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<SEC-DOCUMENT>0000950124-99-003853.txt : 19990623
<SEC-HEADER>0000950124-99-003853.hdr.sgml : 19990623
ACCESSION NUMBER: 0000950124-99-003853
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19990331
FILED AS OF DATE: 19990622
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:
SEC FILE NUMBER: 000-20006
FILM NUMBER: 99649856
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-K
<TEXT>
<PAGE> 1
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, 1999
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 $17.000 closing price of the registrant's common stock
as of May 13, 1999, the aggregate market value of the 16,655,284 shares of the
registrant's common stock deemed to be held by non-affiliates of the registrant
was: $283.1 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 18, 1999, 18,131,305 shares of the registrant's common stock
were outstanding. There were also 100,000 series A- preferred stock purchase
rights authorized with none outstanding, as of the same date.
Documents Incorporated by Reference
Proxy Statement for the Annual Meeting of Stockholders to be held on July 27,
1999 (Part III, Items 10 to 13)
<PAGE> 2
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"), a Wisconsin
corporation, which invests in limited partnerships. IDI created a subsidiary in
March 1997, Nevada Investment Directions, Inc. ("NIDI"), which also invests in
limited partnerships. NIDI was 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 three 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
Corporation ("ADPC") holds and develops certain of the Bank's foreclosed
properties. Anchor Investment Corporation ("AIC") is an operating subsidiary
that 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, 1999, the Bank conducted business from its headquarters and main
office in Madison, Wisconsin and from 35 other full-service offices located
primarily in southcentral and southwest Wisconsin and two loan origination
offices.
The economy of Dane County is characterized by diversified industries,
major medical facilities, state, federal and university governmental bodies, and
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 State of Wisconsin.
1
<PAGE> 3
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, consumer finance
companies and credit unions.
The principal factors that 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 hours, 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 represents selected financial ratios of the Corporation's
operations for the fiscal years indicated. These ratios, where applicable, have
been restated to reflect both a two-for-one stock split on the Corporation's
common stock in August 1998 and the application of Financial Accounting
Standards No. 128 (Earnings Per Share).
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.13% 1.05% 0.76%
Return on average equity 17.70 16.20 11.78
Average equity to average assets 6.38 6.51 6.42
Dividend payout ratio 14.23 13.72 15.83
Net interest margin 3.08 3.18 3.14
</TABLE>
LENDING ACTIVITIES
GENERAL. At March 31, 1999, the Corporation's net loans held for
investment totaled $1.7 billion, representing approximately 81% of its $2.1
billion of total assets at that date. Approximately 79% of the Corporation's
total loans held for investment at March 31, 1999 were secured by first liens on
sreal 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.
The non-real estate loans originated by the Bank consist of a variety
of consumer loans and commercial business loans. At March 31, 1999, the
Corporation's total loans held for investment included $335.8 million of
consumer loans and $40.4 million of commercial business loans.
LOAN PORTFOLIO COMPOSITION. The following table presents information
concerning the composition of the Corporation's consolidated loans held for
investment at the dates indicated.
2
<PAGE> 4
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential ....... $ 841,048 46.06% $ 817,763 48.67% $ 731,732 47.44%
Multi-family residential ........ 224,167 12.28 177,350 10.56 164,729 10.68
Commercial real estate .......... 216,365 11.85 183,914 10.95 171,186 11.10
Construction .................... 154,594 8.47 120,376 7.16 106,536 6.91
Land ............................ 13,552 0.74 12,503 0.74 15,730 0.94
----------- ------ ---------- ------ ----------- ------
Total mortgage loans .......... 1,449,726 79.40 1,311,906 78.08 1,189,913 77.15
----------- ------ ---------- ------ ----------- ------
Consumer loans:
Second mortgage and home equity . 180,122 9.86 183,874 10.94 176,348 11.43
Education ....................... 125,427 6.87 121,306 7.22 112,420 7.29
Other ........................... 30,241 1.66 32,841 1.80 34,682 2.25
----------- ------ ---------- ------ ----------- ------
Total consumer loans .......... 335,790 18.39 338,021 20.12 323,450 20.97
----------- ------ ---------- ------ ----------- ------
Commercial business loans:
Loans ........................... 40,401 2.21 30,239 1.80 29,012 1.88
Lease receivables ............... -- 0.00 5 0.00 10 0.00
----------- ------ ---------- ------ ----------- ------
Total commercial business loans 40,401 2.21 30,244 1.80 29,022 1.88
----------- ------ ---------- ------ ----------- ------
Gross loans receivable ........ 1,825,917 100.00% 1,680,171 100.00% 1,542,385 100.00%
====== ====== ======
Contras to loans:
Undisbursed loan proceeds ....... (77,161) (62,756) (54,002)
Allowance for loan losses ....... (20,208) (21,833) (22,750)
Unearned loan fees .............. (3,824) (3,839) (3,373)
Discount on loans purchased ..... (476) (625) (748)
Unearned interest ............... (6) (29) (89)
----------- ---------- -----------
Total contras to loans ........ (101,675) (89,082) (80,962)
----------- ---------- -----------
Loans receivable, net ......... $ 1,724,242 $1,591,089 $ 1,461,423
=========== ========== ===========
MARCH 31,
---------------------------------------------------
1996 1995
---------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential ....... $ 745,170 51.97% $ 716,212 55.83%
Multi-family residential ........ 162,432 11.33 141,401 11.02
Commercial real estate .......... 139,918 9.76 123,438 9.62
Construction .................... 77,187 5.38 66,519 5.18
Land ............................ 21,077 1.47 13,644 1.06
----------- ------ ----------- ------
Total mortgage loans .......... 1,145,784 79.90 1,061,214 82.72
----------- ------ ----------- ------
Consumer loans:
Second mortgage and home equity . 140,302 9.78 111,725 8.71
Education ....................... 88,674 6.18 69,264 5.40
Other ........................... 28,481 1.99 18,997 1.48
----------- ------ ----------- ------
Total consumer loans .......... 257,457 17.95 199,986 15.59
----------- ------ ----------- ------
Commercial business loans:
Loans ........................... 30,352 2.12 20,272 1.58
Lease receivables ............... 363 0.03 1,467 0.11
----------- ------ ----------- ------
Total commercial business loans 30,715 2.14 21,739 1.69
----------- ------ ----------- ------
Gross loans receivable ........ 1,433,956 100.00% 1,282,939 100.00%
====== ======
Contras to loans:
Undisbursed loan proceeds ....... (46,493) (25,980)
Allowance for loan losses ....... (22,807) (22,429)
Unearned loan fees .............. (2,453) (2,000)
Discount on loans purchased ..... (1,005) (1,151)
Unearned interest ............... (118) (272)
----------- -----------
Total contras to loans ........ (72,876) (51,832)
----------- -----------
Loans receivable, net ......... $ 1,361,080 $ 1,231,107
=========== ===========
</TABLE>
3
<PAGE> 5
The following table shows, at March 31, 1999, 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 $ 33,910 $ 27,601 $105,326 $ 35,016 $ 867
After one year through
five years 117,568 106,747 18,279 174,388 39,310
After five years 689,570 306,184 44,541 126,386 224
-------- -------- -------- -------- --------
$841,048 $440,532 $168,146 $335,790 $ 40,401
======== ======== ======== ======== ========
Interest rate terms on amounts
due after one year:
Fixed $225,057 $ 81,572 $ 15,953 $156,054 $ 6,606
-------- -------- -------- -------- --------
Adjustable $582,081 $331,359 $ 46,867 $144,720 $ 32,928
======== ======== ======== ======== ========
</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, 1999, $841.0 million or 46.1% 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 that 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. This is 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 that
provide for annual adjustment to the interest rate in accordance with changes in
a designated index. These are generally 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, 1999, approximately $606.5 million or 72.1% 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
4
<PAGE> 6
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 investors, while
keeping some of the 10-year term loans in its portfolio. The Bank retains the
right to service substantially all loans that it sells.
At March 31, 1999, approximately $234.5 million or 27.9% of the
permanent single-family residential loans in the Corporation's loans held for
investment consisted of loans that 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, 1999, the Corporation had $224.2 million of loans secured by
multi-family residential real estate and $216.4 million of loans secured by
commercial real estate. The Bank generally limits the origination of such loans
to its 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 five 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.
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,
1999, construction loans amounted to $154.6 million or 8.5% of the Corporation's
total loans held for investment. Of this amount, $86.5 million and $51.2 million
was represented by loans for the construction of single-family and multi-family
residences, respectively. Land loans amounted to $13.6 million at March 31,
1999.
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.
CONSUMER LOANS. The Bank offers consumer loans in order to provide a
full range of financial services to its customers. At March 31, 1999, $335.8
million or 18.4% 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 a high
percentage of insured home equity loans are underwritten in a manner such that
they result in a lending risk which is substantially similar to single-family
residential loans and education loans.
The largest component of the Corporation's consumer loan portfolio are
second mortgage and home equity loans, which amounted to $180.1 million or 9.9%
of loans at March 31, 1999. The Bank has placed additional
5
<PAGE> 7
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 that 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.
Approximately $125.4 million or 6.9% of the Corporation's loans at
March 31, 1999 consisted of education loans. These are generally 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 that 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 ("SLMA")
or to other investors. The Bank sold $1.5 million of these loans during fiscal
1999.
The remainder of the Corporation's consumer loan portfolio consists of
deposit account secured loans and loans that 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
allocated 44% of the profit or losses from such activities. At March 31, 1999,
the Bank's approved credit card lines and the outstanding credit pursuant to
such lines amounted to $25.3 million and $3.4 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, 1999, commercial business loans amounted to $40.4 million
or 2.2% 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 equipment, machinery and other corporate
assets. Commercial business loans generally have terms of five years or less and
interest rates that 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 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
6
<PAGE> 8
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, 1999, the Bank had approximately $15.4 million of loans that 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 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
7
<PAGE> 9
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
that 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, 1999, the Bank was servicing $1.3 billion of
loans for others. The Bank sells all of the FHA/VA loans originated by it on a
servicing-released basis.
The Bank is not an active purchaser of multi-family and commercial
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, 1999, approximately $11.7 million of
mortgage loans were being serviced for the Bank by others.
8
<PAGE> 10
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,
---------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of year(1) $ 1,698,229 $ 1,547,733 $ 1,447,924
----------- ----------- -----------
Loans originated for investment:
Single-family residential 100,324 161,611 191,666
Multi-family residential 108,329 44,602 24,713
Commercial real estate 191,804 84,690 63,600
Construction and land 234,074 178,026 166,533
Consumer 171,485 165,696 190,584
Commercial business 38,216 14,717 17,715
----------- ----------- -----------
Total originations 844,232 649,342 654,811
----------- ----------- -----------
Loans purchased for investment:
Single-family residential -- -- 155
Multi-family residential -- -- 120
Commercial real estate -- -- 464
American Equity purchase -- -- --
----------- ----------- -----------
Total purchases -- -- 739
----------- ----------- -----------
Total originations and purchases 844,232 649,342 655,550
Repayments (603,695) (482,720) (420,698)
Transfers of loans to held for sale (94,789) (28,838) (126,423)
----------- ----------- -----------
Net activity in loans held for investment 145,748 137,784 108,429
----------- ----------- -----------
Loans originated for sale(2):
Single-family residential 475,218 333,930 96,996
Transfers of loans from held for investment 94,789 28,838 126,423
Sales of loans (480,210) (350,056) (177,101)
Loans converted into mortgage-backed
securities (92,427) -- (54,938)
----------- ----------- -----------
Net activity in loans held for sale (2,630) 12,712 (8,620)
----------- ----------- -----------
Gross loans receivable at end of period $ 1,841,347 $ 1,698,229 $ 1,547,733
=========== =========== ===========
</TABLE>
- --------------------------------------------------
(1) Includes loans held for sale and loans held for investment.
(2) Refinancings of loans held in the Corporation's consolidated loan
portfolio amounted to $348.1 million, $236.7 million and $79.8 million
during the years ended March 31, 1999, 1998, and 1997, 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 are generally 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
9
<PAGE> 11
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.
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 1999 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 $290,000. The amount of
interest income attributable to these loans and included in interest income
during fiscal 1999 was $40,000.
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,
---------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------
% 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 $ 2,595 0.14% $ 3,732 0.22% $ 3,144 0.20%
60 to 89 days 455 0.02 994 0.06 909 0.06
90 days and over 1,765 0.10 3,709 0.22 6,795 0.44
------- ---- ------- ---- ------- ----
Total $ 4,815 0.26% $ 8,435 0.50% $10,848 0.70%
======= ==== ======= ==== ======= ====
</TABLE>
There were no non-accrual loans with a carrying value of $1.0 million
or greater at March 31, 1999. 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.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE. At March 31, 1999, there was
one property in non-performing real estate held for development and sale with a
carrying value greater than $1.0 million. The property consists of several
condominium units in Bloomington, Minnesota with a carrying value of $2.1
million. The units were related to, but not a part of, a former non-accrual loan
for a condominium project. These units were purchased
10
<PAGE> 12
in the last fiscal year in an effort to solidify the Corporation's position with
regard to the original non-accrual loan. The Corporation is in the process of
completing the units for subsequent sale. A multi-family project that had been
reported in this category, was transferred to performing troubled debt
restructurings during the fiscal year. The project, located in Madison,
Wisconsin, had a carrying value of $2.9 million. The sale of the project
resulted in the Corporation providing a $300,000 note to the buyer. A deferred
gain of $300,000, associated with the note remains in real estate held for
development and sale until the buyer obtains complete permanent financing. For
additional discussion of real estate held for development and sale that is not
considered a part of non-performing assets, see the discussion under
"Subsidiaries Investment Directions, Inc." and "- Nevada Investment Directions,
Inc." and Note 15 to the Consolidated Financial Statements in Item 8 included
herewith.
FORECLOSED PROPERTIES. At March 31, 1999, the Corporation had no
foreclosed properties with a net carrying value of $1.0 million or more.
Foreclosed properties and repossessed assets decreased $3.1 million during the
fiscal year. The decrease was due primarily to the sale of an apartment complex
in Elm Grove, Wisconsin, which formerly secured a $2.2 million loan. A portion
of the property that had been identified as containing environmental
contamination and limited use restrictions has been written down to zero value.
The balance of the decrease of $900,000 is due largely to the sale of individual
condominium units and a parcel of land associated with the 12-unit condominium
project in Monona, Wisconsin, which had a carrying value of $1.5 million in the
prior fiscal year. The Corporation's remaining carrying value at March 31, 1999
is $400,000, for this project.
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 that is 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
that are not performing under all material contractual terms of the original
notes.
As of March 31, 1999, the Bank's classified assets consisted of $10.5
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, 1998, substandard assets amounted to $15.8 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 current and projected
levels of components of the loan portfolio and the amount and type of its
classified assets. In addition, the Bank monitors and uses standards for these
allowances that depend on the nature of the classification and loan location of
the security property.
11
<PAGE> 13
Additional discussion on the allowance for losses at March 31, 1999 has
been presented as part of the discussion under "Allowance for Loan and
Foreclosure Losses" in Management's Discussion and Analysis, which is contained
in Item 7, included herewith.
12
<PAGE> 14
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 comprehensive income in stockholders' equity. For the year ended
March 31, 1999, stockholders' equity decreased by $360,000 (net of deferred
income tax of $417,000). For the year ended March 31, 1998, stockholder's equity
increased by $1.7 million (net of deferred income taxes of $1.1 million). These
changes reflected respective net unrealized gains and losses on holding
securities classified as available for sale. There were no securities designated
as trading during the three years ending March 31, 1999.
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, 1999, the amortized cost of the Corporation's
mortgage-backed securities held to maturity amounted to $164.8 million and
included $138.2 million, $24.4 million and $2.2 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 $45.3 million at March 31, 1999, of which $9.9
million are five- and seven-year balloon securities, $33.8 million are 15- and
30-year securities and $1.5 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, 1999, $1.0 million of the Corporation's
mortgage-backed securities available for sale and $43.2 million mortgage-backed
securities held to maturity were pledged to secure various obligations of the
Bank.
13
<PAGE> 15
The following table sets forth the activity in the Corporation's
mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of year (1) $ 170,137 $ 207,299 $ 186,005
Held to maturity:
Purchases 18,893 - 14,509
Available for sale:
Purchases 5,366 4,741 2,057
Acquired in the securitization of loans 92,427 - 54,938
Sales (5,658) (1,280) (5,617)
Repayments and other (71,062) (40,623) (44,593)
--------- --------- ---------
Mortgage-backed securities at
end of year (1) $ 210,103 $ 170,137 $ 207,299
========= ========= =========
</TABLE>
- -----------------------------------------------------------
(1) Includes mortgage-backed securities held to maturity and available for sale
and does not include CMO's and REMIC's 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 ("CMO's"), including CMO's which qualify as Real Estate Mortgage
Investment Conduits ("REMIC's") under the Internal Revenue Code of 1986, as
amended ("Code") and are scheduled to mature within five years. At March 31,
1999, the amortized cost of the Corporation's mortgage-derivative securities
held to maturity amounted to $12.1 million. The fair value of the
mortgage-derivative securities available for sale amounted to $1.1 million at
the same date.
14
<PAGE> 16
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
1999, 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:
CMO's and REMIC's $ 244 6.47% $ -- 0.00% $ 836 6.00% $ 1,080
Mortgage-backed securities 5,270 6.23 8,237 6.01 31,734 6.64 45,277
-------- ---- -------- ---- ------- ---- --------
5,514 6.24 8,237 6.01 32,570 6.62 46,357
-------- ---- -------- ---- -------- ---- --------
Held To Maturity:
CMO's and REMIC's 8,656 6.55 1,937 5.92 1,494 6.37 12,087
Mortgage-backed securities 14,585 6.33 21,868 6.28 128,373 6.43 164,826
-------- ---- -------- ------ -------- ---- --------
23,241 6.41 23,805 6.25 129,867 6.43 176,913
-------- ---- -------- ------ -------- ---- --------
Mortgage-related securities $ 28,755 6.38% $ 32,078 6.19% $162,437 6.47% $223,270
======== ==== ======== ====== ======== ==== ========
</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> 17
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,
--------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------
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 $17,645 $17,798 $21,821 $21,859 $26,877 $26,517
Mutual fund 11,142 11,144 14,099 14,104 6,068 6,066
Corporate stock and other 3,730 3,774 2,747 3,592 2,685 2,986
------- ------- ------- ------- ------- -------
$32,517 $32,716 $38,667 $39,555 $35,630 $35,569
Held To Maturity:
U.S. Government and federal
agency obligations $ 6,845 $ 6,846 $17,587 $17,582 $ 7,947 $ 7,890
Certificates of deposit -- -- -- -- -- --
------- ------- ------- ------- ------- -------
6,845 6,846 17,587 17,582 7,947 7,890
------- ------- ------- ------- ------- -------
Total investment securities $39,362 $39,562 $56,254 $57,137 $43,577 $43,459
======= ======= ======= ======= ======= =======
</TABLE>
The following table shows the amortized cost, fair value and yield of
the Corporation's investment securities by contractual maturity at March 31,
1999.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD COST VALUE YIELD
--------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $15,041 $15,047 4.87 $ -- $ -- --
Due after one year through five years 13,746 13,895 5.70 1,570 1,570 6.05
Due after five years 100 100 6.95 5,275 5,276 6.36
Corporate stock 3,630 3,674 -- -- -- --
------- ------- ---- ------- ------- ----
$32,517 $32,716 5.27 $ 6,845 $ 6,846 6.29
======= ======= ==== ======= ======= ====
</TABLE>
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 4.0% at March 31,
1999. The Bank's liquidity ratio was 13.72% as of March 31, 1999.
16
<PAGE> 18
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 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 that will provide
funds for a specified fee. At March 31, 1999, the Bank had $87.5 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,
----------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $1,383,147 $1,304,698 $1,234,878
Net increase before interest credited 52,528 22,218 17,728
Interest credited 61,128 56,231 52,092
---------- ---------- ----------
Net increase in deposits 113,656 78,449 69,820
---------- ---------- ----------
Ending balance $1,496,803 $1,383,147 $1,304,698
========== ========== ==========
</TABLE>
17
<PAGE> 19
The following table sets forth the amount and maturities of the
Corporation's certificates of deposit at March 31, 1999.
<TABLE>
<CAPTION>
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% $ 62,669 $ 97,732 $ 30,853 $ 3,286 $ 1,414 $195,954
5.00% to 6.99% 399,474 224,915 116,482 15,202 23,311 779,384
7.00% to 8.99% 13 169 258 13 2 455
-------- -------- -------- ------- ------- --------
$462,156 $322,816 $147,593 $18,501 $24,727 $975,793
======== ======== ======== ======= ======= ========
</TABLE>
At March 31, 1999, the Corporation had $165.9 million of certificates
greater than or equal to $100,000, of which $50.2 million are scheduled to
mature within three months, $38.1 million in over three months through six
months, $63.3million in over six months through 12 months and $14.3 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 that is 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, 1999 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 1999. See Note 8 to the Corporation's Consolidated Financial
Statements for more information on borrowings.
The following table sets forth the outstanding balances and weighted
average interest rates for the Corporation's borrowings (short-term and
long-term) at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $ 415,595 5.29% $ 398,795 5.73% $ 374,165 5.74%
Repurchase agreements 42,464 4.91 42,935 5.60 39,335 5.43
Other loans payable 12,800 6.21 12,830 8.78 18,039 8.19
</TABLE>
18
<PAGE> 20
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.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Maximum month-end balance:
FHLB advances $ 338,750 $ 357,320 $ 281,500
Repurchase agreements 52,139 45,214 67,316
Other loans payable 21,550 14,972 18,039
Average balance:
FHLB advances 267,412 318,638 242,159
Repurchase agreements 30,930 22,923 63,189
Other loans payable 13,297 12,067 7,524
</TABLE>
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 funded by borrowings from the Corporation. The
Corporation's investment in IDI at March 31, 1999 amounted to $6.5 million. For
the year ended March 31, 1999, IDI had total assets of $28.1 million and net
income of $600,000. This compares to total assets of $13.4 million and a net
loss of $200,000 for the prior year ended March 31, 1998.
The assets of IDI include two partnership interests with carrying
values greater than $1.0 million. The first investment is a project in Indian
Palms, California with a carrying value at March 31, 1999 of $14.9 million. This
compares to a carrying value of $3.3 million for the prior year ended March 31,
1998. The $11.6 million increase in partnership investment from the prior fiscal
year was largely due to expansion for a clubhouse and other developments as well
as a housing development. The housing development is considered recreational
residential housing and sales are expected to begin in July 1999. The
development also includes hotel and resort operations.
The net loss on the Indian Palms partnership for the year ended March
31, 1999 was $600,000 as compared to a net loss of $500,000 for the year ended
March 31, 1998.
The second partnership investment is a project in Tampa Bay, Florida
with a carrying value of $5.9 million at March 31, 1999. This compares to a
carrying value of $4.7 million for the prior year ended March 31, 1998. The $1.2
million increase in partnership investment from the prior fiscal year was
largely due to the development of the project. This project includes a golf
course and fully developed single family recreational residential lots.
The net income on the Tampa Bay partnership for the year ended March
31, 1999 was $1.4 million as compared to a net loss of $600,000 for the year
ended March 31, 1998. Sale of the project is pending at March 31, 1999.
The balance of assets in IDI includes loans to finance the sales of
various partnerships. None of these loans are greater than or equal to $1.0
million and all are current at March 31, 1999.
At March 31, 1999, the Corporation had extended $22.0 million to IDI to
fund various partnership investments. This represents an increase of $14.5
million from borrowings of $7.5 million at March 31, 1998.
At March 31, 1999, IDI has a general valuation alowance of $600,000.
This compared to an allowance of $400,000 for the prior year ended March 31,
1998. As of March 31, 1999 and March 31, 1998, there have been no charge-offs
for any of the partnerships within IDI.
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NEVADA INVESTMENT DIRECTIONS, INC. NIDI is a wholly owned non-banking
subsidiary of IDI formed in March 1997, that has invested in various limited
partnerships, as well. NIDI was organized in the State of Nevada. IDI's
investment in NIDI at March 31, 1999 amounted to $5.2 million. For the year
ended March 31, 1999, NIDI had total assets of $5.8 million and net income of
$700,000. This compares to total assets of $5.9 million and net income of
$300,000 for the prior year ended March 31, 1998.
The assets of NIDI include one partnership interest with a carrying
value greater than $1.0 million. The partnership investment is an industrial
park in Round Rock, Texas with a carrying value at March 31, 1999 of $3.6
million. This compares to a carrying value of $3.3 million for the prior year
ended March 31, 1998. The partnership had net income of $300,000 for the year
ended March 31, 1999 as compared to a net loss of $300,000 for the year ended
March 31, 1998. Management is contemplating developing the project further
because of the growth of light industry in that area of Texas.
The balance of assets at NIDI includes loans to finance the sale of
various partnerships. Two loans to one borrower have a balance greater than or
equal to $1.0 million at March 31, 1999. These loans financed the sale of a
partnership in San Antonio, Texas and have a carrying value of $4.6 million as
of March 31, 1999. Interest income from these loans was $200,000 for the year
ended March 31, 1999. There were no loans to finance the sales of partnerships
for the year ended March 31, 1998. There are other loans to finance the sale of
various partnerships that have carrying values less than $1.0 million. All loans
are current at March 31, 1999.
At March 31, 1999, the Corporation had extended $1.1 million to NIDI to
fund various partnership investments. NIDI had no borrowings as of March 31,
1998.
Together, IDI and NIDI represent the real estate investment segment of
the Corporation's business. This segment is categorized as real estate held for
development and sale on the Corporation's consolidated financial statements. Net
of reserves of $100,000, and non-performing real estate held for development and
sale of $1.8 million, the segment represents $28.3 million of total assets for
that category. For further discussion of the real estate held for development
and sale segment, see Item 8 Note 15 to the Corporation's Consolidated Financial
Statements.
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,
1999, AIS had a net profit of $100,000. The Bank's investment in AIS amounted to
$100,000 at March 31, 1999.
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, 1999 amounted to $1.7 million. ADPC had a net
loss of $90,000 for the year ended March 31, 1999.
ADPC II, LLC. ADPC II was dissolved in September, 1998 with the sale of
its multi-family property that had been classified as non-performing real estate
held for development and sale. A loan to the buyer to help fund the sale, of
$300,000, was transferred to ADPC. A deferred gain of $300,000 was also
transferred to ADPC.
ANCHOR INVESTMENT CORPORATION. AIC is an operating subsidiary of the
Bank which was incorporated in March 1993. Located in the State of Nevada, AIC
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 $184.5 million at
March 31, 1999. AIC had net income of $8.0 million for the year ended March 31,
1999. The Bank had outstanding notes to AIC of $39.0 million at March 31, 1999,
with a weighted average rate of 7.79% and maturities during the next six months.
EMPLOYEES
The Corporation had 538 full-time employees and 173 part-time employees
at March 31, 1999. The Corporation 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 that, 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.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
Transactions between a savings institution and its "affiliates" are
subject to quantitative and qualitative restrictions under Sections 23A and 23B
of the Federal Reserve Act and OTS regulations. Affiliates of a savings
institution include, among other entities, the savings institution's holding
company and companies that are controlled by or under common control with the
savings institution.
In general, the extent to which a savings institution or its
subsidiaries may engage in certain "covered transactions" with affiliates is
limited to an amount equal to 10% of the institution's capital and surplus, in
the case of covered transactions with any one affiliate, and to an amount equal
to 20% of such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings institution and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate as collateral for a loan or
extension of credit to any party; or the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. In addition, a savings institution
may not (i) make a loan or extension of credit to an affiliate unless the
affiliate is engaged only in activities permissible for banks or holding
companies; (ii) purchase or invest in securities of an affiliate other than
shares of a subsidiary; (iii) purchase a low-quality asset from an affiliate; or
(iv) engage in covered transactions and certain other transactions between a
savings institution or its subsidiaries and an affiliate except on terms and
conditions that are consistent with safe and sound banking practices. With
certain exceptions, each loan or extension of credit by a savings institution to
an affiliate must be secured by collateral with a market value ranging from 100%
to 130% (depending on the type of collateral) of the amount of the loan or
extension of credit.
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OTS regulations generally exclude all non-bank and non-savings
institution subsidiaries of savings institutions from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. OTS regulations also provide that certain
classes of savings institutions may be required to give the OTS prior notice of
affiliate transactions.
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 August
3, 1998. 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
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, 1999 was $160,000.
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, 1999 was
$80,000.
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 institution'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.
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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, 1999, the Bank had no loans to one borrower that
exceeded the 15% or $18.6 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 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
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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.
On September 30, 1996, new legislation required all SAIF member
institutions to pay a one-time special assessment to recapitalize the SAIF, with
the aggregate amount to be sufficient to bring the reserve ratio to 1.25% of
insured deposits. 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 legislation also provided for the elimination of the premium differential
between SAIF-insured and BIF-insured institutions and for the merger of the BIF
and the SAIF, with the merger being conditioned upon the prior elimination of
the thrift charter.
Beginning January 1, 1997, effective SAIF rates generally range from
zero basis points to 27 basis points. From 1997 through 1999, SAIF members will
pay 6.4 basis points to fund the Financing Corporation ("FICO"), while BIF
member institutions will pay approximately 1.3 basis points. The Bank's
insurance premiums, which had amounted to 23 basis points, were thus reduced to
6.4 basis points effective January 1, 1997.
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, 1999, the Bank had $87.5 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 that
meet certain separate salability and market valuation tests. The Bank had a
ratio of core capital to total assets of 5.77% at March 31, 1999.
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
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maintenance of a minimum ratio of core capital to total risk-weighted assets of
4.0%. At March 31, 1999, the Bank met all capital requirements on a fully
phased-in basis. (See Note 9 to the Corporation's Consolidated Financial
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, 1999.
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, 1999, the Bank was
in compliance with this net worth requirement with a ratio of 6.78%.
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.
Under new OTS regulations effective April 1, 1999, a savings
institution must file an application for OTS approval of the capital
distribution if either (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's net income for that year to
date plus the institution's retained net income for the preceding two years, (2)
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions that are a subsidiary of a holding
company (as well as certain other institutions) must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
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 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, 1999,
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 4%. Effective November
24, 1997, the OTS adopted a new liquidity rule. The rule lowers liquidity
requirements for savings associations from 5 to 4 percent of the association's
liquidity base. The base has been reduced by modifying the definition of net
withdrawable accounts to exclude, at the association's option, accounts with
maturities in excess of one year. The new rule requires the calculation once
each quarter rather than monthly and removes the requirement that certain
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obligations must mature in five years or less to qualify as a liquid asset. The
rule also added certain short-term mortgage-related securities and short-term
first lien residential mortgage loans to the list of assets includable as
regulatory liquidity. 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 1.0%)
of the total of the average daily balance of its net withdrawable deposits and
short-term borrowings. At March 31, 1999, the Bank was in compliance with these
liquidity requirements.
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, 1999, the Bank owned $22.2 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 1999 amounted to $1.4
million as compared to $1.4 million for fiscal 1998.
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, 1999, 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.
In prior years, the Bank qualified under provisions of the Internal
Revenue Code which permitted, as a deduction from taxable income, allowable bad
debt deductions which significantly exceeded actual losses and the financial
statement loan loss provisions. These earnings appropriated to a savings
institution's bad debt reserves
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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 stockholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1999, the Bank's bad debt reserves for tax purposes
totaled approximately $32.5 million. (See Note 11 to the Consolidated Financial
Statements for additional discussion).
The consolidated federal income tax returns of the bank and
its subsidiaries through March 31, 1995 are closed to examination by the
Internal Revenue Servi