UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22066
FCB Financial Corp.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1760287
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
420 S. Koeller Street, Oshkosh, WI 54902
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (414) 236-3680
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class: Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the 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. [ X ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant, based on the closing sales price of the Registrant's
common stock as of May 31, 1997, was $ 90,413,306.
Number of shares of common stock, $.01 par value, outstanding as of May
31, 1997: 4,099,022
Documents Incorporated by Reference:
Portions of FCB Financial Corp. Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III
hereof.
FCB FINANCIAL CORP.
INDEX TO THE ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended March 31, 1997
PART I Page No.
Item 1 Business 18
Item 2 Properties 45
Item 3 Legal Proceedings 45
Item 4 Submission of Matters to a Vote of Security Holders 45
PART II
Item 5 Market for Registrant's Common Equity
and Related Shareholder Matters 45
Item 6 Selected Financial Data 46
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 47
Item 7A Quantitative and Qualitative Disclosures About Market Risk 50
Item 8 Financial Statements and Supplementary Data 51
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 74
PART III
Item 10 Directors and Executive Officers of the Registrant 74
Item 11 Executive Compensation 74
Item 12 Security Ownership of Certain Beneficial
Owners and Management 74
Item 13 Certain Relationships and Related Transactions 74
PART IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 74
Signatures 75
PART I
Item 1. Business
General and Merger with OSB Financial Corp.
FCB Financial Corp. (the "Corporation"), a Wisconsin corporation,
became the unitary savings and loan holding company for Fox Cities Bank,
F.S.B. (the "Bank") upon the Bank's conversion from a federal mutual
savings bank to a federal stock savings bank (the "Conversion"). The
Conversion was completed on September 23, 1993. At March 31, 1997, the
Corporation had total consolidated assets of $271.2 million and
consolidated shareholders equity of $47.4 million. The Corporation
declared quarterly cash dividends of $0.18 per share to shareholders in
each of the four quarters in the fiscal year ended March 31, 1997, for a
dividend payout ratio (dividends declared per share divided by net income
per share) of 71.3% for the most recent fiscal year. Other financial
ratios are included in Selected Consolidated Financial Data in Part II,
Item 6 of this document. Other than a loan to the FCB Financial Corp.
Employee Stock Ownership Plan and investing in securities of the same
nature as the Bank, the Corporation is not engaged in any other business
activity other than holding the stock of the Bank. Accordingly, the
information set forth in this report, including financial statements and
related data, relates primarily to the Bank and its subsidiaries.
The Bank was established in 1893 under the name Twin City
Building-Loan and Savings Association as a Wisconsin chartered mutual
savings and loan association. In June 1952, the name was changed to Twin
City Savings and Loan Association. In June 1990, the Bank converted to a
federally-chartered mutual savings bank and took its present name. The
Bank considers its primary market area to be East Central Wisconsin
(including Winnebago, Outagamie and Calumet counties).
Effective May 1, 1997, OSB Financial Corp. ("OSB"), a Wisconsin
corporation, was merged (the "Merger") with and into the Corporation. The
Corporation was the surviving corporation in the Merger. The Merger was
consummated in accordance with the terms of an Agreement and Plan of
Merger, dated November 13, 1996 (the "Merger Agreement"), between the
Corporation and OSB. Matters with respect to the Merger were approved by
shareholders of the Corporation and OSB at special meetings of
shareholders of such companies held on April 24, 1997.
Under the terms of the Merger Agreement, each share of common stock,
$.01 par value, of OSB (the "OSB Common Stock") issued and outstanding
immediately prior to the effectiveness of the Merger was (except as
otherwise provided below) cancelled and converted into the right to
receive 1.46 shares of the common stock, $.01 par value, of the
Corporation (the "FCB Common Stock") plus cash in lieu of any fractional
share. All shares of OSB Common Stock (i) owned by OSB as treasury stock,
(ii) owned by OSB Management Development and Recognition Plans and not
allocated to participants thereunder or (iii) owned by the Corporation
were cancelled and no FCB Common Stock or other consideration was given in
exchange therefor. Of the 1,157,534 shares of OSB Common Stock issued and
outstanding at the effective time of the Merger, 48,650 shares were
cancelled pursuant to the preceding sentence and the remaining 1,108,884
shares were converted into shares of FCB Common Stock and cash in lieu of
fractional shares as described above. Shares of FCB Common Stock which
were issued and outstanding at the time of the Merger were not affected by
the Merger and remain outstanding. In connection with the Merger, Oshkosh
Savings Bank, F.S.B., a federally chartered stock savings association and
subsidiary of OSB, was merged with and into the Bank. The Bank was the
surviving corporation in that merger. The Bank now operates from thirteen
different locations, including from its principal executive offices in
Oshkosh, Wisconsin, as well as from twelve branch office locations in
Oshkosh, Neenah, Menasha, Appleton, Winneconne, Berlin, Ripon and Wautoma,
Wisconsin.
Pursuant to the terms of the Merger Agreement, directors of OSB,
namely David L. Baston, Thomas C. Butterbrodt, Dr. Edwin L. Downing, David
L. Geurden, David L. Omachinski, James J. Rothenbach and Ronald L. Tenpas,
were added to the Board of Directors of the Corporation effective as of
the effective time of the Merger. In addition, each of Donald D. Parker,
James J. Rothenbach, Phillip J. Schoofs, Harold L. Hermansen, and Theodore
W. Hoff have entered into employment agreements with the Corporation and
the Bank (the "Employment Agreements"). Pursuant to the Employment
Agreements, each of the above serves as an officer of the Bank: Mr.
Parker serves as Chairman of the Board; Mr. Rothenbach serves as President
and Chief Executive Officer; Mr. Schoofs serves as Vice President,
Treasurer and Chief Financial Officer; Mr. Hermansen serves as
Vice-President - Retail Lending and Secretary; and Mr. Hoff serves as Vice
President - Retail Sales and Service. The foregoing individuals also
serve as officers of the Corporation in accordance with the Employment
Agreements.
Additional information regarding the Merger, including historical
financial statements of OSB and certain pro forma financial data, are
included in the definitive Joint Proxy Statement/Prospectus of the
Corporation and OSB, dated March 12, 1997, as well as in a Current Report
on Form 8-K, dated May 1, 1997, filed by the Corporation with the
Securities and Exchange Commision in connection with the Merger. The
financial and other statistical data included in this Annual Report on
Form 10-K for the Corporation's fiscal year ended March 31, 1997 do not
give the effect to the Merger. Financial data for the Corporation and OSB,
combined as of the date of the merger, will be included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ending June
30, 1997.
Business of the Bank
The business of the Bank consists primarily of attracting savings
deposits from the general public and using those deposits, together with
other funds, to originate first mortgage loans on one- to four-family
homes located in its market area. The Bank also makes commercial real
estate, five or more family residential, consumer and residential
construction loans within its market area. In addition, the Bank invests
in mortgage-related and short- and intermediate-term government or
government agency-backed investment securities and short-term liquid
assets. Through its wholly-owned subsidiary, Fox Cities Financial
Services, Inc., the Bank sells various insurance and investment products
as well as tax deferred annuities. Fox Cities Financial Services, Inc.
also holds a 50% limited partnership interest in a 37-unit apartment
complex providing housing for low/moderate income and elderly persons in
Menasha, Wisconsin. The Bank's other wholly-owned subsidiary, Fox Cities
Investments, Inc. (a Nevada corporation), holds a portfolio of investment
and mortgage-related securities. All of the investments held by the
subsidiary would be allowable investments if held directly by the Bank.
The executive offices of the Corporation and the Bank are located at
420 S. Koeller Street, Oshkosh, Wisconsin 54902, and its telephone number
is (414) 236-3680.
Yields Earned and Rates Paid
The Corporation's earnings depend heavily on the level of net
interest income, which represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
The following schedule sets forth, for the periods indicated, the
yield on assets and cost of liabilities expressed both as dollars and
rates. Such yields and costs were derived by dividing income or expense
by the average balance of assets or liabilities, respectively, for the
periods shown. Average balances were derived from average daily balances
for each of the years presented. The average balance of loans receivable
includes loans on which the Corporation, at the Bank level, has
discontinued accruing interest. Accordingly, non-accruing loans have been
included in the table as loans carrying a zero yield. Total
interest-earning assets are net of discounts and premiums and accrued
interest receivable, which are non-interest-bearing. No tax equivalent
adjustments have been made.
AVERAGE YIELDS
Year Ended March 31,
1997 1996 1995
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Interest-earning
assets:
Loans receivable $216,276 $17,358 8.03% $196,357 $15,719 8.01% $171,005 $12,854 7.52%
Loans held for
sale 4,225 344 8.14 3,076 246 8.00 1,266 108 8.53
Mortgage-related
securities 23,879 1,550 6.49 25,663 1,718 6.69 24,262 1,387 5.72
Investment
securities held
to maturity 8,194 462 5.64 9,219 422 4.58 13,666 572 4.19
Interest-bearing
deposits 1,012 50 4.94 1,064 60 5.62 756 36 4.76
Federal Home
Loan Bank stock 2,955 201 6.80 2,295 154 6.71 1,681 103 6.13
------- ------- ------- ------- ------- -------
Total interest-
earning assets 256,541 19,965 7.78 237,674 18,319 7.71 212,636 15,060 7.08
------- ------- -------
Non-interest-earning
assets:
Office properties
and equipment 4,154 4,324 4,286
Other 4,072 3,751 2,232
------- ------- -------
Total assets $264,767 $245,749 $219,154
======= ======= =======
Interest-bearing
liabilities:
Certificate
accounts $105,825 6,297 5.95 $103,014 6,326 6.14 $86,489 4,428 5.12
Regular
savings
accounts 18,361 502 2.73 19,259 466 2.42 23,543 694 2.95
NOW and
money market
accounts 29,325 831 2.83 28,216 836 2.96 29,225 758 2.59
------- ------- ------- ------- ------- -------
Total deposit
accounts 153,511 7,630 4.97 150,489 7,628 5.07 139,257 5,880 4.22
Borrowed funds 56,188 3,123 5.56 39,120 2,378 6.08 24,818 1,415 5.70
Advance payments
by borrowers for
taxes and
insurance 3,819 74 1.94 3,846 75 1.95 3,613 70 1.94
------- ------- ------- ------- ------- -------
Total interest-
bearing
liabilities 213,518 10,827 5.07 193,455 10,081 5.21 167,688 7,365 4.39
------- ------- -------
Non-interest-bearing
liabilities:
Other liabilities 4,151 3,798 2,831
------- ------- -------
Total
liabilities 217,669 197,253 170,519
Shareholders'
equity 47,098 48,496 48,635
------- ------- -------
Total
liabilities
and share-
holders'
equity $264,767 $245,749 $219,154
======= ======= =======
Net interest
income $9,138 $8,238 $7,695
======= ======= =======
Net interest
rate spread 2.71% 2.50% 2.69%
===== ===== =====
Net earning
assets $43,023 $44,219 $44,948
======= ======= =======
Net yield on
average interest-
earning assets
("net interest
margin") 3.56% 3.47% 3.62%
===== ===== =====
Average interest-
earning assets
to average
interest-bearing
liabilities 120.15% 122.86% 126.80%
======= ======= =======
Rate/Volume Analysis
The following table describes the extent to which changes in interest
rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Corporation's interest
income and interest expense during the periods indicated. Information is
provided in each category with respect to (i) changes attributable to
changes in rate (changes in rate multiplied by prior volume), (ii) changes
attributable to changes in volume (changes in volume multiplied by prior
rate), (iii) changes attributable to changes in rate/volume (changes in
rate multiplied by changes in volume), and (iv) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due
to rate.
Year Ended March 31, 1997 Year Ended March 31, 1996
Compared to Compared to
Year Ended March 31, 1996 Year Ended March 31, 1995
Increase (Decrease) Due to Increase (Decrease) Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $39 $1,596 $4 $1,639 $838 $1,906 $121 $2,865
Loans held for sale 4 92 2 98 (7) 154 (9) 138
Mortgage-related
securities (51) (119) 2 (168) 235 80 16 331
Investment securities
held to maturity 98 (47) (11) 40 53 (186) (17) (150)
Interest-bearing
deposits (7) (3) - (10) 7 15 2 24
Federal Home Loan
Bank stock 2 44 1 47 10 38 3 51
---- ----- ----- ----- ----- ----- ----- -----
Total interest-
earning assets 85 1,563 (2) 1,646 1,136 2,007 116 3,259
Interest-bearing
liabilities:
Certificate accounts (196) 173 (6) (29) 882 846 170 1,898
Regular savings
accounts 60 (22) (2) 36 (125) (126) 23 (228)
NOW and money
market accounts (37) 33 (1) (5) 108 (26) (4) 78
---- ----- ----- ------ ----- ----- ----- -----
Total deposits (173) 184 (9) 2 865 694 189 1,748
Borrowed funds (203) 1,038 (90) 745 94 815 54 963
Advance payments by
borrowers for taxes
and insurance - (1) - (1) - 5 - 5
---- ----- ----- ----- ----- ----- ----- -----
Total interest-
bearing
liabilities (376) 1,221 (99) 746 959 1,514 243 2,716
---- ----- ----- ----- ----- ----- ----- -----
Change in net interest
income $461 $342 $97 $900 $177 $493 ($127) $543
==== ===== ===== ===== ===== ===== ===== =====
Asset and Liability Management
The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity
"gap." An asset or liability is said to be interest rate sensitive within
a specific time period if it will mature or reprice 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. A
gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap
is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During
a period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to result in an
increase in net interest income. Conversely, during a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income while a positive gap would tend to adversely affect net
interest income.
At March 31, 1997, the Bank's one-year gap as a percent of total
assets was a negative 12.1%. Management's strategy is to maximize the
percent of loans which are interest rate sensitive within a three-year
period. Although the Bank originates marketable 15- to 30-year fixed rate
mortgage loans, it is management's current policy (which is subject to
review and adjustment by the Bank's Board of Directors) not to retain
those marketable 15-, 20- and 30-year fixed rate loans aggregating in
excess of $31.0 million, $9.3 million and $17.2 million, respectively. To
comply with this policy, fixed rate loans in excess of these amounts are
sold without recourse in the secondary market with servicing retained by
the Bank. In addition, the Bank generally purchases adjustable rate
mortgage-related securities and short- to intermediate-term investment
securities. On the liability side, management's goal is to offer a range
of deposit accounts with maturities of up to five years. Additionally,
borrowings are structured to have varying maturities of up to five years.
The following table sets forth at March 31, 1997 the amounts of
interest-earning assets and interest-bearing liabilities which are
anticipated by the Bank management, using certain assumptions, to mature
or reprice in each of the periods shown. Except as stated below, the
amounts of assets and liabilities shown which mature or reprice during a
particular period were determined in accordance with the contractual terms
of the asset or liability. Fixed rate loans and mortgage-related
securities are shown on the basis of management's estimate of annual
prepayments, contractual amortization and forecasted prepayment rates
prepared by major dealers in mortgage-related securities. Loans and
securities with adjustable rates are shown as being due in the period
during which the interest rates are next subject to change. The Bank has
assumed that its regular savings, money market and NOW accounts, which
totaled $47.4 million at March 31, 1997, are withdrawn at the annual rates
estimated by management at March 31, 1997.
Certain shortcomings are inherent in the method of analysis presented
in the following 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. Moreover,
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. Further, in
the event of a change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in
calculating this table.
March 31, 1997
More than More than More than
1 year to 3 years to 5 years to More than
0-6 mos. 7-12 mos. 3 years 5 years 10 years 10 years Total
(Dollars in thousands)
Interest-earning assets:
Loans receivable $25,509 $58,131 $73,730 $37,415 $24,000 $2,711 $221,496
Loans held for sale 3,270 - - - - - 3,270
Mortgage-related
securities:
available for sale 4,480 1,883 - - - - 6,363
held to maturity 14,963 925 347 296 - - 16,531
Investment securities
held to maturity - 2,995 6,000 - - - 8,995
Interest-bearing
deposits 4,155 - - - - - 4,155
Federal Home Loan
Bank stock 3,245 - - - - - 3,245
------- ------- ------- ------- ------- ------- -------
Total interest-
earning assets 55,622 63,934 80,077 37,711 24,000 2,711 264,055
------- ------- ------- ------- ------- ------- -------
Interest-bearing
liabilities:
Certificate accounts 51,495 30,243 21,506 2,536 - - 105,780
Regular savings
accounts 1,500 1,491 4,542 2,962 3,759 3,339 17,593
NOW and money market
deposit accounts 5,550 5,472 10,090 2,700 3,240 2,738 29,790
------- ------- ------- ------- ------- ------- -------
Total deposits 58,545 37,206 36,138 8,198 6,999 6,077 153,163
Borrowed funds 53,100 - 10,000 1,800 - - 64,900
Advance payments by
borrowers for taxes
and insurance 2,586 - - - - - 2,586
------- ------- ------- ------- ------- ------- -------
Total interest-
bearing liabilities 114,231 37,206 46,138 9,998 6,999 6,077 220,649
------- ------- ------- ------- ------- ------- -------
Interest sensitivity
gap per period ($58,609) $26,728 $33,939 $27,713 $17,001 ($3,366) $43,406
======= ======= ======= ======= ======= ======= =======
Cumulative interest
sensitivity gap ($58,609) ($31,881) $2,058 $29,771 $46,772 $43,406
======= ======= ======= ======= ======= =======
Percentage of cumulative
gap to total earning
assets (22.2)% (12.1)% 0.8% 11.3% 17.7% 16.4%
===== ===== ===== ===== ===== ======
Cumulative ratio of
interest sensitive
assets to interest
sensitive liabilities 48.69% 78.95% 101.04% 114.34% 121.80% 119.67%
======= ======= ======= ======= ======= =======
Lending Activities
General. The Bank, like many other savings institutions, has
emphasized conventional first mortgage loans secured by one- to
four-family residential properties. These loans continue to be the major
focus of the Bank's lending activities. The Bank offers a wide variety of
mortgage loans, including 15-, 20- and 30-year conventional fixed rate
loans, adjustable rate mortgage (ARM) loans, WHEDA (Wisconsin Housing and
Economic Development Authority) loans, and WDVA (Wisconsin Department of
Veterans Affairs) loans.
In addition to making first mortgage residential loans, and to
increase the yield and interest rate sensitivity of its portfolio, the
Bank also originates commercial real estate, five or more family
residential, consumer and residential construction loans. The Bank has
concentrated its lending activities in its primary market area. The Bank
also purchases short- to intermediate-term mortgage-related securities to
supplement its lending and investment activities and to assist in
asset/liability management.
Loan Portfolio Composition. The following table presents information
(exclusive of loans held for sale) concerning the composition of the
Bank's loans receivable portfolio in dollar amounts (in thousands) and
percentages (before deductions for loans in process, unearned interest and
loan fees, unamortized unrealized losses and allowances for losses) as of
the dates indicated.
March 31,
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Real Estate Loans:
One- to four-family
residential $132,985 57.96% $127,426 60.36% $127,172 66.05% $102,145 69.01% $91,475 72.24%
Five or more family
residential 12,379 5.40 13,275 6.29 11,346 5.89 10,016 6.77 7,488 5.91
Commercial 34,183 14.90 28,636 13.56 25,512 13.25 17,395 11.75 15,735 12.42
Construction and
land 13,885 6.05 13,381 6.34 7,715 4.01 6,717 4.54 2,849 2.25
------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Total real estate
loans 193,432 84.31 182,718 86.55 171,745 89.20 136,273 92.07 117,547 92.82
------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Consumer Loans:
Home improvement and
home equity 18,540 8.08 14,912 7.07 12,168 6.33 9,658 6.52 7,017 5.54
Auto and recreational
vehicles 15,635 6.81 11,974 5.67 7,140 3.71 810 0.55 944 0.75
Educational 1,186 0.52 1,036 0.49 890 0.46 741 0.50 638 0.50
Other 649 0.28 469 0.22 587 0.30 543 0.36 495 0.39
------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Total consumer
loans 36,010 15.69 28,391 13.45 20,785 10.80 11,752 7.93 9,094 7.18
------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Gross loans
receivable 229,442 100.00% 211,109 100.00% 192,530 100.00% 148,025 100.00% 126,641 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- =======
Less:
Loans in process 5,791 4,307 4,031 3,517 1,963
Unearned interest
and loan fees 318 351 292 283 426
Unamortized
unrealized losses 432 479 525 - -
Allowance for loan
losses 1,405 1,075 875 840 766
------- ------- ------- ------- -------
Total deductions 7,946 6,212 5,723 4,640 3,155
------- ------- ------- ------- -------
Total loans, net $221,496 $204,897 $186,807 $143,385 $123,486
======= ======= ======= =======
The following schedule illustrates the maturities and repricing dates
of the Bank's loans receivable and loans held for sale at March 31, 1997.
The schedule does not reflect the effects of possible prepayments, but
does reflect reduction for loans in process and the repricing of loans
with adjustable interest rates. Construction loans are included in the
respective categories. Dollar amounts shown in the schedule are in
thousands.
REAL ESTATE LOANS
One- to Four-Family Five or more Family
Loans Held For Sale Residential Loans Residential Loans Commercial Loans
Weighted Weighted Weighted Weighted
Average Average Average Average
Maturity Amount Rate Amount Rate Amount Rate Amount Rate
Six months
or less - - $24,262 7.58% $3,444 8.35% $8,895 8.91%
More than six
months though
one year - - 25,317 7.90 4,730 8.48 8,697 8.91
More than one
year through
three years - - 20,533 7.23 2,621 8.26 14,419 8.62
More than three
years through
five years - - 5,040 7.24 2,351 8.63 3,002 8.19
More than five
year through
ten years - - 15,072 7.47 - - 2,001 8.78
More than ten
years through
twenty years $1,555 7.17% 30,691 7.28 - - 166 9.00
More than
twenty years 1,715 7.77 15,902 7.77 498 9.50 - -
------- ------- ------- -------
Total $3,270 7.48% $136,817 7.52% $13,644 8.47% $37,180 8.73%
======= ===== ======= ===== ======= ===== ======= =====
Fixed rate $3,270 $67,277 $4,114 $509
Variable rate - 19,961 1,356 19,079
------- ------- ------- -------
Total due in more
than one year $3,270 $87,238 $5,470 $19,588
======= ======= =======
Consumer Loans Total
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
Six months
or less $3,378 8.94% $39,979 8.06%
More than six
months though
one year 555 8.21 39,299 8.20
More than
one year through
three years 11,440 8.25 49,013 7.93
More than three
years through
five years 19,746 8.53 30,139 8.29
More than five
year through
ten years 831 7.82 17,904 7.63
More than ten
years through
twenty years 60 8.44 32,472 7.29
More than
twenty years - - 18,115 7.82
------- -------
Total $36,010 8.46% $226,921 7.92%
======= ===== ======= =====
Fixed rate $32,077 $107,247
Variable rate - 40,396
------- -------
Total due in
more than
one year $32,077 $147,643
======= =======
Under the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA"), the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of
unimpaired capital and surplus, although this limitation is increased to
25% for loans fully secured by readily marketable collateral and to 30%
for domestic residential housing development loans. At March 31, 1997,
based on the above, the Bank's regulatory loans-to-one-borrower limit for
most purposes was $9.5 million. On that date, the Bank had no loans to
one borrower in excess of this limit. The Bank's single largest borrower
on March 31, 1997 had an aggregate of $4.8 million in loans outstanding.
Loan applications submitted to the Bank are initially accepted and
considered at various levels of authority. Loans of less than $250,000 to
any one borrower whose total outstanding borrowings from the Bank
(including the proposed loan) would not exceed $500,000 may be approved by
the In-House Loan Committee of the Bank, which consists of branch
managers, loan officers and any two of the Assistant Vice President-Branch
Coordinator, the Vice President-Lending/Secretary and the Chairman of the
Board/President/Chief Executive Officer. Loan commitments in excess of
these limits must be approved by the Board of Directors of the Bank.
All of the Bank's lending is subject to its written,
nondiscriminatory underwriting standards and to loan origination
procedures. Decisions on loan applications are made on the basis of
detailed applications and property valuations provided by State of
Wisconsin certified or licensed appraisers consistent with the Bank's
written appraisal policy. The loan applications are designed primarily to
determine the borrower's ability to repay the loan, and the more
significant items on the application are verified through use of credit
reports, financial statements, tax returns and/or confirmations.
The Bank requires evidence of marketable title and lien position on
all loans and title insurance on all loans secured by real property, and
requires fire and extended coverage casualty insurance on substantially
all loans in amounts at least equal to the principal amount of the loan or
the value of improvements on the property, depending on the type of loan.
The Bank may also require flood insurance to protect the property securing
its interest.
One- to Four-Family Residential Real Estate Lending
The major focus of the Bank's lending program has historically been
the origination of permanent loans secured by first mortgages on
owner-occupied one- to four-family residences. At March 31, 1997, $133.0
million, or 58.0%, of the Bank's gross loans receivable consisted of
permanent loans on one- to four-family residences. Substantially all of
the residential loans originated by the Bank and currently held in its
portfolio are secured by properties located in the Bank's primary market
area.
The Bank originates ARM loans with interest rates which reset to a
stated margin over an index based on yields for one-year U.S. Treasury
Securities ("Treasury ARMs"). At March 31, 1997, the Bank had $73.6
million of Treasury ARMs in its residential loan portfolio. The Bank's
Treasury ARMs generally establish limits on the amount of the periodic
interest rate changes. Decreases or increases in the interest rate on the
Treasury ARMs are generally limited to 1% to 2% at any annual adjustment
date with a specified cap (typically 6%) over the life of the loan. The
Bank's delinquency experience on its ARM residential loans has been
similar to its experience on fixed rate residential loans, which
management believes to have been historically low compared to industry
standards.
The Bank also makes fixed rate, fully amortizing loans with
contractual maturities of up to 30 years. While the Bank does originate
fixed rate loans, such loans are, subject to certain threshold amounts,
originated for sale in the secondary market. This enables the Bank to
satisfy the demand for fixed rate loans in its market area while meeting
its asset/liability management goals. The amount of fixed rate loans
originated for retention in the portfolio at any particular time is
reviewed regularly by management for compliance with the Bank's
asset/liability management goals. See "Asset and Liability Management."
In making residential real estate lending decisions, the Bank
evaluates both the borrower's ability to make principal, interest and
escrow payments and the value of the property that will secure the loan.
The Bank originates residential mortgage loans with loan-to-value ratios
of up to 95%. On most mortgage loans exceeding an 80% loan-to-value ratio
at the time of origination, the Bank will require private mortgage
insurance in an amount intended to reduce the Bank's exposure to 75% or
less of the appraised value of the underlying property.
The Bank's residential first mortgage loans customarily include
"due-on-sale" clauses, which are provisions giving the Bank the right to
declare a loan immediately due and payable in the event the borrower sells
or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid. The Bank enforces due-on-sale clauses to the extent
permitted under applicable law.
Commercial Real Estate and Five or More Family Residential Lending
To enhance the yield of its assets, the Bank originates commercial
real estate loans and permanent five or more family residential loans,
substantially all of which are short-term loans or have interest rates
which are subject to periodic adjustment. Commercial real estate loans
made by the Bank include loans secured by retail, warehouse, office and
health care related facilities. The five or more family residential loans
originated by the Bank generally relate to low rise apartment complexes
with 40 or fewer units. At March 31, 1997, $46.6 million, or 20.3%, of
the Bank's gross loans receivable consisted of commercial real estate and
five or more family residential loans. On that date, the outstanding
principal balances on the largest commercial real estate and five or more
family residential loans were $3.1 million and $1.9 million, respectively.
Substantially all of the Bank's commercial real estate and five or more
family residential loans are secured by properties located within 100
miles of the Bank's Oshkosh, Wisconsin headquarters.
The Bank also has purchased a limited number of participation
interests in one-to-four and five or more family residential loans and
commercial mortgage loans from other financial institutions in Wisconsin.
At March 31, 1997, the Bank had nineteen of such participations
aggregating $9.9 million. Substantially all of such participations are
secured by property located in Wisconsin.
Commercial real estate and five or more family residential loans are
generally written in amounts of up to 80% of the appraised value of the
underlying property. Appraisals on properties securing commercial real
estate and five or more family residential loans originated by the Bank
are performed by a State of Wisconsin certified or licensed appraiser
designated by the Bank at the time the loan is made. In addition, the
Bank's underwriting procedures generally require verification of the rate
borrowers, personal guarantees are required for all or a portion of
commercial real estate or multi-family residential loans. The Bank's
formal loan underwriting policies require personal financial statements in
connection with commercial real estate and multi-family residential loans.
However, management possesses the discretionary authority to waive the
requirement relating to personal guarantees, which authority has been
exercised in limited cases where management deemed it appropriate.
Loans secured by commercial real estate and five or more family
residential properties generally involve a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by commercial real estate and five or more family residential
properties are often dependent on successful operation or management of
the properties, repayment of such loans may be dependent to a greater
extent on conditions in the real estate market or the economy.
Consumer Loans
Management believes that consumer lending is an attractive component
of a balanced loan portfolio, particularly in light of the shorter loan
terms and typically higher interest rate yields available with various
types of consumer loans. Management also believes that offering consumer
loan products helps to expand and create stronger ties to the Bank's
customer base. At March 31, 1997, the Bank held $36.0 million of consumer
loans in its gross loans receivable portfolio, or 15.7% of said portfolio.
The Bank offers a variety of secured consumer loans, including home
improvement and home equity loans, automobile and recreational vehicle
loans and educational loans, as well as loans secured by certificates of
deposit and unsecured consumer loans. Consumer loan terms vary according
to the type of collateral, term of the loan and creditworthiness of the
borrower. The Bank offers both open-end and closed-end credit. Open-end
credit is extended through home equity lines of credit. This credit line
product generally bears interest at a variable rate tied to the prime rate
plus a margin.
In addition, the Bank began buying automobile loans originated at
local dealerships (indirect automobile loans) during fiscal 1995.
Indirect automobile loans are underwritten and approved by Bank management
prior to buying the loan. Indirect automobile loan production totaled
$10.5 million for the fiscal year ended March 31, 1997. Included in the
consumer loan portfolio at March 31, 1997 are indirect automobile loans of
$13.9 million.
The underwriting standards employed by the Bank for all consumer
loans include a determination of the applicant's payment history on other
debts and an assessment of the borrower's ability to meet payments on the
proposed loan along with his or her existing obligations. Although
creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the
security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or
secured by rapidly depreciable assets such as automobiles. In such case,
any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment for the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In
addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such a
loan. Although the level of delinquencies in the Bank's consumer loan
portfolio has generally been low (approximately 0.09% of the consumer loan
portfolio was delinquent 60 days or more at March 31, 1997), there can be
no assurance that the level of delinquencies will not increase in the
future.
Residential Construction Lending
The Bank makes construction loans to individuals for the construction
of their residences and, to a lesser extent, construction loans to
builders and developers for the construction of one- to four-family
residences and other types of properties and the acquisition of land.
Construction loans to borrowers may convert to permanent loans at the
end of the construction phase, which typically runs not more than six
months. These construction loans require the payment of interest only
during the construction phase and thereafter have rates and terms which
are similar to those of any one- to four-family loan offered by the Bank.
The interest rate and loan term is established at the time the
construction is complete. At March 31, 1997, the Bank had approximately
$13.9 million in gross construction loans. Residential construction loans
are generally underwritten pursuant to the same guidelines used for
originating permanent residential loans.
The Bank's construction loan agreements with borrowers generally
provide that loan proceeds are disbursed in increments as construction
progresses. The amount of each disbursement is based on the construction
cost estimate of a qualified inspector. Substantially all construction
loans are made within the Bank's primary market area, and undergo the same
credit review process as other real estate loans. As a result, the Bank
considers the risk of construction loans to be the same as other similar
real estate loans.
Construction and land loans are obtained principally through
continued business from builders who have previously borrowed from the
Bank as well as walk-in customers and broker referrals. The application
process includes a submission to the Bank of accurate plans,
specifications, and costs of the project to be constructed. These items
are used as a basis to determine the appraised value of the subject
property. Loans are based on the current appraised value of the property
to be constructed and/or the costs of construction.
Origination, Purchase and Sale of Loans
As a federally-chartered savings institution, the Bank has general
authority to make real estate loans secured by properties located
throughout the United States. However, at March 31, 1997, substantially
all of the Bank's loans receivable were secured by real estate located in
its primary market area of East Central Wisconsin.
The Bank originates real estate and other loans through internal loan
production personnel at its offices. Historically, mortgage loans have
been originated by the Bank primarily through referrals received from real
estate brokers, builders, and customers as well as through refinancing of
loans for existing customers.
The Bank has, from time to time, purchased loans, mortgage-related
securities and loan participations to supplement loan originations.
Management believes that such loans were underwritten based on standards
comparable to those used by the Bank. Although it has no specific plans
currently, the Bank may purchase loan participations or pools of loans in
the future.
As a result of consumer demand in the Bank's primary market area for
fixed rate mortgage loans in times of relatively low market rates of
interest, a majority of the mortgage loans originated by the Bank have
historically been long-term fixed rate mortgage loans. Substantially all
of such mortgage loans are originated under terms and conditions which
will permit their sale in the secondary market. Consistent with its
asset/liability management strategy, the Bank sells without recourse a
majority of its fixed rate mortgage loan production in the secondary
market. It is management's current policy (which is subject to review and
adjustment by the Bank's Board of Directors) to sell those marketable 15-,
20- and 30-year fixed rate mortgage loans aggregating in excess of $31.0
million, $9.3 million and $17.2 million, respectively. At March 31, 1997
the Bank held $26.3 million, $8.0 million, and $15.8 million in 15-, 20-
and 30-year fixed rate mortgage loans, respectively. To comply with this
policy, fixed rate mortgage loans in excess of these amounts are sold
without recourse in the secondary market. The Bank's recent sales have
been made both through forward sales commitments and through sales
contracts entered into after the Bank has committed to fund the loan. The
Bank attempts to limit any interest rate risk created by forward
commitments by limiting the number of days between the commitment and
closing, and limiting the amounts of its uncovered commitments at any one
time. The Bank retains servicing rights on the loans that it sells. At
March 31, 1997, the Bank was servicing $127.3 million of mortgage loans it
originated and subsequently sold in the secondary market. Sale of
mortgage loans with servicing retained provides the opportunity for future
servicing income and funds for additional lending and other purposes. For
the fiscal years ended March 31, 1997, 1996 and 1995, the Bank earned
servicing fees of $310,000, $304,000 and $296,000, respectively.
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
Year Ended March 31,
1997 1996 1995
(Dollars in thousands)
Gross Loans Receivable:
At beginning of period $211,109 $192,530 $148,025
------- ------- -------
Loan originations:
One- to four-family 38,421 45,065 29,559
Five or more family 763 1,023 1,120
Commercial real estate 706 3,834 5,398
Construction 18,603 19,029 18,488
Consumer 30,732 24,735 18,652
------- ------- -------
Total loans originated 89,225 93,686 73,217
------- ------- -------
Loans purchased:
Five or more family - 10 860
Commercial real estate 2,459 950 1,015
------- ------- -------
Total loans purchased 2,459 960 1,875
------- ------- -------
Total loans originated
and purchased 91,684 94,646 75,092
Principal repayments (55,063) (49,910) (34,563)
Net (increase) decrease in
loans held for sale 1,891 (4,453) 9,879
Sales of fixed rate loans (20,179) (21,704) (5,903)
------- ------- -------
At end of period $229,442 $211,109 $192,530
======= ======= =======
Delinquencies and Non-Performing Assets
When a borrower fails to make a required payment on a mortgage loan,
the Bank attempts to cure the delinquency by contacting the borrower. A
late notice is sent 15 days after the due date and, if necessary, a second
written notice follows at the end of the month in which the payment was
due. Attempts to contact the borrower by telephone begin approximately 20
days after the payment is due. Attempts to contact the borrower in person
increase after the loan reaches the 45th day of delinquency. If a
satisfactory response is not obtained, continuous follow-up contacts are
attempted until the loan has been brought current. Before the 60th day of
delinquency, attempts to interview the borrower, preferably face-to-face,
are made to establish (i) the cause of the delinquency, (ii) whether the
cause is temporary, (iii) the attitude of the borrower toward the debt,
and (iv) a mutually satisfactory arrangement for curing the default.
The mortgaged premises are inspected to determine physical condition
and occupancy status before recommending further servicing action. Such
inspection normally takes place before the 60th day of delinquency. No
later than 90 days into the delinquency procedure, the Bank notifies the
borrower that homeownership counseling is available for eligible
homeowners. The notice informs the borrower of counseling provided by
non-profit organizations.
In most cases, delinquencies are cured promptly; however, if the
borrower is chronically delinquent and all reasonable means of inducing
the borrower to pay on time have been exhausted, foreclosure, deed in lieu
of foreclosure, or other liquidation in accordance with the terms of the
security agreement and applicable law is initiated. If foreclosed upon,
real property is sold at a public sale, and the Bank usually bids on the
property to protect its interest.
Real estate acquired by the Bank as a result of foreclosure or by
deed in lieu of foreclosure is classified as foreclosed property until it
is sold. When real property is acquired, it is recorded at the estimated
fair value as of the date of acquisition. Subsequently, the foreclosed
assets are carried at the lower of the newly established cost or fair
value less estimated selling costs. After acquisition, all costs incurred
in maintaining the property are expensed. Costs relating to the
improvement of the property are capitalized to the extent of net
realizable value.
When a borrower fails to make a required payment on a consumer loan
by the payment due date, the Bank institutes collection procedures which
are handled in a generally similar fashion as delinquent mortgage loans,
except that initial contacts are made when the account is 10 days past
due. Personal contacts are generally made when the loan becomes more than
15 days past due.
The Board of Directors is informed on a monthly basis as to the
status of all mortgage and consumer loans that are delinquent, as well as
the status on all loans currently in foreclosure, and properties acquired
through foreclosure.
Classification of Assets. Federal regulations require that each
savings institution classify its own assets on a regular basis. In
addition, in connection with examinations of savings institutions, Office
of Thrift Supervision ("OTS") examiners possess the authority to identify
problem assets and, if appropriate, require them to be classified. There
are three classifications for problem assets: Substandard, Doubtful and
Loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets
exhibit the same weaknesses as Substandard assets, coupled with a high
possibility of loss because collection or liquidation in full is
questionable in light of currently existing facts, conditions and values.
An asset classified as Loss is considered uncollectible and of such
limited value that continuance as an asset of the institution is not
warranted. The regulations have also created a Special Mention category,
consisting of assets which do not currently expose a savings institution
to a sufficient degree of risk to warrant classification, but do possess
credit deficiencies or potential weaknesses deserving of management's
close attention. Assets classified as Substandard or Doubtful require the
institution to establish prudent general allowances for loan losses. If
an asset or portion thereof is classified as Loss, the institution must
either establish specific allowances for loan losses in the amount of 100%
of the portion of the asset classified Loss, or charge off such amount.
If an institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the District Director of the
OTS. On the basis of management's review, at March 31, 1997, on a net
basis, the Bank had $195,000 classified as Doubtful. Additionally, assets
classified as Special Mention and Substandard totaled $273,000 and
$82,000, respectively, at March 31, 1997. There were no loans classified
as Loss as of March 31, 1997. Of the assets classified at March 31, 1997,
$404,000 were non-performing. As of March 31, 1997, management believes
that these asset classifications were consistent with those of the OTS.
Management is unaware of any loans not classified where borrowers may have
possible credit problems which may lead to the inability to comply with
current terms of the loan.
Non-Performing Assets. Loans are placed on nonaccrual status
automatically when either principal or interest is more than 90 days past
due or earlier if deemed appropriate by management. Interest accrued and
unpaid at the time a loan is placed on non-accrual status is charged
against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan.
The following table sets forth the amounts and categories of
non-performing assets in the Bank's loan portfolio at the dates indicated.
For all dates presented, the Bank had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans
or making loans at terms materially more favorable than those which would
be provided to other borrowers) or accruing loans more than 90 days
delinquent and, for all dates presented, had no assets foreclosed
in-substance. Foreclosed assets include assets acquired in settlement of
loans.
March 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
Non-accruing loans:
One-to four-family $379 $212 $243 $178 $63
Five or more family - - - - -
Commercial real estate - - - - -
Consumer and other 25 - 27 8 1
---- ---- ---- ---- ----
Total 404 212 270 186 64
---- ---- ---- ---- ----
Foreclosed assets:
One- to four-family - - - - 154
Five or more family - - - - -
Commercial real estate - - - - -
Repossessed assets - 22 - - -
---- ---- ---- ---- ----
Total - 22 - - 154
---- ---- ---- ---- ----
Total non-performing
assets $404 $234 $270 $186 $218
==== ==== ==== ==== ====
Total non-performing
assets as a percentage
of total assets 0.15% 0.09% 0.11% 0.09% 0.12%
==== ==== ==== ==== ====
For the years ended March 31, 1997 and 1996, gross interest income which
would have been recorded had the non-accruing loans been current in
accordance with their original terms is as follows:
Year Ended March 31
1997 1996
(Dollars in thousands)
Interest income that would have
been recorded under original
terms $37 $10
Interest income recorded
during the period (18) (9)
---- ----
Interest forgone $19 $1
==== ====
Management has considered the Bank's non-performing, classified, and
Special Mention assets as well as the overall risk profile of its loan
portfolio, expected economic conditions and industry trends in
establishing its allowance for losses on loans. As of March 31, 1997,
there were no specific allowances on these assets. As a result of
charge-offs, to the extent necessary, the Bank's related loans and
foreclosed property balances are carried at an amount not greater than the
property's estimated fair value less estimated selling costs.
Allowance for Loan Losses Analysis. The following table sets forth
an analysis of the Bank's allowance for loan losses for the periods
indicated.
Year Ended March 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
Allowance at beginning
of period $1,075 $875 $840 $771 $483
Provision for loan
losses 350 200 36 78 397
Charge-offs:
Residential real
estate - - - (6) (109)
Consumer (20) - (1) (3) -
------- ------- ------- ------- -------
Total charge-offs (20) - (1) (9) (109)
------- ------- ------- ------- -------
Recoveries:
Residential real
estate - - - - -
Consumer - - - - -
------- ------- ------- ------- -------
Total recoveries - - - - -
------- ------- ------- ------- -------
Net charge-offs (20) - (1) (9) (109)
------- ------- ------- ------- -------
Allowance at end
of period $1,405 $1,075 $875 $840 $771
======= ======= ======= ======= =======
Ratio of net charge-offs
during the period to
average loans
outstanding during
the period 0.01% - % - % 0.01% 0.08%
======= ======= ======= ======= =======
Ratio of allowance for
loan losses to total
net loans and foreclosed
properties at end of
period 0.63% 0.51% 0.47% 0.59% 0.62%
======= ======= ======= ======= =======
While management believes that the allowances are adequate and that
it uses the best information available to determine the allowance for
losses on loans, unforeseen market conditions could result in adjustments
and net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in making the final determination.
See Note 5 of the Notes to the Corporation's Consolidated Financial
Statements included in Part II, Item 8 of this document, which Note is
incorporated herein by reference.
The distribution of the Bank's allowance for losses on loans and real
estate owned at the dates indicated is summarized as follows:
March 31,
1997 1996 1995
Allowance Total Percent Allowance Total Percent Allowance Total Percent
for loan loan of total for loan loan of total for loan loan of total
losses balances loans losses balances loans losses balances loans
(Dollars in thousands)
Real Estate:
One- to four-
family $495 $132,985 57.96% $438 $127,426 60.36% $382 $127,172 66.05%
Five or more
family 113 12,379 5.40 101 13,275 6.29 99 11,346 5.89
Commercial 365 34,183 14.90 296 28,636 13.56 228 25,512 13.25
Construction - 13,885 6.05 - 13,381 6.34 - 7,715 4.01
Consumer Loans 342 36,010 15.69 235 28,391 13.45 160 20,785 10.80
Unallocated 90 - - 5 - - 6 - -
------- ------- ------- ------- ------- ------- ------- ------- --------
Total $1,405 $229,442 100.00% $1,075 $211,109 100.00% $875 $192,530 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ========
March 31,
1994 1993
Allowance Total Percent Allowance Total Percent
for loan loan of total for loan loan of total
losses balances loans losses balances loans
(Dollars in thousands)
Real Estate:
One- to four-
family $343 $102,145 69.01% $350 $91,475 72.23%
Five or more
family 60 10,016 6.77 45 7,488 5.91
Commercial 346 17,395 11.75 275 15,735 12.42
Construction - 6,717 4.54 - 2,849 2.25
Consumer Loans 64 11,752 7.94 45 9,094 7.18
Unallocated 27 - - 56 - -
------- ------- ------- ------- ------- ------
Total $840 $148,025 100.00% $771 $126,641 100.00%
======= ======= ======= ======= ======= ======
Investment Activities
The Corporation and the Bank have purchased mortgage-related
securities to supplement the Bank's loan production, including
collateralized mortgage obligations ("CMOs"), real estate mortgage
investment conduits ("REMICs") and other mortgage-related securities
insured or guaranteed by either the Governmental National Mortgage
Association, the Federal National Mortgage Association or the Federal Home
Loan Mortgage Corporation. Investment decisions on mortgage-related
securities are made based on management's review of the structure of the
proposed investment, the expected prepayments of the mortgages underlying
the investment and the Corporation's specific investment needs. As of
March 31, 1997, the Corporation and the Bank held $22.9 million in
mortgage-related securities, of which $6.4 million were classified as
available for sale and $16.5 million were classified as held to maturity.
The Corporation and the Bank anticipate that they will continue to invest
in mortgage-related securities in the future.
As a part of their asset/liability management strategy, the
Corporation and the Bank have also invested in high quality short- and
intermediate-term investments, including interest-bearing deposits and
U.S. government and government agency-backed securities. At March 31,
1997, the Corporation on a consolidated basis held $4.2 million in
interest-bearing deposits and $9.0 million of such securities. The
Corporation and the Bank have not made any investments in corporate bonds
or mutual funds although, depending upon market conditions, they may do so
in the future. As a borrower of funds from the Federal Home Loan Bank
("FHLB") of Chicago, the Bank is required to purchase and maintain stock
in the FHLB of Chicago.
At the time of purchase, the Corporation classifies its investment
securities, including mortgage-related securities, as held for investment
or available for sale depending on the intention of management on how the
security will be used in the asset/liability management process.
The following table sets forth the composition of the Corporation's
consolidated investment portfolio (including FHLB of Chicago stock) at the
dates indicated.
March 31,
1997 1996 1995
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in thousands)
Securities Held to Maturity:
U.S. government securities $2,996 10.41% $6,986 20.32% $11,993 29.56%
U.S. agency securities 5,999 20.85 - - - -
Mortgage-related securities 16,531 57.46 17,850 72.13 26,348 64.93
------- ------- ------- ------- ------- ------
Subtotal 25,526 88.72 24,836 92.45 38,341 94.49
FHLB stock 3,245 11.28 2,595 7.55 2,235 5.51
------- ------- ------- ------- ------- ------
Total securities held to
maturity and FHLB stock $28,771 100.00% $27,431 100.00% $40,576 100.00%
======= ======= ======= ======= ======= ======
Securities Available for Sale:
Mortgage-related securities $6,363 100.00% $6,906 100.00% $ - - %
======= ======= ======= ======= ======= ======
The composition and contractual maturities as of March 31, 1997 of
the investment securities portfolio, excluding the FHLB stock, are
indicated in the following table.
March 31, 1997
Less than One to Five to Over ten
one year five years ten years years
Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1)
(Dollars in thousands)
Investment securities
held to maturity
- amortized cost $2,996 5.38% $5,999 6.09% - - - -
- market value 2,989 5,964 - -
Mortgage-related securities
available for sale (2)
- amortized cost - - - - - - $6,490 6.17%
- market value - - - 6,363
Mortgage-related securities
held to maturity (2)
- amortized cost - - 388 8.50 $344 7.88% 15,799 6.64
- market value - 388 348 15,877
Total
Amortized Market
cost value
Investment securities held to
maturity
- amortized cost $8,995
- market value $8,953
Mortgage-related securities
available for sale (2)
- amortized cost 6,490
- market value 6,363
Mortgage-related securities
held to maturity (2)
- amortized cost 16,531
- market value 16,613
------- -------
$32,016 $31,929
======= =======
(1) Represents the weighted average yield.
(2) Maturities for mortgage-related securities are final maturity dates; payments are received on a monthly basis and
expected life is much shorter.
Sources of Funds
General. Deposit accounts and borrowed funds have traditionally been
the principal source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposits, the Bank derives
funds from borrowings from the FHLB of Chicago, loan repayments, the sale
of fixed rate mortgage loans, earnings on investments and cash flows
generated from operations. Scheduled loan payments are a relatively
stable source of funds, while deposit inflows and outflows and the related
cost of such funds typically are varied. Other sources of funds available
include reverse repurchase agreements.
Deposit Accounts. The Bank attracts both short-term and long-term
deposits from its primary market area by offering a wide assortment of
accounts and rates. The Bank offers regular savings accounts, NOW
accounts, "money market" accounts, fixed interest rate certificate
accounts with varying maturities, and individual retirement accounts.
Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit and the interest rate,
among other factors. The Bank has not actively sought deposits outside of
its primary market area, although it may do so in the future.
In setting rates, the Bank regularly evaluates (i) its internal costs
of funds, (ii) the rates offered by competing institutions, (iii) its
investment and lending opportunities and (iv) its liquidity position. To
decrease the volatility of its deposit accounts, the Bank imposes
penalties on early withdrawals on its certificate accounts. The Bank does
not currently have any brokered deposits, but may consider accepting or
soliciting such deposit accounts in the future.
The following table sets forth the balances of deposit accounts in
the various types of deposit programs offered by the Bank at the dates
indicated.
March 31,
1997 1996 1995
Weighted Weighted Weighted
Average Percent Average Percent Average Percent
Nominal of Nominal of Nominal of
Amount Rate Total Amount Rate Total Amount Rate Total
(Dollars in thousands)
NOW accounts:
Non-interest-bearing $2,967 - % 1.94% $2,591 - % 1.72% $1,626 - % 1.13%
Interest bearing 9,235 1.61 6.03 8,484 1.61 5.61 7,865 1.85 5.47
Regular savings accounts 17,593 2.73 11.49 18,896 2.73 12.50 20,275 2.94 14.10
Money market accounts 17,588 3.98 11.48 17,703 3.82 11.72 16,706 4.09 11.61
Certificate accounts 105,780 6.08 69.06 103,441 5.95 68.45 97,379 5.79 67.69
------- ----- ------ ------- ------ ------ ------- ----- ------
Total deposit accounts $153,163 5.07% 100.00% $151,115 4.95% 100.00% $143,851 4.91% 100.00%
======= ===== ====== ======= ====== ====== ======= ===== ======
At March 31, 1997, certificate accounts of $100,000 or more amounted
to $10.5 million.
The following table indicates the amount of the certificate accounts of
$100,000 or greater by time remaining until maturity as of March 31, 1997.
Certificate
Maturity Period Accounts
(Dollars in thousands)
Three months or less $ 3,681
Four through six months 2,016
Seven through twelve months 2,862
Over twelve months 1,966
--------
Total $ 10,525
========
For additional information regarding the composition of the Bank's deposit
accounts, see Note 8 of the Notes to the Corporation's Consolidated
Financial Statements included in Part II, Item 8 Financial Statements and
Supplementary Data, which Note is incorporated herein by reference.
Borrowed Funds. The Bank's other available sources of funds include
notes payable to the FHLB of Chicago and collateralized borrowings, both
of which are analyzed as part of the Bank's asset/liability management
program. As a member of the FHLB of Chicago, the Bank is authorized to
apply for borrowings from the FHLB of Chicago. Each FHLB credit program
has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Chicago may prescribe the acceptable uses for
these borrowings, as well as limitations on the amount and repayment
provisions. The borrowings are secured by capital stock of the FHLB of
Chicago which is owned by the Bank, as well as certain of the Bank's real
estate loans. At March 31, 1997, the Bank had $64.9 million of
outstanding borrowings from the FHLB of Chicago. Of this amount, $18.1
million was on the Bank's open line of credit and $46.8 million was in
term borrowings. For additional information on borrowed funds, see Note 9
of the Notes to the Corporation's Consolidated Financial Statements
included in Part II, Item 8 Financial Statements and Supplementary Data,
which note is incoporated herein by reference. The following table sets
forth information with respect to the borrowing of the Bank.
March 31,
1997 1996 1995
(Dollars in thousands)
FHLB advances:
Average balance
outstanding (1) $56,188 $39,120 $24,818
Maximum amount outstanding
at any month-end during
the period 64,900 51,900 44,200
Balance outstanding at
end of period 64,900 51,900 42,400
Average interest rate during
the period 5.56% 6.08% 5.70%
Weighted-average interest rate
at the end of period 5.59% 5.47% 6.48%
(1) Calculated using monthly average balances
Subsidiary Activities
As a federally-chartered savings bank, the Bank may invest up to 2%
of its assets in capital stock and paid in surplus of, and secured or
unsecured loans to, subsidiary corporations or service corporations (plus
an additional 1%, if for community purposes). The Bank has two
subsidiaries, Fox Cities Financial Services, Inc. and Fox Cities
Investments, Inc. Fox Cities Financial Services, Inc., which was
incorporated in 1956 under the laws of the State of Wisconsin, had total
assets of $428,000 at March 31, 1997. The Bank's equity investment in Fox
Cities Financial Services, Inc. at March 31, 1997 was $406,000. For the
year ended March 31, 1997, Fox Cities Financial Services, Inc. recorded
net income of $82,000. Its principal activity is the sale of insurance
and investment products, as well as tax deferred annuities.
Fox Cities Financial Services, Inc. also holds a 50% limited
partnership interest in a 37-unit apartment complex providing housing for
low/moderate income and elderly persons in Menasha, Wisconsin. The
limited partnership interest was acquired by the Bank in 1989 and
transferred to Fox Cities Financial Services, Inc. in 1992 to comply with
the provisions of FIRREA. The investment was analyzed at the time of
purchase to determine the project's prospects for success. The project
has a positive cash flow, although it reports an annual net loss due to
depreciation expenses. The project remains an attractive investment,
however, because of the availability of an annual tax credit of
approximately $70,000 through 1999. Fox Cities Financial Services, Inc.'s
aggregate investment in the apartment project at March 31, 1997 was
$181,000.
Fox Cities Investments, Inc. was incorporated in the State of Nevada
in December, 1995 and commenced operations in February, 1996. The purpose
of the subsidiary is to hold and manage a portfolio of investment
securities. Fox Cities Investments, Inc. was capitalized by transferring
mortgage-related securities of $16.3 million and cash of $6,000 from the
Bank to the subsidiary. The subsidiary's employees and operations are
located in Nevada. Its Board of Directors is comprised of one employee of
the subsidiary and two executive officers of the Bank. As of March 31,
1997, Fox Cities Investments, Inc. had assets totaling $16.5 million and
net income for the year ended March 31, 1997 of $685,000.
Competition
The Bank faces strong competition both in originating real estate
loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, credit unions,
commercial banks and mortgage banking firms that also make loans secured
by real estate located in the Bank's primary market area. The Bank
competes for real estate loans principally on the basis of the interest
rates and loan fees it charges, the types of loans it originates, the
quality of services it provides to borrowers and its planned retention of
servicing.
The Bank also faces substantial competition in attracting deposits
from other savings institutions, commercial banks, securities firms, money
market and mutual funds, credit unions and other investment vehicles. The
ability of the Bank to attract and retain deposits depends on its ability
to provide investment opportunities that satisfy the requirements of
investors as to rate of return, liquidity, risk and other factors. The
Bank competes for these deposits by offering a variety of deposit accounts
at competitive rates, convenient business hours and a customer-oriented
staff.
The authority to offer "money market" deposits, as well as expanded
lending and other powers authorized for savings institutions by federal
legislation, has resulted in increased competition for both deposits and
loans between savings institutions and other financial institutions such
as commercial banks.
Employees
At March 31, 1997, the Bank had a total of 66 full time equivalent
employees. None of the Bank's employees is represented by any collective
bargaining group. Management considers its employee relations to be good.
REGULATION
General
The Bank is a federally-chartered savings institution, the deposits
of which are federally insured (up to applicable regulatory limits) by the
Federal Deposit Insurance Corporation ("FDIC"). Accordingly, the Bank is
subject to broad federal regulation and oversight extending to all aspects
of its operations. The Bank's primary federal regulator is the Office of
Thrift Supervision ("OTS"). The Bank is a member of the Federal Home Loan
Bank of Chicago ("FHLB Chicago") and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). As the savings and loan holding company of the
Bank, the Corporation also is subject to regulation by the OTS.
Federal Regulation of Savings Banks
The OTS has extensive regulatory and supervisory authority over the
operations of all insured savings institutions, including the Bank. This
regulation and supervision establishes a comprehensive framework of
activities in which the Bank can engage and is intended primarily for the
protection of the deposit insurance fund and depositors. It also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in the laws and regulations governing the operations of the Bank
could have an adverse impact on the Bank and its operations.
The OTS also has enforcement authority over all savings institutions
and their holding companies, including the Bank and the Corporation, and
their affiliated parties. This enforcement authority includes, among
other things, the ability to assess civil money penalties, issue
cease-and-desist or removal orders and initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws
or regulations or for unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS
is required.
The Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted, the examiners may, among other things, require
the Bank to provide for higher general or specific loan loss allowances or
write down the value of certain assets. The last regular examination of
the Bank by the OTS was in September, 1996 and the last examination by the
FDIC was in January, 1992.
The OTS assesses all savings institutions to fund the operations of
the OTS. The general assessment, to be paid on a semi-annual basis, is
computed upon a savings institution's total assets, including consolidated
subsidiaries, as reported in the institution's latest Quarterly Thrift
Financial Report. The Bank's OTS assessment for the six-month period
ended December 31, 1996 was $36,163 (based upon the Bank's assets as of
September 30, 1996 of $267.7 million and the current OTS assessment rate).
Recent Federal Legislative Developments
Deposits of the Bank are currently insured by the FDIC under the
Savings Association Insurance Fund ("SAIF"). The FDIC also maintains the
Bank Insurance Fund ("BIF"), which primarily insures the deposits of
commercial banks (and some state savings banks). Applicable law requires
that the SAIF and BIF each achieve and maintain a ratio of insurance
reserves to total insured deposits equal to 1.25%. The BIF reached this
1.25% reserve level in 1995, and the FDIC thereafter reduced BIF premiums
for most banks. As a result of such reduction, the highest-rated
BIF-insured institutions pay the statutory annual minimum of $2,000 for
FDIC insurance. Premium rates for other BIF-insured institutions
currently range from $0.03 to $0.27 per $100 of deposits.
Prior to September 30, 1996, SAIF-member institutions paid deposit
insurance premiums based on a schedule of $0.23 to $0.31 per $100 of
deposits, creating a substantial disparity between SAIF and BIF deposit
insurance premiums. On September 30, 1996 President Clinton signed into
law the Deposit Insurance Funds Act of 1996 (the "1996 Deposit Insurance
Act") which, among other things, provided for the recapitalization of the
SAIF through a one-time special assessment of approximately 65.7 basis
points on the amount of deposits held by each SAIF-insured institution as
of March 31, 1995. The one-time special assessment payable by the Bank as
of September 30, 1996, was $970,000.
As a result of the recapitalization of the SAIF by the special
assessment, SAIF insurance premiums have been substantially reduced,
effective as of January 1, 1997, with the highest rated SAIF-insured
institutions, such as the Bank, paying the statutory minimum of $2,000
plus 6.4 basis points for payment of the FICO obligations referenced
below, thereby eliminating the disparity between the premiums paid by SAIF
and BIF members of equivalent rating (except for the differential in the
FICO portion of the premiums as described below).
The 1996 Deposit Insurance Act also provided for full pro rata
sharing by SAIF and BIF institutions, beginning no later than January 1,
2000, of the debt service obligation on bonds issued by the federally
chartered Financing Corporation ("FICO") to fund the thrift rescue plan of
the late 1980's, and until such time the premiums for BIF and SAIF will
include a portion for FICO bond debt service of 1.3 and 6.4 basis points,
for BIF and SAIF respectively, beginning January 1, 1997. The 1996
Deposit Insurance Act further provides that the BIF and SAIF will be
merged on January 1, 1999 if bank and savings association charters are
merged into a single federal charter by that date, in which case full
pro-rata sharing of the FICO obligation will commence on that date.
In addition, on August 1, 1996, legislation was enacted to repeal the
special bad debt deduction for federal income tax purposes that had been
available for qualifying thrifts, such as the Bank, although the balance
of a thrift's bad debt reserves as of the close of its last taxable year
beginning prior to January 1, 1988 were exempted so that such balance need
not be taken into income by affected thrifts. Such repeal of the bad debt
deduction may result, on an ongoing basis, in an increase in the Bank's
federal income tax liability and potentially its Wisconsin state tax
liability as well. Management does not believe, however, that such repeal
will have a material effect on the Bank's operations or its ability to
compete in the financial services industry.
Business Activities
The activities of savings associations are governed by the Home
Owner's Loan Act of 1933, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act"). The HOLA and the
FDI Act were amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FIRREA and FDICIA contain
provisions affecting numerous aspects of the operations and regulation of
federally-insured savings institutions and empower the OTS and the FDIC,
among other agencies, to promulgate regulations implementing the
provisions thereof.
The federal banking statutes as amended by FIRREA and FDICIA (1)
restrict the solicitation of brokered deposits by troubled savings
associations that are not well-capitalized, (2) prohibit the acquisition
of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans
secured by non-residential real property to 400% of capital, (4) permit
savings and loan holding companies to acquire up to 5% of the voting
shares of non-subsidiary savings associations or savings and loan holding
companies without prior approval, (5) permit bank holding companies to
acquire healthy savings associations, and (6) require the federal banking
agencies to establish, by regulation, standards for extension of credit
secured by real estate lending. Under HOLA, the Bank does have the
authority to make (i) non-conforming loans (loans in excess of the
specific limitations of HOLA) not exceeding 5.0% of its total assets, and
(ii) construction loans without security for the purpose of financing what
is expected to be residential property not to exceed, in the aggregate,
the greater of total capital or 5.0% of its total assets. To assure
repayment of such loans, the Bank relies substantially on the borrower's
general credit standing, personal guarantees and projected future income
on the properties. No loans have been made by the Bank pursuant to this
authority.
Brokered Deposits; Interest Rate Limitations
FDIC regulations promulgated under FDICIA 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. "Adequately capitalized" institutions may apply for a waiver by
letter to the FDIC. An institution that is not "well capitalized," even
if meeting minimum capital requirements, may not solicit brokered or other
deposits by offering interest rates that are significantly higher than the
relevant local or national rate as determined under the regulations. The
Bank meets the definition of a "well capitalized" institution and,
therefore, may accept brokered deposits without restriction. At March 31,
1997, the Bank had no brokered deposits.
Uniform Lending Standards
Under FDICIA, federal bank regulators are required to adopt uniform
regulations prescribing standards for extensions of credit that are
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real
estate. Under current regulations, savings institutions must adopt and
maintain written policies that establish appropriate limits and standards
for extensions of credit that are secured by liens on or interests in real
estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards (including loan-to-value limits)
that are clear and measurable, loan administration procedures and
documentation, approval and reporting requirements. The real estate
lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies that have been adopted by federal bank
regulators.
Standards for Safety and Soundness
As required by FDICIA and subsequently amended by the Riegle
Community Development and Regulatory Improvement Act of 1994, the OTS and
other federal banking regulators have adopted interagency guidelines
establishing standards for safety and soundness for depository
institutions on matters such as internal controls and audit systems, loan
documentation, credit underwriting, interest-rate risk exposure, asset
growth, asset quality, earnings and compensation and other benefits. The
agencies may request a compliance plan from any institution which fails to
meet one or more of the standards.
Branching by Federally Chartered Banks
OTS rules permit nationwide branching by federally chartered savings
institutions to the extent permitted by federal statute, subject to OTS
supervisory clearance. This permits institutions with interstate networks
to diversify their loan portfolios and lines of business. OTS authority
preempts any state law purporting to regulate branching by federal savings
institutions. However, subject to certain exceptions, federal law
continues to prohibit branching which would result in formation of a
multiple savings and loan holding company controlling savings institutions
in more than one state, unless the statutory law of the additional state
specifically authorizes acquisition of its state-chartered institutions by
state-chartered institutions or their holding companies in the state where
the acquiring institution or holding company is located.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF deposit insurance fund of the FDIC.
Savings deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
government. In its capacity as an insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of, and to
require reporting by, FDIC- insured institutions. It also may prohibit
any FDIC insured institution from engaging in any activity that the FDIC
determines by regulation or order to pose a serious risk to the FDIC.
Under the FDI Act and FIDICIA, the FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action, and may terminate an institution's
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition. Management does not know of any practice, condition or
violation of the Bank that could lead to termination of deposit insurance
for the accounts of the Bank.
FDICIA required the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC has adopted a
risk-based assessment system under which all insured depository
institutions are placed into one of nine assessment risk classifications
and assessed insurance premiums based upon their level of capital and
supervisory evaluation. The FDIC assigns an institution to one of three
capital categories consisting of (i) well capitalized, (ii) adequately
capitalized or (iii) undercapitalized, and one of three supervisory
subcategories. The supervisory subgroup to which an association is
assigned is based on a supervisory evaluation provided to the FDIC by the
association's primary federal regulator and information which the FDIC
determines to be relevant to the association's financial condition and the
risk posed to the deposit insurance funds (which may include, if
applicable, information provided by the association's state supervisor).
An association's assessment rate depends on the capital category and
supervisory category to which it is assigned. The FDIC is
authorized to increase assessment rates, on a semiannual basis, if it
determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve
ratio to that designated reserve level, or such higher reserve ratio as
established by the FDIC. In addition, under FDICIA, the FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the
United States Treasury or for any other reason deemed necessary by the
FDIC. The 1996 Deposit Insurance Act described above imposed a one time
assessment (approximately .657% of SAIF deposits as of March 31, 1995) on
SAIF insured institutions such as the Bank in order to cause the SAIF to
achieve the designated reserve ratio of 1.25% of SAIF insured deposits.
See "Recent Federal Legislative Developments" above.
As of March 31, 1997, the Bank had an aggregate of $157.6 million of
deposit accounts covered by deposit insurance and was classified as well
capitalized and healthy. For the fiscal year ended on such date, the Bank
paid an annual insurance premium of .23% of deposits for the first nine
months and thereafter, commencing as of January 1, 1997, the insurance
premium rate for the Bank and the other most highly rated SAIF
institutions was reduced (pursuant to the 1996 Deposit Insurance Act) to
the statutory minimum premium of $2,000 (plus .064% of deposits for
payment of the FICO obligations).
On October 5, 1994 the FDIC issued an "Advance Notice of Proposed
Rulemaking" pursuant to which the FDIC is soliciting comments on whether
the deposit-insurance assessment base currently provided for in the FDIC's
assessment regulations should be redefined. Under current law insurance
premiums paid to the FDIC are calculated by multiplying the institution's
assessment base (which equals total domestic deposits, as adjusted for
certain elements) by its assessment rate. Based on the risk-based deposit
insurance system, developments in the financial services industry, changes
in the activities of depository institutions and other factors, the FDIC
seeks comments on whether the assessment base should be redefined. The
FDIC has stated that review of the definition of "assessment base" does
not signal any intent to change the total dollar amount of assessments
collected, but that such redefinition may impact the assessments paid on
an institution-by-institution basis. Until final regulations are adopted
affecting the definition of an institution's assessment base, management
of the Corporation cannot predict what impact such regulation may have on
Bank operations.
Regulatory Capital Requirements
Federally-insured savings institutions, such as the Bank, are
required to maintain certain minimum levels of regulatory capital. The
OTS has established three different capital standards: (i) a 1.5%
"tangible capital" standard; (ii) a 3% "leverage ratio" (or core capital
ratio); and (iii) an 8% "risk-based capital" standard. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose
capital requirements in excess of these standards on individual
institutions on a case-by-case basis. Savings institutions must meet all
of the standards in order to comply with the capital requirements.
The following table summarizes the Bank's capital ratios and the
ratios required by federal regulations at March 31, 1997:
Risk-
Tangible Core Based
Capital Capital Capital
(Dollars in thousands)
Bank's regulatory percentage 14.12% 14.12% 24.23%
Required regulatory percentage 1.50 3.00 8.00
----- ----- -----
Excess regulatory percentage 12.62% 11.12% 16.23%
===== ===== =====
Bank's regulatory capital $38,030 $38,030 $39,522
Required regulatory capital 4,039 8,077 13,050
------ ------ ------
Excess regulatory capital $33,991 $29,953 $26,472
====== ====== ======
The capital standards established by the OTS require tangible capital
of at least 1.5% of adjusted total assets (as defined by regulation).
Tangible capital generally includes common stockholders' equity (including
retained earnings) and certain noncumulative perpetual preferred stock and
related surplus, less equity and debt investments in subsidiaries which
are not "includable" subsidiaries. For this purpose all subsidiaries
engaged solely in activities permissible for national banks or engaged
solely in mortgage banking or in certain other activities solely as agent
for its customers are "includable" subsidiaries. The Bank's wholly-owned
subsidiary, Fox Cities Investments, Inc., is an includable subsidiary.
The Bank's other wholly-owned subsidiary, Fox Cities Financial Services,
Inc., is not an includable subsidiary and, accordingly, its assets are not
included in the Bank's assets and capital for purposes of determining the
Bank's regulatory capital. In addition, all intangible assets, other
than a limited amount of mortgage servicing rights, must be deducted from
tangible capital. At March 31, 1997, the Bank did not have any intangible
assets subject to deduction under this requirement.
The OTS capital standards also require core capital equal to at least
3% of adjusted total assets. Core capital generally consists of tangible
capital plus certain intangible assets, including mortgage servicing
rights and purchased credit card relationships (subject to certain
valuation and other percentage limitations). As a result of the prompt
corrective action provisions of FDICIA and OTS regulations thereunder
discussed below, however, a savings association must maintain a
corecapital ratio of at least 4% to be considered adequately capitalized
unless it is rated a composite 1 (the highest rating) under the "CAMELS"
rating system for savings institutions, in which case it is allowed to
maintain a 3% core capital ratio. At March 31, 1997, the Bank had no
purchased credit card relationships or mortgage servicing rights included
in core capital.
The OTS risk-based capital standard requires savings institutions to
have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital (subject to certain exclusions described below)
and supplementary capital, minus the amount of its interest rate risk
("IRR") component discussed below. Supplementary capital consists of
certain types of subordinated debt, certain nonwithdrawable accounts and
certain other capital instruments that do not qualify as core capital and
a portion of an institution's general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement
only up to the amount of core capital. At March 31, 1997, the Bank had
not issued any capital instruments that qualified as supplementary capital
and had $1.4 million of general valuation loan and lease loss allowances
included in supplementary capital.
Certain exclusions from capital and assets are required to be made
for the purpose of calculating total capital, in addition to the
adjustments required for calculating core capital. Such exclusions
consist of equity investments (as defined by regulation) and that portion
of land loans and nonresidential construction loans in excess of an 80%
loan-to-value ratio and reciprocal holdings of qualifying capital
instruments. At March 31, 1997, the Bank had no such investments which
were required to be excluded.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, are multiplied by a risk weight
ranging from 0% to 100%, as assigned by the OTS capital regulation, based
on the risks OTS believes are inherent in the type of asset.
A savings association whose measured interest rate risk (IRR)
exposure exceeds 2% must deduct an IRR component in calculating its total
capital for purposes of determining whether it meets its risk-based
capital requirement. The IRR component is an amount equal to the product
of (i) 50% of the difference between its measured interest-rate risk
exposure and 2%, multiplied by (ii) the estimated economic value of its
total assets. This exposure is a measure of the potential decline in the
Net Portfolio Value ("NPV") of a savings institution that would result
from a hypothetical 200 basis point increase or decrease (except when the
3-month Treasury bond equivalent yield is less than 4%, in which case the
decrease will be one-half such Treasury rate) in market interest rates
(whichever results in a lower NPV) divided by the estimated economic value
of assets (calculated in accordance with certain OTS guidelines). The OTS
will calculate changes in an institution's NPV from data submitted by the
institution in a schedule to its Quarterly Thrift Financial Report. Net
Portfolio Value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. Management does not expect
this rule to have a material impact of the Bank.
Pursuant to FDICIA, in December of 1994 the federal banking agencies,
including the OTS, also adopted final regulations authorizing the agencies
to require a depository institution to maintain additional total capital
to account for concentration of credit risk and the risk of
non-traditional activities, as well as an institution's ability to monitor
and control such risks. While no quantitative measure will be generally
applicable, the OTS is given authority to require individual institutions
to maintain higher capital levels than those required under the
quantitative tests described above, based upon such institution's
particular concentration of credit risk and risks arising from
nontraditional activities, as identified by OTS from time to time.
Management does not believe that the Bank has any concentrations of credit
or is engaged in any non-traditional activities which in either case are
likely to cause the OTS to require the Bank to maintain additional capital
under this regulation.
Prompt Corrective Action Requirements
FDICIA establishes a system of prompt corrective action to resolve
the problems of undercapitalized institutions. Under this system, 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. FDICIA establishes the
following 5 capital categories: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized." Generally, subject to narrow exceptions,
FDICIA requires federal bank regulators to appoint a receiver or
conservator for an institution that is critically undercapitalized and
prohibits such institution from making any payment of principal or
interest on its subordinated debt. FDICIA authorizes federal bank
regulators to specify the ratio of tangible capital to assets at which an
institution becomes critically undercapitalized and requires that ratio to
be no less than 2% of total assets.
Under OTS regulations, an institution is deemed to be
"undercapitalized" if it has a total risk-based capital ratio of less than
8%, a Tier 1 risk-based capital ratio of less than 4% or (generally) a
leverage ratio of less than 4%. An institution which has a total
risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3% or a leverage ratio of less than 3% is deemed to be
"significantly undercapitalized", and an institution which has a ratio of
tangible equity (as defined in the regulations) to total assets that is
equal to or less than 2% is deemed to be "critically undercapitalized".
In addition, the OTS is effectively authorized to downgrade an institution
to a lower capital category than the institution's capital ratios would
otherwise indicate, based upon safety and soundness considerations, such
as when the institution has received a less-than-satisfactory examination
rating for asset quality, management, earnings or liquidity under the
OTS's "CAMELS" rating system for savings institutions.
Subject to limited exceptions, savings institutions are prohibited
from declaring dividends, making any other capital distribution or paying
management fees to controlling persons if, after giving effect thereto,
the institution would be undercapitalized. Undercapitalized institutions
are also subject to certain mandatory supervisory actions, including
increased monitoring, required capital restoration planning and restricted
growth, and acquisition and branching restrictions. Significantly and
critically undercapitalized institutions face even more severe
restrictions.
At March 31, 1997, the Bank was "well capitalized" as defined under
the OTS regulations and, accordingly, was not subject to the foregoing
limitations and restrictions placed upon undercapitalized institutions.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions and requirements on
savings institutions with respect to their ability to pay dividends or
make other capital distributions (such as stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible
debt and other transactions charged to the capital account).
The OTS utilizes a three-tiered approach to permit savings
institutions, based on their capital level and supervisory condition, to
make capital distributions. Generally, an institution that before and
after the proposed distribution meets or exceeds its "fully phased in
capital requirements" (a "Tier 1 institution") and has not been informed
by OTS that it is in need of more than normal supervision, may, after 30
days prior notice to but without the approval of the OTS, make capital
distributions during any calendar year equal to the higher of (a) 100% of
its net income for the year-to-date plus the amount that would reduce by
50% its "surplus capital ratio" (the percentage by which the institution's
ratio of total capital to assets exceeds the ratio of its fully phased-in
capital requirement to assets) at the beginning of the calendar year or
(b) 75% of its net income over the most recent four-quarter period. Any
additional capital distributions would require prior regulatory approval.
The Bank currently meets the requirements for a Tier 1 institution and has
not been notified of a need for more than normal supervision. In the
event the Bank were to fail to satisfy such standards, its ability to make
capital distributions would be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their current minimum capital
requirements but do not meet their fully phased-in capital requirements,
may make capital distributions up to 75% of their net income for the most
recent four-quarter period after notice is given to the OTS and no
objection is made by the OTS within a 30-day period. Tier 3 institutions,
which are institutions that do not meet current minimum capital
requirements, that propose to make a capital distribution, and Tier 1 and
Tier 2 institutions which propose to make a capital distribution in excess
of the noted safe harbor levels described above, must obtain OTS approval
prior to making such a distribution.
Liquidity
Each savings institution, including the Bank, is required to maintain
an average daily balance of liquid assets for each calendar month equal to
a certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and short-term borrowings for the
immediately preceding calendar month. This average liquidity requirement
may be changed from time to time by the OTS (between 4% and 10%),
depending upon economic conditions and deposit flows of all savings
institutions. At the present time, the minimum average liquidity
requirement is 5%. In addition, the average daily balance of short term
liquid assets (e.g., cash, certain time deposits, certain bankers
acceptances and short-term United States Treasury obligations) must
currently constitute at least 1% of an institution's average daily balance
of net withdrawable deposit accounts and current borrowings for the
preceding calendar month. Monetary penalties may be imposed for a
violation of either liquidity ratio requirement. At March 31, 1997, the
Bank was in compliance with both liquidity requirements, with an average
liquidity ratio of 5.16% and a short-term liquidity ratio of 2.67%.
Qualified Thrift Lender Test
All savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings institution to maintain at
least 65% of its portfolio assets (which consist of total assets less (i)
intangibles, (ii) properties used to conduct the savings institution's
business and (iii) liquid assets no exceeding 20% of total assets) in
qualified thrift investments on a monthly average for nine out of every
twelve months on a rolling basis. As of March 31, 1997, the Bank was in
compliance with the QTL requirements.
Generally, qualified thrift investments consist of loans to purchase,
construct or improve residential housing, home equity loans and
mortgage-related securities secured by residential housing, small business
loans, credit card loans and student loans, as well as certain obligations
of the FDIC and stock in any Federal Home Loan Bank. Certain other loans
and investments may be included up to a maximum aggregate limit of 20% of
portfolio assets.
Any savings institution that fails to meet the QTL test must either
convert to a national bank charter (and pay the applicable exit and
entrance fees involved in converting from one insurance fund to another)
or become subject to numerous operating restrictions.
Loans-to-One-Borrower Limit
Under the HOLA, savings associations are subject to maximum
loans-to-one- borrower limits applicable to national banks. In general, a
savings institution may make loans-to-one- borrower in an amount up to the
greater of $500,000 or 15% of the institution's unimpaired capital and
unimpaired surplus (plus an additional 10% of its unimpaired capital and
unimpaired surplus for loans fully secured by certain readily marketable
collateral). At March 31, 1997, the Bank's lending limit for
loans-to-one-borrower not fully secured by marketable collateral was $5.7
million. Under the HOLA, a broader limitation (the lesser of $30 million
or 30% of unimpaired capital and unimpaired surplus) is provided under
certain circumstances and subject to OTS approval, for loans to develop
domestic residential housing units. In addition, under HOLA as limited by
OTS regulation, a savings institution may provide purchase money mortgage
financing in connection with the sale by it of real property acquired in
satisfaction of debts previously contracted in good faith without regard
to the loans-to-one-borrower limitation provided that no new funds are
advanced and the institution is not placed in a more detrimental position
than if it had held the property. The Bank is in compliance with these
loans-to-one-borrower limitations.
Transactions with Affiliates; Loans to Insiders
Transactions between savings institutions and their affiliates are
governed by Sections 23A and 23B of the Federal Reserve Act. With certain
limited exceptions, an affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with
the savings institution. In a holding company context, the parent holding
company of a savings institution (such as the Corporation) and any
companies which are controlled by such parent holding company are
affiliates of the savings institution. Generally, Sections 23A and 23B
(i) limit the extent to which the savings institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount
equal to 10% of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates of 20% of
capital stock and surplus and (ii) require that all such 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, purchase of assets,
issuance of a guarantee and other similar types of transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (a) loan or otherwise extend credit to an affiliate,
except for an affiliate which engages only in activities which are
permissible for bank holding companies, or (b) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate,
except for affiliates which are subsidiaries of the savings institution.In
addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans by savings institutions to executive officers,
directors and principal stockholders of the institution and their related
interests ("insiders"). Under Section 22(h), loans to an insider of a
savings institution (other than a shareholder of which the savings
institution is a subsidiary) or to a director, executive officer or
greater than 10% shareholder of the company that controls the savings
institution, and certain affiliated interests of any such person, may not
exceed, together with all other outstanding loans to such person and
affiliated interests of such person, the institution's
loans-to-one-borrower limit. Section 22(h) also requires that loans to
insiders be made on substantially the same terms offered in, and applying
underwriting policies and procedures no less stringent than those applied
to, comparable transactions with persons who are not insiders or employees
and requires prior approval of a majority of the institution's board (with
the interested party abstaining) for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders, and directors, executive officers and greater than 10%
shareholders of a company that controls the savings institution and their
related interests, cannot exceed the institution's unimpaired capital and
surplus.
Federal Reserve System
Regulation D of the Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts, (primarily checking, NOW and certain
other accounts that permit payments or transfers to third parties) and
non-personal time deposits (including certain money market deposit
accounts). These reserve levels are subject to adjustment from time to
time by the Federal Reserve Board. At March 31, 1997, the Bank was in
compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy liquidity requirements that may be imposed by the OTS.
See "Liquidity."
Federal Home Loan Bank System members such as the Bank are authorized
to borrow from the Federal Reserve Bank "discount window," but Federal
Reserve Board regulations require institutions to exhaust other reasonable
alternative sources of funds, including FHLB borrowings, before borrowing
from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB Chicago, which is one of twelve
regional FHLBs that administer the home financing credit function of
savings institutions throughout the United States. Each FHLB serves as a
reserve or central bank for its members within its assigned region. The
FHLB makes loans to members (i.e. advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All loans from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In
addition, all long-term loans may be made only for the purpose of
providing funds for residential home financing. At March 31, 1997, the
Bank had $64.9 million in advances from the FHLB Chicago.
As a member of the FHLB Chicago, the Bank is required to purchase and
maintain stock in the FHLB Chicago. At March 31, 1997, the Bank had $3.2
million in FHLB stock, which satisfied this requirement. In past years,
the Bank has received dividends on its FHLB stock. The dividend rate on
such FHLB stock in fiscal 1997 was 6.8%.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and affordable
housing projects. These contributions may adversely affect the level of
dividends paid by FHLBs to their members and could also result in the
FHLBs imposing a higher rate of interest on advances to their members.
Any such reduction in dividends paid or increase in the rate charged on
advances could have an adverse affect on the Bank's net interest income
and the value of FHLB Chicago stock held by the Bank. A reduction in
value of the Bank's FHLB stock may result in a corresponding reduction in
the Bank's shareholders' equity.
Holding Corporation Regulation
The Corporation is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Corporation is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority
over the Corporation and its non-savings institution subsidiaries, which
authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings bank. The
regulations of the OTS are primarily concerned with the safety and
soundness of the institutions under its jurisdiction rather than the
protection of such institutions' shareholders.
As a unitary savings and loan holding company, the Corporation
generally is not subject to activity restrictions. However, if the
Corporation were to acquire control of another savings institution and
hold it as a separate subsidiary, the Corporation would become a multiple
savings and loan holding company, and the activities of the Corporation
and any of its subsidiaries (other than the Bank or any other SAIF-insured
savings institution) would become subject to such activity restrictions
unless such other institutions each qualified as a QTL and were acquired
in a supervisory acquisition. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings
institution may commence or continue for more than a limited period of
time after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity, except upon prior notice to,
and no objection by, the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting
an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings
institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of
trust; (vi) those activities authorized by regulation as of March 5, 1987
to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities
authorized by the FRB as permissible for bank holding companies. Those
activities described in (vii) above must also be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan
holding company.
If the Bank were to fail the QTL test, the Corporation would have to
obtain the approval of the OTS prior to continuing, directly or through
its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure, the Corporation would have to
register as, and would become subject to, the restrictions applicable to
bank holding companies. The activities authorized for a bank holding
company are more limited than are the activities authorized for a unitary
or multiple savings and loan holding company. The Corporation
must obtain approval from the OTS before acquiring control of more than 5%
of the voting shares of any other SAIF-insured institution or savings and
loan holding company. Such acquisitions are generally prohibited if they
result in a multiple savings and loan holding company controlling savings
institutions in more than one state. However, such interstate
acquisitions are permitted based on specific state statutory authorization
in the state of the target institution or in a supervisory acquisition of
a failing savings institution.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, a savings institution 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 that it believes
are best suited to its particular community, consistent with the CRA. The
CRA requires the OTS, in connection with its examination of a savings
institution, 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. An institution is
assigned one of four overall ratings: "outstanding", "satisfactory",
"needs improvement" or "substantial noncompliance". The CRA also requires
all institutions to make their CRA ratings available to the public. The
Bank's latest CRA rating, received in August, 1995, was "Satisfactory".
In 1995, the OTS and other federal financial supervisory agencies
issued a final revised regulation to implement the CRA. The revised
regulation, which is being phased in over a period of time and will become
fully effective on July 1, 1997, eliminates the twelve assessment factors
under the prior regulation and substitutes a performance based evaluation
system.
Pursuant to the revised regulation, an institution's performance in
meeting the credit needs of its entire community, as required by the CRA,
will generally be evaluated under three tests: the "lending test"; the
"investment test"; and the "service test".
The lending test analyzes lending performance using five criteria:
(i) the number and amount of loans in the institution's assessment area,
(ii) the geographic distribution of lending, including the proportion of
lending in the assessment area, the dispersion of lending in the
assessment area, and the number and amount of loans in low-, moderate-,
middle- and upper- income areas in the assessment area, (iii) borrower
characteristics, such as the income level of individual borrowers and the
size of businesses or farms, (iv) the number and amount, as well as the
complexity and innovativeness, of an institution's community development
lending and (v) the use of innovative or flexible lending practices in a
safe and sound manner to address the credit needs of low- or
moderate-income individuals or areas. The investment test analyzes
investment performance using four criteria: (i) the dollar amount of
qualified investments, (ii) the innovativeness or complexity of qualified
investments, (iii) the responsiveness of qualified investments to credit
and community development needs, and (iv) the degree to which the
qualified investments made by the institution are not routinely provided
by private investors. The service test analyzes service performance using
six criteria: (i) the institution's branch distribution among low-,
moderate-, middle-, and upper-income areas, (ii) its record of opening and
closing branches, particularly in low- and moderate- income areas, (iii)
the availability and effectiveness of alternative systems for delivering
retail banking services, (iv) the range of services provided in low-,
moderate-, middle- and upper-income areas and extent to which those
services are tailored to meet the needs of those areas, (v) the extent to
which the institution provides community development services, and (vi)
the innovativeness and responsiveness of community development services
provided.
Small institutions, which are defined as institutions with less than
$250 million in total assets which are either independent or are
affiliates of a holding company with banking and thrift assets of less
than $1 billion, will continue to be evaluated under a streamlined
assessment method that would exempt them from new data collection and
reporting requirements.
As an alternative to the lending, service and investment tests, an
institution may submit to the OTS for approval its own "strategic plan",
developed with community input, describing in detail the manner in which
it proposes to meet its CRA obligations. If the plan is approved by OTS
and the institution has operated under the plan for at least one year, the
institution will be evaluated based upon its achieving the goals and
benchmarks outlined in the plan.
Institutions not eligible for the small institution streamlined
assessment method are required to collect and report data on a variety of
matters, including originations and purchases of home mortgage, small
business and small farm loans, and certain information on community
development loans. Collection of information on consumer loans is
optional.
The data collection requirements under the revised regulation became
effective January 1, 1996, and the reporting requirements became effective
January 1, 1997. Evaluations under the lending, investment and service
tests will generally begin July 1, 1997, although evaluations under the
small institution performance standards, which will not utilize newly
required data, began January 1, 1996.
The OTS is required to prepare annually and make available to the
public individual CRA Disclosure Statements for each reporting thrift
institution. Each institution must place its CRA Disclosure Statement in
its public file within three days of receipt of the Statement from the
OTS. Each institution is required to maintain one copy of its public file
in each state in which it has its main office or a branch.
Management does not believe that the revised CRA regulations will
materially impact the operations of the Bank.
Federal Securities Law
The common stock of the Corporation is registered with the Securities
Exchange Commission ("SEC") under Section 12(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Corporation is,
therefore, subject to the periodic reporting, proxy solicitation and
tender offer rules, insider trading restrictions and other requirements
under the Exchange Act.
Shares of Corporation common stock held by persons who are affiliates
(generally officers, directors and principal shareholders) of the
Corporation may not be sold without registration under the Securities Act
of 1933, as amended, unless sold in accordance with certain resale
restrictions. If the Corporation meets specified current public
information requirements, each affiliate of the Corporation is, subject to
certain limitations, able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Executive Officers of the Registrant
The following table sets forth the executive officers of the
Corporation, each of whom is also an executive officer of the Bank. The
executive officers of the Corporation are elected annually by the Board of
Directors of the Corporation.
Name Age Position With Corporation
Donald D. Parker 58 Chairman of the Board and
Director
James J. Rothenbach 47 President, Chief
Executive Officer and
Director
Harold L. Hermansen 46 Vice President - Retail
Lending and Secretary
Phillip J. Schoofs 41 Vice President, Treasurer
and Chief Financial
Officer
Theodore W. Hoff 50 Vice President - Retail
Sales and Services
Donald D. Parker has served as Chairman of the Board of the
Corporation and the Bank since May 1, 1997. Mr. Parker served as Chairman
of the Board, President and Chief Executive Officer of the Corporation
from its incorporation in 1993 unitil May 1, 1997. Mr. Parker has served
as Chairman of the Board of the Bank since 1986, and from 1980 to May 1,
1997. Mr. Parker was also President and Chief Executive Officer of the
Bank. Mr. Parker joined the Bank in 1967. Mr. Parker has served as a
director of the Corporation since its incorporation in 1993 and as a
director of the Bank since 1978.
James J. Rothenbach has served as the President and Chief Executive
Officer of the Corporation and the Bank since May 1, 1997. Mr. Rothenbach
was the President and Chief Executive Officer of OSB and Oshkosh Savings
Bank, F.S.B. from June 1995 until joining the Corporation and the Bank in
connection with the Merger. Mr. Rothenbach was the President and Chief
Executive Officer of Bank One, Stevens Point, Wisconsin, from February
1990 until June 1995. Mr. Rothenbach was appointed a director of the
Corporation and the Bank on May 1, 1997. Prior thereto, he had served as
a director of OSB since 1995.
Harold L. Hermansen has served as Vice President - Lending and
Secretary of the Bank since 1987. He joined the Bank in 1983 and has a
total of twenty-two years of experience in the financial industry. Mr.
Hermansen has served in his current position with the Corporation since
its incorporation in 1993.
Phillip J. Schoofs has served as Vice President-Finance and Treasurer
of the Bank since 1989. Prior thereto he served as Treasurer of the Bank
from 1985 to 1989 and as Assistant Treasurer from 1984 to 1985. Mr.
Schoofs joined the Bank after serving five years with a national
accounting firm. Mr. Schoofs is a certified public accountant and has
served as Vice President, Treasurer and Chief Financial Officer of the
Corporation since May 1, 1997. Prior to that, he served as Vice
President, Treasurer of the Corporation since its incorporation in 1993.
Theodore W. Hoff has served as Vice President - Retail Sales and
Services of the Corporation and the Bank since May 1, 1997. Prior
thereto, he was Vice-President- Retail Sales and Services of Oshkosh
Savings Bank, F.S.B. since 1980.
Item 2. Properties
The following table sets forth information relating to each of the
Corporation's offices as of March 31, 1997. Management believes such
properties to be adequate for the present operation of the business of the
Corporation and the Bank.
Owned Year Net Book Value
Location or Leased Acquired/Leased at March 31, 1997
Home Office:
108 East Wisconsin Avenue Owned 1965 $612,000
Neenah, Wisconsin
Branch Offices:
1065 South Lake Street Owned 1974 276,000
Neenah, Wisconsin
130 Main Street Leased* 1987 19,000
Menasha, Wisconsin
2000 South Memorial Drive Owned 1980 862,000
Appleton, Wisconsin
110 Fox River Drive Owned 1988 943,000
Appleton, Wisconsin
W3160 County Road KK Owned 1994 943,000
Appleton, Wisconsin
*The lease on this property expires May 31, 2000, subject to a five-year
renewal option held by the Bank.
As a result of the Merger, seven offices were added in the following
Wisconsin locations: Oshkosh (2), Appleton, Winneconne, Berlin, Ripon and
Wautoma. All offices are owned except for Ripon and Wautoma, which are
leased.
Item 3. Legal Proceedings
Although the Bank is, from time to time, involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Corporation, the Bank or any subsidiary is a
party, or to which any of their property is subject. To the Corporation's
knowledge, there are no material legal proceedings to which any director,
officer, affiliate or more than 5% shareholder of the Corporation (or any
associate of the foregoing persons) is a party adverse to the Corporation,
the Bank or any subsidiary or has a material interest adverse to the
Corporation, the Bank or any subsidiary.
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 March 31, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
The Corporation's common stock is currently being traded on the
Nasdaq Stock Market under the symbol of FCBF. See Supplemental
Consolidated Financial Information in Part II, Item 8 of this document for
information on stock price ranges, which information is incorporated
herein by reference.
As of March 31, 1997, there were approximately 979 registered
shareholders of record owning a total of 2,463,803 common shares.
The Corporation declared quarterly dividends of $.15 per share in
the fiscal year ended March 31, 1996 and $.18 per share in each of the
quarters in the fiscal year ended March 31, 1997. The Board of Directors
of the Corporation intends to consider the payment of cash dividends on
the common stock on a quarterly basis, but the declaration of future
dividends will necessarily be dependent upon business conditions, the
earnings and financial position of the Corporation and the Bank, and such
other matters as the Board of Directors deems relevant. The Corporation's
ability to pay dividends is limited by regulatory and other requirements
which require the Bank to maintain minimum levels of capital. See Note 12
to Consolidated Financial Statements included in Part II, Item 8 Financial
Statements and Supplementary Data, which Note is incorporated herein by
reference.
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data. The
financial data are derived in part from, and should be read in conjunction
with, the Consolidated Financial Statements and Notes thereto presented
elsewhere in this Annual Report on Form 10-K.
At March 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
Selected Financial Data:
Total assets $271,185 $255,660 $239,305 $196,443 $182,166
Loans receivable - Net 221,496 204,897 186,807 143,385 123,486
Loans held for sale
- Net 3,270 5,161 708 10,102 17,678
Investment securities
held to maturity
(includes FHLB stock) 12,240 9,581 14,228 15,367 1,387
Mortgage-related
securities available
for sale 6,363 6,906 - - -
Mortgage-related
securities held
to maturity 16,531 17,850 26,348 17,309 19,370
Cash and cash equivalents 4,628 4,792 4,773 4,567 15,014
Foreclosed properties and
properties subject to
foreclosure - - - - 210
Deposit accounts 153,163 151,115 143,851 138,208 154,492
Borrowed funds 64,900 51,900 42,400 4,000 -
Shareholders' equity 47,432 47,192 48,017 49,497 21,603
Year Ended March 31,
1997 1996 1995 1994 1993
(Dollars in thousands,
except per share amounts)
Selected Operations Data:
Total interest and
dividend income $19,965 $18,319 $15,060 $13,491 $14,133
Total interest expense 10,827 10,081 7,365 6,652 8,261
------ ------ ------ ------ ------
Net interest income 9,138 8,238 7,695 6,839 5,872
Provision for loan losses 350 200 36 76 368
------ ------ ------ ------ ------
Net interest income
after provision for
loans losses 8,788 8,038 7,659 6,763 5,504
------ ------ ------ ------ ------
Gain (loss) on sale of
loans and foreclosed
property - Net 288 80 (57) 193 493
Other noninterest income 699 685 654 615 593
------ ------ ------ ------ ------
Total noninterest income 987 765 597 808 1,086
------ ------ ------ ------ ------
Operating expenses:
Compensation, payroll
taxes and other
employee benefits 2,437 2,288 2,172 1,819 1,604
Other 3,233 2,291 2,208 2,024 1,889
------ ------ ------ ------ ------
Total operating expenses 5,670 4,579 4,380 3,843 3,493
------ ------ ------ ------ ------
Income before provision
for income taxes and
cumulative effect of
change in accounting
principle 4,105 4,224 3,876 3,728 3,097
Provision for income taxes 1,665 1,667 1,493 1,427 1,297
------ ------ ------ ------ ------
Income before cumulative
effect of change in
accounting principle 2,440 2,557 2,383 2,301 1,800
------ ------ ------ ------ ------
Cumulative effect of change
in accounting principle - - - 140 -
------ ------ ------ ------ ------
Net income $2,440 $2,557 $2,383 $2,441 $1,800
====== ====== ====== ====== ======
Earnings per share $1.01 $1.01 $0.93 $0.84 N/A
====== ====== ====== ====== ======
Dividends declared
per share $0.72 $0.60 $0.45 $0.12 N/A
====== ====== ====== ====== ======
Year Ended March 31,
1997 1996 1995 1994 1993
Selected Financial Ratios
and Other Data:
Performance Ratios
Return on average assets 0.92% 1.04% 1.09% 1.27% 1.00%
Return on average equity 5.18% 5.27% 4.90% 6.37% 8.67%
Dividend payout ratio 71.29% 59.41% 48.39% 14.29% N/A
Shareholders' equity to
total assets 17.49% 18.46% 20.07% 25.20% 11.86%
Average shareholders'
equity to average assets 17.79% 19.73% 22.19% 19.02% 11.55%
Net interest spread 2.71% 2.50% 2.69% 2.86% 2.85%
Net interest margin 3.56% 3.47% 3.62% 3.67% 3.39%
Net interest income to
operating expenses 161.16% 179.91% 175.68% 177.96% 169.91%
Average interest-earning
assets to average
interest-bearing
liabilities 120.15% 122.86% 126.80% 123.30% 111.35%
Asset Quality Ratios
Non-performing assets to
total assets 0.15% 0.09% 0.11% 0.09% 0.12%
Allowance for loan losses
to loans and foreclosed
properties 0.63% 0.51% 0.47% 0.59% 0.62%
Facilities
Number of full-service
offices 6 6 6 5 5
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Management's discussion and analysis of financial condition and
results of operations is intended to assist in understanding the financial
condition and results of operations of the Corporation and the Bank as of
and for the year ended March 31, 1997. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and Supplementary Data , the accompanying Notes to such
Consolidated Financial Statements and the other sections contained in Part
II, Item 8 of this document.
Results of Operations
The Corporation's consolidated results of operations are dependent
primarily on the Bank's net interest income, which is the difference
between the interest income earned on its loans, mortgage-related
securities and investments and the Bank's cost of funds, consisting of
interest paid on its deposits and borrowings. The operating results are
also affected to a lesser extent by the Bank's loan servicing fees,
commissions on insurance sales, service charges for customer services and
gains or losses on the sale of loans. The operating expenses principally
consist of the Bank's employee compensation and benefits, occupancy
expenses, federal deposit insurance premiums and other general and
administrative expenses. The results of operations are also significantly
affected by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of
regulatory authorities.
Comparison of Operating Results for the Years Ended March 31, 1997 and
1996.
General. Net income for the fiscal year ended March 31, 1997
increased 18.7% to $3.0 million from $2.6 million for the year ended March
31, 1996, before considering the effect of a special one-time deposit
insurance assessment. This assessment on the thrift industry generally
was made to recapitalize the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation. The assessment on the Corporation
amounted to $970,000 on a pretax basis and reduced net income for the year
ended March 31, 1997 by $596,000. After considering the effect of the
special assessment, net income for fiscal 1997 was $2.4 million or
decreased $200,000 less than 1996 net income. The increase in net income
prior to the special assessment was primarily attributable to an increase
of $900,000 in net interest income and an increase of $222,000 in total
noninterest income. These items were partially offset by an increase of
$150,000 in the provision for loan losses, and an increase of $121,000 in
total operating expenses prior to consideration of the special assessment.
Net Interest Income. Net interest income increased to $9.1 million
in fiscal 1997 from $8.2 million in fiscal 1996. The increase was
attributable to a $1.7 million increase in total interest and dividend
income which was partially offset by an increase of $746,000 in total
interest expense. The increase in total interest and dividend income was
related to the increase in the average outstanding balance of total
interest-earning assets to $256.5 million for fiscal 1997 from $237.7
million for fiscal 1996 and the increase in the yield on these assets to
7.78% in fiscal 1997 from 7.71% in fiscal 1996. The increase in total
interest expense resulted from an increase in the average outstanding
balance of total interest-bearing liabilities from $193.4 million for
fiscal 1996 to $213.5 million for fiscal 1997 and was partially offset by
a decrease in the cost of these funds from 5.21% in fiscal 1996 to 5.07%
in fiscal 1997. Further discussion of the components of the increases in
interest earning assets and interest bearing liabilities is included in
the Financial Condition section below.
Provision for Loan Losses. The Bank's provision for loan losses
increased to $350,000 during the fiscal year ended March 31, 1997 from
$200,000 for the fiscal year ended March 31, 1996. In fiscal 1997,
management continued to establish loan loss allowance percentages for each
component of the Bank's loan portfolio based on management's judgment
regarding, among other factors, historical loss experience with respect to
the various components of the Bank's loan portfolio and the economic
conditions existing in the Bank's primary market area. The increase in
the loan loss provision for fiscal 1997 related principally to increases
in the adjustable rate mortgage and consumer loan portfolios, as well as
the commercial real estate portfolio. It is management's opinion that no
unusual risk factors were apparent in the Bank's loan portfolio and that
the general economic conditions existing in the Bank's primary market area
were generally as favorable as those being experienced in many areas of
the United States during fiscal 1997. Charge-offs amounted to $20,000 in
fiscal year 1997. There were no charge-offs in the year ended March 31,
1996. Nonperforming loans totaled $404,000 and $234,000 at March 31, 1997
and 1996, respectively. Based on past experience and future expectations,
management believes the loan loss allowance of $1.4 million at March 31,
1997 is adequate.
Noninterest Income. Noninterest income totaled $987,000 for fiscal
1997 compared to $765,000 in fiscal 1996, an increase of 29.0%. The
increase resulted primarily from an increase in the gain on sale of loans
to $288,000 in fiscal 1997 from $80,000 in the fiscal year ended 1996.
The increase in gain on sale of loans was primarily attributable to the
new accounting method which was required for loan sales in fiscal year
1997. This new accounting method resulted in a gain for the year ended
March 31, 1997 of approximately $202,000 more than the gain which would
have been recorded using the previous accounting method. For additional
information on the accounting change, see "Impact of New Accounting
Pronouncements and Regulatory Policies" below. In fiscal 1997, the Bank
also continued to reduce its loss exposure in the sale of loans by
entering into sale commitments prior to extending credit on certain
mortgage loans.
Operating Expenses. Operating expenses increased to $4.7 million in
fiscal 1997 (prior to the special deposit insurance assessment) from $4.6
million in fiscal 1996. The increase resulted primarily from an increase
in compensation, payroll taxes and other employee benefits of $149,000,
which was partially offset by a decrease in occupancy expenses of $46,000.
Normal salary increases caused the above-mentioned increase in
compensation, payroll taxes and other employee benefits. The decreased
occupancy expenses are primarily the result of lower depreciation expense
on furniture and equipment in fiscal 1997 due to assets becoming fully
depreciated during the year. Also contributing to the lower occupancy
expenses were lower property tax assessments on buildings and equipment.
After consideration of the special deposit insurance assessment of
$970,000, operating expenses increased $1.1 million.
Comparison of Operating Results for the Years Ended March 31, 1996 and
1995.
General. Net income for the fiscal year ended March 31, 1996
increased 8.3% to $2.6 million compared to the prior year amount of $2.4
million. The increase in net income was primarily attributable to an
increase of $543,000 in net interest income and an increase of $168,000 in
total noninterest income. These items were partially offset by an
increase of $164,000 in the provision for loan losses, an increase of
$199,000 in total operating expenses and an increase of $174,000 in the
provision for income taxes.
Net Interest Income. Net interest income increased to $8.2 million
in fiscal 1996 from $ 7.7 million in fiscal 1995. The increase was
attributable to a $3.2 million increase in total interest and dividend
income which was partially offset by an increase of $2.7 million in total
interest expense. The increase in total interest and dividend income was
related to the increase in the average outstanding balance of total
interest-earning assets to $237.7 million for fiscal 1996 from $212.6
million for fiscal 1995 and the increase in the yield on these assets to
7.71% in fiscal 1996 from 7.08% in fiscal 1995. The increase in total
interest expense resulted from an increase in the average outstanding
balance of total interest-bearing liabilities for fiscal 1996 to $193.4
million from $167.7 million for fiscal 1995 and an increase in cost of
these funds to 5.21% in fiscal 1996 from 4.39% in fiscal 1995. In
addition, despite the declining interest rate environment experienced
during fiscal 1996, many of the Corporation's assets and liabilities which
repriced in fiscal 1996 increased in yield and cost, respectively, when
compared to their pre-adjustment rates, which had been set during the very
low interest rate environment of fiscal 1994 and early fiscal 1995.
Provision for Loan Losses. During the fiscal year ended March 31,
1996, the Bank's provision for loan losses increased to $200,000 from
$36,000 for the fiscal year ended March 31, 1995. In fiscal 1996,
management continued to establish loan loss allowance percentages for each
component of the Bank's loan portfolio based on management's judgment
regarding, among other factors, historical loss experience with respect to
the various components of the Bank's loan portfolio and the economic
conditions existing in the Bank's primary market area. The increase in
the loan loss provision for fiscal 1996 related principally to increases
in the commercial and consumer loan portfolios. There were no charge-offs
on loans in fiscal 1996 compared to $1,000 in fiscal 1995. Nonperforming
loans totaled $234,000 and $270,000 at March 31, 1996 and 1995,
respectively.
Noninterest Income. Noninterest income for fiscal 1996 totaled
$765,000 as compared to $597,000 in fiscal 1995, an increase of 28.1%.
The increase resulted primarily from the $80,000 gain on sale of loans
which the Corporation realized in fiscal 1996 as compared to the loss of
$57,000 suffered during the prior fiscal year. The fiscal 1996 gain on
sale of loans was attributable in part to the declining interest rate
environment experienced during the majority of fiscal 1996 which allowed
the Bank to sell loans at a profit. The Bank in fiscal 1996 also reduced
its loss exposure in the sale of loans by entering into sale commitments
prior to extending credit on certain mortgage loans.
Operating Expenses. The $199,000 increase in operating expenses to
$4.6 million in fiscal 1996 from $4.4 million in fiscal 1995 resulted
primarily from increases in compensation, payroll taxes and other employee
benefits ($116,000) and occupancy expenses ($34,000). Normal salary
increases caused the above-mentioned increase in compensation, payroll
taxes and other employee benefits. The additional banking facility in
Darboy, Wisconsin (which opened in the second quarter of fiscal 1995 but
was operational during all of fiscal 1996) resulted in the increased
occupancy expenses.
Income Taxes. The provision for income taxes increased to $1.7
million in fiscal 1996 from $1.5 million in fiscal 1995. The increase of
$174,000 was primarily attributable to the increase in income before
provision for income taxes.
Financial Condition
Total Assets. Total assets increased 6.1% to $271.2 million at
March 31, 1997 from $255.7 million at March 31, 1996. The asset growth
reflects the Corporation's strategy to leverage its relatively high level
of shareholders' equity as a means to improve its return on equity. The
increase resulted primarily from increases in adjustable rate mortgage
loan and indirect consumer loan originations. Loans receivable increased
$16.6 million, which was partially offset by a decrease of $1.9 million in
loans held for sale. The growth in total assets was funded by a
combination of an increase in borrowed funds of $13.0 million and an
increase in deposit accounts of $2.1 million.
Investment Securities Held to Maturity. Investment securities held
to maturity increased $2.0 million to $9.0 million at March 31, 1997 from
$7.0 million at March 31, 1996. This increase is the result of the
purchase of a government agency-backed security.
Mortgage-Related Securities Available for Sale and Mortgage-Related
Securities Held to Maturity. Total mortgage-related securities decreased
$1.9 million to $22.9 million at March 31, 1997 from $24.8 at March 31,
1996 as a result of normal principal paydowns. The held to maturity
classification at March 31, 1997 included $10.5 million of adjustable rate
REMIC pass-through certificates which were purchased during the first two
quarters of fiscal 1995 and were funded through borrowings from the
Federal Home Loan Bank of Chicago. The interest rates on these
certificates and related borrowings adjust on a monthly basis to the same
London interbank offered rate ("LIBOR") index. However, the Corporation
may be subject to interest rate exposure because there are no interest
rate caps on the borrowings, while the mortgage-related securities do
contain caps. In addition, because these securities were purchased at a
discount, the interest spreads earned will vary with the actual prepayment
speeds experienced. Fluctuations in prepayment speeds are analyzed by the
Corporation prior to purchasing mortgage-related securities and on an
ongoing basis and are part of the overall asset/liability management
strategy of the Corporation. All of the Corporation's REMIC certificates
meet the Federal Financial Institutions Examination Council definition of
low-risk securities and the Corporation does not anticipate any
difficulties in recovering the carrying amounts of any of its
mortgage-related securities.
Loans Receivable. Loans receivable increased $16.6 million from
$204.9 million at March 31, 1996 to $221.5 million at March 31, 1997.
This increase resulted from the continued strong demand for adjustable
rate mortgage products which are held for investment, and consumer loans
(including auto loans which are purchased from local dealerships). The
Corporation continues to hold established levels of fixed rate mortgage
loans. In addition, as part of its attempt to improve its yield on
earning assets, the Bank has focused on increasing the amount of
commercial real estate loans made. During fiscal 1997 and 1996, $8.7
million and $12.2 million of commercial real estate loans, respectively,
were originated.
Loans Held for Sale. Loans held for sale decreased by $1.9 million
from $5.2 million at March 31, 1996 to $3.3 million at March 31, 1997.
The decrease is consistent with the Bank's strategy to moderate the
interest rate risk on its loan portfolio by minimizing assets which are
valued at the lower of cost or market and therefore subject to changes in
value with interest rate fluctuations.
Deposits. Deposits increased from $151.1 million at March 31, 1996
to $153.2 million at March 31, 1997. This increase was primarily the
result of continued efforts to attract cost-effective funds. During
fiscal 1997, the Bank began to offer a new series of deposit products
associated with a "mature market" program. Rates paid on the new products
are relatively consistent with similar products, and did not have a
negative effect on earnings.
Borrowings. The Corporation at the Bank level increased its level
of borrowed funds $13.0 million during fiscal 1997 to $64.9 million at
March 31, 1997 from $51.9 million at March 31, 1996. These funds were
primarily used to fund loan originations as described above.
Shareholders' Equity. Shareholders' equity increased $200,000 from
$47.2 million at March 31, 1996 to $47.4 million at March 31, 1997. This
increase is a result of the combined effect of the Corporation's net
income, which was partially offset by dividends declared of $1.7 million
and the purchase of 56,000 shares of treasury stock for $1.0 million
during fiscal 1997. Under the current stock repurchase program, the
Corporation is authorized to purchase 125,630 shares. As of May 31, 1997,
62,000 shares had been repurchased pursuant to this program.
Liquidity and Capital Resources
Liquidity. The Corporation's primary sources of funds are deposits,
borrowings, proceeds from principal and interest payments on loans,
mortgage-related securities and investment securities and the sale of
fixed rate mortgage loans. While borrowings and payments on loans and
mortgage-related and investment securities are a predictable source of
funds, deposit flows and mortgage loan prepayments are greatly influenced
by general interest rates, economic conditions and competition.
The Corporation's primary investing activity is the origination of
mortgage loans by the Bank. For the years ended March 31, 1997, 1996 and
1995, mortgage loans originated totaled $53.2 million, $69.9 million and
$56.4 million, respectively. Mortgage loan originations have been funded
primarily by principal repayments on loans and sales of loans originated
for sale, as well as principal repayments on mortgage-related securities
and borrowed funds. Mortgage loan repayments were $28.5 million in fiscal
1997, $25.9 million in fiscal 1996 and $25.5 million in fiscal 1995. Loan
sales for fiscal 1997 were $20.2 million, $21.7 million in fiscal 1996,
and $5.9 million in fiscal 1995. The Bank continues to sell originated
fixed rate loans in accordance with its asset/liability management
strategy. The Corporation's other major investing activity, the purchase
of mortgage-related and investment securities, amounted to $10.0 million,
$7.0 million and $10.7 million in the fiscal years ended March 31, 1997,
1996 and 1995, respectively.
Financing activities were a source of $12.7 million, $13.0 million
and $40.3 million in funds for fiscal years 1997, 1996 and 1995,
respectively. For each year, the major source of cash provided by
financing activities was an increase in borrowed funds.
The Corporation at the Bank level is required to maintain minimum
levels of liquid assets as defined by OTS regulations. These
requirements, which may be varied at the direction of the OTS depending
upon economic conditions and deposit flows, are based on a percentage of
the average daily balance of an institution's net withdrawable deposit
accounts and short-term borrowings. The required ratio is currently 5.0%.
On March 31, 1997, the Bank's liquidity ratio calculated in accordance
with OTS requirements was 6.67%. In addition, according to current OTS
regulations, short-term liquid assets must constitute 1.0% of the sum of
net withdrawable deposit accounts plus short-term borrowings. On March
31, 1997, the Bank's short-term liquidity ratio was 4.16%. Management's
goal is to consistently maintain liquidity levels in excess of regulatory
requirements.
The Corporation's most liquid assets are cash and cash equivalents,
which include highly liquid, short-term investments. The levels of these
assets are dependent on the Corporation's operating, financing and
investing activities during any given period. At March 31, 1997, 1996 and
1995, cash and cash equivalents totaled $4.6 million, $4.8 million and
$4.8 million, respectively. Liquidity management for the Corporation is
both a daily and long-term function of its management. Excess funds are
generally invested in mortgage-related securities and government and
government agency-backed securities with varying maturities.
At March 31, 1997, the Corporation had commitments to originate
mortgage loans of $9.4 million, at various interest rates, and commitments
to extend credit on unused lines of credit of $2.3 million, at various
interest rates. Management does not believe the Corporation will suffer
any material adverse consequences as a result of fulfilling these
commitments.
Capital Resources. The Corporation at the Bank level is required to
maintain specific amounts of capital pursuant to the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 and regulations
promulgated pursuant thereto. As of March 31, 1997, the Bank was in
compliance with all regulatory capital requirements which were effective
as of such date, with tangible, core, and risk-based capital ratios of
14.12%, 14.12%, and 24.23%, respectively. For additionalinformation about
these capital levels, see Note 12 of Notes to Consolidated Financial
Statements included in Consolidated Financial Statements and Supplementary
Data in Part II, Item 8 of this document.
Impact of New Accounting Pronouncements and Regulatory Policies
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. In March, 1995, Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," was issued. SFAS No. 121 requires long-lived assets and certain
intangibles to be held and used by an entity to be reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. The Statement also requires
long-lived assets and certain intangibles to be disposed of to be reported
at the lower of carrying amount or fair value less cost to sell. The
Corporation adopted Statement No. 121 effective April 1, 1996. Adoption
of this statement did not have a material impact on the Corporation's
financial condition or results of operations.
Accounting for Mortgage Servicing Rights. In May, 1995, SFAS No.
122, "Accounting for Mortgage Servicing Rights," was issued. SFAS No. 122
requires that an allocation of costs be made between loans and their
related servicing rights for loans originated with a definitive plan to
sell or to securitize these loans and retain the servicing rights.
Statement No. 122 requires entities to recognize a separate asset for
servicing rights which will increase the gain on sale of loans when the
servicing rights are retained. Previously, costs were fully allocated to
the loans and servicing income was recognized as it was received over the
life of the loan. The Corporation adopted SFAS No. 122 effective April 1,
1996. As a result of adopting SFAS No. 122, the Corporation recorded
additional gain on sale of loans in fiscal 1997 of approximately $202,000.
Accounting for Stock-Based Compensation. In October, 1995, SFAS No.
123, "Accounting for Stock-Based Compensation," was issued. SFAS No. 123
recognizes the fair value on the date of grant of employee stock option
awards either by recognizing compensation expense or by providing
extensive new footnotes to include pro-forma disclosures of net income and
earnings per share. The Corporation adopted Statement No. 123 in fiscal
1997 by the use of expanded footnotes. As such, adoption of the Statement
did not have an effect on the Corporation's financial condition or results
of operations.
Employers' Accounting for Employee Stock Ownership Plans. During
fiscal 1995, the Corporation adopted SOP 93-6, "Employers' Accounting for
Employee Stock Ownership Plans". SOP 93-6 requires that employee stock
ownership plan shares committed to be released to compensate employees be
recorded as compensation expense equal to the fair value of the shares at
the time they are committed to be released, that the difference between
the cost of the shares to the employee stock ownership plan and the fair
value of the shares be credited to additional paid-in capital, and that
employee stock ownership plan shares not commiexpense. The effect of the
additional expense on earnings per share has been offset by the reduction
in the weighted-average number of shares outstanding. Earnings per share
increased $.01 for the twelve months ended March 31, 1995 as a result of
adopting the SOP. The effect on earnings per share will diminish annually
as employee stock ownership plan shares are released to participants'
accounts.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position
and operating results in terms of historical dollars, without considering
the changes in relative purchasing power of money over time due to
inflation. The primary impact of inflation on operations of the
Corporation is reflected in increased operating costs. Unlike most
industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices
of goods and services.
Subsequent Event - Merger with OSB
On May 1, 1997, OSB was merged with and into the Corporation.
Details of the Merger are set forth in Part I of this Annual Report on
Form-K under the caption "Item 1. Business," which information is
incorporated herein by reference. Based on anticipated cost savings, the
Corporation currently believes that the Merger will result in annual
pre-tax savings of approximately $800,000. It is expected that measures to
effect the cost savings will be fully implemented by the start of the 1999
fiscal year. Although cost savings are anticipated during fiscal 1998,
such savings for fiscal 1998 are not expected to approximate the annual
pre-tax savings of approximately $800,000 described above. In addition,
the Corporation currently expects to add approximately $350,000 to its
loan loss provision during the quarter ending June 30, 1997. This
additional provision is intended to equalize the loan loss allowance
percentages historically maintained by the Bank and the former Oshkosh
Savings Bank, F.S.B., respectively.
The preceding discussion contains forward-looking statements
regarding managements' estimates of potential pre-tax cost savings
resulting from the Merger and the proposed loan loss provision for the
quarter ending June 30, 1997. Actual results might differ materially from
those contained in the forward-looking statements. Factors which could
affect actual results include interest rate trends, the general economic
climate in the Corporation's market area, loan deliquency rates,
regulatory treatment and the ability of the Corporation to implement
successfully plans to eliminate redundancies. The forward-looking
statements were necessarily based upon various assumptions that involve
judgements with respect to, among other things, future national and
regional economic and competitive conditions, technological developments,
inflations rates, financial market conditions, future business decisions,
and other uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Corporation. Accordingly, while the
Corporation believes that such assumptions are reasonable for purposes of
the development of estimates of potential savings and the loan loss
provision, there can be no assurance that such assumptions will
approximate actual experience. The forward-looking statements included
here in are made as of the date hereof and the Corporation undertakes no
obligation to update publicly such statements to reflect subsequent events
or cirumstances.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8. Financial Statements and Supplementary Data
FCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1997 and 1996
(Dollars In Thousands)
ASSETS
1997 1996
Cash $ 473 $ 475
Interest-bearing deposits 4,155 4,317
------- -------
Cash and cash equivalents 4,628 4,792
Investment securities held to
maturity (estimated fair value of
$8,953 and $6,965 at March 31, 1997
and 1996, respectively) 8,995 6,986
Mortgage-related securities
available for sale, at fair value 6,363 6,906
Mortgage-related securities held to
maturity (estimated fair value of
$16,613 and $17,986 at March 31,
1997 and 1996, respectively) 16,531 17,850
Investment in Federal Home Loan Bank
stock, at cost 3,245 2,595
Loans held for sale - Net of
unrealized loss of $87 and $101
at March 31, 1997 and 1996,
respectively 3,270 5,161
Loans receivable - Net 221,496 204,897
Office properties and equipment 4,091 4,211
Other assets 2,566 2,262
------- -------
TOTAL ASSETS $ 271,185 $ 255,660
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 153,163 $ 151,115
Borrowed funds 64,900 51,900
Advance payments by borrowers
for taxes and insurance 2,586 2,410
Other liabilities 3,104 3,043
------- -------
Total liabilities 223,753 208,468
------- -------
Commitments and contingencies
(See Notes 11 and 13)
Shareholders' equity:
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued - 2,909,500 shares 29 29
Additional paid-in capital 28,911 28,693
Retained earnings - Substantially
restricted 26,630 25,930
Unrealized loss on securities
available for sale - Net of tax (72) (26)
Unearned compensation - ESOP (869) (1,118)
------- -------
Totals 54,629 53,508
Less - 445,697 and 396,886 shares
of treasury common stock, at cost,
at March 31, 1997 and 1996,
respectively (7,197) (6,316)
------- -------
Total shareholders' equity 47,432 47,192
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 271,185 $ 255,660
======= =======
See accompanying notes to consolidated financial statements.
FCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31, 1997, 1996, and 1995
(Dollars In Thousands, Except Per Share Amounts)
1997 1996 1995
Interest and dividend income:
Mortgage loans $ 15,031 $ 13,818 $ 11,660
Other loans 2,671 2,147 1,302
Investment securities 462 422 572
Mortgage-related securities 1,550 1,718 1,387
Dividends on stock in Federal
Home Loan Bank 201 154 103
Interest-bearing deposits 50 60 36
------- ------- -------
Total interest and dividend
income 19,965 18,319 15,060
------- ------- -------
Interest expense:
Deposit accounts 7,704 7,703 5,950
Borrowed funds 3,123 2,378 1,415
------- ------- -------
Total interest expense 10,827 10,081 7,365
------- ------- -------
Net interest income 9,138 8,238 7,695
Provision for loan losses 350 200 36
------- ------- -------
Net interest income after
provision for loan losses 8,788 8,038 7,659
------- ------- -------
Noninterest income:
Loan fees - Net 378 370 359
Deposit fees 140 117 102
Gain (loss) on sale of loans
- Net 288 80 (57)
Other income 181 198 193
------- ------- -------
Total noninterest income 987 765 597
------- ------- -------
Operating expenses:
Compensation, payroll taxes and
other employee benefits 2,437 2,288 2,172
Marketing 254 250 277
Occupancy 678 724 690
Data processing 270 248 225
Federal insurance premiums 1,246 349 331
Other 785 720 685
------- ------- -------
Total operating expenses 5,670 4,579 4,380
------- ------- -------
Income before provision for
income taxes 4,105 4,224 3,876
Provision for income taxes 1,665 1,667 1,493
------- ------- -------
Net income $ 2,440 $ 2,557 $ 2,383
======= ======= =======
Earnings per share $ 1.01 $ 1.01 $ .93
======= ======= =======
Cash dividends declared
per share $ .72 $ .60 $ .45
======= ======= =======
See accompanying notes to consolidated financial statements.
FCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended March 31, 1997, 1996, and 1995
(Dollars In Thousands, Except Per Share Amounts)
Unrealized
Loss on
Additional Securities Unearned Treasury
Common Paid-In Retained Available For Compensation - Common
Stock Capital Earnings Sale, Net of Tax ESOP Stock Total
Balance at March 31, 1994 $29 $28,421 $23,700 $ - $(1,606) $(1,047) $49,497
Net income for 1995 - - 2,383 - - - 2,383
Cash dividends declared
($.45 per share) - - (1,142) - - - (1,142)
Amortization of unearned
compensation - ESOP - 105 - - 245 - 350
Exercise of stock options -
5,819 treasury common
shares - - (25) - - 84 59
Purchase of treasury common
stock 208,175 shares - - - - - (3,130) (3,130)
------ ------ ------ ------ ------ ------ ------
Balance at March 31, 1995 29 28,526 24,916 - (1,361) (4,093) 48,017
Net income for 1996 - - 2,557 - - - 2,557
Cash dividends declared
($.60 per share) - - (1,484) - - - (1,484)
Amortization of unearned
compensation - ESOP - 167 - - 243 - 410
Increase in unrealized loss
on securities available
for sale - Net of tax - - - (26) - - (26)
Exercise of stock options -
12,500 treasury common
shares - - (59) - - 184 125
Purchase of treasury common
stock - 131,530 shares - - - - - (2,407) (2,407)
------ ------ ------ ------ ------ ------ ------
Balance at March 31, 1996 29 28,693 25,930 (26) (1,118) (6,316) 47,192
Net income for 1997 - - 2,440 - - - 2,440
Cash dividends declared
($.72 per share) - - (1,696) - - - (1,696)
Amortization of unearned
compensation - ESOP - 218 - - 249 - 467
Increase in unrealized loss on
securities available for
sale - Net of tax - - - (46) - - (46)
Exercise of stock options -
7,189 treasury common
shares - - (44) - - 116 72
Purchase of treasury common
stock - 56,000 shares - - - - - (997) (997)
------ ------ ------ ------ ------ ------ ------
Balance at March 31, 1997 $ 29 $ 28,911 $ 26,630 $ (72) $ (869) $ (7,197) $ 47,432
====== ====== ====== ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
FCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1997, 1996, and 1995
(Dollars In Thousands)
1997 1996 1995
Cash flows from operating activities:
Net income $ 2,440 $ 2,557 $ 2,383
------- ------- -------
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation 246 271 250
Provision for loan losses 350 200 36
(Gain) loss on sale of assets -
Net (288) (82) 57
Loans originated for sale (18,000) (27,227) (8,333)
Proceeds from loan sales 20,179 21,704 5,903
Changes in operating assets
and liabilities 165 692 (99)
Other 15 (220) 77
------ ------ ------
Total adjustments 2,667 (4,662) (2,109)
------ ------ ------
Net cash provided by (used in)
operating activities 5,107 (2,105) 274
------ ------ ------
Cash flows from investing activities:
Proceeds from maturities of
investment securities held
to maturity 8,000 12,000 2,000
Purchase of investment securities
held to maturity (10,000) (7,000) -
Principal repayments on
mortgage-related securities
held to maturity 1,325 1,509 1,690
Principal repayments on
mortgage-related securities
available for sale 459 127 -
Purchase of mortgage-related
securities held to maturity - - (10,740)
Purchase of Federal Home Loan
Bank stock (650) (326) (791)
Net increase in loans (16,949) (17,193) (31,691)
Proceeds from sale of
other assets - 63 -
Capital expenditures (126) (60) (799)
------ ------ ------
Net cash used in investing
activities (17,941) (10,880) (40,331)
------ ------ ------
Cash flows from financing activities:
Net increase in deposit accounts 2,048 7,264 5,643
Net increase in borrowed funds 13,000 9,500 38,400
Net increase (decrease) in advance
payments by borrowers for taxes
and insurance 176 (55) 304
Proceeds from exercise of
stock options 72 125 59
Purchase of treasury common
stock (997) (2,407) (3,130)
Dividends paid (1,629) (1,423) (1,013)
------ ------ ------
Net cash provided by financing
activities 12,670 13,004 40,263
------ ------ ------
Net (decrease) increase in cash and
cash equivalents $ (164) $ 19 $ 206
Cash and cash equivalents at
beginning 4,792 4,773 4,567
------ ------ ------
Cash and cash equivalents at end $ 4,628 $ 4,792 $ 4,773
====== ====== ======
Supplemental cash flow information:
Cash paid during the year for:
Interest on deposit accounts $ 7,631 $ 7,457 $ 5,792
Interest on borrowed funds 3,056 2,374 1,195
Income taxes 1,877 1,630 1,349
Loans transferred to foreclosed
properties and properties
subject to foreclosure - 53 -
Loans transferred from held for
sale to held for investment - 1,150 11,767
See accompanying notes to consolidated financial statements.
FCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations.
FCB Financial Corp. is a Wisconsin corporation and the savings and loan
holding company for Fox Cities Bank, F.S.B. (the "Bank"). The Bank is a
federally chartered savings bank and operates as a full service financial
institution with a primary market area including, but not limited to,
Outagamie and Winnebago Counties of East Central Wisconsin. The Bank
emphasizes first mortgage loans secured by one- to four-family real estate
located in its market area. The Bank, through its wholly-owned
subsidiary, Fox Cities Financial Services, Inc., sells various insurance
products and tax deferred annuities. Fox Cities Financial Services, Inc.
also holds a 50% limited partnership interest in an apartment complex
located in Menasha, Wisconsin. The partnership qualifies for federal low
income housing tax credits. Additionally, the Bank owns Fox Cities
Investments, Inc., a Nevada corporation, which owns and manages a
portfolio of investment securities, all of which are permissible
investments of the Bank itself.
Use of Estimates in Preparation of Financial Statements.
The preparation of the accompanying financial statements of FCB Financial
Corp. and Subsidiaries (the "Corporation") in conformity with generally
accepted accounting principles requires the use of certain estimates and
assumptions that directly affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results may differ from these
estimates.
Principles of Consolidation.
The accompanying consolidated financial statements include the accounts of
FCB Financial Corp., Fox Cities Bank, F.S.B., and its wholly owned
subsidiaries, Fox Cities Financial Services, Inc. and Fox Cities
Investments, Inc., after elimination of significant intercompany accounts
and transactions.
Cash Equivalents.
The Corporation considers all highly liquid debt instruments with original
maturities when purchased of three months or less to be cash equivalents.
Investment and Mortgage-Related Securities Held to Maturity and Available
for Sale.
Management determines the appropriate classification of debt securities at
the time of purchase. Debt securities are classified as held to maturity
when the Corporation has the positive intent and ability to hold the
securities to maturity. Held to maturity securities are stated at
amortized cost. Debt securities not classified as held to maturity are
classified as available for sale. Available for sale securities are
stated at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity. Interest and
dividends are included in interest income from securities as earned.
Realized gains and losses, and declines in value judged to be other than
temporary are included in net gains and losses from sales of investment
and mortgage-related securities. The cost of securities sold is based on
the specific identification method.
Federal Home Loan Bank Stock.
The Corporation's investment in Federal Home Loan Bank ("FHLB") stock at
March 31, 1997 and 1996 meets the minimum amount required, and is carried
at cost which is its redeemable (fair) value since the market for this
stock is limited.
Loans Held for Sale.
Loans held for sale consist of the current origination of certain
fixed-rate mortgage loans and are recorded at the lower of aggregate cost
or fair value. Fees received from the borrower are deferred and recorded
as an adjustment of the sale price. A gain or loss is recognized at the
time of the sale reflecting the present value of the difference between
the contractual interest rate of the loans sold and the yield to the
investor, adjusted for the initial value of mortgage servicing rights.
The servicing fee is recognized as the related loan payments are received.
Loans Receivable.
Loans receivable are stated at unpaid principal balances, less unamortized
unrealized losses, the allowance for loan losses, and net deferred
loan-origination fees and discounts.
Interest income is recognized using the interest method. Accrual of
interest is discontinued either when reasonable doubt exists as to the
full, timely collection of interest or principal or when a loan becomes
contractually past due by 90 days or more with respect to interest or
principal. At that time, any accrued but uncollected interest is
reversed, and additional income is recorded only to the extent that
payments are received and the collection of principal is reasonably
assured.
Loan Fees and Related Costs.
Certain loan-origination fees, commitment fees, and direct
loan-origination costs are being deferred and the net amounts amortized as
an adjustment of the related loan's yield. The Bank is amortizing these
amounts into interest income, using the level-yield method, over the
contractual life of the related loan.
Other loan-origination and commitment fees not required to be recognized
as a yield adjustment are included in loan fees.
Mortgage Servicing Rights.
Effective April 1, 1996, the Corporation adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," which amends
the previously issued SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities." SFAS No. 122 requires recognition of mortgage
servicing rights as assets regardless of how the rights are acquired. For
loans which are subsequently sold or securitized, a portion of the cost of
the loans is required to be allocated to the servicing rights based on the
relative fair values of the loans and the servicing rights. The Statement
further requires assessment of the value of the capitalized mortgage
servicing rights for impairment. The Corporation amortizes mortgage
servicing rights over the period of estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair
value of those rights. Fair values are estimated using discounted cash
flows based on a current market interest rate. For purposes of measuring
impairment, the rights are stratified by rate in the quarter in which the
underlying loans are sold.
Allowance for Loan Losses.
The allowance for loan losses includes specific allowances related to
commercial loans which have been judged to be impaired. The Corporation
generally considers credit card, residential mortgage, and consumer
installment loans to be large groups of smaller-balance homogeneous loans.
These loans are collectively evaluated in the analysis of the adequacy of
the allowance for loan losses.
A loan is impaired when, based on current information, it is probable the
Corporation will not collect all amounts due in accordance with the
contractual terms of the loan agreement. Management considers on a loan
by loan basis, the conditions which may constitute a minimum delay or
shortfall in payment, as well as the factors which may influence its
decision in determining when a loan is impaired. These specific
allowances are based on discounted cash flows of expected future payments
using the loan's initial effective interest rate or the fair value of the
collateral if the loan is collateral dependent.
The Corporation continues to maintain a general allowance for loans and
foreclosed properties not considered impaired. The allowance for loan and
foreclosed property losses is maintained at a level which management
believes is adequate to provide for possible losses. Management
periodically evaluates the adequacy of the allowance using the
Corporation's past loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and
other relevant factors. This evaluation is inherently subjective since it
requires material estimates that may be susceptible to significant change.
Office Properties and Equipment.
Office properties and equipment are recorded at cost less accumulated
depreciation. Maintenance and repair costs are charged to expense as
incurred. When property is 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 or expense,
respectively.
The cost of office properties and equipment is being depreciated by the
straight-line method over the estimated useful lives. The cost of
leasehold improvements is amortized on a straight-line method over the
lesser of the term of the respective lease or the estimated economic life
of the improvements.
Advertising Costs.
Advertising costs are expensed as incurred.
Income Taxes.
The Corporation files one consolidated federal income tax return. Federal
income tax expense (credit) is allocated to each subsidiary based on an
intercompany tax sharing agreement. Each subsidiary files separate state
franchise tax returns.
Deferred income taxes have been provided under the liability method.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities,
as measured by the enacted tax rates which will be in effect when these
differences are expected to reverse. Deferred tax expense (credit) is the
result of changes in the deferred tax asset and liability.
Earnings Per Share.
Earnings per share of common stock were computed based on consolidated net
income and weighted average outstanding shares. The weighted average
number of shares used to compute earnings per share for the years ended
March 31, 1997, 1996, and 1995 were 2,409,456, 2,532,241, and 2,554,761,
respectively. Common stock equivalents are computed using the treasury
stock method. Primary and fully diluted earnings per share are the same
for the years ended March 31, 1997, 1996, and 1995 as there is less than
3% dilution.
Future Accounting Changes.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The statement provides guidelines for
classification of a transfer as a sale. The statement also requires
liabilities incurred or obtained by transferors as a part of a transfer of
financial assets be initially recorded at fair value. Subsequent to
acquisition, the serviced assets and liabilities are to be amortized over
the estimated net servicing period. This statement is required to be
adopted for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." This statement
defers implementation of certain provisions of SFAS No. 125 for one year.
Adoption of SFAS No. 127 is not anticipated to have a significant impact
on the Corporation's financial condition or results of operations once
implemented.
Reclassifications.
Certain amounts in the 1996 and 1995 consolidated financial statements
have been reclassified to conform to the 1997 presentation.
NOTE 2 - BUSINESS COMBINATIONS
On November 13, 1996, the Corporation signed a definitive agreement to
merge with OSB Financial Corp. ("OSB"). OSB is the parent company of
Oshkosh Savings Bank, F.S.B., a $255 million thrift institution with seven
banking locations in East Central Wisconsin. The resulting corporation
will operate as FCB Financial Corp. and be headquartered in Oshkosh,
Wisconsin. The transaction is to be accounted for under the purchase
accounting method, and is expected to close in the second quarter of
calendar 1997. The merger is subject to approval of the shareholders of
both the Corporation and OSB, as well as various regulatory authorities.
In the merger, each share of OSB common stock issued and outstanding
immediately prior to the effective time of the merger will be canceled and
converted into the right to receive 1.46 shares of Corporation common
stock plus cash in lieu of fractional shares.
NOTE 3 - INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of investment securities held
to maturity at March 31 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
1997
U.S. government
securities $ 2,996 $ - $ 7 $ 2,989
U.S. agency securities 5,999 - 35 5,964
------ ------ ------ -------
$ 8,995 $ - $ 42 $ 8,953
====== ====== ====== =======
1996
U.S. government
securities $ 6,986 $ - $ 21 $ 6,965
====== ====== ====== =======
There were no sales of investment securities during the years ended March
31, 1997, 1996, and 1995.
The amortized cost and estimated fair value of all investment securities
at March 31, 1997, by contractual maturity, are shown below:
Estimated
Amortized Fair
Cost Value
(Dollars In Thousands)
Due in one year or less $2,996 $2,989
Due after one year through
five years 5,999 5,964
----- -----
Total $8,995 $8,953
===== =====
Fair values of many securities are estimates based on financial methods or
prices paid for similar securities. It is possible interest rates could
change considerably resulting in a material change in the estimated fair
value.
NOTE 4 - MORTGAGE-RELATED SECURITIES
The amortized cost and estimated fair value of mortgage-related securities
at March 31 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
1997
Available for Sale:
Government National
Mortgage Association
Certificates $ 2,506 $ 28 $ 4 $ 2,530
Collateralized Mortgage
Obligations 3,984 - 151 3,833
------- ------ ------ -------
Total $ 6,490 $ 28 $ 155 $ 6,363
======= ====== ====== =======
Held to Maturity:
Government National
Mortgage Association
Certificates $ 1,393 $ 24 $ - $ 1,417
Collateralized Mortgage
Obligations 10,546 22 7 10,561
Federal Home Loan
Mortgage Corporation
Certificates 2,286 22 6 2,302
Federal National
Mortgage Association
Certificates 2,306 27 - 2,333
------- ------- ------ ------
Total $ 16,531 $ 95 $ 13 $ 16,613
======= ======= ====== ======
1996
Available for Sale:
Government National
Mortgage Association
Certificates $ 2,964 $ 54 $ - $ 3,018
Collateralized Mortgage
Obligations 3,984 - 96 3,888
------ ------ ------ -------
Total $ 6,948 $ 54 $ 96 $ 6,906
====== ====== ====== =======
Held to Maturity:
Government National
Mortgage Association
Certificates $ 1,649 $ 27 $ - $ 1,676
Collateralized Mortgage
Obligations 10,519 38 - 10,557
Federal Home Loan
Mortgage Corporation
Certificates 2,755 15 - 2,770
Federal National
Mortgage Association
Certificates 2,927 56 - 2,983
------ ------ ------ ------
Total $ 17,850 $ 136 $ - $ 17,986
====== ====== ====== ======
There were no sales of mortgage-related securities during the years ended
March 31, 1997, 1996 and 1995. Expected maturities for mortgage-related
securities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Fair values of many securities are estimates based on financial methods or
prices paid for similar securities. It is possible interest rates could
change considerably resulting in a material change in the estimated fair
value.
In October, 1995, the FASB issued a Special Report authorizing a change in
classification of investment securities. This opportunity was created to
enable entities to fine tune earlier decisions regarding classifications
under Statement No. 115. Under the Special Report, reclassifications were
to be made by December 31, 1995 at fair market value. As a result, the
Corporation re-evaluated its investment portfolio and transferred
mortgage-related securities with a book value of $7,075,000 and a market
value of $7,042,000 from held to maturity to available for sale in
December, 1995. Mortgage-related securities available for sale are shown
on the statement of financial position at fair market value. The excess
of cost over fair market value of the securities available for sale is
shown net of tax as a separate component of shareholders' equity.
NOTE 5 - LOANS RECEIVABLE
Details of loans receivable at March 31 follow:
1997 1996
(Dollars In Thousands)
First mortgage loans:
One- to four-family residential $132,985 $127,426
Five or more family residential 12,379 13,275
Commercial 34,183 28,636
Construction 13,885 13,381
------- -------
Subtotals 193,432 182,718
------- -------
Consumer loans:
Home improvement and home equity 18,540 14,912
Auto and recreational vehicles 15,635 11,974
Educational 1,186 1,036
Other 649 469
------- -------
Subtotals 36,010 28,391
------- -------
Totals 229,442 211,109
------- -------
Less:
Undisbursed loan proceeds 5,791 4,307
Unearned interest and loan fees 318 351
Unamortized unrealized loss 432 479
Allowance for loan losses 1,405 1,075
------- -------
Subtotals 7,946 6,212
------- -------
Totals $221,496 $204,897
======= =======
A summary of the activity in the allowance for loan losses is as follows:
Year Ended March 31,
1997 1996 1995
(Dollars In Thousands)
Balance at beginning $ 1,075 $ 875 $ 840
Provisions 350 200 36
Charge-offs (20) - (1)
------ ------ ------
Balance at end $ 1,405 $ 1,075 $ 875
====== ====== ======
Nonperforming loans, which include loans on which the accrual of interest
has been discontinued, totaled $404,000 and $234,000 at March 31, 1997
and 1996, respectively. The Bank did not have any troubled debt
restructurings at March 31, 1997 or 1996. The Bank did not have any
impaired commercial loans during fiscal years 1997 and 1996, or at March
31, 1997 and 1996.
More than 90% of the Bank's lending activity is with borrowers within its
primary market area, East Central Wisconsin. Although the Bank has a
diversified portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the general economic conditions of
the area.
NOTE 6 - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of these loans at March 31 are summarized as follows:
1997 1996 1995
(Dollars in Thousands)
Mortgage loan portfolios
serviced for:
Federal Home Loan
Mortgage Corporation $120,971 $116,275 $111,802
Other investors 6,363 5,094 4,533
------- ------- -------
Totals $127,334 $121,369 $116,335
======= ======= =======
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $1,532,000 and $1,558,000 at March 31, 1997 and 1996,
respectively.
Mortgage servicing rights are required to be recognized as a separate
asset and amortized over the estimated servicing income. An analysis of
changes in mortgage servicing rights for 1997 is as follows:
(Dollars In Thousands)
Balance at April 1, 1996 $ -0-
Capitalized amounts 202
Less amortization (8)
------
Balance at March 31, 1997 $ 194
======
There was no impairment of mortgage servicing rights at March 31, 1997,
therefore no valuation allowance was recorded.
NOTE 7 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at March 31 consist of the following:
1997 1996
(Dollars In Thousands)
Land and land improvements $ 997 $ 997
Buildings and building
improvements 4,128 4,128
Leasehold improvements 68 68
Furniture, fixtures, and
equipment 1,683 1,573
Automobiles 39 39
------ ------
Subtotals 6,915 6,805
Less - Accumulated depreciation 2,824 2,594
------ ------
Total office properties and
equipment $ 4,091 $ 4,211
====== ======
NOTE 8 - DEPOSIT ACCOUNTS
Deposit accounts at March 31 are summarized as follows:
1997 1996
(Dollars In Thousands)
Weighted Weighted
Average Average
Amount Rate Amount Rate
NOW accounts:
Non-interest bearing $ 2,967 - $ 2,591 -
Interest bearing 9,235 1.61% 8,484 1.61%
Regular savings accounts 17,593 2.73 18,896 2.73
Money market accounts 17,588 3.98 17,703 3.82
Certificate accounts 105,780 6.08 103,441 5.95
------- -------
Totals $153,163 5.07 $151,115 4.95%
======= ==== ======= ====
Certificate accounts include $10.5 million and $7.5 million in
denominations of $100,000 or more at March 31, 1997 and 1996,
respectively.
On March 31, 1997, certificate accounts have scheduled maturity dates as
follows:
Matures During
Year Ended
March 31, Amount
(Dollars In Thousands)
1998 $ 81,738
1999 19,878
2000 1,628
2001 2,111
2002 425
-------
Totals $ 105,780
=======
Interest expense on deposit accounts consists of the following:
Year Ended March 31,
1997 1996 1995
(Dollars In Thousands)
NOW and money market accounts $ 831 $ 836 $ 758
Regular savings accounts 502 466 694
Certificate accounts 6,297 6,326 4,428
Advance payments by borrowers
for taxes and insurance 74 75 70
------ ------ ------
Totals $ 7,704 $ 7,703 $ 5,950
====== ====== ======
NOTE 9 - BORROWED FUNDS
Borrowed funds consist of FHLB advances at March 31 and are summarized as
follows:
1997 1996
Weighted Weighted
Average Average
Amount Rate Amount Rate
(Dollars In Thousands)
FHLB advances
maturing...
1998 $27,000 5.51% $22,500 5.38%
1999 5,000 5.60 3,000 5.43
2000 13,000 5.60 5,000 5.60
2001 1,800 6.32 8,000 5.45
Open Line of Credit 18,100 5.60 13,400 5.60
------ ------
Total $64,900 5.59% $51,900 5.47%
====== ======
The Corporation 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. The
borrowings are also collateralized by the FHLB stock owned by the
Corporation. The variable rate term borrowings at March 31, 1997, which
are included in the above, total $11.0 million and are at interest rates
tied to the one-month LIBOR index. The open line of credit interest rate
is based on the FHLB's daily investment deposit rate plus 0.45%. Accrued
interest payable on advances totaled $291,000 and $224,000 at March 31,
1997 and 1996, respectively.
NOTE 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 18 years old. Participating employees can contribute up to 15% of
their compensation. The Bank may make discretionary contributions for the
employee's benefit. There was no expense under this plan in 1997, 1996,
and 1995.
The Bank has Deferred Compensation Agreements with three employees and a
Separation Benefit Plan with five employees. Each of these plans are
nonqualified, supplemental retirement plans. Under each plan, the
individual employees have a set amount to be accrued for at age 65. The
current accrued liability is determined based on the present value of this
gross amount. At March 31, 1997, the maximum liability which could be
paid under these agreements is $358,000. The amount charged to operations
was $26,000, $18,000, and $18,000 for 1997, 1996, and 1995, respectively,
under these agreements.
The Corporation has reserved 290,950 shares of common stock to be issued
under a nonqualified stock option plan for employees and directors. A
committee comprised of at least three directors of the Corporation
administers the plan. The committee determines the persons to whom awards
will be granted under the plan, except for certain option grants to
nonemployee directors which are automatic pursuant to the terms of the
plan. Options granted under the plan may be incentive stock options
("ISO") or nonincentive stock options ("SO"), provided that only SOs may
be granted to nonemployee directors. The per share exercise price of
options granted under the plan may not be less than the fair market value
of a share of Corporation common stock on the date of grant, subject to
certain additional limitations for ISOs granted to a 10% or more
shareholder. Options granted under the plan and outstanding as of March
31, 1997 have an exercise term of ten years from the grant date. The plan
also authorizes the committee to grant stock appreciation rights to
officers and employees of the Corporation. The plan expires September 23,
2003, and is subject to early termination at the direction of the Board of
Directors of the Corporation.
The following is a summary of stock option activity:
Shares Option Price
Under Option Per Share
Outstanding at April 1, 1994 130,344 $10
Granted 5,819 $15
Exercised (5,819) $10
-------
Outstanding at March 31, 1995 130,344 $10 - $15
Exercised (12,500) $10
-------
Outstanding at March 31, 1996 117,844 $10 - $15
Exercised (7,189) $10
-------
Outstanding at March 31, 1997 110,655 $10 - $15
=======
At March 31, 1997 there were 57,354 shares eligible for exercise. The
options above are nonincentive stock options and are eligible to be
exercised over a five-year period at 20% each year. As discussed in Note
2, the Corporation has entered into an agreement for a merger of equals.
As part of this business combination, all outstanding options will become
vested upon completion of the merger.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." The Corporation adopted the provisions of the
new standard effective April 1, 1996. As permitted by the statement, the
Corporation did not adopt the fair value method of expense recognition for
stock-based compensation awards. The Corporation continues to apply APB
Opinion No. 25 in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost
been determined on the basis of fair value pursuant to SFAS No. 123, net
income and earnings per share would not have been affected as no options
were granted in the years ended March 31, 1997 and 1996.
The Corporation sponsors an ESOP for substantially all of its full-time
employees. The ESOP originally borrowed $1,800,000 from FCB Financial
Corp. and purchased 180,000 shares of Corporation common stock. The loan
is payable in annual installments of approximately $243,000 including
interest at a rate of 6.5% over a ten-year amortization. Contributions to
the plan must be sufficient to service the ESOP loan. Any additional
contributions are determined by the Board of Directors. All dividends
received by the ESOP are used to pay debt service. As the debt is repaid,
shares are released and allocated to active employees, based on the
proportion of debt service paid in the year. As shares are committed to
be released, the Corporation reports ESOP expense equal to the current
market price of the shares, and the shares become outstanding for earnings
per share computations. The cost of the unearned shares is reported in
the consolidated statement of financial position as unearned compensation.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as ESOP
expense. ESOP expense was $415,000, $380,000 and $328,000 for 1997, 1996,
and 1995, respectively. Dividends received by the ESOP were approximately
$123,200, $102,600 and $70,200 in 1997, 1996 and 1995, respectively, and
were used to reduce loan principal. The fair value of unearned ESOP shares
at March 31, 1997 totalled $1.9 million.
Effective April 1, 1994, the Corporation adopted Statement of Position
("SOP") 93-6, "Employers Accounting for Employee Stock Ownership Plans,"
issued by the American Institute of Certified Public Accountants. The SOP
applies to the Corporation's Employee Stock Ownership Plan ("ESOP") shares
that were not committed to be released as of April 1, 1994 and requires
that 1) compensation expense be recognized based on the fair value of the
ESOP shares when committed to be released rather than based on the cost of
the shares to the ESOP as required under previous accounting, and 2) ESOP
shares that have not been committed to be released are not considered
outstanding for purposes of computing earnings per share, as was required
by previous accounting.
The following is a summary of ESOP shares at March 31:
1997 1996
Allocated 90,461 67,390
Committed to be released- -
Unearned 87,708 112,610
------- -------
Total 178,169 180,000
======= =======
During 1997, 1,831 allocated shares were distributed to former employees.
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
Year Ended March 31,
1997 1996 1995
(Dollars In Thousands)
Current tax expense (credit):
Federal $1,431 $1,532 $1,113
Low income housing credit (70) (70) (70)
State 288 366 298
------- ------- -------
Total current 1,649 1,828 1,341
------- ------- -------
Deferred tax expense
(credit):
Federal 13 (129) 122
State 3 (32) 30
------- ------- -------
Total deferred 16 (161) 152
------- ------- -------
Total provision for
income taxes $ 1,665 $ 1,667 $ 1,493
======= ======= =======
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Corporation's
assets and liabilities. The major components of the net deferred tax
asset as of March 31 are as follows:
1997 1996
(Dollars In Thousands)
Deferred tax assets:
Unrealized securities
losses $ 55 $ 16
Allowance for loan losses 201 -
Deferred directors' fees 238 222
Deferred loan fees 71 92
Other - Net 88 201
------ ------
Total deferred tax assets 653 531
------ ------
Deferred tax liabilities:
Depreciation (32) (9)
FHLB stock dividends (118) (118)
Mortgage servicing rights (76) -
------ ------
Total deferred tax
liabilities (226) (127)
------ ------
Net deferred tax asset $ 427 $ 404
====== ======
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
Year Ended March 31,
1997 1996 1995
Amount Percent Amount Percent Amount Percent
(Dollars In Thousands)
Income before
provision for
income taxes $4,105 100% $4,224 100% $3,876 100%
===== ==== ===== ==== ===== ====
Tax at federal
statutory rates $1,396 34% $1,436 34% $1,318 34%
Increase (decrease)
in tax:
State income
taxes -
Net of federal
income tax
benefits 191 5% 220 5% 216 6%
Low income housing
credit (70) (2%) (70) (2%) (70) (2%)
ESOP compensation 56 1% 47 1% 39 1%
Other 92 2% 34 1% (10) 0%
----- ---- ----- ---- ----- ----
Totals $1,665 40% $1,667 39% $1,493 39%
===== ==== ===== ==== ===== ====
Legislation was passed in 1996 to require recapture of previously allowed
tax bad debt provisions. This legislation requires the Corporation to
recapture its post-1987 reserves of $1,075,000 over an anticipated
six-year period. The repayments have an immaterial impact on the income
statement due to the current deferred tax implications of the allowance
for loan losses. The following table summarizes the activity related to
bad debt recapture:
(Dollars In Thousands)
Total recapture required $ 1,075
1997 recapture recognized (179)
--------
Balance to be recaptured 1998-2002 $ 896
========
NOTE 12 - SHAREHOLDERS' EQUITY
At the time of converting to a stock company, the Bank established a
liquidation account in an amount equal to its total net worth as of the
date of the latest consolidated statement of financial condition appearing
in the final prospectus. The liquidation account will be maintained for
the benefit of eligible account holders who continue to maintain their
accounts at the Bank after the conversion. The liquidation account will
be reduced annually to the extent that eligible account holders have
reduced their qualifying deposits. Subsequent increases will not restore
an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each account holder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held. Except for the purchase of stock and payment of dividends by
the Bank, the existence of the liquidation account will not restrict use
or application of shareholders' equity.
Under federal laws and regulations, the Bank is required to meet certain
tangible, core, and risk-based capital requirements. Tangible capital
generally consists of stockholder's equity minus certain intangible assets
and investments in and advances to "nonincludable" subsidiaries. Core
capital generally consists of tangible capital plus qualifying intangible
assets. The risk-based capital requirements presently address risk
related to both recorded assets and off-balance-sheet commitments and
obligations.
The following table summarizes the Bank's capital ratios and the ratios
required by federal laws and regulations at March 31, 1997:
Tangible Core Risk-Based
Capital Capital Capital
Bank's Regulatory Percentage 14.12% 14.12% 24.23%
Required Regulatory
Percentage 1.50% 3.00% 8.00%
------- ------- -------
Excess Regulatory Percentage 12.62% 11.12% 16.23%
======= ======= =======
(Dollars In Thousands)
Bank's Regulatory Capital $38,030 $38,030 $39,522
Required Regulatory Capital 4,039 8,077 13,050
------- ------- -------
Excess Regulatory Capital $33,991 $29,953 $26,472
======= ======= =======
The Bank has been rated by the OTS as a Tier 1 institution which is
defined as "an association that has capital immediately prior to and on a
pro forma basis after giving effect to a proposed capital distribution
that is equal to or greater than the amount of its fully phased-in capital
requirement." It is management's opinion, as of March 31, 1997, that the
Bank meets all capital adequacy requirements to which it is subject, and
there were no conditions or events since the OTS's rating which would have
changed the Bank's rating.
The capital distribution regulations allow a Tier 1 association to make
capital distributions during a calendar year up to 100% of its net income
to date plus the amount that would reduce by one half its surplus capital
ratio at the beginning of the calendar year. Any distributions in excess
of that amount requires prior OTS notice, with the opportunity for OTS to
object to the distribution.
The Bank has qualified under provisions of the Internal Revenue Code which
permit as a deduction from taxable income an allowance for bad debts which
differs from the provision for such losses charged to income.
Accordingly, retained earnings at March 31, 1997, included approximately
$7,400,000 for which no provision for federal income taxes has been made.
If in the future this portion of retained earnings is used for any purpose
other than to absorb bad debts, federal income taxes may be imposed at the
then applicable rates.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments are in the form of commitments to
extend credit and involve elements of credit risk in excess of the amount
recognized in the consolidated statement of financial condition.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at
March 31 are as follows:
1997 1996
(Dollars In Thousands)
Commitments to extend credit:
Fixed rate (6.50% - 8.375% at March 31,
1997 and 6.875% - 8.25% at March 31,
1996) $ 6,145 $ 5,649
Adjustable rate (6.75% - 8.75% at
March 31, 1997 and 5.875% - 8.50%
at March 31, 1996) 3,234 4,700
------- -------
Total outstanding commitments $ 9,379 $ 10,349
======= =======
Unused lines of credit $ 2,270 $ 1,473
======= =======
Commitments to sell loans $ 3,247 $ -
======= =======
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 not exceeding a maximum
of 45 days or other termination clauses and may require payment of a fee.
Since a portion of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the party.
The Corporation frequently enters into loan sale commitments prior to
closing loans in order to limit interest rate risk for the period of time
between when a loan is committed and when it is sold. These sale
commitments are typically made on a loan by loan basis.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of the Corporation's financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated statement of financial condition for cash and short-term
interest-bearing deposits approximate those assets' fair values.
Investment and mortgage-related securities: Fair values are based on
quoted market prices, where available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans receivable and loans held for sale: For certain homogeneous
categories of loans, such as fixed-rate residential mortgages, fair
value is estimated using the quoted market prices for securities backed
by similar loans, adjusted for differences in loan characteristics. The
fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings. The carrying amount
of accrued interest approximates its fair value. Impaired loans are
measured at the estimated fair value of the expected future cash flows
at the loan's effective interest rate, the loan's observable market
price or the fair value of the collateral for loans which are collateral
dependent. Therefore, the carrying value of impaired loans approximates
the estimated fair value for these assets.
Mortgage servicing rights: The fair value of mortgage servicing rights
is based on the present value of future cash flows using discounted
rates applicable to the level of risk of the underlying loans.
Deposit accounts: The fair value of NOW, passbook, and money market
accounts is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificate accounts is estimated using
discounted cash flows with discount rates at interest rates currently
offered for deposits of similar remaining maturities.
Borrowed funds: Rates currently available to the Corporation for debt
with similar terms and remaining maturities are used to estimate fair
value of existing debt. The fair value of borrowed funds due on demand
is the amount payable at the reporting date. The fair value of borrowed
funds with fixed terms is estimated using discounted cash flows with
discount rates at interest rates currently offered by lenders for
similar remaining maturities.
Off-balance-sheet instruments: The fair value of commitments would be
estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements,
the current interest rates, and the present creditworthiness of the
counter parties. Since this amount is immaterial, no amounts for fair
value are presented.
Limitations: Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Corporation's financial instruments,
fair value estimates are based on judgments regarding future expected
prepayment experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates
are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates. Fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Significant
assets and liabilities that are not considered financial instruments
include premises and equipment, other assets, and other liabilities. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
The carrying value and estimated fair value of financial instruments at
March 31 were as follows:
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Dollars In Thousands)
Financial assets:
Cash and cash
equivalents $4,628 $4,628 $4,792 $4,792
Securities 31,889 31,929 31,742 31,857
Federal Home Loan
Bank stock 3,245 3,245 2,595 2,595
Total loans - Net 224,766 225,561 210,058 212,930
Mortgage servicing
rights 194 239 - -
------- ------- ------- -------
Total financial
assets $264,722 $265,602 $249,187 $252,174
======= ======= ======= =======
Financial liabilities:
Deposit accounts $153,163 $153,668 $151,115 $152,252
Borrowed funds 64,900 64,526 51,900 51,729
------- ------- ------- -------
Total financial
liabilities $218,063 $218,194 $203,015 $203,981
======= ======= ======= =======
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL CONDITION
March 31, 1997 and 1996
(Dollars In Thousands)
ASSETS
1997 1996
Cash $ 778 $ 145
Mortgage-related securities
available for sale 3,833 3,888
Investment in subsidiary 38,654 37,733
Other assets 4,652 5,944
------ ------
TOTAL ASSETS $47,917 $47,710
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 485 $ 518
Total shareholders' equity 47,432 47,192
------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $47,917 $47,710
====== ======
STATEMENTS OF INCOME
Years Ended March 31, 1997, 1996, and 1995
(Dollars In Thousands)
1997 1996 1995
Interest and dividend income $2,222 $2,154 $1,803
Equity in undistributed net
income of subsidiary 471 729 945
----- ----- -----
Total income 2,693 2,883 2,748
Other expense 124 155 141
----- ----- -----
Income before provision for
income taxes 2,569 2,728 2,607
Provision for income taxes 129 171 224
----- ----- -----
Net income $2,440 $2,557 $2,383
===== ===== =====
STATEMENTS OF CASH FLOWS
Years Ended March 31, 1997, 1996, and 1995
(Dollars In Thousands)
1997 1996 1995
Cash flows from operating
activities:
Net income $2,440 $2,557 $2,383
----- ----- -----
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in net income of
subsidiary (2,176) (2,229) (2,011)
Increase in other assets (8) (366) (104)
Increase (decrease) in
other liabilities (100) 78 87
------ ------ ------
Total adjustments (2,284) (2,517) (2,028)
------ ------ ------
Net cash provided by operating
activities 156 40 355
------ ------ ------
Cash flows from investing activities:
Proceeds from maturities of
investment securities held
to maturity - 2,000 -
Dividend received from subsidiary 1,705 1,500 1,066
Net decrease (increase) in
note receivable 1,326 (258) 2,980
------ ------ ------
Net cash provided by investing
activities 3,031 3,242 4,046
------ ------ ------
Cash flows from financing activities:
Purchase of treasury common stock (997) (2,407) (3,130)
Proceeds from exercise of
stock options 72 125 59
Dividends paid (1,629) (1,423) (1,013)
------ ------ ------
Net cash used in financing
activities (2,554) (3,705) (4,084)
------ ------ ------
Net increase (decrease) in cash 633 (423) 317
Cash at beginning 145 568 251
------ ------ ------
Cash at end $ 778 $ 145 $ 568
====== ====== ======
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
FCB Financial Corp.
Neenah, Wisconsin
We have audited the accompanying consolidated statements of financial
condition of FCB Financial Corp. and Subsidiaries as of March 31, 1997 and
1996, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
March 31, 1997. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial condition of FCB
Financial Corp. and Subsidiaries at March 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Wipfli Ullrich Bertelson LLP
April 16, 1997
Green Bay, Wisconsin
REPORT OF MANAGEMENT RESPONSIBILITIES
Management is responsible for the preparation, content and integrity of
the financial statements and all other financial information included in
this Annual Report on Form 10-K. The financial statements have been
prepared in accordance with generally accepted accounting principles.
The Corporation maintains a system of internal controls designed to
provide reasonable assurance as to the integrity of financial records and
the protection of assets. The system of internal controls includes
written policies and procedures, proper delegation of authority and
organizational division of responsibilities, and the careful selection and
training of qualified personnel.
Management recognizes that the cost of a system of internal controls
should not exceed the benefits derived and that there are inherent
limitations to be considered in the potential effectiveness of any system.
However, management believes that the system of internal controls provides
reasonable assurances that financial transactions are recorded properly to
permit the preparation of reliable financial statements.
The Audit Committee of the Board of Directors is composed of a majority of
outside directors and has the responsibility for the recommendation of the
independent auditors for the Corporation. The Committee meets regularly
with independent auditors to review the scope of their audits and audit
reports and to discuss any action to be taken. The independent auditors
have free access to the Audit Committee.
/s/ Donald D. Parker
Donald D. Parker
Chairman of the Board
/s/ Phillip J. Schoofs
Phillip J. Schoofs
Vice President,
Treasurer and Chief Financial Officer
FCB FINANCIAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(Unaudited)
FISCAL YEAR 1997
FIRST SECOND THIRD FOURTH
(Dollars In Thousands, Except Per Share Amounts)
Interest and dividend
income $4,852 $4,986 $5,081 $5,046
Interest expense 2,617 2,715 2,753 2,742
----- ----- ----- -----
Net interest income 2,235 2,271 2,328 2,304
Provision for loan
losses 50 50 100 150
----- ----- ----- -----
Net interest income
after provision for
loan losses 2,185 2,221 2,228 2,154
Net gain on sale
of loans 5 119 146 18
Other noninterest income 170 172 179 178
Operating expenses 1,122 2,157 1,215 1,176
----- ----- ----- -----
Income before provision
for income taxes 1,238 355 1,338 1,174
Provision for income
taxes 481 136 589 459
----- ----- ----- -----
Net income $757 $219 $749 $715
===== ===== ===== =====
Earnings per share $0.31 $0.09 $0.31 $0.30
----- ----- ----- -----
Dividends declared
per share $0.18 $0.18 $0.18 $0.18
----- ----- ----- -----
Per share stock
price ranges:
High $18.25 $17.75 $19.50 $23.50
Low $17.50 $17.00 $17.25 $18.50
Close $17.50 $17.25 $18.50 $22.00
FISCAL YEAR 1996
FIRST SECOND THIRD FOURTH
(Dollars In Thousands, Except Per Share Amounts)
Interest and dividend
income $4,370 $4,529 $4,695 $4,725
Interest expense 2,477 2,524 2,553 2,527
----- ----- ----- -----
Net interest income 1,893 2,005 2,142 2,198
Provision for loan
losses 50 50 50 50
----- ----- ----- -----
Net interest income
after provision for
loan losses 1,843 1,955 2,092 2,148
Net gain (loss) on
sale of loans 19 25 59 (23)
Other noninterest income 172 175 167 171
Operating expenses 1,094 1,123 1,171 1,191
----- ----- ----- -----
Income before provision
for income taxes 940 1,032 1,147 1,105
Provision for income
taxes 371 410 453 433
----- ----- ----- -----
Net income $569 $622 $694 $672
===== ===== ===== =====
Earnings per share $0.22 $0.25 $0.27 $0.27
----- ----- ----- -----
Dividends declared
per share $0.15 $0.15 $0.15 $0.15
----- ----- ----- -----
Per share stock price
ranges:
High $16.00 $17.75 $18.50 $18.50
Low $14.75 $15.25 $16.25 $17.25
Close $15.50 $17.00 $18.50 $18.00
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10 Directors and Executive Officers of the Registrant
Pursuant to Instruction G, the information required by this Item
with respect to directors is hereby incorporated herein by reference from
the information contained under the section captioned "Election of
Directors" set forth in the Corporation's definitive proxy statement for
the Corporation's 1997 Annual Meeting of Shareholders ("Proxy Statement").
Information concerning the executive officers of the Corporation is
included under separate caption in Part I of this document.
Item 11. Executive Compensation
Pursuant to Instruction G, the information required by this Item is
hereby incorporated herein by reference from the information contained
under the sections captioned "Board of Directors - Director Compensation"
and "Executive Compensation" set forth in the Proxy Statement provided,
however, that the section captioned "Executive Compensation - Report of
Executive Compensation" shall not be deemed to be incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to Instruction G, the information required by this Item is
hereby incorporated herein by reference from the information contained
under the section captioned "Principal Shareholders" set forth in the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Pursuant to Instruction G, the information required by this Item is
hereby incorporated herein by reference from the information contained
under the section captioned "Executive Compensation - Certain
Transactions" set forth in the Proxy Statement.
PART IV
Item 14. Financial Statement Schedules, and Reports on Form 8-K
(a)(1)Financial Statements.
The Consolidated Financial Statements and Auditors' Report listed
below are included in the in Part II, Item 8 hereof and incorporated
herein by reference.
1. Independent Auditors' Report.
2. Consolidated Statements of Financial Condition at March 31,
1997 and 1996.
3. Consolidated Statements of Income for the Years Ended March 31,
1997, 1996 and 1995.
4. Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 1997, 1996 and 1995.
5. Consolidated Statements of Cash Flows for the Years Ended March
31, 1997, 1996 and 1995.
6. Notes to Consolidated Financial Statements.
(a)(2)Financial Statement Schedules
All schedules are omitted because they are not required or are not
applicable or the required information is included in the Corporation's
Consolidated Financial Statements.
(a)(3)Exhibits
See Exhibit Index and exhibits attached.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Corporation during the
last quarter of the 1997 fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FCB FINANCIAL CORP.
Date: June 16, 1997
By: /s/ Donald D. Parker
Donald D. Parker
Chairman of the Board
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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/ James J. Rothenbach /s/ Richard A. Bergstrom /s/ Dr. Edwin L. Downing
James J. Rothenbach Richard A. Bergstrom Dr. Edwin L. Downing
President, Chief Director Director
Executive Officer and
Director (Principal
Executive Officer)
Date: June 16, 1997 Date: June 16, 1997 Date: June 16, 1997
/s/ Phillip J. Schoofs /s/ Walter H. Drew /s/ Thomas C. Butterbrodt
Phillip J. Schoofs Walter H. Drew Thomas C. Butterbrodt
Vice President, Director Director
Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Date: June 16, 1997 Date: June 16, 1997 Date: June 16, 1997
/s/ David L. Erdmann /s/ Donald S. Koskinen /s/ Ronald L. Tenpas
David L. Erdmann Donald S. Koskinen Ronald L. Tenpas
Director Director Director
Date: June 16, 1997 Date: June 16, 1997 Date: June 16, 1997
/s/ William A. Raaths /s/ William J. Schmidt /s/ David L. Baston
William A. Raaths William J. Schmidt David L. Baston
Director Director Director
Date: June 16, 1997 Date: June 16, 1997 Date: June 16, 1997
/s/ David L. Geurden /s/ David L. Omachinski
David L. Geurden David L. Omachinski
Director Director
Date: June 16, 1997 Date: June 16, 1997
EXHIBIT INDEX
Exhibit No. Exhibit
2.1 Agreement and Plan of Merger between FCB Financial Corp. and
OSB Financial Corp., herein dated November 13, 1996
(incorporated herein by reference to Exhibit 2.1 of
Registrant's Form S-4 Registration Statement, Registration
No. 333-23177)
3.1 Articles of Incorporation of FCB Financial Corp.
(incorporated herein by reference to Exhibit 3.1 of
Registrant's Form S-1 Registration Statement, Registration
N0. 33-53204)
3.2 Bylaws of FCB Financial Corp. (incorporated herein by
reference to Exhibit 3.2 of Registrant's Form S-1
Registration Statement, Registration No. 33-63204)
10.1 FCB Financial Corp. 1993 Stock Option and Incentive Plan
(incorporated herein by reference to Exhibit 4.1 of
Registrant's Form S-8 Registration Statement, Registration
No. 33-82584)*
10.2 OSB Financial Corp. 1992 Stock and Incentive Plan
(incorporated by reference under File No. 0-20335 to Exhibit
A of OSB Financial Corp.'s Definitive Proxy Statement for
the First Annual Meeting of Stockholders held on April 22,
1993; filed on March 25, 1993)*
10.3 Amendment to OSB Financial Corp. 1992 Stock Option and
Incentive Plan (incorporated herein by reference to Exhibit
4.2 of Registrant's Form S-8 Registration Statement,
Registration No. 333-27135)*
10.4 FCB Financial Corp. Employee Stock Ownership Plan
(incorporated herein by reference to Exhibit 10.3 of
Registrant's Form S-1 Registration Statement, Registration
No. 33-63204)*
10.5 Fox Cities Bank, F. S.B. Management Bonus Plan (incorporated
herein by reference to Exhibit 10.4 of Registrant's Form S-1
Registration Statement, Registration N. 33-63204)*
10.6 Deferred Compensation Agreement between Fox Cities Bank,
F.S.B. and Donald D. Parker (incorporated herein by
reference to Exhibit 10.5 of Registrant's Form S-1
Registration Statement, Registration No. 33-63204)*
10.7 Deferred Compensation Agreement between Fox Cities Bank,
F.S.B. and Harold L. Hermansen (incorporated herein by
reference to Exhibit 10.6 of Registrant's Form S-1
Registration Statement, Registration No. 33-63204)*
10.8 Employment Agreement with Donald D. Parker, dated May 1,
1997 (incorporated herein by reference under File No.
0-22066 to Exhibit 2.2 of Registrant's Current Report on
Form 8-K, dated May 1, 1997)*
10.9 Employment Agreement with James J. Rothenbach, dated May 1.
1997 (incorporated herein by reference under File No.
0-22066 to Exhibit 2.3 of Registrant's Current Report on
Form 8-K, dated May 1, 1997)*
10.10 Employment Agreement with Phillip J. Schoofs, dated May 1.
1997 (incorporated herein by reference under File No.
0-22066 to Exhibit 2.4 of Registrant's Current Report on
Form 8-K, dated May 1, 1997)*
10.11 Employment Agreement with Theodore W. Hoff, dated May 1.
1997 (incorporated herein by reference under File No.
0-22066 to Exhibit 2.5 of Registrant's Current Report on
Form 8-K, dated May 1, 1997)*
10.12 Employment Agreement with Harold L. Hermansen, dated May 1.
1997 (incorporated herein by reference under File No.
0-22066 to Exhibit 2.6 of Registrant's Current Report on
Form 8-K, dated May 1, 1997)*
10.13 Unfunded Deferred Compensation Plan for the Directors of Fox
Cities Bank, F.S.B. (incorporated by reference to Exhibit
10.12 of Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994)*
11 Statement re: Computation of per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Wipfli Ullrich Bertelson LLP
27 Financial Data Schedule (EDGAR version only)
* A management contract or compensatory plan or arrangement.
Fox Cities Bank, F.S.B., a wholly-owned subsidiary of the Registrant, is
the obligor under several long-term loan agreements with the Federal Home
Loan Bank of Chicago. The loan agreements are not being filed with this
Annual Report on Form 10-K in reliance upon Item 601(b)(4)(iii) of
Regulation S-K. Copies of these documents will be furnished to the
Securities and Exchange Commission upon request.