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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, 2004
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, 2004: 23,060,279
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, 2004
and March 31, 2004 2
Consolidated Statements of Income for the Three
Months Ended June 30, 2004 and 2003 3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2004 and 2003 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Results of Operations 11
Financial Condition 15
Asset Quality 16
Liquidity & Capital Resources 19
Asset/Liability Management 22
Segment Reporting 23
Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
Item 4 Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 26
Item 3 Defaults upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 27
Item 6 Exhibits and Reports on Form 8-K 27
SIGNATURES 28
1
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, MARCH 31,
2004 2004
----------------------------------
(In Thousands, Except Share Data)
ASSETS
Cash $ 59,855 $ 65,938
Interest-bearing deposits 106,377 133,055
----------- -----------
Cash and cash equivalents 166,232 198,993
Investment securities available for sale 48,865 29,514
Mortgage-related securities available for sale 204,051 220,918
Mortgage-related securities held to maturity (fair value of
$3,869 and $4,489, respectively) 3,740 4,303
Loans receivable, net:
Held for sale 11,032 14,578
Held for investment 3,162,136 3,066,812
Foreclosed properties and repossessed assets, net 687 2,422
Real estate held for development and sale 62,858 77,749
Office properties and equipment 30,786 31,233
Federal Home Loan Bank stock--at cost 78,612 87,320
Accrued interest on investments and loans and other assets 50,698 56,588
Goodwill 19,956 19,956
----------- -----------
Total assets $ 3,839,653 $ 3,810,386
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits and advance payments by borrowers for taxes and insurance $ 2,663,376 $ 2,609,686
Federal Home Loan Bank and other borrowings 807,614 831,559
Other liabilities 54,658 60,902
----------- -----------
Total liabilities 3,525,648 3,502,147
----------- -----------
Minority interest in real estate partnerships 6,290 6,691
----------- -----------
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,22,997,911 and 22,954,535 shares outstanding, respectively 2,536 2,536
Additional paid-in capital 68,108 67,926
Retained earnings 291,891 284,329
Accumulated other comprehensive income 184 2,670
Treasury stock (2,365,428 shares and 2,408,804 shares, respectively), at cost (49,244) (50,324)
Unearned deferred compensation (5,760) (5,589)
----------- -----------
Total stockholders' equity 307,715 301,548
----------- -----------
Total liabilities and stockholders' equity $ 3,839,653 $ 3,810,386
=========== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30,
-------------------------------------
2004 2003
-------------------------------------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Loans $ 43,088 $ 44,112
Mortgage-related securities 2,188 2,870
Investment securities 1,533 1,880
Interest-bearing deposits 227 180
-------- --------
Total interest income 47,036 49,042
INTEREST EXPENSE:
Deposits 11,816 14,522
Notes payable and other borrowings 7,014 6,060
-------- --------
Total interest expense 18,830 20,582
-------- --------
Net interest income 28,206 28,460
Provision for loan losses 450 450
-------- --------
Net interest income after provision for loan losses 27,756 28,010
NON-INTEREST INCOME:
Real estate investment partnership revenue 23,967 -
Loan servicing income (loss) 478 (1,601)
Service charges on deposits 2,195 2,004
Insurance commissions 634 624
Net gain on sale of loans 299 9,807
Net gain on sale of investments and mortgage-related securities 868 352
Other revenue from real estate operations 907 638
Other 915 1,242
-------- --------
Total non-interest income 30,263 13,066
NON-INTEREST EXPENSE:
Compensation 9,869 10,388
Real estate investment partnership cost of sales 19,819 -
Occupancy 1,704 1,609
Furniture and equipment 1,382 1,448
Data processing 1,276 1,174
Marketing 1,007 790
Other expenses from real estate operations 2,714 -
Other 2,657 2,741
-------- --------
Total non-interest expense 40,428 18,150
-------- --------
Minority interest in income of real estate partnership operations 1,582 -
-------- --------
Income before income taxes 16,009 22,926
Income taxes 5,412 8,833
-------- --------
Net income $ 10,597 $ 14,093
======== ========
Earnings per share:
Basic $ 0.47 $ 0.61
Diluted 0.46 0.59
Dividends declared per share 0.11 0.10
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2004 2003
---------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 10,597 $ 14,093
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for loan losses 450 450
Provision for depreciation and amortization 1,105 888
Net increase (decrease) due to origination and sale of loans held
for sale 3,546 (18,612)
Net gain on sales of loans (299) (9,807)
Amortization of stock benefit plans 62 33
Tax benefit from stock related compensation 182 989
(Increase) decrease in accrued interest receivable (1,235) 195
Decrease in accrued interest payable (264) (307)
Decrease in accounts payable (8,609) (171)
Other (8,835) (14,014)
--------- ---------
Net cash used by operating activities (3,300) (26,263)
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 1,109 744
Proceeds from maturities of investment securities 72,460 97,884
Purchase of investment securities available for sale (92,552) (82,921)
Proceeds from sale of mortgage-related securities available for sale 12,869 4,535
Purchase of mortgage-related securities available for sale (19,572) (25,312)
Principal collected on mortgage-related securities 20,984 53,400
Loans originated for investment (457,174) (361,545)
Principal repayments on loans 390,395 328,975
Purchases of office properties and equipment (586) (935)
Sales of office properties and equipment 171 7
Sales of real estate 2,615 (344)
Investment in real estate held for development and sale 12,201 1,348
--------- ---------
Net cash provided (used) by investing activities (57,080) 15,836
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2004 2003
---------------------------
(IN THOUSANDS)
FINANCING ACTIVITIES
Increase in deposit accounts $ 47,474 $ 59,315
Increase in advance payments by borrowers
for taxes and insurance 6,216 6,356
Proceeds from notes payable to Federal Home Loan Bank 47,200 154,450
Repayment of notes payable to Federal Home Loan Bank (64,900) (146,500)
(Decrease) increase in other loans payable (6,245) 3,848
Treasury stock purchased - (3,876)
Exercise of stock options 312 221
Issuance of management and benefit plans 88 439
Payments of cash dividends to stockholders (2,526) (2,381)
--------- ---------
Net cash provided by financing activities 27,619 71,872
--------- ---------
Net (decrease) increase in cash and cash equivalents (32,761) 61,445
Cash and cash equivalents at beginning of period 198,993 141,427
--------- ---------
Cash and cash equivalents at end of period $ 166,232 $ 202,872
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 17,595 $ 20,777
Income taxes 6,412 3,551
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"). Significant
intercompany balances and transactions have been eliminated. Investments in 50%
owned partnerships are treated as variable interest entities and are
consolidated into the Corporation's balance sheet and income statement.
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, 2004 are not
necessarily indicative of results that may be expected for any other interim
period or the entire fiscal year ending March 31, 2005. 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, 2004.
Unrealized gains or losses on the Corporation's available-for-sale securities
are included in other comprehensive income. During the quarter ended June 30,
2004 and 2003, total comprehensive income amounted to $8.1 million and $13.5
million, respectively.
The Corporation's investment in real estate held for investment and sale
includes 50% owned real estate partnerships which are considered variable
interest entities ("VIE's") and therefore subject to the requirements of
Financial Accounting Standards 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.
Real estate investment partnership revenue is presented in non-interest income
and represents revenue recognized upon the closing of sales of developed lots
and homes to independent third parties. Real estate investment partnership cost
of sales is included in non-interest expense and represents the costs of such
closed sales. Other revenue and other expenses from real estate operations are
also included in non-interest income and non-interest expense, respectively.
Minority interest in real estate partnerships represents the equity interests of
development partners in the real estate investment partnerships. The development
partners' share of income is reflected as minority interest in income of real
estate partnership operations. For all VIE's formed after February 1, 2003, the
statements of condition and results of operations must reflect prior period
assets, liabilities, income and expense. Since none of the Corporation's VIE's
were formed after February 1, 2003, no restatement of prior periods is required.
6
The Financial Accounting Standards Board ("FASB") issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" in
December, 2002. SFAS No. 148 amended 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 amended 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:
THREE MONTHS ENDED
JUNE 30,
-------------------------------------
2004 2003
-------------------------------------
(In Thousands, Except Per Share Data)
Net Income
As reported $ 10,597 $ 14,093
Pro forma 10,471 13,994
Earnings per share-Basic
As reported $ 0.47 $ 0.61
Pro forma 0.46 0.61
Earnings per share-Diluted
As reported $ 0.46 $ 0.59
Pro forma 0.45 0.59
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, 2004 and June 30, 2003 were estimated
on the date of grant using the Black-Scholes option-pricing model.
Certain 2003 accounts have been reclassified to conform to the 2004
presentations.
7
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Corporation's carrying value of goodwill was $20.0 million at June 30, 2004
and at March 31, 2004. Information regarding the Company's other intangible
assets follows:
JUNE 30, 2004 MARCH 31, 2004
-------------------------------- -------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------------------------------- -------------------------------
(In Thousands)
Other intangible assets:
Core deposit premium $ 3,408 $ 2,442 $ 966 $ 3,408 $ 2,229 $ 1,179
Mortgage servicing rights 15,938 2,728 13,210 21,613 9,325 12,288
-------- ------------ ------- -------- ------------ -------
Total $ 19,346 $ 5,170 $14,176 $25,021 $ 11,554 $13,467
======== ============ ======= ======== ============ =======
The projections of amortization expense for mortgage servicing rights and core
deposit premium set forth below are based on asset balances and the interest
rate environment as of June 30, 2004. 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, 2004 (actual) $ 1,600 $ 213 $ 1,813
Estimate for the year ended March 31,
2005 6,400 852 7,252
2006 3,360 114 3,474
2007 1,725 - 1,725
2008 1,725 - 1,725
--------- ------- -------
$ 13,210 $ 966 $14,176
========= ======= =======
NOTE 4 - STOCKHOLDERS' EQUITY
During the quarter ended June 30, 2004, options for 41,661 shares of common
stock were exercised at a weighted-average price of $10.47 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 of $593,000 was charged to retained earnings. During the quarter ended June
30, 2004, the Corporation issued 6,811 shares of treasury stock to the
Corporation's retirement plans. The weighted-average cost of these shares was
$24.75 per share or $169,000 in the aggregate and the gain of the market price
over the cost of the treasury shares of $6,000 was credited to retained
earnings. On May 14, 2004, the Corporation paid a cash dividend of $0.11 per
share, amounting to $2.5 million.
8
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share for the three months ended June 30, 2004 and 2003 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,
---------------------------
2004 2003
---------------------------
Numerator:
Net income $10,597,198 $14,093,018
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $10,597,198 $14,093,018
Denominator:
Denominator for basic earnings per
share--weighted-average common
shares outstanding 22,596,936 23,226,753
Effect of dilutive securities:
Employee stock options 475,014 530,135
Management Recognition Plans 5,074 14,627
Denominator for diluted earnings per
share--adjusted weighted-average
----------- -----------
common shares and assumed conversions 23,077,024 23,771,515
=========== ===========
Basic earnings per share $ 0.47 $ 0.61
=========== ===========
Diluted earnings per share $ 0.46 $ 0.59
=========== ===========
NOTE 6 - CONTINGENT LIABILITIES
The Wisconsin Department of Revenue recently completed an audit of AnchorBank in
connection with the Department's review of financial institutions that
transferred investment securities to its out-of-state investment subsidiaries.
The Bank settled with the Department as regards the taxation of its Nevada
investment subsidiary. Among other provisions, AnchorBank agreed to pay
Wisconsin tax on the income of its Nevada investment subsidiary for the fourth
quarter of fiscal 2004, and for future periods. Management estimates that in
fiscal 2005, the additional income tax expense related to its Nevada investment
subsidiary's operations will amount to approximately $0.06 per diluted share.
The Company reduced its tax accrual, in part as a result of the settlement. This
reduction, when combined with the impact of the settlement for periods prior to
fiscal 2005, resulted in an increase in earnings for the quarter of
approximately $0.05 cents per diluted share.
NOTE 7 - SUBSEQUENT EVENTS
On July 20, 2004, the Corporation declared a $0.125 per share cash dividend on
its common stock to be paid on August 13, 2004 to stockholders of record on July
30, 2004.
9
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.
The loan portfolio, foreclosed properties, and repossessed assets are
evaluated on a continuous basis to determine the necessity for additions to
the allowances for losses and the related balance in the allowances. These
evaluations consider several factors including, but not limited to, general
economic conditions, collateral value, loan portfolio composition, loan
delinquencies, prior loss experience, anticipated loss of interest and
losses inherent in the portfolio. The evaluation of the allowance for loan
losses includes a review of known loan problems as well as potential loan
problems based upon historical trends and ratios. To determine the level
and composition of the loan loss allowance, the loan portfolio is broken
out by categories of single-family residential, multi-family residential,
commercial real estate, construction and land, consumer and commercial
business. These categories are then further divided into performing and
substandard, which includes performing and non-performing groups of loans.
A five-year historical trend is applied to each category of performing
loans to arrive at the appropriate levels of loss reserves for those
respective categories based on the ratio of loss history to overall balance
in each respective loan category. The non-performing groups are analyzed
using the trends of the current year in which they are being evaluated. For
commercial business loans, a three-year historical trend is applied since
that category has shown significant growth both in terms of overall balance
and loss history associated with that growth. The Corporation has allocated
all of its allowance for loan losses to specific categories as a result of
more precise analysis of loan portfolio performance. Also, within specific
loan categories, certain loans may be identified for specific reserve
allocations as well as the whole category of that loan type being reviewed
for a calculated general reserve based on the foregoing analysis of trends
and overall balance growth within that category.
10
- - Valuation of mortgage servicing rights requires the use of judgment.
Mortgage servicing rights are established on loans that are originated and
subsequently sold with servicing rights retained. 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 replaced 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 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, 2004, 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, 2004 decreased $3.5
million to $10.6 million from $14.1 million for the same period in the prior
year. The decrease in net income for the three-month period compared to the same
period last year was largely due to a decrease in the gain on sale of loans of
$9.5 million partially offset by an increase of loan servicing income of $2.1
million and a decrease in income tax expense of $3.4 million.
Net Interest Income. Net interest income decreased $250,000 for the three months
ended June 30, 2004 as compared to the same period in the prior year. Interest
income decreased $2.0 million for the three months ended June 30, 2004 as
compared to the same period in the prior year, primarily due to a decrease in
the weighted average rate on interest earning assets to 5.22% from 5.83%. These
decreases were offset by a decrease in interest expense of $1.8 million for the
three months ended June 30, 2004 as compared to the same period in the prior
year. The net interest margin decreased to 3.13% from 3.39% for the respective
three-month periods. The decrease in the net interest margin is reflective of a
decrease in the cost of funds, offset by a larger decrease in yields on loans as
interest rates continue to decrease. The interest rate spread decreased to 3.05%
from 3.27% for the same respective periods.
Interest income on loans decreased $1.0 million for the three months ended June
30, 2004 as compared to the same period in the prior year. This decrease was the
result of a decrease of 63 basis points in the average yield on loans to 5.50%
from 6.13% for the respective three-month periods. Interest income on
mortgage-related securities decreased $680,000 for the three-month period ended
June 30, 2004, as compared to the same period in the prior year, primarily due
to a decrease of $19.7 million in the average balance of mortgage related
securities and a decrease of 81 basis points in the average yield on
mortgage-related securities to 3.99% from 4.80%. In addition, interest income on
investment securities (including Federal Home Loan Bank stock) decreased
$350,000 for the three-month
11
period ended June 30, 2004, as compared to the same period in the prior year.
This was primarily a result of a decrease of $44.4 million in the average
balance of investment securities for the three-month period ended June 30, 2004,
as compared to the same period in 2003. Interest income on interest-bearing
deposits increased $50,000 for the three months ended June 30, 2004, as compared
to the same period in 2003.
Interest expense on deposits decreased $2.7 million for the three months ended
June 30, 2004, as compared to the same period in 2003. This decrease was due
primarily to a decrease of 45 basis points in the weighted average cost of
deposits to 1.78% from 2.23% for the respective three-month periods. Interest
expense on notes payable and other borrowings increased $950,000 during the
three months ended June 30, 2004, as compared to the same period in the prior
year due primarily to an increase of $212.9 million in the average balance of
notes payable and other borrowings for the three-month period ended June 30,
2004, as compared to the same period in 2003.
Provision for Loan Losses. Provision for loan losses remained constant at
$450,000 for the three-month period ended June 30, 2004, 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.
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.
12
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
2004 2003
-------------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST(1) BALANCE INTEREST COST(1)
-----------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans (2) $ 2,425,125 $ 32,875 5.42% $ 2,232,645 $ 33,883 6.07%
Consumer loans (2) 546,785 7,992 5.85 508,606 8,190 6.44
Commercial business loans (2) 161,018 2,221 5.52 135,549 2,039 6.02
----------- --------- ----------- --------
Total loans receivable (2) 3,132,928 43,088 5.50 2,876,800 44,112 6.13
Mortgage-related securities 219,293 2,188 3.99 238,987 2,870 4.80
Investment securities 61,599 270 1.75 111,409 526 1.89
Interest-bearing deposits 102,140 227 0.89 53,179 180 1.35
Federal Home Loan Bank stock 87,891 1,263 5.75 82,509 1,354 6.56
----------- --------- ----------- --------
Total interest-earning assets 3,603,851 47,036 5.22 3,362,884 49,042 5.83
Non-interest-earning assets 222,720 194,730
----------- -----------
Total assets $ 3,826,571 $ 3,557,614
=========== ===========
INTEREST-BEARING LIABILITIES
Demand deposits $ 736,841 754 0.41 $ 777,480 963 0.50
Regular passbook savings 248,249 262 0.42 214,395 294 0.55
Certificates of deposit 1,671,948 10,800 2.58 1,618,653 13,265 3.28
----------- --------- ----------- --------
Total deposits 2,657,038 11,816 1.78 2,610,528 14,522 2.23
Notes payable and other borrowings 815,933 7,014 3.44 603,064 6,060 4.02
----------- --------- ----------- --------
Total interest-bearing liabilities 3,472,971 18,830 2.17 3,213,592 20,582 2.56
---- ----
Non-interest-bearing liabilities 48,798 45,940
----------- -----------
Total liabilities 3,521,769 3,259,532
Stockholders' equity 304,802 298,082
----------- -----------
Total liabilities and stockholders' equity $ 3,826,571 $ 3,557,614
=========== ===========
Net interest income/interest rate spread $ 28,206 3.05% $ 28,460 3.27%
========= ==== ======== ====
Net interest-earning assets $ 130,880 $ 149,292
=========== ===========
Net interest margin 3.13% 3.39%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.04 1.05
=========== ===========
- ---------------------------------
(1) Annualized
(2) The average balances of loans include non-performing loans, interest of
which is recognized on a cash basis.
13
Non-Interest Income. Non-interest income increased $17.2 million to $30.3
million for the three months ended June 30, 2004, as compared to $13.1 million
for the same period in 2003, primarily due to the addition of real estate
investment partnership revenue of $24.0 million as a result of implementation of
FIN 46 in the quarter ended December 31, 2003. Exclusive of the effects of FIN
46, non-interest income decreased $7.0 million, primarily as a result of the
decrease in net gain on sale of loans of $9.5 million. The decrease in the gain
on sale of loans was primarily due to the rising interest rate environment which
resulted in significantly lower levels of refinancing activity. In addition,
other non-interest income, which includes a variety of loan fee and other
miscellaneous fee income, decreased $330,000 for the three-month period ended
June 30, 2004, as compared to the same period in the prior year. These decreases
were partially offset by an increase in loan servicing income of $2.1 million
and an increase of $520,000 in net gain on sale of investments and
mortgage-related securities as compared to the same period in the prior year.
The increase in loan servicing income was due primarily to decreased
amortization of mortgage servicing rights, which resulted from decreases in loan
sales and mortgage loan refinancings in the rising interest rate environment. In
addition, service charges on deposits increased $190,000 and insurance
commissions remained relatively constant for the three-month period ended June
30, 2004, as compared to the same period in the prior year.
Non-Interest Expense. Non-interest expense increased $22.3 million to $40.4
million for the three months ended June 30, 2004, as compared to $18.2 million
for the same period in 2003, primarily due to the addition of real estate
investment partnership cost of sales of $19.8 million and other expenses from
real estate operations of $2.7 million as a result of implementation of FIN 46
in the quarter ended December 31, 2003. Exclusive of the effects of FIN 46,
non-interest expense decreased $260,000 primarily as a result of the decrease in
compensation expense of $520,000. In addition, other non-interest expense
decreased $80,000 and furniture and equipment expense decreased $70,000 for the
three months ended June 30, 2004 as compared to the same period in the prior
year. These decreases were partially offset by an increase in marketing expense
of $220,000, an increase in data processing expense of $100,000, and an increase
in occupancy expense of $100,000 for the three-month period ended June 30, 2004
as compared to the same period in the prior year.
Income Taxes. Income tax expense decreased $3.4 million during the three months
ended June 30, 2004, as compared to the same period in 2003. The decrease was
the result of a decrease in income before income tax of $6.9 million to $16.0
million for the three months ended June 30, 2004 as compared to $22.9 million
for the same period in the prior year. In addition, the Bank reduced its tax
accrual following the settlement with the Wisconsin Department of Revenue as
regards the taxation of its Nevada investment subsidiary. The effective tax rate
was 33.8% for the current three-month period, as compared to 38.5% for the
three-month period last year. The effective tax rate for future periods will
likely increase due to the additional income tax expense related to its Nevada
investment subsidiary.
14
FINANCIAL CONDITION
During the three months ended June 30, 2004, the Corporation's assets increased
by $29.3 million from $3.81 billion at March 31, 2004 to $3.84 billion. The
majority of this increase was attributable to an increase in loans and
investments, which were partially offset by decreases in other categories such
as mortgage-related securities, real estate held for development and Federal
Home Loan Bank stock.
Total loans (including loans held for sale) increased $91.8 million during the
three months ended June 30, 2004. Activity for the period consisted of (i)
originations and purchases of $738.1 million, (ii) sales of $284.5 million, and
(iii) principal repayments and other adjustments of $361.8 million.
Mortgage-related securities (both available for sale and held to maturity)
decreased $17.4 million during the three months ended June 30, 2004 as a result
of principal repayments and market value adjustments of $24.1 million and sales
of $12.9 million. These decreases were partially offset by purchases of $19.6
million of mortgage-related securities in this three-month period.
Mortgage-related securities consisted of $108.0 million of mortgage-backed
securities and $99.8 million of Collateralized Mortgage Obligations ("CMO's")
and Real Estate Mortgage Investment Conduits ("REMIC's") at June 30, 2004.
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 increased $19.4 million during the three months ended June
30, 2004 as a result of purchases of $92.6 million of U.S. Government and agency
securities, which were substantially offset by sales and maturities of $73.6
million of such securities.
Federal Home Loan Bank stock decreased $8.7 million for the quarter ended June
30, 2004. This decrease was related to a return of excess holdings of FHLB stock
and was used to provide liquidity.
Real estate held for development decreased $14.9 million to $62.9 million as of
June 30, 2004 from $77.7 million as of June 30, 2003. This decrease was the
result of continued home and land lot sales.
Total liabilities increased $23.5 million during the three months ended June 30,
2004. This increase was largely due to a $53.7 million increase in deposits and
was partially offset by a $23.9 million decrease in FHLB advances and other
borrowings 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 $310.9 million at June 30, 2004 and $285.2 million at
March 31, 2004, and generally mature within one to five years.
Stockholders' equity increased $6.2 million during the three months ended June
30, 2004 as a net result of (i) comprehensive income of $8.1 million, (ii) stock
options exercised of $900,000 (with the excess of the cost of treasury shares
over the option price ($590,000) charged to retained earnings), (iii) the
issuance of shares for management and benefit plans of $90,000, and (iv) benefit
plan shares earned and related tax adjustments totaling $180,000. These
increases were partially offset by cash dividends of $2.5 million.
15
ASSET QUALITY
Non-performing assets increased $1.7 million to $19.0 million at June 30, 2004
from $17.3 million March 31, 2004 and increased as a percentage of total assets
to 0.55% from 0.45% at such dates, respectively. Non-performing assets are
summarized as follows at the dates indicated:
AT MARCH 31,
AT JUNE 30, -----------------------------
2004 2004 2003 2002
----------- ------- ------- -------
(Dollars In Thousands)
Non-accrual loans:
Single-family residential $ 3,862 $ 3,247 $ 4,510 $ 4,505
Multi-family residential - - 444 187
Commercial real estate 8,298 8,764 1,776 2,212
Construction and land - - - 168
Consumer 525 642 661 933
Commercial business 5,636 2,268 2,678 1,037
------- ------- ------- -------
Total non-accrual loans 18,321 14,921 10,069 9,042
Real estate held for development and sale - - 49 74
Foreclosed properties and repossessed assets, net 688 2,422 1,535 1,475
------- ------- ------- -------
Total non-performing assets $19,009 $17,343 $11,653 $10,591
======= ======= ======= =======
Performing troubled debt restructurings $ 140 $ 2,649 $ 2,590 $ 403
======= ======= ======= =======
Total non-accrual loans to total loans 0.55% 0.45% 0.34% 0.32%
Total non-performing assets to total assets 0.50 0.46 0.33 0.30
Allowance for loan losses to total loans 0.85 0.87 1.00 1.09
Allowance for loan losses to total
non-accrual loans 155.75 191.72 294.74 346.04
Allowance for loan and foreclosure losses
to total non-performing assets 150.60 165.78 257.87 300.05
Non-accrual loans increased $3.4 million during the three months ended June 30,
2004. The increase was largely attributable to two commercial loans placed on
non-accrual status during the three-month period. One was a $5.2 million
commercial business loan secured by a computer software and consulting company
located in Tempe, Arizona. The other was a $960,000 loan secured by a 54 unit
motel located in Dodgeville, Wisconsin. At June 30, 2004, there were four
non-accrual commercial loans with loan balances greater than $1.0 million. One
loan is a commercial real estate loan which is secured by a 70 unit hotel
located in Kenosha, Wisconsin, with a loan balance of $3.1 million at June 30,
2004. Another loan is a commercial real estate loan which is secured by retail
property in Dallas, Texas, with a loan balance of $1.7 million at June 30, 2004.
Another loan is a commercial real estate loan which is secured by a 161 unit
motel located in Schiller Park, Illinois, with a loan balance of $1.5 million at
June 30, 2004. The other loan with a loan balance greater than $1.0 million is a
commercial business loan secured by the computer software and consulting company
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.
Foreclosed properties and repossessed assets decreased $1.7 million for the
three months ended June 30, 2004. The decrease was not attributable to any one
specific loan. There were no foreclosed properties and repossessed assets with a
carrying value greater than $1.0 million at June 30, 2004.
16
Performing troubled debt restructurings decreased $2.5 million during the three
months ended June 30, 2004 primarily due to a $2.1 million commercial real
estate loan in Sonoma, California that was paid off during the quarter.
At June 30, 2004, assets that the Corporation had classified as substandard, net
of reserves, consisted of $22.1 million of loans and foreclosed properties. As
of March 31, 2004, substandard assets amounted to $31.1 million. An asset is
classified as substandard when it is determined that it is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any, and that the Corporation will sustain some loss if
the deficiencies are not corrected. The decrease of $9.0 million in the
substandard balance for the three months ended June 30, 2004 was in part
attributable to the pay off of three previously classified loans which had
carrying values of greater than $1.0 million. The three loans were located in
Janesville, Wisconsin; Sonoma, California; and Minneapolis, Minnesota.
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 $3.9 million,
is secured by the assets of a stainless tank operation located in Cottage Grove,
Wisconsin. Two loans with a carrying value of $4.4 million, are secured by a
computer software and consulting company located in Tempe, Arizona. A third
loan, with a carrying value of $1.8 million, is secured by a 70 unit hotel
located in Kenosha, Wisconsin. A fourth loan, with a carrying value of $1.2
million, is secured by a commercial property located in Beloit, Wisconsin. A
fifth loan, with a carrying value of $1.0 million is secured by retail property
located in Dallas, Texas. A sixth loan, with a carrying value of $1.0 million,
is secured by a 161 unit motel located in Schiller Park, Illinois.
At June 30, 2004, the Corporation had identified assets of $12.5 million as
impaired, net of reserves. As of March 31, 2004, impaired loans were $11.7
million. A loan is defined as impaired when, according to FAS 114, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. A summary of the details regarding impaired loans follows:
AT JUNE 30, AT MARCH 31,
----------- ---------------------------
2004 2004 2003 2002
----------- ---------------------------
(In Thousands)
Impaired loans with valuation
reserve required $17,873 $17,126 $ 8,483 $11,467
Less:
Specific valuation allowance 5,376 5,382 3,717 4,240
------- ------- ------- -------
Total impaired loans $12,497 $11,744 $ 4,766 $ 7,227
======= ======= ======= =======
Average impaired loans $ 7,930 $ 6,389 $ 6,288 $ 6,216
Interest income recognized
on impaired loans $ 62 $ 710 $ 613 $ 740
Interest income recognized on a cash basis
on impaired loans $ 62 $ 710 $ 613 $ 740
17
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, ---------------------------
2004 2004 2003 2002
----------- ---------------------------
(In Thousands)
30 to 59 days $ 7,536 $ 4,887 $10,083 $17,647
60 to 89 days 3,757 10,941 5,612 2,671
------- ------- ------- -------
Total $11,293 $15,828 $15,695 $20,318
======= ======= ======= =======
The Corporation's loan portfolio, foreclosed properties and repossessed assets
are evaluated on a continuing basis to determine the necessity for additions and
recaptures to the allowance for losses and the related adequacy of the balance
in the allowance for losses account. 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 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,
---------------------
2004 2003
---------------------
(Dollars In Thousands)
Allowance at beginning of period $ 28,607 $ 29,677
Charge-offs:
Mortgage (309) (150)
Consumer (274) (217)
Commercial business (5) (73)
-------- --------
Total charge-offs (588) (440)
Recoveries:
Mortgage 8 236
Consumer 22 28
Commercial business 36 86
-------- --------
Total recoveries 66 350
-------- --------
Net charge-offs (522) (90)
-------- --------
Provision 450 450
-------- --------
Allowance at end of period $ 28,535 $ 30,037
======== ========
Net charge-offs to
average loans (0.07)% (0.01)%
======== ========
Although management believes that the June 30, 2004 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.
18
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, 2004, the Corporation had outstanding commitments to originate loans
of $162.1 million, commitments to extend funds to, or on behalf of, customers
pursuant to lines and letters of credit of $271.3 million and loans sold with
recourse to the Corporation in the event of default by the borrower of $268,000.
The Corporation had sold loans with recourse in the amount of $11.7 million
through the FHLB Mortgage Partnership Finance Program at June 30, 2004.
Scheduled maturities of certificates of deposit during the twelve months
following June 30, 2004 amounted to $982.5 million and scheduled maturities of
FHLB advances during the same period totaled $151.1 million. At June 30, 2004,
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. During
the quarter ended June 30, 2004, the Bank's average liquidity ratio was 9.94%.
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.
19
The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at June 30, 2004 and March 31, 2004:
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES OTS REQUIREMENTS
--------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------------------------------------------
(Dollars In Thousands)
AS OF JUNE 30, 2004:
Tier 1 capital
(to adjusted tangible assets) $ 297,381 7.91% $ 112,733 3.00% $ 187,889 5.00%
Risk-based capital
(to risk-based assets) 320,547 10.78 237,820 8.00 297,275 10.00
Tangible capital
(to tangible assets) 297,381 7.91 56,367 1.50 N/A N/A
AS OF MARCH 31, 2004:
Tier 1 capital
(to adjusted tangible assets) $ 285,680 7.71% $ 111,208 3.00% $ 185,346 5.00%
Risk-based capital
(to risk-based assets) 308,912 10.61 232,858 8.00 291,073 10.00
Tangible capital
(to tangible assets) 285,680 7.71 55,604 1.50 N/A N/A
The following table reconciles the Corporation's stockholders' equity to
regulatory capital at June 30, 2004 and March 31, 2004:
JUNE 30, MARCH 31,
----------------------
2004 2004
----------------------
(In Thousands)
Stockholders' equity of the Corporation $ 307,715 $ 301,548
Less: Capitalization of the Corporation and non-bank
subsidiaries 10,265 8,674
--------- ---------
Stockholders' equity of the Bank 317,980 310,222
Less: Intangible assets and other non-includable assets (20,599) (24,542)
--------- ---------
Tier 1 and tangible capital 297,381 285,680
Plus: Allowable general valuation allowances 23,166 23,232
--------- ---------
Risk based capital $ 320,547 $ 308,912
========= =========
20
GUARANTEES
Financial Interpretation No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others" ("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 has not significantly affected
the Corporation's financial condition.
The Corporation's real estate investment segment, IDI, is required to guaranty
the partnership loans of its subsidiaries, for the development of homes for
sale. As of June 30, 2004, IDI had guaranteed $71.9 million for the following
partnerships on behalf of the respective subsidiaries. As of the same date,
$21.6 million was outstanding. The table below summarizes the individual
subsidiaries and their respective guarantees and outstanding loan balances.
AMOUNT AMOUNT
SUBSIDIARY PARTNERSHIP AMOUNT OUTSTANDING OUTSTANDING
OF IDI ENTITY GUARANTEED AT 6/30/04 AT 3/31/04
- ---------- ------------------------ ---------- ----------- -----------
(Dollars in thousands)
Oakmont Chandler Creek $ 8,440 $ 6,621 $ 7,340
Davsha II Paragon 5,100 3,132 3,130
Davsha III Indian Palms 147, LLC 8,500 1,381 1,650
Davsha IV DH Indian Palms, LLC 20,070 1,853 3,330
Davsha V Villa Santa Rosa, LLC 12,500 3,994 5,490
Davsha VI Bellasara 168, LLC 12,740 2,476 4,700
Davsha VII La Vista Grande 121, LLC 4,500 2,111 -
---------- ----------- -----------
Total $ 71,850 $ 21,568 $ 25,640
========== =========== ===========
IDI has real estate partnership investments within its subsidiaries for which it
guarantees the above loans. These partnerships are also funded by financing with
loans guaranteed by IDI and secured by the lots and homes being developed within
each of the respective partnership entities.
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 $71.9 million. At June 30, 2004, the Corporation's
investment in these partnerships consisted of assets of $49.6 million and cash
and other assets of $3.3 million. The liabilities of these partnerships
consisted of other borrowings of $38.0 million (reported as a part of FHLB and
other borrowings), other liabilities of $4.0 million (reported as a part of
other liabilities) and minority interest of $6.3 million. These amounts
represent the Corporation's maximum exposure to loss at June 30, 2004 as a
result of involvement with these limited partnerships.
21
The partnership agreements generally contain buy-sell provisions whereby certain
partners can require the purchase or sale of ownership interests by certain
partners.
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 Corporation's cumulative net gap
position at June 30, 2004 has not changed materially since March 31, 2004.
22
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, 2004 and 2003, respectively.
23
THREE MONTHS ENDED JUNE 30, 2004
------------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
------------ ------------ ------------ ------------
Interest income $ 130 $ 46,960 $ (54) $ 47,036
Interest expense 138 18,746 (54) 18,830
------------ ------------ ------------ ------------
Net interest income (loss) (8) 28,214 - 28,206
Provision for loan losses - 450 - 450
------------ ------------ ------------ ------------
Net interest income (loss) after provision
for loan losses (8) 27,764 - 27,756
Real estate investment partnership revenue 23,967 - - 23,967
Other revenue from real estate operations 907 - - 907
Other income - 5,389 - 5,389
Real estate investment partnership cost of sales (19,819) - - (19,819)
Other expense from real estate partnership operations (2,714) - - (2,714)
Minority interest in income of real estate
partnerships (1,582) - - (1,582)
Other expense - (17,895) - (17,895)
------------ ------------ ------------ ------------
Income before income taxes 751 15,258 - 16,009
Income tax expense 205 5,207 - 5,412
------------ ------------ ------------ ------------
Net income $ 546 $ 10,051 $ - $ 10,597
============ ============ ============ ============
Total Assets $ 70,003 $ 3,769,650 $ - $ 3,839,653
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
24
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Corporation's market rate risk has not materially changed from
March 31, 2004. See the Corporation's Annual Report on Form 10-K for
the year ended March 31, 2004.
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.
25
ITEM 2 CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
(a) - (d) Not applicable.
(e) The following table sets forth information with respect to any
purchase made by or on behalf of the Corporation or any "affiliated
purchaser," as defined in Section 240.10b-18(a)(3) under the Exchange
Act, of shares of the Corporation's Common Stock during the indicated
periods.
TOTAL NUMBER OF
SHARES PURCHASED AS MAXIMUM NUMBER OF
TOTAL NUMBER AVERAGE PART OF PUBLICLY SHARES THAT MAY YET BE
OF SHARES PRICE PAID ANNOUNCED PLANS OR PURCHASED UNDER THE
PERIOD PURCHASED PER SHARE PROGRAMS PLANS OR PROGRAMS (1)
- ------------------ ------------ ---------- ------------------- ----------------------
April 1 - 30, 2004 - $ - - 960,650
May 1 - 31, 2004 - - - 960,650
June 1 - 30, 2004 - - - 960,650
--- ------- ---- -------
Total - $ - - 960,650
=== ======= ==== =======
(1) On October 28, 2003, the Corporation announced a program to repurchase
up to 1.2 million shares of the Corporation's Common Stock. This
repurchase plan expires October 28, 2004.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on July 27, 2004. There
were 22,983,200 shares of common stock that could be voted, and
19,768,317 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.
NUMBER OF VOTES
---------------------------------------------------
FOR WITHHELD
---------- ---------
Election of Directors for three-year terms expiring
in 2007:
Greg M. Larson 17,408,737 2,359,580
Douglas J. Timmerman 17,137,309 2,631,008
David L. Omachinski 17,248,623 2,519,694
Pat Richter 17,291,532 2,476,785
ABSTAINED/
BROKER
FOR AGAINST NON-VOTES
---------- --------- ---------
Proposal to adopt the 2004 Equity Incentive Plan 14,702,040 1,928,414 3,137,863
FOR AGAINST ABSTAINED
---------- ------- ---------
Appointment of Ernst & Young LLP as independent
auditor for the year ending March 31, 2005
19,180,762 483,689 103,866
26
ITEM 5 OTHER INFORMATION.
AnchorBank settled with the Wisconsin Department of Revenue as regards
the taxation of its Nevada investment subsidiary. For additional
information, see Note 6 to the Unaudited Consolidated Financial
Statements.
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 is included herein as an exhibit to this Report.
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 is included as an exhibit to this Report.
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) is included herein as an exhibit to this
Report.
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) is included herein as an exhibit to this
Report.
(b) REPORTS ON FORM 8-K.
The Corporation filed a Current Report on Form 8-K on May 3, 2004
under Items 7 and 12 to furnish the Corporation's earnings release for
the quarter ended March 31, 2004.
27
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: August 5, 2004 By: /s/ Douglas J. Timmerman
-----------------------------------
Douglas J. Timmerman, Chairman of
the Board, President and Chief
Executive Officer
Date: August 5, 2004 By: /s/ Michael W. Helser
-----------------------------------
Michael W. Helser, Treasurer and
Chief Financial Officer
28