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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- --------------
COMMISSION FILE NUMBER 0-20006
ANCHOR BANCORP WISCONSIN INC.
-----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Wisconsin 39-1726871
--------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 West Main Street
Madison, Wisconsin 53703
------------------------ ----------
(Address of principal executive office) (Zip Code)
(608) 252-8700
--------------
Registrant's telephone number, including area code
Not Applicable
--------------
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common stock -- $.10 Par Value
Number of shares outstanding as of July 31, 2003: 23,456,278
ANCHOR BANCORP WISCONSIN INC.
INDEX - FORM 10-Q
PAGE #
------
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2003
and March 31, 2003 2
Consolidated Statements of Income for the Three
Months Ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2003 and 2002 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations 12
Financial Condition 16
Asset Quality 17
Liquidity & Capital Resources 19
Asset/Liability Management 21
Segment Reporting 22
Item 3 Quantitative and Qualitative Disclosures About Market Risk 24
Item 4 Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities and Use of Proceeds 24
Item 3 Defaults upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
1
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, MARCH 31,
2003 2003
---------------------------------
(In Thousands, Except Share Data)
ASSETS
Cash $ 69,578 $ 69,178
Interest-bearing deposits 133,294 72,249
----------- -----------
Cash and cash equivalents 202,872 141,427
Investment securities available for sale 81,591 97,192
Investment securities held to maturity (fair value of $3,069 and
$3,095, respectively) 2,999 2,998
Mortgage-related securities available for sale 169,585 185,751
Mortgage-related securities held to maturity (fair value of $48,437
and $66,077, respectively) 46,242 62,998
Loans receivable, net:
Held for sale 61,666 43,054
Held for investment 2,823,263 2,770,988
Foreclosed properties and repossessed assets, net 992 1,535
Real estate held for development and sale 43,960 44,994
Office properties and equipment 31,882 31,905
Federal Home Loan Bank stock--at cost 83,108 81,868
Accrued interest on investments and loans and other assets 54,498 53,955
Goodwill 19,956 19,956
----------- -----------
Total assets $ 3,622,614 $ 3,538,621
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 2,633,503 $ 2,574,188
Federal Home Loan Bank and other borrowings 607,614 595,816
Advance payments by borrowers for taxes and insurance 12,935 6,579
Other liabilities 68,863 69,034
----------- -----------
Total liabilities 3,322,915 3,245,617
----------- -----------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding - -
Common stock, $.10 par value, 100,000,000 shares authorized,
25,363,339 shares issued, 23,907,109 and 23,942,858 shares outstanding,
respectively 2,536 2,536
Additional paid-in capital 65,360 64,271
Retained earnings 261,022 251,729
Accumulated other comprehensive income 3,557 4,177
Treasury stock (1,456,230 shares and 1,420,481 shares, respectively), at cost (29,714) (28,917)
Unearned deferred compensation (3,062) (792)
----------- -----------
Total stockholders' equity 299,699 293,004
----------- -----------
Total liabilities and stockholders' equity $ 3,622,614 $ 3,538,621
=========== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
---------------------------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Loans $ 44,112 $ 48,024
Mortgage-related securities 2,870 4,239
Investment securities 1,880 1,581
Interest-bearing deposits 180 604
-------- --------
Total interest income 49,042 54,448
INTEREST EXPENSE:
Deposits 14,483 18,357
Notes payable and other borrowings 6,060 7,224
Other 39 85
-------- --------
Total interest expense 20,582 25,666
-------- --------
Net interest income 28,460 28,782
Provision for loan losses 450 450
-------- --------
Net interest income after provision for loan losses 28,010 28,332
NON-INTEREST INCOME:
Loan servicing income (loss) (1,601) 652
Service charges on deposits 2,004 1,698
Insurance commissions 624 631
Net gain on sale of loans 9,807 1,841
Net gain on sale of investments and mortgage-related securities 352 89
Net income from operations of real estate investments 638 102
Other 1,242 414
-------- --------
Total non-interest income 13,066 5,427
NON-INTEREST EXPENSE:
Compensation 10,388 9,208
Occupancy 1,609 1,362
Furniture and equipment 1,448 1,131
Data processing 1,174 1,348
Marketing 790 714
Other 2,741 2,834
-------- --------
Total non-interest expense 18,150 16,597
-------- --------
Income before income taxes 22,926 17,162
Income taxes 8,833 6,387
-------- --------
Net income $ 14,093 $ 10,775
======== ========
Earnings per share:
Basic $ 0.61 $ 0.43
Diluted 0.59 0.42
Dividends declared per share 0.10 0.08
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
---------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 14,093 $ 10,775
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 450 450
Provision for depreciation and amortization 888 1,445
Net gain on sales of loans (9,807) (1,841)
Amortization of stock benefit plans 33 35
Tax benefit from stock related compensation 989 260
Net decrease (increase) due to origination and sale of loans held for sale (18,612) 25,114
Decrease in accrued interest receivable 195 162
Decrease in accrued interest payable (307) (1,939)
Decrease in accounts payable (171) (6,403)
Other (14,014) 13,663
--------- ---------
Net cash provided (used) by operating activities (26,263) 41,721
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 744 10,362
Proceeds from maturities of investment securities 97,884 92,888
Purchase of investment securities available for sale (82,921) (146,545)
Proceeds from sale of mortgage-related securities available for sale 4,535 4,823
Purchase of mortgage-related securities available for sale (25,312) (9,132)
Principal collected on mortgage-related securities 53,400 26,625
Loans originated for investment (361,545) (256,240)
Principal repayments on loans 328,975 216,831
Net additions of office properties and equipment (928) (610)
Investment in real estate held for development and sale 1,004 57
--------- ---------
Net cash provided (used) by investing activities 15,836 (60,941)
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
---------------------------
(IN THOUSANDS)
FINANCING ACTIVITIES
Increase (decrease) in deposit accounts $ 59,315 $ (44,784)
Increase in advance payments by borrowers
for taxes and insurance 6,356 6,660
Proceeds from notes payable to Federal Home Loan Bank 154,450 8,500
Repayment of notes payable to Federal Home Loan Bank (146,500) (7,500)
Increase in securities sold under agreements
to repurchase - 7,964
Increase (decrease) in other loans payable 3,848 (8,629)
Treasury stock purchased (3,876) (1,537)
Exercise of stock options 221 655
Purchase of stock by retirement plans 439 349
Payments of cash dividends to stockholders (2,381) (2,060)
--------- ---------
Net cash (used) provided by financing activities 71,872 (40,382)
--------- ---------
Net (decrease) increase in cash and cash equivalents 61,445 (59,602)
Cash and cash equivalents at beginning of period 141,427 261,676
--------- ---------
Cash and cash equivalents at end of period $ 202,872 $ 202,074
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 20,777 $ 25,828
Income taxes 3,551 4,536
See accompanying Notes to Unaudited Consolidated Financial Statements
5
ANCHOR BANCORP WISCONSIN INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts and results
of operations of Anchor BanCorp Wisconsin Inc. (the "Corporation") and its
wholly-owned subsidiaries, AnchorBank fsb (the "Bank"), and Investment
Directions, Inc. ("IDI"). The Bank's accounts and results of operations include
its wholly-owned subsidiaries, Anchor Investment Services, Inc. ("AIS"), ADPC
Corporation ("ADPC") and Anchor Investment Corporation ("AIC"). All significant
intercompany balances and transactions have been eliminated. Investments in
joint ventures and other less than 50% owned partnerships, which are not
material, are accounted for by the equity method. Partnerships with 50%
ownership or more are consolidated, with significant intercompany accounts
eliminated.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the consolidated financial statements have been
included.
In preparing the unaudited consolidated financial statements in conformity with
GAAP, management is required to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. The results of
operations and other data for the three-month period ended June 30, 2003 are not
necessarily indicative of results that may be expected for any other interim
period or the entire fiscal year ending March 31, 2004. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included in the Corporation's Annual Report for the year ended March 31, 2003.
Unrealized gains or losses on the Corporation's available-for-sale securities
are included in other comprehensive income. During the quarter ended June 30,
2003 and 2002, total comprehensive income amounted to $13.5 million and $12.8
million, respectively.
NEW ACCOUNTING STANDARDS In November 2002, the FASB issued Financial
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45").
FIN 45 significantly changes current practice in the accounting for, and
disclosure of, guarantees. FIN 45 requires certain guarantees to be recorded at
fair value as a liability at inception and when a loss is probable and
reasonably estimatable, as those terms are defined in FASB Statement No. 5
"Accounting for Contingencies." The recording of the liability will not
significantly affect the Corporation's financial condition. FIN 45 also requires
a guarantor to make significant new disclosures (see below) even when the
likelihood of making any payments under the guarantee is remote.
6
The Corporation's real estate investment segment guarantees some loans for some
of the development partnerships that it invests in to complete developed homes
for sale. As of June 30, 2003 the Corporation has guaranteed $45.6 million for
the following partnerships on behalf of the respective subsidiaries listed
below.
ORIGINAL AMOUNT AMOUNT
SUBSIDIARY PARTNERSHIP AMOUNT OUTSTANDING OUTSTANDING
OF IDI ENTITY GUARANTEED AT 6/30/03 AT 3/31/03
- ---------- ---------------------- ------------ ----------- -----------
(Dollars in thousands)
Oakmont Chandler Creek $ 7,340 $ 7,340 $ 7,340
Davsha Century 2,359 840 1,013
Davsha II Paragon 5,100 1,360 2,000
Davsha III Indian Palms 147, LLC 8,500 2,770 2,700
Davsha IV DH Indian Palms, LLC 10,225 1,390 1,700
Davsha V Villa Santa Rosa, LLC 8,018 3,160 3,300
Davsha VI Bellasara 168, LLC 4,090 4,090 2,600
------------ ----------- -----------
Total $ 45,632 $ 20,950 $ 20,653
------------ ----------- -----------
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51" ("FIN 46"). FIN 46 requires the
consolidation of entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise when it has a controlling financial interest through ownership of a
majority voting interest in the entity. The provisions of this statement are
effective immediately for variable interests in variable interest entities
("VIE") created after January 31, 2003. It applies in the first fiscal year or
interim period beginning after June 15, 2003.
The Corporation's subsidiary, IDI, has real estate partnership investments
within its subsidiaries for which it guarantees the above loans. These
partnerships are also funded by financing from the IDI subsidiaries secured by
the lots and homes being developed within each of the respective partnership
entities.
The Corporation accounts for these partnerships under the equity method of
accounting, recording its share of the net income or loss based upon the terms
of the partnership agreements. As a limited partner, the Corporation still has
the ability to exercise significant influence over operating and financial
policies. This influence is evident in the terms of the respective partnership
agreements and participation in policy-making processes. The Corporation has a
50% controlling interest in the respective limited partnerships and therefore
has significant influence over the right to approve the sale or refinancing of
assets of the respective partnerships in accordance with those partnership
agreements.
In acting as a partner with a controlling interest, the Corporation is committed
to providing additional levels of funding to meet partnership operating deficits
up to an aggregate amount of $45.6 million. At June 30, 2003, the Corporation's
aggregate net investment in these partnerships totaled $44.0 million. These
amounts represent the Corporation's maximum exposure to loss at June 30, 2003 as
a result of involvement with these limited partnerships.
7
The partnership agreements generally contain buy-sell provisions whereby certain
partners can require the purchase or sale of ownership interests by certain
partners. Additionally, there are provisions whereby the Corporation has
guaranteed certain partners' preference returns and equity investments.
The Corporation is currently evaluating the effects of the issuance of FIN 46 on
the accounting for its ownership interests in the limited partnerships.
On December 31, 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS
No. 123 to require disclosure in the summary of significant accounting policies
of the effect of the Company's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148's amendment of the transition and
annual disclosure provisions of SFAS No. 123 are effective for fiscal years
ending after December 15, 2002. The Corporation will continue to account for
stock-based compensation in accordance with APB Opinion 25 as allowed under FASB
No. 123.
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for stock options. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value at the
date of grant for awards under the stock option plans consistent with the method
of SFAS No. 123, the Corporation's net income and earnings per share would have
been reduced to the pro forma amounts indicated (in thousands, except per share
amounts):
THREE MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
---------------------------
Net Income
As reported $ 14,093 $ 10,775
Pro forma 14,020 10,744
Earnings per share-Basic
As reported $ 0.61 $ 0.43
Pro forma 0.61 0.43
Earnings per share-Diluted
As reported $ 0.59 $ 0.42
Pro forma 0.59 0.42
The pro forma amounts indicated above may not be representative of the effects
on reported net income for future years. The fair values of stock options
granted in the three months ended June 30, 2003 and June 30, 2002 were estimated
on the date of grant using the Black-Scholes option-pricing model.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Statement 150 represents a
change in practice in the accounting for a number of financial instruments,
including mandatorily redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. The provisions of this statement are effective for all financial
instruments created or modified after May 31, 2003, and to other instruments at
the beginning of the first interim period beginning after June 15, 2003 and are
not expected to have a material impact on the Corporation's consolidated
financial statements.
Certain 2002 accounts have been reclassified to conform to the 2003
presentations.
8
NOTE 3 -- GOODWILL AND OTHER INTANGIBLE ASSETS
The Corporation's carrying value of goodwill was $20.0 million at June 30, 2003
and at March 31, 2003. Information regarding the Company's other intangible
assets follows:
JUNE 30, 2003 MARCH 31, 2003
------------------------------------------ ----------------------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------------------------------------ ----------------------------------------------
(In Thousands)
Other intangible assets:
Core deposit premium $ 3,124 $ 1,306 $ 1,818 $ 3,124 $ 1,093 $ 2,031
Mortgage servicing rights 14,627 3,506 11,121 23,283 11,564 11,719
-------- --------- --------- ---------- ---------- ----------
Total $ 17,751 $ 4,812 $ 12,939 $ 26,407 $ 12,657 $ 13,750
-------- --------- --------- ---------- ---------- ----------
The projections of amortization expense for mortgage servicing rights set forth
below are based on asset balances and the interest rate environment as of June
30, 2003. Future amortization expense may be significantly different depending
upon changes in the mortgage servicing portfolio, mortgage interest rates and
market conditions.
The following table shows the current period and estimated future amortization
expense for amortized intangible assets:
MORTGAGE CORE
SERVICING DEPOSIT
RIGHTS PREMIUM TOTAL
---------- --------- ----------
(In Thousands)
Quarter ended June 30, 2003 (actual) $ 3,506 $ 213 $ 3,719
Estimate for the year ended March 31,
2004 5,859 852 6,711
2005 2,930 852 3,782
2006 1,465 114 1,579
2007 867 - 867
---------- -------- ----------
$ 11,121 $ 1,818 $ 12,939
---------- -------- ----------
NOTE 4 -- STOCKHOLDERS' EQUITY
During the quarter ended June 30, 2003, options for 137,693 shares of common
stock were exercised at a weighted-average price of $5.55 per share. Treasury
shares were issued in exchange for the options using the last-in-first-out
method. The cost of the treasury shares issued in excess of the option price
paid was charged to retained earnings $2.4 million. During the quarter ended
June 30, 2003, the Corporation repurchased 191,987 shares of common stock and
reissued 18,545 shares of treasury stock to the Corporation's retirement plans.
The weighted-average cost of these shares was $22.94 per share or $440,000 in
the aggregate and the gain of the market price over the cost of the treasury
shares of $14,000 was credited to retained earnings. On May 15, 2003, the
Corporation paid a cash dividend of $0.10 per share, amounting to $2.4 million.
9
NOTE 5 -- EARNINGS PER SHARE
Basic earnings per share for the three months ended June 30, 2003 and 2002 have
been determined by dividing net income for the respective periods by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares outstanding plus common stock equivalents. Common stock
equivalents are computed using the treasury stock method.
THREE MONTHS ENDED JUNE 30,
--------------------------
2003 2002
--------------------------
Numerator:
Net income $14,093,018 $10,775,201
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $14,093,018 $10,775,201
Denominator:
Denominator for basic earnings per
share--weighted-average common
shares outstanding 23,226,753 25,000,703
Effect of dilutive securities:
Employee stock options 530,135 685,502
Management Recognition Plans 14,627 18,462
Denominator for diluted earnings per
share--adjusted weighted-average ----------- -----------
common shares and assumed conversions 23,771,515 25,704,667
=========== ===========
Basic earnings per share $ 0.61 $ 0.43
=========== ===========
Diluted earnings per share $ 0.59 $ 0.42
=========== ===========
NOTE 6 -- SUBSEQUENT EVENTS
On July 22, 2003, the Corporation declared an $0.11 per share cash dividend on
its common stock to be paid on August 15, 2003 to stockholders of record on
August 1, 2003.
10
ANCHOR BANCORP WISCONSIN INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
describe future plans or strategies and include the Corporation's expectations
of future financial results. The Corporation's ability to predict results or the
effect of future plans or strategies is inherently uncertain and the Corporation
can give no assurance that those results or expectations will be attained.
Factors that could affect actual results include but are not limited to i)
general market rates, ii) changes in market interest rates and the shape of the
yield curve, iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve Board, vii) changes in the quality or
composition of the Corporation's loan and investment portfolios, viii) demand
for loan products, ix) the level of loan and MBS repayments, x) deposit flows,
xi) competition, xii) demand for financial services in the Corporation's
markets, and xiii) changes in accounting principles, policies or guidelines. In
addition, acquisitions may result in large one-time charges to income, may not
produce revenue enhancements or cost savings at levels or within time frames
originally anticipated and may result in unforeseen integration difficulties.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
The Corporation does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
SIGNIFICANT ACCOUNTING POLICIES
There are a number of accounting policies that require the use of
judgment. Some of the more significant policies are as follows:
- - Establishing the amount of the allowance for loan losses requires the use
of judgment as well as other systematic objective and quantitative methods.
Assets are evaluated at least quarterly and risk components reviewed as a
part of that evaluation. See Notes to Consolidated Financial Statements --
Summary of Significant Accounting Policies "Allowances for Loan Losses" for
a discussion of risk components.
- - Valuation of mortgage servicing rights requires the use of judgment.
Mortgage servicing rights are established on loans that are originated and
subsequently sold. A portion of the loan's book basis to mortgage servicing
rights is allocated when a loan is sold. The fair value of mortgage
servicing rights is the present value of estimated future net cash flows
from the servicing relationship using current market assumptions for
prepayments, servicing costs and other factors. As the loans are repaid and
net servicing revenue is earned, mortgage servicing rights are amortized
into expense. Net servicing revenues are expected to exceed this
amortization expense. However, if actual prepayment experience exceeds what
was originally anticipated, net servicing revenues may be less than
expected and mortgage servicing rights may be impaired.
- - Judgment is also used in the valuation of other intangible assets (core
deposit intangibles). Core deposit intangibles have been recorded for core
deposits (defined as checking, money market and savings deposits) that have
been acquired in acquisitions that were accounted for as purchase business
combinations. The core deposit intangible assets have been recorded using
the assumption that they provide a more favorable source of funding than
more expensive wholesale borrowings. An intangible asset has been recorded
for the present value of the difference between the expected interest to be
incurred on these deposits and interest expense that would be expected if
these deposits were replace by wholesale borrowings, over the expected
lives of the core deposits. The current estimate of the underlying lives of
the core deposits is seven to fifteen years. If it is determined that
11
these deposits have a shorter life, the asset will be adjusted to reflect
an expense associated with the amount that is impaired.
- - Goodwill is reviewed at least annually for impairment, which requires
judgment. Goodwill has been recorded as a result of an acquisition in which
purchase price exceeded fair value of net assets acquired. The price paid
for the acquisition is analyzed and compared to a number of current
indices. If goodwill is determined to be impaired, it would be expensed in
the period in which it became impaired.
Set forth below is management's discussion and analysis of the Corporation's
financial condition and results of operations for the three months ended June
30, 2003, which includes information on the Corporation's asset/liability
management strategies, sources of liquidity and capital resources. This
discussion should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
RESULTS OF OPERATIONS
General. Net income for the three months ended June 30, 2003 increased $3.3
million to $14.1 million from $10.8 million for the same period in the prior
year. The increase in net income for the three-month period compared to the same
period last year was largely due to an increase in non-interest income of $7.6
million primarily due to an increase in the gain on sale of loans of $8.0
million. In addition, interest expense decreased $5.1 million for the three
months ended June 30, 2003, as compared to the same period in the prior year,
primarily due to a decrease in the weighted average rate paid on
interest-bearing liabilities. These increases were partially offset by a
decrease in interest income of $5.4 million, an increase in income tax expense
of $2.4 million, and an increase in non-interest expense of $1.6 million. The
provision for loan losses of remained constant during the three months ended
June 30, 2003, as compared to the same period in the prior year.
Net Interest Income. Net interest income decreased $320,000 for the three months
ended June 30, 2003, as compared to the same period in the prior year. The net
interest margin decreased to 3.39% from 3.52% for the respective three-month
periods. The interest rate spread decreased to 3.27% from 3.40% for the same
respective periods.
Interest income on loans decreased $3.9 million for the three months ended June
30, 2003, as compared to the same period in the prior year. This decrease was
the result of a decrease of 106 basis points in the average yield on loans to
6.13% from 7.19% for the respective three-month periods. Interest income on
mortgage-related securities decreased $1.4 million for the three-month period
primarily due to a decrease of $33.0 million in the average balance of mortgage
related securities and a decrease of 143 basis points in the average yield on
mortgage-related securities to 4.80% from 6.23%. In addition, interest income on
interest-bearing deposits decreased $420,000 for the three months ended June 30,
2003, as compared to the same period in 2002. Interest income on investment
securities (including Federal Home Loan Bank stock) increased $300,000 for the
three-month period ended June 30, 2003, as compared to the same period in the
prior year. This was primarily a result of an increase of $22.9 million in the
average balance of investment securities for the three-month period ended June
30, 2003.
Interest expense on deposits decreased $3.9 million for the three months ended
June 30, 2003, as compared to the same period in 2002. This decrease was due
primarily to a decrease of 69 basis points in the weighted average cost of
deposits to 2.23% from 2.92% for the respective three-month periods. Interest
expense on notes payable and other borrowings decreased $1.2 million during the
three months ended June 30, 2003, as compared to the same period in the prior
year due primarily to a decrease of $18.4 million in the average balances of
notes payable and other borrowings. There was also a decrease in the weighted
average cost of notes payable and other borrowings of 63 basis points to 4.02%
from 4.65% for the three-month period ended June 30, 2003, as compared to the
same period in 2002. Other interest expense decreased $50,000 for the three
months ended June 30, 2003, as compared to the same period in the prior year.
Provision for Loan Losses. Provision for loan losses remained constant at
$450,000 for the three-month period ended June 30, 2003, as compared to the same
period for the prior year. The provisions were based on management's ongoing
evaluation of asset quality and pursuant to a policy to maintain an allowance
for losses at a level which management believes is adequate to absorb future
charge-offs of loans deemed uncollectible.
12
Average Interest-Earning Assets, Average Interest-Bearing Liabilities and
Interest Rate Spread. The following tables show the Corporation's average
balances, interest, average rates, net interest margin and the spread between
the combined average rates earned on interest-earning assets and average cost of
interest-bearing liabilities for the periods indicated. The average balances are
derived from average daily balances.
13
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST(1) BALANCE INTEREST COST(1)
--------------------------------- ---------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans (2) $2,232,645 $ 33,883 6.07% $2,114,956 $ 37,818 7.15%
Consumer loans (2) 508,606 8,190 6.44 434,982 8,241 7.58
Commercial business loans (2) 135,549 2,039 6.02 120,750 1,965 6.51
---------- ---------- ---------- ----------
Total loans receivable (2) 2,876,800 44,112 6.13 2,670,688 48,024 7.19
Mortgage-related securities 238,987 2,870 4.80 272,031 4,239 6.23
Investment securities 111,409 526 1.89 117,122 908 3.10
Interest-bearing deposits 53,179 180 1.35 157,169 604 1.54
Federal Home Loan Bank stock 82,509 1,354 6.56 53,908 673 4.99
---------- ---------- ---------- ----------
Total interest-earning assets 3,362,884 49,042 5.83 3,270,918 54,448 6.66
Non-interest-earning assets 194,730 198,995
---------- ----------
Total assets $3,557,614 $3,469,913
========== ==========
INTEREST-BEARING LIABILITIES
Demand deposits $ 777,480 963 0.50 $ 730,514 1,875 1.03
Regular passbook savings 204,331 255 0.50 175,452 453 1.03
Certificates of deposit 1,618,653 13,265 3.28 1,612,219 16,029 3.98
---------- ---------- ---------- ----------
Total deposits 2,600,464 14,483 2.23 2,518,185 18,357 2.92
Notes payable and other borrowings 603,064 6,060 4.02 621,429 7,224 4.65
Other 10,064 39 1.55 11,772 85 2.89
---------- ---------- ---------- ----------
Total interest-bearing liabilities 3,213,592 20,582 2.56 3,151,386 25,666 3.26
---------- ---- ---------- ----
Non-interest-bearing liabilities 45,940 34,581
---------- ----------
Total liabilities 3,259,532 3,185,967
Stockholders' equity 298,082 283,946
---------- ----------
Total liabilities and stockholders' equity $3,557,614 $3,469,913
========== ==========
Net interest income/interest rate spread $ 28,460 3.27% $ 28,782 3.40%
========== ==== ========== ====
Net interest-earning assets $ 149,292 $ 119,532
========== ==========
Net interest margin 3.39% 3.52%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.05 1.04
========== ==========
- ---------------------
(1) Annualized
(2) The average balances of loans include non-performing loans, interest of
which is recognized on a cash basis.
14
Non-Interest Income. Non-interest income increased $7.6 million to $13.1 million
for the three months ended June 30, 2003, as compared to $5.4 million for the
same period in the prior year, primarily due to an increase in net gain on sale
of loans of $8.0 million. The increase in the gain on sale of loans was
primarily due to a higher volume of loan originations as a result of the low
interest rate environment. In addition, other non-interest income, which
includes a variety of loan fee and other miscellaneous fee income, increased
$830,000 for the three-month period ended June 30, 2003, as compared to the same
period in the prior year. Net income from operations of real estate investments
increased $540,000 for the three-month period ended June 30, 2003, as compared
to the same period in the prior year. Service charges on deposit accounts
increased $310,000 for the three months ended June 30, 2003. Net gain on sale of
investments and mortgage-related securities increased $260,000 for the three
months ended June 30, 2003. These increases were partially offset by a decrease
in loan servicing income of $2.3 million during the three months ended June 30,
2003, as compared to the same period in the prior year. The decrease in loan
servicing income was due primarily to increased amortization of mortgage
servicing rights, which resulted from increases in mortgage loan refinancings in
the declining interest rate environment. Insurance commissions remained
relatively constant for the three-month period ended June 30, 2003, as compared
to the same period in the prior year.
Non-Interest Expense. Non-interest expense increased $1.6 million to $18.2
million for the three months ended June 30, 2003, as compared to $16.6 million
for the same period in 2002, as a result of several factors. Compensation
expense increased $1.2 million for the three-month period compared to the same
period in the prior year due primarily to an increase in incentive compensation
resulting from increased loan production and increased employee benefits. In
addition, furniture and equipment expense increased $320,000 for the three
months ended June 30, 2003, as compared to the same period in the prior year.
Occupancy expense increased $250,000 and marketing expense increased $80,000 for
the three-month period ended June 30, 2003, as compared to the same period in
the prior year. These increases were partially offset by a decrease in data
processing expense of $170,000 and a decrease in other non-interest expense of
$90,000 for the three-month period ended June 30, 2003, as compared to the same
period in the prior year.
Income Taxes. Income tax expense increased $2.4 million during the three months
ended June 30, 2003, as compared to the same period in 2002. The effective tax
rate was 38.5% for the current three-month period, as compared to 37.2% for the
three-month period last year.
15
FINANCIAL CONDITION
During the three months ended June 30, 2003, the Corporation's assets increased
by $84.0 million from $3.54 billion at March 31, 2003 to $3.62 billion. The
majority of this increase was attributable to an increase in loans, which were
partially offset by decreases in other categories such as mortgage-related
securities and investments.
Total loans (including loans held for sale) increased $70.9 million during the
three months ended June 30, 2003. Activity for the period consisted of (i)
originations and purchases of $942.3 million, (ii) sales of $542.4 million, and
(iii) principal repayments and other adjustments of $329.0 million.
Mortgage-related securities (both available for sale and held to maturity)
decreased $32.9 million during the three months ended June 30, 2003 as a result
of principal repayments and market value adjustments of $53.7 million and sales
of $4.5 million. These decreases were partially offset by purchases of $25.3
million of mortgage-related securities in this three-month period.
Mortgage-related securities consisted of $150.4 million of mortgage-backed
securities and $65.4 million of Collateralized Mortgage Obligations ("CMO's")
and Real Estate Mortgage Investment Conduits ("REMIC's") at June 30, 2003.
The Corporation invests in corporate CMOs and agency-issued REMICs. These
investments are deemed to have limited credit risk. The investments do have
interest rate risk due to, among other things, actual prepayments being more or
less than those predicted at the time of purchase. The Corporation invests only
in short-term tranches in order to limit the reinvestment risk associated with
greater than anticipated prepayments, as well as changes in value resulting from
changes in interest rates.
Investment securities (both available for sale and held to maturity) decreased
$15.6 million during the three months ended June 30, 2003 as a result of sales
and maturities of $98.6 million of U.S. Government and agency securities, which
were substantially offset by purchases of $82.9 million of such securities.
Total liabilities increased $77.3 million during the three months ended June 30,
2003. This increase was largely due to a $59.3 million increase in deposits, an
$11.8 million increase in FHLB advances and other borrowings, and a $6.4 million
increase in advance payments by borrowers for taxes and insurance during the
three-month period. Brokered deposits have been used in the past and may be used
in the future as the need for funds requires them. Brokered deposits totaled
$241.8 million at June 30, 2003 and generally mature within one to five years.
Stockholders' equity increased $6.7 million during the three months ended June
30, 2003 as a net result of (i) comprehensive income of $13.5 million, (ii)
stock options exercised of $2.7 million (with the excess of the cost of treasury
shares over the option price ($2.4 million) charged to retained earnings), (iii)
the purchase of stock by retirement plans of $430,000 (with the gain of the
purchase price over the cost of treasury shares of $10,000 credited to retained
earnings), and (iv) benefit plan shares earned and related tax adjustments
totaling $1.1 million. These increases were partially offset by (i) purchases of
treasury stock of $3.9 million, (ii) cash dividends of $2.4 million, and (iii)
common stock purchased in a rabbi trust established pursuant to the
Corporation's supplemental retirement plan of $2.3 million.
16
ASSET QUALITY
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. As a matter of policy, the
Corporation does not accrue interest on loans past due 90 days or more.
Non-performing assets increased $6.0 million to $17.6 million at June 30, 2003
from $11.7 million March 31, 2003 and increased as a percentage of total assets
to 0.55% from 0.34% at such dates, respectively.
Non-performing assets are summarized as follows at the dates indicated:
AT MARCH 31,
AT JUNE 30, -----------------------------------
2003 2003 2002 2001
----------- -----------------------------------
(Dollars In Thousands)
Non-accrual loans:
Single-family residential $ 4,402 $ 4,510 $ 4,505 $ 2,572
Multi-family residential - 444 187 372
Commercial real estate 8,591 1,776 2,212 650
Construction and land 10 - 168 257
Consumer 762 661 933 499
Commercial business 2,812 2,678 1,037 697
------- ------- ------- -------
Total non-accrual loans 16,577 10,069 9,042 5,047
Real estate held for development and sale 42 49 74 352
Foreclosed properties and repossessed assets, net 992 1,535 1,475 313
------- ------- ------- -------
Total non-performing assets $17,611 $11,653 $10,591 $ 5,712
======= ======= ======= =======
Performing troubled debt restructurings $ 2,567 $ 2,590 $ 403 $ 300
======= ======= ======= =======
Total non-accrual loans to total loans 0.55% 0.34% 0.32% 0.20%
Total non-performing assets to total assets 0.49 0.33 0.30 0.18
Allowance for loan losses to total loans 1.00 1.00 1.09 0.94
Allowance for loan losses to total
non-accrual loans 181.20 294.74 346.04 477.04
Allowance for loan and foreclosure losses
to total non-performing assets 172.66 257.87 300.05 422.16
Non-accrual loans increased $6.5 million during the three months ended June 30,
2003. The increase was largely attributable to two commercial real estate loans.
One was a $3.3 million loan secured by retail property located in Dallas, Texas.
The other one was a $2.4 million loan secured by a 105 unit hotel located in
Janesville, Wisconsin. At June 30, 2003, there were four non-accrual commercial
loans with carrying values greater than $1.0 million. One loan is a commercial
real estate loan which is secured by a 161 unit motel located in Schiller Park,
Illinois, with a carrying value of $1.5 million at June 30, 2003. Another loan
with a carrying value greater than $1.0 million is a commercial business loan
for MRI scanning equipment in Eden Prairie, Minnesota, and had a carrying value
of $1.7 million at June 30, 2003. The other two loans with carrying values
greater than $1.0 million are the commercial real estate loans discussed above.
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. As a matter of policy, the
Corporation does not accrue interest on loans past due more than 90 days.
Non-performing real estate held for development and sale remained relatively
constant for the three months ended June 30, 2003.
17
Foreclosed properties and repossessed assets decreased $540,000 for the three
months ended June 30, 2003. There were no foreclosed properties and repossessed
assets with a carrying value greater than $1.0 million at June 30, 2003.
Performing troubled debt restructurings remained relatively constant during the
three months ended June 30, 2003.
At June 30, 2003, assets that the Corporation has classified as substandard, net
of reserves, consisted of $35.7 million of loans and foreclosed properties. As
of March 31, 2003, substandard assets amounted to $25.1 million. The category of
substandard assets contains several loans with a carrying value of greater than
$1.0 million. One loan, with a carrying value of $5.2 million, secured by a
computer networking and consulting business is located in Phoenix, Arizona. A
second loan, with a carrying value of $4.0 million, secured by the assets of a
stainless tank operation is located in Cottage Grove, Wisconsin. A third loan,
with a carrying value of $3.1 million, is secured by a hotel located in Kenosha,
Wisconsin. A fourth loan with a carrying value of $2.4 million is secured by a
hotel located in Janesville, Wisconsin. A fifth loan, with a carrying value of
$2.2 million, is secured by a milling machining company located in Montello,
Wisconsin. A sixth loan, with a carrying value of $1.9 million, is secured by a
multi-family residential property located in Cottage Grove, Wisconsin.
A summary of the details regarding impaired loans follows (in thousands):
AT MARCH 31,
AT JUNE 30, ---------------------------------
2003 2003 2002 2001
----------- ---------------------------------
Impaired loans with valuation
reserve required $10,485 $ 8,483 $11,467 $ 964
Less:
Specific valuation allowance 4,664 3,717 4,240 615
------- ------- ------- -------
Total impaired loans $ 5,821 $ 4,766 $ 7,227 $ 349
======= ======= ======= =======
Average impaired loans $ 5,711 $ 6,042 $ 6,216 $ 3,301
Interest income recognized
on impaired loans $ 86 $ 613 $ 740 $ 43
The following table sets forth information relating to the Corporation's loans
that were less than 90 days delinquent at the dates indicated.
AT MARCH 31,
AT JUNE 30, -----------------------------------
2003 2003 2002 2001
---------- -----------------------------------
(In Thousands)
30 to 59 days $14,451 $10,083 $17,647 $ 7,141
60 to 89 days 1,051 5,612 2,671 716
------- ------- ------- -------
Total $15,502 $15,695 $20,318 $ 7,857
======= ======= ======= =======
The Corporation's loan portfolio, foreclosed properties and repossessed assets
are evaluated on a continuing basis to determine the necessity for additions to
the allowance for losses and the related balance in the allowances. These
evaluations consider several factors, including, but not limited to, general
economic conditions, loan portfolio composition, loan delinquencies, prior loss
experience, collateral value, anticipated loss of interest and management's
estimation of future losses. The evaluation of the allowance for loan losses
includes a review of known loan problems as well as inherent problems based upon
historical trends and ratios. 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
18
prior to transfer to foreclosed property. The fair value is primarily based on
appraisals, discounted cash flow analysis (the majority of which are based on
current occupancy and lease rates) and pending offers.
A summary of the activity in the allowance for losses on loans follows:
THREE MONTHS ENDED
JUNE 30,
---------------------
2003 2002
---------------------
(Dollars In Thousands)
Allowance at beginning of period $ 29,677 $ 31,065
Charge-offs:
Mortgage (150) (337)
Consumer (217) (75)
Commercial business (73) (319)
-------- --------
Total charge-offs (440) (731)
Recoveries:
Mortgage 236 2
Consumer 28 13
Commercial business 86 49
-------- --------
Total recoveries 350 64
-------- --------
Net charge-offs (90) (667)
-------- --------
Provision 450 450
-------- --------
Allowance at end of period $ 30,037 $ 30,848
======== ========
Net charge-offs to
average loans (0.01)% (0.10)%
======== ========
Although management believes that the June 30, 2003 allowance for loan losses is
adequate based upon the current evaluation of loan delinquencies, non-performing
assets, charge-off trends, economic conditions and other factors, there can be
no assurance that future adjustments to the allowance will not be necessary.
Management also continues to pursue all practical and legal methods of
collection, repossession and disposal, and adheres to high underwriting
standards in the origination process in order to continue to maintain strong
asset quality.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation's sources of funds include dividends
from its subsidiaries, including the Bank, interest on its investments and
returns on its real estate held for sale. The Bank's primary sources of funds
are payments on loans and securities, deposits from retail and wholesale
sources, advances and other borrowings.
At June 30, 2003, the Corporation had outstanding commitments to originate loans
of $266.4 million, commitments to extend funds to, or on behalf of, customers
pursuant to lines and letters of credit of $249.3 million and loans sold with
recourse to the Corporation in the event of default by the borrower of $324,000.
The Corporation had sold loans with recourse in the amount of $9.7 million
through the FHLB Mortgage Partnership Finance Program at June 30, 2003.
Scheduled maturities of certificates of deposit during the twelve months
following June 30, 2003 amounted to $1.08 billion and scheduled maturities of
FHLB advances during the same period totaled $105.9 million. At June 30, 2003,
the Corporation had no reverse repurchase agreements. Management believes
adequate resources are available to fund all commitments to the extent required.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
liquid investments in qualifying types of U.S. Government and agency securities
and other investments sufficient to ensure its safe and sound operation.
19
During the quarter ended June 30, 2003, the Bank's average liquidity ratio was
9.63%, which was substantially in excess of applicable requirements.
Under federal law and regulation, the Bank is required to meet certain tangible,
core and risk-based capital requirements. Tangible capital generally consists of
stockholders' equity minus certain intangible assets. Core capital generally
consists of tangible capital plus qualifying intangible assets. The risk-based
capital requirements presently address credit risk related to both recorded and
off-balance sheet commitments and obligations. The OTS requirement for the core
capital ratio for the Bank is currently 3.00%. The requirement is 4.00% for all
but the most highly-rated financial institutions.
The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at June 30, 2003 and March 31, 2003 (dollars in
thousands):
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES OTS REQUIREMENTS
------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------
AS OF JUNE 30, 2003:
Tier 1 capital
(to adjusted tangible assets) $ 273,038 7.66% $ 106,881 3.00% $ 178,134 5.00%
Risk-based capital
(to risk-based assets) 298,418 11.04 216,284 8.00 270,355 10.00
Tangible capital
(to tangible assets) 273,038 7.66 53,440 1.50 N/A N/A
AS OF MARCH 31, 2003:
Tier 1 capital
(to adjusted tangible assets) $ 258,057 7.43% $ 104,234 3.00% $ 173,723 5.00%
Risk-based capital
(to risk-based assets) 283,004 10.63 213,027 8.00 266,283 10.00
Tangible capital
(to tangible assets) 258,057 7.43 52,117 1.50 N/A N/A
20
The following table reconciles the Corporation's stockholders' equity to
regulatory capital at June 30, 2003 and March 31, 2003 (dollars in thousands):
JUNE 30, MARCH 31,
----------------------
2003 2003
----------------------
Stockholders' equity of the Corporation $ 299,699 $ 293,004
Less: Capitalization of the Corporation and non-bank
subsidiaries (1,322) (8,496)
--------- ---------
Stockholders' equity of the Bank 298,377 284,508
Less: Intangible assets and other non-includable assets (25,339) (26,451)
--------- ---------
Tier 1 and tangible capital 273,038 258,057
Plus: Allowable general valuation allowances 25,380 24,947
--------- ---------
Risk based capital $ 298,418 $ 283,004
========= =========
ASSET/LIABILITY MANAGEMENT
The primary function of asset and liability management is to provide liquidity
and maintain an appropriate balance between interest-earning assets and
interest-bearing liabilities within specified maturities and/or repricing dates.
Interest rate risk is the imbalance between interest-earning assets and
interest-bearing liabilities at a given maturity or repricing date, and is
commonly referred to as the interest rate gap (the "gap"). A positive gap exists
when there are more assets than liabilities maturing or repricing within the
same time frame. A negative gap occurs when there are more liabilities than
assets maturing or repricing within the same time frame. During a period of
rising interest rates, a negative gap over a particular period would tend to
adversely affect net interest income over such period, while a positive gap over
a particular period would tend to result in an increase in net interest income
over such period.
The Corporation's strategy for asset and liability management is to maintain an
interest rate gap that minimizes the impact of interest rate movements on the
net interest margin. As part of this strategy, the Corporation sells
substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, and invests in
adjustable-rate or medium-term, fixed-rate, single-family residential mortgage
loans, medium-term mortgage-related securities and consumer loans, which
generally have shorter terms to maturity and higher interest rates than
single-family mortgage loans.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates and/or
shorter terms to maturity than conventional single-family residential loans.
Long-term, fixed-rate, single-family residential mortgage loans originated for
sale in the secondary market are generally committed for sale at the time the
interest rate is locked with the borrower. As such, these loans involve little
interest rate risk to the Corporation.
The calculation of a gap position requires management to make a number of
assumptions as to when an asset or liability will reprice or mature. Management
believes that its assumptions approximate actual experience and considers them
reasonable, although the actual amortization and repayment of assets and
liabilities may vary substantially. The cumulative net gap position at June 30,
2003 has not changed materially since March 31, 2003.
21
SEGMENT REPORTING
According to the materiality thresholds of SFAS No. 131, the Corporation is
required to report each operating segment based on materiality thresholds of ten
percent or more of certain amounts, such as revenue. Additionally, the
Corporation is required to report separate operating segments until the revenue
attributable to such segments is at least 75 percent of total consolidated
revenue. SFAS No. 131 allows the Corporation to combine operating segments, even
though they may be individually material, if the segments have similar basic
characteristics in the nature of the products, production processes, and type or
class of customer for products or services. Based on the above criteria, the
Corporation has two reportable segments.
COMMUNITY BANKING: This segment is the main basis of operation for the
Corporation and includes the branch network and other deposit support services;
origination, sales and servicing of one-to-four family loans; origination of
multifamily, commercial real estate and business loans; origination of a variety
of consumer loans; and sales of alternative financial investments such as tax
deferred annuities.
REAL ESTATE INVESTMENTS: The Corporation's non-banking subsidiary, IDI, and its
subsidiary, NIDI, invest in limited partnerships in real estate developments.
Such developments include recreational residential developments and industrial
developments (such as office parks).
The following represents reconciliations of reportable segment revenues, profit
or loss, and assets to the Corporation's consolidated totals for the three
months ended June 30, 2003 and 2002, respectively.
22
THREE MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
--------------- ---------------- ---------------- ---------------
Interest income $ 22 $ 49,042 $ (22) $ 49,042
Interest expense 32 20,582 (32) 20,582
---------- ---------- ---------- ----------
Net interest income (loss) (10) 28,460 10 28,460
Provision for loan losses - 450 - 450
---------- ---------- ---------- ----------
Net interest income (loss) after provision
for loan losses (10) 28,010 10 28,010
Other income 3,512 12,427 (2,874) 13,065
Other expense 2,864 18,150 (2,864) 18,150
---------- ---------- ---------- ----------
Income before income taxes 638 22,287 - 22,925
Income tax expense 265 8,567 - 8,832
---------- ---------- ---------- ----------
Net income $ 373 $ 13,720 $ - $ 14,093
========== ========== ========== ==========
Total assets $ 41,974 $3,580,451 $ - $3,622,425
THREE MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
--------------- ---------------- ---------------- ---------------
Interest income $ 30 $ 54,448 $ (30) $ 54,448
Interest expense 83 25,666 (83) 25,666
---------- ---------- ---------- ----------
Net interest income (loss) (53) 28,782 53 28,782
Provision for loan losses - 450 - 450
---------- ---------- ---------- ----------
Net interest income (loss) after provision
for loan losses (53) 28,332 53 28,332
Other income 4,392 5,325 (4,290) 5,427
Other expense 4,237 16,597 (4,237) 16,597
---------- ---------- ---------- ----------
Income before income taxes 102 17,060 - 17,162
Income tax expense (benefit) (86) 6,473 - 6,387
---------- ---------- ---------- ----------
Net income $ 188 $ 10,587 $ - $ 10,775
========== ========== ========== ==========
Total assets $ 39,735 $3,433,883 $ - $3,473,618
23
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Corporation's market rate risk has not materially changed
from March 31, 2003. See the Corporation's Annual Report on
Form 10-K for the year ended March 31, 2003.
ITEM 4 CONTROLS AND PROCEDURES
The management of the Corporation evaluated, with the
participation of the Chief Executive Officer and Chief
Financial Officer, the effectiveness of the Corporation's
disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report.
Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Corporation's
disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports that are
filed or submitted under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and regulations and
are operating in an effective manner.
No change in the Corporation's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under
the Securities Exchange Act of 1934) occurred during the most
recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Corporation is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management of the Corporation to be
immaterial to the financial condition and results of
operations of the Corporation.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
24
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on July 22, 2003.
There were 23,836,013 shares of common stock that could be
voted, and 21,009,815 shares present at the meeting by holders
thereof in person or by proxy which constituted a quorum. The
following is a summary of the results of items voted upon.
There were no broker non-votes at the meeting.
NUMBER OF VOTES
-------------------------------
FOR WITHHELD
-------------- ------------
Election of Directors for three-year terms
expiring in 2006:
Holly Cremer Berkenstadt 20,877,201 132,614
Donald D. Kropidowski 20,878,577 131,238
Mark D. Timmerman 20,666,425 343,390
FOR AGAINST WITHHELD
-------------- --------------- ------------
Appointment of Ernst & Young LLP as independent
auditor for the year ending March 31, 2004 20,542,544 414,303 52,968
ITEM 5 OTHER INFORMATION.
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit 31.1 Certification of Chief Executive
Officer Pursuant to Rules 13a-14 and 15d-14
of the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 31.2 Certification of Chief Financial
Officer Pursuant to Rules 13a-14 and 15d-14
of the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 32.1 Certification of the Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Exhibit 32.2 Certification of the Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
(b) REPORTS ON FORM 8-K.
Press release announcing the Corporation's results for the
three months ending March 31, 2003 and its financial condition
as of March 31, 2003 filed on April 23, 2003.
Press release announcing the Corporation's inclusion in the
NASDAQ Financial-100 Index effective June 23, 2003.
25
SIGNATURES
Pursuant to the requirements 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.
ANCHOR BANCORP WISCONSIN INC.
Date: July 31, 2003 By: /s/ Douglas J. Timmerman
-------------------- ---------------------------------------------
Douglas J. Timmerman, Chairman of the
Board, President and Chief Executive Officer
Date: July 31, 2003 By: /s/ Michael W. Helser
-------------------- ---------------------------------------------
Michael W. Helser, Treasurer and
Chief Financial Officer
26
Exhibit Index
Item Number Description
- ----------- -----------
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934 and Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934 and Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Exhibit 32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
27