1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 2000 Commission File Number 0-22224
- --------------------------------------------------------------------------------
LEDGER CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incorporation) (I.R.S. Employer Identification No.)
5555 N. Port Washington Road
Glendale, Wisconsin 53217
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (414) 290-7900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $1.00
per share, was 2,437,141 at February 13, 2000, the latest practicable date.
2
LEDGER CAPITAL CORP. AND SUBSIDIARY
FORM 10-Q/A
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of December 31, 2000 and June 30, 2000 (unaudited).................. 1
Consolidated Statements of Income for the Three and Six Months
ended December 31, 2000 and 1999 (unaudited)........................... 2
Consolidated Statements of Shareholders' Equity for the Six
Months ended December 31, 2000 and 1999 (unaudited).................... 3
Consolidated Statements of Cash Flows for the Six Months
ended December 31, 2000 and 1999 (unaudited)........................... 4
Notes to Consolidated Financial Statements (unaudited).................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk................. 32
Part II. Other Information
Item 1. Legal Proceedings......................................................... 34
Item 2. Changes in Securities and Use of Proceeds................................. 34
Item 3. Defaults Upon Senior Securities........................................... 34
Item 4. Submission of Matters to a Vote of Security Holders....................... 34
Item 5. Other Information......................................................... 34
Item 6. Exhibits and Reports on Form 8-K.......................................... 34
Signature Page............................................................ 35
3
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(Unaudited)
DECEMBER 31, JUNE 30,
2000 2000
------------ --------
ASSETS (Restated) (Restated)
Cash and non-interest bearing deposits........................................ $2,979 $ 2,782
Interest-bearing deposits..................................................... 16,213 13,777
------ ------
Cash and cash equivalents..................................................... 19,192 16,559
Securities available-for-sale (at fair value):
Investment securities....................................................... 40,585 38,315
Mortgage-backed and related securities...................................... 32,064 35,944
Securities held-to-maturity:
Mortgage-backed and related securities (fair value -
$13,608 at December 31, 2000; $14,685 at June 30, 2000).................... 13,609 15,017
Loans held for sale, at lower of cost or market............................... 3,364 1,122
Loans receivable, net......................................................... 378,166 392,306
Investment in Federal Home Loan Bank stock, at cost........................... 8,051 7,760
Foreclosed properties, net.................................................... 1,095 1,114
Office properties and equipment............................................... 5,769 5,461
Prepaid expenses and other assets............................................. 6,483 6,373
-------- --------
Total assets........................................................ $508,378 $519,971
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................................... $319,043 $345,318
Notes payable and other borrowings.......................................... 146,620 132,040
Advance payments by borrowers for taxes and insurance....................... 1,197 3,724
Accrued interest on deposit accounts and other borrowings................... 4,635 3,421
Accrued expenses and other liabilities...................................... 2,152 1,872
-------- --------
Total liabilities................................................... $473,647 $486,375
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 2,000,000 shares;
none outstanding.......................................................... -- --
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued 3,162,500 shares; outstanding 2,437,141 shares at
December 31, 2000 and 2,563,241 shares at June 30, 2000................... 3,162 3,162
Additional paid-in capital.................................................. 10,170 10,075
Unearned ESOP compensation.................................................. (251) (311)
Unearned restricted stock awards............................................ (74) (74)
Accumulated other comprehensive loss........................................ (674) (2,059)
Treasury stock, at cost: 725,359 shares at December 31, 2000
and 599,259 shares at June 30, 2000....................................... (7,225) (5,824)
Retained earnings, substantially restricted................................. 29,623 28,627
-------- --------
Total shareholders' equity.......................................... $34,731 $ 33,596
-------- --------
Total liabilities and shareholders' equity.......................... $508,378 $519,971
======== ========
See accompanying Notes to Consolidated Financial Statements (unaudited)
1
4
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------- --------------------
2000 1999 2000 1999
-------- ------- -------- --------
(Restated) (Restated) (Restated) (Restated)
INTEREST INCOME:
Loans receivable.................................................. $ 8,089 $ 7,091 $ 16,230 $ 13,291
Mortgage-backed and related securities............................ 845 1,142 1,732 2,241
Securities and interest-bearing deposits.......................... 1,059 1,522 2,134 3,097
--------- ------- -------- --------
Total interest income................................... 9,993 9,755 20,096 18,629
INTEREST EXPENSE:
Deposits.......................................................... 5,007 3,998 10,272 7,632
Advance payments by borrowers for taxes and insurance............. 27 26 50 51
Notes payable and other borrowings................................ 2,142 2,393 4,103 4,496
--------- ------- -------- --------
Total interest expense.................................. 7,176 6,417 14,425 12,179
--------- ------- -------- --------
Net interest income............................................... 2,817 3,338 5,671 6,450
Provision for losses on loans..................................... 100 170 180 290
--------- ------- -------- --------
Net interest income after provision for losses on loans........... 2,717 3,168 5,491 6,160
NON-INTEREST INCOME:
Service charges on loans.......................................... 66 101 140 158
Service charges on deposit accounts............................... 107 119 220 241
Loan servicing fees, net.......................................... 15 12 34 24
Insurance commissions............................................. 22 38 57 50
Gain on sale of securities and
mortgage-backed and related securities, net................... 0 8 0 62
Gain on sale of loans............................................. 166 57 278 153
Other income...................................................... 47 52 81 106
--------- ------- -------- --------
Total non-interest income............................... 423 387 810 794
NON-INTEREST EXPENSE:
Compensation and benefits......................................... 1,307 1,255 2,642 2,625
Marketing......................................................... 108 149 162 202
Occupancy and equipment........................................... 408 424 800 817
Deposit insurance premiums........................................ 18 43 35 88
Other non-interest expense........................................ 398 329 757 664
--------- ------- -------- --------
Total non-interest expense.............................. 2,239 2,200 4,396 4,396
--------- ------- -------- --------
Income before income taxes........................................ 901 1,355 1,905 2,558
Income taxes...................................................... 300 431 649 826
--------- ------- -------- --------
Net income................................................... $ 601 $ 924 $ 1,256 $ 1,732
========= ======= ======== ========
Earnings per share - (basic) ................................ $ 0.25 $ 0.36 $ 0.52 $ 0.66
========= ======= ======== ========
Earnings per share - (diluted) .............................. $ 0.25 $ 0.35 $ 0.50 $ 0.64
========= ======= ======== ========
See accompanying Notes to Consolidated Financial Statements (unaudited)
2
5
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Additional Unearned Unearned
Common Paid-In ESOP Restricted
Stock Capital Compensation Stock
----- ------- ------------ -----------
SIX MONTHS ENDED DECEMBER 31, 2000
Balance at June 30, 2000........................... $3,162 $10,075 ($311) ($74)
Net income......................................... - - - -
Accumulated other comprehensive income:
Unrealized holding gain arising during the
period
On available-for-sale securities portfolio .... - - - -
Loss on derivative hedging instrument.......... - - - -
Income tax effect............................. - - - -
Comprehensive income............................... - - - -
Cash Dividends ($.10 per share).................... - - - -
Amortization of unearned ESOP and
restricted stock award compensation.............. - 90 60 -
Purchase of treasury stock (128,100 shares)........ - - - -
Exercise of stock options (2,000 shares)........... - 5 - -
------ ------- ----- ----
Balance at December 31, 2000....................... $3,162 $10,170 ($251) ($74)
====== ======= ===== ====
SIX MONTHS ENDED DECEMBER 31, 1999
Balance at June 30, 1999........................... $3,162 $ 9,937 ($405) ($78)
Net income......................................... - - - -
Accumulated other comprehensive income:
Unrealized holding loss arising during period- - - - -
Re-classification adjustment for gains
realized in income............................. - - - -
Income tax effect............................. - - - -
Comprehensive income............................... - - - -
Cash Dividends ($.05 per share).................... - - - -
Amortization of unearned ESOP and
restricted stock award compensation.............. - 136 60 4
Purchase of treasury stock (142,000 shares)........ - - - -
------ ------- ----- ----
Balance at December 31, 1999....................... $3,162 $10,073 ($345) ($74)
====== ======= ===== ====
Accumulated
Other Total
Retained Treasury Comprehensive Shareholders'
Earnings Stock loss Equity
-------- ------- -------------- -------------
SIX MONTHS ENDED DECEMBER 31, 2000 (Restated) (Restated)
Balance at June 30, 2000........................... $28,627 ($5,824) ($2,059) $33,596
Net income......................................... 1,256 - - 1,256
Accumulated other comprehensive income:
Unrealized holding gain arising during the
period
On available-for-sale securities portfolio .... - - 2,334 2,334
Loss on derivative hedging instrument.......... - - (64) (64)
Income tax effect............................. - - (885) (885)
Comprehensive income............................... - - - 2,641
Cash Dividends ($.10 per share).................... (248) - - (248)
Amortization of unearned ESOP and
restricted stock award compensation.............. - - - 150
Purchase of treasury stock (128,100 shares)........ - (1,421) - (1,421)
Exercise of stock options (2,000 shares)........... (12) 20 - 13
------- ------- ------- -------
Balance at December 31, 2000....................... $29,623 ($7,225) ($674) $34,731
======= ======= ======= =======
SIX MONTHS ENDED DECEMBER 31, 1999
Balance at June 30, 1999........................... $25,765 ($2,796) ($1,089) $34,496
Net income......................................... 1,732 - - 1,732
Accumulated other comprehensive income:
Unrealized holding loss arising during period- - (1,285) (1,285)
Re-classification adjustment for gains
realized in income............................. - - (62) (62)
Income tax effect............................. - - 528 528
Comprehensive income............................... - - - 913
Cash Dividends ($.05 per share).................... (135) - - (135)
Amortization of unearned ESOP and
restricted stock award compensation.............. - - - 200
Purchase of treasury stock (142,000 shares)........ - (1,713) - (1,713)
------- ------- ------- -------
Balance at December 31, 1999....................... $27,362 ($4,509) ($1,908) $33,761
======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements (unaudited)
3
6
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
DECEMBER 31,
---------------------------------
2000 1999
--------- ---------
(Restated) (Restated)
(IN THOUSANDS)
OPERATING ACTIVITIES
Net Income.................................................................. $ 1,256 $ 1,732
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans............................................. 180 290
Provision for depreciation and amortization............................... 253 407
Net gain on sales of investments and
mortgage-backed and related securities.................................. - (62)
Net gain on sale of loans................................................. (278) (153)
Amortization of unearned ESOP and restricted stock awards................. 150 200
Loans originated for sale................................................. (22,739) (13,272)
Sales of loans originated for sale........................................ 20,497 6,789
Increase in prepaid expenses and other assets............................. (916) (1,158)
Decrease in payables for investments purchased............................ - (9,909)
Increase in accrued expenses and other liabilities........................ 1,494 1,144
Other adjustments......................................................... (112) 867
--------- ---------
Net cash used in operating activities....................................... (215) (13,125)
--------- ---------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale..................... - 44,770
Proceeds from the maturity of securities available-for-sale................. - 4,000
Purchases of securities available-for-sale.................................. (807) (34,737)
Purchases of mortgage-backed and related securities......................... - (8,096)
Principal collected on mortgage-backed and related securities............... 6,134 23,590
Net (increase) decrease in loans receivable................................. 14,176 (70,836)
Proceeds from the sale of foreclosed properties............................. 50 980
Purchase of Federal Home Loan Bank stock.................................... (291) (1,100)
Purchases of office properties and equipment, net........................... (536) (108)
--------- ---------
Net cash provided by (used in) investing activities......................... 18,726 (41,537)
--------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits......................................... (26,275) 29,501
Proceeds from long-term notes payable to Federal Home Loan Bank............. 55,000 65,000
Repayment of long-term notes payable to Federal Home Loan Bank.............. (35,000) (41,500)
Net increase (decrease) in
short-term notes payable and other borrowings............................. (5,420) 7,765
Exercise of stock options................................................... 13 -
Purchase of treasury stock.................................................. (1,421) (1,713)
Cash dividends.............................................................. (248) (135)
Net decrease in advance payments by borrowers for
taxes and insurance....................................................... (2,527) (2,937)
--------- ---------
Net cash provided by (used in) financing activities......................... (15,878) 55,981
--------- ---------
Increase in cash and cash equivalents....................................... 2,633 1,319
Cash and cash equivalents at beginning of period............................ 16,559 8,599
--------- ---------
Cash and cash equivalents at end of period.................................. $ 19,192 $ 9,918
========= =========
See accompanying Notes to Consolidated Financial Statements (unaudited)
4
7
LEDGER CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
--------------------------
2000 1999
-------- ---------
(IN THOUSANDS)
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposit accounts) .............. $ 13,243 $ 11,256
Income taxes paid ........................................................... $ 526 $ 1,044
Non-cash transactions:
Loans transferred to foreclosed properties................................... $ 62 $ 1,319
See accompanying Notes to Consolidated Financial Statements (unaudited)
5
8
LEDGER CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the results
for the interim periods have been included.
The results of operations and other data for the three and six months ended
December 31, 2000 are not necessarily indicative of results that may be expected
for the entire fiscal year ending June 30, 2001.
Effective on October 26, 2000, Hallmark Capital Corp. changed its' name to
Ledger Capital Corp. and its wholly-owned subsidiary, West Allis Savings Bank
has changed its name to Ledger Bank, S.S.B.
The unaudited consolidated financial statements include the accounts of Ledger
Capital Corp. (the "Company") and its wholly-owned subsidiary, Ledger Bank,
S.S.B. and subsidiaries (the "Bank") as of and for the three and six months
ended December 31, 2000. All material intercompany accounts and transactions
have been eliminated in consolidation.
(2) STOCK BENEFITS AND INCENTIVE PLANS
At December 31, 2000, the Company has reserved 373,642 shares of common stock
for a non-qualified stock option plan and 18,462 shares of ungranted restricted
common stock reserved for employees and directors. With respect to options,
which have not been granted, the option exercise price cannot be less than the
fair market value of the underlying common stock as of the date of option grant,
and the maximum term cannot exceed ten years. At December 31, 2000, there were
323,280 stock options outstanding.
The following is a summary of fixed plan stock option activity:
SHARES OPTION
UNDER PRICE PER
OPTION SHARE
------ ----------------
Outstanding at June 30, 2000............................................. 279,480 $ 4.00 - $ 14.63
Granted.............................................................. 15,500 $ 9.75
Exercised............................................................ (2,000) $ 4.00
------- ----------------
Outstanding at December 31, 2000......................................... 292,980 $ 4.00 - $ 14.63
The Board of Directors approved the grant of 30,300 performance based stock
options, on September 28, 2000. These stock option grants provide the CEO and
the COO of the Company, as well as the four outside directors, an opportunity to
buy up to a specified number of shares of the Company if certain performance
levels are reached for the periods ended June 30, 2001, 2002 and 2003. These
options have 10-year terms, but only vest if the target performance is met for a
period. If a performance target is met in the second or third year of the
applicable performance period, previously unvested options for the years, in
which performance targets were not met, also vest.
6
9
(2) STOCK BENEFITS AND INCENTIVE PLANS (CONT.)
The options have an exercise price of $10.688, which is equal to 100% of the
market value on the date of grant. These options will be accounted for as
variable plan options and compensation expense will be recorded based upon the
difference in the market value and the exercise price of the stock on the date
on which the options vest. No compensation expense was accrued for the six
months ended December 31, 2000.
The following is a summary of variable plan performance stock option activity:
SHARES
UNDER WEIGHTED-AVERAGE
OPTION EXERCISE PRICE
------ --------------
Outstanding at June 30, 2000............................................. -
Granted.............................................................. 30,300 $ 10.688
------ --------
Outstanding at December 31, 2000......................................... 30,300 $ 10.688
Options Exercisable at December 31, 2000................................. -
(3) EARNINGS PER SHARE
Basic earnings per share of common stock for the three and six months ended
December 31, 2000 and December 31, 1999 have been computed by dividing net
income for the period by the weighted average number of shares of common stock
reduced by ungranted restricted stock and uncommitted ESOP shares. Diluted
earnings per share is calculated by dividing net income by the sum of the
weighted average shares used in the basic earnings per share calculation plus
the effect of dilutive stock options. The effect of dilutive stock options is
calculated using the treasury stock method. The computation of earnings per
share is as follows:
For the Three Months For the Three Months
Ended Dec. 31, 2000 Ended Dec. 31, 1999
--------------------------- ---------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- ----------
Weighted average common shares outstanding........... 2,471,300 2,471,300 2,702,452 2,702,452
Ungranted restricted stock........................... (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares.............................. (84,333) (84,333) (101,200) (101,200)
Common stock equivalents due to
dilutive effect of stock options.................. - 76,365 - 74,018
----------- ----------- ----------- ----------
Total weighted average common shares
and equivalents outstanding.................. 2,368,504 2,444,869 2,582,790 2,656,808
=========== =========== =========== ==========
Net income for period........................ $ 601,000 $ 601,000 $ 924,000 $ 924,000
Earnings per share........................... $ 0.25 $ 0.25 $ 0.36 $ 0.35
=========== =========== =========== ==========
7
10
(3) EARNINGS PER SHARE (CONT.)
For the Six Months For the Six Months
Ended Dec. 31, 2000 Ended Dec. 31, 1999
--------------------------- ---------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- ----------
Weighted average common shares outstanding........... 2,517,270 2,517,270 2,744,762 2,744,762
Ungranted restricted stock........................... (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares.............................. (84,333) (84,333) (101,200) (101,200)
Common stock equivalents due to
dilutive effect of stock options.................. - 74,301 - 78,548
----------- ----------- ----------- ----------
Total weighted average common shares
and equivalents outstanding....................... 2,414,475 2,488,776 2,625,100 2,703,648
=========== =========== =========== ==========
Net income for period............................. $ 1,256,000 $ 1,256,000 $ 1,732,000 $1,732,000
Earnings per share................................ $ 0.52 $ 0.50 $ 0.66 $ 0.64
=========== =========== =========== ==========
(4) COMMITMENTS AND CONTINGENCIES
Commitments to originate mortgage loans of $716,000 at December 31, 2000
represent amounts which the Bank expects to fund during the quarter ending March
31, 2001. There were no commitments to sell fixed-rate mortgage loans at
December 31, 2000. The Bank had unissued credit under existing home equity
line-of-credit loans and credit card lines of $13.3 million and $6.2 million,
respectively, as of December 31, 2000. Also, the Bank had unused credit under
existing commercial line-of-credit loans of $6.2 million at December 31, 2000.
The Bank had no commitments to purchase fixed-rate mortgage related securities
as of December 31, 2000.
(5) REGULATORY CAPITAL ANALYSIS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt and corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
also are subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). As of December 31, 2000, management believes that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, the Bank is well capitalized as defined by regulatory
standards. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
the table below. There are no conditions or events since that notification that
management believes have changed the Bank's category.
8
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(5) REGULATORY CAPITAL ANALYSIS (CONT.)
The Bank's actual capital amounts and ratios are presented in the tables below.
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- --------- --------
(DOLLARS IN THOUSANDS)
As of December 31, 2000:
Tier I Capital Leverage (to Average Assets):
Consolidated........................ $34,890 6.88% $15,217 3.00% N/A N/A
Ledger Bank......................... 35,805 7.10 15,137 3.00 25,228 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated........................ 34,890 10.03 13,918 4.00 N/A N/A
Ledger Bank......................... 35,805 10.36 13,830 4.00 20,745 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated........................ 38,041 10.93 27,837 8.00 N/A N/A
Ledger Bank......................... 38,956 11.27 27,660 8.00 34,575 10.00
As a state-chartered savings bank, the Bank also is subject to a minimum
regulatory capital requirement of the State of Wisconsin. At December 31, 2000,
on a fully-phased-in basis of 6.0%, the Bank had actual capital of $38,757,000
with a required amount of $30,626,000, for excess capital of $8,131,000. There
is no requirement to calculate the amount to be well capitalized under prompt
corrective action provisions on a consolidated basis.
9
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(6) LOANS RECEIVABLE
Loans receivable are summarized as follows:
DEC. 31, JUNE 30,
2000 2000
------------------- --------------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
--------- --------- ---------- --------- -----------
Real estate mortgage loans:
Residential one-to-four family................... $ 177,322 45.2% $ 186,276 45.1% ($8,954)
Home equity...................................... 22,449 5.7% 21,758 5.3% 691
Residential multi-family......................... 48,793 12.4% 41,751 10.1% 7,042
Commercial real estate........................... 79,927 20.4% 86,521 21.0% (6,594)
Residential construction......................... 8,836 2.2% 21,284 5.1% (12,448)
Other construction and land...................... 32,632 8.3% 27,179 6.6% 5,453
--------- -------- ---------- -------- -----------
Total real estate mortgage loans............ 369,959 94.2% 384,769 93.2% (14,810)
Consumer-related loans:
Automobile...................................... 287 0.1% 262 0.1% 25
Credit card...................................... 2,173 0.5% 2,112 0.5% 61
Other consumer loans............................. 736 0.2% 853 0.2% (117)
--------- -------- ---------- -------- -----------
Total consumer-related loans................ 3,196 0.8% 3,227 0.8% (31)
--------- -------- ---------- -------- -----------
Commercial loans..................................... 19,535 5.0% 24,589 6.0% (5,054)
--------- -------- ---------- -------- -----------
Gross loans................................. 392,690 100.0% 412,585 100.0% ($19,895)
Accrued interest receivable.......................... 2,693 2,573
Less:
Undisbursed portion of loan proceeds............. (13,082) (18,589)
Deferred loan fees............................... (547) (630)
Deferred interest on sale of REO................. (58) (61)
Deferred gain on sale of REO..................... (57) (58)
Unearned interest................................ (322) (313)
Allowances for loan losses....................... (3,151) (3,201)
--------- ----------
$ 378,166 $ 392,306
========= ==========
Loans serviced for investors totaled $52.1 million and $48.6 million at December
31, 2000 and June 30, 2000, respectively.
10
13
(7) NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows (dollars in
thousands):
DEC. 31, 2000 JUNE 30, 2000
------------------------ --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- ------ --------- ------ --------
Advances from
Federal Home Loan Bank 2000 $ -- --% $ 5,000 6.60%
2001 3,000 5.91 3,000 5.91
2002 5,000 6.43 5,000 6.43
2003 13,030 6.12 3,030 5.59
2004 30,000 6.14 50,000 5.63
2005 60,000 6.18 35,000 6.03
2007 6,500 6.03 6,500 6.52
2008 5,000 4.35 5,000 4.35
2010 10,000 5.90 -- --
---------- -----------
$ 132,530 6.10% $ 112,530 5.83%
Open line of credit
With Wells Fargo Bank 2001 $ 4,850 8.25% $ 1,000 9.00%
Securities sold under
Agreements to repurchase 2010 9,240 5.87 18,510 6.24%
---------- -----------
$ 146,620 $ 132,040
========== ===========
FHLB advances totaled $132.5 million, or 90.4%, and $112.5 million, or 85.2%, of
total borrowings at December 31, 2000 and June 30, 2000, respectively. Certain
advances are callable by the FHLB. Advances callable within one year amount to
$65.0 million and $70.0 million at December 31, 2000 and June 30, 2000,
respectively. The Company is required to maintain as collateral unencumbered
one-to-four family mortgage loans in its portfolio such that the outstanding
balance of FHLB advances does not exceed 60% of the book value of this
collateral. The Company had delivered mortgage-backed securities with a carrying
value of $46.1 million and $38.7 million at December 31, 2000 and June 30, 2000,
respectively. In addition, all FHLB advances are collateralized by all Federal
Home Loan Bank stock and are subject to prepayment penalties. The Company's
unused advance line with the Federal Home Loan Bank was $5.1 million based upon
collateral pledged at December 31, 2000. The bank does not hold any FHLB
variable rate term borrowings at December 31, 2000.
The Company enters into sales of mortgage-backed securities with agreements to
repurchase identical securities (reverse repurchase agreements) and
substantially identical securities (dollar reverse repurchase agreements). These
transactions are treated as financings with the obligations to repurchase
securities reflected as a liability. The dollar amount of securities underlying
the agreements remains in the asset accounts. The securities underlying the
agreements are delivered to the counterparty's account. Securities sold under
agreements to repurchase were $9.2 million and $18.5 million at December 31,
2000 and June 30, 2000, respectively.
The Company has a line of credit facility with a third party lender that was
originated in fiscal 2000. The line of credit provides the holding company with
a source of funding to acquire commercial real estate loans and to make further
capital investment in the Bank. The line of credit has a variable rate tied to
the Fed Funds rate.
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(8) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan (ESOP) covering all full-time
employees of the Company who have attained age 21 and completed one year of
service during which they work at least 1,000 hours. The ESOP initially borrowed
$1.0 million from the Company and purchased 253,000 common shares issued in
connection with the Bank's conversion from mutual to stock form in 1993. The
balance of this loan was $404,800 and $506,000 at December 31, 2000 and 1999,
respectively. The Bank makes annual contributions to the ESOP equal to the
ESOP's debt service. As the debt is repaid, shares are released from collateral
and allocated to active employees, based on the proportion of debt service paid
in the year. The Company accounts for its ESOP in accordance with Statement of
Position 93-6. Accordingly, the debt of the ESOP is recorded as debt (which is
eliminated in consolidation) and the shares pledged as collateral are reported
as unearned ESOP shares at their original cost in the statement of financial
position. As the shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares. The excess
of the current market price of shares released over the cost of those shares is
credited to additional paid-in-capital. As shares are released, they become
outstanding for earnings-per-share computations. Dividends on allocated ESOP
shares are recorded as a reduction of shareholders' equity; dividends on
unallocated ESOP shares are recorded as compensation expense. ESOP compensation
expense for the six months ended December 31, 2000 and 1999 was $154,000 and
$197,000, respectively.
The following is a summary of ESOP shares at December 31, 2000 and 1999:
Shares
----------------------------
2000 1999
----------------------------
Allocated shares.............................................. 135,545 114,799
Unallocated shares............................................ 22,521 24,133
Unreleased shares............................................. 60,788 83,308
----------------------------
Total ESOP shares............................................. 218,854 222,240
============================
Fair value of unreleased shares at December 31,............... $ 593,000 $ 750,000
============================
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(9) ACCOUNTING FOR DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES
During the fiscal year ended June 30, 2000, the Company entered into interest
rate caps with a notional amount of $75.0 million with maturity dates ranging
from June 14, 2001 to January 3, 2002. The interest rate caps are carried at
fair market value of $416 and $166,000 in the Consolidated Statement of
Financial Condition at December 31 and June 30, 2000, respectively. The change
in the time value of the interest rate caps is included in expense for the
quarter and the change that relates to the difference in fair value of the
interest rate caps is adjusted to Accumulated Other Comprehensive Loss. At
December 31, 2000, the Company continued to designate these caps as a cash flow
hedge of the interest rate risk on short-term wholesale certificates of deposit
which renew every 90 days and are indexed to the 3-month LIBOR. The caps are
also indexed to the 3-month LIBOR interest rate with a 7% strike rate. Cash
payments will be received by the Company if the 3-month LIBOR exceeds 7%.
The Company formally documents all relationships between hedging instruments and
hedged items as well as its risk-management objective and strategy for
undertaking the hedge transaction. This process includes linking derivatives
that are designated as fair value or cash flow hedges to specific recorded
assets or liabilities or to firm commitments on forecasted transactions.
The Company formally assesses at inception and on an ongoing basis, whether
derivatives that are used in hedging transactions have been highly effective in
offsetting fair values or cash flows of hedged items and whether they are
expected to continue to be highly effective in the future.
If at any time the Company determined that the hedge was no longer highly
effective, or if the hedged forecasted transactions were not executed, hedge
accounting would be discontinued and the derivative instrument would continue to
be marked to its fair value with gains or losses recognized in non-interest
income. The change in fair value of derivative instruments designated as cash
flow hedges will be recognized in other comprehensive income in future periods
and the changes in the fair value of derivative instruments designated as fair
value hedges will be recognized in non-interest income or expense.
At December 31, 2000, the interest rate caps are the only derivative instruments
used by the Company to manage interest rate risk. The Company's derivative
activities are monitored by its Asset Liability Committee as part of that
Committee's oversight of risk management and asset/liability functions.
The Bank also categorizes certain commitments to originate mortgage loans as
derivative financial instruments. Due to the short duration of the commitment
the fair value of such commitments is considered immaterial to the Company's
results of operations and financial position at December 31, 2000 and June 30,
2000.
(10) RESTATEMENT OF FINANCIAL STATEMENTS
In April, 2001 the Company discovered a mathematical error in the way in which
interest income was being accrued on certain purchased commercial real estate
mortgage and multi-family residential mortgage loans. The error resulted from an
inadvertent erroneous set-up of the loans in the Company's outsourced data
processing system. The error resulted in the under accrual of interest income on
these loans of $177,606 and $61,263 for the three months ended December 31, 2000
and 1999, respectively. Interest income has been restated to correct that error.
As a result of increased earnings in 2001 from the correction of this error,
additional compensation of zero and $36,500 is required to be accrued under the
Company's Annual Incentive Plan for the three months ended December 31, 2000 and
1999, respectively. The Company's 2001 and 2000 consolidated financial
statements have, therefore, been restated to accrue the additional interest
income and the additional compensation expense as well as income tax expense of
$69,800 and $9,732, respectively, related to the $177,606 and $24,763 respective
net effect of the corrections on income before taxes. The effect of the
restatement increased net income by $108,806 and $15,031 and basic earnings per
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(10) RESTATEMENT OF FINANCIAL STATEMENTS (CONT.)
share by $.04 and $.01 and diluted earnings per share by $.05 and $.01 for the
three months ended December 31, 2000 and 1999, respectively.
The error resulted from an inadvertent erroneous set-up of the loans in the
Company's outsourced data processing system. The error resulted in the under
accrual of interest income on these loans of $314,167 and $85,338 for the six
months ended December 31, 2000 and 1999, respectively. Interest income has been
restated to correct that error. As a result of increased earnings in 2001 from
the correction of this error, additional compensation of zero and $73,000 is
required to be accrued under the Company's Annual Incentive Plan for the six
months ended December 31, 2000 and 1999, respectively. The Company's 2001 and
2000 consolidated financial statements have, therefore, been restated to accrue
the additional interest income and the additional compensation expense as well
as income tax expense of $69,800 and $43,449, respectively, related to the
$314,167 and $110,558 respective net effect of the corrections on income before
taxes. The effect of the restatement increased net income by $67,109 and
$108,806 and basic earnings per share by $.08 and $.03 and diluted earnings per
share by $.07 and $.02 for the six months ended December 31, 2000 and 1999,
respectively.
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LEDGER CAPITAL CORP. AND SUBSIDIARY
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q/A or future filings with the
Securities and Exchange Commission, in annual reports or press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, various words or phrases are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include words and phrases such as: "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," "intends
to" or similar expressions. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made, and to advise readers that various factors could affect the
Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected. Such factors
include, but are not limited to: (i) general market rates, (ii) general economic
conditions, (iii) legislative/regulatory changes, (iv) monetary and fiscal
policies of the U.S. Treasury and Federal Reserve, (v) changes in the quality or
composition of the Company's loan and investment portfolios, (vi) demand for
loan products, (vii) deposit flows, (viii) competition, (ix) demand for
financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
In April, 2001 the Company discovered a mathematical error in the way in which
interest income was being accrued on certain purchased commercial real estate
mortgage and multi-family residential mortgage loans. The error resulted from an
inadvertent erroneous set-up of the loans in the Company's outsourced data
processing system. The error resulted in the under accrual of interest income on
these loans of $177,606 and $61,263 for the three months ended December 31, 2000
and 1999, respectively. Interest income has been restated to correct that error.
As a result of increased earnings in 2001 from the correction of this error,
additional compensation of zero and $36,500 is required to be accrued under the
Company's Annual Incentive Plan for the three months ended December 31, 2000 and
1999, respectively. The Company's 2001 and 2000 consolidated financial
statements have, therefore, been restated to accrue the additional interest
income and the additional compensation expense as well as income tax expense of
$69,800 and $9,732, respectively, related to the $177,606 and $24,763 respective
net effect of the corrections on income before taxes. The effect of the
restatement increased net income by $108,806 and $15,031 and basic earnings per
share by $.04 and $.01 and diluted earnings per share by $.05 and $.01 for the
three months ended December 31, 2000 and 1999, respectively.
The error resulted from an inadvertent erroneous set-up of the loans in the
Company's outsourced data processing system. The error resulted in the under
accrual of interest income on these loans of $314,167and $85,338 for the six
months ended December 31, 2000 and 1999, respectively. Interest income has been
restated to correct that error. As a result of increased earnings in 2001 from
the correction of this error, additional compensation of zero and $73,000 is
required to be accrued under the Company's Annual Incentive Plan for the six
months ended December 31, 2000 and 1999, respectively. The Company's 2001 and
2000 consolidated financial statements have, therefore, been restated to accrue
the additional interest income and the additional compensation expense as well
as income tax expense of $69,800 and $43,449, respectively, related to the
$314,167 and $110,558 respective net effect of the corrections on income before
taxes. The effect of the restatement increased net income by $67,109 and
$108,806 and basic earnings per share by $.08 and $.03 and diluted earnings per
share by $.07 and $.02 for the six months ended December 31, 2000 and 1999,
respectively.
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GENERAL
Ledger Capital Corp. (the "Company") is a holding company incorporated under the
laws of the State of Wisconsin and is engaged in the financial services business
through its wholly-owned subsidiary, Ledger Bank, S.S.B. (the "Bank"), a
Wisconsin state-chartered stock savings bank headquartered in Milwaukee,
Wisconsin. The Company's initial public offering was consummated in December
1993, and the Company acquired all of the outstanding common stock of the Bank
issued in the mutual to stock conversion of the Bank (the "Conversion") on
December 30, 1993.
The Company's primary strategy since the Conversion through fiscal 2000 has been
to focus on effectively utilizing the capital acquired in the Conversion to fund
asset growth and asset portfolio diversification into higher-yielding assets.
This strategy resulted in an increase in the Company's asset size from $179.6
million at June 30, 1994 to $508.4 million at December 31, 2000. The Company's
asset growth has come primarily through (i) the origination and purchase of
mortgage loans (principally loans secured by one-to-four family owner-occupied
homes) within and outside of the Company's primary lending area, (ii) the
purchase of mortgage-backed and related securities, and (iii) the origination
and purchase of commercial real estate and business loans within and outside of
the Company's primary lending area. This asset growth was funded through
significant increases in Federal Home Loan Bank ("FHLB") advances and other
borrowings, and increases in deposits consisting primarily of brokered and
non-brokered wholesale deposits.
The Company's asset portfolio diversification has been achieved by altering the
composition of loans and securities originated, purchased, sold and held in the
total asset portfolio. In particular, the Company has focused on originating and
purchasing higher-yielding non-conforming one-to-four family, multi-family,
commercial real estate and commercial business loans secured by properties or
assets located both within and outside of the Company's primary lending area, to
either replace or supplement lower-yielding one-to-four family mortgage loans
and principal run-off from the mortgage securities portfolio. For the six months
ended December 31, 2000, the Company originated and purchased loans or
participation interests (loan production) totaling $61.0 million and $13.2
million, respectively (total loan production of $74.2 million), as compared to
the six months ended December 31, 1999 when originated and purchased loans and
participation interests totaled $65.9 million and $68.3 million, respectively
(total loan production of $134.2 million). Approximately $13.2 million and $66.8
million of the Company's total loan production related to properties or business
assets located outside of the Company's primary lending area in the six months
ended December 31, 2000 and 1999, respectively. It is anticipated that the lower
level of loans purchased outside of the Company's lending area will continue
through the balance of fiscal 2001.
The Company has substantially completed its strategy of utilizing the capital
acquired in the Conversion to fund asset growth and asset portfolio
diversification into higher-yielding assets. In fiscal 2001, the Company does
not intend to significantly grow in asset size from its current level of $520.0
million at June 30, 2000 and may decrease its' asset size to maintain risk-based
capital regulatory ratios. Under FDIC regulatory capital adequacy guidelines,
the Bank must maintain certain amounts and ratios of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined in the
regulations) in order to maintain its status as a well-capitalized institution.
As of June 30, 2000 and December 31, 2000, the Bank was fully-leveraged from a
risk-based capital standpoint, with ratios of total capital to risk-weighted
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19
assets of 10.34% and 11.17%, respectively (with a required ratio of 10%). See
Note 5 to the Company's Notes to Consolidated Financial Statements (Unaudited).
Therefore, in fiscal 2001, in order to maintain its well-capitalized status, the
Bank will only be able to increase its asset base to the extent of net retained
earnings.
The Company intends to continue to maximize the yield on its loan portfolio in
fiscal 2001 by maintaining the portfolio percentage composition of
higher-yielding non-conforming one-to-four family, multi-family, commercial real
estate and commercial business loans and selling substantially all of its
current year lower-yielding one-to-four family mortgage loans originated. The
Company projects that total loan production will be approximately $200 million
in fiscal 2001 compared to $259.3 million in fiscal 2000. The Company
anticipates that approximately less than half of its total loan production in
fiscal 2001 will be generated from the purchase of loans secured by properties
located outside of its primary market area. A significant portion of
out-of-market purchases are expected to relate to non-conforming one-to-four
family mortgage loans, multi-family and commercial real-estate loans.
The Company intends to evaluate the benefits of converting the Bank from a state
thrift charter to a state bank charter in 2001. Under regulations established
for state savings banks by the Wisconsin Department of Financial Institutions
("DFI"), the Bank is limited in the amount of commercial real estate and
commercial business loans it can hold in its loan portfolio. The DFI approved
limit for the Bank was 30% of the Bank's total asset base at December 31, 2000
and June 30, 2000. At December 31, 2000, the Bank had $132.1 million of such
loans in its portfolio, representing 26.0% of the Bank's total asset base of
$508.4 million. At June 30, 2000, the Bank had $138.3 million of such loans in
its portfolio, representing 26.0% of the Bank's asset base of $520.0 million.
The Company projects that the percentage of total assets represented by
commercial real estate and commercial business loans will not increase
significantly in fiscal 2001 as a substantial portion of these new originations
and purchases are expected to be sold in the secondary market. Thus, while
management believes that this regulatory limit is currently sufficient to meet
the Bank's business strategy in fiscal 2001, the Company intends to evaluate
whether a state bank charter would provide more lending flexibility.
The Company intends to increase the level of core retail deposits relative to
brokered and non-brokered wholesale deposits which is expected to reduce the
overall cost of liabilities for the Company. This process began in fiscal 2001
with the change of the name of the bank to Ledger Bank, S.S.B. from West Allis
Savings Bank, and will continue with the opening of a new full-service banking
center in Glendale, Wisconsin, implementing a proactive internal sales culture,
and by offering an internet-only deposit product.
The Company changed its bank name from West Allis Savings Bank to Ledger Bank,
S.S.B. during the second quarter of fiscal 2001. The Company intends to support
the new name and enhanced brand identity through increased marketing
expenditures in fiscal 2001. In addition, a new full-service banking center in
Glendale, Wisconsin opened January 2, 2001. This north shore location currently
serves as the executive and administrative headquarters for the Company and
Bank. The full-service banking center offers traditional deposit products and
services, discount brokerage services, and mortgage, consumer and commercial
business lending services. The Company expects to incur significant non-interest
expenses in connection with opening the new banking center.
During fiscal 2001, the Company also intends to generate additional non-interest
income from existing and new revenue sources. This is expected to be
accomplished by (i) continuing to generate commercial lending and deposit
activities through the commercial lending division, (ii) increasing fee income
opportunities within the residential mortgage lending division through the sale
of one-to-four family mortgage loans and referral of subprime mortgage loans,
(iii) increasing fees from its insurance subsidiary, Ledger Investment Services,
Inc., and (iv) expanding commercial mortgage banking activities during fiscal
2001.
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20
In fiscal 2001, the Company intends to continue pursuing commercial lending
activities through its commercial banking division as another source of
additional fee income and higher-yielding assets. The focus of the Company's
commercial division will be the origination and purchase of small business loans
and leases, as well as the acquisition of business deposits. During fiscal 2000,
the Company originated and purchased $158.2 million of multi-family, commercial
real estate, multi-family construction, commercial construction and commercial
business loans, lines of credit and leases, of which $80.9 million were
purchases and $77.3 were originations. Management currently projects that the
commercial lending division will significantly decrease its origination and
purchase activity (by approximately 50%) during fiscal 2001 in order to maintain
a minimal growth rate in the Company's asset base. The Company also expects
increased fee income from the commercial banking division resulting from a
growth in business deposit relationships.
During fiscal 2001, the Company intends to increase its non-interest income by
expanding the secondary marketing activities of its residential mortgage
division, generating additional fee income through the sale of mortgage credit
and life insurance, and through the referral of subprime mortgage loans to a
third party lender. The Company expects one-to-four family mortgage loan
originations to increase due to the lower level of market interest rates and
increased marketing activities and expansion of our retail banking centers. It
is currently anticipated that substantially all of the 30-year fixed rate
conforming one-to-four family mortgage loans originated in fiscal 2001 will be
sold in the secondary market resulting in income from gains on loans sold.
During fiscal 2001, the Company plans to generate non-interest income by
leveraging its existing commercial lending capabilities through the origination,
selling and servicing of commercial real estate mortgages on a national basis,
with primary concentration in the southwest and western regions of the country.
While the Company primarily expects to originate and purchase commercial real
estate mortgages on a national basis, it also may originate and purchase loans
or participation interests in loans secured by multi-family real estate and
commercial business assets. The new commercial mortgage banking operation,
Ledger Financial, Inc. ("LFI"), is a wholly-owned subsidiary of the Company. LFI
will originate loans from a third party commercial real-estate broker on a
non-exclusive basis and act as the lender of record until the loan is sold
without recourse, generally within 45 days of the loan closing. LFI will retain
the servicing rights to these loans and receive a servicing fee. The Company
estimates that based on LFI operations for the six months ended December 31,
2000 approximately $30 - $50 million of commercial real estate mortgage loans
will be originated, sold and serviced on a national basis, with primary
concentration in the southwest and western regions of the country. During the
six months ended December 31, 2000, LFI originated a $3.7 million loan and sold
$1.5 million of that loan. LFI revenues, generated primarily through the
collection of originating and servicing fees, are projected to be approximately
$125,000 - $200,000 in fiscal 2001. The primary benefit of the expansion of the
Bank's commercial lending activities is to gain economies of scale through the
ability to leverage existing staff, expertise level, overhead and infrastructure
in order to increase fee income without a significant incremental increase in
expenses.
The Company expects to incur significant increases in non-interest expense as a
result of implementing its strategic business plan in fiscal 2001. In addition,
due to the Company's negative interest rate gap position (32.9% at December 31,
2000) and the lower level of market interest rates experienced so far in 2001,
management estimates that net interest income will increase during the last
quarter of fiscal 2001 and in future quarters provided market interest rates
remain unchanged or decline. Due to the contractual maturity structure of both
retail and wholesale certificates of deposit, the benefit of lower interest
rates is realized by the Company in future quarters as those certificates of
deposit mature and are repriced at the new lower interest rates. To mitigate the
potential negative effect on net income in future periods due to increases in
market interest rates, the Company intends to continue to decrease its negative
interest rate gap position by lengthening the maturities of its wholesale
funding sources (wholesale brokered CDs and FHLB advances). The Company also may
implement hedging strategies involving derivative financial instruments such as
options and interest rate swaps during fiscal 2001. See "Management's Discussion
and Analysis of Financial Condition - Asset/Liability Management." As a result
of the projected expense
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increases and narrowing of interest margin due to the negative gap position and
the generally higher level of interest rates in the first half of fiscal 2001,
the Company expects net income in fiscal 2001 to fall below reported net income
for fiscal 2000. Despite the projected decline in net income, the Company
believes the strategic benefits of the expanded sales and branch activities will
have a long-term positive impact on the Company's results of operations and
franchise value.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered
deposits, proceeds from principal and interest payments on loans, principal and
interest payments on mortgage-backed and related securities, FHLB-Chicago
advances and reverse repurchase agreements. Alternative funding sources are
evaluated and utilized based upon factors such as interest rates, availability,
maturity, administrative costs and retention capability. Although maturity and
scheduled amortization of loans are predictable sources of funds, deposit flows,
mortgage prepayments and prepayments on mortgage-backed and related securities
are influenced significantly by general interest rates, economic conditions and
competition. Mortgage loans and mortgage securities prepayments increased in
fiscal 1999 overall as interest rates declined significantly during the first
half of the fiscal year before increasing in the last half of the fiscal year.
As a result of the upward trend in interest rates that extended through most of
fiscal 2000, mortgage loan and mortgage securities prepayments and gain on sales
of loans have decreased compared to the fiscal 1999 period. Interest rates have
decreased during the six months ended December 31, 2000 producing an increase in
gains on the sales of loans for the period.
The primary investing activity of the Company is the origination and purchase of
loans and the purchase of mortgage-backed and related securities. For the six
months ended December 31, 2000, the Company originated and purchased loans
totaling $61.0 million and $13.2 million, respectively, as compared to the six
months ended December 31, 1999 when originated and purchased loans totaled $65.9
million and $68.3 million, respectively. Purchases of mortgage-backed and
related securities held-to-maturity for the six months ended December 31, 2000
and 1999 totaled $0 and $8.1 million, respectively. There were no purchases of
investment securities held-to-maturity for the six months ended December 31,
2000 and 1999.
For the six months ended December 31, 2000 and 1999, these activities were
funded primarily by principal repayments on loans of $64.4 million and $60.1
million, respectively; principal repayments on mortgage-backed and related
securities of $6.1 million and $23.6 million, respectively; proceeds from the
sale of mortgage loans of $20.5 million and $6.8 million, respectively; net
proceeds from notes payable to the FHLB-Chicago of $20.0 and $23.5 million,
respectively; and a net increase in deposits of $29.5 million during the 1999
period. There were purchases of $807,000 of securities available-for-sale for
the six months ended December 31, 2000, compared to purchases of $34.7 million
for the six months ended December 31, 1999. There were no sales of securities
available-for-sale for the six months ended December 31, 2000 and sales of $44.8
million for the six months ended December 31, 1999. There were no purchases or
sales of trading securities for the six months ended December 31, 2000 and 1999.
The Company is required to maintain minimum levels of liquid assets under the
regulations of the Wisconsin Department of Financial Institutions, Division of
Savings and Loan for state-chartered stock savings banks. Savings banks are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers acceptances, certain corporate debt
securities, securities of certain mutual funds and specified United States
government, state or federal agency obligations) of not less than 8.0%. The
Company's liquidity ratio was 12.35% at December 31, 2000. The Company adjusts
its liquidity levels to meet various funding needs and to meet its asset and
liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The levels of these assets
are dependent on the Company's operating, financing, lending and investing
activities during any given period. At December 31, 2000 and June 30, 2000, cash
and
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22
cash equivalents were $19.2 million and $16.6 million, respectively. The
increase in cash and cash equivalents was due to a decrease in loans receivable
and principal repayments on securities.
Liquidity management for the Company is both an ongoing and long-term function
of the Company's asset/liability management strategy. Excess funds generally are
invested in short-term investments such as federal funds or overnight deposits
at the FHLB-Chicago. Whenever the Company requires funds beyond its ability to
generate them internally, additional sources of funds are available and obtained
from the wholesale brokered and non-brokered market as well as the unused credit
line from the FHLB-Chicago (subject to the Board-imposed and regulatory
limitations discussed herein), and funds also may be available through reverse
repurchase agreements wherein the Company pledges investment, mortgage-backed or
related securities. The Company maintains a federal funds open line of credit in
the amount of $10.0 million with a correspondent bank which does not require the
direct pledging of any assets and could be used to replace a portion of its
interest rate sensitive liabilities such as borrowings and deposits should such
funding sources become difficult to obtain or retain due to an adverse interest
rate environment. Also, during the six months ended December 31, 2000, the
Company secured an additional $10.0 million federal funds open line of credit
with a separate correspondent bank. For a summary of the Company's borrowings,
see footnote (7) "Notes Payable and Other Borrowings" contained in the section
entitled "Notes to Consolidated Financial Statements." In addition, the Company
maintains a relatively high level of liquid assets, such as investment
securities and mortgage-backed and related securities available-for-sale, in
order to insure sufficient sources of funds are available to meet the Company's
liquidity needs.
At December 31, 2000, retail and wholesale certificates of deposit totaled $54.5
million and $200.5 million, respectively. Management believes that a significant
portion of its retail deposits will remain with the Company and, in the case of
wholesale brokered deposits, may be replaced with similar type accounts should
the level of interest rates change. However, in the event of a significant
increase in market interest rates, the cost of obtaining replacement wholesale
deposits and FHLB advances would increase as well.
The Bank's Board of Directors has set a maximum limitation of total borrowings
equal to 32% of total assets. The internal limitation is 3% below the allowable
borrowing limit (for all borrowings including FHLB advances and reverse
repurchase agreements) of 35% of total assets established by the FHLB-Chicago.
At December 31, 2000, FHLB advances totaled $132.5 million or 26.2% of the
Bank's total assets. At December 31, 2000, securities sold under agreements to
repurchase were $9.2 million or 1.8% of the Bank's total assets. At December 31,
2000, the Bank had unused borrowing authority under the borrowing limitations
established by the Board of Directors of $20.3 million and $35.5 million under
the FHLB total asset limitation. The Bank has and intends to continue to fund
asset growth in fiscal 2001 through modest increases in FHLB advances, and
maintain the 3% excess borrowing cushion through modest increases in FHLB
advances and reverse repurchase agreements.
The Company has various unfunded commitments at December 31, 2000 which
represent amounts the Company expects to fund during the quarter ended March 31,
2000. For a summary of such commitments, see discussion under footnote (4)
"Commitments and Contingencies" contained in the section entitled, "Notes to
Consolidated Financial Statements." The Company anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process to the issuance of firm commitments.
CHANGE IN FINANCIAL CONDITION
Total assets decreased $11.5 million, or 2.2%, from $520.0 million at June 30,
2000 to $508.4 million at December 31, 2000. This decrease is primarily
reflected in a decrease in loans receivable, mortgage-backed and related
securities available-for-sale and deposits. Cash and cash equivalents were $19.2
million and $16.6 million at December 31, 2000 and June 30, 2000, respectively.
The increase in cash and cash equivalents was due to a decrease in loans
receivable and principal repayments on securities.
20
23
Loans receivable decreased to $378.2 million at December 31, 2000 compared to
$392.3 million at June 30, 2000. The decrease in loans receivable at December
31, 2000 as compared to June 30, 2000 is primarily the result of management's
decision to decrease the level of loans purchased to increase the Bank's ratio
of total capital to risk-weighted assets. At December 31, 2000, the ratio of
total capital to risk-weighted assets was 11.17% as compared to 10.34% at June
30, 2000.
Total mortgage loans originated and purchased amounted to $55.5 million ($13.2
million of which were purchased mortgage loans) and $115.6 million ($62.8
million of which were purchased mortgage loans) for the six months ended
December 31, 2000 and 1999, respectively. At December 31, 2000, the multifamily
and commercial components of the Company's loan portfolio totaled $180.9
million, or 35.6% of the total loan portfolio, compared to $153.5 million, or
29.6% of the total loan portfolio at December 31, 1999.
During the six months ended December 31, 2000, the Company did not originate or
purchase non-conforming one-to-four family mortgage loans as compared to the six
months ended December 31, 1999 when the Company purchased $33.4 million in
non-conforming one-to-four family mortgage loans. Of the $61.0 million in loans
originated during the six months ended December 31, 2000, $23.0 million were
conforming one-to-four family mortgage loans, $15.8 million were commercial
business loans, $6.8 million were home equity loans, $4.5 million were
multi-family mortgage loans, $8.0 million were commercial real estate loans,
$67,000 were land loans and $2.8 million were consumer-related loans. The
increase in commercial business loans originated for the six months ended
December 31, 2000 as compared to the comparable 1999 period reflects a
significant increase in the refinance of commercial business loans during the
2000 period. Of the $13.2 million in loans purchased during the six months ended
December 31, 2000, all were commercial real estate loans purchased outside of
the Company's primary lending area. The lower level of loans purchased outside
of the Company's primary lending area in the 2000 period as compared to the 1999
period is expected to continue for the balance of fiscal 2001.
Of the $65.9 million in loans originated during the six months ended December
31, 1999, $21.5 million were conforming one-to-four family mortgage loans, $10.0
million were multi-family mortgage loans, $13.9 million were commercial real
estate loans, $10.2 million were commercial business loans, $5.8 million were
home equity loans and $2.9 million were consumer-related loans. Of the $68.3
million in loans purchased during the six months ended December 31, 1999, $33.4
million were non-conforming one-to-four family mortgage loans purchased outside
of the primary lending area, $22.5 million were commercial real estate loans
purchased outside of the primary lending area, $4.9 million were multi-family
mortgage loans purchased outside of the primary lending area, $1.5 million were
commercial real estate loans purchased within the primary lending area, $5.5
million were commercial business loans purchased outside of the primary lending
area and $500,000 was a land loan purchased outside of the primary lending area.
21
24
Sales of fixed-rate mortgage loans totaled $20.5 million for the six months
ended December 31,2000, compared to $6.8 million for the six months ended
December 31, 1999. The increase in the sales of fixed-rate mortgage loans in the
2000 period is due to the lower level of market interest rates that increased to
level of one-to-four family mortgage loans originated. Management continues to
sell such loans to produce cash gains on the sale and to manage the Company's
interest rate risk since these loans typically have long term fixed-rate
maturities.
Securities available-for-sale decreased to $72.6 million at December 31, 2000
compared to $74.3 million at June 30, 2000. Mortgage-backed and related
securities available-for-sale decreased to $32.1 million at December 31, 2000
compared to $35.9 million at June 30, 2000. Securities held-to-maturity
decreased to $13.6 million at December 31, 2000 compared to $15.0 million at
June 30, 2000. The decrease in securities available-for-sale and securities
held-to-maturity was the result of not replacing the principal repayments with
purchased securities.
Deposits decreased $26.3 million to $319.0 million at December 31, 2000 from
$345.3 million at June 30, 2000. The decrease in deposits was primarily due to
the Company's decrease in wholesale brokered certificates of deposits because of
a decrease in total assets to fund during the six months ended December 31,
2000. Brokered certificates of deposit totaled $189.2 million at December 31,
2000, representing 59.3% of total deposits as compared to $216.2 million, or
62.6% of total deposits, at June 30, 2000. Non-brokered wholesale deposits
totaled $11.3 million at December 31, 2000, representing 3.5% of total deposits
as compared to $14.2 million, or 4.1% of total deposits at June 30, 2000.
Deposits are the Company's primary source of externally generated funds. The
level of deposits is heavily influenced by such factors as the general level of
short- and long-term interest rates as well as alternative yields that investors
may obtain on competing investment securities such as money market mutual funds.
FHLB-Chicago advances increased to $132.5 million at December 31, 2000 compared
to $112.5 million at June 30, 2000. Securities sold under agreements to
repurchase decreased to $9.2 million at December 31, 2000 compared to $18.5
million at June 30, 2000. The Company has increased its use of FHLB-Chicago
advances and decreased its use of securities sold under agreements to repurchase
as a cost efficient way to increase the maturity of the Company's liabilities
and improve the Company's negative interest rate gap.
ASSET/LIABILITY MANAGEMENT
The Company closely monitors interest rate risk in an attempt to manage the
extent to which net interest income is significantly affected by changes in
market interest rates. In managing the Company's interest rate risk during the
six months ended December 31, 2000, the Company utilized FHLB advances to
lengthen the maturity of its' interest costing liabilities due primarily to the
attractive rates offered on FHLB advances as compared to retail and wholesale
deposits. During the six months ended December 31, 2000, the Company did not
increase its' use of derivative securities to hedge its' negative interest rate
gap. For a summary of derivative securities activities, see discussion under
footnote (9) "Accounting for Derivative Investments and Hedging Activities"
contained in the section entitled, "Notes to Consolidated Financial Statements".
At December 31, 2000, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 32.9% of total assets as compared to a
negative 41.1% at June 30, 2000.
The decrease in the Company's negative one-year gap reflects the increased use
of longer-term maturity FHLB advances to fund its' asset base. Beginning in
January 2000 and in conjunction with the increased negative gap position of the
Company, management with the approval of the Board of Directors has started to
manage the interest rate risk on the Company's short-term wholesale certificates
of deposit using interest rate caps to limit the Company's exposure to rising
interest rates. See Footnote (9) "Accounting for Derivative Investments and
Hedging Activities" for discussion of the caps. At December, 2000, the notional
amount of the interest rate caps was $75 million with maturity dates of June 14,
2001 and January 3, 2002. The interest rate caps are tied to the 3-month LIBOR
interest rate with a 7.0% strike rate. Payments will be received by the Bank if
the 3-month LIBOR increases over the 7.0% strike rate. The unamortized cost and
22
25
fair value of the interest rate caps was $416 and $166,000 at December 31, 2000
and June 30, 2000, respectively, and is recorded as an other asset in the
Consolidated Statement of Financial Condition. The time value of the caps of
$102,000 was recognized in Interest Expense in the Consolidated Statements of
Income and the change in fair value of $39,000 was recognized as a component of
Accumulated Other Comprehensive Loss for the six months ended December 31, 2000.
There are certain risks associated with interest rate caps, including the risk
that the counterparty may default and that there may not be an exact correlation
between the indices on which the interest rate cap agreements are based and the
terms of the hedged liabilities. In order to offset these risks, the Company
generally enters into interest rate cap agreements only with nationally
recognized securities firms and monitors the credit status of counterparties,
the level of collateral for such caps and the correlation between the hedged
liabilities and the indices utilized.
During periods of rising interest rates, a negative interest rate sensitivity
gap would tend to negatively affect net interest income, while a positive
interest rate sensitivity gap would positively affect net income.
Notwithstanding, the potential positive effect of the Company's one-year gap
position during periods of falling interest rates, the Company could experience
substantial prepayments of its fixed rate mortgage loans and mortgage-backed and
related securities, which would result in the reinvestment of such proceeds at
market rates which would be lower than the then current rates.
23
26
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at December 31, 2000 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
AMOUNT MATURING OR REPRICING
----------------------------------------------------------------------
MORE THAN MORE THAN
WITHIN FOUR TO ONE YEAR THREE YEARS
THREE TWELVE TO THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
-------- -------- ---------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate.................................... $ 13,243 $ 30,768 $ 78,696 $ 69,442 $ 54,535 $ 246,684
Adjustable rate............................... 33,030 36,732 35,019 4,026 1,028 109,835
Consumer loans(2).................................. 115 2,423 412 122 - 3,072
Commercial loans(2)................................ 5,718 5,743 5,689 1,724 - 18,874
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale.. 1,702 4,517 8,721 5,534 6,861 27,335
Adjustable rate............................... 11,072 7,267 - - - 18,339
Investment securities and
securities available-for-sale ................... 25,029 717 - 9,950 29,670 65,366
-------- -------- -------- -------- -------- ---------
Total interest-earning assets................. $ 89,909 $ 88,167 $128,537 $ 90,798 $ 92,094 $ 489,505
======== ======== ======== ======== ======== =========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts.................................. $ 314 $ 942 $ 1,494 $ 732 $ 704 $ 4,186
Money market deposit accounts................. 5,079 15,238 11,378 1,820 347 33,862
Passbook savings accounts..................... 1,153 3,459 5,489 2,690 2,584 15,375
Certificates of deposit....................... 116,901 118,668 17,316 2,173 - 255,058
Escrow deposits............................... - 1,197 - - - 1,197
Borrowings(4)
FHLB advances and other borrowings............ 74,090 8,000 18,030 40,000 6,500 146,620
-------- -------- -------- -------- -------- ---------
Total interest-bearing liabilities............ $197,537 $147,504 $ 53,707 $ 47,415 $ 10,135 $ 456,298
======== ======== ======== ======== ======== =========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities..................... ($107,628) ($ 59,337) $ 74,830 $ 43,383 $ 81,959 $ 33,207
======== ======== ======== ======== ======== =========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities......... ($107,628) ($166,965) ($ 92,135) ($ 48,752) $ 33,207 $ 33,207
======== ======== ======== ======== ======== =========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets..................... (21.2)% (32.9)% (18.1)% (9.6)% 6.5% 6.5%
======== ======== ======== ======== ======== =========
(1) Adjustable- and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing the
Company's historical prepayment statistics modified for forecasted
statistics using annual prepayment rates ranging from 5% to 20%, based on
the loan type.
(2) Balances have been reduced for undisbursed loan proceeds, unearned credit
insurance premiums, deferred loan fees, purchased loan discounts and the
allowance for loan losses, which aggregated $16.6 million at December 31,
2000.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain historical
amount of such accounts to be core deposits having significantly longer
effective maturities and times to repricing based on the Company's
historical retention of such deposits in changing interest rate
environments. NOW accounts, passbook savings accounts and money market
deposit accounts are assumed to be withdrawn at annual rates of 30%, 30%
and 60%, respectively, of the declining balance of such accounts during the
period shown. The withdrawal rates used are higher than the Company's
historical rates but are considered by management to be more indicative of
expected withdrawal rates currently. If all of the Company's NOW accounts,
passbook savings accounts and money market deposit accounts had been
assumed to be subject to repricing within one year, the one-year cumulative
deficiency of interest-earning assets over interest-bearing liabilities
would have been $194.2 million or 38.2% of total assets.
(4) Adjustable- and floating-rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due.
24
27
ASSET QUALITY
The Company and the Bank regularly review assets to determine proper valuation.
The review consists of an update of the historical loss experience, valuation of
the underlying collateral and the outlook for the economy in general as well as
the regulatory environment.
The following table sets forth information regarding the Bank's non-accrual
loans and foreclosed properties at the dates indicated:
THREE MONTHS ENDED
-------------------------------------------------------------------
DEC 31 SEP 30 JUN 30 MAR 31 DEC 31
2000 2000 2000 2000 1999
-------- -------- -------- -------- --------
(DOLLARS IN (DOLLARS IN (DOLLARS IN (DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS) THOUSANDS) THOUSANDS) THOUSANDS)
Non-accrual mortgage loans............................ $ 2,361 $ 1,990 $ 1,798 $ 1,812 $ 2,100
Non-accrual consumer loans............................ 44 48 54 63 65
Non-accrual commercial loans & leases................. 2,127 - - 163 -
-------- -------- -------- -------- --------
Total non-accrual loans............................... $ 4,532 $ 2,038 $ 1,852 $ 2,038 $ 2,165
======== ======== ======== ======== ========
Loans 90 days or more
delinquent and still accruing....................... 46 16 18 118 118
-------- -------- -------- -------- --------
Total non-performing loans............................ $ 4.578 $ 2.054 $ 1.870 $ 2.156 $ 2,283
======== ======== ======== ======== ========
Non-accrual investment securities..................... - - - - -
Total foreclosed real estate net of
related allowance for losses ....................... 1,095 1,145 1,114 960 960
-------- -------- -------- -------- --------
Total non-performing assets........................... $ 5,673 $ 3,199 $ 2,984 $ 3,116 $ 3,243
======== ======== ======== ======== ========
Non-performing loans to
gross loans receivable.............................. 1.17% 0.51% 0.45% 0.54% 0.61%
======== ======== ======== ======== ========
Non-performing assets to
total assets ....................................... 1.12% 0.62% 0.57% 0.61% 0.63%
======== ======== ======== ======== ========
At December 31, 2000, non-performing loans increased to $4.6 million from $1.9
million at June 30, 2000. The increase is due primarily to the increase in
non-accrual commercial leases and mortgage loans. Impaired loans increased to
$2.6 million at December 31, 2000 from $880,000 at June 30, 2000. Impaired loans
consist primarily of commercial and commercial real estate loans for which,
based on current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Management believes that these loans are adequately collateralized
and/or have specific loan loss reserves established which are adequate to absorb
probable losses related to resolution. The increase in impaired loans is due
primarily to two commercial loans to one borrower with an aggregate balance of
$2.1 million at December 31, 2000. The loans are collateralized by fixtures and
equipment of a resort property located outside of the Bank's primary lending
area. The resort is currently operating under the protection of Chapter 11 of
the bankruptcy laws. On January 23, 2001 Debtor in Possession financing was
approved by the bankruptcy court. Loan payments are scheduled to resume on
February 1, 2001 and February 15, 2001. In accordance with the terms of the
Debtor in Possession financing, a buyer for the resort must be identified by May
31st with a closing no later than September 30, 2001. Management currently
believes the underlying value of the property and the Bank's collateral position
are sufficient to cover the Bank's loan balance. Therefore, the Company has
determined that no loss is probable at this time.
Potential problem loans are loans where known information about possible credit
problems of borrowers causes management to have doubts as to the ability of such
borrowers to comply with the present loan repayment terms. The decision by
management to categorize a loan as a potential problem loan does not necessarily
indicate that the Company expects losses to occur, but that management
recognizes there is a higher degree of risk associated with these performing
loans. At December 31, 2000, the Bank had a
25
28
potential problem loan with a balance of $663,000 secured by 6 first lien
one-to-four family mortgages held in trust for the benefit of the Bank and a
secondary payee under the loan obligation. The original balance of the loan was
$4.1 million. At December 31, 2000, the loan was current as to payment of
principal and interest. Proceeds from payments made to the trustee from
potential homeowners (occupying the properties under 2-year leases with an
option to purchase at an agreed upon price upon expiration of the lease-term),
or from any other eventual sale of the one-to-four family residences securing
the obligation, are to be applied by the trustee first to the repayment of the
total of all principal and interest due the Bank, with any excess over such
amounts becoming due to the secondary payee. The Bank assumed responsibility for
receipt and servicing of payments from the potential homeowners upon the
secondary payee's filing of bankruptcy in June 1999. The Bank also removed a
third party bank as the bond trustee and appointed itself as trustee in December
1999. The one-to-four family properties securing the obligation are located in
the Bank's primary lending area and management believes the underlying value of
the properties and the Bank's first lien status are sufficient to prevent any
significant loss from this credit.
ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Bank's allowance for loan
losses:
SIX MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED
DEC. 31, 2000 JUNE 30, 2000 DEC. 31, 1999
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period..................... $ 3,201 $ 2,648 $ 2,648
Additions charged to expense:
Multi-family and commercial real estate.......... 140 499 197
Consumer......................................... 40 143 55
Commercial....................................... -- 229 38
--------- ---------- ---------
180 871 290
Recoveries:
Multi-family and commercial real estate......... 10 499 --
Consumer........................................ 26 143 14
Commercial...................................... 10 22 --
Charge-offs:
One- to four-family............................. (57) (43) (30)
Multi-family & commercial real estate........... (128) (119) --
Consumer........................................ (90) (178) (12)
--------- ---------- ---------
(276) (340) (42)
--------- ---------- ---------
Net charge-offs.................................... (230) (318) (28)
--------- ---------- ---------
Balance at end of period........................... $ 3,151 $ 3,201 $ 2,910
========== ========== =========
Allowance for loan losses to
non-performing loans at end
of the period.................................... 68.83% 171.26% 127.49%
========== ========== =========
Allowance for loan losses to
total loans at end of the period................. 0.80% 0.78% 0.78%
========== ========== =========
Management believes that the allowance for loan losses is adequate as of
December 31, 2000.
26
29
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2000
AND 1999
GENERAL
Net income for the three months ended December 31, 2000 decreased to $601,000
from $924,000 for the comparable 1999 period. The decrease in net income was
primarily due to a decrease in net interest income. The decrease in net interest
income was primarily due to a decrease in net interest margin from 2.65% for the
three months ended December 31, 1999 to 2.29% for the comparable 2000 period.
Return on average equity decreased to 7.02% for the three months ended December
31, 2000 from 10.88% for the comparable 1999 period. Return on average assets
decreased to 0.48% for the three months ended December 31, 2000 from 0.70% for
the comparable 1999 period. The decrease in the return on average equity and the
return on average assets is due to the decrease in net income for the three
months ended December 31, 2000.
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
FOR THE THREE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 1999
------------------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
-------- -------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans.......................... $362,420 $ 7,536 8.32% $ 319,142 $ 6,435 8.07%
Consumer loans.......................... 2,972 99 13.32 3,480 118 13.56
Commercial loans........................ 20,528 454 8.85 21,566 538 9.98
-------- -------- ---------- --------
Total loans.......................... 385,920 8,089 8.38 344,188 7,091 8.24
Securities held-to-maturity:
Mortgage-backed securities............ 1,251 18 5.76 8,784 137 6.24
Mortgage related securities........... 12,711 218 6.86 45,185 731 6.47
-------- -------- ---------- --------
Total mortgage-backed
and related securities............. 13,962 236 6.76 53,969 868 6.43
Investment and other securities......... 11,857 180 6.07 9,171 133 5.80
Securities available-for-sale........... 72,491 1,327 7.32 89,106 1,524 6.84
Federal Home Loan Bank stock............ 8,045 161 8.00 7,407 139 7.51
-------- -------- ---------- --------
Total interest-earning assets......... 492,275 9,993 8.12 503,841 9,755 7.74
Non-interest earning assets............... 10,951 23,088
-------- ----------
Total assets.......................... $503,226 $ 526,929
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts............................ $ 3,630 7 0.77% $ 2,866 13 1.81%
Money market deposit accounts........... 33,574 468 5.58 33,004 362 4.39
Passbook accounts....................... 16,321 118 2.89 20,130 147 2.92
Certificates of deposit................. 257,512 4,414 6.86 252,085 3,476 5.52
-------- -------- ---------- --------
Total deposits........................ 311,037 5,007 6.44 308,085 3,998 5.19
Advance payments by borrowers
for taxes and insurance................ 5,235 27 2.06 4,526 26 2.39
Borrowings................................ 137,060 2,142 6.25 168,755 2,393 5.67
-------- -------- ---------- --------
Total interest-bearing liabilities.... 453,332 7,176 6.33 481,366 6,417 5.20
Non-interest bearing deposits
and liabilities......................... 15,657 11,604
Shareholders' equity...................... 34,237 33,959
-------- ----------
Total liabilities and
shareholders' equity................ $503,226 $ 526,929
======== ==========
Net interest income/interest rate spread.. $ 2,817 1.79% $ 3,338 2.41%
======== ==== ======== ====
Net earning assets/net interest margin.... $ 38,943 2.29% $ 22,475 2.65%
======== ==== ========== ====
27
30
Net interest income before provision for losses on loans decreased $521,000, or
15.6%, to $2.8 million for the three months ended December 31, 2000 from $3.3
million for the comparable 1999 period. Interest income increased $238,000 for
the three months ended December 31, 2000, partially offset by an increase in
interest expense of $759,000. The lower level of net interest income primarily
reflects a decrease in interest rate spread to 1.79% for the three months ended
December 31, 2000 from 2.41% for the comparable 1999 period and a 2.3% decrease
in average interest-earning assets to $492.3 million for the three months ended
December 31, 2000 from $503.8 million for the comparable 1999 period and by a
73.3% increase in the excess of the Company's average interest-earning assets
over average interest-bearing liabilities to $38.9 million for the three months
ended December 31, 2000 from $22.5 million for the comparable 1999 period. The
decrease in interest rate spread was primarily due to increased cost of funding
sources in the 2000 period as compared to the 1999 period.
INTEREST INCOME
Interest income increased 2.4% to $10.0 million for the three months ended
December 31, 2000 from $9.8 million for the comparable 1999 period. The increase
in interest income was the result of an increase of 38 basis points in the yield
on interest-earning assets to 8.12% for the three months ended December 31, 2000
from 7.74% for the comparable 1999 period, offset by a decrease in average
interest-earning assets of 2.3% to $492.3 million for the three months ended
December 31, 2000 from $503.8 million for the comparable 1999 period. Interest
income on loans increased 14.1% to $8.1 million for the three months ended
December 31, 2000, from $7.1 million for the comparable 1999 period. The
increase was the result of an increase in the Company's average gross loans of
12.1% to $385.9 million for the three months ended December 31, 2000 from $344.2
million for the comparable 1999 period and by an increase in average yield to
8.20% for the 2000 period from 8.17% for the comparable 1999 period. Gross loans
increased primarily as a result of the Company purchasing more loans in the
secondary market and increases in multi-family and commercial components of the
portfolio and retaining substantially all of its adjustable and short-term fixed
rate loan originations. See "Change in Financial Condition" for a discussion of
the increase in gross loans. The increase in yield is attributable to the
increase in loans originated and purchased at higher interest rates and the
upward increase on adjustable rate loans since the period ending December 31,
1999.
Interest income on mortgage-backed securities decreased 86.9% to $18,000 for the
three months ended December 31, 2000 from $137,000 for the comparable 1999
period. The decrease was primarily due to a decrease in average balances to $1.3
million for the three months ended December 31, 2000 from $8.8 million for the
comparable 1999 period and by a decrease in average yield to 5.76% for the 2000
period from 6.24% for the 1999 period. Interest income on mortgage-related
securities decreased 70.2% to $218,000 for the three months ended December 31,
2000 from $731,000 for the comparable 1999 period. The decrease was primarily
due to a decrease in average balances to $12.7 million for the three months
ended December 31, 2000 from $45.2 million for the comparable 1999 period,
offset by an increase in yield to 6.86% for the 2000 period from 6.47% for the
1999 period. The decrease in average balances of mortgage-backed securities and
mortgage-related securities was primarily due to the sale of $2.8 million and
$23.1 million, respectively, in the three months ended March 31, 2000. The
increase in average yield on mortgage-related securities was primarily due to
accelerated amortization of purchase premiums on mortgage related securities due
to faster than projected principal repayments during the 1999 period. The
decrease in average balances of mortgage-backed and related securities is due to
management's decision to replace securities that were sold and repaid with
loans. Interest income on investment securities and securities
available-for-sale and investment and other securities decreased 9.1% to $1.5
million for the three months ended December 31, 2000 from $1.7 million for the
comparable 1999 period. The decrease was primarily due to a decrease in average
balances to $84.3 million for the three months ended December 31, 2000 from
$98.3 million for the 1999 period, offset by an increase in average yield to
7.15% for the three months ended December 31, 2000 from 6.74% for the comparable
1999 period. The decrease in securities available-for-sale was due to
management's decision to sell securities during the 2000 period to fund loan
originations and purchases. The increased average yield was primarily
attributable to the increase in interest rates during fiscal year 2000.
28
31
INTEREST EXPENSE
Interest expense increased 11.8% to $7.2 million for the three months ended
December 31, 2000 from $6.4 million for the comparable 1999 period. The increase
was the result of an increase in the average rate paid on interest-bearing
liabilities to 6.33% for the 2000 period from 5.20% for the 1999 period, offset
by a 5.8% decrease in the average amount of interest-bearing liabilities to
$453.3 million for the three months ended December 31, 2000 compared to $481.4
million for the comparable 1999 period. The increased balances of certificate of
deposit accounts and money market deposit accounts at higher average interest
rates was the primary reason for the increase in the average rate paid on the
interest-bearing liabilities for the three months ended December 31, 2000 as
compared to the 1999 period. Interest expense on deposits increased 25.2% to
$5.0 million for the three months ended December 31, 2000 from $4.0 million for
the comparable 1999 period. The increase was the result of an increase in the
average rate paid to 6.44% for the three months ended December 31, 2000 from
5.19% for the 1999 period and by an increase in average balances of 1.0% to
$311.0 million for the three months ended December 31, 2000 from $308.1 million
for the comparable 1999 period. The increase in deposits was primarily due to an
increase of 2.2% in certificates of deposit accounts to $257.5 million for the
three months ended December 31, 2000 from $252.1 million for the comparable 1999
period, with an increase in the average rate paid to 6.86% for the 2000 period
from 5.52% for the 1999 period. Money market deposit accounts increased 1.7% to
$33.6 million for the three months ended December 31, 2000 from $33.0 million
for the comparable 1999 period and by an increase in average rate paid to 5.58%
for the 2000 period from 4.39% for the 1999 period. NOW accounts increased 26.7%
to $3.6 million for the three months ended December 31, 2000 from $2.9 million
for the comparable 1999 period, offset by a decrease in average rate paid to
0.77% for the 2000 period from 1.81% for the 1999 period.
Offsetting the increases in deposits was a decrease in passbook accounts of
18.9% to $16.3 million for the three months ended December 31, 2000 from $20.1
million for the comparable 1999 period. The Company's increase in certificates
of deposit was the result of aggressive marketing and pricing and the use of
brokered certificates of deposit. Of the $257.5 million in the average balance
of certificates of deposit for the three months ended December 31, 2000, $190.5
million, or 74.0%, represented brokered certificates of deposit compared to
$166.4 million, or 66.0%, for the 1999 period. The average rate paid on brokered
certificates of deposit increased to 6.83% for the three months ended December
31, 2000 from 5.48% for the comparable 1999 period. The increase was primarily
due to the increased interest rate environment in the 2000 period as compared to
the 1999 period. Interest on borrowings (FHLB advances and reverse repurchase
agreements) decreased 10.5% to $2.1 million for the three months ended December
31, 2000 from $2.4 million for the comparable 1999 period. The decrease was
primarily due to the decrease in average balances of FHLB advances and reverse
repurchase agreements of 18.8% to $137.1 million for the three months ended
December 31, 2000 from $168.8 million for the comparable 1999 period, offset by
an increase in the average rate paid to 6.25% for the 2000 period from 5.67% for
the 1999 period. See comments under "Change in Financial Condition" contained in
the section entitled, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of deposits.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans decreased 41.2% to $100,000 for the three
months ended December 31, 2000 from $170,000 for the comparable 1999 period. The
level of allowance for losses on loans generally is determined by the Bank's
historical loan loss experience, the condition and composition of the Bank's
loan portfolio, and existing general economic conditions. Management anticipates
that as the Company's volume of multi-family and commercial/non-residential real
estate lending activity continues to increase, the Company will continue to
build a higher level of allowance for loan losses established through a
provision for loan losses. The lower provision for losses on loans during the
period reflects the lower loan balances during the period as well as
management's evaluation of the loan portfolio at December 31, 2000. The
allowance for losses was established at $3.2 million at December 31 and June 30,
2000. While the allowance for losses on loans remained unchanged, the allowance
for loan losses as a percentage of gross loans increased to 0.80% at December
31, 2000 from 0.78% at June 30, 2000, reflecting a decline in the level of gross
loans outstanding and the continued low level of loans charged off. See comments
under "Asset Quality" contained
29
32
in the section entitled, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of non-performing loans.
NON-INTEREST INCOME
Non-interest income increased 9.0% to $423,000 for the three months ended
December 31, 2000 from $388,000 for the comparable 1999 period. The largest
components of the increase were an increase in gains on the sale loans to
$166,000 for the three months ended December 31, 2000 from $57,000 for the
comparable 1999 and an increase in loan servicing fees to $15,000 for the three
months ended December 31, 2000 from $12,000 for the comparable 1999 period. The
increase in gains on the sale of loans was due to the increased level of loans
originated in the Bank's primary lending area that were sold. Partially
offsetting the increases in non-interest income was a decrease in service
charges on loans to $66,000 for the three months ended December 31, 2000 from
$100,000 for the comparable 1999 period, a decrease in service charges on
deposit accounts to $107,000 for the three months ended December 31, 2000 from
$119,000 for the comparable 1999 period, a decrease in gains on the sale of
securities and mortgage-backed and related securities to $0 for the three months
ended December 31, 2000 from $9,000 for the comparable 1999 period, a decrease
in insurance commissions to $22,000 for the three months ended December 31, 2000
from $39,000 for the comparable 1999 period and a decrease in other non-interest
income to $47,000 for the three months ended December 31, 2000 from $52,000 for
the comparable 1999 period. The decrease in gains on the securities and
mortgage-backed and related securities reflects management's decision to sell
securities from the available-for-sale portfolio in the 1999 period to partially
fund loan growth.
NON-INTEREST EXPENSE
Non-interest expense increased 1.8% to $2.239 million for the three months ended
December 31, 2000 from $2.20 million for the comparable 1999 period. The
increase was primarily due to an increase in compensation and benefits to $1.307
million for the three months ended December 31, 2000 from $1.255 million for the
comparable 1999 period and an increase in other non-interest expense to $398,000
for the three months ended December 31, 2000 from $329,000 for the comparable
1999 period. Partially, offsetting the increases was a decrease in deposit
insurance premiums of $25,000 to $18,000 for the three months ended December 31,
2000 from $43,000 for the comparable 1999 period, a decrease in marketing
expense of $41,000 to $108,000 for the three months ended December 31, 2000 from
$149,000 for the comparable 1999 period and a decrease in occupancy and
equipment expense of $16,000 to $408,000 for the three months ended December 31,
2000 from $424,000 for the comparable 1999 period. The decrease in deposit
insurance premiums relates to a decreased premium rate charged by the FDIC for
deposit insurance in the 2000 period. The increase in other non-interest expense
is primarily due to increases in printing, office supplies, organization dues,
legal and other miscellaneous expenses. Management currently expects that
non-interest expense will increase in the last two quarters of fiscal 2001
primarily due to the added marketing and staffing costs of the new Glendale
banking center.
INCOME TAXES
Income tax expense decreased to $300,000, an effective rate of 33.3% from
$431,000, an effective rate of 31.8% primarily due to lower income before taxes.
The effective tax rate is less than the expected Federal tax rate of 34% due to
the benefit of state net operating loss carryforwards, income on tax-free
securities and the increase in cash surrender value of life insurance.
30
33
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2000 AND
1999
GENERAL
Net income for the six months ended December 31, 2000 decreased to $1.3 million
from $1.7 million for the comparable 1999 period. The decrease in net income was
primarily due to a decrease in net interest income. The decrease in net interest
income was primarily due to a decrease in net interest margin to 2.29% for the
six months ended December 31, 2000 from 2.65% for the six months ended December
31, 1999. Return on average equity decreased to 7.22% for the six months ended
December 31, 2000 from 10.19% for the comparable 1999 period. Return on average
assets decreased to 0.49% for the six months ended December 31, 2000 from 0.68%
for the comparable 1999 period. The decrease in the return on average equity and
the return on average assets is due to the decrease in net income for the six
months ended December 31, 2000.
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
FOR THE SIX MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 1999
------------------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
-------- -------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans.......................... $ 362,739 $ 14,957 8.25% $ 298,130 $ 12,039 8.08%
Consumer loans.......................... 3,033 202 13.32 3,548 244 13.75
Commercial loans........................ 22,037 1,071 9.72 20,092 1,008 10.03
--------- --------- --------- --------
Total loans.......................... 387,809 16,230 8.37 321,770 13,291 8.26
Securities held-to-maturity:
Mortgage-backed securities............ 1,301 38 5.84 9,483 298 6.28
Mortgage related securities........... 13,020 446 6.85 44,521 1,432 6.43
--------- --------- --------- --------
Total mortgage-backed
and related securities............. 14,321 484 6.76 54,004 1,730 6.41
Investment and other securities......... 12,678 391 6.17 8,747 245 5.60
Securities available-for-sale........... 72,974 2,678 7.34 95,345 3,111 6.52
Federal Home Loan Bank stock............ 7,958 313 7.87 7,055 252 7.14
--------- --------- --------- --------
Total interest-earning assets......... 495,740 20,096 8.11 486,921 18,629 7.65
Non-interest earning assets............... 12,306 22,578
--------- ---------
Total assets.......................... $ 508,046 $ 509,499
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts............................ $ 3,400 13 0.76% $ 2,841 25 1.76%
Money market deposit accounts........... 31,917 867 5.43 34,432 761 4.42
Passbook accounts....................... 16,942 243 2.87 20,414 298 2.92
Certificates of deposit................. 268,551 9,149 6.81 241,593 6,548 5.42
--------- --------- --------- --------
Total deposits........................ 320,810 10,272 6.40 299,280 7,632 5.10
Advance payments by borrowers
for taxes and insurance................ 4,905 50 2.04 4,277 51 2.38
Borrowings................................ 133,567 4,103 6.14 158,552 4,496 5.67
--------- --------- --------- --------
Total interest-bearing liabilities.... 459,282 14,425 6.28 462,109 12,179 5.27
Non-interest bearing deposits
and liabilities......................... 13,962 13,388
Shareholders' equity...................... 34,802 34,002
--------- ---------
Total liabilities and
shareholders' equity................ $ 508,046 $ 509,499
========= =========
Net interest income/interest rate spread.. $ 5,671 1.83% $ 6,450 2.38%
========= ==== ======== ====
Net earning assets/net interest margin.... $ 36,458 2.29% $ 24,812 2.65%
========= ==== ========= ====
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34
Net interest income before provision for losses on loans decreased $779,000, or
12.1%, to $5.7 million for the six months ended December 31, 2000 from $6.5
million for the comparable 1999 period. Interest income increased $1.5 million
for the six months ended December 31, 2000, partially offset by an increase in
interest expense of $2.2 million. The lower level of net interest income
primarily reflects a decrease in interest rate spread to 1.83% for the six
months ended December 31, 2000 from 2.38% for the comparable 1999 period, offset
by a 1.8% increase in average interest-earning assets to $495.7 million for the
six months ended December 31, 2000 from $486.9 million for the comparable 1999
period and by a 46.9% increase in the excess of the Company's average
interest-earning assets over average interest-bearing liabilities to $36.5
million for the six months ended December 31, 2000 from $24.8 million for the
comparable 1999 period. The decrease in interest rate spread was primarily due
to increased cost of funding sources in the 2000 period as compared to the 1999
period.
INTEREST INCOME
Interest income increased 7.9% to $20.1 million for the six months ended
December 31, 2000 from $18.6 million for the comparable 1999 period. The
increase in interest income was the result of an increase of 46 basis points in
the yield on interest-earning assets to 8.11% for the six months ended December
31, 2000 from 7.65% for the comparable 1999 period and by an increase in average
interest-earning assets of 1.8% to $495.7 million for the six months ended
December 31, 2000 from $486.9 million for the comparable 1999 period. Interest
income on loans increased 22.1% to $16.2 million for the six months ended
December 31, 2000, from $13.3 million for the comparable 1999 period. The
increase was the result of an increase in the Company's average gross loans of
20.5% to $387.8 million for the six months ended December 31, 2000 from $321.8
million for the comparable 1999 period and by an increase in average yield to
8.37% for the 2000 period from 8.26% for the comparable 1999 period. Gross loans
increased primarily as a result of the Company purchasing more loans in the
secondary market and increases in multi-family and commercial components of the
portfolio and retaining substantially all of its adjustable and short-term fixed
rate loan originations. See "Change in Financial Condition" for a discussion of
the increase in gross loans. The increase in yield is attributable to the
increase in loans originated and purchased at higher interest rates and the
upward increase on adjustable rate loans since the period ending December 31,
1999.
Interest income on mortgage-backed securities decreased 87.2% to $38,000 for the
six months ended December 31, 2000 from $298,000 for the comparable 1999 period.
The decrease was primarily due to a decrease in average balances to $1.3 million
for the six months ended December 31, 2000 from $9.5 million for the comparable
1999 period and by a decrease in average yield to 5.84% for the 2000 period from
6.28% for the 1999 period. Interest income on mortgage-related securities
decreased 68.9% to $446,000 for the six months ended December 31, 2000 from $1.4
million for the comparable 1999 period. The decrease was primarily due to a
decrease in average balances to $13.0 million for the six months ended December
31, 2000 from $44.5 million for the comparable 1999 period, offset by an
increase in yield to 6.85% for the 2000 period from 6.43% for the 1999 period.
The decrease in average balances mortgage-backed securities and mortgage-related
securities was primarily due to the sale of $2.8 million and $23.1 million,
respectively, in the three months ended March 31, 2000. The increase in average
yield on mortgage-related securities was primarily due to accelerated
amortization of purchase premiums on mortgage related securities due to faster
than projected principal repayments during the 1999 period. The decrease in
average balances of mortgage-backed and related securities is due to
management's decision to replace securities that were sold and repaid with
loans. Interest income on investment securities and securities
available-for-sale and investment and other securities decreased 8.5% to $3.1
million for the six months ended December 31, 2000 from $3.4 million for the
comparable 1999 period. The decrease was primarily due to a decrease in average
balances to $85.7 million for the six months ended December 31, 2000 from $104.1
million for the 1999 period, offset by an increase in average yield to 7.17% for
the six months ended December 31, 2000 from 6.45% for the comparable 1999
period. The decrease in securities available-for-sale was due to management's
decision to sell securities during the 2000 period to fund loan originations and
purchases. The increased average yield was primarily attributable to the
increase in interest rates during fiscal year 2000.
32
35
INTEREST EXPENSE
Interest expense increased 18.4% to $14.4 million for the six months ended
December 31, 2000 from $12.2 million for the comparable 1999 period. The
increase was the result of an increase in the average rate paid on
interest-bearing liabilities to 6.28% for the 2000 period from 5.27% for the
1999 period, offset by a 0.6% decrease in the average amount of interest-bearing
liabilities to $459.3 million for the six months ended December 31, 2000
compared to $462.1 million for the comparable 1999 period. The increased
balances of certificate of deposit accounts and money market deposit accounts at
higher average interest rates was the primary reason for the increase in the
average rate paid on the interest-bearing liabilities for the six months ended
December 31, 2000 as compared to the 1999 period. Interest expense on deposits
increased 34.6% to $10.3 million for the six months ended December 31, 2000 from
$7.6 million for the comparable 1999 period. The increase was the result of an
increase in the average rate paid to 6.40% for the six months ended December 31,
2000 from 5.10% for the 1999 period and by an increase in average balances of
7.2% to $320.8 million for the six months ended December 31, 2000 from $299.3
million for the comparable 1999 period. The increase in deposits was primarily
due to an increase of 11.2% in certificates of deposit accounts to $268.6
million for the six months ended December 31, 2000 from $241.6 million for the
comparable 1999 period, with an increase in the average rate paid to 6.81% for
the 2000 period from 5.42% for the 1999 period. NOW accounts increased 19.7% to
$3.4 million for the six months ended December 31, 2000 from $2.8 million for
the comparable 1999 period, offset by a decrease in average rate paid to 0.76%
for the 2000 period from 1.76% for the 1999 period.
Offsetting the increases in deposits was a decrease in passbook accounts of
17.0% to $16.9 million for the six months ended December 31, 2000 from $20.4
million for the comparable 1999 period. Money market deposit accounts decreased
7.3% to $31.9 million for the six months ended December 31, 2000 from $34.4
million for the comparable 1999 period and by an increase in average rate paid
to 5.43% for the 2000 period from 4.42% for the 1999 period. The Company's
increase in certificates of deposit was the result of aggressive marketing and
pricing and the use of brokered certificates of deposit. Of the $268.6 million
in the average balance of certificates of deposit for the six months ended
December 31, 2000, $200.3 million, or 74.6%, represented brokered certificates
of deposit compared to $139.0 million, or 57.5%, for the 1999 period. The
average rate paid on brokered certificates of deposit increased to 6.86% for the
six months ended December 31, 2000 from 5.48% for the comparable 1999 period.
The increase was primarily due to the increased interest rate environment in the
2000 period as compared to the 1999 period. Interest on borrowings (FHLB
advances and reverse repurchase agreements) decreased 8.7% to $4.1 million for
the six months ended December 31, 2000 from $4.5 million for the comparable 1999
period. The decrease was primarily due to the decrease in average balances of
FHLB advances and reverse repurchase agreements of 15.8% to $133.6 million for
the six months ended December 31, 2000 from $158.6 million for the comparable
1999 period, offset by an increase in the average rate paid to 6.15% for the
2000 period from 5.67% for the 1999 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans decreased 37.9% to $180,000 for the six months
ended December 31, 2000 from $290,000 for the comparable 1999 period. The lower
provision for losses on loans during the period reflects the lower loan balances
during the period as well as management's evaluation of the loan portfolio at
December 31, 2000. For a discussion of the factors considered by management in
determining the appropriate level of allowance for losses on loans to be
established through a provision for losses on loans, see comments under
"Provision for Losses on Loans" contained in the section entitled, "Results of
Operations - Comparison of the Three Months Ended December 31, 2000 and 1999."
See comments under "Asset Quality" contained in the section entitled,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of non-performing loans.
33
36
NON-INTEREST INCOME
Non-interest income increased 2.0% to $810,000 for the six months ended December
31, 2000 from $794,000 for the comparable 1999 period. The largest components of
the increase were an increase in gains on the sale loans to $278,000 for the six
months ended December 31, 2000 from $153,000 for the comparable 1999, an
increase in loan servicing fees to $34,000 for the six months ended December 31,
2000 from $24,000 for the comparable 1999 period and an increase in insurance
commissions to $57,000 for the six months ended December 31, 2000 from $50,000
for the comparable 1999 period. The increase in gains on the sale of loans was
due to the increased level of loans originated in the Bank's primary lending
area that were sold. Partially offsetting the increases in non-interest income
was a decrease in service charges on loans to $140,000 for the six months ended
December 31, 2000 from $158,000 for the comparable 1999 period, a decrease in
service charges on deposit accounts to $220,000 for the six months ended
December 31, 2000 from $241,000 for the comparable 1999 period, a decrease in
gains on the sale of securities and mortgage-backed and related securities to $0
for the six months ended December 31, 2000 from $62,000 for the comparable 1999
period and a decrease in other non-interest income to $81,000 for the six months
ended December 31, 2000 from $106,000 for the comparable 1999 period. The
decrease in gains on the securities and mortgage-backed and related securities
reflects management's decision to sell securities from the available-for-sale
portfolio in the 1999 period to partially fund loan growth.
NON-INTEREST EXPENSE
Non-interest expense was unchanged at $4.4 million for the six months ended
December 31, 2000 and 1999. Compensation and benefits increased to $2.642
million for the six months ended December 31, 2000 from $2.625 million for the
comparable 1999 period and other non-interest expense increased to $757,000 for
the six months ended December 31, 2000 from $664,000 for the comparable 1999.
Offsetting the increases was a decrease in deposit insurance premiums of $53,000
to $35,000 for the six months ended December 31, 2000 from $88,000 for the
comparable 1999 period, a decrease in marketing expense of $40,000 to $162,000
for the six months ended December 31, 2000 from $202,000 for the comparable 1999
period and a decrease in occupancy and equipment expense of $17,000 to $800,000
for the six months ended December 31, 2000 from $817,000 for the comparable 1999
period. The decrease in deposit insurance premiums relates to a decreased
premium rate charged by the FDIC for deposit insurance in the 2000 period. The
increase in other non-interest expense is primarily due to increases in
printing, office supplies, organization dues, legal and other miscellaneous
expenses. Management currently expects that non-interest expense will increase
in the last two quarters of fiscal 2001 primarily due to the added marketing and
staffing costs of the new Glendale banking center.
INCOME TAXES
Income tax expense decreased to $649,000, an effective rate of 34.1% from
$826,000, an effective rate of 32.3% primarily due to lower income before taxes.
The effective tax rate is less than the expected Federal tax rate of 34% due to
the benefit of state net operating loss carryforwards, income on tax-free
securities and the increase in cash surrender value of life insurance. Also, the
effective tax rate for the six months ended December 31, 2000 increased due to a
reduction in low-income housing credits recognized.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative financial instruments include futures, forwards, interest rate swaps,
interest rate floors, interest rate caps, interest rate collars, option
contracts, and other financial instruments with similar characteristics. The
Company currently does not enter into futures, forwards, swaps or options but
has purchased interest rate caps to manage the interest rate risk on the
Company's short-term wholesale certificates of deposit. The Company is party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments consist primarily of commitments to extend credit some of which are
categorized as derivative financial instruments. These instruments involve to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the
34
37
consolidated balance sheets. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates and may require
collateral from the borrower if deemed necessary by the Company.
The information required herein pursuant to Item 305 of Regulation S-K is
incorporated by reference in sections entitled "Liquidity and Capital Resources"
from pages 17 to 19 and "Asset/Liability Management" from pages 20 to 21 hereof.
35
38
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to legal
proceedings arising out of its lending activities and other operations.
However, there are no pending legal proceedings of which the Company or
the Bank is a party which, if determined adversely to the Company or
the Bank, would have a material adverse effect on the consolidated
financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On February 5, 2001, the Company announced it had declared a dividend
of $0.05 per share on the common stock of the Company. The dividend
will be payable on February 23, 2001 to shareholders of record as of
February 9, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
11 Computation of Earnings per Share - See Note 2 to the
unaudited Consolidated Financial Statements
No reports on Form 8-K were filed during the quarter for which this
report was filed.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
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39
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ledger Capital Corp.
--------------------
(Registrant)
Date: April 27, 2001 /s/ James D. Smessaert
---------------------------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: April 27, 2001 /s/ Arthur E. Thompson
---------------------------------------------
Arthur E. Thompson
Chief Financial Officer
37
40
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ledger Capital Corp.
--------------------
(Registrant)
Date: April 27, 2001
---------------------------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: April 27, 2001
---------------------------------------------
Arthur E. Thompson
Chief Financial Officer
38