1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1747461
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3545 SOUTH KINNICKINNIC AVENUE, MILWAUKEE, WISCONSIN 53235-3700
- ------------------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(414) 744-8600
--------------
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [ X ] No [ ] (2) Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of November 29, 1996, there were issued and outstanding 5,371,064
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the average of the bid and ask price of such stock as of November 29, 1996, was
$117.8 million. Soley for the purposes of this calculation, all executive
officers and directors of the Registrant are considered to be affiliates; also
included as "affilliate shares" are certain shares held by various employee
benefit plans where the trustees are directors of the Registrant or are
required to vote a portion of unallocated shares at the direction of executive
officers or directors of the Registrant. The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the Registrant that such person is an affiliate of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for the 1997
Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
2
FORM 10-K TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1 - BUSINESS 3
ITEM 2 - PROPERTIES 35
ITEM 3 - LEGAL PROCEEDINGS 37
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 37
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS 38
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA 39
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 41
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 60
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 91
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 91
ITEM 11 - EXECUTIVE COMPENSATION 91
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 91
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 91
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 91
SIGNATURES 94
2
3
PART I
FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K or future filings with the
Securities and Exchange Commission, in quarterly reports or press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, various words or phrases are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include words and phrases such as "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions and various other statements indicated herein with an
asterisk after such statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made, and to advise readers that various factors could affect
the Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected. Such factors
include, but are not limited to: (i) general market rates, (ii) general
economic conditions, (iii) legislative/regulatory changes, (iv) monetary and
fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the
quality or composition of the Company's loan and investment portfolios, (vi)
demand for loan products, (vii) deposit flows, (viii) competition, (ix) demand
for financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
ITEM 1. BUSINESS
GENERAL
St. Francis Capital Corporation (the "Company") is a multi-bank holding company
incorporated under the laws of the State of Wisconsin and is engaged in the
financial services business through its wholly-owned subsidiaries, St. Francis
Bank, F.S.B. (the "Bank"), a federally-chartered stock savings bank, and Bank
Wisconsin ("Bank Wisconsin"), a state-chartered commercial bank. In June 1993,
the Bank converted from a federally-chartered mutual savings institution to a
stock savings institution. As part of the conversion, the Company acquired all
of the outstanding common stock of the Bank. In November 1994, the Company
completed the acquisition of the stock of Valley Bank East Central in Kewaskum,
Wisconsin as well as the deposits and certain assets of the Hartford, Wisconsin
branch of Valley Bank Milwaukee. The acquired bank offices were combined as a
commercial bank named Bank Wisconsin. The Company has reached a definitive
agreement to acquire Kilbourn State Bank, a state-chartered commercial bank
headquartered in Milwaukee, Wisconsin. The acquisition is currently expected
to be completed in early 1997.
The Bank is headquartered in Milwaukee, Wisconsin. Its deposits are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF"),
administered by the Federal Deposit Insurance Corporation ("FDIC"). Originally
chartered in 1923, the Bank serves southeastern Wisconsin with a network of
twelve full-service, two limited service and two loan production offices. Bank
Wisconsin is headquartered in Kewaskum, Wisconsin. Its deposits are insured up
to applicable limits by the Bank Insurance Fund ("BIF"), also administered by
the FDIC. Bank Wisconsin serves southeastern Wisconsin with three full service
offices.
The Company's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from other
operations, primarily to originate mortgage, consumer and other loans within
its primary market areas and to invest in mortgage-backed and related
securities. Primary areas of lending include single-family, multi-family
residential mortgages, home equity lines of credit, second mortgages,
commercial real estate and commercial loans. The Company also purchases
single-family mortgage loans, either by directly purchasing individual loans
from other local mortgage lenders or by purchasing pools of single-family
mortgage loans originated by other non-local lenders and secured by properties
located outside the State of Wisconsin. The Company also invests a significant
portion of its assets in mortgage-backed and related securities, and to a
lesser extent, invests in debt and equity securities, including U.S. Government
and federal agency securities, short-term liquid assets and other marketable
securities. The Company's revenues are derived
3
4
principally from interest on its loan portfolio, interest on mortgage-backed
and related securities and interest and dividends on its debt and equity
securities. The Company's principal sources of funds are from deposits,
including brokered deposits, repayments on loans and mortgage- backed and
related securities and advances from the Federal Home Loan Bank - Chicago
("FHLB").
MARKET AREA AND COMPETITION
The Company offers a variety of deposit products, services and mortgage loan
offerings primarily within the metropolitan Milwaukee area. The Company's main
office is located at 3545 South Kinnickinnic Avenue, Milwaukee, Wisconsin. The
Company's primary market area consists of Milwaukee and Waukesha counties, and
portions of Ozaukee, Washington, Walworth and Kenosha counties. With the
exception of the downtown Milwaukee branch office, all full service branches of
the Bank are located in areas that generally are characterized as residential
neighborhoods, containing predominantly one- and two-family residences.
The Company has significant competition in its mortgage, consumer and
commercial lending business, as well as in attracting deposits. The Company's
competition for loans is principally from other thrift institutions, savings
banks, mortgage banking companies, insurance companies and commercial banks.
However, its most direct competition for deposits historically has come from
other thrifts, savings banks, commercial banks and credit unions. The Company
has faced additional competition for funds from a number of institutions,
including the availability of short-term money market funds and other corporate
and government securities funds offered by other financial service companies,
such as brokerage firms and insurance companies.
LENDING ACTIVITIES
GENERAL
The Company's largest component of the gross loan portfolio, which totaled
$668.7 million at September 30, 1996, was first mortgage loans secured by
owner-occupied one- to four-family residences. At September 30, 1996, one- to
four-family mortgage loans totaled $270.6 million or 40.5% of gross loans. Of
the total one- to four-family mortgage loans, $ 210.2 million or 77.7% were
ARMs. Of the remaining loans held at September 30, 1996, 15.4% of gross loans
were in multi-family mortgage loans, 15.0% of gross loans were in consumer
loans, 13.5% of gross loans were home equity loans, and the balance were in
residential construction, commercial real estate, commercial and agricultural
production loans. As part of its strategy to manage interest rate risk, the
Company originates primarily ARM loans or fixed rate loans which have shorter
maturities for its own loan portfolio. However, the Company also offers longer
term fixed rate mortgage loans, many of which are sold immediately in the
secondary market.
The Company has been actively growing its loan portfolio which in addition to
its traditional one- to four-family lending, includes consumer, commercial,
multi-family and commercial real estate lending. The Company will continue to
attempt to diversify its loan portfolio through lending efforts in all of the
above categories. Areas of lending other than one- to four-family generally
have higher levels of credit risk and higher yields than one- to four-family
lending. In addition, the Company may purchase loans in the above categories
in addition to originating the loans on its own. Purchased loans involve
different types of underwriting than loans originated directly by the Company
and as such represent a different level of risk.
Levels of originations of various lending categories may vary from year-to-year
and result from levels of interest rates, market demand for loans and emphasis
by the Company to various types of loans. The Company will adjust its lending
emphasis occasionally in accordance with its view of the relative returns and
risks available at that time in each category of lending. Although there is
likely to be activity in all areas in which the Company makes loans in any
given year, the amount will vary given the above factors.
COMPOSITION OF LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated.
4
5
September 30,
----------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------------------
Percent Percent Percent
Amount of Total Amount Of Total Amount Of Total
--------- -------- --------- -------- -------- --------
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 270,614 40.5% $ 209,140 39.3% $178,700 38.6%
Residential construction 32,249 4.8% 25,277 4.8% 60,048 13.0%
Multi-family 103,262 15.4% 93,756 17.6% 95,019 20.5%
Commercial real estate 46,391 6.9% 28,277 5.3% 18,347 4.0%
Home equity 90,579 13.5% 80,159 15.1% 66,031 14.2%
--------- ----- --------- ----- -------- -----
543,095 81.1% 436,609 82.1% 418,145 90.3%
Consumer loans:
Interim financing and installment 88,236 13.2% 69,038 13.0% 34,554 7.5%
Education 12,142 1.8% 12,833 2.4% 10,113 2.2%
--------- ----- --------- ----- -------- -----
100,378 15.0% 81,871 15.4% 44,667 9.7%
Commercial and agriculture 25,177 3.9% 13,608 2.5%
--------- ----- --------- ----- -------- -----
Gross loans receivable 668,650 100.0% 532,088 100.0% 462,812 100.0%
===== ===== =====
Less:
Mortgage loans held for sale 20,582 1,138 2,978
Loans in process 29,631 10,903 26,015
Unearned discounts and
deferred loan fees 1,874 2,081 2,351
Allowance for loan losses 5,217 4,076 3,435
Other 647 582 280
--------- -------- --------
Loans receivable, net $ 610,699 $513,308 $427,753
========= ======== ========
September 30,
----------------------------------------------
1993 1992
--------------------- --------------------
Percent Percent
Amount of Total Amount Of Total
--------- -------- -------- --------
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 145,730 39.9% $ 171,971 51.8%
Residential construction 49,004 13.4% 11,245 3.4%
Multi-family 61,215 16.8% 43,431 13.1%
Commercial real estate 19,381 5.3% 20,407 6.2%
Home equity 65,597 17.9% 63,713 19.2%
--------- ----- --------- -----
340,927 93.3% 310,767 93.7%
Consumer loans:
Interim financing and installment 15,124 4.1% 12,207 3.7%
Education 9,430 2.6% 8,837 2.6%
--------- ----- --------- -----
24,554 6.7% 21,044 6.3%
Commercial and agriculture - - - -
--------- ----- --------- -----
Gross loans receivable 365,481 100.0% 331,811 100.0%
===== =====
Less:
Mortgage loans held for sale 10,043 18,394
Loans in process 24,872 8,840
Unearned discounts and
deferred loan fees 2,855 3,320
Allowance for loan losses 3,204 3,181
Other 120 112
--------- ---------
Loans receivable, net $ 324,387 $ 297,964
========= =========
5
6
The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the years indicated. Mortgage
loans held for sale are included in the totals.
Year Ended September 30,
-----------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
Mortgage loans (gross):
At beginning of period $ 436,609 $ 418,145 $ 340,927
Mortgage loans originated:
One- to four-family 97,565 29,350 113,205
Residential construction 31,320 14,866 65,795
Multi-family 29,310 3,306 49,973
Commercial real estate 14,935 7,295 900
Home equity 65,104 54,549 52,495
--------- --------- ---------
Total mortgage loans originated 238,234 109,366 282,368
Mortgage loans purchased:
One- to four-family 56,230 28,805 -
--------- --------- ---------
Total mortgage loans originated and purchased 294,464 138,171 282,368
Transfer of mortgage loans to real estate owned (103) (5,960) (148)
Principal repayments (125,315) (86,993) (115,040)
Sales of mortgage loans:
Exchanged for mortgage-backed securities - (1,988) (76,565)
Cash sales (62,560) (24,766) (13,397)
--------- --------- ---------
Total sales of loans (62,560) (26,754) (89,962)
--------- --------- ---------
At end of period $ 543,095 $ 436,609 $ 418,145
========= ========= =========
Consumer loans (gross):
At beginning of period $ 81,871 $ 44,667 $ 24,554
Loans originated 61,378 41,444 35,896
Loans purchased 12,786 37,379 4,188
Transfer of consumer loans to repossessed assets (23) - -
Principal repayments (40,532) (26,358) (19,971)
Loans sold (15,102) (15,261) -
--------- --------- ---------
At end of period $ 100,378 $ 81,871 $ 44,667
========= ========= =========
Commercial and agricultural loans (gross):
At beginning of period $ 13,608 $ - -
Loans originated 14,034 8,765 -
Loans purchased 3,736 10,721 -
Principal repayments (6,201) (5,878) -
--------- --------- ---------
At end of period $ 25,177 $ 13,608 -
========= ========= =========
6
7
LOAN MATURITY AND REPRICING
The following table shows the maturity of the Company's loan portfolio at
September 30, 1996. The table does not include prepayments or scheduled
principal amortization. Prepayments and scheduled principal amortization on
mortgage loans totaled $125.3 million, $87.0 million and $115.0 million for the
years ended September 30, 1996, 1995 and 1994.
At September 30, 1996
----------------------------------------------------------------------------------------
One- to Commercial Gross
Four- Multi- Commercial Home and Loans
Family (1) Family (1) Real Estate Equity Consumer Agriculture Receivable
---------- ----------- ----------- --------- ------------ ----------- ----------
(In thousands)
Amounts due:
Within one year $ 130,158 $ 57,608 $ 19,310 $ 89,829 $ 45,062 $ 18,409 $ 360,376
After one year:
One to three years 99,236 17,228 8,419 750 11,063 5,250 141,948
Three to five years 28,415 25,880 10,143 - 16,595 1,388 82,420
Over five years 45,054 2,546 8,519 - 27,658 130 83,906
---------- ----------- ----------- --------- ------------ ----------- ----------
Total due after one year 172,705 45,654 27,081 750 55,316 6,768 308,274
---------- ----------- ----------- --------- ------------ ----------- ----------
Total amounts due 302,863 103,262 46,391 90,579 100,378 25,177 668,650
Less:
Mortgage loans held for sale (20,582) - - - - - (20,582)
Loans in process (29,631) - - - - - (29,631)
Unearned discounts, premiums
and deferred loan fees, net (1,068) (847) - - (606) - (2,521)
Allowance for loan losses (957) (840) (593) (449) (2,128) (250) (5,217)
---------- ----------- ----------- --------- ------------ ----------- ----------
Loans receivable, net $ 250,625 $ 101,575 $ 45,798 $ 90,130 $ 97,644 $ 24,927 $ 610,699
========== =========== =========== ========= ============ =========== ==========
(1) Includes some residential construction lending.
The following table sets forth at September 30, 1996 the dollar amount of all
loans and mortgage-backed and related securities due after September 30, 1997,
and whether such loans have fixed interest rates or adjustable interest rates.
Due after September 30, 1997
-----------------------------------------
Fixed Adjustable Total
------------- ------------ ------------
(In thousands)
Mortgage loans:
One- to four-family (1) $ 62,089 $ 110,616 $ 172,705
Multi-family (1) 27,517 18,137 45,654
Commercial real estate 16,322 10,759 27,081
Home equity 750 - 750
Consumer loans 44,131 11,185 55,316
Commercial and agriculture 6,768 - 6,768
------------- ------------ ------------
Gross loans receivable 157,577 150,697 308,274
Mortgage-backed and related securities 188,183 404,529 592,712
------------- ------------ ------------
Gross loans receivable and mortgage-
backed and related securities $ 345,760 $ 555,226 $ 900,986
============= ============ ============
(1) Includes some residential construction lending.
7
8
ONE- TO FOUR-FAMILY MORTGAGE LENDING
A significant portion of the Company's lending activity is the origination of
first mortgage loans secured by one- to four-family, owner occupied residences
within the Company's primary market area. Long-term 15- and 30- year
fixed-rate loans are generally originated to be sold in the secondary market as
are five and seven year balloon loans. Shorter-term ARM loans are originated
both for sale in the secondary market and for the Company's loan portfolio. In
addition, loans made under special loan terms or programs, principally
originated within the purposes of the Community Reinvestment Act of 1977, as
amended ("CRA") are retained for the Company's own loan portfolio. The Company
follows FNMA underwriting guidelines for most one- to four-family mortgage
loans.
The lending policy of the Company generally allows for mortgage loans to be
made in amounts of up to 100% of the appraised value of the real estate to be
mortgaged to the Company. Loans that are to be sold in the secondary market
are made at 80% or less of appraised value under underwriting guidelines of the
major mortgage secondary market makers. Loans retained in the Company's
portfolio are made at levels of up to 100% of appraised value and may have
private mortgage insurance or no mortgage insurance in some cases. With
respect to those loans made at levels of up to 100% of appraised value, other
underwriting criteria, such as debt service ability and credit history are
given greater emphasis than lending involving lower loan to value ratios. In
addition, loans with higher loan to value ratios generally are made at higher
interest rates than other loans and may have a higher level of risk of default.
The Company makes loans under various governmental programs including the
Federal Housing Authority ("FHA"), the federal and state Veterans
Administration ("VA"), the Wisconsin Housing and Economic Development Authority
("WHEDA") and other City of Milwaukee-sponsored mortgage loan programs, and
sells these loans. See "-Loan Sales and Purchases."
Included in mortgage loans held by the Company as part of its loan portfolio
are ARM loans. Current one-year ARM loans typically adjust by a maximum of two
percentage points per year with a lifetime cap approximating six percentage
points above the interest rate established at the origination date of the ARM
loan. Monthly payments of principal and interest are adjusted when the
interest rate adjusts, in order to maintain full amortization of the mortgage
loan within a maximum 30-year term. The initial rate offered on ARM loans
fluctuates with general interest rate changes, and are determined by secondary
market pricing, competitive conditions and the Company's yield requirements.
Currently, the Company primarily utilizes the one-year Constant Maturity
Treasury rate in order to determine the interest rate payable upon the
adjustment date of its ARM loans outstanding. Most of the ARM loans are
granted with conversion capabilities which provide terms under which the
borrower may convert the mortgage loan to a fixed rate mortgage loan for a
limited period during the early term of the ARM loan. The terms at which the
ARM may be converted to a fixed rate loan are established at the date of loan
origination and are set at a level allowing the Company to immediately sell the
ARM loan at the date of conversion.
The Company offers balloon loan programs under which the interest rate and
monthly payments are fixed for the first five or seven years of the mortgage
loan and, thereafter, provided certain conditions are met, the loan would
adjust to then current rates at the end of the fifth or seventh year, at which
time the loan balance is then amortized for the full remaining term of the
loan, based upon interest rates and appropriate principal and interest payments
then in effect.
At September 30, 1996, the Company had $270.6 million in one- to four-family
mortgage loans or 40.5% of the gross loan portfolio compared with $209.1
million or 39.3% of the portfolio at September 30, 1995. The increase was
largely due to increases in the Company's lending activity that resulted from a
lower level of interest rates during the current year and to the Company's
purchasing of mortgage loans during the year from other loan originators. The
volume of one- to four-family mortgage loans is highly dependent on the
relative levels of interest rates, although the Company has been expanding its
one- to four-family lending capacity which will tend to keep total originations
higher than in prior years with similar interest rate levels. In addition,
one- to four-family lending is subject to numerous competitors which can result
in lower origination totals if the competitors are willing to make loans at
lower rates than the Company.
8
9
RESIDENTIAL CONSTRUCTION LENDING
Residential construction loans are made to individuals who have signed
construction contracts with a home builder. Loan proceeds are disbursed in
increments as construction of the residence progresses. These loans have loan
to value ratios not exceeding 90%. When the loan to value ratio exceeds 80%,
private mortgage insurance is required which insures payment of the principal
balance and reduces the Company's exposure to 75% loan to value or less.
Single family residential loans are structured to allow the borrower to pay
interest only on the funds advanced during the first nine months of the loan.
Thereafter, the borrower is required to begin making principal and interest
payments based on an amortization schedule of 351 months or less. Single family
residential construction loan programs typically offered by the Company are
one- or three-year ARM loans or certain balloon loans amortized over a
351-month period after the nine month interest only period.
The Company does not engage in construction lending for large tract
developments. However, from time to time, the Company will consider multi-
family residential construction lending. The loan to value on these loans does
not exceed 80%. Multi-family construction loans typically offered by the
Company are ARM loans amortized over 348 months after allowing for interest
only payments during a twelve month construction period. Loan proceeds are
advanced in increments as construction of the project progresses.
At September 30, 1996, the Company had $32.2 million in residential
construction mortgage loans or 4.8% of the gross loan portfolio compared with
$25.3 million or 4.8% of the portfolio at September 30, 1995. Much of the
construction lending done by the Company results in a permanent mortgage loan
that is either retained in the mortgage loan portfolio or sold in the secondary
market.
MULTI-FAMILY LENDING
The Company originates multi-family loans which it holds in its loan portfolio.
Over the last five years, the Company has increased its emphasis in
multi-family lending and has offered both adjustable- and fixed-rate loans.
Multi-family loans generally have shorter maturities than one- to four-family
mortgage loans, though the Company will make multi-family loans with terms of
up to 30 years. The rates charged on the Company's fixed rate and ARM
multi-family loans are typically higher than on one- to four-family residential
properties. Multi-family ARM loans typically adjust in a manner similar to
that of the Company's other ARM loans, although generally at a slightly higher
rate. Multi- family loans generally are underwritten in amounts of up to 80%
of the lesser of the appraised value or purchase price of the underlying
property.
At September 30, 1996, the largest aggregate amount of loans outstanding to any
one borrower consisted of a loan to two multi-family projects in Greenfield and
Brookfield, Wisconsin, of $7.6 million. This loan does not exceed the
regulatory "loans to one borrower" limitation at September 30, 1996 of $14.0
million. See "-Regulation." Loans secured by multi-family real estate
generally involve a greater degree of credit risk than one- to four-family
loans and carry larger loan balances. The increased credit risk is the result
of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income- producing properties and the increased difficulty of monitoring these
types of loans.
At September 30, 1996, the Company had $103.3 million in multi-family mortgage
loans or 15.4% of the gross loan portfolio compared with $93.8 million or 17.6%
of the portfolio at September 30, 1995. The Company is continuing its efforts
to increase the amount of the multi-family loans in the portfolio as these
loans generally offer a better interest rate than single-family loans, which it
believes more than offsets the increased credit risk.
COMMERCIAL REAL ESTATE LENDING
The current lending policy of the Company includes originating or purchasing
non-residential mortgage loans on a variety of commercial properties, including
small office buildings, warehouses, small industrial/manufacturing buildings,
motel properties and other improved non- residential properties. At September
30, 1996, the balance of such loans held by the Company was $46.4 million. As
of September 30, 1996, the largest outstanding loan on a commercial real estate
property was $2.0 million on a shopping center located in Waukesha, Wisconsin.
Commercial real estate loans generally are underwritten in amounts up to 75% of
the lesser of the appraised value or purchase price of the underlying property.
However, loans secured by commercial real estate properties still
9
10
involve a greater degree of risk than residential mortgage loans, and payments
on loans secured by commercial real estate are often susceptible to adverse
conditions in the real estate market or the economy.
At September 30, 1996, the Company had $46.4 million in commercial real estate
mortgage loans or 6.9% of the gross loan portfolio compared with $28.3 million
or 5.3% of the portfolio at September 30, 1995. The Company is continuing its
efforts to increase the amount of commercial real estate loans in the portfolio
as these loans generally offer a better interest rate than single-family loans,
which it believes more than offsets the increased credit risk.
HOME EQUITY LENDING
The Company has increased its emphasis in originating home equity loans secured
by one- to four-family residences within its primary market area. These loans
currently are originated with an interest rate indexed to the prime rate and
adjustable monthly. The home equity loans are revolving lines of credit which
are granted for a five-year term, renewable at the sole discretion of the
Company for additional five-year periods. The maximum amortization to repay
home equity loans is based on 1.5% of the outstanding balance. Typically, an
origination fee is charged upon the origination of the loan and an annual
service fee is charged thereafter. Home equity lines of credit may be made at
up to a 100% loan-to-value level including any outstanding prior liens against
the property which serves as collateral for the mortgage loan. For loans over
80% loan-to-value, the Company may obtain private mortgage insurance. The
Company is usually in a second lien position on home equity loans. At
September 30, 1996, the Company held $90.6 million in home equity loans or
13.5% of the gross loan portfolio compared with $80.2 million or 15.1% of the
portfolio at September 30, 1995. Home equity loans offer the Company an asset
that adjusts with current rates of interest for the management of its interest
rate risk.
CONSUMER LENDING
The Company has been expanding its consumer lending portfolio because higher
yields can be obtained, there is strong consumer demand for such products, and
the Company historically has experienced relatively low delinquency and few
losses on such products except for potential losses on sub-prime auto loans.
Management also believes that offering consumer loan products helps to expand
and create stronger customer relationships. At September 30, 1996, consumer
loans totaled $100.4 million or 15.0% of gross loans compared to $81.9 million
or 15.4% of gross loans at September 30, 1995.
The Company originates a variety of secured consumer loans, including home
improvement loans, automobile loans, educational loans, fixed term installment
loans and interim financing loans, as well as loans secured by savings accounts
and unsecured loans. Consumer loan terms vary according to the type of
collateral, term of the loan and creditworthiness of the borrower.
During fiscal year 1995 and through January 1996, the Company purchased
sub-prime automobile loans originated throughout the United States under a
warehouse financing agreement. The intent was to warehouse the loans until the
originator could originate sufficient quantities to securitize the loans to
sell to institutional investors. The loans were serviced by an independent
third party servicer and had various levels of insurance and also guaranties
from the originator. The level of delinquencies and defaults on these loans
increased significantly during fiscal 1996 and the Company ceased making such
loans. The Company currently has no intent to enter into any similar
arrangement but does intend to continue to originate or purchase automobile
loans in its primary market areas. The increase in non-performing consumer
loans was primarily the result of the purchased sub-prime automobile loans.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of unsecured or secured by rapidly depreciating assets
such as automobiles. In such case, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such a loan.
10
11
At September 30, 1996, the Company had $100.4 million in consumer loans or
15.0% of the gross loan portfolio compared with $81.9 million or 15.4% of the
portfolio at September 30, 1995. The increase in the portfolio has been
primarily in the area of fixed term installment loans the Company makes that
are secured by second mortgages in residential properties.
COMMERCIAL AND AGRICULTURE LENDING
The Company originates a variety of commercial and agriculture loans, including
inventory and receivable financing, equipment loans, agriculture production
loans and interim financing loans, as well as loans secured by corporate or
farm assets and unsecured loans. Commercial and agriculture loans involve a
greater degree of risk than most other types of loans, and payments on
commercial and agriculture loans are often susceptible to adverse employment
and economic conditions. At September 30, 1996, commercial and agriculture
loans totaled $25.2 million. The Company anticipates commercial and
agriculture lending to continue to increase as management believes this type of
lending is an important component of a balanced loan portfolio.
At September 30, 1996, the Company had $25.2 million in commercial loans or
3.9% of the gross loan portfolio compared with $13.6 million or 2.5% of the
portfolio at September 30, 1995. Beginning with the purchase of Bank
Wisconsin, the Company has begun to build a commercial loan portfolio as one of
the components of its loan portfolio.
CREDIT ENHANCEMENT PROGRAMS
The Company has entered into an agreement whereby, for an initial and annual
fee, it would guarantee payment of an industrial revenue bond issue ("IRB").
The IRB was issued by a municipality to finance real estate owned by a third
party. The Company has not pledged any collateral for purposes of this
agreement. At September 30, 1996, the amount of the IRB for which the Company
has guaranteed payment was $4.2 million.
LOAN SALES AND PURCHASES
SALE OF MORTGAGE LOANS
The Company makes loans under various governmental programs including FHA, VA,
WHEDA and other City of Milwaukee-sponsored mortgage loan programs. All loans
made under the various governmental agency programs are underwritten to and
must meet all requirements of the appropriate city, state or federal agency.
Most of the Company's loans granted under governmental agency programs are sold
either to secondary market purchasers of such loans or, in the case of WHEDA
loans, sold directly to WHEDA, all on a non-recourse basis. Except for loans
sold to WHEDA, servicing of the loans is typically released to the purchaser of
such loans. For the year ended September 30, 1996, the Company originated $6.7
million of loans under these various governmental programs.
In recent years the Company has sold a significant amount of its originated
residential mortgage loans to secondary marketing agencies, principally FNMA,
all on a non-recourse basis. All mortgage loans, upon commitment, are
immediately categorized either as to be held for investment or held for sale.
Mortgage loans originated and sold to the secondary market totaled $60.0
million with gains of $1.1 million for the year ended September 30, 1996, and
totaled $19.1 million with gains of $261,000 for the year ended September 30,
1995. The level of mortgage loan sales is dependent on the amount of sellable
loans being originated by the Company. Depending on factors such as interest
rates, levels of refinancings and competitive factors in the Company's primary
market area, the amount of mortgage loan originations ultimately sold can vary
significantly. Levels of interest rates, competition for loans and a greater
emphasis by the Company resulted in the higher level of one- to four-family
mortgage loans originations for the current fiscal year compared to the prior
year which in turn, resulted in the higher level of gains. The Company is
subject to interest rate risk on fixed rate loans in its pipeline from the
point in time that the rate is locked with the borrower until the actual swap
of the loan and sale of the related security. The Company utilizes various
financial techniques to mitigate such interest rate risk, including short
call/put option strategies, long put options and forward sales commitments.
Any one or all of these strategies may be used depending upon management's
determination of interest rate volatility, the amount of loans currently in the
pipeline and current market conditions for mortgage-backed securities. See
"-Asset/Liability Management Techniques."
11
12
Loan commitments are issued as soon as possible upon completion of the
underwriting process, and mortgage loans are closed as soon as all title
clearance and other required procedures have been completed. Because of the
frequency of both the issuance of commitments and the scheduled closing dates
of the loans, the amount of loan commitments outstanding will vary. At
September 30, 1996, the Company had outstanding mortgage commitments totaling
$37.2 million.
The Company retains servicing of the majority of mortgage loans sold, receiving
a servicing fee, which represents the difference between the mortgage rate on
the loans sold and the yield at which such loans are sold. The servicing yield
earned by the Company on such transactions is typically between .25% and .50%
of the total balance of the loan serviced. The origination of a high volume of
mortgage loans and the related sales of the loans with servicing retained
provides the Company with additional sources of non-interest income through
loan servicing income and gains on the sales of loans. Mortgage loans serviced
for others totaled $226.8 million at September 30, 1996.
PURCHASE OF MORTGAGE LOANS
During fiscal 1996, the Company began as a regular part of its mortgage lending
activity, purchasing single-family mortgage loans originated in its primary
market area by other lenders, primarily mortgage bankers and brokers. The
types of loans purchased are generally newly originated loans with the same
characteristics as the loans normally originated by the Company in its regular
lending operations. This includes both fixed and adjustable rate mortgage
loans which may or may not be sold in the secondary market. The Company pays a
fee to the originating mortgage banker or broker which is amortized over the
life of the loan for loans retained in the portfolio or which becomes an
adjustment to the gain or loss recognized on loans sold in the secondary
market. The Company maintains the same underwriting standards on these loans as
it does on the loans it originates directly. During the fiscal year ended
September 30, 1996, the Company purchased $15.5 million of loans from other
originators compared to zero loans purchased during fiscal year ended September
30, 1995.
The Company also has purchased pools of single-family loans originated by other
lenders in other parts of the country. The loans purchased have generally been
adjustable rate loans with interest rate adjustment features of one month to
one year and are indexed to both current indexes such as the one-year treasury
or to lagging indexes such as the 11th district cost of funds. The loans are
originated in other parts of the country, primarily California, where
adjustable rate lending is more prevalent. As part of its interest rate risk
management, the Company occasionally purchases adjustable rate assets because
the availability of similar product within its primary market area is limited
and competition for that limited amount may force interest rates to levels
considered too low compared to other available instruments. The Company
generally does not make a significant amount of short-term adjustable rate
loans in its home market. The loan pools that have been purchased generally
have been originated in prior years and have seasoning of one to ten years. Of
the $56.2 million one- to four-family mortgage loans purchased during the year
ended September 30, 1996, $40.7 million were loans secured by properties
located outside the state of Wisconsin. Purchased loans can result in a higher
level of risk due to the Company not being involved in the original lending
process. Efforts taken to mitigate the additional risk include underwriting
efforts by the Company prior to purchase, review of the historical payment and
credit history of the loans being purchased and purchasing the loans with
yields that offer additional yield for the risks taken.
LOAN ORIGINATION, SERVICING AND OTHER FEES
In addition to interest earned on loans, the Company receives income through
fees in connection with loan originations, loan sales, loan modifications, late
payments and for miscellaneous services related to its loans, including loan
servicing. Income from these activities varies from period to period with the
volume and type of loans originated.
In connection with the origination of mortgage loans, the Company typically
charges points for origination, commitment and discounts, and fees for
processing and closing in addition to requiring borrower reimbursement for
out-of-pocket fees for costs associated with obtaining independent appraisals,
credit reports, title insurance, private mortgage insurance and other items.
Since the availability of zero point mortgage loans in recent years, most
borrowers typically accept a slightly higher interest rate and pay zero points.
Commitment fees are paid by the applicant at the time of loan commitment,
whereas the origination and discount fees are paid at time of closing.
12
13
DELINQUENCIES, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
DELINQUENT LOANS
When a borrower fails to make a required payment by the end of the month in
which the payment is due, the Company generally initiates collection
procedures. The Company will send a late notice, and in most cases,
delinquencies are cured promptly. However, if a loan has been delinquent for
more than 60 days, the Company contacts the borrower directly, to determine the
reason for the delinquency and to effect a cure, and where it believes
appropriate, reviews the condition of the property and the financial position
of the borrower. At that time the Company may (i) accept a repayment program
for the arrearage; (ii) seek evidence of efforts by the borrower to sell the
property; (iii) request a deed in lieu of foreclosure; or (iv) initiate
foreclosure proceedings. When a loan, secured by a mortgage, is delinquent for
three or more monthly installments, the Company generally will initiate
foreclosure proceedings. With respect to delinquencies on FHA, VA or other
governmental loan program mortgage loans, the Company follows the appropriate
notification and foreclosure procedures prescribed by the respective agencies.
On mortgage loans or loan participations purchased by the Company, the Company
receives monthly reports from its loan servicers with which it monitors the
loan portfolio. Based upon servicing agreements with the servicers of the
loan, the Company relies upon the servicer to contact delinquent borrowers,
collect delinquent amounts and initiate foreclosure proceedings, when
necessary, all in accordance with applicable laws, regulations and the terms of
the servicing agreements between the Company and its servicing agents.
NON-PERFORMING ASSETS
Loans are placed on nonaccrual status when, in the judgment of Company
management, the probability of collection of principal or interest is deemed
insufficient to warrant further accrual of interest. The Company discontinues
the accrual of interest on loans when the borrower is delinquent as to a
contractually due principal or interest payment by 90 days or more. When a
loan is placed on nonaccrual status, all of the accrued interest on it is
reversed by way of a charge to interest income. Interest income is recorded on
nonaccrual loans when cash payments of interest are received. Accrual of
interest on a nonaccrual loan is resumed when all contractually past due
payments are current and when management believes the outstanding loan
principal and contractually due interest is no longer doubtful of collection.
Property acquired by the Company as a result of a foreclosure or by deed in
lieu of foreclosure is classified as foreclosed property. Foreclosed property
is recorded at the lower of the unpaid principal balance of the related loan or
the fair market value of the real estate acquired less the estimated costs to
sell the real estate. The amount by which the recorded loan balance exceeds
the fair market value of the real estate acquired less the estimated costs to
sell the real estate is charged against the allowance for loan losses at the
date title is received. Any subsequent reduction in the carrying value of a
foreclosed property, along with expenses incurred to maintain or dispose of a
foreclosed property, is charged against current earnings. At September 30,
1996, the Company had a total of two properties in foreclosed properties with a
carrying value of $80,000. Non-performing assets as of September 30, 1995
included a single $5.7 million multi-family construction loan on a 104-unit
apartment complex. During the year ended September 30, 1996, the property was
sold at a gain of $684,000.
13
14
Non-performing loans include loans placed on nonaccrual status and troubled
debt restructurings. Non-performing assets include non-performing loans and
foreclosed properties. The following table sets forth non-performing loans and
assets:
AT SEPTEMBER 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Mortgage loans:
Nonaccrual $ 44 $ 296 $ 7,621 $ 1,957 $ 740
Troubled debt restructurings - - - - 1,863
-------- ------- ------- ------- --------
Total non-performing
mortgage loans 44 $ 296 7,621 1,957 2,603
Consumer loans 3,846 136 14 29 27
-------- ------- ------- ------- --------
Total non-performing loans 3,890 432 7,635 1,986 2,630
Foreclosed properties 80 5,833 17 389 557
-------- ------- ------- ------- --------
Total non-performing assets $ 3,970 6,265 $ 7,652 $ 2,375 $ 3,187
======== ======= ======= ======= ========
Total non-performing loans to
gross loans 0.58% 0.08% 1.65% 0.54% 0.79%
Allowance for loan losses to
total non-performing loans 134.11 943.52 44.99 161.33 120.95
Total non-performing assets to
total assets 0.28 0.53 0.75 0.29 0.46
Interest on non-performing loans
on the accrual basis $ 296 $ 34 $ 596 $ 180 $ 213
Actual interest received on
non-performing loans 11 26 315 128 66
-------- ------- ------- ------- --------
Net reduction of interest income $ 285 $ 8 $ 281 $ 52 $ 147
======== ======= ======= ======= ========
Non-performing assets as of September 30, 1996 included $3.6 million of
purchased auto loans which are past due or in default. The auto loans were
purchased over the past two years under a warehouse financing arrangement the
Company had with the originator of sub-prime automobile loans. The intent of
the financing was to warehouse the loans until the originator could originate
sufficient quantities to securitize the loans and sell to institutional
investors. At that time, the loans would be sold back to the originator. The
loans were serviced by an independent third party servicer and the loans had
various levels of insurance and in addition were guaranteed as to principal and
interest payments by the originator of the loans. The maximum amount that the
Company had outstanding at any point in time was a balance of $14.6 million
during February, 1996. The Company has not funded any loans since that time
and as of September 30, 1996, the balance of the sub-prime auto loans was $7.7
million. Actions have been taken to repossess the collateral on the delinquent
loans and to enforce the guarantee of the originator of these loans; however,
it is anticipated that some portion of these loans will ultimately result in a
charge-off due to the possible inability of the originator to perform under its
guaranty.* In addition, the level of insurance collected on policies paying
for credit losses on the loans has beed lower than anticipated. No significant
charge-offs have occurred through September 30, 1996, as the Company is still
pursuing repossession and disposition of the autos and enforcement of the
guarantee of the originator. An additional $1.0 million in loan loss provision
was taken during the year ended September 30, 1996 and management believes that
the allowance for loan losses is adequate to provide for potential losses based
on current conditions.
Non-performing assets as of September 30, 1995 and 1994 included a single $5.7
million multi-family construction loan on a 104-unit apartment complex. During
the year ended September 30, 1995, the loan was transferred from nonaccrual to
foreclosed properties. The property was sold during 1996 at a gain of
$684,000.
14
15
Most of the Company's loans are secured by one- to four-family properties
located in southeastern Wisconsin. There are no concentrations of loans
exceeding 10% of loans which are not otherwise disclosed as a category of
loans.
CLASSIFICATION OF ASSETS
Federal regulations require that each insured financial institution classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions by regulatory authorities, regulatory examiners have
authority to identify problem assets as Substandard, Doubtful or Loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Company will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, questionable, and there is a high possibility of
loss. An asset classified as Loss is considered uncollectible and of such
little value that continuance as an asset of the Company is not warranted.
Assets classified as Substandard or Doubtful require the Company to establish
prudent general allowances for loan losses. Assets classified as Loss must
either be charged off or must have a specific allowance established for 100% of
the asset classified as a Loss. At September 30, 1996, the Company had assets
classified as Substandard of $6.1 million, $77,000 classified as Doubtful and
none classified as Loss. The amounts in the Substandard classification
primarily consist of the previously discussed sub-prime auto loans and other
real estate-related loans with minor credit concerns. Most of the real
estate-related loans are current as to principal and interest, but have some
weaknesses that are being monitored by the Company.
Except for the aforementioned loans included in non-performing assets, the
classified assets principally consist of residential mortgage or consumer loans
and foreclosed properties. None of these remaining classified assets are
considered to represent either individually or in the aggregate any material
loss to the Company; however, such risk has been considered in establishing the
allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
Under federal regulations, when an insured institution classifies problem
assets as either Substandard or Doubtful, it is required to establish general
allowances for loan losses in an amount deemed prudent by management. In
addition to general valuation allowances, the Company may establish specific
loss reserves against specific assets in which a loss may be realized. General
allowances represent loss allowances which have been established to recognize
the inherent risks associated with lending activities, but which, unlike
specific allowances, have not been allocated to recognize probable losses on
particular problem assets. The Company's determination as to its
classification of assets and the amount of its specific and general valuation
allowances are subject to review by the Company's regulators which can order
the establishment of additional general or specific loss allowances.
The allowance for loan losses is a material estimate that is particularly
susceptible to significant changes in the near term and is established through
a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers, among other matters, the estimated net
realizable value of the underlying collateral, economic conditions, historical
loan loss experience and other factors that warrant recognition in providing
for an adequate loan loss allowance.
15
16
The following table shows the Company's total allowance for loan losses and the
allocation to the various categories of loans at the dates indicated.
AT SEPTEMBER 30,
----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
% OF % OF % OF
% OF LOANS IN % OF LOANS IN % OF LOANS IN
TOTAL CATEGORY TOTAL CATEGORY TOTAL CATEGORY
LOANS BY TO TOTAL LOANS BY TO TOTAL LOANS BY TO TOTAL
AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS
------ -------- -------- ------ -------- -------- ------ -------- --------
(DOLLARS IN THOUSANDS)
Breakdown of Allowance:
Mortgage loans:
One- to four-family $ 957 0.32% 45.3% $1,031 0.44% 44.1% $ 718 0.27% 51.6%
Multi-family 840 0.81% 15.4% 957 1.02% 17.6% 2,068 2.07% 20.5%
Commercial real estate 593 1.28% 6.9% 619 2.19% 5.3% 163 0.89% 4.0%
Home equity 449 0.50% 13.5% 504 0.63% 15.1% 259 0.39% 14.2%
------ ------ ------ ------ ------ ------
Total mortgage loans 2,839 81.1% 3,111 82.1% 3,208 90.3%
Consumer 2,128 2.12% 15.0% 789 0.96% 15.4% 227 0.51% 9.7%
Commercial and agriculture 250 0.99% 3.9% 176 1.29% 2.5% - - -
------ ------ ------ ------ ------ ------
Total allowance for loan losses $5,217 100.0% $4,076 100.0% $3,435 100.0%
====== ====== ====== ====== ====== ======
At September 30,
-------------------------------------------------------
1993 1992
--------------------------- --------------------------
% of % of
% of Loans in % of Loans in
Total Category Total Category
Loans by to Total Loans by to Total
Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- --------
(Dollars in thousands)
Breakdown of Allowance:
Mortgage loans:
One- to four-family $ 619 0.32% 53.3% $ 647 0.81% 55.2%
Multi-family 1,252 2.05% 16.8% 1,132 2.61% 13.1%
Commercial real estate 954 4.92% 5.3% 817 4.00% 6.2%
Home equity 251 0.38% 17.9% 431 0.68% 19.2%
------ ------ ------ ------
Total mortgage loans 3,076 93.3% 3,027 93.7%
Consumer 128 0.52% 6.7% 154 0.73% 6.3%
Commercial and agriculture - - - - - -
------ ------ ------ ------
Total allowance for loan losses $3,204 100.0% $3,181 100.0%
====== ====== ====== ======
16
17
It is not anticipated that charge-offs during the year ending September 30,
1997 will exceed the amount allocated to any individual category of loans.
Furthermore, there are no material loans about which management is aware that
there exists serious doubts as to the ability of the borrower to comply with
the loan terms, except as disclosed herein. The increase in the amount of the
allowance for loan losses attributable to consumer loans is primarily the
result of the additional $1.0 million loan loss provision taken by the Company
during the year related to the portfolio of sub-prime auto loans.
INVESTMENT ACTIVITIES
GENERAL
The investment policy of the Company, which is established by the Board of
Directors and implemented by the Asset/Liability Committee, is designed
primarily to provide and maintain required liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk and
complement the Company's lending activities. The Company's investment policy
permits investment in various types of liquid assets permissible under OTS
regulations, which include U.S. Treasury obligations, securities of various
federal agencies, certain certificates of deposits of insured banks and savings
institutions, certain bankers' acceptances and the purchase of federal funds.
The Company also invests in investment grade corporate debt and mortgage-backed
securities ("MBS's") and collateralized repurchase agreements, municipal
securities, mortgage mutual funds, collateralized mortgage obligations
("CMO's"), real estate mortgage investment conduits ("REMIC's"), interest-only
stripped securities ("IO's"), principal-only stripped securities ("PO's") and
CMO residuals.
The Company determines the appropriate classification of securities at the time
of purchase and reevaluates such designations as of each statement of condition
date based on regulatory and accounting guidelines. The Company has
incorporated the requirements of those guidelines into the Company's investment
policy and has categorized its investments in three separate categories: (i)
Held to Maturity: debt and mortgage-backed and related securities are
classified as held to maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
carried at amortized cost; (ii) Available for Sale: debt and mortgage-back
and related securities not classified as held to maturity or trading and
marketable equity securities not classified as trading are classified as
available for sale. Available for sale securities are stated at fair value,
with the unrealized gains or losses, net of tax, reported as a separate
component of shareholders' equity; and (iii) Trading: the Company maintains a
separate portfolio of assets which are carried at market value and have been
acquired for short term/trading purposes, to enhance the Company's financial
results, with unrealized gains or losses recognized in current income.
The investment activities of the Company consist primarily of investments in
mortgage-backed and related securities and other debt and equity securities,
consisting primarily of securities issued or guaranteed by the United States
Government or agencies thereof and corporate obligations. Typical investments
include federally sponsored agency mortgage pass-throughs, private issue and
senior-subordinated pass- throughs and federally sponsored agency and private
issue collateralized mortgage obligations.
MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgage loans, the principal and interest
payments on which are passed from the mortgage loan originators through
intermediaries that pool and repackage the participation interest in the form
of securities for sale to investors such as the Company. Such intermediaries
which guarantee the payment of principal and interest to investors can be
government sponsored enterprises such as FHLMC, FNMA and GNMA or private
mortgage security conduits. Mortgage- backed securities issued by government
sponsored enterprises generally increase the quality of the Company's assets by
virtue of the guarantees that back them. When the intermediary is a private
entity, neither the principal or interest on such securities is guaranteed. In
addition, loans that back private mortgage-backed securities generally are
non-conforming loans and consequently have a greater amount of credit risk. In
addition, mortgage-
17
18
backed securities generally are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
Mortgage-backed securities typically are issued with stated principal amounts
and the securities are backed by pools of mortgage loans that include loans
with interest rates that are within a range and have similar maturities. The
underlying pool of mortgage loans can be composed of either fixed-rate mortgage
loans or ARM loans. Mortgage-backed securities generally are referred to as
participation certificates or pass- through certificates. As a result, the
interest rate risk characteristics of the underlying pool of mortgage loans,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder while the credit risk is not, if guaranteed. The
average life of a mortgage-backed pass-through security is equal to the average
lives of the underlying mortgage loans and is dependent on rates of prepayments
which are significantly influenced by changes in the interest rate environment.
The actual prepayments of the underlying mortgage loans depend upon many
factors, including the type of mortgage loan, the coupon rate, the age of the
mortgage loan, the geographical location of the real estate collateralizing the
mortgage loan and general levels of market interest rates.
CMO's and REMIC's typically are issued by a special purpose entity, which may
be organized in a variety of legal forms, such as a trust, a corporation or a
partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage-related securities. Once combined, the cash
flows can be divided into "tranches" or "classes" of individual securities,
thereby creating more predictable average lives for each security than the
underlying pass-through pools. Accordingly, under this security structure all
principal paydowns from the various mortgage pools are allocated to a
mortgage-related securities' class or classes structured to have priority
until it has been paid off. Thus, these securities are intended to address the
reinvestment concerns associated with mortgage-backed security pass- throughs,
namely that they tend to pay off when interest rates fall.
When purchased by the Company, these securities have credit ratings of A or
better and meet the Federal Financial Institutions Examination Council
definition of low-risk securities. At September 30, 1996, private-issue
mortgage-backed securities, CMO's and REMIC's totaled $570.6 million, 75% of
which had a credit rating of AAA, 18% of which had a credit rating of AA, and
7% of which had a credit rating of A. At September 30, 1995, private-issue
mortgage-backed securities, CMO's and REMIC's totaled $467.1 million, 84% of
which had a credit rating of AAA and 16% of which had a credit rating of AA.
The higher amount of private issue MBS's is a result of the Company's view of
the benefit of higher interest rates generally available on private issue MBS's
versus the additional credit risk associated with such securities in comparison
with agency MBS's. Private issue MBS's and REMIC's have been an integral
component of the Company's plan to increase earning assets by purchasing such
securities and funding them with advances from the Federal Home Loan Bank or
with brokered certificates of deposit. Investment and aggregate investment
limitations and credit quality parameters of each class of investment are
prescribed in the Company's investment policy. The Company performs analyses
on mortgage related securities prior to purchase and on an ongoing basis to
determine the impact on earnings and market value under various interest rate
and prepayment conditions.
At September 30, 1996, the aggregate securities of any single issuer (excluding
securities of the U.S. government and U.S. government agencies and
corporations) did not exceed 10% of the Company's shareholders' equity.
18
19
COMPOSITION OF THE COMPANY'S MORTGAGE-BACKED AND RELATED SECURITIES PORTFOLIO
Held to Maturity. At September 30, 1996, the Company held $71.4 million in its
mortgage-backed and related securities held to maturity portfolio. The
estimated market value of those securities at that date was $68.4 million. Of
this amount, at September 30, 1996, 100% were fixed rate CMO and REMIC
securities. At September 30, 1996, the mortgage-backed and related securities
held to maturity portfolio represented 5.1% of the Company's total assets
compared to $157.5 million or 13.2% of total assets at September 30, 1995.
During the year, the Company reclassified $88.4 million of securities from
held-to-maturity to available for sale under guidance issued by the Financial
Accounting Standards Board which allowed a one-time reclassification of such
securities.
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's mortgage-backed
and related securities held to maturity at September 30, 1996.
-----------------------------------------------------------------------
Over one year to Over five years to
five years ten years Over ten years
---------------------- ------------------------- --------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----------- --------- ------------ ----------- ---------- --------
(Dollars in thousands)
Part. Cert.-FNMA $3,040 8.55% - - - -
REMIC's - - $ 486 5.10% $67,906 6.63%
------ ------- -------
$3,040 $ 486 $67,906
====== ======= =======
------------------------------------------------
Total
------------------------------------------------
Average
Remaining Estimated Weighted
Years to Carrying Fair Average
Maturity Value Value Yield
--------- ------------ ----------- ----------
(Dollars in thousands)
Part. Cert.-FNMA 1.7 $ 3,040 $ 3,113 8.55%
REMIC's 22.9 68,392 65,316 6.61%
------- ------- ----
$71,432 $68,429
======= =======
19
20
The following table shows the maturity of the Company's mortgage-related
securities portfolio held to maturity at September 30, 1996.
At September 30, 1996
------------------------------------------------------
Total
Mortgage-
Related
FNMAs REMIC's Securities
------------------------------------------------------
(In thousands)
Amounts due:
Within one year $ - $ - $ -
After one year:
One to three years 3,040 - 3,040
Three to five years - - -
Five to ten years - 486 486
Ten to 20 years - 18,180 18,180
Over 20 years - 49,905 49,905
--------- ---------- ---------
Total due after one year 3,040 68,571 71,611
--------- ---------- ---------
Total amounts due 3,040 68,571 71,611
Less:
Unearned premiums and (discounts), net - (179) (179)
--------- ---------- ---------
Total mortgage-related securities, net $ 3,040 $ 68,392 $ 71,432
========= ========== =========
Available for Sale. At September 30, 1996, the Company had mortgage-backed and
related securities available for sale with a carrying and estimated market
value of $521.3 million or 37.1% of total assets. Of these, $21.3 million were
MBS's issued by various federal agencies, $197.3 million were private issue
MBS's, $301.8 million were REMIC's and CMO's, $842,000 were adjustable rate
mortgage mutual fund investments and $68,000 were CMO residuals. At September
30, 1995, the Company's mortgage-backed and related securities held for sale
were $360.1 million, representing 30.3% of total assets. Of these, $49.0
million were MBS's issued by various federal agencies, $132.2 million were
private issue MBS's, $177.3 million were REMIC's and CMO's, $1.5 million were
adjustable rate mortgage mutual fund investments and $116,000 were CMO
residuals. The Company is utilizing its capital position to increase earning
assets by increasing the level of mortgage-backed and related securities.
During the past year, the emphasis has been on purchasing adjustable rate
private MBS's and adjustable rate REMIC's which the Company views as having
favorable interest rate risk and pricing characteristics in comparison to other
investment alternatives.
Held for Trading. At September 30, 1996, the Company did not have any assets
in its trading portfolio compared with $3.0 million at September 30, 1995. The
trading portfolio of the Company has typically carried various mortgage-backed
or related securities that are purchased for short-term trading profits or
securities that are required to be classified as such by regulatory definition.
The Company may from time to time originate mortgages which were swapped.
These securities are required to be classified as trading securities. The
Company expects to sell mortgage loans by this method in future years and thus
have higher balances in its trading portfolio.
OTHER SECURITIES
The Company invests in various types of liquid assets that are permissible
investments for federally chartered savings associations or state-chartered
commercial banks, including U.S. Treasury obligations, securities of various
federal agencies, certain certificates of deposit of insured banks and savings
institutions, federal funds and, from time to time, repurchase agreements.
Subject to various restrictions applicable to all federally chartered savings
associations or state-chartered commercial banks, the Company also invests its
assets in commercial paper, investment grade corporate debt securities,
20
21
municipal securities, asset-backed securities and mutual funds, the assets of
which conform to the investments the Company is otherwise authorized to make
directly. Debt and equity securities are classified as either
available-for-sale or held-to-maturity at the time of purchase and carried at
market value if available-for-sale or at amortized cost if held-to-maturity.
The Company's current investment policy permits purchases only of investments
rated investment grade by a nationally recognized rating agency and does not
permit purchases of securities of non-investment grade quality.
COMPOSITION OF THE COMPANY'S SECURITIES PORTFOLIO
Held to Maturity. At September 30, 1996, the Company had debt and equity
securities with a carrying value of $3.2 million and an estimated market value
of $3.2 million. Of the total, $1.2 million were state and municipal
obligations and $2.0 million were corporate notes. The Company purchases debt
and equity securities that are in the top three investment grades (A or better)
at the time that the investment is made.
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's investment
securities at September 30, 1996. The yields on the municipal securities
represent their taxable-equivalent yield.
----------------------------------------------------------------------------------
Over one year to Over five years to
Less than one year five years ten years
------------------------ ----------------------- ----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Corporate notes and bonds $ 1,991 5.36% - - -
State and municipal obligations - - $ 373 6.47% $ 811 6.11%
-------- ------- -------
$ 1,991 $ 373 $ 811
======== ======= =======
---------------------------------------------------------------------------------
Over ten years Total
----------------------- -----------------------------------------------------
Average
Weighted Remaining Estimated Weighted
Carrying Average Years to Carrying Fair Average
Value Yield Maturity Value Value Yield
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
Corporate notes and bonds - - 0.2 $ 1,991 $ 2,001 5.36%
State and municipal obligations - - 5.8 1,184 1,217 6.22%
-------- -------- -------
- $ 3,175 $ 3,218
======== ======== =======
Available for Sale. At September 30, 1996, the Company had securities
available for sale with a carrying value and estimated market value of $58.5
million. Of the total, $23.5 million were U.S. Treasury or agency obligations,
$5.9 million were state and municipal securities, $7.6 million were corporate
notes and bonds, $4.8 million were asset-backed securities and $16.8 million
were marketable equity securities, primarily shares of mutual funds invested in
bank or thrift eligible securities.
21
22
SOURCES OF FUNDS
GENERAL
The Company's primary sources of funds for use in lending, investing and for
other general purposes are deposits, including brokered deposits, proceeds from
principal and interest payment on loans, mortgage-backed and related securities
and debt and equity securities, FHLB advances, and to a lesser extent, reverse
repurchase agreements. Contractual loan payments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general market interest rates and economic
conditions. Borrowings may be used on a short-term basis to compensate for
seasonal or other reductions in normal sources of funds or for deposit inflows
at less than projected levels, or they also may be used on a longer-term basis
to support expanded lending or investment activities.* The Company utilizes
advances from the FHLB and reverse repurchase agreements as sources for its
borrowings. The Company is currently utilizing its capital position to increase
assets by investing in primarily mortgage-backed or REMIC securities with
adjustable rates or short and medium terms and financing the purchases with
advances from the FHLB that generally match the expected maturity duration of
the respective securities. At September 30, 1996 and 1995, the Company had
advances from the FHLB of $373.6 million or 26.6% of total assets and $330.1
million or 27.8% of total assets, respectively. The Company had no outstanding
reverse repurchase agreements at September 30, 1996. At September 30, 1995,
the Company had reverse repurchase agreements outstanding of $13.5 million or
1.1% of total assets. Of the Company's outstanding FHLB advances at September
30, 1996, $12.5 million will mature before September 30, 1997. Based on
sources and uses of funds projections, it is anticipated that all of the
maturing advances, which represent 3.3% of the total FHLB advances outstanding,
will be repaid upon their maturity dates.*
DEPOSITS
The Company offers a variety of deposit accounts having a range of interest
rates and terms. The Company's deposits principally consist of demand accounts
(non-interest bearing checking, NOW, MMDA and passbook) and certificates of
deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates and competition. The Company's
deposits are obtained primarily from the areas in which its branches are
located, and the Company relies principally on customer service, marketing
programs and long-standing relationships with customers to attract and retain
these deposits. Various types of advertising and promotion to attract and
retain deposit accounts also are used. For several years, the Company also has
used brokered deposits as a funding source for its business activities. The
brokered deposits are used to fund both general operating activities of the
Company and to fund the Company's leverage program. At September 30, 1996, the
Company had $138.6 million of brokered deposits, representing 15.8% of total
deposits, compared to $38.0 million or 5.5% of total deposits at September 30,
1995. The increase in brokered deposits has occurred because the Company has
used such certificates in its plan to fund additional earning assets to
increase net interest income, primarily mortgage-backed and related securities.
In addition, the Company has used brokered deposits to fund some operational
activities when such funds offer a better or quicker funding source than retail
deposits or FHLB advances.
Management monitors the Company's certificate accounts and, based on historical
experience, management believes it will retain a large portion of such accounts
upon maturity. However, management believes that the likelihood for retention
of brokered certificates of deposit is more a function of the rate paid on such
accounts as compared to retail deposits which may be established due to branch
location or other intangible reasons. Management considers Company
profitability, the matching of term lengths with assets, the attractiveness to
customers and rates offered by competitors in deposit offerings and promotions.
The Company has been competitive in the types of accounts and interest rates
it has offered on its deposit products. The Company intends to continue its
efforts to attract deposits as a primary source of funds for supporting its
lending and investing activities. The Company has lowered the rates on its
deposit accounts in the last two years because of generally lower market
interest rates.
22
23
At September 30, 1996, the Company had outstanding $25.7 million in
certificates of deposit in amounts of $100,000 or more maturing as follows:
Amount at
September 30,1996
-----------------
(IN THOUSANDS)
Three months or less $ 4,562
Over three through six months 8,078
Over six months through twelve months 6,186
Over twelve months 6,873
-----------
Total $ 25,699
===========
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented. Management does not believe that the
use of year-end balances instead of average balances resulted in any material
difference in the information presented. In this table, brokered deposits are
included with certificates.
September 30,
-------------------------------------------------------------------------
1996 1995
----------------------------------- ----------------------------------
Percent Average Percent Average
of Total stated of Total stated
Amount Deposits rate Amount Deposits rate
--------- -------- ------- --------- -------- -------
(Dollars in thousands)
Demand deposits:
Non-interest bearing $ 34,377 3.9% - $ 26,879 3.9% -
Interest bearing 39,710 4.5% 1.49% 42,687 6.2% 1.47%
Passbook accounts 79,362 9.0% 2.87% 87,678 12.7% 2.75%
Money market
demand accounts 176,838 20.2% 4.53% 121,016 17.6% 4.55%
Certificates 547,397 62.4% 5.60% 410,088 59.6% 5.81%
--------- ----- --------- -----
Total deposits $ 877,684 100.0% 4.74% $ 688,348 100.0% 4.78%
========= ===== ========= =====
September 30,
----------------------------------
1994
----------------------------------
Percent Average
of Total stated
Amount Deposits rate
--------- -------- -------
(Dollars in thousands)
Demand deposits:
Non-interest bearing $ 18,663 3.3% -
Interest bearing 30,552 5.4% 1.50%
Passbook accounts 95,504 16.8% 2.60%
Money market
demand accounts 91,055 16.0% 4.00%
Certificates 334,118 58.5% 4.80%
-------- -----
Total deposits $569,892 100.0% 3.97%
======== =====
23
24
BORROWINGS AND OTHER FINANCING TRANSACTIONS
Although deposits are the Company's largest source of funds, the Company's
policy has been to utilize borrowings as an alternative or less costly source
of funds. The Company utilizes borrowings as part of its asset/liability
investment strategy. Borrowings are collateralized when management believes it
can profitably re-invest those funds for the benefit of the Company. The
Company obtains advances from the FHLB. These advances are collateralized by
the capital stock of the FHLB held by the Company and certain of its mortgage
loans and mortgage-backed and related securities. Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. Additionally, the Company is currently
utilizing its capital position to increase assets by investing in primarily
mortgage-backed REMIC securities with adjustable rates or short and medium
terms and financing the purchases with advances from the FHLB that generally
match the expected maturity duration of the respective securities. The maximum
amount the FHLB will advance to member institutions for purposes other than
meeting withdrawals fluctuates from time to time in accordance with policies of
the OTS and the FHLB. At September 30, 1996, the Company's FHLB advances
totaled $373.6 million, representing 29.2% of total liabilities, up from the
$330.1 million outstanding at September 30, 1995. At September 30, 1996, the
Company had a borrowing capacity available of $116.3 million from the FHLB,
however, additional securities may have to be pledged as collateral.
The Company's borrowings from time to time include reverse repurchase
agreements. The form of reverse repurchase agreement used by the Company
involves the sales of securities owned by the Company with a commitment to
repurchase the same or substantially the same securities at a predetermined
price at a future date, typically within 30 days to six months. These
transactions are treated as borrowings collateralized by the securities sold
and are therefore included as other borrowings on the Company's Consolidated
Financial Statements. These transactions are authorized by the Company's
Investment Policy and are governed by agreements with primary government
dealers under PSA Master Repurchase Agreements. At September 30, 1996 and
1995, the Company had zero and $13.5 million, respectively, of reverse
repurchase agreements.
While increases in borrowings and changes in the collateralization levels due
to market interest rate changes could require the Company to add collateral to
secure its borrowings, the Company does not anticipate having a shortage of
qualified collateral to pledge against its borrowings.
24
25
The following table sets forth certain information regarding the Company's FHLB
advances, borrowed funds and reverse repurchase agreements at or for the
periods ended on the dates indicated.
At or for the year ended September 30,
--------------------------------------------
1996 1995 1994
-------------- ------------- -------------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding $344,787 $330,253 $245,965
Maximum amount outstanding at any
month-end during the year 373,569 343,505 323,505
Balance outstanding at end of year 373,569 330,073 310,505
Weighted average interest rate
during the year (1) 5.43% 5.60% 4.44%
Weighted average interest rate at
end of year 5.45% 5.61% 4.97%
Reverse repurchase agreements:
Average balance outstanding $ 703 $ 10,062 $ 4,640
Maximum amount outstanding at any
month-end during the year - 30,432 22,305
Balance outstanding at end of year - 13,521 5,501
Weighted average interest rate
during the year (1) 5.81% 5.69% 4.59%
Weighted average interest rate at
end of year - 5.81% 4.75%
Total advances and reverse repurchase
agreements:
Average balance outstanding $345,490 $340,315 $250,605
Maximum amount outstanding at any
month-end during the year 373,569 365,937 345,810
Balance outstanding at end of year 373,569 343,594 316,006
Weighted average interest rate
during the year (1) 5.43% 5.61% 4.44%
Weighted average interest rate at
end of year 5.45% 4.97% 4.97%
- ------------------------
(1) Computed on the basis of average daily balances.
SUBSIDIARY ACTIVITIES
During the fiscal year ended September 30, 1996, the Bank had four wholly-owned
subsidiaries: St. Francis Insurance Corp. ("S-F Insurance"), St. Francis
Equity Properties, Inc. ("S-F Equity"), S-F Mortgage Corp. ("S-F Mortgage") and
SF Investment Services ("SF Investment").
S-F Insurance. S-F Insurance offers credit life and disability insurance on
consumer and mortgage loans sold exclusively through licensed agents who also
are employees of the Bank. The Bank is reimbursed by S-F Insurance for
administration and sales services provided by the Bank. At September 30, 1996,
the Bank's total investment in S-F Insurance was approximately $165,000 and S-F
Insurance's assets of $167,000 consisted primarily of cash.
25
26
S-F Equity Properties. S-F Equity Properties ("SFEP") is a Wisconsin
corporation incorporated in February 1993 to own, operate and develop
multi-family rental property, either as a limited partner or through other
ownership status, for investment and subsequent resale. Properties include
projects for low-to-moderate income housing, which would qualify for tax
credits under Section 42 of the Internal Revenue Code (the "Code"). SFEP is
currently a limited partner in 20 projects and has committed to equity
investments in an additional five projects within the state of Wisconsin.
Additionally, the Bank has provided financing or committed to provide financing
to 24 of the projects. However, the primary return to the Company on these
projects is in the form of tax credits earned over the first ten years of the
projects life. At September 30, 1996, the Bank had loans outstanding to such
projects of $21.3 million. At September 30, 1996, the Bank's total investment
in S- F Equity was approximately $1.5 million and S-F Equity's assets of $37.7
million consisted primarily of its interests in the properties developed.
S-F Mortgage. S-F Mortgage is presently an inactive subsidiary which has not
engaged in business during the past five years. The Company has no current
plans to activate S-F Mortgage. At September 30, 1996, the Bank's total
investment in S-F Mortgage was approximately $184,000 and S-F Mortgage's
assets of $185,000 consisted primarily of cash.
SF Investment. SF Investment is a company incorporated in Nevada for the
purpose of managing a portion of the Bank's investment portfolio. At September
30, 1996, the Bank's total investment in SF Investment was approximately $252.6
million and the assets consisted of primarily mortgage-related securities.
Bank Wisconsin has two wholly-owned subsidiaries: Bank Wisconsin Insurance
Services ("BW Insurance") and BWS Investment Services ("BWS Investment"). BW
Insurance is presently an inactive subsidiary which has not engaged in any
business during the year ended September 30, 1996. Bank Wisconsin's investment
in BW Insurance is $11,000. BWS Investment is a company incorporated in Nevada
for the purpose of managing a portion of Bank Wisconsin's investment portfolio.
At September 30, 1996, Bank Wisconsin's total investment in BWS Investment was
approximately $12.5 million and the assets consisted of primarily
mortgage-related securities.
PERSONNEL
As of September 30, 1996, the Company had 261 full-time employees and 82
part-time employees. The employees of the Company are not represented by a
collective bargaining unit and the Company believes its relationship with its
employees to be good.
FEDERAL TAXATION
GENERAL
The following discussion of tax matters is intended to be a summary of the
material tax rules applicable to the Company and does not purport to be a
comprehensive description of all applicable tax rules.
Historically, for federal income tax purposes, the Company has reported its
income and expenses primarily on the hybrid method of accounting and has filed
its consolidated federal income tax returns on this basis through September 30,
1987. Since 1987, the Company has been an accrual taxpayer. Both before and
after the Conversion, the Company is and will be subject to the rules of
federal income taxation applicable to corporations. Generally, the Internal
Revenue Code requires that all corporations, including the Company, compute
taxable income under the accrual method of accounting. For its taxable year
ended September 30, 1996, the Company was subject to a maximum federal income
tax rate of 35%. The Company was audited by the IRS for taxable years through
the year ended September 30, 1993.
26
27
BAD DEBT RESERVES
For the taxable years beginning before 1996, savings institutions, such as the
Bank, which meet certain definitional tests primarily relating to their assets
and the nature of their business ("qualifying thrifts"), are permitted to
establish a reserve for bad debts and to make annual additions thereto, which
additions may, within specified formula limits, be deducted in arriving at
their taxable income. Each year the Bank will review the most favorable way to
calculate the deduction attributable to an addition to the bad debt reserve.
For the taxable years beginning before 1996, earnings appropriated for bad debt
reserves and deducted for federal income tax purposes cannot be used by the
Bank to pay cash dividends to the Company without the payment of income taxes
by the Bank at the then current income tax rate on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. Thus, any dividends to the Company that
would reduce amounts appropriated to the Bank's bad debt reserves and deducted
for federal income tax purposes could create a tax liability for the Company.
The Bank does not intend to pay dividends that would result in a recapture of
its bad debt reserves.
On August 20, 1996, the President signed the Small Business Job Protection Act
of 1996 ("the Act"). The Act repealed the reserve method of accounting for bad
debts by thrift institutions, effective for taxable years beginning after 1995.
Thrift institutions such as the Bank with more than $500 million in assets are
now required to use the specific charge-off method. The Act also grants
partial relief from the bad debt reserve recapture "recapture" which occurs in
connection with the change in method of accounting. The pre-1988 reserves are
not required to be included in income in connection with the change in method
of accounting. In addition, the Act suspends recapture of post-1987 reserves
for a period of two years, conditioned on the institution's compliance with
certain residential loan requirements. Institution's can meet this residential
loan requirement if the principal amount of residential loans made during a
taxable year was not less than the "base amount" for such year. The base
amount is determined on an institution-by-institution basis, and constitutes
the average of the principal amounts of residential loans made by an
institution during the six most recent taxable years. Notwithstanding the
foregoing, institutions will be required to pay for recaptured post-1987 bad
debt reserves ratably over a six-year period starting in 1998. Since
provisions for deferred income tax have been provided for on post-1987 bad debt
reserves, there will not be any additional income tax expense to the Bank on
recapture.
CORPORATE ALTERNATIVE MINIMUM TAX
For taxable years beginning after December 31, 1986, the Internal Revenue Code
imposes an alternative minimum taxable income ("AMTI") which is imposed at a
rate of 20%. For the taxable years beginning before 1996, the excess of the
bad debt reserve deduction using the percentage of taxable income method, over
the deduction that would have been allowable under an experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating losses. For taxable years beginning after
December 31, 1989, the adjustment to AMTI based on book income will be an
amount equal to 75% of the amount by which a corporation's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0
million is imposed on corporations, including the Company, whether or not an
Alternative Minimum Tax ("AMT") is paid. From time to time the Company may be
subject to AMT tax. The Company was subject to an environmental tax liability
for the year ended September 30, 1995, which was not material.
DISTRIBUTIONS
To the extent that (i) the Company's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under an
experience method and (ii) the Company makes "non-dividend distributions" to
shareholders that are considered to result in distributions from the excess bad
debt reserve or the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be
included in the Company's taxable income. Non-dividend
27
28
distributions include distributions in excess of the Company's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid of
the Company's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Company's bad debt reserves.
The amount of additional taxable income created from an Excess Distribution is
an amount that when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if certain portions of the Bank's
accumulated tax bad debt reserve are used for any purpose other than to absorb
qualified bad debt loans, such as for the payment of dividends or other
distributions with respect to the Company's capital stock (including
distributions upon redemption or liquidation), approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 35% corporate income tax rate (exclusive of state
taxes). See "Dividend Policy" and "Regulation" for limits on the payment of
dividends of the Bank and the Company.
STATE TAXATION
The State of Wisconsin imposes a tax on the Wisconsin taxable income of
corporations, including savings institutions, at the rate of 7.9%. Wisconsin
taxable income is generally similar to federal taxable income except that
interest from state and municipal obligations is taxable, no deduction is
allowed for state income taxes and net operating losses may be carried forward
but not back. Wisconsin law does not provide for filing of consolidated state
income tax returns. The Company was audited by the Wisconsin Department of
Revenue for taxable years through September 30, 1990. The results of the audit
assessment, which resulted in an additional $620,000 of taxes, have been taken
into account in calculating income tax expenses. The Company is contesting
virtually all of the audit assessment, but the results or timing of its
challenge is unknown.
REGULATION
The Company is a bank holding company registered with and subject to regulation
by the Board of Governors of the Federal Reserve System (the "FRB") under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is also
a savings and loan holding company registered with and subject to regulation by
the Office of Thrift Supervision (the "OTS") under the Home Owners' Loan Act of
1993, as amended (the "HOLA"). The Company is required to file certain reports
and otherwise comply with the rules and regulations of the OTS, the FRB, and
the Securities and Exchange Commission (the "SEC") under the federal securities
laws. The Bank, as a federally chartered savings bank, is subject to
regulatory oversight by its primary regulator, the OTS. Bank Wisconsin, as a
state chartered commercial bank, is subject to regulatory supervision by the
Wisconsin Department of Financial Institutions, Division of Banking (the
"Division") and the Federal Deposit Insurance Corporation, (the "FDIC"), its
primary federal regulator.
HOLDING COMPANY REGULATIONS
The BHCA requires the Company to obtain prior FRB approval before it may
acquire substantially all of the assets of any bank, or ownership or control or
any voting shares of any bank, if, after such acquisition, it would own or
control, directly or indirectly, more than 5% of the voting shares of such
bank.
The BHCA limits the activities of bank holding companies to managing,
controlling and servicing their subsidiary banks and to engaging in certain
non-banking activities determined by the FRB to be so "closely related" to
banking as to be a "proper incident" thereto. With the exception of such
closely related activities, bank holding companies are prohibited from
acquiring direct or indirect ownership of more than 5% of the voting stock of
any company which is not a bank. The FRB has also permitted bank holding
companies to engage in certain additional activities on a case-by-case basis.
28
29
The Company must obtain approval from the OTS before acquiring control of more
than 5% of the voting shares of any other SAIF - insured institution. Such
acquisitions generally are prohibited if they result in a multiple savings and
loan holding company controlling savings institutions in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings institution.
REGULATION OF FEDERAL SAVINGS BANKS
The OTS has extensive regulatory and supervisory authority over the operations
of the Bank. This regulation and supervision established a comprehensive
framework of activities in which the Bank can engage and is intended primarily
for the protection of the insurance fund and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
The OTS also has enforcement authority over the Bank and the Company, and their
affiliated parties. This enforcement authority includes, among other things,
the ability to assess civil money penalties, issue cease-and-desist or removal
orders and initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws or regulations or for unsafe or unsound
practices. Other actions or inaction may provide the basis for enforcement
actions, including misleading or untimely reports filed with the OTS.
The Bank is required to file periodic reports with the OTS Regional Director
and is subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted, examiners may, among other things, require the Bank
to provide for higher general or specific loan loss reserves or write down the
value of certain assets. The last regular examination by the OTS was in June
1996.
ASSESSMENTS
Savings institutions are required by OTS regulations to pay assessments to the
OTS to fund the operations of the OTS. The general assessment, paid on a
semiannual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the institution's latest
quarterly Thrift Financial Report. The Bank's OTS assessment for the six month
period ended June 30, 1996 was $115,000, based on the Bank's assets as of March
31, 1996 of $1.2 billion and the current OTS assessment rate.
QUALIFIED THRIFT LENDER REQUIREMENT
In order for the Bank to exercise the powers granted to SAIF-insured
institutions and maintain full access to Federal Home Loan Bank ("FHLB")
advances, it must qualify as a qualified thrift lender ("QTL"). Under the HOLA
and OTS regulations, savings institutions are required to maintain a level of
qualified thrift investments equal to at least 65% of its "portfolio assets"
(as defined by statute) on a monthly basis for nine out of twelve months per
calendar year. Qualified thrift investments for purposes of the QTL test
consist primarily of the residential mortgages and related investments. As of
September 30, 1996, the Company maintained 95.9% of its portfolio assets in
qualified thrift investments and therefore met the QTL test.
WISCONSIN COMMERCIAL BANK REGULATION
As a Wisconsin chartered commercial bank, Bank Wisconsin is authorized to make
loans and investments, provided that the total liabilities of any person,
partnership, corporation or bank shall not exceed 20% of the capital of the
bank, with certain exceptions.
Bank Wisconsin may also invest funds in certain types of debt and equity
securities, including obligations of local governments and agencies.
Investment of debt securities in local government units may not exceed 50% of
the capital of the bank, and temporary borrowings of any local government unit
maturing within one year from the date of issues may not exceed 60% of the
bank's capital and surplus. Bank
29
30
Wisconsin may invest in equity positions, such as profit-participation
projects, in an amount determined by the Division.
Bank Wisconsin is subject to statutory and regulatory restrictions on a wide
variety of activities. Subject to regulatory approval, Bank Wisconsin may,
directly or through a subsidiary, undertake any activity, exercise any power or
offer any financially related product or services that any other provider of
financial products or services may undertake, exercise or provide or that the
Division finds to be financially related.
The Division examines the affairs of Bank Wisconsin on an annual basis. The
Division will assess Bank Wisconsin fees in connection with any examination, as
well as an annual assessment for maintenance of the Division's Office. Based
on the assessment rates published by the Division and Bank Wisconsin's total
assets of $92.1 million at December 31, 1995, the Bank paid approximately
$3,000 in assessments for the year ending December 31, 1996.
FEDERAL REGULATIONS
Both the Bank and Bank Wisconsin are subject to federal regulations which
address various issues including, but not limited to insurance of deposits,
capital requirements, and community reinvestment requirements.
- - INSURANCE OF DEPOSITS
The Bank's deposits are insured up to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the FDIC while Bank Wisconsin's
deposits are insured up to applicable limits under the Bank Insurance Fund
("BIF") of the FDIC. The FDIC regulations assign institutions to a
particular capital group based on the level of an institution's capital --
"well capitalized," "adequately capitalized," and "undercapitalized".
These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to
be healthy to those which are considered to be of substantial supervisory
concern. The matrix so created results in nine assessments risk
classifications, with reduced insurance rates paid by well capitalized,
financially sound institutions and higher rates paid by undercapitalized
institutions that pose a substantial risk of loss to the insurance fund
unless effective corrective action is taken.
Under the Federal Deposit Insurance Act (the "FDI Act"), insurance of
deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the Division.
Management of the Company does not know of any practice, condition or
violation that might lead to the termination of deposit insurance. See,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Regulatory Legislative Developments."
- - CAPITAL REQUIREMENTS
FDIC REGULATION
Bank Wisconsin is required to follow FDIC capital adequacy guidelines which
prescribe minimum levels of capital and require that institutions meet
certain risk-based and leverage capital requirements. Under the FDIC
capital regulations, Bank Wisconsin is required to meet the following
capital standards: (i) "Tier 1 capital" in an amount not less than 3% of
total assets; (ii) "Tier 1 capital" in an amount not less than 4% of
risk-weighted assets; and (iii) "total capital" in an amount not less than
8% of risk-weight assets.
30
31
The following table summarizes Bank Wisconsin's capital ratios and the
ratios required by federal regulators at September 30, 1996:
Regulatory
Requirement Capital Excess Capital
------------------ ------------------ ------------------
Capital Standard Amount Percent Amount Percent Amount Percent
---------------- ------- ------- ------ ------- ------ -------
(Dollars in thousands)
Tier 1 capital/average assets 2,890 3.00% 8,789 9.12% 5,899 6.12%
Tier 1 capital/risk-based 2,840 4.00% 8,789 12.38% 5,949 8.38%
Total capital/risk-based 5,680 8.00% 9,478 13.35% 3,798 5.35%
FDIC-regulated institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial
Institutions Examination Council) are required to maintain "Tier 1
capital" equal to at least 3% of total assets (the "leverage limit"
requirement). For all other FDIC-insured institutions, the minimum
leverage limit requirement is 3% of total assets plus at least an
additional 100 to 200 basis point. Tier 1 capital is defined to include
the sum of common stockholders' equity, noncumulative perpetual preferred
stock (including any related surplus), and minority interests in
consolidated subsidiaries, minus all intangible assets (other than
qualifying servicing rights). An institution that fails to meet the
minimum leverage limit requirement must file a capital restoration plan
with the appropriate FDIC regional director that details the steps it will
take to reach capital compliance.
Bank Wisconsin also is required to adhere to certain risk-based capital
guidelines which are designed to provide a measure of capital more
sensitive to the risk profiles of individual banks. Under the risk-based
capital guidelines, capital is divided into two tiers: core (Tier 1)
capital, as defined above, and supplementary capital (Tier 2). Tier 2
capital is limited to 100% of core capital and includes cumulative
perpetual preferred stock, perpetual preferred stock, mandatory convertible
securities, subordinated debt, intermediate preferred stock and allowance
for possible loan and lease losses. Allowance for possible loan and lease
losses includable in supplementary capital is the sum of Tier 1 and Tier 2
capital. The risk-based capital framework assigns balance sheet assets to
one of four broad risk categories which are assigned risk-weights ranging
from 0% to 100% based primarily on the degree of credit risk associated
with the obligor. Off-balance sheet items are converted to an on-balance
sheet "credit equivalent" amount utilizing certain conversion factors. The
weighted sum of the four risk-weighted categories equals risk-weighted
assets.
OTS REGULATION
The OTS capital regulations require savings institutions to meet three
capital standards: (i) "core capital" in an amount not less than 3% of
adjusted total assets; (ii) "tangible capital" in an amount not less than
1.5% of adjusted total assets; and (iii) "risk-based capital" of an least
8% of risk-weighted assets. Savings institutions must meet all of the
standards in order to comply with the capital requirements.
The following table summarizes the Bank's capital ratios and the ratios
required by federal regulations at September 30, 1996:
Regulatory
Requirement Capital Excess Capital
------------------ ------------------ ------------------
Capital Standard Amount Percent Amount Percent Amount Percent
---------------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Tangible capital 19,457 1.50% 89,092 6.86% 69,635 5.37%
Core capital 38,915 3.00% 89,092 6.86% 50,177 3.86%
Risk-based capital 56,576 8.00% 92,764 13.12% 36,188 5.12%
31
32
The minimum core capital requirement is 3% of adjusted total assets (the
"leverage limit" requirement). Core capital is defined to include common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
amounts of consolidated subsidiaries, less any unidentifiable intangible
assets (other than limited amounts of purchased mortgage servicing rights,
supervisory goodwill and other intangibles that meet certain salability and
market valuation tests); and equity and debt investments in subsidiaries
which are not "includable subsidiaries." Includable subsidiaries are
defined as subsidiaries engaged solely in activities permissible for a
national bank, engaged in activities impermissible for a national bank but
only as an agent for its customers, or engaged solely in mortgage-banking
activities.
Each saving institution must also maintain total capital equal to at least
8% of risk-weighted assets. Total capital consists of the sum of core and
supplementary capital, provided that supplementary capital cannot exceed
core capital, as defined above. Supplementary capital includes permanent
capital instruments such as, cumulative perpetual preferred stock,
perpetual subordinated debt, and mandatory convertible subordinated debt,
maturing capital instruments such as, subordinated debt, intermediate-term
preferred stock and mandatory redeemable preferred stock, subject to an
amortization schedule, and general valuation loan and lease loss allowances
up to 1.25% of risk-weighted assets. The OTS risk-based capital
regulation, like the FDIC regulation described above, assigns each balance
sheet asset held by a savings institution to one of five risk categories
based on the amount of credit risk associated with that particular class of
asset.
- - COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977, as amended (the "CRA"), a
depository institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs
of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited
to its particular community, consistent with the CRA. The CRA requires the
federal regulators to assess the institution's record of meeting with the
credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. The CRA also
requires all institutions to make public disclosure of their CRA ratings
and requires an institution's primary regulator to provide a written
evaluation of an institution's performance. The Bank's latest CRA rating,
received in May 1996, was "Outstanding," and Bank Wisconsin's latest CRA
rating, received in March 1996, was "Satisfactory".
On May 4, 1995, the federal banking regulators adopted a final rule ("Final
CRA Rule") governing compliance with CRA. The Final CRA Rule eliminates
the previous CRA regulation's twelve assessment factors and substitutes a
performance based evaluation system. The Final CRA Rule will be phased in
over a period of time and become fully effective by July 1, 1997. Under
the Final CRA Rule, an institution's performance in meeting the credit
needs of its entire community, including low- and moderate-income areas, as
required by the CRA, will generally be evaluated under three assessment
tests relating to lending, investment and service.
The lending test analyzes lending performance using five criteria: (i) the
number and amount of loans in the institution's assessment area, (ii) the
geographic distribution of lending, including the proportion of lending in
the assessment area, the dispersion of lending in the assessment area, and
in the number and amount of loans in the institution's assessment area,
(ii) borrower characteristics, such as the income level of individual
borrowers and the size of businesses or farms, (iii) the number and amount,
as well as the complexity and innovativeness of an institution's community
development lending and (iv) the use of innovative or flexible lending
practices in a safe and sound manner to address the credit needs of low- or
moderate-income individuals or areas.
32
33
The investment test analyzes investment performance using four criteria:
(i) the dollar amount of qualified investments, (ii) the innovativeness or
complexity of qualified investments, (iii) the responsiveness of qualified
investments to credit and community development needs, and (iv) the degree
to which the qualified investments made by the institution are not
routinely provided by private investors.
The service test analyzes service performance using six criteria: (i) the
institution's branch distribution among low-, moderate-, middle-, and
upper-income areas, (ii) its record of opening and closing branches,
particularly in low- and moderate- income areas, (iii) the availability and
effectiveness of alternative systems for delivering retail banking
services, (iv) the rate of services provided in low-, moderate-, middle-
and upper-income areas and extent to which those services are tailored to
meet the needs of those areas, (v) the extent to which the institution
provides community development services, and (vi) the innovativeness and
responsiveness of community development services provided.
Financial institutions with assets of less than $250 million, or a
financial institution with assets of less than $250 million that is a
subsidiary or a holding company with assets if less than $1 billion, will
be evaluated under a streamlined assessment method based primarily on its
lending record. The streamlined test considers an institution's
loan-to-deposit ratio adjusted for seasonal variation and special lending
activities, its percentage of loans and other lending related businesses
and farms of different sizes, the geographic distribution of its loan, and
its record of taking action, if warranted, in response to written
complaints. In lieu of being evaluated under the three assessment tests or
the streamlined test, a financial institution can adopt a "strategic plan"
and elect to be evaluated on the basis of achieving the goals and
benchmarks outlined in the strategic plan.
The data collection requirements under the revised regulation were
effective January 1, 1996, with the reporting requirements to be effective
January 1, 1997. Evaluations under the lending, investment and service
tests generally will begin July 1, 1997, although evaluations under the
small institution performance standards, which will not utilize newly
required data, began January 1, 1996. In addition, beginning January 1,
1996, any institution may submit a strategic plan for approval or elect to
be examined under the revised performance tests, if the institution
provides the necessary data.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System, consisting of twelve FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank and Bank Wisconsin, as members of the FHLB-Chicago, are required to
acquire and hold shares of capital stock in the FHLB-Chicago in an amount equal
to 1% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year. Further, at no time shall advances (borrowings) from the FHLB-Chicago
exceed 20 times the amount paid by such member for FHLB-Chicago capital stock.
The Bank and Bank Wisconsin are in compliance with these requirements with a
total investment in FHLB-Chicago stock of $19.0 million at September 30, 1996.
Among other benefits, the FHLBs provide a central credit facility primarily for
member institutions. It makes advances to members in accordance with policies
and procedures established by the FHFB and the Board of Directors of the
FHLB-Chicago. At September 30, 1996, the Bank and Bank Wisconsin had $373.6
million in advances from the FHLB-Chicago. See "Business of the Company."
33
34
RESERVE REQUIREMENTS
Regulation D, promulgated by the FRB, imposes reserve requirements on all
depository institutions which maintain transaction accounts or non- personal
time deposits. Checking accounts, NOW accounts and certain other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain money
market deposit accounts). Under Regulation D, a depository institution must
maintain average daily reserves equal to 3% on the first $52.0 million of
transaction accounts. There has been a 0% reserve requirement on non-personal
deposits since December 27, 1990. In addition, the first $4.3 million of
otherwise reservable liabilities are exempt from the reserve requirement.
These percentages and tranches are subject to adjustment by the FRB. As of
September 30, 1996, the Bank and Bank Wisconsin met Regulation D reserve
requirements.
OTHER FEDERAL LAWS
RESTRICTIONS ON LOANS TO INSIDERS
Federal regulations establish limits on the total amount an institution may
lend to its executive officers, directors, and principal shareholders, and
their related interests (collectively referred to in this section as
"insiders"). Generally, an insider may borrow an aggregate amount not
exceeding 15% of the institution's unimpaired capital and unimpaired surplus on
an unsecured basis and an additional 10% on a secured basis. The regulations
limit, with certain exceptions, the aggregate amount a depository institution
may lend to its insiders as a class to an amount not exceeding the
institution's unimpaired capital and unimpaired surplus. FRB regulations also
provide for certain exceptions from the definition of "extension of credit"
that pose a minimal risk to institutions, including extensions of credit
secured by obligations fully guaranteed by the federal government,
unconditional takeout commitments or guarantees of any U.S. agency, department
or wholly-owned corporation, or a segregated deposit account at the
institution.
When extending credit to an insider, an institution must apply underwriting
policies and procedures no less stringent than those applied for comparable
transactions with non-insiders. Generally, all loans to insiders must be
approved by a majority of the institution's disinterested directors. Any
credit extension to an executive officer must be reported to the board of
directors, include a current financial statement of the borrower, and include a
demand feature which permits the institution to call the loan if the officer's
borrowings from other institutions aggregated with the loan exceeds applicable
limits. An insider cannot knowingly receive, or permit a related interest to
receive, a loan that violates applicable regulations. Neither the Bank nor
Bank Wisconsin have been significantly affected by such restrictions on loans
to insiders.
TRANSACTIONS WITH AFFILIATES
Both the Bank and Bank Wisconsin must comply with Sections 23A and 23B of the
Federal Reserve Act ("Sections 23A and 23B") relative to transactions with
affiliates. Generally, Sections 23A and 23B limit the extent to which the
insured institution or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus, place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and require
that all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guaranty and similar other types of
transactions. Exemptions from 23A or 23B may be granted only by the Federal
Reserve Board. The Company has not been significantly affected by such
restrictions on transactions with affiliates.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the SEC under Section 12(g) of
the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other restrictions and other
requirements of the SEC under the Exchange Act.
34
35
ITEM 2. PROPERTIES
The Company conducts its business through 15 full-service locations, two
limited service offices in residential retirement communities and two loan
production offices. Seven of the full-service branches are located in
Milwaukee County, four are in Waukesha County, two are in Washington County,
one in Ozaukee County, and one is in Walworth County. Management believes the
current facilities are adequate to meet the present and immediately foreseeable
needs of the Company. A listing of the Company's offices is as follows:
LEASE NET
YEAR OWNED OR EXPIRATION BOOK
LOCATION OPENED LEASED DATE VALUE
- -------- ------ ------ ---- -------
FULL SERVICE OFFICES:
Milwaukee/St. Francis Home Office (1) 1923 Owned - $ 2,848,000
3545 South Kinnickinnic Avenue
Milwaukee, WI 53235
Thiensville Office (1) 1975 Owned - 429,000
153 North Main Street
Thiensville, WI 53092
Muskego Office (1) 1976 Owned - 455,000
S74 W17100 Janesville Road
Muskego, WI 53150
Elmbrook/Wauwatosa Office (1) 1977 Owned - 857,000
2360 North 124th Street
Milwaukee, WI 53226
West Allis Office (1) 1978 Owned - 693,000
9330 West Greenfield Avenue
West Allis, WI 53214
Greendale Office (1) 1980 Leased 2030 456,000
5499 South 76th Street (Land Only)
Greendale, WI 53129
Cudahy Office (1) 1980 Owned - 1,545,000
6042 South Packard Avenue
Cudahy, WI 53110
Milwaukee/Downtown Office (1) 1981 Leased 1999 77,000
142 West Wisconsin Avenue
Milwaukee, WI 53203
Wauwatosa Village Office (1) 1984 Leased 1997 71,000
6810 West State Street
Wauwatosa, WI 53213
Waukesha Office (1) 1986 Leased 2021 479,000
2116 East Moreland Blvd. (Land Only)
Waukesha, WI 53186
New Berlin Office (1) 1988 Leased 2027 397,000
3670 South Moorland Road (Land Only)
New Berlin, WI 53151
35
36
Kewaskum Office (2) 1994 Owned - 365,000
1225 Fond du Lac Avenue
Kewaskum, WI 53040
Hartford Office (2) 1994 Owned - 633,000
709 Grand Avenue
Hartford, WI 53027
Lake Geneva (1) 1996 Owned - 1,075,000
401 Broad Street
Lake Geneva, WI 53147
Menomonee Falls (2) 1996 Owned - 911,000
N88 W16586 Appleton Avenue
Menomonee Falls, WI 53051-0864
LIMITED SERVICE OFFICES:
Tudor Oaks Office (1) 1977 Leased Monthly 1,000
S77 W12929 McShane Drive
Muskego, WI 53150
Alexian Village Office (1) 1978 Leased 2003 1,000
9301 North 76th Street
Milwaukee, WI 53223
LOAN PRODUCTION OFFICES:
International Building (1) 1994 Leased 2004 28,000
611 W. National Avenue
Milwaukee, WI 53204
MEC (1) 1994 Leased Monthly -
2821 N. Fourth Street
Milwaukee, WI 53202
5912 75th Street (1) 1994 Leased 2003 88,000
Kenosha, WI 53142
Total Net Book Value: $11,409,000
===========
(1) Office of St. Francis Bank, F.S.B.
(2) Office of Bank Wisconsin
36
37
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these various legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these legal actions should not
have a material effect on the Company's consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the three months
ended September 30, 1996.
Executive Officers of the Registrant Who Are Not Directors
The following information as to the business experience during the past five
years is supplied with respect to executive officers of the Company who do not
serve on the Company's Board of Directors. There are no arrangements or
understandings between the persons named and any other person pursuant to which
such officers were selected, nor are there any family relationships among them.
JAMES C. HAZZARD, age 51, is President of Bank Wisconsin, one of the Company's
subsidiary. Mr. Hazzard has held his position with Bank Wisconsin since its
inception in 1994. Prior to joining Bank Wisconsin, Mr. Hazzard served as
President and Chief Executive Officer of Associated Bank/F&M Bank Menomonee
Falls, Wisconsin.
BRUCE R. SHERMAN, age 51, is a Vice President of the Company and Senior Vice
President and Treasurer of the Bank. Mr. Sherman has held his position with
the Bank since 1984, and became Vice President of the Company in June 1993.
From 1973 until joining the Bank, Mr. Sherman was with the public accounting
firm of Ernst & Whinney.
BRIAN T. KAYE, age 55, is Secretary of the Company and Secretary and Executive
Vice President of the Bank. Mr. Kaye has held the position of Executive Vice
President of the Bank since August 1989 and his position of Secretary of the
Bank since July 1990, and became Secretary of the Company in November 1992.
Mr. Kaye was a Senior Vice President of First Financial Bank, F.S.B. from 1988
until joining the Bank. From 1982 to 1988, he was a Senior Vice President of
National Savings & Loan. Prior to joining the Bank, Mr. Kaye served as Deputy
Commissioner of the Wisconsin Office of Commissioner of Savings & Loan.
JON D. SORENSON, age 41, is Chief Financial Officer and Treasurer of the
Company and Senior Vice President of the Bank. Mr. Sorenson became Chief
Financial Officer and Treasurer of the Company in November 1992, and has held
his position with the Bank since December 1992. From September 1990 to
December 1992, Mr. Sorenson was a Vice President of the Bank. From 1985 to
1990, Mr. Sorenson was Vice President- Assistant Controller of First Bank
System, a bank holding company. From 1982 to 1985, he was a Vice President and
Treasurer of First Federal Savings-Eau Claire.
WILLIAM T. JAMES, age 37, is Assistant Vice President of the Company and Vice
President of the Bank. Mr. James became Assistant Vice President of the
Company in June 1993, and has held his position with the Bank since April 1991.
Mr. James joined the Bank in 1983.
37
38
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is currently being traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") National
Market System over-the-counter exchange under the symbol of STFR. Information
required by this item is incorporated by reference to the "Quarterly financial
information (unaudited)" shown in Note 19 to Notes to Consolidated Financial
Statements and the "Earnings per share" Note 13 to Notes to Consolidated
Financial Statements included under Item 8 of this Annual Report on Form 10-K.
As of October 31, 1996, there were approximately 1,300 holders of record and
approximately 4,500 beneficial holders owning a total of 5,381,064 shares.
The Company paid quarterly dividends of $0.10 per share starting November 1995
and has increased the dividend to $0.12 per share effective November 1996. No
dividends were paid prior to November 1995. While there can be no assurance of
the payment of future dividends, the Company anticipates that future dividends,
if paid, would be paid on a quarterly basis in February, May, August and
November. Future payments of dividends will be subject to determination and
declaration by the Company's Board of Directors, which will take into account
the Company's financial condition, results of operations, tax considerations,
industry standards, economic conditions and other factors, including regulatory
restrictions which affect the payment of dividends by the Company's
subsidiaries to the Company.
On November 7, 1996, the Company announced it had completed the repurchase of
282,945 shares, or 5% of its common stock outstanding at an average price of
$25.75 per share. The repurchased shares were classified as treasury shares
and may be used for general corporate purposes.
On November 7, 1996, the Company announced it had adopted a share repurchase
program for its common stock. The Company plans to purchase up to 10%, or
538,100 shares over a twelve month period commencing November 11, 1996
depending on market conditions. The repurchased shares will become treasury
shares and will be used for general corporate purposes.
38
39
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data. The
financial data is derived in part from, and should be read in conjunction with,
the Consolidated Financial Statements and notes thereto presented elsewhere in
this Annual Report on Form 10-K.
September 30,
(In thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA:
Total assets $1,404,116 $1,189,215 $1,026,806 $812,473 $688,850
Cash and cash equivalents 22,459 20,780 15,951 11,753 27,384
Loans receivable, net 610,699 513,308 427,753 324,387 297,964
Mortgage loans held for sale 20,582 1,138 2,978 10,043 18,394
Securities held to maturity 3,175 49,928 23,804 28,813 13,879
Mortgage-backed and related securities held to maturity 71,432 157,495 159,178 370,562 263,311
Mortgage-backed and related securities available for sale 521,280 360,077 336,772 32,655 33,758
Deposits 877,684 688,348 569,892 552,004 537,444
Advances from the FHLB and other borrowings 375,034 345,681 317,317 122,180 77,581
Shareholders' equity 125,179 135,228 122,701 124,452 58,101
Year Ended September 30,
(In thousands, except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Total interest and dividend income $ 92,097 $ 83,787 $ 60,133 $ 49,784 $ 55,335
Total interest expense 56,413 50,223 31,633 27,629 35,118
---------- ---------- ---------- -------- --------
Net interest income before provision for loan losses 35,684 33,564 28,500 22,155 20,217
Provision for loan losses 1,300 240 240 95 955
---------- ---------- ---------- -------- --------
Net interest income 34,384 33,324 28,260 22,060 19,262
Other operating income (expense), net
Loan servicing and loan related fees 1,258 1,276 1,116 1,110 1,159
Gain (loss) on investments and mortgage-backed
and related securities, net 3,311 2,576 (101) 2,351 259
Gain on sales of mortgage loans held for sale, net 1,057 261 137 649 799
Other operating income 4,988 4,218 2,342 1,829 1,616
---------- ---------- ---------- -------- --------
Total other operating income, net 10,614 8,331 3,494 5,939 3,833
---------- ---------- ---------- -------- --------
General and administrative expenses (1) 31,622 22,679 19,381 16,205 15,400
---------- ---------- ---------- -------- --------
Income before income tax expense and cumulative
effect of change in accounting principle 13,376 18,976 12,373 11,794 7,695
Income tax expense 2,911 6,277 4,336 4,625 3,965
---------- ---------- ---------- -------- --------
Income before cumulative effect of change in
accounting principle 10,465 12,699 8,037 7,169 3,730
Cumulative effect of change in accounting for
income taxes - - - - 280
---------- ---------- ---------- -------- --------
Net income $ 10,465 $ 12,699 $ 8,037 $ 7,169 $ 4,010
========== ========== ========== ======== ========
Earnings per share $ 1.82 $ 2.10 $ 1.16 $ 0.31 N/A
========== ========== ========== ======== ========
(1) General and administrative expenses for the year ended September 30, 1996
include the one-time special SAIF assessment of $4,155,000 discussed
under Recent Regulatory Legislative Developments on page 58.
39
40
Selected consolidated financial and other data (cont.)
At or For the Year Ended September 30,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios (4)
Return on average assets 0.82% 1.10% 0.87% 1.00% 0.60%
Return on average equity 7.81 10.02 6.44 8.99 7.01
Shareholders' equity to total assets 8.92 11.37 11.95 15.32 8.43
Average shareholders' equity to average assets 10.48 10.95 13.52 11.14 8.50
Net interest spread during the period (1) 2.56 2.56 2.61 2.63 2.68
Net interest margin (1) 2.97 3.04 3.17 3.20 3.10
General and administrative expenses to average assets 2.47 1.96 2.10 2.26 2.29
Other operating income to average assets 0.83 0.72 0.38 0.83 0.57
Average interest-earning assets to average
interest-bearing liabilities 108.73 110.37 115.94 114.13 107.76
Asset Quality Ratios
Non-performing loans to gross loans (2) 0.58 0.08 1.65 0.54 0.79
Non-performing assets to total assets (2) 0.28 0.53 0.75 0.29 0.46
Allowance for loan losses to gross loans 0.78 0.77 0.74 0.88 0.96
Allowance for loan losses to non-performing loans (2) 134.11 943.52 44.99 161.33 120.95
Allowance for loan losses to non-performing assets (2) 131.41 65.06 44.89 134.91 99.81
Net charge-offs to average loans 0.03 0.06 0.02 0.02 0.29
Regulatory Capital Ratios (3)
Tangible ratio 6.86 8.49 8.97 11.62 8.40
Core ratio 6.86 8.49 8.97 11.62 8.40
Tier 1 risk-based ratio 12.60 16.57 18.97 23.57 N/A
Total risk-based ratio 13.12 17.18 19.54 24.12 17.00
Other Data
Number of deposit accounts 96,880 88,391 75,708 75,632 77,577
Number of real estate loans outstanding 3,888 4,018 3,741 3,569 3,969
Number of real estate loans serviced 7,101 6,579 6,272 5,854 5,600
Mortgage loan originations (in thousands) $ 238,234 $ 109,366 $ 282,368 $ 257,562 $ 171,004
Consumer loan originations (in thousands) $ 61,378 $ 41,444 $ 35,896 $ 19,329 $ 14,122
Full service customer facilities 15 13 11 11 11
- ---------------
(1) Net interest spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(2) Non-performing loans consist of nonaccrual loans and troubled debt
restructurings. Non-performing assets consist of non-performing loans
and foreclosed properties, which consist of real estate acquired by
foreclosure or deed-in-lieu thereof.
(3) Capital ratios are those of St. Francis Bank, F.S.B. only.
(4) Performance ratios for the year ended September 30, 1996 include the
one-time special SAIF assessment of $4.2 million.
40
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
St. Francis Capital Corporation (the "Company") is a multi-bank holding company
incorporated under the laws of the State of Wisconsin and is engaged in the
financial services business through its wholly-owned subsidiaries, St. Francis
Bank, F.S.B. (the "Bank"), a federally-chartered savings bank, and Bank
Wisconsin ("Bank Wisconsin"), a state-chartered commercial bank. In June 1993,
the Bank converted from a federally-chartered mutual savings institution to a
stock savings institution. As part of the conversion, the Company acquired all
of the outstanding common stock of the Bank. In November 1994, the Company
completed the acquisition of the stock of Valley Bank East Central in Kewaskum,
Wisconsin as well as the deposits and certain assets of the Hartford, Wisconsin
branch of Valley Bank Milwaukee. The acquired bank offices were combined as a
commercial bank named Bank Wisconsin.
The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on interest-earning
assets, consisting primarily of mortgage, consumer and commercial loans,
mortgage-backed and related securities and other investment securities, and the
interest paid on interest-bearing liabilities, consisting primarily of deposits
and borrowings from the Federal Home Loan Bank of Chicago (the "FHLB"). Net
interest income is a function of the Company's net interest spread, which is
the difference between the average yield earned on interest-earning assets and
the average rate paid on interest-bearing liabilities, as well as a function of
average ratio of interest-earning assets as compared to interest-bearing
liabilities. The Company's earnings also are affected by the level of its
other income, including loan servicing fees, deposit charges and fees and gains
on trading assets and sales of loans and securities, as well as its level of
non-interest expenses, including employee compensation and benefits, occupancy
and equipment costs and federal deposit insurance premiums.
The Company's operating results are significantly affected by general economic
conditions and the monetary, fiscal and regulatory policies of governmental
agencies. Lending activities are influenced by the demand for and supply of
housing competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds likewise are heavily
influenced by prevailing market rates of interest on competing investment
alternatives, account maturities and the levels of personal income and savings
in the Company's market areas.
FINANCIAL CONDITION
Total assets of the Company increased $214.9 million to $1.4 billion at
September 30, 1996 from $1.2 billion at September 30, 1995. The increase was
in loans receivable, including loans held for sale, which increased $116.8
million, and mortgage-backed and related securities, including securities
available for sale, which increased $75.1 million. The increase in loans
receivable was partially due to increases in mortgage loan originations and
purchases. The mortgage loan purchases were of single-family mortgage loans
either by direct purchase of individual loans from other local mortgage lenders
or by purchases of pools of single-family mortgage loans originated in other
parts of the country. The growth in assets was funded primarily by an increase
in deposits of $189.3 million and an increase in advances and other borrowings
of $29.4 million.
During the current fiscal year, the Company reclassified $88.4 million of
mortgage-backed and related securities from held-to-maturity to
available-for-sale. The reclassification was completed under guidance issued
by the Financial Accounting Standards Board allowing a one-time
reclassification of such securities. Mortgage-backed and related securities,
including securities available for sale, increased to $592.7 million at
September 30, 1996 from $517.6 million at September 30, 1995, which represented
42.2% and 43.5% of total assets, respectively. The increase was the result of
purchasing short- and medium-term REMIC's and CMO's. These securities were
financed primarily with advances from the Federal Home Loan Bank of Chicago
(the "FHLB") and deposit growth, primarily brokered deposits. The Company is
utilizing its capital position to increase earning assets by investing
primarily in REMIC securities with short and medium terms of two to five years
and financing the purchases with FHLB advances that generally match the
expected average lives of the respective securities. These securities
41
42
have credit ratings of A or better and primarily meet the Federal Financial
Institutions Examination Council definition of low-risk securities. Management
believes that this strategy will increase the earnings of the Company as well
as limit its exposure to credit risk and future changes in interest rates. The
Company has been an active purchaser of adjustable rate mortgage-backed
securities as well as short-term mortgage-related securities because of their
lower level of interest rate risk and low credit risk in relation to the
interest earned on such securities.
Total loans, including loans held for sale, increased to $631.2 million at
September 30, 1996 from $514.4 million at September 30, 1995. Mortgage loans
increased to $452.5 million during the year compared to $356.5 million in 1995.
The Company increased loan origination activity during the year, originating
$173.1 million of first mortgage loans compared to $54.8 million in the prior
year. Additional activity in loans included mortgage loans sold for the year
ended September 30, 1996 of $62.6 million, up from $24.8 million for the year
ended September 30, 1995, and mortgage loans purchased during the year ended
September 30, 1996 of $56.2 million, up from $28.8 million for the year ended
September 30, 1995. The increase in mortgage loans purchased is primarily due
to the Company's increase in purchases of one-to-four family ARM loans.
Long-term 15- and 30- year fixed-rate loans are generally originated to be sold
in the secondary market as are five and seven year balloon loans. Shorter-term
ARM loans are originated both for sale in the secondary market and for the
Company's loan portfolio. For the year ended September 30, 1996, the Company
originated approximately $126.5 million of consumer and home equity loans,
purchased $12.8 million and sold $15.1 million of these same types of loans,
compared with originations of $96.0 million, purchases of $37.4 million and
sales of $15.3 million for the year ended September 30, 1995.
Debt and equity securities, including those available for sale, increased $7.6
million to $61.7 million at September 30, 1996, from $54.1 million at September
30, 1995. Debt and equity securities are comprised primarily of U.S. Treasury
Notes, tax-exempt obligations, mutual fund investments, preferred stock issues
and commercial paper. During the current fiscal year, the Company reclassified
$28.9 million of securities from held-to-maturity to available-for-sale. The
reclassification was completed under guidance issued by the Financial
Accounting Standards Board allowing a one-time reclassification of such
securities.
Real estate held for investment increased $12.6 million to $36.9 million at
September 30, 1996, from $24.3 million at September 30, 1995. Real estate held
for investment consists of affordable housing projects in which a subsidiary of
the Bank invests, which qualify for tax credits under Section 42 of the
Internal Revenue Code. The subsidiary currently is a limited partner in 20
projects and has committed to equity investments in an additional five
projects, all within the state of Wisconsin. Additionally, the Bank has
provided financing or committed to provide financing to 24 of the projects.
However, the primary return to the Company on these projects is in the form of
income tax credits earned over the first ten years of the project.
Deposits increased $189.3 million to $877.7 million at September 30, 1996 from
$688.3 million at September 30, 1995. The Company continued to sell
certificates of deposit through investment brokers, which totaled $138.6
million at September 30, 1996, an increase of $100.6 million from the prior
year. Additionally, a new totally-free checking account and various odd-term
certificates of deposits were introduced during the year in an effort to
attract deposits. Although the Company has experienced growth in its deposit
liabilities during 1996, there can be no assurance that this trend will
continue in the future.* The level of deposit inflows during any given period
is heavily influenced by factors such as the general level of interest rates as
well as alternative yields that investors may obtain on competing instruments,
such as money market mutual funds.
42
43
Advances and other borrowings increased to $375.0 million at September 30,
1996, from $345.7 million at September 30, 1995. This increase is due
primarily to the Company's previously discussed leveraging strategy to increase
its earning assets through the purchase of short- and medium-term
mortgage-related securities using FHLB advances as a funding source. In
connection with this leveraging strategy, the Company has entered into interest
rate swap agreements for some of the variable rate advances, swapping the
variable rate for a fixed rate (fixed-pay, variable-receive). Interest rate
swaps outstanding totaled $55 million and $65 million at September 30, 1996 and
1995, respectively. The swaps are designed to offset the changing interest
payments of some of the Company's borrowings. The current fixed-pay,
variable-receive swaps will provide for a lower interest expense (or interest
income) in a rising rate environment while adding to interest expense in a
falling rate environment. During the year ended September 30, 1996, the
Company recorded a net reduction of interest expense of $413,000.
43
44
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL
Net income for the year ended September 30, 1996 before a one-time significant
charge increased $300,000 or 2.4% to $13.0 million from $12.7 million for the
year ended September 30, 1995. The significant charge was a one-time
industry-wide assessment of $2.5 million, after tax, for the recapitalization
of the Savings Association Insurance Fund ("SAIF"). The Company reported
actual net income of $10.5 million for the year ended September 30, 1996. The
change was primarily the result of an increase in earning assets, which
resulted in a $2.1 million increase in net interest income, a $2.3 million
increase in other income and a $3.4 million decrease in income tax expense,
partially offset by a $1.1 million increase in provision for loan losses and a
$8.9 million increase in general and administrative expenses.
NET INTEREST INCOME
Net interest income before provision for loans losses increased $2.1 million or
6.3% to $35.7 million for the year ended September 30, 1996 compared to $33.6
million for the year ended September 30, 1995. The increase was due to an
increase of $96.6 million in average earning assets, partially offset by a
decrease in the net interest margin to 2.97% in 1996 from 3.04% in 1995.
Total interest income increased $8.3 million or 9.9% to $92.1 million for the
year ended September 30, 1996 compared to $83.8 million for the year ended
September 30, 1995. The increase in interest income was primarily the result
of a $5.5 million increase in interest on loans and a $2.5 million increase in
interest on mortgage-backed and related securities. The increase in interest
on loans was due to increases in the average balance of loans to $553.7 million
for the year ended September 30, 1996, as compared to $502.6 million for the
year ended September 30, 1995, and an increase in the average yield on loans,
which increased to 8.58% for the year ended September 30, 1996, from 8.35% for
the year ended September 30, 1995. The increase in the yields and average
balances of loans is consistent with the Company's recent efforts to emphasize
higher yielding loans, such as those made in consumer and home equity lending
and an increase in the level of loan purchases. Such loans while resulting in
higher yields for the Company may result in a higher level of credit risk than
conventional mortgage loans. The increase in interest income on
mortgage-backed and related securities was due to an increase in the average
balance of such securities to $559.5 million for the year ended September 30,
1996, from $516.9 million for the year ended September 30, 1995, however, the
average yield on such securities decreased to 7.00% for the year ended
September 30, 1996, from 7.10% for the year ended September 30, 1995. The
Company has purchased significant amounts of adjustable rate and short- and
medium-term securities during the past two years as part of its efforts to
increase earning assets, funding those purchases with FHLB advances, whose
terms generally match the securities purchased.
Total interest expense increased $6.2 million or 12.4% to $56.4 million for the
year ended September 30, 1996 compared to $50.2 million for the year ended
September 30, 1995. Interest expense on deposits increased $6.8 million or
22.1% to $37.6 million for the year ended September 30, 1996 compared to $30.8
million for the year ended September 30, 1995. The increase in interest
expense was the result of increases in the average balances and costs on
deposits and advances and other borrowings. The average balances of deposits
increased to $757.3 million for the year ended September 30, 1996, from $654.7
million for the year ended September 30, 1995. The increases in the balances
of deposits are due to the Company's offering of additional deposit products
and the use of brokers to purchase certificates of deposit. The average cost
of deposits increased to 4.97% for the year ended September 30, 1996, from
4.70% for the year ended September 30, 1995. Brokered deposits increased to
$138.6 million during the year compared to $38.0 million in 1995 at weighted
average stated rates of 5.35% and 6.24%, respectively. The average cost of
deposits increased even though overall market rates of interest were slightly
lower for the year ended September 30, 1996 compared with the prior year. The
Company has been emphasizing deposit accounts such as its prime CD and its
market investor account because of the deposit growth it believes these
accounts can bring over the other products the Company offers. However, these
accounts also tend to have a higher rate of interest than the average of other
deposit accounts offered
44
45
by the Company. Interest expense on advances and other borrowings decreased
$645,000 or 3.3% to $18.8 million for the year ended September 30, 1996 from
$19.4 million for the year ended September 30, 1995. The average balance of
advances and other borrowings increased to $341.2 million for the year ended
September 30, 1996, from $339.8 million for the year ended September 30, 1995,
while the average cost of advances and other borrowings decreased to 5.50% for
the year ended September 30, 1996, from 5.71% for the year ended September 30,
1995. The increase in the average balance of borrowings was a result of the
aforementioned leveraging program with most of the borrowings being
adjustable-rate advances which have repriced downwards as market rates of
interest have decreased.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $1.3 million for the year ended
September 30, 1996 compared to a provision for loan losses of $240,000 for the
year ended September 30, 1995. For the year ended September 30, 1996, the
Company recorded an additional provision of $1.0 million for loan losses on a
pool of auto loans purchased by the Company. The allowance for loan losses
totaled $5.2 million and $4.1 million at September 30, 1996 and 1995,
respectively, representing 0.78% and 0.77% of total loans, respectively. Net
charge-offs were $159,000 during the year ended September 30, 1996 and $293,000
during the year ended September 30, 1995. Included in the net charge-offs for
the year ended September 30, 1995 was a $210,000 charge-off for the settlement
of a loan on a multi-family property in Houston, Texas. The provision for loan
loss is established based on management's evaluation of the risk inherent in
its loan portfolio and the general economy. Such evaluation, which includes a
review of all loans on which full collectibility may not be reasonably assured,
considers, among other matters, the estimated net realizable value of the
underlying collateral, economic conditions, historical loan loss experience and
other factors that warrant recognition in providing for an accurate provision
for loan losses.
OTHER OPERATING INCOME
Other operating income increased $2.3 million or 27.4% to $10.6 million for the
year ended September 30, 1996 compared to $8.3 million for the year ended
September 30, 1995. The increases were due primarily to gains on investments
and mortgage-backed and related securities, gains on mortgage loans held for
sale, gains on foreclosed properties and real estate held for sale and
increased income from the Company's affordable housing subsidiary. Gains on
investments and mortgage-backed and related securities were $3.3 million for
the year ended September 30, 1996, compared to $2.6 million for the year ended
September 30, 1995. The gains recognized were primarily due to declining
interest rates and the Company's repositioning of its existing leverage
portfolio. The Company sold securities from the leverage portfolio and
replaced them with similar securities with more favorable interest rate and
maturity characteristics. One of the Company's asset/liability management
techniques utilizes options which provide it with a practical floor and cap on
portfolio market values for moderately adverse interest rate movements.
However, during periods of rapidly rising interest rates, the strategy may not
prevent a market value loss from being recognized overall, and also may result
in additional losses incurred on the options themselves. Gains on sales of
mortgage loans held for sale increased to $1.1 million for the year ended
September 30, 1996 compared to $261,000 for the year ended September 30, 1995.
Gain/(loss) on foreclosed properties and real estate held for sale, net
increased due to the Company recording a gain of $684,000 in 1996 on the cash
sale of a foreclosed multi-family property acquired in August, 1995. The
operations of the Company's affordable housing subsidiary had increases in
income (which represents primarily rental income) for the year ended September
30, 1996 of $806,000 from the previous year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $8.9 million or 39.2% to $31.6
million for the year ended September 30, 1996, compared to $22.7 million for
the year ended September 30, 1995. General and administrative expenses were
higher primarily because of increased compensation and other costs associated
with the Company's expansion of various lines of business, including an
increased emphasis on commercial banking, higher levels of mortgage and
consumer loan originations, the opening of two new branches and the
establishment of a centralized call center. FDIC premiums increased $4.2
million due to the one-time charge for recapitalization of the Savings
Association Insurance Fund ("SAIF"). A reduction in FDIC premium rates are
expected to favorably impact general and administrative expenses in fiscal
45
46
1997.* The expenses related to the operation of the Company's affordable
housing subsidiary increased $744,000 for the year ended September 30, 1996.
INCOME TAX EXPENSE
Income tax expense decreased by $3.4 million or 53.6% to $2.9 million for the
year ended September 30, 1996 compared to $6.3 million for the year ended
September 30, 1995. The decrease was a result of a decrease in income before
income tax expense, income tax credits received from investment in the
low-income housing units and increased municipal interest and dividends. The
Company's effective tax rate was 21.8% for the year ended September 30, 1996,
compared to 33.1% for the year ended September 30, 1995.
46
47
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL
Net income for the year ended September 30, 1995 increased $4.7 million or
58.0% to $12.7 million from $8.0 million for the year ended September 30, 1994.
The increase was primarily the result of an increase in earning assets, which
resulted in a $5.1 million increase in net interest income and a $4.8 million
increase in other income, partially offset by a $3.3 million increase in
general and administrative expenses and a $1.9 million increase in income tax
expense.
NET INTEREST INCOME
Net interest income before provision for loans losses increased $5.1 million or
17.8% to $33.6 million for the year ended September 30, 1995 compared to $28.5
million for the year ended September 30, 1994. The increase was due to an
increase of $207.2 million in average earning assets, partially offset by a
decrease in the net interest margin to 3.04% in 1995 from 3.17% in 1994.
Total interest income increased $23.7 million or 39.3% to $83.8 million for the
year ended September 30, 1995 compared to $60.1 million for the year ended
September 30, 1994. The increase in interest income was primarily the result
of a $10.7 million increase in interest on loans and a $10.4 million increase
in interest on mortgage-backed and related securities. The increase in
interest on loans was due to increases in the average balance of loans to
$502.6 million for the year ended September 30, 1995, as compared to $387.4
million for the year ended September 30, 1994, and an increase in the average
yield on loans, which increased to 8.35% for the year ended September 30, 1995,
from 8.06% for the year ended September 30, 1994. The increase in the yields
and average balances of loans includes the addition of the Bank Wisconsin loans
and also is consistent with the Company's recent efforts to emphasize higher
yielding loans, such as those made in consumer and home equity lending. The
increase in interest income on mortgage-backed and related securities was due
to an increase in the average balance of such securities to $516.9 million for
the year ended September 30, 1995, from $454.5 million for the year ended
September 30, 1994 and an increase in the average yield on such securities,
which increased to 7.10% for the year ended September 30, 1995, from 5.78% for
the year ended September 30, 1994. The Company has purchased significant
amounts of adjustable rate and short- and medium-term securities during the
past two years as part of its efforts to increase earning assets, funding those
purchases with FHLB advances, whose terms generally match the securities
purchased.
Total interest expense increased $18.6 million or 58.8% to $50.2 million for
the year ended September 30, 1995 compared to $31.6 million for the year ended
September 30, 1994. The increase in interest expense was the result of
increases in the average balances and costs on deposits and advances and other
borrowings. The average balances of deposits increased to $654.7 million for
the year ended September 30, 1995, from $525.8 million for the year ended
September 30, 1994. The increases in the balances of deposits are due to the
acquisition of Bank Wisconsin and the related deposits, the Company's offering
of additional deposit products and the use of brokers to sell certificates of
deposit. The average cost of deposits increased to 4.70% for the year ended
September 30, 1995, from 3.90% for the year ended September 30, 1994. Deposit
rates paid by the Company reflected the general increase in market rates of
interest paid on deposit products during the recent year. The average balance
of advances and other borrowings increased to $339.8 million for the year ended
September 30, 1995, from $242.7 million for the year ended September 30, 1994,
while the average cost of advances and other borrowings increased to 5.71% for
the year ended September 30, 1995, from 4.56% for the year ended September 30,
1994. The increase in the average balance of borrowings was a result of the
aforementioned leveraging program with most of the borrowings being
adjustable-rate advances which have repriced upwards as market rates of
interest have increased.
47
48
PROVISION FOR LOAN LOSSES
During each of the years ended September 30, 1995 and 1994, the Company
recorded a provision for loan losses of $240,000. Furthermore, approximately
$694,000 was added to the Company's allowance for loan losses as a result of
the acquisition of Bank Wisconsin. The allowance for loan losses totaled $4.1
million and $3.4 million at September 30, 1995 and 1994, respectively,
representing 0.77% and 0.74% of total loans, respectively. Net charge-offs
were $293,000 during the year ended September 30, 1995 and $80,000 during the
year ended September 30, 1994. Included in the net charge-offs for the year
ended September 30, 1995 was a $210,000 charge-off for the settlement of a loan
on a multi-family property in Houston, Texas.
OTHER OPERATING INCOME
Other operating income increased $4.8 million or 138.4% to $8.3 million for the
year ended September 30, 1995 compared to $3.5 million for the year ended
September 30, 1994. The increases were due primarily to gains on investments
and mortgage-backed and related securities, gains on trading account activity
and increased income from the Company's affordable housing subsidiary. Gains
on investments and mortgage-backed and related securities were $2.6 million for
the year ended September 30, 1995, compared to losses of $101,000 for the year
ended September 30, 1994. The gains recognized were primarily due to declining
interest rates and the Company's repositioning of its existing leverage
portfolio. The Company sold securities from the leverage portfolio and
replaced them with similar securities with more favorable interest rate and
maturity characteristics. The losses recognized during fiscal 1994 were to
adjust the carrying amount of mortgage loans and related mortgage- backed and
related security option positions due to the general increase in interest rates
during the period. One of the Company's asset/liability management techniques
utilizes options which provide it with a practical floor and cap on portfolio
market values for moderately adverse interest rate movements. However, during
periods of rapidly rising interest rates, the strategy may not prevent a market
value loss from being recognized overall, and also may result in additional
losses incurred on the options themselves, which did occur during fiscal 1994.
The Company believes that its lending activity of salable mortgage loans will
continue to be less than the previous year's periods and thus the notional
amounts of option positions and forward commitments also will be less than
previous years due to a continued decline in fixed rate originations.* Gains
from the trading account were $1.1 million for the year ended September 30,
1995, compared with gains of $13,000 for the year ended September 30, 1994.
The gains during the current year reflect the effect of recently falling
interest rates on the Company's holding of trading assets. The increase in
other income was due primarily to the operations of the Company's affordable
housing subsidiary, which had increases in income (which represents primarily
rental income) for the year ended September 30, 1995 of $735,000 from the
previous year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $3.3 million or 17.0% to $22.7
million for the year ended September 30, 1995, compared to $19.4 million for
the year ended September 30, 1994. The increases are due primarily to the
inclusion of the general and administrative expenses of Bank Wisconsin,
acquired in November 1994, which added approximately $2.5 million to general
and administrative expenses for the year ended September 30, 1995, and the
expenses related to the operation of the Company's affordable housing
subsidiary, which had increases in operating expenses for the year ended
September 30, 1995 of $909,000 from the previous year. Additionally, the
Company recognized $383,000 of amortization of goodwill that resulted from its
acquisition of Bank Wisconsin.
INCOME TAX EXPENSE
Income tax expense increased by $2.0 million or 44.8% to $6.3 million for the
year ended September 30, 1995 compared to $4.3 million for the year ended
September 30, 1994. The increase was a result of an increase in income before
income tax expense, partially offset by income tax credits received from the
low-income housing units in which a subsidiary of the Bank have invested and
municipal interest and dividends. The Company's effective tax rate was 33.1%
for the year ended September 30, 1995, compared to 35.0% for the year ended
September 30, 1994.
48
49
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
consolidated average statements of financial condition and the consolidated
statements of income for the years ended September 30, 1996, 1995 and 1994, and
reflects the average yield on assets and average cost of liabilities for the
years indicated. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
years shown. Average balances are derived principally from average daily
balances and include non- accruing loans. The yields and costs include fees
which are considered adjustments to yields. The amount of interest income
resulting from the recognition of loan fees was $457,000, $465,000 and $791,000
for the years ended September 30, 1996, 1995 and 1994, respectively. Interest
income on non-accruing loans is reflected in the year that it is collected.
Such amounts are not material to net interest income or net change in net
interest income in any year. Non-accrual loans are included in the average
balances and do not have a material effect on the average yield.
49
50
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET 1996 1995 1994
-------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------------------------------------------------------------
ASSETS
Federal funds sold and overnight
deposits $16,110 $ 864 5.36 % $ 19,975 $ 1,118 5.60 % $17,241 $ 587 3.40%
Trading account securities 41 3 7.32 8,098 519 6.41 4,250 185 4.35
Debt and equity securities 54,213 3,329 6.14 40,136 2,396 5.97 22,348 1,148 5.14
Mortgage-backed and related
securities 559,531 39,163 7.00 516,931 36,689 7.10 454,466 26,262 5.78
Loans:
First mortgage 357,529 29,324 8.20 352,843 27,597 7.82 287,031 23,003 8.01
Home equity 81,842 7,889 9.64 75,399 7,439 9.87 64,358 5,102 7.93
Consumer 95,093 8,513 8.95 62,730 5,797 9.24 35,968 3,124 8.69
Commercial and agricultural 19,202 1,786 9.30 11,630 1,142 9.82 - - -
------------------- ------------------- -----------------
Total loans 553,666 47,512 8.58 502,602 41,975 8.35 387,357 31,229 8.06
Federal Home Loan Bank stock 17,859 1,226 6.86 17,086 1,090 6.38 12,003 722 6.02
------------------- ------------------- -----------------
Total earning assets 1,201,420 92,097 7.67 1,104,828 83,787 7.58 897,665 60,133 6.70
------- ------- -------
Valuation allowances (3,798) (7,529) (7,587)
Cash and due from banks 14,334 12,442 9,854
Other assets 66,441 46,724 23,352
---------- ---------- --------
Total assets $1,278,397 $1,156,465 $923,284
========== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 42,013 $ 614 1.46 $ 41,821 $ 553 1.32 $33,170 $ 516 1.56
Money market demand accounts 147,121 6,787 4.61 108,530 4,681 4.31 70,236 1,946 2.77
Passbook 84,078 2,392 2.84 92,609 2,560 2.76 106,148 2,811 2.65
Certificates of deposit 484,051 27,817 5.75 411,753 22,981 5.58 316,216 15,243 4.82
------------------- ------------------- -----------------
Total interest-bearing deposits 757,263 37,610 4.97 654,713 30,775 4.70 525,770 20,516 3.90
Advances and other borrowings 341,184 18,765 5.50 339,827 19,402 5.71 242,676 11,057 4.56
Advances from borrowers for taxes
and insurance 6,477 38 0.59 6,520 46 0.71 5,794 60 1.04
------------------- ------------------- -----------------
Total interest-bearing
liabilities 1,104,924 56,413 5.11 1,001,060 50,223 5.02 774,240 31,633 4.09
------- ------- -------
Non-interest bearing deposits 27,812 20,391 17,628
Other liabilities 11,721 8,337 6,596
Shareholders' equity 133,940 126,677 124,820
---------- ---------- --------
Total liabilities and
shareholders' equity $1,278,397 $1,156,465 $923,284
========== ========== ========
Net interest income $35,684 $ 33,564 $28,500
======= ======== =======
Net yield on interest-earning assets 2.97 % 3.04 % 3.17%
Interest rate spread 2.56 2.56 2.61
Ratio of earning assets to
interest-bearing liabilities 108.73 110.37 115.94
50
51
RATE/VOLUME ANALYSIS
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volumes of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest- bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (iii) changes attributable to the
combined impact of volume and rate (changes in the rate multiplied by the
changes in the volume) and (iv) the net change.
YEAR ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
- ----------------------------------------------------------------------------------------------------------------------
RATE/ RATE/
(In thousands) RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
- ----------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Federal funds sold and overnight
deposits $ (47) $(216) $ 9 $(254) $378 $93 $60 $531
Trading account securities 74 (516) (74) (516) 87 168 79 334
Securities 69 840 24 933 186 914 148 1,248
Mortgage-backed and related securities (508) 3,024 (42) 2,474 5,994 3,610 822 10,426
Loans:
Mortgage 1,343 367 17 1,727 (553) 5,274 (127) 4,594
Home equity (171) 636 (15) 450 1,248 875 214 2,337
Consumer (181) 2,991 (94) 2,716 200 2,324 149 2,673
Commercial and agriculture (60) 744 (40) 644 - - 1,142 1,142
------ ------- ------ ------- ----- -------- ----- ---------
Gross loans receivable 931 4,738 (132) 5,537 895 8,473 1,378 10,746
Federal Home Loan Bank stock 83 49 4 136 44 306 19 369
------ ------- ------ ------- ----- -------- ----- ---------
Total 602 7,919 (211) 8,310 7,584 13,564 2,506 23,654
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts 58 3 - 61 (77) 135 (21) 37
Money market demand accounts 326 1,664 116 2,106 1,083 1,061 591 2,735
Passbook 75 (236) (7) (168) 123 (359) (15) (251)
------ ------- ------ ------- ----- -------- ----- ---------
Certificates of deposit 680 4,037 119 4,836 2,406 4,605 727 7,738
Total deposits 1,139 5,468 228 6,835 3,535 5,442 1,282 10,259
Advances and other
borrowings (712) 77 (3) (638) 2,798 4,426 1,121 8,345
Advances from borrowers for taxes
and insurance (7) - - (7) (19) 8 (3) (14)
------ ------- ------ ------- ----- -------- ----- ---------
Total 420 5,545 225 6,190 6,314 9,876 2,400 18,590
------ ------- ------ ------- ----- -------- ----- ---------
Net change in net
interest income $ 182 $ 2,374 $ (436) $ 2,120 1,270 $ 3,688 106 $ 5,064
====== ======= ====== ======= ===== ======== ===== =========
ASSET/LIABILITY MANAGEMENT
The Company's profitability, like that of most financial institutions, depends
to a large extent upon its net interest income, which is the difference between
interest earned on its interest-earning assets, such as loans and investments,
and its interest expense paid on interest-bearing liabilities, such as
deposits and borrowings.
The Company maintains a high level of short-term savings deposits, including
passbook savings, NOW checking accounts and money market deposit accounts.
These accounts typically react more quickly to changes in market interest rates
than the Company's investments in mortgage-backed and related securities and
mortgage loans because of the shorter maturity and repricing characteristics of
deposits. As a result, sharp increases in interest rates may adversely affect
earnings while decreases in interest rates may beneficially affect earnings.
51
52
In an attempt to manage vulnerability to interest rate changes, management
closely monitors the Company's interest rate risks. The Company has
established its investment strategies through an Asset/Liability Committee
which reports to the Board of Directors. The Committee generally meets monthly
and reviews the Company's interest rate risk position, maturing securities and
borrowings, interest rates and programs for raising deposits, including retail
and brokered and nonbrokered wholesale deposits, and making and purchasing
loans and develops policies dealing with these issues. The Company primarily
seeks to manage its interest rate risk through structuring its balance sheet
by investing in a variety of different types of financial instruments in order
to reduce its vulnerability to changes in interest rates and to enhance its
income. Although the Company's assets and liabilities maturing and repricing
within one year are currently relatively well matched, if interest rates were
to rise significantly, and for a prolonged period, the Company's operating
results could be adversely affected.
Generally, the Company uses the following strategies to reduce its interest
rate risk: (i) the Company seeks to originate and hold a variety of ARMs or
other mortgage loans with short- to medium-term average lives or terms and
invests in primarily adjustable-rate mortgage-backed and related securities
with short- to medium-term average lives; (ii) the Company seeks to lengthen
the maturities of deposits when deemed cost effective through the pricing and
promotion of certificates of deposit with terms of one to five years, and
periodically utilizes deposit marketing programs offering maturity and
repricing terms structured to complement the repricing and maturity
characteristics of the existing asset/liability mix; and (iii) the Company has
utilized longer term borrowings, principally secured from the FHLB, in order to
manage its assets and liabilities and enhance earnings. Furthermore, the
Company is utilizing its capital position to increase earning assets by
investing primarily in REMIC securities with short and medium terms of two to
five years and financing the purchases with FHLB advances that generally match
the expected average lives of the respective securities.
By originating and purchasing ARM loans and other mortgage loans with short to
medium terms and by investing in primarily variable-rate, short- to medium-term
securities, the Company has been able to reduce interest rate risk by more
closely matching the terms and repricing characteristics of its assets and
liabilities. In addition, because of the relative liquidity of mortgage-backed
and related securities, the Company can restructure its interest-earning asset
portfolio more quickly and effectively in a changing interest rate environment.
Although the Company has continued in its emphasis upon originating ARM loans
and has been developing other types of mortgage loans with shorter average
lives, customer demands for fixed rate mortgage and consumer loans and the
level of the Company's portfolio of fixed rate mortgage loans and investments
with longer average lives continues to affect its gap position. The Company's
ARM loans and ARM mortgage-backed and related securities also typically have
annual and lifetime caps on interest rate increases, which reduces the extent
to which they protect the Company against interest rate risk.
The Company continues to closely monitor its interest rate risk as that risk
relates to its strategies. At September 30, 1996, total interest-bearing
liabilities maturing or repricing within one year exceeded total
interest-earning assets maturing or repricing in the same period by $135.7
million, representing a negative cumulative one year gap ratio of 9.7%,
compared to a negative cumulative one year gap ratio of 10.9% at September 30,
1995. With a negative gap position, during periods of rising interest rates it
is expected that the cost of the Company's interest-bearing liabilities will
rise more quickly than the yield on its interest-earning assets, which will
have a negative effect upon its net interest income. Although the opposite
effect on net interest income would occur in periods of falling interest rates,
the Company could experience substantial prepayments of its fixed-rate mortgage
loans and mortgage-backed and related securities in periods of falling interest
rates, which results in the reinvestment of such proceeds at market rates which
are lower than current rates. The change in the cumulative one year gap from
September 30, 1996 to September 30, 1995 was largely the result of the increase
in originating and purchasing ARM loans and other types of mortgage loans with
shorter average lives.
52
53
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996:
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Total
-----------------------------------------------------------------------------------
(Dollars in thousands)
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed $ 14,717 $ 21,701 $ 25,321 $ 28,851 $ 52,201 $ 142,791
Variable 66,845 68,352 105,564 36,974 4,047 281,782
Consumer loans (2) 92,087 38,723 11,063 16,595 27,658 186,126
Mortgage-backed and related securities 1,259 4,034 29,560 27,317 9,262 71,432
Assets available for sale:
Mortgage loans 20,582 - - - - 20,582
Fixed rate mortgagE related 6,500 20,546 36,417 12,412 40,746 116,621
Variable rate mortgage related 295,165 109,494 - - - 404,659
Other 22,286 9,132 8,033 10,793 8,243 58,487
Trading account securities - - - - - -
Investment securities and other assets 22,459 - 3,715 - - 26,174
-----------------------------------------------------------------------------------
Total $541,900 $271,982 $219,673 $132,942 $142,157 $1,308,654
===================================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts $ 3,280 $ 11,140 $ 15,252 $ 6,054 $ 3,984 $ 39,710
Passbook savings accounts 3,373 10,119 20,492 14,117 31,261 79,362
Money market deposit accounts 38,683 116,663 16,119 4,030 1,343 176,838
Certificates of deposit 285,165 176,136 74,317 11,779 - 547,397
Borrowings (4) 304,965 9 70,000 60 - 375,034
-----------------------------------------------------------------------------------
Total $635,466 $314,067 $196,180 $ 36,040 $ 36,588 $1,218,341
===================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(93,566) $(42,085) $ 23,493 $ 96,902 $105,569 $ 90,313
===================================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities $(93,566) ($135,651) ($112,158) ($ 15,256) $ 90,313
====================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets -6.66% -9.66% -7.99% -1.09% 6.43%
=====================================================================
(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 the Public Securities Association model of prepayments.*
For fixed rate mortgage loans and mortgage-backed and related securities,
annual prepayment rates ranging from 8% to 30%, based on the loan coupon
rate, were used.
(2) Balances have been reduced for undisbursed loan proceeds, unearned
insurance premiums, deferred loan fees, purchased loan discounts and
allowances for loan losses, which aggregated $37.4 million at September
30, 1996.
(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 portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's 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 37%, 17% and 88%, 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 in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $248.3 million or 17.7% 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. The effect of interest rate swap agreements
are included in the balances. The effect of the interest rate swap
agreements are to decrease borrowings set to mature or reprice within
three months by $55.0 million and increase borrowings set to mature
or reprice in more than one year to three years by $55.0 million .
53
54
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans and
mortgage-backed and related securities, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of ARM loans and mortgage-backed and related
securities in the Company's portfolios could decrease in future periods if
market interest rates remain at or decrease below current levels due to the
exercise of conversion options and refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase.
From time to time, the Company has utilized a variety of financial instruments
and strategies to manage the interest rate risk associated with its interest
rate sensitive assets and liabilities. Techniques that have been utilized
include interest rate swaps and caps, financial futures and options and forward
commitments. At various points in time, the Company, responding to changing
interest rate, prepayment, credit and market value risk environments, may
emphasize one strategy or financial instrument over another in its endeavor to
achieve the desired interest rate and market value risk profile.
The Company has entered into various off-balance sheet transactions that are
not yet, or never may be, reflected on the balance sheet. The transactions,
while not affecting the balance sheet, may have some effect on earnings. Due
to the possible balance sheet and earnings effect of these items, there is some
potential credit, interest rate and market value price risk inherent in these
transactions. The Company has been primarily utilizing these items to manage
the interest rate and market value risk relating to mortgage-backed securities
that result from the MBS loan swap program. These mortgage-backed securities
are then ultimately sold either through forward commitments or option
contracts. As a result, the majority of held for sale off-balance sheet
transactions do not impact the balance sheet. The Asset/Liability Committee
recommends aggregate limits which may change from time to time, as specifically
authorized by the Board of Directors.
The Company enters into interest rate exchange agreements ("swaps" and "caps")
from time to time in order to reduce the interest rate risk associated with
certain assets and liabilities. The swap transactions have been fixed-pay,
floating-receive payments whereby the Company pays interest at a fixed rate and
receives interest at a floating rate based on a pre-determined, or notional
amount of principal, locking in fixed costs of funds. The net interest income
or expense resulting from the differential between exchanging floating rate and
fixed rate interest payments is recorded on a current basis. The interest rate
caps were purchased to limit interest rate costs in the event of interest rate
increases. Costs to purchase caps are amortized over the term of the caps.
There are certain risks associated with swaps and caps, including the risk that
the counterparty may default and that there may not be an exact correlation
between the indices on which the swap agreements are based and the terms of the
hedged liabilities. In order to offset these risks, the Company generally
enters into swap and cap agreements only with nationally recognized securities
firms and monitors the credit status of counterparties, the level of collateral
for such swaps and the correlation between the hedged liabilities and indices
utilized. Generally, the swaps and caps have been designed to increase in
value in the event of a rise in interest rates and decrease in value in the
event of a fall in interest rates, in order to partially offset the effect on
the additional costs of funds resulting from an increase in interest rates.
However, there is no assurance that in the event interest rates change, the
swaps and caps will move on the same basis or in the same amounts as its cost
of funds. At September 30, 1996 and 1995, the Company had interest rate swaps
outstanding with a notional amount of $55.0 million and $65.0 million,
respectively. $65.0 million is the largest aggregate notional amount of the
Company's interest rate swaps and caps at any one time over the past five
years.
54
55
The agreements consist of the following:
Notional
Amount Maturity Fixed Variable
(000s) Type Date Rate Rate
- ---------------------------------------------------------------------------
$10,000 Fixed Pay-Floating Receive 1998 4.93% 5.57%
10,000 Fixed Pay-Floating Receive 1998 5.04 5.63
15,000 Fixed Pay-Floating Receive 1998 5.25 5.63
10,000 Fixed Pay-Floating Receive 1998 5.23 5.50
10,000 Fixed Pay-Floating Receive 1998 5.43 5.66
There were no outstanding interest rate caps at September 30, 1996 or 1995.
For the years ended September 30, 1996 and 1995, the Company incurred net
interest income on interest rate exchange agreement activity of $413,000 and
$628,000, respectively, while incurring net interest expense of $658,000 for
the year ended September 30, 1994. While this activity resulted in net
interest income in fiscal years 1996 and 1995 and net interest expense in
fiscal year 1994, the Company effectively fixed the related funding costs of
assets associated with the agreements. The Company's Investment Policy limits
the notional amount of outstanding interest rate exchange agreements to $150.0
million. Any notional amounts of interest rate exchange agreements in excess
of $150.0 million must be approved by the Company's Board of Directors.
The Company also utilizes financial futures or options to manage anticipated
increases in interest rates and the resulting decline in the market prices of
its mortgage loan production. Option contracts represent a right (not the
obligation) for the owner of the contract to purchase or sell specified
securities at some specified future (forward) date at a specified price.
Options can be purchased and owned (long), or sold and owned by a counterparty
(short). A long put position represents the right to sell, while a long call
represents the right to purchase. A short put position represents the right of
the counterparty to sell securities to the Company, resulting in a purchase. A
short call option position represents the right of the counterparty to purchase
from the Company, resulting in a sale. These options when exercised become
commitments to purchase or sell securities. These options are over-the-counter
options to purchase or sell mortgage-backed securities and exchange-trade
options on U.S. Treasury futures. The options provide a practical floor and cap
on portfolio market values for moderate interest rate movements while the
forward contracts are used to offset actual and anticipated on- and off-balance
sheet positions of the Company. These options result in a certain amount of
potential interest rate and market value risk exposure for the Company. The
amount of the actual exposure is determined by the exercise of these options.
The Company generally sells options for settlement no more than four months
forward. An option's likelihood of exercise is dependent upon the relation of
the market price of the underlying security to the strike price of the option.
The strategy is not meant to offset losses that could be incurred during a
substantial interest rate move such as that which occurred during the year
ended September 30, 1994 and actually may result in additional losses on the
instruments themselves which is beyond the losses the Company would have
incurred had the management techniques not been utilized. The combined effect
of the Company's option, forward commitment and loan swap activity is included
in the income statement as part of gain (loss) on debt and equity and
mortgage-backed and related securities. For the years ended September 30, 1996
and 1995, the Company realized gains on that combined activity of $203,000 and
$335,000, respectively, as compared to realized losses of $2.4 million for the
year ended September 30, 1994. The loss for the year ended September 30, 1994
was generally the result of the steep increase in interest rates represented by
the rise in the Company's rate of 7.30% on 30-year fixed rate loans quoted in
February 1994 to 9.30% quoted in September 1994. At September 30, 1996 and
1995, the notional amount of outstanding short put options (which if exercised
could result in a purchase) were $4.0 million and $13.0 million, respectively.
As of September 30, 1996 and 1995, the notional amount of outstanding short
call options (which if exercised could result in a sale) were $4.0 million and
$16.0 million, respectively. The notional amount of options and forward
contracts outstanding varies and is a function of the current lending activity
of salable mortgage loans. In order to limit the risks which may be associated
with such financial options or futures, the Company's Investment Policy limits
the amount of outstanding sold puts or calls used to manage the Company's
available for sale portfolio to $40.0 million; the amount of financial futures
or purchased options used to manage Company's held for sale portfolio to $20.0
million; and the amount of financial options used to manage
56
the Company's available for sale portfolio to $40.0 million; the amount of
financial futures or purchased options used to manage Company's held for sale
portfolio to $20.0 million; and the amount of financial options used to manage
the Company's trading portfolio to $20.0 million. Any amounts of outstanding
financial options or futures in excess of these amounts must be approved by the
Company's Board of Directors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings from the FHLB,
proceeds from principal and interest payments on loans and principal and
interest payments on mortgage-backed and related securities and on debt and
equity securities. Although maturities 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 loan and mortgage security prepayments slowed during 1995 and 1996
because of the generally higher level of interest rates. Prepayments had
accelerated considerably throughout most of 1994 because of generally lower
interest rates, which prompted significant mortgage refinancing activity.
The Bank is required to maintain minimum levels of liquid assets as defined
under OTS regulations. These requirements, which may be changed by the OTS
depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio of liquid
assets to deposits and short-term borrowings is currently 5.0%. The Bank's
liquidity ratios were 7.1% and 7.6% at September 30, 1996 and 1995,
respectively. The Bank adjusts its liquidity levels in order to meet various
funding needs and to meet its asset and liability management objectives.
The Bank's most liquid assets are cash and cash equivalents and highly liquid,
short-term investments. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At September 30, 1996 and 1995, liquid assets of the Bank (as defined in the
OTS regulations) were $57.3 million and $48.1 million, respectively. Liquidity
levels are reviewed regularly and decisions are made as to how excess liquid
funds are to be invested. During periods in which the Bank is unable to
originate a sufficient amount of loans that it intends to retain, such as ARM
loans and other loans with shorter durations or terms, and during periods of
high principal prepayments, the Bank will increase liquid assets with remaining
amounts invested in mortgage-backed and related securities which are not
liquidity-qualifying under OTS regulations.
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. During fiscal 1996, the Company has found brokered
certificates of deposit to be an efficient source and a cost-effective method,
relative to local retail market deposits, of meeting the Company's funding
needs. In fiscal 1996, the pricing of brokered deposits ranged from 23 to 36
basis points above comparable term U.S. treasury securities. Management
recognizes that the likelihood for retention of brokered certificates of
deposits is more a function of the rate paid on such accounts as compared to
retail deposits which may be established due to branch location or other
intangible reasons. Management believes that a significant portion of its
retail deposits will remain with the Company, and in the case of brokered
deposits, may be replaced with similar type accounts even should the level of
interest rates change. However, in the event of a significant increase in
market interest rates, the cost of obtaining replacement brokered deposits
would increase as well. Whenever the Company requires funds beyond its ability
to generate them internally, additional sources of funds are available and
obtained from borrowings from the FHLB. Funds also may be available through
reverse repurchase agreements wherein the Company pledges mortgage-backed
securities. The Company utilizes its borrowing capabilities on a regular
basis. At September 30, 1996, FHLB advances totaled $373.6 million or 29.2% of
total liabilities and at September 30, 1995, FHLB advances were $330.1 million
or 31.3% of total liabilities. At September 30, 1996, the Company had a
borrowing capacity available of $116.3 million from the FHLB, however,
additional securities may have to be pledged as collateral. At September 30,
1996, there were no reverse repurchase agreements and at September 30, 1995,
reverse repurchase agreements totaled $13.5 million or 1.3% of total
liabilities. The Company's reverse repurchase agreements are generally
short-term, with maturities of less than 90 days. In a rising interest rate
environment, such short-term borrowings present the risk that upon maturity,
the borrowings will have to be replaced with higher rate borrowings. The
Company generally has matched such borrowings to specific assets and has
relatively little liquidity risk due to the fact that the assets and borrowings
mature at approximately the same time.
56
57
The amount of principal repayments on loans and mortgage securities are heavily
influenced by the general level of interest rates in the economy. Funds
received from principal repayments on mortgage securities for the years ended
September 30, 1996 and 1995, were $68.2 million and $34.7 million,
respectively. Funds received from principal repayments on loans for the years
ended September 30, 1996 and 1995, were $172.0 million and $122.2 million,
respectively. In addition to principal repayments, the Company sells mortgage
loans to government agencies (primarily FNMA) and to institutional investors.
Total mortgage loan sales to FNMA and others were $62.6 million and $26.8
million for the years ended September 30, 1996 and 1995, respectively.
Through both origination and purchase, the Company primarily reinvests funds
received back into loans receivable and mortgage-backed and related securities.
Loan originations totaled $313.6 million and $159.6 million for the years ended
September 30, 1996 and 1995, respectively. Purchases of mortgage-backed and
related securities totaled $324.6 million and $169.7 million for the years
ended September 30, 1996 and 1994, respectively. During the years ended
September 30, 1996 and 1995, the Company repurchased approximately 608,000 and
373,000 shares of its common stock in share repurchase programs at a total cost
of approximately $15.5 million and $7.1 million, respectively.
At September 30, 1996 and 1995, the Company had outstanding loan commitments
including lines of credit of $159.2 million and $100.2 million, respectively.
The Company had no commitments to purchase loans outstanding at either of these
dates. At September 30, 1996 and 1995, the Company had commitments to purchase
$12.8 million and $13.7 million, respectively, of mortgage-backed and related
securities. The Company anticipates it will have sufficient funds available to
meet its current loan commitments, including loan applications received and in
process prior to the issuance of firm commitments. Certificates of deposit
which are scheduled to mature in one year or less at September 30, 1996 and
1995, were $358.3 million and $292.8 million, respectively. Management
believes that a significant portion of such deposits will remain with the
Company.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
contains provisions for capital standards that require banks to have a minimum
3% leverage ratio (Tier 1 capital to adjusted total assets), a minimum 4% Tier
1 capital to risk-weighted assets and a minimum 8% qualifying total capital to
risk-weighted assets. Both the Bank's and Bank Wisconsin's regulatory capital
exceeds all minimum standards required under FDICIA.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
RECENT REGULATORY LEGISLATIVE DEVELOPMENTS
The deposits of thrift institutions such as the Bank are insured up to
applicable limits under the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). Deposits of commercial banks
such as Bank Wisconsin are insured under the Bank Insurance Fund ("BIF") of the
FDIC. Insured institutions pay assessments to the applicable fund based on
assessment rate schedules determined by the law and FDIC regulation.
Premium levels for the BIF and the SAIF are set in order to permit the funds to
be capitalized at a level equal to 1.25% of total fund deposits. As the funds
reach their designated ratios, the FDIC has authority to lower fund premium
assessments to rates sufficient to maintain the designated reserve ratio.
Historically, BIF and SAIF
57
58
assessment schedules had been identical. In May 1995, the BIF achieved its
designated ratio and the FDIC lowered BIF premium rates for most BIF-insured
institutions. In November 1995, the FDIC reduced assessment rates by four cents
per $100 of deposits for all BIF-insured institutions, producing a premium rate
schedule ranging from zero (i.e. whereby such institutions are subject only to a
$2,000 minimum annual premium) to 27 cents per $100 of deposits depending on the
institution's risk-based premium category. Based on these assessment rate
modifications, the majority of BIF members pay only a $2,000 minimum annual
premium. The SAIF has not achieved its designated reserve ratio and is not
anticipated to do so prior to year 2001. Premium rates for SAIF-insured members
were being paid at an average of 23.4 cents per $100 of deposits. As a result
of the modified assessment rate provisions, SAIF member institutions such as the
Bank were placed at a competitive disadvantage based on higher deposit insurance
premium obligations.
Congress recently passed legislation to address the deposit insurance premium
disparity. The "Deposit Insurance Funds Act of 1996" (the "DIF Act") was
included as part of an Omnibus Appropriations Bill that was signed into law on
September 30, 1996. Pursuant to the terms of the DIF Act, the FDIC was directed
to impose a special assessment on SAIF-assessable deposits at a rate that would
cause the SAIF to achieve its designated reserve ratio of 1.25% of SAIF-insured
deposits as of October 1, 1996. The DIF Act requires that the special
assessment be applied against the SAIF-assessable deposits held by institutions
as of March 31, 1995. Pursuant to the final rule issued by the FDIC on October
16, 1996, the special assessment rate was determined to be 65.7 basis points.
This one-time special assessment, which would fully capitalize SAIF, was
targeted to be collected on November 27, 1996.
Based on the special assessment being imposed at 65.7 basis points per $100 of
insurable deposits, the amount of the assessment to the Bank was $4.2 million
with an after-tax effect on income of $2.5 million or $0.45 cents per share. As
described below, with the recapitalization of the SAIF, BIF and SAIF premiums
will be comparable and FDIC premium expense for the Bank will therefore be
reduced in future periods.
The FDIC published a proposed rule on October 16, 1996, under which a permanent
base assessment schedule for the SAIF would be established, setting assessment
rates at a range of 4 to 31 basis points. The proposed rule also called for an
adjusted assessment schedule reducing these rates by 4 basis points to reflect
current conditions, producing an effective SAIF assessment range of 0 to 27
basis points, beginning October 1, 1996. This assessment range is comparable to
the current schedule for BIF-institutions. A special interim rate schedule
ranging from 18 to 27 basis points applies to the majority of SAIF-member
savings associations for the last quarter of 1996, reflecting the fact that
assessments related to certain bond obligations of the Financing Corporation
("FICO") are included in the SAIF rates for these institutions during that
period.
The DIF Act addresses other matters which will affect the Bank. Obligations
pursuant to the FICO bonds, which were issued to ameliorate the savings and loan
crisis in the 1980's, will be shared by all insured depository institutions
beginning after December 31, 1996. This obligation had previously been the sole
responsibility of SAIF-insured institutions and had been funded through SAIF
assessments. The DIF Act eliminates the statutory link between FICO's
assessments and amounts authorized to be assessed by the SAIF, effective January
1, 1997. All insured institutions will pay an annual assessment to fund
interest payments on the FICO bonds. Beginning in 1997, BIF-member institutions
will pay one-fifth the rate to be paid by SAIF members, for the first three
years. After January 1, 2000, BIF and SAIF members will share the FICO payments
on a pro-rata basis, which will be assessed at 2.4 basis points, until the bonds
mature in 2017.
In addition, the DIF Act provides for the merger of BIF and SAIF into a single
Deposit Insurance Fund. This provision will be effective January 1, 1999,
assuming that no insured depository institution is a savings association on that
date. This legislation contemplates that the savings association charter will
be phased out over that period of time. The DIF Act also calls for the
Secretary of the Treasury to undertake a study concerning the development of a
common charter for all insured depository institutions and the abolition of
separate and distinct charters for banks and savings associations.
58
59
Management anticipates that the Bank, after consideration of the one-time
assessment described above, will continue to exceed all the regulatory minimum
capital levels.* Although management is unable to predict the ultimate effect
on Company operations of the FICO bond assessments, the merger of the BIF and
SAIF, and the potential abolition of separate and distinct charters for banks
and savings associations, management does not presently anticipate that these
provisions will have a material impact on the financial condition of the
Company in future periods.
CURRENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board issued Statement No. 123, "Accounting
for Stock Based Compensation," which will be adopted by the Company on October
1, 1996. The statement requires that a fair value based method be used to
value employee compensation plans that include stock based awards. The
statement permits a company to either recognize compensation expense under SFAS
No. 123 or continue to use prior accounting rules which did not consider the
market value of stock in certain award plans. If adoption of the statement's
fair value procedures are not used in the computation of compensation expense
in the income statement, the company must disclose in a note to the financial
statements the pro-forma impact of adoption. The Company has elected not to
recognize additional compensation expense under SFAS No. 123, but will provide
any necessary disclosures in notes to its financial statements beginning in the
year ending September 30, 1997. Therefore, there will be no effect of the
Company adopting this statement on its results of operations.
The Financial Accounting Standards Board issued Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which is effective for transfers occurring after December 31,
1996. This statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on a
consistent application of a financial-components approach that focuses on
control. The effect of adopting this statement will not be material to the
Company's results of operations.
59
60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
St. Francis Capital Corporation:
We have audited the accompanying consolidated statements of financial condition
of St. Francis Capital Corporation and Subsidiaries (the "Company") as of
September 30, 1996 and 1995, and the related consolidated statements of income,
changes in shareholders' equity and cash flow for each of the years in the
three year period ended September 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of St. Francis
Capital Corporation and Subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1996 in conformity with generally
accepted accounting principles.
As discussed in note 1(f) to the consolidated financial statements the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights," an amendment of FASB Statement No. 65.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
October 25, 1996
61
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
- -------------------------------------------------------------------------------------------------------
September 30,
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 17,604 $ 15,710
Federal funds sold and overnight deposits 4,855 5,070
------------ ------------
Cash and cash equivalents 22,459 20,780
------------ ------------
Trading account securities, at market - 3,000
Assets available for sale, at market:
Debt and equity securities (notes 3 and 9) 58,487 4,142
Mortgage-backed and related securities (notes 4 and 9) 521,280 360,077
Mortgage loans held for sale, at lower of cost or market (note 5) 20,582 1,138
Securities held to maturity:
Debt and equity securities (market values of $3,218 and $49,574,
respectively) (note 3) 3,175 49,928
Mortgage-backed and related securities (market values of $68,429
and $155,896, respectively) (notes 5 and 9) 71,432 157,495
Loans receivable, net (notes 5 and 9) 610,699 513,308
Federal Home Loan Bank stock, at cost 19,063 17,440
Accrued interest receivable (note 6) 8,067 7,012
Foreclosed properties 80 5,833
Real estate held for investment 36,865 24,264
Premises and equipment, net (note 7) 16,432 10,892
Other assets (notes 5 and 11) 15,495 13,906
------------ ------------
Total assets $ 1,404,116 $ 1,189,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 8) $ 877,684 $ 688,348
Advances and other borrowings (note 9) 375,034 345,681
Advances from borrowers for taxes and insurance 11,092 10,879
Accrued interest payable and other liabilities (notes 8 & 15) 15,127 9,079
------------ ------------
Total liabilities 1,278,937 1,053,987
------------ ------------
Commitments and contingencies (notes 2 and 16) - -
Shareholders' equity:
Preferred stock $.01 par value:
Authorized, 6,000,000 shares
None issued - -
Common stock $.01 par value:
Authorized 12,000,000 shares
Issued 7,289,620 shares
Outstanding, 5,475,509 and 6,078,799 shares, respectively 73 73
Additional paid-in-capital 72,243 71,819
Unrealized gain (loss) on securities available for sale, net of tax (1,765) 2,332
Unearned ESOP compensation (note 15) (3,488) (3,996)
Unearned restricted stock (note 15) - (701)
Treasury stock, at cost (1,814,111 and 1,210,821 shares at September 30,
1996 and 1995, respectively) (note 14) (35,529) (20,142)
Retained earnings, substantially restricted (note 12) 93,645 85,843
------------ ------------
Total shareholders' equity 125,179 135,228
------------ ------------
Total liabilities and shareholders' equity $ 1,404,116 $ 1,189,215
============ ============
See accompanying Notes to Consolidated Financial Statements
61
62
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
- -------------------------------------------------------------------------------------------------------
Year ended September 30,
(In thousands, except per share data) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans (note 5) $ 47,512 $ 41,975 $ 31,229
Mortgage-backed and related securities 39,163 36,689 26,262
Debt and equity securities 3,329 2,396 1,148
Federal funds sold and overnight deposits 864 1,118 587
Federal Home Loan Bank stock 1,226 1,090 722
Trading account securities 3 519 185
---------- ---------- -----------
Total interest and dividend income 92,097 83,787 60,133
Interest expense:
Deposits (note 8) 37,610 30,775 20,516
Advances and other borrowings 18,803 19,448 11,117
---------- ---------- -----------
Total interest expense 56,413 50,223 31,633
---------- ---------- -----------
Net interest income before provision for loan losses 35,684 33,564 28,500
Provision for loan losses (note 5) 1,300 240 240
---------- ---------- -----------
Net interest income 34,384 33,324 28,260
---------- ---------- -----------
Other operating income (expense), net:
Loan servicing and loan related fees 1,258 1,276 1,116
Depository fees and service charges 1,451 1,316 1,092
Trading securities gains and commitment fees, net 109 1,098 13
Gain (loss) on sale of securities, net (notes 3 and 4) 3,311 2,576 (101)
Gain on sales of mortgage loans held for sale, net (note 5) 1,057 261 137
Insurance and annuity commissions 249 261 424
Gain (loss) on foreclosed properties and real estate
held for sale, net 865 (13) 21
Income from affordable housing 1,899 1,093 373
Other income 415 463 419
---------- ---------- -----------
Total other operating income, net 10,614 8,331 3,494
---------- ---------- -----------
General and administrative expenses:
Compensation, payroll taxes and other employee benefits 13,242 11,198 10,451
Office building expenses, including depreciation 2,106 1,755 1,514
Furniture and equipment expenses, including 1,874 1,457 1,200
Federal deposit insurance premiums 5,641 1,476 1,254
Real estate held for investment operations 2,156 1,412 575
Other general and administrative expenses (note 10) 6,603 5,381 4,387
---------- ---------- -----------
Total general and administrative expenses 31,622 22,679 19,381
---------- ---------- -----------
Income before income tax expense 13,376 18,976 12,373
Income tax expense (note 11) 2,911 6,277 4,336
---------- ---------- -----------
Net income $ 10,465 $ 12,699 $ 8,037
========== ========== ===========
Earnings per share (note 13) $ 1.82 $ 2.10 $ 1.16
========== ========== ===========
See accompanying Notes to Consolidated Financial Statements
62
63
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
Shares of Additional on Securities Unearned Unearned
Common Common Paid-In Available ESOP Restricted Treasury Retained
(Dollars in thousands) Stock Stock Capital For Sale Compensation Stock Stock Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1993 6,938,620 $ 73 $71,425 - $(4,657) $(2,570) $ (5,089) $65,270 $124,452
Net income - - - - - - - 8,037 8,037
Exercise of stock 2,816 - - - - - 36 (36) -
Purchase of treasury stock (506,159) - - - - - (8,280) - (8,280)
Amortization of unearned
compensation - - - - 291 934 - - 1,225
Unrealized loss on securities
available for sale - - - $(2,733) - - - - (2,733)
--------- ----- ------- ------- ------- ------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1994 6,435,277 73 71,425 (2,733) (4,366) (1,636) (13,333) 73,271 122,701
Net income - - - - - - - 12,699 12,699
Exercise of stock 16,470 - - - - - 264 (127) 137
Purchase of treasury stock (372,948) - - - - - (7,073) - (7,073)
Amortization of unearned
compensation - - 394 - 370 935 - - 1,699
Unrealized gain on securities
for sale - - - 5,065 - - - - 5,065
--------- ----- ------- ------- ------- ------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1995 6,078,799 73 71,819 2,332 (3,996) (701) (20,142) 85,843 135,228
Net income - - - - - - - 10,465 10,465
Cash dividend - $0.40 per
share - - - - - - - (2,199) (2,199)
Exercise of stock 5,100 - - - - - 96 (464) (368)
Purchase of treasury stock (608,390) - - - - - (15,483) - (15,483)
Amortization of unearned
compensation - - 424 - 508 701 - - 1,633
Unrealized loss on securities
available for sale - - - (4,097) - - - - (4,097)
--------- ----- ------- ------- ------- ------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1996 5,475,509 $ 73 $72,243 $(1,765) $(3,488) $ - $(35,529) $93,645 $125,179
========= ===== ======= ======= ======= ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements
63
64
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
September 30,
--------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,465 $ 12,699 $ 8,037
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provisions for loan losses 1,300 240 240
Depreciation, accretion and amortization 2,526 2,028 1,971
Deferred income taxes (2,073) (496) 2,455
(Gain) loss on investments, mortgage-backed and related
securities and trading account securities, net (3,420) (3,674) 88
Gains on the sales of mortgage loans held for sale, net (1,057) (261) (137)
Stock-based compensation expense 1,633 1,699 1,225
Increase in loans held for sale (7,507) (14,922) (56,048)
Decrease (increase) in trading account securities, net 3,000 10,196 (9,704)
Other, net 4,974 291 2,306
----------- ----------- -----------
Total adjustments (624) (4,899) (57,604)
----------- ----------- -----------
Net cash provided by (used in) operating activities 9,841 7,800 (49,567)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt and equity securities 25,508 34,217 29,763
Purchases of debt and equity securities (18,535) (60,341) (24,754)
Purchases of mortgage-backed and related securities (1,000) (10,293) (85,285)
Principal repayments on mortgage-backed and related
securities 5,573 11,976 79,182
Purchases of mortgage-backed securities available for sale (323,622) (159,432) (234,114)
Proceeds from sales of mortgage-backed securities
available for sale 178,602 135,078 149,133
Principal repayments on mortgage-backed securities
available for sale 62,579 22,752 61,768
Purchase of debt and equity securities available for sale (64,944) (2,818) (2,059)
Proceeds from sales of debt and equity securities available for
Proceeds from maturities of debt and equity securities available
for sale 16,369 - -
Purchases of Federal Home Loan Bank stock (2,059) (1,265) (10,174)
Redemption of Federal Home Loan Bank stock 436 - -
Purchase of loans (69,016) (67,426) (4,188)
Increase in loans, net of loans held for sale (40,312) (28,952) (103,366)
Increase in real estate held for investment (12,601) (14,446) (7,757)
Proceeds from sale of foreclosed properties 6,767 - -
Purchases of premises and equipment, net (6,634) (3,428) (1,845)
----------- ----------- -----------
Net cash used in investing activities (209,014) (143,328) (153,096)
----------- ----------- -----------
See accompanying Notes to Consolidated Financial Statements
64
65
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
September 30,
-------------------------------------------------------
1996 1995 1994
----------- ---------- ----------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 189,336 118,456 17,888
Proceeds from advances and other borrowings 140,122 38,548 243,154
Repayments on advances and other borrowings (97,248) (18,432) (53,498)
Increase (decrease) in securities sold under agreements
to repurchase (13,521) 8,248 5,501
Increase in advances from borrowers for taxes
and insurance 213 610 2,096
Dividends paid (2,199) - -
Stock option transactions (368) - -
Purchase of treasury stock (15,483) (7,073) (8,280)
----------- ---------- ----------
Net cash provided by financing activities 200,852 140,357 206,861
----------- ---------- ----------
Increase in cash and cash equivalents 1,679 4,829 4,198
Cash and cash equivalents:
Beginning of period 20,780 15,951 11,753
----------- ---------- ----------
End of period $ 22,459 $ 20,780 $ 15,951
=========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 57,143 $ 48,243 $ 30,207
Income taxes 4,521 11,085 2,106
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed securities - 1,988 76,565
Transfer of mortgage-backed and related securities
to assets available for sale 117,300 - 204,308
Transfer from loans to foreclosed properties 126 5,960 148
Transfer of mortgage loans to mortgage loans held for sale 11,937 4,941 13,452
See accompanying Notes to Consolidated Financial Statements
65
66
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of St. Francis Capital Corporation and
subsidiaries (the "Company") conform to generally accepted accounting
principles and to general practice within the banking industry. The
Corporation provides a full range of banking and related financial services to
individual and corporate customers through its network of bank affiliates. The
Corporation is subject to competition from other financial institutions and is
regulated by federal and state banking agencies and undergoes periodic
examinations by those agencies. The following is a description of the more
significant of those policies that the Company follows in preparing and
presenting its consolidated financial statements.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, St. Francis Bank, F.S.B. ("Bank"), and Bank
Wisconsin ("Bank Wisconsin"), the Bank's subsidiaries, SF Investment Corp. ("SF
Investment"), St. Francis Development Corp. (liquidated September 30, 1995),
St. Francis Insurance Services Corp., S-F Mortgage Corp. and St. Francis Equity
Properties ("SFEP") and limited partnerships more than 50% owned by SFEP and
Bank Wisconsin's subsidiaries, BW Investment Corp. ("BW Investment") and BW
Insurance Services ("BW Insurance"). All significant intercompany accounts and
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
(b) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, interest-bearing deposits with the FHLB and
other financial institutions and federal funds sold.
(c) Trading Account Securities
Trading account securities include debt securities which are held for resale in
anticipation of short-term market movements. Trading account securities are
stated at fair value. Gains and losses, both realized and unrealized, are
included in trading securities gains and commitment fees, net.
(d) Securities Held to Maturity and Available For Sale
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designations as of each
statement of condition date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held to maturity securities are stated at
amortized cost.
Debt securities not classified as held to maturity or trading and marketable
equity securities not classified as trading are classified as available for
sale. Available for sale securities are stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity.
The cost of debt securities classified as held to maturity or available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity, or in the case of mortgage-backed and related securities, over the
estimated life of the security. Such amortization is based on a level-yield
method and is included in interest income from the respective security.
Interest and dividends are included in interest and dividend income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net gains and losses from sales of
investments and mortgage-backed and related securities. The cost of securities
sold is based on the specific identification method.
66
67
(e) Loans Held For Sale
Mortgage loans held for sale generally consist of current production of certain
fixed-rate and adjustable-rate first mortgage loans. Mortgage loans held for
sale are carried at the lower of cost (less principal payments received) or
market value, as determined by outstanding commitments from investors or
current quoted investor yield requirements on an aggregate basis.
(f) Loans and Fees and Income on Loans
Loans for which management has the intent and ability to hold for the
foreseeable future or until maturity or pay off are carried at their unpaid
principal balances. Interest on loans is recorded as income in the period
earned.
Loans are normally placed on non-accrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact on
the collectibility of principal or interest on loans, it is management's
practice to place such loans on non-accrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously
accrued and uncollected interest on such loans is reversed, amortization of
related loan fees is suspended, and income is recorded only to the extent that
interest payments are subsequently received in cash and a determination has
been made that the principal balance of the loan is collectible. If
collectibility of the principal is in doubt, payments received are applied to
loan principal.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amounts amortized as an adjustment of the related
loan's yield. These amounts are amortized to income using the level yield
method, over the contractual life of the related loans. Discounts on purchased
loans are amortized using a method which approximates level yield. Unamortized
discounts on purchased loans which prepay are amortized immediately.
Loan origination fees and costs associated with loans sold are deferred and
recognized at the time of sale as a component of gain or loss on the sale of
loans. Fees for the servicing of loans are recognized as income when earned.
The Company adopted Financial Accounting Standards Board Statement No. 122,
"Accounting for Mortgage Servicing Rights" as of October 1, 1995. This
statement requires that separate assets be recognized for the rights to service
mortgage loans for others whether those servicing rights are purchased or
related to loans originated by the Company. The cost of mortgage servicing
rights is amortized in relation to the servicing revenue expected to be earned.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. The Company periodically evaluates the carrying value and
remaining amortization periods for impairment. For purposes of measuring
impairment, the rights are stratified based upon predominant risk
characteristics. The evaluation of mortgage servicing rights takes into
consideration certain risk characteristics including loan type, note rate,
prepayment trends and external market factors. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing rights for
a stratum exceed their fair value.
(g) Allowance for Loan Losses
The allowance for loan losses is a material estimate that is particularly
susceptible to significant change in the near term. The allowance for loan
losses is maintained at a level adequate to provide for loan losses through
charges to operating expense. The allowance is based upon past loan loss
experience and other factors which, in management's judgment, deserve current
recognition in estimating loan losses. Such other factors considered by
management include growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans and economic
conditions. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant properties
which collateralize loans.
67
68
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions
to the allowance based on their judgments about information available to them
at the time of their examination.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" effective October 1, 1994. SFAS No. 114 requires that impaired
loans be measured at the present value of expected future cash flows discounted
at the loan's effective interest rate, or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. SFAS No. 118 eliminates the provisions in SFAS No.
114 that describe how a creditor should report interest income on an impaired
loan and allows a creditor to use existing methods to recognize, measure and
display interest income on an impaired loan.
(h) Financial Options
Interest rate swaps, forward and future commitments and contracts and option
contracts purchased or sold may be used from time to time to manage interest
rate exposure by hedging specific assets or liabilities. Realized and
unrealized gains and losses on these instruments are deferred and amortized
over the life of the hedged assets and liabilities. Financial instruments
which do not meet the criteria for hedge accounting are marked to market in
aggregate and any gains or losses are recognized in the income statement.
Fees received on options written are deferred at the time the fees are received
and recognized in other operating income at the earlier of the settlement or
the expiration of the contract.
(i) Foreclosed Properties
Foreclosed properties (which were acquired by foreclosure or by deed in lieu of
foreclosure) are initially recorded at the lower of the carrying value of the
related loan balance or the fair market value of the real estate acquired less
the estimated costs to sell the real estate at the date title is received.
Costs relating to the development and improvement of the property are
capitalized. Income and expenses incurred in connection with holding and
operating the property are charged to expense. Valuations are periodically
performed by management and independent third parties and an allowance for loss
is established by a charge to expense if the carrying value of a property
exceeds its fair value less estimated costs to sell.
(j) Real Estate Held for Investment
Real estate held for investment is multi-family rental property (affordable
housing projects) that SFEP, a wholly-owned subsidiary of the Bank, owns,
operates and develops as a limited partner. The properties are recorded at
cost less accumulated depreciation. The Company evaluates the recoverability
of the carrying value on a regular basis. If the recoverability was determined
to be in doubt, a valuation allowance would be established by way of a charge
to expense. Depreciation expense is provided on a straight-line basis over the
estimated useful life of the assets. Expenditures for normal repairs and
maintenance are charged to expense as incurred.
(k) Premises and Equipment
Premises and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization expense are provided on a
straight-line basis over the estimated useful lives of the assets. The cost of
leasehold improvements is amortized on the straight-line basis over the lesser
of the term of the respective lease or the estimated economic life of the
improvements.
Expenditures for normal repairs and maintenance are charged to expense as
incurred. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is recorded in income.
68
69
(l) Federal Home Loan Bank Stock
The Company's investment in Federal Home Loan Bank stock meets the minimum
amount required by current regulation and is carried at cost which is its
redeemable (fair) value since the market for this stock is limited.
(m) Income Taxes
The Company and its subsidiaries file consolidated Federal income tax returns.
Federal income tax expense is allocated to each subsidiary based on an
intercompany tax sharing agreement. Each subsidiary files separate state and
local income or franchise tax returns.
Income taxes are accounted for using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to the differences between the
financial statement carrying amount of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date.
Affordable housing tax credits are recognized as a reduction of income tax
expense in the year they are available to be used in the Company's consolidated
income tax returns.
(n) Pending Accounting Changes
The Financial Accounting Standards Board issued Statement No. 123, "Accounting
for Stock Based Compensation," which will be adopted by the Company on October
1, 1996. The statement requires that a fair value based method be used to
value employee compensation plans that include stock based awards. The
statement permits a company to either recognize compensation expense under SFAS
No. 123 or continue to use prior accounting rules which did not consider the
market value of stock in certain award plans. If adoption of the statement's
fair value procedures are not used in the computation of compensation expense
in the income statement, the Company must disclose in a note to the financial
statements the pro-forma impact of adoption. The Company has elected not to
recognize additional compensation expense under SFAS No. 123, but will provide
any necessary disclosures in notes to its financial statements beginning in the
year ending September 30, 1997. Therefore, there will be no effect of the
Company adopting this statement on its results of operations.
The Financial Accounting Standards Board issued Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which is effective for transfers occurring after December 31,
1996. This statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on a
consistent application of a financial-components approach that focuses on
control. The effect of adopting this statement is not expected to be material
to the Company's financial position or results of operations.
(o) Reclassification
Certain amounts for prior years have been reclassified to conform to the 1996
presentation.
(2) ACQUISITIONS
In November 1994, the Company completed the acquisition of the stock of Valley
Bank East Central in Kewaskum, Wisconsin as well as the deposits and certain
assets of the Hartford, Wisconsin branch of Valley Bank Milwaukee for $13.3
million cash. The acquired bank offices are now operating as a commercial bank
named Bank Wisconsin, and the acquisition was accounted for as a purchase. The
related accounts and results of operations are included in the Company's
consolidated financial statements from the date of acquisition. At the time of
acquisition, Bank Wisconsin had assets of approximately $85 million and
deposits of approximately $70 million.
69
70
The excess of cost over the fair value of tangible assets acquired is accounted
for as goodwill and is being amortized over the estimated useful life of
fifteen years using the straight-line method. Goodwill, net of accumulated
amortization, totaled $5.8 million and $6.3 million at September 30, 1996 and
1995, respectively.
In April 1996, the Company announced that it had reached a definitive agreement
with Kilbourn State Bank for the acquisition of Kilbourn State Bank by St.
Francis Capital Corporation for $23.5 million plus an adjustment to be
determined at closing dependent upon the capital level of Kilbourn State Bank
at that time. Under the terms of the definitive agreement, the Company will
acquire all of the outstanding shares of Kilbourn State Bank for cash, with
Kilbourn subsequently merging into Bank Wisconsin, the Company's commercial
banking subsidiary. The acquisition, which has been approved by the Board of
Directors of the Company and Kilbourn State Bank, is expected to close by the
second quarter of 1997, subject to Kilbourn shareholder approval and various
other conditions of closing.
70
71
(3) DEBT AND EQUITY SECURITIES
The following is a summary of available for sale and held to maturity debt and
equity securities:
Amortized Gross Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
----------- ------------ ------------ -----------
At September 30, 1996:
Available for sale:
U.S. Treasury obligations and obligations of
U.S. Government agencies $ 23,565 $ 100 $ 168 $ 23,497
State and municipal obligations 5,961 - 78 5,883
Corporate notes and bonds 7,558 31 27 7,562
Asset-backed securities 4,756 - - 4,756
Marketable equity securities 16,782 7 - 16,789
----------- ------------ ------------ -----------
$ 58,622 $ 138 $ 273 $ 58,487
=========== ============ ============ ===========
Held to maturity:
Corporate notes and bonds $ 1,991 $ 10 $ - $ 2,001
State and municipal obligations 1,184 33 - 1,217
----------- ------------ ------------ -----------
$ 3,175 $ 43 $ - $ 3,218
=========== ============ ============ ===========
At September 30, 1995:
Available for sale:
State and municipal obligations $ 5 $ - $ - $ 5
Corporate notes and bonds 986 5 - 991
Marketable equity securities 2,901 263 18 3,146
----------- ------------ ------------ -----------
$ 3,892 $ 268 $ 18 $ 4,142
=========== ============ ============ ===========
Held to maturity:
U.S. Treasury obligations and obligations of
U.S. Government agencies $ 18,940 $ 81 $ 59 $ 18,962
Corporate notes and bonds 15,060 112 - 15,172
State and municipal obligations 15,928 40 528 15,440
----------- ------------ ------------ -----------
$ 49,928 $ 233 $ 587 $ 49,574
=========== ============ ============ ===========
The amortized cost and estimated fair value of debt and equity securities
available for sale and held to maturity at September 30, 1996, by contractual
maturity, are as follows:
Amortized Estimated
(In thousands) Cost Fair Value
-------------- ------------
Less than one year $ 6,583 $ 6,605
Greater than one year but less than five years 23,446 23,407
Greater than five years but less than ten years 3,453 3,483
Greater than ten years 11,533 11,421
-------------- ------------
45,015 44,916
Marketable equity securities 16,782 16,789
-------------- ------------
$ 61,797 $ 61,705
============== ============
Proceeds from the sale of available for sale debt and equity securities at
September 30, 1996 were $33.9 million; gross profits of $614,000 and gross
losses of $126,000 were realized on those sales. During the years ended
September 30, 1995 and 1994, there were no sales of held to maturity debt and
equity securities.
71
72
Under implementation guidance for SFAS 115, the Company, at December 31, 1995,
reclassified $28.9 million of its held-to-maturity portfolio to
available-for-sale.
(4) MORTGAGE-BACKED AND RELATED SECURITIES
The following is a summary of available for sale mortgage-backed and related
securities and held to maturity mortgage-backed and related securities:
Amortized Gross Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------
At September 30, 1996:
Available for sale:
Participation certificates:
GNMA $ 4,809 $ 332 $ - $ 5,141
FNMA 4,867 75 14 4,928
FHLMC 11,241 55 51 11,245
Private issue 198,755 527 2,018 197,264
REMICs 303,426 2,002 3,636 301,792
Adjustable rate mortgage mutual fund 842 - - 842
CMO residual 68 - - 68
-------- ------ ------ --------
$524,008 $2,991 $5,719 $521,280
======== ====== ====== ========
Held to maturity:
Collateralized mortgage obligations $ 3,040 $ 73 $ - $ 3,113
REMICs 68,392 83 3,159 65,316
-------- ------ ------ --------
$ 71,432 $ 156 $3,159 $ 68,429
======== ====== ====== ========
At September 30, 1995:
Available for sale:
Participation certificates:
GNMA $ 16,992 $ 846 $ - $ 17,838
FNMA 19,430 284 7 19,707
FHLMC 11,234 222 - 11,456
Private issue 132,281 243 314 132,210
Collateralized mortgage obligations 1,703 - 27 1,676
REMICs 173,309 2,957 666 175,600
Adjustable rate mortgage mutual fund 1,462 12 - 1,474
CMO residual 135 - 19 116
-------- ------ ------ --------
$356,546 $4,564 $1,033 $360,077
======== ====== ====== ========
Held to maturity:
Collateralized mortgage obligations $ 9,914 $ 32 $ 25 $ 9,921
REMICs 147,581 995 2,601 145,975
-------- ------ ------ --------
$157,495 $1,027 $2,626 $155,896
======== ====== ====== ========
Under implementation guidance for SFAS 115, the Company, at December 31, 1995,
reclassified $88.4 million of its held-to-maturity portfolio to
available-for-sale.
During the years ended September 30, 1996, 1995 and 1994, proceeds from the
sale of available for sale mortgage-backed and related securities were $178.6
million, $135.1 million and $149.1 million, respectively. The gross realized
gains on such sales totaled $2.8 million, $3.1 million and $3.8 million in
1996, 1995 and 1994, respectively. The gross realized losses on such sales
totaled $10,000, $422,000 and
72
73
$3.1 million in 1996, 1995 and 1994, respectively. There were no sales of
held to maturity mortgage-backed and related securities.
At September 30, 1996 and 1995, $240.4 million and $222.7 million,
respectively, of mortgage-related securities were pledged as collateral for
FHLB advances.
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
September 30,
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
First mortgage - one- to four-family $ 270,614 $ 209,140
First mortgage - residential construction 32,249 25,277
First mortgage - multi-family 103,262 93,756
Commercial real estate 46,391 28,277
Home equity 90,579 80,159
Commercial and agriculture 25,177 13,608
Consumer secured by real estate 66,346 47,060
Interim financing and consumer loans 21,890 21,978
Education 12,142 12,833
------------ -----------
Total gross loans 668,650 532,088
------------ -----------
Less:
Loans in process 29,631 10,903
Unearned insurance premiums 647 582
Deferred loan and guarantee fees 851 1,021
Purchased loan discount 1,023 1,060
Allowance for loan losses 5,217 4,076
------------ -----------
Total deductions 37,369 17,642
------------ -----------
Total loans receivable 631,281 514,446
Less: First mortgage loans held for sale 20,582 1,138
------------ -----------
Loans receivable, net $ 610,699 $ 513,308
============ ===========
Activity in the allowance for loan losses is as follows:
Years Ended September 30,
------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 4,076 $ 3,435 $ 3,204
Provision charged to expense 1,300 240 240
Loans charged off, net of recoveries (159) (293) (80)
Acquired bank's allowance - 694 -
Reclassified allowance - - 71
------------- ------------ -----------
Balance at end of year $ 5,217 $ 4,076 $ 3,435
============= ============ ===========
Recoveries are insignificant in all years. Non-performing loans, which include
loans on which the accrual of interest has been discontinued, and troubled debt
restructurings totaled approximately $3.9 million and $432,000 at September 30,
1996 and 1995, respectively. Non-performing loans at September 30, 1996
include $3.6 million of purchased auto loans which are past due or in default.
Impaired loans totaled $3.6 million at September 30, 1996. These loans had
associated impairment reserves of $1.1 million. During 1996, the average
balance of impaired loans was $1.4 million and no interest income was recorded.
The reclassified allowance in 1994 relates to the allowance for loss on the
amounts of real estate in judgment and in-substance foreclosed loans which were
reclassified to loans in 1994.
73
74
The effect of non-performing loans on interest income is as follows:
Years Ended September 30,
--------------------------------
(In thousands) 1996 1995 1994
-------------- ---- ---- ----
Interest at original contractual rate $ 296 $ 34 $ 596
Interest collected 11 26 315
----- ----- -----
Net reduction of interest income $ 285 $ 8 $ 281
===== ===== =====
Capitalized mortgage servicing rights totaled $701,000 at September 30, 1996.
The Company recorded additional gains of $634,000 and amortization expense of
$23,000 for the year ended September 30, 1996. The fair value approximates the
amount of capitalized mortgage servicing rights at September 30, 1996.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans are summarized as follows:
September 30,
-----------------------
(In thousands) 1996 1995
-------------- ---- ----
Mortgage loans underlying pass-through securities - FNMA $141,944 $162,777
Mortgage loan portfolios serviced for:
FNMA 72,038 17,838
FHLMC 1,233 1,529
Other investors 11,619 13,070
-------- --------
Total loans serviced for others $226,834 $195,214
======== ========
Custodial escrow balances maintained in connection with the
foregoing loan servicing and included in demand deposits $ 8,738 $ 8,193
======== ========
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
September 30,
-------------------
(In thousands) 1996 1995
-------------- ---- ----
Mortgage-backed and related securities $ 3,166 $ 2,531
Loans receivable 3,691 3,355
Other 1,210 1,126
------- -------
$ 8,067 $ 7,012
======= =======
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment, at cost, follows:
September 30,
----------------------
(In thousands) 1996 1995
-------------- ---- ----
Land and land improvements $ 2,890 $ 2,042
Office buildings and improvements 11,825 8,566
Furniture, fixtures and equipment 9,730 7,244
Leasehold improvements 588 547
-------- --------
25,033 18,399
Accumulated depreciation and amortization (8,601) (7,507)
-------- --------
$ 16,432 $ 10,892
======== ========
74
75
Range of depreciable lives:
Office buildings and improvements 5 - 40 years
Furniture, fixtures and equipment 5 - 10 years
Leasehold improvements 5 - 40 years
(8) DEPOSITS
Deposit accounts are summarized as follows:
September 30,
---------------------------------------------------------------------
(Dollars in thousands) 1996 1995
---------------------- ------------------------------- ----------------------------------
Weighted Weighted
average average
rate Amount Percent rate Amount Percent
-------- ------ ------- -------- ------ -------
Demand deposits:
Non-interest bearing - $ 34,377 3.9% - $ 26,879 3.9%
Interest bearing 1.49% 39,710 4.5 1.47% 42,687 6.2
Passbook accounts 2.87 79,362 9.0 2.75 87,678 12.7
Money market
demand accounts 4.53 176,838 20.2 4.55 121,016 17.6
Certificates 5.60 547,397 62.4 5.81 410,088 59.6
-------- ----- -------- -----
Total deposits 4.74 $877,684 100.0% 4.78 $688,348 100.0%
======== ===== ======== =====
The certificates category above includes approximately $138.6 million and $38.0
million of brokered deposits at weighted average stated rates of 5.35% and
6.24% at September 30, 1996 and September 30, 1995, respectively.
Aggregate annual maturities of certificate accounts at September 30, 1996 are
as follows:
(Dollars in thousands) Weighted
average
Matures during year ended September 30: Amount rate
- --------------------------------------- ------ --------
1997 $ 358,252 5.46%
1998 166,216 5.90
1999 10,799 5.48
2000 5,466 5.99
2001 6,589 5.74
Thereafter 75 8.00
---------
$ 547,397
=========
Certificates include approximately $25.7 million and $14.8 million in
denominations of $100,000 or more at September 30, 1996 and 1995, respectively.
Interest expense on deposits is as follows:
Years Ended September 30,
---------------------------------------
(In thousands) 1996 1995 1994
---- ---- ----
Demand deposits $ 614 $ 553 $ 516
Money market demand accounts 6,787 4,681 1,946
Passbook and certificate accounts 30,209 25,541 18,054
-------- -------- --------
$ 37,610 $ 30,775 $ 20,516
======== ======== ========
75
76
Accrued interest payable on deposits totaled approximately $3.5 million and $2.7
million at September 30, 1996 and 1995, respectively.
(9) ADVANCES AND OTHER BORROWINGS
Advances and other borrowings consist of the following:
(Dollars in thousands) Weighted Average
Interest Rate
----------------------
September 30, September 30,
---------------------- Matures in fiscal --------------------
Description 1996 1995 year ended 1996 1995
- ----------- ------ ------ ----------------- --------- ---------
Reverse repurchase agreements - % 5.81% 1996 $ - $ 13,521
Advances from Federal Home
Loan Bank Of Chicago 5.09 - Open Line Advance 6,000 -
- 4.79 1996 - 20,000
5.63 7.00 1997 12,509 9
5.49 5.77 1998 95,000 85,000
5.54 5.84 1999 230,000 200,000
5.56 5.95 2000 25,060 25,064
5.50 - 2001 and after 5,000 -
Federal Reserve Bank
Treasury tax & loan advances 5.16 6.66 Daily overnight 511 958
Mortgages payable 9.40 9.67 Various 954 1,129
-------- --------
$375,034 $345,681
======== ========
The Company is required to maintain as collateral unencumbered mortgage loans
and mortgage-related securities such that the outstanding balance of Federal
Home Loan Bank ("FHLB") advances does not exceed 60% of the book value of this
collateral. In addition, these notes are collateralized by all FHLB stock. At
September 30, 1996 and 1995, $262.0 million and $220.0 million, respectively, of
mortgage loans and $240.4 million and $222.7 million, respectively, of
mortgage-related securities were pledged as collateral for FHLB advances. The
variable rate advances are tied to the one-month and three-month LIBOR indices.
FHLB advances are subject to a prepayment penalty if they are repaid prior to
maturity. The maximum amount of borrowings at any month end during the years
ended September 30, 1996 and 1995 was approximately $375.0 million and $367.2
million, respectively. The approximate average amount outstanding was $344.8
million and $341.7 for those same years. The weighted average interest rate was
5.43% and 5.62% during those years. The Federal Reserve Bank advances are
collateralized by U.S. Treasury bills with a carrying value of $1.0 million at
September 30, 1996 and 1995.
Securities sold under agreements to repurchase averaged $703,000 and $10.1
million based on average daily balances during the years ended September 30,
1996 and 1995, respectively. The maximum amount outstanding at any month-end
was zero and $22.3 million during those years.
76
77
(10) GENERAL AND ADMINISTRATIVE EXPENSES
Other general and administrative expenses are as follows:
Years Ended September 30,
-----------------------------------
(In thousands) 1996 1995 1994
- -------------- ------ ------ ------
Data processing $1,317 $1,115 $ 705
Advertising 1,425 868 995
Stationery, printing and office supplies 481 364 367
Telephone and postage 724 530 480
Insurance and surety bond premiums 103 151 123
Professional fees and services 310 442 431
Supervisory assessment 220 202 164
Amortization of intangible assets 446 383 -
Organization dues and subscriptions 124 96 93
Consumer lending 357 327 261
Miscellaneous 1,096 903 768
------ ------ ------
$6,603 $5,381 $4,387
====== ====== ======
(11) INCOME TAXES
Income tax expense (benefit) in the consolidated statements of income consists
of the following:
(In thousands) Federal State Total
- -------------- ------- ------- --------
YEAR ENDED SEPTEMBER 30, 1996
Current $ 4,785 $ 199 $ 4,984
Deferred (1,820) (253) (2,073)
------- ------ -------
$ 2,965 $ (54) $ 2,911
======= ======= =======
YEAR ENDED SEPTEMBER 30, 1995
Current $ 5,450 $1,323 $ 6,773
Deferred (434) (62) (496)
------- ------ -------
$ 5,016 $1,261 $ 6,277
======= ====== =======
YEAR ENDED SEPTEMBER 30, 1994
Current $ 1,155 $ 726 $ 1,881
Deferred 2,140 315 2,455
------- ------ -------
$ 3,295 $1,041 $ 4,336
======= ====== =======
77
78
Actual income tax expense differs from the "expected" income tax expense
computed by applying the statutory Federal corporate tax rate to income before
income tax expense, as follows:
Years Ended September 30,
----------------------------
(In thousands) 1996 1995 1994
- -------------- ---- ---- ----
Federal income tax expense at statutory rate of
35% for 1996 and 1995; 34% for 1994 $ 4,682 $6,642 $4,207
State income taxes, net of Federal income tax benefit (35) 830 779
Tax exempt interest (237) (295) (198)
Non-deductible compensation 176 138 -
Dividends received deduction (3) (16) (74)
Unused net operating losses - 31 -
Change in beginning of year valuation allowance (171) (41) (92)
Affordable housing credits (1,617) (875) (331)
Other, net 116 (137) 45
------- ------ ------
$ 2,911 $6,277 $4,336
======= ====== ======
Included in other assets is a deferred tax asset of $2.3 million at September
30, 1996 and a deferred tax liability of $239,000 at September 30, 1995. The
tax effects of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities are presented below:
September 30,
------------------
(In thousands) 1996 1995
- -------------- ---- ----
DEFERRED TAX ASSETS:
Loans, principally due to allowance for losses $ 335 $ 572
Deferred fee income 911 882
Net operating losses 99 206
Valuation adjustments and reserves 33 78
Accrued expenses 1,732 32
Deferred compensation 660 540
Unrealized losses on available for sale securities 510 -
Other 20 2
------- ------
Gross deferred tax assets 4,300 2,312
Less valuation allowance (99) (206)
------- ------
Net deferred tax assets 4,201 2,106
DEFERRED TAX LIABILITIES:
Fixed assets, principally due to differences in
depreciation (371) (260)
Unamortized accounting change for securities
marked to market (1,036) (1,564)
Other (450) (521)
------- ------
Gross deferred tax liability (1,857) (2,345)
------- ------
Net deferred tax asset (liability) $ 2,344 $ (239)
======= ======
At September 30, 1996 and 1995, deferred tax assets and the valuation allowance
include approximately $99,000 and $206,000, respectively, relating to various
state net operating loss carry forwards of approximately $1.9 million and $3.9
million for those periods, which begin to expire in 1999.
78
79
(12) SHAREHOLDERS' EQUITY
In accordance with federal regulations, at the time the Bank converted from a
federal mutual savings bank to a federal stock savings bank, the Bank
established a liquidation account equal to its retained earnings of $63.0
million to provide a limited priority claim for the benefit of qualifying
depositors who maintain their deposit accounts at the Bank after conversion.
The liquidation account is reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In
the unlikely event of a complete liquidation of the Bank, and only in such
event, each eligible account holder would receive from the liquidation account
a liquidation distribution based on his or her proportionate share of the then
remaining qualifying deposits. At September 30, 1996, the balance of the
liquidation account was approximately $33.3 million. Under current
regulations, the Bank is not permitted to pay dividends on its stock if the
effect would reduce its regulatory capital below the liquidation account.
Office of Thrift Supervision ("OTS") regulations also provide that an
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution could, and after prior notice but without
approval by the OTS, make capital distributions during the calendar year of up
to 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar
year. Any additional capital distributions would require prior regulatory
approval. During the year ended September 30, 1996, the Bank paid dividends to
the Company totaling $13.1 million. As of September 30, 1996, retained
earnings of the Bank of approximately $22.1 million were free of restriction
and available for dividend payments.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its shareholders. However, the Company's source of
funds for future dividends may depend upon dividends from the Bank.
Under the Internal Revenue Code and the Wisconsin Statutes, for tax years
beginning before 1996, the Company is permitted to deduct an annual addition to
a reserve for bad debts. This amount differs from the provision for loan
losses recorded for financial accounting purposes. Under prior law, bad debt
deductions for income tax purposes were included in taxable income of later
years only if the bad debt reserves were used for purposes other than to absorb
bad debt losses. Because the Company did not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes were provided.
Shareholders' equity at September 30, 1996 includes approximately $21.9 million
for which no federal or state income taxes were provided. Under SFAS No. 109,
deferred income taxes have been provided on certain additions to the tax
reserve for bad debts.
The Small Business Job Protection Act of 1996 repealed the bad debt reserve
method for tax years beginning after 1995. The Bank will not be required to
recapture into income any of the restricted amounts previously deducted except
in the unlikely event of a partial or complete liquidation of the Bank or if
nondividend distributions to shareholders exceed current and accumulated
earnings and profits.
The Company, the Bank and Bank Wisconsin are 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 affect on the Company's, Bank's and Bank Wisconsin's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company, the Bank and Bank
Wisconsin must meet specific capital guidelines that involve quantitative
measures of the Company's, the Bank's and Bank Wisconsin's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's, the Bank's and Bank
79
80
Wisconsin's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") contains
provisions for regulatory capital standards that require a minimum 3.0% Tier 1
leverage capital ratio, a minimum 4.0% Tier 1 capital to risk-weighted assets
capital ratio and a minimum 8.0% qualifying total capital to risk-weighted
assets capital ratio. At September 30, 1996, the Bank's and Bank Wisconsin's
regulatory capital exceed all minimum standards required under FDICIA.
As of September 30, 1996, the Bank and Bank Wisconsin are well capitalized as
defined by the regulatory capital standards. To be categorized as well
capitalized, the Bank and Bank Wisconsin must maintain a minimum total
risk-based ratio of 10.0%, Tier 1 risk-based ratio of 6.0%, and a Tier 1
leverage ratio of 5.0%.
The following table summarizes the Company's, the Bank's and Bank Wisconsin's
capital amounts and capital ratios, and the capital ratios required by the
Company's regulators at September 30, 1996 (dollars in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated 126,257 16.81% 60,103 8.00% N/A
St. Francis Bank 92,764 13.12% 56,576 8.00% 70,721 10.00%
Bank Wisconsin 9,478 13.35% 5,680 8.00% 7,100 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 121,040 16.11% 30,052 4.00% N/A
St. Francis Bank 89,092 12.60% 28,288 4.00% 42,432 6.00%
Bank Wisconsin 8,789 12.38% 2,840 4.00% 4,260 6.00%
Tier 1 Capital (to Average Assets):
Consolidated 121,040 9.00% 40,327 3.00% N/A
St. Francis Bank 89,092 6.86% 38,915 3.00% 64,858 5.00%
Bank Wisconsin 8,789 9.12% 2,890 3.00% 4,817 5.00%
(13) EARNINGS PER SHARE
Earnings per share of common stock for the years ended September 30, 1996 and
1995, have been determined by dividing net income for the year by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Stock options are regarded as common stock
equivalents and are, therefore, considered in per share calculations. Common
stock equivalents are computed using the treasury stock method. Effective
October 1, 1994, the Company adopted SOP 93-6 (see note 15). Therefore, total
shares outstanding beginning with the quarter ended December 31, 1994 have been
reduced by the ESOP shares that have not been committed to be released. Prior
period per share calculations have not been restated.
80
81
The computation of earnings per common share for the years ended September 30,
is as follows:
1996 1995 1994
----------- ----------- ----------
Net income for the period $10,465,000 $12,699,000 $8,037,000
=========== =========== ==========
Common shares issued 7,289,620 7,289,620 7,289,620
Net Treasury shares 1,450,789 1,066,069 575,451
Unallocated ESOP shares 363,222 404,466 -
----------- ----------- ----------
Weighted average common shares
outstanding during the period 5,475,609 5,819,085 6,714,169
Common stock equivalents based on
the treasury stock method 289,416 224,307 190,752
----------- ----------- ----------
Total weighted average common shares
and equivalents outstanding 5,765,025 6,043,392 6,904,921
=========== =========== ==========
Earnings per share $ 1.82 $ 2.10 $ 1.16
=========== =========== ==========
Primary and fully diluted earnings per share for the years ended September 30,
1996, 1995 and 1994, respectively, are the same.
(14) STOCK REPURCHASE PROGRAM
On July 10, 1996, the Company announced it had adopted a share repurchase
program for its common stock whereby the Company planned to purchase up to 5%
of the outstanding stock, or approximately 282,945 shares, commencing July 12,
1996 and concluding before January 31, 1997, depending upon market conditions.
The repurchased shares would become treasury shares and would be used for the
exercise of stock options under the stock option plan and for general corporate
purposes. At September 30, 1996, 188,500 shares had been repurchased at an
average price of $25.89 per share. This is the sixth such repurchase program
that the Company has undertaken, the most recent of which was completed May 13,
1996. At September 30, 1996, an aggregate of 1,838,507 shares had been
repurchased in all such repurchase programs at an average price of $19.54.
(15) EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS:
The Company has a defined contribution pension plan which covers substantially
all employees who are at least 21 years of age and have completed 1,000 hours
or more of service each year. Company contributions are based on a set
percentage of each participant's compensation for the plan year. Plan expense
for the years ended September 1996, 1995 and 1994 was approximately $289,000,
$282,000 and $311,000, respectively. The Company funds the plan's costs.
The Company also has a defined contribution savings plan for substantially all
employees. The plan is qualified under Section 401(k) of the Internal Revenue
Code. Participation in the plan requires that an employee be at least 21 years
of age and have a minimum of six months of full-time service. Participants may
elect to defer a portion of their compensation (between 2% and 7%) and
contribute this amount to the plan. Under the plan, the Company will match the
contribution made by each employee up to fifty percent of 4% of the eligible
employee's annual compensation. Plan expense for the years ended September 30,
81
82
1996, 1995 and 1994 was approximately $111,000, $95,000 and $88,000,
respectively. The Company funds the plan's costs.
The aggregate benefit payable to any employee of both defined contribution
plans is dependent upon the rates of contribution, the earnings of the fund and
the length of time such employee continues as a participant.
OFFICER DEFERRED COMPENSATION PLAN:
The Company has deferred compensation plans covering certain officers of the
Company. These arrangements provide for monthly payments to be made upon
retirement or reaching certain age levels for periods of 10 to 15 years. A
liability is recorded for the present value of the future payments under these
agreements earned through September 30, 1996 and 1995 amounting to $591,000 and
$564,000, respectively. The Company owns insurance policies on the lives of
these officers which are intended to fund these benefits.
EMPLOYEE STOCK OWNERSHIP PLAN:
In conjunction with the conversion of the Bank to a stock savings bank, an
employee stock ownership plan ("ESOP") was adopted 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 borrowed $4.9
million from the Company and purchased 490,600 common shares issued in the
conversion. The debt bears a variable interest rate based on the borrower's
prime lending rate which was 8.25% at September 30, 1996. The balance of this
loan was $4.1 million and $4.4 million at September 30, 1996 and 1995,
respectively. The Bank and Bank Wisconsin make annual contributions to the
ESOP equal to the ESOP's debt service less dividends received by the ESOP. All
dividends received by the ESOP are used to pay debt service. The ESOP shares
initially were pledged as collateral for its debt. 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 and the shares pledged as collateral are reported
as unearned ESOP shares in the statement of financial position. As shares are
released from collateral, the company reports compensation expense equal to the
current market price of the shares for the years ended September 30, 1996 and
1995 and equal to the original cost for the year ended September 30, 1994. The
excess of the current market price of shares released over the cost of those
shares is credited to paid-in-capital. As shares are released they become
outstanding for earnings-per-share (EPS) computations. Dividends on allocated
ESOP shares are recorded as a reduction of shareholders' equity; dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest. ESOP compensation expense for the years ended September 30, 1996,
1995 and 1994 was $932,000, $764,000 and $291,000, respectively. The following
is a summary of ESOP shares at September 30, 1996:
Shares
-----------------------------
1996 1995
---------- ----------
Allocated shares 111,175 71,243
Shares released for allocation 30,659 29,085
Unreleased shares 348,766 390,272
---------- ----------
Total ESOP shares 490,600 490,600
========== ==========
Fair value of unreleased shares
at September 30, $9,000,000 $8,900,000
========== ==========
STOCK OPTION AND INCENTIVE PLANS:
The Company has adopted stock option plans for the benefit of directors and
officers of the Company. The option exercise price cannot be less than the
fair value of the underlying common stock as of the date
82
83
of the option grant, and the maximum term cannot exceed ten years. The stock
options awarded to directors may be exercised at any time after grant provided
the grantee remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time periods,
depending on the individual option grant terms.
At September 30, 1996, 195,478 shares were reserved for future grants. Further
information concerning the options is as follows:
Option Price
Shares Per Share
-------- -----------
Shares under option
September 30, 1993 531,293 $ 10.00
Options granted 8,500 16.75
Options canceled - -
Options exercised (6,988) 10.00
------- --------------
September 30, 1994 532,805 10.00 - 16.75
Options granted - -
Options canceled (6,309) 10.00
Options exercised (21,142) 10.00
------- --------------
September 30, 1995 505,354 10.00 - 16.75
Options granted - -
Options canceled - -
Options exercised (28,952) 10.00
------- --------------
September 30, 1996 476,402 $10.00 - 16.75
======= ==============
Options exercisable 359,470 $10.00 - 16.75
======= ==============
Options exercised during the year ended September 30, 1996 were exercised for
$289,520 in cash.
MANAGEMENT RECOGNITION AND RETENTION PLAN:
The Company and the Bank have a Management Recognition and Retention Plan
("MRP"). Pursuant to the MRP, 280,370 shares of common stock were awarded to
directors and officers and are earned over three years. The aggregate purchase
price of these shares, initially recorded as a reduction of shareholders'
equity, will be amortized as compensation expense as participants become fully
vested. All participants became fully vested as of June 18, 1996. MRP expense
for the years ended September 30, 1996, 1995 and 1994 was $701,000, $935,000
and $934,000, respectively.
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER COMMITMENTS
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 and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated financial statements. The contractual or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for the commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for instruments reflected in the consolidated financial
statements.
83
84
Contractual or Notional Amount(s)
September 30,
----------------------------------
1996 1995
--------- --------
(In thousands)
Financial instruments whose contract amounts
represent credit risk, are as follows:
Commitments to extend credit:
Fixed-rate loans $ 18,487 $ 3,886
Variable-rate loans 18,722 588
Guarantees under IRB issues 4,200 4,200
Interest rate swap agreements 55,000 65,000
Commitments to:
Purchase mortgage-backed securities 12,800 13,700
Sell mortgage-backed securities 1,100 -
Unused and open-ended lines of credit:
Consumer 107,052 89,061
Commercial 14,935 6,711
Open option contracts written:
Short-put options 4,000 13,000
Short-call options 4,000 16,000
Commitments to fund equity investments 13,796 14,283
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 of 45 days or less or other
termination clauses and may require a fee. Fixed-rate loan commitments as of
September 30, 1996 have interest rates ranging from 6.50% to 9.75%. Because
some commitments expire without being drawn upon, the total commitment amounts
do not necessarily represent cash requirements. The Company evaluates the
creditworthiness of each customer on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of credit
is based on management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained consists
primarily of one- to four-family residences and other residential and
commercial real estate.
The Company has entered into agreements whereby, for an initial and annual fee,
it will guarantee payment for an industrial development revenue bond issue
("IRB"). The IRB is issued by a municipality to finance real estate owned by a
third party. Potential loss on a guarantee is the notional amount of the
guarantee less the value of the real estate collateral. Appraised values of
the real estate collateral exceed the amount of the guarantee. An IRB
commitment of $7.0 million is included in the fixed-rate loan commitments
above.
Interest rate swap agreements generally involve the exchange of fixed and
variable rate interest payments without the exchange of the underlying notional
amount on which the interest rate payments are calculated. While interest rate
swaps on their own have market risk, these agreements were entered into as
hedges of the interest rates on FHLB advances which were used to fund fixed
rate securities.
84
85
The agreements at September 30, 1996 consist of the following:
Notional
Amount Maturity Fixed Variable
(000s) Type Date Rate Rate
- --------- ---- -------- ----- --------
$10,000 Fixed Pay-Floating Receive 1998 4.93% 5.57%
10,000 Fixed Pay-Floating Receive 1998 5.04 5.63
15,000 Fixed Pay-Floating Receive 1998 5.25 5.63
10,000 Fixed Pay-Floating Receive 1998 5.23 5.50
10,000 Fixed Pay-Floating Receive 1998 5.43 5.66
Commitments to buy/sell mortgage-backed securities are contracts which
represent notional amounts to buy/sell mortgage-backed securities at a future
date and specified price. Such commitments generally have fixed settlement
dates.
The unused and open consumer lines of credit are conditional commitments issued
by the Company for extensions of credit such as home equity, auto, credit card
or other similar consumer type financing. Furthermore, the unused and open
commercial lines of credit are also conditional commitments issued by the
Company for extensions of credit such as working capital, agricultural
production, equipment or other similar commercial type financing. The credit
risk involved in extending lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for these
commitments may include, but may not be limited to, real estate, investment
securities, equipment, accounts receivable, inventory and Company deposits.
The open option contracts written represent the notional amounts to buy
(short-put options) or sell (short-call options) mortgage-backed securities
(GNMA or FNMA) at a future date and specified price. The Company receives a
premium/fee for option contracts written which gives the purchaser the right,
but not the obligation to buy or sell mortgage-backed securities within a
specified time period for a contracted price. Because these contracts can
expire without being drawn upon, the total commitment amounts do not
necessarily represent cash requirements. The options expire in 37 days.
The commitments to fund equity investments represent amounts St. Francis Equity
Properties ("SFEP"), a subsidiary of the Bank, is committed to invest in
low-income housing projects, which would qualify for tax credits under Section
42 of the Internal Revenue Code (the "Code"). The Code provides a per state
volume cap on the amounts of low-income housing tax credits ("LIHTCs") that may
be taken with respect to low-income housing projects in each state. In order
to claim a LIHTC, a credit allocation must be received from the appropriate
state or local housing development authority. SFEP is currently a limited
partner in 20 projects and has committed to equity investments in an additional
five projects within the state of Wisconsin. At September 30, 1996, SFEP's
equity investments in such projects totaled $13.5 million. Additionally, the
Bank has provided financing or committed to provide financing to 24 of the
projects. However, the primary return to the Company on these projects is in
the form of tax credits. At September 30, 1996, the Bank had loans outstanding
to such projects of $21.3 million. While the Company has experienced
considerable growth in this area, there can be no assurance that the current
rate of growth can be continued.
The Company's primary business activities include granting residential mortgage
and consumer loans to customers located within the proximity of their branch
locations, primarily within the State of Wisconsin. Approximately $1.3 million
of commercial real estate and multi-family loans are outside Wisconsin as of
September 30, 1996.
In the normal course of business, various legal proceedings involving the
Company are pending. Management, based upon advice from legal counsel, does
not anticipate any significant losses as a result of these actions.
85
86
The Company leases nine offices under agreements which expire at various dates
through January 2030, with six leases having renewable options. Rent expense
under these agreements totaled approximately $252,000, $232,000 and $205,000
for the years ended September 30, 1996, 1995 and 1994, respectively.
The future minimum rental commitments as of September 30, 1996 under these
leases for the next five years and thereafter, are as follows:
Years ended Amount
September 30, (In thousands)
------------- --------------
1997 $ 266
1998 229
1999 204
2000 165
2001 152
2002 and thereafter 2,260
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (SFAS No. 107), requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are materially affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent, and should not be interpreted to
represent, the underlying value of the Company.
The following table presents the estimates of fair value of financial
instruments at September 30, 1996:
Carrying Fair
(In thousands) Value Value
- -------------- --------- ---------
Financial Assets:
Cash and cash equivalents 22,459 22,459
Debt and equity securities 61,662 61,705
Mortgage-backed and related securities 592,712 589,709
Mortgage loans held for sale 20,582 20,614
Loans receivable 610,699 614,425
Federal Home Loan Bank stock 19,063 19,063
Financial Liabilities:
Certificate accounts 547,397 547,448
Other deposit accounts 330,287 330,287
Advances and other borrowings 375,034 374,798
86
87
Notional Carrying Fair
(In thousands) Amount Value Value
- -------------- --------- ---------- -------
Off-Balance Sheet Items:
Commitments to extend credit $ 37,209 - *
Unused and open-ended lines of credit 121,987 - *
Commitments to purchase mortgage-backed and related securities 12,800 - -
Commitments to sell mortgage-backed and related securities 1,100 - -
Interest rate swap agreements 55,000 $ (549) $ 599
Open option contracts:
Short-put options 4,000 3 3
Short-call options 4,000 (4) (4)
* Amount is not material.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets' fair values.
DEBT AND EQUITY AND MORTGAGE-BACKED AND RELATED SECURITIES: Fair values for
debt and equity and mortgage-backed and related securities are based on quoted
market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
MORTGAGE LOANS HELD FOR SALE: The fair values for mortgage loans held for sale
are based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics
LOANS RECEIVABLE: For variable-rate mortgage loans that reprice frequently and
with no significant change in credit risk, fair values are based on carrying
values. The fair values for residential mortgage loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair
values for commercial real estate loans, rental property mortgage loans and
consumer and other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of accrued interest
approximates its fair value.
FEDERAL HOME LOAN BANK STOCK: Federal Home Loan Bank stock is carried at cost
which is its redeemable (fair) value since the market for this stock is
limited.
CERTIFICATE ACCOUNTS: The fair values of fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit.
OTHER DEPOSITS: The fair values disclosed for other deposits, which include
interest and non-interest checking accounts, passbook accounts and money market
accounts, are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying value amounts).
FEDERAL HOME LOAN BANK AND OTHER BORROWINGS: The fair values of the Company's
long-term borrowings are estimated using discounted cash flow analyses, based
on the Company's current incremental borrowing rates for similar types of
borrowings arrangements.
87
88
OFF-BALANCE SHEET ITEMS: The fair value of the Company's off-balance sheet
instruments are based on quoted market prices, fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the credit standing of the related counterparty.
The fair value of the interest rate swap agreements is based on the present
value of the swap using dealer quotes. These values represent the estimated
amount the Company would receive or pay to terminate the agreements taking into
account current interest rates and market volatility. The fair value of the
commitment to fund equity investments is not determinable and is therefore not
shown.
The fair value estimates are presented for on-balance sheet financial
instruments without attempting to estimate the value of the Company's long-term
relationships with depositors and the benefit that results from low-cost
funding provided by deposit liabilities.
(18) FINANCIAL INFORMATION OF ST. FRANCIS CAPITAL CORPORATION (PARENT ONLY)
STATEMENT OF FINANCIAL CONDITION
September 30,
(In thousands) 1996 1995
- -------------- ----------- -----------
ASSETS
Cash, all with Bank $ 13,858 $ 3,567
Debt and equity securities available for sale 2,986 1,474
Mortgage-backed and related securities available for sale 1,522 1,759
Debt and equity securities held to maturity - 9,691
Mortgage-backed and related securities held to maturity - 6,016
Investment in subsidiaries, at equity 106,206 111,827
Accrued interest receivable and other assets 607 894
----------- -----------
Total assets $ 125,179 $ 135,228
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities - -
Shareholders' equity:
Common stock $ 73 $ 73
Additional paid-in capital 72,243 71,819
Unrealized gain (loss) on securities available for sale (1,765) 2,332
Unearned ESOP compensation (3,488) (3,996)
Unearned restricted stock - (701)
Treasury stock, at cost (35,529) (20,142)
Retained earnings, substantially restricted 93,645 85,843
----------- -----------
Total shareholders' equity 125,179 135,228
----------- -----------
Total liabilities and shareholders' equity $ 125,179 $ 135,228
=========== ===========
88
89
STATEMENT OF INCOME
Year ended
September 30,
(In thousands) 1996 1995 1994
- -------------- ----------- ------------ ----------
Dividend received from Bank $ 13,124 $ 15,396 $ 6,863
Interest and other dividend income 1,487 1,707 1,647
Other income (loss) 291 45 (99)
General and administrative expenses (1,138) (862) (517)
----------- ----------- ----------
Income before income tax expense and equity in
undistributed earnings of subsidiaries 13,764 16,286 7,894
Income tax expense 143 114 184
----------- ----------- ----------
Income before equity in undistributed earnings of
subsidiaries 13,621 16,172 7,710
Equity in (distributed) undistributed earnings of subsidiaries (3,156) (3,473) 327
----------- ----------- ----------
Net income $ 10,465 $ 12,699 $ 8,037
============ ============ ==========
STATEMENT OF CASH FLOWS
Year ended
September 30,
(In thousands) 1996 1995 1994
- -------------- ---------- ---------- ---------
Cash flows from operating activities:
Net income $ 10,465 $ 12,699 $ 8,037
Adjustments to reconcile net income to
cash provided by operations:
Equity in distributed (undistributed)
earnings of subsidiaries 3,156 3,473 (327)
Increase (decrease) in liabilities - - (124)
Other, net 288 (139) (159)
---------- ---------- ---------
Cash provided by operations 13,909 16,033 7,427
---------- ---------- ---------
Cash flows from investing activities:
Purchase of Bank Wisconsin stock - (13,315) -
Proceeds from sales of securities available for sale 18,075 900 4,725
Purchase of securities available for sale (3,824) (1,475)
Principal repayments on securities available for sale 181 6,440
Purchase of securities held to maturity - (2,434)
Cash provided by (used in) investing activities 14,432 (12,415) 7,256
---------- ---------- ---------
Cash flows from financing activities:
Stock option transactions (368) - -
Purchase of treasury stock (15,483) (7,073) (8,280)
Dividends paid (2,199) - -
Cash used in financing activities (18,050) (7,073) (8,280)
---------- ---------- ---------
Increase in cash 10,291 (3,455) 6,403
Cash at beginning of period 3,567 7,022 619
---------- ---------- ---------
Cash at end of period $ 13,858 $ 3,567 $ 7,022
========== ========== =========
89
90
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
For the quarter ended,
--------------------------------------------------------------------------------------------
Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 Dec 31
1996 1996 1996 1995 1995 1995 1995 1994
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except earnings per share and market prices)
Interest and dividend income $ 24,217 $ 23,253 $ 22,899 $ 21,728 $ 21,604 $ 22,052 $ 21,233 $ 18,898
Interest expense 15,079 14,248 13,899 13,187 13,140 13,453 12,859 10,771
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income 9,138 9,005 9,000 8,541 8,464 8,599 8,374 8,127
Provision for loan losses 1,078 78 78 66 60 60 60 60
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 8,060 8,927 8,922 8,475 8,404 8,539 8,314 8,067
Gain (loss) on sales of investments
and mortgage-backed and related
securities 35 (1) 1,678 1,599 1,196 1,193 265 (78)
Gain (loss) on sales of mortgage
loans held for sale, net 242 157 437 221 60 82 49 70
Other operating income 1,437 1,116 2,054 1,639 1,427 1,756 1,472 839
--------- --------- --------- --------- --------- --------- --------- ---------
Total other operating income 1,714 1,272 4,169 3,459 2,683 3,031 1,786 831
General and administrative expenses 11,561 6,972 6,992 6,097 5,810 5,851 5,583 5,435
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income tax expense (1,787) 3,227 6,099 5,837 5,277 5,719 4,517 3,463
Income tax expense (1,357) 683 1,823 1,762 1,623 1,935 1,541 1,178
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $ (430) $ 2,544 $ 4,276 $ 4,075 $ 3,654 $ 3,784 $ 2,976 $ 2,285
========= ========= ========= ========= ========= ========= ========= =========
Earnings per share (1) $ (0.08) $ 0.45 $ 0.73 $ 0.68 $ 0.61 $ 0.62 $ 0.49 $ 0.38
Weighted average common stock
equivalents 5,532,790 5,673,282 5,878,562 5,973,557 5,983,752 6,085,623 6,055,149 6,041,422
Market Information:
High $ 26.25 $ 28.00 $ 28.00 $ 25.50 $ 22.75 $ 20.25 $ 18.50 $ 17.25
Low 24.75 24.00 22.25 22.25 20.00 17.75 13.75 13.50
Close 25.75 25.00 27.25 23.25 22.75 20.00 18.25 14.00
(1) Earnings per share of common stock have been determined by dividing net
income for the period by the weighted average number of shares of common stock
and common stock equivalents outstanding during the period.
The quarter ended September 30, 1996 contained the effect of a one-time
assessment from the Federal Deposit Insurance Corporation for recapitalization
of the Savings Association Insurance Fund. The assessment was $4.2 million
with an after-tax effect on net income of $2.5 million or $0.45 per share for
the quarter. The quarter also contained the effect of an additional provision
for loan losses of $1.0 million with an after-tax effect of $600,000 or $0.11
per share for the quarter, to provide for potential losses on a pool of
sub-prime auto loans.
On October 25, 1996, the Company declared a dividend of $0.12 per share on the
Company's common stock for the quarter ended September 30, 1996, which was the
fifth cash dividend payment since the Company became a publicly-held company in
June 1993. The dividend was payable on November 22, 1996 to shareholders of
record as of November 8, 1996. At November 29, 1996, the closing price of the
Company's common stock was $27.00 per share.
90
91
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors is included under
the heading "Election of Directors" in the Company's definitive Proxy
Statement, dated December 16, 1996, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for January 22, 1997, which is incorporated
herein by reference. Information concerning executive officers who are not
directors is contained in Part I of this Form 10-K pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the heading "Compensation
of Executive Officers and Directors" in the Company's definitive Proxy
Statement, dated December 16, 1996, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for January 22, 1997, which is incorporated
herein by reference. However, the information set forth under the heading
"Compensation Committee Report" in the Company's definitive Proxy Statement
dated December 16, 1996, shall not be deemed to be incorporated by reference by
any general statement into any filing and shall not otherwise be deemed to be
filed under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is included under the heading "Security
Ownership of Certain Beneficial Owners" in the Company's definitive Proxy
Statement, dated December 16, 1996, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for January 22, 1997, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is included under the heading "Indebtedness
of Management and Certain Transactions" in the Company's definitive Proxy
Statement, dated December 16, 1996, relating to the 1997 Annual Meeting of
Shareholders currently scheduled for January 22, 1997, which is incorporated
herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The following financial statements and financial statement schedules are
included under a separate caption "Financial Statements and Supplementary Data"
in Part II, Item 8 hereof and are incorporated herein by reference:
Consolidated Statements of Financial Condition at September 30, 1996
and 1995
Consolidated Statements of Income for Years Ended September 30, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity for Years Ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for Years Ended September 30,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
91
92
(A) (2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Consolidated Financial Statements.
(A)(3) EXHIBITS:
3.1 Articles of Incorporation of Registrant (1)
3.2 Amended By-laws of Registrant (2)
3.3 Stock Charter of St. Francis Bank, F.S.B. (1)
3.4 By-laws of St. Francis Bank, F.S.B. (1)
10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan (1)
10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan (1)
10.3 St. Francis Bank, F.S.B. Employee Stock Ownership Plan (1)
10.4 Credit Agreement by and between St. Francis Bank, F.S.B. Employee Stock Ownership
Trust and Registrant (1)
10.5 St. Francis Bank, F.S.B. Management Recognition and Retention Plan and Trust (1)
10.6 St. Francis Capital Corporation 1993 Incentive Stock Option Plan (1)
10.7 St. Francis Capital Corporation 1993 Stock Option Plan for Outside Directors (1)
10.8 1980 Deferred Compensation Agreement-John C. Schlosser (1)
10.9 1986 Deferred Compensation Agreement-John C. Schlosser (1)
10.10 1986 Deferred Compensation Agreement-Thomas R. Perz (1)
10.11 1987 Deferred Compensation Agreement-Thomas R. Perz (1)
10.12 1988 Deferred Compensation Agreement-Edward W. Mentzer (1)
10.13 1992 Consulting, Non-Competition and Supplemental Compensation Agreement-John C. Schlosser (1)
10.14 1993 Employment Agreement-John C. Schlosser (1)
10.15 1993 Employment Agreement-Thomas R. Perz (1)
10.16 1993 Employment Agreement-Brian T. Kaye (1)
10.17 1993 Employment Agreement-Bruce R. Sherman (1)
10.18 1994 Employment Agreement-James C. Hazzard (2)
10.19 1996 Employment Agreement-Thomas R. Perz (3)
10.20 1996 Employment Agreement-Brian T. Kaye (3)
10.21 1996 Employment Agreement-Bruce R. Sherman (3)
10.22 1996 Employment Agreement-James C. Hazzard (3)
10.23 1996 Employment Agreement-John C. Schlosser (3)
11.1 Statement regarding computation of per share earnings See footnote (13) in Part II Item 8
13.1 1996 Summary Annual Report to Shareholders (4)
21.1 Subsidiaries of the Registrant See "Subsidiaries" in Part I Item I
23.1 Consent of KPMG Peat Marwick LLP (3)
24.1 Powers of Attorney for certain officers and directors (1)
27.1 Financial Data Schedule (3)
99.1 Appraisal Agreement with R.P. Financial, Inc. (1)
99.2 Appraisal Report of R.P. Financial, Inc. (1)
99.3 Stock Order Form for Subscription and Community Offerings (1)
99.4 Proxy Statement for Special Meeting of Members of St. Francis Bank, F.S.B. (1)
99.5 Marketing Materials (1)
99.6 Proxy Statement for 1997 Annual Meeting of Shareholders (3)
(1) Incorporated by reference to exhibits filed with the Registrant's Form S-1
Registration Statement declared effective on April 22, 1993. (Registration
Number 33-58680).
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
(3) Filed herewith.
(4) Filed in paper format pursuant to Rule 101(b)(1) of Regulation S-T.
92
93
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three months ended
September 30, 1996.
(C) EXHIBITS
Reference is made to the exhibit index set forth above at (a)(3).
(D) FINANCIAL STATEMENT SCHEDULES
Reference is made to the disclosure set forth above at (a)(1 and 2).
93
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
By:/s/ John C. Schlosser
----------------------
John C. Schlosser, President and
Chief Executive Officer
(Duly Authorized Representative)
Date:December 11, 1996
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the dates indicated.
/s/ John C. Schlosser /s/ Jon D. Sorenson
- ----------------------------- --------------------------------
John C. Schlosser, President, Jon D. Sorenson, Chief Financial
Chief Executive Officer and Officer and Treasurer
Director (Principal Executive (Principal Financial and
Accounting Officer)
Date: December 11, 1996 Date: December 11, 1996
----------------- -----------------
/s/ Thomas R. Perz
- ----------------------------- --------------------------------
Thomas R. Perz, Vice President William F. Double, Director
and Director
Date: December 11, 1996 Date: December 11, 1996
----------------- -----------------
/s/ Rudolph T. Hoppe /s/ Edward W. Mentzer
- ----------------------------- --------------------------------
Rudolph T. Hoppe, Director Edward W. Mentzer, Director
Date: December 11, 1996 Date: December 11, 1996
----------------- -----------------
/s/ James C. Hazzard /s/ Edmund O. Templeton
- ----------------------------- --------------------------------
James C. Hazzard, Director Edmund O. Templeton, Director
Date: December 11, 1996 Date: December 11, 1996
----------------- -----------------
/s/ David J. Drury
- -----------------------------
David J. Drury, Director
Date: December 11, 1996
-----------------
94