SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2007
Commission file number:
000-51507
WAUWATOSA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Federally Chartered Corporation
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39-0691250
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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11200 W Plank Ct, Wauwatosa, WI
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53226
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
(414) 761-1000
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.01 Par Value
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The NASDAQ Stock Market, LLC
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(Title of class)
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(Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule
405 of the 1933 Act).
Yes
o
No
þ
Indicate by check mark whether the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the 1934 Act.
Yes
o
No
þ
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
þ
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer.
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under
the Exchange Act).
Yes
o
No
þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
Registrant, computed by reference to the last sale price on June 30, 2007, as reported by the
NASDAQ Capital Market
®
was approximately $517.7 million.
As of February 29, 2008, 30,250,897 shares of the Registrant’s Common Stock were validly issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Part of Form 10-K Into Which
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Document
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Portions of Document are Incorporated
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Proxy Statement for Annual Meeting of
Shareholders on May 13, 2008
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Part III
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WAUWATOSA HOLDINGS, INC.
FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
2
Part 1
Wauwatosa Holdings, Inc. and its subsidiaries, including Wauwatosa Savings Bank, are referred
to herein as the “Company,” “Wauwatosa Holdings,” or “we.”
Item 1.
Business
Introduction
Wauwatosa Holdings, Inc. is a corporation organized under federal law. The Company was formed
as part of the reorganization of Wauwatosa Savings Bank into mutual holding company form in October
2005. As part of the reorganization, Wauwatosa Holdings was formed as a mid-tier stock holding
company. Lamplighter Financial, MHC is our federally chartered mutual holding company. Wauwatosa
Savings Bank was converted from a mutual to a stock savings bank as part of our reorganization. In
connection with the reorganization, Wauwatosa Holdings sold approximately 30% of its stock in a
subscription offering, contributed approximately 1.65% of its common stock to a charitable
foundation, and issued the remaining approximately 68.35% to Lamplighter Financial, MHC. As a
result of the reorganization, Wauwatosa Holdings owns all of the stock of Wauwatosa Savings and, in
turn, is majority owned by Lamplighter Financial, MHC. In this report, we refer to Wauwatosa
Savings Bank, both before and after the reorganization, as “Wauwatosa Savings” or the “Bank.”
On September 28, 2007, the Company completed its charter conversion to change the Company’s
charter from a Wisconsin corporation to that of a federal corporation regulated exclusively by the
Office of Thrift Supervision (the “OTS”). Similarly, the Company’s mutual holding company parent,
Lamplighter Financial, MHC (the “MHC”) also completed its charter conversion to change the MHC’s
charter from a Wisconsin chartered mutual holding company to a federally chartered mutual holding
company exclusively regulated by the OTS. The charter conversions were approved by the OTS and the
Company’s charter conversion was approved by its shareholders at a special meeting held on June 12,
2007. Wauwatosa Savings continues to be a Wisconsin chartered savings bank. In an effort to
convey our broader market, management and the Board of Directors of Wauwatosa Savings intends to
change the Bank name sometime during 2008.
Pursuant to the plan of charter conversion, the outstanding shares of common stock, par value
$.01 per share of the Company as a Wisconsin corporation, became by operation of law, on a
one-for-one basis, common stock, par value $.01 per share of the Company as a federal corporation.
The Company maintains a website at
www.wsbonline.com
. We make available through that
website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports, as soon as is reasonably practical
after the Company electronically files those materials with, or furnishes them to, the Securities
and Exchange Commission. You may access those reports by following the links under “Investor
Relations” at the Company’s website.
3
Cautionary Factors
This Form 10-K contains or incorporates by reference various forward-looking statements
concerning the Company’s prospects that are based on the current expectations and beliefs of
management. Forward-looking statements may also be made by the Company from time to time in other
reports and documents as well as in oral presentations. When used in written documents or oral
statements, the words “anticipate,” “believe,” “estimate,” “expect,” “objective” and similar
expressions and verbs in the future tense, are intended to identify forward-looking statements.
The statements contained herein and such future statements involve or may involve certain
assumptions, risks and uncertainties, many of which are beyond the Company’s control, that could
cause the Company’s actual results and performance to differ materially from what is expected. In
addition to the assumptions and other factors referenced specifically in connection with such
statements, the following factors could impact the business and financial prospects of the Company:
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•
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inflation and changes in the interest rate environment that reduce our margins or
reduce the fair value of financial instruments;
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•
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legislative or regulatory changes that adversely affect our business;
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•
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our ability to enter new markets successfully and take advantage of growth
opportunities;
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•
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general economic conditions, either nationally or in our market area, that are worse
than expected;
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•
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significantly increased competition among depository and other financial
institutions;
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•
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adverse changes in the securities markets;
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•
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adverse changes in real estate markets;
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•
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changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies and the Financial Accounting Standards Board; and
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•
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changes in consumer spending, borrowing and savings habits.
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See also the factors regarding future operations discussed in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Risk Factors” below.
BUSINESS OF WAUWATOSA SAVINGS BANK
General
Our principal business consists of attracting deposits from the general public in the
areas surrounding our main office location in Wauwatosa, Wisconsin, a suburb of Milwaukee, and our
seven other banking offices and our nine automated teller machines (“ATM”), including stand-alone
ATM facilities, located in Milwaukee, Washington and Waukesha counties, Wisconsin.
We invest those deposits, together with funds generated from operations, primarily in
residential real estate mortgage loans. At December 31, 2007, residential real estate mortgage
loans comprised 83.9% of our total loans receivable. On that same date, our residential real estate
mortgage loan portfolio was comprised of first mortgage loans secured by one-to four-family
4
homes (45.6%), and over four-family buildings (32.5%). The remainder of our residential real
estate mortgage loans consists of home equity loans and lines of credit (5.84%) secured by a junior
position on one-to four-family properties. The remainder of our loans receivable consists of
construction and land mortgages, commercial mortgages, commercial business loans and consumer
loans.
Our revenues are derived principally from interest on loans and securities. Our primary
sources of funds are deposits, borrowings and principal and interest payments on loans and
securities.
5
Business Strategy
Our business strategy is to operate a well-capitalized and profitable community bank
dedicated to providing a complete offering of banking products and services available through
multiple delivery channels. Our principal business activity historically has been the origination
of one- to four-family residential mortgage loans. More recently, we have increased our efforts to
originate loans secured by commercial real estate, including over four-family properties. In 2007,
we added a complete line of business loan and deposit products and expanded our consumer loan
product base. There can be no assurances that we will successfully implement our business
strategy.
Highlights of our business strategy are as follows:
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Remaining a Community-Oriented Institution.
We were established in
Wauwatosa, Wisconsin, a suburb of Milwaukee, in 1921, and have been
operating continuously since that time. We have been, and continue to
be, committed to meeting the financial needs of the communities we
serve, and we are dedicated to providing quality personal service to
our customers. Our focus will be to retain our mutual holding company
form of organization consistent with our historical,
community-oriented focus.
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Continuing Emphasis on Residential Real Estate Lending.
We intend to
continue our emphasis on the origination of residential real estate
loans, especially over four-family loans. Current loans-to-one
borrower limitations cap the amount of credit that we can extend to a
single or affiliated group of investors/developers at 15% of Wauwatosa
Savings’ capital. Following our stock offering, we have been able to
serve over four-family borrowers with larger lending needs and to
originate larger commercial real estate loans than we had in the past.
We provide long-term, fixed-rate loans and indexed, adjustable
mortgage loan products to our owner-occupied residential mortgage
customers.
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Expansion within Our Market Area.
Wauwatosa Savings’ growth in recent
years has been achieved through the origination of real estate
mortgages funded primarily by fixed-term deposits. We currently
operate eight banking offices. In 2007, we opened a new full service
branch in the city of West Allis, Wisconsin. We plan to continue to
expand our branch network in the future by adding one to two branches
each year within our existing market area defined as Milwaukee and
Waukesha counties and each of the other five contiguous counties.
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Expansion of Product Offerings.
Beginning in 2007, the Bank began
offering variable rate, indexed residential mortgage loan and
long-term fixed rate loans. Prior to this addition, Bank customers
interested in these terms were referred to the Bank’s mortgage
brokerage subsidiary, Waterston Mortgage Corporation. We also
broadened our residential product offering by buying high balance,
high quality, low loan-to-value ratio jumbo loans secured by real
estate outside our primary market area and brokered by Waterstone
Mortgage Corporation.
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Improving Asset Quality.
By all measures, our asset quality has
deteriorated over the past two years. Current problem loans were
generally originated in 2004 and 2005 with and almost all were
originated prior to 2006. We identified the weaknesses in our
underwriting standards and procedures in the fourth quarter of 2005.
In 2006, we
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rewrote our underwriting policies, strengthened our
underwriting standards and implemented an officers’ loan committee for
review and approval of all loans in excess of $500,000. We hired
senior loan officers experienced in systematically identifying,
objectively evaluating and documenting good credit risks. In 2007, we
added an independent loan underwriting function for all residential
loans and a loan review function to ensure that newly implemented
controls and safeguards are uniformly implemented and applied. We
also expanded our collections staff and upgraded the tools used to
reduce the number of pass-due loans that become chronically
delinquent.
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7
Competition
We face competition within our market area both in making real estate loans and
attracting deposits. The Milwaukee-Waukesha-West Allis metropolitan statistical area has a high
concentration of financial institutions including large commercial banks, community banks and
credit unions. As of June 30, 2007, based on the FDIC’s annual Summary of Deposits Report, our
market share of deposits represented 2.6% of deposits in the metropolitan statistical area, the
sixth largest market share in the area.
Our competition for loans and deposits comes principally from commercial banks, savings
institutions, mortgage banking firms and credit unions. We face additional competition for deposits
from money market funds, brokerage firms, and mutual funds. Our primary focus is to build and
develop profitable customer relationships across all lines of business while maintaining our role
as a community bank.
Market Area
The Bank’s market area is broadly defined as the Milwaukee, Wisconsin metropolitan market
geographically located in the southeast corner of the state. More specifically, our current target
market is based in Milwaukee and Waukesha counties and includes each of the five surrounding
counties: Ozaukee, Washington, Jefferson, Walworth and Racine. The Bank has four branch offices in
Milwaukee County, three branch offices in Waukesha County and one branch office in Washington
County. At June 30, 2007, 42.7% of total bank deposits in the state of Wisconsin were located in
the seven County metropolitan Milwaukee market.
Our primary market area for deposits includes the communities in which we maintain our
banking office locations. Our primary lending area is broader than our primary deposit market area
and includes all of the target market noted above but extends further west to the Madison,
Wisconsin market and further north to the Appleton and Green Bay, Wisconsin markets. In addition,
our mortgage banking operation has seven offices in Wisconsin and one office in Denver, Colorado.
Lending Activities
The scope of the discussion included under “Lending Activities” is limited to lending
operations at the Bank. A discussion related to lending activities at Waterstone Mortgage
Corporation is included under “Mortgage Banking Activities.”
Historically, our principal lending activity has been the origination of mortgage loans for
the purchase or refinancing of residential real estate. Generally, we retain loans that the Bank
originates. One- to four-family residential real estate loans represented $672.4 million, or 45.6%,
of our total loan portfolio at December 31, 2007. Over four-family residential real estate
mortgage loans represented $477.8 million, or 32.5%, of our total loan portfolio at December 31,
2007. We also offer construction and land loans, commercial real estate loans, home equity and
commercial loans. At December 31, 2007, construction and land loans, commercial real estate, home
equity and commercial loans totaled $156.3 million, $52.0 million, $86.0 million and $28.2 million
or 10.6%, 3.5%, 5.8% and 1.9% respectively, of our total loan portfolio.
8
Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio
in dollar amounts and in percentage of the total portfolio at the dates indicated.
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At December 31,
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At June 30,
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2007
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2006
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2005
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2005
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2004
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2003
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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(Dollars in Thousands)
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Mortgage loans:
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Real estate loans:
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One- to four-family
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$
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672,362
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45.64
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%
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638,089
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44.17
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%
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$
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649,996
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46.66
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%
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$
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628,445
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48.36
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%
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$
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576,348
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50.89
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%
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$
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530,466
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53.58
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%
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Over four-family
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477,766
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32.45
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%
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492,693
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34.10
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%
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456,686
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32.78
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%
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407,601
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31.36
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%
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342,535
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30.25
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%
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287,498
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29.03
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%
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Construction and land
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156,289
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10.61
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%
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168,605
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11.67
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%
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157,861
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11.33
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%
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143,686
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11.05
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%
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107,522
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9.49
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%
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87,969
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8.88
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%
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Commercial
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51,983
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3.53
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%
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51,062
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3.53
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%
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35,196
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2.53
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%
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36,586
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2.81
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%
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46,282
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4.09
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%
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40,221
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4.06
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%
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Home equity
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85,954
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5.84
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%
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91,536
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6.34
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%
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93,230
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6.69
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%
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83,345
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6.41
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%
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59,667
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5.27
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%
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43,899
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4.43
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%
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Commercial business
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28,222
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1.92
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%
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2,657
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0.18
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%
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—
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—
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—
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—
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—
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—
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—
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—
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Consumer
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286
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0.01
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%
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141
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0.01
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%
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127
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0.01
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%
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149
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0.01
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%
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154
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0.01
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%
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178
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0.02
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%
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Total loans
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1,472,862
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100.00
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%
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1,444,783
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100.00
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%
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1,393,096
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100.00
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%
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1,299,812
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100.00
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%
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1,132,508
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100.00
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%
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990,231
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100.00
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%
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Undisbursed loan
proceeds
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(67,549
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)
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(67,390
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)
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(82,712
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(77,484
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)
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(61,904
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)
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(44,110
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Net deferred loan
fees and premiums
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(3,265
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)
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(4,486
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)
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(4,366
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(4,161
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)
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(3,631
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)
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(3,099
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Allowance for loan
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(12,839
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)
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(7,195
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)
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(5,250
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)
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(4,606
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)
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(3,378
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)
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(2,970
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
lossws
Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,389,209
|
|
|
|
|
|
|
$
|
1,365,712
|
|
|
|
|
|
|
$
|
1,300,768
|
|
|
|
|
|
|
$
|
1,213,561
|
|
|
|
|
|
|
$
|
1,063,594
|
|
|
|
|
|
|
$
|
940,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-9-
Loan Portfolio Maturities and Yields.
The following table summarizes the final maturities of our
loan portfolio at December 31, 2007. Demand loans, loans having no stated repayment schedule or
maturity, and overdraft loans are reported as being due in one year or less. Maturities are based
upon the final contractual payment dates and do not reflect the impact of prepayments and scheduled
monthly payments that will occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
Over four-family
|
|
|
Construction and land
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Maturity Date
|
|
Amount
|
|
|
Average Rate
|
|
|
Amount
|
|
|
Average Rate
|
|
|
Amount
|
|
|
Average Rate
|
|
|
Amount
|
|
|
Average Rate
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Jan 1, 2008 - Dec 31, 2008
|
|
|
70,350
|
|
|
|
6.30
|
%
|
|
|
103,091
|
|
|
|
6.51
|
%
|
|
|
61,524
|
|
|
|
6.81
|
%
|
|
|
8,187
|
|
|
|
6.55
|
%
|
|
Jan 1, 2009 - Dec 31, 2009
|
|
|
76,373
|
|
|
|
6.58
|
%
|
|
|
122,046
|
|
|
|
6.40
|
%
|
|
|
23,513
|
|
|
|
6.85
|
%
|
|
|
10,372
|
|
|
|
6.50
|
%
|
|
Jan 1, 2010 - Dec 31, 2010
|
|
|
40,574
|
|
|
|
6.60
|
%
|
|
|
77,458
|
|
|
|
6.37
|
%
|
|
|
14,127
|
|
|
|
6.45
|
%
|
|
|
8,648
|
|
|
|
6.63
|
%
|
|
Jan 1, 2011 - Dec 31, 2011
|
|
|
8,405
|
|
|
|
7.00
|
%
|
|
|
19,491
|
|
|
|
6.35
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
3,281
|
|
|
|
6.14
|
%
|
|
Jan 1, 2012 - Dec 31, 2012
|
|
|
3,363
|
|
|
|
6.98
|
%
|
|
|
16,102
|
|
|
|
6.48
|
%
|
|
|
434
|
|
|
|
7.25
|
%
|
|
|
2,675
|
|
|
|
5.83
|
%
|
|
Jan 1, 2013 and thereafter
|
|
|
473,297
|
|
|
|
6.07
|
%
|
|
|
139,578
|
|
|
|
6.42
|
%
|
|
|
56,691
|
|
|
|
6.29
|
%
|
|
|
18,820
|
|
|
|
6.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
672,362
|
|
|
|
6.21
|
%
|
|
$
|
477,766
|
|
|
|
6.42
|
%
|
|
$
|
156,289
|
|
|
|
6.59
|
%
|
|
$
|
51,983
|
|
|
|
6.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity
|
|
|
Commercial Business
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Maturity Date
|
|
Amount
|
|
|
Average Rate
|
|
|
Amount
|
|
|
Average Rate
|
|
|
Amount
|
|
|
Average Rate
|
|
|
Amount
|
|
|
Average Rate
|
|
|
Jan 1, 2008 - Dec
31, 2008
|
|
|
34,113
|
|
|
|
7.60
|
%
|
|
|
14,751
|
|
|
|
7.48
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
292,016
|
|
|
|
6.70
|
%
|
|
Jan 1, 2009 - Dec
31, 2009
|
|
|
1,288
|
|
|
|
7.53
|
%
|
|
|
2,052
|
|
|
|
7.07
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
235,644
|
|
|
|
6.52
|
%
|
|
Jan 1, 2010 - Dec
31, 2010
|
|
|
1,027
|
|
|
|
7.47
|
%
|
|
|
2,099
|
|
|
|
7.06
|
%
|
|
|
194
|
|
|
|
6.91
|
%
|
|
|
144,127
|
|
|
|
6.48
|
%
|
|
Jan 1, 2011 - Dec
31, 2011
|
|
|
7,777
|
|
|
|
7.64
|
%
|
|
|
134
|
|
|
|
7.28
|
%
|
|
|
26
|
|
|
|
9.56
|
%
|
|
|
39,114
|
|
|
|
6.73
|
%
|
|
Jan 1, 2012 - Dec
31, 2012
|
|
|
15,269
|
|
|
|
7.16
|
%
|
|
|
7,277
|
|
|
|
7.18
|
%
|
|
|
66
|
|
|
|
6.51
|
%
|
|
|
45,186
|
|
|
|
6.83
|
%
|
|
Jan 1, 2013
and
thereafter
|
|
|
26,480
|
|
|
|
7.49
|
%
|
|
|
1,909
|
|
|
|
6.75
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
716,775
|
|
|
|
6.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,954
|
|
|
|
7.49
|
%
|
|
$
|
28,222
|
|
|
|
7.29
|
%
|
|
$
|
286
|
|
|
|
7.06
|
%
|
|
$
|
1,472,862
|
|
|
|
6.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-10-
The following table sets forth the scheduled repayments of fixed and adjustable rate loans at
December 31, 2007 that are contractually due after December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After December 31, 2008
|
|
|
|
Fixed
|
|
Variable
|
|
Total
|
|
|
|
(In Thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
8,993
|
|
|
$
|
593,019
|
|
|
$
|
602,012
|
|
|
Over four-family
|
|
|
841
|
|
|
|
373,834
|
|
|
|
374,675
|
|
|
Construction and land
|
|
|
82,081
|
|
|
|
12,684
|
|
|
|
94,765
|
|
|
Commercial
|
|
|
2,227
|
|
|
|
41,569
|
|
|
|
43,796
|
|
|
Home equity
|
|
|
2,725
|
|
|
|
49,116
|
|
|
|
51,841
|
|
|
Commerical
|
|
|
9,250
|
|
|
|
4,221
|
|
|
|
13,471
|
|
|
Consumer
|
|
|
286
|
|
|
|
—
|
|
|
|
286
|
|
|
|
|
|
|
Total loans
|
|
$
|
106,403
|
|
|
$
|
1,074,443
|
|
|
$
|
1,180,846
|
|
|
|
|
|
One- to Four-Family Residential Mortgage Loans.
Wauwatosa Savings’ primary lending activity
consists of the origination of residential mortgage loans secured by properties located in
Milwaukee and surrounding counties. One- to four-family loans totaled $672.4 million, or 45.6% of
total loans at December 31, 2007. One- to four-family residential loans originated during the year
ended December 31, 2007 totaled $65.9 million, or 30.0% of all loans originated. Our variable-rate
mortgage loans generally provide for maximum rate adjustments of 100 basis points per adjustment,
with a lifetime maximum adjustment up to 3%, regardless of the initial rate. Our variable-rate
mortgage loans typically amortize over terms of up to 30 years. Portfolio one- to four-family
loans at December 31, 2007 are variable rate loans but are not indexed. They are adjustable at our
discretion with the limits noted above. The Company does not and has never offered a residential
mortgage specifically designed for borrowers with sub-prime credit scores. Further, prior to 2007,
we did not offer indexed, variable-rate loans other than home equity lines of credit and we have
never offered teaser rate first mortgage products. As a result, our borrowers do not face
automatic mortgage rate increases at the end of an initial lock-in period regardless of their
credit score.
Variable rate mortgage loans can decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks because, as interest rates increase, the
underlying payments by the borrower increase, thus increasing the potential for default by the
borrower. At the same time, the marketability of the underlying collateral may be adversely
affected by higher interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan
documents and, therefore, the effectiveness of variable rate mortgage loans to decrease the risk
associated with changes in interest rates may be limited during periods of rapidly rising interest
rates.
All residential mortgage loans that we originate include “due-on-sale” clauses, which give us
the right to declare a loan immediately due and payable in the event that, among other things,
-11-
the borrower sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid. We also require homeowner’s insurance and where circumstances warrant, flood
insurance on properties securing real estate loans. At December 31, 2007, our largest single
family owner-occupied residential mortgage loan had a principal balance of $4.8 million. This loan
was performing in accordance with its contractual terms. The average single family first mortgage
loan balance was $165,000 on December 31, 2007. This compares with an average balance of $140,000
for two- to four-family mortgage loans on December 31, 2007. At December 31, 2007, our largest
two- to four-family loan had a principal balance of $2.2 million. This loan was performing in
accordance with its contractual terms.
Wauwatosa Savings offered employees special terms applicable to home mortgage loans granted on
their principal residence. Effective April 1, 2006, this program was discontinued for new loan
originations. Under the terms of the discontinued program, mortgage loans were underwritten and
granted under normal terms and conditions applicable to any Wauwatosa Savings borrower. For loans
that were granted prior to April 1, 2006 the employee interest rate is predicated upon Wauwatosa
Savings’ cost of funds on December 31 of the immediately preceding year and is adjusted annually.
The employee rate is not permitted to exceed the contract rate plus or minus increases or decreases
to the contract rate directed by the Wauwatosa Savings Board of Directors to be made to all
residential mortgage loans originated at the same contract rate, subject to any limitations, or the
lender’s right to increase or decrease interest rates contained in the mortgage note. The employee
rate is applicable to all mortgage loans that qualified under the employee loan policy statement
that are scheduled for automatic payment. Mortgage loans that are not scheduled for automatic
payment as of the last business day preceding a monthly installment payment due date revert back to
the contract rate for the following month. At December 31, 2007, the rate of interest on an
employee rate mortgage loan was 4.35%, compared to the weighted average rate of 6.04% on all single
family mortgage loans. This rate decreases to 4.30% effective March 1, 2008. Employee rate
mortgage loans totaled $8.4 million or 0.7% of our residential mortgage loan portfolio on December
31, 2007.
Over Four-family Real Estate Loans.
We originate over four-family real estate loans as a
significant portion of total annual loan production. Over four-family loans totaled $477.8
million, or 32.5% of total loans at December 31, 2007. Over four-family loans originated during
the year ended December 31, 2007 totaled $64.9 million or 29.6% of all loans originated. These
loans are generally located in our primary market area. Our over four-family real estate
underwriting policies generally provide that such real estate loans may be made in amounts of up to
80% of the appraised value of the property provided the loan complies with our current loans-to-one
borrower limit. Over four-family real estate loans may be made with typical terms of up to 30
years and are offered with interest rates that are fixed up to five years or are variable and are
either indexed or adjust at our discretion. In reaching a decision on whether to make an over
four-family real estate loan, we consider gross revenues and the net operating income of the
property, the borrower’s expertise and credit history, business cash flow, and the appraised value
of the underlying property. In addition, we will also consider the terms and conditions of the
leases and the credit quality of the tenants. We generally require that the properties securing
these real estate loans have debt service coverage ratios (the ratio of earnings before interest,
taxes, depreciation and amortization divided by interest expense and current maturities of long
term debt) of at least 1.15 times. Environmental surveys are required for commercial real estate
loans when environmental risks are identified. Generally, over four-family loans made to
corporations,
-12-
partnerships and other business entities require personal guarantees by the principals and
owners of 20% or more of the entity.
An over four-family borrower’s financial information is monitored on an ongoing basis by
requiring periodic financial statement updates, payment history reviews and periodic face-to-face
meetings with the borrower. We generally require borrowers with aggregate outstanding balances
exceeding $1 million to provide annually updated financial statements and federal tax returns.
These requirements also apply to all guarantors on these loans. We also require borrowers with
rental investment property to provide an annual report of income and expenses for the property,
including a tenant list and copies of leases, as applicable. The average outstanding over
four-family mortgage loan balance totaled $495,000 on December 31, 2007. The largest over
four-family real estate loan in our portfolio at December 31, 2007 was an $8.5 million loan for a
112 unit, 14 building apartment complex located in Walworth County, Wisconsin with an appraised
value of $9.9 million. This loan was performing in accordance with its contractual terms. At
December 31, 2007, our largest exposure to one borrower or to a related group of borrowers was
$21.5 million, represented by six separate loans on residential properties with over four units
located in Wisconsin outside of the metropolitan Milwaukee market. Three of these loans are
construction loans so even though the total loan commitment was $21.5 million, the outstanding
principal balance at December 31, 2007 was $19.7 million. The largest loan in the group is a $6.8
million construction loan with a December 31, 2007 outstanding balance of $5.0 million secured by a
112 unit apartment building located in Dodge County, Wisconsin and valued at $8.5 million. These
loans are all performing according to the loan terms.
Loans secured by over four-family real estate generally involve larger principal amounts and a
greater degree of risk than owner-occupied, one- to four-family residential mortgage loans.
Because payments on loans secured by over four-family properties are often dependent on the
successful operation or management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy.
Residential Construction and Land Loans.
We originate construction loans to individuals and
contractors for the construction and acquisition of personal and multi-family residences. At
December 31, 2007, construction mortgage loans totaled $156.3 million, or 10.6%, of total loans.
Construction and land loans originated during the year ended December 31, 2007 totaled $33.7
million or 15.4% of all loans originated. At December 31, 2007, the unadvanced portion of these
construction loans totaled $27.3 million.
Our construction mortgage loans generally provide for the payment of interest only during the
construction phase, which is typically up to nine months although our policy is to consider
construction periods as long as 12 months or more. At the end of the construction phase, the
construction loan converts to a longer term mortgage loan. Construction loans can be made with a
maximum loan-to-value ratio of 90%, provided that the borrower obtains private mortgage insurance
on the loan if the loan balance exceeds 80% of the lesser of the appraised value or sales price of
the secured property. At December 31, 2007, our largest construction mortgage loan commitment was
for $8.0 million, $7.8 million of which had been disbursed. This loan was performing according to
its terms. The average outstanding construction loan balance totaled $852,000 on December 31,
2007.
-13-
Before making a commitment to fund a residential construction loan, we require an appraisal of
the property by an independent licensed appraiser. We also review and inspect each property before
disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after
inspection based on the percentage of completion method.
Construction financing is generally considered to involve a higher degree of credit risk than
longer-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan
depends largely upon the accuracy of the initial estimate of the value of the property at
completion of construction compared to the estimated cost (including interest) of construction and
other assumptions. If the estimate of construction cost is inaccurate, we may be required to
advance funds beyond the amount originally committed in order to protect the value of the property.
Additionally, if the estimate of value is inaccurate, we may be confronted with a project, when
completed, with a value that is insufficient to ensure full payment.
Commercial Real Estate Loans.
Commercial real estate loans originated during the year ended
December 31, 2007 totaled $13.5 million, or 6.2% of all loans originated. Commercial real estate
loans totaled $52.0 million at December 31, 2007, or 3.5% of total loans, and are made up of loans
secured by office and retail buildings, churches, restaurants, other retail properties and mixed
use properties. These loans are generally located in our primary market area. Our commercial real
estate underwriting policies provide that such real estate loans may be made in amounts of up to
80% of the appraised value of the property. Commercial real estate loans may be made with terms of
up to 30 years and are offered with interest rates that are fixed up to five years or are variable
and are either indexed or adjust at our discretion. In reaching a decision on whether to make a
commercial real estate loan, we consider gross revenues and the net operating income of the
property, the borrower’s expertise and credit history, business cash flow, and the appraised value
of the underlying property. In addition, we will also consider the terms and conditions of the
leases and the credit quality of the tenants. We generally require that the properties securing
these real estate loans have debt service coverage ratios (the ratio of earnings before interest,
taxes, depreciation and amortization divided by interest expense and current maturities of long
term debt) of at least 1.15 times. Environmental surveys are required for commercial real estate
loans when environmental risks are identified. Generally, commercial real estate loans made to
corporations, partnerships and other business entities require personal guarantees by the
principals and owners of 20% or more of the entity.
A commercial borrower’s financial information is monitored on an ongoing basis by requiring
periodic financial statement updates, payment history reviews and periodic face-to-face meetings
with the borrower. We generally require borrowers with aggregate outstanding balances exceeding $1
million to provide annually updated financial statements and federal tax returns. These
requirements also apply to all guarantors on these loans. We also require borrowers to provide an
annual report of income and expenses for the property, including a tenant list and copies of
leases, as applicable. The largest commercial real estate loan in our portfolio at December 31,
2007 was a $2.8 million loan for a mixed use commercial and residential building with an appraised
value of $4.0 million located in Milwaukee County, Wisconsin. This loan is performing in
accordance with all loan terms. The loan to value ratio for this mortgage loan is 70.2%.
-14-
Home Equity Loans
.
We also offer home equity loans and home equity lines of credit, both of
which are secured by owner-occupied and non-owner occupied one- to four-family residences. Home
equity loans and lines originated during the year ended December 31, 2007 totaled $15.9 million, or
7.2% of all loans originated. At December 31, 2007, outstanding home equity loans and equity lines
of credit totaled $54.5 million. Additionally, at December 31, 2007, the unadvanced amounts of
home equity lines of credit totaled $31.5 million. The underwriting standards utilized for home
equity loans and home equity lines of credit include a determination of the applicant’s credit
history, an assessment of the applicant’s ability to meet existing obligations and payments on the
proposed loan and the value of the collateral securing the loan. Home equity loans are offered
with adjustable rates of interest and with terms up to 10 years. The loan-to-value ratio for our
home equity loans and our lines of credit is generally limited to 90%. Home equity lines of credit
are offered with a maximum loan-to-value ration of 100% with a minimum credit score of 680. The
largest home equity loan outstanding on December 31, 2007 totaled $1.2 million on a property with
an appraised value of $1.6 million. Our home equity lines of credit have ten-year terms and
adjustable rates of interest which are indexed to the prime rate, as reported in
The Wall Street
Journal
. Interest rates on home equity lines of credit are generally limited to a maximum rate of
18%. The largest home equity line of credit outstanding on December 31, 2007 totaled $1.0 million
on a commitment of $1.1 million, and is secured by a property with an appraised value of $3.7
million.
Commercial Business Loans.
Commercial business loans originated during the year ended
December 31, 2007 totaled $25.2 million, or 11.5% of all loans originated. Commercial loans
totaled $28.2 million at December 31, 2007, or 1.9% of total loans, and are made up of loans
secured by accounts receivable, inventory, equipment and real estate. These loans are generally
located in our primary market area. Working capital lines of credit are granted for the purpose of
carrying inventory and accounts receivable or purchasing equipment. These lines require that
certain working capital ratios are maintained and are monitored on a monthly or quarterly basis.
These are short-term loans with variable rates. Outstanding balances fluctuate up to the maximum
commitment amount based on fluctuations in the balance of the underlying collateral. Personal
property loans secured by equipment are generally made for terms of up to 84 months and for up to
80% of the value of the underlying collateral. Interest rates on equipment loans may be either
fixed or variable. Commercial real estate loans are generally variable rate loans with initial
rate lock periods of up to five years. Real estate loans are amortized over 15 to 25 years. Small
Business Administration participation is available to qualifying borrowers on all types of
commercial business loans.
A commercial borrower’s financial information is monitored on an ongoing basis by requiring
periodic financial statement updates, payment history reviews and periodic face-to-face meetings
with the borrower. The largest commercial loan in our portfolio at December 31, 2007 was a $3.0
million loan for a participation in an $8.5 million loan secured by a warehouse located in Rock
County, Wisconsin. This loan is performing in accordance with all loan terms.
-15-
The following table shows loan origination, purchasing and principal repayment activity during
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
Ended December
|
|
June 30,
|
|
|
|
2007
|
|
2006
|
|
31, 2005
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Total loans at beginning of year
|
|
$
|
1,450,170
|
|
|
$
|
1,393,096
|
|
|
$
|
1,299,812
|
|
|
$
|
1,132,507
|
|
|
Mortgage loans originated for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
65,851
|
|
|
|
111,316
|
|
|
|
110,288
|
|
|
|
211,209
|
|
|
Over four-family
|
|
|
64,857
|
|
|
|
99,420
|
|
|
|
95,734
|
|
|
|
148,964
|
|
|
Construction and land
|
|
|
33,705
|
|
|
|
74,104
|
|
|
|
54,615
|
|
|
|
99,996
|
|
|
Commercial
|
|
|
13,494
|
|
|
|
19,867
|
|
|
|
2,658
|
|
|
|
11,733
|
|
|
Home equity
|
|
|
15,886
|
|
|
|
11,916
|
|
|
|
22,840
|
|
|
|
25,229
|
|
|
|
|
|
|
Total mortgage loans originated for investment
|
|
|
193,793
|
|
|
|
316,623
|
|
|
|
286,135
|
|
|
|
497,131
|
|
|
Consumer loans originated for investment
|
|
|
157
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial loans originated for investment
|
|
|
25,229
|
|
|
|
2,867
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Total loans originated for investment
|
|
|
219,179
|
|
|
|
319,490
|
|
|
|
286,135
|
|
|
|
497,131
|
|
|
|
|
|
|
Other loans — net activity
|
|
|
—
|
|
|
|
67
|
|
|
|
(43
|
)
|
|
|
16
|
|
|
Principal repayments
|
|
|
(191,100
|
)
|
|
|
(267,870
|
)
|
|
|
(192,808
|
)
|
|
|
(329,842
|
)
|
|
|
|
|
|
Net activity in loans held for investment
|
|
|
28,079
|
|
|
|
51,687
|
|
|
|
93,284
|
|
|
|
167,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated for sale
|
|
|
242,120
|
|
|
|
84,603
|
|
|
|
—
|
|
|
|
—
|
|
|
Loans sold
|
|
|
(224,399
|
)
|
|
|
(79,216
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Net activity in loans held for sale
|
|
|
17,721
|
|
|
|
5,387
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable and held for sale at end of period
|
|
$
|
1,495,970
|
|
|
$
|
1,450,170
|
|
|
$
|
1,393,096
|
|
|
$
|
1,299,812
|
|
|
|
|
|
-16-
Origination and Servicing of Loans.
All loans originated by us are underwritten pursuant to
internally developed policies and procedures. While we generally underwrite loans to Freddie Mac
and Fannie Mae standards, due to several unique characteristics, a majority of our loans do not
conform to the secondary market standards. The unique features of our loans include: interest
payments in advance, discretionary rate adjustments, pre-payment penalties, and the historically
lower periodic and lifetime caps on rate adjustments.
Irrespective of our mortgage banking operations, we generally retain in our portfolio all
loans that we originate. However, we periodically sell mortgage loans when a loans
-
to
-
one
-
borrower
limit is being approached. At December 31, 2007, Wauwatosa Savings was servicing loans sold in the
amount of $5.2 million. Loan servicing includes collecting and remitting loan payments, accounting
for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and tax payments on
behalf of the borrowers and generally administering the loans.
Loan Approval Procedures and Authority
.
Wauwatosa Savings’ lending activities follow written,
non-discriminatory, underwriting standards and loan origination procedures established by Wauwatosa
Savings’ Board of Directors. The loan approval process is intended to assess the borrower’s
ability to repay the loan, the viability of the loan and the adequacy of the value of the property
that will secure the loan, if applicable. To assess the borrower’s ability to repay, we review the
employment and credit history and information on the historical and projected income and expenses
of borrowers.
Loan officers are authorized to approve and close any loan that qualifies under Wauwatosa
Savings Bank underwriting guidelines within the following lending limits:
|
|
o
|
|
Any secured one- to four-family mortgage loan up to $500,000 for a
borrower with total outstanding loans receivable of less than $2,000,000 that is
independently underwritten can be approved and closed by any loan officer.
|
|
|
|
|
o
|
|
Any loan up to $500,000 for a borrower with total outstanding loans
receivable of less than $2,000,000 can be approved and closed by a commercial loan
officer.
|
|
|
|
|
o
|
|
Any secured mortgage loan ranging from $500,001 to $2,999,999 or any
new loan to a borrower with outstanding loans receivable exceeding $2,000,000 must
be approved by the Officer Loan Committee. If approved, any loan officer may close
the loan.
|
|
|
|
|
o
|
|
Any loan for $3,000,000 or greater must be approved by the Officer Loan
Committee and Board of Directors prior to closing. If approved, any loan officer
may close the loan.
|
Non-Performing and Problem Assets
A system-generated delinquency notice is mailed monthly to all delinquent borrowers, advising
them of the amount of their delinquency. When a loan becomes more than 30 days delinquent,
Wauwatosa Savings sends a letter advising the borrower of the delinquency. The borrower is given
30 days to pay the delinquent payments or to contact Wauwatosa Savings to make arrangements to
bring the loan current over a longer period of time. If the borrower fails to bring the loan
current within 90 days from the original due date or to make arrangements to cure
-17-
the delinquency over a longer period of time, the matter is referred to legal counsel and
foreclosure or other collection proceedings are considered. We may consider forbearance in select
cases where a temporary loss of income might result, if a reasonable plan is presented by the
borrower to cure the delinquency in a reasonable period of time after his or her income resumes.
All mortgage loans are reviewed on a regular basis, and such loans are placed on non-accrual
status when they become more than 90 days delinquent. When loans are placed on non-accrual status,
unpaid accrued interest is reversed, and further income is recognized only to the extent received.
Non-Performing Assets.
Non-performing assets consist of non-accrual loans and other real
estate owned. Loans are generally placed on non-accrual status either when reasonable doubt exists
as to the full, timely collection of interest or principal, or when a loan becomes contractually
past due more than 90 days with respect to interest or principal. At that time, previously accrued
and uncollected interest on such loans is reversed and additional income is recorded only to the
extent that payments are received and the collection of principal is reasonably assured.
Generally, loans are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of time, and the
ultimate collectibility of the total contractual principal and interest is no longer in doubt.
The table below sets forth the amounts and categories of our non-performing loans and real
estate owned at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
At June 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars in Thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
32,587
|
|
|
$
|
12,044
|
|
|
$
|
8,766
|
|
|
$
|
5,232
|
|
|
$
|
4,028
|
|
|
$
|
6,151
|
|
|
Over four-family
|
|
|
38,218
|
|
|
|
8,384
|
|
|
|
6,703
|
|
|
|
5,877
|
|
|
|
4,776
|
|
|
|
5,268
|
|
|
Construction
|
|
|
3,855
|
|
|
|
7,664
|
|
|
|
1,360
|
|
|
|
830
|
|
|
|
2,072
|
|
|
|
1,641
|
|
|
Commercial real estate
|
|
|
4,358
|
|
|
|
357
|
|
|
|
962
|
|
|
|
1,137
|
|
|
|
1,139
|
|
|
|
2,528
|
|
|
Home equity
|
|
|
1,332
|
|
|
|
439
|
|
|
|
274
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
80,350
|
|
|
|
28,888
|
|
|
|
18,065
|
|
|
|
13,076
|
|
|
|
12,015
|
|
|
|
15,588
|
|
|
Real estate owned
|
|
|
8,543
|
|
|
|
520
|
|
|
|
215
|
|
|
|
475
|
|
|
|
770
|
|
|
|
—
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
88,893
|
|
|
$
|
29,408
|
|
|
$
|
18,280
|
|
|
$
|
13,551
|
|
|
$
|
12,785
|
|
|
$
|
15,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans to total loans, net
|
|
|
5.73
|
%
|
|
|
2.10
|
%
|
|
|
1.39
|
%
|
|
|
1.07
|
%
|
|
|
1.13
|
%
|
|
|
1.65
|
%
|
|
Total non-performing loans to total assets
|
|
|
4.70
|
%
|
|
|
1.75
|
%
|
|
|
1.20
|
%
|
|
|
0.94
|
%
|
|
|
0.97
|
%
|
|
|
1.41
|
%
|
|
Total non-performing assets to total assets
|
|
|
5.20
|
%
|
|
|
1.78
|
%
|
|
|
1.21
|
%
|
|
|
0.98
|
%
|
|
|
1.03
|
%
|
|
|
1.41
|
%
|
Total non-performing loans increased by $51.5 million to $80.4 million as of December 31,
2007, compared to $28.9 million as of December 31, 2006. The ratio of non-performing loans
-18-
to total loans at December 31, 2007 was 5.73% compared to 2.10% at December 31, 2006. All
categories of loans with the exception of construction and land loans experienced an increase in
non-performing loans. Of the $51.5 million increase in non-performing loans between December 31,
2007 and December 31, 2006, $34.4 million related to four borrower relationships. The first is an
$18.1 million relationship with a borrower who has twenty-one loans that are primarily secured by
multi-family properties. Based upon a review of the underlying collateral, the Company has
determined that the value of the properties is not sufficient to allow for the recovery of the
outstanding balance. As a result, a $2.0 million specific reserve has been established with
respect to this relationship. The second borrowing relationship is with an individual with eleven
loans totaling $8.7 million. Based upon a review of the underlying collateral, which consists of
two- to four-family and multi-family rental units, the Company has determined that the value of the
properties is not sufficient to allow for the recovery of the outstanding balance. As a result, a
$235,000 specific reserve has been established with respect to this relationship. The third
borrowing relationship is with an individual with nine loans totaling $4.9 million. The Company
believes that the collateral, which consists of one- to four-family and multi-family rental units,
is adequate to recover the outstanding principal balance of each of the loans should the respective
borrower cease in its efforts to return the loans to a performing status. The fourth borrowing
relationship is with an individual with two loans totaling $2.7 million. Based upon a review of
the underlying collateral, which primarily consists of a multi-family rental property, the Company
has determined that the value of the properties is not sufficient to allow for the recovery of the
outstanding balance. As a result, a $92,000 specific reserve has been established with respect to
this relationship. The majority of the remainder of the increase in non-performing loans relates
to two general categories of borrowers. The first, $12.2 million in non-performing loans relates
to a number of lending relationships with small real estate investors whose collateral consist of
one- to four-family and multi-family rental properties. Based upon a review of the underlying
collateral related to these loans, the Company has determined that the value of the properties, as
analyzed on an individual basis, is not sufficient to allow for the recovery of the outstanding
balance. As a result, $799,000 in specific reserves has been established with respect to these
loans. Lastly, $1.8 million of the increase in non-performing loans related to a number of
borrowers who contracted to construct single-family homes on a speculative basis, using a common
contractor. Based upon a review of the underlying collateral related to these loans, which
consists of single family homes, the Company has determined that the value of the properties, as
analyzed on an individual basis, is not sufficient to allow for the recovery of the outstanding
balance. As a result, a total of $400,000 specific reserve has been established with respect to
these loans. In total, $3.5 million in specific reserves have been established with respect to the
$51.5 million in non-performing loans added during the year ended December 31, 2007.
Of the $80.4 million in total non-performing loans as of December 31, 2007, the Company has
determined that $25.7 million represent loans in which the estimated realizable value of the
underlying collateral is not sufficient to allow for the recovery of the outstanding balance. As a
result of this collateral shortfall, the Company recorded charge-offs totaling $1.5 million and
specific reserves totaling $5.1 million. In general, the losses have been somewhat isolated to
borrowers that fall into the small real estate investor class which includes borrowers with
multiple one- to four-family rental properties or those who have built single family homes on a
speculative basis. Generally, loan performance and collateral shortfall issues have resulted from
both property mismanagement and a soft real estate market. Based upon its review of the remaining
-19-
$54.7 million in non-performing loans, the Company believes that the value of the underlying
collateral securing these loans is adequate to recover the outstanding principal balance of each of
the loans, should the respective borrower cease efforts to return the loan to a performing status.
Total real estate owned increased by $8.0 million to $8.5 million as of December 31, 2007,
compared to $520,000 as of December 31, 2006. Of the $8.0 million increase in real estate owned
between December 31, 2006 and December 31, 2007, $1.3 million of the addition related to four
borrowers who contracted to construct single-family homes on a speculative basis, using a common
contractor. An additional $1.5 million related to a single lending relationship, consisting of two
notes collateralized by two parcels of undeveloped land that was to have been developed into
residential real estate. Lastly, $2.6 million related to a number of lending relationships with
real estate investors whose collateral consist of one- and four-unit rental properties. Foreclosed
properties are recorded at the lower of carrying value or fair value with charge-offs, if any,
charged to the allowance for loan losses upon transfer to real estate owned. The fair value is
primarily based upon appraisals received at the time of foreclosure in addition to an analysis of
current real estate market conditions.
During the year ended December 31, 2007, $6.6 million of interest income would have been
recognized on non-accrual loans if such loans had continued to perform in accordance with their
contractual terms was. Instead, $3.0 million in interest income was recognized during 2007 on
non-accrual loans using the cash basis of accounting. The remaining $3.5 million in interest
income on non-accrual loans was contractually due and payable during 2007 but was not reported as
interest income.
There were no accruing loans past due 90 days or more during the years ended December 31, 2007
and 2006, the six months ended December 31, 2005 or the years ended June 30, 2005, 2004 and 2003.
Troubled debt restructurings totaled $2.2 million during the year ended December 31, 2007. The
troubled debt restructurings consisted of ten loans to one individual. The loans were
collateralized by one- to four-family and multi-family rental properties. There were no troubled
debt restructurings during the year ended December 31, 2006, the six months ended December 31, 2005
or the years ended June 30, 2005, 2004 and 2003.
Classified Assets.
Under our internal risk rating system, we currently classify loans and
other assets considered to be of lesser quality as “substandard,” “doubtful” or “loss” assets. An
asset is considered “substandard” if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include
those characterized by the “distinct possibility” that the institution will sustain “some loss” if
the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses
inherent in those classified “substandard,” with the added characteristic that the weaknesses
present make “collection or liquidation in full,” on the basis of currently existing facts,
conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are
those considered “uncollectible” and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted.
An institution insured by the Federal Deposit Insurance Corporation is required to establish
general allowances for loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
-20-
represent loss allowances which have been established to recognize the inherent losses
associated with lending activities, but which, unlike specific allowances, have not been allocated
to particular problem assets. When an insured institution classifies problem assets as “loss,” it
is required either to establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
Allowance for Loan Losses
Wauwatosa Savings establishes valuation allowances on loans that are deemed to be impaired. A
loan is considered impaired when, based on current information and events it is probable that
Wauwatosa Savings will not be able to collect all amounts due according to the contractual terms of
the loan agreement. A valuation allowance is established for an amount equal to the impairment when
the carrying amount of the loan exceeds the present value of the expected future cash flows,
discounted at the loan’s original effective interest rate or the fair value of the underlying
collateral.
Wauwatosa Savings also establishes valuation allowances based on an evaluation of the various
risk components that are inherent in the loan portfolio. The risk components that are evaluated
include past loan loss experience; the level of nonperforming and classified assets; current
economic conditions; volume, growth, and composition of the loan portfolio; adverse situations that
may affect the borrower’s ability to repay; the estimated value of any underlying collateral; peer
group comparisons; regulatory guidance; and other relevant factors. The allowance is increased by
provisions charged to earnings and recoveries of previously charged-off loans and reduced by
charge-offs. The adequacy of the allowance for loan losses is reviewed and approved quarterly by
the Wauwatosa Savings board of directors. The allowance reflects management’s best estimate of the
amount needed to provide for the probable loss on impaired loans and other inherent losses in the
loan portfolio, and is based on a risk model developed and implemented by management and approved
by the Wauwatosa Savings board of directors.
Actual results could differ from this estimate, and future additions to the allowance may be
necessary based on unforeseen changes in loan quality and economic conditions. In addition, the
Federal Deposit Insurance Corporation and the Wisconsin Department of Financial Institutions, as an
integral part of their examination process, periodically review Wauwatosa Savings’ allowance for
loan losses. Such regulators have the authority to require Wauwatosa Savings to recognize additions
to the allowance based on their judgments of information available to them at the time of their
review or examination.
Any loan that is 90 or more days delinquent is placed on non-accrual and classified as a
non-performing asset. A loan is classified as impaired when it is probable that Wauwatosa Savings
will be unable to collect all amounts due in accordance with the terms of the loan agreement.
Non-performing assets are then evaluated and accounted for in accordance with generally accepted
accounting principles.
-21-
The following table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month
|
|
|
|
|
|
At or for the Year
|
|
Period Ended
|
|
At or for the Year Ended
|
|
|
|
Ended December 31,
|
|
December 31,
|
|
June 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars in Thousands)
|
|
Balance at beginning of period
|
|
$
|
7,195
|
|
|
$
|
5,250
|
|
|
$
|
4,606
|
|
|
$
|
3,378
|
|
|
$
|
2,970
|
|
|
$
|
2,479
|
|
|
Provision for loan losses
|
|
|
11,697
|
|
|
|
2,201
|
|
|
|
1,035
|
|
|
|
1,238
|
|
|
|
860
|
|
|
|
520
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family (1)
|
|
|
1,397
|
|
|
|
524
|
|
|
|
97
|
|
|
|
1
|
|
|
|
320
|
|
|
|
26
|
|
|
Over four-family
|
|
|
634
|
|
|
|
—
|
|
|
|
169
|
|
|
|
—
|
|
|
|
125
|
|
|
|
—
|
|
|
Construction and land
|
|
|
3,982
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial real estate
|
|
|
27
|
|
|
|
5
|
|
|
|
102
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
Home equity
|
|
|
120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
3
|
|
|
|
7
|
|
|
|
23
|
|
|
|
8
|
|
|
|
8
|
|
|
|
3
|
|
|
|
|
|
|
Total charge-offs
|
|
|
6,163
|
|
|
|
536
|
|
|
|
391
|
|
|
|
11
|
|
|
|
453
|
|
|
|
29
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
68
|
|
|
|
144
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Over four-family
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial real estate
|
|
|
40
|
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Home equity
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer (1)
|
|
|
1
|
|
|
|
6
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
Total recoveries
|
|
|
110
|
|
|
|
280
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
6,053
|
|
|
|
256
|
|
|
|
391
|
|
|
|
10
|
|
|
|
452
|
|
|
|
29
|
|
|
|
|
|
|
Allowance at end of year
|
|
$
|
12,839
|
|
|
$
|
7,195
|
|
|
$
|
5,250
|
|
|
$
|
4,606
|
|
|
$
|
3,378
|
|
|
$
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to
non-performing loans at end
of period
|
|
|
15.98
|
%
|
|
|
24.91
|
%
|
|
|
29.06
|
%
|
|
|
35.22
|
%
|
|
|
28.11
|
%
|
|
|
19.05
|
%
|
|
Allowance for loan losses to
net loans outstanding at end
of period
|
|
|
0.92
|
%
|
|
|
0.52
|
%
|
|
|
0.40
|
%
|
|
|
0.38
|
%
|
|
|
0.32
|
%
|
|
|
0.32
|
%
|
|
Net charge-offs to average
loans outstanding
(annualized)
|
|
|
0.44
|
%
|
|
|
0.02
|
%
|
|
|
0.06
|
%
|
|
|
0.00
|
%
|
|
|
0.05
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
(1)
|
|
Prior to the year ended December 31, 2007, one- to four-family loans include home equity loans
and home equity lines of credit, as a separate breakdown is not available for these years.
|
-22-
Allocation of Allowance for Loan Losses.
The following table sets forth the allowance for
loan losses allocated by loan category, the total loan balances by category, and the percent of
loans in each category to total loans at the dates indicated. The allowance for loan losses
allocated to each category is not necessarily indicative of future losses in any particular
category and does not restrict the use of the allowance to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
% of Allowance
|
|
|
|
|
|
|
|
|
|
% of Allowance
|
|
|
|
|
|
|
|
|
|
% of Allowance in
|
|
|
|
|
|
|
|
% of Loans in
|
|
in Category to
|
|
|
|
|
|
% of Loans in
|
|
in Category to
|
|
|
|
|
|
% of Loans in
|
|
in Category to
|
|
|
|
Allowance for
|
|
Category to
|
|
Total
|
|
Allowance for
|
|
Category to
|
|
Total
|
|
Allowance for
|
|
Category to
|
|
Total
|
|
|
|
Loan Losses
|
Total Loans
|
Allowance
|
Loan Losses
|
Total Loans
|
Allowance
|
Loan Losses
|
Total Loans
|
Allowance
|
|
|
|
(Dollars In Thousands)
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
5,424
|
|
|
|
45.64
|
%
|
|
|
42.25
|
%
|
|
|
4,116
|
|
|
|
44.17
|
%
|
|
|
57.21
|
%
|
|
|
2,624
|
|
|
|
46.66
|
%
|
|
|
49.98
|
%
|
|
Over four-family
|
|
|
4,369
|
|
|
|
32.45
|
%
|
|
|
34.03
|
%
|
|
|
2,034
|
|
|
|
34.10
|
%
|
|
|
28.27
|
%
|
|
|
1,716
|
|
|
|
32.78
|
%
|
|
|
32.69
|
%
|
|
Construction and land
|
|
|
2,087
|
|
|
|
10.61
|
%
|
|
|
16.26
|
%
|
|
|
167
|
|
|
|
11.67
|
%
|
|
|
2.32
|
%
|
|
|
234
|
|
|
|
11.33
|
%
|
|
|
4.46
|
%
|
|
Commercial Real Estate
|
|
|
280
|
|
|
|
3.53
|
%
|
|
|
2.18
|
%
|
|
|
764
|
|
|
|
3.53
|
%
|
|
|
10.62
|
%
|
|
|
630
|
|
|
|
2.53
|
%
|
|
|
12.00
|
%
|
|
Home equity
|
|
|
536
|
|
|
|
5.84
|
%
|
|
|
4.17
|
%
|
|
|
—
|
|
|
|
6.34
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
6.69
|
%
|
|
|
—
|
|
|
Commerical
|
|
|
99
|
|
|
|
1.92
|
%
|
|
|
0.77
|
%
|
|
|
—
|
|
|
|
0.18
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
35
|
|
|
|
0.01
|
%
|
|
|
0.27
|
%
|
|
|
30
|
|
|
|
0.01
|
%
|
|
|
0.42
|
%
|
|
|
27
|
|
|
|
0.01
|
%
|
|
|
0.51
|
%
|
|
Unallocated
|
|
|
9
|
|
|
|
0.00
|
%
|
|
|
0.07
|
%
|
|
|
84
|
|
|
|
0.00
|
%
|
|
|
1.16
|
%
|
|
|
19
|
|
|
|
—
|
|
|
|
0.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan
losses
|
|
$
|
12,839
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
$
|
7,195
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
$
|
5,250
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Prior to the year ended December 31, 2007, one- to four-family loans include home
equity loans and home equity lines of credit, as a separate breakdown is not available for those
years.
|
-23-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
|
2005
|
2004
|
2003
|
|
|
|
|
|
|
|
% of Loans in
|
|
% of Allowance
|
|
|
|
|
|
% of Loans in
|
|
% of Allowance
|
|
|
|
|
|
% of Loans in
|
|
% of Allowance in
|
|
|
|
Allowance for
|
|
Category to
|
|
in Category to
|
|
Allowance for
|
|
Category to
|
|
in Category to
|
|
Allowance for
|
|
Category to
|
|
in Category to
|
|
|
|
Loan Losses
|
Total Loans
|
Total Allowance
|
Loan Losses
|
Total Loans
|
Total Allowance
|
Loan Losses
|
Total Loans
|
Total Allowance
|
|
|
|
(Dollars In Thousands)
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
1603
|
|
|
|
48.36
|
%
|
|
|
34.80
|
%
|
|
|
1118
|
|
|
|
50.89
|
%
|
|
|
33.10
|
%
|
|
|
844
|
|
|
|
53.58
|
%
|
|
|
28.42
|
%
|
|
Over four-family
|
|
|
1,646
|
|
|
|
31.36
|
%
|
|
|
35.74
|
%
|
|
|
1,831
|
|
|
|
30.25
|
%
|
|
|
54.20
|
%
|
|
|
1,852
|
|
|
|
29.03
|
%
|
|
|
62.36
|
%
|
|
Construction and land
|
|
|
712
|
|
|
|
11.05
|
%
|
|
|
15.46
|
%
|
|
|
100
|
|
|
|
9.49
|
%
|
|
|
2.96
|
%
|
|
|
—
|
|
|
|
8.88
|
%
|
|
|
—
|
|
|
Commercial Real Estate
|
|
|
450
|
|
|
|
2.81
|
%
|
|
|
9.77
|
%
|
|
|
309
|
|
|
|
4.09
|
%
|
|
|
9.15
|
%
|
|
|
259
|
|
|
|
4.06
|
%
|
|
|
8.72
|
%
|
|
Home equity
|
|
|
10
|
|
|
|
6.41
|
%
|
|
|
0.22
|
%
|
|
|
—
|
|
|
|
5.27
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
4.43
|
%
|
|
|
—
|
|
|
Commerical
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
25
|
|
|
|
0.01
|
%
|
|
|
0.54
|
%
|
|
|
20
|
|
|
|
0.01
|
%
|
|
|
0.59
|
%
|
|
|
15
|
|
|
|
0.02
|
%
|
|
|
0.50
|
%
|
|
Unallocated
|
|
|
160
|
|
|
|
—
|
|
|
|
3.47
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
4,606
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
$
|
3,378
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
$
|
2,970
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Prior to the year ended December 31, 2007, one –to four-family loans include home
equity loans and home equity lines of credit, as a separate breakdown is not available for those
years.
|
-24-
Each quarter, management evaluates the total balance of the allowance for loan losses based on
several factors some of which are not loan specific, but are reflective of the inherent losses in
the loan portfolio. This process includes, but is not limited to, a periodic review of loan
collectibility in light of historical experience, the nature and volume of loan activity,
conditions that may affect the ability of the borrower to repay, underlying value of collateral and
economic conditions in our immediate market area. All loans meeting the criteria established by
management are evaluated individually, based primarily on the value of the collateral securing the
loan and ability of the borrower to repay as agreed. Specific loss allowances are established as
required by this analysis. All loans for which a specific loss review is not required are
segregated by loan type and a loss allowance is established by using loss experience data and
management’s judgment concerning other matters it considers significant including trends in
non-performing loan balances, impaired loan balances, classified asset balances and the current
economic environment. The allowance is allocated to each category of loans based on the results of
the above analysis. Differences between the allocated balances and recorded allowances are
reflected as unallocated and are available to absorb losses resulting from the inherent imprecision
involved in the loss analysis process.
This analysis process is both quantitative and subjective, as it requires us to make estimates
that are susceptible to revisions as more information becomes available. Although we believe that
we have established the allowance at levels appropriate to absorb probable and estimable losses,
additions may be necessary if future economic conditions differ substantially from the current
environment.
At December 31, 2007, the allowance for loan losses was $12.8 million, compared to $7.2
million at December 31, 2006. As of December 31, 2007, the allowance for loan losses to total loans
receivable was 0.92% and represented 16.0% of non-performing loans, compared to 0.52% and 24.9%,
respectively, at December 31, 2006. The increase in the level of the allowance for loan losses as a
percentage of loans receivable reflects an increase both in non-performing and overall loans past
due during the year ended December 31, 2007. Past due loans increased to $139.6 million at December
31, 2007 from $80.0 million at December 31, 2006.
Net charge-offs were $6.1 million, or 0.44% of average loans for the year ended December 31, 2007,
compared to $256,000, or 0.02% of average loans for the year ended December 31, 2006. Of the $6.1
million in total charge-offs for the year ended December 31, 2007, approximately $4.0 million
related to loans secured by construction and land. One lending relationship, consisting of three
notes collateralized by two parcels of undeveloped land that was to have been developed into
residential real estate, accounted for $2.5 million of the construction and land charge-offs.
Management ordered new appraisals on the two parcels in the second quarter of 2007 after the
borrower’s stated plans to refinance the loans or sell the land were delayed or abandoned. The
updated appraised values reduced by estimated costs of disposal provided the basis for the
charge-off. This property was foreclosed upon and is currently held by the Company as real estate
owned. The remaining $1.4 million in construction and land charge-offs relate to loans made to a
number of borrowers to finance single-family speculative home construction using a common
contractor. The contractor was unable to complete the project and the borrowers were unable to
cover cost over runs. The charge-offs are based on either “as is” or “as completed” new appraisals.
An additional $1.4 million in charge-offs recorded during the year ended December 31, 2007 related
to one-to four-family loans. Losses related to loans made
-25-
to small real estate investor class accounted for $1.0 million of total charge-offs on one –to
four-family properties.
The allowance for loan losses increased by $5.6 million, or 78.4%, during 2007 to $12.8
million at December 31, 2007 from $7.2 million at
December 31, 2006. The net increase in specific
reserves related to non-performing loans accounted for $4.2 million of the increase, $3.5 million
of which related to non-performing loans added during the year ended December 31, 2007. The
remaining $1.4 million of the increase is attributable to the general valuation allowance intended
to cover probable losses in the existing loan portfolio and was based on the significant increases
in actual charge-off experience and in non-performing assets as previously described plus the
significant increase in past due but still performing loans. Total loans past due in excess of
sixty days increased $55.2 million, or 131.2%, to $97.3 million as of December 31, 2007, compared
to $42.1 million as of December 31, 2006. As of December 31, 2007, 95.2% of loans past due were
originated prior to 2006 and 67.3% were originated in 2004 and 2005.
The $11.7 million loan loss provision for the years ended December 31, 2007 is the direct
result of the net increase in the ending allowance during the period and the net charge-offs
recorded during the period. The increase in the estimated allowance for loan losses for the period
of $5.6 million plus the $6.1 million in net charge-offs results in the loan loss provision for the
year ended December 31, 2007.
Our revised underwriting policies and procedures emphasize the fact that credit decisions must
rely on both the credit quality of the borrower and the estimated value of the underlying
collateral. In the fourth quarter of 2005, it became clear to us that our credit decisions relied
too heavily on the estimated value of the underlying collateral. In this scenario, credit quality
is assured only when the estimated value of the collateral is objectively determined and is not
subject to significant fluctuation either up or down. The quantified deterioration of the credit
quality of our loan portfolio as described above is the direct result of borrowers who were not
financially strong enough to make regular interest and principal payments or maintain their
properties when the economic environment no longer allowed them the option of converting estimated
real estate value increases into short-term cash flow.
Mortgage Banking Activity
The Bank purchased Waterstone Mortgage Corporation in February 2006. Waterstone is a mortgage
broker that originates, sells and brokers one- to four-family loans. Waterstone originated $387.3
million in mortgage loans during the year ended December 31, 2007. From the date of acquisition
through December 31, 2006, Waterstone originated approximately $200.0 million in loans. Of the
$387.3 million originated during the year ended December 31, 2007, $242.1 million were funded by
Waterstone through a warehouse line of credit supplied by Wauwatosa Savings Bank. The remaining
loans were table funded meaning that the buyer of the loan actually funded the loan at closing.
Proceeds from sales to third parties totaled $226.2 million and $80.3 million for the periods ended
December 31, 2007 and 2006, respectively. These sales generated approximately $1.8 million and
$1.1 million in gains for the periods ended December 31, 2007 and 2006, respectively. These gains
are included in total mortgage banking income. The remaining $1.1 million and $1.0 million in
mortgage banking income for the
-26-
periods ended December 31, 2007 and 2006, respectively relate to brokerage fees earned on
table funded loans.
Waterstone originated a smaller portion of bridge loans for its portfolio during the year
ended December 31, 2007 and the period from acquisition through December 31, 2006. Approximately
$785,000 and $475,000 of these bridge loans remain as loans receivable as of December 31, 2007 and
2006, respectively. These loans are underwritten using national underwriting standards. There is
no history of loan loss on these loans.
Investment Activities
Wauwatosa Investments, Inc. is Wauwatosa Savings’ investment subsidiary located in Las Vegas,
Nevada. Wauwatosa Investments, Inc. manages the entire consolidated investment portfolio.
Wauwatosa Savings’ Treasurer and its Treasury Officer are responsible for implementing our
Investment Policy and monitoring the investment activities of Wauwatosa Investments, Inc. The
Investment Policy is reviewed annually by management and changes to the policy are recommended to
and subject to the approval of our Board of Directors. Authority to make investments under the
approved Investment Policy guidelines is delegated by the Board to designated employees. While
general investment strategies are developed and authorized by management, the execution of specific
actions rests with the Treasurer and Treasury Officer who may act jointly or severally. In
addition, the President of Wauwatosa Investments, Inc. has execution authority for securities
transactions. The Treasurer and Treasury Officer are responsible for ensuring that the guidelines
and requirements included in the Investment Policy are followed and that all securities are
considered prudent for investment. The Treasurer, the Treasury Officer and the President of
Wauwatosa Investments, Inc. are authorized to execute investment transactions (purchases and sales)
without the prior approval of the Board and within the scope of the established Investment Policy.
Our Investment Policy requires that all securities transactions be conducted in a safe and
sound manner. Investment decisions are based upon a thorough analysis of each security instrument
to determine its quality, inherent risks, fit within our overall asset/liability management
objectives, effect on our risk-based capital measurement and prospects for yield and/or
appreciation.
Consistent with our overall business and asset/liability management strategy, which focuses on
sustaining adequate levels of core earnings, the Company’s investment portfolio is comprised
primarily of securities that are classified as available-for-sale. During the year ended December
31, 2007, the Company purchased three structured notes that have been classified as
held-to-maturity. There was no sales activity with respect to the available-for-sale investment
portfolio during the year ended December 31, 2007. During the year ended December 31, 2006, the
Company sold lower yielding debt and mortgage-related securities totaling $12.8 million and $13.0
million, respectively. Total losses realized on the securities sales approximated $819,000. The
proceeds from these sales were used to purchase higher yielding mortgage-related securities.
-27-
Available-for-Sale Portfolio
U.S. Government Sponsored Entity Bonds.
At December 31, 2007, our U.S. Government sponsored
entity bond portfolio totaled $14.2 million, all of which were issued by government sponsored
entities and were classified as available-for-sale. The weighted average yield on these securities
was 4.45% and the weighted average remaining average life was 1.8 years at December 31, 2007.
While these securities generally provide lower yields than other investments in our securities
investment portfolio, we maintain these investments, to the extent appropriate, for liquidity
purposes and prepayment protection. The estimated fair value of our government sponsored entity
bond portfolio at December 31, 2007 was $186,000 more than the amortized cost of $14.0 million.
All government entity bonds are pledged as collateral for borrowings at December 31, 2007.
Mortgage-Related Securities.
We purchase government sponsored enterprise mortgage- related
securities issued by Fannie Mae, Freddie Mac and Ginnie Mae and corporate sponsored
mortgage-related securities issued by investment banks. We invest in mortgage-related securities
to achieve positive interest rate spreads with minimal administrative expense, and to lower our
credit risk. We regularly monitor the credit quality of the mortgage-related portfolio and have
confirmed that these securities have no underlying sub-prime mortgage lending exposure at December
31, 2007.
Mortgage-related securities are created by the pooling of mortgages and the issuance of a
security with an interest rate which is less than the interest rate on the underlying mortgages.
Mortgage-related securities typically represent a participation interest in a pool of single-family
or multi-family mortgages, although we focus our investments on mortgage-related securities backed
by one- to four-family mortgages. The issuers of such securities pool and resell the participation
interests in the form of securities to investors such as Wauwatosa Savings, and in the case of
government agency sponsored issues, guarantee the payment of principal and interest to investors.
Mortgage-related securities generally yield less than the loans that underlie such securities
because of the cost of payment guarantees and credit enhancements. However, mortgage-related
securities are usually more liquid than individual mortgage loans.
At December 31, 2007, mortgage-related securities, all of which were classified as
available-for-sale, totaled $130.6 million, or 7.6% of assets and 8.2 % of average interest earning
assets. The mortgage-related securities portfolio had a weighted average yield of 5.46% and a
weighted average remaining life of 4.9 years at December 31, 2007. The estimated fair value of our
mortgage-related securities at December 31, 2007 was $63,000 more than the amortized cost of $130.5
million. Mortgage-related securities valued at $76.8 million are pledged as collateral for
borrowings at December 31, 2007. Investments in mortgage-related securities involve a risk that
actual prepayments may differ from estimated prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any discount relating to
such instruments, thereby changing the net yield on such securities. There is also reinvestment
risk associated with the cash flows from such securities or if such securities are redeemed by the
issuer. In addition, the market value of such securities may be adversely affected in a rising
interest rate environment, particularly since virtually all of our mortgage-related securities have
a fixed rate of interest.
Municipal Obligations.
These securities consist of obligations issued by states, counties and
municipalities or their agencies and include general obligation bonds, industrial development
-28-
revenue bonds and other revenue bonds. Our Investment Policy requires that such state agency
or municipal obligations be rated “A” or better by a nationally recognized rating agency. A
security that is downgraded below investment grade will require additional analysis of credit
worthiness and a determination will be made to hold or dispose of the investment. At December 31,
2007, Wauwatosa Savings’ state agency and municipal obligations portfolio totaled $27.1 million,
all of which was classified as available-for-sale. The weighted average yield on this portfolio
was 4.25% at December 31, 2007, with a weighted average remaining life of 19.7 years. All
municipal securities are either issued by a Wisconsin municipality or are rated AA or better. The
estimated value of our municipal obligations bond portfolio at December 31, 2007 was $182,000 less
than the amortized cost of $27.3 million. While the estimated market value of the municipal
obligations portfolio is negatively impacted by the financial difficulties being encountered by the
companies that ensure the bonds, the credit quality of the bonds themselves has not declined.
Held-to-Maturity Portfolio.
As of December 31, 2007, the Company held three securities that have
been designated as held-to-maturity. The securities have a total amortized cost of $7.6 million
and an estimated fair value of $7.2 million. Each security is callable quarterly and one security,
with an amortized cost of $2.0 million was called during the first quarter of 2008. The remaining
two securities are callable beginning in the first quarter of 2009 with a final maturity in 2022.
The weighted average yield on this portfolio was 7.51% at December 31, 2007, with a weighted
average remaining life of 12.7 years.
-29-
Investment Securities Portfolio.
The following table sets forth the carrying values of our available-for-sale
mortgage-related and debt securities portfolio at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
Cost
|
Fair Value
|
|
Cost
|
Fair Value
|
|
Cost
|
Fair Value
|
|
Cost
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored entity
bonds
|
|
$
|
13,996
|
|
|
$
|
14,182
|
|
|
$
|
13,450
|
|
|
$
|
13,257
|
|
|
$
|
26,577
|
|
|
$
|
25,950
|
|
|
$
|
26,580
|
|
|
$
|
26,387
|
|
|
Mortgage-related securities
|
|
|
130,547
|
|
|
|
130,610
|
|
|
|
100,693
|
|
|
|
98,873
|
|
|
|
93,515
|
|
|
|
91,578
|
|
|
|
54,438
|
|
|
|
53,445
|
|
|
Municipal obligations
|
|
|
27,277
|
|
|
|
27,095
|
|
|
|
4,278
|
|
|
|
4,421
|
|
|
|
4,278
|
|
|
|
4,427
|
|
|
|
3,923
|
|
|
|
4,159
|
|
|
Other securities
|
|
|
250
|
|
|
|
250
|
|
|
|
794
|
|
|
|
779
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Total securities
available for sale
|
|
$
|
172,070
|
|
|
$
|
172,137
|
|
|
$
|
119,215
|
|
|
$
|
117,330
|
|
|
$
|
124,370
|
|
|
$
|
121,955
|
|
|
$
|
84,941
|
|
|
$
|
83,991
|
|
|
|
|
|
|
|
-30-
Portfolio Maturities and Yields.
The composition and maturities of the mortgage-related and debt
securities portfolio at December 31, 2007 are summarized in the following table. Maturities are
based on the final contractual payment dates and do not reflect the impact of prepayments or early
redemptions that may occur. Municipal obligation yields have not been adjusted to a tax-equivalent
basis. Certain mortgage-related securities have interest rates that are adjustable and will
reprice annually within the various maturity ranges. These repricing schedules are not reflected
in the table below. At December 31, 2007, mortgage-related securities with adjustable rates
totaled $189,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than One Year
|
|
|
More than Five Years
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
through Five Years
|
|
|
through Ten Years
|
|
|
More than Ten Years
|
|
|
Total Securities
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored
entity bonds
|
|
$
|
2,991
|
|
|
|
4.04
|
%
|
|
$
|
11,191
|
|
|
|
4.56
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
14,182
|
|
|
|
4.45
|
%
|
|
Mortgage-related securities
|
|
|
1,585
|
|
|
|
3.40
|
%
|
|
|
51,947
|
|
|
|
5.12
|
%
|
|
|
75,948
|
|
|
|
5.73
|
%
|
|
|
1,130
|
|
|
|
4.93
|
%
|
|
|
130,610
|
|
|
|
5.46
|
%
|
|
Municipal obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,664
|
|
|
|
3.78
|
%
|
|
|
25,431
|
|
|
|
4.28
|
%
|
|
|
27,095
|
|
|
|
4.25
|
%
|
|
Other securities
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
4.05
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
4.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available for
sale
|
|
$
|
4,576
|
|
|
|
3.80
|
%
|
|
$
|
63,388
|
|
|
|
5.04
|
%
|
|
$
|
77,612
|
|
|
|
5.69
|
%
|
|
$
|
26,561
|
|
|
|
4.31
|
%
|
|
$
|
172,137
|
|
|
|
5.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7,646
|
|
|
|
7.51
|
%
|
|
$
|
7,646
|
|
|
|
7.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-31-
Sources of Funds
General.
Deposits have traditionally been our primary source of funds for use in lending and
investment activities. We now also rely on advances from the Federal Home Loan Bank of Chicago and
borrowings from other commercial banks in the form of repurchase agreements collateralized by
investment securities. In addition to deposits and borrowings, funds are derived from scheduled
loan payments, investment maturities, loan prepayments, retained earnings and income on earning
assets. While scheduled loan payments and income on earning assets are relatively stable sources
of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest
rates, market conditions and levels of competition.
Deposits.
A majority of our depositors are persons who work or reside in Milwaukee and
Waukesha Counties and, to a lesser extent, other southeastern Wisconsin communities. We offer a
selection of deposit instruments, including checking, savings, money market deposit accounts, and
fixed-term certificates of deposit. Deposit account terms vary, with the principal differences
being the minimum balance required, the amount of time the funds must remain on deposit and the
interest rate. We also accept non-local, brokered deposits. Certificates of deposit comprised
83.2% of total deposits at December 31, 2007, and had a weighted average cost of 4.75% on that
date. Our high reliance on certificates of deposit results in a higher cost of funding than would
otherwise be the case if demand deposits, savings and money market accounts made up a larger part
of our deposit base. Expansion and development of the Wauwatosa Savings branch network is expected
to result in a decreased reliance on higher cost certificates of deposit by aggressively seeking
lower cost savings, checking and money market accounts.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on
a periodic basis. Deposit rates and terms are based primarily on current operating strategies and
market rates, liquidity requirements, rates paid by competitors and growth goals. To attract and
retain deposits, we rely upon personalized customer service, long-standing relationships and
competitive interest rates.
The flow of deposits is influenced significantly by general economic conditions, changes in
money market and other prevailing interest rates and competition. The variety of deposit accounts
that we offer allows us to be competitive in obtaining funds and responding to changes in consumer
demand. Based on historical experience, management believes our deposits are relatively stable.
It is unclear whether future levels of deposits will reflect our historical experience with deposit
customers. The ability to attract and maintain money market accounts and certificates of deposit,
and the rates paid on these deposits, has been and will continue to be significantly affected by
market conditions. At December 31, 2007 and December 31, 2006, $826.9 million and $883.3 million,
or 83.2% and 85.3%, respectively, of our deposit accounts were certificates of deposit, of which
$627.4 million and $693.4 million, respectively, had maturities of one year or less. The
percentage of our deposit accounts that are certificates of deposit is greater than most of our
competitors.
Deposits obtained from brokers totaled $14.9 million and $36.3 million at December 31, 2007
and 2006, respectively. Brokered deposits are utilized when their relative cost compares favorably
to the cost of local deposits. This is generally the case in a declining interest rate environment
as local market deposit rates lag the national market. Brokered deposits are also
-32-
used when it is necessary as a result of higher than expected loan growth or other short-term
liquidity needs to obtain significant additional funding over a period of weeks rather than months.
Brokered deposits at December 31, 2007 were 1.5% of total deposits and have not exceeded 12.2% of
total deposits during the past three years.
Total deposits declined by $41.7 million, or 4.0%, from December 31, 2006 to December 31,
2007. This net decline was the result of a $56.4 million, or 6.4%, decline in certificates of
deposit partially offset by a $19.9 million, or 21.1%, increase in money market and savings
accounts during the year. Funding previously provided by brokered deposits has been replaced by
local transaction accounts, local certificates of deposit and Federal Home Loan Bank advances.
Brokered deposits declined by $21.4 million, or 59.0%, between December 31, 2006 and December 31,
2007. Brokered deposits are more interest rate sensitive than are local time deposits. As a
result, brokered deposits are typically added during periods of declining short-term interest rates
and allowed to run-off during periods of rising short-term interest rates.
-33-
The following table sets forth the distribution of total deposit accounts, by account type, at the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
At June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
18,950
|
|
|
|
1.91
|
%
|
|
|
0.00
|
%
|
|
$
|
15,087
|
|
|
|
1.46
|
%
|
|
|
0.00
|
%
|
|
$
|
17,667
|
|
|
|
1.69
|
%
|
|
|
0.00
|
%
|
|
$
|
18,816
|
|
|
|
1.67
|
%
|
|
|
0.00
|
%
|
|
NOW accounts
|
|
|
34,260
|
|
|
|
3.44
|
%
|
|
|
0.82
|
%
|
|
|
43,320
|
|
|
|
4.18
|
%
|
|
|
0.95
|
%
|
|
|
64,623
|
|
|
|
6.18
|
%
|
|
|
1.41
|
%
|
|
|
82,045
|
|
|
|
7.27
|
%
|
|
|
1.74
|
%
|
|
Regular savings
|
|
|
19,162
|
|
|
|
1.93
|
%
|
|
|
0.87
|
%
|
|
|
18,177
|
|
|
|
1.75
|
%
|
|
|
0.40
|
%
|
|
|
20,962
|
|
|
|
2.00
|
%
|
|
|
0.50
|
%
|
|
|
23,614
|
|
|
|
2.09
|
%
|
|
|
0.50
|
%
|
|
Money market and
savings deposits
|
|
|
95,225
|
|
|
|
9.57
|
%
|
|
|
3.66
|
%
|
|
|
76,295
|
|
|
|
7.36
|
%
|
|
|
4.70
|
%
|
|
|
12,603
|
|
|
|
1.21
|
%
|
|
|
3.03
|
%
|
|
|
3,503
|
|
|
|
0.31
|
%
|
|
|
1.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transaction
accounts
|
|
|
167,597
|
|
|
|
16.85
|
%
|
|
|
2.35
|
%
|
|
|
152,879
|
|
|
|
14.75
|
%
|
|
|
2.67
|
%
|
|
|
115,855
|
|
|
|
11.08
|
%
|
|
|
1.21
|
%
|
|
|
127,978
|
|
|
|
11.34
|
%
|
|
|
1.24
|
%
|
|
Certificates of
deposit
|
|
|
826,938
|
|
|
|
83.15
|
%
|
|
|
4.75
|
%
|
|
|
883,339
|
|
|
|
85.25
|
%
|
|
|
4.63
|
%
|
|
|
929,738
|
|
|
|
88.92
|
%
|
|
|
3.80
|
%
|
|
|
1,000,813
|
|
|
|
88.66
|
%
|
|
|
3.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
994,535
|
|
|
|
100.00
|
%
|
|
|
4.35
|
%
|
|
$
|
1,036,218
|
|
|
|
100.00
|
%
|
|
|
4.34
|
%
|
|
$
|
1,045,593
|
|
|
|
100.00
|
%
|
|
|
3.51
|
%
|
|
$
|
1,128,791
|
|
|
|
100.00
|
%
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-34-
At December 31, 2007, the aggregate amount of outstanding certificates of deposit in amounts
greater than or equal to $100,000 was approximately $183.4 million. The following table sets forth
the maturity of those certificates at December 31, 2007.
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Due
|
|
|
Three months or less
|
|
$
|
53,022
|
|
|
Over three months through six months
|
|
|
28,547
|
|
|
Over six months through 12 months
|
|
|
57,712
|
|
|
Over 12 months
|
|
|
44,091
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,372
|
|
|
|
|
|
|
-35-
Borrowings.
Our borrowings at December 31, 2007 consist of advances from the Federal Home
Loan Bank of Chicago, repurchase agreements collateralized by investment securities and federal
funds purchased. At December 31, 2007, we had access to additional Federal Home Loan Bank advances
of up to $92.1 million. The following table sets forth information concerning balances and
interest rates on borrowings at the dates and for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Six
|
|
At or For
|
|
|
|
At or For the Year Ended
|
|
Months Ended
|
|
the Year
|
|
|
|
December 31,
|
|
December 31,
|
|
Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at end of
period
|
|
$
|
475,484
|
|
|
|
334,003
|
|
|
|
201,212
|
|
|
|
93,162
|
|
|
Weighted average interest rate
at the end of period
|
|
|
4.16
|
%
|
|
|
4.31
|
%
|
|
|
3.90
|
%
|
|
|
3.07
|
%
|
|
Maximum amount of advances
outstanding at any
month end during the period
|
|
|
475,484
|
|
|
|
349,003
|
|
|
|
201,212
|
|
|
|
106,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
during the period
|
|
|
403,577
|
|
|
|
277,505
|
|
|
|
142,560
|
|
|
|
80,364
|
|
|
Weighted average interest rate
during the period
|
|
|
4.28
|
%
|
|
|
4.25
|
%
|
|
|
3.50
|
%
|
|
|
3.71
|
%
|
Average Balance Sheet and Rate Yield Analysis
See item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Average Balance Sheets and Yield/Costs and — Rate/Volume Analysis.”
Cash Dividends
Wauwatosa Holdings did not pay any cash dividends on its common stock during the years ended
December 31, 2007 and 2006 or during the period from October 5, 2005 through December 31, 2005.
There were no common shares outstanding prior to October 5, 2005.
-36-
Subsidiary Activities
Wauwatosa Holdings currently has one wholly-owned subsidiary, Wauwatosa Savings, which in turn
has three wholly-owned subsidiaries. Wauwatosa Investments, Inc., which holds and manages our
investment portfolio, is located and incorporated in the state of Nevada. Waterstone Mortgage
Corporation is a mortgage broker incorporated in Wisconsin with offices in Wisconsin and Colorado.
Main Street Real Estate Holdings, LLC, an inactive, single member LLC, owned bank office facilities
and held bank office facility leases and is organized in Wisconsin.
Wauwatosa Investments, Inc.
Established in 1998, Wauwatosa Investments, Inc. operates in
Nevada as Wauwatosa Savings’ investment subsidiary. This wholly-owned subsidiary owns and manages
the majority of the consolidated investment portfolio. It has its own board of directors currently
comprised of its President, the Wauwatosa Savings Chief Financial Officer, Treasury Officer and the
Chairman of the Company’s Board of Directors.
Waterstone Mortgage Corporation.
Acquired in February 2006, Waterstone Mortgage Corporation
is a mortgage broker with seven offices in Wisconsin, an office in Denver, Colorado plus employees
in Florida, Montana and Hawaii. Waterstone Mortgage Corporation was the second largest mortgage
broker in the Milwaukee area based on 2007 dollar volume of retail first and second mortgages
originated. It has its own board of directors currently comprised of its President, the Wauwatosa
Savings CEO, CFO, Senior Vice President and General Counsel and the Vice President Residential
Lending.
Main Street Real Estate Holdings, LLC.
Established in 2002, Main Street Real Estate Holdings,
LLC was established to acquire and hold Bank office and retail facilities both owned and leased.
Main Street Real Estate Holdings, LLC is currently inactive.
Personnel
As of December 31, 2007, we had 292 full-time equivalent employees. Our employees are not
represented by any collective bargaining group. Management believes that we have good relations
with our employees.
Supervision and Regulation
The following discussion is only a summary of the primary laws and regulations imposed upon
Wauwatosa Savings, Wauwatosa Holdings, and Lamplighter Financial, MHC. It is not intended to be a
comprehensive description of all laws and regulations applicable to those entities and is qualified
in its entirety by reference to the applicable laws and regulations.
Regulation of Wauwatosa Savings Bank
Wauwatosa Savings is a stock savings bank organized under the laws of the State of Wisconsin.
The lending, investment, and other business operations of Wauwatosa Savings are
-37-
governed by Wisconsin law and regulations, as well as applicable federal law and regulations,
and Wauwatosa Savings is prohibited from engaging in any operations not specifically authorized by
such laws and regulations. Wauwatosa Savings is subject to extensive regulation by the Wisconsin
Department of Financial Institutions, Division of Banking (“WDFI”), by the Federal Deposit
Insurance Corporation (“FDIC”), as its deposit insurer and principal federal regulator, and by the
Board of Governors of the Federal Reserve System (“FRB”). Wauwatosa Savings’ deposit accounts are
insured up to applicable limits by the FDIC under the Deposit Insurance Fund (“DIF”). A summary
of the primary laws and regulations that govern the operations of Wauwatosa Savings are set forth
below.
Intrastate and Interstate Merger and Branching Activities
Wisconsin Law and Regulation.
Any Wisconsin savings bank meeting certain requirements may,
upon approval of the WDFI, establish one or more branch offices in the state of Wisconsin or the
states of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, and Ohio. In addition,
upon WDFI approval, a Wisconsin savings bank may establish a branch office in any other state as
the result of a merger or consolidation.
Federal Law and Regulation
. The Interstate Banking Act (the “IBA”) permits the federal
banking agencies to, under certain circumstances, approve acquisition transactions between banks
located in different states, regardless of whether the acquisition would be prohibited under the
law of the two states. The IBA authorizes
de novo
branching into another state if the host state
enacts a law expressly permitting out of state banks to establish such branches within its borders.
Additionally, the IBA authorizes branching by merger, subject to certain state law limitations.
Loans and Investments
Wisconsin Law and Regulations.
Under Wisconsin law and regulation, Wauwatosa Savings is
authorized to make, invest in, sell, purchase, participate or otherwise deal in mortgage loans or
interests in mortgage loans without geographic restriction, including loans made on the security of
residential and commercial property. Wisconsin savings banks also may lend funds on a secured or
unsecured basis for business, corporate commercial or agricultural purposes, provided the total of
all such loans does not exceed 10% of Wauwatosa Savings’ total assets, unless the WDFI authorizes a
greater amount. Loans are subject to certain other limitations, including percentage restrictions
based on Wauwatosa Savings’ total assets.
Wisconsin savings banks may invest funds in certain types of debt and equity securities,
including obligations of federal, state and local governments and agencies. Subject to prior
approval of the WDFI, compliance with capital requirements and certain other restrictions,
Wisconsin savings banks may invest in residential housing development projects. Wisconsin savings
banks may also invest in service corporations or subsidiaries with the prior approval of the WDFI,
subject to certain restrictions.
Wisconsin savings banks may make loans and extensions of credit, both direct and indirect, to
one borrower in amounts up to 15% of Wauwatosa Savings’ capital plus an additional 10% for loans
fully secured by readily marketable collateral. In addition, and notwithstanding the 15% of
capital and additional 10% of capital limitations set forth above, Wisconsin savings banks may
-38-
make loans to one borrower, or a related group of borrowers, for any purpose in an amount
not to exceed $500,000, or to develop domestic residential housing units in an amount not to exceed
the lesser of $30 million or 30% of Wauwatosa Savings’ capital, subject to certain conditions. At
December 31, 2007, Wauwatosa Savings did not have any loans which exceeded the “loans-to-one
borrower” limitations.
Finally, under Wisconsin law, Wauwatosa Savings must qualify for and maintain a level of
qualified thrift investments equal to 60% of its assets as prescribed in Section 7701(a)(19) of the
Internal Revenue Code of 1986, as amended. A Wisconsin savings bank that fails to meet this
qualified thrift lender test becomes subject to certain operating restrictions otherwise applicable
only to commercial banks. At December 31, 2007, Wauwatosa Savings maintained 97.1% of its assets in
qualified thrift investments and therefore met the qualified thrift lender requirement.
Federal Law and Regulation
. FDIC regulations also govern the equity investments of Wauwatosa
Savings, and, notwithstanding Wisconsin law and regulations, the FDIC regulations prohibit
Wauwatosa Savings from making certain equity investments and generally limit Wauwatosa Savings’
equity investments to those that are permissible for national banks and their subsidiaries. Under
FDIC regulations, Wauwatosa Savings must obtain prior FDIC approval before directly, or indirectly
through a majority-owned subsidiary, engaging “as principal” in any activity that is not
permissible for a national bank unless certain exceptions apply. The activity regulations provide
that state banks which meet applicable minimum capital requirements would be permitted to engage in
certain activities that are not permissible for national banks, including guaranteeing obligations
of others, activities which the FRB has found to be closely related to banking, and certain real
estate and securities activities conducted through subsidiaries. The FDIC will not approve an
activity that it determines presents a significant risk to the FDIC insurance fund. The activities
of Wauwatosa Savings and its subsidiaries are permissible under applicable federal regulations.
Loans to, and other transactions with, affiliates of Wauwatosa Savings such as Wauwatosa
Holdings and Lamplighter Financial, MHC, are restricted by the Federal Reserve Act and regulations
issued by the FRB thereunder. See “Transactions with Affiliates and Insiders” below.
Lending Standards
Wisconsin Law and Regulation.
Wisconsin law and regulations issued by the WDFI impose upon
Wisconsin savings banks certain fairness in lending requirements and prohibit savings banks from
discriminating against a loan applicant based upon the applicant’s physical condition,
developmental disability, sex, marital status, race, color, creed, national origin, religion or
ancestry.
Federal Law and Regulation
. The federal banking agencies adopted uniform regulations
prescribing standards for extensions of credit that are secured by liens on interests in real
estate or made for the purpose of financing the construction of a building or other improvements to
real estate. Under the joint regulations adopted by the federal banking agencies, all insured
depository institutions, including Wauwatosa Savings, must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that are secured by liens or
interests in real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification standards, prudent
underwriting standards
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(including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting requirements. The real estate
lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository institution to establish
internal loan-to-value limits for real estate loans that are not in excess of the following
supervisory limits:
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for loans secured by raw land, the supervisory loan-to-value limit is 65% of the
value of the collateral;
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for land development loans (i.e., loans for the purpose of improving unimproved
property prior to the erection of structures), the supervisory limit is 75%;
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for loans for the construction of commercial, over four-family or other
non-residential property, the supervisory limit is 80%;
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for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
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for loans secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property, including non-owner
occupied, one- to four-family property), the limit is 85%.
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Although no supervisory loan-to-value limit has been established for owner-occupied, one- to
four-family and home equity loans, the Interagency Guidelines state that for any such loan with a
loan-to-value ratio that equals or exceeds 90% at origination, an institution should require
appropriate credit enhancement in the form of either mortgage insurance or readily marketable
collateral.
Deposits
Wisconsin Law and Regulation.
Under Wisconsin law, Wauwatosa Savings is permitted to
establish deposit accounts and accept deposits. Wauwatosa Savings’ board of directors, or its
designee, determines the rate and amount of interest to be paid on or credited to deposit accounts.
Deposit Insurance
Wisconsin Law and Regulation.
Under Wisconsin law, Wauwatosa Savings is required to obtain
and maintain insurance on its deposits from a deposit insurance corporation. The deposits of
Wauwatosa Savings are insured up to the applicable limits by the FDIC.
Federal Deposit Insurance.
Wauwatosa Savings is a member of the Deposit Insurance Fund and its deposit accounts are
insured by the Federal Deposit Insurance Corporation up to prescribed limits. The Federal Deposit
Insurance Corporation administers the Deposit Insurance Fund, which generally insures commercial
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bank, savings association and state savings bank deposits. The Deposit Insurance Fund was created
as a result of the merger of the Bank Insurance Fund and the Savings Association Insurance Fund as
of March 31, 2006, pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”).
This statute also reforms the deposit insurance system by:
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keeping the insurance coverage limit for individual accounts and municipal accounts at
$100,000 but providing an inflation adjustment process which permits an adjustment
effective January 1, 2011 and every five years thereafter based on the Personal Consumption
Expenditures Index (with 2005 as the base year of comparison), unless the Federal Deposit
Insurance Corporation concludes such adjustment would be inappropriate for reasons relating
to risks to the Deposit Insurance Fund;
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increasing insurance coverage limits for self-directed retirement accounts to $250,000,
subject to the same inflation adjustment process described above;
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prohibiting undercapitalized members from accepting employee benefit plan deposits;
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providing for the payment of credits based on a member’s share of the assessment base as
of December 31, 1996 and equal to an aggregate of $4.7 billion for all members, which
credits can offset Federal Deposit Insurance Corporation assessments subject to certain
limits;
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providing for the declaration of dividends to members (based on a member’s share of the
assessment base on December 31, 1996, and premiums paid after that date) equal to 50% of
the amount in the Deposit Insurance Fund in excess of a reserve ratio of 1.35% and 100% of
such amount in excess of a reserve ratio of 1.50%, subject to the Federal Deposit Insurance
Corporation’s right to suspend or limit dividends based on risks to the Deposit Insurance
Fund; and
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eliminating the mandatory assessment (up to 23 basis points) if the Deposit Insurance
Fund falls below 1.25% of insured deposits and retaining assessments based on risk, needs
of the Deposit Insurance Fund, and the effect on the members’ capital and earnings. The
Federal Deposit Insurance Corporation is authorized to set a reserve ratio of between 1.15%
and 1.5% and will have five years to restore the Deposit Insurance Fund if the ratio falls
below 1.15%. On November 2, 2006, the Federal Deposit Insurance Corporation adopted final
regulations that set the designated reserve ratio for the Deposit Insurance Fund at 1.25%
beginning January 1, 2007.
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Also on November 2, 2006, the Federal Deposit Insurance Corporation adopted final regulations
that establish a risk-based premium system. Under the new system, the Federal Deposit Insurance
Corporation will evaluate each institution’s risk based on three primary sources of information:
supervisory ratings for all insured institutions, financial ratios for most institutions and
long-term debt issuer ratings for large institutions that have such ratings. An institution’s
assessments will be based on the insured institution’s ranking in one of four risk categories.
Effective January 1, 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2 are
grouped in Risk Category I and will be assessed for deposit insurance at an annual rate of between
five and seven cents for every $100 of domestic deposits. Institutions in Risk Categories II, III
and IV will be assessed at annual rates of 10, 28 and 43 cents, respectively. An increase in
assessments could have an adverse affect on Wauwatosa Holdings’ earnings.
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Capitalization
Wisconsin Law and Regulation
. Wisconsin savings banks are required to maintain a minimum
capital to assets ratio of 6% and must maintain total capital necessary to ensure the continuation
of insurance of deposit accounts by the FDIC. If the WDFI determines that the financial condition,
history, management or earning prospects of a savings bank are not adequate, the WDFI may require a
higher minimum capital level for the savings bank. If a Wisconsin savings bank’s capital ratio
falls below the required level, the WDFI may direct the savings bank to adhere to a specific
written plan established by the WDFI to correct the savings bank’s capital deficiency, as well as a
number of other restrictions on the savings bank’s operations, including a prohibition on the
declaration of dividends. At December 31, 2007, Wauwatosa Savings’ capital to assets ratio, as
calculated under Wisconsin law, was 9.94%.
Federal Law and Regulation
. Under FDIC regulations, federally insured state-chartered banks
that are not members of the Federal Reserve System (“state non-member banks”), such as Wauwatosa
Savings, are required to comply with minimum leverage capital requirements. For an institution
determined by the FDIC to not be anticipating or experiencing significant growth and to be, in
general, a strong banking organization, rated composite 1 under the Uniform Financial Institutions
Ranking System established by the Federal Financial Institutions Examination Council, the minimum
capital leverage requirement is a ratio of Tier I capital to total assets of 3%. For all other
institutions, the minimum leverage capital ratio is not less than 4%. Tier I capital is the sum of
common shareholders’ equity, non-cumulative perpetual preferred stock (including any related
surplus) and minority investments in certain subsidiaries, less intangible assets (except for
certain servicing rights and credit card relationships) and certain other specified items.
The FDIC regulations require state non-member banks to maintain certain levels of regulatory
capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to
regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based
capital ratios are determined by allocating assets and specified off-balance sheet items (including
recourse obligations, direct credit substitutes and residual interests) to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk. For example, under the FDIC’s risk-weighting system, cash
and securities backed by the full faith and credit of the U.S. government are given a 0% risk
weight, loans secured by one-to-four family residential properties generally have a 50% risk
weight, and commercial loans have a risk weighting of 100%.
State non-member banks, such as Wauwatosa Savings, must maintain a minimum ratio of total
capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier I capital.
Total capital consists of Tier I capital plus Tier 2 or supplementary capital items, which include
allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative
preferred stock and certain other capital instruments, and a portion of the net unrealized gain on
equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the
institution’s Tier I capital. Banks that engage in specified levels of trading activities are
subject to adjustments in their risk based capital calculation to ensure the maintenance of
sufficient capital to support market risk.
The FDIC, along with the other federal banking agencies, has adopted a regulation
providing that the agencies will take into account the exposure of a bank’s capital and
economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The FDIC
also has
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authority to establish individual minimum capital requirements in appropriate cases upon a
determination that an institution’s capital level is, or is likely to become, inadequate in light
of the particular circumstances.
As a bank holding company, Wauwatosa Holdings is subject to capital adequacy guidelines for
bank holding companies similar to those of the FDIC for state-chartered banks. Wauwatosa Holding’s
shareholders’ equity exceeds these requirements as of December 31, 2007.
Safety and Soundness Standards
Each federal banking agency, including the FDIC, has adopted guidelines establishing general
standards relating to internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings
and compensation, fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or disproportionate to
the services performed by an executive officer, employee, director, or principal shareholder.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act requires, among other things, that
federal bank regulatory authorities take “prompt corrective action” with respect to institutions
that do not meet minimum capital requirements. For these purposes, the statute establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The Federal Deposit Insurance Corporation may order savings banks which have insufficient
capital to take corrective actions. For example, a savings bank which is categorized as
“undercapitalized” would be subject to growth limitations and would be required to submit a capital
restoration plan, and a holding company that controls such a savings bank would be required to
guarantee that the savings bank complies with the restoration plan. A “significantly
undercapitalized” savings bank would be subject to additional restrictions. Savings banks deemed by
the Federal Deposit Insurance Corporation to be “critically undercapitalized” would be subject to
the appointment of a receiver or conservator.
Dividends
Under Wisconsin law and applicable regulations, a Wisconsin savings bank that meets its
regulatory capital requirement may declare dividends on capital stock based upon net profits,
provided that its paid-in surplus equals its capital stock. If the paid-in surplus of the savings
bank does not equal its capital stock, the board of directors may not declare a dividend unless at
least 10% of the net profits of the preceding half year, in the case of quarterly or semi-annual
dividends, or 10% of the net profits of the preceding year, in the case of annual dividends, has
been transferred to paid-in surplus. In addition, prior WDFI approval is required before dividends
exceeding 50% of profits for any calendar year may be declared and before a dividend may be
declared out of retained earnings. Under WDFI regulations, a Wisconsin savings bank which has
converted from mutual to
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stock form also is prohibited from paying a dividend on its capital stock
if the payment causes the regulatory capital of the savings bank to fall below the amount required
for its liquidation account.
The primary source of Wauwatosa Holdings’ cash flow, including cash flow to pay dividends on
Wauwatosa Holdings’ Common Stock, is the payment of dividends to Wauwatosa Holdings by Wauwatosa
Savings. The Federal Deposit Insurance Corporation has the authority to prohibit Wauwatosa Savings
from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or
unsound practice in light of the financial condition of Wauwatosa Savings. In addition, since
Wauwatosa Savings is a subsidiary of a savings and loan holding company, Wauwatosa Savings must
file a notice with the Office of Thrift Supervision at least 30 days before the board declares a
dividend or approves a capital distribution.
Liquidity and Reserves
Wisconsin Law and Regulation.
Under WDFI regulations, all Wisconsin savings banks are required
to maintain a certain amount of their assets as liquid assets, consisting of cash and certain types
of investments. The exact amount of assets a savings bank is required to maintain as liquid assets
is set by the WDFI, but generally ranges from 4% to 15% of the saving bank’s average daily balance
of net withdrawable accounts plus short-term borrowings (the “Required Liquidity Ratio”). At
December 31, 2007, Wauwatosa Savings’ Required Liquidity Ratio was 8.0%, and Wauwatosa Savings was
in compliance with this requirement. In addition, 50% of the liquid assets maintained by Wisconsin
savings banks must consist of “primary liquid assets”, which are defined to include securities of
the United States government and United States government agencies. At December 31, 2007,
Wauwatosa Savings was in compliance with this requirement.
Federal Law and Regulation
. Under federal law and regulations, Wauwatosa Savings is required
to maintain sufficient liquidity to ensure safe and sound banking practices. Regulation D,
promulgated by the FRB, imposes reserve requirements on all depository institutions, including
Wauwatosa Savings, which maintain transaction accounts or non-personal time deposits. Checking
accounts, NOW accounts, Super NOW checking accounts, and certain other types of accounts that
permit payments or transfers to third parties fall within the definition of transaction accounts
and are subject to Regulation D reserve requirements, as are any non-personal time deposits
(including certain money market deposit accounts) at a savings institution. For 2007, a depository
institution was required to maintain average daily reserves equal to 3% on the first $45.8 million
of transaction accounts and an initial reserve of $1.1 million, plus 10% of that portion of total
transaction accounts in excess of $45.8 million. The first $8.5 million of otherwise reservable
balances (subject to adjustment by the FRB) are exempt from the reserve requirements. These
percentages and threshold limits are subject to adjustment by the FRB. Savings institutions have
authority to borrow from the Federal Reserve System “discount window,” but Federal Reserve System
policy generally requires savings institutions to exhaust all other sources before borrowing from
the Federal Reserve System. As of December 31, 2007, Wauwatosa Savings met its Regulation D
reserve requirements.
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Transactions with Affiliates and Insiders
Wisconsin Law and Regulation
. Under Wisconsin law, Wauwatosa Savings may not make a loan to a
person owning 10% or more of its stock, an affiliated person, agent, or attorney of the savings
bank, either individually or as an agent or partner of another, except as approved by the WDFI and
regulations of the FDIC. In addition, unless the prior approval of the WDFI is obtained, Wauwatosa
Savings may not purchase, lease or acquire a site for an office building or an interest in real
estate from an affiliated person, including a shareholder owning more than 10% of its capital
stock, or from any firm, corporation, entity or family in which an affiliated person or 10%
shareholder has a direct or indirect interest.
Federal Law and Regulation.
Sections 23A and 23B of the Federal Reserve Act govern
transactions between an insured savings bank, such as Wauwatosa Savings, and any of its affiliates,
including Wauwatosa Holdings. The Federal Reserve Board has adopted Regulation W, which
comprehensively implements and interprets Sections 23A and 23B, in part by codifying prior Federal
Reserve Board interpretations under Sections 23A and 23B.
An affiliate of a bank is any company or entity that controls, is controlled by or is under
common control with the bank. A subsidiary of a bank that is not also a depository institution or a
“financial subsidiary” under federal law is not treated as an affiliate of the bank for the
purposes of Sections 23A and 23B; however, the FDIC has the discretion to treat subsidiaries of a
bank as affiliates on a case-by-case basis. Sections 23A and 23B limit the extent to which a bank
or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal
to 10% of such bank’s capital stock and surplus, and limit all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The statutory sections
also require that all such transactions be on terms that are consistent with safe and sound banking
practices. The term “covered transaction” includes the making of loans, purchase of assets,
issuance of guarantees and other similar types of transactions. Further, most loans by a bank to
any of its affiliates must be secured by collateral in amounts ranging from 100 to 130 percent of
the loan amounts. In addition, any covered transaction by an association with an affiliate and
any purchase of assets or services by an association from an affiliate must be on terms that are
substantially the same, or at least as favorable, to the bank as those that would be provided to a
non-affiliate.
A savings bank’s loans to its executive officers, directors, any owner of more than 10% of its
stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s
related interest) are subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the FRB’s Regulation O thereunder. Under these restrictions, the aggregate
amount of the loans to any insider and the insider’s related interests may not exceed the
loans-to-one-borrower limit applicable to national banks, which is comparable to the
loans-to-one-borrower limit applicable to Wauwatosa Savings’ loans. All loans by a savings bank to
all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired
capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than
loans for the education of the officer’s children and certain loans secured by the officer’s
residence, may not exceed the greater of $25,000 or 2.5% of the savings bank’s unimpaired capital
and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any
proposed loan to an insider or a related interest of that insider be approved in advance by a
majority of the board of directors of the savings bank, with any interested director not
participating in the voting, if such
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loan, when aggregated with any existing loans to that insider and the insider’s related
interests, would exceed either $500,000 or the greater of $25,000 or 5% of the savings bank’s
unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms
as, and follow credit underwriting procedures that are no less stringent than, those that are
prevailing at the time for comparable transactions with other persons and must not present more
than a normal risk of collectibility.
An exception is made for extensions of credit made pursuant to a benefit or compensation plan
of a bank that is widely available to employees of the savings bank and that does not give any
preference to insiders of the bank over other employees of the bank.
Transactions between Bank Customers and Affiliates
Under Wisconsin and federal laws and regulations, Wisconsin savings banks, such as Wauwatosa
Savings, are subject to the prohibitions on certain tying arrangements. A savings bank is
prohibited, subject to certain exceptions, from extending credit to or offering any other service
to a customer, or fixing or varying the consideration for such extension of credit or service, on
the condition that such customer obtain some additional service from the institution or certain of
its affiliates or not obtain services of a competitor of the institution.
Examinations and Assessments
Wauwatosa Savings is required to file periodic reports with and is subject to periodic
examinations by the WDFI and FDIC. Federal regulations require annual on-site examinations for
all depository institutions except those well-capitalized institutions with assets of less than
$100 million; annual audits by independent public accountants for all insured institutions with
assets in excess of $1 billion; the formation of independent audit committees of the boards of
directors of insured depository institutions for institutions with assets equal to or in excess of
$500 million; and management of depository institutions to prepare certain financial reports
annually and to establish internal compliance procedures. Wauwatosa Savings is required to pay
examination fees and annual assessments to fund its supervision. Wauwatosa Savings paid an
aggregate of $84,000 in assessments for the calendar year ended December 31, 2007.
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Customer Privacy
Under Wisconsin and federal law and regulations, savings banks, such as Wauwatosa Savings, are
required to develop and maintain privacy policies relating to information on its customers,
restrict access to and establish procedures to protect customer data. Applicable privacy
regulations further restrict the sharing of non-public customer data with non-affiliated parties if
the customer requests.
Community Reinvestment Act.
Under the Community Reinvestment Act (“CRA”), Wauwatosa Savings has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it believes are best
suited to its particular community, consistent with the CRA. The CRA requires the Federal Deposit
Insurance Corporation in connection with its examination of Wauwatosa Savings, to assess its record
of meeting the credit needs of its community and to take that record into account in its evaluation
of certain applications by Wauwatosa Savings. For example, the regulations specify that a bank’s
CRA performance will be considered in its expansion (e.g., branching) proposals and may be the
basis for approving, denying or conditioning the approval of an application. As of the date of its
most recent regulatory examination, Wauwatosa Savings was rated “satisfactory” with respect to its
CRA compliance.
Federal Home Loan Bank System
The Federal Home Loan Bank System, consisting of twelve FHLBs, is under the jurisdiction of
the Federal Housing Finance Board (“FHFB”). The designated duties of the FHFB are to supervise the
FHLBs; ensure that the FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and ensure that the FHLBs
operate in a safe and sound manner.
Wauwatosa Savings, as a member of the FHLB-Chicago, is required to acquire and hold shares of
capital stock in the FHLB-Chicago in an amount equal to the greater of (i) 1% of the aggregate
outstanding principal amount of residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or (ii) 0.3% of total assets. Wauwatosa Savings is in
compliance with this requirement with an investment in FHLB-Chicago stock of $19.3 million at
December 31, 2007.
Among other benefits, the FHLBs provide a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the FHLB-Chicago. At December 31,
2007, Wauwatosa Savings had $385.8 million in advances from the FHLB-Chicago.
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USA PATRIOT Act
The USA PATRIOT Act of 2001 gave the federal government new powers to address terrorist
threats through enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also
required the federal banking agencies to take into consideration the effectiveness of controls
designed to combat money laundering activities in determining whether to approve a merger or other
acquisition application of a member institution. Accordingly, if we engage in a merger or other
acquisition, our controls designed to combat money laundering would be considered as part of the
application process. We have established policies, procedures and systems designed to comply with
these regulations.
Regulation of Wauwatosa Holdings
Holding Company Regulation
Wisconsin Law and Regulation.
Any company that owns or controls, directly or indirectly,
more than 25% of the voting securities of a state savings bank is subject to regulation as a
savings bank holding company by the WDFI. Wauwatosa Holdings is subject to regulation as a
savings bank holding company under Wisconsin law. However, the WDFI has not yet issued specific
regulations governing savings bank holding companies.
Federal Law and Regulation
. Lamplighter Financial and Wauwatosa Holdings are non-diversified
savings and loan holding companies within the meaning of the Home Owners’ Loan Act. They are
registered with and regulated by the Office of Thrift Supervision. Pursuant to Section 10(o) of
the Home Owners’ Loan Act and Office of Thrift Supervision regulations and policy, a mutual holding
company, such as Lamplighter Financial, MHC and a federally chartered mid-tier holding company,
such as Wauwatosa Holdings may engage in the following activities: (i) investing in the stock of a
savings bank, (ii) acquiring a mutual savings bank through the merger of such savings bank into a
savings bank subsidiary of such holding company or an interim savings bank subsidiary of such
holding company, (iii) merging with or acquiring another holding company, one of whose subsidiaries
is a savings bank, (iv) investing in a corporation, the capital stock of which is available for
purchase by a savings bank under federal law or under the law of any state where the subsidiary
savings bank or savings banks share their home offices, (v) furnishing or performing management
services for a savings bank subsidiary of such company, (vi) holding, managing or liquidating
assets owned or acquired from a savings subsidiary of such company, (vii) holding or managing
properties used or occupied by a savings bank subsidiary of such company, (viii) acting as trustee
under deeds of trust, (ix) any other activity (A) that the Federal Reserve Board, by regulation,
has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding
Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for
savings and loan holding companies; or (B) in which multiple savings and loan holding companies
were authorized (by regulation) to directly engage on March 5, 1987, (x) any activity permissible
for financial holding companies under Section 4(k) of the Bank Holding Company Act, including
securities and insurance underwriting, and (xi) purchasing, holding, or disposing of stock acquired
in connection with a qualified stock issuance if the purchase of such stock by such savings and
loan holding company is approved by the Director of the Office of Thrift Supervision. If a mutual
holding company acquires or merges with another holding company, the holding company
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acquired or the holding company resulting from such merger or acquisition may only invest in
assets and engage in activities listed in (i) through (xi) above, and has a period of two years to
cease any nonconforming activities and divest of any nonconforming investments.
The Home Owners’ Loan Act prohibits a savings and loan holding company, including Wauwatosa
Holdings and Lamplighter Financial, MHC, directly or indirectly, or through one or more
subsidiaries, from acquiring more than 5% of another savings institution or holding company
thereof, without prior written approval of the Office of Thrift Supervision. It also prohibits the
acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company
engaged in activities other than those permitted by the Home Owners’ Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In evaluating applications by
holding companies to acquire savings institutions, the Office of Thrift Supervision must consider
the financial and managerial resources, future prospects of the company and institution involved,
the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by
savings and loan holding companies, and (ii) the acquisition of a savings institution in another
state if the laws of the state of the target savings institution specifically permit such
acquisitions.
Waivers of Dividends by Lamplighter Financial, MHC
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Office of Thrift Supervision regulations require Lamplighter Financial, MHC to notify the
Office of Thrift Supervision of any proposed waiver of its receipt of dividends from Wauwatosa
Holdings. The Office of Thrift Supervision reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: the waiver would not be detrimental
to the safe and sound operation of the subsidiary savings bank; and the mutual holding company’s
board of directors determines that such waiver is consistent with such directors’ fiduciary duties
to the mutual holding company’s depositors. We anticipate that Lamplighter Financial, MHC will
waive any dividends paid by Wauwatosa Holdings. As long as Wauwatosa Savings remains a Wisconsin
chartered savings bank, (i) any dividends waived by Lamplighter Financial, MHC must be retained by
Wauwatosa Holdings or Wauwatosa Savings and segregated, earmarked, or otherwise identified on the
books and records of Wauwatosa Holdings or Wauwatosa Savings, (ii) such amounts must be taken into
account in any valuation of the institution, and factored into the calculation used in establishing
a fair and reasonable basis for exchanging shares in any subsequent conversion of Lamplighter
Financial, MHC to stock form and (iii) such amounts shall not be available for payment to, or the
value thereof transferred to, minority shareholders, by any means, including through dividend
payments or at liquidation.
Conversion of Lamplighter Financial, MHC to Stock Form
.
Office of Thrift Supervision regulations permit Lamplighter Financial, MHC to convert from the
mutual form of organization to the capital stock form of organization (a “Conversion Transaction”).
There can be no assurance when, if ever, a Conversion Transaction will occur, and
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the board of directors has no current intention or plan to undertake a Conversion Transaction.
In a Conversion Transaction a new holding company would be formed as the successor to Wauwatosa
Holdings (the “New Holding Company”), Lamplighter Financial, MHC ‘s corporate existence would end,
and certain depositors of Wauwatosa Savings would receive the right to subscribe for shares of the
New Holding Company. In a Conversion Transaction, each share of common stock held by shareholders
other than Lamplighter Financial, MHC (“Minority Shareholders”) would be automatically converted
into a number of shares of common stock of the New Holding Company determined pursuant to an
exchange ratio that ensures that Minority Shareholders own the same percentage of common stock in
the New Holding Company as they owned in Wauwatosa Holdings immediately prior to the Conversion
Transaction subject to adjustment for any mutual holding company assets or waived dividends, as
applicable. The total number of shares of common stock held by Minority Shareholders after a
Conversion Transaction also would be increased by any purchases by Minority Shareholders in the
stock offering conducted as part of the Conversion Transaction.
Any Conversion Transaction would require the approval of a majority of the outstanding shares
of common stock of Wauwatosa Holdings held by Minority Shareholders and by two thirds of the total
outstanding shares of common stock of Wauwatosa Holdings. Any Conversion Transaction also would
require the approval of a majority of the eligible votes of depositors of Lamplighter Financial,
MHC.
Federal Securities Laws Regulation
Securities Exchange Act.
Wauwatosa Holdings common stock is registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934. The Company is therefore subject
to the information, proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act.
Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 was adopted in response to
public concerns regarding corporate accountability in connection with the accounting and corporate
governance scandals at several prominent companies. The stated goals of the Sarbanes-Oxley Act are
to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws.
Federal and State Taxation
Federal Taxation
General.
Wauwatosa Holdings and subsidiaries and Lamplighter Financial, MHC are subject to
federal income taxation in the same general manner as other corporations, with some exceptions
discussed below. Wauwatosa Holdings and subsidiaries constitute an affiliated group of
corporations and, therefore, are be eligible to report their income on a consolidated basis.
Because Lamplighter Financial, MHC owns less than 80% of the common stock of Wauwatosa Holdings, it
is not a member of that affiliated group and will report its income on a separate return. The
following discussion of federal taxation is intended only to summarize certain pertinent federal
-50-
income tax matters and is not a comprehensive description of the tax rules applicable to
Lamplighter Financial, MHC, Wauwatosa Holdings or Wauwatosa Savings.
Method of Accounting.
For federal income tax purposes, Wauwatosa Holdings currently reports
its income and expenses on the accrual method of accounting and uses a tax year ending December 31
for filing its federal income tax returns.
Bad Debt Reserves.
Prior to the Small Business Protection Act of 1996 (the “1996 Act”),
Wauwatosa Savings was permitted to establish a reserve for bad debts and to make annual additions
to the reserve. These additions could, within specified formula limits, be deducted in arriving at
our taxable income. As a result of the 1996 Act, Wauwatosa Savings was required to use the
specific charge off method in computing its bad debt deduction beginning with its 1996 federal tax
return. Savings institutions were required to recapture any excess reserves over those established
as of December 31, 1987 (base year reserve). At December 31, 2007, Wauwatosa Savings had no
reserves subject to recapture in excess of its base year.
Taxable Distributions and Recapture.
Prior to the 1996 Act, bad debt reserves created prior
to January 1, 1988 were subject to recapture into taxable income if Wauwatosa Savings failed to
meet certain thrift asset and definitional tests. Federal legislation has eliminated these
thrift-related recapture rules. At December 31, 2007, our total federal pre-1988 base year reserve
was approximately $16.7 million. However, under current law, pre-1988 base year reserves remain
subject to recapture if Wauwatosa Savings makes certain non-dividend distributions, repurchases any
of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank
charter.
Alternative Minimum Tax.
The Internal Revenue Code of 1986, as amended (the “Code”), imposes
an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus
certain tax preferences which we refer to as “alternative minimum taxable income.” The AMT is
payable to the extent such alternative minimum taxable income is in excess of an exemption amount
and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of
alternative minimum taxable income. Certain AMT payments may be used as credits against regular
tax liabilities in future years. Wauwatosa Savings has not been subject to the AMT and has no such
amounts available as credits for carryover.
Net Operating Loss Carryovers.
A financial institution may carry back net operating losses to
the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31,
2007, Wauwatosa Savings had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction.
Wauwatosa Holdings may exclude from its income 100%
of dividends received from Wauwatosa Savings as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is 80% in the case of dividends received
from corporations with which a corporate recipient does not file a consolidated tax return, and
corporations which own less than 20% of the stock of a corporation distributing a dividend may
deduct only 70% of dividends received or accrued on their behalf.
-51-
State Taxation
Wisconsin State Taxation.
Lamplighter Financial, MHC, Wauwatosa Holdings and Wauwatosa
Savings are subject to the Wisconsin corporate franchise (income) tax. Under current law, the
state of Wisconsin imposes a corporate franchise tax of 7.9% on the separate taxable incomes of the
members of our consolidated income tax group except our Nevada subsidiary. Presently, the income
of the Nevada subsidiary is only subject to taxation in Nevada, which currently does not impose a
corporate income or franchise tax. However, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Risk Factors — Wisconsin Tax Developments Could Reduce Our
Net Income” for a discussion of Wisconsin tax developments relating to these subsidiaries.
During the first quarter of 2007, the Company settled a dispute with the state of Wisconsin
regarding the operations of the Company’s investment subsidiary located in the state of Nevada.
The settlement covered the Nevada operations through the March 30, 2007 settlement date. The
settlement had no material effect on net income for the period as the full liability of $4.9
million, including interest, net of deferred Federal tax benefit of $1.7 million, was accrued in
prior periods. The settlement had the effect of reducing the estimated effective tax rate for the
year ended December 31, 2007 from the year ended December 31, 2006 as statutory interest will no
longer accrue as the liability has been settled.
Item 1A.
Risk Factors
Changing Interest Rates May Hurt Our Profits.
The Federal Reserve has lowered its target for the federal funds rate from 4.25% effective
December 11, 2007 to 3.00% effective January 30, 2008. If interest rates continue to fall, and if
our loans and investments reprice downwards faster than the cost of deposits and borrowings, we
would experience compression of our net interest margin, which would have a negative effect on our
profitability. Specifically, at December 31, 2007, $619 million in loans will be subject to
repricing within a 12-month period. For the most part, these loans are not indexed and do not
automatically reprice. However, experience indicates that if rates fall, a significant portion of
this total will be refinanced or otherwise modified to reflect the lower rate environment. In
addition, if the decline in rates is significant enough, a significant portion of the remaining
loan portfolio will also be refinanced at lower rates.
If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings
Could Decrease.
We make various assumptions and judgments about the collectibility of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets
serving as collateral for the repayment of many of our loans. In determining the amount of the
allowance for loan losses, we analyze our loss and delinquency experience by loan categories and we
consider the impact of existing economic conditions. If the results of our analyses are incorrect,
our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in additions to our allowance which would decrease our net income. Although we are
unaware of any specific problems with our loan portfolio that would require any increase in our
-52-
allowance at the present time, it may need to be increased further in the future due to credit
deterioration, our emphasis on loan growth and on increasing our portfolio of commercial real
estate loans.
In addition, bank regulators periodically review our allowance for loan losses and may require
us to increase our provision for loan losses or recognize further loan charge-offs, although we are
unaware of any reason for them to do so at the present time. Any increase in our allowance for
loan losses or loan charge-offs as required by these regulatory authorities may have a material
adverse effect on our results of operations and financial condition.
During 2007 We Experienced a Significant Deterioration in Our Loan Portfolio Resulting in
Increased Delinquencies, Non-performing Loans and Charge-offs.
During 2007, we experienced a significant increase in non-performing loans and loan
delinquencies. Our non-performing loans increased from $28.9 million at December 31, 2006 to $80.4
million at December 31, 2007. Moreover, our loans delinquent 60 days or more increased from $42.1
million at December 31, 2006 to $97.3 million an December 31, 2007. This deterioration in our loan
portfolio has contributed to increased charge-offs. To the extent that our loan portfolio
experiences further deterioration, our financial condition and results of operations may be
materially and adversely affected.
Our Shareholders Own a Minority of Wauwatosa Holdings’ Common Stock and Are Not Able to Exercise
Voting Control Over Most Matters Put to a Vote of Shareholders.
Public shareholders own a minority of the outstanding shares of Wauwatosa Holdings common
stock. As a result, shareholders other than Lamplighter Financial, MHC are not able to exercise
voting control over most matters put to a vote of shareholders. Lamplighter Financial, MHC owns a
majority of Wauwatosa Holdings’ common stock and, through its Board of Directors, is able to
exercise voting control over most matters put to a vote of shareholders, including possible
acquisitions. The same directors who govern Wauwatosa Holdings and Wauwatosa Savings also govern
Lamplighter Financial, MHC. The only matters as to which shareholders other than Lamplighter
Financial, MHC are able to exercise voting control are those requiring a majority of disinterested
or non-Lamplighter Financial, MHC shareholders.
Item 1B.
Unresolved Staff Comments
None
-53-
Item 2.
Properties
We conduct substantially all of our business through eight banking offices and our automated
teller machines (“ATM”).
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Year
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Date of
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Owned Or
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Acquired
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Lease
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December 31, 2007
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Location
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Leased
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Or Leased
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Expiration
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Net Book Value
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(In Thousands)
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Branches:
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7500 West State Street
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Wauwatosa, Wisconsin
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Own
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1971
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N/A
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$
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1,276
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6560 South 27th Street
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Oak Creek, Wisconsin
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Own
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1986
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N/A
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$
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1,291
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21505 East Moreland Blvd
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Waukesha, Wisconsin
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Capital Lease
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2005
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2009
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$
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5,295
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1233 Corporate Center Drive
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Oconomowoc, Wisconsin
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Own
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2003
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N/A
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$
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2,756
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1230 George Towne Drive
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Pewaukee, Wisconsin
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Own
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2004
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N/A
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$
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3,860
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6555 S 108th St
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Franklin, Wisconsin
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Own
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2006
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N/A
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$
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2,625
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W188N9820 Appleton Ave
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Germantown, Wisconsin
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Own
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2006
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N/A
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$
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2,617
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10101 W Greenfield Ave
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West Allis, Wisconsin
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Own
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2006
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N/A
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$
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4,479
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7136 W State Street
(1)
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Wauwatosa, Wiscsonsin
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Own
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2000
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N/A
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$
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562
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Corporate Center:
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11200 West Plank Court
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Wauwatosa, Wisconsin
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Own
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2004
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N/A
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$
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4,854
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(1)
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Drive-up banking facility only.
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-54-
Item 3.
Legal Proceedings
We are not involved in any pending legal proceedings as a defendant other than routine legal
proceedings occurring in the ordinary course of business. At December 31, 2007, we were not
involved in any legal proceedings, the outcome of which would be material to our financial
condition or results of operations.
Item 4.
Submission of Matters to a Vote of Security Holders
Not applicable
-55-
Part II
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters and
Issuer Purchase of Equity Securities
The common stock of Wauwatosa Holdings, Inc. is traded on The NASDAQ Global Select Market
®
under the symbol WAUW.
As of February 29, 2008, there were 31,250,897 of common stock outstanding and 4,616
shareholders of record of the common stock. Wauwatosa Holdings, Inc became a publicly-held
corporation on October 4, 2005.
Wauwatosa Holdings did not pay any cash dividends on its common stock during the years ended
December 31, 2007 and 2006 or during the period from October 5, 2005 through December 31, 2005.
There were no common shares outstanding prior to October 5, 2005. Our Board has not currently
considered a policy of paying cash dividends on the common stock. If the Board considers a cash
dividend in the future, which cannot be assured, the payment of dividends will depend upon a number
of factors, including capital requirements, Wauwatosa Holdings’ and Wauwatosa Savings’ financial
condition and results of operations, tax considerations, statutory and regulatory limitations and
general economic conditions and regulatory restrictions that affect the payment of dividends by
Wauwatosa Savings to Wauwatosa Holdings. No assurances can be given that any dividends will be
paid or that, if paid, they will not be reduced or eliminated in the future. Special cash
dividends, stock dividends or returns of capital, to the extent permitted by applicable policy and
regulation, may be paid in addition to, or in lieu of, regular cash dividends. Accordingly, it is
anticipated that any cash distributions made by Wauwatosa Holdings to its shareholders would be
treated as cash dividends and not as a non-taxable return of capital for federal and state tax
purposes.
Dividends from Wauwatosa Holdings will depend, in part, upon receipt of dividends from
Wauwatosa Savings, because Wauwatosa Holdings initially will have no source of income other than
dividends from Wauwatosa Savings, earnings from the investment of proceeds from the sale of shares
of common stock, and interest payments with respect to Wauwatosa Holdings’ loan to the employee
stock ownership plan. Wisconsin law generally will allow Wauwatosa Savings to pay dividends to
Wauwatosa Holdings equal to up to 50% of Wauwatosa Savings’ net profit in the current year without
prior regulatory approval and above such amount, including out of retained earnings, with prior
regulatory approval.
-56-
Market Information
The high and low quarterly trading prices during fiscal 2007 and 2006 were as follows:
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2007
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High
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Low
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1
st
Quarter
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$
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17.99
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17.07
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2
nd
Quarter
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17.99
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16.11
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3
rd
Quarter
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16.65
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14.41
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4
th
Quarter
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17.02
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12.78
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2006
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High
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Low
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1
st
Quarter
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$
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13.85
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$
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11.44
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2
nd
Quarter
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17.06
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13.08
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3
rd
Quarter
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18.90
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15.70
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4
th
Quarter
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18.23
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17.17
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Stock Repurchase Program
On September 5, 2006, the Board of Directors of Wauwatosa Holdings, Inc. approved the commencement
of the Company’s first stock repurchase program for up to 1.5 million shares, or 14% of the
Company’s outstanding common stock held by shareholders other than Lamplighter Financial, MHC. On
June 12, 2007, the Board of Directors of the Company approved a second share repurchase program for
1.4 million shares, or 15% of its outstanding common stock held by shareholders other than
Lamplighter Financial, MHC. Repurchases have and will be made by the Company from time to time in
open-market transactions or otherwise as, in the opinion of management, market conditions warrant.
The repurchased shares will be held as treasury stock and will be available for general corporate
purposes. The following table provides the specified information about the repurchases of shares
by the Company during the fourth quarter of 2007.
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Total number of
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Maximum number
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shares purchased
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of shares that may
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Total number
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Average
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as part of
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yet be purchased
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of shares
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price paid
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publicly announced
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under the
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Period
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purchased
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per share
|
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plans or programs
|
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plans or programs (1)
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October 1 - October 31, 2007
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—
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—
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352,565
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November 1 - November 30, 2007
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110,635
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14.38
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110,635
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241,930
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December 1 - December 31, 2007
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57,370
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13.86
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57,370
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184,560
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168,005
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14.20
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-57-
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total shareholder return on Wauwatosa
Holdings common stock, based on the market price of the common stock and assuming reinvestment of
cash dividends, with the cumulative total return of companies on the NASDAQ Stock Market US Index
and the America’s Community Bankers NASDAQ Index. The graph assumes $100 was invested on October
5, 2005, the first date of Wauwatosa Holdings trading, in Wauwatosa Holdings common stock and each
of those indices.
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Stock/Index
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10/4/2005
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12/31/05
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3/31/06
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6/30/06
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9/30/06
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12/31/06
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3/31/07
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6/30/07
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9/30/07
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12/31/07
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Wauwatosa Holdings Common Stock (WAUW)
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100.00
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114.40
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136.00
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|
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170.60
|
|
|
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176.50
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|
|
178.20
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|
|
|
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174.80
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|
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165.40
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162.50
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128.20
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NASDAQ Stock Market (^IXIC)
|
|
|
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100.00
|
|
|
|
|
103.08
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|
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109.37
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|
|
|
|
101.53
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|
|
|
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105.57
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|
|
|
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112.90
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|
|
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113.19
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|
|
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121.68
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126.28
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|
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123.98
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America’s Community Bankers NASDAQ Index
|
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|
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100.00
|
|
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|
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102.75
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|
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109.05
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|
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108.42
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104.59
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|
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108.63
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|
|
|
|
102.78
|
|
|
|
|
97.49
|
|
|
|
|
93.98
|
|
|
|
|
81.70
|
|
|
|
|
-58-
Item 6
.
Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The summary financial information presented below is derived in part from the Company’s
audited financial statements, although the table itself is not audited. The following data should
be read together with the Company’s consolidated financial statements and related notes and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” later in
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
At June 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In Thousands)
|
|
Selected Financial Condition
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,710,202
|
|
|
$
|
1,648,470
|
|
|
$
|
1,511,209
|
|
|
$
|
1,386,132
|
|
|
$
|
1,240,084
|
|
|
$
|
1,104,893
|
|
|
Available for sale securities
|
|
|
172,137
|
|
|
|
117,330
|
|
|
|
121,955
|
|
|
|
83,991
|
|
|
|
99,549
|
|
|
|
90,453
|
|
|
Federal Home Loan Bank stock
|
|
|
19,289
|
|
|
|
17,213
|
|
|
|
14,406
|
|
|
|
14,097
|
|
|
|
13,322
|
|
|
|
8,658
|
|
|
Loans receivable, net
|
|
|
1,389,209
|
|
|
|
1,365,712
|
|
|
|
1,306,716
|
|
|
|
1,213,561
|
|
|
|
1,063,594
|
|
|
|
940,053
|
|
|
Cash and cash equivalents
|
|
|
17,884
|
|
|
|
73,807
|
|
|
|
16,498
|
|
|
|
20,467
|
|
|
|
19,392
|
|
|
|
28,767
|
|
|
Deposits
|
|
|
994,535
|
|
|
|
1,036,218
|
|
|
|
1,045,593
|
|
|
|
1,128,791
|
|
|
|
1,035,588
|
|
|
|
909,491
|
|
|
Borrowings
|
|
|
475,484
|
|
|
|
334,003
|
|
|
|
201,212
|
|
|
|
93,162
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
Total shareholders’ equity
|
|
|
201,819
|
|
|
|
241,272
|
|
|
|
231,696
|
|
|
|
133,416
|
|
|
|
122,799
|
|
|
|
114,596
|
|
|
Allowance for loan losses
|
|
|
12,839
|
|
|
|
7,195
|
|
|
|
5,250
|
|
|
|
4,606
|
|
|
|
3,378
|
|
|
|
2,970
|
|
|
Non-performing loans
|
|
|
80,350
|
|
|
|
28,888
|
|
|
|
18,065
|
|
|
|
13,076
|
|
|
|
12,015
|
|
|
|
15,588
|
|
-59-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
Years Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(In Thousands, except per share amounts)
|
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
96,975
|
|
|
$
|
92,228
|
|
|
$
|
42,036
|
|
|
$
|
74,207
|
|
|
$
|
66,088
|
|
|
$
|
66,451
|
|
|
Interest expense
|
|
|
62,134
|
|
|
|
53,779
|
|
|
|
20,758
|
|
|
|
36,068
|
|
|
|
32,432
|
|
|
|
34,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
34,841
|
|
|
|
38,449
|
|
|
|
21,278
|
|
|
|
38,139
|
|
|
|
33,656
|
|
|
|
31,933
|
|
|
Provision for loan losses
|
|
|
11,697
|
|
|
|
2,201
|
|
|
|
1,035
|
|
|
|
1,238
|
|
|
|
860
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
23,144
|
|
|
|
36,248
|
|
|
|
20,243
|
|
|
|
36,901
|
|
|
|
32,796
|
|
|
|
31,472
|
|
|
Noninterest income
|
|
|
6,842
|
|
|
|
5,156
|
|
|
|
2,244
|
|
|
|
3,257
|
|
|
|
3,035
|
|
|
|
2,993
|
|
|
Noninterest expense
|
|
|
28,682
|
|
|
|
28,652
|
|
|
|
18,303
|
|
|
|
23,522
|
|
|
|
20,384
|
|
|
|
17,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,304
|
|
|
|
12,752
|
|
|
|
4,184
|
|
|
|
16,636
|
|
|
|
15,447
|
|
|
|
16,847
|
|
|
Provision for income taxes (benefit)
|
|
|
(254
|
)
|
|
|
4,699
|
|
|
|
1,471
|
|
|
|
7,520
|
|
|
|
4,863
|
|
|
|
5,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,558
|
|
|
$
|
8,053
|
|
|
$
|
2,713
|
|
|
$
|
9,116
|
|
|
$
|
10,584
|
|
|
$
|
11,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share — basic (1)
|
|
$
|
0.05
|
|
|
$
|
0.24
|
|
|
$
|
(0.02
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share — diluted (1)
|
|
$
|
0.05
|
|
|
$
|
0.24
|
|
|
$
|
(0.02
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The 2005 loss per share is based upon net loss and weighted average shares outstanding from
the date of reorganization (October 4, 2005) to December 31, 2005.
|
-60-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
At or For the Years Ended
|
|
Ended
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
At or For the Years Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
2003
|
|
Selected Financial Ratios
(4)
and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.09
|
%
|
|
|
0.50
|
%
|
|
|
0.36
|
%
|
|
|
0.70
|
%
|
|
|
0.90
|
%
|
|
|
1.08
|
%
|
|
Return on average equity
|
|
|
0.72
|
|
|
|
3.41
|
|
|
|
3.22
|
|
|
|
7.12
|
|
|
|
8.88
|
|
|
|
10.19
|
|
|
Interest rate spread
(1)
|
|
|
1.74
|
|
|
|
2.00
|
|
|
|
2.43
|
|
|
|
2.74
|
|
|
|
2.70
|
|
|
|
2.84
|
|
|
Net interest margin
(2)
|
|
|
2.19
|
|
|
|
2.52
|
|
|
|
2.96
|
|
|
|
3.04
|
|
|
|
2.98
|
|
|
|
3.19
|
|
|
Noninterest expense to average assets
|
|
|
1.73
|
|
|
|
1.80
|
|
|
|
2.44
|
|
|
|
1.81
|
|
|
|
1.74
|
|
|
|
1.71
|
|
|
Efficiency ratio
(3)
|
|
|
68.85
|
|
|
|
66.19
|
|
|
|
77.84
|
|
|
|
56.88
|
|
|
|
55.55
|
|
|
|
50.36
|
|
|
Average interest-earning assets to average
interest-bearing liabilities
|
|
|
111.68
|
|
|
|
114.59
|
|
|
|
118.38
|
|
|
|
110.29
|
|
|
|
109.71
|
|
|
|
110.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to total assets at end of period
|
|
|
11.80
|
%
|
|
|
14.64
|
%
|
|
|
15.33
|
%
|
|
|
9.63
|
%
|
|
|
9.90
|
%
|
|
|
10.37
|
%
|
|
Average equity to average assets
|
|
|
13.07
|
|
|
|
14.79
|
|
|
|
11.25
|
|
|
|
9.83
|
|
|
|
10.15
|
|
|
|
10.56
|
|
|
Total capital to risk-weighted assets
|
|
|
13.43
|
|
|
|
21.36
|
|
|
|
22.79
|
|
|
|
14.05
|
|
|
|
15.02
|
|
|
|
15.61
|
|
|
Tier I capital to risk-weighted assets
|
|
|
12.52
|
|
|
|
20.75
|
|
|
|
22.29
|
|
|
|
13.58
|
|
|
|
14.62
|
|
|
|
15.22
|
|
|
Tier I capital to average assets
|
|
|
10.08
|
|
|
|
14.47
|
|
|
|
14.23
|
|
|
|
9.84
|
|
|
|
10.18
|
|
|
|
10.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent of total loans
|
|
|
0.92
|
%
|
|
|
0.52
|
%
|
|
|
0.40
|
%
|
|
|
0.38
|
%
|
|
|
0.32
|
%
|
|
|
0.32
|
%
|
|
Allowance for loan losses as a percent of
non-performing loans
|
|
|
15.98
|
|
|
|
24.91
|
|
|
|
29.06
|
|
|
|
35.22
|
|
|
|
28.11
|
|
|
|
19.05
|
|
|
Net charge-offs to average outstanding loans during the
period
|
|
|
0.44
|
|
|
|
0.02
|
|
|
|
0.06
|
|
|
|
0
|
|
|
|
0.05
|
|
|
|
0
|
|
|
Non-performing loans as a percent of total loans
|
|
|
5.73
|
|
|
|
2.10
|
|
|
|
1.39
|
|
|
|
1.07
|
|
|
|
1.13
|
|
|
|
1.65
|
|
|
Non-performing assets as a percent of total assets
|
|
|
5.20
|
|
|
|
1.75
|
|
|
|
1.21
|
|
|
|
0.98
|
|
|
|
1.03
|
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of full service offices
|
|
|
8
|
|
|
|
7
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
|
Number of limited service offices
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
(1)
|
|
Represents the difference between the weighted average yield on average interest-earning
assets and the weighted average cost of interest-bearing liabilities.
|
|
|
|
(2)
|
|
Represents net interest income as a percent of average interest-earning assets.
|
|
|
|
(3)
|
|
Represents non-interest expense divided by the sum of net interest income and non-interest
income.
|
|
|
|
(4)
|
|
Ratios for six-month period have been annualized.
|
-61-
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
On October 4, 2005, Wauwatosa Savings Bank completed its reorganization and initial public
offering of common stock of Wauwatosa Holdings, Inc. Upon completion of the reorganization,
Lamplighter Financial, MHC (a Wisconsin chartered mutual holding company) owned approximately 68%
of the outstanding shares of common stock of Wauwatosa Holdings, Inc. and Wauwatosa Holdings, Inc.
owned 100% of the common stock of the Bank. As of December 31, 2007, Lamplighter Financial, MHC
owned approximately 74% of the Company.
Our results of operations depend primarily on our net interest income. Net interest income is
the difference between the interest income we earn on our interest-earning assets, consisting
primarily of residential loans, construction loans and debt and mortgage-related securities and the
interest we pay on our interest-bearing liabilities, consisting primarily of time deposits and
borrowings from the Federal Home Loan Bank of Chicago. Wauwatosa Savings is a mortgage lender with
mortgage loans comprising 98.1% of total loans receivable on December 31, 2007. Further, 83.9% of
loans receivable at December 31, 2007 are residential mortgage loans of which 45.6% are one— to
four-family loans and 32.5% are over four-family residential mortgage loans. Wauwatosa Savings
funds loan production primarily with retail deposits. Total deposits were 58.2% of total assets on
December 31, 2007. In addition, 83.2% of total deposits were time deposits also known as
certificates of deposit. Deposits obtained from brokers totaled $14.9 million at December 31,
2007. Wauwatosa Savings uses borrowings from the Federal Home Loan Bank of Chicago as a secondary
source of funding. Federal Home Loan Bank advances outstanding on December 31, 2007 totaled $385.8
million or 22.6% of total assets.
Our results of operations also are affected by our provision for loan losses, non-interest
income and non-interest expense. Non-interest income currently consists primarily of service fees,
income from the increase on the cash surrender value of life insurance and miscellaneous other
income. Non-interest expense currently consists primarily of compensation and employee benefits,
occupancy, data processing, advertising and marketing and other operating expenses including
consulting and other professional fees. Our results of operations also may be affected
significantly by general and local economic and competitive conditions, changes in market interest
rates, governmental policies and actions of regulatory authorities.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by
management and that have, or could have, a material impact on our income or the carrying value of
our assets.
Allowance for Loan Losses.
Wauwatosa Savings establishes valuation allowances on loans deemed
to be impaired. A loan is considered impaired when, based on current information and events, it is
probable that Wauwatosa Savings will not be able to collect all amounts due according to the
contractual terms of the loan agreement. A valuation allowance is established for an amount equal
to the impairment when the carrying amount of the loan exceeds the present value of the
-62-
expected future cash flows, discounted at the loan’s original effective interest rate or the
fair value of the underlying collateral.
Wauwatosa Savings also establishes valuation allowances based on an evaluation of the various
risk components that are inherent in the credit portfolio. The risk components that are evaluated
include past loan loss experience; the level of non-performing and classified assets; current
economic conditions; volume, growth, and composition of the loan portfolio; adverse situations that
may affect the borrower’s ability to repay; the estimated value of any underlying collateral;
regulatory guidance; and other relevant factors. The allowance is increased by provisions charged
to earnings and recoveries of previously charged-off loans and reduced by charge-offs. The adequacy
of the allowance for loan losses is reviewed and approved quarterly by the Wauwatosa Savings board
of directors. The allowance reflects management’s best estimate of the amount needed to provide for
the probable loss on impaired loans and other inherent losses in the loan portfolio, and is based
on a risk model developed and implemented by management and approved by the Wauwatosa Savings board
of directors.
Actual results could differ from this estimate, and future additions to the allowance may be
necessary based on unforeseen changes in loan quality and economic conditions. In addition, state
and federal regulators periodically review the Wauwatosa Savings allowance for loan losses. Such
regulators have the authority to require Wauwatosa Savings to recognize additions to the allowance
at the time of their examination.
If the allowance for loan losses is too low we may incur higher provisions for loan losses in
the future resulting in lower net income. If an estimate of the allowance for loan losses is too
high, we may experience lower provisions for loan losses resulting in higher net income.
Income Taxes.
The Company and its subsidiaries file a consolidated federal income tax return.
The provision for income taxes is based upon income in the consolidated financial statements,
rather than amounts reported on the income tax return. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
as income or expense in the period that includes the enactment date.
Positions taken in the Company’s tax returns may be subject to challenge by the taxing
authorities upon examination. Uncertain tax positions are initially recognized in the financial
statements when it is more likely than not the position will be sustained upon examination by the
tax authorities. Such tax positions are both initially and subsequently measured as the largest
amount of tax benefit that is greater than 50% likely of being realized upon settlement with the
tax authority, assuming full knowledge of the position and all relevant facts. Interest and
penalties on income tax uncertainties are classified within income tax expense in the income
statement.
During the first quarter of 2007, the Company settled a dispute with the state of Wisconsin
regarding the operations of the Company’s investment subsidiary located in the state of Nevada.
The settlement covered the Nevada operations through the March 30, 2007 settlement date. The
-63-
settlement had no material effect on net income for the period as the full liability of $4.9
million, including interest, net of deferred Federal tax benefit of $1.7 million, was accrued in
prior periods. The settlement had the effect of reducing the estimated effective tax rate for the
year ended December 31, 2007 from the year ended December 31, 2006 as statutory interest will no
longer accrue as the liability has been settled.
Management believes its tax policies and practices are critical because the determination of
the tax provision and current and deferred tax assets and liabilities have a material impact on our
net income and the carrying value of our assets. We have no plans to change the tax recognition
methodology in the future. If our estimated valuation allowance is too high or too low it will
affect our future net income. Net deferred tax assets totaled $9.7 million, $7.9 million and $6.8
million on December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, 2006 and 2005,
there was a valuation allowance of $244,000, net of $131,000 federal income tax benefit, $234,000,
net of $126,000 federal income tax benefit and $225,000, net of $121,000 federal income tax
benefit, respectively, related to the deferred tax asset recognized for the Wisconsin charitable
contribution deduction carryforward. There were no valuation allowances as of June 30, 2005. If
our estimated current and deferred tax assets and liabilities and any related estimated valuation
allowance is too high or too low, it will affect our future net income in the year that the new
information enabling us to better evaluate our estimates of income tax assets and liabilities
becomes available.
Comparison of Financial Condition at December 31, 2007 and at December 31, 2006
Total Assets.
Total assets increased by $61.7 million, or 3.7%, to $1.7 billion at December
31, 2007 from $1.6 billion at December 31, 2006. The increase in total assets resulted primarily
from increases in securities available-for-sale, loans receivable and loans held for sale as funded
by cash and cash equivalents and borrowings.
Cash and Cash Equivalents.
Cash and cash equivalents decreased by $55.9 million, or 75.8%, to
$17.9 million at December 31, 2007 from $73.8 million at December 31, 2006. Cash was used to
purchase securities, treasury shares and to fund loans receivable.
Securities Available for Sale
.
Securities available for sale increased by $54.8 million, or
46.7%, to $172.1 million at December 31, 2007 from $117.3 million at December 31, 2006. This
targeted increase in the investment portfolio resulted in adding a net $31.7 million in
mortgage-related securities and $22.7 million in bank qualified municipal securities.
Securities Held to Maturity
.
Three structured corporate notes valued at $7.6 million were
added to the investment portfolio in the first quarter of 2007. The terms of these high yield
securities result in a high potential for market value volatility. Therefore, as the Company has
the intent and ability to hold these securities until maturity, the structured corporate notes have
been classified as held-to-maturity rather than as available-for-sale.
Loans Held for Sale.
Loans held for sale increased by $17.1 million, or 328.4%, to $23.1
million at December 31, 2007 from $5.4 million at December 31, 2006. This represents mortgage
loans originated by Waterstone that will be sold in the secondary market. Fluctuations in the
balance of loans held for sale result primarily from the timing of loan closings and sales to third
parties.
-64-
Loans Receivable.
Loans receivable increased $29.1 million, or 2.1%, to $1.40 billion at
December 31, 2007 from $1.37 billion at December 31, 2006. The increase in loans receivable was
primarily attributable to a $34.3 million increase in one- to four-family loans and a $25.6 million
increase in commercial business loans, offset by a $14.9 million decrease in over four —family
loans and a $12.3 million decrease in construction and land loans. During the year ended December
31, 2007, $13.5 million in loans were transferred to real estate owned. The slower growth in loans
receivable in 2007 compared to 2006 is directly tied to the downturn in the local real estate
market.
Federal Home Loan Bank Stock.
Federal Home Loan Bank Chicago (FHLBC) stock increased by $2.1
million, or 12.1%, to $19.3 million at December 31, 2007 from $17.2 million at December 31, 2006.
This increase is the result of the increase in Federal Home Loan Bank advances outstanding at
December 31, 2007 as compared to December 31, 2006. Minimum stock ownership is based on a
combination of member bank mortgage loans and Federal Home Loan Bank advances outstanding.
Wauwatosa Savings owns the minimum required amount of Federal Home Loan Bank stock. The Federal
Home Loan Bank has not paid a dividend since the second quarter of 2007 when it paid a 2.80%
dividend. On October 10, 2007, the FHLBC entered into a consensual cease and desist order with its
regulator, the Federal Housing Finance Board. Under the terms of the order, capital stock
repurchases and redemptions, including redemptions upon membership withdrawal or other termination,
are prohibited unless the FHLBC has received approval of the Director of the Office of Supervision
of the Federal Housing Finance Board (“OS Director”). The order also provides that dividend
declarations are subject to the prior written approval of the OS Director.
Real Estate Owned
.
Total real estate owned increased by $8.0 million to $8.5 million as of
December 31, 2007, compared to $520,000 as of December 31, 2006. This increase is the direct
result of the deterioration of the local real estate market.
Prepaid Expenses and Other Assets
.
Prepaid expenses and other assets increased by $3.0
million, or 25.6%, to $14.7 million at December 31, 2007 from $11.7 million at December 31, 2006.
The biggest single increase in prepaid expenses and other assets relates to deferred federal and
state income taxes which increased by $1.8 million from December 31, 2006 to December 31, 2007.
That increase includes $2.4 million attributable to the allowance for loan losses and $944,000
attributable to accrued interest on non-performing loans. These increases in deferred tax assets
were partially offset by an $832,000 decrease in the federal deferred tax asset on the state tax
liability for the Nevada settlement and by a $684,000 decrease in the deferred tax asset related to
unrealized losses on securities available for sale.
Deposits.
Total deposits decreased $41.7 million, or 4.0%, to $944.5 million at December 31,
2007 from $1.04 billion at December 31, 2006. Total time deposits decreased $56.4 million, or
6.4%, to $826.9 million at December 31, 2007 from $883.3 million at December 31, 2006. Non-local,
wholesale time deposits decreased $34.9 million, or 70.1%, from $49.8 million at December 31, 2006
to $14.9 million at December 31, 2007. Total demand deposits decreased $5.2 million, or 8.9%, from
$58.4 million at December 31, 2006 to $53.2 million at December 31, 2007. Partially offsetting the
decrease in time and demand deposits, total money market and savings deposits increased $19.9
million, or 21.1%, to $114.4 million at December 31, 2007 from $94.5 million at
-65-
December 31, 2006. We developed and promoted competitive retail and business money market
accounts in order to lower the overall cost of funding. The 6.4% decline in time deposits combined
with the 21.1% increase in money market and savings accounts resulted in a small overall shift in
higher cost time deposits to lower cost transactional accounts. Lower cost transactional accounts
increased to 16.9% of total deposits at December 31, 2007 from 14.8% at December 31, 2006.
Borrowings.
Total borrowings increased $141.5 million, or 42.4%, to $475.5 million at December
31, 2007 from $334.0 million at December 31, 2006. At December 31, 2007, borrowings are comprised
of $385.8 million in Federal Home Loan Bank advances, $84.0 million in repurchase agreements and
$5.7 million in overnight federal funds borrowings. At December 31, 2006, all borrowings were
Federal Home Loan Bank advances. Borrowings were primarily used for 2007 funding purposes due to
favorable rates and terms as compared to alternate funding sources including retail and wholesale
time deposits.
Other Liabilities.
Other liabilities increased $970,000, or 2.6%, to $37.8 million at December
31, 2007 from $36.8 million at December 31, 2006. The increase resulted from a $3.2 million
increase in outstanding escrow checks, partially offset by a $2.3 million decrease in accrued
income taxes. The Company receives payments from borrowers for their real estate taxes during the
course of the calendar year until real estate tax obligations are paid out at the end of the fourth
quarter. These amounts remain classified as other liabilities until paid.
Shareholders’ Equity.
Shareholders’ equity decreased $39.5 million, or 16.4%, to $201.8
million at December 31, 2007 from $241.3 million at December 31, 2006. The decrease was primarily
attributable to the repurchase of 2.7 million shares of Company stock at a total cost of $45.3
million. This decrease was partially offset by 2007 net income of $1.6 million, by $1.7 million in
incentive stock compensation, by a $1.3 million decline in unrealized loss on securities
available-for-sale, net of taxes and by $1.3 million for ESOP shares allocated.
Average Balance Sheets, Interest and Yields/Costs
The following tables set forth average balance sheets, average yields and costs, and certain
other information for the periods indicated. No tax-equivalent yield adjustments were made, as the
effect thereof was not material. All average balances are daily average balances. Non-accrual
loans were included in the computation of average balances. The yields set forth below include the
effect of deferred fees, discounts and premiums that are amortized or accreted to interest income
or expense.
-66-
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|
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|
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|
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|
|
Years Ended December 31,
|
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|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
1,387,803
|
|
|
$
|
87,101
|
(1)
|
|
|
6.28
|
%
|
|
$
|
1,350,865
|
|
|
$
|
83,822
|
(1)
|
|
|
6.21
|
%
|
|
$
|
1,219,707
|
|
|
$
|
74,020
|
(1)
|
|
|
6.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage related securities
(5) (6)
|
|
|
111,132
|
|
|
|
5,869
|
|
|
|
5.28
|
|
|
|
87,102
|
|
|
|
4,263
|
|
|
|
4.89
|
|
|
|
83,296
|
|
|
|
2,466
|
|
|
|
2.96
|
|
|
Other earning assets
|
|
|
90,859
|
|
|
|
4,005
|
|
|
|
4.41
|
|
|
|
90,729
|
|
|
|
4,143
|
|
|
|
4.57
|
|
|
|
61,288
|
|
|
|
3,250
|
|
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,589,794
|
|
|
|
96,975
|
|
|
|
6.10
|
|
|
|
1,528,696
|
|
|
|
92,228
|
|
|
|
6.03
|
|
|
|
1,364,291
|
|
|
|
79,736
|
|
|
|
5.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
69,015
|
|
|
|
|
|
|
|
|
|
|
|
68,286
|
|
|
|
|
|
|
|
|
|
|
|
57,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,658,809
|
|
|
|
|
|
|
|
|
|
|
$
|
1,596,982
|
|
|
|
|
|
|
|
|
|
|
$
|
1,421,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand and money market accounts
|
|
|
143,295
|
|
|
|
4,478
|
|
|
|
3.13
|
|
|
$
|
110,907
|
|
|
|
2,810
|
|
|
|
2.53
|
|
|
$
|
89,694
|
|
|
|
1,156
|
|
|
|
1.29
|
|
|
Savings accounts
|
|
|
19,299
|
|
|
|
83
|
|
|
|
0.43
|
|
|
|
20,658
|
|
|
|
101
|
|
|
|
0.49
|
|
|
|
23,812
|
|
|
|
119
|
|
|
|
0.50
|
|
|
Certificates of deposit
|
|
|
857,319
|
|
|
|
40,297
|
|
|
|
4.70
|
|
|
|
925,026
|
|
|
|
39,080
|
|
|
|
4.22
|
|
|
|
970,977
|
|
|
|
34,152
|
|
|
|
3.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,019,913
|
|
|
|
44,858
|
|
|
|
4.40
|
|
|
|
1,056,591
|
|
|
|
41,991
|
|
|
|
3.97
|
|
|
|
1,084,483
|
|
|
|
35,427
|
|
|
|
3.27
|
|
|
Borrowings
|
|
|
381,614
|
|
|
|
16,791
|
|
|
|
4.40
|
|
|
|
265,821
|
|
|
|
11,472
|
|
|
|
4.32
|
|
|
|
110,979
|
|
|
|
3,719
|
|
|
|
3.35
|
|
|
Other interest bearing liabilities
|
|
|
21,963
|
|
|
|
485
|
|
|
|
2.21
|
|
|
|
11,684
|
|
|
|
316
|
|
|
|
2.70
|
|
|
|
11,151
|
|
|
|
391
|
|
|
|
3.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,423,490
|
|
|
|
62,134
|
|
|
|
4.36
|
|
|
|
1,334,096
|
|
|
|
53,779
|
|
|
|
4.03
|
|
|
|
1,206,613
|
|
|
|
39,537
|
|
|
|
3.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
18,442
|
|
|
|
|
|
|
|
|
|
|
|
26,716
|
|
|
|
|
|
|
|
|
|
|
|
81,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,441,932
|
|
|
|
|
|
|
|
|
|
|
|
1,360,812
|
|
|
|
|
|
|
|
|
|
|
|
1,288,011
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
216,877
|
|
|
|
|
|
|
|
|
|
|
|
236,170
|
|
|
|
|
|
|
|
|
|
|
|
133,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,658,809
|
|
|
|
|
|
|
|
|
|
|
$
|
1,596,982
|
|
|
|
|
|
|
|
|
|
|
$
|
1,421,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
34,841
|
|
|
|
|
|
|
|
|
|
|
$
|
38,449
|
|
|
|
|
|
|
|
|
|
|
$
|
40,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
(2)
|
|
|
|
|
|
|
|
|
|
|
1.74
|
%
|
|
|
|
|
|
|
|
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
(3)
|
|
$
|
166,304
|
|
|
|
|
|
|
|
|
|
|
$
|
194,600
|
|
|
|
|
|
|
|
|
|
|
$
|
157,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
(4)
|
|
|
|
|
|
|
|
|
|
|
2.19
|
%
|
|
|
|
|
|
|
|
|
|
|
2.52
|
%
|
|
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
Average interest-earning assets to
average interest- bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
111.68
|
%
|
|
|
|
|
|
|
|
|
|
|
114.59
|
%
|
|
|
|
|
|
|
|
|
|
|
113.07
|
%
|
|
|
|
|
|
(1)
|
|
Includes net deferred loan fee amortization income of $2,164,000, $885,000 and $940,000
for the years ended December 31, 2007, 2006 and 2005, respectively.
|
|
|
|
(2)
|
|
Net interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing liabilities.
|
|
|
|
(3)
|
|
Net interest-earning assets represent total interest-earning assets less total
interest-bearing liabilities.
|
|
|
|
(4)
|
|
Net interest margin represents net interest income divided by average total interest-earning
assets.
|
|
|
|
(5)
|
|
Average balance of available for sale securities is based on amortized historical cost.
|
|
|
|
(6)
|
|
Interest income from tax exempt securities is not significant to total interest income,
therefore, interest and yield on interest earnings assets are not stated on a tax equivalent
basis.
|
-67-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
Average
|
|
|
and
|
|
|
|
|
|
|
Average
|
|
|
and
|
|
|
|
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Dividends
|
|
|
Yield/Cost
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
1,258,594
|
|
|
$
|
38,516
|
(1)
|
|
|
6.12
|
%
|
|
$
|
1,106,826
|
|
|
$
|
34,272
|
(1)
|
|
|
6.19
|
%
|
|
Mortgage related securities
(5) (6)
|
|
|
65,426
|
|
|
|
1,389
|
|
|
|
4.25
|
|
|
|
68,044
|
|
|
|
1,206
|
|
|
|
3.54
|
|
|
Other earning assets
|
|
|
113,023
|
|
|
|
2,131
|
|
|
|
3.77
|
|
|
|
56,248
|
|
|
|
1,102
|
|
|
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,437,043
|
|
|
|
42,036
|
|
|
|
5.85
|
|
|
|
1,231,118
|
|
|
|
36,580
|
|
|
|
5.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
62,987
|
|
|
|
|
|
|
|
|
|
|
|
51,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,500,030
|
|
|
|
|
|
|
|
|
|
|
$
|
1,283,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand and money market accounts
|
|
$
|
92,170
|
|
|
|
792
|
|
|
|
1.72
|
|
|
$
|
92,174
|
|
|
|
412
|
|
|
|
0.89
|
|
|
Savings accounts
|
|
|
18,088
|
|
|
|
60
|
|
|
|
0.66
|
|
|
|
24,912
|
|
|
|
63
|
|
|
|
0.51
|
|
|
Certificates of deposit
|
|
|
961,144
|
|
|
|
17,414
|
|
|
|
3.62
|
|
|
|
928,164
|
|
|
|
15,453
|
|
|
|
3.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,071,402
|
|
|
|
18,266
|
|
|
|
3.41
|
|
|
|
1,045,250
|
|
|
|
15,928
|
|
|
|
3.05
|
|
|
Borrowings
|
|
|
127,046
|
|
|
|
2,258
|
|
|
|
3.55
|
|
|
|
74,031
|
|
|
|
1,253
|
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest bearing liabilities
|
|
|
15,514
|
|
|
|
234
|
|
|
|
3.02
|
|
|
|
13,333
|
|
|
|
109
|
|
|
|
1.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,213,962
|
|
|
|
20,758
|
|
|
|
3.42
|
|
|
|
1,132,614
|
|
|
|
17,290
|
|
|
|
3.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
117,302
|
|
|
|
|
|
|
|
|
|
|
|
11,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,331,504
|
|
|
|
|
|
|
|
|
|
|
|
1,143,747
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
168,766
|
|
|
|
|
|
|
|
|
|
|
|
139,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,500,030
|
|
|
|
|
|
|
|
|
|
|
$
|
1,283,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
21,278
|
|
|
|
|
|
|
|
|
|
|
$
|
19,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
(2)
|
|
|
|
|
|
|
|
|
|
|
2.43
|
%
|
|
|
|
|
|
|
|
|
|
|
2.89
|
%
|
|
Net interest-earning assets
(3)
|
|
$
|
223,081
|
|
|
|
|
|
|
|
|
|
|
$
|
98,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
(4)
|
|
|
|
|
|
|
|
|
|
|
2.96
|
%
|
|
|
|
|
|
|
|
|
|
|
3.13
|
%
|
|
Average interest-earning
assets to average
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
118.38
|
%
|
|
|
|
|
|
|
|
|
|
|
108.70
|
%
|
|
|
|
|
|
(1)
|
|
Includes net deferred loan fee amortization income of $512,000 and $504,000 for the six month
periods ended December 31, 2005 and 2004, respectively.
|
|
|
|
(2)
|
|
Net interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing liabilities.
|
|
|
|
(3)
|
|
Net interest-earning assets represent total interest-earning assets less total
interest-bearing liabilities.
|
|
|
|
(4)
|
|
Net interest margin represents net interest income divided by average total interest-earning
assets.
|
|
|
|
(5)
|
|
Average balance of available for sale securities is based on amortized historical cost.
|
|
|
|
(6)
|
|
Interest income from tax exempt securities is not significant to total interest income,
therefore, interest and yield on interest earnings assets are not stated on a tax equivalent
basis.
|
-68-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
Average
|
|
|
And
|
|
|
|
|
|
|
Average
|
|
|
And
|
|
|
|
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Dividends
|
|
|
Yield/Cost
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
1,140,444
|
|
|
$
|
69,775
|
(1)
|
|
|
6.12
|
%
|
|
$
|
996,511
|
|
|
$
|
61,530
|
(1)
|
|
|
6.17
|
%
|
|
Mortgage related securities
(5)
(6)
|
|
|
51,229
|
|
|
|
2,283
|
|
|
|
4.46
|
|
|
|
86,426
|
|
|
|
3,264
|
|
|
|
3.78
|
|
|
Other earning assets
|
|
|
64,943
|
|
|
|
2,149
|
|
|
|
3.31
|
|
|
|
45,953
|
|
|
|
1,294
|
|
|
|
2.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,256,616
|
|
|
|
74,207
|
|
|
|
5.91
|
|
|
|
1,128,890
|
|
|
|
66,088
|
|
|
|
5.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
45,149
|
|
|
|
|
|
|
|
|
|
|
|
44,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,301,765
|
|
|
|
|
|
|
|
|
|
|
$
|
1,173,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand and money market accounts
|
|
$
|
76,758
|
|
|
|
899
|
|
|
|
1.17
|
|
|
$
|
88,324
|
|
|
|
884
|
|
|
|
1.00
|
|
|
Savings accounts
|
|
|
27,944
|
|
|
|
122
|
|
|
|
0.44
|
|
|
|
22,675
|
|
|
|
113
|
|
|
|
0.50
|
|
|
Certificates of deposit
|
|
|
954,322
|
|
|
|
32,068
|
|
|
|
3.36
|
|
|
|
847,126
|
|
|
|
29,084
|
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,059,024
|
|
|
|
33,089
|
|
|
|
3.12
|
|
|
|
958,125
|
|
|
|
30,081
|
|
|
|
3.14
|
|
|
Advances from the Federal Home Loan Bank
and Federal funds purchased
|
|
|
74,785
|
|
|
|
2,783
|
|
|
|
3.72
|
|
|
|
65,237
|
|
|
|
2,109
|
|
|
|
3.23
|
|
|
Other interest bearing liabilities
|
|
|
5,579
|
|
|
|
196
|
|
|
|
3.51
|
|
|
|
5,624
|
|
|
|
242
|
|
|
|
4.29
|
|
|
Total interest-bearing liabilities
|
|
|
1,139,388
|
|
|
|
36,068
|
|
|
|
3.17
|
|
|
|
1,028,986
|
|
|
|
32,432
|
|
|
|
3.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities
|
|
|
34,351
|
|
|
|
|
|
|
|
|
|
|
|
25,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,173,739
|
|
|
|
|
|
|
|
|
|
|
|
1,054,666
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
128,026
|
|
|
|
|
|
|
|
|
|
|
|
119,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,301,765
|
|
|
|
|
|
|
|
|
|
|
$
|
1,173,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
38,139
|
|
|
|
|
|
|
|
|
|
|
$
|
33,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
(2)
|
|
|
|
|
|
|
|
|
|
|
2.74
|
%
|
|
|
|
|
|
|
|
|
|
|
2.70
|
%
|
|
Net interest-earning assets
(3)
|
|
$
|
117,288
|
|
|
|
|
|
|
|
|
|
|
$
|
99,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
(4)
|
|
|
|
|
|
|
|
|
|
|
3.04
|
%
|
|
|
|
|
|
|
|
|
|
|
2.98
|
%
|
|
Average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
110.29
|
%
|
|
|
|
|
|
|
|
|
|
|
109.71
|
%
|
|
|
|
|
|
(1)
|
|
Includes net deferred loan fee amortization income of $932,000 and $1,008,000 for the years
ended June 30, 2005 and 2004, respectively.
|
|
|
|
(2)
|
|
Net interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing liabilities.
|
|
|
|
(3)
|
|
Net interest-earning assets represent total interest-earning assets less total
interest-bearing liabilities.
|
|
|
|
(4)
|
|
Net interest margin represents net interest income divided by average total interest-earning
assets.
|
|
|
|
(5)
|
|
Average balance of available for sale securities is based on amortized historical cost.
|
|
|
|
(6)
|
|
Interest income from tax exempt securities is not significant to total interest income,
therefore, interest and yield on interest earnings assets are not stated on a tax equivalent
basis.
|
-69-
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest
income for the periods indicated. The rate column shows the effects attributable to changes in
rate (changes in rate multiplied by prior volume). The volume column shows the effects
attributable to changes in volume (changes in volume multiplied by prior rate). The net column
represents the sum of the prior columns. For purposes of this table, changes attributable to
changes in both rate and volume that cannot be segregated have been allocated proportionately based
on the changes due to rate and the changes due to volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
|
|
Increase (Decrease) due to
|
|
|
Increase (Decrease) due to
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
|
(In Thousands)
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
(1) (2)
|
|
$
|
2,311
|
|
|
|
968
|
|
|
|
3,279
|
|
|
$
|
8,108
|
|
|
|
1,694
|
|
|
|
9,802
|
|
|
Mortgage relates securites
(3)
|
|
|
1,248
|
|
|
|
358
|
|
|
|
1,606
|
|
|
$
|
117
|
|
|
|
1,680
|
|
|
|
1,797
|
|
|
Other interest earning assets
|
|
|
6
|
|
|
|
(144
|
)
|
|
|
(138
|
)
|
|
|
1,256
|
|
|
|
(363
|
)
|
|
|
893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
3,565
|
|
|
|
1,182
|
|
|
|
4,747
|
|
|
|
9,481
|
|
|
|
3,011
|
|
|
|
12,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand and money market
|
|
|
927
|
|
|
|
741
|
|
|
|
1,668
|
|
|
|
325
|
|
|
|
1,329
|
|
|
|
1,654
|
|
|
Savings accounts
|
|
|
(6
|
)
|
|
|
(12
|
)
|
|
|
(18
|
)
|
|
|
(15
|
)
|
|
|
(3
|
)
|
|
|
(18
|
)
|
|
Certificates of deposit
|
|
|
(2,262
|
)
|
|
|
3,479
|
|
|
|
1,217
|
|
|
|
(1,516
|
)
|
|
|
6,444
|
|
|
|
4,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
(1,341
|
)
|
|
|
4,208
|
|
|
|
2,867
|
|
|
|
(1,206
|
)
|
|
|
7,770
|
|
|
|
6,564
|
|
|
Borrowings
|
|
|
5,091
|
|
|
|
229
|
|
|
|
5,320
|
|
|
|
6,427
|
|
|
|
1,326
|
|
|
|
7,753
|
|
|
Other interest bearing liabilities
|
|
|
213
|
|
|
|
(45
|
)
|
|
|
168
|
|
|
|
20
|
|
|
|
(95
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
3,963
|
|
|
|
4,392
|
|
|
|
8,355
|
|
|
|
5,241
|
|
|
|
9,001
|
|
|
|
14,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
(398
|
)
|
|
|
(3,210
|
)
|
|
|
(3,608
|
)
|
|
$
|
4,240
|
|
|
|
(5,990
|
)
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes net deferred loan fee amortization income of $2,164,000, $885,000 and $940,000 for
the years ended December 31, 2007, 2006 and 2005, respectively.
|
|
|
|
(2)
|
|
Non-accrual loans have been included in average loans receivable balance.
|
-70-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
Years Ended June 30,
|
|
|
|
|
2005 vs. 2004
|
|
|
2005 vs. 2004
|
|
|
|
|
Increase (Decrease) due to
|
|
|
Increase (Decrease) due to
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
|
(In Thousands)
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
(1) (2)
|
|
$
|
4,649
|
|
|
|
(405
|
)
|
|
|
4,244
|
|
|
$
|
8,812
|
|
|
|
(567
|
)
|
|
|
8,245
|
|
|
Mortgage related securites
(3)
|
|
$
|
(48
|
)
|
|
|
231
|
|
|
|
183
|
|
|
|
(1,495
|
)
|
|
|
514
|
|
|
|
(981
|
)
|
|
Other interest earning assets
|
|
|
1,072
|
|
|
|
(43
|
)
|
|
|
1,029
|
|
|
|
697
|
|
|
|
158
|
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
5,673
|
|
|
|
(217
|
)
|
|
|
5,456
|
|
|
|
8,014
|
|
|
|
105
|
|
|
|
8,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand and money market accounts
|
|
|
—
|
|
|
|
380
|
|
|
|
380
|
|
|
|
(124
|
)
|
|
|
139
|
|
|
|
15
|
|
|
Savings accounts
|
|
|
(20
|
)
|
|
|
17
|
|
|
|
(3
|
)
|
|
|
24
|
|
|
|
(15
|
)
|
|
|
9
|
|
|
Certificates of deposit
|
|
|
516
|
|
|
|
1,445
|
|
|
|
1,961
|
|
|
|
3,614
|
|
|
|
(630
|
)
|
|
|
2,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
496
|
|
|
|
1,842
|
|
|
|
2,338
|
|
|
|
3,514
|
|
|
|
(506
|
)
|
|
|
3,008
|
|
|
Borrowings
|
|
|
946
|
|
|
|
59
|
|
|
|
1,005
|
|
|
|
(1,128
|
)
|
|
|
1,802
|
|
|
|
674
|
|
|
Other interest bearing liabilities
|
|
|
14
|
|
|
|
111
|
|
|
|
125
|
|
|
|
(2
|
)
|
|
|
(44
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,456
|
|
|
|
2,012
|
|
|
|
3,468
|
|
|
|
2,384
|
|
|
|
1,252
|
|
|
|
3,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
4,217
|
|
|
|
(2,229
|
)
|
|
|
1,988
|
|
|
$
|
5,630
|
|
|
|
(1,147
|
)
|
|
|
4,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes net deferred loan fee amortization income of $512,000, $504,000, $932,000 and
$1,008,000 for the six month periods ended December 31, 2005 and 2004 and the years ended
June 30, 2005 and 2004, respectively.
|
|
|
|
(2)
|
|
Non-accrual loans have been included in average loans receivable balance.
|
-71-
Comparison of Operating Results for the Years Ended December 31, 2007 and 2006
General.
Net income for the year ended December 31, 2007 totaled $1.6 million, or $0.05 for
both basic and diluted earnings per share compared to net income of $8.1 million, or $0.24 for
basic and diluted earnings per share for the year ended December 31, 2006. For the year ended
December 31, 2007, our return on average assets was 0.09% and our return on average equity was
0.72%, compared to 0.50% and 3.41%, respectively, for the year ended December 31, 2006. The $6.5
million decrease in net income was due primarily to a $9.5 million increase in the provision for
loan losses, and a $3.6 million decrease in net interest income, partially offset by a $1.7 million
increase in non interest income and a $5.0 million decrease in income tax expense.
Total Interest Income.
Total interest income increased $4.7 million, or 5.1%, to $97.0 million
during the year ended December 31, 2007 compared to $92.2 million for the year ended December 31,
2006. Interest income on loans increased $3.3 million, or 3.9%, to $87.1 million for the year
ended December 31, 2007 compared to $83.8 million for the year ended December 31, 2006. The
increase in interest income resulted from an increase in the average outstanding loans receivable
balance of $36.9 million, or 2.7%, to $1.39 billion during the year ended December 31, 2007 from
$1.35 billion during the year ended December 31, 2006. The increase in interest income also
reflects a 7 basis point increase in the average yield on loans to 6.28% for the year ended
December 31, 2007 from 6.21% for the year ended December 31, 2006. The remaining increase in total
interest income reflected interest income from mortgage-related securities which increased $1.6
million, or 37.7%, to $5.9 million for the year ended December 31, 2007 compared to $4.3 million
for the year ended December 31, 2006. This was due to the increase in the average outstanding
balance of the mortgage-related securities portfolio of $24.0 million, or 27.6%, to $111.1 million
during the year ended December 31, 2007 from $87.1 million during the year ended December 31, 2006.
The increase in interest income from mortgage-related securities also reflects a 39 basis point
increase in the average yield on investment securities to 5.28% for the year ended December 31,
2007 from 4.89% for the year ended December 31, 2006. The increase in interest income on loan and
mortgage-related securities was partially offset by a decrease in interest on other earning assets.
Interest on other earning assets decreased $138,000, or 3.3%, to $4.0 million for the year ended
December 31, 2007 compared to $4.1 million for the year ended December 31, 2006. This was due
primarily to a 16 basis point decrease in the average yield on other earning assets to 4.41% for
the year ended December 31, 2007 from 4.57% for the year ended December 31, 2006. The decrease in
average yield on other interest earning assets results primarily from a decline in dividends
received on the Company’s FHLB stock. The FHLB stock yielded a return of 2.92% during the year
ended December 31, 2006, however, the yield for the year ended December 31, 2007 decreased to
2.11%, which resulted from the FHLB’s decision to not distribute a dividend in the third and fourth
quarters of fiscal 2007.
Total Interest Expense.
Total interest expense increased by $8.3 million, or 15.5%, to $62.1
million during the year ended December 31, 2007 from $53.8 million during the year ended December
31, 2006. This increase was the result of an increase in both the rates paid on deposits and
borrowings and an increase in average borrowings outstanding.
Interest expense on deposits increased $2.9 million, or 6.8%, to $44.9 million during the
-72-
year ended December 31, 2007 from $42.0 million during the year ended December 31, 2006 as a
result of an increase in the cost of deposits, which was partially offset by a decrease in average
deposits outstanding. The cost of total average deposits increased by 43 basis points to 4.40% for
the year ended December 31, 2007 compared to 3.97% for the year ended December 31, 2006. The
increase in the average cost of funding was partially offset by a decrease of $36.7 million, or
3.5%, in the average balance of deposits to $1.02 billion during the year ended December 31, 2007
from $1.06 billion during the year ended December 31, 2006.
Interest expense on borrowings increased $5.5 million, or 46.7%, to $17.2 million during the
year ended December 31, 2007 from $11.7 million during the year ended December 31, 2006. The
increase resulted primarily from an increase in average borrowings outstanding of $115.8 million,
or 43.6%, to $381.6 million during the year ended December 31, 2007 from $265.8 million during the
year ended December 31, 2006. The increase in average borrowings was compounded by an 8 basis
point increase in the average cost of borrowings to 4.40% during the year ended December 31, 2007
from 4.32% during the year ended December 31, 2006.
Net Interest Income.
Net interest income decreased by $3.6 million or 9.4%, during the year
ended December 31, 2007 as compared to the year ended December 31, 2006. The decrease resulted
from a 26 basis point decrease in our net interest rate spread to 1.74% for the year ended December
31, 2007 from 2.00% for the year ended December 31, 2006. The 26 basis point decrease in the net
interest rate spread resulted from a 33 basis point increase in the cost of interest bearing
liabilities, which was partially offset by a 7 basis point increase in the yield on interest
earning assets. The Company experienced net interest margin compression as the yield curve
remained inverted for the majority of 2007. The decrease in net interest income resulting from a
decrease in our net interest rate spread was compounded by a decrease in net average earning assets
of $28.3 million, or 14.5%, to $166.3 million for the year ended December 31, 2007 from $194.6
million from the year ended December 31, 2006.
Provision for Loan Losses.
Our provision for loan losses increased $9.5 million to $11.7
million during the year ended December 31, 2007, from $2.2 million during the year ended December
31, 2006. The provision increased during the year ended December 31, 2007 in order to reflect the
deterioration of our credit quality resulting in an increase in net charge-offs, in specific loan
loss provisions, in loans past due and in non-performing loans. Net charge-offs totaled $6.1
million for the year ended December 31, 2007 compared to $256,000 for the year ended December 31,
2006. Specific loan loss provisions totaling $5.1 million were provided in 2007 for non-performing
loans where the estimated value of the underlying collateral is not sufficient to allow full
recovery of the outstanding loan balance. Loans past due increased by $59.7 million, or 74.6%, to
$139.6 million at December 31, 2007 from $80.0 million at December 31, 2006. Non-performing loans
increased by $51.5 million, or 178.1%, to $80.4 million at December 31, 2007 from $28.9 million at
December 31, 2006.
Non-interest Income.
Total non-interest income increased $1.7 million, or 32.7%, to $6.9
million during the year ended December 31, 2007 from $5.2 million during the year ended December
31, 2006. The increase was primarily due to in increase in mortgage banking income and an absence
of a loss on sales of securities. Mortgage banking income increased $803,000, or 38.1%, to $2.9
million for the year ended December 31, 2007 compared to $2.1 million for the year
-73-
ended December 31, 2006. In addition, in 2006, $26.7 million of investment securities were
sold at a loss of $819,000. The proceeds from the sales were used to purchase higher yielding
securities. There were no sales of securities during the year ended December 31, 2007.
Non-interest Expense.
Total non-interest expense increased $30,000, or 0.1%, to $28.7 million
during the year ended December 31, 2007. While relatively unchanged in the aggregate, overall
non-interest expense was affected by increases in occupancy, office furniture and equipment and
real estate owned expense which were offset by decreases in compensation, payroll taxes and other
employee benefits and other non-interest expense.
Compensation, payroll taxes and other employee benefit expense decreased $722,000, or 4.5%, to
$15.5 million during the year ended December 31, 2007 from $16.2 million during the year ended
December 31, 2006. Expense related to our stock option and restricted stock plans totaled $1.7
million during the year ended December 31, 2007. There was no comparable expense in the prior
year. This increase was offset by a decrease in salary expense and involuntary termination
benefits. Salary expense decreased by $2.2 million, or 17.3% to $10.5 million during the year
ended December 31, 2007 compared to $12.7 million during the year ended December 31, 2006. Salary
expense decreased as a result of a shift from cash bonus compensation to equity incentives.
Involuntary termination benefits decreased by $211,000, or 90.9%, to $21,000 during the year ended
December 31, 2007 compared to $232,000 during the year ended December 31, 2006.
Occupancy, office furniture and equipment increased by $686,000, or 15.9%, to $5.0 million
during the year ended December 31, 2007 from $4.3 million during the year ended December 31, 2006.
The increase relates primarily to the operation of three new branch offices located in Franklin,
Germantown and West Allis, Wisconsin that opened in August 2006, November 2006 and March 2007,
respectively.
Real estate owned expense increased $1.1 million to $1.2 million during the year ended
December 31, 2007 compared to $116,000 during the year ended December 31, 2006. Real estate owned
expense includes net expenses from the maintenance and operation of foreclosed properties in
addition to net gains and/or losses upon the ultimate disposition of the property. The increase
compared to the prior year is a direct result of the increase in foreclosed properties transferred
from the loan portfolio during the year ended December 31, 2007 compared to the year ended December
31, 2006. We held real estate with a total estimated fair value, less costs to sell of $8.5
million at December 31, 2007 compared to $520,000 at December 31, 2006.
Other non-interest expense decreased $715,000, or 24.0%, to $2.3 million for the year ended
December 31, 2007 from $3.0 million during the year ended December 31, 2006. The decrease is the
result of the reduction in amortization of Waterstone Mortgage Corporation intangibles and
decreases in brokered deposit fees, employee related business expenses and insurance expense.
Income Taxes
.
The effective tax rate for the year ended December 31, 2007 was a 19.6% benefit
as compared to 36.9% expense for the year ended December 31, 2006. The 2007 effective tax rate was
comprised of a federal effective rate of 20.4% and a state effective benefit rate of 39.8%. The
federal rate was low due to the relatively low level of consolidated pretax income as a result of
high loan loss provisions. The state benefit was generated by pretax losses from the
-74-
Wisconsin banking subsidiary. As it is anticipated that these benefits will be realized in
future periods, a valuation reserve was not deemed necessary for the state net operating loss carry
forward.
Net Income.
As a result of the foregoing factors, net income for the year ended December 31,
2007 decreased $6.5 million, or 80.7%, to $1.6 million, from $8.1 million during the year ended
December 31, 2006.
Comparison of Operating Results for the Years Ended December 31 2006 and 2005
General.
Net income for the year ended December 31, 2006 totaled $8.1 million, or $0.24 for
both basic and diluted earnings per share compared to net income of $6.0 million for the year ended
December 31, 2005. Due to the timing of the conversion during the prior year, there was no
comparable earnings per share amount for the full twelve months ended December 31, 2005. For the
year ended December 31, 2006, our return on average assets was 0.50% and our return on average
equity was 3.41%, compared to 0.43% and 4.52%, respectively, for the year ended December 31, 2005.
The increase in net income was due primarily to a decrease in income tax expense. The effective
tax rate dropped from 50.3% for the year ended December 31, 2006 to 36.9% for the year ended
December 31, 2006 due to the March 2005 accrual of estimated state tax liability net of federal
deferred tax benefit related to the Wisconsin Department of Revenue indication that it will assess
franchise taxes on certain income of the Wauwatosa Savings out-of-state investment subsidiary.
Total Interest Income.
Total interest income increased $12.5 million, or 15.7%, to $92.2
million during the year ended December 31, 2006 compared to $79.7 million for the year ended
December 31, 2005. Interest income on loans increased $9.8 million, or 13.2%, to $83.8 million for
the year ended December 31, 2006 compared to $74.0 million for the year ended December 31, 2005.
The increase resulted from an increase in the average outstanding loans receivable balance of
$131.2 million, or 10.8%, to $1.4 billion during the year ended December 31, 2006 from $1.2 billion
during the year ended December 31, 2005. The increase in volume was compounded by a 14 basis point
increase in the average yield on loans to 6.21% for the year ended December 31, 2006 from 6.07% for
the year ended December 31, 2005. Much of the remaining increase in total interest income
reflected interest income from investment securities which increased $1.3 million, or 30.6%, to
$5.4 million for the year ended December 31, 2006 compared to $4.1 million for the year ended
December 31, 2005. This was due to the increase in the average outstanding balance of investment
securities portfolio of $9.7 million, or 9.2%, to $115.8 million during the year ended December 31,
2006 from $106.1 million during the year ended December 31, 2005. The increase in volume was
compounded by a 75 basis point increase in the average yield on investment securities to 4.62% for
the year ended December 31, 2006 from 3.87% for the year ended December 31, 2005. Finally, the
average balance of other earning assets increased by $23.5 million, or 61.2%, to $62.0 million
during the year ended December 31, 2006 from $38.5 during the year ended December 31, 2005. The
increase in volume was compounded by a 72 basis point increase in the average yield on other
earning assets to 4.92% during the year ended December 31, 2006 from 4.20% during the year ended
December 31, 2005.
Total Interest Expense.
Total interest expense increased by $14.2 million, or 36.0%, to $53.8
million during the year ended December 31, 2006 from $39.5 million during the year ended
-75-
December 31, 2005. This increase was the result of an increase in both the rates paid on
deposits and borrowings and an increase in average borrowings outstanding.
Interest expense on deposits increased $6.6 million, or 18.5%, to $42.0 million during the
year ended December 31, 2006 from $35.5 million during the year ended December 31, 2005 as a result
of an increase in the cost of deposits, which was partially offset by a decrease in average
deposits outstanding. The cost of total average deposits increased by 70 basis points to 3.97% for
the year ended December 31, 2006 compared to 3.27% for the year ended December 31, 2005. As market
interest rates (in particular short-term interest rates) increased and deposit rates offered by
competitors increased, it was necessary to increase the interest rates we offered on deposits to
attract new and retain existing deposits, thereby increasing our cost of deposits.
Interest expense on borrowings increased $7.7 million, or 188.5%, to $11.7 million during the
year ended December 31, 2006 from $4.1 million during the year ended December 31, 2005. This
increase was the result of increased average borrowings outstanding plus an increase in the related
weighted average interest cost of such borrowings. The weighted average cost of advances from the
Federal Home Loan Bank and of federal funds purchased increased 97 basis points to 4.32% for the
year ended December 31, 2006 compared to 3.35% for the year ended December 31, 2005.
Net Interest Income.
Net interest income decreased by $1.8 million or 4.4%, during the year
ended December 31, 2006 as compared to the year ended December 31, 2005. The decrease resulted
from a 56 basis point decrease in our net interest rate spread to 2.00% for the year ended December
31, 2006 from 2.56% for the year ended December 31, 2005. The 56 basis point decrease in the net
interest rate spread resulted from a 75 basis point increase in the cost of interest bearing
liabilities, which was partially offset by a 19 basis point increase in the yield on interest
earning assets. The Company has experienced net interest margin compression as the yield curve
remains inverted. In addition to the flat or inverted yield curve, net interest margin has been
compressed as the repricing of interest bearing liabilities has outpaced that of interest earning
assets. The decrease in net interest income resulting from a decrease in our net interest rate
spread was partially offset by an increase in net average earning assets of $36.9 million, or
23.4%, to $194.6 million for the year ended December 31, 2006 from $157.7 million from the year
ended December 31, 2005.
Provision for Loan Losses.
Provision for loan losses increased $292,000, or 15.3%, to $2.2
million during the year ended December 31, 2006, from $1.9 million during the year ended December
31, 2005. The higher provision for the year ended December 31, 2006 was the result of growth of
the overall loan portfolio, a continued increase in non-performing loans and specific loan loss
provisions identified and recognized during the period.
Non-interest Income.
Total non-interest income increased $1.7 million, or 48.2%, to $5.2
million during the year ended December 31, 2006 from $3.5 million during the year ended December
31, 2005. The increase was primarily due to $2.1 million in mortgage banking income generated by
Waterstone, a subsidiary purchased by the Bank in February 2006. The increase in non-interest
income generated by Waterstone was partially offset by losses on the sale of investment securities.
In September 2006, $26.7 million of investment securities with unrealized losses approximating
$819,000 were designated for sale with the unrealized loss expensed in the
-76-
third quarter. The securities were sold and the proceeds were used to purchase higher
yielding securities.
Non-interest Expense.
Total non-interest expense decreased $948,000, or 3.2%, to $28.7 million
during the year ended December 31, 2006 from $29.6 million during the year ended December 31, 2005.
The decrease was primarily the result of a decrease in charitable contributions, which was offset
by increases in compensation, payroll taxes and other employee benefits, occupancy and data
processing expenses.
In connection with its October 2005 reorganization, the Company contributed 556,442 shares of
Wauwatosa Holdings Inc. common stock valued at $5.6 million to the Waukesha County Community
Foundation. There was no contribution expense for the year ended December 31, 2006.
Compensation, payroll taxes and other employee benefit expense increased $3.1 million, or
23.4%, to $16.2 million during the year ended December 31, 2006 from $13.1 million during the year
ended December 31, 2005. Wauwatosa Savings’ salary expense increased by $1.6 million, or 15.5%, in
spite of a 9.8% reduction in full-time equivalent employees between December 31, 2005 and December
31, 2006. The net reduction in employees was concentrated in the fourth quarter, therefore the
impact on annual expense was limited. In addition to the regular annual increase in staff wages,
there was also a net increase in senior management personnel hired from outside of the Company for
compensation that was higher than our average employee compensation levels. Compensation, taxes and
employee benefits related to Waterstone totaled $2.0 million from the date of acquisition, February
9, 2006, through December 31, 2006. Compensation expense related to the ESOP Plan totaled $1.2
million during the year ended December 31, 2006, compared to $854,000 during the year ended
December 31, 2005. The increase resulted from an increase in the market value of the stock awarded
to Plan participants. Expense related to health care benefits increased $346,000, or 54%, to
$985,000 for the year ended December 31, 2006 compared to $639,000 for the year ended December 31,
2005. The increase in ESOP and health care benefit expense was fully offset by an $876,000
reduction in pension benefits. The Company elected to freeze benefits accruing in the defined
benefit pension plan in December 2005. Deferred compensation expense was $242,000 higher in 2006
as compared to the prior year as the result of the early retirement of the CEO on December 31,
2006.
Occupancy, office furniture and equipment increased by $734,000, or 20.6%, to $4.3 million
during the year ended December 31, 2006 from $3.6 million during the year ended December 31, 2005.
The increase relates primarily to a new branch office located in Waukesha that opened in September
2005, as well as new branch offices constructed in Franklin and Germantown, Wisconsin and a branch
currently under construction in West Allis, Wisconsin.
Data processing expense increased $318,000, or 22.5%, for the year ended December 31, 2006 to
$1.7 million from $1.4 million during the year ended December 31, 2005. Contract termination costs
of $428,000 were recognized during the year ended December 31, 2006 as the result of a planned
conversion of Wauwatosa Savings’ core data processor to Metavante Corporation effective February
19, 2007. The termination costs were partially offset by a decrease in third party consulting
costs during the year ended December 31, 2006.
-77-
Income Taxes
.
The effective tax rate for the year ended December 31, 2006 was 36.9% as
compared to 50.3% for the year ended December 31, 2005. The 2005 effective tax rate was abnormally
high as a result of an accrual of state income taxes recorded in 2005 attributable to an ongoing
dispute with the Wisconsin Department of Revenue. Wauwatosa Savings has an investment subsidiary
operating in Nevada. The income earned by that corporation is not subject to tax in the state of
Wisconsin nor has any such tax been paid. During the year ended December 31, 2005, an accrued
liability of $2.0 million was established because the Wisconsin Department of Revenue has generally
indicated that it will assess franchise taxes on certain income of such out-of-state subsidiaries.
As of December 31, 2005, the gross liability totaled $3.6 million, offset by a federal deferred tax
benefit of $1.2 million. As of December 31, 2006, the Company has accrued an estimated gross
liability of $4.9 million, offset by a federal deferred tax benefit of $1.7 million.
Net Income.
As a result of the foregoing factors, net income for the year ended December 31,
2006 increased $2.0 million, or 33.2%, to $8.1 million, from $6.0 million during the year ended
December 31, 2005.
Liquidity and Capital Resources
We maintain liquid assets at levels we consider adequate to meet our liquidity needs. Our
liquidity ratio averaged 2.3% and 2.3% for the years ended December 31, 2007 and 2006. Our
liquidity ratio averaged 3.4%, 1.7% and 1.4% for the six-month periods ended December 31, 2005 and
2004 and for the year ended June 30, 2005, respectively. The liquidity ratio is equal to average
daily cash and cash equivalents for the period divided by average total assets. We adjust our
liquidity levels to fund loan commitments, repay our borrowings, fund deposit outflows and pay real
estate taxes on mortgage loans. We also adjust liquidity as appropriate to meet asset and
liability management objectives. The operational adequacy of our liquidity position at any point
in time is dependent upon the judgment of the Chief Financial Officer as supported by the full
Asset/Liability Committee. Liquidity is monitored on a daily, weekly and monthly basis using a
variety of measurement tools and indicators. Regulatory liquidity, as required by the Wisconsin
Department of Financial Institutions, is based on current liquid assets as a percentage of the
prior month’s average deposits and short-term borrowings. Minimum primary liquidity is equal to
4.0% of deposits and short-term borrowings and minimum total regulatory liquidity is equal to 8.0%
of deposits and short-term borrowings. The Bank’s primary and total regulatory liquidity at
December 31, 2007 was 4.08% and 12.01%, respectively.
Our primary sources of liquidity are deposits, amortization and prepayment of loans,
maturities of investment securities and other short-term investments, and earnings and funds
provided from operations. While scheduled principal repayments on loans are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly influenced by market
interest rates, economic conditions, and rates offered by our competition. We set the interest
rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess
funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
Additional sources of liquidity used for the purpose of managing long- and short-term cash flows
include $50 million in Federal funds lines of credit with four commercial banks and advances from
the Federal Home Loan Bank of Chicago (FHLBC).
-78-
A portion of our liquidity consists of cash and cash equivalents, which are a product of our
operating, investing and financing activities. At December 31, 2007 and 2006, respectively, $17.9
million and $73.8 million of our assets were invested in cash and cash equivalents. Our primary
sources of cash are principal repayments on loans, proceeds from the calls and maturities of debt
and mortgage-related securities, increases in deposit accounts, Federal funds purchased and
advances from the FHLBC.
On October 10, 2007, the FHLBC entered into a consensual cease and desist order with its
regulator, the Federal Housing Finance Board. Under the terms of the order, capital stock
repurchases and redemptions, including redemptions upon membership withdrawal or other termination,
are prohibited unless the FHLBC has received approval of the Director of the Office of Supervision
of the Federal Housing Finance Board (“OS Director”). The order also provides that dividend
declarations are subject to the prior written approval of the OS Director. We currently hold, at
cost, $19.3 million of FHLBC stock, all of which we believe we will ultimately be able to recover.
Based upon correspondence we received from the FHLBC, also incorporated into FHLBC’s 8-K, there is
currently no expectation that this cease and desist order will impact the short- and long-term
funding options provided by the FHLBC.
Our cash flows are derived from operating activities, investing activities and financing
activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated
Financial Statements.
During the years ended December 31, 2007 and 2006 and the six months ended December 31, 2005
and the year ended June 30, 2005, our loan originations, net of collected principal, totaled $48.6
million, $68.7 million, $88.2 million and $153.1 million, respectively. Cash received from the
calls and maturities of debt and mortgage-related securities totaled $23.1 million, $15.5 million,
$16.7 million and $46.5 million for the years ended December 31, 2007 and 2006 and the six months
ended December 31, 2005 and the year ended June 30, 2005, respectively. We purchased $76.4
million, $36.0 million, $56.4 million and $34.3 million in debt and mortgage-related securities
classified as available-for-sale during the years ended December 31, 2007 and 2006, the six months
ended December 31, 2005 and the year ended June 30, 2005, respectively. In addition, we purchased
$7.6 million in securities classified as held-to-maturity during the year ended December 31, 2007.
We sold $25.9 million and $5.3 million in available-for-sale debt and mortgage-related securities
during the years ended December 31, 2006 and June 30, 2005, respectively. There were no securities
sold during the year ended December 31, 2007 or six months ended December 31, 2005.
Deposit flows are generally affected by the level of interest rates, the interest rates and
products offered by local competitors, and other factors. The net decrease in deposits was $41.7
million, $9.4 million and $83.2 million during the years ended December 31, 2007 and 2006 and 2005
and the six months ended December 31, 2005, respectively. The net increase in total deposits was
$93.2 million for the year ended June 30, 2005.
Liquidity management is both a daily and longer-term function of business management. If we
require funds beyond our ability to generate them internally, borrowing agreements exist with the
Federal Home Loan Bank of Chicago, which provide an additional source of funds. At December 31,
2007, we had $385.8 million in advances from the Federal Home Loan Bank of
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Chicago, of which $47.8 million was due within 12 months, and an additional available
borrowing limit of $92.1 million based on collateral requirements of the Federal Home Loan Bank of
Chicago.
At December 31, 2007, we had outstanding commitments to originate loans of $16.7 million and
unfunded commitments under lines of credit and standby letters of credit of $69.9 million. At
December 31, 2007, certificates of deposit scheduled to mature in less than one year totaled $627.4
million. Based on prior experience, management believes that a significant portion of such
deposits will remain with us, although there can be no assurance that this will be the case. In
the event a significant portion of our deposits are not retained by us, we will have to utilize
other funding sources, such as Federal Home Loan Bank of Chicago advances in order to maintain our
level of assets. However, we cannot assure that such borrowings would be available on attractive
terms, or at all, if and when needed. Alternatively, we would reduce our level of liquid assets,
such as our cash and cash equivalents and securities available-for-sale in order to meet funding
needs. In addition, the cost of such deposits may be significantly higher if market interest rates
are higher or there is an increased amount of competition for deposits in our market area at the
time of renewal.
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Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
Wauwatosa Savings has various financial obligations, including contractual obligations and
commitments that may require future cash payments. The following tables present information
indicating various non-deposit contractual obligations and commitments of Wauwatosa Savings as of
December 31, 2007 and the respective maturity dates.
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
More than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Three Years
|
|
|
|
|
|
|
|
|
|
|
|
One Year or
|
|
|
Through
|
|
|
Through Five
|
|
|
|
|
|
|
|
Total
|
|
|
Less
|
|
|
Three Years
|
|
|
Years
|
|
|
Over Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Deposits without a stated maturity (5)
|
|
$
|
167,597
|
|
|
$
|
167,597
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Certificates of deposit (5)
|
|
|
826,938
|
|
|
|
627,410
|
|
|
|
175,196
|
|
|
|
24,077
|
|
|
|
255
|
|
|
Federal Home Loan Bank advances (1)
|
|
|
385,779
|
|
|
|
47,779
|
|
|
|
53,000
|
|
|
|
—
|
|
|
|
285,000
|
|
|
Repurchase agreements (5)
|
|
|
84,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
84,000
|
|
|
Operating leases (2)
|
|
|
211
|
|
|
|
107
|
|
|
|
104
|
|
|
|
—
|
|
|
|
—
|
|
|
Capital lease (3)
|
|
|
3,675
|
|
|
|
300
|
|
|
|
3,375
|
|
|
|
—
|
|
|
|
—
|
|
|
State income tax obligation (4)
|
|
|
3,726
|
|
|
|
1,242
|
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
|
Salary continuation agreements
|
|
|
2,833
|
|
|
|
576
|
|
|
|
1,152
|
|
|
|
340
|
|
|
|
765
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
1,474,759
|
|
|
$
|
845,011
|
|
|
$
|
235,311
|
|
|
$
|
24,417
|
|
|
$
|
370,020
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Secured under a blanket security agreement on qualifying assets, principally,
mortgage loans. Excludes interest which will accrue on the advances. All Federal Home Loan
Bank advances with maturities exceeding five years are callable on a quarterly basis with the
initial call at various times from February 2008 through March 2009.
|
|
|
|
(2)
|
|
The repurchase agreements are callable on a quarterly basis with the initial call
in March 2009.
|
|
|
|
(3)
|
|
Represents non-cancelable operating leases for offices and equipment.
|
|
|
|
(4)
|
|
Represents remaining amounts due to the Wisconsin Department of Revenue related to
the operations of the Company’s Nevada subsidiary.
|
|
|
|
(5)
|
|
Excludes interest
|
The following table details the amounts and expected maturities of significant off-balance
sheet commitments as of December 31, 2007.
-81-
Other Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
Through
|
|
|
|
|
|
|
|
|
|
|
|
One Year or
|
|
|
Three
|
|
|
Five
|
|
|
Over Five
|
|
|
|
|
Total
|
|
|
Less
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
|
(In Thousands)
|
|
Real estate loan commitments
(1)
|
|
$
|
16,674
|
|
|
$
|
16,674
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Unused portion of home equity lines of credit
(2)
|
|
|
31,492
|
|
|
|
31,492
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Unused portion of construction loans
(3)
|
|
|
27,336
|
|
|
|
27,336
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Unused portion of business lines of credit
|
|
|
8,721
|
|
|
|
8,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
|
2,337
|
|
|
|
1,776
|
|
|
|
476
|
|
|
|
85
|
|
|
|
—
|
|
|
|
|
|
|
Total Other Commitments
|
|
$
|
86,560
|
|
|
$
|
85,999
|
|
|
$
|
476
|
|
|
$
|
85
|
|
|
$
|
0
|
|
|
|
|
|
General: Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract and generally have fixed expiration dates or
other termination clauses.
|
|
|
|
|
(1)
|
|
Commitments for loans are extended to customers for up to 180 days after which they
expire.
|
|
|
|
(2)
|
|
Unused portions of home equity loans are available to the borrower for up to 10
years.
|
|
|
|
(3)
|
|
Unused portions of construction loans are available to the borrower for up to 1
year.
|
Impact of Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which upon adoption
will replace various definitions of fair value in existing accounting literature with a single
definition, will establish a framework for measuring fair value, and will require additional
disclosures about fair value measurements. The statement clarifies that fair value is the price
that would be received to sell an asset or the price paid to transfer a liability in the most
advantageous market available to the entity and emphasizes that fair value is a market-based
measurement and should be based on the assumptions market participants would use. The statement
also creates a three-level hierarchy under which individual fair value estimates are to be ranked
based on the relative reliability of the inputs used in the valuation. This hierarchy is the basis
for the disclosure requirements, with fair value estimates based on the least reliable inputs
requiring more extensive disclosures about the valuation method used and the gains and losses
associated with those estimates. SFAS 157 is required to be applied whenever another financial
accounting standard requires or permits an asset or liability to be measured at fair value. The
statement does not expand the use of fair value to any new circumstances. The Company adopted SFAS
157 on January 1, 2008 and the adoption did not have a material impact on financial position,
results of operation or liquidity.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Liabilities
. The statement allows an entity to elect to measure certain financial assets and
liabilities at fair value with changes in fair value recognized in the income statement each
period. The statement also requires additional disclosures to identify the effects of an entity’s
fair value election on its earnings. The Company adopted SFAS 159 on January 1, 2008 and the
adoption did not have a material impact on financial position, results of operation or liquidity.
-82-
In December 2007, the FASB issued SFAS No. 141 (revised December 2007),
Business Combinations
,
which replaces FASB Statement No. 141, “Business Combinations.” This statement requires an acquirer
to recognize identifiable assets acquired, liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their full fair values at that date, with limited
exceptions. Assets and liabilities assumed that arise from contractual contingencies as of the
acquisition date must also be measured at their acquisition-date full fair values. SFAS 141R
requires the acquirer to recognize goodwill as of the acquisition date, and in the case of a
bargain purchase business combination, the acquirer shall recognize a gain. Acquisition-related
costs are to be expensed in the periods in which the costs are incurred and the services are
received. Additional presentation and disclosure requirements have also been established to enable
financial statement users to evaluate and understand the nature and financial effects of business
combinations. SFAS 141R is to be applied prospectively for acquisition dates on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. The Company
will adopt SFAS 141R when required in 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements
. SFAS 160 requires noncontrolling interests to be treated as a separate
component of equity, rather than a liability or other item outside of equity. This statement also
requires the amount of consolidated net income attributable to the parent and the noncontrolling
interest to be clearly identified and presented on the face of the income statement. Changes in a
parent’s ownership interest, as long as the parent retains a controlling financial interest, must
be accounted for as equity transactions, and should a parent cease to have a controlling financial
interest, SFAS 160 requires the parent to recognize a gain or loss in net income. Expanded
disclosures in the consolidated financial statements are required by this statement and must
clearly identify and distinguish between the interest of the parent’s owners and the interests of
the noncontrolling owners of a subsidiary. SFAS 160 is to be applied prospectively for fiscal years
beginning on or after December 15, 2008, with the exception of presentation and disclosure
requirements, which shall be applied retrospectively for all periods presented. The Company will
adopt SFAS 160 when required in 2009 and is in the process of assessing the impact on its results
of operations, financial position, and liquidity.
In November 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 109,
Written Loan
Commitments Recorded at Fair Value Through Earnings
. This SAB discusses the SEC’s views regarding
written loan commitments that are accounted for at fair value through earnings under generally
accepted accounting principles. SAB 109 supersedes SAB 105 and is consistent with the guidance in
SFAS No. 156, “Accounting for Servicing of Financial Assets,” and SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities,” in which the expected net future cash flows
related to the associated servicing of the loan should be included in the measurement of all
written loan commitments that are accounted for at fair value through earnings. Consistent with the
requirements of SAB 105, SAB 109 also requires internally-developed intangible assets (such as
customer relationship intangible assets) to not be recorded as part of the fair value of a
derivative loan commitment. SAB 109 is to be applied prospectively to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The Company will adopt SAB
109 when required in 2008 and is in the process of assessing the impact on its results of
operations, financial position, and liquidity.
-83-
Impact of Inflation and Changing Prices
The financial statements and accompanying notes of Wauwatosa Savings have been prepared in
accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP
generally requires the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, our assets and liabilities are primarily monetary in
nature. As a result, changes in market interest rates have a greater impact on performance than do
the effects of inflation.
Quarterly Financial Information
The following table sets forth certain unaudited quarterly data for the periods indicated:
-84-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
2007 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
23,575
|
|
|
$
|
24,335
|
|
|
$
|
24,420
|
|
|
$
|
24,645
|
|
|
Interest expense
|
|
|
14,809
|
|
|
|
15,345
|
|
|
|
15,913
|
|
|
|
16,067
|
|
|
|
|
|
|
Net interest income
|
|
|
8,766
|
|
|
|
8,990
|
|
|
|
8,507
|
|
|
|
8,578
|
|
|
Provision for loan losses
|
|
|
350
|
|
|
|
5,676
|
|
|
|
2,826
|
|
|
|
2,845
|
|
|
|
|
|
|
Net income after provision for loan
losses
|
|
|
8,416
|
|
|
|
3,314
|
|
|
|
5,681
|
|
|
|
5,733
|
|
|
Total noninterest income
|
|
|
1,603
|
|
|
|
1,711
|
|
|
|
1,863
|
|
|
|
1,665
|
|
|
Total noninterest expense
|
|
|
6,808
|
|
|
|
6,988
|
|
|
|
7,178
|
|
|
|
7,708
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3,211
|
|
|
|
(1,963
|
)
|
|
|
366
|
|
|
|
(310
|
)
|
|
Income taxes (benefit)
|
|
|
1,112
|
|
|
|
(694
|
)
|
|
|
(55
|
)
|
|
|
(617
|
)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,099
|
|
|
$
|
(1,269
|
)
|
|
$
|
421
|
|
|
$
|
307
|
|
|
|
|
|
|
Income (loss) per share — basic
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
Income (loss) per share — diluted
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
2006 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
21,857
|
|
|
$
|
22,418
|
|
|
$
|
23,266
|
|
|
$
|
24,687
|
|
|
Interest expense
|
|
|
11,797
|
|
|
|
12,828
|
|
|
|
14,090
|
|
|
|
15,064
|
|
|
|
|
|
|
Net interest income
|
|
|
10,060
|
|
|
|
9,590
|
|
|
|
9,176
|
|
|
|
9,623
|
|
|
Provision for loan losses
|
|
|
307
|
|
|
|
345
|
|
|
|
1191
|
|
|
|
358
|
|
|
|
|
|
|
|
|
Net income after provision for loan
losses
|
|
|
9,753
|
|
|
|
9,245
|
|
|
|
7,985
|
|
|
|
9,265
|
|
|
Total noninterest income
|
|
|
1,077
|
|
|
|
1,576
|
|
|
|
1,228
|
|
|
|
1,275
|
|
|
Total noninterest expense
|
|
|
6,540
|
|
|
|
7,412
|
|
|
|
7,770
|
|
|
|
6,930
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4,290
|
|
|
|
3,409
|
|
|
|
1,443
|
|
|
|
3,610
|
|
|
Income taxes
|
|
|
1,584
|
|
|
|
1,252
|
|
|
|
537
|
|
|
|
1,326
|
|
|
|
|
|
|
Net income
|
|
$
|
2,706
|
|
|
$
|
2,157
|
|
|
$
|
906
|
|
|
$
|
2,284
|
|
|
|
|
|
|
Loss per share — basic
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
|
|
|
|
Loss per share — diluted
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
|
|
|
-85-
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Management of Market Risk
General.
The majority of our assets and liabilities are monetary in nature. Consequently,
our most significant form of market risk is interest rate risk. Our assets, consisting primarily
of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits.
As a result, a principal part of our business strategy is to manage interest rate risk and reduce
the exposure of our net interest income to changes in market interest rates. Accordingly,
Wauwatosa Savings’ Board of Directors has established an Asset/Liability Committee which is
responsible for evaluating the interest rate risk inherent in our assets and liabilities, for
determining the level of risk that is appropriate given our business strategy, operating
environment, capital, liquidity and performance objectives, and for managing this risk consistent
with the guidelines approved by the Board of Directors. Management monitors the level of interest
rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our
asset/liability policies and interest rate risk position, which are evaluated quarterly.
We have sought to manage our interest rate risk in order to minimize the exposure of our
earnings and capital to changes in interest rates. We have implemented the following strategies to
manage our interest rate risk: (i) emphasized variable rate loans including variable rate one- to
four-family, and commercial real estate loans as well as three to five year commercial real estate
balloon loans, (ii) reducing and shortening the expected average life of the investment portfolio,
and (iii) whenever possible, lengthening the term structure of our deposit base and our borrowings
from the Federal Home Loan Bank of Chicago. These measures should serve to reduce the volatility
of our net interest income in different interest rate environments.
Income Simulation.
Simulation analysis is an estimate of our interest rate risk exposure at a
particular point in time. At least quarterly we review the potential effect changes in interest
rates could have on the repayment or repricing of rate sensitive assets and funding requirements of
rate sensitive liabilities. Our most recent simulation uses projected repricing of assets and
liabilities at December 31, 2007 on the basis of contractual maturities, anticipated repayments and
scheduled rate adjustments. Prepayment rate assumptions can have a significant impact on interest
income simulation results. Because of the large percentage of loans and mortgage-backed securities
we hold, rising or falling interest rates may have a significant impact on the actual prepayment
speeds of our mortgage related assets that may in turn affect our interest rate sensitivity
position. When interest rates rise, prepayment speeds slow and the average expected lives of our
assets would tend to lengthen more than the expected average lives of our liabilities and therefore
would most likely have a negative impact on net interest income and earnings.
-86-
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Increase (Decrease) in Estimated Net
|
|
|
|
Annual Interest Income
|
|
|
|
Over 24 Months
|
|
300 basis point increase in rates
|
|
|
(1.54
|
%)
|
|
200 basis point increase in rates
|
|
|
1.53
|
%
|
|
100 basis point increase in rates
|
|
|
2.75
|
%
|
|
100 basis point decrease in rates
|
|
|
(6.51
|
%)
|
|
200 basis point decrease in rates
|
|
|
(10.06
|
%)
|
|
300 basis point decrease in rates
|
|
|
(15.87
|
%)
|
Wauwatosa Savings’ Asset/Liability policy limits projected changes in net average annual
interest income to a maximum variance of (10%) to (50%) for various levels of interest rate changes
measured over a 24-month period when compared to the flat rate scenario. In addition, projected
changes in the capital ratio are limited to (.15%) to (1.00%) for various levels of changes in
interest rates when compared to the flat rate scenario. These limits are re-evaluated on a
periodic basis and may be modified, as appropriate. Because our balance sheet is moderately asset
sensitive, income is projected to increase as interest rates rise. At December 31, 2007, a 100
basis point immediate and instantaneous increase in interest rates had the effect of increasing
forecast net interest income by 2.75% while a 100 basis point decrease in rates had the effect of
reducing net interest income by 6.51%. At December 31, 2007, a 100 basis point immediate and
instantaneous increase in interest rates had the effect of increasing the forecast return on assets
by 0.04% while a 100 basis point decrease in rates had the effect of reducing the return on assets
by 0.10%. While we believe the assumptions used are reasonable, there can be no assurance that
assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment
activity.
-87-
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Board of Directors
Wauwatosa Holdings, Inc.:
We
have audited the accompanying consolidated statements of financial condition of Wauwatosa
Holdings, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in shareholders’ equity, and cash flows for the years ended
December 31, 2007 and 2006, the year ended June 30, 2005 and for the six month period ended
December 31, 2005. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2007 and 2006, and the
results of its operations and its cash flows for years ended December 31, 2007 and 2006, the year
ended June 30, 2005 and for the six months ended December 31, 2005 in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 14, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ KPMG LLP
Milwaukee, Wisconsin
March 14, 2008
-88-
Wauwatosa Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In Thousands, except share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,492
|
|
|
|
26,745
|
|
|
Federal funds sold
|
|
|
11,833
|
|
|
|
19,458
|
|
|
Interest-bearing deposits in other financial institutions
and other short term investments
|
|
|
559
|
|
|
|
27,604
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
17,884
|
|
|
|
73,807
|
|
|
Securities available-for-sale (at fair value)
|
|
|
172,137
|
|
|
|
117,330
|
|
|
Securities held-to-maturity (at amortized cost)
|
|
|
7,646
|
|
|
|
—
|
|
|
Loans held for sale
|
|
|
23,108
|
|
|
|
5,387
|
|
|
Loans receivable
|
|
|
1,402,048
|
|
|
|
1,372,907
|
|
|
Less: Allowance for loan losses
|
|
|
12,839
|
|
|
|
7,195
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
|
1,389,209
|
|
|
|
1,365,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Office properties and equipment, net
|
|
|
32,018
|
|
|
|
32,625
|
|
|
Federal Home Loan Bank stock, at cost
|
|
|
19,289
|
|
|
|
17,213
|
|
|
Cash surrender value of life insurance
|
|
|
25,649
|
|
|
|
24,152
|
|
|
Real estate owned
|
|
|
8,543
|
|
|
|
520
|
|
|
Prepaid expenses and other assets
|
|
|
14,719
|
|
|
|
11,724
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,710,202
|
|
|
|
1,648,470
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
53,210
|
|
|
|
58,407
|
|
|
Money market and savings deposits
|
|
|
114,387
|
|
|
|
94,472
|
|
|
Time deposits
|
|
|
826,938
|
|
|
|
883,339
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
994,535
|
|
|
|
1,036,218
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
53,484
|
|
|
|
41,224
|
|
|
Long-term borrowings
|
|
|
422,000
|
|
|
|
292,779
|
|
|
Advance payments by borrowers for taxes
|
|
|
607
|
|
|
|
190
|
|
|
Other liabilities
|
|
|
37,757
|
|
|
|
36,787
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,508,383
|
|
|
|
1,407,198
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock (par value $.01 per share)
|
|
|
|
|
|
|
|
|
|
Authorized -
20,000,000 shares, no shares issued
|
|
|
—
|
|
|
|
—
|
|
|
Common stock (par value $.01 per share)
|
|
|
|
|
|
|
|
|
|
Authorized - 200,000,000 shares in 2007 and 2006
|
|
|
|
|
|
|
|
|
|
Issued - 33,975,250 in 2007 and 33,723,750 in 2006
|
|
|
|
|
|
|
|
|
|
Outstanding - 31,250,897 in 2007 and 33,723,750
in 2006
|
|
|
340
|
|
|
|
337
|
|
|
Additional paid-in capital
|
|
|
106,306
|
|
|
|
104,182
|
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
44
|
|
|
|
(1,225
|
)
|
|
Retained earnings
|
|
|
146,367
|
|
|
|
144,809
|
|
|
Unearned ESOP shares
|
|
|
(5,977
|
)
|
|
|
(6,831
|
)
|
|
Treasury shares (2,724,353 shares), at cost
|
|
|
(45,261
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
201,819
|
|
|
|
241,272
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,710,202
|
|
|
|
1,648,470
|
|
|
|
|
|
|
|
|
|
See Accompanying notes to consolidated financial statements.
-89-
Wauwatosa Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
|
Years ended December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
|
(In Thousands, except per share amounts)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
87,101
|
|
|
|
83,822
|
|
|
|
38,516
|
|
|
|
69,775
|
|
|
Mortgage-related securities
|
|
|
5,869
|
|
|
|
4,263
|
|
|
|
1,389
|
|
|
|
2,283
|
|
|
Debt securities, federal funds sold and
short-term investments
|
|
|
4,005
|
|
|
|
4,143
|
|
|
|
2,131
|
|
|
|
2,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
96,975
|
|
|
|
92,228
|
|
|
|
42,036
|
|
|
|
74,207
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
44,910
|
|
|
|
42,038
|
|
|
|
18,296
|
|
|
|
33,285
|
|
|
Borrowings
|
|
|
17,224
|
|
|
|
11,741
|
|
|
|
2,462
|
|
|
|
2,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
62,134
|
|
|
|
53,779
|
|
|
|
20,758
|
|
|
|
36,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
34,841
|
|
|
|
38,449
|
|
|
|
21,278
|
|
|
|
38,139
|
|
|
Provision for loan losses
|
|
|
11,697
|
|
|
|
2,201
|
|
|
|
1,035
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
23,144
|
|
|
|
36,248
|
|
|
|
20,243
|
|
|
|
36,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on loans and deposits
|
|
|
1,983
|
|
|
|
2,021
|
|
|
|
940
|
|
|
|
1,216
|
|
|
Increase in cash surrender value of life insurance
|
|
|
1,192
|
|
|
|
1,055
|
|
|
|
587
|
|
|
|
642
|
|
|
Gain (loss) on sale of securities
|
|
|
—
|
|
|
|
(819
|
)
|
|
|
—
|
|
|
|
12
|
|
|
Mortgage banking income
|
|
|
2,912
|
|
|
|
2,109
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
755
|
|
|
|
790
|
|
|
|
717
|
|
|
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
6,842
|
|
|
|
5,156
|
|
|
|
2,244
|
|
|
|
3,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, payroll taxes, and other employee benefits
|
|
|
15,487
|
|
|
|
16,209
|
|
|
|
7,404
|
|
|
|
11,434
|
|
|
Occupancy, office furniture, and equipment
|
|
|
4,990
|
|
|
|
4,304
|
|
|
|
1,802
|
|
|
|
3,482
|
|
|
Advertising
|
|
|
1,158
|
|
|
|
1,369
|
|
|
|
764
|
|
|
|
1,128
|
|
|
Data processing
|
|
|
1,622
|
|
|
|
1,730
|
|
|
|
840
|
|
|
|
1,142
|
|
|
Charitable contributions
|
|
|
—
|
|
|
|
—
|
|
|
|
5,310
|
|
|
|
2,088
|
|
|
Communications
|
|
|
729
|
|
|
|
700
|
|
|
|
300
|
|
|
|
591
|
|
|
Professional fees
|
|
|
1,230
|
|
|
|
1,243
|
|
|
|
529
|
|
|
|
627
|
|
|
Real estate owned
|
|
|
1,200
|
|
|
|
116
|
|
|
|
(54
|
)
|
|
|
338
|
|
|
Other
|
|
|
2,266
|
|
|
|
2,981
|
|
|
|
1,408
|
|
|
|
2,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses
|
|
|
28,682
|
|
|
|
28,652
|
|
|
|
18,303
|
|
|
|
23,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,304
|
|
|
|
12,752
|
|
|
|
4,184
|
|
|
|
16,636
|
|
|
Income tax (benefit) expense
|
|
|
(254
|
)
|
|
|
4,699
|
|
|
|
1,471
|
|
|
|
7,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,558
|
|
|
|
8,053
|
|
|
|
2,713
|
|
|
|
9,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
|
0.24
|
|
|
|
(0.02
|
)
|
|
|
N/A
|
|
|
Diluted
|
|
$
|
0.05
|
|
|
|
0.24
|
|
|
|
(0.02
|
)
|
|
|
N/A
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,570,677
|
|
|
|
33,076,565
|
|
|
|
33,135,424
|
|
|
|
N/A
|
|
|
Diluted
|
|
|
31,578,626
|
|
|
|
33,076,565
|
|
|
|
33,135,424
|
|
|
|
N/A
|
|
See Accompanying notes to consolidated financial statements.
-90-
Wauwatosa Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Unearned
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
ESOP
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Shares
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Equity
|
|
|
|
|
(In Thousands)
|
|
|
Balances at December 31, 2005
|
|
|
33,724
|
|
|
|
337
|
|
|
|
103,859
|
|
|
|
136,756
|
|
|
|
(7,685
|
)
|
|
|
(1,571
|
)
|
|
|
—
|
|
|
|
231,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,053
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,053
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding losses on
available for sale securities arising during the period,
net of taxes of $101
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(187
|
)
|
|
|
—
|
|
|
|
(187
|
)
|
|
Reclassification adjustment for net losses on
available for sale securities realized in net
income, net of taxes of $285
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
533
|
|
|
|
—
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,399
|
|
|
ESOP shares committed to be released to Plan participants
|
|
|
—
|
|
|
|
—
|
|
|
|
323
|
|
|
|
—
|
|
|
|
854
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
33,724
|
|
|
$
|
337
|
|
|
|
104,182
|
|
|
|
144,809
|
|
|
|
(6,831
|
)
|
|
|
(1,225
|
)
|
|
|
—
|
|
|
|
241,272
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,558
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,558
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains on
available for sale securities arising during the period,
net of taxes of $684
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,269
|
|
|
|
—
|
|
|
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,827
|
|
|
ESOP shares committed to be released to Plan participants
|
|
|
—
|
|
|
|
—
|
|
|
|
398
|
|
|
|
—
|
|
|
|
854
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,252
|
|
|
Stock based compensation
|
|
|
251
|
|
|
|
3
|
|
|
|
1,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,729
|
|
|
Purchase of treasury shares
|
|
|
(2,724
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(45,261
|
)
|
|
|
(45,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
31,251
|
|
|
$
|
340
|
|
|
|
106,306
|
|
|
|
146,367
|
|
|
|
(5,977
|
)
|
|
|
44
|
|
|
|
(45,261
|
)
|
|
|
201,819
|
|
|
|
|
|
See Accompanying notes to consolidated financial statements.
-91-
Wauwatosa Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Unearned
|
|
|
Other
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
ESOP
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Shares
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
(In Thousands)
|
|
|
Balances at June 30, 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
124,927
|
|
|
|
—
|
|
|
|
(2,129
|
)
|
|
|
122,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,116
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,116
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains on
available for sale securities arising during the period, net
of taxes $799
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,509
|
|
|
|
1,509
|
|
|
Reclassification adjustment for net losses on
available for sale securities realized in net
income, net of taxes of $5
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2005
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
134,043
|
|
|
|
—
|
|
|
|
(627
|
)
|
|
|
133,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,713
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,713
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding losses on
available for sale securities arising during the period, net
of taxes $521
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(944
|
)
|
|
|
(944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,769
|
|
|
Sale of common stock, net of issuance costs of $2,439
|
|
|
10,117
|
|
|
|
101
|
|
|
|
98,630
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
98,731
|
|
|
Contribution of shares to charitable foundation
|
|
|
557
|
|
|
|
6
|
|
|
|
5,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,565
|
|
|
Capitalization of Lamplighter Financial, MHC
|
|
|
23,050
|
|
|
|
230
|
|
|
|
(330
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(100
|
)
|
|
Purchase of ESOP shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,539
|
)
|
|
|
—
|
|
|
|
(8,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP shares committed to be released to Plan participants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
854
|
|
|
|
—
|
|
|
|
854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
33,724
|
|
|
$
|
337
|
|
|
|
103,859
|
|
|
|
136,756
|
|
|
|
(7,685
|
)
|
|
|
(1,571
|
)
|
|
|
231,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying notes to consolidated financial statements.
-92-
Wauwatosa Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
Six months ended
|
|
|
Years ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
|
(In Thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,558
|
|
|
|
8,053
|
|
|
|
2,713
|
|
|
|
9,116
|
|
|
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
11,697
|
|
|
|
2,201
|
|
|
|
1,035
|
|
|
|
1,238
|
|
|
Provision for depreciation
|
|
|
2,633
|
|
|
|
2,369
|
|
|
|
1,053
|
|
|
|
1,607
|
|
|
Deferred income taxes
|
|
|
(2,469
|
)
|
|
|
(1,280
|
)
|
|
|
(1,933
|
)
|
|
|
(1,192
|
)
|
|
Stock based compensation
|
|
|
1,729
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net amortization of premium on debt and
mortgage-related securities
|
|
|
(219
|
)
|
|
|
22
|
|
|
|
(81
|
)
|
|
|
49
|
|
|
Amortization of unearned ESOP shares
|
|
|
1,252
|
|
|
|
1,177
|
|
|
|
854
|
|
|
|
—
|
|
|
Gain on sale of loans held for sale
|
|
|
(1,820
|
)
|
|
|
(1,054
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Loans originated for sale
|
|
|
(242,120
|
)
|
|
|
(84,603
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds on sales of loans originated for sale
|
|
|
226,219
|
|
|
|
80,270
|
|
|
|
—
|
|
|
|
—
|
|
|
Charitable contribution of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
5,565
|
|
|
|
—
|
|
|
Increase in accrued interest receivable
|
|
|
(950
|
)
|
|
|
(621
|
)
|
|
|
(412
|
)
|
|
|
(230
|
)
|
|
Increase in cash surrender value of life insurance
|
|
|
(1,192
|
)
|
|
|
(1,055
|
)
|
|
|
(587
|
)
|
|
|
(642
|
)
|
|
Increase (decrease) in accrued interest on deposits
|
|
|
(45
|
)
|
|
|
1,301
|
|
|
|
68
|
|
|
|
1,269
|
|
|
Increase in other liabilities
|
|
|
1,046
|
|
|
|
2,901
|
|
|
|
1,241
|
|
|
|
3,004
|
|
|
FHLB stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
(309
|
)
|
|
|
(776
|
)
|
|
(Gain) loss on sale of securities
|
|
|
—
|
|
|
|
819
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
(Gain) loss on sale of office properties and
equipment
|
|
|
(77
|
)
|
|
|
7
|
|
|
|
(571
|
)
|
|
|
(488
|
)
|
|
(Gain) loss related to real estate owned
|
|
|
712
|
|
|
|
31
|
|
|
|
25
|
|
|
|
2
|
|
|
Other
|
|
|
1,822
|
|
|
|
(417
|
)
|
|
|
1,119
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(224
|
)
|
|
|
10,121
|
|
|
|
9,780
|
|
|
|
13,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in loans receivable
|
|
|
(48,643
|
)
|
|
|
(68,717
|
)
|
|
|
(88,242
|
)
|
|
|
(153,126
|
)
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
(28,958
|
)
|
|
|
—
|
|
|
|
(6,700
|
)
|
|
|
(34,299
|
)
|
|
Mortgage-related securities
|
|
|
(47,401
|
)
|
|
|
(36,037
|
)
|
|
|
(49,682
|
)
|
|
|
—
|
|
|
Structured notes, held-to-maturity
|
|
|
(7,646
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Premises and equipment, net
|
|
|
(2,122
|
)
|
|
|
(11,598
|
)
|
|
|
(2,346
|
)
|
|
|
(6,506
|
)
|
|
Waterstone Mortgage Corporation, net of cash
|
|
|
—
|
|
|
|
(1,081
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Bank owned life insurance
|
|
|
(306
|
)
|
|
|
(306
|
)
|
|
|
(126
|
)
|
|
|
(456
|
)
|
|
FHLB stock
|
|
|
(2,076
|
)
|
|
|
(2,807
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments on mortgage-related securities
|
|
|
17,621
|
|
|
|
15,457
|
|
|
|
10,323
|
|
|
|
21,091
|
|
|
Maturities of debt securities
|
|
|
5,509
|
|
|
|
—
|
|
|
|
6,350
|
|
|
|
25,397
|
|
|
Sales of debt securities
|
|
|
—
|
|
|
|
12,832
|
|
|
|
—
|
|
|
|
262
|
|
|
Sales of mortgage-related securities
|
|
|
—
|
|
|
|
13,036
|
|
|
|
—
|
|
|
|
5,348
|
|
|
Sales of foreclosed properties and other assets
|
|
|
3,369
|
|
|
|
2,984
|
|
|
|
1,082
|
|
|
|
2,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(110,653
|
)
|
|
|
(76,237
|
)
|
|
|
(129,341
|
)
|
|
|
(139,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying notes to consolidated financial statements.
-93-
Wauwatosa Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
Six months ended
|
|
|
Years ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
|
(In Thousands)
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(41,683
|
)
|
|
|
(9,375
|
)
|
|
|
(83,198
|
)
|
|
|
93,203
|
|
|
Net change in short-term borrowings
|
|
|
(35,519
|
)
|
|
|
(112,209
|
)
|
|
|
38,000
|
|
|
|
10,000
|
|
|
Proceeds from long-term borrowings
|
|
|
177,000
|
|
|
|
245,000
|
|
|
|
70,050
|
|
|
|
23,162
|
|
|
Net increase in advance payments by borrowers for taxes
|
|
|
417
|
|
|
|
9
|
|
|
|
648
|
|
|
|
1,375
|
|
|
Purchase of treasury stock
|
|
|
(45,261
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net proceeds from sale of stock
|
|
|
—
|
|
|
|
—
|
|
|
|
98,731
|
|
|
|
—
|
|
|
Capitalization of Lamplighter, MHC
|
|
|
—
|
|
|
|
—
|
|
|
|
(100
|
)
|
|
|
—
|
|
|
Financing for purchase of ESOP shares
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,539
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
54,954
|
|
|
|
123,425
|
|
|
|
115,592
|
|
|
|
127,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(55,923
|
)
|
|
|
57,309
|
|
|
|
(3,969
|
)
|
|
|
1,075
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
73,807
|
|
|
|
16,498
|
|
|
|
20,467
|
|
|
|
19,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
17,884
|
|
|
|
73,807
|
|
|
|
16,498
|
|
|
|
20,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid or credited during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
|
4,429
|
|
|
|
4,777
|
|
|
|
2,970
|
|
|
|
5,925
|
|
|
Interest payments
|
|
|
62,179
|
|
|
|
52,477
|
|
|
|
20,691
|
|
|
|
34,798
|
|
|
Noncash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable transferred to foreclosed
properties
|
|
|
13,455
|
|
|
|
1,572
|
|
|
|
—
|
|
|
|
1,921
|
|
|
Obligations under capital lease
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,423
|
|
|
Non Cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term FHLB advances reclassified to
short-term
|
|
|
47,779
|
|
|
|
66,224
|
|
|
|
14,209
|
|
|
|
25,000
|
|
See Accompanying notes to consolidated financial statements.
-94-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
1)
|
|
Summary of Accounting Policies
|
|
|
a)
|
|
Organization
|
|
|
|
|
|
|
The Board of Directors of Wauwatosa Savings Bank (the Bank) adopted the Plan of
Reorganization and related Stock Issuance Plan on May 17, 2005, as amended on June 3, 2005,
under which Wauwatosa Holdings, Inc. (the Company) was formed to become the mid-tier holding
company for the Bank. In addition, Lamplighter Financial, MHC, a Federally-chartered mutual
holding company, was formed to become the majority owner of Wauwatosa Holdings, Inc.
|
|
|
|
|
|
|
In connection with the Plan of Reorganization and Stock Issuance Plan, on October 4, 2005,
10,117,125 shares of Wauwatosa Holdings, Inc. were sold to eligible subscribers in a
registered stock offering; 556,442 shares were issued to the Wauwatosa Savings Bank Fund of
the Waukesha County Community Foundation, and the remaining 23,050,183 shares were issued to
Lamplighter Financial, MHC. The Company’s outstanding common shares are 73.8% owned by
Lamplighter Financial, MHC at December 31, 2007.
|
|
|
|
|
b)
|
|
Fiscal Year Change
|
|
|
|
|
|
|
In 2005, the Company changed its fiscal year ended June 30 to a fiscal year ended December
31. The six month period ended December 31, 2005, transitions between the Company’s old and
new fiscal year ends. The results of operations for the six-month period ended December 31,
2005 are not necessarily indicative of results that may be expected for any other interim
period or for an entire fiscal year.
|
|
|
|
|
c)
|
|
Nature of Operations
|
|
|
|
|
|
|
The Company operates as a one-bank holding company. The Bank is principally engaged in the
business of attracting deposits from the general public and using such deposits to originate
residential real estate loans.
|
|
|
|
|
d)
|
|
Principles of Consolidation
|
|
|
|
|
|
|
The consolidated financial statements include the accounts and operations of Wauwatosa
Holdings, Inc. and its wholly owned subsidiary, Wauwatosa Savings Bank. The Bank has the
following wholly owned subsidiaries: Wauwatosa Investments, Inc., Waterstone Mortgage
Corporation and Main Street Real Estate Holdings, LLC. All significant intercompany accounts
and transactions have been eliminated in consolidation.
|
|
|
|
|
|
|
The Bank provides a full range of financial services to customers through branch locations
in southeastern Wisconsin. The Bank is subject to the regulations of certain federal and
state agencies and undergoes periodic examinations by those regulatory authorities.
|
|
|
|
|
e)
|
|
Use of Estimates
|
|
|
|
|
|
|
The preparation of the consolidated financial statements requires management of the Company
to make a number of estimates and assumptions relating to the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during
the period. Significant items subject to such estimates
and assumptions include the allowance for loan losses and deferred income taxes. Actual
results could differ from those estimates.
|
-95-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
f)
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
The Company considers federal funds sold and highly liquid debt instruments with a maturity
of three months or less when purchased to be cash equivalents.
|
|
|
|
|
g)
|
|
Securities
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
Management has designated certain securities as available-for-sale. As such, they are stated
at fair value, with the unrealized gains and losses, net of tax, reported as a separate
component of equity.
|
|
|
|
|
|
|
The cost of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity or, in the case of mortgage-related securities, over the estimated
life of the security. Such amortization is included in interest income from investments.
Declines in the fair value of investment securities available for sale that are deemed to be
other-than-temporary are charged to earnings as a realized loss and a new cost basis for the
securities is established. In evaluating other-than-temporary impairment, management
considers the length of time and extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issuer, and the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value in the near term. Realized securities gains or losses
on securities sales (using specific identification method) and declines in value judged to
be other-than-temporary are included in investment securities gains (losses), net, in the
consolidated statements of income.
|
|
|
|
|
|
|
Held-to-Maturity Securities
|
|
|
|
|
|
|
Debt securities that the Company has the intent and ability to hold to maturity have been
designated as held-to-maturity. Such securities are stated at amortized cost.
|
|
|
|
|
|
|
Federal Home Loan Bank Stock
|
|
|
|
|
|
|
Federal Home Loan Bank stock is carried at cost, which is the amount that the stock is
redeemable by tendering to the FHLB or the amount at which shares can be sold to other FHLB
members. FHLB dividends are recognized as income on their ex-dividend date.
|
|
|
|
|
h)
|
|
Loans Held for Sale
|
|
|
|
|
|
|
Loans held for sale, which generally consist of current origination of certain fixed-rate
mortgage loans, are carried at the lower of cost or estimated market value as determined on
an aggregate basis. The amount by which cost exceeds market value is accounted for as a
valuation adjustment to the carrying value of the loans. Changes, if any, are included in
mortgage banking income in the consolidated statements of income.
|
|
|
|
|
i)
|
|
Loans Receivable and Related Interest Income
|
|
|
|
|
|
|
Loans are carried at the principal amount outstanding, net of any unearned income. Loan
origination and commitment fees and certain direct loan origination costs are deferred and
the net amount amortized as an
adjustment of the related loan yield. Amortization is based on a level-yield method over the
contractual life of the related loans or until the loan is paid in full. Interest on loans
is accrued and credited to income as it is earned. Accrual of interest is generally
discontinued either when reasonable doubt exists as to the full, timely collection of
interest or principal, or when a loan becomes contractually past due more than 90
|
-96-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
days with
respect to interest or principal. At that time, previously accrued and uncollected interest
on such loans is reversed and additional income is recorded only to the extent that payments
are received and the collection of principal is reasonably assured. Generally, loans are
restored to accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time, and the ultimate
collectibility of the total contractual principal and interest is no longer in doubt.
|
|
|
|
|
j)
|
|
Allowance for Loan Losses
|
|
|
|
|
|
|
The allowance for loan losses is established as losses are estimated to have occurred
through a provision for loan losses charged to income. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
|
|
|
|
|
|
|
The Bank establishes valuation allowances on multi-family and commercial real estate loans
considered impaired. A loan is considered impaired when, based on current information and
events, it is probable that the Bank will not be able to collect all amounts due according
to the contractual terms of the loan agreement. A valuation allowance is established for an
amount equal to the impairment when the carrying amount of the loan exceeds the present
value of the expected future cash flows, discounted at the loan’s original effective
interest rate or the fair value of the underlying collateral.
|
|
|
|
|
|
|
The Bank also establishes valuation allowances based on an evaluation of the various risk
components that are inherent in the loan portfolio. The risk components that are evaluated
include past loan loss experience; the level of nonperforming and classified assets; current
economic conditions; volume, growth, and composition of the loan portfolio; adverse
situations that may affect the borrower’s ability to repay; the estimated value of any
underlying collateral; regulatory guidance; and other relevant factors. The allowance is
increased by provisions charged to earnings and reduced by charge-offs, net of recoveries.
The adequacy of the allowance for loan losses is approved quarterly by the Bank’s board of
directors. The allowance reflects management’s best estimate of the amount needed to provide
for the probable loss on impaired loans, as well as other credit risks of the Bank, and is
based on a risk model developed and implemented by management and approved by the Bank’s
board of directors.
|
|
|
|
|
|
|
Actual results could differ from this estimate, and future additions to the allowance may be
necessary based on unforeseen changes in economic conditions. In addition, federal
regulators periodically review the Bank’s allowance for loan losses. Such regulators have
the authority to require the Bank to recognize additions to the allowance at the time of
their examination.
|
|
|
|
|
k)
|
|
Real Estate Owned
|
|
|
|
|
|
|
Real estate owned consists of real estate properties acquired through, or in lieu of, loan
foreclosure. Real estate owned is recorded at estimated fair value less anticipated selling
costs based upon the property’s appraised value at the date of transfer, with any difference
between the fair value of the property and the net carrying value of the loan charged to the
allowance for loan losses. Gains or losses not previously
recognized resulting from the sale of real estate owned are recognized in real estate owned
expense on the date of sale.
|
|
|
|
|
l)
|
|
Cash Surrender Value of Life Insurance
|
|
|
|
|
|
|
The Company purchased bank owned life insurance on the lives of certain employees. The
Company is the beneficiary of the life insurance policies. The cash surrender value of life
insurance is reported at the
|
-97-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
amount that would be received in cash if the polices were
surrendered. Increases in the cash value of the policies and proceeds of death benefits
received are recorded in non-interest income. The increase in cash surrender value of life
insurance is not subject to income taxes, as long as the Company has the intent and ability
to hold the policies until the death benefits are received.
|
|
|
|
|
m)
|
|
Office Properties and Equipment
|
|
|
|
|
|
|
Office properties and equipment, including leasehold improvements and software, are stated
at cost, net of depreciation and amortization. Depreciation and amortization are computed on
the straight-line method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the lease term, if shorter than the estimated useful life.
Maintenance and repairs are charged to expense as incurred, while additions or major
improvements are capitalized and depreciated over their estimated useful lives. Estimated
useful lives of the assets are 10 to 30 years for office properties, three to 10 years for
equipment, and three years for software. Rent expense related to long-term operating leases
is recorded on the accrual basis.
|
|
|
|
|
n)
|
|
Income Taxes
|
|
|
|
|
|
|
The Company and its subsidiaries file a consolidated federal income tax return. The
provision for income taxes is based upon income in the consolidated financial statements,
rather than amounts reported on the income tax return. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income or expense in the period that includes the
enactment date.
|
|
|
|
|
|
|
Positions taken in the Company’s tax returns may be subject to challenge by the taxing
authorities upon examination. Uncertain tax positions are initially recognized in the
financial statements when it is more likely than not the position will be sustained upon
examination by the tax authorities. Such tax positions are both initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of being
realized upon settlement with the tax authority, assuming full knowledge of the position and
all relevant facts. Interest and penalties on income tax uncertainties are classified
within income tax expense in the income statement.
|
|
|
|
|
o)
|
|
) Earnings Per Share
|
|
|
|
|
|
|
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed by dividing net
income by the weighted average number of common shares outstanding adjusted for the dilutive
effect of all potential common shares. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Shares of the Employee Stock
Ownership Plan committed to be released are considered outstanding for both common and
diluted EPS. Incentive stock compensation awards granted in 2007 result in dilution.
|
|
|
|
|
p)
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
Comprehensive income is the total of reported net income and all other revenues, expenses,
gains and losses that under generally accepted accounting principles bypass reported net
income. The Company
|
-98-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
includes unrealized gains or losses, net of tax, on securities
available for sale in other comprehensive income.
|
|
|
|
|
q)
|
|
Employee Stock Ownership Plan (ESOP)
|
|
|
|
|
|
|
Compensation expense under the ESOP is equal to the fair value of common shares released or
committed to be released to participants in the ESOP in each respective period. Common
stock purchased by the ESOP and not committed to be released to participants is included in
the consolidated statements of financial condition at cost as a reduction of shareholders’
equity.
|
|
|
|
|
r)
|
|
Reclassifications
|
|
|
|
|
|
|
Certain prior year amounts have been reclassified to conform to the 2007 presentation.
|
-99-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
2)
|
|
Securities
|
|
|
|
|
|
Securities Available for Sale
|
The amortized cost and fair values of the Company’s investment in securities follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
|
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
20,128
|
|
|
|
154
|
|
|
|
(68
|
)
|
|
|
20,214
|
|
|
Collateralized mortgage obligations
|
|
|
110,419
|
|
|
|
1,050
|
|
|
|
(1,073
|
)
|
|
|
110,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
|
130,547
|
|
|
|
1,204
|
|
|
|
(1,141
|
)
|
|
|
130,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored entity bonds
|
|
|
13,996
|
|
|
|
187
|
|
|
|
(1
|
)
|
|
|
14,182
|
|
|
Municipals
|
|
|
27,277
|
|
|
|
209
|
|
|
|
(391
|
)
|
|
|
27,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
41,273
|
|
|
|
396
|
|
|
|
(392
|
)
|
|
|
41,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities
|
|
|
250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
172,070
|
|
|
|
1,600
|
|
|
|
(1,533
|
)
|
|
|
172,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
|
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
18,274
|
|
|
|
3
|
|
|
|
(275
|
)
|
|
|
18,002
|
|
|
Collateralized mortgage obligations
|
|
|
82,419
|
|
|
|
1
|
|
|
|
(1,549
|
)
|
|
|
80,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
|
100,693
|
|
|
|
4
|
|
|
|
(1,824
|
)
|
|
|
98,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored entity bonds
|
|
|
13,450
|
|
|
|
—
|
|
|
|
(193
|
)
|
|
|
13,257
|
|
|
Municipals
|
|
|
4,278
|
|
|
|
151
|
|
|
|
(8
|
)
|
|
|
4,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
17,728
|
|
|
|
151
|
|
|
|
(201
|
)
|
|
|
17,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities
|
|
|
794
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119,215
|
|
|
|
155
|
|
|
|
(2,040
|
)
|
|
|
117,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, $14.2 million of the Company’s government sponsored entity bonds and
$76.8 million of the Company’s mortgage-related securities were pledged as collateral to
secure repurchase agreement obligations of the Company.
-100-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
The amortized cost and fair value of securities at December 31, 2007, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities because issuers or
borrowers may have the right to prepay obligations with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
cost
|
|
|
Fair value
|
|
|
|
|
(In Thousands)
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
2,991
|
|
|
|
2,991
|
|
|
Due after one year
through five years
|
|
|
11,005
|
|
|
|
11,191
|
|
|
Due after five years
through ten years
|
|
|
1,654
|
|
|
|
1,664
|
|
|
Due after ten years
|
|
|
25,623
|
|
|
|
25,431
|
|
|
Mortgage-related securities
|
|
|
130,547
|
|
|
|
130,610
|
|
|
Mutual Funds
|
|
|
250
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
172,070
|
|
|
|
172,137
|
|
|
|
|
|
|
|
|
|
Total proceeds and gross realized gains and losses from sale of securities available for sale
for the years ended December 31, 2007 and 2006 and the six-month periods ended December 31,
2005 and for the year ended June 30, 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Year ended
|
|
|
|
Years Ended December 31,
|
|
December 31,
|
|
June 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Proceeds
|
|
$
|
—
|
|
|
|
25,868
|
|
|
|
—
|
|
|
|
5,610
|
|
|
Gross gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
|
Gross losses
|
|
|
—
|
|
|
|
819
|
|
|
|
—
|
|
|
|
4
|
|
-101-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
Gross unrealized losses on securities available-for-sale and the fair value of the related
securities, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
value
|
|
|
loss
|
|
|
value
|
|
|
loss
|
|
|
value
|
|
|
loss
|
|
|
|
|
(In Thousands)
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
|
—
|
|
|
|
3,230
|
|
|
|
(68
|
)
|
|
|
3,230
|
|
|
|
(68
|
)
|
|
Collateralized mortgage obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
38,707
|
|
|
|
(1,073
|
)
|
|
|
38,707
|
|
|
|
(1,073
|
)
|
|
Government sponsored entity bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
998
|
|
|
|
(1
|
)
|
|
|
998
|
|
|
|
(1
|
)
|
|
Municipals
|
|
|
15,079
|
|
|
|
(391
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
15,079
|
|
|
|
(391
|
)
|
|
Other Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,079
|
|
|
|
(391
|
)
|
|
|
42,935
|
|
|
|
(1,142
|
)
|
|
|
58,014
|
|
|
|
(1,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
value
|
|
|
loss
|
|
|
value
|
|
|
loss
|
|
|
value
|
|
|
loss
|
|
|
|
|
(In Thousands)
|
|
|
Mortgage-backed securities
|
|
$
|
2,846
|
|
|
|
(3
|
)
|
|
|
14,922
|
|
|
|
(272
|
)
|
|
|
17,768
|
|
|
|
(275
|
)
|
|
Collateralized mortgage obligations
|
|
|
36,140
|
|
|
|
(467
|
)
|
|
|
40,000
|
|
|
|
(1,082
|
)
|
|
|
76,140
|
|
|
|
(1,549
|
)
|
|
Government sponsored entity bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
13,257
|
|
|
|
(193
|
)
|
|
|
13,257
|
|
|
|
(193
|
)
|
|
Municipals
|
|
|
874
|
|
|
|
(5
|
)
|
|
|
472
|
|
|
|
(3
|
)
|
|
|
1,346
|
|
|
|
(8
|
)
|
|
Other Securities
|
|
|
778
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
778
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,638
|
|
|
|
(490
|
)
|
|
|
68,651
|
|
|
|
(1,550
|
)
|
|
|
109,289
|
|
|
|
(2,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There are two, sixteen and one individual securities at December 31, 2007, that comprise the
mortgage-backed, collateralized mortgage obligations and government sponsored entity bonds,
respectively, which have been in an unrealized loss position for twelve months or longer.
Because the decline in fair value is attributable to changes in interest rates and not credit
quality, and because the Company has the ability and intent to hold these debt securities
until a market price recovery or maturity, these securities are not considered
other-than-temporarily impaired.
Securities Held-to-Maturity
As of December 31, 2007, the Company held three securities that have been designated as
held-to-maturity. The securities have a total amortized cost of $7.6 million and an estimated
fair value of $7.2 million. Each
security is callable quarterly and one was called in the first quarter of 2008. The remaining
two securities are callable beginning in the first quarter of 2009 with a final maturity in
2022.
-102-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
3) Loans Receivable
Loans receivable at December 31, 2007 and 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In Thousands)
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
672,362
|
|
|
|
638,089
|
|
|
Over four-family
|
|
|
477,766
|
|
|
|
492,693
|
|
|
Construction and land
|
|
|
156,289
|
|
|
|
168,605
|
|
|
Commercial real estate
|
|
|
51,983
|
|
|
|
51,062
|
|
|
Home equity
|
|
|
85,954
|
|
|
|
91,536
|
|
|
Consumer
|
|
|
286
|
|
|
|
141
|
|
|
Commercial loans
|
|
|
28,222
|
|
|
|
2,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,472,862
|
|
|
|
1,444,783
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Undisbursed loan proceeds
|
|
|
67,549
|
|
|
|
67,390
|
|
|
Unearned loan fees
|
|
|
3,265
|
|
|
|
4,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,402,048
|
|
|
|
1,372,907
|
|
|
|
|
|
|
|
|
|
Real estate collateralizing the Company’s first mortgage loans is located in the Company’s
general lending area of metropolitan Milwaukee.
The unpaid principal balance of loans serviced for others was $5.2 million and $7.9 million at
December 31, 2007 and December 31, 2006, respectively. These loans are not reflected in the
consolidated financial statements.
-103-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
A summary of the activity for the years ended December 31, 2007 and 2006, six months ended
December 31, 2005 and for the year ended June 30, 2005 in the allowance for loan losses
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
|
Years ended December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
|
(In Thousands)
|
|
|
Balance at beginning of period
|
|
$
|
7,195
|
|
|
|
5,250
|
|
|
|
4,606
|
|
|
|
3,378
|
|
|
Provision for loan losses
|
|
|
11,697
|
|
|
|
2,201
|
|
|
|
1,035
|
|
|
|
1,238
|
|
|
Charge-offs
|
|
|
(6,163
|
)
|
|
|
(536
|
)
|
|
|
(391
|
)
|
|
|
(11
|
)
|
|
Recoveries
|
|
|
110
|
|
|
|
280
|
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
12,839
|
|
|
|
7,195
|
|
|
|
5,250
|
|
|
|
4,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of allowance to
gross loans
|
|
|
0.92
|
%
|
|
|
0.52
|
%
|
|
|
0.40
|
%
|
|
|
0.38
|
%
|
Non-accrual loans totaled $80.4 million and $28.9 million at December 31, 2007 and 2006,
respectively.
The following table presents data on impaired loans at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In Thousands)
|
|
|
Impaired loans for which an allowance
has been provided
|
|
$
|
27,896
|
|
|
|
11,430
|
|
|
Impaired loans for which no allowance
has been provided
|
|
|
54,632
|
|
|
|
18,499
|
|
|
|
|
|
|
|
|
|
|
Total loans
determined to be
impaired
|
|
$
|
82,528
|
|
|
|
29,929
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses related to
impaired loans
|
|
$
|
5,783
|
|
|
|
1,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Average recorded investment in
impaired loans
|
|
$
|
51,110
|
|
|
|
14,447
|
|
|
Cash basis interest income recognized
from impaired loans
|
|
$
|
2,735
|
|
|
|
2,216
|
|
-104-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
As of December 31, 2007, troubled debt restructurings totaled $2.2 million. These loans are
included in the total of impaired loans for which no allowance has been provided as of
December 31, 2007. The loans are performing in accordance with the terms of the restructuring
as of December 31, 2007. There were no troubled debt restructurings as of December 31, 2006.
The Company serves the credit needs of its customers by offering a wide variety of loan
programs to customers, primarily in Wisconsin. The loan portfolio is widely diversified by
types of borrowers, property type, and market areas. Significant loan concentrations are
considered to exist for a financial institution when there are amounts loaned to one borrower
or to multiple borrowers engaged in similar activities that would cause them to be similarly
impacted by economic or other conditions. At December 31, 2007 and 2006, no loans to one
borrower or industry concentrations existed in the Company’s loan portfolio in excess of 10%
of total loans.
4) Office Properties and Equipment
Office properties and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In Thousands)
|
|
|
Land
|
|
$
|
5,994
|
|
|
|
5,989
|
|
|
Office buildings and improvements
|
|
|
29,709
|
|
|
|
28,838
|
|
|
Furniture and equipment
|
|
|
9,224
|
|
|
|
11,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,927
|
|
|
|
46,128
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(12,909
|
)
|
|
|
(13,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,018
|
|
|
|
32,625
|
|
|
|
|
|
|
|
|
|
The Company is obligated under a capital lease related to facilities and equipment at one of
the Company’s branch locations. The four-year lease, which was entered into in March 2005,
provides the Company an option to either purchase the building for $3.3 million at maturity or
to renew the lease for an additional 26 years. The building was occupied in September 2005. It
is probable that the building will be purchased at the end of the initial term of the lease in
March 2009.
The gross amount of buildings and improvements and accumulated amortization recorded under the
capital lease is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In Thousands)
|
|
|
Office buildings and improvements
|
|
$
|
5,727
|
|
|
|
5,724
|
|
|
Less accumulated depreciation
|
|
|
(432
|
)
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,295
|
|
|
|
5,484
|
|
|
|
|
|
|
|
|
|
Amortization of assets held under the capital lease is included in depreciation expense.
-105-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
The Company and certain subsidiaries are obligated under non-cancelable operating leases
for other facilities and equipment. The appropriate minimum annual commitments under all
non-cancelable lease agreements for leases with remaining terms in excess of one year and
future minimum capital lease payments as of December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
lease
|
|
|
leases
|
|
|
|
|
(In Thousands)
|
|
|
Within one year
|
|
$
|
300
|
|
|
|
107
|
|
|
One to two years
|
|
|
3,375
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,675
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
|
3,675
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum
capital lease payments
|
|
$
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5) Deposits
At December 31, 2007 and 2006, time deposits with balances greater than one hundred thousand
dollars amounted to $183.4 million and $207.0 million, respectively. Time deposits at
December 31, 2007 and 2006 also include brokered deposits of $14.9 million, $36.3 million,
respectively.
-106-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
A summary of interest expense on deposits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
|
2007
|
|
|
2006
|
|
|
December 31, 2005
|
|
|
30, 2005
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
331
|
|
|
|
631
|
|
|
|
637
|
|
|
|
863
|
|
|
Money market and savings
deposits
|
|
|
4,283
|
|
|
|
2,326
|
|
|
|
122
|
|
|
|
202
|
|
|
Time deposits
|
|
|
40,296
|
|
|
|
39,081
|
|
|
|
17,537
|
|
|
|
32,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,910
|
|
|
|
42,038
|
|
|
|
18,296
|
|
|
|
33,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the contractual maturities of time deposits at December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
Within one year
|
|
$
|
627,410
|
|
|
One to two years
|
|
|
127,541
|
|
|
Two to three years
|
|
|
47,655
|
|
|
Three to four years
|
|
|
5,638
|
|
|
Four through five years
|
|
|
18,439
|
|
|
After five years
|
|
|
255
|
|
|
|
|
|
|
|
|
|
$
|
826,938
|
|
|
|
|
|
|
-107-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
6) Borrowings
Borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Federal funds purchased maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
5,705
|
|
|
|
4.75
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Federal Home Loan Bank (FHLB) advances maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
41,224
|
|
|
|
3.94
|
%
|
|
2008
|
|
|
47,779
|
|
|
|
4.24
|
%
|
|
|
47,779
|
|
|
|
4.24
|
%
|
|
2009
|
|
|
4,100
|
|
|
|
4.23
|
%
|
|
|
—
|
|
|
|
—
|
|
|
2010
|
|
|
48,900
|
|
|
|
4.80
|
%
|
|
|
25,000
|
|
|
|
4.72
|
%
|
|
2016
|
|
|
220,000
|
|
|
|
4.34
|
%
|
|
|
220,000
|
|
|
|
4.34
|
%
|
|
2017
|
|
|
65,000
|
|
|
|
3.19
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
84,000
|
|
|
|
3.97
|
%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
475,484
|
|
|
|
4.16
|
%
|
|
|
334,003
|
|
|
|
4.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $220 million in advances due in 2016 consist of eight callable advances. The call
features are as follows: $70 million at a weighted average rate of 4.44% callable quarterly
until maturity, two $25 million advances at a
weighted average rate of 4.64% callable beginning in July 2008, and August 2008 and quarterly
thereafter, and two $50 million advances at a weighted average rate of 4.13% callable
beginning in January 2009 and March 2009 and quarterly thereafter.
The $65 million in advances due in 2017 consist of three callable advances. The call features
are as follows: $15 million at a rate of 3.46% callable beginning in February 2008 and
quarterly thereafter and two $25 million advances at a weighted average rate of 3.11% callable
beginning in March 2009 and quarterly thereafter.
The $84 million in repurchase agreements with two unrelated counter parties consist of six
callable agreements. The call features are as follows: a $15 million agreement at a rate of
2.94% callable beginning in February 2008 and quarterly thereafter; two $12 million agreements
at a weighted average rate of 4.21% callable beginning in March 2017 and quarterly thereafter;
two $15 million agreements at a weighted average rate of 4.24% callable beginning in August of
2017 and quarterly thereafter; and a $15 million agreement at a rate of 4.09% callable
beginning in September 2017 and quarterly thereafter. The repurchase agreements are
collateralized by securities available for sale with an estimated market value of $91.0
million at December 31, 2007.
The Company selects loans that meet underwriting criteria established by the FHLB as
collateral for outstanding advances. The Company’s borrowings at the FHLB are limited to 60%
of the carrying value of unencumbered one- to four-family mortgage loans. In addition, these
advances are collateralized by FHLB
stock of $19.3 million, and $17.2 million at December 31, 2007 and 2006, respectively. In the
event of prepayment, the Company is obligated to pay all remaining contractual interest on the
advance.
-108-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
The Company has a federal funds line of credit with four commercial banks which total $50
million. As of December 31, 2007, there was $5.7 million outstanding in federal funds
borrowings.
7) Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31, 2007, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2007 the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as “well capitalized” under the regulatory framework for
prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios, as set forth in the
table below. There are no conditions or events since that notification that management
believes have changed the Bank’s category.
As a state-chartered savings bank, the Bank is required to meet minimum capital levels
established by the state of Wisconsin in addition to federal requirements. For the state of
Wisconsin, regulatory capital consists of retained income, paid-in-capital, capital stock
equity and other forms of capital considered to be qualifying capital by the Federal Deposit
Insurance Corporation.
The actual and required capital amounts and ratios for the Bank as of December 31, 2007 and
2006 are presented in the table below:
-109-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well-Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars In Thousands)
|
|
Wauwatosa Savings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted
assets)
|
|
$
|
181,745
|
|
|
|
13.43
|
%
|
|
|
108,248
|
|
|
|
8.00
|
%
|
|
|
135,311
|
|
|
|
10.00
|
%
|
|
Tier I capital (to risk-weighted
assets)
|
|
|
169,431
|
|
|
|
12.52
|
%
|
|
|
54,124
|
|
|
|
4.00
|
%
|
|
|
81,186
|
|
|
|
6.00
|
%
|
|
Tier I capital (to average assets)
|
|
|
169,431
|
|
|
|
10.08
|
%
|
|
|
67,225
|
|
|
|
4.00
|
%
|
|
|
84,031
|
|
|
|
5.00
|
%
|
|
State of Wisconsin (to total assets)
|
|
|
169,431
|
|
|
|
9.94
|
%
|
|
|
102,250
|
|
|
|
6.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
Wauwatosa Savings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted
assets)
|
|
$
|
203,400
|
|
|
|
18.19
|
%
|
|
|
89,439
|
|
|
|
8.00
|
%
|
|
|
111,799
|
|
|
|
10.00
|
%
|
|
Tier I capital (to risk-weighted
assets)
|
|
|
196,464
|
|
|
|
17.57
|
%
|
|
|
44,719
|
|
|
|
4.00
|
%
|
|
|
67,079
|
|
|
|
6.00
|
%
|
|
Tier I capital (to average assets)
|
|
|
196,464
|
|
|
|
12.10
|
%
|
|
|
64,961
|
|
|
|
4.00
|
%
|
|
|
81,201
|
|
|
|
5.00
|
%
|
|
State of Wisconsin (to total assets)
|
|
|
196,464
|
|
|
|
12.26
|
%
|
|
|
96,180
|
|
|
|
6.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
On September 28, 2007, the Company completed its charter conversion to change the Company’s
charter from a Wisconsin corporation to that of a federal corporation regulated exclusively by
the Office of Thrift Supervision (the “OTS”). The OTS does not impose either consolidated or
unconsolidated regulatory capital requirements on thrift holding companies. Prior to
September 28, 2007, the Company was chartered as a state corporation regulated by the Federal
Reserve Bank. Under Federal Reserve Bank regulation, the Company was required to meet minimum
capital levels. The actual and required capital amounts and ratios for the Company as of
December 31, 2006 are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well-Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions (1)
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars In Thousands)
|
|
Wauwatosa Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted
assets)
|
|
$
|
248,866
|
|
|
|
21.36
|
%
|
|
|
93,216
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Tier I capital (to risk-weighted
assets)
|
|
|
241,760
|
|
|
|
20.75
|
%
|
|
|
46,608
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Tier I capital (to average assets)
|
|
|
241,760
|
|
|
|
14.47
|
%
|
|
|
66,820
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
(1)
|
|
Prompt corrective action provisions are not applicable at the bank
holding company level.
|
8) Stock Based Compensation
Stock-Based Compensation Plan
In 2005, the Company’s shareholders approved the 2006 Equity Incentive Plan. During the year
ended December 31, 2007, the Company granted 797,500 stock options in tandem with stock
appreciation rights and 251,500 shares of restricted stock. The restricted shares were issued
from previously unissued shares. All stock awards granted under these plans vest over a
period of five years and are required to be settled in shares of the Company’s common stock.
The exercise price for all stock options granted is equal to the
-110-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
quoted NASDAQ market close price on the date that the awards were granted and expire ten years
after the grant date, if not exercised.
Accounting for Stock-Based Compensation Plan
The fair value of stock options granted is estimated on the grant date using a Black-Scholes
pricing model. The fair value of restricted shares is equal to the quoted NASDAQ market
close price on the date of grant. The fair value of stock grants is recognized as
compensation expense on a straight-line basis over the vesting period of the grants.
Compensation expense is included in compensation, payroll taxes and other employee benefits in
the consolidated statements of income.
Assumptions are used in estimating the fair value of stock options granted. The weighted
average expected life of the stock options represent the period of time that the options are
expected to be outstanding and is based on the SEC simplified approach to calculating expected
term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant. The expected volatility is based on the historical volatility for a group of
selected peers. The following assumptions were used in estimating the fair value of options
granted in the year ended December 31, 2007.
|
|
|
|
|
|
|
Dividend Yield
|
|
|
1.32
|
%
|
|
Risk-free interest rate
|
|
|
4.44
|
%
|
|
Expected volatility
|
|
|
31.86
|
%
|
|
Weighted average expected life
|
|
|
6.5
|
years
|
|
Weighted average per share value of options
|
|
$
|
6.25
|
|
In accordance with Statement on Financial Standards No. 123R, Share-Based Payment, the Company
is required to estimate potential forfeitures of stock grants and adjust compensation expense
recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service
period to the extent that actual forfeitures differ, or are expected to differ, from such
estimates. Changes in estimated forfeitures will be recognized in the period of change and
will also impact the amount of stock compensation expense to be recognized in future periods.
A summary of the Company’s stock option activity for the year ended December 31, 2007, is
presented below.
-111-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted Average
|
|
Years Remaining in
|
|
Instrinsic Value
|
|
Stock Options
|
|
Shares
|
|
Exercise Price
|
|
Contractual Term
|
|
(000's)
|
|
|
|
Outstanding December 31, 2006
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Granted
|
|
|
797,500
|
|
|
$
|
17.63
|
|
|
|
10.00
|
|
|
|
—
|
|
|
Excercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Forfeited
|
|
|
(15,000
|
)
|
|
|
17.67
|
|
|
|
9.50
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
|
782,500
|
|
|
|
17.63
|
|
|
|
9.02
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
|
—
|
|
|
|
17.63
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the Company’s nonvested stock option activity
for the three months ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Stock Options
|
|
Shares
|
|
Grant Date Fair Value
|
|
|
|
Nonvested at December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
|
Granted
|
|
|
797,500
|
|
|
$
|
6.25
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
(15,000
|
)
|
|
|
6.27
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
782,500
|
|
|
|
6.25
|
|
|
|
|
|
|
|
|
|
|
|
The Company amortizes the expense related to stock options as compensation expense over the
vesting period. During the year ended December 31, 2007, 797,500 options were granted, of
which 15,000 have been forfeited. Expense for the stock options granted of approximately
$841,000 was recognized during the year ended December 31, 2007. At December 31, 2007, the
Company had $3.4 million in estimated unrecognized compensation costs related to outstanding
stock options that is expected to be recognized over the next 48 months.
The following table summarizes information about the Company’s restricted stock shares
activity for the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Restricted Stock
|
|
Shares
|
|
Grant Date Fair Value
|
|
|
|
Nonvested at December 31, 2006
|
|
|
—
|
|
|
|
|
|
|
Granted
|
|
|
251,500
|
|
|
$
|
17.67
|
|
|
Vested
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
251,500
|
|
|
|
17.67
|
|
|
|
|
|
|
|
|
|
|
|
-112-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
The Company amortizes the expense related to restricted stock awards as compensation expense
over the vesting period. During the year ended December 31, 2007, 251,500 shares of
restricted stock were awarded, of which no shares have been forfeited. Expense for the
restricted stock awards of approximately $888,000 was recorded for the year ended December 31,
2007. At December 31, 2007, the Company had $3.6 million of unrecognized compensation expense
related to restricted stock shares that is expected to be recognized over a period of 48
months.
9) Employee Benefit Plans
The Company participates in an industry group sponsored multi-employer defined-benefit
retirement plan covering substantially all employees with one year or more of service. During
the period ended December 31, 2005, the Company elected to freeze benefits accruing in the
Pension Plan, and has applied to the Internal Revenue Service to terminate the Plan and to pay
out all benefits to Plan participants in the year ending December 31, 2008. There was no
related expense for the years ended December 31, 2007 and 2006. The expense for the six
months ended December 31, 2005 includes amounts contributed to the Plan to fully settle the
pension plan obligation. Pension plan expense was approximately $640,000 and $485,000 for the
six months ended December 31, 2005 and for the year ended June 30, 2005, respectively. The
Company’s policy is to fund pension costs accrued.
The Company has a 401(k) profit sharing plan and trust covering substantially all employees
with at least one year of service who have attained age 18. Participating employees may
annually contribute up to 15% of their pretax compensation. The Bank made no contributions to
the Plan during the years ended December 31, 2007 and 2006, the six months ended December 31,
2005 and the year ended June 30, 2005.
The Company has a nonqualified salary continuation plan for three former employees. These
agreements provide for payments of specific amounts over 10-year periods subsequent to each
key employee’s retirement. The deferred compensation liability was accrued ratably to the
employee’s respective normal retirement date. Payments made to the retired employees reduce
the liability. As of December 31, 2007 and 2006, approximately $2.4 million and $2.8 million
was accrued related to these plans, respectively. These agreements are intended to be funded
by life insurance policies owned by the Company on these employees, which have a face amount
of $15.2 million and a cash surrender value of $10.3 million and $9.4 million at December 31,
2007 and 2006, respectively. The former employees, however, have no interest in these
policies. There was no expense for compensation under these agreements during the year ended
December 31, 2007. The expense for compensation under these agreements was approximately
$322,000, $40,000 and $74,000 for the year ended December 31, 2006, six months ended December
31, 2005 and for the year ended June 30, 2005, respectively.
During the year ended December 31, 2006, the Company established a nonqualified deferred
compensation plan for executive officers. The plan allows participants to defer a portion of
regular salary and bonus to future periods. The participant earns interest on the deferred
balance. As of December 31, 2007 and 2006, compensation of approximately $539,000 and
$78,000, respectively has been deferred under this plan. Earnings credited to compensation
deferred totaled $23,000 and $1,000 for the years ended December 31, 2007 and 2006,
respectively.
In addition to the key-man policies noted above, there is a Bank-owned life insurance contract
with a face amount of $308.5 million and cash surrender value of $15.3 million and $14.8
million at December 31, 2007 and 2006, respectively.
-113-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
10) Employee Stock Ownership Plan
In conjunction with the mutual holding company reorganization, Wauwatosa Savings established
an Employee Stock Ownership Plan (the “Plan”). All employees are eligible to participate in
the Plan after they attain twenty-one years of age and complete twelve consecutive months of
service in which they work at least 1,000 hours of service. The Plan borrowed $8.5 million
from the Company and purchased 761,515 shares of common stock of the Company in the open
market. The Plan debt is secured by shares of the Company. The Company has committed to make
annual contributions to the Plan necessary to repay the loan, including interest. The loan is
scheduled to be repaid in ten annual installments. While the shares are not released and
allocated to Plan participants until the loan payment is made, the shares are deemed to be
earned and are therefore, committed to be released throughout the service period. As such,
one-tenth of the shares are scheduled to be released as shares are earned over a period of ten
years, beginning with the six-month period ended December 31,
2005. As the debt is repaid, shares are released from collateral and allocated to active employees’ accounts. The shares
pledged as collateral are reported as unearned ESOP shares in the consolidated statement of
financial condition. As shares are committed to be released from collateral, the Company
reports compensation expense equal to the average fair market price
of the shares, and the shares become outstanding for earnings per share computations. Compensation expense
attributed to the ESOP was $1.3 million, $1.2 million and $854,000, respectively for the year
ended December 31, 2007 and 2006 and for the six months ended December 31, 2005.
The aggregate activity in the number of unearned ESOP shares, considering the allocation of
those shares committed to be released as of December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Beginning ESOP shares
|
|
|
609,213
|
|
|
|
685,365
|
|
|
Shares committed to be released
|
|
|
(76,152
|
)
|
|
|
(76,152
|
)
|
|
|
|
|
|
|
|
|
|
Unreleased shares
|
|
|
533,061
|
|
|
|
609,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of unreleased shares (in thousands)
|
|
$
|
6,834
|
|
|
|
10,856
|
|
-114-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
11) Income Taxes
The provision (benefit) for income taxes for the year ended December 31, 2007 and 2006, the
six months ended December 31, 2005 and for the year ended June 30, 2005 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
|
Years ended December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,046
|
|
|
|
4,761
|
|
|
|
2,526
|
|
|
|
5,403
|
|
|
State
|
|
|
169
|
|
|
|
1,218
|
|
|
|
878
|
|
|
|
3,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,215
|
|
|
|
5,979
|
|
|
|
3,404
|
|
|
|
8,712
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,780
|
)
|
|
|
(899
|
)
|
|
|
(1,632
|
)
|
|
|
(1,155
|
)
|
|
State
|
|
|
(689
|
)
|
|
|
(381
|
)
|
|
|
(301
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,469
|
)
|
|
|
(1,280
|
)
|
|
|
(1,933
|
)
|
|
|
(1,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(254
|
)
|
|
|
4,699
|
|
|
|
1,471
|
|
|
|
7,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provisions differ from that computed at the Federal statutory corporate tax
rate for the years ended December 31, 2007 and 2006, the six months ended December 31, 2005
and for the year ended June 30, 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
ended June
|
|
|
|
|
Years ended December 31,
|
|
|
December 31,
|
|
|
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,304
|
|
|
|
12,752
|
|
|
$
|
4,184
|
|
|
$
|
16,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at Federal statutory rate (35%)
|
|
|
456
|
|
|
|
4,463
|
|
|
|
1,464
|
|
|
|
5,822
|
|
|
Add (deduct) effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income
taxes, net of Federal
income tax benefit
|
|
|
(338
|
)
|
|
|
545
|
|
|
|
375
|
|
|
|
2,127
|
|
|
Cash surrender value of life insurance
|
|
|
(417
|
)
|
|
|
(370
|
)
|
|
|
(205
|
)
|
|
|
(225
|
)
|
|
Non-deductible ESOP and stock
option expense
|
|
|
258
|
|
|
|
113
|
|
|
|
—
|
|
|
|
—
|
|
|
Tax-exempt interest income
|
|
|
(282
|
)
|
|
|
(69
|
)
|
|
|
(29
|
)
|
|
|
(64
|
)
|
|
Other
|
|
|
69
|
|
|
|
17
|
|
|
|
(134
|
)
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
provision (benefit)
|
|
|
(254
|
)
|
|
|
4,699
|
|
|
|
1,471
|
|
|
|
7,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(19.6
|
%)
|
|
|
36.9
|
%
|
|
|
35.2
|
%
|
|
|
45.2
|
%
|
-115-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
The significant components of the Company’s net deferred tax assets (liabilities) included in
prepaid expenses and other assets are as follows at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In Thousands)
|
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Excess book depreciation
|
|
$
|
530
|
|
|
|
455
|
|
|
Compensation agreements
|
|
|
1,189
|
|
|
|
1,139
|
|
|
Restricted stock and stock options
|
|
|
558
|
|
|
|
—
|
|
|
Allowance for loan losses
|
|
|
5,233
|
|
|
|
2,846
|
|
|
Interest income recognized for tax but not books
|
|
|
1,761
|
|
|
|
817
|
|
|
State tax liability — Nevada settlement
|
|
|
869
|
|
|
|
1,701
|
|
|
State NOL carryforward
|
|
|
146
|
|
|
|
167
|
|
|
Unrealized loss on securities available for sale
|
|
|
—
|
|
|
|
660
|
|
|
Charitable contributions carry forward
|
|
|
1,144
|
|
|
|
1,386
|
|
|
Other
|
|
|
139
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
11,569
|
|
|
|
9,306
|
|
|
Valuation allowance — charitable
contribution carry forward
|
|
|
(244
|
)
|
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
11,325
|
|
|
|
9,072
|
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
FHLB stock dividends
|
|
|
(932
|
)
|
|
|
(1,018
|
)
|
|
Deferred loan fees
|
|
|
(666
|
)
|
|
|
(135
|
)
|
|
Unrealized gain on securities available for sale
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred liabilities
|
|
|
(1,622
|
)
|
|
|
(1,153
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred
tax assets
|
|
$
|
9,703
|
|
|
|
7,919
|
|
|
|
|
|
|
|
|
|
The change in net deferred tax assets from December 31, 2006 to December 31, 2007 and from
December 31, 2005 to December 31, 2006, includes the deferred tax effect reported in other
comprehensive income of $684,000 and $184,000 respectively. The Bank has a Wisconsin net
operating loss carry forward of $2.8 million at December 31, 2007, which begins to expire in 2021. The Bank also has a Wisconsin charitable contribution carry
forward of $3.1 million which will be carried back to open tax years. In addition, the
Company has a Wisconsin charitable contribution carry forward of $5.2 million at December 31,
2007 which expires in 2010 if not fully utilized by then.
Based upon the level of historical taxable income and expected future taxable income over the
periods in which the net deferred tax assets are deductible, management believes it is more
likely than not the Bank will realize the benefits of these deductible differences, net of the valuation allowance of $244,000.
Management believes that it is more likely than not that $4.7 million of the Company’s
Wisconsin charitable contribution carry forward will expire unused. A December 31, 2007
valuation allowance of $244,000, net of federal benefit, reduces the deferred tax benefit to
its net estimated realizable value.
-116-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
The Company files consolidated federal tax returns. The Company and two subsidiaries also file separate company
Wisconsin income tax returns. The Company is no longer subject to federal income tax
examinations by tax authorities for years before 2005 or state income tax examinations for
years before 2004.
|
|
|
|
|
|
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, on January 1, 2007. Adoption had no effect on the liability for unrecognized
tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
|
|
|
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
4,132,000
|
|
|
Decreases related to settlements with taxing authorities
|
|
|
(4,107,000
|
)
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
24,000
|
|
|
|
|
|
|
|
|
|
The beginning unrecognized benefit is Wisconsin tax on a portion of the income generated by
the Company’s subsidiary located in the state of Nevada for the period July 1, 2002 through
December 31, 2006. A state of Wisconsin closing agreement regarding this matter was executed
on March 30, 2007. The settlement had an effect of reclassifying $4.1 million in unrecognized
benefits as of January 1, 2007 as accrued state tax liability. Under the terms of the closing
agreement, the Company paid $1.2 million, including interest, on the settlement date with the
remaining $3.7 million to be paid over the next three years. Management does not anticipate significant adjustments
to the total amount of unrecognized tax benefits within the next twelve months.
|
|
|
|
|
|
The Company recognizes interest and penalties related to unrecognized tax benefits in income
tax expense. During the years ended 2007, 2006 and for the six-month transition period ended
December 31, 2005, the Company recognized approximately $111,000, $263,000 and $174,000 in
interest and penalties. The Company had $812,000 accrued for the payment of interest and
penalties at December 31, 2006 all of which was paid in 2007. Under the Internal Revenue Code
and Wisconsin Statutes, the Company is permitted to deduct, for tax years beginning before
1998, an annual addition to a reserve for bad debts. This amount differs from the provision
for loan losses recorded for financial accounting purposes. Under prior law, bad debt
deductions for income tax purposes were included in taxable income of later years only if the
bad debt reserves were used for purposes other than to absorb bad debt losses. Because the
Company did not intend to use the reserve for purposes other than to absorb losses, no
deferred income taxes were provided. Retained earnings at December 31, 2007 include
approximately $16.7 million for which no deferred Federal or state income taxes were provided.
Under SFAS No. 109, deferred income taxes have been provided on certain additions to the tax
reserve for bad debts.
|
|
|
|
12)
|
|
Financial Instruments with Off-Balance-Sheet Risk
|
|
|
|
|
|
The Company is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular classes of
financial instruments.
|
|
|
|
|
|
The Company’s potential exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of those instruments. The Company
uses the
same credit policies in making commitments and conditional obligations as it does for other
financial instruments reflected in the consolidated financial statements.
|
-117-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Financial instruments whose contract
amounts represent potential credit risk:
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit under
first mortgage loans
|
|
$
|
16,674
|
|
|
|
28,067
|
|
|
Commitments to extend credit under
home equity lines of credit
|
|
|
31,492
|
|
|
|
34,676
|
|
|
Unused portion of construction loans
|
|
|
27,336
|
|
|
|
32,714
|
|
|
Unused portion of business lines of credit
|
|
|
8,721
|
|
|
|
—
|
|
|
Standby letters of credit
|
|
|
2,337
|
|
|
|
639
|
|
|
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements of the Company. The Company evaluates
each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on management’s credit
evaluation of the counter-party. Collateral obtained generally consists of mortgages on the
underlying real estate.
|
|
|
|
|
|
Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The
Company holds mortgages on the underlying real estate as collateral supporting those
commitments for which collateral is deemed necessary.
|
|
|
|
|
|
The Company has determined that there are no probable losses related to commitments to extend
credit or the standby letters of credit as of December 31, 2007 and 2006.
|
|
|
|
|
|
In connection with its mortgage banking activities, the Company enters into forward loan sale
commitments. Forward commitments to sell mortgage loans represent commitments obtained by the
Company from a secondary market agency to purchase mortgages from the Company at specified
interest rates and within specified periods of time. Commitments to sell loans are made to
mitigate interest rate risk on commitments to originate loans and loans held for sale. As of
December 31, 2007, the Company had $23.1 million in forward loan sale commitments. A forward
sale commitment is a derivative instrument under Statement of Financial Accounting Standards
No. 133 (“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities,” (as
amended), which must be recognized at fair value on the consolidated balance sheet in other
assets and other liabilities with changes in its value recorded in income from mortgage
banking operations. In determining the fair value of its derivative loan commitments for
economic purposes, the Company considers the value that would be generated when the loan
arising from exercise of the loan commitment is sold in the secondary mortgage market. That
value includes the price that the loan is expected to be sold for in the secondary mortgage
market.
|
-118-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
13)
|
|
Fair Values of Financial Instruments
|
|
|
|
|
|
Fair value information about financial instruments follows, whether or not recognized in the
consolidated statements of financial condition, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Certain financial instruments and all nonfinancial instruments
are excluded from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
|
|
|
|
|
|
The carrying amounts and fair values of the Company’s financial instruments consist of the
following at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
amount
|
|
value
|
|
amount
|
|
value
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,884
|
|
|
|
17,884
|
|
|
|
73,807
|
|
|
|
73,807
|
|
|
Securities available-for-sale
|
|
|
172,137
|
|
|
|
172,137
|
|
|
|
117,330
|
|
|
|
117,330
|
|
|
Securities held-to-maturity
|
|
|
7,646
|
|
|
|
7,174
|
|
|
|
—
|
|
|
|
—
|
|
|
Loans held for sale
|
|
|
23,108
|
|
|
|
23,108
|
|
|
|
5,387
|
|
|
|
5,387
|
|
|
Loans receivable
|
|
|
1,389,209
|
|
|
|
1,372,856
|
|
|
|
1,365,712
|
|
|
|
1,367,223
|
|
|
FHLB stock
|
|
|
19,289
|
|
|
|
19,289
|
|
|
|
17,213
|
|
|
|
17,213
|
|
|
Cash surrender value of
life insurance
|
|
|
25,649
|
|
|
|
25,649
|
|
|
|
24,152
|
|
|
|
24,152
|
|
|
Accrued interest receivable
|
|
|
3,129
|
|
|
|
3,129
|
|
|
|
2,179
|
|
|
|
2,179
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
994,535
|
|
|
|
997,394
|
|
|
|
1,036,218
|
|
|
|
1,034,697
|
|
|
Advance payments by
borrowers for taxes
|
|
|
607
|
|
|
|
607
|
|
|
|
190
|
|
|
|
190
|
|
|
Borrowings
|
|
|
475,484
|
|
|
|
511,880
|
|
|
|
334,003
|
|
|
|
333,746
|
|
|
Accrued interest payable
|
|
|
4,299
|
|
|
|
4,299
|
|
|
|
4,344
|
|
|
|
4,344
|
|
|
Obligations under capital leases
|
|
|
3,343
|
|
|
|
3,343
|
|
|
|
3,374
|
|
|
|
3,374
|
|
|
Other Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stand-by letters of credit
|
|
|
16
|
|
|
|
16
|
|
|
|
4
|
|
|
|
4
|
|
-119-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
The following methods and assumptions were used by the Company in determining its fair value
disclosures for financial instruments.
|
a)
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
The carrying amounts reported in the consolidated statements of financial condition for
cash and cash equivalents approximate those assets’ fair values.
|
|
|
|
b)
|
|
Securities
|
|
|
|
|
|
Fair values for securities are based on quoted market prices of these or comparable
instruments.
|
|
|
|
c)
|
|
Loans Held for Sale
|
|
|
|
|
|
Fair value is estimated using the prices of the Company’s existing commitments to sell
such loans and/or the quoted market price for commitments to sell similar loans.
|
|
|
|
d)
|
|
Loans Receivable
|
|
|
|
|
|
Fair values for loans receivable are estimated using a discounted cash flow calculation
that applies current interest rates to estimated future cash flows of the loans
receivable.
|
|
|
|
e)
|
|
FHLB Stock
|
|
|
|
|
|
For FHLB stock, the carrying amount is the amount at which shares can be redeemed with
the FHLB and is a reasonable estimate of fair value.
|
|
|
|
f)
|
|
Cash Surrender Value of Life Insurance
|
|
|
|
|
|
The carrying amounts reported in the consolidated statements of financial condition for
the cash surrender value of life insurance approximate those assets’ fair values.
|
|
|
|
g)
|
|
Deposits and Advance Payments by Borrowers for Taxes
|
|
|
|
|
|
The fair values for interest-bearing and noninterest-bearing negotiable order of
withdrawal accounts, savings accounts, and money market accounts are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their carrying
amounts). The fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being offered on
certificates of similar remaining maturities to a schedule of aggregated expected monthly
maturities of the outstanding certificates of deposit. The advance payments by borrowers
for taxes are equal to their carrying amounts at the reporting date.
|
|
|
|
h)
|
|
Borrowings
|
|
|
|
|
|
Fair values for borrowings are estimated using a discounted cash flow calculation that
applies current interest rates to estimated future cash flows of the borrowings.
|
|
|
|
i)
|
|
Accrued Interest Payable and Accrued Interest Receivable
|
|
|
|
|
|
For accrued interest payable and accrued interest receivable, the carrying amount is a
reasonable estimate of fair value.
|
-120-
Notes to Consolidated Financial Statements
Years Ended December 31, 2007 and 2006 and June 30, 2005
Six Months Ended December 31, 2005
|
j)
|
|
Obligations under Capital Leases
|
|
|
|
|
|
The fair value of obligations under capital leases is determined using a present value of
future minimum lease payments discounted at the current interest rate at the time of
lease inception.
|
|
|
|
k)
|
|
Commitments to Extend Credit and Standby Letters of Credit
|
|
|
|
|
|
Commitments to extend credit and standby letters of credit are generally not marketable.
Furthermore, interest rates on any amounts drawn under such commitments would be
generally established at market rates at the time of the draw. Fair values for the
Company’s commitments to extend credit and standby letters of credit are based on fees
currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements, the counterparty’s credit standing, and discounted cash flow
analyses. The fair value of the Company’s commitments to extend credit is not material at
December 31, 2007 and 2006.
|
-121-
Notes to Consolidated Financial Statements
Years Ended December 31, 2006 and 2005 and June 30, 2005
Six Months Ended December 31, 2005
|
14)
|
|
Earnings (loss) per share
|
|
|
|
|
|
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted EPS is computed by
dividing net income (loss) by the weighted average number of common shares outstanding
adjusted for the dilutive effect of all potential common shares. At December 31, 2007, 2006
and 2005, 228,454, 152,302 and 76,150 shares of the Employee Stock Purchase Plan have been
committed to be released to Plan participants and are considered outstanding for both common
and dilutive earnings per share, respectively. No earnings per share are reflected for
periods prior to October 4, 2005, as there were no shares outstanding prior to the
reorganization. The calculation of earnings per share for the period subsequent to the
reorganization reflect the actual net loss and weighted average shares outstanding from the
period October 5, 2005 through December 31, 2005.
|
|
|
|
|
|
Presented below are the calculations for basic and diluted earnings (loss) per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
|
|
|
|
|
|
|
|
|
October 5, 2005
|
|
|
|
|
For the year ended December 31,
|
|
|
through December
|
|
|
|
|
2007
|
|
|
2006
|
|
|
31, 2005
|
|
|
|
|
(In Thousands, except per share amounts)
|
|
|
Net income (loss)
|
|
$
|
1,558
|
|
|
|
8,053
|
|
|
|
(709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
31,571
|
|
|
|
33,077
|
|
|
|
33,135
|
|
|
Effect of dilutive potential common shares
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
31,579
|
|
|
|
33,077
|
|
|
|
33,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.05
|
|
|
|
0.24
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.05
|
|
|
|
0.24
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
-122-
Notes to Consolidated Financial Statements
Years Ended December 31, 2006 and 2005 and June 30, 2005
Six Months Ended December 31, 2005
15) Condensed Parent Company Only Statements
Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In Thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,352
|
|
|
|
82
|
|
|
Loans receivable
|
|
|
4,829
|
|
|
|
42,786
|
|
|
Less: Allowance for loan losses
|
|
|
(442
|
)
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
|
4,387
|
|
|
|
42,697
|
|
|
Investment in subsidiaries
|
|
|
170,143
|
|
|
|
195,975
|
|
|
Receivable from ESOP
|
|
|
1,195
|
|
|
|
1,238
|
|
|
Deferred tax asset
|
|
|
1,478
|
|
|
|
1,062
|
|
|
Income tax benefit receivable
|
|
|
317
|
|
|
|
459
|
|
|
Other assets
|
|
|
6
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
201,878
|
|
|
|
241,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
59
|
|
|
|
159
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
Preferred Stock (par value $.01 per share)
|
|
|
—
|
|
|
|
—
|
|
|
Authorized — 20,000,000 shares, no shares issued
|
|
|
|
|
|
|
|
|
|
Common stock (par value $.01 per share)
|
|
|
340
|
|
|
|
337
|
|
|
Authorized — 200,000,000 shares in 2007 and 2006
|
|
|
|
|
|
|
|
|
|
Issued — 33,975,250 in 2007 and 33,723,750 in 2006
|
|
|
|
|
|
|
|
|
|
Outstanding — 31,250,897 in 2007 and 33,723,750 in 2006
|
|
|
|
|
|
|
|
|
|
Additional paid-in-capital
|
|
|
106,306
|
|
|
|
104,182
|
|
|
Retained earnings
|
|
|
146,367
|
|
|
|
144,809
|
|
|
Unearned ESOP shares
|
|
|
(5,977
|
)
|
|
|
(6,831
|
)
|
|
Treasury stock (2,724,353 shares), at cost
|
|
|
(45,261
|
)
|
|
|
—
|
|
|
Accumulated other comprehensive loss (net of taxes)
|
|
|
44
|
|
|
|
(1,225
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
201,819
|
|
|
|
241,272
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
201,878
|
|
|
|
241,431
|
|
|
|
|
|
|
|
|
|
-123-
Notes to Consolidated Financial Statements
Years Ended December 31, 2006 and 2005 and June 30, 2005
Six Months Ended December 31, 2005
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
|
For the year ended December 31,
|
|
|
October 5, 2005 through
|
|
|
|
|
2007
|
|
|
2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,163
|
|
|
|
2,601
|
|
|
|
97
|
|
|
Provision for loan losses
|
|
|
271
|
|
|
|
171
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income after provision for loan losses
|
|
|
1,892
|
|
|
|
2,430
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries*
|
|
|
1,170
|
|
|
|
7,390
|
|
|
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
3,062
|
|
|
|
9,820
|
|
|
|
3,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
446
|
|
|
|
513
|
|
|
|
—
|
|
|
Professional fees
|
|
|
81
|
|
|
|
146
|
|
|
|
—
|
|
|
Charitable contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
5,564
|
|
|
Other expense
|
|
|
464
|
|
|
|
448
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
991
|
|
|
|
1,107
|
|
|
|
5,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit
|
|
|
2,071
|
|
|
|
8,713
|
|
|
|
(2,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
513
|
|
|
|
660
|
|
|
|
(1,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,558
|
|
|
|
8,053
|
|
|
|
(709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Equity in earnings of subsidiaries related to the period ended December 31, 2005 is for the period
from October 5, 2005 through December 31, 2005, the period for which Wauwatosa Holdings, Inc owned
the Bank and its subsidiaries.
|
-124-
Notes to Consolidated Financial Statements
Years Ended December 31, 2006 and 2005 and June 30, 2005
Six Months Ended December 31, 2005
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
|
For the year ended December 31,
|
|
|
October 5, 2005 through
|
|
|
|
|
2007
|
|
|
2006
|
|
|
December 31, 2005
|
|
|
|
|
(In Thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,558
|
|
|
|
8,053
|
|
|
|
(709
|
)
|
|
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
271
|
|
|
|
171
|
|
|
|
—
|
|
|
Amortization of unearned ESOP
|
|
|
1,252
|
|
|
|
1,177
|
|
|
|
—
|
|
|
Stock based compensation
|
|
|
1,729
|
|
|
|
—
|
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
(416
|
)
|
|
|
502
|
|
|
|
(1,564
|
)
|
|
Charitable contribution of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
5,565
|
|
|
Equity in earnings of subsidiaries
|
|
|
(1,170
|
)
|
|
|
(7,390
|
)
|
|
|
(2,965
|
)
|
|
Change in other assets and liabilities
|
|
|
(1,650
|
)
|
|
|
(956
|
)
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating actitivies
|
|
|
1,574
|
|
|
|
1,557
|
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in loans receivable
|
|
|
37,957
|
|
|
|
(42,786
|
)
|
|
|
—
|
|
|
Investment of proceeds in subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
(57,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
37,957
|
|
|
|
(42,786
|
)
|
|
|
(57,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(45,261
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Dividend received from subsidiary
|
|
|
30,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Net proceeds from sale of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
98,731
|
|
|
Capitalization of Lamplighter, MHC
|
|
|
—
|
|
|
|
—
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(15,261
|
)
|
|
|
—
|
|
|
|
98,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
24,270
|
|
|
|
(41,229
|
)
|
|
|
41,311
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
82
|
|
|
|
41,311
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
24,352
|
|
|
|
82
|
|
|
|
41,311
|
|
|
|
|
|
|
|
|
|
|
|
|
-125-
Notes to Consolidated Financial Statements
Years Ended December 31, 2006 and 2005 and June 30, 2005
Six Months Ended December 31, 2005
16) Segments and Related Information
The Company is required to report each operating segment based on materiality thresholds of
10% or more of certain amounts, such as revenue. Additionally, the Company is required to
report separate operating segments until the revenue attributable to such segments is at least
75% of total consolidated revenue. The Company provides a broad range of financial services to
individuals and companies in southeastern Wisconsin. These services include demand, time, and
savings products, and commercial and retail lending. While the Company’s chief decision-maker
monitors the revenue streams of the various products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Since the Company’s business units
have similar basic characteristics in the nature of the products, production processes, and
type or class of customer for products or services, and do not meet materiality thresholds
based on the requirements of reportable segments, these business units are considered one
operating segment.
-126-
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item 9A
.
Controls and Procedures
Disclosure Controls and Procedures
:
Wauwatosa Holdings management, with the participation
of Wauwatosa Holding’s Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of Wauwatosa Holdings’ disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this report. Based on such evaluation, Wauwatosa
Holdings’ Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of
such period, Wauwatosa Holdings’ disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed by
Wauwatosa Holdings in the reports that it files or submits under the Exchange Act.
Change in Internal Control Over Financial Reporting
:
There have not been any changes in
Wauwatosa Holdings’ internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal quarter of the period
to which this report relates that have materially affected, or are reasonably likely to materially
affect, Wauwatosa Holdings’ internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Wauwatosa Holdings Inc. (the “Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company’s financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control over
financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
As of December 31, 2007, management assessed the effectiveness of the Company’s internal control
over financial reporting based on criteria for effective internal control over financial reporting
established in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring
Organization of the Treadway Commission (COSO). Based on this assessment, management has determined
that the Company’s internal control over financial reporting as of December 31, 2007 is effective.
KPMG LLP, the independent registered public accounting firm that audited the consolidated financial
statements of the Company included in this Annual Report on Form 10-K, has issued a report on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.
The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007, is included below under the heading
“Report of Independent Registered Public Accounting Firm.”
-127-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Wauwatosa Holdings, Inc.:
We have audited Wauwatosa Holdings, Inc’s internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control-Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Wauwatosa Holdings,
Inc’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Wauwatosa Holdings, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria established in
Internal
Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
-128-
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of financial
condition of Wauwatosa Holdings, Inc and subsidiaries
as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in
shareholders’ equity, and cash flows for the years ended December 31, 2007 and 2006 and June 30,
2005 and the six month period ended December 31, 2005, and our report dated March 14, 2008
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Milwaukee, Wisconsin
March 14, 2008
-129-
Item 9B
.
Other Information
.
None
-130-
Part III
Item 10
.
Directors and Executive Officers of the Registrant
The information in the Company’s definitive Proxy Statement, prepared for the 2008 Annual Meeting
of Shareholders, which contains information concerning directors of the Company under the caption
“Election of Directors” and compliance with Section 16 reporting requirements under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance” and information concerning executive
officers of the Company under the caption “Executive Officers of Wauwatosa Holdings” in Part I
hereof is incorporated herein by reference.
Executive Officers of the Registrant
The table below sets forth certain information regarding the persons who have been determined,
by our board of directors, to be executive officers of the Company. The executive officers of the
Company are elected annually and hold office until their respective successors have been elected or
until death, resignation, retirement or removal by the Board of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
|
Offices and Positions with Wauwatosa
|
|
Officer
|
|
Name and Age
|
|
Holdings and Wauwatosa Savings Bank*
|
|
Since (1)
|
|
Douglas S. Gordon, 50
|
|
Chief Executive Officer and
President of Wauwatosa Holdings and
of Wauwatosa Savings Bank
|
|
|
2005
|
|
|
Richard C. Larson, 50
|
|
Chief Financial Officer and Senior
Vice President of Wauwatosa Holdings
and of Wauwatosa Savings Bank
|
|
|
1990
|
|
|
William F. Bruss, 38
|
|
General Counsel, Senior Vice
President and Secretary of Wauwatosa
Holdings and of Wauwatosa Savings
Bank
|
|
|
2005
|
|
|
Rebecca M. Arndt, 40
|
|
Vice President — Retail Operations
of Wauwatosa Savings Bank
|
|
|
2006
|
|
|
|
|
|
|
*
|
|
Excluding directorships and excluding positions with Bank subsidiaries. Those positions do
not constitute a substantial part of the officers’ duties.
|
|
|
|
(1)
|
|
Indicates date when individual first held an executive officer position with the Bank. These
individuals became executive officers of Wauwatosa Holdings upon its organization as noted.
|
-131-
Item 11
.
Executive Compensation
The information in the Company’s definitive Proxy Statement, prepared for the 2008 Annual Meeting
of Shareholders, which contains information concerning this item under the captions “Executive
Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider
Participation,” and “Compensation Discussion and Analysis” is incorporated herein by reference.
Item 12
.
Security Ownership of Certain Beneficial Owners and Management
The information in the Company’s definitive Proxy Statement, prepared for the 2008 Annual
Meeting of Shareholders, which contains information concerning this item under the caption “Stock
Ownership of Certain Beneficial Owners” is incorporated herein by reference.
Compensation Plans
Set forth below is information as of December 31, 2007 regarding equity compensation plans
that have been approved by shareholders. The Company has no equity based benefit plans that were
not approved by shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of shares to be
|
|
|
|
|
|
securities
|
|
|
|
issued upon exercise of
|
|
Weighted average
|
|
remaining available
|
|
|
|
outstanding options and
|
|
option exercise
|
|
for issuance under
|
|
Plan
|
|
rights
|
|
price
|
|
plan
|
|
|
|
2006 Equity Incentive Plan
|
|
|
1,494,298
|
(1)
|
|
$
|
17.63
|
|
|
|
460,298
|
|
|
|
|
|
|
(1)
|
|
Consists of 1,067,356 shares reserved for grants of stock options and 426,942 shares reserved
for grants of restricted stock. On December 31, 2007, 782,500 options are outstanding with a
weighted average exercise price of $17.63 on of which were exercisable as of that date.
|
Item 13
.
Certain Relationships and Related Transactions and Director Independence
The information in the Company’s definitive Proxy Statement, prepared for the 2008 Annual
Meeting of Shareholders, which contains information concerning this item under the captions
“Certain Transactions with the Company” and “Board Meetings and Committee” is incorporated herein
by reference.
Item 14
.
Principal Accountant Fees and Services
The information in the Company’s definitive Proxy Statement, prepared for the 2008 Annual
Meeting of Shareholders, which contains information concerning this item under the caption
“Independent Registered Public Accounting Firm,” is incorporated herein by reference.
-132-
Part IV
Item 15
.
Exhibits and Financial Statement Schedules
|
|
(a)
|
|
Documents filed as part of the Report:
|
1. and 2.
Financial Statements and Financial Statement Schedules
.
The following consolidated financial statements of Wauwatosa Holdings, Inc. and subsidiaries are
filed as part of this report under Item 8, “Financial Statements and Supplementary Data”:
Consolidated Statements of Financial Condition – December 31, 2007 and 2006.
Consolidated Statements of Income – Years ended December 31, 2007 and 2006 and June 30, 2005
and Six months ended December 31, 2005.
Consolidated Statements of Equity – Years ended December 31, 2007 and 2006 and June 30, 2005
and Six months ended December 31, 2005.
Consolidated Statements of Cash Flows – Years ended December 31, 2007 and 2006 and June 30,
2005 and Six months ended December 31, 2005.
Notes to Consolidated Financial Statements.
Report of KPMG LLP, Independent Registered Public Accounting Firm, on consolidated financial
statements.
All schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(b).
Exhibits
. See Exhibit Index following the signature page of this report, which
is incorporated herein by reference. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report is identified in the Exhibit
Index by an asterisk following its exhibit number.
-133-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAUWATOSA HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
March 14, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/Douglas S. Gordon
|
|
|
|
|
|
|
|
Douglas S. Gordon
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Douglas S. Gordon, Richard C.
Larson and William F. Bruss, or any of them, as attorneys-in-fact with full power of substitution,
to execute in the name and on behalf of such person, individually, and in each capacity stated
below or otherwise, and to file, any and all amendments to this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated.*
Signature and Title
|
|
|
|
|
/s/Douglas S. Gordon
|
|
/s/Patrick S. Lawton
|
|
|
|
|
|
Douglas S. Gordon,
|
|
Patrick S. Lawton,
Chairman and Director
|
|
Chief Executive Officer and Director
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/Richard C. Larson
|
|
/s/Thomas E. Dalum
|
|
|
|
|
|
Richard C. Larson,
Senior Vice President
|
|
Thomas E. Dalum,
Director
|
|
Chief Financial Officer
|
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ William F. Bruss
|
|
/s/Michael L. Hansen
|
|
|
|
|
|
William F. Bruss,
Senior Vice President
|
|
Michael L. Hansen,
Director
|
|
Secretary
|
|
|
|
|
|
|
|
|
|
/s/Stephen J. Schmidt
|
|
|
|
|
|
|
|
Stephen J. Schmidt,
Director
|
|
|
|
*Each of the above signatures is affixed as of March 14, 2008.
|
-134-
WAUWATOSA HOLDINGS, INC.
( “Wauwatosa Holdings” or the “Company”)**
Commission File No. 000-51507
EXHIBIT INDEX
TO
2007 REPORT ON FORM 10-K
The following exhibits are filed with, or incorporated by reference in, this Annual Report on Form
10-K for the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated Herein
|
|
Filed
|
|
Exhibit
|
|
Description
|
|
By Reference To
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Plan of Reorganization from
Mutual Savings Bank to Mutual
Holding Company of Wauwatosa
Savings Bank (the “Bank”), as
adopted on May 17,2005 and
amended on June 3, 2005 (the
“Plan”)
|
|
Exhibit 2.1 to the Company’s
Registration Statement on
Form S-1, Registration No.
333-125715 (the “2005 S-1”)
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Proposed Articles of
Incorporation of the Company
|
|
Exhibit 3.1 to 2005 S-1
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Proposed Bylaws of the Company
|
|
Exhibit 3.1 to 2005 S-1
|
|
|
|
|
|
|
|
|
|
|
|
10.1*
|
|
Wauwatosa Savings Bank
Employee Stock Ownership Plan
and Trust
|
|
Exhibit 10.1 to 2005 S-1
|
|
|
|
|
|
|
|
|
|
|
|
10.2*
|
|
Supplemental Retirement
Benefit Plan between the Bank
and Donald J. Stephens
|
|
Exhibit 10.2 to 2005 S-1
|
|
|
|
|
|
|
|
|
|
|
|
10.3*
|
|
Employment Agreement between
the Bank and Douglas S.
Gordon
|
|
Exhibit 10.1 to the
Company’s Current Report on
Form 8-K filed on October
26, 2005 and amended on
December 19, 2006
|
|
|
|
|
|
|
|
|
|
|
|
10.4*
|
|
Stock Compensation Plans
|
|
Exhibit 10.1 to the
company’s Current Report on
Form 8-K filed on May 22,
2006
|
|
|
|
|
|
|
|
|
|
|
|
10.5*
|
|
Early Retirement, Resignation
and Release Agreement between
the Bank and Donald J.
Stephens
|
|
Exhibit 10.5 to the
Company’s Annual Report on
Form 10-K filed March 27,
2006
|
|
|
|
|
|
|
|
|
|
|
|
11.1
|
|
Statement re: Computation of
Per Share Earnings
|
|
See Note 13 in Part II Item 8
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
List of Subsidiaries
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Independent
Registered Public Accounting
Firm
|
|
|
|
X
|
EI-1
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated Herein
|
|
Filed
|
|
Exhibit
|
|
Description
|
|
By Reference To
|
|
Herewith
|
|
|
|
24.1
|
|
Powers of Attorney
|
|
Signature Page
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Sarbanes-Oxley Act Section
302 Certification signed by
the Chief Executive Officer
of Wauwatosa Holdings
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Sarbanes-Oxley Act Section
302 Certification signed by
the Chief Financial Officer
of Wauwatosa Holdings
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification pursuant to 18
U.S. C. Section 1350, as
adopted pursuant to Section
906 of the Sarbanes-Oxley Act
of 2002 signed by the Chief
Executive Officer of
Wauwatosa Holdings
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Certification pursuant to 18
U.S. C. Section 1350, as
adopted pursuant to Section
906 of the Sarbanes-Oxley Act
of 2002 signed by the Chief
Financial Officer of
Wauwatosa Holdings
|
|
|
|
X
|
|
|
|
|
|
*
|
|
Designates management or compensatory agreements, plans or arrangements required to be filed as
exhibits pursuant to Item 15(b) of Form 10-K.
|
EI-2
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