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, 1998
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 (IRS Employer Identification No.)
incorporation or organization)
420 South Koeller Street, Oshkosh, WI 54902
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (920) 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 other
information statements incorporated by reference in Part III of this Form
10-K or any amendments 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, 1998, was $ 104,000,000 .
Number of shares of common stock, $.01 par value, outstanding as of May
31, 1998: 3,867,080
Documents Incorporated by Reference:
Portions of FCB Financial Corp.'s Proxy Statement for the 1998 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, 1998
PART I Page No.
Item 1 Business 1
Item 2 Properties 39
Item 3 Legal Proceedings 39
Item 4 Submission of Matters to a Vote of Security Holders 39
PART II
Item 5 Market for Registrant's Common Equity
and Related Shareholder Matters 40
Item 6 Selected Financial Data 40
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 40
Item 7A Quantitative and Qualitative Disclosures about
Market Risk 40
Item 8 Financial Statements and Supplementary Data 40
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 40
PART III
Item 10 Directors and Executive Officers of the Registrant 40
Item 11 Executive Compensation 40
Item 12 Security Ownership of Certain Beneficial
Owners and Management 41
Item 13 Certain Relationships and Related Transactions 41
PART IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 41
Signatures 42
PART I
Item 1. Business
General
FCB Financial Corp. (the "Corporation"), a Wisconsin corporation,
became the unitary savings and loan holding company for Fox Cities Bank
(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, 1998, the Corporation had
total consolidated assets of $517.8 million and consolidated shareholders
equity of $74.9 million. The Corporation declared quarterly cash
dividends of $0.18 per share to shareholders in the first quarter and $.20
per share to shareholders in each of the last three quarters in the fiscal
year ended March 31, 1998, for a dividend payout ratio (dividends declared
per share divided by diluted earnings per share) of 50.3% 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 loans 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.
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) canceled 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 canceled 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
canceled 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 remained 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 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. The Bank considers its primary market area to be
East Central Wisconsin (including Winnebago, Outagamie, Calumet, Waushara,
Green Lake and Fond du Lac counties).
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,
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 investment securities and
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 held to maturity. 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 South Koeller Street, Oshkosh, Wisconsin 54902, and its telephone
number is (920)236-3680.
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 a 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, 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,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
Real Estate Loans:
One- to four-family
residential $214,353 56.24 % $132,985 57.96 % $127,426 60.36 %
Five or more family
residential 14,230 3.73 12,379 5.40 13,275 6.29
Commercial 64,451 16.91 34,183 14.90 28,636 13.56
Construction 18,938 4.97 13,885 6.05 13,381 6.34
------- ------- ------- -------- ------- ------
Total real estate
loans 311,972 81.85 193,432 84.31 182,718 86.55
------- ------- ------- -------- ------- ------
Consumer Loans:
Home improvement and home
equity 36,303 9.53 18,540 8.08 14,912 7.07
Auto and recreational
vehicles 19,496 5.12 15,635 6.81 11,974 5.67
Educational 4,197 1.10 1,186 0.52 1,036 0.49
Other 1,530 0.40 649 0.28 469 0.22
------- ------- ------- ------- -------- -------
Total consumer loans 61,526 16.15 36,010 15.69 28,391 13.45
------- ------- ------- ------- -------- -------
Commercial Loans 7,622 2.00 -- -- -- --
------- ------- ------- ------- -------- -------
Gross loans
receivable 381,120 100.00 % 229,442 100.00 % 211,109 100.00 %
------- ====== ------- ======= -------- =======
Less:
Loans in process 5,930 5,791 4,307
Unearned interest and loan
fees 298 318 351
Unamortized unrealized
losses 391 432 479
Allowance for loan losses 3,567 1,405 1,075
------- -------- -------
Total deductions 10,186 7,946 6,212
------- -------- -------
Total loans, net $370,934 $221,496 $204,897
======= ======== =======
1995 1994
Amount Percent Amount Percent
Real Estate Loans:
One- to four-family
residential $127,172 66.05 % $102,145 69.01 %
Five or more family
residential 11,346 5.89 10,016 6.77
Commercial 25,512 13.25 17,395 11.75
Construction 7,715 4.01 6,717 4.54
------- ------- ------- -------
Total real estate
loans 171,745 89.20 136,273 92.07
------- ------- ------- -------
Consumer Loans:
Home improvement and home
equity 12,168 6.33 9,658 6.52
Auto and recreational
vehicles 7,140 3.71 810 0.55
Educational 890 0.46 741 0.50
Other 587 0.30 543 0.36
-------- ------- -------- --------
Total consumer loans 20,785 10.80 11,752 7.93
-------- ------- -------- --------
Commercial Loans -- -- -- --
-------- ------- -------- --------
Gross loans
receivable 192,530 100.00 % 148,025 100.00 %
------- ------- ------- ========
Less:
Loans in process 4,031 3,517
Unearned interest and loan
fees 292 283
Unamortized unrealized
losses 525 --
Allowance for loan losses 875 840
-------- --------
Total deductions 5,723 4,640
-------- --------
Total loans, net $186,807 $143,385
======== ========
The following schedule illustrates the maturities and repricing dates
of the Bank's loans receivable and loans held for sale at March 31, 1998.
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. 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 Construction Loans
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Maturity Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
Six months
or less -- -- $36,528 8.06 % $3,469 9.16 % $13,800 9.09 % $8,071 7.69 %
More than six
months though
one year -- -- 39,104 7.84 8,256 8.35 12,425 8.73 5,892 8.43
More than one
year through
three years -- -- 41,768 7.29 744 8.11 20,841 8.47 -- --
More than
three years
through five
years -- -- 21,085 7.39 263 9.08 10,102 8.60 -- --
More than
five years
through ten
years -- -- 22,311 7.66 -- -- 2,595 7.88 -- --
More than
ten years
through
twenty
years $10,386 7.01 % 37,316 7.35 -- -- 3,313 8.51 -- --
More than
twenty years 6,306 7.42 17,172 7.70 536 9.58 451 8.45 -- --
------- -------- ------- ------- -------
Total $16,692 7.16 % $215,284 7.61 % $13,268 8.61 % $63,527 8.65 % $13,963 8.00 %
======= ====== ======== ====== ======= ======= ======= ======= ======= =======
Fixed rate $16,692 $103,685 $1,013 $11,577 --
Variable rate -- 35,967 530 25,725 --
------- -------- ------- -------- -------
Total due in
more than
one year $16,692 $139,652 $1,543 $37,302 0
======= ======== ======= ======== =======
Consumer Loans Commercial Loans Total
Weighted Weighted Weighted
Average Average Average
Maturity Amount Rate Amount Rate Amount Rate
Six months
or less $9,120 9.51 % $4,387 9.48 % $75,375 8.41 %
More than six
months though
one year 2,483 8.43 93 9.99 68,253 8.14
More than one
year through
three years 21,476 8.38 643 8.95 85,472 7.87
More than
three years
through five
years 24,692 8.30 2,338 9.18 58,480 8.06
More than
five years
through ten
years 3,370 8.64 161 10.12 28,437 7.81
More than
ten years
through
twenty years 385 8.97 -- -- 51,400 7.37
More than
twenty years -- -- -- -- 24,465 7.68
------- -------- --------
Total $61,526 8.54 % $7,622 9.36 % $391,882 7.97 %
======= ====== ======== ====== ======== ======
Fixed rate $49,923 $3,142 $186,032
Variable rate -- -- 62,222
------- -------- --------
Total due in
more than
one year $49,923 $3,142 $248,254
======= ======== ========
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, 1998,
based on the above, the Bank's regulatory loans-to-one-borrower limit for
most purposes was $14.8 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, 1998 had an aggregate of $4.6 million in loans outstanding.
Loan applications submitted to the Bank are initially accepted and
considered at various levels of individual loan officer authority. The
Bank Loan Committee, consisting of the President and CEO, Chairman of the
Board, Vice President - Business Banking, Vice President - Retail Lending,
Vice President - Retail Sales and Service, Vice President and Business
Lender, and Assistant Vice President - Sr. Mortgage Loan Officer, may
approve loans up to $750,000, or up to $1.0 million with the affirmative
vote of the President and CEO or the Chairman of the Board. Any credit
exposure to any one borrower in excess of $500,000 must be approved by the
Bank Loan Committee. Any commitments in excess of $1.0 million exposure
to any one borrower must be approved by the Board Executive Committee or
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, 1998, $214.4
million, or 56.2%, 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 a variety of residential loans including various
types of ARM loans. Prior to 1986, the Bank originated adjustable rate
loans on which the interest rate can be reset at the Bank's discretion,
subject to a rate cap based on state usury laws ("non-index ARM loans").
Since 1986, the Bank has originated 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, 1998, the Bank had
$11.5 million of non-index ARM loans and $165.2 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 primarily 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.
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, 1998, $78.7 million, or 20.6%, 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 $3.0 million and $1.5 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. At March 31,
1998, the Bank had 42 of such participations aggregating $11.1 million.
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
borrower's credit history, annual income and financial statements and
credit references as well as income projections for the property.
Generally, in the case of corporate 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, 1998, the Bank held $61.5 million of consumer
loans in its loans receivable portfolio, or 16.2% of said portfolio.
The Bank offers a variety of secured consumer loans, including home
improvement and home equity loans, automobile, boat 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 buys automobile loans originated at local
dealerships (indirect automobile loans). Indirect automobile loans are
underwritten and approved by Bank management prior to buying the loan.
Indirect automobile loan production totaled $11.5 million for the fiscal
year ended March 31, 1998. Included in the consumer loan portfolio at
March 31, 1997 are indirect automobile loans of $15.9 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 0.55% of the consumer loan
portfolio was delinquent 60 days or more at March 31, 1998), 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, 1998, the Bank had approximately
$18.9 million of 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.
Commercial Loans
In the fiscal year 1998, the Bank began making secured and unsecured
loans to businesses for purposes other than financing real estate. The
Bank considers this to be an attractive lending market based on higher
yields typically realized, as well as repricing and maturity terms shorter
than those of traditional real estate loan products. Management also
feels that entering the business banking arena will help the Bank expand
its customer base, and provide the opportunity for additional cross-
selling.
The Bank's target for business banking is to provide a full array of
banking products for small- to mid-market businesses with operations
typically within the Bank's primary market area. The Bank currently
offers secured and unsecured lines of credit, as well as term loans
secured by plant or equipment.
The Bank has a comprehensive underwriting policy which includes a
credit analysis of the borrower to review the borrowing history,
historical operating results, financial condition, and collateral values
which help determine the borrower's ability to repay the loan. The loan
approval process also includes a review by the executive officer in charge
of the business banking division.
At March 31, 1998, the Bank had $7.6 million outstanding in
commercial loans, which represents loans disbursed net of principal
repayments, as well as commercial loans acquired through acquisition.
Commercial loans may entail greater risk than loans secured by real
estate, particularly in the case of unsecured loans, and loans secured by
inventory and accounts receivable. In such cases, values of collateral
may not provide an adequate source of repayment based upon depletion of
the assets. Additionally, borrowers are typically more susceptible to
economic downturns and changes interest rates. Although the level of
delinquencies in the Bank's commercial loan portfolio has been low ( 0.59%
of all commercial loans were delinquent 60 days or more at March 31,
1998), there can be no assurance that the level of delinquencies will not
increase in the future.
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, 1998, 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 substantially all
marketable 15-, 20- and 30-year fixed rate mortgage loans 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, 1998, the Bank
was servicing $242.5 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, 1998, 1997 and 1996, the Bank earned net servicing fees of
$567,000, $310,000 and $304,000, respectively.
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
Year Ended March 31,
1998 1997 1996
(Dollars in thousands)
Gross Loans Receivable:
At beginning of period $229,442 $211,109 $192,530
------- ------- -------
Acquired through merger 177,786 -- --
Loan originations:
One- to four-family 78,956 38,421 45,065
Five or more family 280 763 1,023
Commercial real estate 17,422 706 3,834
Construction 21,909 18,603 19,029
Consumer 40,245 30,732 24,735
Commercial 8,033 -- --
------- ------- -------
Total loans
originated 166,845 89,225 93,686
------- ------- -------
Loans purchased:
Five or more family - - 10
Commercial real estate 6,115 2,459 950
------- ------- -------
Total loans purchased 6,115 2,459 960
------- ------- -------
Total loans
originated and
purchased 172,960 91,684 94,646
Principal repayments (127,452) (55,063) (49,910)
Net (increase) decrease in
loans held for sale (13,422) 1,891 (4,453)
Sales of fixed rate loans (58,194) (20,179) (21,704)
-------- -------- --------
At end of period $381,120 $229,442 $211,109
======== ======== ========
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.
Delinquent commercial loans are monitored and collected on a case-by-
case basis.
The Board of Directors is informed on a monthly basis as to the
status of all loans that are delinquent, as well as the status on all
loans currently in foreclosure or collection, and properties or other
assets 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, 1998, on a net
basis, the Bank had $73,000 classified as Doubtful. Additionally, assets
classified as Special Mention and Substandard totaled $680,000 and $1.1
million, respectively, at March 31, 1998. There were no loans classified
as Loss as of March 31, 1998. Of the assets classified at March 31, 1998,
$1.2 million were on a non-accrual status. As of March 31, 1998,
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 non-accrual 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,
1998 1997 1996 1995 1994
(Dollars in thousands)
Non-accruing loans:
One- to four-family $941 $379 $212 $243 $178
Five or more family -- -- -- -- --
Commercial real estate -- -- -- -- --
Consumer and other 188 25 -- 27 8
Commercial 96 -- -- -- --
------ ----- ----- ------ ------
Total 1,225 404 212 270 186
------ ----- ----- ------ ------
Foreclosed assets:
One- to four-family 113 -- -- -- --
Five or more family -- -- -- -- --
Commercial real estate -- -- -- -- --
Repossessed assets -- -- 22 -- --
------ ------ ------ ------- -------
Total 113 -- 22 -- --
------ ------ ------ ------- -------
Total non-performing
assets $1,338 $404 $234 $270 $186
====== ====== ====== ======= =======
Total non-performing
assets as a percentage
of total assets 0.26% 0.15% 0.09% 0.11% 0.09%
===== ===== ===== ===== =====
For the years ended March 31, 1998 and 1997, 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
1998 1997
(Dollars in thousands)
Interest income that
would have been recorded under
original terms $95 $37
Interest income recorded during
the period (45) (18)
----- ------
Interest forgone $50 $19
===== ======
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, 1998,
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,
1998 1997 1996 1995 1994
(Dollars in thousands)
Allowance at
beginning of period $1,405 $1,075 $875 $840 $771
Provision for loan
losses 950 350 200 36 78
Allowance acquired
through acquisition 1,419 -- -- -- --
Charge-offs:
Residential real
estate loans (5) -- -- -- (6)
Consumer loans (65) (20) -- (1) (3)
Commercial loans (154) -- -- -- --
----- ----- ----- ----- -----
Total charge-
offs (224) (20) -- (1) (9)
----- ----- ----- ----- -----
Recoveries:
Residential real
estate loans -- -- -- -- --
Consumer loans 17 -- -- -- --
Commercial loans -- -- -- -- --
------ ------ ------ ----- -----
Total
recoveries 17 -- -- -- --
------ ------ ------ ----- -----
Net charge-
offs (207) (20) -- (1) (9)
------ ------ ------ ------ -----
Allowance at end of
period $3,567 $1,405 $1,075 $875 $840
====== ====== ====== ====== =====
Ratio of net
charge-offs during
the period to
average loans
outstanding
during the period 0.05% 0.01% --% --% 0.01%
======= ====== ====== ====== =====
Ratio of allowance
for loan losses to
total net loans and
foreclosed
properties at end
of period 0.96% 0.63% 0.51% 0.47% 0.59%
======= ====== ====== = ====== ======
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.
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,
1998 1997 1996
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 Loans:
One- to four-
family $1,082 $214,353 56.25 % $495 $132,985 57.96 % $438 $127,426 60.36 %
Five or more
family 197 14,230 3.73 113 12,379 5.40 101 13,275 6.29
Commercial 594 64,451 16.91 365 34,183 14.90 296 28,636 13.56
Construction 187 18,938 4.97 -- 13,885 6.05 -- 13,381 6.34
Consumer Loans 910 61,526 16.14 342 36,010 15.69 235 28,391 13.45
Commercial Loans 444 7,622 2.00 -- -- -- -- -- --
Unallocated 153 -- -- 90 -- -- 5 -- --
------ ------- ------ ------ -------- ------ ------ -------- ------
Total $3,567 $381,120 100.00 % $1,405 $229,442 100.00 % $1,075 $211,109 100.00 %
====== ======= ====== ====== ======== ====== ====== ======== ======
March 31,
1995 1994
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 Loans:
One- to four-
family $382 $127,172 66.05 % $343 $102,145 69.01 %
Five or more
family 99 11,346 5.89 60 10,016 6.77
Commercial 228 25,512 13.25 346 17,395 11.75
Construction -- 7,715 4.01 -- 6,717 4.54
Consumer Loans 160 20,785 10.80 64 11,752 7.94
Unallocated 6 -- -- 27 -- --
----- -------- ------- ------ -------- ------
Total $875 $192,530 100.00 % $840 $148,025 100.00 %
===== ======== ======= ====== ======== ======
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, 1998, the Corporation and the Bank held $59.6 million in
mortgage-related securities, of which $33.9 million were classified as
available for sale and $25.7 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 its asset/liability management strategy, the Corporation
and the Bank have also invested in high quality short- and
intermediate-term investments, including interest-bearing deposits,
municipal securities, and U.S. government and government agency-backed
securities. At March 31, 1998, the Corporation on a consolidated basis
held $27.3 million in interest-bearing deposits. Investment securities
totaled $23.3 million, and included $2.9 million classified as available
for sale and $20.4 million classified as held to maturity. The
Corporation and the Bank have not made any investments in corporate bonds
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. The Bank's investment in FHLB of Chicago stock totaled $6.0
million at March 31, 1998.
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,
1998 1997 1996
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in thousands)
Securities Held to Maturity:
U.S. government securities $9,999 19.15 % $2,996 10.41 % $6,986 20.32 %
U.S. agency securities 5,930 11.36 5,999 20.85 -- --
Municipal securities 4,495 8.61 -- -- -- --
Mortgage-related securities 25,754 49.33 16,531 57.46 17,850 72.13
------- ------ ------- ------ ------- ------
Subtotal 46,178 88.45 25,526 88.72 24,836 92.45
FHLB stock 6,028 11.55 3,245 11.28 2,595 7.55
------- ------ ------- ------ ------- ------
Total securities held to
maturity and FHLB
stock $52,206 100.00 % $28,771 100.00 % $27,431 100.00 %
======= ====== ======= ====== ======= ======
Securities Available for Sale:
Mortgage-related securities $33,118 91.96 % $6,363 100.00 % $6,906 100.00 %
Other 2,894 8.04 -- -- -- --
------- ------ ------- ------ ------- ------
Total securities available
for sale $36,012 100.00 % $6,363 100.00 % $6,906 100.00 %
======= ====== ======= ====== ======= ======
The composition and contractual maturities as of March 31, 1998 of
the investment securities portfolio, excluding the FHLB of Chicago stock,
are indicated in the following table.
March 31, 1998
Total
Less than One to Five to Over ten
one year five years ten years years Book Market
Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1) value value
(Dollars in thousands)
Investment securities
available for
sale
- book value $ 896 5.80 % $ 1,998 5.74 % -- -- -- -- $ 2,894
- market value 896 1,998 -- -- $ 2,894
Investment securities
held to maturity
- book value 5,480 5.38 % 12,666 6.15 % $ 2,278 4.67 % -- -- 20,424
- market value 5,501 12,866 2,352 -- 20,719
Mortgage-related
securities
available for
sale (2)
- book value -- -- -- -- -- -- $33,118 6.46 % 33,118
- market value -- -- -- 33,870 33,870
Mortgage-related
securities
held to
maturity(2)
- book value -- -- 1,288 6.49 % 121 7.06 % 24,345 8.14 25,754
- market value -- 1,308 124 24,692 26,124
------- -------
$82,190 $83,607
======= =======
(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
currently has $1.2 million in brokered deposits acquired through the
Merger. The Bank has not actively sought or accepted any other 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,
1998 1997 1996
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 $ 12,449 -- % 3.91 % $2,967 -- % 1.94 % $2,591 -- % 1.72 %
Interest bearing 17,271 1.63 5.42 9,235 1.61 6.03 8,484 1.61 5.61
Regular savings
accounts 37,864 2.73 11.89 17,593 2.73 11.49 18,896 2.73 12.50
Money market
accounts 42,451 4.59 13.33 17,588 3.98 11.48 17,703 3.82 11.72
Certificate
accounts 208,473 6.11 65.45 105,780 6.08 69.06 103,441 5.95 68.45
------- ------ -------- ------ ------- ------
Total deposit
accounts $318,508 5.02 % 100.00 % $153,163 5.07 % 100.00 % $151,115 4.95 % 100.00 %
======= ====== ======== ====== ======= ======
At March 31, 1998, certificate accounts of $100,000 or more amounted
to $18.3 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, 1998.
Certificate
Maturity Period Accounts
(Dollars in thousands)
Three months or less $ 5,424
Four through six months 3,813
Seven through twelve
months 5,290
Over twelve months 3,756
------
Total $ 18,283
======
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.
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, 1998, the Bank had $109.4 million of
outstanding borrowings from the FHLB of Chicago. The entire amount
outstanding at March 31, 1998 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. The following table sets
forth various information related to the Bank's borrowings.
March 31,
1998 1997 1996
(Dollars in thousands)
FHLB advances:
Average balance outstanding(1) $108,322 $ 56,188 $ 39,120
Maximum amount outstanding
at any month-end during the
period 120,260 64,900 51,900
Balance outstanding at end of
period 109,350 64,900 51,900
Average interest rate during
the period (2) 5.69 % 5.60 % 6.02 %
Weighted-average interest rate
at the end of period 5.56 % 5.59 % 5.47 %
(1) Calculated using monthly average balances.
(2) Calculated using month-end weighted averages.
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 $214,000 at March 31, 1998. The Bank's equity investment in Fox
Cities Financial Services, Inc. at March 31, 1998 was $309,000. For the
year ended March 31, 1998, Fox Cities Financial Services, Inc. recorded
net income of $66,000. Its principal activity is the sale of investment
products and 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
$147,000.
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. 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, 1998,
Fox Cities Investments, Inc. had assets totaling $63.8 million and net
income for the year ended March 31, 1998 of $2.2 million.
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, 1998, the Bank had a total of 145 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 Company ("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 OTS. The
Bank is a member of the FHLB 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. 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 December, 1997.
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, 1997 was $58,663 (based upon the Bank's assets as of
September 30, 1997 of $515.9 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). The Deposit Insurance
Funds Act of 1996 (the "1996 Deposit Insurance Act") which became
effective in September 1996, provided for recapitalization of the SAIF by
a special assessment and 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. 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.
Several broad financial reform proposals were introduced in Congress
in 1997 which, by their terms, could significantly affect federally
chartered savings institutions, including proposals which would eliminate
the federal thrift charter and require federal thrifts, such as the Bank,
to convert to national banks. Management of the Corporation is unable to
predict whether any such legislative proposal will be enacted into law in
its current form or with substantial modifications and, accordingly,
management cannot predict what impact, if any, such legislation may have
on the Corporation or the Bank.
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,
1998, the Bank had $1.2 million of 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 FDICIA, 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.
Applicable law requires that SAIF maintain a ratio of insurance
reserves to total insured deposits equal to 1.25%. As a result of the
recapitalization of the SAIF by the special assessment required by the
1996 Deposit Insurance Act, effective as of January 1, 1997, the highest
rated SAIF-insured institutions, such as the Bank, pay SAIF insurance
premiums equal to the statutory minimum of $2,000 plus 6.4 basis points
for payment of the FICO obligations referenced above, thereby eliminating
any 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 above).
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
subgroups. 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 subgroup 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.
As of March 31, 1998, the Bank had an aggregate of $335.5 million of
deposit accounts covered by deposit insurance and was classified as well
capitalized.
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. At
March 31, 1998, the Bank's capital substantially exceeded each of the OTS
capital standards.
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 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, 1998, 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 (the "leverage ratio"). 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 core capital 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% leverage capital ratio. At
March 31, 1998, 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 nonwithdrawlable 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, 1998, the Bank had
not issued any capital instruments that qualified as supplementary capital
and had $3.6 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, 1998, 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.
On April 22, 1998, the OTS announced a proposal to "streamline" the
test used to determine interest rate exposure. Under the proposal, a
savings institution would be required to determine the affect of a 300-
basis point change in interest rates on its capital; as described above,
under current regulations a savings institution must determine the impact
of a 400-basis point change on overall assets and net earnings.
Management does not believe that the proposed change, if adopted, would
have a material impact on 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 a 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 (core) 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, 1998, 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.
The OTS has published for comment certain proposed revisions to its
rule relating to capital distributions by savings institutions.
Management does not believe that the proposed rule, if adopted, would have
a material affect on the Bank or its ability to pay dividends.
Liquidity
Each savings institution, including the Bank, is required generally
to maintain sufficient liquidity to ensure its safe and sound operation,
and specifically to maintain an average daily balance of liquid assets in
each calendar quarter equal to a certain percentage of either (i) the sum
of its net withdrawable deposits and short-term borrowings (the "liquidity
base") at the end of the preceding quarter or (ii) the average daily
balance of its liquidity base during the preceding quarter. 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 4%. Monetary penalties may be imposed for a violation of
the liquidity ratio requirement. At March 31, 1998, the Bank was in
compliance with such liquidity requirement, with a liquidity ratio of
20.1%.
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 not 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, 1998, 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, 1998, the Bank's lending limit for loans-to-one-borrower not
fully secured by marketable collateral was $9.1 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. As of March 31, 1998, the Bank was 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 stockholder of which the savings
institution is a subsidiary) or to a director, executive officer or
greater than 10% stockholder 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, 1998, 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 of 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, 1998, the
Bank had $109.4 million in advances from the FHLB of Chicago.
As a member of the FHLB of Chicago, the Bank is required to purchase
and maintain stock in the FHLB Chicago. At March 31, 1998, the Bank had
$6.0 million in FHLB stock, which satisfied this requirement. In past
years, the Bank has received dividends on its FHLB stock.
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 of 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 Company 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 became 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.
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 with total assets of $250 million or more 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 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 currently an executive officer of the
Bank, as of March 31, 1998. 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 59 Chairman of the Board and Director
James J. Rothenbach 48 President and Chief Executive Officer
and Director
James J. Goetz 43 Vice President - Business Banking
Harold L. Hermansen 47 Vice President - Retail Lending and
Secretary
Theodore W. Hoff 51 Vice President - Retail Sales and
Services
Phillip J. Schoofs 42 Vice President, Treasurer and Chief
Financial Officer
Donald D. Parker has served as Chairman of the Board of the Corporation
and the Bank since May 1, 1997. Mr. Parker sedrved as Chairman of the
Board, President and Chief Executive Officer of the Coropration from its
incorporation in 1993 until May 1, 1997. Mr. Parker has served as
Chariman 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.
James J. Goetz has served as Vice President - Business Banking since
August 1997. Mr. Goetz was a Senior Vice President of Bank One, Wisconsin
from 1994 to 1997. At Bank One, he was most recently in charge of
business banking for the Milwaukee marketplace. Previously, he was in
charge of commercial banking for Valley Bank, Milwaukee (now M&I Bank)
from 1991 to 1994.
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-four years of experience in the financial industry. Mr. Hermansen
has served in his current position with 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 therto,
he was Vice President - Retail Sales and Services of Oshkosh Savings Bank,
F.S.B. since 1980.
Phillip J. Schoofs has served Vice President, Treasurer and Chief
Financial Officer of the Coropration since May 1, 1997. Prior to that, he
served as Vice President, Treasurer of the Corporation since its
incorporation in 1993 and 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.
Item 2. Properties
The following table sets forth information relating to each of the
Corporation's offices as of March 31, 1998. Management believes such
properties to be adequate for the present operation of the business of the
Corporation and the Bank.
Net Book
Year Value
Owned Acquired/ at March 31,
Location or Leased Leased 1998
Home Office:
420 South Koeller Street Owned 1997 $ 2,474,000
Oshkosh, Wisconsin
Branch Offices:
16 Washington Avenue Owned 1997 135,000
Oshkosh, Wisconsin
108 East Wisconsin Avenue Owned 1965 579,000
Neenah, Wisconsin
1065 South Lake Street Owned 1974 260,000
Neenah, Wisconsin
130 Main Street Leased* 1987 19,000
Menasha, Wisconsin
2000 South Memorial Drive Owned 1980 861,000
Appleton, Wisconsin
110 Fox River Drive Owned 1988 909,000
Appleton, Wisconsin
1220 West Northland Avenue Owned 1997 367,000
Appleton, Wisconsin
W3160 County Road KK Owned 1994 923,000
Appleton, Wisconsin
927 East Main Street Owned 1997 65,000
Winneconne, Wisconsin
137 East Huron Street Owned 1997 122,000
Berlin, Wisconsin
547 East Fond du Lac Avenue Leased** 1997 0
Ripon, Wisconsin
Highway 21 and 73E Leased*** 1997 0
Wautoma, Wisconsin
* The lease on this property expires May 31, 2001, subject to a five-
year renewal option held by the Bank.
** The lease on this property expires March 1, 1999, subject to a five-
year renewal option held by the Bank.
*** The lease on this property expires July 31, 2004, subject to a ten-
year renewal option held by the Bank.
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, 1998.
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, 1998, there were approximately 1,384 registered
shareholders of record owning a total of 3,867,080 common shares.
The Corporation declared quarterly dividends of $.18 per share in the
quarter ended March 31, 1997 and $.20 per share in each of the quarters
thereafter in the fiscal year ended March 31, 1998. 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.
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data. The
financial data is 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. Data presented for March
31, 1998 includes the effect of the Merger.
At March 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
Selected Financial
Data:
Total assets $517,772 $271,185 $255,660 $239,305 $196,443
Loans receivable
- Net 370,934 221,496 204,897 186,807 143,385
Loans held for sale
- Net 16,692 3,270 5,161 708 10,102
Investment securities
available for
sale 2,894 - - - -
Investment securities
held to maturity
(includes FHLB
stock) 26,452 12,240 9,581 14,228 15,367
Mortgage-related
securities available
for sale 33,870 6,363 6,906 - -
Mortgage-related
securities held
to maturity 25,754 16,531 17,850 26,348 17,309
Cash and cash
equivalents 28,359 4,628 4,792 4,773 4,567
Deposit accounts 318,508 153,163 151,115 143,851 138,208
Borrowed funds 109,350 64,900 51,900 42,400 4,000
Shareholders'
equity 74,916 47,432 47,192 48,017 49,497
Year Ended March 31,
1998 1997 1996 1995 1994
(Dollars in thousands, except per share amounts)
Selected Operations
Data:
Total interest
and dividend
income $37,939 $19,965 $18,319 $15,060 $13,491
Total interest
expense 21,292 10,827 10,081 7,365 6,652
------- ------- ------- ------- -------
Net interest
income 16,647 9,138 8,238 7,695 6,839
------- ------- ------- ------- -------
Provision for
loan losses 950 350 200 36 76
------- ------- ------- ------- -------
Net interest
income after
provision for
loans losses 15,697 8,788 8,038 7,659 6,763
Gain (loss) on
sale of assets 1,049 288 80 (57) 193
Other noninterest
income 1,961 699 685 654 615
------- ------- ------- ------- -------
Total noninterest
income 3,010 987 765 597 808
------- ------- ------- ------- -------
Operating expenses:
Compensation,
payroll taxes
and other
employee
benefits 5,133 2,437 2,288 2,172 1,819
Other 4,710 3,233 2,291 2,208 2,024
------- ------- ------- ------- -------
Total operating
expenses 9,843 5,670 4,579 4,380 3,843
------- ------- ------- ------- -------
Income before
provision for
income taxes
and cumulative
effect of
change in
accounting
principle 8,864 4,105 4,224 3,876 3,728
Provision for
income taxes 3,020 1,665 1,667 1,493 1,427
------- ------- ------- ------- -------
Income before
cumulative effect of
change in accounting
principle 5,844 2,440 2,557 2,383 2,301
------- ------- ------- ------- -------
Cumulative effect of
change in accounting
principle - - - - 140
------- ------- ------- ------- -------
Net income $5,844 $2,440 $2,557 $2,383 $2,441
======= ======= ======= ======= =======
Basic earnings
per share $1.59 $1.03 $1.03 $0.93 $0.84
======= ======= ======= ======= =======
Diluted earnings
per share $1.55 $1.01 $1.01 $0.92 $0.83
======= ======= ======= ======= =======
Dividends declared
per share $0.78 $0.72 $0.60 $0.45 $0.12
======= ======= ======= ======= =======
Year Ended March 31,
1998 1997 1996 1995 1994
Selected Financial
Ratios and Other
Data:
Performance Ratios
Return on
average assets 1.17% 0.92% 1.04% 1.09% 1.27%
Return on
average equity 8.06% 5.18% 5.27% 4.90% 6.37%
Dividend payout
ratio 50.32% 71.29% 59.41% 48.39% 14.29%
Shareholders'
equity to total
assets 14.47% 17.49% 18.46% 20.07% 25.20%
Average shareholders'
equity to average
assets 14.49% 17.79% 19.73% 22.19% 19.02%
Net interest spread 2.68% 2.72% 2.50% 2.69% 2.86%
Net interest margin 3.41% 3.57% 3.47% 3.62% 3.67%
Net interest income
to operating
expenses 169.13% 161.16% 179.91% 175.68% 177.96%
Average interest-
earning assets to
average interest-
bearing liabilities 116.56% 120.15% 122.86% 126.80% 123.30%
Asset Quality Ratios
Non-performing assets
to total assets 0.26% 0.15% 0.09% 0.11% 0.09%
Allowance for loan
losses to loans
and foreclosed
properties 0.96% 0.63% 0.51% 0.47% 0.59%
Facilities
Number of full-
service offices 13 6 6 6 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, 1998. 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, 1998 and
1997.
General. Net income for the fiscal year ended March 31, 1998
increased to $5.8 million from $2.4 million for the fiscal year ended
March 31, 1997. The increase in earnings was primarily the result of
including the operating results of OSB from the date of the Merger. The
results were also impacted by the nonrecurrence of the $970,000 special
SAIF assessment paid to the FDIC in the quarter ended September 30, 1996;
there was no such special assessment paid in the year ended March 31,
1998.
Net Interest Income. Net interest income increased to $16.6 million
in fiscal 1998 from $9.1 million in fiscal 1997. This was primarily
attributable to the increase in average net earning assets to $69.4
million in fiscal 1998 from $43.0 million in fiscal 1997 as a result of
the Merger. Total interest and dividend income increased by $17.9 million
in fiscal 1998 from fiscal 1997, which was partially offset by an
increase of $10.5 million in total interest expense during the same time
periods. The increase in total interest and dividend income was related
to an increase in the average outstanding balance of total interest-
earning assets to $488.8 million for fiscal 1998 from $256.5 million for
fiscal 1997, which was somewhat offset by a decrease in yield on these
assets to 7.76% for fiscal 1998 from 7.78% for fiscal 1997. The increase
in total interest expense resulted from an increase in the average
outstanding balance of total interest-bearing liabilities for fiscal 1998
to $419.3 million from $213.5 million for fiscal 1997 and an increase in
the cost of these funds to 5.08% in fiscal 1998 from 5.07% in fiscal 1997.
Provision for Loan Losses. During the fiscal year ended March 31,
1998, the Bank's provision for loan losses increased to $950,000 from
$350,000 for the fiscal year ended March 31, 1997. The increase was
primarily a result of a provision of $350,000 made to equalize the loan
loss allowance percentage historically maintained by the Bank and the
former Oshkosh Savings Bank, F.S.B. In fiscal 1998, management continued
to establish loan loss allowance percentages for each component of the
Bank's loan portfolio based on management's judgement 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 remaining increase
between the years was due to a change in the mix of the loan portfolio.
The increase in the loan loss provision for fiscal 1998 related
principally to increases in the commercial, consumer and commercial real
estate loan portfolios. 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 1998. Charge-offs amounted to $224,000 and
$20,000 in fiscal 1998 and 1997, respectively. Nonaccrual loans totaled
$1.2 million and $404,000 at March 31, 1998 and 1997, respectively. Based
on past experience and future expectations, management believes the loan
loss allowance of $3.6 million at March 31, 1998 is adequate.
Noninterest Income. Noninterest income increased from $987,000 for
the fiscal year ended March 31, 1997 to $3.0 million for the fiscal year
ended March 31, 1998. This increase was primarily the result of including
in the Corporation's financial statements the operating results of OSB
from the date of the Merger. Additionally, as a result of deposit product
restructuring in connection with the Merger, deposit fee income increased
from $140,000 for fiscal 1997 to $756,000 for fiscal 1998. Gain on sale
of other assets - net increased from $288,000 for fiscal 1997 to $950,000
for fiscal 1998 as a result of the increase in long-term fixed rate
mortgage loan sales; mortgage loans sold during fiscal 1997 totaled $20.2
million, while mortgage loans sold during fiscal 1998 totaled $58.2
million. Further contributing to the increase was the gain of $99,000 on
the sale of a mortgage-related security held for sale during the fiscal
year ended March 31, 1998. There were no such sales during fiscal 1997.
Operating Expenses. Operating expenses increased to $9.8 million
for the fiscal year ended March 31, 1998 from $5.7 million for the fiscal
year ended March 31, 1997. Included in the increase for fiscal 1998 was a
charge of $827,000 for costs associated with the Merger. These Merger-
related items included (but were not limited to) the cost of combining the
respective banks' loan and deposit products, contract termination charges,
data processing conversion charges, personnel training costs and severance
costs. The remainder of the increase in operating expenses for both
periods presented was primarily due to adding the operating expense of the
former OSB from the date of the Merger. Partially offsetting the increase
was a decrease in deposit insurance premiums due to the industry-wide
reduction in the deposit insurance assessment rate commencing September
30, 1996.
Provision for Income Taxes. The provision for income taxes
increased to $3.0 million in fiscal 1998 from $1.7 million in fiscal 1997.
The increase was primarily a result of the increase in income before
taxes. Partially offsetting this increase was a larger proportional tax-
free investment portfolio acquired as part of the Merger.
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 SAIF. 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 decreased $200,000 from fiscal 1996 to $2.4
million for fiscal 1997. 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 cost of these funds from 5.21% in fiscal 1996 to 5.07% in
fiscal 1997.
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. Nonaccrual loans totaled $404,000 and $234,000 at March 31, 1997
and 1996, respectively.
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. 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.
Financial Condition
Total Assets. Total assets increased to $517.8 million at March
31, 1998 from $271.2 million at March 31, 1997. The Merger added $256.7
million in assets to the Corporation on May 1, 1997.
Cash and Cash Equivalents. Cash and cash equivalents increased to
$28.4 million at March 31, 1998 from $4.6 million at March 31, 1997. This
increase resulted from the large inflow of cash from the sale of long-term
fixed rate mortgage loans, the increase in principal paydowns on mortgage-
related securities and the premature redemptions of investment securities
issued by government agencies during the low interest rate environment
experienced during the quarter ended March 31, 1998.
Investment and Mortgage-related Securities. Total investment and
mortgage-related securities increased by $51.0 million from $31.9 million
at March 31, 1997 to $82.9 million at March 31, 1998. The Merger added
$67.8 million to total investment and mortgage-related securities. On the
date of the Merger, the OSB investment portfolio was evaluated and
reclassifications were made between securities available for sale and held
to maturity to reconcile the former OSB portfolio with the Corporation's
investment policy. These securities were transferred at their market
value on the date of the Merger. Subsequent to the Merger, the
Corporation sold a $3.3 million mortgage-related security available for
sale at a gain of $99,000. Further reduction in the investment and
mortgage-related security portfolios was experienced during the fiscal
year due to maturities, principal paydowns and normal amortization. The
mortgage-related securities held to maturity classification at March 31,
1998 included $9.9 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.
Loans Receivable. Loans receivable increased $149.4 million from
$221.5 million at March 31, 1997 to $370.9 million at March 31, 1998. The
Merger added $176.3 million in loans receivable. As part of its attempt
to improve its yield on earning assets, the Bank has focused on increasing
the amount of commercial, commercial real estate and consumer loans made.
During fiscal 1998, the Bank originated $8.0 million of commercial loans,
the first year that loans of this type were originated. During fiscal
1998 and 1997, $17.4 million and $704,000 of commercial real estate loans,
and $40.2 million and $30.7 million of consumer loans, respectively, were
originated. However, the reduction in the loans receivable portfolio
between the Merger and March 31, 1998 resulted from the large volume of
mortgage loans which were refinanced into long-term fixed rate loans
during the low interest rate environment experienced during that time
period and then sold as part of the Bank's asset/liability management
policy. Total loans sold during the year ended March 31, 1998 were $58.2
million, as compared to $20.2 million during the year ended March 31,
1997.
Loans Held for Sale. Loans held for sale increased by $13.4 million
from $3.3 million at March 31, 1997 to $16.7 million at March 31, 1998.
This increase resulted from the large amount of long-term fixed rate
mortgage loans which the Bank originated during the quarter ended March
31, 1998. Total commitments to sell long-term fixed rate mortgage loans
amounted to $19.4 million at March 31, 1998.
Deposits. Deposits increased from $153.2 million at March 31, 1997
to $318.5 million at March 31, 1998. This increase was mainly the result
of the Merger, which added $162.3 million in deposits.
Borrowings. The Corporation at the Bank level increased its level
of borrowed funds $44.5 million during fiscal 1998 to $109.4 million at
March 31, 1998 from $64.9 million at March 31, 1997. The Merger added
$58.4 million to the Corporation's borrowed funds. Following the Merger,
some high rate maturing advances were paid off with excess cash.
Shareholders' Equity. Shareholders' equity increased from $47.4
million at March 31, 1997 to $74.9 million at March 31, 1998. This
increase was primarily due to the issuance of additional common shares in
connection with the Merger, which was partially offset by the purchase of
269,806 shares of treasury stock for $7.2 million between May 1, 1997 and
March 31, 1998 . Under its current stock repurchase program, approved in
September of 1997, the Corporation is authorized to purchase 193,000
shares. No shares have been purchased as of March 31, 1998 under this
repurchase program.
Yields Earned and Rates Paid
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.
1998 1997 1996
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 $381,389 $30,839 8.09 % $216,276 $17,358 8.03 % $196,357 $15,719 8.01 %
Loans held for sale 7,376 553 7.50 4,225 344 8.14 3,076 246 8.00
Mortgage-related
securities 58,485 4,058 6.94 23,879 1,550 6.49 25,663 1,718 6.69
Investment
securities 27,936 1,686 6.04 8,194 462 5.64 9,219 422 4.58
Interest-bearing
deposits 7,824 409 5.23 1,012 50 4.94 1,064 60 5.62
Federal Home Loan
Bank stock 5,787 394 6.81 2,955 201 6.80 2,295 154 6.71
------- ------- ------- ------- ------- -------
Total interest-
earning assets 488,797 37,939 7.76 256,541 19,965 7.78 237,674 18,319 7.71
------- ------- -------
Non-interest-earning
assets:
Office properties
and equipment 6,084 4,154 4,324
Other 5,071 4,072 3,751
------- ------- -------
Total assets $499,952 $264,767 $245,749
======= ======= =======
Interest-bearing
liabilities:
Certificate
accounts $213,665 12,154 5.69 $105,825 6,297 5.95 $103,014 6,326 6.14
Regular savings
accounts 34,885 985 2.82 18,361 502 2.73 19,259 466 2.42
NOW and money
market accounts 55,905 1,824 3.26 29,325 831 2.83 28,216 836 2.96
------- ------- ------- ------- ------- -------
Total deposit
accounts 304,455 14,963 4.91 153,511 7,630 4.97 150,489 7,628 5.07
Borrowed funds 108,322 6,231 5.75 56,188 3,123 5.56 39,120 2,378 6.08
Advance payments by
borrowers for
taxes and insurance 6,571 98 1.49 3,819 74 1.94 3,846 75 1.95
------- ------- ------- ------- ------- -------
Total interest-
bearing
liabilities 419,348 21,292 5.08 213,518 10,827 5.07 193,455 10,081 5.21
------- ------- -------
Non-interest-bearing
liabilities:
Other liabilities 8,146 4,151 3,798
------- ------- -------
Total liabilities 427,494 217,669 197,253
Shareholders' equity 72,458 47,098 48,496
------- ------- -------
Total liabilities
and shareholders'
equity $499,952 $264,767 $245,749
======= ======= =======
Net interest income $16,647 $9,138 $8,238
======= ======= =======
Net interest rate
spread 2.68 % 2.71 % 2.50 %
==== ===== ====
Net earning assets $69,449 $43,023 $44,219
======= ======= =======
Net yield on average
interest-earning
assets ("net interest
margin") 3.41 % 3.56 % 3.47 %
==== ==== ====
Average interest-
earning assets to
average interest-
bearing liabilities 116.56 % 120.15 % 122.86 %
====== ====== ======
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, 1998 Year Ended March 31, 1997
Compared to Compared to
Year Ended March 31, 1997 Year Ended March 31, 1996
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 $130 $13,259 $92 $13,481 $39 $1,596 $4 $1,639
Loans held for sale (27) 256 (20) 209 4 92 2 98
Mortgage-related
securities 107 2,246 155 2,508 (51) (119) 2 (168)
Investment securities 33 1,113 78 1,224 98 (47) (11) 40
Interest-bearing deposits 3 337 19 359 (7) (3) 0 (10)
Federal Home Loan Bank
stock 0 193 0 193 2 44 1 47
---- ------ --- ------ --- ----- --- ------
Total interest-earning
assets 246 17,404 324 17,974 85 1,563 (2) 1,646
Interest-bearing
liabilities:
Certificate accounts (275) 6,416 (281) 5,860 (196) 173 (6) (29)
Regular savings accounts 17 451 14 482 60 (22) (2) 36
NOW and money market
accounts 126 752 113 991 (37) 33 (1) (5)
---- ------ --- ------ --- ----- --- ------
Total deposits (132) 7,619 (154) 7,333 (173) 184 (9) 2
Borrowed funds 107 2,899 102 3,108 (203) 1,038 (90) 745
Advance payments by borrowers
for taxes and insurance (17) 53 (12) 24 0 (1) 0 (1)
---- ------ --- ------ --- ----- --- ------
Total interest-bearing
liabilities (42) 10,571 (64) 10,465 (376) 1,221 (99) 746
---- ------ --- ------ --- ----- --- ------
Change in net interest
income $288 $6,833 $388 $7,509 $461 $342 $97 $900
==== ====== ==== ====== ==== ==== === ====
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, 1998, 1997 and
1996, mortgage loans originated totaled $118.6 million, $58.5 million and
$69.9 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 $56.4 in fiscal 1998,
$28.5 million in fiscal 1997 and $25.9 million in fiscal 1996. Loan sales
for fiscal 1998 were $58.2 million, $20.2 million in fiscal 1997 and $21.7
million in fiscal 1996. The Corporation's other major investing activity,
the purchase of mortgage-related and investment securities, amounted to
$5.0 million, $10.0 million and $7.0 million in the fiscal years ended
March 31, 1998, 1997 and 1996, respectively.
Financing activities used $19.5 million, and provided $12.7 million
and $13.0 million of funds in fiscal years 1998, 1997 and 1996,
respectively. In fiscal 1998 the repayment of borrowed funds was the
major use of cash by financing activities. In fiscal years 1997 and
1996, 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 4.0%.
On March 31, 1998, the Bank's liquidity ratio calculated in accordance
with OTS requirements was 20.1%. 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, 1998, 1997 and
1996, cash and cash equivalents totaled $28.4 million, $4.6 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, 1998, the Corporation had commitments to originate
loans of $21.2 million, at various interest rates, and commitments to
extend credit on unused lines of credit of $7.8 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 a1mounts of capital pursuant to the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 and regulations
promulgated pursuant thereto. As of March 31, 1998, the Bank was in
compliance with all regulatory capital requirements which were effective
as of such date, with tangible equity, leverage, and total risk-based
capital ratios of 11.60%, 11.60%, and 18.88%, respectively. For
additional information 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.
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.
Impact of Year 2000
Historically, computer programs generally abbreviated dates by
eliminating the century digits of the year. Many resources, such as
software, hardware, telephones, alarms, heating, ventilating and air
conditioning ("Systems") were affected. These Systems were designed to
assume a century value of "19" to save memory and disk space within their
programs. In addition, many Systems used a value of "99" in a year or
"99/99/99" in a date to indicate "no date" or "any date" or even a default
expiration date.
As the year 2000 approaches, this abbreviated date mechanism with
Systems threatens to disrupt the function of computer software at nearly
every business, including the Bank, which relies heavily on computer
systems for account and other recordkeeping functions. If the millennium
issue is ignored, system failures or miscalculations could occur, causing
disruptions of operations, including among other things, a temporary
inability to process transactions or engage in similar normal business
activities.
The Bank outsources a majority of its computer functions to Fiserv,
Inc. ("Fiserv") of Milwaukee, Wisconsin. Because year 2000 problems could
affect Fiserv, and hence the Bank through its relationship with Fiserv,
the Bank has discussed potential year 2000 problems with Fiserv. These
discussions have kept the Bank abreast of Fiserv's progress in
anticipating and avoiding year 2000 problems that could affect the Bank's
operations.
Based on recent assessments, the Bank has determined that it will be
required to modify or replace certain portions of its internal software
and hardware so that its Systems will function properly with respect to
dates on or after September 9, 1999 ("9/9/99"). It is currently
anticipated that the cost of these modifications will not exceed a total
of $200,000. The Bank presently believes that with these modifications,
the year 2000 will not pose significant operational problems for its
Systems. However, if such modifications and conversions are not made, or
are not completed on a timely manner, the year 2000 could have an adverse
impact on the operations of the Bank.
The Bank has currently completed approximately 90% of the awareness
and assessment phases of its year 2000 project. These phases, along with
the renovation, validation and implementation phases are expected to be
completed by the fourth quarter of calendar 1998. The Bank expects to use
internal resources to reprogram, upgrade or replace and test its Systems.
The costs of the year 2000 project and the date on which the Bank
believes it will complete the year 2000 modifications are based on
managements' best estimates, which were derived using numerous assumptions
of future events, including the continued availability of certain
resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ from those anticipated.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Corporation's financial performance is heavily dependent upon
the level of net interest income. Net interest income is impacted by,
among other factors, interest rate risk and credit risk. Management
mitigates credit risk by closely monitoring troubled loans, and
maintaining an adequate allowance for loan losses.
The Corporation manages its exposure to changing interest rates
(interest rate risk) by monitoring its ratios of interest-earning assets
to interest-bearing liabilities for various maturity or repricing periods.
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, 1998, the Bank's one-year gap as a percentage of total
assets was a negative 3.4%. 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) to sell
substantially all of those marketable 15-, 20- and 30-year fixed rate
loans. To comply with this policy, most fixed rate loans 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, 1998 the amounts of
interest-earning assets and interest-bearing liabilities which are
anticipated by 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 $110.0 million at March 31, 1998, are withdrawn at the annual
rates estimated by management at March 31, 1998.
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, 1998
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 $26,846 $86,848 $140,878 $71,554 $40,467 $ 4,341 $370,934
Loans held for sale 16,692 -- -- -- -- -- 16,692
Mortgage-related securities:
available for sale 27,523 1,624 -- -- -- 4,723 33,870
held to maturity 17,094 700 -- 1,288 1,325 5,347 25,754
Investment securities
available for sale 896 1,998 -- -- -- -- 2,894
held to maturity 2,491 3,977 5,609 6,070 2,277 -- 20,424
Interest-bearing deposits 27,330 -- -- -- -- -- 27,330
Federal Home Loan Bank stock 6,028 -- -- -- -- -- 6,028
------- -------- ------- ------- ------- ------ --------
Total interest-earning assets 124,900 95,147 146,487 78,912 44,069 14,411 503,926
======= ======== ======= ======= ======= ====== ========
Interest-bearing liabilities:
Certificate accounts 98,697 57,965 47,974 3,837 -- -- 208,473
Regular savings accounts 3,200 3,237 9,777 6,374 8,090 7,186 37,864
NOW and money market deposit
accounts 13,350 10,882 25,772 6,896 9,255 6,016 72,171
------- ------- -------- ------- ------- ------- --------
Total deposits 115,247 72,084 83,523 17,107 17,345 13,202 318,508
Borrowed funds 29,000 16,250 11,300 42,800 10,000 -- 109,350
Advance payments by borrowers
for taxes and insurance 4,644 -- -- -- -- -- 4,644
------- ------- ------- ------- ------- ------- --------
Total interest-bearing
liabilities 148,891 88,334 94,823 59,907 27,345 13,202 432,502
------- ------- ------- ------- ------- ------- --------
Interest sensitivity gap per
period ($23,991) $6,813 $51,664 $19,005 $16,724 $ 1,209 $ 71,424
======= ======= ======= ======= ======= ======= ========
Cumulative interest sensitivity
gap ($23,991) ($17,178) $34,486 $53,491 $70,215 $71,424
======= ======= ======= ======= ======= =======
Percentage of cumulative gap to
total earning assets (4.8) % (3.4) % 6.8 % 10.6 % 13.9 % 14.2 %
==== ==== ==== ==== ==== ====
Cumulative ratio of interest
sensitive assets to interest
sensitive liabilities 83.89 % 92.76 % 110.39 % 113.65 % 116.75 % 116.51 %
===== ===== ====== ====== ====== ======
Although management believes that these asset liability strategies
reduce the potential effects of changes in interest rates on the
Corporation's operations, material and prolonged increases in interest
rates may adversely affect the Corporation's operations because of the
Corporation's negative gap position. Alternatively, prolonged decreases
in interest rates may benefit the Corporation's operations.
The Corporation does not use derivative financial instruments such
as futures, swaps, caps, floors, options, interest- or principal-only
strips, or similar financial instruments to manage interest rate risk.
The Corporation does however, use forward sales commitments of fixed-rate
mortgage loans to manage its exposure to interest rate risk in the loans
held for sale portfolio. The Corporation's policy is to cover a
substantial portion of its loans held for sale and commitments to
originate fixed-rate mortgage loans. These forward sales typically
require delivery within 90 days. Based on the short-term nature of the
loans held for sale portfolio, as well as the above policies, management
believes that these financial instruments post minimal interest rate risk
to the Corporation.
The OTS requires the Bank to estimate the sensitivity of its market
value of portfolio equity ("MVPE") to changes in interest rates, and to
measure such sensitivity on at least a quarterly basis. MVPE is defined
as the estimated net present value of an institutions' existing assets,
liabilities, and off-balance sheet instruments at a given level of market
interest rates. Management typically relies on the OTS to make
assumptions related to such items such as: discount rates, loan
prepayment speeds, deposit decay rates, etc. for several interest rate
scenarios.
The following table summarizes the Bank's sensitivity of MVPE to a
100 basis point immediate and sustained increase or decrease in interest
rates. All market rate sensitive instruments are classified as held to
maturity or available for sale. The Corporation has no trading
securities.
Estimated
Change in Interest Rates MVPE
(Dollars in
thousands)
100 basis point increase $77,219
Base scenario 78,211
100 basis point decline 77,613
The Bank's MPVE declines under both scenarios due to the Bank's
relatively low interest rate risk. Based upon peer comparison information
provided by the OTS, the Bank at March 31, 1998 was less sensitive to
interest rate changes than 83% of its peers. Typically, companies in an
negatively gapped position see a decrease in the MVPE in a rising rate
environment and an increase in MVPE in a declining interest rate
environment. The Bank shows a slight decrease in MVPE using a 100 basis
point increase, and an even smaller decrease considering a 100 basis point
decrease. This is due to the fact that a significant percentage of the
Bank's assets have very low interest rate sensitivity, or are subject to
prepayment in a falling rate environment. Therefore, overall assets would
not appreciate as quickly as the total liabilities when interest rates
decrease. In the above scenario, the Bank's profitability would remain
relatively constant given either rate change presented above.
Certain shortcomings are inherent in using MVPE to quantify an
exposure to market risk. For example, actual and future values of assets,
liabilities, and off-balance sheet items will differ from those determined
by the model due to differences in actual market discount rates, loan
prepayment activity, and deposit run-off experience. Further, the model
does not account for potential future changes in asset/liability mix, or
mangement reaction to interest rate changes. The changes in the Bank's
MVPE as of March 31, 1998 are within acceptable tolerances as established
by executive mangement and the Board of Directors.
Special Note Regarding Forward-Looking Statements
The statements which are not historical facts contained in this
Annual Report on Form 10-K are forward-looking statements intended to
qualify for the safe harbors from liability established by the Private
Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those currently anticipated. These factors include,
without limitation, interest rate trends, the general economic climate in
the Corporation's market area, loan delinquency rates and regulatory
treatment. These factors should be considered in evaluating the forward-
looking statements, and undue reliance should not be placed on such
statements. The forward-looking statements included herein are made as of
the date hereof and the Corporation undertakes no obligation to update
publicly such statements to reflect subsequent events or circumstances.
Item 8. Financial Statements and Supplementary Data
FCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1998 and 1997
(Dollars In Thousands)
ASSETS
1998 1997
Cash $ 1,029 $ 473
Interest-bearing deposits 27,330 4,155
-------- --------
Cash and cash equivalents 28,359 4,628
Investment securities available for sale,
at fair value 2,894 -
Investment securities held to maturity
(estimated fair value of $20,719 and
$8,953 at March 31, 1998 and
1997, respectively) 20,424 8,995
Mortgage-related securities available
for sale, at fair value 33,870 6,363
Mortgage-related securities held to
maturity (estimated fair value of
$26,124 and $16,613 at March 31,
1998 and 1997, respectively) 25,754 16,531
Investment in Federal Home Loan Bank
stock, at cost 6,028 3,245
Loans held for sale 16,692 3,270
Loans receivable - Net 370,934 221,496
Office properties and equipment 6,610 4,091
Other assets 6,207 2,566
-------- --------
TOTAL ASSETS $517,772 $271,185
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
Liabilities:
Deposit accounts $318,508 $153,163
Borrowed funds 109,350 64,900
Advance payments by borrowers
for taxes and insurance 4,644 2,586
Other liabilities 10,354 3,104
-------- --------
Total liabilities 442,856 223,753
-------- --------
Commitments and contingencies
(See Note 14)
Shareholders' equity:
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued - 4,528,368 shares and
2,909,500 shares at March 31,
1998 and 1997, respectively 45 29
Additional paid-in capital 59,638 28,911
Retained earnings - Substantially
restricted 29,211 26,630
Unrealized gain (loss) on securities
available for sale - Net of tax 502 (72)
Unearned compensation - ESOP (1,036) (869)
-------- --------
Totals 88,360 54,629
Less - 661,288 and 445,697 shares of
treasury common stock, at cost,
at March 31, 1998 and 1997,
respectively (13,444) (7,197)
-------- --------
Total shareholders' equity 74,916 47,432
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $517,772 $271,185
======== ========
See accompanying notes to consolidated financial statements.
FCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31, 1998, 1997, and 1996
(Dollars In Thousands, Except Per Share Amounts)
1998 1997 1996
Interest and dividend income:
Mortgage loans $ 24,155 $ 15,031 $ 13,818
Other loans 7,237 2,671 2,147
Investment securities 1,686 462 422
Mortgage-related securities 4,058 1,550 1,718
Dividends on stock in Federal
Home Loan Bank 394 201 154
Interest-bearing deposits 409 50 60
-------- -------- --------
Total interest and dividend
income 37,939 19,965 18,319
-------- -------- --------
Interest expense:
Deposit accounts 15,061 7,704 7,703
Borrowed funds 6,231 3,123 2,378
-------- -------- --------
Total interest expense 21,292 10,827 10,081
-------- -------- --------
Net interest income 16,647 9,138 8,238
Provision for loan losses 950 350 200
-------- -------- --------
Net interest income after
provision for loan losses 15,697 8,788 8,038
-------- -------- --------
Noninterest income:
Loan fees - Net 674 378 370
Deposit fees 756 140 117
Gain on sale of securities 99 - -
Gain on sale of other assets - Net 950 288 80
Other income 531 181 198
-------- -------- --------
Total noninterest income 3,010 987 765
-------- -------- --------
Operating expenses:
Compensation, payroll taxes and
other employee benefits 5,133 2,437 2,288
Marketing 367 254 250
Occupancy 1,185 678 724
Data processing 618 270 248
Federal insurance premiums 199 1,246 349
Merger-related 827 - -
Other 1,514 785 720
-------- -------- --------
Total operating expenses 9,843 5,670 4,579
-------- -------- --------
Income before provision for
income taxes 8,864 4,105 4,224
Provision for income taxes 3,020 1,665 1,667
-------- -------- --------
Net income $ 5,844 $ 2,440 $ 2,557
======== ======== ========
Basic earnings per share $ 1.59 $ 1.03 $ 1.03
======== ======== ========
Diluted earnings per share $ 1.55 $ 1.01 $ 1.01
======== ======== ========
Cash dividends declared per share $ .78 $ .72 $ .60
======== ======== ========
See accompanying notes to consolidated financial statements.
FCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended March 31, 1998, 1997, and 1996
(Dollars In Thousands, Except Per Share Amounts)
Additional
Common Paid-In Retained
Stock Capital Earnings
Balance at April 1, 1995 $ 29 $ 28,526 $ 24,916
Net income for 1996 - - 2,557
Cash dividends declared
($.60 per share) - - (1,484)
Amortization of unearned
compensation - ESOP - 167 -
Increase in unrealized gain
(loss) on securities
available for sale -
Net of tax - - -
Exercise of stock options -
12,500 treasury common
shares - - (59)
Purchase of treasury common
stock - 131,530 shares - - -
------- -------- --------
Balance at March 31, 1996 29 28,693 25,930
Net income for 1997 - - 2,440
Cash dividends declared
($.72 per share) - - (1,696)
Amortization of unearned
compensation - ESOP - 218 -
Increase in unrealized gain
(loss) on securities
available for sale -
Net of tax - - -
Exercise of stock options -
7,189 treasury common shares - - (44)
Purchase of treasury common
stock - 56,000 shares - - -
------- -------- --------
Balance at March 31, 1997 29 28,911 26,630
Net income for 1998 - - 5,844
Cash dividends declared
($.78 per share) - - (2,946)
Amortization of unearned
compensation - ESOP - 530 -
Change in unrealized gain
(loss) on securities
available for sale -
Net of tax - - -
Exercise of stock options -
54,215 treasury common shares - 290 (317)
Purchase of treasury common
stock - 269,806 shares - - -
Acquisition of OSB Financial
Corp. 16 29,907 -
-------- ------- -------
Balance at March 31, 1998 $ 45 $ 59,638 $ 29,211
======== ======= =======
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Cont'd.)
Unrealized
Gain (Loss) on
Securities Unearned Treasury
Available For Compensation - Common
Sale, Net of Tax ESOP Stock Total
$ - $(1,361) $ (4,093) $ 48,017
- - - 2,557
- - - (1,484)
- 243 - 410
(26) - - (26)
- - 184 125
- - (2,407) (2,407)
------- -------- -------- --------
(26) (1,118) (6,316) 47,192
- - - 2,440
- - - (1,696)
- 249 - 467
(46) - - (46)
- - 116 72
- - (997) (997)
-------- --------- --------- ---------
(72) (869) (7,197) 47,432
- - - 5,844
- - - (2,946)
- 320 - 850
574 - - 574
- - 938 911
- - (7,185) (7,185)
- (487) - 29,436
-------- --------- --------- ---------
$ 502 $(1,036) $(13,444) $ 74,916
======== ========= ========= =========
See accompanying notes to consolidated financial statements.
FCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1998, 1997, and 1996
(Dollars In Thousands)
1998 1997 1996
Cash flows from operating
activities:
Net income $ 5,844 $ 2,440 $ 2,557
-------- -------- --------
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and net
amortization 202 261 51
Provision for loan losses 950 350 200
Gain on sale of assets - Net (1,049) (288) (82)
Loans originated for sale (72,388) (18,000) (27,227)
Proceeds from loan sales 58,194 20,179 21,704
Changes in operating assets
and liabilities 3,281 165 692
-------- -------- --------
Total adjustments (10,810) 2,667 (4,662)
-------- -------- --------
Net cash provided by (used in)
operating activities (4,966) 5,107 (2,105)
-------- -------- --------
Cash flows from investing
activities:
Proceeds from maturities of
investment securities held
to maturity 15,924 8,000 12,000
Purchases of investment
securities held to maturity (2,954) (10,000) (7,000)
Purchases of investment
securities available
for sale (1,997) - -
Principal repayments on
mortgage-related securities
held to maturity 2,605 1,325 1,509
Principal repayments on
mortgage-related securities
available for sale 823 459 127
Proceeds from sale of mortgage-
related securities available
for sale 3,470 - -
Purchases of Federal Home Loan
Bank stock (40) (650) (326)
Redemption of Federal Home Loan
Bank stock 175 - -
Net (increase) decrease in
loans 27,495 (16,949) (17,193)
Proceeds from sale of
other assets 64 - 63
Capital expenditures (497) (126) (60)
Net cash received in
acquisition 3,104 - -
--------- --------- ---------
Net cash provided by (used in)
investing activities 48,172 (17,941) (10,880)
--------- --------- ---------
Cash flows from financing
activities:
Net increase in deposit
accounts $ 3,069 $ 2,048 $ 7,264
Net increase (decrease) in
short-term borrowings (18,100) 4,700 (1,000)
Proceeds from other borrowings 87,000 47,300 57,000
Repayment of other borrowings (82,810) (39,000) (46,500)
Net increase (decrease) in
advance payments by
borrowers for taxes
and insurance 263 176 (55)
Proceeds from exercise of
stock options 911 72 125
Purchases of treasury
common stock (7,185) (997) (2,407)
Dividends paid (2,623) (1,629) (1,423)
--------- --------- ---------
Net cash provided by (used in)
financing activities (19,475) 12,670 13,004
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents $ 23,731 $ (164) $ 19
Cash and cash equivalents at
beginning 4,628 4,792 4,773
--------- --------- ---------
Cash and cash equivalents
at end $ 28,359 $ 4,628 $ 4,792
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Interest on deposit accounts $ 15,085 $ 7,631 $ 7,457
Interest on borrowed funds 6,257 3,056 2,374
Income taxes 3,037 1,877 1,630
Loans transferred to foreclosed
properties and properties
subject to foreclosure 112 - 53
Loans transferred from held for
sale to held for investment 2,231 - 1,150
See accompanying 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 (the "Bank"). The Bank is a federally
chartered savings bank and operates as a full service financial
institution with a primary market area 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 also makes commercial,
commercial real estate, five or more family residential, consumer and
residential construction loans within its primary market area. The Bank,
through its wholly-owned subsidiary, Fox Cities Financial Services, Inc.,
sells various investment 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, 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.
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.
Federal Home Loan Bank Stock.
The Corporation's investment in Federal Home Loan Bank ("FHLB") stock at
March 31, 1998 and 1997 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.
The Corporation accounts for mortgage servicing rights under Financial
Accounting Standards Board (AFASB") Statement of Financial Accounting
Standards (ASFAS") No. 125, "Accounting for Transfers and Servicing of
Assets and Extinguishments of Liabilities," of which certain aspects were
adopted on April 1, 1997. Previously, the Corporation accounted for
mortgage servicing rights under SFAS No. 122, "Accounting for Mortgage
Servicing Rights." The Corporation recognizes 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.
Foreclosed Properties.
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of the foreclosure.
Subsequently, the foreclosed assets are carried at the lower of the newly
established cost or fair value less estimated selling costs. Costs
related to the development and improvement of property are capitalized,
whereas costs related to the holding of property are expensed.
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.
In February, 1997, the FASB issued SFAS No. 128, AEarnings Per Share,"
which became effective for the Corporation for reporting periods after
December 15, 1997. Under the provisions of SFAS No. 128, primary and
fully-diluted earnings per share were replaced with basic and diluted
earnings per share. Basic earnings per share is arrived at by dividing
net income available to common shareholders by the weighted-average number
of common shares outstanding and does not include the impact of any
potentially dilutive common stock equivalents. The diluted earnings per
share calculation is arrived at by dividing net income by the weighted-
average number of shares outstanding, adjusted for the dilutive effect of
outstanding stock options, and any other common stock equivalents.
Earnings per share for prior periods have been restated in accordance with
the Statement. See Note 13 for a reconciliation of basic earnings per
share to diluted earnings per share.
Future Accounting Changes.
In June, 1997, the FASB issued SFAS No. 130, AReporting Comprehensive
Income." This statement establishes standards for reporting and display
of comprehensive income in a full set of general-purpose financial
statements. This statement requires that all items that are required to
be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. This statement requires
that an enterprise display an amount representing total comprehensive
income for the period in a financial statement, but does not require a
specific format for that financial statement. This statement also
requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the
statement of financial condition. The statement is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. Management, at this time, cannot determine the effect that
adoption of this statement may have on the financial statements of the
Corporation as comprehensive income is dependent on the amount and nature
of assets and liabilities held which generate non-income changes to
equity.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. It also amends SFAS No. 94, "Consolidation of All Majority-
Owned Subsidiaries," to remove the special disclosure requirements for
previously unconsolidated subsidiaries. The statement is effective for
financial statements for periods beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years
is to be restated. This statement need not be applied to interim
financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods
in the second year of application. The statement is not expected to have
an effect on the financial position or operating results of the
Corporation, but may require additional disclosures in the financial
statements.
Reclassifications.
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform to the 1998 presentation.
NOTE 2 - BUSINESS COMBINATION
On May 1, 1997, the Corporation acquired OSB Financial Corp. ("OSB"), the
savings and loan holding company for Oshkosh Savings Bank, F.S.B., a
community oriented institution with $256.7 million in assets, $176.3
million in loans, and $162.3 million in deposits. The merger of equals
added seven full service banking locations in East Central Wisconsin to
the Corporation.
The purchase price of $29.9 million was made up of 1,618,868 shares of the
Corporation's common stock and an immaterial amount of cash paid in lieu
of fractional shares.
The merger was accounted for as a purchase. Accordingly, the related
accounts and results of operations of OSB are included in Corporation's
consolidated financial statements from the date of acquisition. Prior
period results and balances have not been restated in connection with the
merger. There was no goodwill recorded as a result of the transaction.
The following presents pro-forma information as though the two
corporations had combined at the beginning of each of the periods
presented:
Year Ended March 31,
1998 1997 1996
(Dollars In Thousands, Except
Per Share Information)
Revenue $ 42,639 $ 40,404 $ 38,104
Net income $ 5,785 $ 3,838 $ 2,995
Basic earnings per share $ 1.57 $ 0.96 $ 0.71
Diluted earnings per share $ 1.54 $ 0.95 $ 0.71
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
March 31 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
1998
Available for Sale
Other securities $ 2,894 $ - $ - $ 2,894
======= ======== ======= =======
Held to Maturity
U.S. government
securities $ 9,999 $ 90 $ - $ 10,089
U.S. agency securities 5,930 83 - 6,013
Municipal securities 4,495 122 - 4,617
------- -------- ------- -------
Totals $ 20,424 $ 295 $ - $ 20,719
======= ======== ======= =======
1997
Held to Maturity
U.S. government
securities $ 2,996 $ - $ 7 $ 2,989
U.S. agency securities 5,999 - 35 5,964
------- ------- ------- -------
Totals $ 8,995 $ - $ 42 $ 8,953
======= ======= ======= =======
There were no sales of investment securities during the years ended March
31, 1998, 1997, and 1996.
The amortized cost and estimated fair value of all investment securities
at March 31, 1998, by contractual maturity, are shown below:
Available for Sale Held to Maturity
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars In Thousands)
Due in one year or less $ 896 $ 896 $ 5,480 $ 5,501
Due after one year
through five years 1,998 1,998 12,666 12,866
Due after five years
through ten years - - 2,278 2,352
------- ------- -------- -------
Totals $ 2,894 $ 2,894 $ 20,424 $ 20,719
======= ======= ======== =======
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)
1998
Available for Sale:
Government National
Mortgage Association
Certificates $ 2,141 $ 51 $ - $ 2,192
Collateralized Mortgage
Obligations 8,650 343 136 8,857
Federal Home Loan
Mortgage Corporation
Certificates 1,611 65 - 1,676
Federal National
Mortgage Association
Certificates 20,716 436 7 21,145
-------- -------- -------- -------
Totals $ 33,118 $ 895 $ 143 $ 33,870
======== ======== ======== =======
Held to Maturity:
Government National
Mortgage Association
Certificates $ 1,091 $ 33 $ - $ 1,124
Collateralized Mortgage
Obligations 14,993 124 - 15,117
Federal Home Loan
Mortgage Corporation
Certificates 3,894 87 - 3,981
Federal National
Mortgage Association
Certificates 5,776 126 - 5,902
------- ------- ------- -------
Totals $ 25,754 $ 370 $ - $ 26,124
======= ======= ======= =======
1997
Available for Sale:
Government National
Mortgage Association
Certificates $ 2,506 $ 28 $ 4 $ 2,530
Collateralized Mortgage
Obligations 3,984 - 151 3,833
-------- -------- -------- -------
Totals $ 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
-------- -------- -------- -------
Totals $ 16,531 $ 95 $ 13 $ 16,613
======== ======== ======== =======
Sales of mortgage-related securities resulted in total proceeds of
$3,470,000 and gross realized gains of $99,000 during the year ended March
31, 1998. There were no sales of mortgage-related securities during the
years ended March 31, 1997 and 1996.
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.
NOTE 5 - LOANS RECEIVABLE
Details of loans receivable at March 31 follow:
1998 1997
(Dollars In Thousands)
First mortgage loans:
One- to four-family residential $ 214,353 $ 132,985
Five or more family residential 14,230 12,379
Commercial 64,451 34,183
Construction 18,938 13,885
-------- --------
Total first mortgage loans 311,972 193,432
-------- --------
Consumer loans:
Home improvement and home equity 36,303 18,540
Auto and recreational vehicles 19,496 15,635
Educational 4,197 1,186
Other 1,530 649
-------- --------
Total consumer loans 61,526 36,010
-------- --------
Commercial loans 7,622 -
-------- --------
Subtotals 381,120 229,442
-------- --------
Less:
Undisbursed loan proceeds 5,930 5,791
Unearned interest and loan fees 298 318
Unamortized unrealized loss 391 432
Allowance for loan losses 3,567 1,405
-------- --------
Subtotals 10,186 7,946
-------- --------
Totals $ 370,934 $ 221,496
======== ========
A summary of the activity in the allowance for loan losses is as follows:
Year Ended March 31,
1998 1997 1996
(Dollars In Thousands)
Balance at beginning $ 1,405 $ 1,075 $ 875
Provisions 950 350 200
Charge-offs (224) (20) -
Recoveries 17 - -
Allowance acquired through
acquisition 1,419 - -
------- -------- -------
Balance at end $ 3,567 $ 1,405 $1,075
======= ======== =======
Nonperforming loans, which include loans on which the accrual of interest
has been discontinued, totaled $1,225,000 and $404,000 at March 31, 1998
and 1997, respectively. The Bank did not have any troubled debt
restructurings at March 31, 1998 or 1997. The Bank did not have any
material impaired commercial loans during fiscal years 1998 and 1997, and
had no impaired commercial loans at March 31, 1998 and 1997.
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:
1998 1997 1996
(Dollars In Thousands)
Mortgage loan portfolios serviced
for:
Federal Home Loan Mortgage
Corporation $169,884 $120,971 $116,275
Federal National Mortgage
Association 62,787 - -
Other investors 9,820 6,363 5,094
------- ------- -------
Totals $242,491 $127,334 $121,369
======= ======= =======
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $5,028,000 and $1,532,000 at March 31, 1998 and 1997,
respectively.
Mortgage servicing rights are required to be recognized as a separate
asset and amortized over the estimated period that servicing income is
recognized. An analysis of changes in mortgage servicing rights for 1998
and 1997 is as follows:
1998 1997
(Dollars In Thousands)
Balance at beginning $ 194 $ -
Capitalized amounts 579 202
Less amortization (33) (8)
------- -------
Balance at end $ 740 $ 194
======= =======
There was no impairment of mortgage servicing rights at March 31, 1998 or
1997, therefore no valuation allowance was recorded.
NOTE 7 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at March 31 consist of the following:
1998 1997
(Dollars In Thousands)
Land and land improvements $1,737 $ 997
Buildings and building
improvements 7,065 4,128
Leasehold improvements 90 68
Furniture, fixtures, and
equipment 3,696 1,683
Automobiles 64 39
Construction in progress 381 -
------- -------
Subtotals 13,033 6,915
Less - Accumulated
depreciation 6,423 2,824
------- -------
Total office properties
and equipment $ 6,610 $ 4,091
======= =======
Depreciation and amortization of office properties and equipment charged
to operating expenses amounted to $389,000, $261,000, and $271,000 in
1998, 1997, and 1996, respectively.
NOTE 8 - DEPOSIT ACCOUNTS
Deposit accounts at March 31 are summarized as follows:
1998 1997
(Dollars In Thousands)
Weighted Weighted
Average Average
Amount Rate Amount Rate
NOW accounts:
Non-interest bearing $ 12,449 - % $2,967 - %
Interest bearing 17,271 1.63 9,235 1.61
Regular savings accounts 37,864 2.73 17,593 2.73
Money market accounts 42,451 4.59 17,588 3.98
Certificate accounts 208,473 6.11 105,780 6.08
------- -------
Totals $318,508 5.02% $153,163 5.07%
======= ===== ======= =====
Certificate accounts include $18.3 million and $10.5 million in
denominations of $100,000 or more at March 31, 1998 and 1997,
respectively.
On March 31, 1998, certificate accounts have scheduled maturity dates as
follows:
Matures During
Year Ended
March 31, Amount
(Dollars In Thousands)
1999 $156,662
2000 42,001
2001 5,973
2002 3,210
2003 627
--------
Totals $208,473
========
Interest expense on deposit accounts consists of the following:
Year Ended March 31,
1998 1997 1996
(Dollars In Thousands)
NOW and money market
accounts $ 1,824 $ 831 $ 836
Regular savings accounts 985 502 466
Certificate accounts 12,154 6,297 6,326
Advance payments by
borrowers for taxes
and insurance 98 74 75
------- -------- --------
Totals $15,061 $ 7,704 $7,703
======= ======== ========
NOTE 9 - BORROWED FUNDS
Borrowed funds consist of FHLB advances at March 31 and are summarized as
follows:
1998 1997
Weighted Weighted
Average Average
Amount Rate Amount Rate
(Dollars In Thousands)
FHLB advances maturing during
the year ended March 31,:
1998 $ - - % $ 27,000 5.51%
1999 34,250 5.72 5,000 5.60
2000 22,300 5.65 13,000 5.60
2001 - - - -
2002 1,800 6.32 1,800 6.32
2003 41,000 5.49 - -
2004 10,000 4.98 - -
Open Line of Credit - - 18,100 5.60
------- -------
Totals $109,350 5.56% $ 64,900 5.59%
======= =======
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, 1998, which
are included in the above, total $16.0 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 $533,000 and $291,000 at March 31,
1998 and 1997, 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
employees' benefit. Bank expense related to this plan was $36,000 in
1998. There was no expense under this plan in 1997 and 1996.
The Bank has Deferred Compensation Agreements with two employees and a
Separation Benefit Plan with three 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, 1998, the maximum liability which could be
paid under these agreements is $138,000. The amount charged to operations
was $15,000, $26,000, and $18,000 for 1998, 1997, and 1996, 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. The
compensation committee of the Board of 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, 1998 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.
As a result of the business combination outlined in Note 2, options
representing 83,112 shares of Corporation stock were assumed by the
Corporation at exercise prices as originally granted, adjusted for the
exchange ratio of the merger transaction. These options were origionally
granted by OSB under its stock option plan. Also as a result of the
merger, all outstanding options for employees of each corporation became
100% vested and excercisable on the date of the transaction.
The following is a summary of stock option activity:
Shares Option Price
Under Option Per Share
Outstanding at April 1, 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
Transferred in 83,112 $7.87 - $16.60
Granted 55,500 $23.75 - $27.375
Exercised (54,215) $7.87 - $16.60
-------
Outstanding at March 31, 1998 195,052 $7.87 - $27.375
=======
The options above are nonincentive stock options. Options granted after
the merger are eligible to be exercised over a five-year period at 20%
each year.
The fair value of each option granted is estimated on the grant date using
the Black-Scholes methodology. The following assumptions were made in
estimating the fair value for options granted:
1998
Dividend yield 2.75%
Risk-free interest rate 5.12%
Weighted average expected life (years) 7.5
Expected volatility 30.26%
The per share weighted average fair value
of the options granted as of their grant
date, using the assumptions shown above $4.36
No compensation cost has been recognized for the plan. Had compensation
cost been determined on the basis of fair value, net income and earnings
per share would have been reduced as follows:
1998
(Dollars In Thousands,
Except Per Share Amounts)
Net income:
As reported $5,844
======
Pro forma $5,817
======
Earnings per share:
As reported:
Basic $1.59
Diluted $1.55
Pro forma:
Basic $1.58
Diluted $1.54
The following is a summary of the options outstanding at March 31, 1998:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life-Years Price Number Price
7.870 - 10.000 90,005 5.3 $ 9.72 90,005 $ 9.72
15.410 - 16.600 49,547 7.3 16.12 49,547 16.12
23.750 - 27.375 55,500 9.2 24.14 - -
------ --- ------ ------- -----
Totals 195,052 6.9 $15.45 139,552 $11.99
======= === ====== ======= =====
The Corporation sponsors an Employee Stock Ownership Plan ("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 $243,000 including interest at a rate of 6.5% over a ten-year
amortization. In addition, pursuant to the terms of the merger discussed
in Note 2, the ESOP plan of OSB was combined with the above plan. The
conversion ratio was applied to the OSB ESOP shares prior to inclusion in
the Corporation ESOP. As part of this transaction, the Corporation also
assumed $487,000 of debt related to the former OSB ESOP. This loan is
payable in quarterly installments of $29,000 including interest at the
prime rate of interest over a remaining 54 month amortization from March
31, 1998. 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. ESOP
shares that have not been committed to be released are not considered
outstanding for purposes of computing earnings per share. The cost of the
unearned shares is reported in the consolidated statement of financial
condition 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 $754,000,
$415,000, and $380,000 for 1998, 1997, and 1996, respectively. Dividends
received by the ESOP were $209,000, $123,000, and $103,000 in 1998, 1997,
and 1996, respectively, and were used to reduce loan principal. The fair
value of unearned ESOP shares at March 31, 1998 totaled $3.8 million.
The following is a summary of ESOP shares at March 31:
1998 1997
Allocated
137,980 90,461
Committed to be released - -
Unearned 117,591 87,708
------- -------
Totals 255,571 178,169
======= =======
The ESOP distributed 40,034 and 1,831 allocated shares to former employees
during the years ended March 31, 1998 and 1997, respectively.
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
Year Ended March 31,
1998 1997 1996
(Dollars In Thousands)
Current tax expense (credit):
Federal $ 2,735 $ 1,431 $ 1,532
Low income housing credit (70) (70) (70)
State 469 288 366
------- ------- -------
Total current 3,134 1,649 1,828
------- ------- -------
Deferred tax expense (credit):
Federal (91) 13 (129)
State (23) 3 (32)
------- ------- -------
Total deferred (114) 16 (161)
------- ------- -------
Total provision for income taxes $ 3,020 $ 1,665 $ 1,667
======= ======= =======
Included in the total provision for income taxes is expense of $34,000 for
the year ended March 31, 1998 related to security transactions. There
were no sales of securities during the years ended March 31, 1997 and
1996.
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:
1998 1997
(Dollars In Thousands)
Deferred tax assets:
Unrealized securities losses $ - $ 55
Loans held for sale 181 6
Allowance for loan losses 1,122 201
Marketable securities 406 -
Deferred directors' fees 521 238
Deferred loan fees 58 71
Other - Net 234 82
------- -------
Total deferred tax assets 2,522 653
------- -------
Deferred tax liabilities:
Unrealized securities gains (250) -
Depreciation (35) (32)
FHLB stock dividends (161) (118)
Mortgage servicing rights (290) (76)
------- -------
Total deferred tax liabilities (736) (226)
------- -------
Net deferred tax asset $ 1,786 $ 427
======= =======
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
Year Ended March 31,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
(Dollars In Thousands)
Income before
provision for
income taxes $ 8,864 100% $ 4,105 100% $ 4,224 100%
======== ====== ======= ====== ======== =======
Tax at federal
statutory rates $ 3,014 34% $ 1,396 34% $ 1,436 34%
Increase
(decrease) in
tax:
State income
taxes - Net of
federal income
tax benefits 294 3% 191 5% 220 5%
Low income
housing credit (70) (1%) (70) (2%) (70) (2%)
ESOP
compensation 148 2% 56 1% 47 1%
Tax exempt interest
exclusion (71) (1%) - - - -
Other (295) (3%) 92 2% 34 1%
------- ------ ------- ------ ------- -------
Totals $ 3,020 34% $ 1,665 40% $ 1,667 39%
======= ====== ======= ====== ======= =======
NOTE 12 - SHAREHOLDERS' EQUITY
Under federal laws and regulations, the Bank is required to meet certain
tangible, leverage, and risk-based capital requirements. Tangible equity
generally consists of stockholder's equity minus certain intangible assets
and investments in and advances to "nonincludable" subsidiaries. Leverage
capital generally consists of tangible equity plus qualifying intangible
assets. The total 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, 1998:
Total
Tangible Leverage Risk-Based
Equity Capital Capital
Bank's Regulatory Percentage 11.60% 11.60% 18.88%
Required Regulatory Percentage 2.00% 4.00% 8.00%
------ ------ ------
Excess Regulatory Percentage 9.60% 7.60% 10.88%
====== ====== ======
(Dollars In Thousands)
Bank's Regulatory Capital $59,392 $ 59,392 $62,959
Required Regulatory Capital 10,237 20,474 26,674
-------- -------- -------
Excess Regulatory Capital $49,155 $ 38,918 $36,285
======== ======== =======
To be categorized as well capitalized under Prompt Corrective Action
provisions at March 31, 1998, the Bank must maintain minimum leverage and
total risk-based capital ratios of 5% and 10%, respectively.
The following table summarizes the Bank's capital ratios and the ratios
required by federal laws and regulations at March 31, 1997:
Total
Tangible Leverage 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, 1998, 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.
NOTE 13 - EARNINGS PER SHARE
The following table reflects a reconciliation, for the years ended March
31, of basic earnings per share and diluted earnings per share:
Years ended March 31,
1998 1997 1996
(Dollars In Thousands, Except Share
and Per-Share Amounts)
Basic EPS:
Income available to common
shareholders $ 5,844 $ 2,440 $ 2,557
Average common shares
outstanding 3,679,692 2,357,465 2,482,369
Earnings per share - basic $ 1.59 $ 1.03 $ 1.03
======== ========= ========
Diluted EPS:
Income available to
common shareholders $ 5,844 $ 2,440 $ 2,557
Average common shares
outstanding 3,679,692 2,357,465 2,482,369
Effect of options - net 83,826 51,991 49,872
-------- -------- --------
Average common shares
outstanding - diluted 3,763,518 2,409,456 2,532,241
Earnings per share - diluted $ 1.55 $ 1.01 $ 1.01
======== ======== ========
NOTE 14 - 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:
1998 1997
(Dollars In Thousands)
Commitments to extend credit:
Fixed rate (6.125% - 9.50% at
March 31, 1998 and 6.50% - 8.375%
at March 31, 1997) $ 16,359 $ 6,145
Adjustable rate (6.125% - 9.75%
at March 31, 1998 and 6.75% -
8.75% at March 31, 1997) 4,883 3,234
------- -------
Total outstanding commitments $ 21,242 $ 9,379
======= =======
Unused lines of credit $ 7,838 $ 2,270
======= =======
Commitments to sell loans $ 21,411 $ 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 15 - 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 office properties 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 are as follows:
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Dollars In Thousands)
Financial assets:
Cash and cash equivalents $28,359 $ 28,359 $ 4,628 $ 4,628
Securities 82,942 83,607 31,889 31,929
Federal Home Loan Bank stock 6,028 6,028 3,245 3,245
Total loans - Net 387,626 392,565 224,766 225,561
Mortgage servicing rights 740 740 194 239
-------- -------- -------- --------
Total financial assets $505,695 $511,299 $264,722 $265,602
======== ======== ======== ========
Financial liabilities:
Deposit accounts $318,508 $318,689 $153,163 $153,668
Borrowed funds 109,350 107,225 64,900 64,526
-------- -------- -------- --------
Total financial liabilities $427,858 $425,914 $218,063 $218,194
======== ======== ======== ========
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL CONDITION
March 31, 1998 and 1997
(Dollars In Thousands)
ASSETS
1998 1997
Cash $ 3,128 $ 778
Investment securities held to maturity 4,495 -
Mortgage-related securities
available for sale 3,847 3,833
Investment in subsidiary 61,025 38,654
Other assets 3,232 4,652
-------- -------
TOTAL ASSETS $ 75,727 $47,917
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
Other liabilities $ 811 $ 485
Total shareholders' equity 74,916 47,432
-------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 75,727 $47,917
======== =======
STATEMENTS OF INCOME
Years Ended March 31, 1998, 1997, and 1996
(Dollars In Thousands)
1998 1997 1996
Interest and dividend income $ 10,672 $ 2,222 $ 2,154
Equity in undistributed net income
of subsidiary (4,686) 471 729
Other income 4 - -
-------- -------- --------
Total income 5,990 2,693 2,883
Other expense 146 124 155
-------- -------- --------
Income before provision for
income taxes 5,844 2,569 2,728
Provision for income taxes - 129 171
-------- -------- --------
Net income $ 5,844 $ 2,440 $ 2,557
======== ======== ========
STATEMENTS OF CASH FLOWS
Years Ended March 31, 1998, 1997, and 1996
(Dollars In Thousands)
1998 1997 1996
Cash flows from operating
activities:
Net income $ 5,844 $ 2,440 $ 2,557
------- ------- -------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in net income of
subsidiary (5,071) (2,176) (2,229)
Increase in other assets (42) (8) (266)
Increase (decrease) in other
liabilities (199) (100) 78
------- ------- --------
Total adjustments (5,312) (2,284) (2,517)
------- ------- --------
Net cash provided by operating
activities 532 156 40
------- ------- --------
Cash flows from investing
activities:
Proceeds from maturities of
investment securities held to
maturity - - 2,000
Purchases of investment
securities held to maturity (4,481) - -
Dividend received from
subsidiary 9,757 1,705 1,500
Net decrease (increase) in
note receivable 1,747 1,326 (258)
Net cash received in
acquisition 4,015 - -
------- ------- --------
Net cash provided by investing
activities 11,038 3,031 3,242
------- ------- --------
Cash flows from financing activities:
Purchases of treasury common
stock (7,185) (997) (2,407)
Proceeds from exercise of
stock options 911 72 125
Dividends paid (2,946) (1,629) (1,423)
------- ------- --------
Net cash used in financing
activities (9,220) (2,554) (3,705)
------- ------- --------
Net increase (decrease) in cash 2,350 633 (423)
Cash at beginning 778 145 568
------- ------- --------
Cash at end $ 3,128 $ 778 $ 145
======= ======= ========
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, 1998 and
1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
March 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Wipfli Ullrich Bertelson LLP
April 17, 1998
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/ James J. Rothenbach
James J. Rothenbach
President and Chief Executive Officer
/s/ Phillip J. Schoofs
Phillip J. Schoofs
Vice President
Treasurer and Chief Financial Officer
FCB FINANCIAL CORP.
QUARTERLY FINANCIAL INFORMATION
(Unaudited)
FISCAL YEAR 1998
FIRST SECOND THIRD FOURTH
(Dollars In Thousands, Except Per Share Amounts)
Interest and dividend
income $8,376 $9,870 $9,883 $9,810
Interest expense 4,696 5,686 5,475 5,435
------- ------- ------- -------
Net interest income 3,680 4,184 4,408 4,375
Provision for loan losses 500 150 150 150
------- ------- ------- -------
Net interest income after
provision for loan losses 3,180 4,034 4,258 4,225
Net gain on sale of loans 140 195 188 412
Other noninterest income 493 523 514 545
Operating expenses 2,789 2,335 2,307 2,412
------- ------- ------- -------
Income before provision for
income taxes 1,024 2,417 2,653 2,770
Provision for income taxes 333 727 935 1,025
------- ------- ------- -------
Net income $691 $1,690 $1,718 $1,745
======= ======= ======= =======
Basic earnings per share $0.21 $0.45 $0.46 $0.47
------- ------- ------- -------
Diluted earnings per share $0.20 $0.44 $0.45 $0.46
------- ------- ------- -------
Dividends declared
per share $0.18 $0.20 $0.20 $0.20
------- ------- ------- -------
Per share stock price
ranges:
High $25.50 $28.00 $30.25 $34.00
Low $20.00 $24.75 $26.50 $28.00
Close $25.25 $27.00 $29.50 $32.00
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
======= ======= ======= =======
Basic earnings per share $0.32 $0.09 $0.32 $0.30
------- ------- ------- -------
Diluted 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
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 1998 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. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements.
The Consolidated Financial Statements and Auditor's Report
listed below are included in Part II, Item 8 hereof and incorporated
herein by reference.
1. Independent Auditor's Report.
2. Consolidated Statements of Financial Condition at March 31,
1998 and 1997.
3. Consolidated Statements of Income for the Years Ended March
31, 1998, 1997 and 1996.
4. Consolidated Statements of Shareholders' Equity for the
Years Ended March 31, 1998, 1997 and 1996.
5. Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1997 and 1996.
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
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation during the
last quarter of the 1998 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 12, 1998
By: /s/ James J. Rothenbach
James J. Rothenbach
President, Chief Executive Officer
and Director (Principal Executive
Officer)
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
James J. Rothenbach
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: June 12, 1998
/s/ Donald D. Parker /s/ Richard A. Bergstrom
Donald D. Parker Richard A. Bergstrom
Chairman of the Board and Director
Director
Date: June 12, 1998 Date: June 12, 1998
/s/ Phillip J. Schoofs /s/ Dr. Edwin L. Downing
Phillip J. Schoofs Dr. Edwin L. Downing
Vice President, Treasurer Director
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: June 12, 1998 Date: June 12, 1998
/s/ Walter H. Drew /s/ Thomas C. Butterbrodt
Walter H. Drew Thomas C. Butterbrodt
Director Director
Date: June 12, 1998 Date: June 12, 1998
/s/ David L. Erdmann /s/ Ronald L. Tenpas
David L. Erdmann Ronald L. Tenpas
Director Director
Date: June 12, 1998 Date: June 12, 1998
/s/ William A. Raaths /s/ William J. Schmidt
William A. Raaths William J. Schmidt
Director Director
Date: June 12, 1998 Date: June 12, 1998
/s/ David L. Geurden /s/ David L. Omachinski
David L. Geurden David L. Omachinski
Director Director
Date: June 12, 1998 Date: June 12, 1998
EXHIBIT INDEX
Exhibit No. Exhibit
2.1 Agreement and Plan of Merger between FCB Financial Corp.
and OSB Financial Corp., 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
No. 33-63204)
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 23, 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 Management Bonus Plan*
10.6 Deferred Compensation Agreement between Fox Cities Bank 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,
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-
022066 to Exhibit 2.2 of Registrant's Current Report on
Form 8-K, dated May 1, 1997)*
10.9 Amended and Restated Employment Agreement with James J.
Rothenbach, dated May 1, 1998*
10.10 Employment Agreement with Phillip J. Schoofs, dated May 1,
1997 (incorporated herein by reference under File No. 0-
022066 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-
022066 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-
022066 to Exhibit 2.6 of Registrant's Current Report on
Form 8-K, dated May 1, 1997)*
10.13 Amended and Restated Employment Agreement with James J.
Goetz, dated May 1, 1998.*
10.14 Unfunded Deferred Compensation Plan for the Directors of
Fox Cities Bank, (incorporated herein by reference under
File No. 0-22066 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 (incorporated herein by
reference under File No. 0-22066 to Exhibit 21 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997)
23 Consent of Wipfli Ullrich Bertelson LLP
27.1 Financial Data Schedule at and for the year ended March 31,
1998
27.2 Restated Financial Data Schedule at and for the year ended
March 31, 1997
27.3 Restated Financial Data Schedule at and for the year ended
March 31, 1996
* A management contract or compensatory plan or arrangement.
Fox Cities Bank, 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.