbable. An asset
classified as Loss is considered uncollectible and of such little value that
continuance as an asset of the bank is not warranted. At June 30, 1997, the
Bank had assets classified as Substandard of $385,000, $35,000 as Doubtful, and
none as Loss. Assets which are classified as Loss are charged off. The FDIC
examination policies include a Special Mention category, consisting of assets
which currently do not expose the Bank to a sufficient degree of risk to
warrant adverse classification, but do possess credit deficiencies deserving
management's close attention. At June 30, 1997, none of the Bank's assets were
classified as Special Mention.
ALLOWANCE FOR LOAN LOSSES
Under federal regulations, when an insured institution classifies problem
assets as either Substandard or Doubtful, it is required to establish a general
allowance for loan losses in an amount deemed prudent by management. In
addition to general valuation allowances, the Bank may establish specific loss
allowances against specific assets in which a loss may be realized. General
allowances represent loss allowances which have been established to recognize
the inherent risks associated with lending activities, but which, unlike
specific allowances, have not been allocated to recognize probable losses on
particular problem assets. The Bank's determination as to its classification
of assets and the amount of its specific and general valuation allowances are
subject to review by the Commissioner and the FDIC, either one of which can
order the establishment of additional general or specific loss allowances.
The allowance for loan losses is established through a provision for loan
losses, which reduces net interest income, based on management's evaluation of
the risk inherent in its loan portfolio and the general economy. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers, among other matters, the estimated
net realizable value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Also, management continues to
evaluate the allowance for losses on loans as established by industry peers.
During fiscal 1997, the increase in the level of allowance for losses on loans
was primarily the result of the increase in multi-family, multi-family
construction, home equity, commercial real estate and commercial business loan
portfolios which carry a greater degree of credit risk as compared to
one-to-four family lending. It is anticipated that in fiscal 1998, additions
charged to operations will increase due to increased emphasis on, and increased
risks associated with, multi-family, commercial real estate lending and
commercial business lending and overall loan portfolio growth.
-20-
<PAGE> 23
The following table sets forth activity in the Bank's allowance for loan
losses during the fiscal years indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period .................. $1,234 $953 $769 $652 $320
Additions charged to operations:
One-to-four family .......................... 295 172 114 129 204
Multi-family and commercial real estate ..... 181 80 57 -- 21
Consumer .................................... 114 115 77 100 188
Commercial .................................. 60 -- -- -- --
-------- -------- -------- -------- -------
650 367 248 229 413
-------- -------- -------- -------- -------
Recoveries:
One-to-four family .......................... 1 8 -- -- --
Consumer .................................... 5 9 7 15 11
-------- -------- -------- -------- -------
6 17 7 15 11
-------- -------- -------- -------- -------
Charge-Offs:
One-to-four family .......................... (11) (15) (13) (47) --
Consumer .................................... (117) (88) (58) (80) (92)
-------- -------- -------- -------- -------
(128) (103) (71) (127) (92)
-------- -------- -------- -------- -------
Net charge-offs ................................. (122) (86) (64) (112) (81)
-------- -------- -------- -------- -------
Balance at end of period ........................ $ 1,762 $ 1,234 $953 $769 $652
======== ======== ======== ======== =======
Percentage of loans to gross loans receivable:
Mortgage loans .............................. 96.73% 97.29% 93.59% 91.23% 88.91%
Consumer loans .............................. 2.06 2.71 6.41 8.77 11.09
Commercial loans ............................ 1.21 -- -- -- --
Ratio of allowance for loan losses to gross loans
receivable at the end of period ............. 0.62 0.50 0.62 0.70 0.78
Ratio of allowance for losses on loans to non-
performing loans at the end of period ....... 282.37 1,153.27 666.43 354.38 309.00
Ratio of allowance for losses on loans to non-
performing assets at the end of period ...... 273.60 1,153.27 570.66 316.47 295.02
Ratio of net charge-offs to average gross loans
during period ............................... 0.04 0.05 0.05 0.12 0.10
Average gross loans outstanding ................. $274,056 $187,969 $134,152 $ 94,428 $79,287
Gross loans receivable at end of period ......... $285,851 $248,552 $152,572 $110,009 $83,175
</TABLE>
-21-
<PAGE> 24
At June 30, 1997, 1996, and 1995, delinquencies in the Bank's loan
portfolio were as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT JUNE 30, 1996
------------------------------------ -------------------------------------------
60-89 90 DAYS 60-89 90 DAYS
DAYS OR MORE(1) DAYS OR MORE(1)
----------------- ----------------- ------------------- ----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One-to-four family ........ -- $-- 8 $573 1 $10 4 $64
Residential construction .. 1 12 -- -- -- -- -- --
Home equity ............... -- -- -- -- -- -- -- --
Multi-family .............. -- -- -- -- -- -- -- --
Commercial ................ -- -- -- -- -- -- -- --
------ --------- ------ --------- ------ ----------- ----------- ---------
Total mortgage loans .. 1 12 8 573 1 10 4 64
CONSUMER LOANS ............... 2 5 18 51 19 48 13 43
------ --------- ------ --------- ------ ----------- ----------- ---------
TOTAL ..................... 2 5 26 624 20 $58 17 $107
====== ========= ====== ========= ====== =========== =========== =========
DELINQUENT LOANS TO GROSS
LOANS(2)..................... 0.01% 0.22% 0.02% 0.04%
===== ===== ===== =====
<CAPTION>
AT JUNE 30, 1995
------------------------------------
60-89 90 DAYS
DAYS OR MORE(1)
----------------- -----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One-to-four family ........ -- $-- 3 $117
Residential construction .. -- -- -- --
Home equity ............... -- -- -- --
Multi-family .............. -- -- -- --
Commercial ................ -- -- -- --
------ --------- ------ ---------
Total mortgage loans .. 0 0 3 117
CONSUMER LOANS ............... 5 9 13 26
------ --------- ------ ---------
TOTAL ..................... 5 $9 16 $143
====== ========= ====== =========
DELINQUENT LOANS TO GROSS
LOANS(2)..................... 0.01% 0.09%
===== =====
- ------------------------------
</TABLE>
(1) The Bank discontinues the accrual of interest on loans when the borrower
is delinquent as to a contractually due principal or interest payment by more
than 90 days.
(2) Excluding mortgage-backed and related securities.
-22-
<PAGE> 25
The following table shows the Bank's allowance for loan losses and the
allocation to the various categories of loans held for investment at the dates
indicated. Allocations to a particular category do not restrict the Bank's
ability to use such allowance in any other category.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------------ ---------------------------
% OF % OF % OF
% OF LOANS IN % OF LOANS IN % OF LOANS IN
TOTAL CATEGORY TOTAL CATEGORY TOTAL CATEGORY
LOANS TO TOTAL LOANS TO TOTAL LOANS TO TOTAL
BY OUTSTANDING BY OUTSTANDING BY OUTSTANDING
AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS
------ -------- ------ ------- -------- ----- ------ -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of Allowance:
Mortgage loans:
One-to-four family ........... $685 0.41% 58.60% $488 0.32% 61.82% $471 0.44% 69.90%
Home equity .................. 253 1.00 8.85 194 1.00 7.78 119 1.00 7.23
Multi-family ................. 190 0.69 9.66 198 1.00 7.96 37 0.98 2.46
Commercial/nonresidential .... 198 0.91 7.59 44 0.80 2.21 13 1.00 0.85
One-to-four family
construction ................ 69 0.40 6.08 40 0.17 9.61 51 0.40 8.39
Multi-family construction .... 72 0.75 3.37 46 0.35 5.28 0 0.00 0.00
Other construction and land .. 74 1.00 2.58 65 1.00 2.60 64 1.01 4.20
------ -------- -------- -------- ------ --------
Total mortgage loans ........ 1,541 96.73 1,075 97.26 755 93.03
------ -------- -------- -------- ------ --------
Consumer loans ................ 161 2.74 2.06 159 2.34 2.74 198 2.02 6.97
------ -------- -------- -------- ------ --------
Commercial loans .............. 60 1.73 1.21 -- --
------ -------- -------- ------
Total allowance for loan
losses ..................... $1,762 100.00% $1,234 100.00% $953 100.00%
====== ======== ======== ======== ====== ========
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------
1994 1993
--------------------------------- ---------------------------------
% OF % OF
% OF LOANS IN % OF LOANS IN
TOTAL CATEGORY TOTAL CATEGORY
LOANS TO TOTAL LOANS TO TOTAL
BY OUTSTANDING BY OUTSTANDING
AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS
------ -------- ----------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Breakdown of Allowance:
Mortgage loans:
One-to-four family ................ $386 0.50% 70.76% $335 0.64% 68.72%
Multi-family ...................... 25 0.99 2.31 9 0.49 2.20
Home equity ....................... 99 1.01 8.92 71 1.01 8.46
Commercial/nonresidential ......... 17 1.01 1.52 17 0.97 2.10
One-to-four-family construction ... 35 0.50 6.38 28 0.51 6.61
Other construction and land ....... 15 1.01 1.34 7 1.03 0.82
----- ------ ----- ------
Total mortgage loans ............. 577 91.23 467 88.91
----- ------ ----- ------
Consumer loans ..................... 192 1.99 8.77 185 2.01 11.09
----- ------ ----- ------
Total allowance for loan losses .. $769 100.00% $652 100.00%
===== ====== ===== ======
</TABLE>
-23-
<PAGE> 26
INVESTMENT ACTIVITIES
GENERAL
The investment policy of the Bank, which is established by the Board of
Directors and implemented by the Bank's President/Chief Executive Officer,
Executive Vice President and Senior Vice President-Finance, is designed to
provide a required level of liquidity and minimize potential losses due to
interest rate fluctuations without incurring undue credit risk. The Bank is
authorized by regulation to invest in various types of liquid assets, including
United States Treasury obligations, securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB-Chicago,
certain certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. The Bank also invests in
mortgage-backed and related securities, securities that are either of
investment grade or issued or guaranteed by FHLMC, the Federal National
Mortgage Association ("FNMA") or the Government National Mortgage Association
("GNMA"), investment grade corporate debt and mortgage mutual funds.
The Bank categorizes the securities it purchases into a
"Held-To-Maturity," "Trading Account" or "Available-For-Sale" portfolio as
follows:
1. Securities Held-to-Maturity. The Company has the positive
ability and intent to hold these assets to maturity. Upon
acquisition, securities are classified as to the Bank's intent and
only under remote situations could a sale from this portfolio be
effected. The held-to-maturity portfolio is not used for
speculative purposes and is carried at amortized cost. Should the
intent change these assets would be classified as
available-for-sale.
2. Trading Securities. This portfolio includes securities
acquired to make a profit from short-term movements in market
prices. Securities purchased for trading purposes are carried at
fair value, with unrelated holding gains and losses included in
earnings.
3. Securities Available-for-Sale. This is a portfolio for
securities not classified as either Held-to-Maturity or Trading.
This portion of the securities portfolio is designed to meet
anticipated loan demand and deposit runoff. Securities classified
as available-for-sale are carried at fair value, with unrealized
holding gains and losses reported as a separate component of
shareholders' equity and are not reported in earnings until a
decline in fair value below cost is deemed to be
other-than-temporary.
The investment activities of the Bank consist primarily of investments in
mortgage-backed and related securities and other investment securities,
consisting primarily of securities issued or guaranteed by the United States
Government or agencies thereof and corporate obligations. Typical investments
include federally sponsored agency mortgage pass-throughs, private issue and
senior-subordinated pass-throughs, and federally sponsored agency and
mortgage-related securities. Investment and aggregate investment limitations
and credit quality parameters of each class of investment are prescribed in the
Bank's investment policy. The Bank performs analyses on mortgage related
securities prior to purchase and on an ongoing basis to determine the impact on
earnings and market value under various interest rate and prepayment
conditions.
INVESTMENT SECURITIES
The Bank invests in various types of liquid assets that are permissible
investments for state chartered savings banks, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of federally insured banks and savings institutions and federal funds.
The Bank also invests its assets in commercial paper and mutual funds, the
assets of which conform to the investments that a Wisconsin-chartered savings
association is otherwise authorized to make directly. The Bank's current
investment policy permits purchases only of investments rated investment grade
by a nationally recognized rating agency and does not permit purchases of
securities of non-investment grade quality.
-24-
<PAGE> 27
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators through intermediaries
(federal-government sponsored enterprises or private entities) that pool and
repackage the participation interest in the form of securities to investors
such as the Bank. The underlying pool of mortgages can be composed of either
fixed-rate mortgages or ARM loans. Mortgage-backed securities commonly are
referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder.
When the intermediary is a quasi-governmental agency such as FHLMC, FNMA
and GNMA, timely payment of principal and interest is guaranteed to investors
by such agency and the loans that back such securities are conforming loans
(meaning they are underwritten to certain standards and are subject to certain
size limitations). When the intermediary is a private entity, neither the
principal nor the interest on such securities is guaranteed. In addition, the
loans that back private mortgage-backed securities generally are non-conforming
loans and consequently have a greater amount of credit risk. Mortgage-backed
securities issued by quasi-governmental agencies generally increase the quality
of the Bank's assets by virtue of the guarantees that back them. In addition,
mortgage-backed securities generally are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations of the
Bank.
The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. The actual maturity of a mortgage-backed security
varies, however, depending on when the mortgagors prepay or repay the
underlying mortgages. Prepayments of the underlying mortgages may shorten the
life of the investment, thereby adversely affecting its yield to maturity and
the related market value of the mortgage-backed security. The yield is based
upon the interest income and the amortization of the premium or accretion of
the discount related to the mortgage-backed security. Premiums and discounts
on mortgage-backed securities are amortized or accreted over the estimated term
of the securities using a level yield method. The prepayment assumptions used
to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security and these
assumptions are reviewed periodically to reflect the actual prepayment. The
actual prepayments of the underlying mortgages depend on many factors,
including type of mortgages, the coupon rate, the age of the mortgages, the
geographical location of the real estate collateralizing the mortgages and
general levels of market interest rates. The difference between the interest
rates on the underlying mortgages and the prevailing mortgage interest rates is
an important determinant in the rate of prepayments. During periods of falling
mortgage interest rates, prepayments generally increase. If the coupon rate of
the underlying mortgages significantly exceeds the prevailing market interest
rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience
is more difficult to estimate for adjustable rate mortgage-backed securities.
A senior-subordinated structure often is used with mortgage-backed
securities to provide credit enhancement for pass-through securities when the
underlying collateral is not guaranteed by an agency of the U.S. Government.
These structures divide mortgage pools into two risk classes: a senior class
and one or more subordinated classes. The subordinated classes provide
protection to the senior classes. When cash flow is impaired, debt service
goes first to the holders of senior class securities. In addition, incoming
cash flows also may go into a reserve fund to meet any future shortfalls of
cash flow to senior noteholders. The subordinated noteholder may not receive
any funds until the senior noteholders have been paid and, when appropriate,
until a specified level of funds has been contributed to the reserve fund. It
is the policy of the Bank to purchase only investment grade non-agency backed
mortgage-backed securities.
MORTGAGE RELATED SECURITIES
REMICs and CMOs are typically issued by a special purpose entity, which
may be organized in a variety of legal forms, such as a trust, a corporation or
a partnership. The entity aggregates pools of pass-through securities, which
are used to collateralize the mortgage related securities. Once combined, the
cash flows can be divided into "tranches" or "classes" of individual
securities, thereby creating more predictable average lives for each security
that
-25-
<PAGE> 28
the underlying pass-through pools. Accordingly, under this security
structure all principal paydowns from the various mortgage pools are allocated
to a mortgage related securities class or classes structured to have priority
until it has been paid off. Thus, these securities are intended to address the
reinvestment concerns associated with mortgage-backed security pass-throughs,
namely that they tend to pay off when interest rates fall. Bank management
believes these securities represent attractive alternatives relative to other
investments due to the wide variety of maturity and repayment options available
through such investments and due to the limited prepayment risk associated with
such investments. The Bank has not purchased and does not intend to purchase
higher risk CMO residuals or stripped mortgage securities for its investment
securities portfolio. The Bank's investment in REMICs/CMOs is primarily in
floating-rate or short- and intermediate-term (1-5 years) fixed-rate tranche
securities.
The Bank has experienced a decrease in the level of principal repayments
on mortgage-backed securities and mortgage related securities to $19.0 million
during the fiscal year ended June 30, 1997, from $22.1 million in fiscal year
1996. The decrease in principal repayments during fiscal 1997 is primarily
related to the decreased size of the mortgage-backed and related securities
portfolio. The decrease in the balance of mortgage-backed and related
securities portfolio is part of the Company's strategy to increase and
diversify its loan portfolio.
COMPOSITION OF SECURITIES HELD-TO-MATURITY
Mortgage-Backed and Related Securities. At June 30, 1997, the Company
held $85.4 million in its mortgage-backed and related securities portfolio as
compared to $97.3 million and $66.8 million at June 30, 1996 and 1995,
respectively. Of this amount, fixed-rate securities and adjustable-rate
securities were $13.4 million and $72.0 million; $16.7 million and $80.6
million; and $15.1 million and $51.7 million at June 30, 1997, 1996 and 1995,
respectively. The decrease in fiscal 1997 is attributable to the decision of
the Company to use the principal repayments on mortgage-backed and related
securities to fund the increase in loans receivable. The estimated market
value of these securities at June 30, 1997 was $86.1 million as compared to
$97.2 million and $66.8 million at June 30, 1996 and 1995, respectively. At
June 30, 1997, the mortgage-backed and related securities portfolio represented
20.8% of the Company's total assets as compared to 25.8% and 25.7% at June 30,
1996 and 1995, respectively. Included in the mortgage-backed securities
portfolio were federal agency backed and private-issue pass-through securities
totaling $21.0 million and $25.1 million; $27.0 million and $28.8 million;
$17.7 million and $22.1 million at June 30, 1997, 1996 and 1995, respectively.
Of the $25.1 million in private-issue securities at June 30, 1997, all were
adjustable rate securities and carried a minimum credit rating of AA at the
time of purchase and such ratings have not been downgraded since the time of
purchase.
Mortgage-related securities, which primarily consisted of real estate
mortgage investment conduit securities ("REMICs"), totaled $39.4 million, $41.5
million and $27.0 million at June 30, 1997, 1996 and 1995, respectively.
Other Investment Securities. Other investments consisted primarily of
overnight deposits, certificates of deposit and bankers' acceptances which
totaled $5.7 million, $3.7 million and $5.0 million at June 30, 1997, 1996 and
1995, respectively. The market value of these securities were $5.7 million,
$3.7 million and $5.0 million at June 30, 1997, 1996 and 1995, respectively.
COMPOSITION OF SECURITIES AVAILABLE-FOR-SALE
Mortgage-Backed Securities and Related Securities. At June 30, 1997, the
Company held mortgage-backed and related securities available-for-sale with a
carrying and market value of $11.4 million as compared to $17.9 million and
$15.7 million at June 30, 1996 and 1995, respectively. Of this amount at June
30, 1997, $3.7 million of the securities are mortgage-backed securities and
$7.7 million REMIC securities. Included in the mortgage-backed and related
securities were federal agency backed and private-issue securities totaling
$3.1 million and $8.3 million, respectively, and all were fixed-rate
securities. The Company carries such investments at fair value.
Other Investment Securities. The Company's other investment securities
available-for-sale include U.S. Government and agency obligations and ARM
Mutual Funds totaling $16.7 million and $1.0 million; $17.9 million and $1.4
million; and $16.0 million and $1.5 million at June 30, 1997, 1996 and 1995,
respectively. Also at June 30, 1997, the Company had municipal bonds with a
carrying and market value of $411,000. The Company carries such investments at
fair value.
-26-
<PAGE> 29
The tables below sets forth certain information regarding the carrying
value, composition and market value of the Company's available-for-sale and
held-to-maturity securities at June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------
CARRYING % OF MARKET
VALUE TOTAL VALUE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. government securities ............................ $16,748 56.74% $16,748
Mortgage-backed securities ............................ 3,695 12.52 3,695
Mortgage-related securities (REMICs) .................. 7,686 26.04 7,686
ARM loan mutual funds ................................. 978 3.31 978
Municipal bonds ....................................... 411 1.39 411
-------- -------- --------
Total securities available-for-sale .................. $29,518 100.00% $29,518
======== ======== ========
SECURITIES HELD-TO-MATURITY:
Demand deposits in other financial institutions ....... $4,896 86.26 $4,896
Time deposits in other financial institutions ......... 780 13.74 780
-------- -------- --------
Total securities held-to-maturity .................... $5,676 100.00% $5,676
======== ======== ========
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
GNMA .................................................. $934 2.03% $979
FHLMC ................................................. 4,823 10.47 4,893
FNMA .................................................. 15,171 32.94 15,359
Other participation certificates ...................... 25,132 54.56 25,101
-------- -------- --------
Total mortgage-backed securities held-to-maturity .... $46,060 100.00 $46,332
======== ======== ========
MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY:
CMOs .................................................. -- -- --
REMICs ................................................ 39,370 100.00 39,817
-------- -------- --------
Total mortgage-related securities held-to-maturity ..... $39,370 100.00% $39,817
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
CARRYING % OF MARKET
VALUE TOTAL VALUE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. government securities ............................ $17,932 48.10% $17,932
Mortgage-backed securities ............................ 8,775 23.53 8,775
Mortgage-related securities (REMICs) .................. 9,151 24.54 9,151
ARM loan mutual funds ................................. 1,426 3.83 1,426
-------- -------- --------
Total securities available-for-sale .................. $37,284 100.00% $37,284
======== ======== ========
SECURITIES HELD-TO-MATURITY:
Demand deposits in other financial institutions ....... $2,689 73.33% $2,689
Time deposits in other financial institutions ......... 978 26.67 978
-------- -------- --------
Total securities held-to-maturity .................... $3,667 100.00% $3,667
======== ======== ========
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
GNMA .................................................. $1,379 2.47% $1,433
FHLMC ................................................. 6,484 11.62 6,509
FNMA .................................................. 19,127 34.28 19,157
Other participation certificates ...................... 28,801 51.63 28,524
-------- -------- --------
Total mortgage-backed securities held-to-maturity .... $55,791 100.00% $55,623
======== ======== ========
MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY:
CMOs .................................................. -- -- --
REMICs ................................................ 41,541 100.00 41,616
-------- -------- --------
Total mortgage-related securities held-to-maturity ... $41,541 100.00% $41,616
======== ======== ========
</TABLE>
-27-
<PAGE> 30
<TABLE>
<CAPTION>
JUNE 30, 1995
----------------------------
CARRYING % OF MARKET
VALUE TOTAL VALUE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. government securities ............................ $15,970 48.24% $15,970
Mortgage-backed securities ............................ 15,666 47.31 15,666
ARM loan mutual funds ................................. 1,472 4.45 1,472
-------- -------- --------
Total securities available-for-sale .................. $33,108 100.00% $33,108
======== ======== ========
SECURITIES HELD-TO-MATURITY:
Demand deposits in other financial institutions ....... $ 2,417 48.61% $ 2,417
Time deposits in other financial institutions ......... 2,554 51.39 2,554
-------- -------- --------
Total securities held-to-maturity .................... $ 4,971 100.00% $ 4,971
======== ======== ========
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
GNMA .................................................. $ 1,697 4.26% $ 1,767
FHLMC ................................................. 6,593 16.56 6,668
FNMA .................................................. 9,416 23.65 9,337
Other participation certificates ...................... 22,114 55.53 22,120
-------- -------- --------
Total mortgage-backed securities held-to-maturity .... $39,820 100.00% $39,892
======== ======== ========
MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY:
CMOs .................................................. -- -- --
REMICs ................................................ 26,961 100.00 26,950
-------- -------- --------
Total mortgage-related securities held-to-maturity ... $26,961 100.00% $26,950
======== ======== ========
</TABLE>
The composition and contractual maturities of securities held-to-maturity,
excluding FHLB-Chicago stock, is indicated in the following table.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------
TOTAL
LESS THAN 1 TO 10 OVER 10 INVESTMENT
1 YEAR YEARS YEARS SECURITIES
--------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities held-to-maturity:
Demand deposits in other financial institutions ....... $4,896 - - $4,896
Time deposits in other financial institutions ......... 780 - - 780
--------- ----------- ----------- ----------
Total securities held-to-maturity .................... $5,676 - - $5,676
========= =========== =========== ==========
Weighted average yield ................................. 5.49% -% -% 5.49%
========= =========== =========== ==========
</TABLE>
-28-
<PAGE> 31
The following table shows the maturity or period to repricing of the Company's
securities available-for-sale at June 30, 1997.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------------------------------------
FIXED-RATE FIXED-RATE FIXED-RATE
U.S. GOVERNMENT MORTGAGE-BACKED CMOS AND
SECURITIES SECURITIES REMICS
-------------------- -------------------- -------------------- ---------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD VALUE YIELD VALUE YIELD VALUE
--------- --------- --------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AMOUNTS DUE OR REPRICING:
Within one year .............................. $ 993 4.50% $ 610 11.73% $ --% $978
AFTER ONE YEAR:
One to three years ........................... 987 5.93 517 5.08 -- -- --
Three to five years .......................... 13,767 6.06 2,568 5.81 -- -- --
Five to ten years ............................ 1,001 7.00 -- -- -- -- --
Ten to 20 years .............................. -- -- -- -- 4,081 7.22 --
Over 20 years ................................ -- -- -- -- 3,605 6.23 --
------- ----- ------ ----- ------ ----- ----
Total due or repricing after one year ...... 15,756 6.11 3,085 5.68 7,686 6.76 --
Total amount due or repricing .............. 16,748 6.02% 3,695 6.60% 7,686 6.76% 978
------- ----- ------ ----- ------ ----- ----
Less unearned discounts and premiums, net .. -- -- -- --
Mortgage-backed and related securities ..... $16,748 $3,695 $7,686 $978
======= ====== ====== ====
Average remaining years to maturity ............ 3.5 2.8 18.9 0.0
<CAPTION>
FIXED-RATE
ADJUSTABLE-RATE MUNICIPAL
MUTUAL FUNDS BONDS TOTAL
------------------ -------------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
------------------ --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AMOUNTS DUE OR REPRICING:
Within one year .............................. $ -- --% $ 2,581 6.83%
AFTER ONE YEAR:
One to three years ........................... 161 5.00 1,665 5.58
Three to five years .......................... -- -- 16,336 6.02
Five to ten years ............................ 250 5.20 1,251 6.64
Ten to 20 years .............................. -- -- 3,842 7.22
Over 20 years ................................ -- -- 3,843 6.23
---- ----- ------- -----
Total due or repricing after one year ...... 411 -- 26,526 6.24
---- ----- ------- -----
Total amount due or repricing .............. 411 5.12% 29,518 6.28%
Less unearned discounts and premiums, net .. -- --
Mortgage-backed and related securities ..... $411 $29,518
==== =======
Average remaining years to maturity ............ 6.9 7.4
</TABLE>
The following table shows the maturity or period to repricing of the Company's
mortgage-backed and related securities portfolio held-to-maturity at June 30,
1997.
<TABLE>
AT JUNE 30, 1997
----------------------------------------------------------------
FIXED-RATE FIXED-RATE FIXED-RATE
U.S. GOVERNMENT MORTGAGE-BACKED CMOS AND
SECURITIES SECURITIES REMICS
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
AMOUNTS DUE OR REPRICING:
<S> <C> <C> <C> <C> <C> <C>
Within one year ............................ $ -- --% $40,894 7.32% $ -- --%
AFTER ONE YEAR:
One to three years ......................... 1,025 7.12 -- -- 327 5.44
Three to five years ........................ 1,095 6.62 -- -- 280 6.60
Five to ten years .......................... 2,293 5.75 -- -- 1,151 5.65
Ten to 20 years ............................ 452 8.65 -- -- 1,483 6.99
Over 20 years .............................. 114 9.50 -- -- 5,131 7.08
------- ----- ----- ------ -----
Total due or repricing after one year .... 4,979 6.56 -- -- 8,372 6.79
------- ----- -------- ----- ------ -----
Total amounts due or repricing ........... 4,979 6.56% 40,894 7.32% 8,372 6.78%
Less unearned discounts and premiums, net .... 49 139 (11)
------- ------- ------
Mortgage-backed and related securities, net .. $ 5,028 $41,033 $8,361
======= ======= ======
Average remaining years to maturity .......... 6.3 25.0 18.9
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------------
ADJUSTABLE-RATE
REMICS TOTAL
------------------ ---------------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
------------------ --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AMOUNTS DUE OR REPRICING:
Within one year ............................ $ 31,213 6.73% $ 72,107 7.06%
AFTER ONE YEAR:
One to three years ......................... -- -- 1,352 6.71
Three to five years ........................ -- -- 1,375 6.62
Five to ten years .......................... -- -- 3,444 5.72
Ten to 20 years ............................ -- -- 1,935 7.38
Over 20 years .............................. -- -- 5,245 7.13
----------- ----------- ----------- -----------
Total due or repricing after one year .... -- -- 13,351 6.70
----------- ----------- ----------- -----------
Total amounts due or repricing ........... 31,213 6.73% 85,458 7.01%
Less unearned discounts and premiums, net .... (205) (28)
----------- -----------
Mortgage-backed and related securities, net .. $ 31,008 $ 85,430
=========== ===========
Average remaining years to maturity .......... 23.3 22.7
</TABLE>
-29-
<PAGE> 32
SOURCES OF FUNDS
GENERAL
The Company's primary sources of funds for use in lending, investing and
for other general purposes are deposits, proceeds from principal and interest
payments on loans, mortgage-backed and related securities and investment
securities, FHLB advances and reverse repurchase agreements. Contractual loan
payments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general market
interest rates and economic conditions. Borrowings are used to support
expanded lending or investment activities. The Company utilizes advances from
the FHLB-Chicago and reverse repurchase agreements as sources for its
borrowings. At June 30, 1997, the Company had advances from the FHLB-Chicago
totaling $92.1 million or 22.5% of total assets as compared to $102.4 million
or 27.1% of total assets and $63.4 million or 24.4% of total assets as of June
30, 1996 and 1995, respectively. At June 30, 1997, the Company had no reverse
repurchase agreements At June 30, 1996, the Company had $11.6 million in
reverse repurchase agreements as compared to $13.4 million at June 30, 1995.
The Bank has continued to use FHLB-Chicago advances as a funding source due to
the attractive rates offered on advances in relation to deposit funds
obtainable in the Company's local market. Also see, "-Borrowings and Other
Financing Transactions." Of the Company's outstanding FHLB-Chicago advances at
June 30, 1997, $25.0 million will mature before June 30, 1998. For a further
discussion of the Company's funding strategy, see Part II, Item 7 of the
Company's Annual Report on Form 10-K, "Financial Condition," "Liquidity and
Capital Resources" and "Asset/Liability Management."
DEPOSITS
The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company's deposits principally consist of
non-interest bearing checking, NOW, money market deposit and passbook accounts
and certificates of deposit. The flow of deposits is influenced significantly
by general economic conditions, changes in prevailing interest rates and
competition. The Company's deposits are obtained from the areas in which its
branches are located, and more recently from national wholesale certificate of
deposit sources. Various types of advertising and promotion to attract and
retain deposit accounts also are used. Management monitors the Bank's
certificates of deposit and, based on historical experience, management
believes it will retain a large portion of such accounts upon maturity.
Management considers Company profitability, the matching of term lengths with
assets, the attractiveness to customers and rates offered by competitors in
considering its deposit offerings and promotions. The Company believes it has
been competitive in the types of accounts and interest rates it has offered on
its deposit products. The Company intends to continue its efforts to attract
deposits as a primary source of funds for supporting its lending and investing
activities. The Company has maintained competitive rates on its deposit
accounts over the last year as higher market interest rates prevailed.
The following table presents the deposit activity of the Company for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1997 1996 1995
-------- -------------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Deposits ............................... $432,876 $424,023 $301,218
Withdrawals ............................ 387,593 352,357 268,150
-------- -------- --------
Net deposits/withdrawals ............... 45,283 71,666 33,068
Interest credited on deposits .......... 6,554 5,842 4,063
-------- -------- --------
Total increase (decrease) in deposits .. $ 51,837 $ 77,508 $37,131
======== ======== ========
</TABLE>
The Company attributes the increase in deposits before interest credited
during fiscal 1997 primarily to the solicitation of certificates of deposit
locally and on a wholesale basis nationally. Management believes the
likelihood for retention of brokered certificates of deposit is more a function
of the rate paid on such accounts as compared to retail deposits which may be
established due to Bank location or other intangible reasons. Brokered
deposits totaled $92.2 million at June 30, 1997, as compared to $75.3 million
at June 30, 1996. The average maturity of brokered deposits at June 30, 1997
was eleven months as compared to eight months at June 30, 1996. The average
rate paid on brokered deposits for the fiscal year ended June 30, 1997 was
5.98% as compared to 5.81% for the fiscal year
-30-
<PAGE> 33
ended June 30, 1996. The Company's demand deposits have decreased in recent
fiscal years, primarily due to the decline in passbook savings accounts;
however, increases in certificates of deposit have offset this growth.
Management believes that this pattern is a result of the higher interest rate
environment.
At June 30, 1997, the Company had outstanding $50.8 million in
certificates of deposit in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
AMOUNT AT
JUNE 30, 1997
--------------
<S> <C>
(IN THOUSANDS)
Three months or less ............ $11,990
Over three through six months ... 11,425
Over six through twelve months .. 11,877
Over twelve months .............. 15,459
-------
Total ......................... $50,751
=======
</TABLE>
-31-
<PAGE> 34
The following table sets forth the distribution of the Company's demand
deposits and certificate accounts at the dates indicated and the weighted
average nominal interest rates on each category of deposits presented.
Management does not believe that the use of year end balances instead of
average balances in calculating weighted average nominal interest rates
resulted in any material difference in the information presented. The jumbo
certificates of deposit in the following table contain $92.2 million of
brokered certificates of deposit at June 30, 1997, which represent all of the
Company's brokered deposits at June 30, 1997.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ---------------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
----- -------- ----- ------ -------- ---- ------ -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEMAND DEPOSITS:
Non-interest-bearing $7,105 2.52% --% $7,215 3.14% --% $4,556 3.00% --%
NOW................. 2,594 0.92 1.75 2,517 1.10 1.75 5,801 3.81 1.75
Money market........ 20,730 7.37 5.20 7,678 3.34 5.21 5,139 3.37 5.02
Passbook............ 21,952 7.80 2.98 24,342 10.60 2.99 25,454 16.73 2.97
------- ------- --------- -------- ------- -------
Total............. 52,381 18.61 3.40 41,752 18.18 2.79 40,950 26.91 2.72
CERTIFICATE ACCOUNTS (TERM):
One to nine months..
12 to 20 months..... 12,650 4.49 5.37 21,999 9.58 5.37 17,263 11.34 5.90
24 to 36 months..... 40,309 14.32 5.90 24,482 10.66 5.49 29,852 19.62 5.72
38 to 60 months..... 15,555 5.53 5.73 17,688 7.70 5.94 17,878 11.75 5.66
66 to 96 months..... 19,439 6.90 5.96 15,586 6.79 6.08 17,594 11.56 6.48
Wholesale(1)........ 157 0.06 7.96 172 0.07 7.93 180 0.12 7.91
Total certificates.. 141,021 50.09 6.15 107,996 47.02 6.22 28,450 18.70 6.22
------- ------- --------- -------- ------- -------
229,131 81.39 6.02 187,923 81.82 5.99 111,217 73.09 5.99
------- ------- --------- -------- ------- -------
Total deposits...... $281,512 100.00% 5.53% $229,675 100.00% 5.41% $152,167 100.00% 5.11%
======== ======= ======== ======= ======== =======
</TABLE>
- --------------------
(1) Wholesale certificates of deposit have an average maturity of 11.6 months,
8.2 months and 4.0 months at June 30, 1997, 1996 and 1995, respectively.
-32-
<PAGE> 35
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at June 30, 1997, 1996 and 1995, and the
periods to maturity of the certificate accounts outstanding at June 30, 1997.
At June 30, 1997, brokered certificates of deposit totaled $92.2 million with
an average rate of 6.11%.
<TABLE>
<CAPTION>
AT JUNE 30, PERIOD TO MATURITY FROM JUNE 30, 1997
----------------------------- ------------------------------------------------------------
WITHIN ONE ONE TO THREE
1997 1996 1995 YEAR YEARS THEREAFTER TOTAL
-------- -------- ------- ---------- ------------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CERTIFICATES OF DEPOSIT:
4.99% and less.......... $ 1,579 $ 10,044 $13,765 $ 1,191 $ 388 $ -- $ 1,579
5.00% to 5.99%.......... 89,991 141,411 30,973 58,395 24,727 6,869 89,991
6.00% to 6.99%.......... 136,808 34,359 60,139 30,262 98,127 8,419 136,808
7.00% to 7.99%.......... 619 1,977 4,401 -- 170 449 619
8.00% to 8.99%.......... 134 132 1,939 -- 1 133 134
9.00% to 9.99%.......... -- -- -- -- -- -- --
10.00% to 10.99%........ -- -- -- -- -- -- --
-------- ------------ ------------ ------------- ------------- ------------ ---------
Total................... $229,131 $187,923 $111,217 $89,848 $123,413 $15,870 $229,131
======== ============ ============ ============= ============= ============ =========
</TABLE>
BORROWINGS AND OTHER FINANCING TRANSACTIONS
Although deposits are the Company's primary source of funds, the Company's
policy has been to utilize borrowings as an alternative or less costly source
of funds. The Company utilizes borrowings as part of its asset/liability
management strategy. Borrowings are secured when management believes it can
profitably re-invest those funds for the benefit of the Company. The Company's
primary form of borrowing consists of advances from the FHLB-Chicago. These
advances are collateralized by the capital stock of the FHLB-Chicago held by
the Company and certain of its mortgage loans and mortgage-backed and related
securities. Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount the FHLB-Chicago will advance to member institutions, including
the Company, for purposes other than meeting withdrawals fluctuates from time
to time in accordance with policies of the FHLB-Chicago. The Company's unused
advance line with the FHLB-Chicago was approximately $24.5 million as of June
30, 1997. At June 30, 1997, the Bank's FHLB-Chicago advances totaled $92.1
million, representing 24.2% of total liabilities, a decrease from the $102.4
million outstanding at June 30, 1996. For a further discussion of the
Company's funding strategy, see Part II, Item 7 of the Company's Annual Report
on Form 10-K, "Financial Condition," "Liquidity and Capital Resources" and
"Asset/Liability Management."
The Company's borrowings from time to time include reverse repurchase
agreements. The form of reverse repurchase agreement used by the Company
involves the sale of securities owned by the Company with a commitment to
repurchase the same or substantially the same securities at a predetermined
price at a future date, typically within 30 days to six months. These
transactions are treated as borrowings collateralized by the securities sold
and are therefore included as other borrowings in the Company's Consolidated
Financial Statements. These transactions are authorized by the Company's
Investment Policy and are governed by agreements with primary government
dealers under Public Securities Association Master Repurchase Agreements. At
June 30, 1996, there were $11.6 million in repurchase agreements. At June 30,
1997, the Company had no reverse repurchase agreements outstanding. The Bank
has continued to use FHLB-Chicago advances and decreased its use of reverse
repurchase agreements as a funding source because of the attractive long-term
interest rates offered on FHLB advances.
While increases in borrowings and changes in the collateralization levels
due to market interest rate changes could require the Bank to add collateral to
secure its borrowings, the Company does not anticipate having a shortage of
qualified collateral to pledge against its borrowings.
-33-
<PAGE> 36
The following table sets forth certain information regarding the Bank's
FHLB-Chicago advances, borrowed funds and reverse repurchase agreements at or
for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED JUNE 30,
----------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB-CHICAGO ADVANCES:
Average balance outstanding........................... $100,384 $75,097 $48,714
Maximum amount outstanding at any month-end during
the period.......................................... 106,086 102,386 63,598
Balance outstanding at end of period.................. 92,073 102,386 63,398
Weighted average interest rate during the period (1).. 5.98% 5.25% 5.66%
Weighted average interest rate at end of period....... 6.02 5.82 6.09
REVERSE REPURCHASE AGREEMENTS:
Average balance outstanding........................... $3,717 $12,433 $6,380
Maximum amount outstanding at any month-end during
the period.......................................... 11,652 13,926 13,505
Balance outstanding at end of period.................. -- 11,568 13,381
Weighted average interest rate during the period (1).. 5.96% 6.27% 5.76%
Weighted average interest rate at end of period....... -- 5.61 6.22
TOTAL ADVANCES AND REVERSE REPURCHASE AGREEMENTS:
Average balance outstanding........................... $104,101 $87,529 $55,094
Maximum amount outstanding at any month-end during
the period........................................... 111,233 113,954 77,103
Balance outstanding at end of period.................. 92,073 113,954 76,779
Weighted average interest rate during the period (1).. 5.98% 5.40% 5.67%
Weighted average interest rate at end of period....... 6.02 5.80 6.11
</TABLE>
- -----------------------------
(1) Computed on the basis of average monthly balances.
COMPETITION
The Bank has significant competition in its mortgage, consumer and
commercial lending business, as well as in attracting deposits. The Bank's
primary competitors for loans are savings banks, thrifts, mortgage banking
companies, insurance companies and commercial banks. Its most direct
competition for deposits are savings banks, thrifts, commercial banks and
credit unions. Because of the large industrial base in West Allis and
surrounding areas, credit unions, formerly affiliated with industry, present
formidable competition. These credit unions have obtained community charters,
enabling them to attract business from the community at large, rather than just
the associated industry. Additionally, these credit unions have certain tax
advantages, and, consequently, are able to offer competitive rates. The Bank
faces additional competition for funds from a number of institutions, including
short-term money market funds and other corporate and government securities
funds offered by other financial service companies, such as brokerage firms and
insurance companies.
SUBSIDIARY ACTIVITIES
The Bank's wholly-owned subsidiary, Hallmark Planning Service, Inc. (the
"HPS," formerly West Allis Insurance, Inc.), was organized as a Wisconsin
corporation in 1978. During the fiscal year ended June 30, 1997, HPS was
engaged primarily in the sale of annuity and mutual fund products. The Bank
has a management agreement with HPS whereby HPS reimburses the Bank for certain
services it performs and pays rent for occupancy in the West Allis branch
office. Net income for HPS was $28,117 and $39,727 for the fiscal years ended
June 30, 1997 and 1996, respectively.
The Bank organized a wholly-owned subsidiary located in Nevada in
September 1994 named Hallmark Investment Corp. The purpose of this subsidiary
is to manage a portion of the Bank's investment portfolio.
-34-
<PAGE> 37
PERSONNEL
At June 30, 1997, the Bank had 69 full-time employees and 14 part-time
employees. The employees of the Bank are not represented by a collective
bargaining unit and the Bank believes its relationship with its employees to be
good.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business or which
in the aggregate involve amounts that are believed by management to be
immaterial to the financial condition of the Bank.
FEDERAL TAXATION
GENERAL
The following discussion of tax matters is intended to be a summary of the
material tax rules applicable to the Bank and does not purport to be a
comprehensive description of all applicable tax rules.
For federal income tax purposes, the Bank reported its income and expenses
primarily on the hybrid method of accounting (i.e., a method that incorporated
more than one type of accounting method in determining taxable income) and
filed its consolidated federal income tax returns on this basis through June
30, 1987. Beginning with its taxable year ended June 30, 1988, the Bank has
adopted an accrual method of accounting. Both before and after the Conversion,
the Bank, as a general matter, is and will be subject to the rules of federal
income taxation applicable to corporations. Generally, the Internal Revenue
Code requires that all corporations, including the Bank, compute taxable income
under the accrual method of accounting. For its taxable year ended June 30,
1997, the Bank was subject to a maximum federal income tax rate of 34%.
BAD DEBT RESERVES
Savings banks, such as the Bank, which meet certain definitional tests
primarily relating to their assets and the nature of their business
("qualifying thrifts"), were permitted for tax years beginning prior to
December 31, 1995 to establish a reserve for bad debts and to make annual
additions thereto, which additions may, within specified formula limits, be
deducted in arriving at their taxable income. Such additions were computed
using one of two allowable methods. Each year, the Bank has used the method
that allows the largest addition, and thus, the greater deduction for tax
purposes.
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 for bad debt reserves and deducted for federal
income tax purposes cannot be used by the Bank to pay cash dividends or
distributions to the Holding Company without the Bank including the amount in
taxable income, together with an amount deemed necessary to pay the resulting
income tax. Thus, any dividends to
-35-
<PAGE> 38
the Holding Company that would reduce amounts appropriated to the
Bank's bad debt reserves and deducted for federal income tax purposes could
create a tax liability for the Bank. The Bank does not intend to pay dividends
that would result in a recapture of its bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX
For taxable years beginning after December 31, 1986, the Internal Revenue
Code imposes an alternative minimum tax ("AMT") of 20% on alternative minimum
taxable income ("AMTI"). Only 90% of AMTI can be offset by net operating
losses. For taxable years beginning after December 31, 1989, the adjustment to
AMTI based on book income will be an amount equal to 75% of the amount by which
a corporation's adjusted current earnings exceeds its AMTI (prior to reduction
for net operating losses). In addition, for taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of
the excess of AMTI (with certain modifications) over $2.0 million is imposed on
corporations, including the Bank, whether or not AMT is paid. The Bank does
not expect to be subject to AMT in the future, although no assurance can be
made that it will not. The Bank was subject to an environmental tax liability
for the year ended June 30, 1994 which was not material.
DISTRIBUTIONS
To the extent that the Bank makes "non-dividend distributions" to
shareholders that are considered to result in distributions from (i) the Bank's
reserve for losses on qualifying real property loans that exceeds the amount
that would have been allowed under an experience method or (ii) the
supplemental reserve for losses on loans ("Excess Distributions"), then an
amount equal to such Excess Distributions must be included in the Bank's
taxable income. Non-dividend distributions include distributions in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation. In
contrast, distributions made from the Bank's current or accumulated earnings
and profits, as calculated for federal income tax purposes, rather than the
Bank's bad debt reserves are generally considered dividends for federal income
tax purposes and therefore would not be included in the Bank's taxable income.
Further, under certain circumstances, such as tax-free reorganizations,
non-dividend distributions may not be required to be included in the Bank's
taxable income.
The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if after the
Conversion, certain portions of the Bank's accumulated tax bad debt reserve are
used for any purpose other than to absorb qualified bad debt loans, such as for
the payment of dividends or other distributions with respect to the Bank's
capital stock (including distributions upon redemption or liquidation) and such
payment or other distribution is not otherwise excluded from the provisions
generally applicable to Excess Distributions, approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state
taxes). See "Regulation" and "Dividend Policy" for limits on the payment of
dividends of the Bank.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"),
enacted on August 10, 1993, the maximum federal corporate income tax rate was
increased from 34% to 35% for taxable income over $10.0 million, with a 3%
surtax imposed on taxable income over $15.0 million.
STATE TAXATION
The State of Wisconsin imposes a tax on the Wisconsin taxable income of
corporations, including savings banks, 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 was audited by the Wisconsin Department of Revenue for
taxable years through June 30, 1990. The results of the audit assessment,
which resulted in an additional $26,000 of taxes, have been taken into account
in calculating income tax expenses. The Bank is contesting virtually all of
the audit assessment, but the ultimate resolution of its challenge is unknown.
-36-
<PAGE> 39
REGULATION
The following discussion is intended to be a summary of regulatory issues
and not a comprehensive description of all applicable regulations.
The Bank is a Wisconsin-chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF").
The Bank is subject to extensive regulation by the DSI, as its chartering
agency, and by the FDIC, as its deposit insurer and principal federal
regulator. The lending and investment authority of the Bank is prescribed by
Wisconsin law and regulations, as well as applicable federal law and
regulations, and the Bank is prohibited from engaging in any activities not
permitted by such law and regulations. The Company is a unitary bank holding
company subject to regulatory oversight by the Board of Governors of the
Federal Reserve System (the "FRB"), the Wisconsin Department of Financial
Institutions, Division of Savings Institutions ("DSI") and the Securities and
Exchange Commission ("SEC").
WISCONSIN SAVINGS BANK REGULATION
Regulations adopted by the DSI govern various aspects of the activities
and the operation of Wisconsin-chartered savings banks.
EXAMINATIONS AND ASSESSMENTS
The Bank is required to file periodic reports with and is subject to
periodic examinations by the DSI. Savings banks are required to pay
examination fees and annual assessments to fund the supervisory operations of
the DSI. Based on the assessment rates published by the DSI and the Bank's
total assets of approximately $397.2 million at December 31, 1996, the Bank
paid $13,871 in assessments in the fiscal year ended June 30, 1997.
LOANS AND INVESTMENTS
The Bank is authorized to make, invest in, sell, purchase, participate or
otherwise deal in mortgage loans or interests in mortgage loans without
geographic restriction, including loans made on the security of residential and
commercial property. Savings banks also may lend funds on a secured or
unsecured basis for business, corporate commercial or agricultural purposes
provided the total of all such loans do not exceed 10% of the Bank's total
assets, unless the DSI authorizes a greater amount. Loans are subject to
certain limitations, including percentage restrictions based on the Bank's
total assets.
Under regulations established for state savings banks by the DSI as
implemented by the Administrator of the DSI, the Bank is limited in the amount
of multi-family, commercial real estate and commercial business loans it can
hold in its loan portfolio. This limit is currently 20% of the Bank's total
assets and may be increased with the approval of the DSI. At June 30, 1997,
the Bank had $62.2 million of such loans in its portfolio with a current limit
based on the Bank's asset base of $82.1 million. Management anticipates that as
the Bank's multi-family, commercial real estate and commercial business loan
origination and purchase activity increases in fiscal 1998, the Bank will be
required to apply to the DSI to increase the limit to an amount in excess of
20% of the Bank's asset base.* While management believes it will be able to
obtain such DSI approval, there can be no assurances that if requested, the DSI
will approve an increase in such lending limit for the Bank, or at what lending
limit level such approval will be granted.
Savings banks may invest funds in certain types of debt and equity
securities, including obligations of federal, state and local governments and
agencies. Subject to the prior approval of the DSI, compliance with capital
requirements and certain other restrictions, savings banks may invest in
residential housing development projects. Savings banks may invest in service
corporations or subsidiaries with the prior approval of the DSI, subject to
certain restrictions. The lending and investment powers of Wisconsin savings
banks also are limited by FDIC regulations and other federal laws and
regulations.
-37-
<PAGE> 40
The Bank's subsidiary operations also are regulated by the FDIC and the
FRB. See "-Federal Deposit Insurance Corporation Improvement Act" and
"-Holding Company Regulation." At June 30, 1997, the Bank's subsidiary
operations were not under any DSI, FRB or FDIC order to divest or terminate any
activity. The lending and investment powers of Wisconsin savings banks also
are limited by FDIC regulations and other federal law and regulations. See
"Federal Deposit Insurance Corporation Improvement Act of 1991 - Restrictions
on State-Chartered Banks."
LOANS TO ONE BORROWER
Savings banks may make loans and extensions of credit, both direct and
indirect, to one borrower in amounts up to 15% of capital plus an additional
10% for loans fully secured by readily marketable collateral. In addition,
savings banks may make loans to one borrower for any purpose in an amount not
to exceed $500,000, or to develop domestic residential housing units in an
amount not to exceed the lesser of $30 million or 30% of capital, provided
certain conditions are satisfied. At June 30, 1997, the Bank did not have any
loans which exceeded the loans-to-one borrower limitations.
QUALIFIED THRIFT LENDER REQUIREMENT
The Bank must qualify for and maintain a level of qualified thrift
investments equal to 60% of its assets as prescribed in Section 7701(a)(19) of
the Internal Revenue Code of 1986, as amended. At June 30, 1997, the Bank
maintained 85.11% of its assets in qualified thrift investments and therefore
met the qualified thrift lender requirement.
DIVIDEND LIMITATIONS
A savings bank which meets its regulatory capital requirement may declare
dividends on capital stock based upon net profits, provided that its paid-in
surplus equals its capital stock. If the paid-in surplus of the savings bank
does not equal its capital stock, the board of directors may not declare a
dividend unless at least 10% of the net profits of the preceding half year in
the case of quarterly or semi-annual dividends, or 10% of the net profits of
the preceding year in case of annual dividends, has been transferred to paid-in
surplus. In addition, prior approval of the DSI is required before dividends
exceeding 50% of profits for any calendar year may be declared and before a
dividend may be declared out of retained earnings. Under the DSI's
regulations, a savings bank which has converted from mutual to stock form also
would be prohibited from paying a dividend on its capital stock if the effect
thereof would cause the regulatory capital of the savings bank to be reduced
below the amount required for its liquidation account.
LIQUIDITY
Savings banks are required to maintain an average daily balance of liquid
assets of not less than 8% of its average daily balance of its net withdrawable
accounts plus its short-term borrowings. Also required is a "primary liquid
assets" ratio of at least 4% of average daily withdrawable accounts and
short-term borrowings. Primary liquid assets is defined as primarily
short-term liquid assets and U.S. government and U.S. government agency
securities. At June 30, 1997, the Bank's daily liquidity ratio was 20.80%.
RESTRICTIONS ON LOANS TO AND TRANSACTIONS WITH INSIDERS AND AFFILIATES
FRB regulations limit the total amount a savings bank may lend to its
executive officers, directors, principal shareholders, and their related
interests. Generally, an affiliated person may borrow an aggregate amount not
exceeding 15% of a savings bank's unimpaired capital and unimpaired surplus on
an unsecured basis and an additional 10% on a secured basis. The regulations
limit, with certain exceptions, the aggregate amount a depository institution
may lend to affiliated persons as a class to an amount not exceeding the
institution's unimpaired capital and unimpaired surplus.
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<PAGE> 41
In addition, DSI regulations provide certain restrictions and limits on
loans and other transactions with the Bank's affiliated persons to ensure that
such loans and transactions are on terms which would be available to members of
the general public of similar credit status.
The Bank also must comply with Sections 23A and 23B of the Federal Reserve
Act relative to transactions with affiliates in the same manner and to the same
extent as if the Bank were a Federal Reserve member bank. Generally, Sections
23A and 23B limit the extent to which an insured institution or its
subsidiaries may engage in certain covered transactions with an affiliate to an
amount equal to 10% of such institution's capital and surplus, plus an
aggregate limit on all such transactions with affiliates to an amount equal to
20% of such capital and surplus, and require that all transactions be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, the purchase of assets, issuance of
a guaranty and similar other types of transactions. The DSI may, for safety
and soundness reasons, impose more stringent restrictions on savings banks but
may not exempt transactions from or otherwise abridge Sections 23A and 23B.
Unless prior approval of the DSI is obtained, a savings bank may not
purchase, lease or acquire a site for an office building or an interest in real
estate from an affiliated person, including a stockholder owning more than 10%
of its capital stock, or from any firm, corporation, entity or family in which
an affiliated person or 10% stockholder has a direct or indirect interest.
The Bank has not been significantly affected by the applicable
restrictions on loans to and transactions with affiliates.
INSURANCE OF DEPOSITS
The Bank's deposits are insured to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the FDIC. The FDIC regulations assign
institutions to a particular capital group based on the level of an
institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized." These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with reduced insurance rates paid by well capitalized,
financially sound institutions and higher rates paid by undercapitalized
institutions that pose a substantial risk of loss to the insurance fund unless
effective corrective action is taken.
Deposit insurance premiums for the Bank are currently assessed at the rate
of 6.4 cents per $100 of deposits. The Bank's expense related to FDIC premiums
was $347,650 for the fiscal year ended June 30, 1997. Deposit premium levels
are set in order to permit the SAIF to achieve a ratio of reserves to insured
deposits of 1.25%, and the FDIC may adjust assessment rates in order to
maintain the target ratio. In addition, the FDIC imposed a special assessment
on the Bank of $739,997 for the fiscal year ended June 30, 1997. While an
increase in premiums for the Bank could have an adverse effect on earnings, a
decrease in premiums could have a positive impact on earnings. The Bank does
not expect that any reasonably foreseeable increased insurance assessments
would significantly impair the Bank's overall financial condition or results of
operations.
The FDIC insures commercial bank deposits through a separate fund, the
Bank Insurance Fund ("BIF"). During 1995, BIF assessment rates were reduced
and as a result, BIF member institutions were paying lower deposit insurance
premiums than SAIF-member institutions. Legislation passed during 1996
addressed the BIF/SAIF premium disparity and other matters related to deposit
insurance obligations. See " -Regulatory Legislation Affecting Deposit
Insurance."
Under the FDIC Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order or condition imposed by the FDIC.
Management of the Company does not know of any practice, condition or violation
that might lead to the termination of deposit insurance for the Bank.
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<PAGE> 42
CERTAIN FEDERAL REGULATIONS
Provisions of federal law address risk reduction and the promotion of
standards of safety and soundness for insured depository institutions.
EXAMINATIONS AND AUDITS
Federal regulations require annual on-site examinations for all depository
institutions except those well-capitalized institutions with assets of less
than $100 million; annual audits by independent public accountants for all
insured institutions with assets in excess of $500 million; the formation of
independent audit committees of the boards of directors of insured depository
institutions for institutions with assets equal to or in excess of $500
million; and management of depository institutions to prepare certain financial
reports annually and to establish internal compliance procedures.
PROMPT CORRECTIVE REGULATORY ACTION
Federal bank regulators are required to take certain supervisory actions
with respect to undercapitalized institutions, the severity of which depends
upon the institution's degree of capitalization. The regulations provide that
an insured institution that has a ratio of total capital to risk-based assets
of less than 8.0%, core capital to risk-based assets of less than 4.0% or a
leverage ratio that is less than 4.0%, would be considered "undercapitalized."
An insured institution that has a ratio of total capital to risk-based assets
of less than 6.0%, core capital to risk-based assets of less than 3.0% or a
leverage ratio that is less than 3.0%, would be considered "significantly
undercapitalized" and an insured institution that has tangible capital to
assets ratio equal to or less than 2.0% would be deemed "critically
undercapitalized."
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends, making any
other capital distribution or paying a management fee to a controlling person
or entity. Undercapitalized and significantly undercapitalized institutions
face more severe restrictions. The Bank currently exceeds all applicable
regulatory capital requirements and, therefore, is not subject to prompt
correctional action.
BROKERED DEPOSITS
FDIC regulations govern the acceptance of brokered deposits by insured
depository institutions. The capital position of an institution determines
whether and with what limitations an institution may accept brokered deposits.
A "well-capitalized" institution (one that significantly exceeds specified
capital ratios) may accept brokered deposits without restriction.
"Undercapitalized" institutions (those that fail to meet minimum regulatory
capital requirements) may not accept brokered deposits and "adequately
capitalized" institutions (those that are not "well-capitalized" or
"undercapitalized") may only accept such deposits with the consent of the FDIC.
(The definitions of "well-capitalized", "adequately capitalized" and
"undercapitalized" governing the acceptance of brokered deposits conform to the
definitions used in the regulations implementing the prompt corrective action
provisions of the FDICIA.) The Bank is a "well-capitalized" institution and
therefore may accept brokered deposits without restriction. At June 30, 1997,
the Bank had $92.2 million in brokered deposits.
UNIFORM LENDING STANDARDS
Savings institutions must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that are
secured by liens or interests in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards
(including loan-to-value limits) that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies that have been
adopted by federal bank regulators. The Bank has adopted and maintains such
policies.
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<PAGE> 43
STANDARDS FOR SAFETY AND SOUNDNESS
On July 10, 1995, federal bank regulators adopted Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") and also
adopted a final rule establishing deadlines for submission and review of safety
and soundness compliance plans and operational and managerial standards for all
insured depository institutions relating to internal controls, information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; and compensation fees and benefits. The
compensation standards prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss. Federal bank regulators are authorized,
but not required, to request a compliance plan for failure to satisfy the
safety and soundness standards set out in the Guidelines.
The Bank believes that its operational and managerial standards
substantially comply with the standards set forth in the Guidelines and that
compliance with the Guidelines will therefore not impose a significant burden
on Bank operations.
RESTRICTIONS UPON STATE-CHARTERED BANKS
FDIC regulations governing the equity investments of the Bank prohibit
certain equity investments and generally limit equity investments to those
permissible for federally-chartered banks and their subsidiaries. Banks
holding impermissible equity investments that do not receive FDIC approval must
submit to the FDIC a plan for divesting such investments. The Bank does not
hold any impermissible equity investments.
Under FDIC regulations, the Bank must obtain the FDIC's prior approval
before directly, or indirectly through a majority-owned subsidiary, engaging
"as principal" in any activity that is not permissible for a national bank
unless certain exceptions apply. The activity regulations provide that state
banks which meet applicable minimum capital requirements would be permitted to
engage certain activities that are not permissible for national banks,
including guaranteeing obligations of others, activities which the FRB has
found to be closely related to banking and certain securities activities
conducted through subsidiaries. The FDIC will not approve an activity that it
determines presents a significant risk to the FDIC insurance funds. As a
SAIF-insured, state-chartered savings bank which was formerly a state-chartered
savings association, the Bank continues to be subject to certain restrictions
which are imposed by federal law on state-chartered savings associations. The
activities of the Bank and its subsidiary are of a type permissible under
applicable federal regulations.
CAPITAL MAINTENANCE
FDIC REGULATION
FDIC-insured institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based capital requirements. The Bank is
required to meet the following capital standards to remain adequately
capitalized and not be subject to corrective action: (i) "Tier 1 capital" in
an amount not less than 3% of total assets; (ii) "Tier 1 capital" in an amount
not less than 4% of risk-weighted assets; and (iii) "total capital" in an
amount not less than 8% of risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial Institutions
Examination Council) are also required to maintain "Tier 1 capital" equal to at
least 3% of total assets (the "leverage capital" requirement). Tier 1 capital
is defined to include the sum of common shareholders' equity, noncumulative
perpetual preferred stock (including any related surplus), and minority
interests in consolidated subsidiaries, minus all intangible assets (with
certain exceptions), identified losses, and qualifying investments in
securities subsidiaries. An institution that fails to meet the minimum
leverage limit requirement must file a capital restoration plan with the
appropriate FDIC regional director. At June 30, 1997, the Bank's ratio of Tier
1 capital to total assets was 6.47%, or 3.47 percentage points in excess of the
minimum leverage capital requirement, the Bank's Tier 1 capital to
risk-weighted assets was 11.24%, or 7.24 percentage points in excess of the
FDIC requirement, and the Bank's total capital to risk-weighted assets was
11.98%, or 3.98 percentage points in excess of the FDIC requirement.
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<PAGE> 44
WISCONSIN REGULATION
Wisconsin-chartered savings banks are required to maintain a minimum
capital to assets ratio of 6% and must maintain total capital necessary to
ensure the continuation of insurance of deposit accounts by the FDIC. If the
DSI determines that the financial condition, history, management or earning
prospects of a savings bank are not adequate, the DSI may require a higher
minimum capital level for the savings bank. If a savings bank's capital ratio
falls below the required level, the DSI may direct the savings bank to adhere
to a specific written plan established by the DSI to correct the savings bank's
capital deficiency, as well as a number of other restrictions on the savings
bank's operations, including a prohibition on the declaration of dividends. At
June 30, 1997, the Bank's total capital, as calculated under Wisconsin law, was
$28.2 million, or 6.85% of total assets, which was 0.85% in excess of the
required amount.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977, as amended (the "CRA"), as
implemented by FDIC regulations, the Bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services it believes are best suited to its
particular community. The CRA requires the FDIC, in connection with its
examination of a bank, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such institution. The law requires public
disclosure of an institution's CRA rating and also requires the primary
regulator to provide a written evaluation of an institution's CRA performance.
The Bank's latest CRA rating, received on July 10, 1995, was "satisfactory."
On May 4, 1995, the federal banking regulators adopted uniform final rules
governing the compliance with the CRA by financial institutions. Although the
new rules modify the standards used to assess CRA performance, the Bank does
not anticipate that its CRA rating will be negatively affected when the new
rules are implemented.
FEDERAL RESERVE SYSTEM
Regulation D, promulgated by the FRB, imposes reserve requirements on all
depository institutions which maintain transaction accounts or non-personal
time deposits. Checking accounts, NOW accounts and certain other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain money
market deposit accounts) at a savings institution. For 1997, a depository
institution must maintain average daily reserves equal to 3% on the first $49.3
million of transaction accounts and an initial reserve of $1.5 million, plus
10% of that portion of total transaction accounts in excess of $49.3 million.
The first $4.4 million of otherwise reservable balances (subject to adjustment
by the FRB) are exempt from the reserve requirements. These percentages and
threshold limits are subject to adjustment by the FRB. As of June 30, 1997,
the Bank met its Regulation D reserve requirements.
Thrift institutions also have authority to borrow from the Federal Reserve
Bank "discount window," but FRB policy generally requires thrift institutions
to exhaust all FHLB sources before borrowing from the Federal Reserve System.
The Bank had no discount window borrowings as of June 30, 1997.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System, consisting of twelve FHLBs, is under
the jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital markets; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Chicago, is required to acquire and hold
shares of capital stock in the FHLB-Chicago in an amount equal to the greater
of (i) 1% of the aggregate outstanding principal amount of
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<PAGE> 45
residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each year, or (ii) 0.3% of total assets. The Bank is in
compliance with this requirement with an investment in FHLB-Chicago stock of
$5.3 million at June 30, 1997.
Among other benefits, the FHLBs provide a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB-Chicago. At June 30, 1997, the
Bank had $92.1 million in advances from the FHLB-Chicago.
HOLDING COMPANY REGULATION
FEDERAL REGULATION
The Company is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended (the "BHCA"). As such, the Company is
subject to examination, regulation and periodic reporting under the BHCA, as
administered by the FRB. The FRB has adopted capital adequacy guidelines for
bank holding companies (on a consolidated basis) substantially similar to those
of the FDIC for the Bank. Failure to meet the capital adequacy requirements
may result in supervisory or enforcement action by the FRB. The Company's pro
forma total and Tier 1 capital significantly exceed such capital adequacy
requirements.
The Company is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior FRB approval is required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company. The BHCA also prohibits the acquisition by the
Company of more than 5% of the voting shares, or substantially all the assets
of a bank located outside the State of Wisconsin unless such an acquisition is
specifically authorized by the laws of the state in which such bank is located.
FRB regulations govern a variety of bank holding company matters,
including redemption of outstanding equity securities and a bank holding
company engaging in non-banking activities. Pursuant to FRB policy, dividends
should be paid only out of current earnings and only if the prospective rate of
earnings retention by the bank holding company appears consistent with its
capital needs, asset quality and overall financial condition. The FRB policy
also requires that a bank holding company serve as a source of financial
strength to its subsidiary banks by standing ready to use available resources
to provide adequate capital funds to those banks during periods of financial
stress or adversity. These policies could affect the ability of the Holding
Company to pay cash dividends.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
See " -Restrictions on Loans to and Transactions with Affiliates." Moreover,
subsidiaries of bank holding companies are prohibited from engaging in certain
tie-in arrangements (with the Company or any of its subsidiaries) in connection
with any extension of credit, lease or sale of property or furnishing of
services.
The Company and its subsidiary, the Bank, are affected by the monetary and
fiscal policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for management of the
Company to accurately predict future changes in monetary policy or the effect
of such changes on the business or financial condition of the Company.
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<PAGE> 46
STATE SAVINGS BANK HOLDING COMPANY REGULATION
In addition to the FRB bank holding company regulations, a bank holding
company that owns or controls, directly or indirectly, more than 25% of the
voting securities of a state savings bank also is subject to regulation as a
savings bank holding company by the DSI. The DSI has not yet issued proposed
regulations governing savings bank holding companies.
ACQUISITION OF THE COMPANY
Under the federal Change in Bank Control Act of 1978, as amended (the
"CBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's shares of Common Stock outstanding, unless the FRB has found that the
acquisition will not result in a change in control of the Company. Under the
CBCA, the FRB has 60 days within which to act on such notices, taking into
consideration certain factors, including the financial and managerial resources
of the acquiror, the convenience and needs of the communities served by the
Company and the Bank, and the anti-trust effects of the acquisition. Under the
BHCA, any company would be required to obtain prior approval from the FRB
before it may obtain "control" of the Company within the meaning of the BHCA.
Control is generally defined to mean ownership or power to vote 25 percent or
more of any class of voting securities of the Company or the ability to control
in any manner the election of a majority of the Company's directors. In
addition, the BHCA prohibits the acquisition of the Company by a bank holding
company located outside the State of Wisconsin, unless such acquisition is
specifically authorized by Wisconsin law. See "Holding Company Regulation."
FEDERAL SECURITIES LAWS
The Company filed with the Commission a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock was registered with the Commission under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of the shares of the Common
Stock does not cover the resale of such shares. Shares of Common Stock
purchased by persons who are not affiliates of the Company may be resold
without registration. Shares purchased by an affiliate of the Holding Company
will be subject to the resale restrictions of Rule 144 under the Securities
Act. If the Company meets the current public information requirements of Rule
144 under the Securities Act, each affiliate of the Company who complies with
the other conditions of Rule 144 (including those that require the affiliate's
sale to be aggregated with those of certain other persons) would be able to
sell in the public market, without registration, a number of shares not to
exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
REGULATORY LEGISLATION AFFECTING DEPOSIT INSURANCE
Deposits of the Bank currently are insured to applicable limits by the
FDIC under the Savings Associations Insurance Fund ("SAIF"). The FDIC also
insures commercial bank deposits under the Bank Insurance Fund ("BIF").
Premium levels are set in order to permit the funds to be capitalized at a
level equal to 1.25% of total fund deposits. Assessment rate changes made in
1995 created a deposit insurance premium disparity between the two funds; while
most BIF members were paying only a nominal $2,000 annual premium, SAIF members
were paying average rates of 23.4 basis points of deposits.
On September 30, 1996, Congress passed legislation to address the deposit
insurance premium disparity. The "Deposit Insurance Funds Act of 1996" (the
"DIF Act"), included as part of an Omnibus Appropriations Bill, directed the
FDIC to impose a special assessment on SAIF-assessable deposits at a rate that
would cause the SAIF to achieve its designated reserve ratio of 1.25% of
SAIF-insured deposits as of October 1, 1996. The DIF Act required that the
special assessment be applied against the SAIF-assessable deposits held by
institutions as of March 31, 1995.
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<PAGE> 47
Pursuant to a final rule issued by the FDIC on October 16, 1996, the
special assessment rate was determined to be 65.7 basis points. This one-time
special assessment fully capitalized the SAIF and was collected on November 27,
1996.
The amount of the assessment to the Bank was $877,000. The special
assessment was recorded on September 30, 1996 and had the effect of reducing
the Bank's earnings and capital by the after-tax amount of the assessment as of
the date of enactment, which was $533,000 or $0.38 per share. As described
below, with the recapitalization of the SAIF, BIF and SAIF regular premiums
will be comparable and, therefore, FDIC premium expense is expected to be
reduced in future periods.
The FDIC published a final rule on December 24, 1996, establishing a
permanent base assessment schedule for the SAIF and setting assessment rates at
a range of 4 to 31 basis points. The rule provides for an adjusted assessment
schedule reducing these rates by 4 basis points to reflect current conditions,
producing an effective SAIF assessment range of 0 to 27 basis points beginning
October 1, 1996. This assessment range, which applies to all SAIF institutions
other than SAIF member savings associations, is comparable to the current
schedule for BIF-institutions. A special interim rate schedule ranging from 16
to 27 basis points applied to SAIF-member savings associations for the last
quarter of 1996, reflecting the fact that assessments related to certain bond
obligations of the Financial Corporation ("FICO"), which were issued to resolve
the savings and loan crisis in the 1980's, will be included in the SAIF rates
for these institutions curing that period. Because the Bank is a "Sasser bank"
(a bank that converted its charter from a savings association to a state
savings bank charter, yet remains a SAIF member in accordance with the
so-called "Sasser Amendment"), it was not assessed this interim rate and
received a credit in January 1997 for its entire FDIC premium for the quarter
ended December 31, 1996.
The DIF Act addressed other matters which will affect the Bank. Certain
bond obligations of the Financial Corporation ("FICO"), which were issued to
resolve the savings and loan crisis in the 1980's, are being shared by all
insured depository institutions beginning after December 31, 1996. This
obligation had previously been the sole responsibility of SAIF-insured
institutions and had been funded through SAIF assessments. The DIF Act
eliminated the statutory link between FICO's assessments and amounts authorized
to be assessed by the SAIF, effective January 1, 1997, all insured institutions
will pay an annual assessment to fund interest payments on the FICO bonds.
BIF-member institutions will pay one-fifth the rate to be paid by SAIF members,
for the first three years. The annual FICO assessment is 1.3 and 6.5 basis
points of deposits for BIF and SAIF members, respectively. After January 1,
2000, BIF and SAIF members will share the FICO payments on a pro-rata basis,
which is assessed at 2.4 basis points, until the bonds mature in 2017.
In addition, the DIF Act provides for the merger of BIF and SAIF into a
single Deposit Insurance Fund. This provision will be effective January 1,
1999, assuming that no insured depository institution is a savings association
on that date. This legislation contemplates that the savings association
charter will be phased out over that period of time.
ITEM 2. PROPERTIES
The Bank conducts its business through three full-service office
locations. In May 1996, the Bank opened a limited-service office inside of a
new senior community residence in West Allis. Library Square, the senior
community, is located at 1820 South 75th Street and contains 118 apartments for
independent living. The Bank conducts business at Library Square two days a
week. Two of the full-service branch offices are located in Milwaukee county
and one in Waukesha County. The Bank owns all of the properties on which its
full-service offices are located. Management believes the Bank's current
facilities are adequate to meet present and immediately foreseeable needs of
the Bank and the Holding Company. The Bank will analyze additional
limited-service office opportunities in the future. A list of the Bank's
full-service offices is as follows:
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<PAGE> 48
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTIES AND
YEAR IMPROVEMENTS AT
OFFICE LOCATION OPENED JUNE 30, 1997
--------------------------- ------ -----------------
<S> <C> <C>
West Allis/Home Office 1919 $271,000
7401 West Greenfield Avenue
West Allis, WI 53214
New Berlin Office 1989 995,000
15600 West Cleveland Avenue
New Berlin, WI 53151
Greenfield Office 1988 1,051,000
5101 South 27th Street ----------
Greenfield, WI 53221
Net Book Value: $2,317,000
==========
</TABLE>
In addition to the properties described above, in January, 1991, the Bank
entered into a purchase contract with two companies (the "Sellers") for the
purchase of certain real estate located in Wauwatosa, Wisconsin. The Bank
sought to acquire the real estate as a location for a Wauwatosa branch office.
The purchase contract required the Sellers, at their cost and expense, to take
all steps necessary to remove all hazardous substances and underground storage
tanks, pipes, and related appurtenances from the property.
As a result of Sellers' failure to remove the hazardous substances from
the property, the Bank instituted suit in August 1992 for specific performance
of the purchase contract, alleging Sellers' failure to clean up the property
and the Bank's entitlement to have the purchase contract enforced by requiring
the Sellers to complete the agreed-upon clean-up of the property.
In July 1993, the Circuit Court for Milwaukee County, denied the Bank's
request for specific performance of the purchase contract and found the
purchase contract unenforceable based upon the Bank's right in its sole
discretion to void the purchase contract. The Bank appealed the decision but
the Wisconsin Court of Appeals affirmed the Circuit Court.
The Bank continues to have some interest in the property as a prospective
branch office location. As of June 30, 1995, the Bank has advanced $117,000 in
real estate taxes to avoid a foreclosure suit resulting from a default in
payment of property taxes and has taken a real estate mortgage on the property
to secure repayment of such amounts.
In March 1993, the Bank recognized losses of $250,000 to provide an
allowance for capitalized real estate taxes, legal fees and other expenses
related to the attempted acquisition of the property. The Bank does not intend
to acquire the property without the clean-up having been completed nor does it
intend to participate in the costs of the clean-up. The Bank believes its
current position does not expose it to liability in connection with clean-up
expenses or other expenses related to the property, including without
limitation liabilities arising under the Comprehensive Environmental Response,
Compensation and Liability Act.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal
actions arising in the normal course of its business. While the ultimate
outcome of these various legal proceedings cannot be predicted with certainty,
it is the opinion of management that the resolution of these legal actions
should not have a material effect on the Company's consolidated financial
condition or results of operations.
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<PAGE> 49
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 June 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information as to the business experience is supplied with
respect to executive officers of the Company who, with the exception of Messrs.
James D. Smessaert and Peter A. Gilbert, do not serve on the Company's Board of
Directors. There are no arrangements or understandings between the persons
named and any one person pursuant to which such officers were selected, nor are
there any family relationships among them.
JAMES D. SMESSAERT, age 59, is President, Chief Executive Officer and
Chairman of the Board of the Company, has been President, Chief Executive
Officer and a director of the Bank since 1983, and became Chairman of the Board
effective July 1, 1993. Prior to joining the Bank, Mr. Smessaert was Executive
Vice President of Advantage Bank, formerly Kenosha Savings and Loan
Association. Mr. Smessaert is past President of the Milwaukee Council of the
Wisconsin League of Financial Institutions. He currently serves as Secretary
and as a member of the Legislative and Executive Committees of the Wisconsin
League of Financial Institutions. Mr. Smessaert also is immediate past
Chairman of the West Allis Chamber of Commerce and past Chairman of the West
Allis Business Expo.
PETER A. GILBERT, age 49, is Corporate Secretary and Executive Vice
President, Chief Operating Officer and a director of the Bank effective August
1, 1995, and a director of the Company effective August 22, 1995. Prior to
joining the Bank, Mr. Gilbert was President and CEO of Valley Real Estate
Services Corp., a mortgage banking subsidiary of Valley Bancorporation located
in Sheboygan, Wisconsin, from 1992 to 1994, and Managing Director of Gilbert
and Associates, a financial services consulting firm located in Encinitas,
California, from 1988 to 1992.
ARTHUR E. THOMPSON, age 37, is Chief Financial Officer and Treasurer of
the Company and has been Senior Vice President of the Bank since March 1993.
Mr. Thompson joined the Bank in 1985 as the Controller and served as Vice
President and Treasurer from 1987 to March 1993. Mr. Thompson also is a
director of the Bank's subsidiary, Hallmark Investment Corp. Prior to joining
the Bank, Mr. Thompson was an accountant at Hopkins Savings & Loan Association
from 1984 to 1985 and Assistant Controller at West Bend Savings & Loan
Association from 1983 to 1984. Mr. Thompson is a Certified Public Accountant.
NANCY S. HOELTER, age 51, is Vice President of the Company and has been
Senior Vice President of the Bank since March 1993. Ms. Hoelter joined the
Bank in 1986, served as an Administrative Assistant from 1987 to 1989, as Human
Resources Coordinator from 1989 to 1992 and as Vice President from 1992 to
March 1993. Ms. Hoelter also is a director, Secretary and Treasurer of the
West Allis Savings Bank Foundation.
ELIZABETH S. BORST, age 35, is Senior Vice President-Sales and Marketing
of the Bank since November 1995, and as Vice President-Marketing from 1993 to
1995. Ms. Borst also is a director of the Bank's subsidiary, Hallmark Planning
Services, Inc.
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<PAGE> 50
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
SHAREHOLDERS/SHARES OUTSTANDING
The Company's common stock is currently being traded on the National
Association of Securities Dealers Automated Quotation (NASDAQ) National Market
System over-the-counter exchange under the symbol of HALL. Information
required by this item is incorporated by reference to the table "Market
Information" as part of the "Quarterly Financial Information (Unaudited)" shown
in Note 17 to Notes to Consolidated Financial Statements and the "Earnings Per
Share" Note 1 to Notes to Consolidated Financial Statements included under Item
8 of this Annual Report on Form 10-K.
As of August 31, 1997, there were 358 holders of record and an estimated
1,000 beneficial holders owning a total of 1,422,950 voting shares.
The Board of Directors of the Company does not presently anticipate the
declaration or payment of a dividend. Future payments of dividends will be
subject to determination and declaration by the Company's Board of Directors,
which will take into account the Company's financial condition, results of
operations, tax considerations, industry standards, economic conditions and
other factors, including regulatory restrictions which affect the payment of
dividends by the Bank to the Company. There can be no assurance that dividends
will in fact be paid on the Common Stock or that, if paid, such dividends will
not be reduced or eliminated in future periods.
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<PAGE> 51
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (Five-Year Summary)
Set forth below are selected consolidated financial and other data of the
Company. The financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Company and
Notes thereto presented elsewhere in this report.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets ....................................... $409,820 $377,157 $259,477 $179,642 $153,858
Loans receivable, net .............................. 273,556 224,807 142,321 105,068 79,515
Cash and cash equivalents .......................... 8,755 4,825 6,820 8,429 12,332
Securities held for sale/available-for-sale ........ 29,518 37,284 33,108 22,224 5,972
Investment securities and certificates of deposit .. 780 978 590 1,783 9,198
Mortgage-backed and related securities ............. 85,430 97,332 66,781 35,511 39,932
Deposits ........................................... 281,512 229,675 152,167 115,036 109,890
FHLB advances and other borrowings ................. 92,073 113,954 76,779 35,998 26,036
Shareholders' equity ............................... 29,672 27,011 25,260 24,294 14,709
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED OPERATIONS DATA:
Total interest income ................................. $29,823 $22,894 $14,560 $11,258 $11,102
Total interest expense ................................ 20,210 15,348 8,743 6,333 6,241
------- ---------- ---------- ---------- ----------
Net interest income .................................. 9,613 7,546 5,817 4,925 4,861
Provision for loan losses ............................. 650 367 248 229 413
------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses .. 8,963 7,179 5,569 4,696 4,448
Non-interest income:
Loan servicing and loan-related fees ................. 251 233 238 202 138
Depository fees and service charges .................. 478 494 464 491 555
Gain on sale of loans ................................ 95 75 23 193 506
Gain (loss) on sale of securities and
mortgage-backed and related securities, net ......... 7 72 (102) (103) 100
Other non-interest income ............................ 197 388 375 186 187
------- ---------- ---------- ---------- ----------
Total non-interest income ............................. 1,028 1,262 998 969 1,486
Total non-interest expense ............................ 7,046 5,554 4,785 4,635 4,837
------- ---------- ---------- ---------- ----------
Income before income tax expense ...................... 2,945 2,887 1,782 1,030 1,097
Income tax expense .................................... 1,026 1,009 708 437 454
------- ---------- ---------- ---------- ----------
Net income .......................................... $1,919 $1,878 $1,074 $593 $643
======= ========== ========== ========== ==========
Earnings per share .................................. 1.33 1.33 .77 .22 N/A
======= ========== ========== ==========
Pro forma earnings per share ........................ N/A N/A N/A .40 N/A
==========
</TABLE>
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<PAGE> 52
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED JUNE 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS
Return on average assets ............................... 0.48% 0.60% 0.51% 0.35% 0.42%
Return on average equity ............................... 6.83 7.17 4.39 2.91 4.45
Interest rate spread during period(1) .................. 2.06 1.97 2.34 2.57 3.03
Net interest margin(1) ................................. 2.48 2.45 2.89 3.06 3.37
Non-interest expense to average assets ................. 1.77 1.76 2.29 2.74 3.16
Non-interest income to average assets .................. 0.26 0.40 0.48 0.57 0.97
Average interest-earning assets to
average interest-bearing liabilities .................. 1.08x 1.10x 1.13x 1.12x 1.08x
ASSET QUALITY RATIOS
Non-performing loans to gross loans(2) ................. 0.22% 0.04% 0.09% 0.20% 0.25%
Non-performing assets to total assets(2) ............... 0.16 0.03 0.06 0.14 0.14
Allowance for loan losses to non-performing loans ...... 282.37 1,153.27 666.43 354.38 309.00
Ratio of allowance for loan losses to gross loans ...... 0.62 0.50 0.62 0.70 0.78
Net charge-offs to average gross loans ................. 0.04 0.05 0.05 0.12 0.10
CAPITAL RATIOS(3)
Average shareholders' equity to average assets ......... 7.07 8.30 11.70 12.03 9.45
Shareholders' equity to total assets at end of period .. 7.24 7.16 9.73 13.52 9.56
OTHER DATA
Number of deposit accounts ............................. 18,064 18,070 19,285 18,487 19,043
Number of real estate loans outstanding ................ 3,824 3,654 2,922 2,334 1,907
Number of real estate loans serviced ................... 4,360 4,111 3,419 2,893 2,486
Number of consumer loans outstanding ................... 3,310 3,705 5,322 5,671 5,922
Number of commercial loans outstanding ................. 32 -- -- -- --
Loan originations/purchases ............................ $118,108 $140,313 $70,175 $72,900 $71,509
Full-service facilities ................................ 3 3 3 3 3
</TABLE>
- ---------------------------
(1) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin represents net interest income as a
percentage of average interest-earning assets.
(2) Non-performing loans consist of non-accrual loans, accruing loans 90 days
or more past due and troubled debt restructurings. Non-performing assets
consist of non-performing loans and foreclosed properties, which consist
of real estate acquired by foreclosure or deed-in-lieu thereof, real
estate in judgment and loans which are deemed in-substance foreclosed.
(3) For a discussion of the Bank's regulatory capital ratios, see Note 9 of
Notes to Consolidated Financial Statements.
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<PAGE> 53
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In order to maximize shareholder value, the Company continues to pursue a
strategy of effectively utilizing the capital acquired in the Bank's Conversion
and the Company's initial public offering consummated in December 1993. The
Company believes that its effective utilization of capital is best achieved
through the growth of the Company's business. Pursuant to the Company's
post-Conversion strategic plan, this growth is to be achieved through the
expansion of the Company's asset base and diversification of the Company's
portfolio into higher yielding assets, and is to be implemented in two stages.
In stage one, implemented in fiscal 1994 through the first half of fiscal 1997,
management focused on achieving a target asset size for the Company established
by the Board of Directors. In stage two, which commenced in the second half of
fiscal 1996 and will continue in fiscal 1998, management focused, and intends
to continue to focus, on portfolio diversification coupled with a moderate
increase in the rate of growth of the Company's asset base.
Commencing in fiscal 1994 and continuing through the first half of fiscal
1997, the Company implemented the first stage of the strategy by leveraging its
capital base to achieve asset growth. The objective of the first stage of the
strategy was to reach a targeted asset size for the Company established by the
Board of Directors within a three-to-five year period following the Conversion.
The Company increased its asset size from $179.6 million at June 30, 1994 to
$409.8 million at June 30, 1997. The Bank's principal investment focus during
the four-year post-Conversion period was to originate and purchase mortgage
loans (principally loans secured by one-to-four family owner-occupied homes)
and purchase mortgage-backed securities. The asset growth was funded through
significant increases in Federal Home Loan Bank ("FHLB") advances and other
borrowings and increases in deposits, primarily brokered and non-brokered
wholesale deposits. Pursuit of the foregoing strategy resulted in increases in
the Company's net income, earnings per share, return on average equity ("ROAE")
and return on average assets ("ROAA") in fiscal 1994, 1995 and 1996. Excluding
the impact of the one-time industry-wide SAIF assessment in fiscal 1997,
pursuit of the strategy also resulted in increases in the Company's net income,
earnings per share, ROAE and ROAA for fiscal 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Starting in the latter half of fiscal 1996 and continuing in fiscal 1997,
the Company implemented the second stage of its post-Conversion plan in order
to continue to increase net income, earnings per share, ROAE and ROAA. This
strategy involved shifting the focus from asset growth to asset portfolio
diversification, while maintaining prudent capital and liquidity levels. This
was, and continues to be achieved by altering the composition of loans and
securities originated, purchased, sold and held in the total asset portfolio.
In particular, the Company focused and will focus on originating and purchasing
higher-yielding multi-family, commercial real estate and commercial business
loans secured by properties or assets located within the Company's primary
lending area (as defined herein), which will either replace or supplement the
lower-yielding one-to-four family mortgage loans and principal run-off from the
mortgage securities portfolio. The Company also evaluated opportunities to
purchase multi-family and commercial real estate loans or participation
interests in such loans secured by properties located outside the Company's
primary lending area. In fiscal 1997, the Company purchased an aggregate of
$5.4 million, or 1.9% of gross loans at June 30, 1997, of loans and
participation interests in loans originated by other lenders and secured by
properties located outside of the Company's primary lending area (as defined
herein). These loans and participation interests consisted primarily of
commercial real estate and commercial real estate construction loans. In the
second half of fiscal 1997, the Company also expanded its opportunities to
originate higher-yielding loans by establishing a new commercial lending
division which offers commercial/industrial real estate term loans, equipment
leasing, inventory/equipment/receivables financing, lines of credit, letters of
credit and SBA loan programs. Asset portfolio diversification in fiscal 1997
was funded through principal repayment cash flows from existing assets,
wholesale brokered and non-brokered deposits, retail deposits and FHLB
advances.
In fiscal 1998, the Company intends to continue the implementation of the
second phase of its strategic plan by slowing the rate of growth of its asset
base and continuing to focus on asset portfolio diversification.* This will
continue to be accomplished by increasing the origination and purchase of
multi-family real estate, commercial real estate and commercial/industrial
business loans, combined with the growth of the commercial
-51-
<PAGE> 54
lending division.* The Company also intends to begin to increase sales
of one-to-four family mortgage loans in the secondary market, including selling
seasoned and recently originated one-to-four family mortgage loans in order to
provide liquidity for the funding of higher-yielding loan originations and
purchases, increase non-interest income and maintain adequate levels of
capital.* The Company anticipates that increased sales of one-to-four family
loans will decrease the proportion of the gross loan portfolio represented by
such loans, will increase non-interest income as a result of increased gains on
the sales of such loans, and will further lessen the Company's negative gap
position as such loans are replaced by higher-yielding, adjustable rate assets,
including multi-family, commercial real estate and commercial loans.*
Portfolio diversification in fiscal 1998 also will include continued purchases
of loans or participation interests in loans originated by other lenders both
within and outside of its primary lending area.* Loans purchased, or
participation interests purchased, which relate to properties located outside
of the Company's primary lending area will consist primarily of multi-family,
commercial real estate, multi-family construction and commercial real estate
construction loans.* In deciding whether or not to purchase a loan or
participation interest in a loan originated outside of the Company's primary
lending area, management of the Company has applied, and continues to apply,
underwriting guidelines which are at least as strict as those applicable to the
origination of similar loans within its primary lending area.
The Company intends to fund its asset portfolio diversification in fiscal
1998 by a combination of retail deposits, brokered deposits, borrowings, the
sale of one-to-four family mortgage loans in the secondary market, the maturity
and sale of mortgage-backed and related securities and FHLB advances.*
The increase in the level of the allowance for losses on loans during
fiscal 1997 was primarily the result of increases in the commercial, home
equity and commercial real estate loan portfolios. Loans secured by
multi-family and commercial real estate and commercial business assets
generally involve a greater degree of credit risk than one-to-four family loans
and carry larger balances. The increased credit risk is the result of several
factors, including concentration of principal in a limited number of loans and
borrowers, the effect of general economic conditions on income-producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Management anticipates that as the Company's volume of
multi-family and commercial/nonresidential real estate and commercial business
lending activity continues to increase, the Company will need to build a higher
level of allowance for loan losses established through a provision for loan
losses, which will have a negative effect on the Company's net income in the
short-term.* However, the Company believes that building the higher yielding
multi-family and commercial/nonresidential real estate components of its gross
loan portfolio will benefit the Company longer term, and should contribute to a
long-term improvement in the Company's net income and return on equity.*
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND
1996
GENERAL
Net income for the fiscal year ended June 30, 1997 increased 2.2% to
$1.919 million from $1.878 million for fiscal 1996. The increase in net income
was primarily attributable to an increase in net interest income. Net interest
income before the provision for losses on loans increased to $9.6 million for
the fiscal year ended June 30, 1997 from $7.5 million for fiscal 1996,
primarily as a result of higher average interest-earning assets during fiscal
1997 as compared to fiscal 1996. Non-interest income decreased by $234,000 to
$1.0 million for the fiscal year ended June 30, 1997 from $1.3 million for
fiscal 1996. The decrease in non-interest income was primarily due to a
decrease in other non-interest income which decreased $174,000 to $87,000 for
the fiscal year ended June 30, 1997 from $261,000 for fiscal 1996 and a
decrease in gains on the sale of investments and mortgage-backed and related
securities of $65,000 to $7,000 for fiscal year ended June 30, 1997 from
$72,000 for fiscal 1996. Also, insurance commissions decreased $17,000 to
$110,000 for the fiscal year ended June 30, 1997 from $127,000 for fiscal 1996,
loan servicing fees decreased $17,000 to $86,000 for the fiscal year ended June
30, 1997 from $103,000 for fiscal 1996, and service charges on deposit accounts
decreased $16,000 to $478,000 for the fiscal year ended June 30, 1997 from
$494,000 for fiscal 1996. The decrease in non-interest income was partially
offset by an increase in service charges on loans of $35,000. Non-interest
expense increased $1.4 million to $7.0 million for the fiscal year ended June
30, 1997 from $5.6 million for fiscal 1996, primarily as a result of a one-time
industry-wide FDIC special assessment charge of $877,000, partially offset by a
refund credit of $137,000, an increase of $454,000 in compensation and
benefits, an increase of $182,000 in other non-interest
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<PAGE> 55
expense, an increase of $114,000 in occupancy and equipment expense and
an increase of $47,000 in marketing expense. Net income also was reduced by an
increase in the provision for losses on loans to $650,000 for fiscal 1997 from
$367,000 for fiscal 1996.
Return on average equity decreased to 6.83% for the fiscal year ended June
30, 1997 from 7.17% for fiscal 1996. Return on average assets decreased to
.48% for the fiscal year ended June 30, 1997 from .60% for fiscal 1996. The
decreases in return on average equity and average assets resulted primarily
from a one-time after-tax charge of $533,000 to recapitalize the SAIF, the FDIC
insurance fund which insures deposits of savings associations, partially offset
by an after-tax FDIC credit refund of $83,000. Excluding the effects of the
FDIC assessment and credit, return on average equity and return on average
assets would have been 8.43% and .60%, respectively. The Company's principal
investment focus during the fiscal year ended June 30, 1997 was the origination
and purchase of mortgage and commercial loans. The asset growth primarily was
funded through increases in deposits, primarily brokered and non-brokered
wholesale certificates of deposit, money market deposits, retail certificates
of deposit and sales of loans in the secondary market.
NET INTEREST INCOME
Net interest income increased 27.4% to $9.6 million for fiscal 1997 from
$7.5 million for fiscal 1996. Interest income increased $6.9 million in fiscal
1997, while interest expense increased $4.9 million. The level of net interest
income primarily reflects a 26.3% increase in average interest-earning assets
during fiscal 1997 and a 4.7% increase in the excess of the Company's average
interest-earning assets over average interest-bearing liabilities to $28.7
million for fiscal 1997 from $27.4 million for fiscal 1996, and by an increased
interest rate spread to 2.06% for fiscal 1997 from 1.97% for fiscal 1996. The
increased interest rate spread for fiscal 1997 is a result of the Company's
origination and purchase of loans with variable rates at higher interest rates,
partially offset by higher funding costs.
INTEREST INCOME
Interest income increased 30.3% to $29.8 million for fiscal 1997 from
$22.9 million for fiscal 1996. The increase in interest income was the result
of an increase in average interest-earning assets of 26.3% to $388.1 million
for fiscal 1997 compared to $307.4 million for fiscal 1996 and an increase of
23 basis points in the yield on interest-earning assets to 7.68% for fiscal
1997 from 7.45% for fiscal 1996. The rate of asset growth experienced during
fiscal year 1997 is not expected to continue as the Company had substantially
completed the leveraging of its assets during the first half of fiscal 1997 and
continues to implement the second phase of its strategic plan by slowing its
assets growth and focusing on asset portfolio diversification in fiscal 1998.
Interest income on loans increased 52.7% to $20.7 million for fiscal 1997 from
$13.6 million for fiscal 1996. The increase was the result of an increase in
the Company's average gross loans of 47.0% to $254.1 million for fiscal 1997
from $172.9 million for fiscal 1996 and an increase in average yield to 8.16%
for fiscal 1997 from 7.86% for fiscal 1996. While total mortgage loans
originated and purchased decreased in fiscal 1997 compared to fiscal 1996 as
the Company focused on portfolio diversification, gross loans increased
primarily as a result of the Company retaining all of its originated adjustable
rate loans. The increase in yield is primarily attributable to the retention
of higher rate adjustable-rate loans, and to the higher yields paid on the
multi-family and commercial components of the loan portfolio. Interest income
on mortgage-backed securities decreased 6.8% to $3.5 million for fiscal 1997
from $3.8 million for fiscal 1996. The decrease was primarily due to a
decrease in average balances to $50.4 million for fiscal 1997 from $55.2
million for fiscal 1996 offset by an increase in average yield to 7.05% for
fiscal 1997 from 6.90% for fiscal 1996. The decrease in mortgage-backed
securities is expected to continue in fiscal 1998 as the Company continues to
use the principal prepayments to fund the asset portfolio diversification.
Interest income on mortgage-related securities increased 2.1% to $2.7 million
for fiscal 1997 from $2.6 million for fiscal 1996. The increase was primarily
due to an increase in average balances to $40.5 million for fiscal 1997 from
$37.3 million for fiscal 1996, offset by a decrease in average yield to 6.65%
for fiscal 1997 from 7.06% for fiscal 1996. Interest income on investment
securities and securities available-for-sale decreased 4.3% to $2.5 million for
fiscal 1997 from $2.6 million for fiscal 1996. The decrease was primarily due
to a decrease in average yield to 6.54% for fiscal 1997 from 6.83% for fiscal
1996. The lower average yield was primarily attributable to the falling
interest rate environment during the last half of fiscal 1997. The interest
rate environment for fiscal 1997 was marked by increasing interest rates for
the first half before falling in the last half
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<PAGE> 56
as compared to a rising interest rate environment throughout fiscal
1996. The lower interest rates of the last half of fiscal 1997 also resulted
in lower average yields on the Bank's fixed and adjustable rate loans and
related securities portfolios.
INTEREST EXPENSE
Interest expense increased 31.7% to $20.2 million for fiscal 1997 from
$15.3 million for fiscal 1996. The increase was the result of a 28.4% increase
in the average amount of interest-bearing liabilities to $359.4 million for
fiscal 1997 compared to $280.0 million for fiscal 1996 and an increase in the
average rate paid on interest-bearing liabilities to 5.62% for fiscal 1997 from
5.48% for fiscal 1996. The increased balances of certificates of deposit
(including brokered and non-brokered wholesale deposits), money market deposits
and borrowings, offset by decreases in lower cost NOW accounts and passbook
deposits, was the primary reason for the increase in the average rate paid in
fiscal 1997 as compared to fiscal 1996. Interest expense on deposits increased
36.9% to $13.9 million for fiscal 1997 from $10.1 million for fiscal 1996. The
increase was the result of an increase in average balances of 33.0% to $251.8
million for fiscal 1997 from $189.4 million for fiscal 1996 and an increase in
the average rate paid on deposits to 5.52% for fiscal 1997 from 5.36% for
fiscal 1996. The increase in deposits was primarily due to an increase of
35.1% in certificates of deposit to $211.0 million for fiscal 1997 compared to
$156.2 million in fiscal 1996 and an increase in average rate paid on
certificates of deposit to 5.86% for fiscal 1997 from 5.81% for fiscal 1996.
Also, money market deposits increased 148.8% to $15.4 million for fiscal 1997
compared to $6.2 million in fiscal 1996 and the average rate paid on such
deposits increased to 5.21% for fiscal 1997 from 4.78% for fiscal 1996. These
increases were partially offset by a decline of 5.9% in passbook accounts to
$23.0 million for fiscal 1997 compared to $24.4 million for fiscal 1996 and a
decline of 7.5% in NOW accounts to $2.4 million for fiscal 1997 compared to
$2.6 million for fiscal 1996. Money market deposits increased due to
aggressive marketing and an attractive interest rate paid within the Bank's
local market area. The Company's increase in certificates of deposit was the
result of aggressive marketing and pricing and the use of brokered certificates
of deposit. Of the $211.1 million in the average balance of certificates of
deposit for fiscal 1997, $87.1 million or 41.3% represented brokered
certificates of deposit compared to $52.5 million or 33.6% for fiscal 1996.
The average rate paid on brokered certificates of deposit increased to 6.11%
for fiscal 1997 from 5.81% for fiscal 1996. The rate of brokered certificate
of deposit growth experienced in fiscal 1997 is not expected to continue as the
Company continues to implement the second phase of its strategic plan by
slowing the rate of growth of its asset base and focusing on asset portfolio
diversification in fiscal 1998. Interest on borrowings (FHLB advances and
reverse repurchase agreements) increased 21.6% to $6.2 million for fiscal 1997
from $5.1 million for fiscal 1996. The increase in borrowings was primarily
due to growth in the average balance of FHLB advances of 33.7% to $100.4
million for fiscal 1997 compared to $75.1 million for fiscal 1996. The
increase in interest on borrowings also was due to an increase in average rate
paid to 5.98% for fiscal 1997 from 5.85% for fiscal 1996, as interest rates on
the adjustable-rate and short-term fixed-rate maturity borrowings increased as
interest rates in general increased in the first half of fiscal 1997. FHLB
advances will continue to be utilized as the Company continues the
implementation of the second phase of its strategic plan by slowing the rate of
growth of its asset base and focusing on asset portfolio diversification in
fiscal 1998.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased by 77.1% to $650,000 for
fiscal 1997 from $367,000 for fiscal 1996. The level of allowance for losses
on loans generally is determined by the Bank's historical loan loss experience,
the condition and composition of the Bank's loan portfolio and existing and
anticipated general economic conditions. Based on management's evaluation of
the loan portfolio and the increase in gross loans during fiscal 1997, the
allowance for losses on loans increased 42.8% to $1.8 million at June 30 1997
compared to $1.2 million at June 30, 1996. The increase in the level of
allowance for losses on loans was primarily the result of the increases in
commercial, home equity and commercial real estate loan portfolios which carry
a greater degree of credit risk. The ratio of allowance for loan losses to
gross loans increased to 0.62% at June 30, 1997 from 0.50% at June 30, 1996.
The amount of non-performing loans at June 30, 1997 was $624,000 or 0.22% of
gross loans compared to $107,000 or 0.04% of gross loans at June 30, 1996.
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<PAGE> 57
NON-INTEREST INCOME
Non-interest income decreased 18.5% to $1.0 million for fiscal 1997 from
$1.3 million for fiscal 1996. The largest components of the decrease were a
decrease in other income to $87,000 for fiscal 1997 compared to $261,000 for
fiscal 1996, a decrease in gains on the sale of securities and mortgage-backed
and related securities to $7,000 for fiscal 1997 compared to $72,000 for fiscal
1996, a decrease in insurance commissions to $110,000 for fiscal 1997 compared
to $127,000 for fiscal 1996, a decrease in loan servicing fees to $86,000 for
fiscal 1997 compared to $103,000 for fiscal 1996, and a decrease in service
charges on deposit accounts to $478,000 for fiscal 1997 compared to $494,000
for fiscal 1996. The decreases in non-interest income were offset by an
increase in gains on the sales of loans to $95,000 for fiscal 1997 compared to
$75,000 for fiscal 1996. The decrease in other income and insurance
commissions reflects the sale of the property and casualty policies of the
Company's insurance subsidiary for a one-time gain of $100,000 during fiscal
1996. The decrease in gains on the sale of securities and mortgage-backed and
related securities reflects management's decision to sell more higher-yielding
available-for-sale securities in the 1996 period. The increase in gains on the
sale of loans reflects the gains on the sale of an increased volume of mortgage
loans in the 1997 period. The decrease in loan servicing fees reflects
decreases in the average balance of the Company's sold loan serviced portfolio.
Service charges on loans increased $35,000 to $165,000 for fiscal 1997 from
$130,000 for fiscal 1996, primarily reflecting the increased fees charged on
commercial loan volume.
NON-INTEREST EXPENSE
Non-interest expense increased 26.9% to $7.0 million for fiscal 1997 from
$5.6 million for fiscal 1996. The increase was primarily due to an increase in
FDIC deposit insurance premiums of $695,000 to $1.1 million for fiscal 1997
from $393,000 for fiscal 1996. The increase in FDIC deposit insurance premiums
was primarily a result of an industry-wide special assessment charge of
$877,000 for an amount to recapitalize the SAIF during the 1997 period,
partially offset by a refund credit of $137,000. See "Recent Regulatory
Developments." Compensation and benefits expense increased $454,000 to $3.5
million for fiscal 1997 from $3.0 million for fiscal 1996, which primarily
relates to higher salary, loan commissions and incentive compensation and an
increase in full-time equivalent employees. Occupancy and equipment expense
increased $114,000 to $963,000 for fiscal 1997 from $849,000 for fiscal 1996,
due to additional bank equipment purchases. Other non-interest expense
increased $182,000 to $1.2 million for fiscal 1997 from $1.0 million for fiscal
1996, due to increases in loan, printing, office supplies, organization dues,
legal and other miscellaneous expenses. Marketing expense increased $47,000 to
$328,000 for fiscal 1997 from $281,000 for fiscal 1996.
INCOME TAX EXPENSE
Income tax expense increased to $1.026 million for fiscal 1997 from $1.009
million for fiscal 1996. The increase was primarily a result of higher income
before income taxes, partially offset by lower state income taxes due to an
increase in the amount of interest income not subject to state income taxes.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1996 AND
1995
GENERAL
Net income for fiscal 1996 increased 74.9% to $1.9 million from $1.1
million for fiscal 1995. The increase in net income was primarily attributable
to an increase in net interest income. Net interest income before the
provision for losses on loans increased to $7.5 million for fiscal 1996 from
$5.8 million for fiscal 1995, primarily as a result of higher average
interest-earning assets during fiscal 1996 as compared to fiscal 1995.
Non-interest income increased by $264,000 to $1.3 million for fiscal 1996 from
$998,000 million for fiscal 1995. The increase in non-interest income was
primarily due to an increase in gains on the sale of investments and
mortgage-backed and related securities of $174,000 to $72,000 for fiscal 1996
from a loss of $102,000 for fiscal 1995. Also, other non-interest income
increased $82,000 to $261,000 for fiscal 1996 from $179,000 for fiscal 1995 and
gains on the sale of loans increased $52,000 to $75,000 for fiscal 1996 from
$23,000 for fiscal 1995. The increase in non-interest income was partially
offset by a decrease in insurance commissions of $69,000 and
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<PAGE> 58
service charges on loans of $14,000. Non-interest expense increased
$769,000 to $5.6 million for fiscal 1996 from $4.8 million for fiscal 1995,
primarily as a result of an increase of $396,000 in compensation and benefits,
$154,000 in other non-interest expense, $117,000 in deposit insurance premiums,
$54,000 in occupancy and equipment expense and $48,000 in marketing expense.
Net income was reduced by an increase in the provision for losses on loans to
$367,000 for fiscal 1996 from $248,000 for fiscal 1995.
Return on average equity increased to 7.17% for fiscal 1996 from 4.39% for
fiscal 1995. Return on average assets increased to .60% for fiscal 1996 from
.51% for fiscal 1995. The increases in return on average equity and average
assets resulted from the continuation of the Company's leveraging strategy in
which total assets increased to $377.2 million at June 30, 1996 from $259.5
million at June 30, 1995. The Company's principal investment focus during
fiscal 1996 was the origination and purchase of mortgage loans and the purchase
of mortgage-backed and related securities. The asset growth was funded through
increases in FHLB advances and other borrowings and increases in deposits,
primarily brokered and non-brokered wholesale certificates of deposit.
NET INTEREST INCOME
Net interest income increased 29.7% to $7.5 million for fiscal 1996 from
$5.8 million for fiscal 1995. Interest income increased $8.3 million in fiscal
1996, while interest expense increased $6.6 million. The level of net interest
income primarily reflects a 52.9% increase in average interest-earning assets
during fiscal 1996 and a 22.2% increase in the excess of the Company's average
interest-earning assets over average interest-bearing liabilities to $27.4
million for fiscal 1996 from $22.4 million for fiscal 1995, partially offset by
a narrowing interest rate spread to 1.97% for fiscal 1996 from 2.34% for fiscal
1995. This increase was primarily the result of the strategy to leverage the
Company's capital base. The 22.2% increase in the excess of the Company's
average interest-earning assets over average interest-bearing liabilities was
primarily the result of transferring $3.0 million of interest-bearing checking
accounts to non-interest bearing type accounts. The decision to transfer such
accounts to non-interest bearing type accounts resulted from a checking account
profitability study, and management believes that such transfer will not result
in the loss of a significant portion of such accounts. The narrowing interest
rate spread for fiscal 1996 is a result of the Company's origination and
purchase of loans and securities with variable rates at lower interest rates
which were primarily funded by higher interest rate certificates of deposit
(including brokered certificates of deposit) and borrowings.
INTEREST INCOME
Interest income increased 57.2% to $22.9 million for fiscal 1996 from
$14.6 million for fiscal 1995. The increase in interest income was the result
of an increase in average interest-earning assets of 52.9% to $307.4 million
for fiscal 1996 compared to $201.0 million for fiscal 1995 and an increase of
21 basis points in the yield on interest-earning assets to 7.45% for fiscal
1996 from 7.24% for fiscal 1995. The rate of asset growth experienced during
fiscal year 1996 is not expected to continue as the Company achieves its
targeted asset size in fiscal 1997 and implements the second phase of its
strategic plan by slowing its assets growth and focusing on asset portfolio
diversification in fiscal 1997. Interest income on loans increased 38.2% to
$13.6 million for fiscal 1996 from $9.8 million for fiscal 1995. The increase
was the result of a rise in the Company's average gross loans of 36.7% to
$172.9 million for fiscal 1996 from $126.5 million for fiscal 1995 and an
increase in average yield to 7.86% for fiscal 1996 from 7.77% for fiscal 1995.
Gross loans increased primarily as a result of the Company retaining
substantially all of its originated fixed-rate loans and purchasing additional
loans in the secondary market. The increase in yield is primarily attributable
to the retention of longer-term fixed-rate and adjustable-rate loans. The
Company's decision to now retain longer-term fixed-rate loans is due to the
higher interest rates on longer-term fixed-rate loans as compared to the lower
initial rate offered on adjustable rate loans. Interest income on
mortgage-backed securities increased 83.9% to $3.8 million for fiscal 1996 from
$2.1 million for fiscal 1995. The increase was primarily due to an increase in
average balances to $55.2 million for fiscal 1996 from $33.0 million for fiscal
1995 and an increase in average yield to 6.90% for fiscal 1996 from 6.28% for
fiscal 1995. Interest income on mortgage-related securities increased 87.0% to
$2.6 million for fiscal 1996 from $1.4 million for fiscal 1995. The increase
in average yield on mortgage-backed and related securities was primarily due to
an upward interest rate adjustment in the adjustable rate securities portion of
these portfolios. Interest income on investment securities and securities
available-for-sale increased 137.2% to $2.6 million for fiscal 1996 from $1.1
million for fiscal 1995. The increase was primarily due to an increase in
average balances
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<PAGE> 59
of 118.1% to $37.9 million for fiscal 1996 from $17.4 million for fiscal
1995 and an increase in average yield to 6.83% for fiscal 1996 from
6.28% for fiscal 1995. It is anticipated that the rate of growth experienced
in fiscal 1996 for mortgage-backed and related securities and investment
securities available-for-sale will not continue as the Company achieves its
targeted asset size in fiscal 1997 and implements the second phase of its
strategic plan by slowing its assets growth and focusing on asset portfolio
diversification in fiscal 1997. The higher average yield was primarily
attributable to the higher balances of the securities available-for-sale
portfolio invested in longer term and higher yielding securities. The interest
rate environment for fiscal 1996 was marked by falling interest rates for the
first half before increasing in the last half as compared to a rising interest
rate environment throughout fiscal 1995. The higher interest rates of the last
half of fiscal 1996 also resulted in higher average yields on the Bank's fixed
and adjustable rate loans and mortgage-backed and related securities
portfolios.
INTEREST EXPENSE
Interest expense increased 75.5% to $15.3 million for fiscal 1996 from
$8.7 million for fiscal 1995. The increase was the result of a 56.8% increase
in the average amount of interest-bearing liabilities to $280.0 million for
fiscal 1996 compared to $178.6 million for fiscal 1995 and an increase in the
average rate paid on interest-bearing liabilities to 5.48% for fiscal 1996 from
4.90% for fiscal 1995. The increased balances of certificates of deposit
(including brokered deposits) and borrowings, as compared to NOW accounts,
money market deposits and passbook deposits, was the primary reason for the
increase in the average rate paid in fiscal 1996 as compared to fiscal 1995.
Interest expense on deposits increased 83.2% to $10.1 million for fiscal 1996
from $5.5 million for fiscal 1995. The increase was the result of an increase
in average balances of 57.0% to $189.4 million for fiscal 1996 from $120.6
million for fiscal 1995 and an increase in the average rate paid on deposits to
5.36% for fiscal 1996 from 4.59% for fiscal 1995. The increase in deposits was
primarily due to an increase of 87.8% in certificates of deposit to $156.2
million for fiscal 1996 compared to $83.1 million in fiscal 1995 and an
increase in average rate paid on certificates of deposit to 5.81% for fiscal
1996 from 5.35% for fiscal 1995. Also, money market deposits increased 49.5%
to $6.2 million for fiscal 1996 compared to $4.2 million in fiscal 1995 and the
average rate paid on such deposits increased to 4.78% for fiscal 1996 from
4.26% for fiscal 1995. These increases were partially offset by a decline of
9.8% in passbook accounts to $24.4 million for fiscal 1996 compared to $27.1
million for fiscal 1995 and a decline of 58.7% in NOW accounts to $2.6 million
for fiscal 1996 compared to $6.2 million for fiscal 1995. The decline in NOW
accounts was primarily the result of transferring $3.0 million of
interest-bearing NOW accounts to non-interest bearing demand deposit type
accounts. The Company's increase in certificates of deposit was the result of
aggressive marketing and pricing and the use of brokered certificates of
deposit. Of the $156.2 million in the average balance of certificates of
deposit for June 30, 1996, $52.5 million or 33.6% represented brokered
certificates of deposit compared to $3.9 million or 4.7% at June 30, 1995. The
average rate paid on brokered certificates of deposit increased to 5.81% at
June 30, 1996 from 5.30% at June 30, 1995. The rate of brokered certificate of
deposit growth experienced in fiscal 1996 is not expected to continue as the
Company achieves its targeted asset size in fiscal 1997 and implements the
second phase of its strategic plan by slowing its assets growth and focusing on
asset portfolio diversification in fiscal 1997. Interest on borrowings (FHLB
advances and reverse repurchase agreements) increased 63.7% to $5.1 million for
fiscal 1996 from $3.1 million for fiscal 1995. The increase was primarily due
to growth in the average balance of FHLB advances and reverse repurchase
agreements of 58.9% to $87.5 million for fiscal 1996 compared to $55.1 million
for fiscal 1995. The increase in interest on borrowings also was due to an
increase in average rate paid to 5.85% for fiscal 1996 from 5.67% for fiscal
1995, as interest rates on the adjustable-rate and short-term fixed-rate
maturity borrowings increased as interest rates in general increased in the
second half of fiscal 1996. The rate of FHLB advance growth experienced in
fiscal 1996 is not expected to continue as the Company achieves its targeted
asset size in fiscal 1997 and implements the second phase of its strategic plan
by slowing its asset growth and focusing on asset portfolio diversification in
fiscal 1997.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased by 48.0% to $367,000 for
fiscal 1996 from $248,000 for fiscal 1995. The level of allowance for losses
on loans generally is determined by the Bank's historical loan loss experience,
the condition and composition of the Bank's loan portfolio and existing and
anticipated general economic conditions. Based on management's evaluation of
the loan portfolio and the increase in gross loans during fiscal 1996, the
allowance for losses on loans increased 29.5% to $1.2 million at June 30 1996
compared
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<PAGE> 60
to $953,000 at June 30, 1995. The increase in the level of allowance
for losses on loans was primarily the result of the increase in multi-family,
multi-family construction, home equity and commercial real estate loan
portfolios which carry a greater degree of credit risk. The ratio of allowance
for loan losses to gross loans decreased to 0.50% at June 30, 1996 from 0.62%
at June 30, 1995. The amount of non-performing loans at June 30, 1996 was
$107,000 or 0.04% of gross loans compared to $143,000 or 0.09% of gross loans
at June 30, 1995.
NON-INTEREST INCOME
Non-interest income increased 26.5% to $1.3 million for fiscal 1996 from
$998,000 for fiscal 1995. During the fiscal year ended June 30, 1996, gains on
the sale of investments and mortgage-backed and related securities increased
$174,000 to $72,000 from a loss of $102,000 for fiscal 1995, primarily due to
management's decision in fiscal 1996 to sell securities from the Company's
available-for-sale portfolio, as part of the Company's repositioning of its
available-for-sale portfolio. Other non-interest income increased $82,000 to
$261,000 for fiscal 1996 from $179,000 for fiscal 1995, reflecting the sale of
the property and casualty policies of the Company's insurance subsidiary of
$100,000. Gains on the sales of loans increased $52,000 to $75,000 for fiscal
1996 from $23,000 for fiscal 1995, primarily due to the sale of the Company's
student loan portfolio. Service charges on deposit accounts increased $30,000
to $494,000 for fiscal 1996 from $464,000 for fiscal 1995, primarily due to
normal deposit service pricing increases. Loan servicing fees increased $9,000
to $103,000 for fiscal 1996 from $94,000 for fiscal 1995, due to an increase in
the average balance of loans serviced to secondary market investors. Increases
in non-interest income were partially offset by decreases in service charges on
loans of $14,000 to $130,000 for fiscal 1996 from $144,000 for fiscal 1995, due
to decreases in the service charges related to lending. In addition, during
fiscal 1996, the Company had a decrease in insurance commissions of $69,000 to
$127,000 from $196,000 for fiscal 1995, as a result of the cessation of
commissions received on the property and casualty policies sold to a third
party during fiscal 1996.
NON-INTEREST EXPENSE
Non-interest expense increased 16.1% to $5.6 million for fiscal 1996 from
$4.8 million for fiscal 1995. The increase was primarily due to an increase in
compensation and benefits expense of $396,000 to $3.0 million for fiscal 1996
from $2.6 million for fiscal 1995, relating to higher salary, loan commissions,
incentive compensation and stock benefit plan expenses. Marketing expenses
increased $48,000 to $281,000 for fiscal 1996 from $233,000 for fiscal 1995,
primarily due to more aggressive marketing of line-of-credit home equity loans.
Occupancy and equipment expense increased $54,000 to $849,000 for fiscal 1996
from $795,000 for fiscal 1995, due to additional Bank equipment purchases.
Deposit insurance premiums increased $117,000 to $393,000 for fiscal 1996 from
$276,000 for fiscal 1995, due to an increase in the deposit account base.
Other non-interest expense increased $154,000 to $991,000 for fiscal 1996 from
$837,000 for fiscal 1995, due to increases in loan, printing, office supplies,
organization dues, legal and other miscellaneous expenses.
INCOME TAX EXPENSE
Income tax expense increased to $1.0 million for fiscal 1996 from $708,000
for fiscal 1995. The increase was primarily a result of higher income before
income taxes, partially offset by lower state income taxes due to an increase
in the amount of interest income not subject to state income taxes.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's consolidated average statements of financial condition and the
consolidated statements of income at and for the fiscal years ended June 30,
1997, 1996 and 1995, and reflects the average yields on interest-earning assets
and average rates on interest-bearing liabilities for the periods indicated.
Such yields and rates are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown. Average balances are derived principally
from average monthly balances and include non-accruing loans. The average
yields and rates include loan fees which are considered adjustments to loan
yield. The amount of interest income resulting from the recognition of loan
fees was $4,000, ($4,000) and $3,000 for the fiscal years ended June 30, 1997,
1996 and 1995, respectively. The increase in the amount of loan fees
recognized in interest
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<PAGE> 61
income for 1997 as compared to 1996 primarily resulted from the originations of
loans with higher fees. Interest income on non-accrual loans is reflected in
the period it is collected and not in the period it is earned. Such amounts
are not material to net interest income or net change in net interest income in
any period. Non-accruing loans are included in the average balances and do not
have a material effect on the average yield.
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<PAGE> 62
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------------------
1997 1996
------------------------------ -------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans ............................... $246,744 $19,849 8.04% $164,565 $12,617 7.67%
Consumer loans ............................... 6,015 776 12.90 8,339 968 11.61
Commercial loans ............................. 1,387 124 8.94 -- -- --
--------- -------- ---------- --------
Total loans ................................. 254,146 20,749 8.16 172,904 13,585 7.86
Mortgage-backed securities ................... 50,367 3,552 7.05 55,218 3,810 6.90
Mortgage derivative securities ............... 40,494 2,691 6.65 37,320 2,636 7.06
--------- -------- --------- --------
Total loans and related securities .......... 90,861 6,243 6.87 92,538 6,446 6.97
Investment and other securities .............. 4,980 294 5.90 4,378 268 6.12
Securities available for sale ................ 32,887 2,184 6.64 33,523 2,322 6.93
Federal Home Loan Bank stock ................. 5,217 354 6.79 4,036 273 6.76
--------- -------- --------- --------
Total interest-earning assets(1) ............ 388,091 29,824 7.68 307,379 22,894 7.45
-------- ---- -------- ----
Non-interest earning assets ................... 9,456 7,966
Total assets ................................ $397,547 $315,345
========= ==========
LIABILITIES AND RETAINED EARNINGS:
Deposits:
NOW accounts ................................. $2,370 41 1.73 $2,562 42 1.64
Money market deposit accounts ................ 15,444 804 5.21 6,207 297 4.78
Passbook ..................................... 23,001 691 3.00 24,446 734 3.00
Certificates of deposit ...................... 211,010 12,357 5.86 156,161 9,072 5.81
--------- -------- --------- --------
Total deposits .............................. 251,825 13,893 5.52 189,376 10,145 5.36
Advance payments by borrowers for taxes
and insurance ................... 3,486 94 2.66 3,089 85 2.71
Borrowings ..................................... 104,101 6,224 5.98 87,529 5,118 5.85
-------- -------- -------- --------
Total interest-bearing liabilities .......... 359,412 20,211 5.62 279,994 15,348 5.48
-------- ---- -------- ----
Other liabilities
(Incl. non-interest bearing demand deposits) 10,031 9,163
Retained earnings ............................. 28,104 26,188
--------- ---------
Total liabilities and retained earnings ..... $397,547 $315,345
======== =========
Net interest income/interest rate spread(2) .... $9,613 2.06% $ 7,546 1.97%
======== ======== ======= =======
Net earning assets/net interest margin(3) ...... $28,679 2.48% $27,385 2.45%
======== ========= ======= =======
Average interest-earning assets to average
interest-bearing liabilities .. 1.08x 1.10x
====== ======
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS
FISCAL YEAR ENDED JUNE 30,
1995
------------------------------
AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- -------- -------
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans ......................................................... $116,959 $8,795 7.52%
Consumer loans ......................................................... 9,538 1,034 10.84
Commercial loans ....................................................... -- -- --
----------- -------
Total loans ........................................................... 126,497 9,829 7.77
Mortgage-backed securities ............................................. 33,000 2,072 6.28
Mortgage derivative securities ......................................... 21,624 1,410 6.52
----------- --------
Total loans and related securities .................................... 54,624 3,482 6.37
Investment and other securities ........................................ 5,085 297 5.84
Securities available for sale .......................................... 12,290 795 6.47
Federal Home Loan Bank stock ........................................... 2,491 157 6.30
----------- --------
Total interest-earning assets(1) ...................................... 200,987 14,560 7.24
-------- ----
Non-interest earning assets ............................................. 8,079
-----------
Total assets .......................................................... $209,066
===========
LIABILITIES AND RETAINED EARNINGS:
Deposits:
NOW accounts ........................................................... $6,210 105 1.69
Money market deposit accounts .......................................... 4,152 177 4.26
Passbook ............................................................... 27,101 808 2.98
Certificates of deposit ................................................ 83,148 4,449 5.35
----------- --------
Total deposits ........................................................ 120,611 5,539 4.59
Advance payments by borrowers for taxes and insurance ................... 2,874 78 2.71
Borrowings .............................................................. 55,094 3,126 5.67
----------- --------
Total interest-bearing liabilities .................................... 178,579 8,743 4.90
------- -------
Other liabilities (Incl. non-interest bearing demand deposits) .......... 6,033
Retained earnings ....................................................... 24,454
-----------
Total liabilities and retained earnings ............................... $209,066
===========
Net interest income/interest rate spread(2) .............................. $5,817 2.34%
======== =======
Net earning assets/net interest margin(3) ................................ $22,408 2.89%
=========== =======
Average interest-earning assets to average interest-bearing liabilities .. 1.13x
========
</TABLE>
(1) Calculated net of deferred loans fees, loan discounts, loans in process and
allowance for loan losses.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate on interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
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<PAGE> 63
RATE/VOLUME ANALYSIS
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of, and rates
earned or paid on, interest-earning assets and interest-bearing liabilities.
The volume of earning dollars in loans and investments, compared to the volume
of interest-bearing liabilities represented by deposits and borrowings,
combined with the spread, produces the changes in net interest income between
periods. The following table shows the interest income for periods indicated.
Information is provided with respect to (i) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume),
(ii) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate), and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997 FISCAL YEAR ENDED JUNE 30, 1996
COMPARED TO COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1996 FISCAL YEAR ENDED JUNE 30, 1995
-------------------------------------- ---------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
---------- -------- ------------------ -------- -------- ------------------
Interest-earning assets:
Mortgage loans ..................... $621 $6,301 $310 $7,232 $137 $3,231 $56 $3,424
Consumer loans ..................... 108 (270) (30) (192) 40 286 6 332
Commercial loans ................... -- 124 -- 124 -- -- -- --
Mortgage-backed securities ......... 84 (335) (7) (258) 205 1,395 138 1,738
Mortgage-derivative securities ..... (156) 224 (13) 55 117 1,024 85 1,226
Investment and other securities .... (10) 37 (1) 26 14 (41) (2) (29)
Securities available for sale ...... (96) (44) 2 (138) 56 1,374 97 1,527
Federal Home Loan Bank stock ....... 1 80 -- 81 12 97 7 116
-------- -------- -------- -------- -------- -------- -------- --------
Total ............................ 552 5,993 385 6,930 581 7,366 387 8,334
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
NOW accounts ....................... 2 (3) -- (1) (3) (62) 2 (63)
Money market demand accounts ....... 26 442 39 507 21 88 11 120
Passbook accounts .................. -- (43) -- (43) 6 (79) (1) (74)
Certificates of deposit ............ 73 3,186 26 3,285 381 3,907 335 4,623
Advance payments by borrowers
for taxes and insurance .......... (2) 11 -- 9 -- 7 -- 7
Borrowings ......................... 115 969 22 1,106 96 1,840 56 1,992
-------- -------- -------- -------- -------- -------- -------- --------
Total ............................ 214 4,562 87 4,863 501 5,701 403 6,605
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net interest income .... $338 $1,431 $298 $2,067 $80 $1,665 ($16) $1,729
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
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<PAGE> 64
FINANCIAL CONDITION
Total assets increased $32.6 million or 8.7%, from $377.2 million at June
30, 1996 to $409.8 million at June 30, 1997. This increase is primarily
reflected in increases in loans receivable, consistent with the Company's
strategy of moderate asset growth and asset portfolio diversification. The
increase was funded primarily by an increase in wholesale brokered and
non-brokered deposits, money market deposits and retail certificates of
deposit.
Starting in the later half of fiscal 1996 and continuing in fiscal 1997,
the Company implemented the second stage of its post-Conversion strategy by
shifting its focus from asset growth to asset portfolio diversification. While
the Company intends to continue to originate and purchase one-to-four family
mortgage loans, the Company's long-term objective is to increase net income by
increasing the proportion of higher yielding assets in its loan portfolio. The
Company began to implement this strategy in the second half of fiscal 1996 by
increasing the multi-family real estate, multi-family construction and
commercial/nonresidential real estate components of its loan portfolio. In the
second half of fiscal 1997, a commercial lending division began operations to
continue the asset portfolio diversification. The moderate asset growth and
portfolio diversification in fiscal 1997 was funded primarily through increases
in deposits, primarily brokered and non-brokered wholesale certificates of
deposit, money market deposits, retail certificates of deposit and sales of
loans in the secondary market. The Company intends to fund its asset portfolio
diversification in fiscal 1998 through increases in retail deposits, brokered
and non-brokered wholesale deposits, principal repayment cash flows from
existing assets, modest increases in FHLB advances (subject to Board-imposed
and regulatory limitations discussed herein), the liquidation of a portion of
its available-for-sale portfolio and loan sales in the secondary market.
Cash and cash equivalents increased 81.5% to $8.8 million at June 30, 1997
compared to $4.8 million at June 30, 1996. The increase is largely
attributable to the decrease in mortgage-backed and related securities.
Investment securities decreased to $780,000 at June 30, 1997 compared to
$978,000 at June 30, 1996. The change was primarily the result of management's
decision to decrease its portfolio of investment securities, which consist
primarily of certificates of deposits in other financial institutions, due to
the competitive yields on loans in fiscal 1997 and loan portfolio
diversification.
Securities available-for-sale decreased to $29.5 million at June 30, 1997
compared to $37.3 million at June 30, 1996. The decrease is the result of
management's decision to decrease its investment in securities
available-for-sale due to favorable competitive yields on loans and loan
portfolio diversification. At June 30, 1997, the securities available-for-sale
portfolio contained $16.7 million of fixed-rate U.S. government securities,
$3.7 million of agency and private-issue fixed-rate mortgage-backed securities
with a minimum investment rating of AA, $7.7 million of fixed-rate
intermediate-term tranche CMOs with a minimum investment rating of AAA, $1.0
million of adjustable-rate mortgage mutual funds and $411,000 of municipal
bonds.
Mortgage-backed and related securities held-for-investment decreased to
$85.4 million at June 30, 1997 compared to $97.3 million at June 30, 1996. The
decrease is attributable to management's decision to decrease its investment in
mortgage-backed and related securities to provide funding for the loan
portfolio growth and diversification. Of the $85.4 million in mortgage-backed
and related securities at June 30, 1997, $72.0 million were adjustable rate and
$13.4 million were fixed rate, compared to a total of $97.3 million at June 30,
1996, of which $80.6 million were adjustable rate and $16.7 million were fixed
rate. The decrease in mortgage-backed and related securities was primarily
attributable to the principal repayments of adjustable-rate mortgage-backed
securities and CMOs in fiscal 1997. At June 30, 1997, $32.0 million of the
mortgage-backed and related securities portfolio consisted of private-issue
mortgage-backed and related securities, each issue of which carried a minimum
investment rating of AA at the time of purchase and at June 30, 1997.
Loans receivable increased to $273.6 million at June 30, 1997 compared to
$224.8 million at June 30, 1996. The increase at June 30, 1997 compared to the
prior fiscal year end is primarily the result of management's decision to
retain more ARM loans originated and purchased for the Company's portfolio, as
such loans carried higher yields than comparable mortgage-backed and related
securities in fiscal 1996. Total mortgage loans originated and purchased
amounted to $104.0 million and $133.1 million for the fiscal years ended June
30, 1997 and 1996, respectively, while sales of fixed-rate mortgage loans
totaled $10.6 million and $1.0 million for the fiscal years ended June 30, 1997
and 1996, respectively. The increase in fixed-rate mortgage loan sales is
primarily attributable to the Company's decision to create liquidity to fund
commercial loan originations. During fiscal 1997, the Company originated and
purchased loans totaling $83.5 million and $20.5 million,
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respectively. Of the $20.5 million in purchased loans, the Company
purchased $5.3 million outside of its primary lending area, whereby management
of the Company has applied underwriting guidelines which are at least as strict
as those applicable to the origination of similar loans within its primary
lending area.
Deposits increased $51.8 million to $281.5 million at June 30, 1997 from
$229.7 million at June 30, 1996. The increase in deposits was primarily due to
the Company's use of brokers and marketing efforts to increase the certificates
of deposit with the Company. Brokered deposits totaled $92.2 million at June
30, 1997, representing 32.8% of total deposits as compared to $75.3 million, or
32.8% of total deposits, at June 30, 1996. The average maturity of brokered
deposits was eleven months at June 30, 1997, compared to eight months at June
30, 1996. Non-brokered wholesale deposits totaled $48.8 million at June 30,
1997, representing 17.3% of total deposits as compared to $32.7 million, or
14.2% of total deposits, at June 30, 1996. Deposits are the Company's primary
source of externally generated funds. The level of deposits is heavily
influenced by such factors as the general level of short and long-term interest
rates as well as alternative yields that investors may obtain on competing
investment securities such as money market mutual funds.
FHLB-Chicago advances and other borrowings decreased to $92.1 million at
June 30, 1997 compared to $114.0 million at June 30, 1996. At June 30, 1997,
FHLB advances were $92.1 million or 24.2% of total liabilities compared to
$102.4 million or 29.2% of total liabilities at June 30, 1996. At June 30,
1996, the Company had borrowed $11.6 million under reverse repurchase
agreements. There were no borrowings under reverse repurchase agreements at
June 30, 1997. The Company has increasingly used FHLB-Chicago advances and
securities sold under agreements to repurchase as a funding source due to
attractive rates offered on advances in relation to deposit funds obtainable in
the Company's local market. The Company uses borrowings from the FHLB-Chicago
and securities sold under agreements to repurchase to manage the total
asset/liability portfolio of the Company. For a further discussion of FHLB
borrowings and securities sold under agreements to repurchase, see Note 8 to
Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered
deposits, proceeds from principal and interest payments on loans, principal and
interest payments on mortgage-backed and related securities and FHLB-Chicago
advances. Alternative funding sources are evaluated and utilized based upon
factors such as interest rates, availability, maturity, administrative costs
and retention capability. Although maturity and scheduled amortization of
loans are predicable sources of funds, deposit flows, mortgage prepayments and
prepayments on mortgage-backed and related securities are influenced
significantly by general interest rates, economic conditions and competition.
Mortgage loans and mortgage securities prepayments declined in fiscal 1995 as
interest rates increased and increased in fiscal 1996 as interest rates
declined for the first half of the fiscal year before increasing in the last
half of the fiscal year. During fiscal year 1997, prepayments increased as
interest rates decreased in the second half of the fiscal year.
The primary investing activity of the Company is the origination and
purchase of loans and the purchase of mortgage-backed and related securities.
For fiscal 1997, the Company originated and purchased loans totaling $97.6
million and $20.5 million, respectively, as compared to fiscal 1996 when
originated and purchased loans totaled $88.7 million and $51.6 million,
respectively. Purchases of mortgage-backed and related securities totaled $0
and $50.9 million for fiscal 1997 and 1996, respectively. The Company also
purchased investment securities in the amount of $0 and $580,000 during fiscal
1997 and 1996, respectively. For fiscal 1997 and 1996, these activities were
funded primarily by principal repayments on loans of $70.1 million and $38.7
million, respectively; principal repayments on mortgage-backed and related
securities of $19.0 million and $22.1 million, respectively; proceeds from the
sale of mortgage loans of $10.6 million and $5.3 million, respectively;
proceeds from maturity of investment securities of $198,000 and $192,000,
respectively; a net increase in deposits of $51.8 million and $77.5 million,
respectively and proceeds from long-term notes payable to the FHLB-Chicago of
$35.0 million and $33.0 million, respectively. Purchases of securities
available-for-sale totaled $2.0 million and sales were $2.3 million for fiscal
1997, compared to purchases of $51.5 million and sales of $44.7 million for
fiscal 1996.
During fiscal 1997, the Company has found wholesale brokered and
non-brokered deposits to be an efficient source and a cost-effective method,
relative to local retail market deposits, of meeting the Bank's funding needs.
In fiscal 1997, pricing of wholesale brokered deposits ranged from 20 to 40
basis points above comparable term U.S. Treasury securities. At June 30, 1997,
the average rate of the wholesale brokered deposits accepted by the Company was
6.11% compared to an average rate paid for retail certificates of deposit of
5.81%. Management believes that the strategy of leveraging the capital
acquired in the Conversion to achieve the targeted asset size established by
the Board of Directors within a three-to-five year period following the
Conversion, could not have been achieved solely through the use of retail
deposits from the local market.
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Management also believes that the costs, overhead and interest expense
of achieving comparable retail deposit growth would have exceeded the costs
related to the use of wholesale brokered deposits as a funding source.
However, management recognizes that the likelihood for retention of brokered
certificates of deposit is more a function of the rate paid on such accounts as
compared to retail deposits which may be established due to Bank location or
other intangible reasons. During fiscal 1997, management negotiated and
established a $15.0 million backup credit facility for contingency purposes to
replace funds from wholesale brokered deposits should retention of those
deposits diminish due to extraordinary events in the financial markets. The
Company's overall cost of funds has increased in recent years due primarily to
a much greater percentage of the deposits being in certificates, both wholesale
brokered and retail, as opposed to passbooks, money market accounts and
checking accounts. Management believes that a significant portion of its
retail deposits will remain with the Company and, in the case of wholesale
brokered deposits, may be replaced with similar type accounts even should the
level of interest rates change. However, in the event of a significant
increase in market interest rates, the cost of obtaining replacement brokered
deposits would increase as well.
The Bank's Board of Directors has set a maximum limitation of total
borrowings equal to 32% of total assets. This internal limit is 3% below the
allowable borrowing limit (for all borrowings including FHLB advances and
reverse repurchase agreements) of 35% of total assets established by the
FHLB-Chicago. At June 30, 1997, FHLB advances totaled $92.1 million or 22.5%
of the Bank's total assets. At June 30, 1997, the Bank had unused borrowing
authority under the borrowing limitations established by the Board of Directors
of $39.1 million and $51.4 million under the FHLB total asset limitation. The
Bank intends to fund asset portfolio diversification in fiscal 1998 through
modest increases in FHLB advances, and to maintain the 3% excess borrowing
capacity with the FHLB as a contingent source of funds to meet liquidity needs
as deemed necessary by the Board of Directors of the Bank.
During fiscal 1997, management continued to extend out the maturities of
both its wholesale brokered certificates of deposits and the FHLB borrowings to
reduce short-term liquidity risks. As of June 30, 1997, the average maturity
of the wholesale brokered certificates of deposit was eleven months compared to
eight months in fiscal 1996 and compared to a twelve month maturity for retail
certificates of deposits as of June 30, 1997.
The Company is required to maintain minimum levels of liquid assets under
the regulations of the Department of Financial Institutions, Division of
Savings and Loan for state-chartered savings banks. Savings banks are required
to maintain an average daily balance of liquid assets (including cash, certain
time deposits, certain bankers acceptances, certain corporate debt securities,
securities of certain mutual funds and specified United States government,
state or federal agency obligations) of not less than 8.0% since April 1, 1996
and 5.0% prior to that date. The Company's liquidity ratios were 19.83% and
24.75% at June 30, 1997 and 1996, respectively. The Company adjusts its
liquidity levels to meet various funding needs and to meet its asset and
liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At June 30, 1997 and 1996, cash
and cash equivalents were $8.8 million and $4.8 million, respectively. The
increase in cash and cash equivalents in fiscal 1997 resulted primarily from a
increase in net cash provided by operating activities.
Liquidity management for the Company is both an ongoing and long-term
function of the Company's asset/liability management strategy. Excess funds
generally are invested in short-term investments such as federal funds or
overnight deposits at the FHLB-Chicago. Whenever the Company requires funds
beyond its ability to generate them internally, additional sources of funds are
available and obtained from the wholesale brokered and non-brokered market as
well as the unused credit line from the FHLB-Chicago (subject to the
Board-imposed and regulatory limitations discussed herein), and funds also may
be available through reverse repurchase agreements wherein the Company pledges
investment, mortgage-backed or related securities. During fiscal 1997,
management obtained a $15.0 million contingent backup credit facility to
replace a portion of its interest rate sensitive liabilities such as borrowings
and deposits should such funding sources become difficult to obtain or retain
due to an adverse interest rate environment. The Company also has a federal
funds open line of credit in the amount of $5.0 million with a correspondent
bank which does not require the direct pledging of any assets. In addition,
the Company maintains a relatively high level of liquid assets such as
investment securities and mortgage-backed and related securities
available-for-sale in order to insure sufficient sources of funds are available
to meet the Company's liquidity needs.
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At June 30, 1997, the Company had outstanding loan commitments of $5.4
million. The Company had no commitments to purchase mortgage-backed and
related securities at June 30, 1997. The Company anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process to the issuance of firm commitments.
Certificates of deposit scheduled to mature in one year or less at June 30,
1997 totaled $137.9 million.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's Consolidated Financial Statements and Notes thereto have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance.
ASSET/LIABILITY MANAGEMENT
The Company's profitability, like that of most financial institutions,
depends to a large extent upon its net interest income, which is the difference
between interest earned on interest-earning assets, such as loans and
investments, and interest paid on interest-bearing liabilities, such as
deposits and borrowings. Net interest income is significantly affected by
changes in market interest rates. During periods of rising interest rates, the
Company is required to pay higher rates to attract deposits which can result in
a decline in net interest income if the Company is unable to increase the yield
on its interest-earning assets sufficiently to compensate for the increase in
its cost of funds.
In an attempt to manage vulnerability to interest rate changes, management
closely monitors the Company's interest rate risk. The Company has established
its investment strategies through an Asset/Liability Committee. The Committee
consists of James Smessaert, President/CEO, Peter Gilbert, Executive Vice
President/COO, Arthur Thompson, Senior Vice President-Finance/CFO, and
Elizabeth Borst, Senior Vice President-Sales & Marketing. The Committee
generally meets weekly and reviews the Company's interest rate risk position,
maturing securities and borrowings, interest rates and programs for increasing
retail and brokered and non-brokered wholesale deposits and originating and
purchasing loans, and develops strategies regarding such issues. In addition,
the Committee closely monitors the Company's growth, profitability, liquidity
and capital adequacy ratios. Minutes of these meetings are prepared and given
to the Board of Directors for their review as well as formal quarterly
asset/liability management and investment strategy reports.
The Company utilizes basic strategies in managing its assets and
liabilities by managing or maximizing the net interest income under various
interest rate scenarios. Certain techniques such as hedging through the use of
options, financial futures, and interest rate swaps historically have not been
utilized by the Company. Management does not intend to use such sophisticated
techniques in the near future. In addition to monitoring interest rate risk on
a weekly basis, the Company reviews loan and deposit rates weekly. The
emphasis has been on prudent pricing as opposed to increasing local retail
market share, and the Company has significantly supplemented and substituted
retail deposits using FHLB-Chicago advances and wholesale brokered and
non-brokered deposits in fiscal 1996 and 1997 as a result of favorable advance
and wholesale rates in relation to those obtainable on retail deposits.
Generally, the Company utilizes the following strategies to manage its
interest rate risk: (i) the Company maintains a relatively high level of
liquid assets, such as investment securities and mortgage-backed and related
securities available-for-sale; (ii) the Company seeks to primarily originate
and retain mortgage loans and mortgage-backed and related securities with
short-to medium-term periods to re-pricing; (iii) the Company attempts to
extend the maturities of retail deposits when deemed cost effective through the
pricing and promotion of certificates of deposit with longer terms, and
periodically utilizes deposit marketing programs offering maturity and
repricing terms structured to complement the repricing and maturity
characteristics of the existing asset/liability mix; (iv) the Company also
attempts to extend the maturities of wholesale brokered deposits when deemed
cost effective; and (v) the Bank utilizes longer-term borrowings from the
FHLB-Chicago to manage its assets and liabilities and enhance earnings. At
June 30, 1997, 1996 and 1995, total FHLB-Chicago advances were $92.1 million or
22.5% of total assets, $102.4 million or 27.1% of total assets, and $63.4
million or 24.4% of total assets, respectively.
Prior to January 1, 1996, most of the Company's wholesale brokered and
non-brokered certificates of deposits had 90 day initial maturities and, as of
June 30, 1997, the average maturity was eleven months. During the fiscal year
ended June 30,
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1997, management also has extended the maturity of new fixed-rate term
advances from the FHLB-Chicago to between two to five years to reduce the
Company's overall negative interest rate gap. Liquidity is another factor in
asset/liability management. As of June 30, 1997, the Company had $8.8 million
in cash or demand deposits and $29.5 million in its available-for-sale
portfolio, of which $2.0 million is due or will be repriced within one year.
The composition of the held-to-maturity portfolio as of June 30, 1997 was $85.4
million, of which $77.7 million will be due or repriced within one year.
By primarily originating or purchasing ARM and intermediate fixed-rate
loans during fiscal 1997, the Company has been able to reduce interest rate
risk by more closely matching the terms and repricing characteristics of its
assets by extending the maturities of its liabilities to reduce interest rate
risk. However, during fiscal 1997, the Company originated for portfolio $13.0
million in 30-year fixed-rate mortgage loans as compared to $21.3 million for
fiscal 1996. The decrease was due to the increasing interest rate environment
during the first half of fiscal 1997. In addition, because of the relative
liquidity of mortgage-backed and related securities, the Company can
restructure its interest-earning asset portfolios more quickly and effectively
in a changing interest rate environment. The Company's ARM loans and ARM
mortgage-backed and related securities typically have annual and lifetime
interest rate caps which reduce their ability to protect the Company against a
prolonged and significant increase in interest rates. Mortgage-backed and
related securities are subject to reinvestment risk. For example, during
periods of falling interest rates, mortgage-backed and related securities are
more likely to prepay, and the Company may not be able to reinvest the proceeds
from prepayments in securities or other assets with yields similar to those of
the prepaying mortgage-backed and related securities.
Rate sensitive and by monitoring an institution's interest rate
sensitivity. An asset or liability is said to be interest rate sensitive
within a specific time period if it matures or reprices within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or reprice within a specific time period and the amount
of interest-bearing liabilities anticipated, based upon certain assumptions, to
mature or reprice within that same time period. An interest rate sensitivity
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities that mature or
reprice within a specified time period. An interest rate sensitivity gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets that mature or reprice
within a specified time period.
At June 30, 1997 and 1996, total interest-bearing liabilities repricing
within one year exceeded total interest-bearing assets repricing in the same
period by $17.7 million and $51.5 million, respectively, representing a
negative cumulative one-year interest rate sensitivity gap equal to 4.3% and
13.7%, respectively, of total assets. The decrease in the Company's negative
one-year gap reflects the increased use of longer-term maturity deposits and
borrowings to fund adjustable rate mortgage loans and intermediate fixed-rate
loans. During periods of rising interest rates, a positive interest rate
sensitivity gap would tend to positively affect net interest income while a
negative interest rate sensitivity gap would tend to adversely affect net
interest income. In addition to the potentially adverse effect on net interest
income resulting from increasing interest rates due to the Company's one-year
gap position, the Company could experience a substantial decrease in
prepayments of its fixed-rate mortgage loans with rising interest rates, which
may result in a lower level of proceeds available for reinvestment.
In addition to measuring the interest rate risk as a static gap
measurement, the Company also measures the impact on interest income with an
instantaneous increase or decrease of interest rates of 100, 200, 300 and 400
basis points. This shock analysis is performed monthly. A third measurement
is used whereby interest rates are ramped over a one-year time frame with
increases and decreases of 100, 200, 300 and 400 basis points. Management
continues to upgrade its modeling techniques related to asset/liability
modeling. Results of the gap, shock and ramped interest risk analysis are
reviewed by the Board of Directors.
In fiscal 1998, the Company intends to maintain the weighted average
maturity level of its fixed-rate liabilities, including FHLB borrowings and
certificates of deposit, to fund the asset portfolio diversification.
Management anticipates that the effect of funding the origination and purchase
of an increasing portfolio of multi-family real estate, multi-family
construction and commercial/nonresidential loans with such liabilities will be
to lessen the Company's negative gap position. Also, the origination and
purchase of such assets normally carry more desirable interest rate repricing
features as compared to the Company's experience with one-to-four family
mortgage lending.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in
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<PAGE> 69
market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as ARM
loans and mortgage-backed and related securities, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
In addition, the proportion of ARM loans and mortgage-backed and related
securities in the Company's portfolios could decrease in future periods if
market interest rates remain at or decrease below current levels due to
refinance activity. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in the table. Finally, the ability of many borrowers to service
their adjustable-rate debt may decrease in the event of an interest rate
increase.
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ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at June 30, 1997 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
-----------------------------------------------------------------------------
MORE THAN MORE THAN
WITHIN FOUR TO ONE YEAR TO THREE YEARS TO
THREE MONTHS TWELVE MONTHS THREE YEARS FIVE YEARS
----------------- ----------------- ---------------- --------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ------ ------ ------ ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate ..................................... $ 4,725 8.46% $ 10,906 8.19% $ 25,945 8.11% $ 23,090 8.08
Adjustable rate ................................ 28,809 9.22 43,728 8.03 72,730 7.92 7,386 8.12
Consumer loans (2) .............................. 344 10.04 3,722 12.92 1,128 10.15 383 10.70
Commercial loans (2) ............................ 906 9.68 510 9.49 1,292 9.49 703 9.49
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale 1,492 6.67 4,254 6.67 9,246 6.67 4,551 6.67
Adjustable rate ................................ 50,615 6.78 21,334 7.48 - -
Investment securities and
securities available-for-sale .................. 10,426 6.15 1,720 5.19 1,346 5.83 13,767 6.06
------- -------- -------- -------
Total interest-earning assets .................. $97,317 7.55 $ 86,174 8.01 $111,687 7.88 $ 49,880 7.44
======= ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts ................................... $195 1.75 $ 584 1.75 $ 926 1.75 $ 454 1.75
Money market deposit accounts .................. 3,110 5.19 9,329 5.19 6,965 5.19 1,114 5.19
Passbook savings accounts ...................... 1,647 2.97 4,939 2.97 7,837 2.97 3,840 2.97
Certificates of deposit ........................ 44,618 5.67 93,291 5.95 88,386 6.26 2,714 5.95
Escrow deposits ................................ - 3,485 2.83 - -
Borrowings(4)
FHLB advances and other borrowings ............. 10,000 6.02 30,000 5.56 36,012 6.31 13,000 6.38
------- -------- -------- --------
Total interest-bearing liabilities ............. $59,570 5.62% $141,628 5.62% $140,126 6.01% $ 21,122 5.54%
======= ======== ======== ========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ....... $37,747 ($55,454) ($28,439) $ 28,758
======= ======== ======== ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities $37,747 ($17,707) ($46,146) ($17,388)
======= ======== ========= ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets ....... 9.2% (4.3)% (11.3)% (4.2)%
=== ==== ===== ====
<CAPTION>
AMOUNT MATURING OR REPRICING
-------------------------------------
OVER FIVE YEARS TOTAL
-----------------------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate ..................................... $45,450 7.96% $110,116 8.06%
Adjustable rate ................................ - 152,653 8.21
Consumer loans (2) .............................. 137 11.27 5,714 12.01
Commercial loans (2) ............................ - 3,411 9.54
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale 5,319 6.83 24,862 6.70
Adjustable rate ................................ - 71,949 6.99
Investment securities and
securities available-for-sale .................. 1,833 6.74 29,092 6.07
------- --------
Total interest-earning assets .................. $52,739 7.81 $397,797 7.76
======= ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts ................................... $435 1.75 $2,594 1.75
Money market deposit accounts .................. 212 5.19 20,730 5.19
Passbook savings accounts ...................... 3,689 2.97 21,952 2.97
Certificates of deposit ........................ 122 8.00 229,131 6.02
Escrow deposits ................................ - 3,485 2.83
Borrowings(4)
FHLB advances and other borrowings ............. 3,061 5.60 92,073 6.02
------- --------
Total interest-bearing liabilities ............. $7,519 4.11% $369,965 5.73%
======= ========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ....... $45,220 $ 27,832
======= ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities $27,832 $ 27,832
======= ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets ....... 6.8% 6.8%
==== ====
</TABLE>
(1) Adjustable- and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing
the Company's historical prepayment statistics modified for forecasted
statistics using annual prepayment rates ranging from 5% to 20%, based on
the loan type.
(2) Balances have been reduced for undisbursed loan proceeds, unearned credit
insurance premiums, deferred loan fees, purchased loan discounts and the
allowance for loan losses, which aggregated $14.0 million at June 30,
1997.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain historical
amount of such accounts to be core deposits having significantly longer
effective maturities and times to repricing based on the Company's
historical retention of such deposits in changing interest rate
environments. NOW accounts, passbook savings accounts and money market
deposit accounts are assumed to be withdrawn at annual rates of 30%, 30%
and 60%, respectively, of the declining balance of such accounts during
the period shown. The withdrawal rates used are higher than the Company's
historical rates but are considered by management to be more indicative of
expected withdrawal rates currently. If all of the Company's NOW
accounts, passbook savings accounts and money market deposit accounts had
been assumed to be subject to repricing within one year, the one-year
cumulative deficiency of interest-earning assets over interest-bearing
liabilities would have been $43.2 million or 10.5% of total assets.
(4) Adjustable- and floating-rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hallmark Capital Corp.:
We have audited the accompanying consolidated statements of financial
condition of Hallmark Capital Corp. and subsidiary (the "Company") as of June
30, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 misstatements. 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 Hallmark
Capital Corp. and subsidiary as of June 30, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
August 1, 1997
-69-
<PAGE> 72
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT JUNE 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and non-interest bearing deposits ......................... $3,859 $2,136
Interest-bearing deposits ...................................... 4,896 2,689
-------- --------
Cash and cash equivalents ...................................... 8,755 4,825
Securities available-for-sale (at fair value):
Investment securities ......................................... 18,137 19,358
Mortgage-backed and related securities ........................ 11,381 17,926
Securities held-to-maturity:
Investment securities (fair value - $780 at
June 30, 1997, $978 at June 30, 1996) ........................ 780 978
Mortgage-backed and related securities (fair value -
$86,149 at June 30, 1997; $97,239 at June 30, 1996) .......... 85,430 97,332
Loans receivable, net .......................................... 273,556 224,807
Investment in Federal Home Loan Bank stock, at cost ............ 5,279 5,119
Foreclosed properties, net ..................................... 20 --
Office properties and equipment ................................ 3,091 2,939
Prepaid expenses and other assets .............................. 3,391 3,873
-------- --------
Total assets .............................................. $409,820 $377,157
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ...................................................... $281,512 $229,675
Notes payable to Federal Home Loan Bank ....................... 92,073 102,386
Securities sold under agreements to repurchase ................ -- 11,568
Advance payments by borrowers for taxes and insurance ......... 3,485 3,554
Accrued interest on deposit accounts and borrowings ........... 1,578 1,523
Accrued expenses and other liabilities ........................ 1,500 1,440
-------- --------
Total liabilities ......................................... $380,148 $350,146
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 2,000,000 shares;
none outstanding ............................................. -- --
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued 1,581,250 shares; outstanding 1,442,950 shares ........ 1,581 1,581
Additional paid-in capital .................................... 10,603 10,465
Unearned ESOP compensation .................................... (632) (740)
Unearned restricted stock award ............................... (208) (334)
Net unrealized depreciation on securities available for sale .. (225) (595)
Treasury stock, at cost: 138,300 shares ...................... (1,592) (1,592)
Retained earnings, substantially restricted ................... 20,145 18,226
-------- --------
Total shareholders' equity ................................ $29,672 $27,011
-------- --------
Total liabilities and shareholders' equity ................ $409,820 $377,157
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-70-
<PAGE> 73
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable.......................................... $20,749 $13,585 $ 9,829
Securities and interest-bearing deposits.................. 1,829 1,852 1,249
Mortgage-backed and related securities.................... 7,245 7,457 3,482
------------ ------------ ------------
Total interest income................................... 29,823 22,894 14,560
INTEREST EXPENSE:
Deposits.................................................. 13,893 10,145 5,539
Advance payments by borrowers for taxes and insurance..... 93 85 78
Notes payable and other borrowings........................ 6,224 5,118 3,126
------------ ------------ ------------
Total interest expense.................................. 20,210 15,348 8,743
------------ ------------ ------------
Net interest income......................................... 9,613 7,546 5,817
Provision for losses on loans............................... 650 367 248
------------ ------------ ------------
Net interest income after provision for losses on loans..... 8,963 7,179 5,569
NON-INTEREST INCOME:
Service charges on loans.................................. 165 130 144
Service charges on deposit accounts....................... 478 494 464
Loan servicing fees, net.................................. 86 103 94
Insurance commissions..................................... 110 127 196
Gain (loss) on sale of securities and
mortgage-backed and related securities, net.............. 7 72 (102)
Gain on sale of loans..................................... 95 75 23
Other income.............................................. 87 261 179
------------ ------------ ------------
Total non-interest income............................... 1,028 1,262 998
NON-INTEREST EXPENSE:
Compensation and benefits................................. 3,494 3,040 2,644
Marketing................................................. 328 281 233
Occupancy and equipment................................... 963 849 795
Deposit insurance premiums................................ 1,088 393 276
Other non-interest expense................................ 1,173 991 837
------------ ------------ ------------
Total non-interest expense.............................. 7,046 5,554 4,785
------------ ------------ ------------
Income before income taxes.................................. 2,945 2,887 1,782
Income taxes................................................ 1,026 1,009 708
------------ ------------ ------------
Net income................................................ $ 1,919 $ 1,878 $ 1,074
============ ============ ============
Earnings per share........................................ $ 1.33 $ 1.33 $ 0.77
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-71-
<PAGE> 74
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED UNEARNED UNREALIZED
COMMON PAID-IN ESOP RESTRICTED GAINS TREASURY RETAINED
STOCK CAPITAL COMPENSATION STOCK (LOSSES) STOCK EARNINGS TOTAL
------ ---------- ------------ ---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 .................... $1,581 $10,316 ($961) ($673) ($378) ($921) $15,330 $24,294
Net income .................................. -- -- -- -- -- -- 1,074 1,074
Amortization of unearned ESOP and
restricted stock award compensation ........ -- 44 100 171 -- -- -- 315
Purchase of treasury stock (75,112 shares) .. -- -- -- -- -- (854) -- (854)
Exercise of stock options (15,812 shares) ... -- -- -- -- -- 183 (56) 127
Unrealized appreciation on securities
available for sale, net of tax ............. -- -- -- -- 304 -- -- 304
------ ---------- ------------ ---------- ---------- -------- -------- -------
Balance at June 30, 1995 .................... $1,581 $10,360 ($861) ($502) ($74) ($1,592) $16,348 $25,260
Net income .................................. -- -- -- -- -- -- 1,878 1,878
Amortization of unearned ESOP and
restricted stock award compensation ........ -- 105 121 168 -- -- -- 394
Unrealized depreciation on securities
available for sale, net of tax benefit ..... -- -- -- -- (521) -- -- (521)
------ ---------- ------------ ---------- ---------- -------- -------- -------
Balance at June 30, 1996 .................... $1,581 $10,465 ($740) ($334) ($595) ($1,592) $18,226 $27,011
Net income .................................. -- -- -- -- -- -- 1,919 1,919
Amortization of unearned ESOP and
restricted stock award compensation ........ -- 138 108 126 -- -- -- 372
Unrealized appreciation on securities
available for sale, net of tax ............. -- -- -- -- 370 -- -- 370
------ ---------- ------------ ---------- ---------- -------- -------- -------
Balance at June 30, 1997 .................... $1,581 $ 10,603 ($632) ($208) ($225) ($1,592) $20,145 $29,672
====== ========== ============ ========== ========== ======== ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-72-
<PAGE> 75
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
-----------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................................... $ 1,919 $ 1,878 $ 1,074
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans.............................................. 650 367 248
Provision for depreciation and amortization................................ 248 227 223
Deferred income taxes...................................................... (171) (26) (20)
Net (gain) loss on sales of investments and
mortgage-backed and related securities..................................... (7) (72) 102
Net gain on sale of loans.................................................. (95) (75) (23)
Amortization of unearned ESOP and restricted stock awards.................. 372 394 315
Loans originated for sale.................................................. (10,618) (3,515) (8,334)
Sales of loans originated for sale......................................... 10,618 5,281 3,219
(Increase) decrease in prepaid expenses and other assets................... 727 (998) (245)
Increase (decrease) in other liabilities................................... 60 36 (138)
Other adjustments.......................................................... (148) 613 149
-------- --------- --------
Net cash provided by (used in) operating activities.......................... 3,555 4,110 (3,430)
-------- --------- --------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale...................... 2,268 22,158 8,914
Proceeds from the maturity of securities available-for-sale.................. 500 22,552 1,000
Purchases of securities available-for-sale................................... (1,950) (51,544) (17,836)
Purchases of investment securities held-to-maturity.......................... -- (580) (887)
Proceeds from maturities of investments held-to-maturity..................... 198 192 2,080
Purchases of mortgage-backed and related securities.......................... -- (50,914) (37,238)
Proceeds from sales of mortgage-backed and related securities................ 435 -- 221
Principal collected on mortgage-backed and related securities................ 18,995 22,105 6,818
Net change in loans receivable............................................... (49,413) (82,904) (37,478)
Proceeds from sales of foreclosed properties................................. 15 150 26
Purchase of Federal Home Loan Bank stock..................................... (160) (1,824) (1,389)
Purchases of office properties and equipment, net............................ (400) (409) (103)
-------- --------- --------
Net cash used in investing activities........................................ (29,512) (121,018) (75,972)
-------- --------- --------
FINANCING ACTIVITIES
Net increase in deposits..................................................... 51,837 77,508 37,131
Proceeds from long-term notes payable to Federal Home Loan Bank.............. 35,000 33,000 13,000
Net increase (decrease) in short-term notes payable to Federal Home Loan Bank (39,300) 26,000 22,300
Repayment of long-term notes payable to Federal Home Loan Bank............... (6,013) (20,012) (7,010)
Net increase (decrease) in securities sold under agreements to repurchase.... (11,568) (1,813) 12,491
Net increase in advance payments by borrowers for taxes and insurance........ (69) 230 608
Net proceeds from issuance of common stock................................... -- -- 127
Purchase of treasury stock................................................... -- -- (854)
-------- --------- --------
Net cash provided by financing activities.................................... 29,887 114,913 77,793
-------- --------- --------
Increase (decrease) in cash and cash equivalents............................. 3,930 (1,995) (1,609)
Cash and cash equivalents at beginning of year............................... 4,825 6,820 8,429
-------- --------- --------
Cash and cash equivalents at end of year..................................... $ 8,755 $ 4,825 $ 6,820
======== ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-73-
<PAGE> 76
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid (including amounts credited to deposit
accounts).................................................... $20,153 $14,836 $8,250
Income taxes paid............................................. $1,208 $950 $647
Non-cash transactions:
Mortgage loans securitized as mortgage-backed securities...... -- $2,512 $3,416
Loans transferred to foreclosed properties.................... $54 $126 $24
Loans made to finance the sale of foreclosed properties....... -- $13 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-74-
<PAGE> 77
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hallmark Capital Corp. (the "Company") is the holding company for West Allis
Savings Bank (the "Bank"), a Wisconsin state-chartered savings bank. On
December 30, 1993, the Bank completed its conversion from a Wisconsin
state-chartered stock savings bank. On that date, the Company issued and sold
1,581,250 shares of its common stock at $8.00 per share to complete the
conversion. The Company acquired all of the issued and outstanding capital
stock of the Bank using a portion of the net proceeds from the conversion.
BUSINESS
The Company provides a wide range of financial services to individual customers
through the Bank with locations in the counties of Milwaukee and Waukesha,
Wisconsin area. The Bank is subject to the regulations of certain federal and
state agencies and undergoes periodic examinations by those regulatory
authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company since December 30, 1993 and its wholly-owned subsidiary, West Allis
Savings Bank, and its subsidiaries, for the entire period presented.
Significant intercompany accounts and transactions have been eliminated. In
preparing financial statements, management is required to make estimates and
assumptions that effect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate
to the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosure or in satisfaction of
loans. In connection with the determination of the allowance for loan losses
and foreclosed assets, management obtains independent appraisals for
significant properties.
STATEMENTS OF CASH FLOWS
For the purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, interest-bearing deposits with the FHLB and
other financial institutions. The Company considers interest-bearing deposits
having a maturity of three months or less when purchased to be cash
equivalents.
SECURITIES
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
financial statement reporting date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at
amortized cost. Trading account securities are carried at fair value. Gains
and losses on sales and changes in market value are included in non-interest
income. Debt securities not classified as trading or held-to-maturity are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity for the periods presented. The
amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for the amortization of premiums and accretion
of discounts to maturity, or in the case of mortgage-backed and related
securities, over the estimated life of the security. Such amortization or
accretion is included in interest income from the related security. Interest
and dividends are included in interest income form the related securities.
Realized gains and losses and declines in value judged to be
other-than-temporary are included in gain (loss) on sale of securities and
mortgage-backed and related securities, net. The cost of securities sold is
based on the specific identification method.
LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of aggregate cost or market value
and generally consist of certain fixed-rate first mortgage loans which are
expected to be sold in the foreseeable future. Fees received from the borrower
are deferred and recorded as an adjustment of the sales price.
-75-
<PAGE> 78
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE AND INTEREST ON LOANS AND LOAN FEES
Loans receivable which are originated or purchased with the intent to hold to
maturity or for the foreseeable future are carried at their unpaid principal
balances. Interest on loans is recorded as income in the period earned. An
allowance for interest is established for uncollected interest on loans when
any payments are 91 days or more past due and on loans which are impaired.
Impaired loans are defined as all non-accrual loans except for one-to-four
family residential real estate loans and consumer loans. Loan origination and
commitment fees and certain direct loan origination costs are deferred and the
net amounts are amortized as an adjustment to the related loan's yield. The
Bank is amortizing these amounts using the level-yield method over the
contractual life of the related loans.
Mortgage servicing rights associated with loans originated and sold, where
servicing is retained, are capitalized and included in other assets in the
balance sheet. The value of these capitalized servicing rights is amortized in
relation to the servicing revenue expected to be earned. Impairment of
mortgage serving rights is assessed based on the fair value of those rights.
The Company periodically evaluates the carrying value and remaining
amortization periods for impairment. For purposes of measuring impairment, the
rights are stratified into certain risk characteristics including underlying
loan type, note rate, prepayment trends and external market factors. The
Company accounts for mortgage servicing rights under Financial Accounting
Standards Board Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("Statement 125"), which
was adopted on January 1, 1997. Previously, mortgage servicing rights were
accounted for under Financial Accounting Standards Board Statement No. 122,
Accounting for Mortgage Servicing Rights. The adoption of Statement 125 did
not have a material effect on the accounting for mortgage servicing rights.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb losses in the loan portfolio. Management's determination
of the adequacy of the allowance is based on an evaluation of the portfolio
and, among other things, the borrowers' ability to repay, estimated collateral
values, prior loss experience, and growth and composition of the portfolio;
however, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies periodically
review the allowance for loan losses. These agencies may require the Bank to
make additions to the allowance for loan losses based on information available
to them at the time of their examination.
INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The Company's investment in Federal Home Loan Bank stock meets the minimum
amount required by current regulation and is carried at cost which is
redeemable (fair) value since the market for this stock is limited.
FORECLOSED PROPERTIES
Foreclosed properties (which were acquired by foreclosure or by deed in lieu of
foreclosure) are initially recorded at the lower of cost or fair value minus
estimated costs to sell at the date of foreclosure and any loss at that time is
charged to the allowance for loan losses. Costs related to the development and
improvement of property are capitalized, whereas costs related to holding the
property are expensed. Valuations are periodically performed by management and
independent third parties, and an allowance for losses is established by a
charge to expense if the carrying value of a property exceeds its fair value
minus estimated costs to sell.
OFFICE PROPERTIES AND EQUIPMENT
Premises and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization expense are provided on a
straight-line basis over the estimated useful lives of the assets. The cost of
leasehold improvements is amortized on the straight-line basis over the lesser
of the term of the respective lease or the estimated economic life of the
improvements.
-76-
<PAGE> 79
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Expenditure for normal repairs and maintenance are charged to expense as
incurred. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is recorded in income.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method deferred tax assets and liabilities are determined based on the
difference between financial reporting and the tax basis of assets and
liabilities and are measured using the enacted tax rates and laws in effect.
PENDING ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
("Statement 128"), which is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. The
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings
per share previously found in APB Opinion No. 15, Earnings per Share, and makes
them comparable to international EPS standards. It replaces the presentation
of primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. This statement requires
restatement of all prior-period EPS data presented. The Company has not
completed its evaluation of the impact of Statement 128 on the financial
position of the Company.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, Disclosure of Information about Capital Structure ("Statement 129"),
which is effective for financial statements for periods ending after December
15, 1997. This statement established standards for disclosing information
about an entity's capital structure and applies to all entities. It contains no
change in disclosure requirements for entities that were previously subject to
the requirements of APB Opinion No. 10, Omnibus Opinion -- 1996, APB Opinion
No. 15, Earnings per Share and FASB Statement No. 47, Disclosure of Long Term
Obligations. The Company currently does not expect that adoption of Statement
No. 129 will have any effect on the financial position or operation of the
Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("Statement 130"). Statement 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. All items that are required to be recognized
under accounting standards as components of comprehensive income are to be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Statement 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the equity
section of the balance sheet. Statement 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information
("Statement 131"), which is effective for financial statements for periods
beginning after December 15, 1997. Statement 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Statement 131 supersedes FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise ("Statement 14") but retains the retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
Statement 131 does not apply to nonpublic business enterprises or to
not-for-profit organizations.
-77-
<PAGE> 80
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per share is calculated by dividing net income for the years ended
June 30, 1997, 1996 and 1995 by the weighted average number of shares of common
stock and common stock equivalents outstanding. Stock options are regarded
as common stock equivalents and are, therefore, considered in both primary and
fully diluted earnings per share calculations. Common stock equivalents are
computed using the treasury stock method.
The computation of net income per common share is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1997 PRIMARY FULLY DILUTED
- ------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Weighted average common shares outstanding ........................ 1,442,950 1,442,950
Ungranted restricted stock ........................................ (9,231) (9,231)
Uncommitted ESOP shares ........................................... (79,146) (79,146)
Common stock equivalents due to dilutive effect of stock options .. 85,460 101,344
---------------- ----------------
Total weighted average common shares and equivalents outstanding .. 1,440,033 1,455,917
================ ================
Net income for period ............................................. $1,919,000 $1,919,000
Earnings per share ................................................ $1.33 $1.32
==================================
FOR THE YEAR ENDED JUNE 30, 1996 PRIMARY FULLY DILUTED
- ------------------------------------------------------------------- ---------------- ----------------
Weighted average common shares outstanding ........................ 1,442,950 1,442,950
Ungranted restricted stock ........................................ (9,231) (9,231)
Uncommitted ESOP shares ........................................... (92,495) (92,495)
Common stock equivalents due to dilutive effect of stock options .. 72,056 72,056
---------------- ----------------
Total weighted average common shares and equivalents outstanding .. 1,413,280 1,413,280
================ ================
Net income for period ............................................. $1,878,000 $1,878,000
Earnings per share ................................................ $1.33 $1.33
================ ================
FOR THE YEAR ENDED JUNE 30, 1995 PRIMARY FULLY DILUTED
- ------------------------------------------------------------------- ---------------- ----------------
Weighted average common shares outstanding ........................ 1,462,049 1,462,049
Ungranted restricted stock ........................................ (9,231) (9,231)
Uncommitted ESOP shares ........................................... (107,525) (107,525)
Common stock equivalents due to dilutive effect of stock options .. 49,583 60,755
---------------- ----------------
Total weighted average common shares and equivalents outstanding .. 1,394,876 1,406,048
================ ================
Net income for period ............................................. $1,074,000 $1,074,000
Earnings per share ................................................ $0.77 $0.76
================ ================
</TABLE>
Pro-forma 1997 earnings per share data showing the effects of the adoption of
FASB Statement 128 is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1997 BASIC DILUTED
- ------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Weighted average common shares outstanding ........................ 1,442,950 1,442,950
Ungranted restricted stock ........................................ (9,231) (9,231)
Uncommitted ESOP shares ........................................... (79,146) (79,146)
Common stock equivalents due to dilutive effect of stock options .. -- 85,460
---------- ----------
Total weighted average common shares and equivalents outstanding .. 1,354,573 1,440,033
========== ==========
Net income for period ............................................. $1,919,000 $1,919,000
Earnings per share ................................................ $1.42 $1.33
========== ==========
</TABLE>
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation.
-78-
<PAGE> 81
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT SECURITIES
The following is a summary of available-for-sale securities and
held-to-maturity securities.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
At June 30, 1997: (IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-For-Sale:
U.S. Government and federal agency obligations .. $16,982 $-- $233 $16,749
Adjustable-rate mortgage mutual funds ........... 1,000 -- 23 977
Municipal Bonds ................................. 410 1 -- 411
--------- ---------- ---------- ---------
$18,392 $1 $256 $18,137
========= ========== ========== =========
Held-To-Maturity:
Certificates of Deposit ......................... $ 780 -- -- $ 780
--------- ---------- ---------- ---------
$ 780 $-- $ -- $ 780
========= ========== ========== =========
At June 30, 1996:
Available-For-Sale:
U.S. Government and federal agency obligations .. $18,477 $1 $546 $17,932
Adjustable-rate mortgage mutual funds ........... 1,462 -- 36 1,426
--------- ---------- ---------- ---------
$19,939 $1 $582 $19,358
========= ========== ========== =========
Held-To-Maturity:
Certificates of Deposit ......................... $ 978 -- -- $ 978
--------- ---------- ---------- ---------
$ 978 $-- $ -- $ 978
========= ========== ========== =========
</TABLE>
The amortized cost and estimated fair value of investment securities at June
30, 1997 by contractual maturity, are shown below.
<TABLE>
<CAPTION>
AVAILABLE- AVAILABLE- HELD-TO- HELD-TO-
FOR-SALE FOR-SALE MATURITY MATURITY
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less ............................ $ 2,000 $ 1,970 $780 $780
Due after one year through five years .............. 15,142 14,916 -- --
Due after five years through ten years ............. 1,250 1,251 -- --
Due after ten years ................................ -- -- -- --
---------- ---------- --------- ----------
$18,392 $18,137 $780 $780
========== ========== ========= ==========
</TABLE>
Proceeds from the sale of securities available-for-sale were $2,268,000,
$22,158,000 and $8,914,000 during the years ended June 30, 1997, 1996 and 1995,
respectively. The gross realized losses on such sales totaled $9,000 in 1997,
$27,000 in 1996 and $234,000 in 1995. The gross realized gains on such sales
totaled $1,000 in 1997, $99,000 in 1996 and $128,000 in 1995. There were no
sales of held-to-maturity securities during 1997, 1996 and 1995.
-79-
<PAGE> 82
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MORTGAGE-BACKED AND RELATED SECURITIES
The following is a summary of available-for-sale and held-to-maturity
mortgage-backed and related securities.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At June 30, 1997:
Available-For-Sale:
Fixed-rate mortgage-backed securities.. $ 3,697 $ 57 $ 59 $ 3,695
Fixed-rate collateralized
mortgage obligations................. 7,799 - 113 7,686
--------- ---------- ---------- ---------
$11,496 $ 57 $172 $11,381
========= ========== ========== =========
Held-To-Maturity:
Mortgage-backed securities
Adjustable-rate....................... $41,033 $ 365 $70 $41,328
Fixed-rate............................ 5,027 51 73 5,005
Collateralized mortgage obligations:
Adjustable-rate....................... 31,009 646 211 31,444
Fixed-rate............................ 8,361 43 32 8,372
--------- ---------- ---------- ---------
$85,430 $1,105 $386 $86,149
========= ========== ========== =========
At June 30, 1996:
Available-For-Sale:
Fixed-rate mortgage-backed securities.. $ 8,899 $ - $124 $ 8,775
Fixed-rate collateralized
mortgage obligations 9,426 - 275 9,151
--------- ---------- ---------- ---------
$18,325 $ - $399 $17,926
========= ========== ========== =========
Held-To-Maturity:
Mortgage-backed securities
Adjustable-rate....................... $49,256 $ 234 $315 $49,175
Fixed-rate............................ 6,534 72 158 6,448
Collateralized mortgage obligations: 31,349 464 284 31,529
Adjustable-rate....................... 10,193 9 115 10,087
Fixed-rate............................ --------- ---------- ---------- ---------
$97,332 $779 $872 $97,239
========= ========== ========== =========
</TABLE>
-80-
<PAGE> 83
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MORTGAGE-BACKED AND RELATED SECURITIES (CONTINUED)
The following table is a summary of aggregate mortgage-backed and related
securities by issuer.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
$ 24,324 $ 521 $ 70 $ 24,775
31,313 471 259 31,525
934 45 - 979
At June 30, 1997: 40,355 126 230 40,251
Federal Home Loan Mortgage Corporation (FHLMC)... --------- ---------- ---------- ---------
Federal National Mortgage Association (FNMA)..... $ 96,926 $1,163 $ 559 $ 97,530
Government National Mortgage Association (GNMA).. ========= ========== ========== =========
Private issuers.................................. $ 24,443 $ 430 $ 210 $ 24,663
At June 30, 1996: 38,459 291 423 38,327
FHLMC............................................ 1,379 53 - 1,432
FNMA............................................. 51,376 5 638 50,743
GNMA............................................. --------- ---------- ---------- ---------
Private issuers.................................. $115,657 $ 780 $1,271 $115,165
========= ========== ========== =========
</TABLE>
Proceeds from the sale of mortgage-backed and related securities
held-to-maturity were $435,000 and $221,000 during the years ended June 30,
1997 and 1995, respectively. Gross realized gains from such sales totaled
$15,000 and $4,000 for the years ended June 30, 1997 and 1995, respectively.
There were no such sales for the year ended June 30, 1996.
-81-
<PAGE> 84
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable are summarized as follows:
AT JUNE 30,
------------------------
1997 1996
--------- --------
<S> <C> <C>
(IN THOUSANDS)
Real estate mortgage loans:
Residential one-to-four family .................................. $167,511 $153,689
Residential multi-family ........................................ 27,616 19,788
Commercial real estate .......................................... 21,693 5,488
Home equity ..................................................... 25,297 19,349
Residential construction ........................................ 27,003 37,016
Other construction and land ..................................... 7,385 6,491
--------- --------
Total real estate mortgage loans ............................. 276,505 241,821
Consumer and other loans:
Automobile ...................................................... 1,195 1,774
Credit card ..................................................... 2,730 2,585
Other ........................................................... 1,950 2,372
--------- --------
Total consumer and other loans ............................... 5,875 6,731
Commercial loans .................................................. 3,471 --
--------- --------
Gross loans .................................................. 285,851 248,552
Accrued interest receivable ....................................... 1,694 1,287
Less:
Undisbursed portion of loan proceeds ............................ (11,998) (23,770)
Deferred loan fees .............................................. (197) (18)
Unearned interest ............................................... (32) (10)
Allowances for loan losses ...................................... (1,762) (1,234)
--------- --------
$273,556 $224,807
========= ========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
-----------------------------
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year ................................... $1,234 $ 953 $ 769
Provisions charged to income ................................... 650 367 248
Charge-offs and recoveries, net ................................ (122) (86) (64)
------ ------ -------
Balance at end of year ......................................... $1,762 $1,234 $ 953
====== ====== =======
</TABLE>
Non-accrual loans for which interest is recognized only when received, totaled
approximately $575,000 and $85,000 at June 30, 1997 and 1996, respectively.
-82-
<PAGE> 85
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE (CONTINUED)
Non-performing loans include troubled debt restructuring and loans on which
accrual of interest, amortization of deferred net fees or costs and accretion
of discount has ceased. Non-performing loans totaled $623,000, $107,000 and
$143,000 at June 30, 1997, 1996 and 1995, respectively. The effect of
non-performing loans on interest income is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
--------------------------------------
1997 1996 1995
---------- -------------- ----------
(In thousands)
<S> <C> <C> <C>
$34 $12 $17
Interest at original contract rate 9 1 8
Interest collected................ ------- ------ ------
Net reduction of interest income.. $25 $11 $9
======= ====== ======
</TABLE>
Loans serviced for investors were $29,998,000 and $23,549,000 at June 30, 1997
and 1996, respectively. Custodial escrow balances maintained in connection
with the foregoing serviced loans were $819,000 and $728,000 at June 30, 1997
and 1996, respectively. These loans are not reflected in the accompanying
consolidated statements of financial condition.
The Bank originates mortgage loans, which, depending upon whether the loans
meet the Bank's investment objectives, may be sold in the secondary market or
to other private investors. All loans are sold on a nonrecourse basis and the
servicing of these loans may or may not be retained by the Bank. Direct
origination and servicing costs for mortgage banking activities cannot be
presented as these operations are integrated with and not separable from the
origination and servicing of portfolio loans, and, as a result, cannot be
accurately estimated.
5. ACCRUED INTEREST RECEIVABLE
<TABLE>
<CAPTION>
Accrued interest receivable on investments is summarized as follows:
AT JUNE 30,
------------------------------------
1997 1996
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Interest-bearing deposits .......................................... $ 4 $ 3
Investment securities .............................................. 356 383
Mortgage-backed and related securities ............................. 585 733
--------- ---------
$945 $1,119
========= =========
</TABLE>
6. OFFICE PROPERTIES AND EQUIPMENT
<TABLE>
<CAPTION>
Office properties and equipment are summarized as follows:
AT JUNE 30,
------------------------------------
1997 1996
------------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Land................................................................ $ 624 $ 624
Office buildings and improvements................................... 2,726 2,562
Furniture and equipment............................................. 1,665 1,485
------ ------
$5,015 4,671
Less:
Accumulated depreciation............................................ 1,924 1,732
------ ------
$3,091 $2,939
====== ======
</TABLE>
-83-
<PAGE> 86
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
<TABLE>
<CAPTION>
Deposits are summarized as follows: AT JUNE 30,
------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
DEMAND DEPOSITS:
Non-interest bearing ............. $ 7,105 2.52% --% $ 7,215 3.14% --%
NOW .............................. 2,594 0.92 1.75 2,517 1.10 1.75
Money market ..................... 20,730 7.37 5.20 7,678 3.34 5.21
Passbook ......................... 21,952 7.80 2.98 24,342 10.60 2.99
---------- ---------- ----------- ----------
Total ........................... 52,381 18.61 3.39 41,752 18.18 2.79
CERTIFICATES OF DEPOSIT:
One to six months ................ $ 26,992 9.59 5.56 $ 21,999 9.58 5.37
12 to 20 months .................. 32,642 11.60 5.86 24,482 10.66 5.49
24 to 36 months .................. 26,037 9.25 6.05 17,688 7.70 5.94
38 to 60 months .................. 2,317 0.82 5.87 15,586 6.79 6.08
66 to 96 months .................. 122 0.04 8.00 172 0.07 7.93
Wholesale ........................ 141,021 50.09 6.15 107,996 47.02 6.22
---------- ---------- ----------- ----------
Total ........................... 229,131 81.39 6.02 187,923 81.82 5.99
---------- ---------- ----------- ----------
Total deposits .................... $281,512 100.00% 5.54% $229,675 100.00% 5.41%
========== ========== =========== ==========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $50,751,000 and $41,315,000 at June 30, 1997 and
1996, respectively, which also includes brokered accounts. The average
maturity of wholesale certificates of deposit was eleven months and eight
months at June 30, 1997 and 1996, respectively.
Aggregate annual maturities of certificate accounts at June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
MATURES DURING
YEAR ENDED
JUNE 30 AMOUNT
-------------- --------------
<S> <C>
(IN THOUSANDS)
1998 $137,909
1999 70,691
2000 17,695
2001 2,836
Thereafter --
--------------
$229,131
==============
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
$ 41 $ 42 $ 105
804 297 173
NOW accounts......... 691 734 808
Money market accounts 12,357 9,072 4,453
Passbook accounts.... ---------- ---------- ----------
Certificate accounts. $13,893 $10,145 $5,539
========== ========== ==========
</TABLE>
-84-
<PAGE> 87
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT JUNE 30, 1996
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- -------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Advances from
Federal Home Loan Bank 1996 -- -- 23,200 5.77%
1997 $25,000 5.62% 27,100 5.79
1998 23,000 6.16 20,000 5.44
1999 18,012 6.37 18,000 6.06
2000 8,000 6.34 8,016 6.53
2001 15,000 5.95 3,000 5.91
2003 3,061 5.60 3,070 5.60
-------- ----------- ----------- --------
$92,073 6.02% $102,386 5.82%
======== =========== =========== ========
Securities sold under
agreements to repurchase 1996 $ -- -- $ 11,568 5.61%
======== ===========
</TABLE>
The Company is required to maintain as collateral unencumbered one-to-four
family mortgage loans such that the outstanding balance of FHLB advances does
not exceed 60% of the book value of this collateral. At June 30, 1997, the
Bank had delivered mortgage-backed securities with a carrying value of
$19,657,000 to the Federal Home Loan Bank as additional collateral for the
advances. In addition, advances are collateralized by all Federal Home Loan
Bank stock. Variable rate term borrowings consist of $7.0 million tied to the
one-month LIBOR, and $3.0 million tied to the six-month LIBOR index. FHLB
advances are subject to a prepayment penalty if they are repaid prior to
maturity. The Company's unused advance line with the Federal Home Loan Bank
was $24.5 million at June 30, 1997.
The Company enters into sales of mortgage-backed securities with agreements to
repurchase identical securities (reverse repurchase agreements) and
substantially identical securities (dollar reverse repurchase agreements).
These transactions are treated as financings with the obligations to repurchase
securities reflected as a liability. The dollar amount of securities
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are delivered to the counterparty's account. At June
30, 1997, there were no liabilities recorded under agreements to repurchase
identical securities. At June 30, 1996, liabilities recorded under agreements
to repurchase identical securities totaled $11,568,000 with a weighted average
underlying coupon interest rate of 5.61%, and matured within 30 days of the
date indicated. The agreements were collateralized by mortgage-backed
certificates with carrying value of $11,841,000 and market value of $12,115,000
at June 30, 1996.
Securities sold under agreements to repurchase averaged $3,716,000 and
$12,433,000 for the years ended June 30, 1997 and 1996, respectively. The
average is computed using month-end balances for the respective fiscal years.
The maximum outstanding at any month-end during the years ended June 30, 1997
and 1996 were $11,652,000 and $13,926,000, respectively. The Company retains
securities under it's control.
Accrued interest expense on FHLB advances and other borrowings was $497,000 and
$0; and $441,000 and $8,000 at June 30, 1997 and 1996, respectively.
Interest expense on FHLB advances and other borrowings was $6,003,000 and
$221,000; and $4,386,000 and $732,000; and $2,759,000 and $367,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
-85-
<PAGE> 88
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHAREHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt and corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the Bank is well capitalized as defined by regulatory
standards. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are presented in the tables below.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ----------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Tier I Capital Leverage (to Average Assets):
Consolidated ............................ $29,883 7.24% $12,390 3.00% $20,650 5.00%
West Allis Savings Bank ................. 26,664 6.47 12,362 3.00 20,603 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated ............................ 29,883 12.59 9,490 4.00 14,236 6.00
West Allis Savings Bank ................. 26,664 11.24 9,487 4.00 14,231 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated ............................ 31,645 13.34 18,981 8.00 23,726 10.00
West Allis Savings Bank ................. 28,426 11.98 18,974 8.00 23,718 10.00
As of June 30, 1996:
Tier I Capital Leverage (to Average Assets):
Consolidated ............................ $27,584 7.74% $10,694 3.00% $17,823 5.00%
West Allis Savings Bank ................. 22,404 6.30 10,672 3.00 17,787 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated ............................ 27,584 13.79 8,003 4.00 12,005 6.00
West Allis Savings Bank .. 22,404 11.21 7,991 4.00 11,987 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated ............................ 28,818 14.40 16,007 8.00 20,009 10.00
West Allis Savings Bank ................. 23,638 11.83 15,983 8.00 19,979 10.00
</TABLE>
As a state-charted savings bank, the Bank is also subject to a minimum
regulatory capital requirement of the State of Wisconsin. At June 30, 1997, on
a fully-phased-in basis of 6.0%, the Bank had actual capital of $28,214,000
with a required amount of $24,724,000, for excess capital of $3,490,000.
-86-
<PAGE> 89
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At the time of conversion, the Bank established a liquidation account in the
amount of $14.9 million which was equal to its retained earnings as of the
latest practicable date prior to the conversion. The liquidation account is
established to provide a limited priority claim to the assets of the Bank to
qualified depositors (Eligible Account Holders) at December 30, 1993 who
continue to maintain those deposits at the Bank after conversion. As the
deposits are withdrawn, the liquidation account decreases. In the unlikely
event of a complete liquidation of the Bank, and only in such event, each
Eligible Account Holder would receive from the liquidation account a
liquidation distribution based on his or her proportionate share of the then
remaining qualifying deposits.
On February 21, 1997, the Company's Board of Directors adopted a shareholders'
rights plan (the "Rights Plan"). Under the terms of the Rights Plan, the Board
of Directors declared a dividend of one preferred share purchase right on each
outstanding share of common stock of the Company. Upon becoming exercisable,
each right entitles shareholders to buy one one-hundredth of a share of the
Company's preferred stock at a price of $100.00, subject to adjustment as
provided in the Rights Plan (the "Exercise Price"). Rights do not become
exercisable until eleven business days after any person or group has acquired,
commenced or announced its intention to commence a tender or exchange offer to
acquire 20% or more of the Company's common stock, or in the event a person or
group owning 15% or more of the Company's common stock is deemed to be
"adverse" to the Company. If the rights become exercisable, holders of each
right other than the acquiror, upon payment of the Exercise Price, will have
the right to purchase the Company's common stock (in lieu of preferred stock)
having a value equal to two times the Exercise Price. If the Company is
acquired in a merger, share exchange or other business combination or 50% or
more of its consolidated assets or earning power are sold, rights holders,
other than the acquiring or adverse person or group, will be entitled to
purchase the acquiror's shares at a similar discount. If the rights become
exercisable, the Company may also exchange rights, other than those held by the
acquiring or adverse person or group, in whole or in part, at an exchange rate
of one share of the Company's common stock per right held. Rights are
redeemable by the Company at any time until they are exercisable at the
exchange rate of $.01 per right. Issuance of the rights has no immediate
dilutive effect, does not currently affect reported earnings per share, is not
taxable to the Company or its shareholders, and will not change the way in
which the Company's shares are traded. The rights expire in ten years.
10. EMPLOYEE BENEFIT PLANS
The Bank has a qualified defined-contribution plan covering substantially all
full-time employees who have completed one year of service and are at least 21
years old. Employees may contribute up to 15% of their compensation to the
Plan where employee contributions of up to 4% are matched 25% by the Bank. In
addition, the Bank may make a profit-sharing contribution to the Plan at its
discretion. Retirement plan expense recorded in connection with the Plan was
$13,000, $12,000 and $10,000 during 1997, 1996 and 1995, respectively.
The Company has an Employee Stock Ownership Plan ("ESOP") for substantially all
of its full-time employees. The cost of unearned ESOP shares is shown as a
reduction of shareholders' equity. ESOP expense for the years ended June 30,
1997, 1996 and 1995 totaled $236,000, $226,000 and $144,000, respectively. The
expense was determined using the fair value of shares committed to be released
during the year. As shares are committed, the reduction in shareholders'
equity decreases by the cost of those shares. The difference between the cost
and fair value of the shares committed is a charge or credit to additional
paid-in-capital. The fair value of the unearned ESOP shares totaled $1.7
million at June 30, 1997.
The Bank has Management Recognition and Retention Plans ("MRPs") for officers
and directors under which 94,875 shares are authorized for award.
Approximately 86,969 shares were awarded to directors and officers in the
conversion with 7,906 shares reserved for future grants. As of June 30, 1997,
9,231 shares remain reserved for future grants. The shares awarded to
directors vest at a rate of 33.33% per year commencing December 30, 1994, while
officers' shares vest at a rate of 20% per year commencing one year from the
date of grant of the award. The aggregate cost of these shares is amortized to
compensation expense as the participants become vested. The unamortized cost
is reflected as a reduction of shareholders' equity as unearned restricted
stock. Compensation expense of $126,000, $168,000 and $171,000 was recognized
for the years ended June 30, 1997, 1996 and 1995.
-87-
<PAGE> 90
For the purposes of providing the pro-forma disclosures required under SFAS No.
123 "Accounting for Stock Based Compensation," the fair value of stock options
granted was estimated using the Black-Scholes option pricing model. The per
share weighted-average fair value of stock options granted during fiscal 1997
and 1996 was $2.33 and $2.41, respectively, on the date of grant with the
following variable assumptions: 1997 - The Company did not pay a dividend in
fiscal 1997. Risk-free interest rate of 7.0%, an expected life of ten years
and expected volatility of 24.9%; 1996: The Company did not pay a dividend in
fiscal year 1996. Risk-free interest rate of 7.20%, an expected life of ten
years and expected volatility of 29.2%.
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, compensation cost based on the fair value at grant date has not
been recognized for its stock options in the consolidated financial statements
for the fiscal years ended June 30, 1997 and 1996.
Had compensation cost of the Company's stock-based plans been determined in
accordance with SFAS No. 123, net income would have been $1,914,000 and
$1,876,000 for fiscal 1997 and 1996, respectively. Earnings per share would
have been $1.33 for fiscal 1997 and 1996.
The Company has reserved 173,938 shares of common stock for a non-qualified
stock option plan for employees and directors. With respect to options which
have not been granted, the option exercise price cannot be less than the fair
market value of the underlying common stock as of the date of option grant, and
the maximum term cannot exceed ten years.
<TABLE>
<CAPTION>
The following is a summary of stock option activity:
SHARES OPTION
UNDER PRICE PER
OPTION SHARE
-------- ---------------
<S> <C> <C>
Outstanding at June 30, 1994 ........................ 158,119 8.00
Granted ............................................ 15,000 11.00
Exercised .......................................... (15,812) 8.00
-------- ---------------
Outstanding and exercisable at June 30, 1995 ........ 157,307 $8.00 - $11.00
Granted ............................................ 8,000 $14.50 - $15.25
-------- ---------------
Outstanding and exercisable at June 30, 1996 ........ 165,307 $8.00 - $15.25
Granted ............................................ 8,000 $14.75
-------- ---------------
Outstanding and exercisable at June 30, 1997 ........ 173,307 $8.00 - $15.25
======== ===============
</TABLE>
-88-
<PAGE> 91
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company 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 consist of commitments to extend credit.
Commitments to extend credit involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract amount reflects the extent of involvement
the Company has in this particular class of financial instrument.
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.
Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. As some commitments expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The Company generally extends credit on a
secured basis. Collateral obtained varies, but consists primarily of one-to
four-family residences located in the counties of Milwaukee and Waukesha,
Wisconsin.
Commitments to sell mortgage loans represent commitments to sell mortgage loans
to other entities at a future date and at a specified price. Commitments to
sell mortgage loans and commitments to extend credit are generally exercised
and fulfilled within ninety days. The fair value of mortgage loans held for
sale plus the commitments to extend credit generally offset the commitments to
sell mortgage loans. Both the commitments to extend credit and the commitments
to sell mortgage loans are at current market interest rates.
Financial instruments whose contract amounts represent a potential credit risk
are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Commitments to extend credit:
Fixed-rate mortgage loans (7.50% - 9.50% at June 30, 1997) ..... $1,192 $2,982
Adjustable rate mortgage loans ................................. 4,207 4,287
Unused lines of credit:
Credit cards ................................................... 6,753 5,239
Home equity .................................................... 14,630 11,129
Commercial ..................................................... 1,542 --
</TABLE>
12. LITIGATION
The Company and its subsidiary are involved in certain lawsuits in the course
of its general lending business and other operations. The Company believes
that there are sound defenses against the claims asserted therein and is
vigorously defending these actions. Management, after review with its legal
counsel, is of the opinion that the ultimate disposition of its litigation will
not have a material effect on the Company's financial condition.
-89-
<PAGE> 92
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PARENT COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------
1997 1996
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF CONDITION
Assets:
Cash and cash equivalents ........................... $ 2,135 $ 2,835
Investment securities available-for-sale ............ 411 1,500
Investment in subsidiary ............................ 27,161 22,641
Other assets ........................................ 27 52
------- -------
$29,734 $27,028
======= =======
Liabilities and Shareholders' Equity:
Other liabilities ................................... $ 62 $ 17
Total shareholders' equity .......................... 29,672 27,011
------- -------
$29,734 $27,028
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------
1997 1996 1995
------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
OF INCOME
Interest and dividend income ......................... $ 191 $ 389 $ 417
Equity in undistributed net income of subsidiary ..... 1,880 1,721 904
------- --------- -------
Total income ...................................... 2,071 2,110 1,321
Other expense ........................................ 159 131 135
------- --------- -------
Income before provision for income taxes ............. 1,912 1,979 1,186
Provision for income taxes ........................... (7) 101 112
------- --------- -------
Net income ........................................ $1,919 $ 1,878 $ 1,074
======= ========= =======
STATEMENT OF CASH FLOWS
Operating activities:
Net income .......................................... $1,919 $ 1,878 $ 1,074
Adjustments to reconcile net income
to net cash used in operating activities:
Equity in undistributed net income of subsidiary.. (1,880) (1,721) (904)
Loss on sale of investment securities ............ -- -- 29
Decrease in other assets ......................... 25 29 24
Increase (decrease) in other liabilities ......... 45 (89) (204)
Other ............................................ 102 94 71
------- --------- -------
Net Cash Provided By Operating Activities ........... 211 191 90
Investment activities:
Sale of investment securities ....................... 2,308 500 971
Purchase of investment securities ................... (1,219) -- --
Investment in Bank subsidiary ....................... (2,000) (2,500) --
------- --------- -------
Net Cash Provided By (Used In) Investing Activities.. (911) (2,000) 971
Financing activities:
Net proceeds from issuance of common stock........... -- -- 127
Purchase of treasury stock .......................... -- -- (854)
------- --------- -------
Net Cash (Used In) Financing Activities.............. -- -- (727)
------- --------- -------
Net increase (decrease) in cash ...................... (700) (1,809) 334
Cash and cash equivalents at beginning of period ..... 2,835 4,644 4,310
------- --------- -------
Cash And Cash Equivalents At End Of Year............. $ 2,135 $ 2,835 $ 4,644
======= ========= =======
</TABLE>
-90-
<PAGE> 93
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or
not recognized in the balance sheet, for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair market value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not necessarily
represent the underlying value of the Company. The Company does not routinely
measure the market value of financial instruments because such measurements
represent point-in-time estimates of value. It is generally not the intent of
the Company to liquidate and therefore realize the difference between market
value and carrying value and even if it were, there is no assurance that the
estimated market values could be realized. Thus, the information presented is
not particularly relevant to predicting the Company's future earnings or cash
flows.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount reported in the statement of financial condition for cash
and cash equivalents approximates those assets' fair values.
INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
Fair values for investment and mortgage-backed and related securities are based
on quoted market prices.
FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank stock is carried at cost, which is its redeemable value,
since the market for this stock is limited.
LOANS RECEIVABLE
The fair value of one-to-four family fixed-rate mortgage loans is determined
based on the current market price for securities collateralized by similar
loans. For variable rate one-to-four family mortgage, consumer and other loans
that reprice frequently and with no significant change in credit risk, carrying
values approximate fair values. The fair value for fixed-rate consumer and
other loans is estimated by discounting cash flows at market interest rates.
The fair value of commercial loans was calculated by discounting cash flows
using an estimated rate that reflects the type of loan and the credit risk
inherent in the loan category. The carrying value of accrued interest
receivable approximates fair value.
DEPOSITS
The fair values disclosed for demand deposits are equal to the amounts payable
on demand 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 offered on certificates to a schedule of aggregated
expected monthly maturities on such deposits. The carrying value of accrued
interest payable approximates fair value.
NOTES PAYABLE TO THE FEDERAL HOME LOAN BANK
The fair values of long-term notes payable to the Federal Home Loan Bank are
estimated using discounted cash flow analysis, based on current borrowing rates
for similar types of borrowing arrangements. The carrying value for variable
rate notes payable to the Federal Home Loan Bank approximates fair value.
-91-
<PAGE> 94
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The carrying amounts reported in the statement of financial condition for
securities sold under agreements to repurchase approximate fair value.
OFF-BALANCE SHEET ITEMS
The fair value of commitments to extend credit is not material and is therefore
not shown.
The carrying amounts and fair values of the Company's financial instruments
consisted of the following:
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------
1997 1996
------------------- -------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Cash and cash equivalents ....................... $ 8,755 $ 8,755 $ 4,825 $ 4,825
Investment securities available-for-sale ........ 18,137 18,137 19,358 19,358
Investment securities held-to-maturity .......... 780 780 978 978
Mortgage-backed and related
securities available-for-sale .................. 11,381 11,381 17,926 17,926
Mortgage-backed and related
securities held-to-maturity .................... 85,430 86,149 97,332 97,239
Federal Home Loan Bank stock .................... 5,279 5,279 5,119 5,119
Loans receivable:
Real estate (including home equity) ............ 262,787 265,756 216,958 217,587
Credit card and other consumer .................. 5,714 5,714 6,572 6,572
Commercial ...................................... 3,393 3,393 -- --
-------- --------- -------- ---------
$271,894 $274,863 $223,530 $224,159
======== ========= ======== =========
Accrued interest receivable ..................... $ 2,825 $ 2,825 $ 2,484 $ 2,484
Deposits:
NOW ............................................ 9,699 9,699 9,732 9,732
Money market ................................... 20,730 20,730 7,678 7,678
Passbooks ...................................... 21,952 21,952 24,342 24,342
Certificates ................................... 229,131 229,533 187,923 188,885
-------- --------- -------- ---------
$281,512 $281,914 $229,675 $230,637
======== ========= ======== =========
Borrowings:
Federal Home Loan Bank advances ................ $ 92,073 $ 91,560 $102,386 $102,178
Securities sold under agreements to repurchase . -- -- 11,568 11,568
-------- --------- -------- ---------
$ 92,073 $ 91,560 $113,954 $113,746
======== ========= ======== =========
Accrued interest payable ........................ $ 1,578 $ 1,578 $ 1,523 $ 1,523
</TABLE>
-92-
<PAGE> 95
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
Income tax expense (benefit) in the consolidated statements of income consists
of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Year ended June 30, 1997:
Federal.................. $1,117 ($149) $ 968
State.................... 80 (22) 58
-------- -------- -------
$1,197 ($171) $1,026
======== ======== =======
Year ended June 30, 1996:
Federal.................. $966 ($21) $ 945
State.................... 69 (5) 64
-------- -------- -------
$1,035 ($26) $1,009
======== ======== =======
Year ended June 30, 1995:
Federal.................. $ 625 ($ 5) $ 620
State.................... 103 (15) 88
-------- -------- -------
$ 728 ($20) $ 708
======== ======== =======
</TABLE>
Income tax expense attributable to income from operations was $1,026,000,
$1,009,000 and $708,000 for the years ended June 30, 1997, 1996 and 1995,
respectively, and differed from the amounts computed by applying the Federal
income tax rate of 34 percent to pre-tax income from continuing operations as a
result of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Computed "expected" tax expense $1,001 $ 982 $606
State income taxes, net of
federal income tax benefit..... 38 42 58
Change in valuation allowance.... -- (8) 8
Other............................ (13) (7) 36
------- ------- -------
$1,026 $1,009 $708
======= ======= =======
</TABLE>
-93-
<PAGE> 96
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
AT JUNE 30,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Deferred compensation.................. $168 $128
Allowances for loan losses............. 628 407
Unrealized depreciation on securities
available for sale.................... 146 385
Amortization of stock benefit plans.... 16 37
Other, net............................. 24 -
------- -------
Gross deferred tax assets............... 982 957
Deferred Tax Liabilities:
Deferred loan fees..................... 73 69
Depreciation........................... 93 88
Mortgage servicing rights.............. 29 -
Other.................................. 90 50
------- -------
Gross deferred tax liabilities......... 285 207
------- -------
Net deferred tax assets................ $697 $750
======= =======
</TABLE>
The 1997 net deferred tax asset decreased by $53,000. The difference between
the decrease and the deferred portion of tax expense is primarily attributable
to the tax effect on the unrealized depreciation on securities
available-for-sale which does not have an income statement impact in 1997 and
1996.
-94-
<PAGE> 97
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
1997 1997 1996 1996 1996 1996 1995 1995
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income..... $7,844 $7,580 $7,334 $ 7,065 $6,393 $5,968 $5,528 $5,005
Interest expense................. 5,323 5,110 4,996 4,781 4,266 3,980 3,753 3,349
------ ------ ------ ------- ------ ------ ------ ------
Net interest income.............. 2,521 2,470 2,338 2,284 2,127 1,988 1,775 1,656
Provision for loan losses........ 146 150 170 184 114 129 99 25
------ ------ ------ ------- ------ ------ ------ ------
Net interest income after
provision for loan losses....... 2,375 2,320 2,168 2,100 2,013 1,859 1,676 1,631
Gain on sales of investments and
mortgage-backed and related
securities...................... -- -- -- 7 2 27 39 4
Gain on sale of loans, net....... 81 1 5 8 23 1 42 9
Other non-interest income........ 233 236 234 223 307 319 270 219
------ ------ ------ ------- ------ ------ ------ ------
314 237 239 238 332 347 351 232
Total non-interest income........ 1,564 1,543 1,513 2,426 1,506 1,427 1,386 1,235
------ ------ ------ ------- ------ ------ ------ ------
Total non-interest expense....... 1,125 1,014 894 (88) 839 779 641 628
Income (loss) before income taxes 387 349 321 (31) 285 278 220 226
Income tax expense (benefit)..... ------ ------ ------ ------- ------ ------ ------ ------
Net income (loss)................ $ 738 $ 665 $ 573 $ (57) $ 554 $ 501 $ 421 $ 402
Earnings (loss) per share........ ====== ====== ====== ======= ====== ====== ====== ======
Market information $ 0.51 $ 0.46 $ 0.40 $ (0.04) $ 0.39 $ 0.35 $ 0.30 $ 0.29
Trading range - high............ 22.50 19.38 17.75 17.50 15.75 16.00 16.00 16.25
low............. 17.50 17.00 16.75 14.50 14.75 15.00 14.75 13.50
close........... 21.38 18.00 17.75 16.75 15.00 15.25 15.50 15.50
</TABLE>
No dividends were declared on the shares of Common Stock during the fiscal
years ended June 30, 1997 and 1996.
-95-
<PAGE> 98
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors is included
under the heading "Election of Directors" in the Company's definitive Proxy
Statement dated September 19, 1997, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for October 30, 1997, which has been filed
separately with the Securities and Exchange Commission pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended and in accordance with
General Instruction G(3) to Form 10-K, not later than 120 days after the end of
the Company's fiscal year, and which section is hereby incorporated herein by
reference. Information concerning executive officers who are not directors,
with the exception of Messrs. James D. Smessaert and Peter A. Gilbert, is
contained in Part I of this Form 10-K pursuant to paragraph (b) of Item 401 of
Regulation S-K in reliance on Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the heading
"Compensation of Executive Officers and Directors" in the Company's definitive
Proxy Statement dated September 19, 1997, relating to the 1997 Annual Meeting
of Shareholders currently scheduled for October 30, 1997, which has been filed
separately with the Securities and Exchange Commission pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended and in accordance with
General Instruction G(3) to Form 10-K, not later than 120 days after the end of
the Company's fiscal year, and which section is hereby incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is included under the heading "Stock
Ownership of Certain Beneficial Owners" in the Company's definitive Proxy
Statement dated September 19, 1997, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for October 30, 1997, which has been filed
separately with the Securities and Exchange Commission pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended and in accordance with
General Instruction G(3) to Form 10-K, not later than 120 days after the end of
the Company's fiscal year, and which section is hereby incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is included under the heading
"Indebtedness of Management and Certain Transactions" in the Company's
definitive Proxy Statement dated September 19, 1997, relating to the 1997
Annual Meeting of Shareholders currently scheduled for October 30, 1997, which
has been filed separately with the Securities and Exchange Commission pursuant
to Rule 14a-6 under the Securities Exchange Act of 1934, as amended and in
accordance with General Instruction G(3) to Form 10-K, not later than 120 days
after the end of the Company's fiscal year, and which section is hereby
incorporated herein by reference.
-96-
<PAGE> 99
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and financial statement schedules are
included under a separate caption "Financial Statements and Supplementary Data"
in Part II, Item 8 hereof and are incorporated herein by reference.
Independent Auditor's Report
Consolidated Statements of Financial Condition at June 30, 1997 and 1996
Consolidated Statements of Income for Years Ended June 30, 1997, 1996 and
1995
Consolidated Statements of Shareholders' Equity for Years Ended June 30,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for Years Ended June 30, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
-97-
<PAGE> 100
(A)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Consolidated Financial
Statements.
SEQUENTIAL
(A)(3) EXHIBITS PAGE NUMBER
3.1 Amended Articles of Incorporation of Registrant (1)
3.2 Amended By-laws of Registrant (2)
3.3 Stock Charter of West Allis Savings Bank (1)
3.4 By-laws of West Allis Savings Bank (1)
10.1 West Allis Savings Bank 401(k) Savings Plan (1)
10.2 West Allis Savings Bank Employee Stock Ownership Plan (1)
10.3 Credit Agreement by and between West Allis Savings Bank,
Employee Stock Ownership Trust and Company (1)
10.4 West Allis Savings Bank Management Recognition and Retention Plan (1)
10.5 Hallmark Capital Corp. 1993 Incentive Stock Option Plan, as amended (3)
10.6 Hallmark Capital Corp. 1993 Stock Option Plan for Outside Directors, as
amended (3)
10.7 Employment Agreement - James D. Smessaert (1)
10.8 Employment Agreement - Peter A. Gilbert (2)
10.9 Employment Agreement - Arthur E. Thompson (1)
10.1 Executive Employee Salary Continuation Agreement - James D.
Smessaert (1)
11.1 Statement regarding computation of per share earnings - See Footnote (1)
in Part II, Item 8
13.1 1997 Summary Annual Report to Shareholders (4)
21.1 Subsidiaries of the Registrant - See "Subsidiary Activities" in Part I,
Item 1
23.1 Consent of KPMG Peat Marwick, LLP (3)
24.1 Powers of Attorney for certain officers and directors (1)
27.0 Financial Data Schedule (3)
99.1 Appraisal Agreement with J.G. Cornwell and Co. (1)
99.2 Appraisal Report of J.G. Cornwell and Co. (1)
99.3 Stock Order Form for Subscription and Community Offerings (1)
99.4 Proxy Statement for Special Meeting of Members of West Allis Savings
Bank (1)
99.5 Marketing Materials (1)
99.6 Proxy Statement for 1997 Annual Meeting of Shareholders (3)
- --------------------------
(1) Incorporated by reference to exhibits filed with Company's Form S-1
Registration Statement declared effective on November 4, 1993
(Registration Number 33-67184).
(2) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995.
(3) Filed herein.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
Reference is made to the exhibit index set forth above at (a)(3).
(D) FINANCIAL STATEMENT SCHEDULES
Reference is made to the disclosure set forth above at (a)(1 and 2).
(4) Filed in paper format with the SEC persuant to Rule 101 of Regulation S-T.
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
<PAGE> 101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HALLMARK CAPITAL CORP.
/s/ James D. Smessaert
-------------------------------------
James D. Smessaert, Chairman
President and Chief Executive Officer
Date: September 16, 1997
----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Floyd D. Brink /s/ Peter A. Gilbert
- ---------------------------------- -----------------------------------------
Floyd D. Brink, Director Peter A. Gilbert, Executive Vice
President, Corporate Secretary and
Director
Date: September 16, 1997 Date: September 16, 1997
- ---------------------------------- -----------------------------------------
/s/ Reginald M. Hislop, III /s/ Charles E. Rickheim
- ---------------------------------- -----------------------------------------
Reginald M. Hislop, III, Director Charles E. Rickheim, Director
Date: September 16, 1997 Date: September 16, 1997
- ---------------------------------- -----------------------------------------
/s/ James D. Smessaert /s/ Arthur E. Thompson
- ---------------------------------- -----------------------------------------
James D. Smessaert, Chairman, Arthur E. Thompson
President and Chief Executive Officer Chief Financial Officer and Corporate
Treasurer
Date: September 16, 1997 Date: September 16, 1997
- ---------------------------------- -----------------------------------------
/s/ Jerome A. Weitzer /s/ Donald A. Zellmer
- ---------------------------------- -----------------------------------------
Jerome A. Weitzer, Director Donald A. Zellmer, Director
Date: September 16, 1997 Date: September 16, 1997
- ---------------------------------- -----------------------------------------
-99-
<PAGE> 1
HALLMARK CAPITAL CORP.
1993 INCENTIVE STOCK OPTION PLAN
[AS AMENDED ON OCTOBER 22, 1996,
(TO BE EFFECTIVE NOVEMBER 1, 1996;
AS AMENDED ON AUGUST __, 1997
(TO BE EFFECTIVE ON OCTOBER 30, 1997)]
1. PURPOSE.
The purpose of the Hallmark Capital Corp. (the "Holding Company") 1996
Incentive Stock Option Plan (the "Plan") is to advance the interests of the
Holding Company and its shareholders by providing those key employees of the
Holding Company and its Affiliates, including West Allis Savings Bank (the
"Bank"), upon whose judgment, initiative and efforts the successful conduct of
the business of the Holding Company and its Affiliates largely depends, with
additional incentive to perform in a superior manner. A purpose of the Plan
also is to attract people of experience and ability to the service of the
Holding Company and its Affiliates.
2. DEFINITIONS.
(a) "Affiliate" means (i) a member of a controlled group of corporations
of which the Holding Company is a member or (ii) an unincorporated trade or
business which is under common control with the Holding Company as determined
in accordance with Section 414(c) of the Internal Revenue Code of 1986, as
amended, (the "Code") and the regulations issued thereunder. For purposes
hereof, a "controlled group of corporations" shall mean a controlled group of
corporations as defined in Section 1563(a) of the Code determined without
regard to Section 1563(a)(4) and (e)(3)(C).
(b) "Award" means a grant of Non-statutory Stock Options, Incentive Stock
Options, and/or Limited Rights under the provisions of this Plan.
(c) "Board of Directors" or "Board" means the board of directors of the
Holding Company.
(d) "Change in Control" of the Holding Company means a Change in Control
of a nature that: (i) would be required to be reported in response to Item 1 of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); or (ii) results in a Change in Control of the Bank or the
Holding Company within the meaning of the Home Owners Loan Act of 1933 and the
Rules and Regulations promulgated by the Office of Thrift Supervision (or its
predecessor agency), as in effect on the effective date of this Plan; or (iii)
without limitation such a Change in Control shall be deemed to have occurred at
such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Bank or the Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding securities ordinarily having the
<PAGE> 2
right to vote at the election of directors except for any securities of the
Bank purchased by the Holding Company in connection with the conversion of the
Bank to the stock form and any securities purchased by the Bank's employee
stock benefit plans; or (b) individuals who constitute the Board on the date
hereof (the "Incumbent Board"), cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Holding Company's shareholders was approved by
the same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a member of the
Incumbent Board; or (c) a plan of reorganization, a merger, consolidation, sale
of all or substantially all the assets of the Bank or the Holding Company or
similar transaction in which the Bank or Holding Company is not the surviving
institution occurs; or (d) a proxy statement soliciting proxies from
shareholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking shareholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or the Bank or
similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company shall be distributed; or (e) a
tender offer is made for 20% or more of the voting securities of the Bank or
the Holding Company.
(e) "Committee" means a committee consisting of two or more Non-Employee
Directors appointed by the Board pursuant to Section 3 hereof. "Non-Employee
Director," as defined in Rule 16b-3 promulgated by the Securities and Exchange
Commission ("SEC") under the Exchange Act, means a director who (i) is not
currently an officer or otherwise employed by the Holding Company or the Bank,
or a parent or other subsidiary of the Holding Company, (ii) does not receive
compensation for consulting services or in any other capacity from the Holding
Company or the Bank in excess of $60,000 in any one year, and (iii) does not
possess an interest in and is not engaged in business relationships required to
be reported under Items 404(a) or 404(b) of Regulation S-K promulgated under
the Exchange Act.
(f) "Common Stock" means the Common Stock of the Holding Company, par
value, $1.00 per share.
(g) "Date of Grant" means the date an Award granted by the Committee is
effective pursuant to the terms hereof.
(h) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or
approved by the Board of Directors must advise the Committee that it is either
not possible to determine when such Disability will terminate or that it
appears probable that such Disability will be permanent during the remainder of
said participant's lifetime.
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<PAGE> 3
(i) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the average of the reported bid and ask price of the
Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System (as published by the Wall Street Journal, if
published) on such date or if the Common Stock was not traded on such date, on
the next preceding day on which the Common Stock was traded thereon or the last
previous date on which a sale is reported. For purposes of the grant of options
in the conversion of the Bank, Fair Market Value shall mean the initial public
offering price of the Common Stock.
(j) "Incentive Stock Option" means an Option granted by the Committee to a
Participant, which Option is designed as an Incentive Stock Option pursuant to
Section 8 of this Plan.
(k) "Limited Right" means the right to receive an amount of cash based
upon the terms set forth in Section 9 of this Plan.
(l) "Non-statutory Stock Option" means an Option granted by the Committee
to a participant and which is not designated by the Committee as an Incentive
Stock Option.
(m) "Normal Retirement" means retirement at the normal or early retirement
date as set forth in the employee stock ownership plan of the Bank.
(n) "Option" means Award granted under Section 7 or Section 8 of this
Plan.
(o) "Participant" means an employee of the Holding Company or its
affiliates chosen by the Committee to participate in the Plan.
(p) "Plan Year(s)" means a calendar year or years commencing on or after
January 1, 1993.
(q) "Termination for Cause" means the termination upon an intentional
failure to perform stated duties, breach of a fiduciary duty involving personal
dishonesty, which results in material loss to the Holding Company or one of its
Affiliates or willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order which
results in material loss to the Holding Company or one of its Affiliates.
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<PAGE> 4
3. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it sees necessary for the proper administration of the Plan and
to make whatever determinations and interpretations in connection with the Plan
it sees as necessary or advisable. All determinations and interpretations made
by the Committee shall be binding and conclusive on all Participants in the
Plan and on their legal representatives and beneficiaries.
4. TYPES OF AWARDS.
Awards under the Plan may be granted in any one or a combination of:
(a) Non-statutory Stock Options;
(b) Incentive Stock Options; and
(c) Limited Rights
as defined in paragraphs 7 through 9 of the Plan.
5. STOCK SUBJECT TO THE PLAN.
The maximum number of shares reserved for purchase pursuant to the exercise
of options granted under the Plan is [184,960] shares of Common Stock of the
Holding Company, par value $1.00 per share. These shares of Common Stock may
be either authorized but unissued shares or shares previously issued and
reacquired by the Holding Company. To the extent that options or Limited
Rights are granted under the Plan, the shares underlying such options will be
unavailable for future grants under the Plan except that, to the extent that
options together with any related Limited Rights granted under the Plan
terminate, expire or are canceled without having been exercised (in the case of
Limited Rights, exercised for cash) new Awards may be made with respect to
these shares.
6. ELIGIBILITY.
Officers and other employees of the Holding Company or its affiliates
(including employees who are also directors of the Holding Company or its
affiliates) shall be eligible to receive Incentive Stock Options, Non-statutory
Stock Options and/or Limited Rights under the Plan. Directors who are not
employees or officers of the Holding Company or its affiliates shall not be
eligible to receive Awards under the Plan.
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<PAGE> 5
7. NON-STATUTORY STOCK OPTIONS.
7.1 Grant of Non-statutory Stock Options.
The Committee may, from time to time, grant Non-statutory Stock Options to
eligible employees and, upon such terms and conditions as the Committee may
determine, grant Non-statutory Stock Options in exchange for and upon surrender
of previously granted Awards under this Plan. Non-statutory Stock Options
granted under this Plan are subject to the following terms and conditions:
(a) Price. The purchase price per share of Common Stock deliverable upon
the exercise of each Non-statutory Stock Option shall be determined by the
Committee on the date the option is granted. Such purchase price shall not be
less than 100% of the Fair Market Value of the Holding Company's Common Stock
on the Date of Grant. Shares may be purchased only upon full payment of the
purchase price. Payment of the purchase price may be made, in whole or in
part, through the surrender of shares of the Common Stock of the Holding
Company at the Fair Market Value of such shares on the date of surrender
determined in the manner described in Section 2(i) of the Plan.
(b) Terms of Options. The term during which each Non-statutory Stock
Option may be exercised shall be determined by the Committee, but in no event
shall a Non-statutory Stock Option be exercisable in whole or in part more than
10 years from the Date of Grant. The Committee shall determine the date on
which each Non-statutory Stock Option shall become exercisable and may provide
that a Non-statutory Stock Option shall become exercisable in installments.
The shares comprising each installment may be purchased in whole or in part at
any time after such installment becomes purchasable. The Committee may, in its
sole discretion, accelerate the time at which any Non-statutory Stock Option
may be exercised in whole or in part. Notwithstanding the above, in the event
of a Change in Control of the Holding Company, all Non-statutory Stock Options
shall become immediately exercisable.
(c) Termination of Employment. Upon the termination of a Participant's
service for any reason other than Disability, Normal Retirement, death or
Termination for Cause, the Participant's Non-statutory Stock Options shall be
exercisable only as to those shares which were immediately purchasable by the
Participant at the date of termination and only for a period of three months
following termination. In the event of Termination for Cause, all rights under
the Participant's Non-statutory Stock Options shall expire upon termination.
In the event of the death, Disability or Normal Retirement of any Participant,
all Non-statutory Stock Options held by the Participant, whether or not
exercisable at such time, shall be exercisable by the Participant or his legal
representatives or beneficiaries of the Participant for one year or such longer
period as determined by the Committee following the date of the Participant's
death, Normal Retirement or cessation of employment due to Disability, provided
that in no event shall the period extend beyond the expiration of the
Non-statutory Stock Option term.
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<PAGE> 6
8. INCENTIVE STOCK OPTIONS.
8.1 Grant of Incentive Stock Options.
The Committee may, from time to time, grant Incentive Stock Options to
eligible employees. Incentive Stock Options granted pursuant to the Plan shall
be subject to the following terms and conditions:
(a) Price. The purchase price per share of Common Stock deliverable upon
the exercise of each Incentive Stock Option shall be not less than 100% of the
Fair Market Value of the Holding Company's Common Stock on the Date of Grant.
However, if a Participant owns Common Stock possessing more than 10% of the
total combined voting power of all classes of Common Stock of the Holding
Company (or under Section 425(d) of the Code is deemed to own Common Stock
representing more than 10% of the total combined voting power of all such
classes of Common Stock), the purchase price per share of Common Stock
deliverable upon the exercise of each Incentive Stock Option shall not be less
than 110% of the Fair Market Value of the Holding Company's Common Stock on the
Date of Grant. Shares may be purchased only upon payment of the full purchase
price. Payment of the purchase price may be made, in whole or in part, through
the surrender of shares of the Common Stock of the Holding Company at the Fair
Market Value of such shares on the date of surrender determined in the manner
described in Section 2(i).
(b) Amounts of Options. Incentive Stock Options may be granted to any
eligible employee in such amounts as determined by the Committee. In the case
of an option intended to qualify as an Incentive Stock Option, the aggregate
Fair Market Value (determined as of the time the option is granted) of the
Common Stock with respect to which Incentive Stock Options granted are
exercisable for the first time by the Participant during any calendar year
(under all plans of the Participant's employer corporation and its parent and
subsidiary corporations) shall not exceed $100,000. The provisions of this
Section 8.1(b) shall be construed and applied in accordance with Section 422(d)
of the Code and the regulations, if any, promulgated thereunder. To the extent
an award under this Section 8.1 exceeds this $100,000 limit, the portion of the
award in excess of such limit shall be deemed a Non-statutory Stock Option.
(c) Terms of Options. The term during which each Incentive Stock Option
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If at the time an Incentive Stock Option is granted to
an employee, the employee owns Common Stock representing more than 10% of the
total combined voting power of the Holding Company (or, under Section 425(d) of
the Code, is deemed to own Common Stock representing more than 10% of the total
combined voting power of all such classes of Common Stock) the Incentive Stock
Option granted to such employee shall not be exercisable after the expiration
of five years from the Date of Grant. No Incentive Stock Option granted under
this Plan is
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<PAGE> 7
transferable except by will or the laws of descent and distribution and is
exercisable in his lifetime only by the employee to whom it is granted.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable and may provide that an Incentive Stock Option shall
become exercisable in installments. The shares comprising each installment may
be purchased in whole or in part at any time after such installment becomes
purchasable, provided that the amount able to be first exercised in a given
year is consistent with the terms of Section 422 of the Code. The Committee
may, in its sole discretion, accelerate the time at which any Incentive Stock
Option may be exercised in whole or in part, provided that it is consistent
with the terms of Section 422 of the Code. Notwithstanding the above, in the
event of a Change in Control of the Holding Company, all Incentive Stock
Options shall become immediately exercisable.
(d) Termination of Employment. Upon the termination of a Participant's
service for any reason other than Disability, Normal Retirement, Change in
Control, death or Termination for Cause, the Participant Incentive Stock
Options shall be exercisable only as to those shares which were immediately
purchasable by the Participant at the date of termination and only for a period
of three months following termination. In the event of Termination for Cause
all rights under the Participant's Incentive Stock Options shall expire upon
termination.
In the event of death or Disability of any employee, all Incentive Stock
Options held by such the Participant, whether or not exercisable at such time,
shall be exercisable by the Participant or the Participant's legal
representatives or beneficiaries for one year following the date of the
Participant's death or cessation of employment due to Disability. Upon
termination of the Participant's service due to Normal Retirement, or a Change
in Control, all Incentive Stock Options held by such Participant, whether or
not exercisable at such time, shall be exercisable for a period of one year
following the date of Participant's cessation of employment, provided however
that such option shall not be eligible for treatment as an Incentive Stock
Option in the event such option is exercised more than three months following
the date of the Participant's Normal Retirement. In no event shall the
exercise period extend beyond the expiration of the Incentive Stock Option
term.
(e) Compliance with Code. The options granted under this Section 8 of the
Plan are intended to qualify as incentive stock options within the meaning of
Section 422 of the Code, but the Holding Company makes no warranty as to the
qualification of any option as an incentive stock option within the meaning of
Section 422 of the Code.
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<PAGE> 8
9. LIMITED RIGHTS.
9.l Grant of Limited Rights.
Simultaneously with the grant of any option, the Committee may grant a
Limited Right with respect to all or some of the shares covered by such option.
Limited Rights granted under this Plan are subject to the following terms and
conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable in
whole or in part before the expiration of six months from the Date of Grant of
the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control of the Holding Company.
The Limited Right may be exercised only when the underlying option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the exercise price of the related
option.
Upon exercise of a Limited Right, the related option shall cease to be
exercisable. Upon exercise or termination of an option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the exercise price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
receive from the Holding Company an amount of cash equal to the difference
between the Fair Market Value on the Date of Grant of the related option and
the Fair Market Value of the underlying shares on the date the Limited Right is
exercised, multiplied by the number of shares with respect to which such
Limited Right is being exercised.
(c) Termination of Employment. Upon the termination of a Participant's
service for any reason other than Termination for Cause, any Limited Rights
held by the Participant shall then be exercisable for a period of one year
following termination. In the event of Termination for Cause, all Limited
Rights held by the Participant shall expire immediately. Upon termination of
the Participant's employment for reason of death, Normal Retirement or
Disability, all Limited Rights held by such Participant shall be exercisable by
the Participant or the Participant's legal representative or beneficiaries for
a period of one year from the date of such termination. In no event shall the
period extend beyond the expiration of the term of the related option.
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<PAGE> 9
10. SURRENDER OPTION.
In the event of a Participant's termination of employment as a result of
death, disability or Normal Retirement, the Participant (or the Participant's
Personal representative(s), heir(s), or devisee(s)) may, in a form acceptable
to the Committee make application to surrender all or part of options held by
such Participant in exchange for a cash payment from the Holding Company of an
amount equal to the difference between the Fair Market Value of the Common
Stock on the date of termination of employment and the exercise price per share
of the option on the Date of Grant. Whether the Committee accepts such
application or determines to make payment, in whole or part, is within its
absolute and sole discretion, it being expressly understood that the Committee
is under no obligation to any Participant whatsoever to make such payments. In
the event that the Committee accepts such application and the Holding Company
determines to make payment, such payment shall be in lieu of the exercise of
the underlying option and such option shall cease to be exercisable.
11. RIGHTS OF A SHAREHOLDER; LIMITED TRANSFERABILITY.
No Participant shall have any rights as a shareholder with respect to any
shares covered by a Non-statutory and/or Incentive Stock Option until the date
of issuance of a stock certificate for such shares. Nothing in this Plan or in
any Award granted confers on any person any right to continue in the employ of
the Holding Company or its Affiliates or to continue to perform services for
the Holding Company or its Affiliates or interferes in any way with the right
of the Holding Company or its Affiliates to terminate a Participant's services
as an officer or other employee at any time.
No Incentive Stock Option granted under this Plan is transferable except by
will or the laws of descent and distribution and is exercisable in his or her
lifetime only by the Participant to whom it is granted.
Non-statutory Stock Options granted hereunder may be exercised only during a
Participant's lifetime by the Participant, the Participant's guardian or legal
representative or by a permissible transferee. Non-statutory Stock Options
shall be transferable by Participants pursuant to the laws of descent and
distribution upon a Participant's death, and during a Participant's lifetime,
Non-statutory Stock Options shall be transferable by Participants to members of
their immediate family, trusts for the benefit of members of their immediate
family, and charitable institutions ("permissible transferees") to the extent
permitted under Section 16 of the Exchange Act and subject to federal and state
securities laws. The term "immediate family" shall mean any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, sister-in-law, or brother-in-law
and shall include adoptive relationships.
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<PAGE> 10
Non-statutory Stock Options also shall be transferable by Participants other
than to permissible transferees with the prior approval of the Committee which
shall have the authority to approve such transfers of Non-statutory Stock
Options on a case-by-case basis in its sole discretion.
Limited Rights may be transferable only with the prior approval of the
Committee which shall have the authority to approve such transfers of Limited
Rights on a case-by-case basis in its sole discretion. The Committee may deny
a Participant's request to transfer Limited Rights in its sole discretion for
any reason, including but not limited to the failure of the Company to obtain a
favorable opinion from legal counsel to the Company regarding the tax
consequences of the transfer of Limited Rights.
The Committee shall have the authority to establish rules and regulations
specifically governing the transfer of stock options and Limited Rights granted
under this Plan as it deems necessary and advisable.
12. AGREEMENT WITH GRANTEES.
Each Award of Options, and/or Limited Rights will be evidenced by a written
agreement, executed by the Participant and the Holding Company or its
Affiliates which describes the conditions for receiving the Awards including
the date of Award, the purchase price if any, applicable periods, and any other
terms and conditions as may be required by the Board of Directors or applicable
securities law.
13. DESIGNATION OF BENEFICIARY.
A Participant may, with the consent of the Committee, designate a person or
persons to receive, in the event of death, any stock option or Limited Rights
Award to which the Participant would then be entitled. Such designation will
be made upon forms supplied by and delivered to the Holding Company and may be
revoked in writing. If a Participant fails effectively to designate a
beneficiary, then the Participant's estate will be deemed to be the
beneficiary.
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<PAGE> 11
14. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock of the
Holding Company by reason of any stock dividend or split, recapitalization,
merger, consolidation, spin-off, reorganization, combination or exchange of
shares, or other similar corporate change, or other increase or decrease in
such shares without receipt or payment of consideration by the Holding Company,
the Committee will make such adjustments to previously granted Awards, to
prevent dilution or enlargement of the rights of the Participant, including any
or all of the following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
which may be awarded under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
covered by Awards already made under the Plan;
(c) adjustments in the purchase price of outstanding Incentive and/or
Non-statutory Stock Options, or any Limited Rights attached to such options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award.
15. WITHHOLDING.
There may be deducted from each distribution of cash and/or Common Stock
under the Plan the amount of tax required by any governmental authority to be
withheld.
16. AMENDMENT OF THE PLAN.
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect; provided however, that Sections 7.1 and 8.1
governing grants shall not be amended more than once every six months other
than to comport with the Code or the Employee Retirement Income Security Act of
1974, as amended, if applicable.
The Board may determine that shareholder approval of any amendment to this
Plan may be advisable for any reason, including but not limited to, for the
purpose of obtaining or retaining any statutory or regulatory benefits under
tax, securities or other laws or satisfying applicable stock exchange listing
requirements.
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<PAGE> 12
No such termination, modification or amendment may affect the rights of a
Participant under an outstanding Award.
17. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon the consummation of the conversion of
West Allis Savings Bank from the mutual to capital stock form of ownership (the
"Effective Date"). The Plan, as initially adopted, shall be presented to
shareholders of the Holding Company for ratification for purposes of: (i)
obtaining favorable treatment under Section 16(b) of the Exchange Act; (ii)
satisfying one of the requirements of Section 422 of the Code governing the tax
treatment for Incentive Stock Options; and (iii) maintaining listing on the
NASDAQ National Market System. The failure to obtain shareholder ratification
will not effect the validity of the Plan and the options thereunder, provided,
however, that if the Plan is not ratified, the Plan shall remain in full force
and effect, and any Incentive Stock Options granted under the Plan shall be
deemed to be Non-statutory Stock Options.
18. TERMINATION OF THE PLAN.
The right to grant Awards under the Plan will terminate upon the earlier of
ten (10) years after the Effective Date of the Plan or the issuance of Common
Stock or the exercise of options or related Limited Rights equivalent to the
maximum number of shares reserved under the Plan as set forth in Section 5.
The Board of Directors has the right to suspend or terminate the Plan at any
time. No termination shall, without the consent of a Participant, adversely
affect such individual's rights under a previously granted award.
19. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the State of
Wisconsin to the extent not Preempted by Federal law as now or hereafter in
effect.
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<PAGE> 13
20. COMPLIANCE WITH SECTION 16.
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provisions of this Plan or action of the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
- --------------------------- --------------------------------
Date Adopted Signature
[Title]
- --------------------------- ------------------------------
Date Approved by Secretary
Shareholders
October 22, 1996 (to be --------------------------------
effective November 1, 1996) Signature
[Title]
- --------------------------- --------------------------------
Date Amended Secretary
August __, 1997 (to be --------------------------------
effective October 30, 1997) Signature
[Title]
- ------------------------- ------------------------------
Date Amended Secretary
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<PAGE> 1
HALLMARK CAPITAL CORP.
1993 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
[AS AMENDED ON OCTOBER 22, 1996,
(TO BE EFFECTIVE ON NOVEMBER 1, 1996);
AS AMENDED ON AUGUST __, 1997
(TO BE EFFECTIVE ON OCTOBER 30, 1997)]
I. PURPOSE.
The purpose of the Hallmark Capital Corp. (the "Holding Company") 1993 Stock
Option Plan for Outside Directors (the "Directors' Option Plan") is to promote
the growth and profitability of the Holding Company and West Allis Savings Bank
(the "Bank") by providing Outside Directors of the Holding Company and its
affiliates (including the Bank) with an incentive to achieve long-term
objectives of the Holding Company and to attract and retain non-employee
directors of outstanding competence by providing such Outside Directors with an
opportunity to acquire an equity interest in the Holding Company.
II. GRANT OF OPTIONS.
(a) Initial Grant. Each Outside Director (for purposes of this Directors'
Option Plan, the term "Outside Director" shall mean a member of the Board of
Directors of the Holding Company or any of its affiliates not also serving as
an employee of the Holding Company or any of its affiliates), serving in such
capacity on the date of the Holding Company's initial public offering and at
the effective date of this Directors' Option Plan, shall be granted
non-statutory stock options to purchase shares of the common stock of the
Holding Company ("Common Stock") subject to adjustment as provided in Section V
hereof. All Outside Directors shall be granted options for 12,031 shares of
Common Stock issued in connection with the conversion of the Bank to stock form
("Conversion"). The purchase price per share of the Common Stock deliverable
upon the exercise of each non-statutory stock option shall be the initial
public offering price of the Common Stock sold in connection with the
Conversion. The effective date of these initial grants shall be the effective
date of the Directors' Option Plan as defined in Section VI hereof ("Effective
Date").
All specific references provided in this Section II(a) with respect to grants
or total options available are based on the assumption that 1,375,000 shares of
Common Stock of the Company will be issued in the Conversion. In the event of
issuance of a greater or lesser number of Common Shares, all specific
references to numbers of option grants or total options shall be increased or
decreased proportionately.
(b) Subsequent Grants to Outside Directors. To the extent options are
available for grant under the Directors' Option Plan, the Board of Directors
shall have the authority to grant options to one or more Outside Directors in
its discretion. The purchase price per share shall equal the Fair Market Value
of the Common Stock on the date the option is granted as determined under
paragraph (d) of this Section II.
<PAGE> 2
(c) Ineligibility. An option under the Directors' Option Plan shall not be
granted to any Outside Director who at any previous time was an employee of
either the Holding Company or the Bank and in such capacity was eligible to
receive any options to purchase Common Stock.
(d) Fair Market Value. For purposes of the Directors' option Plan, when
used in connection with Common Stock on a certain date, Fair Market Value means
the average of the bid and ask prices of the Common Stock as reported by the
National Association of Securities Dealers Automated Quotation System (as
published by the Wall Street Journal "NASDAQ", if published) on the effective
date of the grant, or if the Common Stock was not traded on such date, on the
next preceding day on which the Common Stock was traded thereon. For purposes
of the grant of options in the Conversion as defined in Section VI hereof, of
the Bank, Fair Market Value shall mean the initial public offering price of the
Common Stock.
(e) Disability. The permanent and total inability by reason of mental or
physical infirmity, or both, of an Outside Director to perform the work
customarily assigned to him.
III. EARNING OF OPTIONS.
(a) General Rules.
(i) Initial Grants. Options shall be earned by an Outside Director at
the rate of thirty-three and one third percent (33 1/3%) of the
aggregate number of Options granted at the end of each full twelve months of
consecutive service with the Bank or the Holding Company after the date of
the grant. If the service of a Director is terminated prior to the third
anniversary of the date of grant of the Option for any reason (except as
specifically provided in Subsections (b) and (c) below), the Outside
Director shall forfeit the right to earn any options which have not
theretofore been earned.
(ii) Subsequent Grants. To the extent options are available for
subsequent grants under the Directors' Option Plan, and the Board of
Directors authorizes grants to Outside Directors under paragraph (b) of
Section II, the Board of Directors shall have the authority to determine the
vesting schedule applicable to such grants in its sole discretion.
(iii) Rounding. In determining the number of Options which are
earned, fractional shares shall be rounded down to the nearest whole
number, provided that such fractional shares shall be aggregated and earned,
on the last anniversary in which the Option vests.
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<PAGE> 3
(b) Exception for Terminations Due to Death or Disability. Notwithstanding
the general rule contained in Section (a) above, all Options held by an Outside
Director whose service as a Director with the Bank or Holding Company
terminates due to death or Disability, shall be deemed earned as of the Outside
Director's last day of service as a Director with the Bank or the Holding
Company.
(c) Exception for Terminations After a Change in Control. Notwithstanding
the general rule contained in Section (a) above, all Options held by a Director
whose service on the Board of Directors of the Bank or Holding Company
terminates following a change in control of the Bank or Holding Company, shall
be deemed earned as of the Outside Director's last day of service as an Outside
Director with the Bank or the Holding Company. For purposes of determining
under the Plan whether there has been a change in control of the Bank or the
Holding Company, a "Change in Control" of the Bank or the Holding Company means
a "Change in Control" of a nature that (i) would be required to be reported in
response to Item 1 of the current report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"); or (ii) results in a Change in Control of the
Bank or the Holding Company within the meaning of the Home Owners Loan Act of
1933 and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the effective date of
this Plan; or (iii) without limitation such a Change in Control shall be deemed
to have occurred at such time as (a) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20%
or more of the Bank's or the Holding Company's outstanding securities
ordinarily having the right to vote at the election of directors except for any
securities of the Bank purchased by the Holding Company in connection with the
conversion of the Bank to the stock form and any securities purchased by the
Bank's employee stock benefit plans; or (b) individuals who constitute the
Board on the date hereof (the "Incumbent Board"), cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Holding Company's shareholders was
approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (b), considered as though he were a
member of the Incumbent Board; or (c) a Plan of reorganization, a merger,
consolidation, sale or substantially all the assets of the Bank or the Holding
Company or similar transaction in which the Bank or Holding Company is not the
surviving institution occurs; or (d) a proxy statement soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or the Bank or
similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company shall be distributed; or (e) a
tender offer is made for 20% or more of the voting securities of the Bank or
the Holding Company.
-3-
<PAGE> 4
IV. TERMS AND CONDITIONS.
(a) Option Agreement. Each option shall be evidenced by a written option
agreement between the Holding Company and the Outside Director specifying the
number of shares of Common Stock that may be acquired through its exercise and
containing such other terms and conditions which are not inconsistent with the
terms of this plan.
(b) Termination of Options. Each option shall expire upon the earlier of
(i) one hundred and twenty (120) months following the date of grant, or (ii)
one (1) year following the date on which the Outside Director ceases to serve
in such capacity for any reason other than removal for cause; provided,
however, that if the Participant's service on the Board of Directors is
terminated prior to the date the Plan initially is presented to the
shareholders of the Company for ratification, the option may not be exercised
prior to the date of the shareholders meeting regarding such ratification but
shall remain exercisable for a period of one year from the date of such
meeting. If the Outside Director dies before fully exercising any portion of
an option then exercisable, such option may be exercised by such Outside
Director's personal representative(s), heir(s) or devisee(s) at any time within
the one (1) year period following his or her death; provided, however, that in
no event shall the option be exercisable: (i) more than one hundred and twenty
(120) months after the date of its grant; or (ii) more than one year following
the date on which the outside director ceases to serve in that capacity other
than removal for cause. If the Outside Director is removed for cause all
options awarded to him shall expire immediately upon such removal.
(c) Manner of Exercise. The option may be exercised from time to time, in
whole or in part, by delivering a written notice of exercise to the Chief
Executive Officer of the Holding Company. Such notice is irrevocable and must
be accompanied by full payment of the exercise price (as determined in Section
II(d) hereof) in cash or shares of previously acquired Common Stock of the
Holding Company at the Fair Market Value of such shares determined on the
exercise date by the manner described in Section II(d) above or by such other
means as determined by the Board of Directors. If previously acquired shares
of Common Stock are tendered in payment of all or part of the exercise price,
the value of such shares shall be determined as of the date of such exercise.
(d) Transferability. Options granted hereunder may be exercised only during
an Outside Director's lifetime by the Outside Director, the Outside Director's
guardian or legal representative or by a permissible transferee. Options shall
be transferable by Outside Directors pursuant to the laws of descent and
distribution upon an Outside Director's death, and during an Outside Director's
lifetime, options shall be transferable by Outside Directors to members of
their immediate family, trusts for the benefit of members of their immediate
family and charitable institutions ("permissible transferees") to the extent
permitted under Section 16 of the Exchange Act, and subject to federal and
state securities laws. The term "immediate family" shall mean any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling,
-4-
<PAGE> 5
mother-in-law, father-in-law, son-in-law, brother-in-law, or sister-in-law and
shall include adoptive relationships.
Options also shall be transferable by Outside Directors other than to
permissible transferees with the prior approval of the Board of Directors which
shall have the authority to approve such transfers of options on a case-by-case
basis in its sole discretion.
The Board of Directors shall have the authority to establish rules and
regulations specifically governing the transfer of options granted hereunder as
it deems necessary and advisable.
V. COMMON STOCK SUBJECT TO THE DIRECTORS' OPTION PLAN.
The shares which shall be issued and delivered upon exercise of options
granted under the Directors' Option Plan may be either authorized and unissued
shares of Common Stock or authorized and issued shares of Common Stock held by
the Holding Company as Treasury stock. The number of shares of Common Stock
reserved for issuance under the Directors' Option Plan shall not exceed
[76,990] shares of the Common Stock of the Holding Company, par value $l.00 per
share, issued in connection with the Conversion of the Bank from the mutual to
the stock form of ownership, subject to adjustments pursuant to this Section V.
Any shares of Common Stock subject to an option which for any reason either
terminates unexercised or expires, shall again be available for issuance under
the Directors' Option Plan.
In the event of any change or changes in the outstanding Common Stock of the
Holding Company by reason of any stock dividend or split, recapitalization,
reorganization, merger, consolidation, spin-off, combination or any similar
corporate change, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Company, the number of shares of
Common Stock which may be issued under this Directors' Option Plan, the number
of shares of Common Stock subject to options granted under this Directors'
Option Plan and the option price of such options, shall be automatically
adjusted to prevent dilution or enlargement of the rights granted to an Outside
Director under the Directors' Option Plan.
-5-
<PAGE> 6
VI. EFFECTIVE DATE OF THE PLAN; SHAREHOLDER RATIFICATION.
The Directors' Option Plan after adoption by the Board of Directors shall
become effective upon the conversion of the Bank from the mutual to capital
stock form of ownership and the acquisition of the Bank by the Holding Company
(the "Conversion"). Following Conversion, the Directors' Option Plan shall be
presented to shareholders of the Company for ratification for purposes of (i)
obtaining favorable treatment under Section 16(b) of the Exchange Act; and (ii)
maintaining listing on the NASDAQ National Market System; provided, however,
that the failure to obtain shareholder ratification shall not affect the
validity of this Plan and the options granted hereunder.
VII. TERMINATION OF THE PLAN.
The right to grant options under the Directors' Option Plan will terminate
ten years after the Effective Date of the Plan. A majority of the outstanding
shares of the Common Stock entitled to vote is required to terminate the
Directors' Option Plan. No termination pursuant to Article VII shall, without
the consent of the affected individual, affect such individual's rights under a
previously granted option.
VIII. AMENDMENT OF THE PLAN.
The Directors' Option Plan may be amended from time to time by the Board of
Directors of the Company provided that Section II hereof, "Grant of Options"
shall not be amended more than once every six months other than to comport with
the Internal Revenue Code of 1986, as amended, or the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder. Except as
provided in Section V hereof, rights and obligations under any option granted
before an amendment shall not be altered or impaired by such amendment without
the written consent of the optionee. The Board of Directors may determine that
shareholder approval of an amendment to the Directors' Option Plan may be
advisable for any reason, including but not limited to, for the purpose of
obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying applicable stock exchange listing
requirements.
IX. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the State of
Wisconsin.
-6-
<PAGE> 7
X. COMPLIANCE WITH SECTION 16.
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successor under the Exchange Act. To the
extent any provision of the Plan or action by the Board of Directors fails to
so comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Board of Directors of the Holding Company.
- ----------------------------- ------------------------------
Date Adopted By Board Signature
[Title]
- ----------------------------- ------------------------------
Date Ratified By Shareholders Signature
[Title]-----------------------
- ----------------------------- ------------------------------
October 22, 1996 (to be Signature
effective November 1, 1996) [Title]-----------------------
Date Amended
- ----------------------------- ------------------------------
August __, 1992 (to be Signature
effective October 30, 1997) [Title]-----------------------
Date Amended
-7-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Hallmark Capital Corp.:
We consent to incorporation by reference in the subject registration statement
(No. 33-80-700) on Form S-8 of Hallmark Capital Corp. of our report dated
August 1, 1997, relating to the consolidated statements of financial condition
of Hallmark Capital Corp. and subsidiary as of June 30, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended June 30, 1997, which
report appears in the June 30, 1997 annual report on Form 10-K of Hallmark
Capital Corp.
KPMG Peat Marwick, LLP
Milwaukee, Wisconsin
September 16, 1997
-100-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,859
<INT-BEARING-DEPOSITS> 4,896
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,518
<INVESTMENTS-CARRYING> 29,518
<INVESTMENTS-MARKET> 29,518
<LOANS> 273,556
<ALLOWANCE> 1,762
<TOTAL-ASSETS> 409,820
<DEPOSITS> 281,512
<SHORT-TERM> 25,101
<LIABILITIES-OTHER> 6,563
<LONG-TERM> 66,972
0
0
<COMMON> 29,672
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 409,820
<INTEREST-LOAN> 20,823
<INTEREST-INVEST> 9,074
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 29,823
<INTEREST-DEPOSIT> 13,893
<INTEREST-EXPENSE> 20,210
<INTEREST-INCOME-NET> 9,613
<LOAN-LOSSES> 650
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 1,173
<INCOME-PRETAX> 2,945
<INCOME-PRE-EXTRAORDINARY> 2,945
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,919
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 8.16
<LOANS-NON> 594
<LOANS-PAST> 625
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,234
<CHARGE-OFFS> 128
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,762
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,762
</TABLE>
<PAGE> 1
[HALLMARK CAPITAL CORP. LETTERHEAD]
September 19, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of Hallmark Capital Corp. (the "Company"), the holding
company for West Allis Savings Bank (the "Bank"), which will be held on
Thursday, October 30, 1997, at 7:00 p.m., Milwaukee, Wisconsin time, at the
Pettit National Ice Center, Hall of Fame Room, 500 South 84th Street, West
Allis, Wisconsin 53214.
The attached Notice of Annual Meeting of Shareholders and Proxy Statement
describe the formal business to be conducted at the Annual Meeting. We also
have enclosed a copy of the Company's Summary Annual Report and Annual Report
on Form 10-K for the fiscal year ended June 30, 1997. Directors and officers
of the Company, as well as representatives of KPMG Peat Marwick LLP, the
Company's independent auditors, will be present at the Annual Meeting to
respond to any questions that our shareholders may have.
The vote of every shareholder is important to us. Please sign and return
the enclosed appointment of proxy form ("Proxy") promptly in the postage-paid
envelope provided, regardless of whether you are able to attend the Annual
Meeting in person. If you attend the Annual Meeting, you may vote in person
even if you have already mailed your Proxy.
On behalf of the Board of Directors and all of the employees of the
Company and the Bank, I wish to thank you for your continued support.
Sincerely yours,
/S/ James D. Smessaert
-------------------------------------
James D. Smessaert
President and Chief Executive Officer
<PAGE> 2
HALLMARK CAPITAL CORP.
[LETTERHEAD]
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 30, 1997
----------------------------------------
TO THE HOLDERS OF COMMON STOCK OF HALLMARK CAPITAL CORP.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Annual Meeting") of Hallmark Capital Corp. (the "Company") will be held on
Thursday, October 30, 1997, at 7:00 p.m., Milwaukee, Wisconsin time, at the
Pettit National Ice Center, Hall of Fame Room, 500 South 84th Street, West
Allis, Wisconsin 53214.
The Annual Meeting is for the purpose of considering and voting upon the
following matters, all of which are set forth more completely in the
accompanying Proxy Statement:
1. The election of one director for a three-year term, and until his
successor is elected and qualified;
2. The approval of an amendment to the Hallmark Capital Corp. 1993
Incentive Stock Option Plan;
3. The approval of an amendment to the Hallmark Capital Corp. 1993 Stock
Option Plan for Outside Directors;
4. The ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company for the fiscal year ending June
30, 1998; and
5. Such other matters as may properly come before the Annual Meeting or
any adjournments or postponements thereof. The Board of Directors is
not aware of any other such business.
The Board of Directors has established September 12, 1997, as the record
date for the determination of shareholders entitled to notice of and to vote at
the Annual Meeting and any adjournments or postponements thereof. Only
shareholders of record as of the close of business on that date will be
entitled to vote at the Annual Meeting or any adjournments or postponements
thereof. In the event there are not sufficient votes for a quorum or to
approve or ratify any of the foregoing proposals at the time of the Annual
Meeting, the Annual Meeting may be adjourned or postponed in order to permit
further solicitation of proxies by the Company.
BY ORDER OF THE BOARD OF DIRECTORS,
/S/ Peter A. Gilbert
-------------------------
West Allis, Wisconsin Peter A. Gilbert
September 19, 1997 Executive Vice President and Corporate Secretary
- --------------------------------------------------------------------------------
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU PLAN
TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY FORM PROMPTLY IN THE ENVELOPE PROVIDED.
- --------------------------------------------------------------------------------
<PAGE> 3
[HALLMARK CAPITAL CORP. LETTERHEAD]
-------------------------
PROXY STATEMENT
-------------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 30, 1997
---------------------------------------
This Proxy Statement is being furnished to holders of common stock, $1.00
par value per share (the "Common Stock") of Hallmark Capital Corp. (the
"Company") in connection with the solicitation on behalf of the Board of
Directors of the Company of proxies to be used at the Annual Meeting of
Shareholders (the "Annual Meeting") to be held on Thursday, October 30, 1997,
at 7:00 p.m., Wisconsin time, at the Pettit National Ice Center, 500 South 84th
Street, West Allis, Wisconsin and at any adjournments or postponements thereof.
The 1997 Summary Annual Report to Shareholders and the Company's Annual
Report on Form 10-K, including the consolidated financial statements for the
fiscal year ended June 30, 1997, accompanies this Proxy Statement and
appointment of proxy form (the "Proxy"), which are first being mailed to
shareholders on or about September 19, 1997.
Only shareholders of record as of the close of business on September 12,
1997 (the "Voting Record Date") will be entitled to vote at the Annual Meeting.
On the Voting Record Date, there were 1,442,950 shares of Common Stock
outstanding and entitled to vote, and the Company had no other class of
securities outstanding.
The presence, in person or by Proxy, of the holders of at least a majority
of the total number of shares of Common Stock entitled to vote is necessary to
constitute a quorum at the Annual Meeting. As to the election of directors,
the Proxy being provided by the Board of Directors enables a director to vote
for the election of the nominees proposed by the Board, or to withhold
authority to vote for one or more of the nominees being proposed. Under the
Wisconsin Business Corporation Law, directors are elected by a plurality of the
votes cast with a quorum present and shareholders do not have the right to
cumulate their votes for the election of directors unless the articles of
incorporation provide otherwise. The Company's Articles of Incorporation do
not provide cumulative voting rights for the election of directors. The
affirmative vote of at least a majority of the shares of Common Stock
represented in person or by proxy at the Annual Meeting is necessary to approve
the amendment to the Hallmark Capital Corp. 1993 Incentive Stock Option Plan
(the "Incentive Stock Option Plan") and the amendment to the Hallmark Capital
Corp. 1993 Stock Option Plan for Outside Directors (the "Directors' Plan").
The affirmative vote of a majority of the total votes cast in person or by
proxy is necessary to ratify the appointment of KPMG Peat Marwick LLP as
independent auditors for the fiscal year ending June 30, 1998.
Abstentions are included in the determination of shares present and voting
for purposes of whether a quorum exists, while broker non-votes are not.
Because of the required votes, abstentions will have the same effect as a vote
against the proposal to approve the amendments to the option plans and to
ratify the appointment of the Company's independent auditors, but will not be
counted as votes cast for the election of directors and thus, will have no
effect on the voting for the election of directors. Under the rules of the New
York Stock Exchange,
<PAGE> 4
all of the proposals for consideration at the Annual Meeting are considered
"discretionary" items upon which brokerage firms may vote in their discretion
on behalf of their client if such clients have not furnished voting
instructions. Therefore, there are no proposals to be considered at the Annual
Meeting which are considered "non-discretionary" and for which there will be
"broker non-votes." In the event there are not sufficient votes for a quorum
or to approve or ratify any proposal at the time of the Annual Meeting, the
Annual Meeting may be adjourned or postponed in order to permit the further
solicitation of proxies.
As provided in the Company's Articles of Incorporation, record holders of
Common Stock who beneficially own in excess of 10% of the outstanding shares of
Common Stock (the "10% Limit") are not entitled to any vote in respect of the
shares held in excess of the 10% Limit. A person or entity is deemed to
beneficially own shares owned by an affiliate of, as well as such persons
acting in concert with, such person or entity. However, no director or officer
of the Company shall be deemed to beneficially own any Common Stock
beneficially owned by any other director or officer, solely by reason of any or
all of such directors or officers acting in their capacities as such. The
Company's Articles of Incorporation authorize the Board (i) to make all
determinations necessary to implement and apply the 10% Limit, including
determining whatever persons or entities are acting in concert, and (ii) to
demand that any person who is reasonably believed to beneficially own stock in
excess of the 10% Limit supply information to the Company to enable the Board
to implement and apply the 10% Limit. The provisions of the Company's Articles
of Incorporation relating to the 10% Limit do not apply to an acquisition of
more than 10% of the shares of Common Stock if such acquisition has been
approved by a majority of disinterested directors; provided such approval shall
be effective only if obtained at a meeting where a quorum of disinterested
directors is present.
Shareholders are requested to vote by completing the enclosed Proxy and
returning it signed and dated in the enclosed postage-paid envelope.
Shareholders are urged to indicate their votes in the spaces provided on the
Proxy. Proxies solicited by the Board of Directors of the Company will be
voted in accordance with the directions given therein. Where no instructions
are given, signed proxies will be voted FOR the election of each of the nominee
for director named in this Proxy Statement, FOR approval of the amendment to
the Incentive Stock Option Plan, FOR approval of the amendment to the
Directors' Plan and FOR the ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors of the Company for the fiscal year ending
June 30, 1998. In the event other matters properly come before the Annual
Meeting or any adjournments or postponements thereof, including, without
limitation, a motion to adjourn the Annual Meeting in order to permit further
solicitation of proxies by the Company, the proxies will be entitled to vote as
they, in their discretion, deem appropriate. Returning your completed Proxy
will not prevent you from voting in person at the Annual Meeting should you be
present and wish to do so.
Any shareholder giving a Proxy has the power to revoke it any time before
it is exercised by (i) filing with the Secretary of the Company written notice
thereof (Peter A. Gilbert, Corporate Secretary, Hallmark Capital Corp., 7401
West Greenfield Avenue, West Allis, Wisconsin 53214); (ii) submitting a duly
executed Proxy bearing a later date; or (iii) appearing at the Annual Meeting
and giving the Secretary notice of his or her intention to vote in person. If
you are a shareholder whose shares are not registered in your own name, you
will need additional documentation from your record holder to vote personally
at the Annual Meeting. Proxies solicited hereby may be exercised only at the
Annual Meeting and any adjournment or postponement thereof and will not be used
for any other meeting.
The cost of solicitation of proxies by mail on behalf of the Board of
Directors will be borne by the Company. The Company has retained Morrow &
Company, Inc., a professional proxy solicitation firm, to assist in the
solicitation of proxies. Morrow & Company, Inc. will be paid a fee of $4,250,
plus reimbursement for out-of-pocket expenses. Proxies also may be solicited
by personal interview or by telephone, in addition to the use of the mails by
directors, officers and regular employees of the Company and West Allis Savings
Bank (the "Bank"), without additional compensation therefor. The Company also
has made arrangements with brokerage firms, banks, nominees and other
fiduciaries to forward proxy solicitation materials for shares of Common Stock
held of record by the beneficial owners of such shares. The Company will
reimburse such holders for their reasonable out-of-pocket expenses.
Proxies solicited hereby will be referred to the Board of Directors, and
will be tabulated by inspectors of election designated by the Board of
Directors, who will not be employed by, or a director of, the Company or any of
its affiliates.
-2-
<PAGE> 5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of August 31, 1997 (except as noted otherwise below) by (i)
each shareholder known to the Company to beneficially own more than 5% of the
shares of Common Stock outstanding, as disclosed in certain reports regarding
such ownership filed with the Company and with the Securities and Exchange
Commission (the "SEC") in accordance with Sections 13(d) or 13(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) each
director of the Company, (iii) each director nominee of the Company; (iv) the
executive officers of the Company appearing in the Summary Compensation Table
below, and (v) all directors and executive officers as a group. Members of the
Board of Directors of the Company also serve as directors of the Bank.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME OWNED (1) PERCENT OF CLASS
---- ---------------- ----------------
<S> <C> <C>
Financial Institution Partners, L.P./ Hovde
Capital, Inc. (5) ........................ 142,000 9.84%
West Allis Savings Bank Employee Stock
Ownership Trust (6) ...................... 80,521 5.58
Heartland Advisors, Inc.(7) ............... 55,000 3.81
James D. Smessaert (2)(3)(4) .............. 103,436 6.92
Floyd D. Brink (2)(3) ..................... 34,241 2.35
Milton Dalin (2)(3) ....................... 27,991 1.92
Reginald M. Hislop, III ................... 100 *
Charles E. Rickheim (2)(3) ................ 41,470 2.85
Jerome A. Weitzer (2)(3) .................. 34,241 2.35
Donald A. Zellmer ......................... 1,500 *
Peter A. Gilbert (3) ...................... 34,564 2.38
All directors and executive officers
as a group (11 persons) (2)(3)(4) ........ 331,461 20.84%
</TABLE>
____________________
* Amount represents less than 1.0% of the total shares of Common Stock
outstanding.
(1) Unless otherwise indicated, includes shares of Common Stock held directly
by the individuals as well as by members of such individuals' immediate
family who share the same household, shares held in trust and other
indirect forms of ownership over which shares the individuals exercise
sole or shared voting power and/or investment power. Fractional shares of
Common Stock held by certain executive officers under the West Allis
Savings Bank Employee Stock Ownership Plan (the "ESOP") have been rounded
to the nearest whole share.
(2) Includes shares of Common Stock which the named individuals and certain
executive officers have the right to acquire within 60 days of the Voting
Record Date pursuant to the exercise of stock options: Mr. Smessaert -
51,800 shares and Mr. Gilbert - 7,200 shares.
(3) Includes shares of Common Stock awarded to certain executive officers and
directors under the West Allis Savings Bank Management Recognition and
Retention Plan (the "MRP"). Recipients of awards under the MRP may direct
voting prior to vesting.
(4) Includes shares of Common Stock allocated to certain executive officers
under the ESOP, of which approximately 4,582 shares were allocated to Mr.
Smessaert.
(5) Based upon Amendment No. 1 to a Schedule 13D, dated November 7, 1996,
filed with the Company pursuant to the Exchange Act by Financial
Institution Partners, L. P. and Hovde Capital, Inc., reporting the
beneficial ownership of shares are where they have shared voting and
dispositive power. Hovde Capital, Inc. is the general partner of
Financial Institution Partners, L.P. and their business office is located
at 1110 Lake Cook Road, Suite 165, Buffalo Grove, IL 60089.
(6) First Bank Milwaukee, N.A. (the "Trustee") is the trustee for the ESOP.
The Trustee's address is 201 West Wisconsin Avenue, Milwaukee, Wisconsin
53202.
(7) Based upon Amendment No. 1 to a Schedule 13G, dated February 12, 1997,
filed with the Company pursuant to the Exchange Act by Heartland Advisors,
Inc., an investment adviser registered under the Investment Advisers Act
of 1940, as amended, reporting the beneficial ownership of shares over
which they have the sole voting and dispositive power. The principal
business office of Heartland Advisors, Inc. is located at 790 North
Milwaukee Street, Milwaukee, Wisconsin 53202.
-3-
<PAGE> 6
MATTERS TO BE VOTED ON AT THE ANNUAL MEETING
MATTER 1.
ELECTION OF DIRECTORS
Pursuant to the Articles of Incorporation of the Company, at the first
annual meeting of shareholders of the Company held on October 28, 1994,
directors of the Company were divided into three classes as equal in number as
possible. Directors of the first class were elected to hold office for a term
expiring at the first succeeding annual meeting, directors of the second class
were elected to hold office for a term expiring at the second succeeding annual
meeting, and directors of the third class were elected to hold office for a
term expiring at the third succeeding annual meeting, and in each case until
their successors are elected and qualified. At each subsequent annual meeting
of shareholders, one class of directors, or approximately one-third of the
total number of directors, are to be elected for a term of three years. There
are no family relationships among the directors and/or executive officers of
the Company. No person being nominated as a director is being proposed for
election pursuant to any agreement or understanding between any person and the
Company.
Unless otherwise directed, each Proxy executed and returned by a
shareholder will be voted FOR the election of the nominees for director listed
below. If any person named as nominee should be unable or unwilling to stand
for election at the time of the Annual Meeting, the proxies will nominate and
vote for any replacement nominee or nominees recommended by the Board of
Directors. At this time, the Board of Directors knows of no reason why any of
the nominees listed below may not be able to serve as a director if elected.
The following tables present information concerning the nominees for
director and continuing directors. All of the proposed nominees currently
serve as directors of the Bank. James D. Smessaert has served as a director of
the Company since the Company's formation in June 1993. In July 1997, the
Board of Directors approved an amendment to the Company's By-laws to reduce the
number of directors from seven to six, effective upon the expiration of Mr.
Jerome A. Weitzer's current term at the Annual Meeting. Mr. Weitzer, age 75,
has been a director of the Bank since 1972, and is a retired Vice President and
a former director of Weitzer Bros., Inc., a plumbing and heating contract
company, located in West Allis, Wisconsin.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR
AND PRINCIPAL OCCUPATION OF THE BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE
- ---- --- -------------------------- -----------
<S> <C> <C> <C>
NOMINEE FOR DIRECTOR FOR THREE-YEAR TERM EXPIRING IN 2000
James D. Smessaert 59 President, Chief Executive Officer and Chairman 1984
of the Board for the Company and the Bank.
</TABLE>
-4-
<PAGE> 7
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR
AND PRINCIPAL OCCUPATION OF THE BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE
- ---- --- -------------------------- -----
<S> <C> <C> <C>
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Peter A. Gilbert 49 Director of the Company and the Bank; Executive 1995
Vice President, Chief Operating Officer and
Corporate Secretary of the Bank and Executive
Vice President and Corporate Secretary of
the Company. Prior to joining the Bank in
December 1995, Mr. Gilbert was President and
CEO of Valley Real Estate Services Corp., a
mortgage banking subsidiary of Valley
Bancorporation located in Sheboygan, Wisconsin,
from 1992 to 1994.
Reginald M. Hislop, III 37 Director of the Company and the Bank; President 1995
and Chief Executive Officer of The Village at
Manor Park, Inc., a diversified organization
which provides long-term care and specialized
health care services to senior adults, located in
West Allis, Wisconsin.
Charles E. Rickheim 56 Director of the Company and the Bank; Owner and 1982
manager of residential real estate located in
the State of Wisconsin.
DIRECTORS WHOSE TERMS EXPIRE IN 1999
Floyd D. Brink 71 Director of the Company and the Bank; Retired 1969
President and owner of West Allis Heating, Inc.,
West Allis, Wisconsin.
Donald A. Zellmer 64 Director of the Company and the Bank; Retired 1996
Partner of Ernst & Young LLP, Milwaukee Office;
Director of St. Luke's Hospital, Milwaukee,
Wisconsin, and Aurora Health Care Services, Inc.,
a health care provider, located in Milwaukee,
Wisconsin.
</TABLE>
THE AFFIRMATIVE VOTE OF A PLURALITY OF THE VOTES CAST IS REQUIRED FOR THE
ELECTION OF DIRECTORS. UNLESS OTHERWISE SPECIFIED, THE SHARES OF COMMON STOCK
REPRESENTED BY THE PROXIES SOLICITED HEREBY WILL BE VOTED IN FAVOR OF THE
ELECTION OF THE ABOVE-DESCRIBED NOMINEE. THE BOARD OF DIRECTORS RECOMMENDS
THAT YOU VOTE FOR ELECTION OF THE NOMINEE FOR DIRECTOR.
-5-
<PAGE> 8
MATTER 2.
AMENDMENT OF THE HALLMARK CAPITAL CORP.
1993 INCENTIVE STOCK OPTION PLAN
DESCRIPTION OF AMENDMENT
The Board of Directors of the Company proposes for consideration and
approval by the Company's shareholders an amendment (the "Incentive Plan
Amendment") to the Hallmark Capital Corp. 1993 Incentive Stock Option Plan (the
"Incentive Stock Option Plan") to increase the number of shares authorized for
issuance thereunder by 50,550 shares, or approximately 3.5% of the number of
shares of Common Stock outstanding on the Voting Record Date, to 184,960 shares
of Common Stock. Absent shareholder approval, the Incentive Plan Amendment
will not be effective. Shareholder approval of the Incentive Plan Amendment
will qualify the Incentive Stock Option Plan for granting Incentive Stock
Options under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code") with respect to the additional shares authorized for
grant, and is a non-quantitative listing requirement under the By-laws of the
National Association of Securities Dealers, Inc. ("NASD") which is applicable
to all issuers, including the Company, whose shares are traded on the NASDAQ
National Market System.
PURPOSE OF THE INCENTIVE PLAN AMENDMENT
In connection with the conversion of West Allis Savings Bank (the "Bank")
from mutual to stock form and the issuance of the Common Stock in connection
therewith in 1993 (the "Conversion"), the Board of Directors adopted the
Incentive Stock Option Plan, which authorized in the aggregate options to
purchase 134,410 shares of Common Stock. The Incentive Stock Option Plan was
approved by the Company's shareholders at a Special Meeting of Shareholders
held on March 31, 1994. In connection with the Conversion, options to purchase
102,779 shares of Common Stock were granted to officers of the Company under
the Incentive Stock Option Plan, and option to purchase 31,000 shares of Common
Stock have been granted to eligible participants under the Incentive Stock
Option Plan since the Conversion. Options to purchase 631 shares of Common
Stock remain available for future grant under the Incentive Stock Option Plan.
In August, 1997, at the direction of the Board of Directors of the
Company, the Compensation Committee of the Board of Directors of the Company
reviewed the scope and adequacy of Company's current stock-based compensation
plans with the long-term objective of increasing the stock-based components of
total compensation paid to directors, officers and employees of the Company and
its subsidiaries. The Board of Directors believes that increasing the
stock-based components of total compensation serves to further align the
interests of the Company's directors, officers and employees and its
shareholders. Based upon such review, the Compensation Committee recommended,
and the Board of Directors approved, the proposed Incentive Plan Amendment and
the amendment to the Hallmark Capital Corp. 1993 Stock Option Plan for Outside
Directors, described further under Matter 3., as a method of increasing the
stock-based components of total compensation and providing an adequate reserve
of options for additional corporate purposes such as retaining existing
directors, officers and employees, recruiting future directors and officers,
and for issuances in connection with potential strategic acquisitions. The
Incentive Plan Amendment is designed to provide such reserve for officers and
employees who are eligible participants in the Incentive Stock Option Plan.
-6-
<PAGE> 9
ELIGIBILITY, TYPE OF OPTION GRANTS AND SHARES SUBJECT TO PLAN
Under the Incentive Stock Option Plan, all officers and employees of the
Company and its subsidiaries are eligible to participate. As of August 1,
1997, the Company had 80 officers and employees eligible to participate in the
Incentive Stock Option Plan. The Incentive Stock Option Plan authorizes the
grant of (i) options to purchase shares of Common Stock intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code
("Incentive Stock Options"); (ii) options that do not so qualify
("Non-Statutory Options"); and (iii) options which are exercisable only upon a
change in control of the Company or the Bank ("Limited Rights"). If the
Incentive Plan Amendment is approved by shareholders, options for a total of
51,181 shares of Common Stock (including the 631 shares currently available for
grant under the Incentive Stock Option Plan) will be available for future
grants to eligible participants. The Company currently has no immediate plans
to grant options under the Incentive Stock Option Plan, as amended.
The shares of Common Stock to be issued by the Company upon the exercise
of options by optionees may be acquired either through open market purchases by
the Company, or issued from authorized but unissued shares of Common Stock. If
additional authorized but unissued shares of Common Stock are issued upon the
exercise of options, the interests of existing shareholders will be diluted.
ADMINISTRATION
The Incentive Stock Option Plan is administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee"). The
Committee consists solely of "non-employee directors" as that term is defined
under Rule 16b-3 promulgated by the SEC under the Exchange Act and "outside
directors" as that term is defined under applicable regulations issued by the
Internal Revenue Service under the Internal Revenue Code. Pursuant to the
terms of the Incentive Stock Option Plan, the Committee is authorized to make
the following determinations with respect to grants to eligible participants:
(i) the persons to whom options are granted; (ii) the terms at which options
are to be granted; (iii) the number of shares of Common Stock subject to an
individual grant; (iv) the vesting schedule applicable to individual grants;
and (v) the expiration date of the option (which shall not be later than ten
years from the date the option is granted). The exercise price may be paid in
cash or shares of Common Stock and shall be the fair market value (as defined
in the Incentive Stock Option Plan) of the Common Stock on the date of grant or
such greater amount as determined by the Committee.
TERMS AND CONDITIONS OF OPTION GRANTS
Options granted under the Incentive Stock Option Plan are subject to
certain terms and conditions as described herein. The aggregate fair market
value of shares of Common Stock with respect to which Incentive Stock Options
may be granted to an eligible participant which are exercisable for the first
time in any calendar year may not exceed $100,000. Any option granted in
excess of such amount shall be treated as a Non-Statutory Option. Incentive
Stock Options granted to any person who is the beneficial owner of more than
10% of the outstanding shares of Common Stock may be exercised only for a
period of five years following the date of grant and the exercise price at the
time of grant must be equal to at least 110% of the fair market value of the
Common Stock on the date of the grant.
No option granted under the Incentive Stock Option Plan will be
exercisable after three months after the date on which the optionee ceases to
perform services for the Company, except that in the event of death, retirement
or disability, all options, whether or not exercisable at such time, may be
exercisable for up to one year thereafter or such longer period as determined
by the Committee. Options held by employees terminated for cause will
terminate on the date of termination. Termination "for cause" includes
termination due to an intentional failure to perform stated duties, breach of
fiduciary duty involving personal dishonesty, willful violations of law or the
entry of a final cease and desist order which results in a material loss to the
Company or one of its affiliates.
-7-
<PAGE> 10
In the event of a Change of Control of the Company, all Incentive Stock
Options and Non-Statutory Options, whether or not exercisable at such time,
shall become immediately exercisable. If a participant is terminated due to
such Change of Control, all options shall be exercisable for a period of one
year following such Change of Control; provided that in no event shall the
period extend beyond the option term and in the case of Incentive Stock
Options, such options shall not be eligible for treatment as Incentive Stock
Options if exercised more than three months following the date of a
participant's cessation of employment. "Change of Control" is defined to mean
a change of control of a nature that: (i) would be required to be reported to
the SEC by the Company in a current report on Form 8-K; or (ii) results in a
change in control of the Bank or the Company within the meaning of the Home
Owners Loan Act of 1933 and the rules and regulations promulgated by the Office
of Thrift Supervision (or its predecessor agency) (the "OTS"). In addition,
under the Incentive Stock Option Plan, a Change of Control shall be deemed to
have occurred at such time as (i) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company or its subsidiaries representing 20% or more of such
entities' outstanding voting securities; (ii) individuals who constitute the
current Board of Directors of the Company (the "Incumbent Board"), cease for
any reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the effective date of the Incentive Stock
Option Plan whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's shareholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be considered as a member of the
Incumbent Board; or (iii) a plan of reorganization, merger, consolidation, sale
of all or substantially all the assets of the Company or similar transaction in
which the Company is not the surviving institution; or (iv) any change of
control of the Company instituted by an entity or individual other than current
management of the Company.
In the event of a participant's termination of employment, the Company, if
requested by the participant, may elect to pay the participant, or beneficiary
in the event of death, in exchange for cancellation of the option, the amount
by which the fair market value of the Common Stock exceeds the exercise price
of the option on the date of the participant's termination of employment.
Incentive Stock Options may be transferred only by will or the laws of
descent and distribution. Non-Statutory Options may be transferred by
participants pursuant to the laws of descent and distribution, and during a
participant's lifetime by participants to members of their "immediate family"
(as defined in the Incentive Stock Option Plan), trusts for the benefit of
members of their immediate family and charitable institutions to the extent
permitted under Section 16 of the Exchange Act and subject to federal and state
securities laws.
FEDERAL INCOME TAX TREATMENT
An optionee will not be deemed to have received taxable income upon the
grant or exercise of an Incentive Stock Option, provided that such shares of
Common Stock are held for at least one year after the date of exercise and two
years after the date of grant. No gain or loss will be recognized by the
Company as a result of the grant or exercise of Incentive Stock Options. An
optionee will be deemed to receive ordinary income upon exercise of
Non-Statutory Options in an amount equal to the amount by which the fair market
value of the Common Stock on the exercise date exceeds the exercise price. The
amount of any ordinary income deemed to be received by an optionee due to a
premature disposition of the shares of Common Stock acquired upon the exercise
of an Incentive Stock Option or upon the exercise of a Non-Statutory Option
will be a deductible expense for tax purposes for the Company. At this time,
generally accepted accounting principles ("GAAP") do not require compensation
expense to be recorded for any options granted for which the exercise price
equals the market value on the date of grant. When options are exercised, the
net proceeds received by the Company will be recorded as an increase in Common
Stock and paid-in capital.
-8-
<PAGE> 11
ADJUSTMENTS IN THE EVENT OF CAPITAL CHANGES
In the event the number of shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
of stock or other securities of the Company by reason of any stock dividend or
split, recapitalization, merger, consolidation, spin-off, reorganization,
combination or exchange of shares, or other similar corporate change, or other
increase or decrease in such shares without receipt or payment of consideration
by the Company, the following appropriate adjustments may be made to prevent
dilution or enlargement of the rights of participants, including any or all of
the following: (i) adjustments in the aggregate number or kind of shares of
Common Stock which may be awarded; (ii) adjustments in the aggregate number or
kind of shares of Common Stock covered by outstanding option grants; and (iii)
adjustments in the purchase price of outstanding option grants. No such
adjustments may, however, materially change the value of benefits available to
participants under a previously granted award.
DURATION AND AMENDMENT OF INCENTIVE STOCK OPTION PLAN
No options will be awarded under the Incentive Stock Option Plan following
the tenth anniversary of approval of the Incentive Stock Option Plan by
shareholders of the Company.
The Board of Directors of the Company may amend the Incentive Stock Option
Plan in any respect; provided, however, that certain provisions governing the
terms of Incentive Stock Option and Non-Statutory Option grants shall not be
amended more than once every six months to comport with the Internal Revenue
Code or the Employee Retirement Income Security Act of 1974, as amended, if
applicable. In addition, the Board of Directors may determine that shareholder
approval of any amendment to the Incentive Stock Option Plan may be advisable
for any reason, including but not limited to, for the purpose of obtaining or
retaining any statutory or regulatory benefits under tax, securities or other
laws or satisfying applicable stock exchange listing requirements.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON STOCK
REPRESENTED IN PERSON OR BY PROXY AND VOTED AT THE ANNUAL MEETING IS REQUIRED
FOR APPROVAL OF THE INCENTIVE PLAN AMENDMENT. UNLESS MARKED TO THE CONTRARY,
THE SHARES OF COMMON STOCK REPRESENTED BY THE ENCLOSED PROXY WILL BE VOTED FOR
APPROVAL OF THE INCENTIVE PLAN AMENDMENT. THE BOARD OF DIRECTORS RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE INCENTIVE PLAN AMENDMENT.
-9-
<PAGE> 12
MATTER 3.
AMENDMENT OF THE HALLMARK CAPITAL CORP.
1993 STOCK OPTION PLAN
FOR OUTSIDE DIRECTORS
DESCRIPTION OF AMENDMENT
The Board of Directors of the Company proposes for consideration and
approval by the Company's shareholders an amendment (the "Directors' Plan
Amendment") to the Hallmark Capital Corp. 1993 Stock Option Plan (the
"Directors' Plan") for directors of the Company and the Bank who are not also
employees of the Company or the Bank ("Outside Directors") to increase the
number of shares authorized for issuance by 21,650 shares, or approximately
1.5% of the number of shares outstanding on the Voting Record Date, to 76,990
shares of Common Stock. Absent shareholder approval, the Directors' Plan
Amendment will not be effective. Shareholder approval of the Directors' Plan
Amendment is a non-quantitative listing requirement under the By-laws of the
NASD which is applicable to all issuers, including the Company, whose shares
are traded on the NASDAQ National Market System.
PURPOSE OF THE DIRECTORS' PLAN AMENDMENT
In connection with the Conversion, the Board of Directors of the Company
adopted the Directors' Plan for Outside Directors, which authorized the grant
of options to purchase 55,340 shares of Common Stock, all of which were granted
on the date of consummation of the Conversion (December 30, 1993) with an
exercise price of $8.00 per share. All options granted under the Directors'
Plan vested 100% upon consummation of the Conversion and will expire ten years
after the date the options were granted. As noted under Matter 2., in
considering whether to adopt the Incentive Plan Amendment, the Board of
Directors also evaluated the Company's need for an adequate reserve of options
to be granted in connection with retaining existing directors, recruiting
future directors and for issuance in connection with potential strategic
acquisitions. The Directors' Plan Amendment is designed to provide such
reserve for eligible participants in the Directors' Plan.
ELIGIBILITY, TYPE OF OPTION GRANTS AND SHARES SUBJECT TO THE DIRECTORS' PLAN
Under the Directors' Plan, all Outside Directors of the Company and its
subsidiaries are eligible to participate. As of August 1, 1997, the Company
had seven directors eligible to participate in the Directors' Plan. Only
Non-Statutory Options may be granted under the Directors' Plan. If the
Directors' Plan Amendment is approved by shareholders, options for a total of
21,650 shares of Common Stock will be available for future grants to eligible
participants. The Company currently has no immediate plans to grant options
under the Directors' Plan, as amended.
The shares of Common Stock to be issued by the Company upon the exercise
of options by optionees may be acquired either through open market purchases by
the Company, or issued from authorized but unissued shares of Common Stock. If
additional authorized but unissued shares of Common Stock are issued upon the
exercise of options, the interests of existing shareholders will be diluted.
ADMINISTRATION
The Directors' Plan is administered by the Board of Directors of the
Company. Pursuant to the terms of the Directors' Plan, the Board is authorized
to make the following determinations with respect to grants to eligible
participants: (i) the persons to whom options are granted; (ii) the terms at
which options are to be granted; (iii) the number of shares of Common Stock
subject to an individual grant; (iv) the vesting schedule applicable to
individual grants; and (v) the expiration date of the option (which shall not
be later than ten years from the date the option is granted). The exercise
price may be paid in cash or shares of Common Stock and shall be the fair
market value (as defined in the Directors' Plan) of the Common Stock on the
date of grant or such greater amount as determined by the Board.
-10-
<PAGE> 13
TERMS AND CONDITIONS OF OPTION GRANTS
No option granted under the Director's Plan shall be exercisable after one
year after the date on which the optionee ceases to perform services for the
Company, except that in the event an optionee is removed for cause all options
awarded to the optionee shall expire immediately upon such removal. All
options, whether or not exercisable, shall become immediately exercisable in
the event of death or disability of an optionee, or in the event of a Change of
Control of the Company. The definition of "Change of Control" for purposes of
the Directors' Plan is the same as the definition of "Change of Control" for
purposes of the Incentive Stock Option Plan, as previously described under
Matter 2.
Options granted under the Directors' Plan may be transferred by
participants pursuant to the laws of descent and distribution, and during a
participant's lifetime by participants to members of their "immediate family"
(as defined in the Directors' Plan) trusts for the benefit of their immediate
family and charitable institutions to the extent permitted under Section 16 of
the Exchange Act and subject to federal and state securities laws.
FEDERAL INCOME TAX TREATMENT
An optionee will be deemed to receive ordinary income upon the exercise of
options granted under the Directors' Plan in an amount equal to the amount by
which the fair market value of the Common stock on the exercise date exceeds
the exercise price. The amount of any ordinary income upon the exercise of
such options will be a deductible expense for tax purposes by the Company.
When options are exercised, the net proceeds received by the Company will be
recorded as an increase in Common Stock and paid-in capital.
ADJUSTMENTS IN THE EVENT OF CAPITAL CHANGES
In the event the number of shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
of stock or other securities of the Company by reason of any stock dividend or
split, recapitalization, merger, consolidation, spin-off, reorganization,
combination or exchange of shares, or other similar corporate change, or other
increase or decrease in such shares without receipt or payment of consideration
by the Company, the following appropriate adjustments may be made to prevent
dilution or enlargement of the rights of participants, including any or all of
the following: (i) adjustments in the aggregate number or kind of shares of
Common Stock which may be awarded; (ii) adjustments in the aggregate number or
kind of shares of Common Stock covered by outstanding option grants; and (iii)
adjustments in the purchase price of outstanding option grants. No such
adjustments may, however, materially change the value of benefits available to
participants under a previously granted award.
DURATION AND AMENDMENT OF DIRECTORS' PLAN
No options will be awarded under the Directors' Plan following the tenth
anniversary of approval of the Directors' Plan by shareholders of the Company.
The Board of Directors of the Company may amend the Directors' Plan in any
respect. In addition, the Board of Directors may determine that shareholder
approval of any amendment to the Directors' Plan may be advisable for any
reason, including but not limited to, for the purpose of obtaining or retaining
any statutory or regulatory benefits under tax, securities or other laws or
satisfying applicable stock exchange listing requirements.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF COMMON
STOCK REPRESENTED IN PERSON OR BY PROXY AND VOTED AT THE ANNUAL MEETING IS
REQUIRED FOR RATIFICATION OF THE DIRECTORS' PLAN AMENDMENT. UNLESS MARKED TO
THE CONTRARY, THE SHARES OF COMMON STOCK REPRESENTED BY THE ENCLOSED PROXY WILL
BE VOTED FOR APPROVAL OF THE DIRECTORS' PLAN AMENDMENT. THE BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE DIRECTORS' PLAN AMENDMENT.
-11-
<PAGE> 14
MATTER 4.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for the fiscal year ended June 30, 1997
were KPMG Peat Marwick LLP. The Board of Directors of the Company has
reappointed KPMG Peat Marwick LLP to perform the audit of the Company's
financial statements for the fiscal year ending June 30, 1998. Representatives
of KPMG Peat Marwick LLP will be present at the Annual Meeting and will be
given the opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions from the Company's shareholders.
UNLESS MARKED TO THE CONTRARY, THE SHARES OF COMMON STOCK REPRESENTED BY
THE ENCLOSED PROXY WILL BE VOTED FOR RATIFICATION OF THE APPOINTMENT OF KPMG
PEAT MARWICK LLP, AS THE INDEPENDENT AUDITORS OF THE COMPANY. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF KPMG PEAT
MARWICK LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Company was organized on June 29, 1993. Regular meetings of the Board
of Directors of the Company generally are held on a quarterly basis. During
the fiscal year ended June 30, 1997, the Board of Directors of the Company held
four regular meetings and one special meeting. No incumbent director attended
fewer than 75% of the aggregate total number of meetings of the Board of
Directors held and the total number of committee meetings on which such
director served during the fiscal year ended June 30, 1997.
The Board of Directors of the Company has a standing Audit Committee and
Compensation Committee. The Audit Committee consists of Messrs. Donald A.
Zellmer (Chairman), Floyd D. Brink and Jerome A. Weitzer. The Audit Committee
reviews the scope and timing of the audit of the Company's financial statements
by the Company's independent public accountants and will review with the
independent public accountants the Company's management policies and procedures
with respect to auditing and accounting controls. The Audit Committee also
will review and evaluate the independence of the Company's accountants, and
recommend to the Board the engagement, continuation or discharge of the
Company's accountants. In addition, the Audit Committee will direct the
activities of the Bank's internal audit. The Company's Audit Committee met
once during the fiscal year ended June 30, 1997.
The Board of Directors of the Bank has established a Compensation
Committee consisting of three directors, Messrs. Charles E. Rickheim
(Chairman), Floyd D. Brink and Reginald M. Hislop, III who are neither officers
nor employees of the Company or the Bank ("Outside Directors"). During the
fiscal year ended June 30, 1997, the Company did not pay separate compensation
to its executive officers. The Compensation Committee of the Company met in
January of 1997 and in June of 1997 to review and approve the compensation
decisions made by the Compensation Committee of the Bank and to issue the Joint
Compensation Committee Report which appears in this Proxy Statement.
The Company's Nominating Committee, consisting of Jerome A. Weitzer
(Chairman), Reginald M. Hislop, III and Floyd D. Brink, met on July 22, 1997 to
consider and select a nominee for director to stand for election at the Annual
Meeting. The Company's By-laws allow for shareholder nominations of directors
and require such nominations be made pursuant to timely notice in writing to
the Secretary of the Company. See "Shareholder Proposals for the 1998 Annual
Meeting."
-12-
<PAGE> 15
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
During the fiscal year ended June 30, 1997, the Company did not pay
separate compensation to its officers. Separate compensation will not be paid
to officers of the Company until such time as the officers of the Company
devote significant time to separate management of Company affairs, which is not
expected to occur until the Company becomes actively involved in additional
business beyond the Bank. The following table summarizes the total
compensation paid by the Bank to its Chief Executive Officer during the Bank's
fiscal years ended June 30, 1995, 1996 and 1997, and to the Bank's next highest
paid officer whose compensation, based on salary and bonus, exceeded $100,000
during the Company's fiscal years ended June 30, 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION AWARDS
----------------------- ---------------------
VALUE OF NUMBER
RESTRICTED OF SHARES
STOCK SUBJECT TO ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) AWARDS(3) OPTIONS(4) COMPENSATION(5)
- --------------------------- ---- ------ -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James D. Smessaert ............ 1997 $150,700 $35,704 -- 3,000 $28,600
President and Chief Executive 1996 116,000 25,984 -- 3,000 25,065
Officer and Director of the 1995 111,800 -- -- -- 21,060
Company and the Bank
Peter A. Gilbert(6) ........... 1997 $120,250 $24,981 -- 2,000 $27,403
Executive Vice President & 1996 93,000 18,228 -- 2,000 --
Corporate Secretary of the 1995 91,000 9,328 $43,000 15,000 --
Company, Executive Vice
President/Chief Operating
Officer and Corporate Secretary
of the Company and the Bank
</TABLE>
- ---------------------
(1) Perquisites provided to Messrs. Smessaert and Gilbert by the Company did
not exceed the lesser of $50,000 or 10% of total annual salary and bonus
during the fiscal years indicated and accordingly, are not included.
(2) Bonuses paid to Messrs. Smessaert and Gilbert in fiscal 1996 and 1997
were based upon the terms set forth under the West Allis Savings Bank
Annual Incentive Plan (the "Incentive Plan"). See "Annual Incentive
Plan." The bonus paid to Mr. Gilbert in fiscal 1995 was based upon an
interim bonus arrangement for the period from January 1, 1995 to June 30,
1995 established at the time he was hired.
(3) The amount shown in this column represents the value of vested and
unvested shares of Common Stock awarded under the West Allis Savings Bank
Management Recognition and Retention Plan (the "MRP"). The amount shown
for Mr. Gilbert was calculated by multiplying the value of the Common
Stock on the date of the grant ($10.75) by the number of shares of Common
Stock awarded. The number and the vesting schedule of the shares of
Common Stock awarded to Mr. Gilbert are as follows: (i) 800 (1/1/96);
(ii) 800 (1/1/97); (iii) 800 (1/1/98); (iv) 800 (1/1/99); and (v) 800
(1/1/00). Recipients of awards under the MRP are entitled to payment of
any dividends on unvested shares. The value of the unvested MRP shares
held by Messrs. Smessaert and Gilbert at June 30, 1997 was $270,436 and
$51,312, respectively, based on 12,649 shares and 2,400 shares
respectively, and the value of the Common Stock on that date ($21.38 per
share).
(4) Amounts shown in this column represent the total number of shares of
Common Stock subject to options granted (both vested and unvested) under
the Incentive Stock Option Plan. The options awarded are subject to a
vesting schedule under the Incentive Stock Option Plan and are exercisable
as follows: (i) Mr. Smessaert: 600 (8/1/96); 600 (7/12/97); 600 (8/1/97);
600 (7/12/98); 600 (8/1/98); 600 (7/12/99); 600 (8/1/99); 600 (7/12/00);
600 (8/1/00) and 600 (7/12/01); and (ii) Mr. Gilbert: 3,000 (12/31/95);
400 (8/1/96); 3,000 (12/31/96); 400 (7/12/97); 400 (8/1/97); 3,000
(12/31/97); 400 (7/12/98); 400 (8/1/98); 3,000 (12/31/98); 400 (7/12/99);
400 (8/1/99); 3,000 (12/31/99); 400 (7/12/00); 400 (8/1/00) and 400
(7/12/01).
(5) Amounts shown in this column represent the Bank's contributions on behalf
of Mr. Smessaert under the ESOP for the fiscal years ended June 30, 1995,
1996 and 1997; and on behalf of Mr. Gilbert for the fiscal year ended June
30, 1997.
(6) Mr. Gilbert was hired on December 31, 1994; the salary amount indicated for
fiscal 1995 has been annualized.
-13-
<PAGE> 16
EMPLOYMENT AGREEMENTS
In connection with Conversion, the Bank entered into a three-year
employment agreement with Mr. Smessaert, President and Chief Executive Officer
of the Bank, and on December 31, 1994, the Bank entered into a three-year
employment agreement with Mr. Peter A. Gilbert, Executive Vice President/Chief
Operating Officer and Corporate Secretary of the Bank. The terms of each of
their employment agreements may be restored to three years by action of the
Bank's Board of Directors, subject to the Board's annual performance
evaluation. The employment agreements are intended to ensure that the Bank
maintains stable and competent management.
Under the employment agreements, the current base salaries for Messrs.
Smessaert and Gilbert are $150,700 and $120,250, respectively. The base
salaries may be increased by the Bank's Board of Directors, but may not be
reduced except as part of a general pro rata reduction in compensation for all
executive officers. In addition to base salary, the employment agreements
provide for payments from other Bank incentive compensation plans, and provide
for other benefits, including participation in any group health, life,
disability, or similar insurance program and in any pension, profit-sharing,
employee stock ownership plan, deferred compensation, 401(k) or other
retirement plans maintained by the Bank. The employment agreements also
provide for participation in any stock-based incentive programs made available
to executive officers of the Bank. The employment agreements may be terminated
by the Bank upon death, disability, retirement, or for cause at any time, or in
certain events specified by the regulations of the Wisconsin Department of
Financial Institutions, Division of Savings and Loan. If the Bank terminates
the employment agreements for any reasons other than due to death, disability,
retirement or for cause, Messrs. Smessaert and Gilbert are entitled to a
severance payment equal to one year's base salary (based on the highest base
salary within the three years preceding the date of termination) together with
other compensation and benefits in which they were vested at the termination
date.
The employment agreements provide for severance payments if Mr.
Smessaert's or Mr. Gilbert's employment terminates following a change in
control. Under the employment agreements, a "Change in Control" is generally
defined to include any change in control required to be reported under the
federal securities laws as well as (i) the acquisition by any person of 25% or
more of the Company's outstanding voting securities, or (ii) a change in a
majority of the directors of the Company during any two-year period without
approval of at least two-thirds of the persons who were directors at the
beginning of such period. Within the greater of twelve months or the remaining
employment term at the effective date of any Change in Control, Messrs.
Smessaert and Gilbert have the option of receiving as severance: (i) the
amount payable if the Bank terminated employment for reasons other than death,
disability, retirement or for cause; or (ii) an amount equal to the salary
payments for the then-remaining employment term (which at the executive's
election may be payable in one lump sum). In either case, Messrs. Smessaert
and Gilbert are entitled to all qualified retirement and other benefits in
which they were vested. If the severance benefits payable following a Change
in Control would constitute "parachute payments" within the meaning of Section
280G(b)(2) of the Internal Revenue Code, and the present value of such
"parachute payments" equals or exceeds three times their average annualized
includable income for the five calendar years preceding the year in which a
Change in Control occurred, the severance benefits will be reduced to an amount
equal to the present value of 2.99 times the average annual compensation paid
to Messrs. Smessaert and Gilbert during the five years immediately preceding
such Change in Control.
EXECUTIVE EMPLOYEE SALARY CONTINUATION AGREEMENT
In August 1992, the Bank and Mr. Smessaert entered into an Executive
Employee Salary Continuation Agreement (the "Continuation Agreement").
Pursuant to the Continuation Agreement, the Bank agreed to pay Mr. Smessaert an
annual benefit of $50,000 upon his retirement at age 65. In the event Mr.
Smessaert retires between the ages of 60 and 65, the Continuation Agreement
provides for a reduced annual benefit until attainment of age 65. The
Continuation Agreement provides that in the event of Mr. Smessaert's death,
either while employed at the Bank or after his retirement, the Bank will pay
his designated beneficiary approximately $650,000 payable in equal monthly
installments over a 13-year period. The Continuation Agreement does not
provide for payments upon voluntary termination of employment, discharge for
cause or termination of employment upon disability (prior to age 60). However,
notwithstanding Mr. Smessaert's termination of employment due to disability,
the Continuation Agreement provides that if Mr. Smessaert's disability
continues to or occurs after attainment of age 60, Mr. Smessaert may elect to
receive reduced annual benefits until reaching the age of 65 with eligibility
for full benefits under the Continuation Agreement thereafter.
-14-
<PAGE> 17
The Continuation Agreement provides for payment of $50,000 per year for
three years in equal monthly installments upon Mr. Smessaert's involuntary
termination of employment or termination of his employment following a change
in control. "Involuntary termination of employment" is defined as Mr.
Smessaert's cessation of employment due to the Bank's significantly lessening
either his title, duties, responsibilities, compensation or altering his situs
of employment, without his consent. Mr. Smessaert's compensation shall be
deemed to be significantly lessened if any employment reduction is imposed
except as part of an overall employment reduction applied proportionately to
all of the Bank's management employees or if Mr. Smessaert fails to receive
periodic compensation increases substantially proportionate to and coincident
with the increases granted to other executive officers. "Change in control" is
defined as set forth in Section 280G(b)(2) of the Internal Revenue Code. In
October 1991, the Bank purchased two single-premium annuity policies on the
life of Mr. Smessaert designating the Bank as beneficiary to fund the Bank's
anticipated obligations under the Continuation Agreement.
ANNUAL INCENTIVE PLAN
In August 1995, the Board of Directors of the Bank adopted the West Allis
Savings Bank Annual Incentive Plan (the "Incentive Plan") which was effective
for the fiscal year ending June 30, 1997. The Incentive Plan is designed to
provide annual incentive opportunity targets that are consistent with the
Bank's executive compensation philosophy and current competitive median market
compensation practices. Under the Incentive Plan, the Chief Executive Officer,
Executive Vice President/Chief Operating Officer and Senior Vice Presidents of
the Bank earn incentive compensation if the Company achieves targets set by the
Compensation Committee on an annual basis for net income of the Company.
Previously, the Incentive Plan targets were based upon ROAE of the Company.
The Board of Directors of the Bank decided to modify the Incentive Plan to
provide for net income targets for fiscal 1997 rather than ROAE targets based
upon their determination that incentive compensation should be based upon
factors over which management has more direct influence and control. The
amount of incentive compensation earned will be a percentage of each officer's
base salary and will be dependent upon whether the Company achieves threshold,
target and maximum levels of net income. The threshold, target and maximum net
income levels and the corresponding percentages of base salary applicable to
computation of incentive compensation will be established at the beginning of
each fiscal year by the Compensation Committee of the Company. If the
financial performance of the Company is such that the threshold net income
level is not achieved, no incentive compensation will be earned. For fiscal
1998, if the threshold level set for net income is achieved, the Incentive Plan
provides for incentive payments as follows: (i) 20.0% of the Chief Executive
Officer's base salary; (ii) 17.50% of the Executive Vice President/Chief
Operating Officer's base salary; and (iii) 12.50% of the Senior Vice
Presidents' base salaries. If the target level set for net income is achieved,
the Incentive Plan provides for incentive payments as follows: (i) 40.0% of
the Chief Executive Officer's base salary; (ii) 35.0% of the Executive Vice
President/Chief Operating Officer's base salary; and (iii) 25.0% of the Senior
Vice Presidents' base salaries. If the maximum level set for net income is
achieved, the Incentive Plan provides for incentive payments as follows: (i)
60.0% of the Chief Executive Officer's base salary; (ii) 52.50% of the
Executive Vice President/Chief Operating Officer's base salary; and (iii)
37.50% of the Senior Vice Presidents' base salaries. Incentive payments for
achievement of net income at levels within the range set by the threshold,
target and maximum levels will be based upon interpolated percentages.
Incentive compensation will not exceed the percentages of base salary set for
the maximum net income level if the Company's net income exceeds the maximum
net income level. The Incentive Plan is administered by the Compensation
Committee of Board of Directors of the Bank. Prior to the payment of incentive
compensation, the Compensation Committee of the Board of Directors will certify
that the net income levels were achieved.
-15-
<PAGE> 18
INCENTIVE STOCK OPTION PLAN
In connection with the Conversion, the Board of Directors of the Company
adopted the Incentive Stock Option Plan. All officers and employees of the
Company and its subsidiaries are eligible to participate in the Incentive Stock
Option Plan. At June 30, 1997, the Company and its subsidiaries had 69
eligible officers and employees. The Incentive Stock Option Plan authorizes
the grant of (i) options to purchase shares of Common Stock intended to qualify
as incentive stock options under Section 422A of the Internal Revenue Code
("Incentive Stock Options"), (ii) options that do not so qualify
("Non-Statutory Options"), and (iii) options which are exercisable only upon a
change in control of the Company or the Bank ("Limited Rights"). Options for a
total of 134,410 shares of Common Stock were made available for granting to
eligible participants under the Incentive Stock Option Plan, and options to
purchase 631 shares of Common Stock remained available for future grant at June
30, 1997.
The following table sets forth certain information concerning individual
grants of stock options under the Incentive Stock Option Plan to the named
executive officers of the Company during the fiscal year ended June 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS PER SHARE
GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR(1) ($/SH) DATE VALUE(2)
- ---- ---------- -------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
James D. Smessaert .. 3,000 37.5% $14.75 07/12/06 $6,990
Peter A. Gilbert .... 2,000 25.0% 14.75 07/12/06 4,660
</TABLE>
- -----------------
(1) The options granted are subject to a vesting schedule under the Option
Plan and are exercisable as follows: (i) James D. Smessaert: 600 -
(7/12/97); 600 - (7/12/98); 600 - (7/12/99); 600 - (7/12/00); 600 -
(7/12/01); (ii) Peter A. Gilbert: 400 - (7/12/97); 400 - (7/12/98); 400 -
(7/12/99); 400 - (7/12/00); 400 - (7/12/01). Options to purchase 8,000
shares of Common Stock were granted to eligible participants under the
Incentive Stock Option Plan during the fiscal year ended June 30, 1997.
(2) Based upon the Black-Scholes option pricing model, adopted for use in
valuing stock options, based upon the following variable assumptions: (i)
a ten year option term; (ii) a volatility statistic of 24.9%; (iii) a
dividend yield of 6.83% representing the current return on equity of the
Company; and (iv) a risk-free rate of return of 7.0% representing the
interest rate on a U.S. Treasury security with a ten year maturity on the
date of grant. The actual value, if any, an executive may realize will
depend upon the excess of the stock price over the exercise price on the
date the option is exercised. There is no assurance the value realized
will be at or near the value estimated by the Black-Scholes model.
-16-
<PAGE> 19
The following table sets forth certain information concerning the exercise
of stock options granted under the Incentive Stock Option Plan by the named
executive officers during the fiscal year ended June 30, 1997, and the value
of their unexercised stock options at June 30, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS IN-THE-MONEY
NUMBER OF AT OPTIONS AT
SHARES FISCAL YEAR END FISCAL YEAR END (1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James D. Smessaert ..... 0 $0 50,600 10,743 $672,875 $107,838
Peter A. Gilbert ....... 0 0 6,400 12,600 65,000 117,625
</TABLE>
- -----------------
(1) The value of Unexercised In-the-Money Options is based upon the
difference between the fair market value of the securities underlying the
options ($21.38) at June 30, 1997 and the exercise price of the options
(Mr. Smessaert - 55,343 shares at $8.00; 3,000 shares at $14.50; 3,000
shares at $14.75; and Mr. Gilbert - 15,000 shares at $11.00; 2,000 shares
at $14.50; 2,000 shares at $14.75).
DIRECTORS' COMPENSATION
BOARD FEES
The Board of Directors of the Company meets at least quarterly and
received $250 for each regular or special Board meeting attended during the
fiscal year ended June 30, 1997. For the fiscal year ended June 30, 1997, each
member of the Board of Directors of the Bank received a $1,200 monthly meeting
fee.
DIRECTORS' EMERITUS PROGRAM
On July 20, 1994, the Bank adopted a Directors' Emeritus Program (the
"Emeritus Program") which provides for an annual payment equal to 50% of the
annual retainer fee paid to eligible directors. Under the Emeritus Program, an
eligible director is defined as a director whose service as a director
terminates on or after the director has attained age 70. The mandatory
retirement age for directors of the Bank is 70 which will result in Messrs.
Brink and Weitzer no longer being eligible for re-election upon expiration of
their respective terms as directors of the Bank in fiscal years 1999 and 1997.
For eligible directors who have attained age 70 on or prior to July 1, 1996,
the annual payments shall continue until the eligible director's death. For
eligible directors who have not attained age 70 on or prior to July 1, 1996,
the annual payments shall continue until the earlier of: (i) the eligible
director's death; or (ii) five years from the date the eligible director's
board service shall have terminated.
In addition, each eligible director who attains age 70 on or prior to July
1, 1996 shall receive health insurance (single and family coverage) under the
health plan maintained by the Bank until the eligible director's death.
Eligible directors who do not attain age 70 on or prior to July 1, 1996 shall
not be entitled to health insurance benefits under the Emeritus Program.
In the event of a Change in Control (as defined in the Emeritus Program)
of the Bank, or a merger or other business combination involving the Bank in
which the Bank is not the resulting entity, the rights and obligations of the
Bank under the Emeritus Program shall become the rights and obligations of the
successor or acquiring entity.
-17-
<PAGE> 20
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
In connection with the Conversion, the Board of Directors of the Company
adopted the Directors' Plan. Options to purchase 55,340 shares of Common Stock
were made available for granting to Outside Directors under the Directors'
Plan, all of which were granted on the date of consummation of the Conversion
(December 30, 1993) with an exercise price of $8.00 per share. All options
granted under the Directors' Plan expire upon the earlier of ten years
following the date the option was granted (i.e., December 29, 2003) or one year
following the date the optionee ceases to be a director. All options granted
under the Directors' Plan vested 100% upon consummation of the Conversion.
During the fiscal year ended June 30, 1994, the Outside Directors, Messrs.
Floyd D. Brink, Milton Dalin, Charles E. Rickheim and Jerome A. Weitzer, each
were granted options to purchase, at $8.00 per share, 13,835 shares of Common
Stock.
-18-
<PAGE> 21
COMPENSATION COMMITTEE REPORT
The Report of the Compensation Committee on Executive Compensation shall not be
deemed incorporated by reference by any general statement into any filing under
the Securities Act of 1933, as amended (the "Securities Act") or the Exchange
Act, except to the extent the Company specifically incorporates such
information by reference, and shall not otherwise be deemed filed under the
Securities Act or Exchange Act.
COMPENSATION COMMITTEE
I. ROLE OF THE COMPENSATION COMMITTEE
The Compensation Committee of Board of Directors of the Company and the
Bank consists of the Outside Directors, Messrs. Charles E. Rickheim (Chairman),
Floyd D. Brink and Reginald M. Hislop, III. During the fiscal year ended June
30, 1997, the Company did not pay separate compensation to its executive
officers. In January and July 1997, the Compensation Committee of the Company
met to review and approve compensation decisions made by the Compensation
Committee of the Bank and to issue this Joint Compensation Committee Report.
All executive officer compensation was paid by the Bank and compensation
policies were determined by the Compensation Committee of the Bank. The term
"Compensation Committee" in this report refers to the Compensation Committee of
the Company and the Bank.
II. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed entirely of independent Outside
Directors who are not former officers or employees of the Company or any of its
subsidiaries. There are no interlocks, as defined under the rules and
regulations of the SEC, between the Compensation Committee and corporate
affiliates of members of the Compensation Committee.
III. COMPENSATION COMMITTEE REPORT
Under rules established by the SEC, the Company is required to provide
certain data and information regarding the compensation and benefits provided
to the Company's Chief Executive Officer and certain other executive officers
of the Company. The rules require compensation disclosure in the form of
tables and a report of the Compensation Committee which explains the rationale
and considerations that led to fundamental compensation decisions affecting
such individuals. The Compensation Committee has prepared the following
report, at the direction and approval of the Board of Directors of the Company,
for inclusion in this Proxy Statement.
EXECUTIVE COMPENSATION PHILOSOPHY
The primary objective of the Company's executive compensation policy is to
attract and retain highly skilled and motivated executive officers who will
manage the Company and the Bank in a manner to promote growth and
profitability. In recommending and establishing levels of executive
compensation, it is the policy of the Compensation Committee to consider the
following factors: (i) the individual performance of the executive; (ii) the
executive's contribution to achievement of the strategic business plan of the
Company and the Bank; (iii) the executive's experience and responsibility level
during the present period and anticipated responsibilities during the following
fiscal year; and (iv) compensation levels for executives of comparable
financial institutions. The executive compensation program consists of three
elements: base salary and incentive compensation, long-term incentive
compensation and retirement and other benefits.
BASE SALARY AND INCENTIVE COMPENSATION
Base salary levels are designed to be competitive with cash compensation
levels paid to similar executives at financial institutions of similar size,
giving due consideration to the competitive market in which the Company and the
Bank operate. Prior to the Conversion, the Bank reviewed executive salary
studies and surveys prepared by an independent consultant to obtain
compensation data of comparable financial institutions and determined base
salary levels for executive officers to be effective upon consummation of the
Conversion. The peer group used in
-19-
<PAGE> 22
the compensation analysis consisted of a different set of institutions than
those which comprise the peer group index (SNL Thrift Index) utilized in the
Stock Performance Graph below. The salary levels were designed to reflect the
increased responsibilities associated with being executive officers of a public
company. Base salaries are subject to review and adjustment by the
Compensation Committee each year. In fiscal 1997, the average increase in base
salary for executive officers was 25.85%.
In connection with the Conversion, the Bank established the West Allis
Savings Bank Employee Stock Ownership Plan (the "ESOP") (discussed further
herein) in which all officers and employees of the Company and its subsidiaries
participate. In order to fund the ESOP, in fiscal 1994, the Bank eliminated a
Management Incentive Compensation Program which was in effect prior to the
Conversion pursuant to which executive officers of the Bank earned short-term
cash incentive compensation. In August 1995, the Board of Directors of the
Bank adopted the West Allis Savings Bank Annual Incentive Plan ("Incentive
Plan") which was effective for the fiscal year ending June 30, 1997. The
Incentive Plan is intended to replace the former Management Incentive
Corporation Program of the Bank and is intended to accomplish the following
objections: (i) reward key individuals for achieving pre-established financial
and non-financial goals that support the Company's and Bank's annual business
objectives; (ii) encourage and reinforce effective teamwork and individual
contributions toward Company and Bank goals; and (iii) provide an incentive
opportunity that will enable the Company and the Bank to attract, motivate and
retain outstanding executives.
Previously, the Incentive Plan targets were based upon ROAE of the
Company. The Board of Directors of the Bank decided to modify the Incentive
Plan to provide for net income targets for fiscal 1997 rather than ROAE targets
based upon their determination that incentive compensation should be based upon
factors over which management has more direct influence and control. In
administering the Incentive Plan for fiscal 1997, the net income effect of the
one-time industry wide FDIC SAIF assessment was not considered.
For fiscal 1997, the Company achieved a net income level in excess of the
threshold level of net income but less than the target level of net income
established by the Board under the Incentive Plan. Therefore, incentive
compensation paid to executive officers for fiscal 1997 was based upon
interpolated percentages of their base salaries established under the Incentive
Plan for achievement of net income in the range between the threshold and
target net income levels. For a further discussion of the Incentive Plan, see
"Annual Incentive Plan."
LONG-TERM INCENTIVE COMPENSATION
In fiscal 1994, executive officers of the Company and the Bank were
awarded restricted stock under the West Allis Savings Bank Management
Recognition and Retention Plan ("MRP") and stock options under the Incentive
Stock Option Plan in connection with the Conversion. The Bank established the
MRP and the Incentive Stock Option Plan as a method of providing officers and
employees of the Bank with a proprietary interest in the Company and to
encourage such persons to remain with the Bank. All officers and employees of
the Company are eligible to participate in the MRP and the Incentive Stock
Option Plan. The restricted stock and option awards are designed to align the
financial interests of the Company's executive officers more closely with the
Company's shareholders. During fiscal 1997, non-qualifying stock options to
purchase 8,000 shares of Common Stock were awarded to senior executive officers
of the Company and the Bank.
RETIREMENT AND OTHER BENEFITS
In August 1992, the Bank and Mr. Smessaert entered into an Executive
Employee Salary Continuation Agreement (the "Continuation Agreement") which
provides for certain cash payments upon Mr. Smessaert's retirement. For a
further description of the Continuation Agreement, see "Compensation of
Executive Officers and Directors - Executive Employee Salary Continuation
Agreement." Additional retirement and other benefits provided to executive
officers, are the same as those benefits provided to all employees of the Bank,
including participation in the ESOP, the West Allis Savings Bank 401(k) Plan
(in which Mr. Smessaert does not participate) and comprehensive health
insurance, life insurance and short-term and long-term disability insurance.
Under the ESOP, benefits may be payable upon death, retirement, early
retirement, disability or separation from service. Benefits may be paid either
in shares of Common Stock or in cash. In connection with
-20-
<PAGE> 23
the Conversion, the ESOP borrowed funds from the Company to purchase 126,500
shares of Common Stock, and collateral for the loan is the Common Stock
purchased by the ESOP. On March 15, 1997, the Bank contributed $168,920 to the
ESOP and allocations of shares of Common Stock were based upon compensation
paid to participants for the year ended December 31, 1996.
CHIEF EXECUTIVE OFFICER COMPENSATION
The compensation paid to the President and Chief Executive Officer of the
Company and the Bank, James D. Smessaert, during the fiscal year ended June 30,
1997 was consistent with the Company's overall executive compensation
philosophy. Based upon the compensation philosophy of the Bank, Mr.
Smessaert's base salary under his employment agreement was increased to
$150,700 effective January 1, 1997. Bonus compensation paid to Mr. Smessaert
for the fiscal year ended June 30, 1997 under the Incentive Plan totaled
$35,704. In addition, Mr. Smessaert was granted options to purchase 3,000
shares of Common Stock under the Incentive Stock Option Plan during fiscal
1997.
-21-
<PAGE> 24
PERFORMANCE GRAPH
The following graph shows semi-annual comparisons of the Company's
cumulative shareholder return on the Common Stock with (i) the cumulative total
return on stocks included in the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") Stock Market Index (for United States
companies) and (ii) the cumulative total return on stocks included in the SNL
Thrift Index, published by SNL Securities, Charlottesville, Virginia,
commencing on December 30, 1993, the date the Common Stock was issued, through
June 30, 1997. The cumulative returns set forth below for each index assume
the reinvestment of dividends into additional shares of the same class of
equity securities at the frequency with which dividends were paid on such
securities during the applicable comparison period.
COMPARISON OF SEMI-ANNUAL CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, NASDAQ STOCK MARKET (U.S.) INDEX
AND SNL THRIFT INDEX(1)
[CHART]
<TABLE>
<CAPTION>
PERIOD ENDING
---------------------------------------------
INDEX 12/31/93 6/30/94 6/30/95 6/30/96 6/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HALLMARK CAPITAL CORP. 100.00 151.56 168.75 187.50 267.19
NASDAQ - TOTAL US 100.00 91.32 121.89 156.50 190.32
SNL THRIFT INDEX 100.00 107.28 126.60 160.60 259.95
</TABLE>
- --------------
(1) Assumes $100.00 invested on December 30, 1993, and all dividends
reinvested through the end of the Company's fiscal year on June 30, 1997.
The Company did not pay dividends during the period from December 30, 1993
to June 30, 1997. The performance chart is based upon closing prices on
the trading day specified, with the exception of the value of the
Company's Common Stock on December 30, 1993 which is based upon the
initial offering price of the Company's Common Stock of $8.00 per share.
The Performance Graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this proxy statement with any
filing under the Securities Act or the Exchange Act, except to the extent the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under the Securities Act or the Exchange Act.
-22-
<PAGE> 25
INDEBTEDNESS OF MANAGEMENT AND CERTAIN TRANSACTIONS
Current federal law requires that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the
greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested
members of the Board of Directors of the Bank.
The Bank's policy provides that all loans or extensions of credit to
executive officers and directors are to be made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectibility
or present other unfavorable features. All loans since the enactment of
current laws were made by the Bank in the ordinary course of business and were
not made with favorable terms nor involved more than the normal risk of
collectibility or presented unfavorable features.
The following table summarizes loans made by the Bank on preferential
terms to executive officers, directors and their associates, prior to the
enactment of current laws, whose aggregate indebtedness to the Bank exceeded
$60,000 at any time since July 1, 1996. All loans or extensions of credit to
executive officers, directors and their associates were current as of June 30,
1997.
<TABLE>
<CAPTION>
LARGEST AMOUNT
OUTSTANDING DURING
MATURITY THE YEAR ENDED BALANCE AT INTEREST
NAME DATE OF LOAN DATE JUNE 30, 1997 JUNE 30, 1997 RATE/TYPE
---- ------------ -------- ------------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Charles E. Rickheim . . 09/09/88 10/01/18 125,654 123,033 6.47%/Adj.
Director of the Mortgage
Company and
Bank
</TABLE>
The Company and the Bank intend that all transactions in the future
between the Company and the Bank and executive officers, directors, holders of
10% or more of the shares of any class of common stock of the Company and
affiliates thereof, will contain terms no less favorable to the Company or the
Bank than could have been obtained by them in arms' length negotiations with
unaffiliated persons and will be approved by a majority of independent outside
directors of the Company or the Bank, as applicable, not having any interest in
the transaction.
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of the shares of Common
Stock outstanding, to file reports of ownership and changes in ownership with
the SEC and the National Association of Securities Dealers, Inc. Officers,
directors and greater than ten percent shareholders are required by regulation
to furnish the Company with copies of all Section 16(a) forms they file. Based
upon review of the information provided to the Company, the Company believes
that during the fiscal year ended June 30, 1997, officers, directors and
greater than ten percent shareholders complied with all Section 16(a) filing
requirements, with the exception of Ms. Nancy S. Hoelter who inadvertently
failed to timely file a Form 4 with respect to the sale of 1,581 shares of
Common Stock in February 1997, which subsequently was reported in May 1997.
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<PAGE> 26
SHAREHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
Any proposal which a shareholder wishes to have included in the proxy
materials of the Company relating to the fourth annual meeting of the
shareholders of the Company, which is scheduled to be held in October 1998,
must be received at the principal executive offices of the Company, 7401 West
Greenfield Avenue, West Allis, Wisconsin 53214, Attention: Peter A. Gilbert,
Corporate Secretary, no later than May 22, 1998. If such proposal is in
compliance with all of the requirements of Rule 14a-8 under the Exchange Act,
it will be included in the proxy statement and set forth on the form of proxy
issued for such annual meeting of shareholders. It is urged that any such
proposals be sent certified mail, return receipt requested.
Nothing in this section shall be deemed to require the Company to include
in its proxy statement and proxy relating to the 1997 Annual Meeting any
shareholder proposal which does not meet all of the requirements for inclusion
established by the SEC in effect at the time such proposal is received.
Shareholder proposals which are not submitted for inclusion in the
Company's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before an annual meeting pursuant to Article VII of the Company's
Articles of Incorporation. For business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
shareholder's notice must be delivered to or mailed by first class United
States mail, postage prepaid, to the principal executive offices of the Company
not later than the close of business on the tenth day following the day on
which notice of such annual meeting is first given to shareholders. A
shareholder's notice must set forth certain information in accordance with
Article VII of the Company's Articles of Incorporation. The advance notice
must include the shareholder's name and address, as they appear on the
Company's record of shareholders, the class and number of shares of the
Company's Common Stock beneficially owned by such shareholder, a brief
description of the proposed business, the reason for considering such business
at the annual meeting and any material interest of the shareholder in the
proposed business. In the case of nominations for elections to the Board of
Directors, certain information regarding the nominee must be provided.
OTHER MATTERS WHICH MAY PROPERLY
COME BEFORE THE ANNUAL MEETING
The Board of Directors knows of no business which will be presented for
consideration at the Annual Meeting other than as stated in the Notice of
Annual Meeting of Shareholders. If, however, other matters are properly
brought before the Annual Meeting or any adjournments or postponements thereof,
it is the intention of the persons named in the accompanying proxy to vote the
shares represented thereby on such matters in accordance with their best
judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Peter A. Gilbert
--------------------------
West Allis, Wisconsin Peter A. Gilbert
September 19, 1997 Executive Vice President and Corporate Secretary
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WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE
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