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<SEC-DOCUMENT>0000912057-97-020269.txt : 19970616
<SEC-HEADER>0000912057-97-020269.hdr.sgml : 19970616
ACCESSION NUMBER: 0000912057-97-020269
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19970331
FILED AS OF DATE: 19970613
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ANCHOR BANCORP WISCONSIN INC
CENTRAL INDEX KEY: 0000885322
STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036]
IRS NUMBER: 391726871
STATE OF INCORPORATION: WI
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-20006
FILM NUMBER: 97623501
BUSINESS ADDRESS:
STREET 1: 25 WEST MAIN ST
CITY: MADISON
STATE: WI
ZIP: 53703
BUSINESS PHONE: 6082528700
MAIL ADDRESS:
STREET 1: PO BOX 7933
CITY: MADISON
STATE: WI
ZIP: 53707-7933
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended March 31, 1997
--------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________________ to ________________
Commission File Number 0-20006
ANCHOR BANCORP WISCONSIN INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1726871
- ---------------------------------- --------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
25 West Main Street
Madison, Wisconsin 53703
-------------------------
(Address of principal executive office)
Registrant's telephone number, including area code (608) 252-8700
--------------
Securities registered pursuant to Section 12 (b) of the Act
Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $.10 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.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or 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 the Form 10-K or any amendment to this
Form 10-K. /X/
Based upon the $43.125 closing price of the registrant's common stock as of
May 16, 1997, the aggregate market value of the 4,527,117 shares of the
registrant's common stock deemed to be held by non-affiliates of the registrant
was: $172.4 million. Although directors and executive officers of the
registrant and certain of its employee benefit plans were assumed to be
"affiliates" of the registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
As of June 6, 1997, 4,527,117 shares of the registrant's common stock were
outstanding.
Documents Incorporated by Reference
Proxy Statement for the Annual Meeting of Stockholders to be held on July
22, 1997 (Part III, Items 10 to 13)
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Anchor BanCorp Wisconsin Inc. (the "Corporation") is a registered savings
and loan holding company incorporated under the laws of the State of Wisconsin
and is engaged in the savings and loan business through its wholly-owned banking
subsidiary, AnchorBank, S.S.B. (the "Bank"). On July 15, 1992, the Bank
converted from a state-chartered mutual savings institution to a stock savings
institution. As part of the conversion, the Corporation acquired all of the
outstanding common stock of the Bank. The Corporation also has a non-banking
subsidiary, Investment Directions, Inc. ("IDI"), which invests in limited
partnerships. IDI created a subsidiary in March 1997, Nevada Investment
Directions, Inc. ("NIDI"), which also invest in limited partnerships. NIDI is
organized in the state of Nevada.
The Bank was organized in 1919 as a Wisconsin-chartered savings
institution. As a state-chartered savings institution, the Bank's deposits are
insured up to the maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Home Loan Bank of
Chicago ("FHLB"), and is regulated by the Office of Thrift Supervision ("OTS"),
the FDIC and the Wisconsin Commissioner of Savings and Loan ("Commissioner").
The Corporation is subject to the periodic reporting requirements of the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended ("Exchange Act"). The Bank is also regulated by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") relating to
reserves required to be maintained against deposits and certain other matters.
See "Regulation."
The Bank blends an interest in the consumer and small business markets with
the willingness to expand its numerous checking, savings and lending programs to
meet customers' changing financial needs. The Bank offers checking, savings,
money market accounts, mortgages, home equity and other consumer loans, student
loans, credit cards, annuities and related consumer financial services. The
Bank also offers banking services to businesses, including checking accounts,
lines of credit, secured loans and commercial real estate loans.
The Bank has four wholly-owned subsidiaries. Anchor Insurance Services,
Inc. ("AIS") offers a full line of insurance products, securities and annuities
to the Bank's customers and other members of the general public. ADPC II, LLC
("ADPC II") was created in September 1996 to improve and manage a multi-family
property acquired by foreclosure. ADPC Corporation ("ADPC") holds and develops
certain of the Bank's foreclosed properties. Anchor Investment Corporation
("AIC") is an operating subsidiary which is located in and formed under the laws
of the State of Nevada. AIC was formed for the purpose of managing a portion
the Bank's investment portfolio (primarily mortgage-related securities). All of
the Bank's subsidiaries, except AIC, are Wisconsin corporations.
MARKET AREA
The Bank's primary market area consists of the metropolitan area of
Madison, Wisconsin, the suburban communities of Dane County, Wisconsin and
southern Wisconsin as well as contiguous counties in Iowa and Illinois. As of
March 31, 1997, the Bank conducted business from its headquarters and main
office in Madison, Wisconsin, 33 other full-service offices and two loan
origination offices.
The economy of Dane County is characterized by diversified industries,
major medical facilities, state, federal and university governmental bodies, as
well as a sound agricultural base. It is estimated that the population of Dane
County increased by 13.5% from 1980 to 1990, which was more than three times the
percentage increase for the entire State of Wisconsin.
1
<PAGE>
Madison is one of a few cities in the United States which houses both the
State capitol and the major university of the state university system--The
University of Wisconsin-Madison. In addition, Madison Area Technical College, a
part of the highly regarded Wisconsin Vocational Education System, Edgewood
College, a Catholic liberal arts college and Madison Junior College of Business,
a nationally-recognized business college, are located in the Madison
metropolitan area. Major non-governmental employers in Dane County include Cuna
Mutual Insurance Company, American Family Insurance Company and Oscar Mayer
Foods Corporation.
COMPETITION
The Bank is subject to extensive competition from other savings
institutions as well as commercial banks and credit unions in both attracting
and retaining deposits and in real estate and other lending activities.
Competition for deposits also comes from money market funds, bond funds,
corporate debt and government securities. Competition for the origination of
real estate loans comes principally from other savings institutions, commercial
banks and mortgage banking companies. Competition for consumer loans is
primarily from other savings institutions, commercial banks, automobile
manufacturers and their financing subsidiaries, consumer finance companies and
credit unions.
The principal factors which are used to attract deposit accounts and
distinguish one financial institution from another include rates of return,
types of accounts, service fees, convenience of office locations, and other
services. The primary factors in competing for loans are interest rates, loan
fee charges, timeliness and quality of service to the borrower.
FINANCIAL RATIOS
The following table sets forth selected financial ratios of the corporation's
operations for the fiscal years indicated.
Year Ended March 31,
-----------------------------
1997 1996 1995
-----------------------------
Return on average assets 0.76% 0.88% 1.00%
Return on average equity 11.78 12.13 12.89
Average equity to average assets 6.42 7.24 7.41
Dividend payout ratio 16.67 11.76 8.58
Net interest margin 3.12 3.18 3.60
LENDING ACTIVITIES
GENERAL. At March 31, 1997, the Corporation's net loans held for
investment totalled $1.461 billion, representing approximately 78% of its $1.885
billion of total assets at that date. Approximately 77% of the Corporation's
total loans held for investment at March 31, 1997 were secured by first liens on
real estate.
The Bank's primary lending emphasis is on the origination of single-family
residential loans secured by properties located primarily in Wisconsin, with
adjustable-rate loans generally being originated for inclusion in the Bank's
loan portfolio and fixed-rate loans generally being originated for sale into the
secondary market. In addition, in order to increase the yield and interest rate
sensitivity of its portfolio, the Bank also originates commercial real estate,
multi-family, construction, consumer and commercial business loans in its
primary market area.
2
<PAGE>
The non-real estate loans originated by the Bank consist of a variety of
consumer loans and commercial business loans. At March 31, 1997, the
Corporation's total loans held for investment included $323.5 million of
consumer loans and $29.0 million of commercial business loans.
LOAN PORTFOLIO COMPOSITION. The table on the following page presents
information concerning the composition of the Corporation's consolidated loans
held for investment at the dates indicated.
3
<PAGE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-----------------------------------------------------------------------------------------------
(Dollars in Thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 731,732 47.44% $ 745,170 51.97% $ 716,212 55.83% $618,647 55.25% $493,105 50.35%
Multi-family residential 164,729 10.68 162,432 11.33 141,401 11.02 142,750 12.75 173,979 17.76
Commercial real estate 171,186 11.10 139,918 9.76 123,438 9.62 129,196 11.54 121,419 12.40
Construction 106,536 6.91 77,187 5.38 66,519 5.18 50,691 4.53 34,699 3.54
Land 15,730 1.02 21,077 1.47 13,644 1.06 8,280 0.74 4,223 0.43
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total mortgage loans 1,189,913 77.15 1,145,784 79.90 1,061,214 82.72 949,564 84.81 827,425 84.48
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Consumer loans:
Second mortgage and home equity 176,348 11.43 140,302 9.78 111,725 8.71 84,922 7.58 68,689 7.01
Education 112,420 7.29 88,674 6.18 69,264 5.40 52,289 4.67 48,457 4.95
Other 34,682 2.25 28,481 1.99 18,997 1.48 13,587 1.21 13,598 1.39
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total consumer loans 323,450 20.97 257,457 17.95 199,986 15.59 150,798 13.46 130,744 13.35
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Commercial business loans:
Loans 29,012 1.88 30,352 2.12 20,272 1.58 16,195 1.45 13,378 1.37
Lease receivables 10 0.00 363 0.03 1,467 0.11 3,154 0.28 7,859 0.80
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total commercial business loans 29,022 1.88 30,715 2.14 21,739 1.69 19,349 1.73 21,237 2.17
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross loans receivable 1,542,385 100.00% 1,433,956 100.00% 1,282,939 100.00% 1,119,711 100.00% 979,406 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Contras to loans:
Undisbursed loan proceeds (54,002) (46,493) (25,980) (27,950) (18,465)
Allowance for loan losses (22,750) (22,807) (22,429) (22,119) (18,437)
Unearned loan fees (3,373) (2,453) (2,000) (1,966) (1,291)
Discount on loans purchased (748) (1,005) (1,151) (195) (379)
Unearned interest (89) (118) (272) (536) (1,640)
--------- ---------- ---------- ---------- ----------
Total contras to loans (80,962) (72,876) (51,832) (52,766) (40,212)
--------- ---------- ---------- ---------- ----------
Loans receivable, net $1,461,423 $1,361,080 $1,231,107 $1,066,945 $939,194
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
The following table shows, at March 31, 1997, the scheduled contractual
maturities of the Corporation's consolidated gross loans held for investment, as
well as the dollar amount of such loans which are scheduled to mature after one
year which have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
MULTI-FAMILY
RESIDENTIAL
AND
SINGLE-FAMILY COMMERCIAL CONSTRUCTION COMMERCIAL
RESIDENTIAL REAL ESTATE AND LAND CONSUMER BUSINESS
LOANS LOANS LOANS LOANS LOANS
----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
In one year or less $ 31,759 $ 49,440 $ 100,313 $ 48,601 $ 12,593
After one year through
five years 94,664 46,323 4,106 140,567 12,217
After five years 605,309 240,152 17,847 134,282 4,212
--------- ---------- --------- ---------- ---------
$ 731,732 $ 335,915 $ 122,266 $ 323,450 $ 29,022
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
Interest rate terms on amounts
due after one year:
Fixed $ 90,290 $ 35,979 $ 670 $ 150,616 $ 16,240
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
Adjustable $ 609,683 $ 250,496 $ 21,283 $ 124,233 $ 189
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
</TABLE>
SINGLE-FAMILY RESIDENTIAL LOANS. Historically, savings associations, such
as the Bank, have concentrated their lending activities on the origination of
loans secured primarily by first mortgage liens on owner-occupied, existing
single-family residences. At March 31, 1997, $731.7 million of the Bank's total
loans held for investment consisted of single-family residential loans,
substantially all of which are conventional loans, which are neither insured or
guaranteed by a federal or state agency.
The Bank has emphasized single-family residential loans which provide for
periodic adjustments to the interest rate since the early 1980s. The
adjustable-rate loans currently emphasized by the Bank have up to 30-year
maturities and terms which permit the Bank to annually increase or decrease the
rate on the loans at its discretion, subject to a limit of 1% per adjustment and
an aggregate 5% adjustment over the life of the loan. The Bank also originates,
to a much lesser extent, adjustable-rate loans with terms which provide for
annual adjustment to the interest rate in accordance with changes in a
designated index, which generally are subject to a limit of 2% per adjustment
and an aggregate 5% adjustment over the life of the loan.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding fixed-rate loans in an increasing interest rate
environment. At March 31, 1997, approximately $624.2 million or 85.3% of the
Corporation's permanent single-family residential loans held for investment
consisted of loans with adjustable interest rates.
The Bank continues to originate long-term, fixed-rate mortgage loans,
including conventional, Federal Housing Administration ("FHA"), Federal Veterans
Administration ("VA") and Wisconsin Housing and Economic Development Authority
("WHEDA") loans, in order to provide a full range of products to its customers.
The Bank generally sells current production of these loans with terms of 20
years or more to the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA"), WHEDA and other institutional
5
<PAGE>
investors, while keeping some of the 15-year term loans in its portfolio. The
Bank retains the right to service substantially all loans that it sells.
At March 31, 1997, approximately $107.5 million or 14.7% of the permanent
single-family residential loans in the Corporation's loans held for investment
consisted of loans which provide for fixed rates of interest. Almost 60% of
these loans have original terms of 15 years or less. Although these loans
generally provide for repayments of principal over a fixed period of 10 to 30
years, it is the Bank's experience that because of prepayments and due-on-sale
clauses, such loans generally remain outstanding for a substantially shorter
period of time.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE. During the 1980s, the
Bank emphasized the origination and purchase of loans secured by multi-family
residences and commercial real estate located within and outside of Wisconsin in
order to diversify the type and geographic location of its loan portfolio. Such
loans also were emphasized because they generally have adjustable rates and
shorter terms than single-family residential loans, thus increasing the
sensitivity of the loan portfolio to changes in interest rates, as well as
providing higher fees and rates than single-family residential loans. At March
31, 1997, the Corporation had $164.7 million of loans secured by multi-family
residential real estate and $171.2 million of loans secured by commercial real
estate. The Bank generally limits the origination of such loans to its own
primary market area, except to facilitate the sale or resolution of certain
remaining foreclosed properties outside its market area.
The Bank's multi-family residential loans are primarily secured by
apartment buildings and commercial real estate loans are primarily secured by
office buildings, industrial buildings, warehouses, small retail shopping
centers and various special purpose properties, including motels, restaurants
and nursing homes.
Although terms vary, multi-family residential and commercial real estate
loans generally have maturities of 15 to 30 years, as well as balloon payments,
and terms which provide that the interest rates thereon may be adjusted annually
at the Bank's discretion, subject to an initial fixed-rate for a one to three
year period and an annual limit of 1% to 1.5% per adjustment, with no limit on
the amount of such adjustments over the life of the loan.
Multi-family residential and commercial real estate lending is generally
considered to involve a higher degree of risk than single-family residential
lending. Such lending typically involves large loan balances concentrated in a
single borrower or group of related borrowers. In addition, the payment
experience on loans secured by existing income-producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions in real estate
markets or in the economy generally. The Bank generally attempts to limit these
risks by, among other things, adopting what management believes are conservative
underwriting standards and lending primarily in its market area.
CONSTRUCTION AND LAND LOANS. Historically, the Bank has been an active
originator of loans to construct residential and commercial properties
("construction loans"), and to a lesser extent, loans to acquire and develop
real estate for the construction of such properties ("land loans"). At March
31, 1997, construction loans amounted to $106.5 million of the Corporation's
total loans held for investment. Of this amount, $44.3 million and $27.2
million was represented by loans for the construction of single-family and
multi-family residences, respectively. Land loans amounted to $15.7 million at
March 31, 1997.
The Bank's construction loans generally have terms of six to 12 months,
fixed interest rates and fees which are due at the time of origination and at
maturity if the Bank does not originate the permanent financing on the
constructed property. Loan proceeds are disbursed in increments as construction
progresses and as inspections by the Bank's in-house appraiser warrant. Land
acquisition and development loans generally have the same terms as construction
loans, but may have longer maturities than such loans.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, owner-occupied real estate
because of the uncertainties of construction, including the possibility of costs
exceeding the initial estimates and the need to obtain a tenant or purchaser if
the property will not
6
<PAGE>
be owner-occupied, which similarly can be affected by adverse conditions in real
estate markets or in the general economy.
CONSUMER LOANS. The Bank offers consumer loans in order to provide a full
range of financial services to its customers. At March 31, 1997, $323.5 million
of the Corporation's consolidated total loans held for investment consisted of
consumer loans. Consumer loans generally have shorter terms and higher interest
rates than mortgage loans but generally involve more risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. These risks are not as prevalent in the case of the
Bank's consumer loan portfolio, however, because of the high percentage of
insured home equity loans which are underwritten in a manner such that they
result in a lending risk which is substantially similar to single-family
residential loans and secured education loans
The largest component of the Corporation's consumer loan portfolio are
second mortgage and home equity loans, which amounted to $176.3 million or 54.5%
of consumer loans at March 31, 1997. The Bank has placed additional emphasis on
its home equity loan program in recent years to respond to changes in federal
income tax laws. The primary home equity loan product has an adjustable
interest rate which is linked to the prime interest rate and is secured by a
mortgage, either a primary or a junior lien, on the borrower's residence. A
fixed-rate home equity product is also offered.
Due to the Bank's proximity to the University of Wisconsin, approximately
$112.4 million or 34.8% of its consumer loans at March 31, 1997 consisted of
education loans, which generally are made for a maximum of $2,500 per year for
undergraduate studies and $5,000 per year for graduate studies and are either
due within six months of graduation or repaid on an installment basis after
graduation. Education loans generally have interest rates which adjust monthly
in accordance with a designated index. Both the principal amount of an
education loan and interest thereon generally are guaranteed by the Great Lakes
Higher Education Corporation, which generally obtains reinsurance of its
obligations from the U.S. Department of Education. Education loans may be sold
to the Student Loan Marketing Association or to other investors. The Bank sold
$1.4 million of these loans during fiscal 1997.
The remainder of the Corporation's consumer loan portfolio consists of
deposit account secured loans and loans which have been made for a variety of
consumer purposes. These include credit extended through credit cards issued by
the Bank pursuant to an agency arrangement under which the Bank generally is
responsible for 45% of the profit or losses from such activities. At March 31,
1997, the Bank's approved credit card lines and the outstanding credit pursuant
to such lines amounted to $19.6 million and $2.9 million, respectively.
COMMERCIAL BUSINESS LOANS AND LEASES. The Bank originates loans for
commercial, corporate and business purposes, including issuing letters of
credit. At March 31, 1997, commercial business loans amounted to $29.0 million
or 1.9% of the Corporation's total loans held for investment. The Corporation's
commercial business loan portfolio is comprised of loans for a variety of
purposes and generally is secured by various equipment, machinery and other
corporate assets. Commercial business loans generally have terms of five years
or less and interest rates which float in accordance with a designated prime
lending rate. Substantially all of such loans are secured and backed by the
personal guarantees of the individuals of the business.
FEE INCOME FROM LENDING ACTIVITIES. Loan origination and commitment fees
and certain direct loan origination costs are being deferred and the net amounts
amortized as an adjustment of the related loan's yield.
The Bank also receives other fees and charges relating to existing mortgage
loans, which include prepayment penalties, late charges and fees collected in
connection with a change in borrower or other loan modifications. Other types
of loans also generate fee income for the Bank. These include annual fees
assessed on credit card accounts, transactional fees relating to credit card
usage and late charges on consumer loans.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Bank's loan originations come
from a number of sources. Residential mortgage loan originations are
attributable primarily to depositors, walk-in customers, referrals from real
estate brokers and builders and direct solicitations. Commercial real estate
loan originations are obtained by direct
7
<PAGE>
solicitations and referrals. Consumer loans are originated from walk-in
customers, existing depositors and mortgagors and direct solicitation. Student
loans are originated from solicitation of eligible students and from walk-in
customers.
Applications for all types of loans are obtained at the Bank's five
regional lending offices, certain of its branch offices and two loan origination
facilities. Loans may be approved by members of the Loan Committee within
designated limits. Depending on the type and amount of the loans, one or more
signatures of the members of the Senior Loan Committee also may be required. At
least three signatures of members of the Senior Loan Committee are required to
approve (i) all loans over $250,000 and all loans secured by properties over
eight units and (ii) loans over $750,000 and up to $1.0 million, provided that
the President is one of the approving members. Loans in excess of $1.0 million
may be committed by the Senior Loan Committee, subject in all cases to the prior
approval of the Board of Directors of the Bank.
The Bank's general policy is to lend up to 80% of the appraised value of
the property securing a single-family residential loan (referred to as the
loan-to-value ratio). The Bank will lend more than 80% of the appraised value of
the property, but generally will require that the borrower obtain private
mortgage insurance in an amount intended to reduce the Bank's exposure to 80% or
less of the appraised value of the underlying property. At March 31, 1997, the
Bank had approximately $11.9 million of loans which had a loan-to-value ratio of
greater than 80% and did not have private mortgage insurance for the portion of
the loan above such amount.
Property appraisals on the real estate and improvements securing the Bank's
single-family residential loans are made by the Bank's staff or independent
appraisers approved by the Bank's Board of Directors. Appraisals are performed
in accordance with federal regulations and policies.
The Bank's underwriting criteria generally require that multi-family
residential and commercial real estate loans have loan-to-value ratios which
amount to 80% or less and debt coverage ratios of at least 110%. The Bank also
generally obtains personal guarantees on its multi-family residential and
commercial real estate loans from the principals of the borrowers, as well as
appraisals of the security property from independent appraisal firms.
The portfolio of commercial and multi-family residential loans is reviewed
on a continuing basis (annually for most loans of $500,000 or more) to identify
any potential risks that exist in regard to the property management, financial
criteria of the loan, operating performance, competitive marketplace and
collateral valuation. The credit analysis function of the Bank is responsible
for identifying and reporting credit risk quantified through a loan rating
system and making recommendations to mitigate credit risk in the portfolio.
These and other underwriting standards are documented in written policy
statements, which are periodically updated, and approved by the Bank's Board of
Directors.
The Bank generally obtains title insurance policies on most first mortgage
real estate loans it originates. If title insurance is not obtained or is
unavailable, the Bank obtains an abstract of title and title opinion. Borrowers
must obtain hazard insurance prior to closing and, when required by the United
States Department of Housing and Urban Development, flood insurance. Borrowers
may be required to advance funds, with each monthly payment of principal and
interest, to a loan escrow account from which the Bank makes disbursements for
items such as real estate taxes, hazard insurance premiums and mortgage
insurance premiums as they become due.
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on secured properties. Certain states
may also impose liens with higher priorities than first mortgages on properties
to recover funds used in such efforts. Although the foregoing environmental
risks are more usually associated with industrial and commercial loans,
environmental risks may be substantial for residential lenders, like the Bank,
since environmental contamination may render the secured property unsuitable for
residential use. In addition, the value of residential properties may become
substantially diminished by contamination of nearby properties. In accordance
with the guidelines of FNMA and FHLMC, appraisals for single-family homes on
which the Bank lends include comments on environmental influences and
conditions. The Bank attempts to control its exposure to environmental risks
with respect to loans secured by larger properties by monitoring available
information on hazardous waste
8
<PAGE>
disposal sites and requiring environmental inspections of such properties prior
to closing the loan. No assurance can be given, however, that the value of
properties securing loans in the Bank's portfolio will not be adversely affected
by the presence of hazardous materials or that future changes in federal or
state laws will not increase the Bank's exposure to liability for environmental
cleanup.
The Bank has been actively involved in the secondary market since the
mid-1980s and generally originates single-family residential loans under terms,
conditions and documentation which permit sale to FHLMC, FNMA and other
investors in the secondary market, such as WHEDA, the Wisconsin Department of
Veterans Affairs and other financial institutions. The Bank sells substantially
all of the fixed-rate, single-family residential loans with terms over 15 years
it originates in order to decrease the amount of such loans in its loan
portfolio, as well as all of the FHA and VA loans originated. The Bank's sales
are usually made through forward sales commitments. The Bank attempts to limit
any interest rate risk created by forward commitments by limiting the number of
days between the commitment and closing, charging fees for commitments, and
limiting the amounts of its uncovered commitments at any one time. Forward
commitments to cover closed loans and loans with rate locks to customers range
from 70% to 90% of committed amounts. The Bank also periodically has used its
loans to securitize mortgage-backed securities.
The Bank generally continues to collect payments on conventional loans
which it sells to others as they become due, to inspect the security property,
to make certain insurance and tax advances on behalf of borrowers and to
otherwise service such loans. The Bank recognizes a servicing fee when the
related loan payments are received. At March 31, 1997, the Bank was servicing
$1.1 billion of loans for others. The Bank sells all of the FHA/VA loans
originated by it on a servicing-released basis.
Although the Bank purchased larger multi-family residential and commercial
real estate loans secured by properties located outside of its market area
during the early to mid-1980s in order to obtain assets with higher yields and
shorter maturities than are generally provided by single-family residential
loans, the Bank in more recent years generally has not been an active purchaser
of these types of loans because of sufficient loan demand in its market area.
Servicing of loans or loan participations purchased by the Bank is performed by
the seller, with a portion of the interest being paid by the borrower retained
by the seller to cover servicing costs. At March 31, 1997, approximately $25.4
million of mortgage loans were being serviced for the Bank by others.
9
<PAGE>
The following table shows the Corporation's consolidated total loans
originated, purchased, sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1997 1996 1995
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of year(1) $ 1,447,924 $ 1,285,903 $ 1,136,253
Loans originated for investment(2):
Single-family residential 191,666 159,525 152,781
Multi-family residential 24,713 15,792 14,419
Commercial real estate 63,600 38,440 19,780
Construction and land 166,533 116,556 102,123
Consumer 190,584 141,820 114,825
Commercial business 17,715 23,913 11,094
----------- ----------- -----------
Total originations 654,811 496,046 415,022
----------- ----------- -----------
Loans purchased for investment:
Single-family residential 155 2,480 9,173
Multi-family residential 120 4,500 252
Commercial real estate 464 939 1,440
American Equity purchase - 85,244 -
----------- ----------- -----------
Total purchases 739 93,163 10,865
----------- ----------- -----------
Total originations and purchases 655,550 589,209 425,887
Repayments (420,698) (338,847) (249,619)
Transfers of loans to held for sale (126,423) (99,345) (13,040)
----------- ----------- -----------
Net activity in loans held for investment 108,429 151,017 163,228
----------- ----------- -----------
Loans originated for sale(2):
Single-family residential 96,996 180,055 81,711
American Equity purchase - 5,969 -
Transfers of loans from held for investment 126,423 99,345 13,040
Sales of loans (177,101) (177,593) (108,329)
Loans converted into mortgage-backed
securities (54,938) (96,772) -
----------- ----------- -----------
Net activity in loans held for sale (8,620) 11,004 (13,578)
----------- ----------- -----------
Gross loans receivable at end of year $ 1,547,733 $ 1,447,924 $ 1,285,903
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(1) Includes loans held for sale and loans held for investment.
(2) Refinancings of loans held in the Corporations's consolidated loan
portfolio amounted to $79.8 million, $99.1 million and $27.4 million during
the years ended March 31, 1997, 1996 and 1995, respectively.
DELINQUENCY PROCEDURES. Delinquent and problem loans are a normal part of
any lending business. When a borrower fails to make a required payment by the
15th day after which the payment is due, the loan is considered delinquent and
internal collection procedures generally are instituted. The borrower is
contacted to determine the reason for the delinquency and attempts are made to
cure the loan. In most cases, deficiencies are cured promptly. The Bank
regularly reviews the loan status, the condition of the property, and
circumstances of the borrower. Based upon the results of its review, the Bank
may negotiate and accept a repayment program with the borrower, accept a
voluntary deed in lieu of foreclosure or, when deemed necessary, initiate
foreclosure proceedings.
10
<PAGE>
A decision as to whether and when to initiate foreclosure proceedings is
based upon such factors as the amount of the outstanding loan in relation to the
original indebtedness, the extent of delinquency and the borrower's ability and
willingness to cooperate in curing the deficiencies. If foreclosed on, the
property is sold at a public sale and the Bank will generally bid an amount
reasonably equivalent to the lower of the fair value of the foreclosed property
or the amount of judgment due the Bank. A judgment of foreclosure for
residential mortgage loans will normally provide for the recovery of all sums
advanced by the mortgagee including, but not limited to, insurance, repairs,
taxes, appraisals, post-judgment interest, attorneys' fees, costs and
disbursements.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as foreclosed property until it is sold. When
property is acquired, it is carried at the lower of carrying or estimated fair
value at the date of acquisition, with charge-offs, if any, charged to the
allowance for loan losses prior to transfer to foreclosed property. Upon
acquisition, all costs incurred in maintaining the property are expensed. Costs
relating to the development and improvement of the property, however, are
capitalized to the extent of fair value. Remaining gain or loss on the ultimate
disposal of the property is included in operations.
LOAN DELINQUENCIES. Loans are placed on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. As a matter of policy, the Bank does not accrue interest on
loans past due more than 90 days.
The interest income that would have been recorded during fiscal 1997 if the
Corporation's non-accrual loans at the end of the period had been current in
accordance with their terms during the period was $654,000. The amount of
interest income which was attributable to these loans and included in interest
income during fiscal 1997 was $358,000.
The following table sets forth information relating to delinquent loans of
the Corporation and their relation to the Corporation's total loans held for
investment at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
DAYS PAST DUE BALANCE LOANS BALANCE LOANS BALANCE LOANS
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 3,144 0.20% $ 5,776 0.40% $ 2,696 0.21%
60 to 89 days 909 0.06 789 0.06 1,099 0.09
90 days and over 6,795 0.44 1,890 0.13 2,493 0.19
--------- ------ -------- ------ -------- ------
Total $ 10,848 0.70% $ 8,455 0.59% $ 6,288 0.49%
--------- ------ -------- ------ -------- ------
--------- ------ -------- ------ -------- ------
</TABLE>
There was one non-accrual loan with a carrying value of $2.5 million at
March 31, 1997. The loan represented a 26% participation, involving two other
lenders, in a 48 unit condominium project in Bloomington, Minnesota. Voluntary
foreclosure is sought by the Bank. For additional discussion of the
Corporation's asset quality, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition-Non-
Performing Assets" in Item 7 included herewith. See also Notes 1 and 5 to the
Consolidated Financial Statements in Item 8 included herewith.
FORECLOSED PROPERTIES. Set forth below is a brief description of the
Corporation's foreclosed property which had a net carrying value of $1.0 million
or more at March 31, 1997.
11
<PAGE>
APARTMENT COMPLEX, ELM GROVE, WISCONSIN. At March 31, 1997, the
Corporation's foreclosed properties included a $2.2 million loan which is
secured by an apartment complex in Elm Grove, Wisconsin. Phase I studies of the
environmental impact indicated a need for a Phase II study based on the history
of the property which the Bank is pursuing. The Bank believes any cleanup
needed will be partially reimbursed by the Petroleum Environmental Cleanup Fund,
although there can be no assurance in this regard. The Bank also believes that
in the event of any remaining environmental cleanup liability that it will
pursue reimbursement from the adjoining land owner, which is believed to have
caused the contamination. As a result, the Bank does not anticipate incurring
any cost at this time.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
An asset classified loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. Another
category designated special mention also must be established and maintained for
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification as substandard, doubtful or loss but do
possess credit deficiencies or potential weaknesses deserving management's close
attention.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount.
Classified assets include non-performing assets plus other loans and
assets, including contingent liabilities, meeting the criteria for
classification. Non-performing assets include loans and foreclosed properties
which are not performing under all material contractual terms of the original
notes.
As of March 31, 1997, the Bank's classified assets consisted of $16.5
million of loans and foreclosed properties classified as substandard, net of
specific reserves, and no loans classified as special mention, doubtful or loss.
At March 31, 1996, substandard assets amounted to $12.6 million and no loans
were classified as special mention, doubtful or loss.
ALLOWANCE FOR LOSSES. A provision for losses on loans and foreclosed
properties is provided when a loss is probable and can be reasonably estimated.
The allowance is established by charges against operations in the period in
which those losses are identified.
The Bank establishes general allowances based on the amount and types of
loans in its loan portfolio and the amount of its classified assets. In
addition the Bank monitors and uses standards for these allowances which depend
on the nature of the classification and loan and location of the security
property.
Additional discussion on the allowance for losses at March 31, 1997 has
been presented as part of the discussion of Allowance for Loan and Foreclosure
Losses in Management's Discussion and Analysis, which is contained in in Item 7,
included herewith.
12
<PAGE>
SECURITIES - GENERAL
Management determines the appropriate classification of securities at the
time of purchase. Securities are classified as held to maturity when the
Corporation has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are carried at amortized cost. Securities are
classified as trading when the Corporation intends to actively buy and sell
securities in order to make a profit. Trading securities are carried at fair
value, with unrealized holding gains and losses included in the income
statement.
Securities not classified as held to maturity or trading are classified as
available for sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. For the year ended March 31, 1997 and 1996
balances of stockholders' equity were reduced by $5,000 and $82,000 (net of
$59,300 and $55,000 in deferred income taxes), respectively, to reflect the
change in net unrealized loss on holding securities classified as available for
sale. There were no securities designated as trading during the three years
ending March 31, 1997.
MORTGAGE-RELATED SECURITIES
The Corporation purchases mortgage-related securities to supplement loan
production and to provide collateral for borrowings. The Corporation invests in
mortgage-backed securities which are insured or guaranteed by FHLMC, FNMA, or
the Government National Mortgage Association ("GNMA") and in mortgage-derivative
securities backed by FHLMC, FNMA and GNMA mortgage-backed securities.
At March 31, 1997, the amortized cost of the Corporation's mortgage-backed
securities held to maturity amounted to $129.1 million and included $69.7
million, $55.7 million and $3.7 million which are insured or guaranteed by FNMA,
FHLMC and GNMA, respectively. The GNMA securities are the only adjustable-rate
securities included in securities held to maturity.
The fair value of the Corporation's mortgage-backed securities available
for sale amounted to $78.2 million at March 31, 1997, of which $11.4 million are
five- and seven-year balloon securities, $63.9 million are 15- and 30-year
securities and $2.9 million are adjustable-rate securities.
Mortgage-backed securities increase the quality of the Corporation's assets
by virtue of the insurance or guarantees of federal agencies that back them,
require less capital under risk-based regulatory capital requirements than
non-insured or guaranteed mortgage loans, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Corporation. At March 31, 1997, $19.1 million of the Corporation's
mortgage-backed securities available for sale and $22.5 million mortgage-backed
securities held to maturity were pledged to secure various obligations of the
Bank.
13
<PAGE>
The following table sets forth the activity in the Corporation's
mortgage-backed securities during the periods indicated.
YEAR ENDED MARCH 31,
--------------------------------------
1997 1996 1995
--------------------------------------
(In Thousands)
Mortgage-backed securities at
beginning of year (1) $ 186,005 $ 123,358 $ 145,687
Held to maturity:
Purchases 14,509 3,025 8,355
Transfers to available for sale - (90,376) -
Available for sale:
Purchases 2,057 5,531 2,497
Acquired in exchange of loans 54,938 96,772 -
Transfers from held to maturity - 90,376 -
Sales (5,617) (9,107) (888)
Repayments and other (44,593) (33,574) (32,293)
--------- --------- ---------
Mortgage-backed securities at
end of year (1) $ 207,299 $ 186,005 $ 123,358
--------- --------- ---------
--------- --------- ---------
(1) Includes mortgage-backed securities held to maturity and available for sale
and does not include
mortgage-derivative securities, discussed below.
Management believes that certain mortgage-derivative securities represent
an attractive alternative relative to other investments due to the wide variety
of maturity and repayment options available through such investments and due to
the limited credit risk associated with such investments. The Bank's
mortgage-derivative securities are made up of collateralized mortgage
obligations ("CMOs"), including CMOs which qualify as Real Estate Mortgage
Investment Conduits ("REMIC") under the Internal Revenue Code of 1986, as
amended ("Code") and are scheduled to mature within five years. At March 31,
1997, the amortized cost of the Corporation's mortgage-derivative securities
held to maturity amounted to $31.0 million. The fair value of the
mortgage-derivative securities available for sale amounted to $2.1 million at
the same date.
14
<PAGE>
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
1997, classified by term to maturity. The balance is at amortized cost for
held-to-maturity securities and at fair value for available-for-sale securities.
<TABLE>
<CAPTION>
ONE TO FIVE YEARS SIX TO TEN YEARS OVER TEN YEARS
---------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD TOTAL
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Available For Sale:
Mortgage-derivative securities $ 2,141 6.17% $ - 0.00% $ - 0.00% $ 2,141
Mortgage-backed securities 11,331 6.23 12,525 6.82 54,303 6.72 78,159
--------- ---- -------- ---- --------- ---- ----------
13,472 6.22 12,525 6.82 54,303 6.72 80,300
--------- ---- -------- ---- --------- ---- ----------
Held To Maturity:
Mortgage-derivative securities 27,667 6.27 3,294 6.68 - 0.00 30,961
Mortgage-backed securities 46,841 6.21 23,631 7.56 58,668 6.57 129,140
--------- ---- -------- ---- --------- ---- ----------
74,508 6.23 26,925 7.45 58,668 6.57 160,101
--------- ---- -------- ---- --------- ---- ----------
Mortgage-related securities $ 87,980 6.23% $ 39,450 7.25% $ 112,971 6.64% $ 240,401
--------- ---- -------- ---- --------- ---- ----------
--------- ---- -------- ---- --------- ---- ----------
</TABLE>
Due to repayments of the underlying loans, the actual maturities of
mortgage-related securities are expected to be substantially less than the
scheduled maturities.
For additional information regarding the Corporation's mortgage-related
securities, see the Corporation's Consolidated Financial Statements, including
note 3 thereto.
INVESTMENT SECURITIES
In addition to lending activities and investments in mortgage-related
securities, the Corporation conducts other investment activities on an ongoing
basis in order to diversify assets, limit interest rate risk and credit risk and
meet regulatory liquidity requirements. Investment decisions are made by
authorized officers in accordance with policies established by the respective
boards of directors.
The Corporation's policy does not permit investment in non-investment grade
bonds and permits investment in various types of liquid assets permissible for
the Bank under OTS regulations, which include U.S. Government obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to limitations on investment grade
securities, the Corporation also invests in corporate debt securities from time
to time.
15
<PAGE>
The table below sets forth information regarding the amortized cost and
fair values of the Corporation's investment securities at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available For Sale:
U.S. Government and federal
agency obligations $ 26,877 $ 26,517 $ 20,498 $ 20,333 $ 13,733 $ 13,347
Mutual fund 6,068 6,066 9,059 9,058 10,185 10,185
Corporate stock and other 2,685 2,986 791 850 - -
--------- --------- --------- --------- --------- ----------
35,630 35,569 30,348 30,241 23,918 23,532
--------- --------- --------- --------- --------- ----------
Held To Maturity:
U.S. Government and federal
agency obligations 7,947 7,890 2,500 2,503 - -
Certificates of deposit - - 96 96 100 100
--------- --------- --------- --------- --------- ----------
7,947 7,890 2,596 2,599 100 100
--------- --------- --------- --------- --------- ----------
Total investment securities $ 43,577 $ 43,459 $ 32,944 $ 32,840 $ 24,018 $ 23,632
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
</TABLE>
The following table shows the amortized cost, fair value and yield of the
Corporation's investment securities by contractual maturity at March 31, 1997.
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------------
Due in one year or less $ 13,197 $ 13,186 $ - $ -
Due after one year through five years 19,748 19,397 7,947 7,890
Corporate stock 2,685 2,986 - -
-------- -------- ------- -------
$ 35,630 $ 35,569 $ 7,947 $ 7,890
-------- -------- ------- -------
-------- -------- ------- -------
For additional information regarding the Corporation's investment
securities, see the Corporation's Consolidated Financial Statements, including
Note 2 thereto included in Item 8.
The Bank is required by the OTS to maintain liquid assets at minimum levels
which vary from time to time and which amounted to 5.0% at March 31, 1997. The
Bank's liquidity ratio was 9.23% as of March 31, 1997.
SOURCES OF FUNDS
GENERAL. Deposits are a major source of the Bank's funds for lending and
other investment activities. In addition to deposits, the Bank derives funds
from loan and mortgage-related securities principal repayments and prepayments,
maturities of investment securities, sales of loans and securities, interest
payments on loans and securities, advances from the FHLB and, from time to time,
repurchase agreements and other borrowings. Loan repayments and interest
payments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates, economic conditions and competition. Borrowings
16
<PAGE>
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They also may be used on a longer
term basis for general business purposes, including providing financing for
lending and other investment activities and asset/liability management
strategies.
DEPOSITS. The Bank's deposit products include passbook savings accounts,
demand accounts, NOW accounts, money market deposit accounts and certificates of
deposit ranging in terms of 42 days to seven years. Included among these
deposit products are Individual Retirement Account certificates and Keogh
retirement certificates, as well as negotiable-rate certificates of deposit with
balances of $100,000 or more ("jumbo certificates").
The Bank's deposits are obtained primarily from residents of Wisconsin.
The Bank has entered into agreements with certain brokers which will provide
funds for a specified fee. At March 31, 1997, the Bank had $46.7 million in
brokered deposits.
The Bank attracts deposits through a network of convenient office locations
by utilizing a detailed customer sales and service plan and by offering a wide
variety of accounts and services, competitive interest rates and convenient
customer hours. Deposit terms offered by the Bank vary according to the minimum
balance required, the time period the funds must remain on deposit and the
interest rate, among other factors. In determining the characteristics of its
deposit accounts, consideration is given to the profitability of the Bank,
matching terms of the deposits with loan products, the attractiveness to
customers and the rates offered by the Bank's competitors.
The following table sets forth the activity in the Corporation's deposits
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $1,234,878 $1,092,120 $1,061,262
Net increase (decrease) before interest credited 17,728 29,041 (3,482)
Interest credited 52,092 48,914 34,340
Purchase of branch - 64,803 -
---------- ---------- ----------
Net increase in deposits 69,820 142,758 30,858
---------- ---------- ----------
Ending balance $1,304,698 $1,234,878 $1,092,120
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the amount and maturities of the Corporation's certificates of deposit at March
31, 1997.
OVER SIX OVER OVER TWO
MONTHS ONE YEAR YEARS OVER
SIX MONTHS THROUGH THROUGH THROUGH THREE
INTEREST RATE AND LESS ONE YEAR TWO YEARS THREE YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
3.00% to 4.99% $ 29,021 $ 702 $ 244 $ 102 $ - $ 30,069
5.00% to 6.99% 413,990 279,989 116,328 20,152 25,570 856,029
7.00% to 8.99% 4,249 8,756 47 169 245 13,466
---------- ---------- ---------- --------- --------- -----------
$ 447,260 $ 289,447 $ 116,619 $ 20,423 $ 25,815 $ 899,564
---------- ---------- ---------- --------- --------- -----------
---------- ---------- ---------- --------- --------- -----------
</TABLE>
17
<PAGE>
At March 31, 1997, the Corporation had $104.0 million of jumbo
certificates, of which $40.5 million are scheduled to mature within three
months, $19.7 million in over three months through six months, $35.0 million in
over six months through 12 months and $8.8 million in over 12 months.
BORROWINGS. From time to time the Bank obtains advances from the FHLB,
which generally are secured by capital stock of the FHLB required to be held by
the Bank and by certain of the Bank's mortgage loans. See "Regulation." Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The FHLB may prescribe the
acceptable uses for these advances, as well as limitations on the size of the
advances and repayment provisions.
From time to time the Bank enters into repurchase agreements with
nationally recognized primary securities dealers. Repurchase agreements are
accounted for as borrowings by the Bank and are secured by mortgage-backed
securities. The Bank has utilized this source of funds during the year ended
March 31, 1997 and may continue to do so in the future.
The Corporation has a short-term line of credit to fund IDI limited
partnership interest. The interest is based on Libor and is payable monthly and
each draw has a specified maturity. The final maturity of the line of credit is
in December 1997. ADPC II has a mortgage on the multi-family property it owns.
Principal and interest payments are due monthly, with the final payment due in
October 2005. See Note 8 to the Corporation's Consolidated Financial Statements
for more information on borrowings.
The following table sets forth the outstanding balance and weighted average
interest rate for the Corporation's borrowings (short-term and long-term) at the
dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $ 374,165 5.74% $ 316,869 5.69% $ 274,500 5.71%
Repurchase agreements 39,335 5.43 47,582 5.32 5,600 6.72
Other loans payable 18,039 8.19 7,031 9.94 - 0.00
</TABLE>
The following table sets forth information relating to the Corporation's
short-term (maturities of one year or less) borrowings at the dates and for the
periods indicated.
MARCH 31,
--------------------------------------
1997 1996 1995
--------------------------------------
(In Thousands)
Maximum month-end balance:
FHLB advances $ 281,500 $ 177,500 $ 152,000
Repurchase agreements 67,316 72,850 5,600
Other loans payable 18,039 5,998 -
Average balance:
FHLB advances 242,159 161,939 95,832
Repurchase agreements 63,189 35,352 467
Other loans payable 7,524 917 -
18
<PAGE>
SUBSIDIARIES
INVESTMENT DIRECTIONS, INC. IDI is a wholly-owned non-banking subsidiary
of the Corporation formed in February 1996, which has invested in various
limited partnerships. The Corporation's investment in IDI at March 31, 1997
amounted to $6.1 million. For the year ended March 31, 1997, IDI had a net
profit of $1.4 million.
NEVADA INVESTMENT DIRECTIONS, INC. NIDI is a wholly-owned non-banking
subsidiary of IDI formed in March 1997, which has invested in various limited
partnerships. NIDI was organized in the State of Nevada. IDI's investment in
NIDI at March 31, 1997 amounted to $6.0 million. For the year ended March 31,
1997, NIDI had a net profit of $42,000.
ANCHOR INSURANCE SERVICES, INC. AIS is a wholly-owned subsidiary of the
Bank which offers a full line of insurance products, securities and annuities to
its customers and members of the general public. For the year ended March 31,
1997, AIS had a net profit of $91,000. The Bank's investment in AIS amounted to
$80,000 at March 31, 1997. AIS paid a dividend to the Bank in fiscal 1997 of
$150,000.
ADPC II, LLC. ADPC II is a subsidiary of the Bank (99% ownership) and ADPC
(1% ownership) formed in September 1995, which is engaged in the improvement and
management of a multi-family property. This former foreclosed property was
acquired from ADPC as a result of the reorganization plan from the bankruptcy
proceedings. ADPC II obtained a $2.0 million loan from the Bank for
renovations, all of which has now been sold to private investors in the
secondary market. The Bank's investment in ADPC II at March 31, 1997 amounted
to $1.4 million. ADPC II had a net loss of $235,000 for the year ended
March 31, 1997.
ADPC CORPORATION. ADPC is a wholly-owned subsidiary of the Bank which
holds and develops certain of the Bank's foreclosed properties. The Bank's
investment in ADPC at March 31, 1997 amounted to $1.8 million. ADPC had net
income of $68,000 for the year ended March 31, 1997.
ANCHOR INVESTMENT CORPORATION. AIC is an operating subsidiary of the Bank
which was incorporated in March 1993. AIC, which is located in the State of
Nevada, was formed for the purpose of managing a portion of the Bank's
investment portfolio (primarily mortgage-backed securities). As an operating
subsidiary, AIC's results of operations are combined with the Bank's for
financial and regulatory purposes. The Bank's investment in AIC amounted to
$176.0 million at March 31, 1997. AIC had net income of $6.7 million for the
year ended March 31, 1997. The Bank had outstanding notes to AIC of $24.0
million at March 31, 1997, with a weighted average rate of 8.25% and maturities
during the next six months.
ANCHOR FINANCIAL CORP. AFC was a wholly-owned subsidiary of the Bank which
was dissolved on March 18, 1997.
EMPLOYEES
The Bank had 516 full-time employees and 157 part-time employees at March
31, 1997. The Bank promotes equal employment opportunity and considers its
relationship with its employees to be good. The employees are not represented
by a collective bargaining unit.
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REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Corporation and the Bank. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
THE CORPORATION
The Corporation is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Corporation is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries which permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. In addition, the Corporation is subject to
the examination and supervision by the Commissioner. The Commissioner is
authorized to prohibit by order the activities of a savings and loan holding
company which, among other things, the Commissioner feels endangers the safety
of the savings and loan association or is contrary to the public interest. The
Commissioner is empowered to direct the operations of the savings and loan
association and its holding company until the order is complied with and may
prohibit dividends from the savings and loan association to its holding company
during such period.
As a unitary savings and loan holding company, the Corporation generally is
not subject to activity restrictions as long as the Bank is in compliance with
the Qualified Thrift Lender ("QTL") Test. See "Qualified Thrift Lender
Requirement."
The Corporation must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Interstate acquisitions generally are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
THE BANK
The Bank is a state chartered savings institution, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad state and federal
regulation and oversight by the OTS and the FDIC extending to all aspects of its
operations. The Bank is a member of the FHLB of Chicago and is subject to
certain limited regulation by the Federal Reserve Board. The Bank is a member
of the Savings Association Insurance Fund ("SAIF") and the deposits of the Bank
are insured by the FDIC. As a Wisconsin-chartered institution, the Bank is also
subject to regulation, examination and supervision by the Commissioner.
FEDERAL AND STATE REGULATION OF SAVINGS ASSOCIATIONS. The OTS has
extensive authority over the operations of all insured savings associations. In
addition, the Bank is subject to regulation and supervision by the Commissioner.
As part of this authority, the Bank is required to file periodic reports with
the OTS and the Commissioner and is subject to periodic examinations by the OTS,
the Commissioner and the FDIC. Examinations by the Commissioner are usually
conducted jointly with the OTS. When these examinations are conducted by the
OTS, the Commissioner or the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss allowances. The last regular joint
examination of the Bank by the OTS and the Commissioner was as of February 29,
1996. The FDIC was included in a joint examination as of November 30, 1992.
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS. A schedule of fees has
also been established for the various types of applications and filings made by
savings associations with the OTS. The general assessment, to be paid on a
semi-annual basis, is computed upon the savings association's total assets,
including consolidated subsidiaries, as reported in the association's latest
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quarterly thrift financial report. Savings associations that (unlike the Bank)
are classified as "troubled" (i.e., having a supervisory rating of "4" or "5" or
subject to a conservatorship) are required to pay a 50% premium over the
standard assessment. The Bank's semi-annual OTS assessment for the six months
ending June 30, 1997 was $159,000.
Wisconsin-chartered institutions are also required to pay an annual state
assessment. Under Wisconsin law, the fee cannot exceed 12 cents per $1,000 of
assets or fraction thereof, as of the close of the preceding calendar year. In
addition to an annual fee, each Wisconsin-chartered institution is subject to
examination fees. The Bank's assessment for the year ending June 30, 1997 was
$59,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the
Corporation, and their affiliated parties such as directors, officers,
employees, agents and certain other persons providing services to the Bank or
the Corporation. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OTS.
Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required. The Commissioner has similar enforcement
authority over the Bank and the Corporation.
During 1996, the OTS continued its comprehensive review of its regulations
to eliminate duplicative, unduly burdensome and unnecessary regulations
concerning lending and investments, corporate governance, subsidiaries and
equity investments, conflicts of interest and usurpation of corporate
opportunity. The OTS's revised lending and investments regulation generally
imposes general safety and soundness standards, and also provides that
commercial loans made by a service corporation of a savings association will be
exempted from an institutions's overall 10% limit on commercial loans. Such
regulations now allow an institution to use its own cost-of-funds index in
structuring adjustable rate mortgages, and eliminate percentage of assets
limitations on credit card lending.
The OTS also converted its policy statement on conflicts of interest to a
regulation that is intended to be based upon common law principles of "duty of
loyalty" and "duty of care." The new conflicts regulation provides that
directors, officers, employees, persons having the power to control the
management or policies of savings associations, and other persons who owe
fiduciary duties to savings institutions will be prohibited from advancing their
own personal or business interests, or those of others, at the expense of the
institutions they serve. The "appearance of a conflict of interest" standard
was removed from the scope of the revised rule. The OTS also clarified that
"persons having the power to control the management or policies of savings
associations" includes holding companies such as the Corporation. The OTS
corporate opportunity regulations and policy statements also were eliminated and
replaced with a standard similar to common law standards governing usurpation of
corporate opportunity. Significantly under the revised regulation, transfers of
a line of business within a holding company structure will not be deemed to be a
usurpation of corporate opportunity if an institution receives fair market
consideration for a line of business transferred to its holding company or its
affiliate. In such transactions, the OTS will generally defer to decisions made
by a holding company, subject to compliance with Section 23A or 23B of the
Federal Reserve Act and general safety and soundness principles.
In addition, the investment and lending authority of the Bank is prescribed
by federal and state laws and regulations, and the Bank is prohibited from
engaging in any activities not permitted by such laws and regulations. The Bank
is in compliance with each of these restrictions.
The Bank's permissible loans-to-one-borrower lending limit under federal
law is to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At March 31, 1997, the Bank had no loans to one borrower which exceeded the 15%
or $16.2 million limitation. A broader limitation (the lesser of $30 million or
30% of unimpaired capital and surplus) is provided, under certain circumstances
and subject to OTS approval, for loans to develop domestic residential housing
units. In addition, the Bank may provide purchase money financing for the sale
of any asset without regard to the loans-to-one-borrower limitation so long as
no new funds are advanced and the Bank is not placed in a more detrimental
position than if it had held the asset. Under Wisconsin
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law, the aggregate amount of loans that an association may make to any one
borrower may not exceed 5% of the aggregate of an association's mortgage,
consumer and commercial assets, except as otherwise authorized by the
Commissioner. The Bank is in compliance with these loans-to-one-borrower
limitations.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of
the SAIF, which along with the Bank Insurance Fund ("BIF"), is one of the two
insurance funds administered by the FDIC. Savings deposits are insured up to
$100,000 per insured member (as defined by law and regulation) by the FDIC and
such insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the FDIC. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged, or is engaging in, unsafe or unsound practices, or
is in an unsafe or unsound condition.
The Bank is required to pay assessments to the FDIC based on a percent of
its insured deposits for the insurance of its deposits by the SAIF. Under
Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated deposits or at a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances raising a significant risk of substantial future losses to
the SAIF.
Under the risk-based deposit insurance system adopted by the FDIC, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups - well capitalized, adequately capitalized, or
undercapitalized - using the same percentage criteria used under the prompt
corrective action regulations. Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on instituions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Bank incurred an after-tax expense of $4.6 million during
the quarter ended September 30, 1996.
The FDIC has proposed a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF and SAIF members will
be assessed at the same rate for FICO payments.
The 1996 legislation also contemplates the merger of the SAIF with the BIF,
which generally insures deposits in national and state-chartered banks. The
combined deposit insurance fund, which will be formed no earlier that January 1,
1999, will insure deposits at all FDIC insured depository institutions. As a
condition to the combined insurance fund, however, no insured depository
institution can be chartered as a savings association. The Secretary of the
Treasury is required to report to the Congress no later than March 31, 1997 with
respect to the
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development of a common charter for all insured depository institutions. Future
legislation also may result in the Corporation becoming regulated as a bank
holding company by the Federal Reserve Board rather than a savings and loan
holding company regulated by the OTS. Regulation by the Federal Reserve Board
could subject the Corporation to capital requirements that are not currently
applicable to the Corporation as a holding company under OTS regulation and may
result in statutory limitations on the type of business activities in which the
Corporation may engage at holding company level, at which business activities
currently are not restricted. The Corporation and the Bank are unable to
predict whether such legislation will be enacted.
The 1996 legislation also contained several provisions that could impact
operations of the Bank, including augmenting the Bank's commercial lending
authority by 10% of assets, provided that any loans in excess of 10% are used
for small business loans. Furthermore, the qualified thrift lender test that
the Bank must comply with was liberalized to provide that small business, credit
card and student loans can be included without any limit, and that the Bank can
qualify as a qualified thrift lender by meeting either the test set forth in the
Home Owners' Loan Act or under the definition of a domestic building and loan
association as defined under the Internal Revenue Code of 1986, as amended (The
"IRC").
FDIC regulations govern the acceptance of brokered deposits by insured
depository institutions. The capital position of an institution determines
whether and with what limitations an institution may accept brokered deposits.
A "well capitalized" institution (one that significantly exceeds specified
capital ratios) may accept brokered deposits without restriction.
"Undercapitalized" institutions (those that fail to meet minimum regulatory
capital requirements) may not accept brokered deposits and "adequately
capitalized" institutions (those that are not "well capitalized" or
"undercapitalized") may only accept such deposits with the consent of the FDIC.
The Bank meets the definition of a "well capitalized" institution and therefore
may accept brokered deposits without restriction. At March 31, 1997, the Bank
had $46.7 million in brokered deposits.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as the Bank, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible
capital requirement, a core capital requirement and a risk-based capital
requirement applicable to such savings associations. FIRREA mandated that these
capital requirements be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock and related surplus and minority
interest in the equity accounts of fully consolidated subsidiaries. In
addition, all intangible assets, other than a limited amount of purchased
mortgage servicing rights (in no event exceeding the amount of tangible
capital), must be deducted from tangible capital.
The capital standards require core capital equal to at least 3% of adjusted
total assets (as defined by regulation). Core capital generally consists of
tangible capital plus up to 25% of certain other intangibles which meet certain
separate salability and market valuation tests. The OTS has issued notice of a
proposed regulation that would require all but the most highly rated savings
institutions to maintain a minimum core capital ratio of between 4% and 5%. The
Bank had a ratio of core capital to total assets of 5.77% at March 31, 1997.
The OTS risk-based capital requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital, for
purposes of the risk-based capital requirement, equals the sum of core capital
plus supplementary capital (which, as defined, includes the sum of, among other
items, certain permanent and maturing capital instruments that do not qualify as
core capital and general loan and lease loss allowances up to 1.25% of
risk-weighted assets) less certain deductions. The amount of supplementary
capital that may be used to satisfy the risk-based requirement is limited to the
extent of core capital, and OTS regulations require the maintenance of a minimum
ratio of core capital to total risk-weighted assets of 4.0%. At March 31, 1997,
the Bank met all capital requirements on a fully phased-in basis. (See Note 9
to the Corporation's Consolidated Financial
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Statements.) In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, are multiplied by a risk-weight based
on the risks inherent in the type of assets as determined by the OTS.
OTS policy imposes a limitation on the amount of net deferred tax assets under
SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets, reduced by any valuation allowances, in
excess of deferred tax liabilities.) Application of the limit depends on the
possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited: taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depend on an institution's future taxable
income (exclusive of reversing temporary differences and carryforwards), or its
tax-planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year of the quarter-end report date or 10% of core capital. The foregoing
considerations did not affect the calculation of the Bank's regulatory capital
at March 31, 1997.
In August 1993, the OTS adopted a final rule incorporating an interest rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk is subject
to a deduction of its interest rate risk component from total capital for
purposes of calculating the risk-based capital requirement. As a result, such
an institution is required to maintain additional capital in order to comply
with the risk-based capital requirement. An institution with a greater than
normal interest rate risk is defined as an institution that would suffer a loss
of net portfolio value exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component is
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and the market value of its assets
multiplied by 2.0%. Although the final rule was originally scheduled to be
effective as of January 1994, the OTS has indicated that it will delay invoking
its interest rate risk rule requiring institutions with above normal interest
rate risk exposure to adjust their regulatory capital requirement until appeal
procedures are implemented and evaluated. The OTS has not yet established an
effective date for the capital deduction. Management does not believe that the
OTS' adoption of an interest rate risk component to the risk-based capital
requirement will have a material effect on the Bank.
Under current OTS policy, savings associations must value securities
available for sale at amortized cost for regulatory purposes. This means that
in computing regulatory capital, savings associations add back any unrealized
losses and deduct any unrealized gains, net of income taxes, on securities
reported as a separate component to stockholders' equity under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against any association that fails to meet its
capital requirements (an "undercapitalized association"). The OTS may grant to
an undercapitalized association an exemption from the various sanctions or
penalties for failure to meet its capital requirements (other than appointment
of a conservator or receiver and the mandatory growth restrictions) through the
association's submission of and compliance with an approved capital plan. If
the plan is not approved, the association generally will be prohibited from
making capital distributions, increasing its assets or making any loans and
investments without OTS approval and must comply with other limits imposed by
the OTS.
Any undercapitalized association is also subject to possible enforcement
actions by the OTS or the FDIC. Such actions could include a capital directive,
a cease-and-desist order, civil money penalties or the establishment of
restrictions on all aspects of the association's operations. The OTS also could
impose harsher measures, such as the appointment of a receiver or conservator or
a forced merger into another institution. The grounds for appointment of a
conservator or receiver include substantially insufficient capital and losses or
likely losses that will deplete substantially all capital with no reasonable
prospect for replenishment of capital without federal assistance.
Wisconsin-chartered associations are required to maintain a net worth ratio
of at least 6.0%. Under this provision, an association's "net worth ratio" is
defined as a ratio, expressed as a percentage of assets, calculated by
subtracting liabilities from assets, adding to the resulting difference
unallocated general loan loss allowances, and dividing the sum by the
association's assets. The rule authorizes the Commissioner to require an
association to
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maintain a higher level of net worth if the Commissioner determines that the
nature of the association's operations entails a risk requiring greater net
worth to ensure the association's stability. A failure to comply with such
requirements authorizes the Commissioner to direct the association to adhere to
a plan, which can include various operating restrictions, in order to restore
the association's net worth to required levels. At March 31, 1997, the Bank was
in compliance with this net worth requirement with a ratio of 6.98%.
LIMITATION ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory (or total)
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other transactions charged to
the capital account. Under the rule, a savings institution is classified as a
tier 1 institution, a tier 2 institution or a tier 3 institution depending on
its level of regulatory capital both before and after giving effect to a
proposed capital distribution. A tier 1 institution (i.e., one that both before
and after a proposed capital distribution has net capital equal to or in excess
of its fully phased-in regulatory capital requirement) may make capital
distributions during any calendar year equal to 100% of its net income for the
year-to-date period plus 50% of the amount by which the association's total
capital exceeds its fully phased-in capital requirement (the "capital surplus"),
as measured at the beginning of the calendar year. The Bank meets the
requirements for a tier 1 association.
A tier 2 institution (i.e., one that both before and after a proposed
capital distribution has net capital equal to its then-applicable minimum
capital requirement) may make distributions not exceeding 75% of net income over
the most recent four-quarter period.
A tier 3 institution (i.e., one that either before or after a proposed
capital distribution fails to meet its then-applicable minimum capital
requirement) may not make any capital distributions without the prior written
approval of the OTS or the OTS may prohibit a capital distribution.
Tier 2 associations proposing to make a capital distribution within the
safe harbor provisions and tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, the "tiered"
approach described above would be replaced and institutions would be permitted
to make capital distributions that would not result in their capital being
reduced below the level required to remain "adequately capitalized," as defined
in the OTS regulations. Under the proposal, savings associations which are held
by a savings and loan holding company would continue to be required to provide
advance notice of the capital distribution to the OTS. The Bank does not
believe that the proposal will adversely affect its ability to make capital
distributions if it is adopted substantially as proposed.
Unless prior approval of the Commissioner is obtained, the Bank may not pay
a dividend or otherwise distribute any profits if it fails to maintain its
required net worth ratio either prior to, or as a result of, such distribution.
QUALIFIED THRIFT LENDER REQUIREMENT. All savings associations, including
the Bank, are required to meet a QTL test to avoid certain restrictions on their
operations. Currently, a savings institution will be a QTL if the savings
institution's qualified thrift investments continue to equal or exceed 65% of
the institution's portfolio assets on a monthly average basis in nine out of
every 12 months. Subject to certain exceptions, qualified thrift investments
generally consist of housing related loans and investments and certain groups of
assets, such as consumer loans, to a limited extent. The term "portfolio
assets" means the savings institution's total assets minus goodwill and other
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intangible assets, the value of property used by the savings institution to
conduct its business and liquid assets held by the savings institution in an
amount up to 20% of its total assets. As of March 31, 1997, the Bank was in
compliance with the QTL test.
OTS regulations provide that any savings institution that fails to meet the
definition of a QTL must either convert to a bank charter, other than a savings
bank charter, or limit its future investments and activities (including
branching and payments of dividends) to those permitted for both savings
institutions and national banks. Additionally, any such savings institution
that does not convert to a bank charter will be ineligible to receive further
FHLB advances and, beginning three years after the loss of QTL status, will be
required to repay all outstanding FHLB advances and dispose of or discontinue
any preexisting investment or activities not permitted for both savings
institutions and national banks. Further, within one year of the loss of QTL
status, the holding company of a savings institution that does not convert to a
bank charter must register as a bank holding company and will be subject to all
statutes applicable to bank holding companies.
LIQUIDITY. Under applicable federal regulations, savings institutions are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers' acceptances, certain corporate debt
securities and highly rated commercial paper, securities of certain mutual funds
and specified United States Government, state or federal agency obligations)
equal to a certain percentage of the sum of its average daily balance of net
withdrawable deposits plus short-term borrowings. This liquidity requirement
may be changed from time to time by the Director of the OTS to any amount within
the range of 4% to 10% depending upon economic conditions and the deposit flows
of member institutions, and currently is 5%. In May 1997, however, the OTS
proposed to amend its liquidity regulation to, among other things, provide that
a savings association shall maintain liquid assets of not less than 4% of the
amount of its liquidity base at the end of the preceding calendar quarter, as
well as to provide that each savings association must maintain sufficient
liquidity to ensure its safe and sound operation. Historically, the Bank has
operated in compliance with applicable liquidity requirements.
Savings institutions are also required to maintain an average daily balance
of short-term liquid assets at a specified percentage (currently 1%) of the
total of the average daily balance of its net withdrawable deposits and
short-term borrowings. At March 31, 1997, the Bank was in compliance with these
liquidity requirements.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
association's capital. Affiliates of the Bank include the Corporation and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates; however, the OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a case
by case basis.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Chicago, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. The FHLBs provide a central credit
facility for member savings institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to member (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and
procedures are subject to regulation and oversight of the Federal Housing
Finance Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term
advances are required to provide funds for residential home financing.
As a member, the Bank is required to own shares of capital stock in the
FHLB of Chicago. At March 31, 1997, the Bank owned $19.0 million in FHLB stock,
which is in compliance with this requirement. The Bank has received substantial
dividends on its FHLB stock. The dividend for fiscal 1997 amounted to $1.3
million as compared to $1.2 million for fiscal 1996.
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The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to low- and moderately-priced housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a charge to the Corporation's earnings.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At March 31, 1997, the Bank
was in compliance with these requirements. These reserves may be used to
satisfy liquidity requirements imposed by the Director of the OTS. Because
required reserves must be maintained in the form of cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve Board regulations, however, require
savings institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
TAXATION
FEDERAL
The Corporation files a consolidated federal income tax return on behalf of
itself, the Bank and its subsidiaries on a fiscal tax year basis. Income and
expense are reported on the liability method of accounting.
For taxable years beginning prior to January 1, 1996, a savings institution such
as the Bank that met certain definitional tests relating to the composition of
its assets and the sources of its income (a "qualifiying savings institution")
was permitted to establish reserves for bad debts and to claim annual tax
deductions for additions to such reserves. A qualifying savings institution was
permitted to make annual additions to such reserves based on the institution's
loss experience. Alternatively, a qualifying savings institution could elect,
on an annual basis, to use the "percentage of taxable income" method to compute
its addition to its bad debt reserve on qualifying real property loans
(generally, loans secured by an interest in improved real estate). The
percentage of taxable income method permitted the institution to deduct a
specified percentage of its taxable income before such deduction, regardless of
the institution's actual bad debt experience, subject to certain limitations.
From 1988 to 1995, the Bank has claimed bad debt deductions under the percentage
of taxable income method because that method produced a greater deduction than
did the experience method.
On August 20, 1996, President Clinton signed the Small Business Job Protection
Act (the "Act") into law. The legislation (i) repealed the reserve method of
accounting for bad debts for savings institutions effective for taxable years
beginning after 1995; (ii) provides for recapture of a portion of the reserves
existing at the close of the last taxable year beginning before January 1, 1996,
exempting pre-1988 bad debt deductions from recapture; and (iii) suspended for
two years post-1987 in bad debt deductions from recapture provided that a
savings institution meets a new home mortgage lending test. The legislation
exempted from recapture $30.0 million in pre-1988 bad debt deductions taken by
the Bank and will defer recapture of an additional $3.1 million subject to the
Bank's compliance with the new home mortgage lending test. See Note 11 to the
Consolidated Financial Statements for a discussion of the effect of this
legislation on the Bank. For its tax years beginning on or after January 1,
1996, the Bank will be required to account for its bad debts under the specific
charge-off method. Under this method, deductions may be claimed only as and to
the extent that loans become wholly or partially worthless.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on
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alternative minimum taxable income, which is the sum of a corporation's regular
taxable income with certain adjustments and tax preference items, less any
available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax, and net operating losses can
offset no more than 90% of alternative minimum taxable income. For taxable
years beginning after 1986 and before 1996, corporations, including savings
associations such as the Bank, are also subject to an environmental tax equal to
0.12% of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
Earnings appropriated to a savings institution's bad debt reserves and
deducted for federal income tax purposes may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1997, the Bank's bad debt reserves for tax purposes
totaled approximately $33.1 million.
The consolidated federal income tax returns of the Bank and its
subsidiaries through March 31, 1993 are closed to examination by the Internal
Revenue Service due to the expiration of the statute of limitations.
The State of Wisconsin imposes a corporate franchise tax measured by the
separate Wisconsin taxable income of each of the members. The current corporate
tax rate imposed by Wisconsin is 7.9%. Wisconsin taxable income is
substantially similar to federal taxable income except that no deduction is
allowed for state income taxes paid. The current bad debt deduction for
Wisconsin income tax purposes is the same as the deduction permitted for federal
income tax purposes. Wisconsin does not allow the carryback of a net operating
loss to prior taxable years. Thus, any net operating loss for state income tax
purposes must be carried forward to offset income in future years. The
Wisconsin corporate franchise tax is deductible for purposes of computing
federal taxable income. The separate Wisconsin state income tax returns of the
members of the Bank's group through March 31, 1992 are closed to examination by
the Wisconsin Department of Revenue due to the expiration of the statute of
limitations.
The Corporation also has a non-banking subsidiary of IDI (NIDI) and the
Bank has an operating subsidiary (AIC) located in Nevada. The income of NIDI
and AIC is only subject to taxation in Nevada, which currently does not impose a
corporate income or franchise tax.
ITEM 2. PROPERTIES
At March 31, 1997, The Bank conducted its business from its headquarters
and main office at 25 West Main Street, Madison, Wisconsin and 33 other
deposit-taking offices located primarily in southcentral and southwest
Wisconsin. The Bank owns 23 of its deposit-taking offices, leases the land on
which FOUR such offices are located, and leases the remaining 6 deposit-taking
offices. In addition, the Bank leases offices for two loan origination
facilities. The leases expire between 1997 AND 2005. The aggregate net book
value at March 31, 1997 of the properties owned or leased, including
headquarters, properties and leasehold improvements, was $12.0
million. See Note 6 to the Corporation's Consolidated Financial Statements,
filed as Item 8 hereto, for information regarding the premises and equipment.
The following tables set forth the location of the Corporation's banking and
other offices.
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MADISON, WISCONSIN OFFICES: Stoughton, Wisconsin
25 West Main Street SURROUNDING AREA OFFICES:
Madison, Wisconsin
1712 12th Street
302 North Midvale Boulevard Monroe, Wisconsin
Madison, Wisconsin
80 South Court Street
2929 North Sherman Avenue Platteville, Wisconsin
Madison, Wisconsin (1)
106 West Oak Street
216 Cottage Grove Road Boscobel, Wisconsin (2)
Madison, Wisconsin (1)
100 West Racine Street
5750 Raymond Road Janesville, Wisconsin
Madison, Wisconsin (2)
600 East Blackhawk Avenue
333 South Westfield Road Prairie du Chien, Wisconsin
Madison, Wisconsin (1)
708 North Madison Street
6501 Monona Drive