1996 ANCHOR BANCORP WISCONSIN INC. ANNUAL REPORT
TABLE OF CONTENTS
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Selected Financial Highlights . . . . . . . . . . . . . . . . . . . . . . .2
President's Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Management's Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . .6
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 25
Corporate Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Board of Directors/Officers. . . . . . . . . . . . . . . . . . . . . . . . 46
Office/Subsidiary Locations. . . . . . . . . . . . . . . . . . . . . . . . 47
1
CORPORATE PROFILE
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Anchor BanCorp Wisconsin Inc. (the "Corporation") was incorporated as a holding
company on March 18, 1992, and went public July 15, 1992. Headquartered in
Madison, Wisconsin, its wholly-owned bank subsidiary is AnchorBank, S.S.B. (the
"Bank"). The $1.8 billion consumer-oriented bank is state chartered and is one
of Wisconsin's largest thrifts.
Founded in 1919, the Bank blends an interest in the consumer and small business
markets with the willingness to expand its numerous checking, savings and
lending programs to meet customers' changing financial needs. With 33
full-service and three lending-only facilities, the Bank serves approximately
96,000 households in 26 Wisconsin cities located primarily in southern and
western Wisconsin. The Bank has approximately 660 full- and part-time employees.
The Bank offers checking, savings, money market accounts, mortgages, home equity
and other consumer loans, student loans, credit cards, annuities and related
consumer financial services. The Bank also offers banking services to
businesses, including checking accounts, lines of credit, secured loans and
commercial real estate loans.
SELECTED FINANCIAL HIGHLIGHTS
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AT OR FOR YEAR ENDED MARCH 31,
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PERCENT
1996 (1) 1995 CHANGE
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(Dollars In Thousands, Except Per Share Data)
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OPERATING RESULTS:
Net interest income $ 50,743 $ 50,586 0.3%
Net income 14,507 14,417 0.6
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PER SHARE (2):
Earnings:
Primary $ 2.72 $ 2.68 1.5%
Fully diluted 2.70 2.66 1.5
Book value 24.00 21.96 9.3
Cash dividends paid 0.32 0.23 39.1
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FINANCIAL CONDITION:
Total assets $1,754,556 $1,510,917 16.1%
Loans receivable held for
investment, net 1,361,080 1,231,107 10.6
Mortgage-related securities 220,998 160,401 37.8
Deposits 1,240,958 1,098,210 13.0
Borrowings 371,482 280,100 32.6
Stockholders' equity 118,402 111,187 6.5
Shares outstanding (2) 4,934,350 5,063,830 (2.6)
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SIGNIFICANT RATIOS FOR THE YEAR (3):
Yield on earning assets 7.87% 7.46% 5.5%
Cost of funds 4.96 4.11 20.7
Interest rate spread 2.91 3.35 (13.1)
Net interest margin 3.18 3.60 (11.7)
Return on assets 0.88 1.00 (12.0)
Return on equity 12.13 13.45 (9.8)
Equity to assets 7.24 7.41 (2.3)
Non-interest expenses to assets 2.24 2.28 (1.8)
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SIGNIFICANT RATIOS AT YEAR END:
Net interest spread 2.90% 3.00% (3.3)%
Non-performing assets to total assets 0.59 0.69 (14.5)
Stockholders' equity to total assets 6.75 7.36 (8.3)
(1) Reflects the acquisition of American Equity BanCorp Inc. of Stevens Point,
Wisconsin, in June, 1995 under the purchase method of accounting.
(2) Per share data and shares outstanding have been adjusted to reflect a
5-for-4 stock split distributed in October, 1995.
(3) Based on average daily balances.
2
PRESIDENT'S MESSAGE
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I am pleased to report our Company's results for this past fiscal year. As
you know, our goal was profitable growth. We reached that goal. Earnings set
a record for the fourth year in a row and our total [photo omitted] assets
grew 16.1%. We attained those results through a merger and growth in our
consumer product lines. We expected to maintain our deposit base and we did.
In addition, we once again experienced an increase in our core deposits. We
are a growing financial institution serving an economically strong market
through a system of well-positioned branches.
Now let's look at how we achieved our success.
[BAR GRAPH OMITTED]
FINANCIAL PERFORMANCE As you know, I pay close attention to increasing
shareholder value. Our primary earnings per share increased from $2.68 last year
to $2.72 as of March 31, 1996, adjusted for the 5-for-4 stock split distributed
in October, 1995. The Board of Directors authorized the repurchase of
outstanding shares from time to time to further increase shareholder value,
book value increased from $21.96 to $24.00. The Board approved an increase in
our dividend from $.08 to $.10 per share per quarter effective in May, 1996.
This was the fourth increase since becoming a public company. Net income set
another record, increasing from $14.4 million to $14.5 million for the year.
[BAR GRAPH OMITTED]
The Company's non-interest expenses to average assets ratio declined for the
third straight year. This year it went from 2.28% to 2.24%.
As stockholders, your investment continues to grow. We consistently get positive
feedback from many of the people who analyze our Company's stock. Our growth
reflects the improved health of our industry and continued growth in the markets
we serve.
[BAR GRAPH OMITTED]
3
PRESIDENT'S MESSAGE (CONT'D)
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[BAR GRAPH OMITTED]
SOLID GROWTH/QUALITY ASSETS AnchorBank is the market leader in both the dollar
volume and the number of mortgages produced in Dane County, Wisconsin. Dane
County is one of the fastest growing counties in Wisconsin and has had extremely
low unemployment for the past five years. We grew 8.0% in mortgages while
focusing on generating quality assets. We have been successful in our mission --
our non-performing assets to total assets ratio is .59%, down from .69% at March
31, 1995. Our consumer loans outstanding also showed continued strength. They
grew 32.6% last fiscal year and 28.7% this fiscal year. We continue to solicit
customers and potential customers via direct mail -- offering them a variety of
ways to get the money they need when, where and how they want it.
MARKET STRATEGIES As intended, we strengthened our branch network this past
year. We are very interested in maintaining our mix of urban, suburban and rural
markets in central and southern Wisconsin where we can efficiently generate
funds. In June, 1995, we expanded into the Stevens Point area via a merger with
American Equity BanCorp. Almost immediately, we opened a second office in the
Stevens Point area, in Plover's Econofoods grocery store. Those offices
complement our other offices in central Wisconsin.
[BAR GRAPH OMITTED]
We continue, as well, to improve our presence in Dane County. We opened an
office in Stoughton, Wisconsin, in June, 1995 to serve this fast-growing market.
We combined two offices on Madison's west side in order to give us better
efficiency and increase convenience for our customers.
4
PRESIDENT'S MESSAGE (CONT'D)
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TARGET HOUSEHOLDS We saw a significant increase in the number of households
served this past year. New households were generated with the merger of American
Equity as well as with checking and consumer loan promotions. We continue to
target potential customers whose product needs meet our goal of improving our
asset/liability mix. Our yield on earning assets improved from 7.46% to 7.87%
during the year. On the liability side, we continue to focus on our goal of
increasing core deposit accounts. The number of checking accounts grew 23% from
1995 to 1996.
LOOKING AHEAD What we are doing is working. We are focusing additional effort
on higher margin lending activities, while continuing to generate quality
assets. Our strength is "people-oriented" loans - mortgages, consumer loans and
small business loans. Building strong customer relationships and providing
outstanding customer service is key to increasing market share in our target
consumer markets. We have the advantage of an extensive branch network in which
we can promote both lending and retail savings products. Our objectives remain
focused on safety and soundness, profitability and growth.
[BAR GRAPH OMITTED]
On behalf of the Board, management and staff at Anchor, we thank
you for your continued trust and support.
Sincerely,
/S/ Douglas J. Timmerman
Douglas J. Timmerman
President
5
MANAGEMENT'S DISCUSSION
FIVE-YEAR SUMMARY
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AT OR FOR YEAR ENDED MARCH 31,
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1996(1) 1995 1994 1993 1992
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(In Thousands, Except Per Share Data)
Earnings per share (2):
Primary $ 2.72 $ 2.68 $ 2.32 $ 1.72 $ N/A
Fully diluted 2.70 2.66 2.32 1.70 N/A
Interest income 125,721 104,884 97,306 105,088 116,093
Interest expense 74,978 54,298 49,539 57,208 78,731
Net interest income 50,743 50,586 47,767 47,880 37,362
Provision for loan losses 475 1,580 4,348 7,415 7,765
Non-interest income 9,259 7,508 11,106 11,560 10,111
Non-interest expenses 37,061 33,033 32,788 34,221 30,821
Income taxes 7,959 9,064 8,265 6,938 3,103
Net income 14,507 14,417 13,472 10,866 5,784
Total assets 1,754,556 1,510,917 1,380,276 1,297,408 1,265,179
Investment securities 32,837 23,632 20,781 13,833 13,918
Mortgage-related securities 220,998 160,401 187,710 238,465 184,489
Loans receivable held for
investment, net 1,361,080 1,231,107 1,066,945 939,194 925,014
Deposits 1,240,958 1,098,210 1,065,741 1,062,903 1,149,738
Notes payable to FHLB 316,869 274,500 186,750 111,000 41,000
Other borrowings 54,613 5,600 - - -
Stockholders' equity 118,402 111,187 105,137 101,987 52,351
Shares outstanding (2) 4,934,350 5,063,830 5,394,269 5,937,500 N/A
Book value per share
at end of period (2) 24.00 21.96 19.49 17.18 N/A
Dividend payout ratio (2) 11.76% 8.58% 8.19% 2.79% N/A%
Yield on earning assets 7.87 7.46 7.42 8.41 9.44
Cost of funds 4.96 4.11 4.04 4.86 6.51
Interest rate spread 2.91 3.35 3.38 3.55 2.93
Net interest margin 3.18 3.60 3.64 3.83 3.04
Return on average assets 0.88 1.00 1.00 0.84 0.45
Return on average equity 12.13 13.45 12.89 12.29 11.52
Average equity to average assets 7.24 7.41 7.74 6.86 3.94
(1) In June, 1995, the Corporation acquired American Equity BanCorp Inc.
("American") of Stevens Point, Wisconsin, through an exchange of stock.
This transaction was accounted for as a purchase, with the results of
operations being included in the consolidated financial statements since
the date of acquisition.
(2) As adjusted for a five-for-four stock split as of October 27, 1995.
Per share data for fiscal 1992 are not applicable because
the Corporation was not a public company until July 15, 1992.
6
MANAGEMENT'S DISCUSSION
QUARTERLY DATA
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The following table sets forth the Corporation's unaudited quarterly income and
expense data for the two years ended March 31, 1996.
MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1996 1995 1995 1995(1) 1995 1994 1994 1994
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(In Thousands, Except Per Share Data)
Interest income:
Loans $28,182 $27,296 $26,731 $25,227 $24,489 $23,879 $22,346 $21,235
Securities 4,617 5,048 5,057 3,563 3,136 3,308 3,277 3,214
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Total interest income 32,799 32,344 31,788 28,790 27,625 27,187 25,623 24,449
Interest expense:
Deposits 14,526 14,674 13,853 12,297 11,243 10,123 9,863 9,709
Borrowings and other 5,270 4,881 5,142 4,335 4,014 3,979 2,998 2,369
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Total interest expense 19,796 19,555 18,995 16,632 15,257 14,102 12,861 12,078
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Net interest income 13,003 12,789 12,793 12,158 12,368 13,085 12,762 12,371
Provision for loan losses -- 150 150 175 403 449 377 351
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Net interest income after
provision for loan losses 13,003 12,639 12,643 11,983 11,965 12,636 12,385 12,020
Service charges on loans
and deposits 1,529 1,553 1,554 1,295 1,307 1,296 1,298 1,301
Net gain (loss) on sale of
loans and securities 267 224 242 159 89 (109) 18 (128)
Other non-interest income 815 567 519 535 517 640 635 644
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Total non-interest income 2,611 2,344 2,315 1,989 1,913 1,827 1,951 1,817
Compensation 4,972 4,864 4,866 4,365 4,035 4,304 4,364 4,338
Other non-interest expenses 4,818 4,626 4,533 4,017 4,364 3,926 3,883 3,819
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Total non-interest expenses 9,790 9,490 9,399 8,382 8,399 8,230 8,247 8,157
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Income before income taxes 5,824 5,493 5,559 5,590 5,479 6,233 6,089 5,680
Income taxes 2,063 1,947 1,968 1,981 2,088 2,387 2,351 2,238
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Net income $ 3,761 $ 3,546 $ 3,591 $ 3,609 $ 3,391 $ 3,846 $ 3,738 $ 3,442
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Earnings Per Share (2):
Primary $ 0.72 $ 0.65 $ 0.65 $ 0.70 $ 0.65 $ 0.72 $ 0.68 $ 0.62
Fully diluted 0.72 0.65 0.65 0.70 0.65 0.72 0.68 0.62
(1) In June, 1995, the Corporation acquired American through an exchange of
stock. This transaction was accounted for as a purchase, with the results
of operations being included in the consolidated financial statements since
the date of acquisition.
(2) Per share data for all periods have been adjusted to reflect the 5-for-4
stock split distributed in October, 1995.
7
MANAGEMENT'S DISCUSSION
RESULTS OF OPERATIONS
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COMPARISON OF YEARS ENDED MARCH 31, 1996 AND 1995
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GENERAL Net income increased to $14.5 million in fiscal 1996 from $14.4 million
in fiscal 1995. The returns on average assets and average stockholders' equity
for fiscal 1996 were 0.88% and 12.13%, respectively, as compared to 1.00% and
13.45%, respectively, for fiscal 1995.
The major components of the increase in earnings for fiscal 1996, as compared to
fiscal 1995, were (i) an increase of $1.8 million in non-interest income, (ii) a
decrease of $1.1 million in provision for loan losses and (iii) a decrease of
$1.1 million in income taxes, which were partially offset by an increase of $4.0
million in non-interest expenses.
NET INTEREST INCOME Net interest income increased by $157,000 during fiscal
1996. The average balances of interest-earning assets and interest-bearing
liabilities increased to $1.598 billion and $1.511 billion in fiscal 1996,
respectively, from $1.407 billion and $1.321 billion, respectively, in fiscal
1995. The average balance increases were partially due to the American Equity
BanCorp Inc. ("American") acquisition in June, 1995 (refer to Note 2 to the
Corporation's Consolidated Financial Statements for additional discussion). The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased to 1.06 for fiscal 1996 from 1.07 for fiscal 1995. The average yield
on interest-earning assets (7.87% in fiscal 1996 versus 7.46% in fiscal 1995)
increased, as did the average cost on interest-bearing liabilities (4.96% in
fiscal 1996 versus 4.11% in fiscal 1995). The net interest margin decreased
to 3.18% for fiscal 1996 from 3.60% for fiscal 1995 and the interest rate spread
decreased to 2.91% from 3.35% for fiscal 1996 and 1995, respectively. These
factors are reflected in the analysis of changes in net interest income, arising
from changes in the volume of interest-earning assets, interest-bearing
liabilities and the rates earned and paid on such assets and liabilities. The
analysis indicates that the increases in the volume of interest-earning assets
and interest-bearing liabilities increased net interest income in fiscal 1996 by
approximately $5.1 million. Offsetting this increase, in part, was a $5.0
million decrease in net interest income caused by the combination of rate and
rate/volume changes.
PROVISION FOR LOAN LOSSES Provision for loan losses decreased $1.1 million to
$475,000 for fiscal 1996 from $1.6 million for fiscal 1995, reflecting a lower
level of charge-offs experienced in fiscal 1996. The Corporation's allowance
for loan losses increased to $22.8 million, or 1.59% of loans held for
investment, at March 31, 1996, from $22.4 million, or 1.75%, respectively, at
March 31, 1995. For further discussion of the allowance for loan losses, see
"Allowance for Loan and Foreclosure Losses."
NON-INTEREST INCOME Non-interest income increased $1.8 million to $9.3
million for fiscal 1996 compared to $7.5 million for fiscal 1995 as a net
result of several factors. Net gain (loss) on sale of loans increased from a
loss of $83,000 in fiscal 1995 to a gain of $645,000 in fiscal 1996. The
increase was due to an increase in the volume of sales of loans during the
period. Service charges on deposits increased $600,000 in fiscal 1996 as
compared to fiscal 1995 due to an increase in demand deposit fees due in part
to the increase in demand deposit accounts from the American acquisition.
Net gain (loss) on sale of securities increased from a loss of $47,000 in
fiscal 1995 to a gain of $247,000 in fiscal 1996 due to an increase in the
volume of sales of securities during the period. Loan servicing income
increased $297,000 due to increased volume of loans serviced for others.
Other non-interest income increased $146,000 for fiscal 1996 due to increased
partnership earnings on partnerships which are less than 50% owned and
accounted for under the equity method. These increases were partially offset
by a decrease of $312,000 in insurance commissions during fiscal 1996 as a
result of large decreases in annuity sales.
NON-INTEREST EXPENSES Non-interest expenses increased $4.0 million for
fiscal 1996 compared to 1995 as a net result of several factors.
Compensation increased $2.0 million for fiscal 1996 due to the combination of
increases in staff, salaries and benefits as a result of additional offices
and new benefit plans. Furniture, equipment and occupancy expense increased
$693,000 primarily due to increased depreciation and other costs from
additional offices. Other expenses increased $926,000 during fiscal 1996 due
to increases in robbery loss, goodwill amortization, demand deposit expenses,
postage and TYME transaction fees. Data processing expense increased
$348,000 mainly due to costs associated with buying out a servicing contract
of American.
INCOME TAXES Income tax expense decreased $1.1 million for fiscal 1996 as
compared to fiscal 1995. The effective tax rate for fiscal 1996 was 35.43% as
compared to 38.60% for fiscal 1995. The decrease in the tax rate in the current
year was due to an adjustment for excess deferred taxes during the year. See
Note 12 to the Consolidated Financial Statements.
COMPARISON OF YEARS ENDED MARCH 31, 1995 AND 1994
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GENERAL Net income increased to $14.4 million in fiscal 1995 from $13.5 million
in fiscal 1994. The returns on average assets and average stockholders' equity
for fiscal 1995 were 1.00% and 13.45%, respectively, as compared to 1.00% and
12.89%, respectively, for fiscal 1994.
The major components of the increase in earnings for fiscal 1995, as compared to
fiscal 1994, were (i) an increase of $2.8 million in net interest income and
(ii) a decrease of $2.8 million in provision for loan losses, which were
partially offset by (i) a decrease of $3.6 million in non-interest income and
(ii) an increase of $800,000 in income taxes.
8
MANAGEMENT'S DISCUSSION
RESULTS OF OPERATIONS (CONT'D)
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NET INTEREST INCOME Net interest income increased by $2.8 million during
fiscal 1995 due to increases in the volume of interest-earning assets and
interest-bearing liabilities, which offset the effects of a decrease in the
Corporation's interest rate spread. The average balances of interest-earning
assets and interest-bearing liabilities increased to $1.407 billion and $1.321
billion, respectively, in fiscal 1995, from $1.311 billion and $1.226 billion,
respectively, in fiscal 1994. The ratio of average interest-earning assets to
average interest-bearing liabilities stayed the same at 1.07 for fiscal 1995
and 1994. The average yield on interest-earning assets (7.46% in fiscal 1995
versus 7.42% in fiscal 1994) increased, as did the average cost on
interest-bearing liabilities (4.11% in fiscal 1995 versus 4.04% in fiscal
1994). The net interest margin decreased to 3.60% for fiscal 1995 from 3.64%
for fiscal 1994 and the interest rate spread decreased to 3.35% from 3.38% for
fiscal 1995 and 1994, respectively. These factors are reflected in the
analysis of changes in net interest income arising from changes in the volume
of interest-earning assets and interest-bearing liabilities and the rates
earned and paid on such assets and liabilities. The analysis indicates that
the increases in the volume of interest-earning assets and interest-bearing
liabilities increased net interest income in fiscal 1995 by approximately $4.0
million. Offsetting this increase in part was a $1.2 million decrease in net
interest income caused by the combination of rate and rate/volume changes.
PROVISION FOR LOAN LOSSES Provision for loan losses decreased $2.8 million to
$1.6 million for fiscal 1995 from $4.3 million for fiscal 1994, reflecting a
lower level of charge-offs experienced in fiscal 1995. The Corporation's
allowance for loan losses increased to $22.4 million, or 1.75% of loans held for
investment, at March 31, 1995, from $22.1 million, or 1.98%, respectively, at
March 31, 1994. For further discussion of the allowance for loan losses, see
"Allowance for Loan and Foreclosure Losses."
NON-INTEREST INCOME Non-interest income decreased $3.6 million to
$7.5 million for fiscal 1995 compared to $11.1 million for fiscal 1994 as a
net result of several factors. Net gain (loss) on sale of loans decreased from
a gain of $3.2 million in fiscal 1994 to a loss of $83,000 in fiscal 1995. The
decline was due to a decrease in the volume of sales of loans and the
increase in rates during the period. Loan servicing income decreased
$124,000 in fiscal 1995 as compared to fiscal 1994 due to reduced spreads
from serviced loans. Net gain (loss) on sale of securities decreased from a
gain of $99,000 in fiscal 1994 to a loss of $47,000 in fiscal 1995. Other
non-interest income decreased $434,000 due in part to reduced prepayment fees
on loans and other loan fees. The reductions were partially offset by an
increase of $300,000 in service charges on deposits in fiscal 1995 as
compared to 1994, which was due to an increase in demand deposit fees.
NON-INTEREST EXPENSES Non-interest expenses increased $245,000 for fiscal 1995
compared to 1994 as a net result of several factors. Compensation increased
$300,000 for fiscal 1995 due to the increased cost of benefits, including dental
insurance and two new deferred compensation plans. Federal insurance premiums
increased $350,000 for fiscal 1995 due to a one-time refund of past premiums in
fiscal 1994. Furniture and equipment expense increased $280,000 primarily due
to increased depreciation on new computer equipment purchases. These increases
were partially offset by a $1.1 million decrease in net cost of operations of
foreclosure properties due to (i) decreased net cost of operations of $500,000,
(ii) decreased provision for losses of $275,000 and (iii) increased profit on
sales of $350,000.
INCOME TAXES Income tax expense increased $800,000 for fiscal 1995 as compared
to fiscal 1994. The effective tax rate for fiscal 1995 was 38.60% as compared
to 38.02% for fiscal 1994. See Note 12 to the Consolidated Financial
Statements.
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-BEARING LIABILITIES AND
INTEREST RATE SPREAD AND MARGIN The table on the following page shows the
Corporation's average balances, interest, average rates, the spread between
the combined average rates earned on interest-earning assets and average cost
of interest-bearing liabilities, the average net interest margin, computed as
net interest income as a ratio of average interest-earning assets, and the
ratio of average interest-earning assets to average interest-bearing
liabilities, the average net interest margin, computed as net interest income
as a ratio of average interest-earning assets, and the ratio of average
interest-earning assets to average interest-bearing liabilities for the years
indicated. Balances of interest-sensitive assets and liabilities arising from
the fiscal 1996 acquisition are included from the date of acquisition. The
average balances are derived from average daily balances.
9
MANAGEMENT'S DISCUSSION
AVERAGE BALANCE SHEETS
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YEAR ENDED MARCH 31,
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1996 1995 1994
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AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------------------------------------------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans(2) $1,047,092 $ 82,798 7.91% $ 999,008 $ 75,434 7.55% $ 898,025 $ 69,981 7.79%
Consumer loans 236,767 22,010 9.30 171,700 14,679 8.55 140,100 11,798 8.42
Commercial business loans 25,040 2,628 10.50 19,155 1,836 9.58 18,857 1,702 9.03
----------------------- --------------------- ---------------------
Total loans receivable(1) 1,308,899 107,436 8.21 1,189,863 91,949 7.73 1,056,982 83,481 7.90
Mortgage-related securities(2) 221,135 14,152 6.40 174,013 10,637 6.11 208,375 11,812 5.67
Investment securities(2) 41,168 2,490 6.05 22,781 1,198 5.26 18,634 942 5.06
Interest-bearing deposits 8,694 488 5.61 7,201 313 4.35 16,954 502 2.96
Federal Home Loan Bank stock 17,204 1,155 6.71 12,782 787 6.16 9,687 569 5.87
----------------------- --------------------- ---------------------
Total interest-earning assets 1,597,100 125,721 7.87 1,406,640 104,884 7.46 1,310,632 97,306 7.42
Non-interest-earning assets 54,330 39,567 39,301
---------- ---------- ----------
Total assets $1,651,430 $ 1,446,207 $ 1,349,933
---------- ---------- ----------
---------- ---------- ----------
INTEREST-BEARING LIABILITIES
Demand deposits $ 218,811 4,577 2.09 $ 191,667 3,062 1.60 $ 197,345 3,716 1.88
Regular passbook savings 107,707 2,498 2.32 116,946 2,674 2.29 117,473 3,083 2.62
Certificates of deposit 847,113 48,275 5.70 757,617 35,202 4.65 744,744 34,616 4.65
----------------------- --------------------- ---------------------
Total deposits 1,173,631 55,350 4.72 1,066,230 40,938 3.84 1,059,562 41,415 3.91
Notes payable and other
borrowings 324,123 19,148 5.91 240,792 12,871 5.35 154,632 7,457 4.82
Other 13,064 480 3.67 13,763 489 3.55 12,076 667 5.52
----------------------- --------------------- ---------------------
Total interest-bearing
liabilities 1,510,818 74,978 4.96 1,320,785 54,298 4.11 1,226,270 49,539 4.04
--------------- --------------- --------------
Non-interest-bearing
liabilities 21,013 18,264 19,178
--------- --------- ---------
Total liabilities 1,531,831 1,339,049 1,245,448
Stockholders' equity 119,599 107,158 104,485
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,651,430 $ 1,446,207 $ 1,349,933
---------- ---------- ----------
---------- ---------- ----------
Net interest income/
interest rate spread(3) $ 50,743 2.91% $ 50,586 3.35% $ 47,767 3.38%
--------------- --------------- --------------
--------------- --------------- --------------
Net interest-earning assets $ 86,282 $ 85,855 $ 84,362
---------- ---------- ----------
---------- ---------- ----------
Net interest margin 3.18% 3.60% 3.64%
---- ---- ----
---- ---- ----
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 1.06 1.07 1.07
---- ---- ----
---- ---- ----
(1) The average balances of loans receivable include non-accrual loans.
(2) Includes assets held and available for sale.
(3) The interest rate spread at March 31, 1996, 1995 and 1994 amounted to
2.90%, 3.00% and 3.36%, respectively.
10
MANAGEMENT'S DISCUSSION
RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------
The most significant impact on the Corporation's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of earning dollars in loans and investments, compared to the volume of
interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods.
The following table shows the relative contribution of the changes in average
volume and average interest rates on changes in net interest income for the
periods indicated. Information is provided with respect to (i) effects on
interest income attributable to changes in rate (changes in rate multiplied by
prior volume), (ii) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate) and (iii) changes in rate/volume
(changes in rate multiplied by changes in volume).
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
-----------------------------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
-----------------------------------------------------------------------------------------------
(In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans(1) $ 3,562 $ 3,631 $ 171 $ 7,364 $(2,172) $ 7,869 $ (244) $ 5,453
Consumer loans 1,282 5,563 486 7,331 179 2,662 40 2,881
Commercial business loans 174 564 54 792 105 27 2 134
-----------------------------------------------------------------------------------------------
Total loans receivable 5,018 9,758 711 15,487 (1,888) 10,558 (202) 8,468
Mortgage-related securities(1) 500 2,880 135 3,515 925 (1,947) (153) (1,175)
Investment securities(1) 180 967 145 1,292 38 210 8 256
Interest-bearing deposits 91 65 19 175 235 (289) (135) (189)
Federal Home Loan Bank stock 71 272 25 368 27 182 9 218
-----------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets 5,860 13,942 1,035 20,837 (663) 8,714 (473) 7,578
INTEREST-BEARING LIABILITIES
Demand deposits 947 434 134 1,515 (563) (107) 16 (654)
Regular passbook savings 38 (211) (3) (176) (397) (14) 2 (409)
Certificates of deposit 7,973 4,158 942 13,073 (12) 598 0 586
-----------------------------------------------------------------------------------------------
Total deposits 8,958 4,381 1,073 14,412 (972) 477 18 (477)
Notes payable and other borrowings 1,354 4,454 469 6,277 809 4,155 450 5,414
Other 17 (25) (1) (9) (238) 93 (33) (178)
-----------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 10,329 8,810 1,541 20,680 (401) 4,725 435 4,759
-----------------------------------------------------------------------------------------------
Net change in net interest
income $(4,469) $ 5,132 $ (506) $ 157 $ (262) $ 3,989 $ (908) $ 2,819
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
(1) Includes assets held and available for sale.
11
MANAGEMENT'S DISCUSSION
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
On an unconsolidated basis, the Corporation had cash equivalents of $1.9 million
and loans and real estate held for development and sale of $11.5 million at
March 31, 1996. Principal and interest payments are a predictable source of
funds, but funds from sales of real estate are unpredictable. During fiscal
1996, the Bank made dividend payments of $13.8 million to the Corporation. The
Bank is subject to certain regulatory limitations relative to its ability to pay
dividends to the Corporation. Management believes that the Corporation will not
be adversely affected by these dividend limitations and that projected future
dividends from the Bank will be sufficient to meet the Corporation's liquidity
needs. In addition to dividends from the Bank, the Corporation also could sell
capital stock or debt issues through the capital markets as alternative sources
of funds.
The Bank's primary sources of funds are principal and interest payments on loans
receivable and mortgage-related securities, sales of mortgage loans originated
for sale, Federal Home Loan Bank ("FHLB") advances, deposits and other
borrowings. While maturities and scheduled amortization of loans and
mortgage-related securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
specified levels of liquid investments in qualifying types of U.S. Government
and agency securities and other investments. This requirement, which may be
varied by the OTS, is based upon a percentage of deposits and short-term
borrowings. The required percentage is currently 5.0%. At March 31, 1996 and
1995, the Bank's liquidity ratio was 11.3% and 10.8%, respectively.
Operating activities resulted in a net cash inflow of $16.2 million. Operating
cash flows for fiscal 1996 included earnings of $14.5 million and $178.2 million
realized from the sale of mortgage loans held for sale, less $180.1 million
disbursed for loans originated for sale.
Investing activities in fiscal 1996 resulted in a net cash outflow of $126.9
million. Primary investing activities resulting in cash outflows were $82.0
million for the purchase of securities and $146.2 million for the increase in
net loans receivable. The most significant cash inflows from investing
activities were principal payments of $44.7 million received on mortgage-related
securities, as well as $59.7 million from the proceeds of sales of securities
available for sale.
Financing activities resulted in a net cash inflow of $125.5 million including
a net increase in deposits of $78.0 million, a net increase in borrowings of
$65.0 million and a cash outflow of $19.8 million for treasury stock purchases.
At March 31, 1996, the Corporation had outstanding commitments to originate
$35.5 million of loans, commitments to extend funds to or on behalf of customers
pursuant to lines and letters of credit of $51.4 million, $3.8 million of loans
sold with recourse to the Corporation in the event of default by the borrower
and $2.6 million of financial guarantees provided to holders of certain
industrial revenue bonds. (See Note 13 to the Consolidated Financial
Statements.) Scheduled maturities of certificates of deposit during the twelve
months following March 31, 1996, amounted to $576.8 million and scheduled
maturities of borrowings during the same period totalled $231.1 million. The
Bank has entered into agreements with certain brokers which will provide blocks
of funds at specified interest rates for an identified fee. Management believes
adequate capital and borrowings are available from various sources to fund all
commitments to the extent required.
At March 31, 1996, the Bank's capital exceeded all capital requirements of the
State of Wisconsin and the OTS as mandated by federal law and regulations on
both a current and fully phased-in basis. See Note 10 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
GENERAL Total assets of the Corporation increased $243.6 million or 16.1% from
$1.51 billion at March 31, 1995 to $1.75 billion at March 31, 1996. The
American acquisition accounted for $102.4 million of the increase in total
assets. This increase was primarily funded by net increases in deposits of
$142.7 million and in borrowings of $91.4 million. These funds were generally
invested in loans receivable and mortgage-related securities.
MORTGAGE-RELATED SECURITIES Mortgage-related securities (both available for
sale and held to maturity) increased $60.6 million as a net result of (i)
securities acquired from American of $1.0 million, (ii) exchanges of $96.8
million of loans with the Federal Home Loan Mortgage Corporation for securities
backed by such loans, (iii) purchases of $17.1 million, (iv) principal
repayments and market value adjustments of $45.2 million and (v) sales of $9.1
million. Mortgage-related securities consisted of $186.0 million
mortgage-backed securities and $35.0 million mortgage-derivative securities at
March 31, 1996. See Notes 1 and 3 to the Consolidated Financial Statements.
In October, 1995, the Financial Accounting Standards Board ("FASB") approved a
modification of Statement of Financial Accounting Standards ("SFAS") No. 115
providing that from November 15, 1995, through December 31, 1995, the
Corporation had the one-time opportunity to reconsider its classification of
investment and mortgage-related securities as held to maturity, trading or
available
12
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
for sale. Accordingly, on December 31, 1995, the Corporation chose to
reclassify certain mortgage-backed securities from held to maturity to available
for sale. At the date of transfer, the amortized cost of the mortgage-backed
securities was $90.4 million. The unrealized gain on those securities at the
time of transfer was $684,000, which is included in unrealized gains/losses
on securities available for sale, net, which is a component of stockholders'
equity. At March 31, 1996, unrealized losses on securities available for
sale, net, amounted to $728,000.
Since mortgage-related securities are asset-backed securities, they are subject
to inherent risks based upon the future performance of the underlying collateral
(i.e., mortgage loans) for these securities. Among these risks are prepayment
risk and interest rate risk. Should general interest rate levels decline, the
mortgage-related securities portfolio would be subject to (i) prepayments as
borrowers typically would seek to obtain financing at lower rates, (ii) a
decline in interest income received on adjustable-rate mortgage-related
securities, and (iii) an increase in fair value of fixed-rate mortgage-related
securities. Conversely, should general interest rate levels increase, the
mortgage-related securities portfolio would be subject to (i) a longer term to
maturity as borrowers would be less likely to prepay their loans, (ii) an
increase in interest income received on adjustable-rate mortgage-related
securities, (iii) a decline in fair value of fixed-rate mortgage-related
securities, and (iv) a decline in fair value of adjustable-rate mortgage-related
securities to an extent dependent upon the level of interest rate increases, the
time period to the next interest rate repricing date for the individual security
and the applicable periodic (annual and/or lifetime) cap which could limit the
degree to which the individual security could reprice within a given time
period.
LOANS RECEIVABLE Total loans (including loans held for sale) increased $141.0
million during fiscal 1996 from $1.234 billion at March 31, 1995, to $1.375
billion at March 31, 1996. The activity included (i) loans acquired from
American of $91.2 million, (ii) originations and purchases of $684.0 million,
(iii) sales of loans held for sale of $274.4 million, which included exchanges
of $96.8 million for mortgage-backed securities and (iv) principal repayments
and other reductions of $359.8 million. The components of the increase in total
loans, including loans held for sale, are summarized by type of loan as follows:
MARCH 31,
-------------------------------------
INCREASE
1996 1995 (DECREASE)
-------------------------------------
(In Thousands)
FIRST MORTGAGE LOANS:
Single-family residential $ 745,170 $ 716,212 $ 28,958
Multi-family residential 162,432 141,401 21,031
Commercial real estate 139,918 123,438 16,480
Construction and land 98,264 80,163 18,101
-------------------------------------
Total first mortgage loans 1,145,784 1,061,214 84,570
OTHER LOANS:
Second mortgage 140,302 111,725 28,577
Education 88,674 69,264 19,410
Commercial business and leases 30,715 21,739 8,976
Other consumer 28,481 18,997 9,484
-------------------------------------
Total other loans 288,172 221,725 66,447
-------------------------------------
Gross loans receivable 1,433,956 1,282,939 151,017
Less: Net items to loans receivable (72,876) (51,832) (21,044)
-------------------------------------
Net loans receivable $1,361,080 $1,231,107 $129,973
-------------------------------------
-------------------------------------
Loans held for sale $ 13,968 $ 2,964 $ 11,004
-------------------------------------
-------------------------------------
13
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
Mortgage loans increased $84.6 million during fiscal 1996 primarily as a result
of the acquisition of American. Also, as interest rates fell in fiscal 1996,
borrowers turned to fixed-rate financing. Long-term fixed-rate loans are
generally sold by the Corporation into the secondary market, which is reflected
in the increase in loans held for sale of $11.0 million and the increase in
loans sold during the period of $69.9 million compared to last year.
Consumer loans increased a total of $57.5 million in fiscal 1996 primarily due
to continued success in marketing promotions and new products. The majority of
this increase was in second mortgage loans, including home equity lines of
credit. Consumer loans are seldom sold in the secondary market. For
additional information, see Note 5 to the Consolidated Financial Statements.
NON-PERFORMING ASSETS Non-performing assets (consisting of non-accrual loans,
non-performing real estate held for development and sale, foreclosed properties
and repossessed assets) decreased to $10.3 million or 0.59% of total assets at
March 31, 1996, from $10.5 million or 0.69%, respectively, at March 31, 1995.
Non-performing assets are summarized as follows for the dates indicated:
AT MARCH 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
(Dollars In Thousands)
Non-accrual loans:
Single-family residential $ 629 $ 833 $ 565 $ 2,273 $ 2,141
Multi-family residential - - 37 1,593 3,373
Commercial real estate 470 624 617 12,365 14,242
Construction and land 81 81 81 135 195
Consumer 202 219 333 297 138
Commercial business 508 736 831 984 1,399
---------------------------------------------------------------------
Total non-accrual loans 1,890 2,493 2,464 17,647 21,488
Real estate held for development and sale 2,319 857 2,767 4,916 -
Foreclosed properties and repossessed assets, net 6,077 7,116 5,294 2,052 8,661
---------------------------------------------------------------------
Total non-performing assets $ 10,286 $ 10,466 $ 10,525 $ 24,615 $ 30,149
---------------------------------------------------------------------
---------------------------------------------------------------------
Performing troubled debt restructurings $ 332 $ 335 $ 4,687 $ 10,011 $ 9,161
---------------------------------------------------------------------
---------------------------------------------------------------------
Total non-accrual loans to total loans 0.13% 0.19% 0.22% 1.80% 2.25%
Total non-performing assets to total assets 0.59 0.69 0.76 1.90 2.38
Allowance for loan losses to total loans 1.59 1.75 1.98 1.88 1.54
Allowance for loan losses to total
non-accrual loans 1,206.72 899.68 897.69 104.48 68.65
Allowance for loan and foreclosure losses
to total non-performing assets 228.70 221.82 213.42 75.43 55.17
Non-accrual loans decreased $603,000 during fiscal 1996 with decreases occurring
in all categories. Loans are placed on non-accrual status when, in the judgment
of management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Corporation does not accrue interest on loans past
due more than 90 days.
Non-performing real estate held for development and sale increased $1.5
million during fiscal 1996 as a net result of (i) an increase of $900,000 due
to a multi-family residential property acquired by foreclosure and transferred
to a new Bank subsidiary for improvement and management, (ii) an increase of
$1.4 million in capitalized improvement costs on the above multi-family
property and (iii) a decrease of $857,000 due to the sale of single-family
lots in Arizona. In fiscal 1995, an interest in a limited partnership in San
Antonio, Texas, totalling $1.7 million was classified as non-performing real
extate held for development and sale. This investment subsequently was
reclassified to performing real extate held for development and sale, because
it was determined that htis partnership never met the criteria as
non-performing.
Foreclosed properties and repossessed assets decreased $1.0 million in fiscal
1996 primarily due to the transfer of a $900,000 foreclosed property into a Bank
subsidiary described above. There were two properties in this classification
with a carrying value of greater than $1.0 million. The first was a hotel and
office building in Garden Grove, California. The Bank's share of the net
carrying value of this property amounted to $3.4 million at March 31, 1996.
14
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
The owners have filed for bankruptcy. The second property was an apartment
complex in Elm Grove, Wisconsin, which formerly secured a $2.2 million loan.
Phase I studies of the environmental impact indicated a need for a Phase II
study based on the history of the property, which the Bank is pursuing. The
Bank believes any cleanup which may be necessary will be partially reimbursed by
the Petroleum Environmental Cleanup Fund, although there can be no assurance in
this regard.
ALLOWANCES FOR LOAN AND FORECLOSURE LOSSES The Corporation's loan portfolio,
foreclosed properties, repossessed assets, loans sold with recourse and off-
balance sheet financial guarantees are evaluated on a continuing basis to
determine the necessity for additions to the allowances for losses and the
related balance in the allowances. These evaluations consider several factors
including, but not limited to, general economic conditions, collateral value,
loan portfolio composition, loan delinquencies, prior loss experience,
anticipated loss of interest and management's estimation of future potential
losses. The evaluation of the allowance for loan losses includes a review of
known loan problems as well as potential loan problems based upon historical
trends and ratios. Foreclosed properties are recorded at the lower of carrying
or fair value with charge-offs, if any, charged to the allowance for loan
losses prior to transfer to foreclosed property. The fair value is primarily
based on appraisals, discounted cash flow analysis (the majority of which are
based on current occupancy and lease rates) and pending offers. A summary of
the activity in the allowance for losses on loans follows:
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
(Dollars In Thousands)
Allowance at beginning of year $ 22,429 $ 22,119 $ 18,437 $ 14,751 $ 15,830
Acquired bank's allowance 550 - - - -
Provision:
Mortgage 88 1,308 3,189 6,760 4,249
Consumer 182 185 134 87 145
Commercial business 205 87 1,025 568 3,371
---------------------------------------------------------------------
Total provision 475 1,580 4,348 7,415 7,765
---------------------------------------------------------------------
Charge-offs:
Mortgage (439) (1,460) (2,607) (2,749) (6,416)
Consumer (104) (36) (67) (65) (103)
Commercial business (455) (309) (948) (1,343) (2,726)
---------------------------------------------------------------------
Total charge-offs (998) (1,805) (3,622) (4,157) (9,245)
---------------------------------------------------------------------
Recoveries:
Mortgage 298 374 2,809 253 209
Consumer 10 17 14 23 4
Commercial business 43 144 133 152 188
---------------------------------------------------------------------
Total recoveries 351 535 2,956 428 401
---------------------------------------------------------------------
Net charge-offs (647) (1,270) (666) (3,729) (8,844)
---------------------------------------------------------------------
Allowance at end of year $ 22,807 $ 22,429 $ 22,119 $ 18,437 $ 14,751
---------------------------------------------------------------------
---------------------------------------------------------------------
Net charge-offs to average loans
held for sale and for investment (0.05)% (0.11)% (0.06)% (0.38)% (0.89)%
---------------------------------------------------------------------
---------------------------------------------------------------------
15
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
The fiscal 1996 provision for loan losses totalled $475,000 as compared to $1.6
million in fiscal 1995. The provision for loan losses for fiscal years 1996
and 1995 remain at significantly lower levels compared to earlier years when
the Bank's charge-off experience from certain portfolio segments required
larger allowances. Those segments were largely multi-family real estate loans
secured by properties in states other than Wisconsin and leases receivable.
The Corporation substantially ceased extending credit in those segments since
the late 1980's. The result of this activity was to retain the allowance for
loan losses at a level considered appropriate by management based on historical
experience, the volume and type of lending conducted, the status of past due
principal and interest payments, general economic conditions and other factors
related to the collectibility of the loan portfolio. Based on current levels
of delinquencies and the current components of loans receivable, management
anticipates 1997 provisions to be similar to those of 1996.
The table below shows the Corporation's total allowance for loan losses and the
allocation to the various categories of loans held for investment at the dates
indicated.
MARCH 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL
LOANS BY LOANS BY LOANS BY LOANS BY LOANS BY
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
---------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Single-family residential $ 200 0.03% $ 15 -% $ 54 0.01% $ 215 0.04% $ 288 0.06%
Multi-family residential 263 0.16 365 0.26 427 0.30 721 0.41 959 0.53
Commercial real estate 476 0.34 916 0.74 917 0.71 1,931 1.59 872 0.63
Construction and land 4 - 87 0.11 107 0.18 107 0.27 - -
Unallocated mortgage 20,054 1.75 19,186 1.81 18,841 1.98 13,709 1.66 10,299 1.27
---------------------------------------------------------------------------------------------------
Total mortgage loans 20,997 1.83 20,569 1.94 20,346 2.14 16,683 2.02 12,418 1.53
Consumer 802 0.31 645 0.32 479 0.32 398 0.30 354 0.30
Commercial business 1,008 3.28 1,215 5.59 1,294 6.69 1,356 6.39 1,979 6.69
---------------------------------------------------------------------------------------------------
Total allowance for loan
losses $ 22,807 1.59% $22,429 1.75% $22,119 1.98% $18,437 1.88% $14,751 1.54%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for losses on foreclosed properties
follows. The provision for losses on such properties is included in the
consolidated statements of income in "Net cost of operations of foreclosure
properties."
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
(In Thousands)
Allowance at beginning of year $ 787 $ 343 $ 130 $ 1,882 $ 11,895
Provision 200 950 1,225 1,400 750
Charge-offs (270) (506) (1,012) (3,152) (10,763)
---------------------------------------------------------------------
Allowance at end of year $ 717 $ 787 $ 343 $ 130 $ 1,882
---------------------------------------------------------------------
---------------------------------------------------------------------
The fiscal 1996 provision for foreclosure losses totalled $200,000 as compared
to $950,000 for fiscal 1995. Charge-offs declined by $236,000 during the
fiscal year. The Corporation conducts ongoing evaluations of the adequacy of
the allowance for losses, which are based on amounts of foreclosed properties,
recent appraisals, discounted cash flows or pending offers.
Although management believes that the March 31, 1996, allowances for loan and
foreclosed property losses are adequate based upon the current evaluation of
loan delinquencies, non-performing assets, charge-off trends, economic
conditions and other factors, there can be no assurance that future adjustments
to the allowance will not be necessary. Management also continues to pursue all
practical and legal methods of collection, repossession and disposal, as well as
adhering to high underwriting standards in the origination process, in order to
continue to maintain strong asset quality.
DEPOSITS Deposits increased $142.7 million during fiscal 1996 to $1.241
billion, of which $64.9 million was a result of the American acquisition. The
majority of the remaining increase was due to a new market yield demand deposit
account. The weighted average cost of deposits increased to 4.67% at fiscal
year-end 1996 compared to 4.40% at fiscal year-end 1995.
16
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
BORROWINGS FHLB advances increased $42.4 million during fiscal 1996 to fund the
increased loan activity. At March 31, 1996, advances totalled $316.9 million
with an average interest rate of 5.69%. Reverse repurchase agreements increased
$42.0 million during fiscal 1996 as management diversified its borrowings.
Other loans payable increased $7.0 million resulting from the Corporation and
subsidiary borrowings. For additional information, see Note 9 to the
Consolidated Financial Statements.
STOCKHOLDERS' EQUITY Stockholders' equity at March 31, 1996, was $118.4
million, or 6.75% of total assets, compared to $111.2 million and 7.36%,
respectively, at March 31, 1995. Stockholders' equity increased as a result
of (i) additions due to the American acquisition of $12.5 million, (ii) net
income of $14.5 million, (iii) the repayment of ESOP borrowings of $928,000,
(iv) the exercise of stock options of $306,000, (v) the vesting of recognition
plan shares of $246,000 and (vi) the tax benefit from certain stock options of
$272,000, which were partially offset by (i) the purchase of treasury stock of
$19.8 million, (ii) the payment of cash dividends of $1.7 million and (iii) the
recording of the net unrealized loss on available-for-sale securities of
$82,000.
REGULATORY ISSUES Legislation has been proposed to recapitalize the Savings
Association Insurance Fund through a one-time special assessment. For
additional information on this and other related issues, see Note 15 to the
Consolidated Financial Statements.
ASSET AND LIABILITY MANAGEMENT The primary function of asset and liability
management is to provide liquidity and maintain an appropriate balance between
interest-earning assets and interest-bearing liabilities within specified
maturities and/or repricing dates. Interest rate risk is the imbalance between
interest-earning assets and interest-bearing liabilities at a given maturity or
repricing date, and is commonly referred to as the interest rate gap (the
"gap"). A positive gap exists when there are more assets than liabilities
maturing or repricing within the same time frame. A negative gap occurs when
there are more liabilities than assets maturing or repricing within the same
time frame.
The Corporation's strategy for asset and liability management is to maintain an
interest rate gap that minimizes the impact of interest rate movements on the
net interest margin. As part of this strategy, the Corporation sells
substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, invests in adjustable-rate
or medium-term, fixed-rate, single-family residential mortgage loans, invests in
medium-term mortgage-related securities and invests in consumer loans which
generally have shorter terms to maturity and higher and/or adjustable interest
rates.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates and/or
shorter terms to maturity than conventional single-family residential loans.
Long-term, fixed-rate, single-family mortgage loans originated for sale in the
secondary market are generally committed for sale at the time the interest rate
is locked with the borrower. As such, these loans pose little interest rate
risk to the Corporation.
Although management believes that its asset/liability management strategies
reduce the potential effects of changes in interest rates on the Corporation's
operations, material and prolonged changes in interest rates would adversely
affect the Corporation's operations.
The Corporation's cumulative net gap position at March 31, 1996, for one year
or less was a positive 4.60% of total assets. The calculation of a gap
position requires management to make a number of assumptions as to when an
asset or liability will reprice or mature. Management believes that its
assumptions approximate actual experience and considers them reasonable,
although the actual amortization and repayment of assets and liabilities
may vary substantially.
17
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION (CONT'D)
- --------------------------------------------------------------------------------
The following table summarizes the Corporation's interest rate sensitivity gap
position as of March 31, 1996.
MORE THAN MORE THAN
WITHIN ONE TO THREE TO MORE THAN
ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
--------------------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS:
Mortgage loans (1) (2):
Fixed $ 96,850 $ 71,926 $ 26,202 $ 18,405 $ 213,383
Variable 623,666 264,449 10,581 - 898,696
Consumer loans (1) 171,680 60,988 19,754 4,833 257,255
Commercial business loans (1) 25,989 4,218 - - 30,207
Mortgage-related securities (3) 105,190 82,840 22,318 10,650 220,998
Investment securities and other
interest-earning assets (3) 16,584 7,680 16,808 - 41,072
--------------------------------------------------------------------------
Total $ 1,039,959 $ 492,101 $ 95,663 $ 33,888 $ 1,661,611
--------------------------------------------------------------------------
--------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits (4) $ 727,182 $ 326,967 $ 69,692 $ 39,824 $ 1,163,665
Borrowings 232,113 139,320 49 - 371,482
--------------------------------------------------------------------------
Total $ 959,295 $ 466,287 $ 69,741 $ 39,824 $ 1,535,147
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Interest sensitivity gap $ 80,664 $ 25,814 $ 25,922 $ (5,936) $ 126,464
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cumulative interest sensitivity gap $ 80,664 $ 106,478 $ 132,400 $ 126,464
---------------------------------------------------------
---------------------------------------------------------
Cumulative interest sensitivity gap
as a percent of total assets 4.60% 6.07% 7.55% 7.21%
----------------------------------------------------------
----------------------------------------------------------
(1) Balances have been reduced for (i) undisbursed loan proceeds, which
aggregated $46.5 million, and (ii) non-accrual loans, which amounted to
$1.9 million.
(2) Includes $14.0 million of loans held for sale spread throughout the
periods.
(3) Includes $140.5 million of securities available for sale spread throughout
the periods.
(4) Does not include $71.2 million of demand accounts because they are
non-interest-bearing. Also does not include accrued interest payable,
which amounted to $6.1 million. Projected decay rates for demand deposits
and passbook savings were provided by the OTS.
LITIGATION The Bank is involved in litigation relating to alleged structural
deficiencies of a property located in Vero Beach, Florida. The Bank contracted
for the completion of this property after it was acquired by foreclosure and
converted it into a condominium complex. In January, 1993, the Bank and the
Homeowners Association which represents the condominium owners entered into a
settlement agreement which covers various repairs totalling $500,000 which the
Corporation accrued in September, 1992 and paid in January, 1993, as well as
repairs which are related to the post-tension cable system, an estimated amount
of which was accrued by the Corporation in September, 1993 but has not yet been
paid. Three lawsuits have been filed against the Bank in connection with the
foregoing by various owners of condominiums in the complex and the Homeowners
Association. During fiscal 1996, one trial involving an individual homeowner
was finished, of which the result relieved the Bank of any claim for punitive
and/or general damages, but provided the owner with recision (return of the unit
to the Bank). The Bank is currently considering the alternatives of appeal
and/or negotiated settlement. Based on the outcome of the above described case
and the evaluation of the accruals by the Corporation to date, management does
not believe that the remaining litigation will have a material adverse effect on
the Corporation and the Bank beyond amounts previously provided for.
18
CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Changes in Stockholders' Equity. . . . . . . . 22
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 25
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . . 44
Management and Audit Committee Report. . . . . . . . . . . . . . . . . . . 44
19
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
MARCH 31,
------------------------
1996 1995
------------------------
(In Thousands)
ASSETS
Cash $ 35,454 $ 26,096
Federal funds sold 7,525 2,769
Interest-bearing deposits 710 -
------------------------
Cash and cash equivalents 43,689 28,865
Securities available for sale:
Investment securities 30,241 23,532
Mortgage-related securities 110,268 36,571
Securities held to maturity:
Investment securities (fair value of $2.6 million
and $100,000, respectively) 2,596 100
Mortgage-related securities
(fair value of $109.9 million
and $120.4 million, respectively) 110,730 123,830
Loans receivable, net:
Held for sale 13,968 2,964
Held for investment 1,361,080 1,231,107
Foreclosed properties and repossessed assets, net 6,077 7,116
Real estate held for development and sale 13,640 2,581
Office properties and equipment 18,906 17,206
Federal Home Loan Bank stock-at cost 16,019 16,007
Accrued interest on investments and loans 11,549 9,182
Prepaid expenses and other assets 15,793 11,856
------------------------
Total assets $ 1,754,556 $ 1,510,917
------------------------
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,240,958 $ 1,098,210
Advance payments by borrowers for taxes and insurance 7,938 8,751
Notes payable to Federal Home Loan Bank 316,869 274,500
Reverse repurchase agreements 47,582 5,600
Other loans payable 7,031 -
Other liabilities 15,776 12,669
------------------------
Total liabilities 1,636,154 1,399,730
------------------------
------------------------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding - -
Common stock, $.10 par value, 20,000,000 shares
authorized, 6,249,662 shares issued 625 625
Additional paid-in capital 50,086 47,638
Retained earnings 100,191 88,094
Less: Treasury stock (1,315,312 shares and
1,186,170 shares, respectively) (29,298) (21,790)
Deferred compensation due employees (928) (1,200)
Common stock purchased by recognition plans (1,546) (1,534)
Unrealized losses on securities available for
sale, net of tax (728) (646)
------------------------
Total stockholders' equity 118,402 111,187
------------------------
------------------------
Total liabilities and stockholders' equity $ 1,754,556 $ 1,510,917
------------------------
------------------------
See accompanying Notes to Consolidated Financial Statements.
20
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Loans $107,436 $ 91,949 $83,481
Mortgage-related securities 14,152 10,637 11,812
Investment securities 3,645 1,985 1,511
Interest-bearing deposits 488 313 502
-------------------------------------------
Total interest income 125,721 104,884 97,306
INTEREST EXPENSE:
Deposits 55,350 40,938 41,415
Notes payable and other borrowings 19,148 12,871 7,457
Other 480 489 667
-------------------------------------------
Total interest expense 74,978 54,298 49,539
-------------------------------------------
Net interest income 50,743 50,586 47,767
Provision for loan losses 475 1,580 4,348
-------------------------------------------
Net interest income after provision for loan losses 50,268 49,006 43,419
NON-INTEREST INCOME:
Loan servicing income 2,741 2,444 2,568
Service charges on deposits 3,175 2,577 2,280
Insurance commissions 700 1,012 928
Net gain (loss) on sale of loans 645 (83) 3,192
Net gain (loss) on sale of securities 247 (47) 99
Other 1,751 1,605 2,039
-------------------------------------------
Total non-interest income 9,259 7,508 11,106
NON-INTEREST EXPENSES:
Compensation 19,067 17,041 16,719
Occupancy 2,800 2,511 2,492
Federal insurance premiums 2,669 2,458 2,108
Furniture and equipment 2,557 2,153 1,870
Data processing 2,133 1,785 1,690
Marketing 1,576 1,659 1,509
Net cost of operations of foreclosure properties 127 220 1,351
Other 6,132 5,206 5,049
-------------------------------------------
Total non-interest expenses 37,061 33,033 32,788
-------------------------------------------
Income before income taxes 22,466 23,481 21,737
Income taxes 7,959 9,064 8,265
-------------------------------------------
Net income $ 14,507 $ 14,417 $13,472
-------------------------------------------
-------------------------------------------
EARNINGS PER SHARE (1):
Primary $ 2.72 $ 2.68 $ 2.32
Fully diluted 2.70 2.66 2.32
(1) As adjusted for a five-for-four stock split as of October 27, 1995.
See accompanying Notes to Consolidated Financial Statements.
21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
DEFERRED COMMON STOCK
ADDITIONAL COMPENSATION PURCHASED BY NET
COMMON PAID-IN RETAINED TREASURY DUE RECOGNITION UNREALIZED
STOCK(1) CAPITAL(1) EARNINGS STOCK EMPLOYEES PLANS LOSSES TOTAL
--------------------------------------------------------------------------------------------------
(In Thousands)
Balance at April 1, 1993 $ 625 $ 47,280 $ 62,933 $ (4,451) $ (2,400) $ (2,000) $ - $ 101,987
Net income - - 13,472 - - - - 13,472
Purchase of treasury stock
(580,044 shares)(1) - - - (10,201) - - - (10,201)
Exercise of stock options - - (236) 531 - - - 295
Cash dividend ($.19 per
share)(1) - - (1,088) - - - - (1,088)
Recognition plan shares vested - - - - - 236 - 236
Tax benefit from stock
related compensation - 24 - - - - - 24
Adjustment for grants in
recognition plan - 16 - - - (16) - -
Repayment of ESOP borrowings - - - - 600 - - 600
Unrealized losses on
available-for-sale securities,
net of tax of $125,000 - - - - - - (188) (188)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1994 625 47,320 75,081 (14,121) (1,800) (1,780) (188) 105,137
Net income - - 14,417 - - - - 14,417
Purchase of treasury stock
(363,751 shares)(1) - - - (8,149) - - - (8,149)
Exercise of stock options - - (214) 480 - - - 266
Cash dividend ($.23 per
share)(1) - - (1,190) - - - - (1,190)
Recognition plan shares vested - - - - - 246 - 246
Tax benefit from stock
related compensation - 318 - - - - - 318
Repayment of ESOP borrowings - - - - 600 - - 600
Change in unrealized losses on
available-for-sale securities,
net of tax of $305,000 - - - - - - (458) (458)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1995 625 47,638 88,094 (21,790) (1,200) (1,534) (646) 111,187
Net income - - 14,507 - - - - 14,507
Purchase of treasury stock
(640,749 shares)(1) - - - (19,756) - - - (19,756)
Exercise of stock options - - (758) 1,064 - - - 306
Cash dividend ($.32 per
share)(1) - - (1,652) - - - - (1,652)
Recognition plan shares vested - - - - - 246 - 246
Tax benefit from stock
related compensation - 272 - - - - - 272
Repayment of ESOP borrowings - - - - 928 - - 928
Purchase of American Equity - 2,187 - 11,184 (656) (258) - 12,457
Stock split fractional shares - (11) - - - - - (11)
Change in unrealized losses on
available-for-sale securities,
net of tax of $55,000 - - - - - - (82) (82)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1996 $ 625 $ 50,086 $ 100,191 $ (29,298) $ (928) $ (1,546) $ (728) $ 118,402
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
(1) As adjusted for a five-for-four stock split as of October 27, 1995.
See accompanying Notes to Consolidated Financial Statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 14,507 $ 14,417 $ 13,472
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans and real estate 675 2,530 5,573
Provision for depreciation and amortization 1,885 1,599 1,373
Loans originated for sale (180,055) (81,711) (411,945)
Proceeds from sales of loans held for sale 178,238 108,329 406,896
Net loss (gain) on sales of loans and securities (892) 130 (3,291)
Decrease (increase) in accrued interest receivables (2,367) (1,638) 1,329
Increase (decrease) in accrued interest payable 442 2,187 (436)
Increase (decrease) in accounts payable 2,392 (2,067) 71
Other 1,410 (6,095) (3,334)
----------------------------------------------------
Net cash provided by operating activities 16,235 37,681 9,708
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale 50,562 18,104 18,895
Proceeds from maturities of investment
securities 8,125 1,996 3,000
Purchase of investment securities available
for sale (62,646) (23,093) (29,465)
Purchase of investment securities held to
maturity (2,500) (100) -
Proceeds from sales of mortgage-related
securities available for sale 9,107 890 31,840
Purchase of mortgage-related securities
available for sale (5,340) (3,498) (13,561)
Purchase of mortgage-related securities
held to maturity (11,561) (15,149) (55,895)
Principal collected on mortgage-related
securities 44,734 44,256 104,187
Net increase in loans receivable (146,808) (185,462) (138,396)
Purchase of office properties and equipment (2,485) (2,809) (2,313)
Sales of office properties and equipment 214 87 218
Sales of real estate 3,407 6,313 6,956
Purchase of real estate held for sale (10,374) (1,655) -
Increase in capitalized expense on real estate (1,368) (496) (3,295)
----------------------------------------------------
Net cash used by investing activities (126,933) (160,616) (77,829)
See accompanying Notes to Consolidated Financial Statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
(In Thousands)
FINANCING ACTIVITIES
Increase in deposits $ 77,955 $ 30,858 $ 3,584
Increase (decrease) in advance payments by
borrowers for taxes and insurance (813) 778 882
Proceeds of notes payable to Federal Home
Loan Bank 407,250 368,350 151,750
Repayment of notes payable to Federal Home
Loan Bank (391,195) (280,600) (76,000)
Increase in securities sold under agreements
to repurchase 41,982 5,600 -
Increase in other loans payable 7,031 - -
Treasury stock purchased (19,756) (8,149) (10,201)
Sale of treasury stock for American purchase 3,486 - -
Reissuance of treasury stock for options 306 266 296
Payments of cash dividends to stockholders (1,652) (1,190) (1,088)
Cash repayment of ESOP borrowing 928 600 600
----------------------------------------------------
Net cash provided by financing activities 125,522 116,513 69,823
----------------------------------------------------
Increase (decrease) in cash and cash equivalents 14,824 (6,422) 1,702
Cash and cash equivalents at beginning of year 28,865 35,287 33,585
----------------------------------------------------
Cash and cash equivalents at end of year $ 43,689 $ 28,865 $ 35,287
----------------------------------------------------
----------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 74,536 $ 52,111 $ 49,975
Income taxes 8,370 9,248 10,132
Non-cash transactions:
Mortgage loans transferred to loans held for sale 2,573 13,040 -
Loans transferred to foreclosed properties 1,614 6,680 6,297
Mortgage loans converted into mortgage-backed securities 96,772 - 15,096
Mortgage-related securities transferred to
available for sale (at amortized cost) 90,376 - 40,887
Investment securities transferred to available
for sale (at amortized cost) - - 3,969
American Equity BanCorp purchase:
Investment securities available for sale (2,390) - -
Mortgage-related securities available for sale 954 - -
Loans held for sale (5,969) - -
Loans receivable (85,244) - -
Office properties and equipment (1,314) - -
Federal Home Loan Bank stock (1,346) - -
Other assets (4,022) - -
Deposits 64,803 - -
Notes payable to Federal Home Loan Bank 26,314 - -
Other liabilities 1,038 - -
Treasury stock issued 7,698 - -
Other stockholders' equity 1,273 - -
See accompanying Notes to Consolidated Financial Statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BUSINESS Anchor BanCorp Wisconsin Inc. (the "Corporation") is a Wisconsin
corporation incorporated in March, 1992 for the purpose of becoming a savings
and loan holding company for AnchorBank, S.S.B. (the "Bank"), a wholly-owned
subsidiary. On July 15, 1992, the Bank converted from a mutual to a stock
form of ownership and the Corporation completed its initial public offering.
The Bank provides a full range of financial services to individual customers
through its branch locations in Wisconsin. The Bank is subject to competition
from other financial institutions and other financial service providers. The
Corporation and its subsidiary also are subject to the regulations of certain
federal and state agencies and undergo periodic examinations by those
regulatory authorities. The Corporation created a non-banking subsidiary in
fiscal 1996, Investment Directions, Inc., which has invested in a limited
partnership located in Austin, Texas.
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts and operations of the Corporation, the Bank and the
Bank's subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated. Investments in joint ventures
and other less than 50% owned partnerships, which are not material, are
accounted for on the equity method. Partnerships over 50% ownership are
consolidated, with significant intercompany accounts eliminated.
The average number of shares outstanding for 1995 and 1994 has been adjusted to
reflect the five-for-four stock split distributed in October, 1995. Cash
dividends per share were also restated.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses, the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans, as well as the valuation of intangible assets,
investments, mortgage-related securities and mortgage servicing rights. In
connection with the determination of the allowance for loan losses and real
estate owned, management obtains independent appraisals for significant
properties.
CASH AND CASH EQUIVALENTS The Corporation considers federal funds sold and
interest-bearing deposits that have original maturities of three months or less
to be cash equivalents.
INVESTMENT AND MORTGAGE-RELATED SECURITIES HELD TO MATURITY AND AVAILABLE FOR
SALE Securities are classified as held to maturity when the Corporation has the
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. 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 stockholders' equity. At March 31, 1996 and
1995, the balances of stockholders' equity were decreased by $82,000 and
$458,000, net of $55,000 and $305,000 in deferred income taxes. See Notes 3 and
4. No securities are held by the Corporation in a trading account.
In October, 1995, the Financial Accounting Standards Board ("FASB") approved a
modification of Statement of Financial Accounting Standards ("SFAS") No. 115,
wherein from November 15, 1995, through December 31, 1995, the Corporation had
the opportunity to reconsider its classifications of investment and
mortgage-related securities as held to maturity, trading, or available for
sale. Accordingly, on December 31, 1995, the Corporation chose to reclassify
certain mortgage-backed securities from held to maturity to available for sale.
At the date of transfer, the amortized cost of the mortgage-backed securities
was $90,376,000. The unrealized gain on those securities was $684,000, which is
included in stockholders' equity net of income tax effect of $274,000.
The amortized cost of securities classified as held to maturity or available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity, or in the case of mortgage-related securities, over the estimated life
of the security. Such amortization is included in interest income from the
related security.
Realized gains and losses, and the decline in value judged to be other than
temporary, are included in "Net gain (loss) on sale of securities" in the
consolidated statements of income. The cost of securities sold is based on the
specific identification method.
LOANS HELD FOR SALE Loans held for sale generally consist of current
production of certain fixed-rate mortgage loans and certain adjustable-rate
mortgage loans which are carried at the lower of aggregate cost or market
value. Fees received from the borrower and direct costs to originate are
deferred and recorded as an adjustment of the sales price. Any premium or
discount recorded at the time of 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 an estimated normal servicing fee) is
recognized in loan servicing income over the
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
estimated lives of the related loans using the level yield method adjusted
periodically for prepayments. The servicing fee on loans sold to and serviced
for others is recognized when the related loan payments are received.
INTEREST ON LOANS Interest on loans is recorded using the accrual method.
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of principal and interest is deemed to be insufficient
to warrant further accrual. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from income. Interest
received on non-accrual loans generally is either applied against principal or
reported as interest income, according to management's judgment as to the
collectibility of principal. Generally, loans are restored to accrual status
when the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt. Allowances of $868,000 and $331,000 were established at March 31, 1996
and 1995, respectively, for interest on non-accrual status loans.
LOAN FEES AND DISCOUNTS Loan origination and commitment fees and certain
direct loan origination costs are deferred and the net amount is amortized as
an adjustment to the related loans' yield. The Corporation is amortizing these
amounts, as well as discounts on purchased loans, using the level yield method,
adjusted for prepayments, over the contractual life of the related loans.
FORECLOSED PROPERTIES AND REPOSSESSED ASSETS Real estate (which was acquired
by foreclosure or by deed in lieu of foreclosure) and other repossessed assets
are carried at the lower of cost or fair value, less estimated selling
expenses. Costs relating to the development and improvement of the property
are capitalized; holding period costs are charged to expense. Gains on sales
are recognized based on the carrying value when the earnings process is
substantially complete. Losses on sales not previously provided for are
recognized upon closing of the sale.
ALLOWANCE FOR LOSSES Allowances for losses on loans, lease receivables,
foreclosed properties and repossessed assets are established when a loss is
probable and can be reasonably estimated. Management's evaluation of loss
considers various factors including, but not limited to, general economic
conditions, the level of troubled assets, expected future cash flows, loan
portfolio composition, prior loss experience, estimated sales price of the
collateral and holding and selling costs. The evaluation is inherently
subjective as it requires material estimates including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
susceptible to significant change. Management believes that the allowances for
losses on loans, lease receivables, foreclosed properties and re-possessed
assets are adequate. While management uses available information to recognize
losses, future additions to the allowances may be necessary based on changes in
economic conditions.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE Real estate held for development and
sale includes investments in partnerships which purchased land and other
property and also an investment in multi-family residential property. These
investments are carried at the lower of initial cost plus capitalized
development period costs and interest, less accumulated depreciation, or
estimated fair value.
OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are recorded at
cost and include expenditures for new facilities and items that substantially
increase the useful lives of existing buildings and equipment. Expenditures for
normal repairs and maintenance are charged to operations as incurred. When
properties are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recorded in income.
DEPRECIATION AND AMORTIZATION The cost of office properties and equipment is
being depreciated principally by the straight-line method over the estimated
useful lives of the assets. The cost of leasehold improvements is being
amortized on the straight-line method over the lessor of the term of the
respective lease or estimated economic life.
POSTRETIREMENT EMPLOYEE BENEFIT A limited number of former officers and
directors are provided certain post-retirement health care insurance benefits.
The Corporation has established an accrual representing the present value of
these benefits. The amount of this accrual is reported in "Other liabilities"
on the consolidated balance sheet and is insignificant to current operations
and cumulative earnings.
INCOME TAXES The Corporation provides for income taxes using the liability
method. Under this method, financial statement provisions are made in the
income tax expense accounts for deferred taxes applicable to income and expense
items reported in different periods than for income tax purposes. This policy
also requires that deferred tax assets and liabilities be adjusted regularly to
amounts estimated to be receivable or payable based on current tax law and the
Corporation's tax status. Consequently, tax expense in future years may be
impacted by changes in tax rates and return limitations.
EARNINGS PER SHARE Primary and fully diluted earnings per share are based on
the weighted average number of common shares outstanding during each period and
common equivalent shares (using the treasury stock method) outstanding at the
end of each period. The Corporation's common equivalent shares consist entirely
of stock options. The resulting number of shares used in
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
computing primary earnings per share for the years ended March 31, 1996, 1995
and 1994 is 5,341,652, 5,387,000 and 5,806,000, respectively. The resulting
number of shares used in computing fully diluted earnings per share for the
years ended March 31, 1996, 1995 and 1994 is 5,369,046, 5,412,000 and 5,815,000,
respectively.
PENDING ACCOUNTING CHANGE SFAS No. 122, "Accounting For Mortgage Servicing
Rights, an Amendment of SFAS No. 65," is being adopted prospectively effective
April 1, 1996. SFAS No. 122 requires the cost of originating mortgage servicing
rights to be capitalized separately from the cost of originating a loan, when a
definitive plan to sell or securitize the loan and retain the mortgage servicing
rights exists. Once recorded, mortgage servicing rights are amortized in
proportion to expected net servicing income. The effect of this adoption will
depend on the volume of loan sales which is affected by future interest rate
levels and other factors.
RECLASSIFICATIONS Certain 1995 and 1994 accounts have been reclassified to
conform to the 1996 presentations.
NOTE 2 - BUSINESS COMBINATIONS
- -------------------------------------------------------------------------------
On June 30, 1995, the Corporation acquired American Equity BanCorp ("American")
of Stevens Point, Wisconsin. In the acquisition, 474,753 shares of the
Corporation's common stock were issued to American stockholders based upon an
exchange ratio of .976 shares of the Corporation's common stock for each
outstanding share of American's common stock. Upon closing, American's
wholly-owned subsidiary, American Equity Bank, F.S.B. ("American Bank") was
merged into the Bank as a branch office. American was merged into the
Corporation. The transaction was accounted for as a purchase. The assets and
liabilities of American were recorded at their estimated fair value at the date
of acquisition; results of operations were included in the Consolidated
Statement of Income since July 1, 1995. Prior to purchase accounting entries,
American had total assets, deposits and stockholders' equity of $102.4 million,
$65.3 million and $9.4 million, respectively.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and fair values of investment securities are as
follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
AT MARCH 31, 1996:
Available for Sale:
U.S. Government and federal agency obligations $20,498 $ 70 $(235) $20,333
Mutual funds 9,059 -- (1) 9,058
Corporate stock and other 791 59 -- 850
--------------------------------------------------
$30,348 $129 $(236) $30,241
--------------------------------------------------
--------------------------------------------------
Held to Maturity:
U.S. Government and federal agency obligations $ 2,500 $ 5 $ (2) $ 2,503
Certificates of deposit 96 -- -- 96
--------------------------------------------------
$ 2,596 $ 5 $ (2) $ 2,599
--------------------------------------------------
--------------------------------------------------
AT MARCH 31, 1995:
Available for Sale:
U.S. Government and federal agency obligations $13,733 $ 59 $(445) $13,347
Mutual funds 10,185 -- -- 10,185
--------------------------------------------------
$23,918 $ 59 $(445) $23,532
--------------------------------------------------
--------------------------------------------------
Held to Maturity:
Certificates of deposit $ 100 $ -- $ -- $ 100
--------------------------------------------------
--------------------------------------------------
Proceeds from sales of investment securities available for sale during the
years ended March 31, 1996, 1995 and 1994 were $50,562,000, $18,104,000 and
$18,895,000, respectively. Gross gains of $31,000, zero and $48,000 were
realized on those sales in the respective periods. Gross losses of $28,000,
$44,000 and $95,000 were also realized in the respective periods.
The amortized cost and fair value of investment securities by contractual
maturity at March 31, 1996, are shown below (in thousands). Actual
maturities may differ from contractual maturities because issuers have the
right to call or prepay obligations with or without call or prepayment
penalties.
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------
Due in one year or less $ 9,059 $ 9,058 $ 96 $ 96
Due after one year through five years 20,598 20,433 2,500 2,503
Corporate stock 691 750 -- --
--------------------------------------
$30,348 $30,241 $2,596 $2,599
--------------------------------------
--------------------------------------
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - MORTGAGE-RELATED SECURITIES
- -------------------------------------------------------------------------------
The amortized cost and fair values of mortgage-related securities are as
follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
AT MARCH 31, 1996:
Available for Sale:
Mortgage-derivative securities $ 7,362 $ -- $ (107) $ 7,255
Mortgage-backed securities 104,013 234 (1,234) 103,013
--------------------------------------------------
- - $111,375 $234 $(1,341) $110,268
--------------------------------------------------
--------------------------------------------------
Held to Maturity:
Mortgage-derivative securities $ 27,738 $ 20 $ (578) $ 27,180
Mortgage-backed securities $ 82,992 458 (773) $ 82,677
--------------------------------------------------
$110,730 $478 $(1,351) $109,857
--------------------------------------------------
--------------------------------------------------
AT MARCH 31, 1995:
Available for Sale:
Mortgage-derivative securities $ 11,758 $ 1 $ (206) $ 11,553
Mortgage-backed securities 25,504 19 (505) 25,018
--------------------------------------------------
$ 37,262 $ 20 $ (711) $ 36,571
--------------------------------------------------
--------------------------------------------------
Held to Maturity:
Mortgage-derivative securities $ 25,490 $ -- $ (932) $ 24,558
Mortgage-backed securities 98,340 45 (2,569) 95,816
---------------------------------------------------
$123,830 $ 45 $(3,501) $120,374
---------------------------------------------------
---------------------------------------------------
Proceeds from sales of mortgage-related securities available for sale during the
years ended March 31, 1996, 1995 and 1994 were $9,107,000, $890,000 and
$31,840,000, respectively. Gross gains of $248,000, $1,000 and $166,000 were
realized on those sales in the respective periods. Gross losses of $4,000,
$4,000 and $20,000 were also realized in the respective periods.
Mortgage-related securities are backed by governmental agencies, including the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association and the Government National Mortgage Association. Mortgage-
derivative securities are made up of real estate mortgage investment conduits
with estimated average lives of five years or less.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE
- -------------------------------------------------------------------------------
Loans receivable held for investment consist of the following (in thousands):
MARCH 31,
--------------------------
1996 1995
--------------------------
First mortgage loans:
Single-family residential $ 745,170 $ 716,212
Multi-family residential 162,432 141,401
Commercial real estate 139,918 123,438
Construction 77,187 66,519
Land 21,077 13,644
--------------------------
1,145,784 1,061,214
Second mortgage loans 140,302 111,725
Education loans 88,674 69,264
Commercial business loans and leases 30,715 21,739
Credit cards and other consumer loans 28,481 18,997
--------------------------
1,433,956 1,282,939
Less:
Undisbursed loan proceeds 46,493 25,980
Allowance for loan losses 22,807 22,429
Unearned loan fees 2,453 2,000
Discount on purchased loans 1,005 1,151
Unearned interest 118 272
--------------------------
72,876 51,832
--------------------------
$1,361,080 $1,231,107
--------------------------
--------------------------
Loans serviced for investors approximated $874,081,000, $732,414,000 and
$693,749,000 at March 31, 1996, 1995 and 1994, respectively. These loans are
not reflected in the consolidated financial statements.
A summary of the activity in the allowance for loan losses follows (in
thousands):
YEAR ENDED MARCH 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Balance at beginning of year $ 22,429 $ 22,119 $ 18,437
Acquired bank's allowance 550 -- --
Provisions 475 1,580 4,348
Charge-offs (998) (1,805) (3,622)
Recoveries 351 535 2,956
--------------------------------------
Balance at end of year $ 22,807 $ 22,429 $ 22,119
--------------------------------------
--------------------------------------
A substantial portion of the Bank's loans are collateralized by real estate in
and around Dane County, Wisconsin. Accordingly, the ultimate collectibility of
a substantial portion of the loan portfolio is susceptible to changes in market
conditions in that area.
Impaired loans as defined under SFAS No. 114 are immaterial and no separate
disclosure was deemed necessary.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
- -------------------------------------------------------------------------------
Foreclosed properties, repossessed assets and properties subject to redemption
are summarized as follows (in thousands):
MARCH 31,
--------------
1996 1995
---------------
Foreclosed properties and repossessed assets $ 786 $ 483
Properties subject to redemption 6,008 7,420
---------------
6,794 7,903
Less allowance for losses 717 787
---------------
$6,077 $7,116
---------------
---------------
The summary of the activity in the allowance for losses follows (in thousands):
YEAR ENDED MARCH 31,
------------------------------
1996 1995 1994
------------------------------
Balance at beginning of year $ 787 $ 343 $ 130
Provision 200 950 1,225
Charge-offs (270) (506) (1,012)
------------------------------
Balance at end of year $ 717 $ 787 $ 343
------------------------------
------------------------------
Provision for losses on foreclosed properties and repossessed assets are
included in "Net cost of operations of foreclosure properties" in the
consolidated statements of income.
NOTE 7 - OFFICE PROPERTIES AND EQUIPMENT
- --------------------------------------------------------------------------------
Office properties and equipment are summarized as follows (in thousands):
MARCH 31,
-----------------
1996 1995
-----------------
Land and land improvements $ 3,951 $ 3,395
Office buildings 15,623 13,931
Furniture and equipment 14,180 12,136
Leasehold improvements 2,084 2,106
Parking ramp 1,573 1,573
Property for future expansion 126 317
-----------------
37,537 33,458
Less allowance for depreciation and amortization 18,631 16,252
-----------------
$18,906 $17,206
-----------------
-----------------
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEPOSITS
- -------------------------------------------------------------------------------
Deposits are summarized as follows (dollars in thousands):
MARCH 31,
----------------------------------------
1996 1995
----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------------------------------------
Negotiable order of withdrawal
("NOW") accounts:
Non-interest-bearing $ 71,213 --% $ 46,529 --%
Interest-bearing 53,852 1.50 52,209 1.50
Variable rate 14,721 1.99 12,661 1.79
--------- ---------
139,786 0.79 111,399 0.91
Variable rate insured money
market accounts 143,189 4.15 64,635 2.68
Passbook accounts 106,092 2.30 105,001 2.28
Certificates of deposit:
3.00% to 4.99% 122,367 4.79 368,419 4.52
5.00% to 6.99% 705,945 5.81 349,201 5.57
7.00% to 8.99% 17,499 7.18 93,465 7.27
--------- ----------
845,811 5.69 811,085 5.29
--------- ---------
1,234,878 4.67% 1,092,120 4.40%
---- ----
---- ----
Accrued interest on deposits 6,080 6,090
---------- ----------
$1,240,958 $1,098,210
---------- ----------
---------- ----------
A summary of annual maturities of certificates of deposit follows (in
thousands):
MATURES DURING YEAR ENDED MARCH 31, AMOUNT
- --------------------------------------------------------------------------------
1997 $576,757
1998 206,533
1999 33,311
Thereafter 29,210
--------
$845,811
--------
--------
At March 31, 1996 and 1995, certificates of deposit with balances greater than
or equal to $100,000 amounted to $68,525,000 and $40,043,000, respectively.
These deposits had scheduled maturity dates as follows (in thousands):
MARCH 31,
-----------------------
1996 1995
-----------------------
Three months or less $11,588 $12,293
Over three through six months 7,324 6,316
Over six through twelve months 38,547 13,163
Over twelve months 11,066 8,271
-----------------------
$68,525 $40,043
-----------------------
-----------------------
Interest expense on deposits consists of the following (in thousands):
YEAR ENDED MARCH 31,
--------------------------------
1996 1995 1994
--------------------------------
NOW accounts $ 1,126 $ 1,110 $ 1,364
Variable rate insured money market accounts 3,451 1,952 2,352
Passbook accounts 2,498 2,674 3,083
Certificates of deposit 48,275 35,202 34,616
--------------------------------
$55,350 $40,938 $41,415
--------------------------------
--------------------------------
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - BORROWINGS
- -------------------------------------------------------------------------------
The Bank enters into sales of securities (primarily mortgage-backed
securities) under agreements to repurchase the securities ("reverse repurchase
agreements"). These agreements are treated as financings with the obligations
to repurchase securities reflected as a liability and the dollar amount of
securities underlying the agreements remaining in the asset accounts. The
securities underlying the agreements are held by the counter-party brokers in
the Bank's account. At March 31, 1996 and 1995, liabilities recorded under
agreements to repurchase the identical securities were $47,582,000 and
$5,600,000, respectively. The reverse repurchase agreements had a
weighted-average interest rate of 5.32% and 6.72% at March 31, 1996 and 1995,
respectively, and mature within one year of the fiscal year-end. Based upon
month-end balances, securities sold under agreements to repurchase averaged
$35,352,000 and $467,000 during 1996 and 1995, respectively. The maximum
outstanding at any month-end was $72,850,000 and $5,600,000 during 1996 and
1995, respectively. The agreements were collateralized by mortgage-backed
securities available for sale with market values of $72,747,000 and $6,046,000
at March 31, 1996 and 1995, respectively.
Federal Home Loan Bank ("FHLB") advances and other loans payable consist of the
following (dollars in thousands):
MARCH 31, 1996 MARCH 31, 1995
---------------------------------------------------------
MATURES DURING WEIGHTED WEIGHTED
YEAR ENDED MARCH 31, AMOUNT RATE AMOUNT RATE
---------------------------------------------------------
FHLB advances: 1996 $ -- --% $132,750 5.67%
1997 177,500 5.71 99,000 5.94
1998 109,370 5.75 25,250 5.41
1999 29,950 5.34 17,500 5.14
2000 49 5.78 -- --
Other loans payable 1997 5,998 10.08 -- --
Subsidiary mortgage 2005 1,033 9.13 -- --
------- --------
$323,900 5.78% $274,500 5.71%
----------------------------------
----------------------------------
The Bank is required to maintain unencumbered first mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the FHLB as collateral. In addition, these notes are collateralized by FHLB
stock of $16,019,000 at March 31, 1996.
Other loans payable are payable in quarterly installments ranging from $500,000
to $1,500,000. Interest at the lender's prime rate is payable monthly. Under
the terms of the indenture relating to the loan, the ability of the Corporation
to incur additional indebtedness is limited under certain circumstances. The
indenture does not limit the ability of the Bank to incur indebtedness. The
subsidiary mortgage is payable in principal and interest payments beginning in
June, 1996 at an initial interest rate of 9.125% which is fixed for three years.
The final maturity date is October, 2005.
NOTE 10 - STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The Board of Directors declared a five-for-four stock split of the Corporation's
common stock to stockholders of record on October 13, 1995, payable on October
27, 1995. This stock split was effected in the form of a 25% stock dividend by
the distribution of shares. The par value of the common stock remained at
$0.10.
The Board of Directors of the Corporation is authorized to issue preferred stock
in series and to establish the voting powers, other special rights of the shares
of each such series and the qualifications and restrictions thereof. Preferred
stock may rank prior to the common stock as to dividend rights, liquidation
preferences or both, and may have full or limited voting rights. Under
Wisconsin state law, preferred stockholders would be entitled to vote as a
separate class or series in certain circumstances, including any amendment which
would adversely change the specific terms of such series of stock or which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. No preferred stock has been issued.
Under federal law and regulations, the Bank is required to meet certain
tangible, core and risk-based capital requirements. Tangible capital generally
consists of stockholders' equity minus certain intangible assets. Core capital
generally consists of tangible capital plus qualifying intangible assets. The
risk-based capital requirements address credit risk related to both recorded and
off-balance sheet commitments and obligations. As a state-chartered savings
institution, the Bank is also subject to the minimum regulatory capital
requirements of the State of Wisconsin.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
The following table summarizes the Bank's capital ratios and the ratios required
by The Office of Thrift Supervision ("OTS") and the State of Wisconsin at March
31, 1996 (dollars in thousands):
STATE OF
TANGIBLE CORE RISK-BASED WISCONSIN
CAPITAL CAPITAL CAPITAL CAPITAL
-----------------------------------------------------------
Bank's stockholder's equity $ 107,822 $ 107,822 $ 107,822 $ 107,822
Adjustment for SFAS No. 115 capital component 763 763 763 --
Goodwill and other (2,598) (2,598) (2,757) --
Allowable unallocated general loss allowance -- -- 13,345 21,546
-----------------------------------------------------------
Total regulatory capital 105,987 105,987 119,173 129,368
Required amount 26,070 52,141 84,758 104,392
-----------------------------------------------------------
Excess $ 79,917 $ 53,846 $ 34,415 $ 24,976
-----------------------------------------------------------
Regulatory capital ratio 6.10% 6.10% 11.25% 7.44%
Required ratio 1.50 3.00 8.00 6.00
-----------------------------------------------------------
Excess 4.60% 3.10% 3.25% 1.44%
-----------------------------------------------------------
-----------------------------------------------------------
The OTS has adopted a final rule, which was effective in 1994, disallowing any
new core deposit intangibles, acquired after the rule's effective date, from
counting as regulatory capital. Core deposit intangibles acquired prior to the
effective date have been grandfathered for purposes of this rule. The OTS also
has proposed to increase the minimum required core capital ratio from the
current 3.00% to a range of 4.00% to 5.00% for all but the most healthy
financial institutions. The OTS has added an interest rate risk calculation
such that an institution with a measured interest rate risk exposure, as
defined, greater than specified levels must deduct an interest rate risk
component when calculating the OTS risk-based capital. Final implementation of
this rule was pending at March 31, 1996. Management does not believe these
rules will significantly impact the Bank's ability to meet the capital
requirements.
Under the terms of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the Bank is further subject to the prompt corrective action
("PCA") provisions of FDICIA. Under FDICIA, thrift institutions are assigned,
based upon regulatory capital ratios and other subjective supervisory criteria,
to one of five PCA categories, ranging from "well capitalized" to "critically
undercapitalized." Institutions assigned to the three lowest categories are
subject to PCA sanctions by the OTS. PCA sanctions include, among other items,
additional restrictions on dividends and capital distributions. As of March 31,
1996, management believes that the Bank had capital in excess of the
requirements to be a "well capitalized" institution under the PCA provisions of
FDICIA.
Applicable rules and regulations of the OTS impose limitations on dividends paid
by the Bank. Within those limitations, certain "safe harbor" dividends are
permitted, subject to providing the OTS at least 30 days' advance notice. The
safe harbor amount is based upon an institution's regulatory capital level.
Thrift institutions which have capital in excess of all capital requirements
before and after the proposed dividend, are permitted to make capital
distributions during any calendar year up to the greater of (i) 100% of net
income to date during the calendar year, plus one-half of the surplus over such
institution's capital requirements at the beginning of the calendar year, or
(ii) 75% of net income over the most recent four-quarter period. Additional
restrictions would apply to an institution which does not meet its capital
requirement before or after a proposed dividend. In addition, as a result of
the PCA provisions of FDICIA, the OTS has indicated that it intends to review
existing regulations on dividends to determine whether amendments are necessary
based on such provisions. In the interim, the OTS has indicated that it intends
to determine the permissibility of dividends consistent with the PCA provisions
of FDICIA.
Unlike the Bank, the Corporation is not subject to these regulatory restrictions
on the payment of dividends to its stockholders. However, the source of its
future corporate dividends may depend upon dividends from the Bank.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
The Corporation maintains a defined contribution plan that covers substantially
all employees with more than one year of service and who are at least 21 years
of age. Participating employees may contribute up to 18% (8% before tax and 10%
after tax) of their compensation. The Corporation must match the amounts
contributed by each participating employee up to 2% of the employee's
compensation and 25% of each employee's contributions up to the next 4% of
compensation. The Corporation may also contribute additional amounts at its
discretion. The Corporation's contribution was $307,000, $272,000 and $249,000
for the years ended March 31, 1996, 1995 and 1994, respectively.
In conjunction with the Bank's conversion, the Corporation formed an Employee
Stock Ownership Plan ("ESOP"). The ESOP covers substantially all employees with
more than one year of employment and who are at least 21 years of age. The ESOP
borrowed $3,000,000 from the Corporation to purchase 375,000 common shares
issued in the conversion. The Bank will make scheduled cash contributions to
the ESOP sufficient to service the amount borrowed. Shares are released based
on the ratio of the current year principal and interest paid on the ESOP loan
to the total principal and interest estimated to be due for the remaining
life of the loan, applied against the remaining unreleased shares. Any
discretionary contributions to the ESOP and the shares calculated to be
released from the suspense account are allocated among participants on the
basis of compensation. Forfeitures are reallocated among remaining
participating employees. The unpaid balance of the ESOP loan is reflected as
a reduction of stockholders' equity in the Corporation's consolidated balance
sheets. During fiscal 1996, as part of the acquisition of American, the
Corporation acquired the existing ESOP of American, originally established by
American in 1992. The plan's 36,791 shares and $656,426 in debt were merged
into the existing ESOP. The ESOP plan expense for the fiscal years 1996, 1995
and 1994 was $1,074,000, $746,000 and $740,000, which was the amount of
principal ($928,000, $600,000 and $600,000, respectively) and interest
($146,000, $146,000 and $140,000, respectively) due on the ESOP
debt as of March 31, 1996, 1995 and 1994, respectively. The dividends on ESOP
shares were used to purchase additional shares to be allocated under the
plan. The number of shares allocated to participants is determined based on
the annual contribution plus any shares purchased from dividends received
during the year.
The activity in the number of ESOP shares follows (1995 and 1994 shares have
been restated for the stock split):
YEAR ENDED MARCH 31,
----------------------------
1996 1995 1994
----------------------------
Balance at beginning of year 377,475 379,238 376,161
Additional shares purchased 36,791 2,225 3,077
Shares distributed for terminations -- (276) --
Sale of shares for cash distributions (4,625) (3,712) --
----------------------------
Balance at end of year 409,641 377,475 379,238
Allocated shares included above 329,620 236,752 162,092
----------------------------
Unreleased shares 80,021 140,723 217,146
----------------------------
----------------------------
The Corporation also formed four Management Recognition Plans ("MRPs") which
acquired a total of 4% of the shares of common stock in the conversion. The
Bank contributed $2,000,000 to the MRPs to enable the MRP trustee to acquire a
total of 250,000 shares of common stock in the conversion. Of these shares,
1,200 shares and 1,625 shares were awarded during the years ended March 31, 1996
and 1994, respectively, to employees in management positions in order to provide
them with a proprietary interest in the Corporation in a manner designed to
encourage such employees to remain with the Corporation. There were no
additional grants during the year ended March 31, 1995. The $2,000,000
contributed to the MRPs is being amortized to compensation expense as the Bank's
employees become vested in the awarded shares, which is generally over five
years. During fiscal 1996, as part of the acquisition of American, the
Corporation acquired the existing MRP of American, originally established by
American in 1992. The plan was merged into one of the existing MRPs. The amount
amortized to expense was $287,000, $246,000 and $238,000 for the years ended
March 31, 1996, 1995 and 1994, respectively. Shares becoming vested during
the years ended March 31, 1996, 1995 and 1994 and distributed to the
employees totalled 30,041, 30,041 and 29,500, respectively. The remaining
unamortized cost of the MRPs, which is comparable to deferred compensation,
is reflected as a reduction of stockholders' equity.
The Corporation also has stock option plans under which shares of common stock
are reserved for the grant of both incentive and non-incentive stock options to
directors, officers and employees. The Corporation follows the intrinsic value
method of accounting. Therefore, because the plan provides that option prices
will not be less than the fair market value of the stock at the grant date, no
compensation expense is recorded as a result of these options. The date on
which the options are first exercisable is determined by a committee of the
Board of Directors of the Corporation. The options expire no later than ten
years from the grant date.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLANS (CONT'D)
- --------------------------------------------------------------------------------
A summary of stock options activity follows:
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------------------------------
Balance at April 1, 1993 363,125 $ 8.00
Granted 26,063 17.60
Exercised (36,813) 8.00
Cancelled --
--------------------------------
Balance at March 31, 1994 352,375 8.00 - $17.60
Granted 64,688 21.60 - 22.10
Exercised (33,313) 8.00
Cancelled --
--------------------------------
Balance at March 31, 1995 383,750 8.00 - 22.10
Granted 210,270 8.20 - 26.10
Exercised (36,851) 8.00 - 14.76
Cancelled (3,750) 8.00 - 26.10
--------------------------------
Balance at March 31, 1996 553,419 $ 8.00 - $26.10
--------------------------------
--------------------------------
During the years ended March 31, 1996 and 1995, 260,329 shares and 94,781 shares
were exercisable, respectively. At March 31, 1996, options for 479,250 shares
were available for future grants.
During the year ended March 31, 1994, the Corporation adopted two deferred
compensation plans to benefit certain executives of the Corporation and the
Bank. The first plan provides for contributions by both the participant and the
Corporation equal to the amounts in excess of limitations imposed by the
Internal Revenue Code amendment of 1986. The expense associated with this plan
for fiscal 1996, 1995 and 1994 was $134,000, $184,000 and $108,000,
respectively. The second plan provides for contributions by the Corporation to
supplement the participant's retirement. The expense associated with this plan
for fiscal 1996, 1995 and 1994 was $534,000, $133,000 and $100,000,
respectively.
NOTE 12 - INCOME TAXES
- --------------------------------------------------------------------------------
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns.
The Bank qualifies under provisions of the Internal Revenue Code which permit as
a deduction from taxable income allowable bad debt deductions which, in prior
years, significantly exceeded actual losses and the financial statement loan
loss provisions. Amounts accumulated in excess of the base year level, as
defined by the Internal Revenue Service, are treated as temporary timing
differences. The amount of the base year reserves is considered to meet the
indefinite reversal criteria of Accounting Principle Board Opinion No. 23,
"Accounting for Income Taxes -- Special Areas," and, accordingly, is not
subject to deferred taxes. The Bank's base year tax bad debt reserves are
approximately $28,245,000. Income taxes of approximately $11,300,000 would be
imposed if the Bank were to use these reserves for any purpose other than to
absorb bad debt losses.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES (CONT'D)
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes consists of the following (in
thousands):
YEAR ENDED MARCH 31,
----------------------------------
1996 1995 1994
----------------------------------
Current:
Federal $ 6,629 $ 8,869 $ 8,751
State 1,038 1,458 1,419
----------------------------------
7,667 10,327 10,170
Deferred:
Federal 276 (1,076) (1,635)
State 16 (187) (270)
----------------------------------
292 (1,263) (1,905)
----------------------------------
$ 7,959 $ 9,064 $ 8,265
----------------------------------
----------------------------------
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
YEAR ENDED MARCH 31,
----------------------------------
1996 1995 1994
----------------------------------
Income before income taxes $ 22,466 $ 23,481 $ 21,737
----------------------------------
Income tax expense at federal statutory
rate of 35% $ 7,863 $ 8,218 $ 7,608
State income taxes, net of federal income
tax benefits 725 791 756
Reduction in valuation allowance (600) -- --
Other (29) 55 (99)
----------------------------------
Income tax provision $ 7,959 $ 9,064 $ 8,265
----------------------------------
----------------------------------
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The significant components of the Corporation's deferred tax assets
(liabilities) are as follows (in thousands):
MARCH 31,
-----------------------
1996 1995
-----------------------
Deferred tax assets:
Allowances for losses $ 8,313 $ 8,328
Other 2,185 2,300
-----------------------
Total deferred tax assets 10,498 10,628
Valuation allowance (638) (1,238)
-----------------------
Adjusted deferred tax assets 9,860 9,390
Deferred tax liabilities:
Other (1,233) (1,042)
-----------------------
Total deferred tax assets $ 8,627 $ 8,348
-----------------------
-----------------------
A valuation allowance has been recognized to offset deferred tax assets related
to state net operating loss carryforwards of subsidiaries and other timing
differences. When the deferred benefits are realized, the reduction of the
valuation allowance will be used to reduce current tax expense for that period.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
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 include commitments to extend credit, loans sold
with recourse against the Corporation and financial guarantees which involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract amounts of
those instruments reflect the extent of involvement and exposure to credit loss
the Corporation has in particular classes of financial 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 are as
follows (in thousands):
MARCH 31,
-----------------------
1996 1995
-----------------------
Commitments to extend credit:
Fixed rate (6.70% to 8.40% at March 31, 1996) $ 22,100 $ 2,900
Adjustable rate 13,400 14,100
Unused lines of credit:
Home equity 19,500 11,700
Credit cards 14,000 6,000
Commercial 6,600 8,500
Letters of credit 11,300 7,100
Loans sold with recourse 3,800 4,500
Financial guarantees written 2,570 8,250
Commitments to extend credit and unused lines of credit are agreements to
lend to a customer as long as there is no violation of any condition
established in the contract. Letters of credit commit the Corporation to
make payments on behalf of customers when certain specified future events
occur. Commitments and letters of credit generally have fixed expiration
dates or other termination clauses and may require payment of a fee. As some
such commitments 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. With the exception of credit card lines of credit, the Corporation
generally extends credit only on a secured basis. Collateral obtained
varies, but consists primarily of single-family residences and
income-producing commercial properties. Fixed-rate loan commitments expose
the Corporation to a certain amount of interest rate risk if market rates of
interest substantially increase during the commitment period. Similar risks
exist relative to loans classified as held for sale, which totalled
$13,968,000 and $2,964,000 at March 31, 1996 and 1995, respectively. This
exposure, however, is mitigated by the hedge of firm commitments to sell the
majority of the fixed-rate loans. Commitments outstanding to sell mortgage
loans within 60 days at March 31, 1996 and 1995 amounted to $20,170,000 and
$3,000,000, respectively.
Loans sold to investors with recourse to the Corporation met the underwriting
standards of the investor and the Corporation at the time of origination. In
the event of default by the borrower, the investor may resell the loans to the
Corporation at par value. As the Corporation expects relatively few such loans
to become delinquent, the total amount of loans sold with recourse does not
necessarily represent future cash requirements. Collateral obtained on such
loans consists primarily of single-family residences.
Financial guarantees represent agreements whereby, for an annual fee, certain
of the Bank's mortgage-backed securities are pledged as collateral for
industrial development revenue bonds, which were issued by municipalities to
finance commercial or multi-family real estate owned by third parties. In
the event the third party borrowers default on principal or interest payments
on the bonds, the Bank is required to either pay the amount in default or
acquire the then outstanding bonds. The Bank may foreclose on the underlying
real estate to recover amounts in default. Management has considered these
agreements in its review of the adequacy of the allowances for losses. At
March 31, 1996, certain mortgage-backed securities with carrying values of
approximately $3.8 million were held by the trustees as collateral for these
bonds totalling $2.6 million. The bond agreements have expiration dates of
September, 1996.
Except for the above-noted commitments to originate and/or sell mortgage loans
in the normal course of business, the Corporation and the Bank have not
undertaken the use of off-balance sheet derivative financial instruments for any
purpose.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Disclosure of fair value information about financial instruments, for which
it is practicable to estimate that value, is required, whether or not
recognized in the balance sheets. In cases where quoted market prices are
not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instruments. Certain
financial instruments and all non-financial instruments are excluded from
the disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not necessarily represent the underlying value of the
Corporation.
The Corporation does not routinely measure the market value of financial
instruments because such measurements represent point-in-time estimates of
value. It is generally not the intent of the Corporation to liquidate and
therefore realize the difference between market value and carrying value and
even if it were, there is no assurance that the estimated market values could be
realized. Thus, the information presented is not particularly relevant to
predicting the Corporation's future earnings or cash flows.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST: The carrying amounts reported
in the balance sheets approximate those assets' and liabilities' fair values.
INVESTMENT AND MORTGAGE-RELATED SECURITIES: Fair values for investment and
mortgage-related securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for loans held for sale are based on outstanding sale
commitments or quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics.
The fair value of fixed-rate residential mortgage loans held for investment,
commercial real estate loans, rental property mortgage loans and consumer and
other loans and leases are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. For construction loans, fair values are based on
carrying values due to the short-term nature of the loans.
Due to the lack of practicability, the fair value of mortgage loan servicing
rights has not been determined and is not presented below.
FEDERAL HOME LOAN BANK STOCK: FHLB stock is carried at cost which is its
redeemable (fair) value since the market for this stock is limited.
DEPOSITS: The fair values disclosed for NOW accounts, passbook accounts and
variable rate insured money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
The fair values of fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies current incremental interest rates
being offered on certificates of deposit to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit.
BORROWINGS: The fair value of the Corporation's borrowings are estimated using
discounted cash flow analysis, based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS: Fair value of the Corporation's
off-balance-sheet instruments (lending commitments and unused lines of credit)
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements, the counterparties' credit
standing and discounted cash flow analyses. The fair value of these
off-balance-sheet items approximates the recorded amounts of the related fees
and is not material at March 31, 1996 and 1995.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)
- --------------------------------------------------------------------------------
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following (in thousands):
MARCH 31,
----------------------------------------------------------------
1996 1995
----------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------------------
Cash and cash equivalents $ 43,689 $ 43,689 $ 28,865 $ 28,865
Securities available for sale:
Investment securities $ 30,241 $ 30,241 $ 23,532 $ 23,532
Mortgage-related securities $ 110,268 $ 110,268 $ 36,571 $ 36,571
Securities held to maturity:
Investment securities $ 2,596 $ 2,599 $ 100 $ 100
Mortgage-related securities $ 110,730 $ 109,857 $ 123,830 $ 120,374
Loans held for sale $ 13,968 $ 14,268 $ 2,964 $ 3,263
Loans receivable:
First mortgage $ 1,096,066 $ 1,080,445 $ 1,032,047 $ 1,021,945
Consumer 257,210 243,387 199,984 185,112
Commercial business and leases 30,611 30,611 21,505 21,505
----------------------------------------------------------------
$ 1,383,887 $ 1,354,443 $ 1,253,536 $ 1,228,562
----------------------------------------------------------------
----------------------------------------------------------------
Federal Home Loan Bank stock $ 16,019 $ 16,019 $ 16,007 $ 16,007
Accrued interest receivable $ 11,550 $ 11,550 $ 9,182 $ 9,182
Deposits:
NOW accounts $ 139,786 $ 139,786 $ 111,399 $ 111,399
Variable rate insured money market accounts 143,189 143,189 64,635 64,635
Passbook accounts 106,092 106,092 105,001 105,001
Certificates of deposit 845,811 849,793 811,085 808,281
----------------------------------------------------------------
$ 1,234,878 $ 1,238,860 $ 1,092,120 $ 1,089,316
----------------------------------------------------------------
----------------------------------------------------------------
Notes payable to Federal Home Loan Bank $ 316,869 $ 315,691 $ 274,500 $ 269,545
Reverse repurchase agreements $ 47,582 $ 47,564 $ 5,600 $ 5,588
Other loans payable $ 7,031 $ 7,031 $ -- $ --
Accrued interest payable $ 7,859 $ 7,859 $ 7,417 $ 7,417
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - REGULATORY ISSUES
- --------------------------------------------------------------------------------
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") as administered by the Federal Deposit Insurance Corporation
("FDIC"). Deposit insurance premiums to both the SAIF and the Bank Insurance
Fund ("BIF") of the FDIC were identical when both funds were created in 1989,
with an eight cent differential between the premiums paid by well-capitalized
institutions and the premiums paid by under-capitalized institutions (23
cents to 31 cents per $100 of assessable deposits). Deposit insurance
premiums for the SAIF and the BIF, which insures deposits in national and
state-chartered banks, are set to facilitate each fund achieving its
designated reserve ratio. In August, 1995, the FDIC determined that the BIF
had achieved its designated reserve ratio and lowered BIF deposit insurance
premium rates for all but the riskiest institutions. Effective January 1,
1996, BIF deposit insurance premiums for well-capitalized banks were further
reduced to the statutory minimum of $2,000 per institution per year. Because
the SAIF remains significantly below its designated reserve ratio, SAIF
deposit insurance premiums were not reduced and remain at 0.23% to 0.31% of
deposits, based upon an institution's supervisory evaluations and capital
levels. The current discrepancy in deposit insurance premiums between the
BIF and the SAIF could place the Bank at a competitive disadvantage to BIF
insured institutions.
The current financial condition of the SAIF has resulted in proposed
legislation to recapitalize the SAIF through a one-time special assessment
(of approximately 80 cents to 85 cents per $100 of assessable SAIF deposits
as of March 31, 1995) and in legislation to then merge the SAIF into the BIF.
If the special assessment is enacted, a special one-time assessment of
approximately $5.5 million, net of tax effect, would be imposed on the Bank.
After the special assessment, it is expected that the SAIF would achieve its
designated reserve ratio and that SAIF premium rates would then become
comparable to BIF rates. The proposed legislation also contemplates a merger
of the SAIF into the BIF, which would require separate legislation. The
Corporation is unable to predict whether this legislation will be enacted or
the amount or applicable retroactive date of any one-time assessment or the
rates that would then apply to assessable SAIF deposits.
Legislation has also been proposed that may result in the Corporation
becoming regulated at the holding company level by the Federal Reserve Board
rather than by the OTS. Regulation by the Federal Reserve Board could
subject the Corporation to capital requirements that are not currently
applicable to the Corporation as a holding company under OTS regulation and
may result in statutory limitations on the type of business activities in
which the Corporation may engage at the holding company level, which business
activities currently are not restricted. The Corporation is unable to
predict whether such legislation will be enacted.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS (in thousands):
MARCH 31,
----------------------
1996 1995
----------------------
ASSETS
Cash and cash equivalents $ 1,865 $ 7,710
Investment in subsidiaries 110,275 95,397
Securities available for sale:
Investment securities 850 931
Mortgage-related securities 7 1,763
Investment securities held to maturity 96 100
Loans receivable, net 7,588 3,905
Real estate held for development and sale 3,958 1,724
Prepaid expenses and other assets 271 1,342
----------------------
$ 124,910 $ 112,872
----------------------
----------------------
LIABILITIES
Loans payable $ 4,998 $ --
Payable to subsidiary-recognition plan 1,306 1,534
Other liabilities 204 151
----------------------
Total liabilities 6,508 1,685
STOCKHOLDERS' EQUITY
Common stock 625 625
Additional paid-in capital 50,086 47,638
Retained earnings 101,191 88,094
Less: Treasury stock (29,298) (21,790)
Deferred compensation due employees (928) (1,200)
Common stock purchased by recognition plan (1,546) (1,534)
Unrealized losses, net of tax (728) (646)
----------------------
Total stockholders' equity 118,402 111,187
----------------------
$ 124,910 $ 112,872
----------------------
----------------------
CONDENSED STATEMENTS OF INCOME
(in thousands):
YEAR ENDED MARCH 31,
---------------------------
1996 1995 1994
---------------------------
Interest income $ 713 $ 675 $ 678
Interest expense 43 -- --
---------------------------
Net interest income 670 675 678
Equity in net income from subsidiaries 13,978 14,058 13,113
Non-interest income 527 207 146
---------------------------
15,175 14,940 13,937
Non-interest expenses 313 265 224
---------------------------
Income before income taxes 14,862 14,675 13,713
Income taxes 355 258 241
---------------------------
Net income $14,507 $14,417 $13,472
---------------------------
---------------------------
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONT'D)
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (in thousands):
YEAR ENDED MARCH 31,
-----------------------------
1996 1995 1994
-----------------------------
OPERATING ACTIVITIES
Net income $ 14,507 $ 14,417 $ 13,472
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in net income of subsidiaries (13,978) (14,058) (13,113)
Other 1,041 (1,161) 163
-----------------------------
Net cash provided (used) by operating activities 1,570 (802) 522
INVESTING ACTIVITIES
Principal collected on mortgage-backed securities 282 232 762
Purchase of securities available for sale (887) -- (7,068)
Proceeds from sales of securities available for sale 2,619 -- 8,185
Purchase of securities held to maturity -- (100) --
Net decrease (increase) in loans receivable (3,683) 170 (1,355)
Dividends from subsidiary 13,805 13,802 6,481
Purchase of real estate held for sale (1,875) (1,655) --
Purchase of subsidiary stock (2,500) -- --
-----------------------------
Net cash provided in investing activities 7,761 12,449 7,005
FINANCING ACTIVITY
Increase in other loans payable 4,998 -- --
Purchase of treasury stock (19,756) (8,149) (10,201)
Exercise of stock options 306 266 296
Cash dividend paid (1,652) (1,190) (1,088)
Repayment of ESOP borrowings 928 600 600
-----------------------------
Net cash used by financing activities (15,176) (8,473) (10,393)
-----------------------------
Increase (decrease) in cash and cash equivalents (5,845) 3,174 (2,866)
Cash and cash equivalents at beginning of year 7,710 4,536 7,402
-----------------------------
Cash and cash equivalents at end of year $ 1,865 $ 7,710 $ 4,536
-----------------------------
-----------------------------
43
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Anchor BanCorp Wisconsin Inc.
We have audited the accompanying consolidated balance sheets of Anchor
BanCorp Wisconsin Inc. and subsidiaries (the "Corporation") as of March 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1996. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Corporation at
March 31, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
April 24, 1996
Milwaukee, Wisconsin
MANAGEMENT AND AUDIT COMMITTEE REPORT
- --------------------------------------------------------------------------------
Management is responsible for the preparation, content and integrity of the
financial statements and all other financial information included in this annual
report. 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, organizational division of
responsibilities and the careful selection and training of qualified personnel.
In addition, the internal auditors and independent auditors periodically test
the system of internal controls.
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 outside directors
and has the responsibility for the recommendation of the independent auditors
for the Corporation. The committee meets regularly with the independent
auditors and internal auditors to review the scope of their audits and audit
reports and to discuss any action to be taken. The independent auditors and the
internal auditors have free access to the Audit Committee.
/s/ D. Timmerman /s/ Arlie M. Mucks, Jr.
Douglas J. Timmerman Arlie M. Mucks, Jr.
President and Chief Executive Officer Chairman, Audit Committee
/s/ Michael W. Helser April 24, 1996
Michael W. Helser
Treasurer and Chief Financial Officer
44
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS The Annual Meeting of Stockholders of Anchor
BanCorp Wisconsin Inc. will be held at 2 p.m. on July 23, 1996, at the Holiday
Inn-East Towne, 4402 E. Washington Avenue, Madison, WI 53704. All stockholders
are cordially invited.
STOCKHOLDER INFORMATION Inquiries regarding account status, dividend payments,
stock transfers, lost certificates, change of ownership and change of address
should be addressed to the Corporation's transfer agent. Please call or write
them at:
Firstar Trust Company
Corporate Trust Investor Services Unit
615 East Michigan
P.O. Box 2077
Milwaukee, WI 53201
(414) 276-3737, or (800) 637-7549
FORM 10-K REPORT Individuals interested in receiving single copies of the
Corporation's Annual Report or the Form 10-K for fiscal 1996 as filed with the
Securities and Exchange Commission should write to Anchor BanCorp Wisconsin
Inc., Investor Relations Department, P.O. Box 8999, Madison, WI 53708-8999.
Securities analysts, portfolio managers and other interested parties seeking
information about the Corporation should contact Anchor BanCorp Wisconsin Inc.,
William Klein, Vice President - Investor Relations, P.O. Box 8999, Madison, WI
53708-8999 or call (608) 252-1810.
COMMON STOCK INFORMATION Anchor BanCorp Wisconsin Inc.
Trading: NASDAQ Stock Market (OTC), NASDAQ symbol ABCW. The Wisconsin State
Journal's abbreviation is AncBWis.
Common shares outstanding at March 31, 1996: 4,934,350
Approximate registered stockholders of record at March 31, 1996: 2,100
The table below show the reported high and low sale prices of common stock and
cash dividends paid per share of common stock during the periods indicated in
fiscal 1996 and 1995. The data in the table have been adjusted for the
five-for-four stock split which was paid on October 27, 1995.
MARKET PRICE CASH
QUARTER ENDED HIGH LOW DIVIDEND
- --------------------------------------------------------------------------------
March 31, 1996 $36.250 $33.250 $0.080
December 31, 1995 36.250 30.900 0.080
September 30, 1995 31.400 25.800 0.080
June 30, 1995 30.200 23.600 0.080
March 31, 1995 31.000 23.400 0.060
December 31, 1994 24.200 21.000 0.060
September 30, 1994 25.600 21.800 0.060
June 30, 1994 22.200 17.600 0.048
45
ANCHOR BANCORP WISCONSIN INC. BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
DOUGLAS J. TIMMERMAN ARLIE M. MUCKS, JR.
Chairman Special Events Coordinator
Anchor BanCorp Wisconsin Inc. University of Wisconsin-
Madison, Wisconsin Madison, Wisconsin
ROBERT C. BUEHNER PAT RICHTER
Former Executive Vice President and Athletic Director
General Counsel University of Wisconsin-
Provident Savings and Loan Madison, Wisconsin
Retired
Madison, Wisconsin
HOLLY CREMER BERKENSTADT BRUCE A. ROBERTSON
Secretary-Treasurer and Director Former Vice President
Wisconsin Cheeseman, Inc. and AnchorBank, S.S.B.
President Retired
Scott's, Inc. Columbus, Wisconsin
Sun Prairie, Wisconsin
GREG M. LARSON DONALD D. KROPIDLOWSKI
President Senior Vice President
Demco, Inc. AnchorBank, S.S.B.
Madison, Wisconsin Stevens Point, Wisconsin
ANCHOR BANCORP WISCONSIN INC. OFFICERS
- --------------------------------------------------------------------------------
DOUGLAS J. TIMMERMAN
President and
Chief Executive Officer
J. ANTHONY CATTELINO
Vice President and
Secretary
MICHAEL W. HELSER
Treasurer and
Chief Financial Officer
46
ANCHORBANK, S.S.B.
OFFICE/SUBSIDIARY LOCATIONS
- -------------------------------------------------------------------------------
MADISON OFFICES:
Atwood
2000 Atwood Avenue
Madison, WI 53704
(608) 246-3515
Capitol Square
25 W. Main Street
Madison, WI 53703
(608) 252-8700
Cottage Grove Road
216 Cottage Grove Road
Madison, WI 53716
(608) 221-6550
East Towne
4702 East Towne Blvd.
Madison, WI 53704
(608) 246-3500
Hilldale
302 N. Midvale Blvd.
Madison, WI 53705
(608) 231-5252
Meadowood
5750 Raymond Road
Madison, WI 53711
(608) 275-7979
Monona
6501 Monona Drive
Monona, WI 53716
(608) 221-6555
Sherman Plaza
2929 N. Sherman Avenue
Madison, WI 53704
(608) 246-3505
West Towne
333 S. Westfield Road
Madison, WI 53717
(608) 833-4900
DANE COUNTY OFFICES:
DeForest
601 S. Main Street
DeForest, WI 53532
(608) 846-4701
Middleton
6200 Century Avenue
Middleton, WI 53562
(608) 831-3330
Mount Horeb
300 E. Main Street
Mount Horeb, WI 53572
(608) 437-3011
Oregon
705 N. Main Street
Oregon, WI 53575
(608) 835-5702
Stoughton
1720 Highway 51
Stoughton, WI 53589
(608) 877-4100
Sun Prairie
1516 W. Main Street
Sun Prairie, WI 53590
(608) 837-5181
Verona
420 W. Verona Avenue
Verona, WI 53593
(608) 845-6716
Waunakee
204A-1 S. Century Avenue
Waunakee, WI 53597
(608) 849-5041
SURROUNDING AREA OFFICES:
Boscobel
106 W. Oak Street
Boscobel, WI 53805
(608) 375-5062
Chippewa Falls
302 Bay Street
Chippewa Falls, WI 54729
(715) 723-4414
Columbus
150 N. Ludington Street
Columbus, WI 53925
(414) 623-3140
Delavan
500 E. Walworth Avenue
Delavan, WI 53115
(414) 728-3456
Dodgeville
316 W. Spring Street
Dodgeville, WI 53533
(608) 935-9356
Janesville
100 W. Racine Street
Janesville, WI 53545
(608) 752-7886
Janesville
2215 Holiday Drive
Janesville, WI 53545
(608) 756-2600
Lancaster
708 N. Madison Street
Lancaster, WI 53813
(608) 723-7601
Monroe
1712 12th Street
Monroe, WI 53566
(608) 325-7161
New Glarus
606 Highway 69
New Glarus, WI 53574
(608) 527-5248
Platteville
80 S. Court Street
Platteville, WI 53818
(608) 348-9556
Plover
1101 Post Road
Plover, WI 54467
(715) 345-2370
Prairie du Chien
600 E. Blackhawk Avenue
Prairie du Chien, WI 53821
(608) 326-2444
Richland Center
187 S. Central Avenue
Richland Center, WI 53581
(608) 647-6136
Stevens Point
640 Division Street
Stevens Point, WI 54481
(715) 344-8080
Viroqua
102 S. Rock Avenue
Viroqua, WI 54665
(608) 637-3142
LENDING-ONLY OFFICES:
Appleton
2711 N. Mason Street
Appleton, WI 54914
(414) 733-5554
Lake Geneva
772 Main Street, Suite 204
Lake Geneva, WI 53147
(414) 248-3020
Oshkosh
1775 Witzel Avenue
Oshkosh, WI 54901
(414) 233-4040
SUBSIDIARIES:
ADPC Corporation
25 W. Main Street
Madison, WI 53703
(608) 252-8700
ADPC II LLC
25 W. Main Street
Madison, WI 53703
(608) 252-8700
Anchor Financial Corp.
25 W. Main Street
Madison, WI 53703
(608) 252-8700
Anchor Insurance Services, Inc.
302 N. Midvale Blvd.
Madison, WI 53705
(608) 232-2700
Anchor Investment Corporation
3800 Howard Hughes Parkway,
Suite 1560
Las Vegas, NV 89109
(702) 735-1811
Investment Directions, Inc.
25 W. Main Street
Madison, WI 53703
(608) 252-8700
47
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