<PAGE> 1
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, 1999 Commission File Number 0-22224
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HALLMARK CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incorporation) (IRS Employer Identification No.)
5555 N. Port Washington Road
Glendale, Wisconsin 53217
(Address and Zip Code of principal executive offices)
Registrant's telephone number: (414) 290-7900
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 7, 1999, there were issued and outstanding 3,162,500 and
2,731,941 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 7, 1999, was $31.4 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 1999 Annual Meeting
of Shareholders are incorporated by reference into Part III hereof.
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FORM 10-K TABLE OF CONTENTS
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Part I
Item 1 - Business................................................................................ 1
Item 2 - Properties.............................................................................. 50
Item 3 - Legal Proceedings....................................................................... 52
Item 4 - Submission of Matters to a Vote of Security Holders..................................... 52
Part II
Item 5 - Market for the Registrant's Common Stock and Related Security
Holder Matters.......................................................................... 53
Item 6 - Selected Consolidated Financial and Other Data.......................................... 54
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 56
Item 7a - Quantitative and Qualitative Disclosures About Market Risk.............................. 75
Item 8 - Financial Statements and Supplementary Data............................................. 76
Item 9 - Changes in and Disagreements with Accountants and Financial Disclosure.................. 106
Part III
Item 10 - Directors and Executive Officers of the Registrant...................................... 106
Item 11 - Executive Compensation.................................................................. 106
Item 12 - Security Ownership of Certain Beneficial Owners and Management.......................... 106
Item 13 - Certain Relationships and Related Transactions.......................................... 106
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 107
Signatures............................................................................................ 109
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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," "intend" 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") is a holding company
incorporated under the laws of the State of Wisconsin and is engaged in the
financial services business through its wholly-owned subsidiary, West Allis
Savings Bank (the "Bank"), a Wisconsin state-chartered stock savings bank
headquartered in Milwaukee, Wisconsin. The Company's initial public offering was
consummated in December 1993, and the Company acquired all of the outstanding
common stock of the Bank issued in the mutual to stock conversion of the Bank
(the "Conversion") on December 30, 1993.
The Company's primary strategy since the Conversion has been to focus
on effectively utilizing the capital acquired in the Conversion through asset
growth and asset portfolio diversification into higher-yielding assets. This
strategy resulted in an increase in the Company's asset size from $179.6 million
at June 30, 1994 to $469.6 million at June 30, 1999. The Company's asset growth
has come primarily through (i) the origination and purchase of mortgage loans
(principally loans secured by one-to-four family owner-occupied homes) within
and outside of the Company's primary lending area, (ii) the purchase of
mortgage-backed and related securities, and (iii) the origination and purchase
of commercial real-estate and business loans within and outside of the Company's
primary lending area. This asset growth was funded through significant increases
in Federal Home Loan Bank ("FHLB") advances and other borrowings, and increases
in deposits consisting primarily of brokered and non-brokered wholesale
deposits. The Company's asset portfolio diversification has been, 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 has focused 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), to
either replace or supplement lower-yielding one-to-four family mortgage loans
and principal run-off from the mortgage securities portfolio.* As part of its
asset portfolio diversification strategy, the Company established a new
commercial lending division in fiscal 1997 to originate commercial/industrial
real estate term loans, construction loans, equipment leasing, inventory/
equipment/receivables financing, lines of credit, letters of credit and
government loan programs both within and outside of the Company's primary
lending area. In fiscal 2000, the Company intends to continue its asset
portfolio diversification strategy while maintaining a steady rate of growth of
its asset base.*
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In fiscal 2000, the Company's business strategy is to continue its
focus on increasing net interest income and generating additional non-interest
income from existing and new revenue sources.* In order to increase net interest
income, the Company intends to continue to utilize its asset portfolio
diversification strategy of selling lower-yielding assets such as securities and
one-to-four family mortgage loans that conform to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("Fannie Mae")
guidelines in the secondary market to provide liquidity to fund higher-yielding
one-to-four family non-conforming mortgage, multi-family, commercial real estate
and commercial business 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 conforming mortgage loans will decrease
the proportion of the gross loan portfolio represented by such loans and will
increase non-interest income as a result of increased gains on the sales of such
loans.*
Portfolio diversification in fiscal 2000 also will include an increased
level of purchases of loans or participation interests in loans originated by
other lenders both within and outside the Company's primary lending area.* The
Company anticipates that slightly over half of the asset growth in fiscal 2000
will come from residential and commercial loan and participation interest
purchases outside of its primary lending area.* Loans purchased, or
participation interests purchased, which relate to properties or business assets
located outside of the Company's primary lending area will primarily consist of
higher-yielding non-conforming one-to-four family, multi-family, commercial real
estate, multi-family construction, commercial real estate construction and
commercial business loans.* In fiscal 2000, the Company projects total loan and
participation interest purchases which relate to residential and commercial
properties or business assets to be approximately $90 million compared to $56.9
million in fiscal 1999.* The Company anticipates that approximately $50 million
of such amount will relate to one-to-four family non-conforming mortgage loans
secured by properties located outside of the Company's primary lending area and
the balance (approximately $40 million) will relate to the purchase of
multi-family, multi-family construction, commercial real estate, commercial
construction and commercial business loans secured by properties and assets
located both inside and outside its primary lending area.* In deciding whether
or not to purchase a loan or participation interest in a loan secured by
properties or business assets located outside of the Company's primary lending
area, management of the Company has applied, and will continue to apply,
underwriting guidelines at least as strict as those applicable to the
origination of similar loans within its primary lending area.*
In fiscal 2000, the Company will evaluate opportunities to purchase
one-to-four family mortgage loans which conform to FHMLC and Fannie Mae
underwriting guidelines and non-conforming portfolio loans which are not sold in
the secondary agency market due to underwriting characteristics that do not
conform to the secondary agency market.* Purchases of conforming and
non-conforming one-to-four family mortgage loans will include lending
opportunities on a national basis. One-to-four family non-conforming loans also
will be originated by the Company within its primary lending area.
In fiscal 2000, the Company also intends to continue increasing the
activities of its commercial lending division as another element of its overall
portfolio diversification strategy.* The focus of the Company's commercial
lending operation will be the origination and purchase of small business loans
and leases.* During fiscal 1999, the Company originated and purchased $137.7
million of multi-family, commercial real estate, multi-family construction,
commercial construction and commercial business loans, lines of credit and
leases. Management currently projects that the commercial lending division will
increase its level of originations and purchases to approximately $150 million
in new commercial loans, lines of credit and leases during fiscal 2000.*
Management believes the commercial lending component of its operations will
benefit the Company longer term and contribute to a long-term increase in net
income and return on equity.* The commercial lending division also has enhanced
the Company's core deposit base, through the establishment of new deposit
relationships with the commercial lending division's customers.
The Company also intends to enhance earnings in fiscal 2000 through
non-interest fee income generated from the Company's new mortgage banking
subsidiary, Hallmark Financial, Inc. (d/b/a Major Finance).* Major Finance was
established at the end of fiscal 1999 to provide lending activities involving
higher credit risk financial services (also known as subprime lending). Major
Finance currently acts as a broker of non-conforming subprime residential and
commercial mortgage loans. The Company anticipates that the majority of Major
Finance's subprime lending activity will relate to residential mortgage loans as
opposed to commercial real estate loans in
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fiscal 2000.*. As a broker, Major Finance interviews prospective borrowers,
completes a loan application, collects and verifies financial data on the
borrower and submits the loan file to a potential lender or investor. The lender
or investor makes the final underwriting decision and closes the loan in their
own name. Major Finance receives a fee directly from the lender or investor for
its brokering services but Major Finance does not fund or retain the loan in its
portfolio. The Company intends to evaluate opportunities to broker subprime
loans both within and outside of its primary market area. Management estimates
that Major Finance will broker approximately $7.5 million in subprime loans,
generating approximately $175,000 in fee income of such loans in fiscal 2000.*
The borrowers on such loans typically have credit deficiencies on their credit
history, such as late mortgage loan payments, low credit scores, foreclosures or
bankruptcies. Other non-conforming factors which may result in a loan being
classified as subprime include higher debt-to-income ratios, no down payment,
limited documentation, high cash-out refinances or no verification of the
borrower's income or assets. A secondary market of private investors and
mortgage bankers provides a mechanism for the underwriting, funding, sale and
servicing of subprime loans. Due to the higher degree of credit risk inherent in
this type of lending, subprime residential mortgage loan rates generally are
higher yielding compared to conventional one-to-four family mortgage rates, and
if sold in the secondary market, a higher origination fee and yield spread
premium are generally paid in connection with such loans.
The Company currently intends to broker all subprime loans originated
by Major Finance on a service released basis in fiscal 2000.* However, in the
event management decides to originate, service and retain any subprime loans in
its portfolio in fiscal 2000, instead of solely brokering such loans, a risk
assessment and risk management policy would be established in advance and
approved by the Company's Board of Directors. See "Lending Activities - Subprime
Lending."
During fiscal 2000, the Company also intends to increase its
non-interest income by expanding the residential lending and commercial banking
fee income producing divisions.* The Company expects one-to-four family mortgage
loan originations to remain strong despite the generally higher level of market
interest rates.* It is currently anticipated that substantially all of the
30-year fixed rate conforming one-to-four family mortgage loans originated in
fiscal 2000 will be sold in the secondary market resulting in income from gains
on loans sold.* The Company also expects increased fee income from the
commercial banking division resulting from a growth in business deposit
relationships and loan originations.* The Company expects its insurance
subsidiary, Hallmark Planning Services, Inc., to continue to generate fee income
from investment product and annuity sales.* The Company also has recently
implemented a program for mortgage contract cash processing within the
commercial lending division, a service intended to generate fee income.* The
Bank acts as a partial sub-servicer, providing a cash/processing function for
nationally-originated commercial real estate loans.
The Company also intends to expand its community "relationship banking"
focus by targeting cross sales opportunities to individuals and businesses
through customer segmentation and database marketing, planning the opening of a
new retail location at the Company's headquarters in Glendale, Wisconsin, and
expanding the delivery of products and services through the Internet.*
MARKET AREA
The Company offers a variety of retail deposits and services primarily
in the metropolitan Milwaukee area. The Company also offers a variety of
mortgage, consumer and commercial lending 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"). In addition, management evaluates lending opportunities on a
national basis, and also will evaluate opportunities to originate and purchase
one-to-four family, multi-family, multi-family construction, commercial real
estate, commercial construction and commercial business 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 Company's administrative office is located at 5555 N. Port
Washington Road, Glendale, Wisconsin. The city of Glendale is immediately north
of the city of Milwaukee, which is located on the western shore of Lake
Michigan, approximately 90 miles north of Chicago, Illinois. The Company has
three full-service branches located in West Allis, Greenfield and New Berlin,
which are suburbs of Milwaukee and Waukesha counties,
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respectively. The Company also operates a limited-services office inside of a
senior community residence in West Allis. All of the Company's locations are in
areas generally characterized as residential neighborhoods.
During fiscal 2000, the Company intends to finalize plans to open a new
retail office in the building currently housing the administrative office in
Glendale, Wisconsin.* Like the Company's other locations, the new location is
located in a primarily residential neighborhood, but management anticipates
opportunity for commercial loan origination and deposit acquisition.*
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 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., Rockwell 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 1920'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
$298.9 million at June 30, 1999, was first mortgage loans secured by
owner-occupied one-to-four family residences. At June 30, 1999, one-to-four
family owner-occupied mortgage loans totaled $132.9 million or 44.5% of gross
loans. Of the remaining gross loans held at June 30, 1999, 14.2% were commercial
real estate loans, 12.1% were multi-family mortgage loans, 6.8% were home equity
loans, 5.0% were one-to-four family non-owner-occupied mortgage loans, 6.1% were
commercial business loans, 5.7% were commercial construction and lot loans, 1.4%
were in various consumer loans, 1.3% were one-to-four family construction loans
and 2.9% were multi-family construction loans. As part of its strategy to manage
interest rate risk, 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.
Since fiscal 1996, the Bank has been actively diversifying its loan
portfolio from lower-yielding one-to-four family mortgage loans into
higher-yielding multi-family, commercial real estate and commercial business
loans while steadily increasing the total asset size of the Bank. At June 30,
1999, total gross loans receivable grew by a modest 3.56% to $298.9 million from
$288.6 million at June 30, 1998. During the same period, higher-yielding
multi-family, commercial real estate and commercial business loans increased
proportionately higher than lower-yielding one-to-four family conforming
mortgage loans. Multi-family real estate and construction loans grew by 23.0% to
$45.1 million at June 30, 1999 from $36.6 million at June 30, 1998. Commercial
real estate loans grew by 22.4% to $42.4 million at June 30, 1999 from $34.6
million at June 30, 1998, and commercial business loans grew by 24.6% to $18.3
million from $14.6 million during the same period. Lower-yielding one-to-four
family conforming mortgage and construction loans decreased by 4.54% to $152.9
million at June 30, 1999 from $158.8 million at June 30, 1998. The decline in
one-to-four family conforming mortgage loans was due to the Bank's asset
portfolio diversification strategy into higher-yielding loans and also due to
the lower interest rate environment during fiscal 1999. During periods of lower
interest rates, customers generally prefer long-term fixed rate mortgages, which
the Bank originates and typically sells in the secondary market based on its
asset/liability management strategy. Substantially all of the 30-year fixed rate
conforming one-to-four family mortgage loans originated in fiscal 1999 were sold
in the secondary market on a service-released basis in lieu of being retained in
the Bank's portfolio, resulting in a strong increase in gains on sales of
mortgages.
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In fiscal 2000, the Company intends to continue to leverage its capital
position by continuing to grow the loan portfolio and by diversifying into
higher-yielding non-conforming one-to-four family loans as well as continuing to
diversify into multi-family, commercial real estate and commercial business
loans.* In addition, the Company intends 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. The Company also intends to manage
its capital and liquidity position and improve profitability by continuing to
sell a larger percentage of newly-originated conforming one-to-four family
mortgage loans in the secondary market.* The Company believes it will continue
to improve its return on equity and earnings through strong asset growth by
increasing the volume of higher-yielding real estate mortgage and commercial
business loan originations and purchases, and through the sale of one-to-four
family conforming mortgage loans in the secondary market.*
The Company anticipates that slightly over half of the asset growth in
fiscal 2000 will come from loan and participation interest purchases outside of
its primary lending area.* The Company projects total loan and participation
interest purchases which relate to residential and commercial properties or
business assets to be approximately $90 million compared to $56.9 million in
fiscal 1999.* The Company anticipates that approximately $50 million will relate
to one-to-four family non-conforming mortgage loans secured by properties
located outside of the Company's primary lending area and the balance
(approximately $40 million) will relate to the purchase of multi-family,
commercial real estate and commercial business loans secured by properties or
business assets located both inside and outside its primary lending area.* The
Company's management will continue to evaluate and implement opportunities to
purchase higher-yielding non-conforming one-to-four family, multi-family,
commercial real estate loans, multi-family and commercial construction loans,
commercial business loans or participation interests in such loans, originated
by other lenders on a national basis. One-to-four family mortgage loans
purchased for the Bank's loan portfolio will consist of both loans conforming to
FHMLC and Fannie Mae underwriting guidelines and non-conforming portfolio loans
which are not sold in the secondary agency market due to underwriting
characteristics that do not conform to the federal agency secondary market.
Purchases of conforming and non-conforming one-to-four family loans will include
lending opportunities on a national basis. One-to-four family non-conforming
loans also will be originated by the Company within its primary lending area.*
For a further discussion of the Company's one-to-four family non-conforming
mortgage lending activities, see "Lending Activities - One-to-Four Family
Mortgage Lending."
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. Management of the Company intends to
continue to monitor the performance of such loans secured by multi-family and
commercial real estate as well as business assets, 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. Due to the risks associated with
this type of lending, the Company uses a separate risk monitoring and analysis
process for its portfolio of purchased loans both within and outside of its
primary lending area.
The Company also intends to apply a stringent underwriting review
process before purchasing one-to-four family non-conforming loans that involve
higher loan-to-value and debt-to-income ratios both within and outside of its
primary lending area.* Additional procedures have been implemented relative to
non-conforming one-to-four family mortgage loans originated by the Company for
its own portfolio which include a secondary review process in the areas of
underwriting, risk and yield analysis. A monthly review of the portfolio is
conducted by the Company's Asset Quality Committee.
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. The Company anticipates that due to the projected increase in
purchases of non-conforming one-to-four family mortgage loans (within and
outside of its primary lending area) and the resulting growth in total assets
during
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fiscal 2000, the Company's general allowance for loan losses, established
through a provision for loan losses, will consequently increase in fiscal 2000.*
However, the Company believes that building the higher-yielding non-conforming
one-to-four family, 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, allowance for loan losses and
allowance for uncollected interest) as of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
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1999 1998 1997 1996
-------------------- -------------------- --------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
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REAL ESTATE LOANS:
One-to-four family:
Owner-occupied........................ $ 132,924 44.5% $ 134,877 46.7% $ 153,618 53.6% $ 146,022 58.7%
Non-owner occupied.................... 15,036 5.0 20,205 7.0 13,893 4.9 7,667 3.1
Home equity.............................. 20,457 6.8 25,079 8.7 25,297 8.8 19,349 7.8
Multi-family............................. 36,320 12.1 33,513 11.6 27,616 9.7 19,788 8.0
Commercial/nonresidential................ 42,366 14.2 34,610 12.0 21,693 7.6 5,488 2.2
One-to-four family construction.......... 3,933 1.3 3,718 1.3 17,382 6.1 23,885 9.6
Multi-family construction................ 8,740 2.9 3,120 1.1 9,621 3.4 13,131 5.3
Other construction and land.............. 17,056 5.7 13,874 4.8 7,385 2.6 6,491 2.6
--------- ------ ---------- ------ ---------- ----- ---------- -----
Total real estate loans............... 276,832 92.6 268,996 93.2 276,505 96.7 241,821 97.3
CONSUMER AND OTHER LOANS:
Automobile............................... 444 0.1 755 0.3 1,195 0.7 1,774 0.7
Student.................................. -- 0.0 -- 0.0 -- 0.0 -- 0.0
Credit card.............................. 2,372 0.8 2,777 1.0 2,730 1.0 2,585 1.0
Other consumer loans..................... 1,030 0.3 1,476 1.0 1,950 1.0 2,372 1.0
--------- ------ ---------- ------ ---------- ----- ---------- -----
Total consumer loans.................. 3,846 1.4 5,008 1.8 5,875 2.1 6,731 2.7
Commercial loans......................... 18,254 6.1 14,646 5.1 3,471 1.2 - 0.0
Gross loans receivable................... 298,932 100.0% 288,650 100.0% 285,851 100.0% 248,552 100.0%
--------- ------ ---------- ------ ---------- ----- ---------- -----
ADD:
Accrued interest, net.................... 1,664 1,764 1,694 1,287
LESS:
Loans in process......................... (16,279) (6,848) (11,998) (23,770)
Deferred fees and discounts.............. (490) (319) (197) (18)
Allowance for loan losses ............... (2,648) (2,329) (1,762) (1,234)
Allowance for uncollected interest....... (60) (29) (32) (10)
---------- ---------- ---------- ----------
Total additions/deductions........... (17,812) (7,762) (12,295) (23,745)
---------- ---------- ---------- ----------
Loans receivable, net............ $ 281,120 $ 280,889 $ 273,566 $ 224,807
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------
1995
---------------------------
(DOLLARS IN THOUSANDS)
AMOUNT PERCENT
------ -------
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REAL ESTATE LOANS:
One-to-four family:
Owner-occupied........................ $ 101,008 66.2%
Non-owner occupied.................... 5,633 3.7
Home equity................................. 11,888 7.8
Multi-family............................. 3,755 2.5
Commercial/nonresidential................ 1,297 0.8
One-to-four family construction.......... 12,796 8.4
Multi-family construction................ 2,556 1.7
Other construction and land.............. 3,858 2.5
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Total real estate loans............... 142,791 93.6
CONSUMER AND OTHER LOANS:
Automobile............................... 2,327 1.5
Student.................................. 1,974 1.3
Credit card.............................. 2,796 1.8
Other consumer loans..................... 2,684 1.8
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Total consumer loans.................. 9,781 6.4
Commercial loans............................ - 0.0
Gross loans receivable................... 152,572 100.0%
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ADD:
Accrued interest, net.................... 784
LESS:
Loans in process......................... (10,099)
Deferred fees and discounts.............. 28
Allowance for loan losses ............... (953)
Allowance for uncollected interest....... (11)
---------
Total additions/deductions........... (10,251)
---------
Loans receivable, net............ $ 142,321
=========
</TABLE>
-7-
<PAGE> 10
LOAN MATURITY
The following table shows the contractual maturity of the Bank's loan
and mortgage-backed and related securities portfolio at June 30, 1999. Loans
that have adjustable rates are shown as being due in the period during which the
last payment is due. Demand loans that 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 $199.7 million, $140.2
million and $70.1 million for the years ended June 30, 1999, 1998 and 1997,
respectively. Management anticipates that if and when the Bank purchases
multi-family, one-to-four family, commercial real estate and commercial business
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, 1999
-------------------------------------------------------------------------
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...................... $ 984 $ 179 $ 373 $ 488 $ 4,620
After one year:
One to three years................. 200 -- 437 4,925 3,000
Three to five years................ 2,890 -- 625 8,134 --
Five to ten years.................. 17,982 -- 18,378 7,280 --
Ten to 20 years.................... 52,673 150 644 992 --
Over 20 years...................... 73,231 3,604 -- 14,501 1,120
--------- ------ ------- ------- -------
Total due after one year......... 146,976 3,754 20,084 35,832 4,120
-------- ------ ------- ------- -------
Total amounts due ............... 147,960 3,933 20,457 36,320 8,740
LESS:
Loans in process..................... (177) (2,361) -- -- (6,613)
Deferred fees and discounts.......... (180) -- -- -- --
Allowance for loan losses/
Unrealized depreciation on
securities available-for-sale........ (613) (13) (240) (296) (17)
-------- ------ ------- ------- -------
Loans receivable and mortgage-
backed and related securities, net... $146,990 $1,559 $20,217 $36,024 $ 2,110
======== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
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...................... $ 3,424 $ 6,500 $ 275 $2,510 $ 5,171 $ 24,524
After one year:
One to three years................. 2,699 2,000 1,153 322 6,979 21,715
Three to five years................ 19,068 2,133 1,251 202 4,122 38,425
Five to ten years.................. 12,583 3,908 5,568 385 1,982 68,066
Ten to 20 years.................... 4,592 2,515 10,501 427 -- 72,494
Over 20 years...................... -- -- 91,605 -- -- 184,061
------- ------- -------- ------ ------- --------
Total due after one year......... 38,942 10,556 110,078 1,336 13,083 384,761
------- ------- -------- ------ ------- --------
Total amounts due ............... 42,366 17,056 110,353 3,846 18,254 409,285
LESS:
Loans in process..................... -- (7,128) -- -- -- (16,279)
Deferred fees and discounts.......... (310) -- 225 -- -- (265)
Allowance for loan losses/
Unrealized depreciation on
securities available-for-sale........ (935) (135) (394) (164) (235) (3,042)
------- ------- -------- ------ ------- --------
Loans receivable and mortgage-
backed and related securities, net... $41,121 $ 9,793 $110,184 $3,682 $18,019 $389,699
======= ======= ======== ====== ======= ========
</TABLE>
The following table sets forth at June 30, 1999, the dollar amount of
all loans and mortgage-backed and related securities due after June 30, 2000,
and whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 2000
------------------------------------------
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One-to-four family......................................... $111,189 $35,787 $146,976
One-to-four family construction............................ 150 3,604 3,754
Home equity................................................ 2,529 17,555 20,084
Multi-family............................................... 16,980 18,852 35,832
Multi-family construction.................................. 3,000 1,120 4,120
Commercial/nonresidential.................................. 26,993 11,949 38,942
Other construction and land................................ 6,541 4,015 10,556
Consumer loans ................................................... 1,336 -- 1,336
Commercial loans................................................... 13,083 -- 13,083
-------- ------- --------
Gross loans receivable..................................... 181,801 92,882 274,683
Mortgage-backed and related securities.............................. 38,382 71,696 110,078
-------- ------- --------
Gross loans receivable and
mortgage-backed and related securities................... $220,183 $164,578 $384,761
======== ======== ========
</TABLE>
-8-
<PAGE> 11
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 1999, the
Bank primarily originated and purchased one-to-four family real estate loans
secured by properties located within the Bank's primary lending area. Due to the
lower level of interest rates and high refinancing activity, the Bank increased
its originations of one-to-four family loans by 90.9% to $89.3 million at June
30, 1999 from $46.8 million at June 30, 1998. The Bank purchased $7.0 million in
one-to-four family mortgage loans during fiscal 1999 of which $2.5 million were
secured by properties located outside of the primary lending area compared to
$2.1 million in one-to-four family loan purchases during fiscal 1998. All
one-to-four family mortgage loans purchased in fiscal 1999 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 or rate adjustments were
obtained.
The Bank offers conventional fixed-rate mortgage loans and ARM loans
with maturity dates that typically range from 15 to 30 years. During fiscal
1999, substantially all of the ARM loans were originated for the Bank's own loan
portfolio. The Bank also originates 15-year fixed-rate loans that primarily have
been retained in the Bank's portfolio in recent fiscal years. During the fiscal
year ended June 30, 1999, the Bank originated and purchased $83.2 million in
fixed-rate one-to-four family mortgage loans. The Bank sold $48.3 million in
fixed-rate one-to-four family mortgage loans in fiscal 1999 of which
substantially all were 30-year fixed-rate mortgage loans. The Bank had sold
primarily all of its 30-year fixed loans in prior years. During fiscal 1999, the
Bank sold a portion of the fixed-rate loans originated and purchased to provide
funds for adding higher yielding loans to the portfolio. In fiscal 2000, the
Bank intends to continue to sell a larger percentage of one-to-four family
conforming mortgage loans in the secondary market as part of its strategy of
asset portfolio diversification 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 FHLMC and Fannie Mae
underwriting guidelines for its conforming 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 has originated and intends to continue
to originate loans that are for sale in the secondary market and primarily
without points.*
In fiscal 2000, the Bank intends to begin purchasing higher-yielding
one-to-four family non-conforming mortgage loans secured by properties located
outside of the Company's primary lending area from out-of-state lenders as well
as loans secured by properties located within the Company's primary lending
area.* To meet the Company's asset growth and asset portfolio diversification
objectives, management expects to purchase approximately $50 million in
one-to-four family non-conforming mortgage loans secured by properties located
outside of its primary lending area. One-to four family non-conforming portfolio
loans are defined as loans that do not meet FHLMC or Fannie Mae underwriting
guidelines generally due to reasons such as alternative or limited
documentation, higher loan-to-value ratios, higher debt-to-income ratios,
consolidation of unseasoned debt, 100% combined loan-to-value ratios or no
private mortgage insurance. With respect to these loans made at higher
loan-to-value ratios, other underwriting criteria such as debt-to-income ratios
and credit history are given greater emphasis than loans involving lower
loan-to-value ratios and conforming underwriting guidelines. Credit and payment
histories are current and generally considered acceptable by federal secondary
market agency standards. Due to the higher loan-to-value or debt-to-income
ratios, these loans may present a higher level of risk of default and are
accordingly made at higher interest rates than one-to-four family conforming
loans. Because the Bank is not involved in the lending origination process, the
Bank takes efforts to mitigate the additional risk by reviewing the historical
payment and credit history of the borrower, and the collateral quality prior to
purchase of the loans. The Bank expects the servicing of these non-conforming
portfolio loans to be retained by the originating lender.*
The Bank also originates mortgage loans secured by one-to-four family
properties located within its primary lending area for retention in its own
portfolio which do not conform to FHLMC and Fannie Mae underwriting guidelines,
typically due to higher loan-to-value ratios, source of down payment or lower
credit
-9-
<PAGE> 12
scores. The Company estimates that less than 20% of its total one-to-four family
originations in fiscal 1999 (or approximately $18 million) were composed of
one-to-four family non-conforming mortgage loans secured by properties within
the Company's primary lending area.* Management anticipates that one-to-four
family non-conforming originations in fiscal 2000 will increase slightly as the
Company expands its residential lending operations within its primary lending
area.* To compensate for the non-conforming characteristics which increase the
risk on these loans, the Bank receives a higher interest rate. Additional
procedures have been implemented relative to non-conforming one-to-four family
mortgage loans originated by the Company for its own portfolio which include a
secondary review process in the areas of underwriting, risk and yield analysis.
A monthly review of the portfolio is conducted by the Company's Asset Quality
Committee.
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 generally 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. For loans with lower
loan-to-value ratios, escrow requirements may be waived for an additional fee.
The lending policy of the Bank for its one-to-four family mortgage loans meeting
federal secondary market guidelines 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-to-four family non-conforming mortgage loans
purchased by the Company typically do not have private mortgage insurance.
Another exception to this policy is for ARM loans in which case the Bank loans
up to 95% 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 portion of one-to-four family loans were outsourced to a contract
underwriter, then reviewed by the Bank's internal underwriter during fiscal
1999. The use of 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 underwriter prior to a
final loan denial and secondarily reviewed by the department manager. Summaries
of all one-to-four family mortgage loan applications are reviewed on a monthly
basis by the Board of Directors and the 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 the
Wisconsin Housing Economic Development Authority ("WHEDA"), the Federal Veterans
Administration ("VA"), the State Department of Veterans Affairs ("VA") and other
grant programs offered through various local and state grant programs. The WHEDA
and VA programs generally have lower down payment requirements, lower interest
rates and less restrictive qualification ratios. The WHEDA and VA loans are
originated for the agencies, underwritten and serviced by them.
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 that contain a fixed-rate conversion
feature permitting conversion to a fixed rate for up to five years after
origination are sold in the secondary market. Substantially all ARM loans that
are originated for the Bank's
-10-
<PAGE> 13
own portfolio are non-convertible to a fixed rate. 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. 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, 1999, the Bank had $3.0
million of non-index ARMs outstanding.
The Bank offers one- to three-year ARM loan programs amortized over a
15-year term for land loans. Under these programs, the interest rate and monthly
payment are fixed for the initial term and, thereafter, adjust annually after
the initial one- and three-year terms.
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 rate, open-ended
loans have an interest rate adjustable monthly, currently set at the prime rate
plus 2%-3% for loans with combined loan-to-value ratios above 80% and prime rate
for loans with combined loan-to-value ratios up to 80%. Origination fees are
charged on close-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, 1999, the home
equity loan portfolio was $20.5 million compared to $25.1 million at June 30,
1998. The decrease is attributed to the large volume of refinance activity in
fiscal 1999 whereby borrowers normally consolidate their existing home equity
loan into a single mortgage. The open-ended home equity product is emphasized by
loan originators and offers the Bank an asset that adjusts with current interest
rates and is part of the Bank's asset/liability management strategy. In fiscal
2000, the Bank intends to increase its home equity business by training
additional retail branch staff to originate home equity loans.*
RESIDENTIAL CONSTRUCTION LENDING
Construction loans are made to individuals who have signed construction
contracts with a homebuilder and to a lesser extent, directly to a self 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.
-11-
<PAGE> 14
For the fiscal year ended June 30, 1999, residential construction loan
originations and purchases totaled $5.1 million, of which none were purchased
loans, compared to $4.9 million at June 30, 1998. In fiscal 1999, all originated
one-to-four family construction loans were secured by properties located within
the Bank's primary lending area. A significant number of the Bank's construction
loans result in permanent mortgage loans. In fiscal 2000, 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.
SUBPRIME LENDING
During the latter half of fiscal 1999, the Bank established a new
mortgage banking subsidiary, Hallmark Financial, Inc. (d/b/a Major Finance), to
provide lending activities involving higher credit risk financial services (also
known as subprime lending). The Bank hired an experienced subprime lending
manager to direct the subprime lending operations. Major Finance's operations
are located at 7409 W. Greenfield Avenue, West Allis, Wisconsin, on the second
floor of the Bank's retail office. Major Finance currently acts as a broker of
non-conforming subprime residential and commercial mortgage loans to secondary
market lenders and investors. The Company anticipates that the majority of Major
Finance's subprime lending activity will relate to residential mortgage loans as
opposed to commercial real estate loans in fiscal 2000.* As a broker, Major
Finance interviews prospective borrowers, completes an application, collects and
verifies financial data on the borrower and submits the loan file to a potential
lender or investor. The lender or investor makes the final underwriting decision
and closes the loan in their own name. Major Finance receives a fee directly
from the lender or investor for its brokering services but Major Finance does
not fund or retain the loan in its portfolio. The borrowers on such loans
typically have credit deficiencies on their credit history, such as late
mortgage loan payments, low credit scores, foreclosures or bankruptcies. Other
defining elements of a subprime borrower are driven by a combination of low
credit scores, blemished credit history (number of times past due, judgments,
charge-offs, collection actions, or bankruptcies), limited credit history, high
debt-to-income ratios, no down payment, limited documentation, high cash-out
refinances or no verification of the borrower's income or assets. A secondary
market of private investors and mortgage bankers provides a mechanism for the
underwriting, funding, sale and servicing of subprime loans. Due to the higher
degree of credit risk inherent in this type of lending, subprime residential
mortgage loan rates generally are higher yielding compared to conventional
one-to-four family mortgage rates. In addition, if sold in the secondary market,
a higher origination fee and yield spread premium are generally paid in
connection with such loans.
The subprime loans are typically brokered without recourse as to credit
risk; however, depending upon the contract between Major Finance and the
secondary market investor, Major Finance may retain some contractual liability
in the event of a breach of representations and warranties, including
representations regarding compliance with laws, regulations and program
standards, accuracy of information, fraud or other defects or misrepresentations
in the loan origination process. Such representations and warranties could in
some instances extend to any false or materially inaccurate information about
the borrower or the underlying collateral, which was provided to Major Finance
by the borrower. During the life of the loan, if the secondary market lender or
investor finds that there was a breach of representations and warranties from
the information in the loan package, Major Finance could be required to purchase
the loan from the secondary market lender or investor or indemnify the secondary
market lender or investor against any losses incurred from the subprime loan. In
addition, some brokered subprime loans may require Major Finance to return all
or a portion of the premium received upon the brokering of the loan in the event
the loan is repaid within a specified period (usually within the first six to
twelve months following the closing of the loan).
-12-
<PAGE> 15
Major Finance has brokered and intends to continue to broker subprime
loans primarily secured by one-to-four family and commercial real estate within
and outside the Company's primary lending area.* Major Finance utilizes
underwriting guidelines established by the secondary market lenders since it
receives contractual commitments from such lenders to fund such loans prior to
the final approval and closing of the loan.
The Company currently intends to broker all subprime loans originated
by Major Finance on a service released basis during fiscal 2000.* However, in
the event management decides to originate, service and retain any subprime loans
in its portfolio, instead of solely brokering such loans, a risk assessment and
risk management policy would be established in advance and approved by the
Company's Board of Directors. The risk management policy would be developed
based on FDIC guidelines that would incorporate a lending policy, purchase
evaluation, loan administration procedures, loan review and monitoring,
provision for loan losses, management re-evaluation, capitalization
considerations, and securitization, with an annual limit on subprime loans
originated, retained and serviced of approximately 1% of the Company's total
gross loan portfolio, which currently represents approximately $3 million.*
Subprime loans brokered at June 30, 1999 were $226,500 of one-to-four
family mortgage loans, generating fee income on the brokering of subprime
mortgage loans of $7,361. Management estimates that Major Finance will broker
approximately $7.5 million in subprime loans, primarily secured by one-to-four
family properties, generating approximately $175,000 of fee income on such
subprime loans during fiscal 2000.* The Company will evaluate opportunities to
broker subprime loans both within and outside of its primary lending area.* Out
of market subprime loan brokering activities may involve establishing
relationships with outside loan brokers as well as its own Company employees. If
the Company were to establish a network of brokers, a full analysis of the
broker's license, financial statements, references and personal background would
be conducted. Legal broker agreements would be signed, holding the broker liable
for specific representations and warranties. In addition, the Company would
review the broker loan files for compliance with lender underwriting guidelines
and regulatory requirements.
Upon receipt of a completed mortgage application from a prospective
borrower, the Bank orders a credit report, obtains an appraisal from an
independent third party, verifies income and other deposit information, and
additional financial information is requested as required by the actual lender
or investor. The lender or investor issues a written final commitment and
approves the closing agent and date of closing. Closings are conducted by a
title company. The subprime loan is closed in the name of the lender or investor
who funds the loan directly. The lender or investor pays the Bank a fee for its
efforts in connection with the brokering of the loan. The title company handles
disbursements, satisfactions and recordings. The lender or investor 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. Private mortgage insurance and escrowing of funds are typically not
used in subprime lending. Subprime loans typically carry a prepayment penalty
where allowable by state law.
The Company's competitors in the subprime loan market include other
banks, consumer finance companies, mortgage banking companies, commercial banks,
credit unions and subprime loan brokers, many of which are substantially larger
and have considerably greater financial, technical and marketing resources than
the Company. Such competitors have both a local or national market presence.
MULTI-FAMILY LENDING
The Bank originates multi-family loans that it retains in its
portfolio. In the past, the Bank offered both ARM and fixed-rate multi-family
loans. Currently, the Bank offers fixed-rate balloon notes typically with
three-to-five year maturities amortized over 15 to 30 years. Multi-family loans
generally have shorter maturities than one-to-four family mortgage loans. The
rates charged on the Bank's multi-family loans typically are slightly higher
than those charged on loans secured by one-to-four family residential
properties. An origination fee equal to 0.5% to 1.0% of the principal amount is
usually charged on such loans.
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. In addition, the Bank's
underwriting procedures
-13-
<PAGE> 16
require verification of the borrower's credit history, an analysis of the
borrower's income, personal and business (if applicable) 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 typically
required as part of the overall credit analysis. 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.
The Bank originated $10.6 million in multi-family loans in fiscal 1999
secured by properties within its primary lending area and $13.3 million in
fiscal 1998. In fiscal 1999, the Bank purchased $1.0 million of loans secured by
multi-family properties located within its primary lending area. There were no
such purchases in fiscal 1998. The Bank intends to continue increasing the
amount of multi-family loans in its portfolio in fiscal 2000.* The Bank will
also continue to explore opportunities to originate and purchase multi-family
loans both within and outside of its primary lending area in fiscal 2000.*
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 have 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.
MULTI-FAMILY CONSTRUCTION LENDING
In fiscal 1999, the Bank slightly increased its multi-family
residential construction lending activities as compared to fiscal 1998. The
primary reason for the increase in multi-family construction lending was an
increase in the origination of multi-family construction loans within the Bank's
primary lending area. For the fiscal year ended June 30, 1999, the Bank
originated $5.7 million in multi-family residential construction loans compared
to $1.7 million for the fiscal year ended June 30, 1998. There were no purchases
of multi-family construction loans in fiscal 1999, compared to $3.9 million of
such purchases in fiscal 1998. Of the $5.7 million in multi-family construction
loans originated in fiscal 1999, none were originated outside of the Bank's
primary lending area. In fiscal 2000, 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 inside and
outside of the Bank's primary lending area.*
Multi-family construction loans typically offered by the Bank are
balloon loans with three-to-five year terms amortized over 15 to 30 years 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 loans are typically higher than those charged on loans
secured by one-to-four family residential properties. An origination fee of 0.5%
to 1% of the principal amount is usually charged on such loans.
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. 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 (if applicable)
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
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<PAGE> 17
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 are typically required as part of the
overall credit analysis. 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.
The Bank uses underwriting guidelines for construction loans purchased outside
its primary lending area which are at least as strict as those guidelines for
loans originated within its primary lending area. 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 have been
minimal. At June 30, 1999, the Bank had one multi-family construction loan
located in its primary lending area in default for a total of $1.1 million.
While management believes that a loss will not be experienced on this property,
management does believe that the loan loss reserves established on this loan are
adequate to absorb any unforeseen loss related to its resolution.*
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). The Bank
originated and purchased $8.1 million, $11.0 million and $49.8 million in
commercial real estate loans in fiscal years 1997, 1998 and 1999, respectively.
The significant increase in originations and purchases in fiscal 1999 is
consistent with the Bank's asset portfolio diversification strategy into
higher-yielding assets. In fiscal 1999, the Bank originated and purchased $49.8
million of commercial real estate loans, of which $36.7 million, or 73.7%, were
loans originated or purchased and secured by properties within the Bank's
primary lending area, and $13.1 million were participation interests in loans
secured by properties located outside of the Bank's primary lending area. The
$13.1 million of participation interests purchased outside of the Bank's primary
lending area consisted of ten separate transactions with the largest transaction
aggregating $2.7 million which relates to commercial real estate located in
California. As part of the Bank's asset growth and portfolio diversification
strategy, the Bank intends to continue increasing originations and purchases of
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 and business (if applicable)
financial statements and banking relationships and a review of the property,
including cash flow projections, historical operating results 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
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<PAGE> 18
dependent upon the successful operation of the related business occupant.
Payments on loans secured by commercial real estate also are 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 have 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, 1999, these consumer loans totaled $3.8 million, or 1.4% of gross loans,
compared to $5.0 million or 1.8% at June 30, 1998. 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.
OTHER CONSTRUCTION/LAND LENDING
In fiscal 1999, the Bank originated or purchased $28.4 million of
commercial real estate construction loans for commercial properties and
residential real estate land loans compared to $18.5 million in fiscal 1998.
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 $28.4 million originated or purchased
in fiscal 1999, $9.1 million were originated internally, and $7.7 million of the
$9.1 million originated by the Bank consisted of commercial real estate
construction loans and $1.4 million consisted of residential land loans. Of the
$19.3 million of loans purchased, $17.5 million were participation interests in
commercial real estate construction loans originated by other lenders and $1.8
million consisted of land loans. $14.6 million of the $17.5 million of
participation interests in commercial real estate construction loans were
secured by properties located outside the Bank's primary lending area, of which
$7.6 million consisted of participation interests in commercial real estate
construction loans secured by properties located in Minnesota. In fiscal 2000,
the Bank intends to continue to increase its originations and purchases of 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 (if applicable) 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 typically required as part of the
overall credit analysis. The Bank originates and purchases construction loans
whereby substantially all are provided permanent financing as a part of the
original loan agreement. Despite the risks inherent in commercial real estate
construction and land lending, the Bank's delinquencies have been minimal.
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<PAGE> 19
COMMERCIAL BUSINESS LENDING
The commercial lending division originated $36.8 million in commercial
business loans during fiscal 1999 compared to $29.0 million in fiscal 1998.
During fiscal 1999, the Bank purchased $8.6 million in commercial business
loans, of which $6.1 million related to businesses located outside of the Bank's
primary lending area. Aggregate commercial business loans purchased in fiscal
1998 were $6.6 million. Of the $6.1 million in out-of-market commercial business
loan purchases, the largest single transaction consisted of a $3.3 million loan
secured by business assets in South Dakota. 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 fixed or adjustable rate loans with three-to-five year
maturities.
The Bank anticipates loan growth to come from commercial lending
originations, which will also assist the Bank in its asset portfolio
diversification strategy.* The focus of the Company's commercial lending
operation is to provide financing options to businesses with revenues up to $10
million by offering commercial/industrial real estate term loans, construction
loans, equipment leasing, inventory/equipment/receivables financing, lines of
credit, letters of credit and government loan programs both within and outside
of the Bank's primary lending area. Under regulations established for state
savings banks by the Wisconsin Department of Financial Institutions ("DFI") as
implemented by the Administrator of the DFI, the Bank is limited in the amount
of commercial real estate and commercial business loans it can hold in its loan
portfolio. The DFI approved an increase in the limit for the Bank from 20% to
30% of the Bank's total asset base in March 1999. At June 30, 1999, the Bank had
$77.7 million of such loans in its portfolio which represents 16.5% of the
Bank's asset base of $469.6 million. Management believes that this expanded
regulatory limit will be sufficient to meet the Bank's asset growth and
portfolio diversification objectives in fiscal 2000.*
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. To the extent the Bank originates or purchases
commercial loans for business located outside of its primary lending area, the
risks may be increased due to the decreased ability to monitor these loans. 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. Loans secured by
properties or business assets outside of the Company's primary lending area are
generally serviced by a local financial institution who closely monitors the
performance of the loans and borrowers.
LOAN APPROVAL
The Bank's residential lending 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, home equity loans up to $100,000 and
consumer loans up to $30,000. Authority exceeding the aforementioned limits for
the residential lending division are referred to the Senior Loan Committee and
its limits are $100,000 for consumer loans, $250,000 for home equity installment
and flexloans, and $750,000 for one-to-four family mortgage loans.
A commercial lending 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 $1.5 million, and loans in
excess of $1.5 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
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<PAGE> 20
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. See
also "Lending Activities - One-to-four Family Mortgage Lending" and "Subprime
Lending."
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 repayments for the periods indicated. Mortgage loans and
mortgage-backed and related securities held for sale are included in the totals.
In fiscal 2000, the Company intends to continue to evaluate
opportunities to purchase, and may in fact purchase, non-conforming one-to-four
family, multi-family, multi-family construction, commercial real estate loans,
commercial real estate construction and commercial business 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 2000 to provide liquidity for the funding of higher-yielding
non-conforming one-to-four family, 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 and will increase non-interest income as a
result of increased gains on the sales of such loans.*
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<PAGE> 21
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS (GROSS):
At beginning of period..................................... $ 268,996 $ 276,505 $241,821
Mortgage loans originated:
One-to-four family....................................... 89,265 46,756 27,781
One-to-four family construction.......................... 5,148 3,218 12,241
Home equity.............................................. 10,899 16,151 18,950
Multi-family............................................ 10,606 13,301 7,287
Multi-family construction................................ 5,691 1,720 1,810
Commercial/non-residential............................... 28,833 2,504 4,826
Other construction/land.................................. 9,060 16,034 10,563
--------- --------- --------
Total mortgage loans originated........................ 159,502 99,684 83,458
Mortgage loans purchased:
One-to-four family....................................... 6,951 413 6,368
One-to-four family construction.......................... -- 1,688 8,345
Multi-family............................................. 1,000 -- 500
Multi-family construction................................ -- 3,917 --
Commercial/non-residential............................... 20,936 8,513 3,250
Other construction/land.................................. 19,377 6,540 2,029
--------- --------- --------
Total mortgage loans purchased......................... 48,264 21,071 20,492
--------- --------- --------
Total mortgage loans originated and purchased............ 207,766 120,755 103,950
--------- --------- --------
Transfer of mortgage loans to foreclosed
real estate.............................................. (682) (267) (54)
Principal repayments....................................... (150,919) (107,784) (58,594)
Sales of fixed-rate loans.................................. (48,329) (20,213) (10,618)
--------- --------- --------
At end of period........................................... $ 276,832 $ 268,996 $276,505
========= ========= ========
CONSUMER LOANS:
At beginning of period..................................... $ 5,008 $ 5,875 $ 6,731
Consumer loans originated................................ 5,768 7,065 7,896
Principal repayments....................................... (6,930) (7,932) (8,752)
--------- --------- --------
At end of period........................................... $ 3,846 $ 5,008 $ 5,875
========= ========= ========
COMMERCIAL LOANS:
At beginning of period..................................... $ 14,646 $ 3,471 $ --
Commercial loans originated.............................. 36,828 28,982 6,262
Commercial loans purchased............................... 8,598 6,631 --
Principal repayments..................................... (41,818) (24,438) (2,791)
--------- --------- --------
At end of period........................................... $ 18,254 $ 14,646 $ 3,471
========= ========= ========
MORTGAGE-BACKED AND RELATED SECURITIES:
At beginning of period..................................... $ 122,831 $ 96,811 $115,258
Mortgage-backed and related
securities purchased..................................... 83,730 63,753 731
Sales of mortgage-backed and related
securities............................................... (2,503) (8,905) (421)
Amortization and repayments................................ (93,577) (28,938) (19,041)
Market valuation allowance on available-for-sale
mortgage-backed securities................................ (297) 110 284
--------- --------- --------
At end of period........................................... $ 110,184 $ 122,831 $ 96,811
========= ========= ========
</TABLE>
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<PAGE> 22
SALE OF MORTGAGE LOANS
The Bank sells one-to-four family mortgage loans, on a non-recourse
basis, into the secondary market to FHLMC, WHEDA, federal and state VA 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 $48.3 million in fixed-rate one-to-four family mortgage loans in fiscal
1999. Of the $48.3 million, substantially all were 30-year fixed-rate mortgage
loans. The Bank had sold primarily all of its 30-year fixed loans in prior
years. During fiscal 1999, management continued to sell a portion of the
fixed-rate loans originated 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 FHLMC
and Fannie Mae underwriting guidelines for its one-to-four family mortgage loans
which are sold in the secondary market. In fiscal 2000, management intends to
continue the sale of 30-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 and
provide liquidity for the funding of higher-yielding non-conforming one-to-four
family, multi-family, commercial real estate and commercial business loans.*
For the fiscal years ended June 30, 1999, 1998 and 1997, the Bank's
fixed-rate loan sales to private and governmental investors totaled $48.3
million, $18.7 million and $10.6 million, with associated gains of $892,000,
$297,000 and $95,000, respectively.
All mortgage loans for sale 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, 1999, 1998 and 1997, the
Bank's net service fees on loans sold into the secondary market totaled $21,000,
$61,000 and $86,000, 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.
The Company also sells subprime one-to-four family and commercial real
estate loans in the secondary market. These loans are originated through the
Company's mortgage banking subsidiary, Hallmark Financial, Inc. (d/b/a Major
Finance) which provides lending activities involving higher credit risk
financial services (also known as subprime lending). See "Lending Activities -
Subprime Lending."
PURCHASED LOANS
During the fiscal year ended June 30, 1999, the Bank purchased $56.9
million of one-to-four family mortgage loans, multi-family, multi-family
construction, commercial real estate, commercial construction and commercial
business loans compared to $27.7 million in fiscal 1998 and $20.5 million in
fiscal 1997. Of the $56.9 million of loans purchased during fiscal 1999, $49.9
million or 87.7% consisted of participation interests, primarily in commercial
construction, commercial real estate, commercial business and multi-family
loans, and $7.0 million or 12.3% consisted of whole loans, primarily in
one-to-four family mortgage loans, which were serviced either by the Bank or
others. Of the $21.1 million of mortgage loans purchased during fiscal 1998,
$19.0 million or 90.0% consisted of participation interests, primarily in
commercial construction, commercial real estate and multi-family loans, and $2.1
million or 10.0% consisted of whole loans, primarily in one-to-four family
mortgage loans, which were serviced either by the Bank or others. Furthermore,
$38.2 million or 67.1% of the loans purchased during fiscal 1999 were secured by
properties and business assets located outside of the Bank's primary lending
area compared to $18.1 million or 85.8% during fiscal 1998.
The level of purchases of one-to-four family mortgage, multi-family,
multi-family construction, commercial real estate, commercial construction and
commercial business loans both within and outside of the
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<PAGE> 23
Company's primary lending area increased significantly during fiscal 1999. This
increase is due to the Company's strategy of capital and liquidity management,
steady asset growth and asset portfolio diversification which has shifted the
emphasis from the origination and purchase of lower-yielding one-to-four family
mortgage loans to the origination and purchase of higher-yielding residential
and commercial loans.
The Bank will continue to evaluate opportunities to purchase such loans
both within and outside of its primary lending area during fiscal 2000 due to
strong local competition which exerts downward pressure on interest rates,
market demand, availability for internally originated loans and the Bank's
emphasis on various types of loans in order to meet asset portfolio
diversification objectives.* The Company projects total loan and participation
interest purchases which relate to residential and commercial properties or
business assets to be approximately $90 million compared to $56.9 million in
fiscal 1999.* The Company anticipates that approximately $50 million will relate
to one-to-four family non-conforming mortgage loans secured by properties
located outside of the Company's primary lending area and the balance
(approximately $40 million) will relate to the purchase of multi-family,
commercial real estate and commercial business loans secured by properties or
business assets located both inside and outside its primary lending area.*
The Bank also intends to continue to actively adjust and monitor its
lending emphasis in accordance with its view of the relative returns and risk in
each category.* There is likely to be activity in all areas in which the Bank
originates and purchases loans in any given year. However, the percentage will
vary based on the above-described factors. 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 will continue to
apply, underwriting guidelines which are at least as strict as those applicable
to the origination of similar loans within its primary lending area.*
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 $490,000, $319,000 and $197,000 at
June 30, 1999, 1998, and 1997, respectively. The increase in unamortized
deferred loan fees at June 30, 1998, 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, 1999, the Bank serviced
$22.1 million of loans for others and received fee income of $21,000 for the
fiscal year ended June 30, 1999 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. During fiscal 1998, mortgage servicing
rights on loans sold, where the servicing was retained by the Bank, to secondary
market investors totaled $66,000 and is included in gains on the sale of loans.
The mortgage servicing asset created will
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<PAGE> 24
be amortized against the servicing fee income stream in accordance with
Statement of Financial Accounting Standard 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. See also "Lending Activities - Subprime
Lending."
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 VA or other governmental loan program mortgages, the Bank
follows the appropriate notification and foreclosure procedures prescribed by
the respective agencies.
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 7 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. The non-performing credit
card loans are typically charged off at 120 to 150 days past due.
-22-
<PAGE> 25
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, 1999, the Bank had one property in foreclosure.
The increase in the non-accrual mortgage loans 90 days or more past due
primarily relates to the default of a multi-family real-estate loan located in
the Bank's primary lending area with a balance of $1.1 million. The increase in
the real estate owned and in judgment relates to the default of a commercial
real-estate loan in fiscal 1998 which was acquired by the Bank during fiscal
1999. The property is located in the Bank's primary lending area. Management
believes the specific loan loss reserve established on this property is adequate
to absorb any probable loss related to its disposal.
Non-performing loans include loans placed on non-accrual status and
troubled debt restructuring. Non-performing assets include non-performing loans,
foreclosed properties and investment securities. The following table sets forth
non-performing loans and assets:
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans 90 days or more past due............. $2,118 $1,338 $572 $ 64 $ 117
Non-accrual consumer loans 90 days or more past due............. 88 52 20 21 --
Loans 90 days or more past due and still accruing(1)............ 219 34 31 22 26
Troubled debt restructuring..................................... -- -- -- -- --
------ ------ ---- ---- ----
Total non-performing loans.................................... 2,425 1,424 623 107 143
------ ------ ---- ---- ----
Total real estate owned and in judgment, net of
related allowance for losses................................ 621 11 20 -- 24
------ ------ ---- ---- ----
Total investment securities, net of related discount............ 235 -- -- -- --
------ ------ ---- ---- ----
Total non-performing assets..................................... $3,281 $1,435 $643 $107 $167
====== ====== ==== ==== ====
Total non-performing loans to gross loans receivable............ 0.81% 0.50% 0.22% 0.04% 0.09%
====== ====== ==== ==== ====
Total non-performing assets to total assets..................... 0.70% 0.32% 0.16% 0.03% 0.06%
====== ====== ==== ==== ====
</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, 1999, total loans 90 days or more
past due and still accruing consisted of credit card loans in the amount of
$34,000 and mortgage loans in the amount of $159,000.
POTENTIAL PROBLEM LOANS
Potential problem loans are loans where known information about
possible credit problems of borrowers causes management to have doubts as to the
ability of such borrowers to comply with the present loan repayment terms. The
decision by management to categorize a loan as a potential problem loan does not
necessarily indicate that the Company expects losses to occur, but that
management recognizes there is a higher degree of risk associated with these
performing loans. At June 30, 1999, the Bank had a potential problem loan with a
balance of $3.3 million secured by 23 first-lien one-to-four family mortgages
held in trust for the benefit of the Bank and a secondary payee under the loan
obligation. The original balance of the loan was $4.1 million. At June 30, 1999,
the loan was current as to payment of principal and interest. Proceeds from
payments made to the trustee from potential homeowners (occupying the properties
under 2-year leases with an option to purchase at a agreed upon price upon
expiration of the lease-term), or from any other eventual sale of the
one-to-four family residences securing the obligation, are to be applied by the
trustee first to the repayment of the total of all principal and interest due
the Bank, with any excess over such amounts becoming due to the secondary payee.
The Bank assumed responsibility for receipt and servicing of payments from the
potential homeowners upon the secondary payee's filing of bankruptcy in June
1999, and the Bank currently is working directly with the trustee. The secondary
payee's bankruptcy may complicate servicing and collection and could delay the
Bank's ability to act
-23-
<PAGE> 26
promptly to realize upon its security in the event of default. The one-to-four
family properties securing the obligation are located in the Bank's primary
lending area and management believes the underlying value of the properties and
the Bank's first lien status are sufficient to prevent any significant loss from
this credit.
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, 1999, the Bank had assets
classified as Substandard of $2,370,000, $86,000 as Doubtful, and none as Loss.
The increase in Substandard classified assets and non-accrual mortgage loans
primarily relates to the default of a multi-family real-estate loan during
fiscal 1999 that is located in the Bank's primary lending area with a balance of
$1,072,000. Management believes that the special loan loss reserve established
on this loan is adequate to absorb any probable loss related to its resolution.
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, 1999, 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 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 1999, the increase in the
level of allowance for losses on loans was primarily the result of the increase
in multi-family, multi-family construction, commercial real estate and
commercial business loan portfolios which carry a greater degree of inherent
credit risk as compared to one-to-four family lending. It is anticipated that in
fiscal 2000, additions charged to expense will increase due to increased
emphasis on, and increased risks associated with, non-conforming one-to-four
family, multi-family, commercial real estate lending and commercial business
lending and overall loan portfolio growth. Despite the significant growth the
Company anticipates in loan purchases of higher-yielding non-conforming
one-to-four family, multi-family, commercial real estate and commercial business
loans during fiscal 2000, management believes that it continues to have a
sufficient allowance for loan losses. The Board of Directors of the Company and
the Asset Quality Committee actively monitor the Bank's general and specific
levels of loan loss reserves based on performance of its own portfolio and the
industry standard. If the Company decides to retain and service subprime loans
in fiscal 2000, the allowance for loan losses will be adjusted to compensate for
the additional risks inherent in this type of lending. See "Lending Activities -
Subprime Lending."
-24-
<PAGE> 27
The following table sets forth activity in the Bank's allowance for
loan losses during the fiscal years indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.................. $ 2,329 $ 1,762 $ 1,234 $ 953 $ 769
Additions charged to expense:
One-to-four family......................... -- -- 295 172 114
Multi-family and commercial real estate.... 310 512 181 80 57
Consumer................................... 120 163 114 115 77
Commercial................................. 50 125 60 -- --
-------- -------- -------- -------- --------
480 800 650 367 248
-------- -------- -------- -------- --------
Recoveries:
One-to-four family......................... -- -- 1 8 --
Consumer................................... 15 -- 5 9 7
Commercial................................. -- 31 -- -- --
-------- -------- -------- -------- --------
15 31 6 17 7
-------- -------- -------- -------- --------
Charge-Offs:
One-to-four family......................... (11) (69) (11) (15) (13)
Multi Family and commercial real estate.... (34) -- -- -- --
Consumer................................... (131) (195) (117) (88) (58)
-------- -------- -------- -------- --------
(176) (264) (128) (103) (71)
-------- -------- -------- -------- --------
Net charge-offs................................. (161) (233) (122) (86) (64)
-------- -------- -------- -------- --------
Balance at end of period........................ $ 2,648 $ 2,329 $ 1,762 $ 1,234 $ 953
======== ======== ======== ======== ========
Percentage of loans to gross loans receivable:
Mortgage loans............................. 92.61% 93.19% 96.73% 97.29% 93.59%
Consumer loans............................. 1.29 1.73 2.06 2.71 6.41
Commercial loans........................... 6.11 5.08 1.21 -- --
Ratio of allowance for loan losses to gross loans
receivable at the end of period............ 0.89 0.81 0.62 0.50 0.62
Ratio of allowance for losses on loans to non-
performing loans at the end of period...... 109.19 166.36 282.37 1153.27 666.43
Ratio of net charge-offs to average gross loans
during period.............................. 0.05 0.08 0.04 0.05 0.05
Average gross loans outstanding................. $297,899 $280,204 $274,056 $187,969 $134,152
Gross loans receivable at end of period......... $298,932 $288,650 $285,851 $248,552 $152,572
</TABLE>
-25-
<PAGE> 28
At June 30, 1999, 1998, and 1997, delinquencies in the Bank's loan
portfolio were as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1999 AT JUNE 30, 1998
------------------------------------------ -------------------------------------------
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........ 6 $ 284 17 $ 1,125 6 $350 8 $ 533
Residential construction.. -- -- -- -- -- -- -- --
Home equity............... 9 209 8 80 5 95 9 122
Commercial................ 1 688 1 1,072 -- -- -- --
-- ------ -- ------- -- ---- -- ------
Total mortgage loans.. 16 1,181 26 2,277 11 445 18 1,338
CONSUMER LOANS................. 9 16 26 148 10 28 23 86
-- ------ -- ------- -- ---- -- ------
TOTAL..................... 25 $1,197 52 $ 2,425 21 $473 41 $1,424
== ====== == ======= == ==== == ======
DELINQUENT LOANS TO GROSS
LOANS(2)..................... 0.40% 0.81% 0.17% 0.50%
==== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------------------------
60-89 90 DAYS
DAYS OR MORE(1)
------------------- ------------------
(DOLLARS IN THOUSANDS)
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........ -- $ -- 8 $573
Residential construction.. 1 12 -- --
Home equity............... -- -- -- --
Commercial................ -- -- -- --
-- -- -- ----
Total mortgage loans.. 1 12 8 573
CONSUMER LOANS................. 2 5 18 51
--- ---- -- ----
TOTAL..................... 3 $ 17 26 $624
=== ==== == ====
DELINQUENT LOANS TO GROSS
LOANS(2)..................... 0.01% 0.22%
==== ====
</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.
-26-
<PAGE> 29
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,
------------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
% 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............. $ 613 0.42% 49.50% $ 585 0.38% 53.73%
Home equity.................... 240 1.15 6.84 342 1.36 8.69
Multi-family................... 296 0.82 12.15 242 0.72 11.61
Commercial/nonresidential...... 935 1.93 14.17 600 1.73 11.99
One-to-four family
construction.................. 13 0.33 1.32 11 0.30 1.29
Multi-family construction...... 17 0.82 2.92 23 0.74 1.08
Other construction and land.... 135 1.36 5.71 181 1.30 4.81
------ ------ ------ ------
Total mortgage loans.......... 2,249 92.61 1,984 93.20
------ ------ ------ ------
Consumer loans................... 164 4.28 1.29 160 3.19 1.73
------ ------ ------ ------
Commercial loans................. 235 1.29 6.10 185 1.26 5.07
------ ------ ------ ------
Total allowance for loan
losses..................... $2,648 100.00% $2,329 100.00%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
1997
----------------------------------
% OF
% OF LOANS IN
TOTAL CATEGORY
LOANS TO TOTAL
BY OUTSTANDING
AMOUNT CATEGORY LOANS
------ -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Breakdown of Allowance:
Mortgage loans:
One-to-four family............. $ 685 0.41% 58.60%
Home equity.................... 253 1.00 8.85
Multi-family................... 190 0.69 9.66
Commercial/nonresidential...... 198 0.91 7.59
One-to-four family
construction.................. 69 0.40 6.08
Multi-family construction...... 72 0.75 3.37
Other construction and land.... 74 1.00 2.58
------ ------
Total mortgage loans.......... 1,541 96.73
------ ------
Consumer loans................... 161 2.74 2.06
------ ------
Commercial loans................. 60 1.73 1.21
------ ------
Total allowance for loan
losses..................... $1,762 100.00%
====== ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
% 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............. $ 488 0.32% 61.82% $471 0.44% 69.90%
Home equity.................... 194 1.00 7.78 119 1.00 7.23
Multi-family................... 198 1.00 7.96 37 0.98 2.46
Commercial/nonresidential...... 44 .80 2.21 13 1.00 0.85
One-to-four-family
construction................. 40 0.17 9.61 51 0.40 8.39
Multi-family construction...... 46 0.35 5.28 -- -- --
Other construction and land.... 65 1.00 2.60 64 1.01 4.20
------ ------ ---- ------
Total mortgage loans......... 1,075 97.26 755 93.03
------ ------ ---- ------
Consumer loans................... 206 2.34 2.74 198 2.02 6.97
------ ------ ---- ------
Total allowance for loan
losses..................... $1,281 100.00% $953 100.00%
====== ====== ==== ======
</TABLE>
-27-
<PAGE> 30
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, Fannie Mae or the Government National Mortgage
Association ("GNMA"), investment grade corporate debt, non-rated trust preferred
securities issued by other financial institutions 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-through, private issue and
senior-subordinated pass-through, 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 also
invests in trust preferred securities issued by other financial institutions.
Trust preferred securities are a form of preferred stock issued to increase the
Tier I capital of the issuing financial institution. The Bank generally
purchases up to $500,000 with any one issuer that is considered, at minimum,
"well capitalized" by the FDIC. The Bank's current investment policy permits
purchases only of investments rated investment grade by a nationally recognized
rating agency and
-28-
<PAGE> 31
does not permit purchases of securities of non-investment grade quality;
provided however, the investment policy does permit purchases of investments in
non-rated trust preferred securities up to 15% of the Bank's equity capital.
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,
Fannie Mae 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.
-29-
<PAGE> 32
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 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-through, 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 an increase in the level of principal
repayments on mortgage-backed securities and mortgage related securities to
$93.6 million during the fiscal year ended June 30, 1999, from $28.9 million in
fiscal year 1998. The increase in principal repayments during fiscal 1999 is
primarily related to the decrease in interest rates and increase in refinancing.
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, 1999, the Company
held $54.6 million in its mortgage-backed and related securities portfolio as
compared to $65.3 million and $85.4 million at June 30, 1998 and 1997,
respectively. Of this amount, fixed-rate securities and adjustable-rate
securities were $11.4 million and $43.2 million; $8.1 million and $57.2 million;
and $13.4 million and $72.0 million at June 30, 1999, 1998 and 1997,
respectively. The decrease in fiscal 1999 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, 1999 was $54.9 million as compared to $66.2
million and $86.1 million at June 30, 1998 and 1997, respectively. At June 30,
1999, the mortgage-backed and related securities portfolio represented 11.6% of
the Company's total assets as compared to 14.9% and 20.8% at June 30, 1998 and
1997, respectively. Included in the mortgage-backed securities portfolio were
federal agency backed and private-issue pass-through securities totaling $9.2
million and $2.1 million; $14.7 million and $16.8 million; $21.0 million and
$25.1 million at June 30, 1999, 1998 and 1997, respectively. Of the $2.1 million
in private-issue securities at June 30, 1999, 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 $43.4 million, $33.8
million and $39.3 million at June 30, 1999, 1998 and 1997, respectively.
Other Investment Securities. Other investments consisted primarily of
overnight deposits, certificates of deposit and bankers' acceptances which
totaled $5.0 million, $6.6 million and $5.7 million at June 30, 1999, 1998 and
1997, respectively. The market value of these securities were $5.0 million, $6.6
million and $5.7 million at June 30, 1999, 1998 and 1997, respectively.
COMPOSITION OF SECURITIES AVAILABLE-FOR-SALE
Mortgage-Backed Securities and Related Securities. At June 30, 1999,
the Company held mortgage-backed and related securities available-for-sale with
a carrying and market value of $55.6 million as compared to $57.5 million and
$11.4 million at June 30, 1998 and 1997, respectively. Of this amount at June
30, 1999, $16.9 million of the securities are mortgage-backed securities and
$38.7 million REMIC securities. Included in the mortgage-backed and related
securities were federal agency backed and private-issue securities totaling
$16.4 million and $39.2 million, respectively, and all were fixed-rate
securities. Of the $55.6 million in mortgage-
-30-
<PAGE> 33
backed and related securities available-for-sale at June 30, 1999, fixed-rate
securities and adjustable-rate securities were $27.0 million and $28.6 million,
respectively. 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 $38.7 million and $1.0 million; $5.0 million and $1.0 million;
and $16.7 million and $1.0 million at June 30, 1999, 1998 and 1997,
respectively. Also at June 30, 1999, the Company had trust preferred securities
and municipal bonds with a carrying and market value of $4.8 million and
$414,000, respectively. The Company carries such investments at fair value.
-31-
<PAGE> 34
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------
CARRYING % OF MARKET
VALUE TOTAL VALUE
--------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. government securities........................................ $ 38,702 38.52% $ 38,702
Mortgage-backed securities........................................ 16,943 16.86 16,943
Mortgage-related securities (REMICs).............................. 38,623 38.44 38,623
ARM loan mutual funds............................................. 964 .96 964
Trust preferred securities........................................ 4,797 4.78 4,797
Municipal bonds/other............................................. 439 .44 439
-------- ------ --------
Total securities available-for-sale............................. $100,468 100.00% $100,468
======== ====== ========
SECURITIES HELD-TO-MATURITY:
Demand deposits in other financial institutions................... $ 5,017 100.00 $ 5,017
-------- ------ --------
Total securities held-to-maturity............................. $ 5,017 100.00% $ 5,017
======== ====== ========
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
GNMA.............................................................. $ 571 5.07% $ 595
FHLMC............................................................. 2,302 20.45 2,311
FNMA.............................................................. 6,292 55.88 6,301
Other participation certificates.................................. 2,094 18.60 2,090
-------- ------ --------
Total mortgage-backed securities held-to-maturity............... $ 11,259 100.00 $ 11,297
======== ====== ========
MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY:
CMOs.............................................................. -- -- --
REMICs............................................................ 43,359 100.00 43,557
-------- ------ --------
Total mortgage-related securities held-to-maturity.................. $ 43,359 100.00% $ 43,557
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------
CARRYING % OF MARKET
VALUE TOTAL VALUE
-------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. government securities........................................ $ 4,992 7.51% $ 4,992
Mortgage-backed securities........................................ 39,150 58.92 39,150
Mortgage-related securities (REMICs).............................. 18,399 27.69 18,399
ARM loan mutual funds............................................. 969 1.46 969
Trust preferred securities........................................ 2,500 3.76 2,500
Municipal bonds/other............................................. 435 .66 435
------- ------ -------
Total securities available-for-sale............................. $66,445 100.00% $66,445
======= ====== =======
SECURITIES HELD-TO-MATURITY:
Demand deposits in other financial institutions................... $ 6,186 94.10% $ 6,186
Time deposits in other financial institutions..................... 388 5.90 388
------- ------ -------
Total securities held-to-maturity............................... $ 6,574 100.00% $ 6,574
======= ====== =======
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
GNMA.............................................................. $ 720 2.29% $ 758
FHLMC............................................................. 2,986 9.49 3,038
FNMA.............................................................. 10,256 32.58 11,514
Other participation certificates.................................. 17,518 55.64 17,434
------- ------ -------
Total mortgage-backed securities held-to-maturity............... $31,480 100.00% $31,744
======= ====== =======
MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY:
CMOs.............................................................. -- -- --
REMICs............................................................ 33,802 100.00 34,441
-------- ------ -------
Total mortgage-related securities held-to-maturity............. $33,802 100.00% $34,441
======= ====== =======
</TABLE>
-32-
<PAGE> 35
<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 39,370
------- ------ -------
Total mortgage-related securities held-to-maturity............. $39,370 100.00% $39,370
======= ====== =======
</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, 1999
------------------------------------------------
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............. $5,017 - - $5,017
------ ------
Total securities held-to-maturity....................... $5,017 - - $5,017
====== ======== ======== ======
Weighted average yield........................................ 4.77% -% -% 4.77%
==== ======== ======== ====
</TABLE>
-33-
<PAGE> 36
The following table shows the maturity or period to repricing of the Company's
securities available-for-sale at June 30, 1999.
<TABLE>
<CAPTION>
AT JUNE 30, 1999
-------------------------------------------------------------------------------------
FIXED-RATE FIXED-RATE ADJUSTABLE-RATE FIXED-RATE
U.S. GOVERNMENT MORTGAGE-BACKED MORTGAGE-BACKED CMOS AND
SECURITIES SECURITIES SECURITIES REMICS
------------------ ------------------ ------------------ ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMOUNTS DUE OR REPRICING:
Within one year.............................. $ -- -- $ -- -- $ 2,794 5.93% $ -- --
AFTER ONE YEAR:
One to three years........................... -- -- 511 5.10 -- -- -- --
Three to five years.......................... 9,816 6.04 -- -- -- -- 79 7.07
Five to ten years............................ 1,937 6.50 -- -- -- -- -- --
Ten to 20 years.............................. 26,949 7.00 4,672 6.26 -- -- 1,288 6.97
Over 20 years................................ -- -- 8,966 7.20 -- -- 11,531 6.94
------- ---- ------- ---- ------- ------ ------ ------
Total due or repricing after one year....... 38,702 6.73 14,149 6.81 -- 12,898 6.95
------- ---- ------- ---- ------- ------ ------ ------
Total amount due or repricing............... 38,702 6.73% 14,149 6.81% 2,794 5.93% 12,898 6.95%
Less unearned discounts and premiums, net... -- -- -- --
Mortgage-backed and related securities.... $38,702 $14,149 $ 2,794 $12,898
======= ======= ======= =======
Average remaining years to maturity............ 12.2 24.9 21.7 26.4
<CAPTION>
AT JUNE 30, 1999
-------------------------------------------------------------------------------------
TRUST PREFERRED SEC/ FIXED-RATE
ADJUSTABLE-RATE ADJUSTABLE-RATE MUNICIPAL
REMICS MUTUAL FUNDS BONDS TOTAL
-------------------- ------------------- ---------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMOUNTS DUE OR REPRICING:
Within one year.............................. $25,725 6.46% $ 964 5.36% $ 161 5.00% $ 29,644 6.37%
AFTER ONE YEAR:
One to three years........................... -- -- -- -- -- -- 511 5.10
Three to five years.......................... -- -- -- -- -- -- 9,895 6.05
Five to ten years............................ -- -- -- -- 278 5.33 2,215 6.40
Ten to 20 years.............................. -- -- -- -- -- -- 32,909 6.89
Over 20 years................................ -- -- 4,797 8.94 -- -- 25,294 7.41
------- ------ ------ ------ ------ ----- ------- ------
Total due or repricing after one year....... -- 4,797 8.94 278 5.33 70,824 6.93
------- ------ ------ ------ ------ ----- ------- ------
Total amount due or repricing............... 25,725 6.46% 5,761 8.34% 439 5.21% 100,468 6.77%
Less unearned discounts and premiums, net... -- -- -- --
Mortgage-backed and related securities.... $25,725 $5,761 $ 439 $100,468
======= ====== ====== ========
Average remaining years to maturity............ 25.8 0.0 4.5 20.0
</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,
1999.
<TABLE>
<CAPTION>
AT JUNE 30, 1999
-----------------------------------------------------------
FIXED-RATE ADJUSTABLE-RATE FIXED-RATE
MORTGAGE-BACKED MORTGAGE-BACKED CMOS AND
SECURITIES SECURITIES REMICS
----------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AMOUNTS DUE OR REPRICING:
Within one year............................ $ 269 7.33% $8,832 6.61% $ -- --%
AFTER ONE YEAR:
One to three years......................... 638 6.54 -- -- -- --
Three to five years........................ 1,172 5.87 -- -- -- --
Five to ten years.......................... 71 8.00 -- -- 744 6.90
Ten to 20 years............................ 186 9.00 -- -- -- --
Over 20 years.............................. 64 9.50 -- -- 8,274 6.52
------ ------ ------ ---- ------ ------
Total due or repricing after one year.... 2,131 6.52 -- -- 9,018 6.55
------ ------ ------ ---- ------ ------
Total amounts due or repricing........... 2,400 6.61% 8,832 6.61% 9,018 6.55%
Less unearned discounts and premiums, net..... 19 8 3
------ ------ ------
Mortgage-backed and related securities, net... $2,419 $8,840 $9,021
====== ====== ======
Average remaining years to maturity........... 4.8 21.9 24.3
<CAPTION>
AT JUNE 30, 1999
-----------------------------------------
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............................ $34,357 6.51% $43,458 6.54%
AFTER ONE YEAR:
One to three years......................... -- -- 638 6.54
Three to five years........................ -- -- 1,172 5.87
Five to ten years.......................... -- -- 815 7.00
Ten to 20 years............................ -- -- 186 9.00
Over 20 years.............................. -- -- 8,338 6.54
------- ----- ------- ----
Total due or repricing after one year.... -- -- 11,149 6.55
------- ----- ------- ----
Total amounts due or repricing........... 34,357 6.51% 54,607 6.54%
Less unearned discounts and premiums, net..... (19) 11
------- -------
Mortgage-backed and related securities, net... $34,338 $54,618
======= =======
Average remaining years to maturity........... 21.8 21.5
</TABLE>
-34-
<PAGE> 37
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, 1999, the Company had advances from the FHLB-Chicago
totaling $120.0 million or 25.6% of total assets as compared to $117.1 million
or 26.7% of total assets and $92.1 million or 22.5% of total assets as of June
30, 1998 and 1997, respectively. At June 30, 1999 the Company had $9.5 million
in reverse repurchase agreements. The Company had no reverse repurchase
agreements at June 30, 1998 and 1997, respectively. 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, 1999, $29.0 million will
mature before June 30, 2000. 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,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits.................................... $691,858 $449,609 $432,876
Withdrawals................................. 682,088 466,515 387,593
-------- -------- --------
Net deposits/withdrawals.................... 9,770 (16,906) 45,283
Interest credited on deposits............... 7,325 7,013 6,554
-------- -------- --------
Total increase (decrease) in deposits....... $ 17,095 $ (9,893) $ 51,837
======== ======== ========
</TABLE>
The Company attributes the increase in deposits before interest
credited during fiscal 1999 primarily to the increase in wholesale brokered and
non-brokered certificates of deposit as well as an increase in money market
deposit accounts. 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 $101.2 million at June 30,
1999, as compared to $81.4 million at June 30, 1998. The increase in brokered
deposits is due to attractive rates offered on the brokered deposits. The
average maturity of brokered deposits at June 30, 1999 was four months as
compared to eight months
-35-
<PAGE> 38
at June 30, 1998. The average rate paid on brokered deposits for the fiscal year
ended June 30, 1999 was 5.63% as compared to 6.13% for the fiscal year ended
June 30, 1998.
At June 30, 1999, the Company had outstanding $97.8 million in
certificates of deposit in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
AMOUNT AT
JUNE 30, 1999
--------------
(IN THOUSANDS)
<S> <C>
Three months or less..................................... $51,523
Over three through six months............................ 25,634
Over six through twelve months........................... 19,077
Over twelve months....................................... 1,602
-------
Total................................................ $97,836
=======
</TABLE>
-36-
<PAGE> 39
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 $101.2 million of brokered certificates
of deposit at June 30, 1999, which represent all of the Company's brokered
deposits at June 30, 1999.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------------------------------------------------
1998 1998 1997
--------------------------------- ----------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT OF AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL 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... $ 9,006 3.12% --% $ 7,738 2.85% --% $ 7,105 2.52% --%
NOW.................... 2,789 0.97 1.75 2,701 0.99 1.75 2,594 0.92 1.75
Money market........... 35,495 12.29 4.37 27,995 10.31 5.10 20,730 7.37 5.20
Passbook............... 20,962 7.26 2.92 21,158 7.79 2.93 21,952 7.80 2.98
------ ----- -------- ----- -------- ------
Total................ 68,252 23.64 3.24 59,592 21.94 3.52 52,381 18.61 3.40
CERTIFICATE ACCOUNTS
(TERM): 51,931 17.98 5.06 68,050 25.09 5.79 12,650 4.49 5.37
One to nine months..... 7,759 2.69 5.08 14,290 5.26 5.77 40,309 14.32 5.90
12 to 20 months........ 1,522 0.53 5.55 2,662 0.98 5.83 15,555 5.53 5.73
24 to 36 months........ 2,868 0.99 6.62 2,685 0.99 6.02 19,439 6.90 5.96
38 to 60 months........ -- 0.00 -- -- 0.00 -- 157 0.06 7.96
66 to 96 months........ 156,382 54.17 5.32 124,340 45.74 6.07 141,021 50.09 6.15
------- ----- -------- ----- ------- -----
Wholesale(1)............ 220,462 76.36 5.26 212,027 78.06 5.95 229,131 81.39 6.02
------- ----- -------- ----- ------- -----
Total certificates....
$288,714 100.00% 4.78% $271,619 100.00% 5.42% $281,512 100.00% 5.53%
======== ====== ======== ====== ======== ======
Total deposits.............
</TABLE>
(1) Wholesale certificates of deposit have an average maturity of 4.3 months,
8.0 months and 11.6 months at June 30, 1999, 1998 and 1997, respectively.
-37-
<PAGE> 40
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at June 30, 1999, 1998 and 1997, and the
periods to maturity of the certificate accounts outstanding at June 30, 1999. At
June 30, 1999, brokered certificates of deposit totaled $101.2 million with an
average rate of 5.32%.
<TABLE>
<CAPTION>
AT JUNE 30, PERIOD TO MATURITY FROM JUNE 30, 1999
--------------------------- --------------------------------------------
WITHIN ONE TO
ONE THREE
1999 1998 1997 YEAR YEARS THEREAFTER TOTAL
----- ----- ----- ------ ------ ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CERTIFICATES OF DEPOSIT:
4.99% and less................. $ 36,190 $ 1,033 $ 1,579 $ 31,539 $ 4,057 $ 594 $ 36,190
5.00% to 5.99%................. 162,753 118,081 89,991 153,497 7,770 1,486 162,753
6.00% to 6.99%................. 21,057 92,344 136,808 18,218 2,189 650 21,057
7.00% to 7.99%................. 314 430 619 314 -- -- 314
8.00% to 8.99%................. 148 139 134 10 -- 138 148
-------- -------- -------- -------- ------- ------- --------
Total....................... $220,462 $212,027 $229,131 $203,578 $14,016 $ 2,868 $220,462
======== ======== ======== ======== ======= ======= ========
</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. At June 30, 1999, the
Bank's FHLB-Chicago advances totaled $120.0 million, representing 27.6% of total
liabilities, an increase from the $117.1 million outstanding at 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."
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,
1999, reverse repurchase agreements totaled $9.5 million, representing 2.2% of
total liabilities. At June 30, 1998 and 1997, the Company had no reverse
repurchase agreements outstanding. The Bank has increased its use of reverse
repurchase agreements as a funding source because of the attractive short-term
interest rates offered on reverse repurchase agreements relative to 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.*
-38-
<PAGE> 41
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,
----------------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB-CHICAGO ADVANCES:
Average balance outstanding....................................... $126,518 $107,378 $100,384
Maximum amount outstanding at any month-end during the period..... 132,059 115,573 106,086
Balance outstanding at end of period.............................. 120,044 117,059 92,073
Weighted average interest rate during the period (1).............. 5.81% 6.10% 5.98%
Weighted average interest rate at end of period................... 5.59 5.87 6.01
REVERSE REPURCHASE AGREEMENTS:
Average balance outstanding....................................... $ 4,414 $ -- $ 3,717
Maximum amount outstanding at any month-end during the period..... 18,289 -- 11,652
Balance outstanding at end of period.............................. 9,475 -- --
Weighted average interest rate during the period (1).............. 5.12% --% 5.96%
Weighted average interest rate at end of period................... 5.25% -- --
TOTAL ADVANCES AND REVERSE REPURCHASE AGREEMENTS:
Average balance outstanding....................................... $130,932 $107,378 $104,101
Maximum amount outstanding at any month-end during the period..... 150,348 115,573 111,233
Balance outstanding at end of period.............................. 129,519 117,059 92,073
Weighted average interest rate during the period (1).............. 5.78% 6.10% 5.98%
Weighted average interest rate at end of period................... 5.51 5.87 6.01
</TABLE>
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(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 on a local and national
basis. 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
securities brokerage firms and insurance companies. The Bank also is
experiencing increased competition from national and regional banks and savings
banks as well as national credit card companies as it focuses on obtaining
wholesale funding from sources beyond its primary market area.
SUBSIDIARY ACTIVITIES
The Bank's wholly-owned subsidiary, Hallmark Planning Service, Inc.
("HPS," formerly West Allis Insurance, Inc.), was organized as a Wisconsin
corporation in 1978. During the fiscal year ended June 30, 1999, 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 loss for HPS was ($6,313) and ($8,124) for the fiscal years ended
June 30, 1999 and 1998, respectively.
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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.
The Bank established a wholly-owned subsidiary, Hallmark Financial,
Inc. (d/b/a Major Finance) during fiscal 1999 to provide subprime lending
activities. Major Finance's operations are located in West Allis, Wisconsin. For
a further discussion of the Bank's subprime lending activities, see "Lending
Activities - Subprime Lending."
PERSONNEL
At June 30, 1999, the Bank had 80 full-time employees and 10 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, 1999, 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.
The Small Business Job Protection Act of 1996 ("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
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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 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 was 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.
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.
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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. In fiscal 1998, the Bank received refunds from the Wisconsin Department
of Revenue totaling $177,000 related to audit assessments which had previously
been taken into account in calculating tax expense.
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 Wisconsin Department of Financial
Institutions, Division of Savings Institutions ("DFI"), 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 DFI and the Securities and Exchange Commission ("SEC").
WISCONSIN SAVINGS BANK REGULATION
Regulations adopted by the DFI 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 DFI. Savings banks are required to pay examination
fees and annual assessments to fund the supervisory operations of the DFI. Based
on the assessment rates published by the DFI and the Bank's total assets of
approximately $479.0 million at December 31, 1998, the Bank paid $14,377 in
assessments in the fiscal year ended June 30, 1999.
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 does not exceed 10% of the Bank's total assets, unless
the DFI 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 DFI and
implemented by the Administrator of the DFI, the Bank is limited in the amount
of commercial real estate and commercial business loans it can hold in its loan
portfolio. The DFI approved an increase in the limit for the Bank from 20% to
30% of the Bank's total asset base in March 1999. At June 30, 1999, the Bank had
$77.7 million of such loans in its portfolio which represents 16.5% of the
Bank's asset base of $469.6 million. Management believes that this expanded
regulatory limit will be sufficient to meet the Bank's asset growth and
portfolio diversification objectives in fiscal 2000.*
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 DFI, compliance with capital
requirements and certain other restrictions, savings banks may invest in
residential housing development projects.
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<PAGE> 45
Savings banks may invest in service corporations or subsidiaries with the prior
approval of the DFI, 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.
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, 1999, the Bank's subsidiary operations were not
under any DFI, 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, subject to certain
conditions. At June 30, 1999, 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, 1999, the Bank
maintained 70.39% 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 DFI 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 DFI'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 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 are defined as
primarily short-term liquid assets and U.S. government and U.S. government
agency securities. At June 30, 1999, the Bank's daily liquidity ratio was
17.65%.
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> 46
In addition, FRB 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 (i) on terms which would be available to members
of the general public for similar credit extensions, or (ii) only under the
terms of a benefit or compensation plan which is generally available to
employees of the Bank and its affiliates and does not give preference to or
otherwise distinguish between such employees.
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 DFI 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 DFI 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 $172,355, $173,713 and $347,650 for the fiscal year ended June 30,
1999, 1998 and 1997, respectively. 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 one-time, industry-wide, special assessment, which
resulted in a premium charge of $739,997 for the Bank's 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 any increase in the insurance premium in the
foreseeable future.
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
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<PAGE> 47
Company does not know of any practice, condition or violation that might lead to
the termination of deposit insurance for the Bank.
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, 1999, the Bank had $101.2 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, as well as loan
administration procedures and documentation, approval and reporting
requirements. The real estate lending policies
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<PAGE> 48
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.
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
in 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 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.
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<PAGE> 49
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, 1999, the Bank's ratio of Tier 1 capital to total assets was 6.86%, or
3.86 percentage points in excess of the minimum leverage capital requirement,
the Bank's Tier 1 capital to risk-weighted assets was 11.60%, or 7.60 percentage
points in excess of the FDIC requirement, and the Bank's total capital to
risk-weighted assets was 12.56%, or 4.56 percentage points in excess of the FDIC
requirement.
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 DFI
determines that the financial condition, history, management or earning
prospects of a savings bank are not adequate, the DFI may require a higher
minimum capital level for the savings bank. If a savings bank's capital ratio
falls below the required level, the DFI may direct the savings bank to adhere to
a specific written plan established by the DFI 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, 1999, the Bank's total capital, as calculated under Wisconsin law, was
$34.7 million, or 7.35% of total assets, which was 1.35% 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 February 23, 1999, 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 by the new rules.
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, 1999, 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, 1999.
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
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<PAGE> 50
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 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 $6.5 million at June 30,
1999.
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, 1999, the Bank had
$120.0 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 of a bank located outside the State
of Wisconsin or of substantially all of the assets of such a bank, 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.
-48-
<PAGE> 51
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 DFI. The DFI 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 acquirer, 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 could 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
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<PAGE> 52
that the special assessment be applied against the SAIF-assessable deposits held
by institutions as of March 31, 1995. 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 $740,000. 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 $450,000 or $0.16 per share. As described below,
with the recapitalization of the SAIF/BIF and SAIF regular premiums will be
comparable, 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.
In December 1997, the Bank purchased a former Security Bank, S.S.B.
facility in Glendale, Wisconsin for $2.5 million. The Bank intends to finalize
plans for a new full-service banking facility at the Glendale location in fiscal
2000.* The Bank currently leases a portion of the Glendale facility to various
tenants and operates certain administrative functions out of the remaining
portion of such facility. A list of the Bank's administrative and full-service
offices is as follows:
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<PAGE> 53
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTIES AND
YEAR IMPROVEMENTS AT
OFFICE LOCATION OPENED JUNE 30, 1999
- --------------- ------ -----------------
<S> <C> <C>
West Allis/Home Office 1919 $ 259,000
7401 West Greenfield Avenue
West Allis, WI 53214
New Berlin Office 1989 951,000
15600 West Cleveland Avenue
New Berlin, WI 53151
Greenfield Office 1988 999,000
5101 South 27th Street
Greenfield, WI 53221
Glendale Office 1998 2,533,000
5555 N. Port Washington Road
Glendale, WI 53217
----------
Net Book Value: $4,742,000
==========
</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 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. During fiscal 1999,
Milwaukee County foreclosed on the property, which terminated the Bank's
interest in the property, if any. 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.*
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<PAGE> 54
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.
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, 1999.
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 61, 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 51, 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 39, 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.
ELIZABETH S. BORST, age 37, is Senior Vice President of the Company and
has been Senior Vice President of Sales and Marketing of the Bank since November
1995. Ms. Borst served 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> 55
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 16 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, 1999, there were 329 holders of record and an
estimated 1,279 beneficial holders owning a total of 2,731,941 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> 56
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,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------- ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets......................................... $469,659 $438,374 $409,820 $377,157 $259,477
Loans receivable, net................................ 281,120 280,889 273,556 224,807 142,321
Cash and cash equivalents............................ 8,599 8,184 8,755 4,825 6,820
Securities available-for-sale........................ 100,468 66,445 29,518 37,284 33,108
Investment securities and certificates of deposit.... -- 388 780 978 590
Mortgage-backed and related securities............... 54,618 65,282 85,430 97,332 66,781
Deposits............................................. 288,714 271,619 281,512 229,675 152,167
FHLB advances and other borrowings................... 129,519 117,059 92,073 113,954 76,779
Shareholders' equity................................. 34,496 33,453 29,672 27,011 25,260
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------
1999 1997 1997 1996 1995
--------- ---------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income................................ $34,298 $32,227 $29,823 $22,894 $14,560
Total interest expense............................... 22,814 21,586 20,210 15,348 8,743
------- ------- --------- --------- -------
Net interest income................................ 11,484 10,641 9,613 7,546 5,817
Provision for loan losses............................ 480 800 650 367 248
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 11,004 9,841 8,963 7,179 5,569
Non-interest income:
Loan servicing and loan-related fees............... 334 349 251 233 238
Depository fees and service charges................ 451 429 478 494 464
Gain on sale of loans.............................. 892 297 95 75 23
Gain (loss) on sale of securities and
mortgage-backed and related securities, net...... 68 (8) 7 72 (102)
Other non-interest income.......................... 337 141 197 388 375
--------- -------- -------- -------- --------
Total non-interest income............................ 2,082 1,208 1,028 1,262 998
Total non-interest expense........................... 8,451 6,847 7,046 5,554 4,785
-------- -------- -------- -------- -------
Income before income tax expense..................... 4,635 4,202 2,945 2,887 1,782
Income tax expense................................... 1,505 1,403 1,026 1,009 708
-------- -------- -------- -------- --------
Net income....................................... $ 3,130 $ 2,799 $ 1,919 $ 1,878 $ 1,074
======== ======== ======== ========= ========
Earnings per share (basic)....................... $ 1.13 $ 1.01 $ 0.71 $ 0.70 $ 0.38
======== ======== ======== ========= ========
Earnings per share (diluted)..................... $ 1.10 $ 0.97 $ 0.68 $ 0.68 $ 0.37
======== ======== ======== ========= ========
</TABLE>
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<PAGE> 57
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS
Return on average assets................................. 0.67% 0.67% 0.48% 0.60% 0.51%
Return on average equity................................. 9.08 8.89 6.83 7.17 4.39
Interest rate spread during period(1).................... 2.18 2.22 2.06 1.97 2.34
Net interest margin(1)................................... 2.54 2.63 2.48 2.45 2.89
Non-interest expense to average assets................... 1.81 1.64 1.77 1.76 2.29
Non-interest income to average assets.................... 0.44 0.29 0.26 0.40 0.48
Average interest-earning assets to
average interest-bearing liabilities.................... 1.08x 1.08x 1.08x 1.10x 1.13x
ASSET QUALITY RATIOS
Non-performing loans to gross loans(2)................... 0.81% 0.49% 0.22% 0.04% 0.09%
Non-performing assets to total assets(2)................. 0.70 0.32 0.16 0.03 0.06
Allowance for loan losses to non-performing loans........ 109.19 166.36 282.37 1,153.27 666.43
Ratio of allowance for loan losses to gross loans........ 0.89 0.81 0.62 0.50 0.62
Net charge-offs to average gross loans................... 0.05 0.08 0.04 0.05 0.05
CAPITAL RATIOS(3)
Average shareholders' equity to average assets........... 7.36 7.54 7.07 8.30 11.70
Shareholders' equity to total assets at end of period.... 7.34 7.63 7.24 7.16 9.73
OTHER DATA
Number of deposit accounts............................... 15,441 16,054 18,064 18,070 19,285
Number of real estate loans outstanding.................. 3,306 3,620 3,824 3,654 2,922
Number of real estate loans serviced..................... 3,687 4,063 4,360 4,111 3,419
Number of consumer loans outstanding..................... 3,011 3,229 3,310 3,705 5,322
Number of commercial loans outstanding................... 129 90 32 -- --
Loan originations/purchases.............................. $258,960 $162,637 $118,108 $140,313 $70,175
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> 58
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
GENERAL
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," "intend" 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.
Hallmark Capital Corp. (the "Company") is a holding company
incorporated under the laws of the State of Wisconsin and is engaged in the
financial services business through its wholly-owned subsidiary, West Allis
Savings Bank (the "Bank"), a Wisconsin state-chartered stock savings bank
headquartered in Milwaukee, Wisconsin. The Company's initial public offering was
consummated in December 1993, and the Company acquired all of the outstanding
common stock of the Bank issued in the mutual to stock conversion of the Bank
(the "Conversion") on December 30, 1993.
The Company's primary strategy since the Conversion has been to focus
on effectively utilizing the capital acquired in the Conversion through asset
growth and asset portfolio diversification into higher-yielding assets. This
strategy resulted in an increase in the Company's asset size from $179.6 million
at June 30, 1994 to $469.6 million at June 30, 1999. The Company's asset growth
has come primarily through (i) the origination and purchase of mortgage loans
(principally loans secured by one-to-four family owner-occupied homes) within
and outside of the Company's primary lending area, (ii) the purchase of
mortgage-backed and related securities, and (iii) the origination and purchase
of commercial real-estate and business loans within and outside of the Company's
primary lending area. This asset growth was funded through significant increases
in Federal Home Loan Bank ("FHLB") advances and other borrowings, and increases
in deposits consisting primarily of brokered and non-brokered wholesale
deposits. The Company's asset portfolio diversification has been, 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 has focused 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), to
either replace or supplement lower-yielding one-to-four family mortgage loans
and principal run-off from the mortgage securities portfolio.* As part of its
asset portfolio diversification strategy, the Company established a new
commercial lending division in fiscal 1997 to originate commercial/industrial
real estate term loans, construction loans, equipment leasing, inventory/
equipment/receivables financing, lines of credit, letters of credit and
government loan programs both within and outside of the Company's primary
lending area. In fiscal 2000, the Company intends to continue its asset
portfolio diversification strategy while maintaining a steady rate of growth of
its asset base.*
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In fiscal 2000, the Company's business strategy is to continue its
focus on increasing net interest income and generating additional non-interest
income from existing and new revenue sources.* In order to increase net interest
income, the Company intends to continue to utilize its asset portfolio
diversification strategy of selling lower-yielding assets such as securities and
one-to-four family mortgage loans that conform to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("Fannie Mae")
guidelines in the secondary market to provide liquidity to fund higher-yielding
one-to-four family non-conforming mortgage, multi-family, commercial real estate
and commercial business 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 conforming mortgage loans will decrease
the proportion of the gross loan portfolio represented by such loans and will
increase non-interest income as a result of increased gains on the sales of such
loans.*
Portfolio diversification in fiscal 2000 also will include an increased
level of purchases of loans or participation interests in loans originated by
other lenders both within and outside the Company's primary lending area.* The
Company anticipates that slightly over half of the asset growth in fiscal 2000
will come from residential and commercial loan and participation interest
purchases outside of its primary lending area.* Loans purchased, or
participation interests purchased, which relate to properties or business assets
located outside of the Company's primary lending area will primarily consist of
higher-yielding non-conforming one-to-four family, multi-family, commercial real
estate, multi-family construction, commercial real estate construction and
commercial business loans.* In fiscal 2000, the Company projects total loan and
participation interest purchases which relate to residential and commercial
properties or business assets to be approximately $90 million compared to $56.9
million in fiscal 1999.* The Company anticipates that approximately $50 million
of such amount will relate to one-to-four family non-conforming mortgage loans
secured by properties located outside of the Company's primary lending area and
the balance (approximately $40 million) will relate to the purchase of
multi-family, multi-family construction, commercial real estate, commercial
construction and commercial business loans secured by properties and assets
located both inside and outside its primary lending area.* In deciding whether
or not to purchase a loan or participation interest in a loan secured by
properties or business assets located outside of the Company's primary lending
area, management of the Company has applied, and will continue to apply,
underwriting guidelines at least as strict as those applicable to the
origination of similar loans within its primary lending area.*
In fiscal 2000, the Company will evaluate opportunities to purchase
one-to-four family mortgage loans which conform to FHMLC and Fannie Mae
underwriting guidelines and non-conforming portfolio loans which are not sold in
the secondary agency market due to underwriting characteristics that do not
conform to the secondary agency market.* Purchases of conforming and
non-conforming one-to-four family mortgage loans will include lending
opportunities on a national basis. One-to-four family non-conforming loans also
will be originated by the Company within its primary lending area.
In fiscal 2000, the Company also intends to continue increasing the
activities of its commercial lending division as another element of its overall
portfolio diversification strategy.* The focus of the Company's commercial
lending operation will be the origination and purchase of small business loans
and leases.* During fiscal 1999, the Company originated and purchased $137.7
million of multi-family, commercial real estate, multi-family construction,
commercial construction and commercial business loans, lines of credit and
leases. Management currently projects that the commercial lending division will
increase its level of originations and purchases to approximately $150 million
in new commercial loans, lines of credit and leases during fiscal 2000.*
Management believes the commercial lending component of its operations will
benefit the Company longer term and contribute to a long-term increase in net
income and return on equity.* The commercial lending division also has enhanced
the Company's core deposit base, through the establishment of new deposit
relationships with the commercial lending division's customers.
The Company also intends to enhance earnings in fiscal 2000 through
non-interest fee income generated from the Company's new mortgage banking
subsidiary, Hallmark Financial, Inc. (d/b/a Major Finance).* Major Finance was
established at the end of fiscal 1999 to provide lending activities involving
higher credit risk financial services (also known as subprime lending). Major
Finance currently acts as a broker of non-conforming subprime residential and
commercial mortgage loans. The Company anticipates that the majority of Major
Finance's subprime lending activity will relate to residential mortgage loans as
opposed to commercial real estate loans in
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fiscal 2000.*. As a broker, Major Finance interviews prospective borrowers,
completes a loan application, collects and verifies financial data on the
borrower and submits the loan file to a potential lender or investor. The lender
or investor makes the final underwriting decision and closes the loan in their
own name. Major Finance receives a fee directly from the lender or investor for
its brokering services but Major Finance does not fund or retain the loan in its
portfolio. The Company intends to evaluate opportunities to broker subprime
loans both within and outside of its primary market area. Management estimates
that Major Finance will broker approximately $7.5 million in subprime loans,
generating approximately $175,000 in fee income of such loans in fiscal 2000.*
The borrowers on such loans typically have credit deficiencies on their credit
history, such as late mortgage loan payments, low credit scores, foreclosures or
bankruptcies. Other non-conforming factors which may result in a loan being
classified as subprime include higher debt-to-income ratios, no down payment,
limited documentation, high cash-out refinances or no verification of the
borrower's income or assets. A secondary market of private investors and
mortgage bankers provides a mechanism for the underwriting, funding, sale and
servicing of subprime loans. Due to the higher degree of credit risk inherent in
this type of lending, subprime residential mortgage loan rates generally are
higher yielding compared to conventional one-to-four family mortgage rates, and
if sold in the secondary market, a higher origination fee and yield spread
premium are generally paid in connection with such loans.
The Company currently intends to broker all subprime loans originated
by Major Finance on a service released basis in fiscal 2000.* However, in the
event management decides to originate, service and retain any subprime loans in
its portfolio in fiscal 2000, instead of solely brokering such loans, a risk
assessment and risk management policy would be established in advance and
approved by the Company's Board of Directors. See "Lending Activities - Subprime
Lending."
During fiscal 2000, the Company also intends to increase its
non-interest income by expanding the residential lending and commercial banking
fee income producing divisions.* The Company expects one-to-four family mortgage
loan originations to remain strong despite the generally higher level of market
interest rates.* It is currently anticipated that substantially all of the
30-year fixed rate conforming one-to-four family mortgage loans originated in
fiscal 2000 will be sold in the secondary market resulting in income from gains
on loans sold.* The Company also expects increased fee income from the
commercial banking division resulting from a growth in business deposit
relationships and loan originations.* The Company expects its insurance
subsidiary, Hallmark Planning Services, Inc., to continue to generate fee income
from investment product and annuity sales.* The Company also has recently
implemented a program for mortgage contract cash processing within the
commercial lending division, a service intended to generate fee income.* The
Bank acts as a partial sub-servicer, providing a cash/processing function for
nationally-originated commercial real estate loans.
The Company also intends to expand its community "relationship banking"
focus by targeting cross sales opportunities to individuals and businesses
through customer segmentation and database marketing, planning the opening of a
new retail location at the Company's headquarters in Glendale, Wisconsin, and
expanding the delivery of products and services through the Internet.*
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1999 AND
1998
GENERAL
Net income for the fiscal year ended June 30, 1999 increased 11.8% to
$3.1 million from $2.8 million for fiscal 1998. The increase in net income was
primarily attributable to an increase in net interest income and non-interest
income. Net interest income before the provision for losses on loans increased
to $11.5 million for the fiscal year ended June 30, 1999 from $10.6 million for
fiscal 1998, primarily as a result of higher average interest-earning assets
during fiscal 1999 as compared to fiscal 1998. Non-interest income increased by
$874,000 to $2.1 million for the fiscal year ended June 30, 1999 from $1.2
million for fiscal 1998. The increase in non-interest income was primarily due
to a increase in gain on the sale of loans which increased $595,000 to $892,000
for the fiscal year ended June 30, 1999 from $297,000 for fiscal 1998, an
increase in other non-interest income of $134,000 to $226,000 for the fiscal
year ended June 30, 1999 from $92,000 for fiscal 1998, an increase in gains on
the sale of securities available-for-sale and mortgage-backed and related
securities available-for-sale to $68,000 for the fiscal year ended June 30, 1999
from a loss of $8,000 for fiscal 1998, an increase in insurance
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commissions of $41,000 to $90,000 for the fiscal year ended June 30, 1999 from
$49,000 for fiscal 1998 and an increase in service charges on deposit accounts
of $22,000 to $451,000 for the fiscal year ended June 30, 1999 from $429,000 for
fiscal 1998. The increases were partially offset by a decrease in loan servicing
fees of $40,000 to $21,000 for the fiscal year ended June 30, 1999 from $61,000
for fiscal 1998. Non-interest expense increased $1.7 million to $8.5 million for
the fiscal year ended June 30, 1999 from $6.8 million for fiscal 1998, primarily
as a result of an increase in compensation and benefits expense of $1.0 million
to $5.0 million for the fiscal year ended June 30, 1999 from $4.0 million for
fiscal 1998, an increase in occupancy and equipment of $447,000 to $1.6 million
for the fiscal year ended June 30, 1999 from $1.2 million for fiscal 1998 and an
increase other non-interest expense of $123,000 to $1.3 million for the fiscal
year ended June 30, 1999 from $1.2 million for fiscal 1998. The increase in
non-interest expense was partially offset by a decrease in marketing expense of
$28,000 to $352,000 for the fiscal year ended June 30, 1999 from $380,000 for
fiscal 1998. Net income also was increased by a decrease in the provision for
losses on loans to $480,000 for fiscal 1999 from $800,000 for fiscal 1998.
Return on average equity increased to 9.08% for the fiscal year ended
June 30, 1999 from 8.89% for fiscal 1998. Return on average assets was .67% for
the fiscal year ended June 30, 1999 and 1998. The increase in return on average
equity was primarily due to the increases in net income and treasury stock. The
Company's principal investment focus during the fiscal year ended June 30, 1999
was the origination and purchase of mortgage and commercial loans. The asset
growth primarily was funded through increases in FHLB advances, securities sold
under agreements to repurchase, wholesale certificates of deposit, money market
deposits and sales of loans in the secondary market.
NET INTEREST INCOME
Net interest income increased 7.9% to $11.5 million for fiscal 1999
from $10.6 million for fiscal 1998. Interest income increased $2.1 million in
fiscal 1999, while interest expense increased $1.2 million. The level of net
interest income primarily reflects a 11.8% increase in average interest-earning
assets during fiscal 1999 and a 5.1% increase in the excess of the Company's
average interest-earning assets over average interest-bearing liabilities to
$30.5 million for fiscal 1999 from $29.0 million for fiscal 1998, partially
offset by a decrease in interest rate spread to 2.18% for fiscal 1999 from 2.22%
for fiscal 1998. The decreased interest rate spread for fiscal 1999 is primarily
a result of the Company's refinancing of loans that carry lower interest rates.
INTEREST INCOME
Interest income increased 6.4% to $34.3 million for fiscal year 1999
from $32.2 million for fiscal 1998. The increase in interest income was the
result of an increase in average interest-earning assets of 11.8% to $452.0
million for fiscal 1999 from $404.3 million for fiscal 1998, partially offset by
a decrease of 38 basis points in the yield on interest-earning assets to 7.59%
for fiscal 1999 from 7.97% for fiscal 1998. Interest income on loans decreased
1.0% to $23.5 million for fiscal 1999 from $23.8 million for fiscal 1998. The
decrease was the result of a decrease in average yield to 8.27% for fiscal 1999
from 8.49% for fiscal 1998, partially offset by an increase in average gross
loans of 1.6% to $284.7 million for fiscal 1999 from $280.2 million for fiscal
1998. Gross loans increased primarily as a result of the Company retaining
substantially all of its adjustable and short-term fixed rate loan originations,
purchasing more loans in the secondary market and increases in multi-family and
commercial components of the portfolio. The decrease in yield is attributable to
the increase in loans refinanced at lower interest rates. Interest income on
mortgage-backed securities decreased 63.4% to $1.0 million for fiscal 1999 from
$2.8 million for the comparable 1998 period. The decrease was primarily due to a
decrease in average balances to $14.6 million for fiscal 1999 from $40.0 million
for fiscal 1998, partially offset by an increase in average yield to 7.08% for
the 1999 period from 7.06% for the 1998 period. Interest income on
mortgage-related securities increased 11.5% to $2.8 million for fiscal 1999 from
$2.5 million for fiscal 1998. The increase was primarily due to an increase in
average balances to $43.0 million for fiscal 1999 from $37.2 million for fiscal
1998, partially offset by a decrease in average yield to 6.59% for the 1999
period from 6.84% for the 1998 period. The increase in average yield on
mortgage-backed securities was primarily due to the higher level of repayments
on the adjustable rate securities portion of this portfolio which carry lower
interest rates. The decrease in average yield on mortgage related securities was
primarily due to the accelerated amortization of purchase premiums due to faster
than projected principal repayments during fiscal 1999. The decline in average
balances of mortgage-backed securities and is due to management's decision to
increase the securities available-for-sale portfolio. Interest
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income on investment securities and securities available-for-sale increased
140.6% to $6.5 million for fiscal 1999 from $2.7 million for fiscal 1998. The
increase was primarily due to an increase in average balance to $103.2 million
for fiscal 1999 from $41.2 million for fiscal 1998, partially offset by a
decrease in average yield to 6.25% for the 1999 period from 6.51% for the 1998
period. The lower average yield was primarily attributable to the lower interest
rate environment during the 1999 period as compared to the 1998 period and the
short-term maturity of the securities in this portfolio.
INTEREST EXPENSE
Interest expense increased 5.7% to $22.8 million for fiscal 1999 from
$21.6 million for fiscal 1998. The increase was primarily the result of an 12.3%
increase in the average amount of interest-bearing liabilities to $421.5 million
for fiscal 1999 compared to $375.3 million for fiscal 1998, partially offset by
a decrease in the average rate paid on interest-bearing liabilities to 5.41% for
the 1999 period from 5.75% for the 1998 period. The increased balances of
certificates of deposit (including brokered deposits), money market deposit
accounts, NOW accounts and borrowings at lower average interest rates was the
primary reason for the decrease in the average rate paid on the interest-bearing
liabilities for fiscal 1999 as compared to fiscal 1998. Interest expense on
deposits increased 1.4% to $15.2 million for fiscal 1999 from $15.0 million for
the comparable 1998 period. The increase was the result of an increase in
average balances of 8.6% to $287.4 million for fiscal 1999 from $264.8 million
for the comparable 1998 period, partially offset by a decrease in the average
rate paid to 5.28% for the 1999 period from 5.65% for the 1998 period. The
increase in deposits was primarily due to an increase of 5.7% in certificates of
deposit (including brokered deposits) to $228.0 million for fiscal 1999 from
$215.7 million for the 1998 period, with a decrease in the average rate paid on
such deposits to 5.60% for the 1999 period from 6.01% for the 1998 period. Money
market deposit accounts increased 41.0% to $35.6 million for fiscal 1999 from
$25.2 million for the comparable 1998 period, with a decrease in the average
rate paid on such deposits to 4.88% for the 1999 period from 5.23% for the 1998
period. Money market deposit accounts increased primarily due to aggressive
marketing and a competitive rate offered during fiscal 1999. NOW accounts
increased 4.9% to $2.8 million for fiscal 1999 from $2.6 million for the
comparable 1998 period, with an increase in average rate paid to 1.74% for the
1999 period from 1.71% for the 1998 period. 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 $228.0 million in the
average balance of certificates of deposit for fiscal 1999, $101.5 million, or
44.5%, represented brokered certificates of deposit compared to $81.4 million,
or 37.8%, for the 1998 period. The average rate paid on brokered certificates of
deposit decreased to 5.63% for fiscal 1999 from 6.13% for the comparable 1998
period. The decrease was primarily due to the lower interest rate environment
during the 1999 period as compared to the 1998 period. Interest on borrowings
(FHLB advances and reverse repurchase agreements) increased 15.7% to $7.6
million for fiscal 1999 from $6.5 million for the comparable 1998 period. The
increase was primarily due to the increase in average balance to $131.2 for
fiscal 1999 from $107.4 for the comparable 1998 period, partially offset by a
decrease in average rate paid to 5.78% for fiscal 1999 from 6.10% for the 1998
period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans decreased to $480,000 for fiscal 1999
from $800,000 for fiscal 1998. 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 general economic
conditions. Management anticipates that as the Company's volume of multi-family
and commercial/non-residential real estate 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.* Based on management's
evaluation of the loan portfolio and the increase in gross loans during fiscal
1999, the allowance for losses on loans increased 13.7% to $2.6 million at June
30, 1999 compared to $2.3 million at June 30, 1998. This increase was primarily
the result of the increase in the multi-family, multi-family construction,
commercial real estate and commercial loan components of the gross loan
portfolio which carry a greater degree of inherent credit risk as compared to
one-to-four family mortgage lending and also due to an increase in
non-performing loans. The ratio of allowance for loan losses to gross loans
increased to 0.89% at June 30, 1999 from 0.81% at June 30, 1998. The amount of
non-performing loans at June 30, 1999 was $2.4 million or 0.81% of gross loans,
compared to $1.4 million or 0.50% of gross loans at June 30, 1998. The increase
in non-performing loans during fiscal 1999 primarily relates to the default of a
commercial real-estate loan located in the Bank's primary lending area with a
balance of $1.1 million.
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NON-INTEREST INCOME
Non-interest income increased 72.4% to $2.1 million for fiscal 1999
from $1.2 million for the comparable 1998 period. The largest components of the
increase were an increase in gains on the sale of loans to $892,000 for fiscal
1999 from $297,000 for the comparable 1998 period, an increase in service
charges on loans to $334,000 for fiscal 1999 from $288,000 for the comparable
1998 period, an increase in service charges on deposit accounts to $451,000 for
fiscal 1999 from $429,000 for the comparable 1998 period, an increase in gains
on the sale of securities and mortgage-backed and related securities to $68,000
for fiscal 1999 from a loss of $8,000 for the comparable 1998 period, an
increase in insurance commissions to $90,000 for fiscal 1999 from $49,000 for
the comparable 1998 period and an increase in other non-interest income to
$226,000 for fiscal 1999 from $92,000 for the comparable 1998 period. The
increase in gains on the sale of loans reflects the increase in long-term fixed
rate loans sold into the secondary market during the 1999 period as compared to
the 1998 period due to a higher level of refinanced loans. Partially offsetting
the increases in non-interest income was a decrease in loan servicing fees to
$21,000 for fiscal 1999 from $61,000 for the comparable 1998 period. The
decrease in loan servicing fees was due to a decrease in the loans serviced due
to an increase in prepayments on the serviced loans as well as accelerated
amortization of the mortgage servicing right asset based on the decreasing
balance of the underlying assets.
NON-INTEREST EXPENSE
Non-interest expense increased 23.4% to $8.5 million for fiscal 1999
from $6.8 million for the comparable 1998 period. The increase was primarily due
to an increase in compensation and benefits expense of $1.0 million to $5.0
million for fiscal 1999 from $4.0 million for the comparable 1998 period, an
increase in occupancy and equipment expense of $447,000 to $1.6 million for
fiscal 1999 from $1.2 million for the comparable 1998 period and an increase in
other non-interest expense of $123,000 to $1.3 million for fiscal 1999 from $1.2
million for the comparable 1998 period. The increase in non-interest expense was
partially offset by a decrease in marketing expense of $28,000 to $352,000 for
fiscal 1999 from $380,000 for the comparable 1998 period. The increase in
compensation and benefits expense primarily relates to higher salary levels, an
increase in the number of full time equivalent employees and an increase in
incentive compensation related to the increased volume of loans sold into the
secondary market. The increase in occupancy and equipment expense primarily
relates to the addition of an administrative facility and increased purchases of
bank equipment. The increase in other non-interest income is primarily due to
increases in printing, office supplies, organization dues, legal and other
miscellaneous expenses.
INCOME TAX EXPENSE
Income tax expense increased to $1.5 million for fiscal 1999 from $1.4
million for fiscal 1998. 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, 1998 AND
1997
GENERAL
Net income for the fiscal year ended June 30, 1998 increased 45.9% to
$2.8 million from $1.9 million for fiscal 1997. 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 $10.6 million for
the fiscal year ended June 30, 1998 from $9.6 million for fiscal 1997, primarily
as a result of higher average interest-earning assets during fiscal 1998 as
compared to fiscal 1997. Non-interest income increased by $180,000 to $1.2
million for the fiscal year ended June 30, 1998 from $1.0 million for fiscal
1997. The increase in non-interest income was primarily due to a increase in
gain on the sale of loans which increased $202,000 to $297,000 for the fiscal
year ended June 30, 1998 from $95,000 for fiscal 1997 and a increase in service
charges on loans of $123,000 to $288,000 for fiscal year ended June 30, 1998
from $165,000 for fiscal 1997. Also, other non-interest income increased $5,000
to $92,000 for the fiscal year ended June 30, 1998 from $87,000 for fiscal 1997.
The increases were offset by a
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decrease in service charges on deposit accounts of $49,000 to $429,000 for the
fiscal year ended June 30, 1998 from $478,000 for fiscal 1997, a decrease in
insurance commissions which decreased $61,000 to $49,000 for the fiscal year
ended June 30, 1998 from $110,000 for fiscal 1997 and a decrease in loan
servicing fees which decreased $25,000 to $61,000 for the fiscal year ended June
30, 1998 from $86,000 for fiscal 1997. Also, gains on the sale of securities and
mortgage-backed and related securities decreased $15,000 to a loss of $8,000 for
the fiscal year ended June 30, 1998 from a gain of $7,000 for fiscal 1997.
Non-interest expense decreased $200,000 to $6.8 million for the fiscal year
ended June 30, 1998 from $7.0 million for fiscal 1997, 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 for the fiscal year ended June 30, 1997
and a decrease in deposit insurance premiums of $174,000 to $174,000 for the
fiscal year ended June 30, 1998 from $348,000 for fiscal 1997. The decreases
were offset by an increase in compensation and benefits expense of $464,000 to
$4.0 million for the fiscal year ended June 30, 1998 from $3.5 million for
fiscal 1997, an increase in occupancy and equipment of $195,000 to $1.2 million
for the fiscal year ended June 30, 1998 from $1.0 million for fiscal 1997 and a
increase in marketing expense of $52,000 to $380,000 for the fiscal year ended
June 30, 1998 from $328,000 for fiscal 1997. Net income also was reduced by an
increase in the provision for losses on loans to $800,000 for fiscal 1998 from
$650,000 for fiscal 1997.
Return on average equity increased to 8.89% for the fiscal year ended
June 30, 1998 from 6.83% for fiscal 1997. Return on average assets increased to
.67% for the fiscal year ended June 30, 1998 from .48% for fiscal 1997. The
increases in return on average equity and average assets resulted primarily from
a one-time after-tax charge in fiscal 1997 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 for fiscal 1997 would have been 8.43% and .60%, respectively.
The Company's principal investment focus during the fiscal year ended June 30,
1998 was the origination and purchase of mortgage and commercial loans both
within and outside of the Company's primary lending area. In addition, in fiscal
1999, the Company intends to continue increasing the activities of its
commercial lending division as another element of the overall portfolio
diversification strategy.* The focus of the Company's commercial lending
operation will be small business loans and leases. Management currently
anticipates that the commercial lending division will generate approximately $40
million in new commercial loans/leases during fiscal 1999.* Management believes
that the commercial lending component of its operations will benefit the Company
longer term, and should contribute to a long-term increase in net income and
return on equity.* The commercial lending division also has enhanced the
Company's core deposit base, through the establishment of new deposit
relationships with the commercial lending division's customers. As of June 30,
1998, commercial deposits totaled $5.9 million or 2.16% of the Company's core
deposit base. The asset growth primarily was funded through increases in FHLB
advances and money market deposits and sales of loans in the secondary market.
NET INTEREST INCOME
Net interest income increased 10.7% to $10.6 million for fiscal 1998
from $9.6 million for fiscal 1997. Interest income increased $2.4 million in
fiscal 1998, while interest expense increased $1.4 million. The level of net
interest income primarily reflects a 4.2% increase in average interest-earning
assets during fiscal 1998, a 1.2% increase in the excess of the Company's
average interest-earning assets over average interest-bearing liabilities to
$29.0 million for fiscal 1998 from $28.7 million for fiscal 1997, and by an
increased interest rate spread to 2.22% for fiscal 1998 from 2.06% for fiscal
1997. The increased interest rate spread for fiscal 1998 is a result of the
Company's origination and purchase of multi-family, commercial real estate and
commercial business loans that carry higher interest rates than one-to-four
family loans and mortgage-backed and related securities.
INTEREST INCOME
Interest income increased 8.1% to $32.2 million for fiscal 1998 from
$29.8 million for fiscal 1997. The increase in interest income was the result of
an increase in average interest-earning assets of 4.2% to $404.3 million for
fiscal 1998 compared to $388.1 million for fiscal 1997 and an increase of 29
basis points in the yield on interest-earning assets to 7.97% for fiscal 1998
from 7.68% for fiscal 1997. Interest income on loans increased 14.7% to $23.8
million for fiscal 1998 from $20.7 million for fiscal 1997. The increase was the
result of an increase in the Company's average gross loans of 10.3% to $280.2
million for fiscal 1998 from $254.1 million for
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fiscal 1997 and an increase in average yield to 8.49% for fiscal 1998 from 8.16%
for fiscal 1997. Gross loans increased in fiscal 1998 compared to fiscal 1997
primarily as a result of the Company retaining all of its originated adjustable
rate loans and purchasing loans from outside of its primary market. 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 20.5% to $2.8 million for fiscal 1998 from $3.6 million for
fiscal 1997. The decrease was primarily due to a decrease in average balances to
$40.0 million for fiscal 1998 from $50.4 million for fiscal 1997, partially
offset by an increase in average yield to 7.06% for fiscal 1998 from 7.05% for
fiscal 1997. The decrease in mortgage-backed securities is expected to continue
in fiscal 1999 as the Company will use the principal prepayments to fund the
asset portfolio diversification.* Interest income on mortgage-related securities
decreased 5.5% to $2.5 million for fiscal 1998 from $2.7 million for fiscal
1997. The decrease was primarily due to a decrease in average balances to $37.2
million for fiscal 1998 from $40.5 million for fiscal 1997, partially offset by
a increase in average yield to 6.84% for fiscal 1998 from 6.65% for fiscal 1997.
Interest income on investment securities and securities available-for-sale
increased 8.3% to $2.7 million for fiscal 1998 from $2.5 million for fiscal
1997. The increase was primarily due to a increase in average balances to $41.2
million for fiscal 1998 from $37.9 million for fiscal 1997 offset by a decrease
in yield to 6.51% for fiscal 1998 from 6.54% for fiscal 1997. The lower average
yield was primarily attributable to a larger portion of the average balances
maintained in shorter-term investments that carry lower yields. The interest
rate environment for fiscal 1998 was marked by decreasing interest rates,
especially longer-term interest rates. The lower longer-term interest rates also
resulted in increased refinancing of one-to-four family mortgage loans and
mortgage-backed and related securities.
INTEREST EXPENSE
Interest expense increased 6.8% to $21.6 million for fiscal 1998 from
$20.2 million for fiscal 1997. The increase was the result of a 4.4% increase in
the average amount of interest-bearing liabilities to $375.3 million for fiscal
1998 compared to $359.4 million for fiscal 1997 and an increase in the average
rate paid on interest-bearing liabilities to 5.75% for fiscal 1998 from 5.62%
for fiscal 1997. The increased average 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 1998 as compared to fiscal 1997. Interest expense on deposits increased
7.7% to $15.0 million for fiscal 1998 from $13.9 million for fiscal 1997. The
increase was the result of an increase in average balances of 5.1% to $264.8
million for fiscal 1998 from $251.8 million for fiscal 1997 and an increase in
the average rate paid on deposits to 5.65% for fiscal 1998 from 5.52% for fiscal
1997. The increase in deposits was primarily due to an increase of 2.2% in the
average outstanding balance of certificates of deposit to $215.7 million for
fiscal 1998 compared to $211.0 million in fiscal 1997 and an increase in average
rate paid on certificates of deposit to 6.01% for fiscal 1998 from 5.86% for
fiscal 1997. Average money market deposits increased 63.4% to $25.2 million for
fiscal 1998 compared to $15.4 million in fiscal 1997 and the average rate paid
on such deposits increased to 5.23% for fiscal 1998 from 5.21% for fiscal 1997.
Also, NOW accounts increased 10.9% to $2.6 million for fiscal 1998 compared to
$2.4 million for fiscal 1997 and the average rate paid on such accounts
decreased to 1.71% for fiscal 1998 from 1.73% for fiscal 1997. These increases
were partially offset by a decline of 7.9% in passbook accounts to $21.2 million
for fiscal 1998 compared to $23.0 million for fiscal 1997 and a decrease in
average rate paid to 2.95% for fiscal 1998 from 3.00% for fiscal 1997. 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 $215.7 million in the
average balance of certificates of deposit for fiscal 1998, $81.4 million or
37.8%, represented brokered certificates of deposit compared to $87.1 million,
or 41.3% for fiscal 1997. The average rate paid on brokered certificates of
deposit increased to 6.13% for fiscal 1998 from 6.11% for fiscal 1997. Interest
on borrowings (FHLB advances and reverse repurchase agreements) increased 5.2%
to $6.5 million for fiscal 1998 from $6.2 million for fiscal 1997. The increase
in borrowings was primarily due to growth in the average balance of FHLB
advances of 3.2% to $107.4 million for fiscal 1998 compared to $104.1 million
for fiscal 1997. The increase in interest on borrowings also was due to an
increase in average rate paid to 6.10% for fiscal 1998 from 5.98% for fiscal
1997, as the Company increased it's use of longer-term fixed-rate advances. 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 continued focus on asset portfolio diversification
in fiscal 1999.*
-63-
<PAGE> 66
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased by 23.1% to $800,000 for
fiscal 1998 from $650,000 for fiscal 1997. 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 general economic
conditions. Based on management's evaluation of the loan portfolio and the
increase in gross loans during fiscal 1998, the allowance for losses on loans
increased 32.2% to $2.3 million at June 30 1998 compared to $1.8 million at June
30, 1997. 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 inherent credit risk
and non-performing loans. The ratio of allowance for loan losses to gross loans
increased to 0.81% at June 30, 1998 from 0.62% at June 30, 1997. The amount of
non-performing loans at June 30, 1998 was $1.4 million or 0.50% of gross loans
compared to $624,000 or 0.22% of gross loans at June 30, 1997.
NON-INTEREST INCOME
Non-interest income decreased 17.5% to $1.2 million for fiscal 1998
from $1.0 million for fiscal 1997. The largest components of the increase was an
increase in gain on the sale of loans to $297,000 for fiscal 1998 compared to
$95,000 for fiscal 1997, an increase in service charges on loans to $288,000 for
fiscal 1998 compared to $165,000 for fiscal 1997, and an increase in other
non-interest income to $92,000 for fiscal 1998 compared to $87,000 for fiscal
1997. Partially offsetting the increases in non-interest income were decreases
in insurance commissions to $49,000 for fiscal 1998 compared to $110,000 for
fiscal 1997, a decrease in service charges on deposit accounts to $429,000 for
fiscal 1998 compared to $478,000 for fiscal 1997, a decrease in loan servicing
fees to $61,000 for fiscal 1998 compared to $86,000 for fiscal 1997 and a
decrease in gains on the sale of securities and mortgage-backed and related
securities to a loss of $8,000 for fiscal 1998 from a gain of $7,000 for fiscal
1997. The increase in gain on sale of loans reflects the increased volume of
loans sold in fiscal year 1998 due to a higher level of refinanced loans.
Service charges on loans increased due to the increased loan volume and higher
charges associated with commercial type loans. The decrease in insurance
commissions reflects the sale of the property and casualty policies of the
Company's insurance subsidiary 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 1997 period. The decrease in loan servicing fees reflects decreases in
the average balance of the Company's sold loan serviced portfolio.
NON-INTEREST EXPENSE
Non-interest expense decreased 2.8% to $6.8 million for fiscal 1998
from $7.0 million for fiscal 1997. The decrease was primarily due to an
industry-wide special assessment charge in fiscal 1997 of $877,000 for an amount
to recapitalize the SAIF, partially offset by a refund credit of $137,000 and a
decrease in FDIC deposit insurance premiums of $174,000 to $174,000 for fiscal
1998 from $348,000 for fiscal 1997. Compensation and benefits expense increased
$464,000 to $4.0 million for fiscal 1998 from $3.5 million for fiscal 1997,
which primarily relates to higher salary, loan commissions and incentive
compensation and an increase in full-time equivalent employees. Occupancy and
equipment expense increased $195,000 to $1.2 million for fiscal 1998 from $1.0
million for fiscal 1997, due to additional building and bank equipment
purchases. Marketing expense increased $52,000 to $380,000 for fiscal 1998 from
$328,000 for fiscal 1997. Other non-interest expense increased $4,000 to $1.177
million for fiscal 1998 from $1.173 million for fiscal 1997, due to increases in
loan, printing, office supplies, organization dues, legal and other
miscellaneous expenses.
INCOME TAX EXPENSE
Income tax expense increased to $1.4 million for fiscal 1998 from $1.0
million for fiscal 1997. The increase was primarily a result of higher income
before income taxes. However, the effective tax rate decreased from 34.8% for
fiscal 1997 to 33.4% for fiscal 1998 resulting from lower state income taxes due
to an increase in the amount of interest income not subject to state income
taxes.
-64-
<PAGE> 67
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,
1999, 1998 and 1997, 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
$312,000, $169,000 and $4,000 for the fiscal years ended June 30, 1999, 1998 and
1997, respectively. The increase in the amount of loan fees recognized in
interest income for 1999 as compared to 1998 primarily resulted from the
originations of loans with higher fees and the increased refinancing of the loan
portfolio. 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.
-65-
<PAGE> 68
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------
1999 1998
---------------------------------- ---------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/
BALANCE PAID RATE BALANCE PAID
------- ---- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans......................................................... $ 265,438 $ 21,607 8.14% $ 267,549 $ 22,390
Consumer loans......................................................... 4,157 572 13.76 5,280 704
Commercial loans....................................................... 15,081 1,368 9.07 7,375 700
--------- ---------- --------- --------
Total loans.......................................................... 284,676 23,547 8.27 280,204 23,794
Mortgage-backed securities............................................. 14,603 1,034 7.08 40,007 2,825
Mortgage derivative securities......................................... 43,009 2,835 6.59 37,205 2,543
--------- ---------- --------- --------
Total loans and related securities................................... 57,612 3,869 6.72 77,212 5,368
Investment and other securities........................................ 14,550 775 5.33 10,678 711
Securities available for sale.......................................... 88,650 5,680 6.41 30,524 1,972
Federal Home Loan Bank stock........................................... 6,505 427 6.56 5,661 382
--------- ---------- --------- --------
Total interest-earning assets(1)..................................... 451,993 34,298 7.59 404,279 32,227
---------- ----- --------
Non-interest earning assets.............................................. 16,126 13,315
--------- ---------
Total assets......................................................... $ 468,119 $ 417,594
========= =========
LIABILITIES AND RETAINED EARNINGS:
Deposits:
NOW accounts........................................................... $ 2,757 48 1.74 $ 2,628 45
Money market deposit accounts.......................................... 35,563 1,736 4.88 25,230 1,319
Passbook............................................................... 21,107 613 2.90 21,194 625
Certificates of deposit................................................ 227,979 12,766 5.60 215,701 12,967
--------- ---------- --------- --------
Total deposits....................................................... 287,406 15,163 5.28 264,753 14,956
Advance payments by borrowers for taxes and insurance.................... 2,927 75 2.56 3,139 84
Borrowings............................................................... 131,164 7,576 5.78 107,378 6,546
--------- ---------- --------- --------
Total interest-bearing liabilities................................... 421,497 22,814 5.41 375,270 21,586
---------- ----- --------
Other liabilities (Incl. non-interest bearing demand deposits)........... 12,167 10,848
Retained earnings........................................................ 34,455 31,476
--------- ---------
Total liabilities and retained earnings.............................. $ 468,119 $ 417,594
========= =========
Net interest income/interest rate spread(2)................................ $ 11,484 2.18% $ 10,641
========== ===== ========
Net earning assets/net interest margin(3).................................. $ 30,496 2.54% $ 29,009
========= ===== =========
Average interest-earning assets to average interest-bearing liabilities.... 1.07x 1.08x
========== ========
<CAPTION>
-----------------------------------------------
1998 1997
--------- ------------------------------------
AVERAGE AVERAGE INTEREST AVERAGE
YIELD/ OUTSTANDING EARNED/ YIELD/
RATE BALANCE PAID RATE
---- ------- ---- ----
<S> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans......................................................... 8.37% $246,744 $19,849 8.04%
Consumer loans......................................................... 13.33 6,015 776 12.90
Commercial loans....................................................... 9.49 1,387 124 8.94
-------- -------
Total loans.......................................................... 8.49 254,146 20,749 8.16
Mortgage-backed securities............................................. 7.06 50,367 3,552 7.05
Mortgage derivative securities......................................... 6.84 40,494 2,691 6.65
-------- -------
Total loans and related securities................................... 6.95 90,861 6,243 6.87
Investment and other securities........................................ 6.66 4,980 294 5.90
Securities available for sale.......................................... 6.46 32,887 2,184 6.64
Federal Home Loan Bank stock........................................... 6.75 5,217 354 6.79
-------- -------
Total interest-earning assets(1)..................................... 7.97 388,091 29,824 7.68
----- ------- ----
Non-interest earning assets.............................................. 9,456
--------
Total assets......................................................... $397,547
========
LIABILITIES AND RETAINED EARNINGS:
Deposits:
NOW accounts........................................................... 1.71 $ 2,370 41 1.73
Money market deposit accounts.......................................... 5.23 15,444 804 5.21
Passbook............................................................... 2.95 23,001 691 3.00
Certificates of deposit................................................ 6.01 211,010 12,357 5.86
-------- -------
Total deposits....................................................... 5.65 251,825 13,893 5.52
Advance payments by borrowers for taxes and insurance.................... 2.68 3,486 94 2.66
Borrowings............................................................... 6.10 104,101 6,224 5.98
-------- -------
Total interest-bearing liabilities................................... 5.75 359,412 20,211 5.62
----- ------- ----
Other liabilities (Incl. non-interest bearing demand deposits)........... 10,031
Retained earnings........................................................ 28,104
--------
Total liabilities and retained earnings.............................. $397,547
========
Net interest income/interest rate spread(2)................................ 2.22% $ 9,613 2.06%
===== ======= =====
Net earning assets/net interest margin(3).................................. 2.63% $ 28,679 2.48%
===== ======== =====
Average interest-earning assets to average interest-bearing liabilities.... 1.08x
=======
</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.
66
<PAGE> 69
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, 1999 FISCAL YEAR ENDED JUNE 30, 1998
COMPARED TO COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1998 FISCAL YEAR ENDED JUNE 30, 1997
------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------- -------------------------------
(IN THOUSANDS)
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
---- ------ ------ --- ---- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans............................ ($611) ($177) $5 ($783) $800 $1,674 $67 $2,541
Consumer loans............................ 23 (150) (5) (132) 26 (95) (3) (72)
Commercial loans.......................... (31) 731 (32) 668 8 535 33 576
Mortgage-backed securities ............... 8 (1,794) (5) (1,791) 5 (731) (1) (727)
Mortgage-derivative securities............ (91) 397 (14) 292 77 (219) (6) (148)
Investment and other securities........... (142) 258 (52) 64 38 336 43 417
Securities available for sale............. (16) 3,755 (31) 3,708 (59) (157) 4 (212)
Federal Home Loan Bank stock.............. (10) 57 (2) 45 (2) 30 -- 28
------ ------- ------ ------ ---- ------ ---- ------
Total.................................. (870) 3,077 (136) 2,071 893 1,373 137 2,403
------ ------- ------ ------ ---- ------ ---- ------
Interest-bearing liabilities:
NOW accounts.............................. 1 2 -- 3 -- 4 -- 4
Money market demand accounts.............. (87) 540 (36) 417 3 509 2 514
Passbook accounts......................... (9) (3) -- (12) (13) (54) 1 (66)
Certificates of deposit................... (889) 738 (50) (201) 328 275 7 610
Advance payments by borrowers
for taxes and insurance................... (4) (6) 1 (9) (1) (9) -- (10)
Borrowings................................ (344) 1,451 (77) 1,030 122 196 4 322
------ ------ ------ ------ ---- ------ ---- ------
Total.................................. (1,332) 2,722 (162) 1,228 439 921 14 1,374
------ ------ ------ ------ ---- ------ ---- ------
Net change in net interest income........... $ 462 $ 355 $ 26 $ 843 $454 $ 452 $123 $1,029
====== ====== ====== ====== ==== ====== ==== ======
</TABLE>
67
<PAGE> 70
FINANCIAL CONDITION
Total assets increased $31.3 million or 7.1%, from $438.4 million at
June 30, 1998 to $469.7 million at June 30, 1999. This increase is primarily
reflected in increases in loans receivable and investment securities
available-for-sale, consistent with the Company's strategy of moderate asset
growth and asset portfolio diversification. The increase was funded primarily by
an increase in FHLB-Chicago advances, securities sold under agreements to
repurchase, wholesale brokered and non-brokered deposits and money market
deposits.
Cash and cash equivalents increased 5.1% to $8.6 million at June 30,
1999 compared to $8.2 million at June 30, 1998. The increase is largely
attributable to the increase in deposits and borrowings.
Investment securities decreased to $0 at June 30, 1999 compared to
$388,000 at June 30, 1998. 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 1999 and loan portfolio
diversification.
Securities available-for-sale increased to $100.5 million at June 30,
1999 compared to $66.4 million at June 30, 1998. The increase is the result of
management's decision to increase its investment in securities
available-for-sale due to favorable competitive yields on such securities and
the increased level of repayments received on the loan portfolio. At June 30,
1999, the securities available-for-sale portfolio contained $38.7 million of
fixed-rate U.S. government agency securities, $14.1 million of agency and
private-issue fixed-rate mortgage-backed securities with a minimum investment
rating of AA, $2.8 million of private-issue adjustable-rate mortgage-backed
securities with a minimum investment rating of AA, $12.9 million of fixed-rate
intermediate-term tranche CMOs with a minimum investment rating of AAA, $25.8
million of floating-rate tranche CMOs with a minimum investment rating of AA,
$4.8 million in trust preferred securities, $1.0 million of adjustable-rate
mortgage mutual funds and $410,000 of municipal bonds.
Mortgage-backed and related securities held-for-investment decreased to
$54.6 million at June 30, 1999 compared to $65.3 million at June 30, 1998. The
decrease is the result of management's decision to decrease its investment in
mortgage-backed and related securities to provide funding for the loan portfolio
growth and diversification and increased investment in investment securities
available-for-sale. Of the $54.6 million in mortgage-backed and related
securities at June 30, 1999, $43.2 million were adjustable rate and $11.4
million were fixed rate, compared to a total of $65.3 million at June 30, 1998,
of which $57.2 million were adjustable rate and $8.1 million were fixed rate. At
June 30, 1999, $19.5 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, 1999. The decrease in mortgage-backed and related
securities was primarily attributable to the principal repayments of
adjustable-rate mortgage-backed securities and CMOs which was used for other
funding and investment purposes in fiscal 1999.
Loans receivable increased to $281.1 million at June 30, 1999 compared
to $280.9 million at June 30, 1998. The increase at June 30, 1999 compared to
the prior fiscal year end is primarily the result of management's decision to
retain more fixed-rate loans originated and purchased for the Company's
portfolio, as such loans carried higher yields than comparable mortgage-backed
and related securities in fiscal 1999. Total mortgage loans originated and
purchased amounted to $207.8 million and $120.8 million for the fiscal years
ended June 30, 1999 and 1998, respectively, while sales of fixed-rate mortgage
loans totaled $48.3 million and $20.2 million for the fiscal years ended June
30, 1999 and 1998, respectively. The increase in fixed-rate mortgage loan sales
is primarily attributable to the lower interest rate environment during the
first half of fiscal 1999 that increased the level of loans refinanced. During
fiscal 1999, the Company originated and purchased loans totaling $202.1 million
and $56.9 million, respectively. Of the $56.9 million in purchased loans, the
Company purchased $38.2 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 $17.1 million to $288.7 million at June 30, 1999
from $271.6 million at June 30, 1998. 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 $101.2
million at June 30, 1999, representing 35.1% of total deposits as compared to
$81.4 million, or 30.0% of total deposits, at June 30, 1998. The average
maturity of brokered deposits was
68
<PAGE> 71
four months at June 30, 1999, compared to eight months at June 30, 1998.
Non-brokered wholesale deposits totaled $55.2 million at June 30, 1999,
representing 19.1% of total deposits, as compared to $42.9 million, or 15.8% of
total deposits, at June 30, 1998. 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 increased to $129.5 million
at June 30, 1999 compared to $117.1 million at June 30, 1998. At June 30, 1999,
FHLB advances were $120.0 million, or 27.6% of total liabilities, compared to
$117.1 million, or 28.9% of total liabilities at June 30, 1998. Borrowings under
reverse repurchase agreements at June 30, 1999 totaled $9.5 million. There were
no borrowings under reverse repurchase agreements at June 30, 1998. 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 predictable 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 increased in
fiscal 1999 overall as interest rates declined significantly during the first
half of the fiscal year before increasing in the last half of the fiscal year.
During fiscal years 1997 and 1998, prepayments increased as interest rates
decreased in the second half of the both fiscal years.
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 1999, the Company originated and purchased loans totaling $202.1
million and $56.9 million, respectively, as compared to fiscal 1998 when
originated and purchased loans totaled $134.9 million and $27.7 million,
respectively. The Company purchased mortgage-backed and related securities in
the amount of $12.3 million and $0 in fiscal 1999 and 1998, respectively. The
Company also purchased investment securities in the amount of $184,000 and
$352,000 during fiscal 1999 and 1998, respectively. For fiscal 1999 and 1998,
these activities were funded primarily by principal repayments on loans of
$199.9 million and $140.2 million, respectively; principal repayments on
mortgage-backed and related securities of $93.4 million and $28.8 million,
respectively; proceeds from the sale of mortgage loans of $48.3 million and
$20.2 million, respectively; proceeds from maturity of investment securities of
$572,000 and $392,000, respectively; proceeds from notes payable to the
FHLB-Chicago of $35.5 million and $50.0 million, respectively; and a net
increase in deposits of $17.1 million in fiscal 1999. Purchases of securities
available-for-sale totaled $125.3 million and sales were $10.6 million for
fiscal 1999, compared to purchases of $69.9 million and sales of $20.9 million
for fiscal 1998.
During fiscal 1999, 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 1999, pricing of wholesale brokered deposits ranged from 20 to 40
basis points above comparable term U.S. Treasury securities. At June 30, 1999,
the average rate of the wholesale brokered deposits accepted by the Company was
5.63% compared to an average rate paid for retail certificates of deposit of
5.58%. 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. 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 1999, management maintained 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
69
<PAGE> 72
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, 1999, FHLB advances and borrowings under reverse
repurchase agreements totaled $129.5 million, or 27.6% of the Bank's total
assets. At June 30, 1999, the Bank had unused borrowing authority under the
borrowing limitations established by the Board of Directors of $20.7 million and
$34.8 million under the FHLB total asset limitation. The Bank intends to fund
asset portfolio diversification in fiscal 2000 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 1999, management shortened the maturities of both its
wholesale brokered certificates of deposits and the FHLB borrowings to increase
net interest income. As of June 30, 1999, the average maturity of the wholesale
brokered certificates of deposit was five months compared to eight months in
fiscal 1998 and compared to a nine month maturity for retail certificates of
deposits as of June 30, 1999.
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 17.65% and 26.50%
at June 30, 1999 and 1998, 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. Cash and cash equivalents were
$8.6 million and $8.2 million at June 30, 1999 and 1998, respectively. The
increase in cash and cash equivalents in fiscal 1999 resulted primarily from an
increase in deposits.
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. The Company maintains 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.
At June 30, 1999, the Company had outstanding loan commitments of $1.9
million. The Company had $10.0 million in commitments to purchase securities and
mortgage-backed and related securities at June 30, 1999. 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, 1999 totaled $203.6 million.
70
<PAGE> 73
IMPACT OF YEAR 2000
The Company is currently in the process of addressing a potential
problem that faces all users of automated systems including information systems.
Many computer systems process transactions based on two digits representing the
year of transaction, rather than four digits. These computer systems may not
operate properly when the last two digits become "00", as will occur on January
1, 2000. The problem could affect a wide variety of automated information
systems, such as mainframe applications, personal computers, communication
systems, environmental systems and other information systems.
The Company has identified areas of operations critical for the
delivery of its loan and deposit products. The majority of the Company's
applications used in operations are purchased from outside vendors. The vendors
providing the software are responsible for maintenance of the systems and
modifications to enable uninterrupted usage after December 31, 1999. The
Company's plan includes obtaining certification of compliance from third parties
and testing all of the impacted applications (both internally developed and
third party provided). Testing of the system and conversion activities were
completed as of June 30, 1999. There are no mission critical systems which are
non-compliant. The Company has developed and finalized contingency plans for any
adverse situations that may arise related to Year 2000. The Company's plan also
includes reviewing any potential risks associated with loan and deposit data
base information due to the Year 2000 issue. Potential risks could include, but
are not limited to, system failure or miscalculations causing disruptions of
operations which may include the temporary inability to process transactions,
and to provide accurate customer loan payment or deposit receipt information.
Based on currently available information, management does not
anticipate that the cost to address the Year 2000 issues will have a material
adverse impact on the Company's financial position.* Direct expenditures in
fiscal year 1998, and fiscal year 1999 for the Year 2000 project totaled $5,000
and $37,800, respectively. It is estimated that completion of the project will
result in additional expenditures of approximately $40,000.* Direct expenditures
include capital expenditures for compliant equipment and software, write-offs of
non-compliant equipment and software upgrades. The expenditures will be funded
by increases in the Company's non-interest expense budget. Currently, the
Company is utilizing internal staff to coordinate the Year 2000 project which
may delay new product implementation through calendar year 1999. The Company
does not plan to engage consultants to complete the Year 2000 project. There can
be no guarantee that the systems of other parties on which the Company's systems
rely will be timely converted and not have an adverse impact on the Company's
systems.
The Company also made inquiries and reviewed plans of certain third
parties, such as commercial loan customers, where Year 2000 failures could
result in significant adverse impact on the Company. The Company has completed
the inquiry and review process and is satisfied the Bank will not be subject to
significant adverse impact.* The Board of Directors of the Company receives
written status reports on the Year 2000 project and meets with project leaders
quarterly.
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
71
<PAGE> 74
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 1998 and 1999 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 and reverse
repurchase agreements to manage its assets and liabilities and enhance earnings.
At June 30, 1999, 1998 and 1997, total FHLB-Chicago advances and borrowings
under reverse repurchase agreements were $129.5 million or 27.6% of total
assets, $117.1 million or 26.7% of total assets, and $92.1 million or 22.5% 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, 1999, the average maturity was four months. During the fiscal year
ended June 30, 1999, management maintained the maturity level fixed-rate term
advances from the FHLB-Chicago to between one to five years. Liquidity is
another factor in asset/liability management. As of June 30, 1999, the Company
had $8.6 million in cash or demand deposits and $100.5 million in its
available-for-sale portfolio, of which $49.7 million is due or will be repriced
within one year. The amount of the held-to-maturity portfolio as of June 30,
1999 was $54.6 million, of which $43.2 million will be due or repriced within
one year.
During fiscal 1999, the Company increased its interest rate risk by
funding fixed rate loan assets with shorter-term wholesale deposits and
borrowings. The increase was due to the decreasing interest rate environment
during the first half of fiscal 1999 that lead to the refinancing of loans to
longer term fixed rate loans and early repayment of adjustable rate loans.
However, 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
72
<PAGE> 75
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.
The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are 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, 1999 and 1998, total interest-bearing liabilities repricing
within one year exceeded total interest-bearing assets repricing in the same
period by $120.0 million and $22.3 million, respectively, representing a
negative cumulative one-year interest rate sensitivity gap equal to 25.6% and
5.1%, respectively, of total assets. The increase in the Company's negative
one-year gap reflects the increased use of shorter-term maturity wholesale
deposits and borrowings to fund fixed rate mortgage 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 2000, the Company intends to extend 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 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.
73
<PAGE> 76
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at June 30, 1999 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
WITHIN FOUR TO ONE YEAR TO
THREE MONTHS TWELVE MONTHS THREE YEARS
----------------- -------------------- -------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate .......................................... $ 9,174 7.83% $ 26,270 7.79% $ 52,710 7.76%
Adjustable rate ..................................... 23,030 8.65 40,969 7.62 26,270 7.88
Consumer loans (2) .................................... 328 11.01 2,852 13.41 503 10.34
Commercial loans (2) .................................. 5,691 9.47 5,935 9.10 6,083 9.26
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale ........ 2,340 6.79 6,228 6.79 12,093 6.79
Adjustable rate ..................................... 48,369 6.43 23,327 6.58 --
Investment securities and
securities available-for-sale ....................... 11,777 5.95 891 5.54
--------- --------- ---------
Total interest-earning assets........................ $ 100,709 7.20 $ 106,472 7.61 $ 97,659 7.78
========= ========= =========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts ........................................ $ 209 1.75 $ 628 1.75 $ 996 1.75
Money market deposit accounts ....................... 5,324 4.36 15,973 4.36 11,926 4.36
Passbook savings accounts ........................... 1,572 2.91 4,716 2.91 7,483 2.91
Certificates of deposit ............................. 94,740 5.18 108,838 5.31 14,016 5.34
Escrow deposits ..................................... -- 3,225 2.74 --
Borrowings(4)
FHLB advances and other borrowings .................. 68,975 5.16 23,002 6.14 18,042 5.81
--------- --------- ---------
Total interest-bearing liabilities .................. $ 170,820 5.12% $ 156,382 5.20% $ 52,463 4.86%
========= ========= =========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ............ ($ 70,111) ($49,910) $ 45,196
========= ========= =========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities .... ($ 70,111) ($120,021) ($ 74,825)
========= ========= =========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets ............ (14.9)% (25.6)% (15.9)%
==== ====== =====
<CAPTION>
AMOUNT MATURING OR REPRICING
--------------------------------------------------------------------
MORE THAN
THREE YEARS TO
FIVE YEARS OVER FIVE YEARS TOTAL
----------------- ------------------- ------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate .......................................... $ 34,559 7.62 $ 38,959 7.39% $161,672 7.65%
Adjustable rate ..................................... 4,843 7.87 1,339 7.77 96,451 7.95
Consumer loans (2) .................................... -- -- 3,683 12.77
Commercial loans (2) .................................. -- -- 17,709 9.28
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale ........ 7,691 6.79 10,136 6.79 38,488 6.79
Adjustable rate ..................................... -- -- 71,696 6.48
Investment securities and
securities available-for-sale ....................... 9,816 6.03 33,962 7.24 56,446 6.73
-------- -------- --------
Total interest-earning assets........................ $ 56,909 7.25 $ 84,396 7.26 $446,145 7.44
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts ........................................ $ 488 1.75 $ 468 1.75 $ 2,789 1.75
Money market deposit accounts ....................... 1,908 4.36 364 4.36 35,495 4.36
Passbook savings accounts ........................... 3,667 2.91 3,524 2.91 20,962 2.91
Certificates of deposit ............................. 2,868 5.62 -- 220,462 5.26
Escrow deposits ..................................... -- -- 3,225 2.74
Borrowings(4)
FHLB advances and other borrowings .................. 3,000 5.59 16,500 6.10 129,519 5.56
-------- -------- --------
Total interest-bearing liabilities .................. $ 11,931 4.42% $ 20,856 5.43% $412,452 5.11%
======== ======== ========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ............ $ 44,978 $ 63,540 $ 33,693
======== ======== ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities .... ($29,847) $ 33,693 $ 33,693
======== ======== ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets ............ (6.4)% 7.2% 7.2%
===== === ===
</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 $19.4 million at June 30, 1999.
(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 $150.8 million or 32.1% 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.
74
<PAGE> 77
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options. However, 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 primarily of
commitments to extend credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. 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 and may
require collateral from the borrower if deemed necessary by the Company.
Additional information required herein pursuant to Item 305 of
Regulation S-K is incorporated by reference in sections entitled "Liquidity and
Capital Resources" from pages 69 to 70 and "Asset/Liability Management" from
pages 72 to 73 hereof.
75
<PAGE> 78
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, 1999 and
1998, 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,
1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Milwaukee, Wisconsin
July 23, 1999
76
<PAGE> 79
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------
1999 1998
-------------------- ---------------------
<S> <C> <C>
ASSETS
Cash and non-interest bearing deposits..................................... $3,582 $1,998
Interest-bearing deposits.................................................. 5,017 6,186
------ ------
Cash and cash equivalents.................................................. 8,599 8,184
Securities available-for-sale (at fair value):
Investment securities.................................................... 44,902 8,896
Mortgage-backed and related securities................................... 55,566 57,549
Securities held-to-maturity:
Investment securities (fair value - $388 at June 30, 1998)............... -- 388
Mortgage-backed and related securities (fair value -
$54,854 at June 30, 1999 $66,185 at June 30, 1998)..................... 54,618 65,282
Loans held for sale, at lower of cost or market............................ 6,437 2,056
Loans receivable, net...................................................... 281,120 280,889
Investment in Federal Home Loan Bank stock, at cost........................ 6,527 5,932
Foreclosed properties, net................................................. 621 11
Office properties and equipment............................................ 5,771 5,653
Prepaid expenses and other assets.......................................... 5,498 3,534
-------- --------
Total assets..................................................... $469,659 $438,374
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits................................................................. $288,714 $271,619
Notes payable and other borrowings....................................... 129,519 117,059
Advance payments by borrowers for taxes and insurance.................... 3,225 3,163
Accrued interest on deposit accounts and borrowings...................... 2,006 1,455
Accrued expenses and other liabilities................................... 11,699 11,625
-------- --------
Total liabilities................................................ $435,163 $404,921
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 3,162,500 shares; outstanding 2,839,941 shares at June 30, 1999
and 2,933,608 at June 30, 1998......................................... 3,162 3,162
Additional paid-in capital............................................... 9,937 9,512
Unearned ESOP compensation............................................... (405) (532)
Unearned restricted stock award.......................................... (78) (124)
Retained earnings, substantially restricted.............................. 25,765 22,847
Accumulated other comprehensive income (loss)............................ (1,089) (27)
Treasury stock, at cost: 322,559 shares at June 30, 1999
and 228,892 shares at June 30, 1998................................... (2,796) (1,385)
-------- --------
Total shareholders' equity....................................... $ 34,496 $ 33,453
-------- --------
Total liabilities and shareholders' equity....................... $469,659 $438,374
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
77
<PAGE> 80
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
--------------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable.................................................. $23,547 $23,794 $20,749
Securities and interest-bearing deposits.......................... 2,938 1,858 1,829
Mortgage-backed and related securities............................ 7,813 6,575 7,245
------- -------- --------
Total interest income......................................... 34,298 32,227 29,823
INTEREST EXPENSE:
Deposits.......................................................... 15,163 14,956 13,893
Advance payments by borrowers for taxes and insurance............. 75 84 93
Notes payable and other borrowings................................ 7,576 6,546 6,224
------- -------- --------
Total interest expense........................................ 22,814 21,586 20,210
------- -------- --------
Net interest income.................................................... 11,484 10,641 9,613
Provision for losses on loans.......................................... 480 800 650
------- -------- --------
Net interest income after provision for losses on loans................ 11,004 9,841 8,963
NON-INTEREST INCOME:
Service charges on loans.......................................... 334 288 165
Service charges on deposit accounts............................... 451 429 478
Loan servicing fees, net.......................................... 21 61 86
Insurance commissions............................................. 90 49 110
Gain (loss) on sale of securities and
mortgage-backed and related securities, net..................... 68 (8) 7
Gain on sale of loans ............................................ 892 297 95
Other income...................................................... 226 92 87
------- -------- --------
Total non-interest income..................................... 2,082 1,208 1,028
NON-INTEREST EXPENSE:
Compensation and benefits......................................... 5,021 3,958 3,494
Marketing......................................................... 352 380 328
Occupancy and equipment........................................... 1,605 1,158 963
Deposit insurance premiums........................................ 173 174 348
FDIC SAIF assessment, net......................................... - - 740
Other non-interest expense ....................................... 1,300 1,177 1,173
------- -------- --------
Total non-interest expense.................................... 8,451 6,847 7,046
------- -------- --------
Income before income taxes............................................. 4,635 4,202 2,945
Income taxes.......................................................... 1,505 1,403 1,026
------- -------- --------
Net income........................................................ $ 3,130 $ 2,799 $ 1,919
======= ======== ========
Earnings per share (basic)........................................ $ 1.13 $ 1.01 $ 0.71
======= ======== ========
Earnings per share (diluted)...................................... $ 1.10 $ 0.97 $ 0.68
======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
78
<PAGE> 81
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED UNEARNED
COMMON PAID-IN ESOP RESTRICTED RETAINED
STOCK CAPITAL COMPENSATION STOCK EARNINGS
------ -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996....................................... $3,162 $8,884 ($740) ($334) $18,226
Net income..................................................... -- -- -- -- 1,919
Accumulated other comprehensive income
Unrealized holding gain arising during period................ -- -- -- -- --
Re-classification adjustment for gains realized in income.... -- -- -- --
Income tax effect............................................ -- -- -- -- --
Comprehensive Income........................................... -- -- -- -- --
Amortization of unearned ESOP and
restricted stock award compensation.......................... -- 138 108 126 --
------ ------ ------ ----- -------
Balance at June 30, 1997....................................... $3,162 $9,022 ($632) ($208) $20,145
Net income..................................................... -- -- -- -- 2,799
Accumulated other comprehensive income
Unrealized holding gain arising during period................ -- -- -- -- --
Re-classification adjustment for losses realized in income... -- -- -- -- --
Income tax effect............................................ -- -- -- -- --
Comprehensive Income........................................... -- -- -- -- --
Amortization of unearned ESOP and
restricted stock award compensation.......................... -- 270 100 84 --
Exercise of stock options (47,708 shares issued
In connection with 55,340 options exercised)................. -- 220 -- -- (97)
------ ------ ------ ----- -------
Balance at June 30, 1998....................................... $3,162 $9,512 ($532) ($124) $22,847
Net income..................................................... -- -- -- -- 3,130
Accumulated other comprehensive income
Unrealized holding loss arising during period................ -- -- -- -- --
Re-classification adjustment for gains realized in income.... -- -- -- -- --
Income tax effect............................................ -- -- -- -- --
Comprehensive Income........................................... -- -- -- -- --
Amortization of unearned ESOP and
restricted stock award compensation.......................... -- 248 127 46 --
Purchase of 146,900 shares for treasury stock ................. -- -- -- -- --
Exercise of stock options (53,233 shares issued
In connection with 61,294 options exercised)................. -- 177 -- -- (212)
------ ------ ------ ----- -------
Balance at June 30, 1999....................................... $3,162 $9,937 ($405) ($78) $25,765
====== ====== ====== ===== =======
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK EARNINGS (LOSS) EQUITY
------- --------------- --------
<S> <C> <C> <C>
Balance at June 30, 1996....................................... ($1,592) ($595) $27,011
Net income..................................................... -- -- 1,919
Accumulated other comprehensive income
Unrealized holding gain arising during period................ -- 617 617
Re-classification adjustment for gains realized in income.... -- (7) (7)
Income tax effect............................................ -- (240) (240)
-------
Comprehensive Income........................................... -- -- 2,289
Amortization of unearned ESOP and
restricted stock award compensation.......................... -- -- 372
------- ------- -------
Balance at June 30, 1997....................................... ($1,592) ($225) $29,672
Net income..................................................... -- -- 2,799
Accumulated other comprehensive income
Unrealized holding gain arising during period................ -- 318 318
Re-classification adjustment for losses realized in income... -- 8 8
Income tax effect............................................ -- (128) (128)
-------
Comprehensive Income........................................... -- -- 2,997
Amortization of unearned ESOP and
restricted stock award compensation.......................... -- -- 454
Exercise of stock options (47,708 shares issued
In connection with 55,340 options exercised)................. 207 -- 330
------- ------- -------
Balance at June 30, 1998....................................... ($1,385) ($27) $33,453
Net income..................................................... -- -- 3,130
Accumulated other comprehensive income
Unrealized holding loss arising during period................ -- (1,720) (1,720)
Re-classification adjustment for gains realized in income.... -- (68) (68)
Income tax effect............................................ -- 726 726
-------
Comprehensive Income........................................... -- -- 2,068
Amortization of unearned ESOP and
restricted stock award compensation.......................... -- -- 421
Purchase of 146,900 shares for treasury stock ................. (1,784) -- (1,784)
Exercise of stock options (53,233 shares issued
In connection with 61,294 options exercised)................. 373 -- 338
------- ------- -------
Balance at June 30, 1999....................................... ($2,796) ($1,089) $34,496
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-79-
<PAGE> 82
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
--------------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................................ $3,130 $2,799 $1,919
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans........................................... 480 800 650
Provision for depreciation and amortization............................. 394 321 248
Deferred income taxes................................................... (246) (288) (171)
Net (gain) loss on sales of investments and
mortgage-backed and related securities................................ (68) 8 (7)
Net gain on sale of loans............................................... (892) (297) (95)
Amortization of unearned ESOP and restricted stock awards............... 421 454 372
Loans originated for sale............................................... (54,499) (20,213) (10,618)
Sales of loans originated for sale...................................... 50,118 18,157 10,618
(Increase) decrease in prepaid expenses and other assets................ (1,964) 143 727
Increase in other liabilities........................................... 74 10,125 60
Other adjustments....................................................... 1,637 (153) (148)
------- ------- -------
Net cash provided by (used in) operating activities....................... (1,415) 11,856 3,555
------- ------- -------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale................... 10,641 20,881 2,268
Proceeds from the maturity of securities available-for-sale............... 8,365 4,000 500
Purchases of securities available-for-sale................................ (125,264) (69,928) (1,950)
Purchases of investment securities held-to-maturity....................... (184) (352) --
Proceeds from maturities of investments held-to-maturity.................. 572 392 198
Purchases of mortgage-backed and related securities....................... (12,314) -- --
Proceeds from sales of mortgage-backed and related securities
held-to-maturity.......................................................... -- -- 435
Principal collected on mortgage-backed and related securities............. 93,379 28,845 18,995
Net change in loans receivable............................................ (440) (8,103) (49,413)
Proceeds from sales of foreclosed properties.............................. 11 273 15
Purchase of Federal Home Loan Bank stock.................................. (595) (653) (160)
Purchases of office properties and equipment, net......................... (512) (2,883) (400)
------- ------- -------
Net cash used in investing activities..................................... (26,341) (27,528) (29,512)
------- ------- -------
FINANCING ACTIVITIES
Net increase (decrease) in deposits....................................... 17,095 (9,893) 51,837
Proceeds from long-term notes payable to Federal Home Loan Bank........... 25,000 50,000 35,000
Net increase (decrease) in short-term notes payable and other borrowings.. 10,475 -- (50,868)
Repayment of long-term notes payable to Federal Home Loan Bank............ (23,015) (25,014) (6,013)
Net increase (decrease) in advance payments by borrowers for taxes and
insurance................................................................. 62 (322) (69)
Purchase of treasury stock................................................ (1,784) -- --
Stock option transactions................................................. 338 330 --
------- ------- -------
Net cash provided by financing activities................................. 28,171 15,101 29,887
------- ------- -------
Increase (decrease) in cash and cash equivalents.......................... 415 (571) 3,930
Cash and cash equivalents at beginning of year............................ 8,184 8,755 4,825
------- ------- -------
Cash and cash equivalents at end of year.................................. $ 8,599 $ 8,184 $ 8,755
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-80-
<PAGE> 83
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
-------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid (including amounts credited to deposit accounts)............ $22,265 $21,714 $20,153
Income taxes paid......................................................... $1,724 $1,737 $1,208
Non-cash transactions:
Loans transferred to foreclosed properties................................ $682 $267 $54
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-81-
<PAGE> 84
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
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 to a Wisconsin state-chartered stock
savings bank. The Company provides a wide range of financial services including
real-estate mortgage, commercial and consumer loans and transaction and time
deposit accounts and the sale of certain non-deposit financial products to
individual and corporate customers through the Bank with locations in the
counties of Milwaukee and Waukesha, Wisconsin. 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 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 affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for losses on loans and the valuation of real estate acquired
in connection with 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 and 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
and direct costs to originate the loans are deferred and recorded as an
adjustment of the sales price.
-82-
<PAGE> 85
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 and ability
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.
Impaired loans are measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient at
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Interest income is not recognized on these loans
until the principal balance has been reduced sufficiently to ensure future
collections and then generally on a cash basis only.
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 amortization of servicing
rights is netted against loan servicing fees.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision charged to
expense and is maintained at a level believed adequate by management to absorb
probable 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 is held as required by
current regulation and is carried at cost which is the amount at which it can be
redeemed and which approximates fair value since the market for this stock is
limited. Dividends received are Federal Home Loan Bank stock and is included in
interest income on securities.
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.
-83-
<PAGE> 86
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Expenditures 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 temporary
difference between financial reporting and the tax basis of assets and
liabilities and are measured using the enacted tax rates and laws in effect.
Deferred tax assets are reduced by a valuation allowance when in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
EARNINGS PER SHARE
Basic earnings per share is derived by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding and
does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation is derived by dividing
net income by the weighted-average number of shares outstanding, adjusted for
the dilutive effect of stock options.
REPORTING COMPREHENSIVE INCOME
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.
Accounting standards require 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. The Company's other comprehensive income comprises unrealized gains and
losses on available for sale securities and the related deferred tax impact.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
On July 1, 1998, the Company adopted SFAS No. 131, Disclosures about Segments of
a Business Enterprise and Related Information (SFAS No. 131). SFAS No. 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. A segment is further defined as a component whose operating results
are reviewed by the chief operating decision-maker in the determination of
resource allocation and performance, and for which discrete financial
information is available.
SFAS No. 131 replaces the industry concept of SFAS No. 14 with a management
approach concept as the basis for identifying reportable segments. The
management approach is based on the way that management organizes the segments
within the enterprise for making operating decisions and assessing performance.
Consequently, the segments are evident from the structure of the enterprise's
internal organization, focusing on financial information that an enterprise's
chief operating decision-maker uses to make decisions about the enterprise's
operating matters.
The Company through the branch network of its subsidiaries provides a broad
range of financial services to individual and companies in southeastern
Wisconsin. These services include demand, time and savings deposits; the sale of
certain non-deposit financial products; and commercial and retail lending. While
the Company's chief decision-maker monitors the revenue streams of the various
products and services, operations are managed and financial performance is
evaluated on a Corporate-wide basis. Accordingly, all of the Company's
operations are considered by management to be aggregated in one reportable
operating segment.
-84-
<PAGE> 87
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENDING ACCOUNTING CHANGES
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). In June 1999, the FASB issued proposed SFAS 137, Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No.133, that amends SFAS 133, deferring the effective date. SFAS
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. Statement 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designed and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designed as a
hedge, the gain or loss is recognized in earnings in the period of change. The
Company anticipates that the adoption of Statement 133 will not have a material
impact in the Company's financial statements.
-85-
<PAGE> 88
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income for the years
ended June 30, 1999, 1998 and 1997 by the weighted average number of shares of
common stock reduced by ungranted restricted stock and uncommitted ESOP shares.
Diluted earnings per share is calculated by dividing net income by the sum of
the weighted average shares used in the basic earnings per share calculation
plus the effect of dilutive stock options. The effect of dilutive stock options
is calculated using the treasury stock method.
The computation of net income per common share is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1999 BASIC DILUTED
- -------------------------------- ----- -------
<S> <C> <C>
Weighted average common shares outstanding............................... 2,898,004 2,898,004
Ungranted restricted stock............................................... (18,462) (18,462)
Uncommitted ESOP shares.................................................. (113,850) (113,850)
Common stock equivalents due to dilutive effect of stock options......... -- 85,942
---------- ----------
Total weighted average common shares and equivalents outstanding......... 2,765,692 2,851,634
========== ==========
Net income for period.................................................... $3,130,000 $3,130,000
Earnings per share....................................................... $ 1.13 $ 1.10
========== ==========
FOR THE YEAR ENDED JUNE 30, 1998 BASIC DILUTED
- -------------------------------- ----- -------
Weighted average common shares outstanding............................... 2,918,075 2,918,075
Ungranted restricted stock............................................... (18,462) (18,462)
Uncommitted ESOP shares.................................................. (139,150) (139,150)
Common stock equivalents due to dilutive effect of stock options......... -- 121,306
---------- ----------
Total weighted average common shares and equivalents outstanding......... 2,760,463 2,881,769
========== ==========
Net income for period.................................................... $2,799,000 $2,799,000
Earnings per share....................................................... $ 1.01 $ 0.97
========== ==========
FOR THE YEAR ENDED JUNE 30, 1997 BASIC DILUTED
- -------------------------------- ----- -------
Weighted average common shares outstanding............................... 2,885,900 2,885,900
Ungranted restricted stock............................................... (18,462) (18,462)
Uncommitted ESOP shares.................................................. (158,292) (158,292)
Common stock equivalents due to dilutive effect of stock options......... -- 103,974
---------- ----------
Total weighted average common shares and equivalents outstanding......... 2,709,146 2,813,120
========== ==========
Net income for period.................................................... $1,919,000 $1,919,000
Earnings per share....................................................... $ 0.71 $ 0.68
========== ==========
</TABLE>
RECLASSIFICATIONS
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform with the 1999 presentation.
-86-
<PAGE> 89
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
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
At June 30, 1999: (IN THOUSANDS)
Available-For-Sale:
U.S. Government and federal agency obligations......... $ 39,914 $ -- $ 1,212 $ 38,702
Adjustable-rate mortgage mutual funds.................. 1,000 -- 36 964
Trust preferred stock.................................. 4,991 25 219 4,797
Municipal Bonds/other.................................. 435 4 -- 439
-------- ------ ------- --------
$ 46,340 $ 29 $ 1,467 $ 44,902
======== ======= ======= ========
At June 30, 1998:
Available-For-Sale:
U.S. Government and federal agency obligations.......... $ 5,000 $ -- $ 8 $ 4,992
Adjustable-rate mortgage mutual funds .................. 1,000 -- 31 969
Trust preferred stock................................... 2,500 -- -- 2500
Municipal Bonds......................................... 435 -- -- 435
------- -- ----- -------
$ 8,935 $ -- $ 39 $ 8,896
======== ======= ======= =======
Held-To-Maturity:
Certificates of Deposit................................ $ 388 -- -- $ 388
-------- ------- ------- -------
$ 388 $ -- $ -- $ 388
======== ======= ======= =======
</TABLE>
The amortized cost and estimated fair value of investment securities at June 30,
1999 by contractual maturity, are shown below.
<TABLE>
AVAILABLE- AVAILABLE-
FOR-SALE FOR-SALE
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
Due in one year or less....................................... $ 160 $ 161
Due after one year through five years......................... 10,000 9,816
Due after five years through ten years........................ 2,275 2,215
Due after ten years........................................... 33,905 32,710
-------- --------
$ 46,340 $ 44,902
======== ========
</TABLE>
Proceeds from the sale of securities available-for-sale were $10,641,000,
$20,881,000 and $2,268,000 during the years ended June 30, 1999, 1998 and 1997,
respectively. The gross realized losses on such sales totaled $2,000 in 1999,
$74,000 in 1998 and $9,000 in 1997. The gross realized gains on such sales
totaled $70,000 in 1999, $66,000 in 1998 and $1,000 in 1997. There were no sales
of held-to-maturity securities during 1999, 1998 and 1997.
-87-
<PAGE> 90
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
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
At June 30, 1999:
Available-For-Sale:
Mortgage-backed securities
Adjustable-rate.................................. $ 2,788 $ 10 $ 4 $ 2,794
Fixed-rate ...................................... 14,291 -- 142 14,149
Collateralized mortgage obligations
Adjustable-rate............................... 25,868 10 153 25,725
Fixed-rate.................................... 13,013 1 116 12,898
------ ------ ---- -------
$55,960 $ 21 $ 415 $55,566
======= ====== ===== =======
Held-To-Maturity:
Mortgage-backed securities
Adjustable-rate................................ $ 8,840 $ 76 $ 38 $ 8,878
Fixed-rate..................................... 2,419 24 24 2,419
Collateralized mortgage obligations:
Adjustable-rate................................. 34,338 366 150 34,554
Fixed-rate...................................... 9,021 22 40 9,003
------- ------ ----- -------
$54,618 $ 488 $ 252 $54,854
======= ====== ===== =======
At June 30, 1998:
Available-For-Sale:
Mortgage-backed securities
Adjustable-rate................................. $31,498 $ 25 $ 37 $31,486
Fixed-rate...................................... 7,656 15 7 7,664
Collateralized mortgage obligations
Adjustable-rate................................. 3,769 -- -- 3,769
Fixed-rate...................................... 14,631 7 8 14,630
------- ------ ----- -------
$57,554 $ 47 $ 52 $57,549
======= ====== ===== =======
Held-To-Maturity:
Mortgage-backed securities
Adjustable-rate................................ $27,674 $ 242 $ 7 $27,909
Fixed-rate..................................... 3,806 45 16 3,835
Collateralized mortgage obligations:
Adjustable-rate................................ 29,536 756 157 30,135
Fixed-rate..................................... 4,266 45 5 4,306
------- ------ ----- -------
$65,282 $1,088 $ 185 $66,185
======= ====== ===== =======
</TABLE>
-88-
<PAGE> 91
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>
At June 30, 1999:
Federal Home Loan Mortgage Corporation (FHLMC)............. $ 21,858 $ 249 $172 $ 21,935
Federal National Mortgage Association (FNMA)............... 24,304 199 126 24,377
Government National Mortgage Association (GNMA)............ 5,481 23 - 5,504
Private issuers............................................ 58,935 38 369 58,604
-------- ------ ---- --------
$110,578 $ 509 $667 $110,420
======== ====== ==== ========
At June 30, 1998:
FHLMC...................................................... $ 19,593 $ 541 $ 7 $ 20,127
FNMA....................................................... 30,700 462 147 31,015
GNMA....................................................... 720 38 - 758
Private issuers............................................ 71,823 94 83 71,834
$122,836 $1,135 $237 $123,734
======== ====== ==== ========
</TABLE>
Proceeds from the sale of mortgage-backed and related securities
held-to-maturity were $435,000 during the year ended June 30, 1997. Gross
realized gains from such sales totaled $15,000 for the year ended June 30, 1997.
There were no such sales for the years ended June 30, 1999 and 1998.
-89-
<PAGE> 92
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------
1999 1998
-------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Real estate mortgage loans:
Residential one-to-four family......................................... $147,960 $155,082
Residential multi-family............................................... 36,320 33,513
Commercial real estate................................................. 42,366 34,610
Home equity............................................................ 20,457 25,079
Residential construction............................................... 12,673 6,838
Other construction and land............................................ 17,056 13,874
-------- --------
Total real estate mortgage loans.................................. 276,832 268,996
Consumer and other loans:
Automobile............................................................. 444 755
Credit card............................................................ 2,372 2,777
Other.................................................................. 1,030 1,476
-------- --------
Total consumer and other loans.................................... 3,846 5,008
Commercial loans........................................................... 18,254 14,646
-------- --------
Gross loans....................................................... 298,932 288,650
Accrued interest receivable................................................ 1,664 1,764
Less:
Undisbursed portion of loan proceeds................................... (16,279) (6,848)
Deferred loan fees..................................................... (490) (319)
Unearned interest...................................................... (59) (29)
Allowance for loan losses.............................................. (2,648) (2,329)
-------- --------
$281,120 $280,889
======== ========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................................... $2,329 $1,762 $1,234
Provisions charged to expense.............................................. 480 800 650
Charge-offs................................................................ (176) (264) (128)
Recoveries................................................................. 15 31 6
------ ------ ------
Balance at end of year..................................................... $2,648 $2,329 $1,762
====== ====== ======
</TABLE>
Non-accrual loans for which interest is recognized only when received, totaled
approximately $2,206,000 and $1,314,000 at June 30, 1999 and 1998, respectively.
-90-
<PAGE> 93
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 $2,425,000, $1,400,000 and
$623,000 at June 30, 1999, 1998 and 1997, respectively. The effect of
non-performing loans on interest income is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
-----------------------------------------
1998 1998 1997
------ ------- ------
<S> <C> <C> <C>
(IN THOUSANDS)
Interest at original contract rate................... $368 $ 178 $ 34
Interest collected................................... 108 93 9
Net reduction of interest income..................... $260 $ 85 $ 25
==== ==== ====
</TABLE>
At June 30, 1999 the Company has identified one loan with a balance of
$1,072,000 as being impaired. This loan has $268,000 in allocated loan loss
reserves. During the fiscal year ended June 30, 1999 and 1998 the average
balance of impaired loans was $1,113,000 and $342,000, respectively. Interest
income of $8,000 and $22,000 was recorded on such loans in the fiscal year
ending June 30, 1999 and 1998, respectively. Impaired loans were deemed to be
immaterial for fiscal year ending June 30, 1997.
Loans serviced for investors were $22,141,000 and $25,702,000 at June 30, 1999
and 1998, respectively. Custodial escrow balances maintained in connection with
the foregoing serviced loans and included in liabilities were $580,000 and
$683,000 at June 30, 1999 and 1998, respectively. Serviced loans are not
reflected in the accompanying consolidated statements of financial condition.
The fair value of capitalized mortgage servicing rights exceeded the carrying
value at June 30, 1999 and 1998. Changes in capitalized mortgage servicing
rights is summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------
1999 1998
-------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Balance beginning of year.................................................. $ 94 $ 74
Originated servicing rights capitalized.................................... 71 57
Amortization of servicing rights........................................... (59) (37)
------- --------
Balance end of year........................................................ $ 106 $ 94
======= ========
</TABLE>
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.
-91-
<PAGE> 94
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable on securities and interest bearing deposits is
summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------
1999 1998
-------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Interest-bearing deposits.................................................. $ 4 $ 4
Investment securities...................................................... 673 262
Mortgage-backed and related securities..................................... 645 733
------- -------
$ 1,322 $ 999
======= =======
</TABLE>
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------
1999 1998
------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Land....................................................................... $1,572 $ 1,572
Office buildings and improvements.......................................... 4,418 4,348
Furniture and equipment.................................................... 2,381 1,939
------ --------
8,371 7,859
Less:
Accumulated depreciation................................................... 2,600 2,206
------ --------
$5,771 $ 5,653
====== ========
</TABLE>
-92-
<PAGE> 95
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
<TABLE>
<CAPTION>
Deposits are summarized as follows: AT JUNE 30,
---------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
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..................... $ 9,006 3.12% --% $ 7,738 2.85% --%
NOW...................................... 2,789 0.97 1.75 2,701 0.99 1.75
Money market............................. 35,495 12.29 4.37 27,995 10.31 5.10
Passbook................................. 20,962 7.26 2.92 21,158 7.79 2.93
-------- ------ -------- -----
Total................................. 68,252 23.64 3.24 59,592 21.94 3.52
CERTIFICATES OF DEPOSIT:
One to 12 months......................... $ 51,931 17.98 5.06 $ 68,050 25.09 5.79
12 to 24 months.......................... 7,759 2.69 5.08 14,290 5.26 5.77
24 to 36 months.......................... 1,522 0.53 5.55 2,662 0.98 5.83
36 to 60 months.......................... 2,868 0.99 5.62 2,685 0.99 6.02
60 and greater........................... -- 0.00 -- 0.00
Wholesale................................ 156,382 54.17 5.32 124,340 45.74 6.07
-------- ------ -------- ------
Total................................. 220,462 76.36 5.26 212,027 78.06 5.95
-------- ------ -------- ------
Total deposits.............................. $288,714 100.00% 4.78% $271,619 100.00% 5.42%
======== ====== ======== ======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $97,836,000 and $56,049,000 at June 30, 1999 and
1998, respectively, which also includes brokered deposit accounts. The average
maturity of wholesale certificates of deposit was four months and eight months
at June 30, 1999 and 1998, respectively.
Aggregate annual maturities of certificate accounts at June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
MATURES DURING
YEAR ENDED
JUNE 30 AMOUNT
-------------- ------
(IN THOUSANDS)
<S> <C>
2000 $203,577
2001 12,046
2002 1,971
2003 1,866
Thereafter 1,002
--------
$220,462
========
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------------
1999 1998 1997
----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
NOW accounts........................ $ 48 $ 45 $ 41
Money market accounts............... 1,736 1,319 804
Passbook accounts................... 613 625 691
Certificate accounts................ 12,766 12,967 12,357
------- ------- -------
$15,163 $14,956 $13,893
======= ======= =======
</TABLE>
-93-
<PAGE> 96
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, 1999 AT JUNE 30, 1998
----------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Advances from
Federal Home Loan Bank 1998 $ -- -- $ 8,000 5.41%
1999 7,000 6.55% 21,000 6.62
2000 27,002 5.98 22,007 6.24
2001 3,000 5.91 3,000 5.91
2002 28,500 5.61 28,500 5.61
2003 8,042 5.13 3,052 5.60
2004 5,000 6.32 5,000 6.32
2005 5,000 5.33 -- --
2007 6,500 6.52 6,500 6.52
2008 30,000 4.79 20,000 4.95
---------- ------
$ 120,044 5.59% $ 117,059 5.87%
==== ====
Securities sold under
Agreements to repurchase 1999 $ 9,475 5.25% $ --
---------- ==== --------
$ 129,519 $ 117,059
========== ==========
</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, 1999, the Bank
had delivered mortgage-backed securities with a carrying value of $51.9 million
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 $8.0 million tied to the one-month
LIBOR. FHLB advances are subject to a prepayment penalty if they are repaid
prior to maturity.
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. Securities sold under
agreements to repurchase were $9,475,000, $0 and $0 at June 30, 1999, 1998 and
1997, respectively.
Securities sold under agreements to repurchase averaged $4,414,000 for the year
ended June 30, 1999. The average is computed using daily balances for the
respective fiscal year. The maximum outstanding at any month-end during the year
ended June 30, 1999 was $18,289,000. There were no securities sold under
agreements to repurchase for the year ended June 30, 1998. The Company retains
securities under its control.
-94-
<PAGE> 97
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, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1999, the most recent notification from the Bank's regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 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
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
As of June 30, 1999:
Tier I Capital Leverage (to Average Assets):
Consolidated........................ $35,243 7.52% $14,064 3.00% N/A N/A
West Allis Savings Bank............. 32,056 6.86 14,018 3.00 23,364 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated........................ 35,243 12.34 11,426 4.00 N/A N/A
West Allis Savings Bank............. 32,056 11.60 11,056 4.00 16,584 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated........................ 37,891 13.26 22,852 8.00 N/A N/A
West Allis Savings Bank............. 34,704 12.56 22,111 8.00 27,639 10.00
As of June 30, 1998:
Tier I Capital Leverage (to Average Assets):
Consolidated........................ $33,252 7.81% $12,777 3.00% N/A N/A
West Allis Savings Bank............. 29,888 7.05 12,725 3.00 21,209 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated........................ 33,252 13.03 10,207 4.00 N/A N/A
West Allis Savings Bank............. 29,888 11.98 10,173 4.00 15,260 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated........................ 35,581 13.94 20,414 8.00 N/A N/A
West Allis Savings Bank............. 32,217 12.92 20,347 8.00 25,433 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, 1999, on a
fully-phased-in basis of 6.0%, the Bank had actual capital of $34,704,000 with a
required amount of $28,326,000, for excess capital of $6,378,000.
-95-
<PAGE> 98
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHAREHOLDERS' EQUITY (CONTINUED)
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.
The Company has a shareholders' rights plan (the "Rights Plan"). Under the terms
of the Rights Plan, shareholders hold 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 acquirer, 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 acquirer'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. The rights
have no immediate dilutive effect currently, and therefore due not effect
reported earnings per share, are not taxable to the Company or its shareholders,
and have no effect on the way in which the Company's shares are traded. The
rights expire in ten years from the plan's adoption.
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,
and employee contributions 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 $19,000,
$14,000 and $13,000 during 1999, 1998 and 1997, 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,
1999, 1998 and 1997 totaled $375,000, $362,000 and $236,000, 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 $1.2 million
at June 30, 1999.
The Company has an agreement with an executive officer of the Company to provide
certain deferred payments upon retirement and certain payments to his
beneficiary in the event of his death. During fiscal 1999 an agreement with a
second executive officer and the Company was entered into. The expense related
to these agreements was $214,000 in 1999, $43,000 in 1998 and $43,000 in 1997.
-96-
<PAGE> 99
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Bank has Management Recognition and Retention Plans ("MRPs") for officers
and directors. As of June 30, 1999, 18,462 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. The cost of awarded shares has been fully
amortized at June 30, 1999. Compensation expense of $46,000, $84,000 and
$126,000 was recognized for the years ended June 30, 1999, 1998 and 1997.
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 a binomial pricing model for stock options granted
in fiscal year 1999 and the Black-Scholes option pricing model for stock options
granted in prior fiscal years. The per share weighted-average fair value of
stock options granted during fiscal 1999 and 1998 was $3.06 and $1.81,
respectively, on the date of grant with the following variable assumptions: 1999
- - The Company did not pay a dividend, return on equity of 8.79%, an expected
life of ten years and expected volatility of 32.4%; 1998: The Company did not
pay a dividend in fiscal year 1998, risk-free interest rate of 5.6%, an expected
life of ten years and expected volatility of 32.7%.
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 stock option grants in the consolidated financial statements
for the fiscal years ended June 30, 1999,1998 and 1997.
Had compensation cost of the Company's stock-based plans been determined in
accordance with SFAS No. 123, net income would have been $3,118,000, $2,794,000
and $1,915,000 for fiscal 1999, 1998 and 1997, respectively. Diluted earnings
per share would have been $1.09, $.97 and $.68, respectively for fiscal 1999,
1998 and 1997.
The Company has reserved 375,642 shares of common stock for its 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.
The followings is a summary of stock option activity:
<TABLE>
<CAPTION>
SHARES OPTION
UNDER PRICE PER
OPTION SHARE
------ -----
<S> <C> <C>
Outstanding at June 30, 1996............................................. 330,614 $ 4.00 - $ 7.63
Granted.............................................................. 16,000 $ 7.38
-------- ------------------
Outstanding at June 30, 1997............................................. 346,614 $ 4.00 - $ 7.63
Granted.............................................................. 30,000 $14.63
Exercised............................................................ (55,340) $ 4.00
-------- ------------------
Outstanding at June 30, 1998............................................. 321,274 $ 4.00 - $14.63
Granted.............................................................. 21,500 $ 10.00 - $11.38
Exercised............................................................ (61,294) $ 4.00 - $ 7.38
Forfeited............................................................ (2,000) $ 4.00 - $ 7.38
-------- ------------------
Outstanding at June 30, 1999............................................. 279,480 $ 4.00 - $14.63
</TABLE>
-97-
<PAGE> 100
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The range of options outstanding at June 30, 1999 were:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
WEIGHTED-AVERAGE REMAINING
NUMBER OF SHARES EXERCISE PRICE CONTRACTUAL
---------------------------------------------------------------- LIFE
PRICE OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE (IN YEARS)
RANGE ----------- ----------- ----------- ----------- --------
- -----
<S> <C> <C> <C> <C> <C>
$4 - 7.63 227,980 207,980 $4.61 $4.40 4.9
10 - 11.38 21,500 -- 11.12 -- 9.7
14.63 30,000 6,000 14.63 14.63 9.0
-------- --------- ----- ----- ---
279,480 213,980 $6.18 $4.68 5.7
======= ======= ===== ===== ===
</TABLE>
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.
-98-
<PAGE> 101
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Financial instruments whose contract amounts represent a potential credit risk
are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Commitments to extend credit:
Fixed-rate mortgage loans (7.125% - 7.625% at June 30, 1999)...... $ 1,157 $3,480
Adjustable rate mortgage loans.................................... 723 570
Unused lines of credit:
Credit cards...................................................... 8,203 8,331
Home equity....................................................... 11,578 13,641
Commercial........................................................ 12,914 3,174
Stand-by letters of credit........................................ 3,259 3,101
</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.
-99-
<PAGE> 102
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
13. PARENT COMPANY ONLY FINANCIAL INFORMATION AT JUNE 30,
------------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF CONDITION
Assets:
Cash and cash equivalents......................................... $ 1,256 $ 850
Securities available-for-sale..................................... 1,294 1,909
Investment in bank subsidiary..................................... 31,761 30,696
Other assets...................................................... 245 60
--------- --------
$ 34,556 $ 33,515
========= ========
Liabilities and Shareholders' Equity:
Other liabilities................................................. $ 60 $ 62
Total shareholders' equity........................................ 34,496 33,453
--------- --------
$ 34,556 $ 33,515
========= ========
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1999 1998 1997
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF INCOME
Interest and dividend income........................................ $ 243 $ 177 $ 191
Dividend income from subsidiary..................................... 1,300 -- --
Gain on sale of investment securities............................... 28 -- --
Equity in undistributed net income of subsidiary.................... 1,740 2,764 1,880
--------- --------- --------
Total income................................................... 3,311 2,941 2,071
Other expense....................................................... 136 130 159
--------- --------- --------
Income before provision for income taxes............................ 3,175 2,811 1,912
Provision for income taxes.......................................... 45 12 (7)
--------- --------- --------
Net income..................................................... $ 3,130 $ 2,799 $ 1,919
======== ========= ========
STATEMENT OF CASH FLOWS
Operating activities:
Net income........................................................ $ 3,130 $ 2,799 $ 1,919
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Equity in undistributed net income of subsidiary............... (1,740) (2,764) (1,880)
Decrease (increase) in other assets............................ (185) (33) 25
Increase (decrease) in other liabilities....................... (2) -- 45
Other.......................................................... 187 (119) 102
-------- -------- --------
Net Cash Provided By (Used In) Operating Activities............... 1,390 (117) 211
Investment activities
Sale of investment securities..................................... 528 -- 2,308
Purchase of investment securities................................. -- (1,498) (1,219)
Investment in Bank subsidiary..................................... -- -- (2,000)
-------- -------- --------
Net Cash Provided By (Used In) Investing Activities............... 528 (1,498) (911)
Financing activities:
Purchase of common stock of subsidiary............................ (1,785) -- --
Proceeds from exercise of stock options........................... 273 330 --
-------- -------- -------
Net Cash Provided by (Used In) Financing Activities.............. (1,512) 330 --
-------- -------- -------
Net increase (decrease) in cash..................................... 406 (1,285) (700)
Cash and cash equivalents at beginning of year...................... 850 2,135 2,835
-------- -------- -------
Cash and cash equivalents at end of year.......................... $ 1,256 $ 850 $ 2,135
======== ======== =======
</TABLE>
-100-
<PAGE> 103
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.
-101-
<PAGE> 104
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE The carrying amounts
reported in the statement of financial condition for accrued interest receivable
and accrued interest payable 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,
-------------------------------------------------
1999 1998
----------------------- ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ----- ------ -----
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents................................... $ 8,599 $ 8,599 $ 8,184 $ 8,184
Investment securities available-for-sale.................... 46,340 44,902 8,896 8,896
Investment securities held-to-maturity...................... -- -- 388 388
Mortgage-backed and related
securities available-for-sale............................. 55,566 55,566 57,549 57,549
Mortgage-backed and related
securities held-to-maturity............................... 54,618 54,854 65,282 66,185
Federal Home Loan Bank stock................................ 6,527 6,527 5,932 5,932
Loans receivable:
Real estate (including home equity)....................... 258,124 256,293 260,127 262,045
Credit card and other consumer............................ 3,683 3,683 4,838 4,838
Commercial................................................ 17,709 17,709 14,189 14,189
--------- --------- --------- ---------
$ 279,516 $ 277,685 $ 279,154 $ 281,072
========= ========= ========= =========
Accrued interest receivable................................. $ 2,985 $ 2,985 $ 2,763 $ 2,763
Deposits:
NOW....................................................... 11,215 11,215 10,439 10,439
Money market.............................................. 36,075 36,075 27,995 27,995
Passbooks................................................. 20,962 20,962 21,158 21,158
Certificates.............................................. 220,462 220,726 212,027 212,740
--------- --------- --------- ---------
$ 288,714 $ 288,978 $ 271,619 $ 272,332
========= ========= ========= =========
Borrowings:
Notes payable and other borrowings.......................... $ 129,519 $ 128,887 $ 117,059 $ 117,370
Accrued interest payable...................................... $ 2,006 $ 2,006 $ 1,455 $ 1,455
</TABLE>
-102-
<PAGE> 105
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
------- -------- -----
<S> <C> <C> <C>
(In thousands)
Year ended June 30, 1999:
Federal.......................................... $ 1,705 ($213) $ 1,492
State............................................ 46 (33) 13
------- ------ -------
$ 1,751 ($246) $ 1,505
======= ====== =======
Year ended June 30, 1998:
Federal.......................................... $ 1,551 ($250) $ 1,301
State............................................ 140 (38) 102
------- ------ -------
$ 1,691 ($288) $ 1,403
======= ====== =======
Year ended June 30, 1997:
Federal.......................................... $ 1,117 ($ 149) $968
State............................................ 80 (22) 58
------- ------ -------
$ 1,197 ($ 171) $ 1,026
======= ====== =======
</TABLE>
Income tax expense attributable to income from operations was $1,505,000,
$1,403,000 and $1,026,000 for the years ended June 30, 1999, 1998 and 1997,
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,
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(In thousands)
Computed "expected" tax expense...................... $1,576 $1,429 $1,001
State income taxes, net of
federal income tax benefit....................... 9 67 38
Utilization of Low Income Housing Credits.......... (20) (29) (16)
Net (increase)/decrease in the cash
surrender value of life insurance
premiums paid.................................... 15 (15) (14)
Other................................................ (75) (49) 17
------ ------ ------
$1,505 $1,403 $1,026
====== ====== ======
</TABLE>
-103-
<PAGE> 106
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,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Deferred Tax Assets:
Deferred compensation.............................. $ 299 $ 217
Allowances for loan losses......................... 1,013 863
Deferred loan fees................................. 39 30
Unrealized depreciation on securities
available for sale............................... 718 15
Other, net....................................... 61 25
------ ------
Gross deferred tax assets............................ 2,130 1,150
Deferred Tax Liabilities:
Depreciation....................................... 157 146
Mortgage servicing rights.......................... 42 37
Other.............................................. 127 112
------ ------
Gross deferred tax liabilities..................... 326 295
------ ------
Net deferred tax assets............................ $1,804 $ 855
------ ------
</TABLE>
The net deferred tax asset increased by $949,000 in 1999 and $168,000 in 1998.
The difference between the increase 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
1999 and 1998.
-104-
<PAGE> 107
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,
1999 1999 1998 1998 1998 1998 1997 1997
------- ------- -------- --------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income........ $8,252 $8,801 $8,885 $8,360 $8,118 $7,943 $8,162 $8,004
Interest expense.................... 5,418 5,849 5,984 5,563 5,408 5,259 5,485 5,434
------ ------ ------ ------ ------ ------ ------ ------
Net interest income................. 2,834 2,952 2,901 2,797 2,710 2,684 2,677 2,570
Provision for loan losses........... -- 140 210 130 160 200 240 200
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses......... 2,834 2,812 2,691 2,667 2,550 2,484 2,437 2,370
Gain (loss) on sales of
investments and mortgage-backed
and related securities............ 33 -- 35 -- -- -- 9 (17)
Gain (loss) on sale of loans, net... 60 180 438 214 160 114 2 21
230 393 233 266 247 251 225 196
Other non-interest income........... ------ ------ ------ ------ ------ ------ ------ ------
Total non-interest income........... 323 573 706 480 407 365 236 200
1,859 2,327 2,191 2,074 1,880 1,811 1,576 1,580
Total non-interest expense.......... ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes... 1,298 1,058 1,206 1,073 1,077 1,038 1,097 990
393 340 417 355 316 359 383 345
Income tax expense (benefit)........ ------ ------ ------ ------ ------ ------ ------ ------
$ 905 $ 718 $ 789 $ 718 $ 761 $ 679 $ 714 $ 645
Net income (loss)................... ====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) per share (basic)... $ 0.33 $ 0.26 $ 0.28 $ 0.26 $ 0.27 $ 0.24 $ 0.26 $ 0.24
Earnings (loss) per share (diluted). $ 0.32 $ 0.25 $ 0.28 $ 0.25 $ 0.26 $ 0.23 $ 0.25 $ 0.23
Market Information
Trading range - high.............. 12.13 11.75 13.50 16.25 16.75 17.50 19.00 13.25
low........... 10.00 9.75 9.25 10.63 14.00 14.75 13.00 10.50
close......... 11.63 10.63 11.00 11.50 14.00 15.50 17.00 12.88
</TABLE>
No dividends were declared on the shares of Common Stock during the fiscal
years ended June 30, 1999 and 1998.
-105-
<PAGE> 108
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 24, 1999, relating to the 1999 Annual Meeting of
Shareholders currently scheduled for October 27, 1999, 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 24, 1999, relating to the 1999 Annual Meeting of
Shareholders currently scheduled for October 27, 1999, 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 24, 1999, relating to the 1999 Annual Meeting of
Shareholders currently scheduled for October 27, 1999, 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 24, 1999, relating to the 1999 Annual
Meeting of Shareholders currently scheduled for October 27, 1999, which section
is hereby incorporated herein by reference.
-106-
<PAGE> 109
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, 1999 and
1998
Consolidated Statements of Income for Years Ended June 30, 1999, 1998
and 1997
Consolidated Statements of Shareholders' Equity for Years Ended June
30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for Years Ended June 30, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
-107-
<PAGE> 110
(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.
<TABLE>
<CAPTION>
SEQUENTIAL
(A)(3) EXHIBITS PAGE NUMBER
-------- -----------
<S> <C>
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)
10.10 Executive Employee Supplemental Compensation Agreement - James D. Smessaert (4)
10.11 Executive Employee Supplemental Compensation Agreement - Peter A. Gilbert (4)
12.1 Statement regarding computation of per share earnings - See Footnote (1) in Part II, Item 8
13.1 1999 Summary Annual Report to Shareholders (5)
21.1 Subsidiaries of the Registrant - See "Subsidiary Activities" in Part I, Item 1
23.1 Consent of KPMG LLP (6)
24.1 Powers of Attorney for certain officers and directors (1)
27.1 Financial Data Schedule (6)
99.1 Proxy Statement for 1999 Annual Meeting of Shareholders (6)
</TABLE>
(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) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997.
(4) Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarter Ended December 31, 1998.
(5) Filed in paper format with the SEC pursuant to Rule 101 of Regulation S-T.
(6) 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).
-108-
<PAGE> 111
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
23.1 Consent of KPMG LLP
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
99 Proxy Statement for 1999 Annual Meeting of Shareholders.
<PAGE> 112
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 15, 1999
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/ Martin Hedrich, Jr. /s/ Reginald M. Hislop, III
- ------------------------------------------ ---------------------------------
Martin Hedrich Jr., Director Reginald M. Hislop, III, Director
Date: September 15, 1999 Date: September 15, 1999
/s/ Peter A. Gilbert /s/ Charles E. Rickheim
- ------------------------------------------ ---------------------------------
Peter A. Gilbert, Executive Vice President, Charles E. Rickheim, Director
Corporate Secretary and Director
Date: September 15, 1999 Date: September 15, 1999
/s/ James D. Smessaert /s/ Arthur E. Thompson
- ------------------------------------------ ---------------------------------
James D. Smessaert, Chairman, Arthur E. Thompson
President and Chief Executive Officer Chief Financial Officer and
(Principal Executive Officer) Corporate Treasurer
(Principal Financial and
Accounting Officer)
Date: September 15, 1999 Date: September 15, 1999
/s/ Donald A. Zellmer
- ------------------------------------------
Donald A. Zellmer, Director
Date: September 15, 1999
-109-
<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 July
23, 1999, relating to the consolidated statements of financial condition of
Hallmark Capital Corp. and subsidiary as of June 30, 1999 and 1998, 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, 1999, which report
appears in the June 30, 1999 annual report on Form 10-K of Hallmark Capital
Corp.
KPMG LLP
Milwaukee, Wisconsin
September 15, 1999
-110-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,582
<INT-BEARING-DEPOSITS> 5,017
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,468
<INVESTMENTS-CARRYING> 100,468
<INVESTMENTS-MARKET> 100,468
<LOANS> 281,120
<ALLOWANCE> 2,648
<TOTAL-ASSETS> 469,659
<DEPOSITS> 288,714
<SHORT-TERM> 38,477
<LIABILITIES-OTHER> 13,705
<LONG-TERM> 91,042
0
0
<COMMON> 34,496
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 469,659
<INTEREST-LOAN> 23,547
<INTEREST-INVEST> 10,751
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 34,298
<INTEREST-DEPOSIT> 15,163
<INTEREST-EXPENSE> 22,814
<INTEREST-INCOME-NET> 11,484
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 68
<EXPENSE-OTHER> 8,451
<INCOME-PRETAX> 4,635
<INCOME-PRE-EXTRAORDINARY> 4,635
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,130
<EPS-BASIC> 1.13
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 8.14
<LOANS-NON> 2,206
<LOANS-PAST> 2,425
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,329
<CHARGE-OFFS> 176
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 2,648
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,648
</TABLE>
<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
HALLMARK CAPITAL CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[HALLMARK CAPITAL CORP. LETTERHEAD]
September 24, 1999
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
Wednesday, October 27, 1999, at 7:00 p.m., Milwaukee, Wisconsin time, at the
Pettit National Ice Center, Hall of Fame Room, 500 South 84th Street, Milwaukee,
Wisconsin 53214.
The attached Notice of Annual Meeting of Shareholders and Proxy
Statement describe the formal business to be conducted at the Annual Meeting.
The Company's Form 10-K Annual Report for the fiscal year ended June 30, 1999
also is included in this 1999 Annual Report. Directors and officers of the
Company, as well as representatives of KPMG 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> 3
[HALLMARK CAPITAL CORP. LETTERHEAD]
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 27, 1999
----------------------------------------
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
Wednesday, October 27, 1999, at 7:00 p.m., Milwaukee, Wisconsin time, at the
Pettit National Ice Center, Hall of Fame Room, 500 South 84th Street, Milwaukee,
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 two directors for a three-year term, and until
their successors are elected and qualified;
2. The ratification of the appointment of KPMG LLP as independent
auditors of the Company for the fiscal year ending June 30,
2000; and
3. 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 10, 1999, 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
Glendale, Wisconsin Peter A. Gilbert
September 24, 1999 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> 4
[HALLMARK CAPITAL CORP. LETTERHEAD]
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 27, 1999
--------------------------------
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 Wednesday, October 27, 1999,
at 7:00 p.m., Wisconsin time, at the Pettit National Ice Center, 500 South 84th
Street, Hall of Fame Room, Milwaukee, Wisconsin and at any adjournments or
postponements thereof.
The Company's 1999 Annual Report to Shareholders which includes the
Company's Form 10-K Annual Report, including the Company's consolidated
financial statements for the fiscal year ended June 30, 1999, accompany this
Proxy Statement and appointment of proxy form (the "Proxy"), which are first
being mailed to shareholders on or about September 24, 1999.
RECORD DATE AND OUTSTANDING SHARES
Only shareholders of record at the close of business on September 10,
1999 (the "Voting Record Date") will be entitled to vote at the Annual Meeting.
On the Voting Record Date, there were 2,731,941 shares of Common Stock
outstanding and entitled to vote, and the Company had no other class of
securities outstanding.
QUORUM
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.
ABSTENTIONS AND BROKER NON-VOTES
Abstentions (i.e., shares for which authority is withheld to vote for a
matter) are included in the determination of shares present and voting for
purposes of whether a quorum exists. For the election of directors, abstentions
will have no effect on the outcome of the vote because directors are elected by
a plurality of the votes cast. For all other matters to be voted on at the
Annual Meeting, abstentions will be included in the number of shares voting on a
matter, and consequently, an abstention will have the same practical effect as a
vote against such matter.
-1-
<PAGE> 5
Proxies relating to "street name" shares (i.e., shares held of record
by brokers or other third party nominees) that are voted by brokers or other
third party nominees on certain matters will be treated as shares present and
voting for purposes of determining the presence or absence of a quorum. "Broker
non-votes" (i.e., proxies submitted by brokers or third party nominees
indicating that such persons have not received instructions from the beneficial
owners or other persons entitled to vote shares as to a matter with respect to
which the brokers or third party nominees do not have discretionary power to
vote under the rules of the New York Stock Exchange) will be considered present
for the purpose of establishing a quorum, but will not be treated as shares
entitled to vote on such matters.
ALL MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING ARE CONSIDERED
"DISCRETIONARY" PROPOSALS FOR WHICH BROKERS AND THIRD PARTY NOMINEES MAY VOTE
PROXIES NOTWITHSTANDING THE FACT THAT THEY HAVE NOT RECEIVED VOTING INSTRUCTIONS
FROM THE BENEFICIAL OWNERS OF SHARES; CONSEQUENTLY, SHARES HELD BY BROKERS OR
THIRD PARTY NOMINEES WILL BE COUNTED IF AND AS VOTED BY SUCH BROKERS AND THIRD
PARTY NOMINEES.
VOTING
Matter 1 (Election of Directors). The Proxy being provided by the Board
of Directors enables a shareholder to vote for the election of the nominees
proposed by the Board, or to withhold authority to vote for the nominees being
proposed. The Company's Articles of Incorporation do not provide for cumulative
voting by shareholders for the election of the Company's directors. Under the
Wisconsin Business Corporation Law ("WBCL"), directors are elected by a
plurality of the votes cast with a quorum present, meaning that the two nominees
receiving the most votes will be elected directors.
Matter 2 (Appointment of KPMG LLP). The affirmative vote of a majority
of the shares of Common Stock represented in person or by Proxy at the Annual
Meeting is necessary to ratify the appointment of KPMG LLP as auditors for the
fiscal year ending June 30, 2000.
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. 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.
SOLICITATION AND REVOCATION
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 vote 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
indicated, signed proxies will be voted:
- FOR the election of the nominees for director named in this
Proxy Statement;
- FOR the ratification of the appointment of KPMG LLP as
independent auditors of the Company for the fiscal year ending
June 30, 2000; and
- In accordance with the best judgment of the persons appointed
as proxies upon the transaction of such other business as may
properly come before the Annual Meeting or any adjournments or
postponements thereof.
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.
-2-
<PAGE> 6
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.,
5555 North Port Washington Road, Glendale, Wisconsin 53217); (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.
-3-
<PAGE> 7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of August 31, 1999 (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)...................................... 284,000 10.40%
West Allis Savings Bank Employee Stock
Ownership Trust (6).................................... 107,441 3.93
James D. Smessaert (2)(3)(4)............................. 229,747 8.06
Reginald M. Hislop, III (2).............................. 2,200 *
Martin Hedrich, Jr....................................... 200 *
Charles E. Rickheim (2)(3)............................... 66,215 2.40
Donald A. Zellmer (2).................................... 7,200 *
Peter A. Gilbert (2)(3)(4)............................... 89,305 3.23
Arthur E. Thompson (2)(3)(4)............................. 56,129 2.03
All directors and executive officers
as a group (8 persons) (2)(3)(4)....................... 465,746 15.78%
- --------------------
</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 -
120,286 shares; Mr. Gilbert - 30,400 shares; Mr. Thompson - 34,824; Mr.
Hislop - 1,600 shares; Mr. Rickheim - 27,670 shares and Mr. Zellmer -
1,200 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 under the ESOP, for which such
individuals possess shared voting power, of which approximately, 37,874
shares have been allocated to the accounts of the named executive
officers in the Summary Compensation Table as follows: Mr. Smessaert -
14,002 shares; Mr. Gilbert - 7,401 shares; and Mr. Thompson - 10,171
shares.
(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) U.S. Bancorp. (the "Trustee") is the trustee for the ESOP. The Trustee's
address is 601 2nd Avenue South, Minneapolis, Minnesota 55402-4302.
-4-
<PAGE> 8
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. Martin Hedrich, Jr. has served as a director of the
Company since September 1998. Donald A. Zellmer has served as a director of the
Company since October 1996. James D. Smessaert has served as a director of the
Company since the Company's formation in June 1993. Peter A. Gilbert and
Reginald M. Hislop, III have served as directors of the Company since August
1995. Charles E. Rickheim has served as a director of the Company since the
Company's formation in June 1993.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR
AND PRINCIPAL OCCUPATION OF THE BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE
- ---- --- -------------------------- -----
NOMINEES FOR DIRECTOR FOR THREE-YEAR TERMS EXPIRING IN 2002
<S> <C> <C>
Martin Hedrich, Jr. 57 Director of the Company and the Bank; President and 1998
owner of Monopanel Technologies, Inc., a manufacturer
of switches used in appliance, instrument, computer
and medical markets, located in West Allis, Wisconsin.
Donald A. Zellmer 65 Director of the Company and the Bank; President and 1996
owner of Ridgeview Farms, Inc.; Retired Partner of
Ernst & Young LLP, Milwaukee Office.
</TABLE>
-5-
<PAGE> 9
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR
AND PRINCIPAL OCCUPATION OF THE BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE
- ---- --- -------------------------- -----
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS
DIRECTOR WHOSE TERM EXPIRES IN 2000
<S> <C> <C>
James D. Smessaert 61 President, Chief Executive Officer and Chairman of 1984
the Board for the Company and the Bank.
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRES IN 2001
<S> <C> <C>
Peter A. Gilbert 51 Director of the Company and the Bank; Executive Vice 1995
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 39 Director of the Company and the Bank; President and 1995
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 58 Director of the Company and the Bank; Owner and manager 1980
of residential real estate located in the State of
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 NOMINEES. THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR ELECTION OF THE NOMINEES FOR DIRECTOR.
-6-
<PAGE> 10
MATTER 2.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for the fiscal year ended June 30,
1999 were KPMG LLP. The Board of Directors of the Company has reappointed KPMG
LLP to perform the audit of the Company's financial statements for the fiscal
year ending June 30, 2000. Representatives of KPMG 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
LLP, AS THE INDEPENDENT AUDITORS OF THE COMPANY. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF KPMG 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, 1999, the Board of Directors of the
Company held four regular meetings. 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, 1999.
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), Charles E. Rickheim and Reginald M. Hislop, III. 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, 1999.
The Board of Directors of the Bank has established a Compensation
Committee consisting of three directors, Messrs. Charles E. Rickheim (Chairman),
Reginald M. Hislop, III and Martin Hedrich, Jr. who are neither officers nor
employees of the Company or the Bank ("Outside Directors"). During the fiscal
year ended June 30, 1999, the Company did not pay separate compensation to its
executive officers. The Compensation Committee of the Company met in February
and June of 1999 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. For a further discussion of the
compensation policies of the Company, see "Compensation Committee Report."
The entire Board of Directors, acting as a Nominating Committee, met on
August 24, 1999 to consider and select nominees 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 2000 Annual Meeting."
-7-
<PAGE> 11
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
During the fiscal year ended June 30, 1999, 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 and the next two highest paid
executive officers of the Bank whose compensation (salary and bonus) exceeded
$100,000 during the Company's fiscal years ended June 30, 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION
--------------- ------------
NUMBER
OF SHARES
SUBJECT TO ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS(3) COMPENSATION(4)
- --------------------------- ---- ------ -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
James D. Smessaert........................ 1999 $164,564 $66,774 6,000 $24,378
President and Chief Executive 1998 158,235 76,066 6,000 36,683
Officer and Director of the 1997 150,700 35,704 6,000 28,600
Company and the Bank
Peter A. Gilbert.......................... 1999 $131,314 $46,622 4,000 $24,378
Executive Vice President & 1998 126,263 53,109 4,000 36,683
Corporate Secretary of the 1997 120,250 24,981 4,000 27,403
Company, Executive Vice
President/Chief Operating
Officer and Corporate Secretary
of the Company and the Bank
Arthur E. Thompson........................ 1999 $ 85,176 $21,600 2,000 $21,727
Vice President and Treasurer 1998 81,900 24,607 2,000 35,975
of the Company/Senior Vice 1997 78,000 11,550 2,000 14,190
President, Finance and
Corporate Treasurer of the Bank
</TABLE>
- -------------------
(1) Perquisites provided to Messrs. Smessaert, Gilbert and Thompson 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, Gilbert and Thompson in fiscal 1997,
1998 and 1999 were based upon the terms set forth under the West Allis
Savings Bank Annual Incentive Plan (the "Incentive Plan"). See "Annual
Incentive Plan."
(3) Amounts shown in this column represent the total number of shares of Common
Stock subject to options granted (both vested and unvested) under the
Hallmark Capital Corp. 1993 Incentive Stock Option Plan, as amended (the
"Incentive Stock Option Plan"). The options awarded are subject to a
vesting schedule over a five-year period from the date of grant.
(4) Amounts shown in this column represent the Bank's contributions on behalf
of Mr. Smessaert, Mr. Gilbert and Mr. Thompson under the ESOP for the
fiscal years ended June 30, 1997, 1998 and 1999.
-8-
<PAGE> 12
EMPLOYMENT AGREEMENTS
In connection with the conversion of the Bank from a state-chartered
mutual savings bank to a state-chartered stock savings bank (the "Conversion"),
the Bank entered into three-year employment agreements with Mr. Smessaert,
President and Chief Executive Officer of the Bank, and Mr. Thompson, Senior Vice
President of Finance of the Bank. On December 31, 1994, the Bank entered into a
three-year employment agreement with Mr. 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 Mr.
Smessaert, Mr. Gilbert and Mr. Thompson are $164,564, $131,314 and $85,176,
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, the executive officers 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 the
executive officers 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, the executive officers 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, the executive officers 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 the executive officers during the five years immediately preceding such
Change in Control.
EXECUTIVE EMPLOYEE SUPPLEMENTAL COMPENSATION AGREEMENT
In December 1998, the Bank entered into a Supplemental Compensation
Agreement (the "SERP") with Mr. Smessaert and Mr. Gilbert. The SERP surpersedes
the Executive Salary Continuation Agreement of August 1992 between the Bank and
Mr. Smessaert. Pursuant to the SERP, the Bank agreed to pay Mr. Smessaert and
Mr. Gilbert an annual benefit of $115,000 and $100,000, respectively, upon their
retirement at age 65 or upon their attainment of age 65 following an involuntary
termination or a termination subsequent to a "change in control." In an effort
to provide "golden handcuffs," the SERP provides that in the event of a
voluntary termination of employment prior to age 65, the benefit commencement
date will extend significantly beyond 65. The SERP provides benefits to Mr.
Smessaert and Mr. Gilbert for life once the payments commence. In the event of
death while employed at the Bank, the Bank will pay their designated
beneficiaries approximately $2.3 million and $2.0
-9-
<PAGE> 13
million, respectively, payable in equal monthly installments over a 20-year
period. In the event of death within 20 years after retirement, the Bank will
pay their designated beneficiaries the remaining monthly payments.
The SERP agreements contain restrictive covenants which provide that
Mr. Smessaert or Mr. Gilbert would forfeit any further benefits under the SERP
if they commence employment with another competitive financial institution for a
period of 18 months following any voluntary termination of employment (excluding
termination caused by a "change in control"). "Change in control" is generally
defined to include any change in control required to be reported under the
federal securities laws, as well as the acquisition by any person of 25% or more
of the Company's or Bank's outstanding voting securities. The Bank has 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 SERP.
In addition, in September 1998, the Bank purchased split-dollar life insurance
policies on the lives of Mr. Smessaert and Mr. Gilbert to provide their
beneficiaries a death benefit of $1.0 million each and to additionally fund the
Bank's anticipated obligations under the SERP.
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, 1999. 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. 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 1999, 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.
-10-
<PAGE> 14
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, 1999, the Company and its subsidiaries had 78
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 369,920
shares of Common Stock were made available for granting to eligible participants
under the Incentive Stock Option Plan, and options to purchase 72,862 shares of
Common Stock remained available for future grant at June 30, 1999.
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,
1999.
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............. 6,000 38.7% $11.38 06/25/09 $18,480
Peter A. Gilbert............... 4,000 25.8% 11.38 06/25/09 12,320
Arthur E. Thompson............. 2,000 12.9% 11.38 06/25/09 6,160
</TABLE>
- ----------------------
(1) The options granted are subject to a vesting schedule under the
Incentive Stock Option Plan and are exercisable as follows: (i) James
D. Smessaert: 1,200 - (6/25/00); 1,200 - (6/25/01); 1,200 - (6/25/02);
1,200 - (6/25/03) and 1,200 - (6/25/04); (ii) Peter A. Gilbert: 800 -
(6/25/00); 800 - (6/25/01); 800 - (6/25/02); 800 - (6/25/03) and 800 -
(6/25/04); and (iii) Arthur E. Thompson: 400 - (6/25/00); 400 -
(6/25/01); 400 - (6/25/02); 400 - (6/25/03) and 400 - (6/25/04).
Options to purchase 16,000 shares of Common Stock were granted to
eligible participants under the Incentive Stock Option Plan during the
fiscal year ended June 30, 1999.
(2) Based upon a binomial 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 32.4%; (iii) a return on
equity of 8.79% for the Company; and (iv) 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 binomial pricing model.
-11-
<PAGE> 15
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, 1999, and the
value of their unexercised stock options at June 30, 1999.
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 $0 117,886 16,800 $ 869,919 $27,252
Peter A. Gilbert............. 0 0 28,800 17,200 164,292 54,918
Arthur E. Thompson........... 0 0 34,024 5,600 249,779 9,084
</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 ($11.625) and the exercise price of the options at June 30,
1999.
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, 1999. For the fiscal year ended June 30, 1999, each
member of the Board of Directors of the Bank received a $1,300 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. For eligible directors who
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 did not attain
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 attained age 70 on or prior to
July 1, 1996 receives health insurance (single and family coverage) under the
health plan maintained by the Bank until the eligible director's death. Eligible
directors who did not attain age 70 on or prior to July 1, 1996 are not 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.
-12-
<PAGE> 16
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
In connection with the Conversion, the Board of Directors of the
Company adopted the Hallmark Capital Corp. 1993 Stock Option Plan for Outside
Directors of the Company and the Bank (the "Directors' Plan"). Options to
purchase 153,980 shares of Common Stock were made available for granting to
Outside Directors under the Directors' Plan, and options to purchase 23,300
shares of Common Stock remained available for future grant at June 30, 1999. All
options granted under the Directors' Plan expire upon the earlier of ten years
following the date the option was granted or one year following the date the
optionee ceases to be a director. During the fiscal year ended June 30, 1999,
the Outside Directors, Messers. Donald A. Zellmer, Reginald M. Hislop III and
Charles E. Rickheim were each granted options to purchase 500 shares of Common
Stock at $11.38 per share, with such options vesting over a five-year period
commencing June 25, 1999. Also, Outside Director, Martin Hedrich, Jr. was
granted options to purchase 4,000 and 500 shares of Common Stock, respectively,
at $10.00 and $11.38 per share, with such options vesting over a five-year
period commencing February 23, 1999 and June 25, 1999, respectively.
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 or 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 the Board of Directors of the Company and
the Bank consists of the Outside Directors, Messrs. Charles E. Rickheim
(Chairman), Reginald M. Hislop, III and Martin Hedrich, Jr. During the fiscal
year ended June 30, 1999, the Company did not pay separate compensation to its
executive officers. In February and June 1999, the Compensation Committee met to
review and ratify the compensation policies set by, and the decisions made by,
the Board of Directors of the Bank. 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.
-13-
<PAGE> 17
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. Base salaries are subject to review and adjustment
by the Compensation Committee each year. In fiscal 1999, the average increase in
base salary for executive officers was 4.00%.
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, 1999. The Incentive Plan 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.
For fiscal 1999, the Company achieved a net income level that exceeded
the target level of net income established by the Board under the Incentive
Plan. Therefore, incentive compensation paid to executive officers for fiscal
1999 was based upon interpolated percentages of their base salaries established
under the Incentive Plan for achievement of net income in the range between the
target and maximum net income levels. The gross amount of bonuses paid to
executive officers for fiscal 1999 was $154,105. The average bonus (incentive
compensation) earned under the Incentive Plan for fiscal 1999 by the two highest
paid executive officers at year-end (other than the CEO) was 29.9% of their base
salaries compared to 34.7% for fiscal 1998. For a further discussion of the
Incentive Plan, see "Compensation of Executive Officers and Directors - Annual
Incentive Plan."
LONG-TERM INCENTIVE COMPENSATION
The Bank established the Incentive Stock Option Plan in fiscal 1994 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 offices and employees of the Company are eligible to participate in the
Incentive Stock Option Plan. The option awards are designed to align the
financial interests of the Company's executive officers more closely with the
Company's shareholders. During fiscal 1999, non-qualifying stock options to
purchase a total of 15,500 shares of Common Stock were awarded to senior
executive officers of the Company and the Bank.
RETIREMENT AND OTHER BENEFITS
In December 1998, the Bank and Messrs. Smessaert and Gilbert entered
into Supplemental Compensation Agreements ("SERP") to ensure that such
executives continue to provide services to the Bank and to provide an incentive
for such executives to refrain from providing services to a competitor of the
Bank. Pursuant to the SERP, the Bank will pay Messrs. Smessaert and Gilbert
annually $115,000 and $100,000, respectively, upon the attainment of certain
events. The benefits under the SERP are forfeited in the event such executive
commences employment for a competitor of the Bank. For a further description of
the SERPs, see "Compensation of Executive Officers and Directors - Executive
Employee Supplemental Compensation Agreement." Additional retirement and other
benefits provided to executive officers are the same as those benefits provided
to all employees of the Bank, including participating in the ESOP, the West
Allis Savings Bank 401(k) Plan (in which
-14-
<PAGE> 18
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. On March 15, 1999, the Bank contributed
$162,172 to the ESOP and allocations of shares of Common Stock were based upon
compensation paid to participants for the year ended December 31, 1998.
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, 1999 was consistent with the Company's overall executive compensation
philosophy. Based upon the compensation philosophy of the Bank, Mr. Smessaert's
competitively determined base salary under his employment agreement was
increased 4% from fiscal 1998 to $164,564 effective January 1, 1999. Mr.
Smessaert receives no additional payment for serving as a member of the Board of
Directors of the Company or the Bank.
In August 1999, a cash bonus of $66,774 was paid to Mr. Smessaert for
the fiscal year ended June 30, 1999 pursuant to the Incentive Plan. The cash
bonus reflected the Company's financial performance relative to net income
levels of the Company established by the Compensation Committee. During fiscal
1999, the Company achieved a net income level that exceeded the target level of
net income established by the Board under the Incentive Plan, resulting in a
cash bonus of approximately 40.6% of Mr. Smessaert's base salary. For a further
description of the Incentive Plan, see "Compensation of Executive Officers and
Directors - Annual Incentive Plan." Mr. Smessaert receives no additional
compensation for serving as a director of the Company and the Bank. Mr.
Smessaert was granted options to purchase 6,000 shares of Common Stock under the
Incentive Stock Option Plan during fiscal 1999. The options vest at the rate of
20% over a five-year period from the date of grant.
COMPENSATION COMMITTEE
CHARLES E. RICKHEIM
REGINALD M. HISLOP, III
MARTIN HEDRICH, JR.
-15-
<PAGE> 19
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 June 30, 1994, the date the Common Stock was issued, through June 30, 1999.
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)
---------------------------------------------------
HALLMARK CAPITAL CORP.
---------------------------------------------------
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
Period Ending
------------------------------------------------------------------------------------
Index 6/30/94 6/30/95 6/30/96 6/30/97 6/30/98 6/30/99
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hallmark Capital Corp. 100.00 111.33 123.70 176.28 230.91 191.74
NASDAQ - Total US* 100.00 133.48 171.38 206.42 274.43 392.51
SNL Thrift Index 100.00 118.01 149.71 242.31 328.13 278.34
</TABLE>
- -------------------
(1) Assumes $100.00 invested on June 30, 1994, and all dividends reinvested
through the end of the Company's fiscal year on June 30, 1999. The
Company did not pay dividends during the period from June 30, 1994 to
June 30, 1999. The performance chart is based upon closing prices on
the trading day specified (as adjusted to reflect the Company's 2-for-1
stock split in November 1997).
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.
-16-
<PAGE> 20
INDEBTEDNESS OF MANAGEMENT AND CERTAIN TRANSACTIONS
Current federal law requires that loans or extensions of credit to
executive officers and directors must be made only (i) 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, or (ii)
pursuant to benefit or compensation programs which are widely available to
employees of the Bank and which do not give such executive officers and
directors preference over other Bank employees. 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 loans or extensions of credit to
executive officers and directors will be made only in the ordinary course of
business (i.e., 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), or in accordance with the terms of
nonpreferential benefit or compensation plans generally available to Bank
employees. All loans since the enactment of current laws were made by the Bank
in the ordinary course of business or pursuant to non-preferential benefit or
compensation plans generally available to Bank employees.
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 be made only in the ordinary course of business or
pursuant to nonpreferential benefit or compensation programs generally available
to Bank employees.
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, 1999, officers, directors and greater
than ten percent shareholders complied with all Section 16(a) filing
requirements.
-17-
<PAGE> 21
SHAREHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS FOR INCLUSION IN 2000 PROXY
MATERIALS
Any proposal which a shareholder wishes to have included in the proxy
materials of the Company relating to the fifth annual meeting of the
shareholders of the Company, which is scheduled to be held in October 2000, must
be received at the principal executive offices of the Company, 5555 North Port
Washington Road, Glendale, Wisconsin 53217, Attention: Peter A. Gilbert,
Corporate Secretary, no later than May 27, 2000. 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 2000 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.
ADVANCE NOTICE REQUIREMENT FOR ANY PROPOSAL OR NOMINATION TO BE RAISED BY A
SHAREHOLDER
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.
DISCRETIONARY VOTING OF 2000 PROXIES
Pursuant to Rule 14a-4(c) under the Exchange and Article VII of the
Company's Articles of Incorporation, if a shareholder who intends to present a
proposal at the 2000 Annual Meeting timely and properly notifies the Company of
such proposal at least ten days after mailing of the 2000 proxy statement, as
described above, management proxies may not use their discretionary voting power
for such proposal unless the Company sends to shareholders information on the
matter to be presented at the meeting and how the management proxies intend to
exercise their discretionary vote of such matter.
-18-
<PAGE> 22
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
Glendale, Wisconsin Peter A. Gilbert
September 24, 1999 Executive Vice President and Corporate Secretary
================================================================================
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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<PAGE> 23
HALLMARK CAPITAL CORP.
555 North Port Washington Road REVOCABLE PROXY
Glendale, Wisconsin 53217
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF HALLMARK CAPITAL
CORP.
FOR USE ONLY AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 27,
1999
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders (the "Annual Meeting") and the Proxy Statement and,
revoking any proxy heretofore given, hereby constitutes and appoints Messrs.
James D. Smessaert and Peter A. Gilbert, directors of Hallmark Capital Corp.
(the "Company"), to represent and to vote, as designated below, all the shares
of common stock, $1.00 par value per share ("Common Stock"), of the Company
held of record by the undersigned on September 10, 1998, at the Annual Meeting
which will be held on October 27, 1999, at 7:00 p.m., Milwaukee, Wisconsin
time, at the Petit National Ice Center, 500 South 84th Street, West Allis,
Wisconsin 53214, or any adjournments or postponements thereof.
This proxy is revocable and will be voted as directed, but if no
instructions are specified, this proxy will be voted FOR each of the matters
listed. If any other business is presented at the Annual Meeting, this proxy
will be voted by the Board of Directors of the Company in their best judgment.
At the present time, the Board of Directors of the Company knows of no other
business to be presented at the Annual Meeting.
Please mark your votes as in this example: [X]
\/ DETACH BELOW AND RETURN USING THE ENVELOPE PROVIDED \/
HALLMARK CAPITAL CORP. 1999 ANNUAL MEETING
<TABLE>
<CAPTION>
<S> <C> <C> <C> [ ] FOR all nominees [ ] WITHHOLD AUTHORITY
1. ELECTION OF DIRECTORS: 1- Martin Hedrich, Jr. 2- Donald A. Zellmer listed to the left to vote for all nominees
(except as specified listed to the left
below)
(Instructions: To withhold authority to vote for any indicated nominee, write ____________________________________________________
the number(s) of the nominee(s) in the box provided to the right).
____________________________________________________
2. Ratification of the appointment of KPMG LLP as independent auditors of
the Company for the fiscal year ending June 30, 2000. [ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting or any adjournments
or postponements thereof.
Check appropriate box Date _________________________ NO. OF SHARES
indicate changes below
Address Change? [ ] Name Change? [ ] ____________________________________________________
____________________________________________________
SIGNATURE(S) IN BOX
IMPORTANT: Please sign your name exactly as it
appears hereon. When signing as an attorney,
administrator, agent, corporation, officer,
executor, trustee, guardian or similar position,
please add your full title to your signature. If
shares of common stock are held jointly, each
holder may sign but only one signature is required.
</TABLE>
