1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ______________
Commission File Number 0-20006
ANCHOR BANCORP WISCONSIN INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1726871
- --------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
25 West Main Street
Madison, Wisconsin 53703
(Address of principal executive office)
Registrant's telephone number, including area code (608) 252-8700
Securities registered pursuant to Section 12 (b) of the Act
Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, par value $.10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Based upon the $43.125 closing price of the registrant's common stock as
of May 21, 1998, the aggregate market value of the 8,083,059 shares of the
registrant's common stock deemed to be held by non-affiliates of the registrant
was: $348.6 million. Although directors and executive officers of the
registrant and certain of its employee benefit plans were assumed to be
"affiliates" of the registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
As of June 12, 1998, 8,924,135 shares of the registrant's common stock
were outstanding. There were also 100,000 series A preferred stock purchase
rights authorized with none outstanding, as of the same date.
Documents Incorporated by Reference
Proxy Statement for the Annual Meeting of Stockholders to be held on July 28,
1998 (Part III, Items 10 to 13)
2
PART I
ITEM 1. BUSINESS
GENERAL
Anchor BanCorp Wisconsin Inc. (the "Corporation") is a registered savings
and loan holding company incorporated under the laws of the State of Wisconsin
and is engaged in the savings and loan business through its wholly-owned
banking subsidiary, AnchorBank, S.S.B. (the "Bank"). On July 15, 1992, the
Bank converted from a state-chartered mutual savings institution to a stock
savings institution. As part of the conversion, the Corporation acquired all
of the outstanding common stock of the Bank. The Corporation also has a
non-banking subsidiary, Investment Directions, Inc. ("IDI"), which invests in
limited partnerships. IDI created a subsidiary in March 1997, Nevada Investment
Directions, Inc. ("NIDI"), which also invests in limited partnerships. NIDI is
organized in the state of Nevada.
The Bank was organized in 1919 as a Wisconsin-chartered savings
institution. As a state-chartered savings institution, the Bank's deposits are
insured up to the maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Home Loan Bank of
Chicago ("FHLB"), and is regulated by the Office of Thrift Supervision ("OTS"),
the FDIC and the Wisconsin Commissioner of Savings and Loan ("Commissioner").
The Corporation is subject to the periodic reporting requirements of the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended ("Exchange Act"). The Bank is also regulated by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") relating to
reserves required to be maintained against deposits and certain other matters.
See "Regulation."
The Bank blends an interest in the consumer and small business markets
with the willingness to expand its numerous checking, savings and lending
programs to meet customers' changing financial needs. The Bank offers
checking, savings, money market accounts, mortgages, home equity and other
consumer loans, student loans, credit cards, annuities and related consumer
financial services. The Bank also offers banking services to businesses,
including checking accounts, lines of credit, secured loans and commercial real
estate loans.
The Bank has four wholly owned subsidiaries. Anchor Insurance Services,
Inc. ("AIS") offers a full line of insurance products, securities and annuities
to the Bank's customers and other members of the general public. ADPC II, LLC
("ADPC II") was created in September 1996 to improve and manage a multi-family
property acquired by foreclosure. ADPC Corporation ("ADPC") holds and develops
certain of the Bank's foreclosed properties. Anchor Investment Corporation
("AIC") is an operating subsidiary that is located in and formed under the laws
of the State of Nevada. AIC was formed for the purpose of managing a portion
the Bank's investment portfolio (primarily mortgage-related securities). All of
the Bank's subsidiaries, except AIC, are Wisconsin corporations.
MARKET AREA
The Bank's primary market area consists of the metropolitan area of
Madison, Wisconsin, the suburban communities of Dane County, Wisconsin and
southern Wisconsin as well as contiguous counties in Iowa and Illinois. As of
March 31, 1998, the Bank conducted business from its headquarters and main
office in Madison, Wisconsin and from 35 other full-service offices and two
loan origination offices.
The economy of Dane County is characterized by diversified industries,
major medical facilities, state, federal and university governmental bodies,
and a sound agricultural base. It is estimated that the population of Dane
County increased by 13.5% from 1980 to 1990, which was more than three times
the percentage increase for the State of Wisconsin.
1
3
COMPETITION
The Bank is subject to extensive competition from other savings
institutions as well as commercial banks and credit unions in both attracting
and retaining deposits and in real estate and other lending activities.
Competition for deposits also comes from money market funds, bond funds,
corporate debt and government securities. Competition for the origination of
real estate loans comes principally from other savings institutions, commercial
banks and mortgage banking companies. Competition for consumer loans is
primarily from other savings institutions, commercial banks, consumer finance
companies and credit unions.
The principal factors that are used to attract deposit accounts and
distinguish one financial institution from another include rates of return,
types of accounts, service fees, convenience of office locations and hours, and
other services. The primary factors in competing for loans are interest rates,
loan fee charges, timeliness and quality of service to the borrower.
FINANCIAL RATIOS
The following table represents selected financial ratios of the Corporation's
operations for the fiscal years indicated. These ratios, where applicable,
have been restated to reflect both a two-for-one stock split in August 1997 and
the application of Financial Accounting Standards No. 128 (Earnings Per Share).
YEAR ENDED MARCH 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Return on average assets 1.13% 0.76% 0.88%
Return on average equity 16.20 11.78 12.13
Average equity to average assets 6.51 6.42 7.24
Dividend payout ratio 13.66 15.83 11.27
Net interest margin 3.18 3.14 3.18
LENDING ACTIVITIES
GENERAL. At March 31, 1998, the Corporation's net loans held for
investment totalled $1.6 billion, representing approximately 80% of its $2.0
billion of total assets at that date. Approximately 78% of the Corporation's
total loans held for investment at March 31, 1998 were secured by first liens
on real estate.
The Bank's primary lending emphasis is on the origination of single-family
residential loans secured by properties located primarily in Wisconsin, with
adjustable-rate loans generally being originated for inclusion in the Bank's
loan portfolio and fixed-rate loans generally being originated for sale into
the secondary market. In addition, in order to increase the yield and interest
rate sensitivity of its portfolio, the Bank also originates commercial real
estate, multi-family, construction, consumer and commercial business loans in
its primary market area.
The non-real estate loans originated by the Bank consist of a variety of
consumer loans and commercial business loans. At March 31, 1998, the
Corporation's total loans held for investment included $338.0 million of
consumer loans and $30.2 million of commercial business loans.
LOAN PORTFOLIO COMPOSITION. The following table presents information
concerning the composition of the Corporation's consolidated loans held for
investment at the dates indicated.
2
4
MARCH 31,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------------------------------------------------------------------------------
(Dollars in Thousands)
Mortgage loans:
Single-family residential $ 817,763 48.67% $ 731,732 47.44% $ 745,170 51.97%
Multi-family residential 177,350 10.56 164,729 10.68 162,432 11.33
Commercial real estate 183,914 10.95 171,186 11.10 139,918 9.76
Construction 120,376 7.16 106,536 6.91 77,187 5.38
Land 12,503 0.74 15,730 1.02 21,077 1.47
----------- ------ --------- ------ --------- ------
Total mortgage loans 1,311,906 78.08 1,189,913 77.15 1,145,784 79.90
----------- ------ --------- ------ --------- ------
Consumer loans:
Second mortgage and home equity 183,874 10.94 176,348 11.43 140,302 9.78
Education 121,306 7.22 112,420 7.29 88,674 6.18
Other 32,841 1.95 34,682 2.25 28,481 1.99
----------- ------ --------- ------ --------- ------
Total consumer loans 338,021 20.12 323,450 20.97 257,457 17.95
----------- ------ --------- ------ --------- ------
Commercial business loans:
Loans 30,239 1.80 29,012 1.88 30,352 2.12
Lease receivables 5 0.00 10 0.00 363 0.03
----------- ------ --------- ------ --------- ------
Total commercial business loans 30,244 1.80 29,022 1.88 30,715 2.14
----------- ------ --------- ------ --------- ------
Gross loans receivable 1,680,171 100.00% 1,542,385 100.00% 1,433,956 100.00%
====== ====== ======
Contras to loans:
Undisbursed loan proceeds (62,756) (54,002) (46,493)
Allowance for loan losses (21,833) (22,750) (22,807)
Unearned loan fees (3,839) (3,373) (2,453)
Discount on loans purchased (625) (748) (1,005)
Unearned interest (29) (89) (118)
----------- ----------- ----------
Total contras to loans (89,082) (80,962) (72,876)
----------- ----------- ----------
Loans receivable, net $ 1,591,089 $ 1,461,423 $1,361,080
=========== ============ ==========
MARCH 31,
-----------------------------------------------------
1995 1994
-----------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-----------------------------------------------------
(Dollars in Thousands)
Mortgage loans:
Single-family residential $ 716,212 55.83% $ 618,647 55.25%
Multi-family residential 141,401 11.02 142,750 12.75
Commercial real estate 123,438 9.62 129,196 11.54
Construction 66,519 5.18 50,691 4.53
Land 13,644 1.06 8,280 0.74
--------- ------ --------- ------
Total mortgage loans 1,061,214 82.72 949,564 84.81
--------- ------ --------- ------
Consumer loans:
Second mortgage and home equity 111,725 8.71 84,922 7.58
Education 69,264 5.40 52,289 4.67
Other 18,997 1.48 13,587 1.21
--------- ------ --------- ------
Total consumer loans 199,986 15.59 150,798 13.46
--------- ------ --------- ------
Commercial business loans:
Loans 20,272 1.58 16,195 1.45
Lease receivables 1,467 0.11 3,154 0.28
--------- ------ --------- ------
Total commercial business loans 21,739 1.69 19,349 1.73
--------- ------ --------- ------
Gross loans receivable 1,282,939 100.00% 1,119,711 100.00%
====== ======
Contras to loans:
Undisbursed loan proceeds (25,980) (27,950)
Allowance for loan losses (22,429) (22,119)
Unearned loan fees (2,000) (1,966)
Discount on loans purchased (1,151) (195)
Unearned interest (272) (536)
---------- ----------
Total contras to loans (51,832) (52,766)
---------- ----------
Loans receivable, net $1,231,107 $1,066,945
========== ==========
5
The following table shows, at March 31, 1998, the scheduled contractual
maturities of the Corporation's consolidated gross loans held for investment,
as well as the dollar amount of such loans which are scheduled to mature after
one year which have fixed or adjustable interest rates.
MULTI-FAMILY
RESIDENTIAL
AND
SINGLE-FAMILY COMMERCIAL CONSTRUCTION COMMERCIAL
RESIDENTIAL REAL ESTATE AND LAND CONSUMER BUSINESS
LOANS LOANS LOANS LOANS LOANS
-----------------------------------------------------------------
(In Thousands)
Amounts due:
In one year or less $ 43,627 $ 53,184 $105,140 $ 46,646 $ 14,357
After one year through
five years 110,586 46,231 14,663 149,402 11,770
After five years 663,550 261,849 13,076 141,973 4,117
-------- -------- -------- -------- --------
$817,763 $361,264 $132,879 $338,021 $ 30,244
======== ======== ======== ======== ========
Interest rate terms on amounts
due after one year:
Fixed $178,663 $ 33,159 $ 11,896 $153,991 $ 4,488
======== ======== ======== ======== ========
Adjustable $595,473 $274,921 $ 15,843 $137,384 $ 11,399
======== ======== ======== ======== ========
SINGLE-FAMILY RESIDENTIAL LOANS. Historically, savings associations, such
as the Bank, have concentrated their lending activities on the origination of
loans secured primarily by first mortgage liens on owner-occupied, existing
single-family residences. At March 31, 1998, $817.8 million or 48.7% of the
Bank's total loans held for investment consisted of single-family residential
loans, substantially all of which are conventional loans, which are neither
insured or guaranteed by a federal or state agency.
The Bank has emphasized single-family residential loans that provide for
periodic adjustments to the interest rate since the early 1980s. The
adjustable-rate loans, currently emphasized by the Bank, have up to 30-year
maturities and terms which permit the Bank to annually increase or decrease the
rate on the loans at its discretion. This is subject to a limit of 1% per
adjustment and an aggregate 5% adjustment over the life of the loan. The Bank
also originates, to a much lesser extent, adjustable-rate loans with terms that
provide for annual adjustment to the interest rate in accordance with changes
in a designated index. These are generally subject to a limit of 2% per
adjustment and an aggregate 5% adjustment over the life of the loan.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding fixed-rate loans in an increasing interest rate
environment. At March 31, 1998, approximately $627.8 million or 76.8% of the
Corporation's permanent single-family residential loans held for investment
consisted of loans with adjustable interest rates.
The Bank continues to originate long-term, fixed-rate mortgage loans,
including conventional, Federal Housing Administration ("FHA"), Federal
Veterans Administration ("VA") and Wisconsin Housing and Economic Development
Authority ("WHEDA") loans, in order to provide a full range of products to its
customers. The Bank generally sells current production of these loans with
terms of 20 years or more to the Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), WHEDA and other
institutional investors, while keeping some of the 15-year term loans in its
portfolio. The Bank retains the right to service substantially all loans that
it sells.
4
6
At March 31, 1998, approximately $190.1 million or 23.2% of the permanent
single-family residential loans in the Corporation's loans held for investment
consisted of loans that provide for fixed rates of interest. Almost 60% of
these loans have original terms of 15 years or less. Although these loans
generally provide for repayments of principal over a fixed period of 10 to 30
years, it is the Bank's experience that because of prepayments and due-on-sale
clauses, such loans generally remain outstanding for a substantially shorter
period of time.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE. During the 1980s,
the Bank emphasized the origination and purchase of loans secured by
multi-family residences and commercial real estate located within and outside
of Wisconsin in order to diversify the type and geographic location of its loan
portfolio. Such loans also were emphasized because they generally have
adjustable rates and shorter terms than single-family residential loans, thus
increasing the sensitivity of the loan portfolio to changes in interest rates,
as well as providing higher fees and rates than single-family residential
loans. At March 31, 1998, the Corporation had $177.4 million of loans secured
by multi-family residential real estate and $183.9 million of loans secured by
commercial real estate. The Bank generally limits the origination of such
loans to its primary market area, except to facilitate the sale or resolution
of certain remaining foreclosed properties outside its market area.
The Bank's multi-family residential loans are primarily secured by
apartment buildings and commercial real estate loans are primarily secured by
office buildings, industrial buildings, warehouses, small retail shopping
centers and various special purpose properties, including motels, restaurants
and nursing homes.
Although terms vary, multi-family residential and commercial real estate
loans generally have maturities of 15 to 30 years, as well as balloon payments,
and terms which provide that the interest rates thereon may be adjusted
annually at the Bank's discretion, subject to an initial fixed-rate for a one
to five year period and an annual limit of 1% to 1.5% per adjustment, with no
limit on the amount of such adjustments over the life of the loan.
CONSTRUCTION AND LAND LOANS. Historically, the Bank has been an active
originator of loans to construct residential and commercial properties
("construction loans"), and to a lesser extent, loans to acquire and develop
real estate for the construction of such properties ("land loans"). At March
31, 1998, construction loans amounted to $120.4 million or 7.2% of the
Corporation's total loans held for investment. Of this amount, $43.6 million
and $14.2 million was represented by loans for the construction of
single-family and multi-family residences, respectively. Land loans amounted
to $12.5 million at March 31, 1998.
The Bank's construction loans generally have terms of six to 12 months,
fixed interest rates and fees which are due at the time of origination and at
maturity if the Bank does not originate the permanent financing on the
constructed property. Loan proceeds are disbursed in increments as
construction progresses and as inspections by the Bank's in-house appraiser
warrant. Land acquisition and development loans generally have the same terms
as construction loans, but may have longer maturities than such loans.
CONSUMER LOANS. The Bank offers consumer loans in order to provide a full
range of financial services to its customers. At March 31, 1998, $338.0
million or 20.1% of the Corporation's consolidated total loans held for
investment consisted of consumer loans. Consumer loans generally have shorter
terms and higher interest rates than mortgage loans but generally involve more
risk than mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. These risks are not as prevalent
in the case of the Bank's consumer loan portfolio, however, because a high
percentage of insured home equity loans are underwritten in a manner such that
they result in a lending risk which is substantially similar to single-family
residential loans and education loans
The largest component of the Corporation's consumer loan portfolio are
second mortgage and home equity loans, which amounted to $183.9 million or
10.9% of loans at March 31, 1998. The Bank has placed additional emphasis on
its home equity loan program in recent years to respond to changes in federal
income tax laws. The primary home equity loan product has an adjustable
interest rate that is linked to the prime interest rate and is secured by a
mortgage, either a primary or a junior lien, on the borrower's residence. A
fixed-rate home equity product is also offered.
5
7
Approximately $121.3 million or 7.2% of the Corporation's loans at March
31, 1998 consisted of education loans. These are generally made for a maximum
of $2,500 per year for undergraduate studies and $5,000 per year for graduate
studies and are either due within six months of graduation or repaid on an
installment basis after graduation. Education loans generally have interest
rates that adjust monthly in accordance with a designated index. Both the
principal amount of an education loan and interest thereon generally are
guaranteed by the Great Lakes Higher Education Corporation, which generally
obtains reinsurance of its obligations from the U.S. Department of Education.
Education loans may be sold to the Student Loan Marketing Association or to
other investors. The Bank sold $1.7 million of these loans during fiscal 1998.
The remainder of the Corporation's consumer loan portfolio consists of
deposit account secured loans and loans which have been made for a variety of
consumer purposes. These include credit extended through credit cards issued
by the Bank pursuant to an agency arrangement under which the Bank generally is
responsible for 45% of the profit or losses from such activities. At March 31,
1998, the Bank's approved credit card lines and the outstanding credit pursuant
to such lines amounted to $23.1 million and $3.1 million, respectively.
COMMERCIAL BUSINESS LOANS AND LEASES. The Bank originates loans for
commercial, corporate and business purposes, including issuing letters of
credit. At March 31, 1998, commercial business loans amounted to
$30.2 million or 1.8% of the Corporation's total loans held for investment.
The Corporation's commercial business loan portfolio is comprised of loans for
a variety of purposes and generally is secured by equipment, machinery and
other corporate assets. Commercial business loans generally have terms of five
years or less and interest rates that float in accordance with a designated
prime lending rate. Substantially all of such loans are secured and backed by
the personal guarantees of the individuals of the business.
FEE INCOME FROM LENDING ACTIVITIES. Loan origination and commitment fees
and certain direct loan origination costs are being deferred and the net
amounts amortized as an adjustment of the related loan's yield.
The Bank also receives other fees and charges relating to existing
mortgage loans, which include prepayment penalties, late charges and fees
collected in connection with a change in borrower or other loan modifications.
Other types of loans also generate fee income for the Bank. These include
annual fees assessed on credit card accounts, transactional fees relating to
credit card usage and late charges on consumer loans.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Bank's loan originations
come from a number of sources. Residential mortgage loan originations are
attributable primarily to depositors, walk-in customers, referrals from real
estate brokers and builders and direct solicitations. Commercial real estate
loan originations are obtained by direct solicitations and referrals. Consumer
loans are originated from walk-in customers, existing depositors and mortgagors
and direct solicitation. Student loans are originated from solicitation of
eligible students and from walk-in customers.
Applications for all types of loans are obtained at the Bank's five
regional lending offices, certain of its branch offices and two loan
origination facilities. Loans may be approved by members of the Loan
Committee, within designated limits. Depending on the type and amount of the
loans, one or more signatures of the members of the Senior Loan Committee also
may be required. At least three signatures of members of the Senior Loan
Committee are required to approve (i) all loans over $250,000 and all loans
secured by properties over eight units and (ii) loans over $750,000 and up to
$1.0 million, provided that the President is one of the approving members.
Loans in excess of $1.0 million may be committed by the Senior Loan Committee,
subject in all cases to the prior approval of the Board of Directors of the
Bank.
The Bank's general policy is to lend up to 80% of the appraised value of
the property securing a single-family residential loan (referred to as the
loan-to-value ratio). The Bank will lend more than 80% of the appraised value
of the property, but generally will require that the borrower obtain private
mortgage insurance in an amount intended to reduce the Bank's exposure to 80%
or less of the appraised value of the underlying property. At March 31, 1998,
the Bank had approximately $11.4 million of loans that had a loan-to-value
ratio of greater than 80% and did not have private mortgage insurance for the
portion of the loan above such amount.
6
8
Property appraisals on the real estate and improvements securing the
Bank's single-family residential loans are made by the Bank's staff or
independent appraisers approved by the Bank's Board of Directors. Appraisals
are performed in accordance with federal regulations and policies.
The Bank's underwriting criteria generally require that multi-family
residential and commercial real estate loans have loan-to-value ratios which
amount to 80% or less and debt coverage ratios of at least 110%. The Bank also
generally obtains personal guarantees on its multi-family residential and
commercial real estate loans from the principals of the borrowers, as well as
appraisals of the security property from independent appraisal firms.
The portfolio of commercial and multi-family residential loans is reviewed
on a continuing basis (annually for most loans of $500,000 or more) to identify
any potential risks that exist in regard to the property management, financial
criteria of the loan, operating performance, competitive marketplace and
collateral valuation. The credit analysis function of the Bank is responsible
for identifying and reporting credit risk quantified through a loan rating
system and making recommendations to mitigate credit risk in the portfolio.
These and other underwriting standards are documented in written policy
statements, which are periodically updated, and approved by the Bank's Board of
Directors.
The Bank generally obtains title insurance policies on most first mortgage
real estate loans it originates. If title insurance is not obtained or is
unavailable, the Bank obtains an abstract of title and title opinion.
Borrowers must obtain hazard insurance prior to closing and, when required by
the United States Department of Housing and Urban Development, flood insurance.
Borrowers may be required to advance funds, with each monthly payment of
principal and interest, to a loan escrow account from which the Bank makes
disbursements for items such as real estate taxes, hazard insurance premiums
and mortgage insurance premiums as they become due.
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for
costs of cleaning up hazardous materials found on secured properties. Certain
states may also impose liens with higher priorities than first mortgages on
properties to recover funds used in such efforts. Although the foregoing
environmental risks are more usually associated with industrial and commercial
loans, environmental risks may be substantial for residential lenders, like the
Bank, since environmental contamination may render the secured property
unsuitable for residential use. In addition, the value of residential
properties may become substantially diminished by contamination of nearby
properties. In accordance with the guidelines of FNMA and FHLMC, appraisals
for single-family homes on which the Bank lends include comments on
environmental influences and conditions. The Bank attempts to control its
exposure to environmental risks with respect to loans secured by larger
properties by monitoring available information on hazardous waste disposal
sites and requiring environmental inspections of such properties prior to
closing the loan. No assurance can be given, however, that the value of
properties securing loans in the Bank's portfolio will not be adversely
affected by the presence of hazardous materials or that future changes in
federal or state laws will not increase the Bank's exposure to liability for
environmental cleanup.
The Bank has been actively involved in the secondary market since the
mid-1980s and generally originates single-family residential loans under terms,
conditions and documentation which permit sale to FHLMC, FNMA and other
investors in the secondary market, such as WHEDA, the Wisconsin Department of
Veterans Affairs and other financial institutions. The Bank sells
substantially all of the fixed-rate, single-family residential loans with terms
over 15 years it originates in order to decrease the amount of such loans in
its loan portfolio, as well as all of the FHA and VA loans originated. The
Bank's sales are usually made through forward sales commitments. The Bank
attempts to limit any interest rate risk created by forward commitments by
limiting the number of days between the commitment and closing, charging fees
for commitments, and limiting the amounts of its uncovered commitments at any
one time. Forward commitments to cover closed loans and loans with rate locks
to customers range from 70% to 90% of committed amounts. The Bank also
periodically has used its loans to securitize mortgage-backed securities.
The Bank generally continues to collect payments on conventional loans
that it sells to others as they become due, to inspect the security property,
to make certain insurance and tax advances on behalf of borrowers and to
otherwise service such loans. The Bank recognizes a servicing fee when the
related loan payments are received.
7
9
At March 31, 1998, the Bank was servicing $1.1 billion of loans for others. The
Bank sells all of the FHA/VA loans originated by it on a servicing-released
basis.
The Bank is not an active purchaser of multi-family and commercial loans
because of sufficient loan demand in its market area. Servicing of loans or
loan participations purchased by the Bank is performed by the seller, with a
portion of the interest being paid by the borrower retained by the seller to
cover servicing costs. At March 31, 1998, approximately $16.6 million of
mortgage loans were being serviced for the Bank by others.
8
10
The following table shows the Corporation's consolidated total loans
originated, purchased, sold and repaid during the periods indicated.
YEAR ENDED MARCH 31,
--------------------------------------------------------
1998 1997 1996
--------------------------------------------------------
(In Thousands)
Gross loans receivable at beginning of year(1) $ 1,547,733 $ 1,447,924 $ 1,285,903
Loans originated for investment:
Single-family residential 161,611 191,666 159,525
Multi-family residential 44,602 24,713 15,792
Commercial real estate 84,690 63,600 38,440
Construction and land 178,026 166,533 116,556
Consumer 165,696 190,584 141,820
Commercial business 14,717 17,715 23,913
----------- ----------- -----------
Total originations 649,342 654,811 496,046
----------- ----------- -----------
Loans purchased for investment:
Single-family residential -- 155 2,480
Multi-family residential -- 120 4,500
Commercial real estate -- 464 939
American Equity purchase -- -- 85,244
----------- ----------- -----------
Total purchases -- 739 93,163
----------- ----------- -----------
Total originations and purchases 649,342 655,550 589,209
Repayments (482,720) (420,698) (338,847)
Transfers of loans to held for sale (28,838) (126,423) (99,345)
----------- ----------- -----------
Net activity in loans held for investment 137,784 108,429 151,017
----------- ----------- -----------
Loans originated for sale(2):
Single-family residential 333,930 96,996 180,055
American Equity purchase -- -- 5,969
Transfers of loans from held for investment 28,838 126,423 99,345
Sales of loans (350,056) (177,101) (177,593)
Loans converted into mortgage-backed
securities -- (54,938) (96,772)
----------- ----------- -----------
Net activity in loans held for sale 12,712 (8,620) 11,004
----------- ----------- -----------
Gross loans receivable at end of period $ 1,698,229 $ 1,547,733 $ 1,447,924
=========== =========== ===========
- --------------------
(1) Includes loans held for sale and loans held for investment.
(2) Refinancings of loans held in the Corporation's consolidated loan portfolio
amounted to $236.7 million, $79.8 million and $99.1 million during the years
ended March 31, 1998, 1997, and 1996, respectively.
DELINQUENCY PROCEDURES. Delinquent and problem loans are a normal part of
any lending business. When a borrower fails to make a required payment by the
15th day after which the payment is due, the loan is considered delinquent and
internal collection procedures are generally instituted. The borrower is
contracted to determine the
9
11
reason for the delinquency and attempts are made to cure the loan. In most
cases, deficiencies are cured promptly. The Bank regularly reviews the loan
status, the condition of the property, and circumstances of the borrower.
Based upon the results of its review, the Bank may negotiate and accept a
repayment program with the borrower, accept a voluntary deed in lieu of
foreclosure or, when deemed necessary, initiate foreclosure proceedings.
A decision as to whether and when to initiate foreclosure proceedings is
based upon such factors as the amount of the outstanding loan in relation to
the original indebtedness, the extent of delinquency and the borrower's ability
and willingness to cooperate in curing the deficiencies. If foreclosed on, the
property is sold at a public sale and the Bank will generally bid an amount
reasonably equivalent to the lower of the fair value of the foreclosed property
or the amount of judgment due the Bank. A judgment of foreclosure for
residential mortgage loans will normally provide for the recovery of all sums
advanced by the mortgagee including, but not limited to, insurance, repairs,
taxes, appraisals, post-judgment interest, attorneys' fees, costs and
disbursements.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as foreclosed property until it is sold. When
property is acquired, it is carried at the lower of carrying or estimated fair
value at the date of acquisition, with charge-offs, if any, charged to the
allowance for loan losses prior to transfer to foreclosed property. Upon
acquisition, all costs incurred in maintaining the property are expensed.
Costs relating to the development and improvement of the property, however, are
capitalized to the extent of fair value. Remaining gain or loss on the
ultimate disposal of the property is included in operations.
LOAN DELINQUENCIES. Loans are placed on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. As a matter of policy, the Bank does not accrue interest on
loans past due more than 90 days.
The interest income that would have been recorded during fiscal 1998 if
the Corporation's non-accrual loans at the end of the period had been current
in accordance with their terms during the period was $464,000. The amount of
interest income which was attributable to these loans and included in interest
income during fiscal 1998 was $91,000.
The following table sets forth information relating to delinquent loans of
the Corporation and their relation to the Corporation's total loans held for
investment at the dates indicated.
March 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
DAYS PAST DUE BALANCE LOANS BALANCE LOANS BALANCE LOANS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
30 to 59 days $ 3,732 0.22% $ 3,144 0.20% $ 5,776 0.40%
60 to 89 days 994 0.06 909 0.06 789 0.06
90 days and over 3,709 0.22 6,795 0.44 1,890 0.13
------- ---- ------- ---- ------- ----
Total $ 8,435 0.50% $10,848 0.70% $ 8,455 0.59%
======= ==== ======= ==== ======= ====
There were no non-accrual loans with a carrying value of $1.0 million or
greater at March 31, 1998. The non-accrual loan that had been reported at
March 31, 1997, with a carrying value of $2.5 million, was repurchased by the
lead lender in fiscal 1998. For additional discussion of the Corporation's
asset quality, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Condition-Non-Performing Assets" in Item
7 included herewith. See also Notes 1 and 5 to the Consolidated Financial
Statements in Item 8 included herewith.
10
12
FORECLOSED PROPERTIES. Set forth below is a brief description of the
Corporation's two foreclosed properties that had a net carrying value of $1.0
million or more at March 31, 1998.
APARTMENT COMPLEX, ELM GROVE, WISCONSIN. At March 31, 1998, the
Corporation's foreclosed properties included a $1.6 million loan that is
secured by an apartment complex in Elm Grove, Wisconsin. The loan had
reached maturity and the borrower was unable to repay the balance. Rather than
restructure the debt, the Bank felt it necessary to seek foreclosure. The
complex was built on what had been an above ground fuel tank storage facility
and as a result, the entire parcel of land was contaminated. The Bank has
applied for and received approval to be substantially reimbursed by the
Petroleum Environmental Cleanup Fund ("PECFA"). The Bank is also currently
pursuing reimbursement from the adjoining landowner believed to be liable for a
portion of the contamination. As a result, the Bank does not anticipate
incurring any cost at this time.
CONDOMINIUM BUILDING AND LAND IN MONONA, WISCONSIN. At March 31, 1998,
the Corporation's foreclosed properties and repossessed assets also includes a
12 unit condominium unit and associated land in Monona, Wisconsin. The
Corporation's net carrying value at March 31, 1998 is $1.5 million. ADPC is in
the process of selling individual units.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
An asset that is classified loss is considered uncollectible and of such little
value, that continuance as an asset of the institution is not warranted.
Another category designated special mention also must be established and
maintained for assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification as substandard, doubtful or
loss but do possess credit deficiencies or potential weaknesses deserving
management's close attention.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount.
Classified assets include non-performing assets plus other loans and
assets, including contingent liabilities, meeting the criteria for
classification. Non-performing assets include loans and foreclosed properties
that are not performing under all material contractual terms of the original
notes.
As of March 31, 1998, the Bank's classified assets consisted of $15.8
million of loans and foreclosed properties classified as substandard, net of
specific reserves, and no loans classified as special mention, doubtful or
loss. At March 31, 1997, substandard assets amounted to $16.5 million and no
loans were classified as special mention, doubtful or loss.
ALLOWANCE FOR LOSSES. A provision for losses on loans and foreclosed
properties is provided when a loss is probable and can be reasonably estimated.
The allowance is established by charges against operations in the period in
which those losses are identified.
The Bank establishes general allowances based on the amount and types of
loans in its loan portfolio and the amount of its classified assets. In
addition the Bank monitors and uses standards for these allowances that depend
on the nature of the classification and loan and location of the security
property.
Additional discussion on the allowance for losses at March 31, 1998 has
been presented as part of the discussion of Allowance for Loan and Foreclosure
Losses in Management's Discussion and Analysis, which is contained in Item 7,
included herewith.
11
13
SECURITIES - GENERAL
Management determines the appropriate classification of securities at the
time of purchase. Securities are classified as held to maturity when the
Corporation has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are carried at amortized cost. Securities are
classified as trading when the Corporation intends to actively buy and sell
securities in order to make a profit. Trading securities are carried at fair
value, with unrealized holding gains and losses included in the income
statement.
Securities not classified as held to maturity or trading are classified as
available for sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. For the year ended March 31, 1998,
stockholders' equity increased by $1.7 million (net of deferred income tax of
$1.1 million). For the year ended March 31, 1997, stockholder's equity decreased
by $5,000 (net of deferred income taxes of $60,000). These changes reflected
respective net unrealized gains and losses on holding securities classified as
available for sale. There were no securities designated as trading during the
three years ending March 31, 1998.
MORTGAGE-RELATED SECURITIES
The Corporation purchases mortgage-related securities to supplement loan
production and to provide collateral for borrowings. The Corporation invests in
mortgage-backed securities which are insured or guaranteed by FHLMC, FNMA, or
the Government National Mortgage Association ("GNMA") and in Collateralized
Mortgage Obligations ("CMO's") and Real Estate Mortgage Investment Conduits
(REMIC's) backed by FHLMC, FNMA and GNMA mortgage-backed securities.
At March 31, 1998, the amortized cost of the Corporation's mortgage-backed
securities held to maturity amounted to $103.7 million and included $59.1
million, $41.6 million and $3.0 million which are insured or guaranteed by FNMA,
FHLMC and GNMA, respectively. The GNMA securities are the only adjustable-rate
securities included in securities held to maturity.
The fair value of the Corporation's mortgage-backed securities available
for sale amounted to $66.4 million at March 31, 1998, of which $10.4 million are
five- and seven-year balloon securities, $53.7 million are 15- and 30-year
securities and $2.3 million are adjustable-rate securities.
Mortgage-backed securities increase the quality of the Corporation's assets
by virtue of the insurance or guarantees of federal agencies that back them,
require less capital under risk-based regulatory capital requirements than
non-insured or guaranteed mortgage loans, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Corporation. At March 31, 1998, $28.3 million of the Corporation's
mortgage-backed securities available for sale and $15.8 million mortgage-backed
securities held to maturity were pledged to secure various obligations of the
Bank.
12
14
The following table sets forth the activity in the Corporation's
mortgage-backed securities during the periods indicated.
YEAR ENDED MARCH 31,
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
(In Thousands)
Mortgage-backed securities at
beginning of year(1) $ 207,299 $ 186,005 $ 123,358
Held to maturity:
Purchases - 14,509 3,025
Transfers to available for sale - - (90,376)
Available for sale:
Purchases 4,741 2,057 5,531
Acquired in exchange of loans - 54,938 96,772
Transfers from held to maturity - - 90,376
Sales (1,280) (5,617) (9,107)
Repayments and other (40,623) (44,593) (33,574)
--------- --------- -----------
Mortgage-backed securities at
end of year(1) $ 170,137 $ 207,299 $ 186,005
========= ========= ===========
- -----------------------
(1) Includes mortgage-backed securities held to maturity and available for
sale and does not include CMO's and REMICS, discussed below.
Management believes that certain CMO's and REMIC's represent an attractive
alternative relative to other investments due to the wide variety of maturity
and repayment options available through such investments and due to the limited
credit risk associated with such investments. CMO's and REMIC's generally have a
maturity within five years of purchase. At March 31, 1998, the amortized cost of
the Corporation's CMO's and REMICS held to maturity amounted to $23.5 million.
The fair value of CMO's and REMICS available for sale amounted to $1.1 million
at the same date.
13
15
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
1998, classified by term to maturity. The balance is at amortized cost for
held-to-maturity securities and at fair value for available-for-sale securities.
ONE TO FIVE YEARS SIX TO TEN YEARS OVER TEN YEARS
-----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD TOTAL
-----------------------------------------------------------------------------
(Dollars in Thousands)
Available For Sale:
CMO's and Remics $ 1,111 6.33% $ - 0.00% $ - 0.00% $ 1,111
Mortgage-backed securities 13,499 6.39 18,140 6.93 34,776 6.55 66,415
------- ---- ------- ---- ------- ---- ---------
14,610 6.39 18,140 6.93 34,776 7.55 67,526
------- ---- ------- ---- ------- ---- ---------
Held To Maturity:
CMO's and Remics 18,032 6.44 2,249 6.62 3,234 6.47 23,515
Mortgage-backed securities 36,441 6.21 16,493 7.58 50,790 6.54 103,724
------- ---- ------- ---- ------- ---- ---------
54,473 6.28 18,742 7.46 54,024 6.53 127,239
------- ---- ------- ---- ------- ---- ---------
Mortgage-related securities $ 69,083 6.31% $36,882 7.20% $88,800 6.54% $ 194,765
======== ==== ======= ==== ======= ==== =========
Due to repayments of the underlying loans, the actual maturities of
mortgage-related securities are expected to be substantially less than the
scheduled maturities.
For additional information regarding the Corporation's mortgage-related
securities, see Note 3 to the Corporation's Consolidated Financial Statements,
including note 3 thereto, in Item 8 included herewith.
INVESTMENT SECURITIES
In addition to lending activities and investments in mortgage-related
securities, the Corporation conducts other investment activities on an ongoing
basis in order to diversify assets, limit interest rate risk and credit risk and
meet regulatory liquidity requirements. Investment decisions are made by
authorized officers in accordance with policies established by the respective
boards of directors.
The Corporation's policy does not permit investment in non-investment grade
bonds and permits investment in various types of liquid assets permissible for
the Bank under OTS regulations, which include U.S. Government obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to limitations on investment grade
securities, the Corporation also invests in corporate debt securities from time
to time.
14
16
The table below sets forth information regarding the amortized cost and
fair values of the Corporation's investment securities at the dates indicated.
MARCH 31,
------------------------------------------------------------------------------
1997
------------------------------------------------------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
------------------------------------------------------------------------------
(In Thousands)
Available For Sale:
U.S. Government and federal
agency obligations $ 21,821 $ 21,859 $ 26,877 $ 26,517 $ 20,498 $ 20,333
Mutual fund 14,099 14,104 6,068 6,066 9,059 9,058
Corporate stock and other 2,747 3,592 2,685 2,986 791 850
-------- -------- -------- -------- -------- --------
$ 38,667 $ 39,555 $ 35,630 $ 35,569 $ 30,348 $ 30,241
Held To Maturity:
U.S. Government and federal
agency obligations $ 17,587 $ 17,582 $ 7,947 $ 7,890 $ 2,500 $ 2,503
Certificates of deposit - - - 96 96
-------- -------- -------- -------- -------- --------
17,587 17,582 7,947 7,890 2,596 2,599
-------- -------- -------- -------- -------- --------
Total investment Securities $ 56,254 $ 57,137 $ 43,577 $ 43,459 $ 32,944 $ 32,840
======== ======== ======== ======== ======== ========
The following table shows the amortized cost, fair value and yield of the
Corporation's investment securities by contractual maturity at March 31, 1998.
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------------------------------
(In Thousands)
Due in one year or less $ 22,022 $ 22,020 $ - $ -
Due after one year through five years 13,398 13,447 11,258 11,275
Due after five years 500 495 6,329 6,307
Corporate stuck 2,747 3,593 - -
----------- ----------- ---------- ----------
$ 38,667 $ 39,555 $ 17,587 $ 17,582
=========== =========== ========== ==========
For additional information regarding the Corporation's investment
securities, see Note 2 to the Corporation's Consolidated Financial Statements,
included in Item 8.
The Bank is required by regulations to maintain liquid assets at minimum
levels which vary from time to time and which amounted to 4.0% at March 31,
1998. The Bank's liquidity ratio was 14.74% as of March 31, 1998.
SOURCES OF FUNDS
GENERAL. Deposits are a major source of the Bank's funds for lending and
other investment activities. In addition to deposits, the Bank derives funds
from loan and mortgage-related securities principal repayments and prepayments,
maturities of investment securities, sales of loans and securities, interest
payments on loans and securities, advances from the FHLB and, from time to time,
repurchase agreements and other borrowings. Loan principal and interest payments
are a relatively stable source of funds, while deposit inflows and outflows and
loan
15
17
prepayments are significantly influenced by general interest rates, economic
conditions and competition. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources.
They also may be used on a longer term basis for general business purposes,
including providing financing for lending and other investment activities and
asset/liability management strategies.
DEPOSITS. The Bank's deposit products include passbook savings accounts,
demand accounts, NOW accounts, money market deposit accounts and certificates of
deposit ranging in terms of 42 days to seven years. Included among these deposit
products are Individual Retirement Account certificates and Keogh retirement
certificates, as well as negotiable-rate certificates of deposit with balances
of $100,000 or more ("jumbo certificates").
The Bank's deposits are obtained primarily from residents of Wisconsin. The
Bank has entered into agreements with certain brokers that will provide funds
for a specified fee. At March 31, 1998, the Bank had $55.4 million in brokered
deposits.
The Bank attracts deposits through a network of convenient office locations
by utilizing a detailed customer sales and service plan and by offering a wide
variety of accounts and services, competitive interest rates and convenient
customer hours. Deposit terms offered by the Bank vary according to the minimum
balance required, the time period the funds must remain on deposit and the
interest rate, among other factors. In determining the characteristics of its
deposit accounts, consideration is given to the profitability of the Bank,
matching terms of the deposits with loan products, the attractiveness to
customers and the rates offered by the Bank's competitors.
The following table sets forth the activity in the Corporation's deposits
during the periods indicated.
YEAR ENDED MARCH 31,
------------------------------------------------------
1998 1997 1996
------------------------------------------------------
(In Thousands)
Beginning balance $ 1,304,698 $ 1,234,878 $ 1,092,120
Not increase (decrease) before interest credited 22,218 17,728 29,041
Interest credited 56,231 52,092 48,914
Purchase of American Equity - - 64,803
----------- ----------- ------------
Net increase in deposits 78,449 69,820 142,758
----------- ----------- ------------
Ending balance $ 1,383,147 $ 1,304,698 $ 1,234,878
=========== =========== ============
16
18
The following table sets forth the amounts and maturities of the
Corporation's certificates of deposit at March 31, 1998.
OVER SIX OVER OVER TWO
MONTHS ONE YEAR YEARS OVER
SIX MONTHS THROUGH THROUGH THROUGH THREE
INTEREST RATE AND LESS ONE YEAR TWO YEARS THREE YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------
(In Thousands)
3.00% to 4.99% 20,158 $ 198 $ 97 $ - $ - $ 20,453
5.00% to 6.99% 576,624 152,238 110,521 44,725 18,656 902,764
7.00% to 8.99% 248 12 174 252 2 688
--------- --------- -------- -------- -------- --------
$ 597,030 $ 152,448 $110,792 $ 44,977 $ 18,618 $923,905
========= ========= ======== ======== ======== ========
At March 31, 1998, the Corporation had $124.4 million of jumbo
certificates, of which $39.2 million were scheduled to mature within three
months, $33.6 million in over three months through six months, $41.1 million in
over six months through 12 months and $10.5 million in over 12 months.
BORROWINGS. From time to time the Bank obtains advances from the FHLB,
which generally are secured by capital stock of the FHLB that is required to be
held by the Bank and by certain of the Bank's mortgage loans. See "Regulation."
Such advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The FHLB may prescribe
the acceptable uses for these advances, as well as limitations on the size of
the advances and repayment provisions.
From time to time the Bank enters into repurchase agreements with
nationally recognized primary securities dealers. Repurchase agreements are
accounted for as borrowings by the Bank and are secured by mortgage-backed
securities. The Bank has utilized this source of funds during the year ended
March 31, 1998 and may continue to do so in the future.
The Corporation has a short-term line of credit to fund IDI limited
partnership interest. The interest is based on LIBOR and is payable monthly and
each draw has a specified maturity. The final maturity of the line of credit is
July 31, 1998. ADPC II has a mortgage on the multi-family property it owns.
Principal and interest payments are due monthly, with the final payment due in
October 2005. See Note 8 to the Corporation's Consolidated Financial Statements
for more information on borrowings.
The following table sets forth the outstanding balance and weighted average
interest rate for the Corporation's borrowings (short-term and long-term) at the
dates indicated.
MARCH 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------------------------------------------------------------------------
(Dollars In Thousands)
FHLB advances $ 398,795 5.73% $ 374,165 5.74% $ 316,869 5.69%
Repurchase agreements 42,935 5.60 39,335 5.43 47,582 5.32
Other loans payable 12,830 8.78 18,039 8.19 7,031 9.94
17
19
The following table sets forth information relating to the Corporation's
short-term (maturities of one year or less) borrowings at the dates and for the
periods indicated.
MARCH 31,
--------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------
(In Thousands)
Maximum month-end balance:
FHLB advances $ 357,320 $ 281,500 $ 177,500
Repurchase agreements 45,214 67,316 72,850
Other loans payable 14,972 18,039 5,998
Average balance:
FHLB advances 318,638 242,159 161,939
Repurchase agreements 22,923 63,189 35,352
Other loans payable 12,067 7,524 917
SUBSIDIARIES
INVESTMENT DIRECTIONS, INC. IDI is a wholly-owned non-banking subsidiary of
the Corporation formed in February 1996, which has invested in various limited
partnerships. The Corporation's investment in IDI at March 31, 1998 amounted to
$5.9 million. For the year ended March 31, 1998, IDI had a net loss of $177,000.
NEVADA INVESTMENT DIRECTIONS, INC. NIDI is a wholly owned non-banking
subsidiary of IDI formed in March 1997, which has invested in various limited
partnerships. NIDI was organized in the State of Nevada. IDI's investment in
NIDI at March 31, 1998 amounted to $4.3 million. For the year ended March 31,
1998, NIDI had a net profit of $330,000.
ANCHOR INSURANCE SERVICES, INC. AIS is a wholly-owned subsidiary of the
Bank which offers a full line of insurance products, securities and annuities to
its customers and members of the general public. For the year ended March 31,
1998, AIS had a net profit of $61,000. The Bank's investment in AIS amounted to
$141,000 at March 31, 1998.
ADPC CORPORATION. ADPC is a wholly-owned subsidiary of the Bank which holds
and develops certain of the Bank's foreclosed properties. The Bank's investment
in ADPC at March 31, 1998 amounted to $1.8 million. ADPC had a net loss of
$41,000 for the year ended March 31, 1998.
ADPC II, LLC. ADPC II is a subsidiary of the Bank, which is engaged in the
improvement and management of a multi-family property. This former foreclosed
property was acquired from ADPC as a result of the reorganization plan from the
bankruptcy proceedings. ADPC II obtained a $2.0 million loan from the Bank for
renovations, all of which has now been sold to private investors in the
secondary market. The Bank's investment in ADPC II at March 31, 1998 amounted to
$1.4 million. ADPC II had a net loss of $29,000 for the year ended March 31,
1998.
ANCHOR INVESTMENT CORPORATION. AIC is an operating subsidiary
of the Bank, that is located in the State of Nevada. AIC holds a portion of the
Bank's investment portfolio (primarily mortgage-backed securities). As an
operating subsidiary, AIC's results of operations are combined with the Bank's
for financial and regulatory purposes. The Bank's investment in AIC amounted to
$184.0 million at March 31, 1998. AIC had net income of $7.7 million for the
year ended March 31, 1998. The Bank had outstanding notes to AIC of $30.0
million at March 31, 1998, with a weighted average rate of 8.50% and maturities
during the next six months.
18
20
EMPLOYEES
The Bank had 509 full-time employees and 154 part-time employees at March
31, 1998. The Bank promotes equal employment opportunity and considers its
relationship with its employees to be good. The employees are not represented by
a collective bargaining unit.
19
21
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Corporation and the Bank. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
THE CORPORATION
The Corporation is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Corporation is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries which permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. In addition, the Corporation is subject to
the examination and supervision by the Commissioner. The Commissioner is
authorized to prohibit by order the activities of a savings and loan holding
company that, among other things, the Commissioner feels endanger the safety of
the savings and loan association or are contrary to the public interest. The
Commissioner is empowered to direct the operations of the savings and loan
association and its holding company until the order is complied with and may
prohibit dividends from the savings and loan association to its holding company
during such period.
As a unitary savings and loan holding company, the Corporation generally is
not subject to activity restrictions as long as the Bank is in compliance with
the Qualified Thrift Lender ("QTL") Test. See "Qualified Thrift Lender
Requirement."
The Corporation must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Interstate acquisitions generally are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
THE BANK
The Bank is a state chartered savings institution, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad state and federal
regulation and oversight by the OTS and the FDIC extending to all aspects of its
operations. The Bank is a member of the FHLB of Chicago and is subject to
certain limited regulation by the Federal Reserve Board. The Bank is a member of
the Savings Association Insurance Fund ("SAIF") and the deposits of the Bank are
insured by the FDIC. As a Wisconsin-chartered institution, the Bank is also
subject to regulation, examination and supervision by the Commissioner.
FEDERAL AND STATE REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of all insured savings associations. In addition,
the Bank is subject to regulation and supervision by the Commissioner. As part
of this authority, the Bank is required to file periodic reports with the OTS
and the Commissioner and is subject to periodic examinations by the OTS, the
Commissioner and the FDIC. Examinations by the Commissioner are usually
conducted jointly with the OTS. When these examinations are conducted by the
OTS, the Commissioner, or the FDIC, the examiners may require the Bank to
provide for higher general or specific loan loss allowances. The last regular
joint examination of the Bank by the OTS and the Commissioner was as of June 26,
1997. The FDIC was included in a joint examination as of November 30, 1992.
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS. A schedule of fees has
also been established for the various types of applications and filings made by
savings associations with the OTS. The general assessment, to be paid on a
semi-annual basis, is computed upon the savings association's total assets,
including consolidated subsidiaries, as reported in the association's latest
quarterly thrift financial report. Savings associations that (unlike the Bank)
are classified as "troubled" (i.e., having
20
22
a supervisory rating of "4" or "5" or subject to a conservatorship) are
required to pay a 50% premium over the standard assessment. The Bank's
semi-annual OTS assessment for the six months ending June 30, 1998 was
$162,000.
Wisconsin-chartered institutions are also required to pay an annual state
assessment. Under Wisconsin law, the fee cannot exceed 12 cents per $1,000 of
assets or fraction thereof, as of the close of the preceding calendar year. In
addition to an annual fee, each Wisconsin-chartered institution is subject to
examination fees. The Bank's assessment for the year ending June 30, 1998 was
$65,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the
Corporation, and their affiliated parties such as directors, officers,
employees, agents and certain other persons providing services to the Bank or
the Corporation. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required. The Commissioner has similar enforcement authority over the
Bank and the Corporation.
During 1996, the OTS continued its comprehensive review of its regulations
to eliminate duplicative, unduly burdensome and unnecessary regulations
concerning lending and investments, corporate governance, subsidiaries and
equity investments, conflicts of interest and usurpation of corporate
opportunity. The OTS's revised lending and investments regulation generally
imposes general safety and soundness standards, and also provides that
commercial loans made by a service corporation of a savings association will be
exempted from an institutions's overall 10% limit on commercial loans. Such
regulations now allow an institution to use its own cost-of-funds index in
structuring adjustable rate mortgages, and eliminate percentage of assets
limitations on credit card lending.
The OTS also converted its policy statement on conflicts of interest to a
regulation that is intended to be based upon common law principles of "duty of
loyalty" and "duty of care." The new conflicts regulation provides that
directors, officers, employees, persons having the power to control the
management or policies of savings associations, and other persons who owe
fiduciary duties to savings institutions will be prohibited from advancing their
own personal or business interests, or those of others, at the expense of the
institutions they serve. The "appearance of a conflict of interest" standard was
removed from the scope of the revised rule. The OTS also clarified that "persons
having the power to control the management or policies of savings associations"
includes holding companies such as the Corporation. The OTS corporate
opportunity regulations and policy statements also were eliminated and replaced
with a standard similar to common law standards governing usurpation of
corporate opportunity. Significantly under the revised regulation, transfers of
a line of business within a holding company structure will not be deemed to be a
usurpation of corporate opportunity if an institution receives fair market
consideration for a line of business transferred to its holding company or its
affiliate. In such transactions, the OTS will generally defer to decisions made
by a holding company, subject to compliance with Section 23A or 23B of the
Federal Reserve Act and general safety and soundness principles.
In addition, the investment and lending authority of the Bank is prescribed
by federal and state laws and regulations, and the Bank is prohibited from
engaging in any activities not permitted by such laws and regulations. The Bank
is in compliance with each of these restrictions.
The Bank's permissible loans-to-one-borrower lending limit under federal
law is to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
March 31, 1998, the Bank had no loans to one borrower that exceeded the 15% or
$17.1 million limitation. A broader limitation (the lesser of $30.0 million or
30% of unimpaired capital and surplus) is provided, under certain circumstances
and subject to OTS approval, for loans to develop domestic residential housing
units. In addition, the Bank may provide purchase money financing for the sale
of any asset without regard to the loans-to-one-borrower limitation so long as
no new
21
23
funds are advanced and the Bank is not placed in a more detrimental position
than if it had held the asset. Under Wisconsin law, the aggregate amount of
loans that an association may make to any one borrower may not exceed
5% of the aggregate of an association's mortgage, consumer and commercial
assets, except as otherwise authorized by the Commissioner. The Bank is in
compliance with these loans-to-one-borrower limitations.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of
the SAIF, which along with the Bank Insurance Fund ("BIF"), is one of the two
insurance funds administered by the FDIC. Savings deposits are insured up to
$100,000 per insured member (as defined by law and regulation) by the FDIC and
such insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged, or is engaging in, unsafe or unsound practices, or is
in an unsafe or unsound condition.
The Bank is required to pay assessments to the FDIC based on a percent of
its insured deposits for the insurance of its deposits by the SAIF. Under
Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated deposits or at a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances raising a significant risk of substantial future losses to
the SAIF.
Under the risk-based deposit insurance system adopted by the FDIC, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups - well capitalized, adequately capitalized, or
undercapitalized - using the same percentage criteria used under the prompt
corrective action regulations. Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Bank incurred an after-tax expense of $4.6 million during
the quarter ended September 30, 1996.
The FDIC adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings has been reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF and SAIF members will be
assessed at the same rate for FICO payments.
The 1996 legislation also contained several provisions that could impact
operations of the Bank, including augmenting the Bank's commercial lending
authority by 10% of assets, provided that any loans in excess of 10% are used
for small business loans. Furthermore, the qualified thrift lender test that the
Bank must comply with was liberalized to provide that small business, credit
card and student loans can be included without any limit, and that the Bank can
qualify as a qualified thrift lender by meeting either the test set forth in the
Home Owners' Loan Act
22
24
or under the definition of a domestic building and loan association as defined
under the Internal Revenue Code of 1986, as amended (The "IRC").
FDIC regulations govern the acceptance of brokered deposits by insured
depository institutions. The capital position of an institution determines
whether and with what limitations an institution may accept brokered deposits. A
"well capitalized" institution (one that significantly exceeds specified capital
ratios) may accept brokered deposits without restriction. "Undercapitalized"
institutions (those that fail to meet minimum regulatory capital requirements)
may not accept brokered deposits and "adequately capitalized" institutions
(those that are not "well capitalized" or "undercapitalized") may only accept
such deposits with the consent of the FDIC. The Bank meets the definition of a
"well capitalized" institution and therefore may accept brokered deposits
without restriction. At March 31, 1998, the Bank had $55.4 million in brokered
deposits.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as the Bank, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement, a core capital requirement and a risk-based capital requirement
applicable to such savings associations. FIRREA mandated that these capital
requirements be generally as stringent as the comparable capital requirements
for national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock and related surplus and minority
interest in the equity accounts of fully consolidated subsidiaries. In addition,
all intangible assets, other than a limited amount of purchased mortgage
servicing rights (in no event exceeding the amount of tangible capital), must be
deducted from tangible capital.
The capital standards require core capital equal to at least 3% of adjusted
total assets (as defined by regulation). Core capital generally consists of
tangible capital plus up to 25% of certain other intangibles that meet certain
separate salability and market valuation tests. The Bank had a ratio of core
capital to total assets of 5.64% at March 31, 1998.
The OTS risk-based capital requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital, for
purposes of the risk-based capital requirement, equals the sum of core capital
plus supplementary capital (which, as defined, includes the sum of, among other
items, certain permanent and maturing capital instruments that do not qualify as
core capital and general loan and lease loss allowances up to 1.25% of
risk-weighted assets) less certain deductions. The amount of supplementary
capital that may be used to satisfy the risk-based requirement is limited to the
extent of core capital, and OTS regulations require the maintenance of a minimum
ratio of core capital to total risk-weighted assets of 4.0%. At March 31, 1998,
the Bank met all capital requirements on a fully phased-in basis. (See Note 9 to
the Corporation's Consolidated Financial Statements.) In determining the amount
of risk-weighted assets, all assets, including certain off-balance sheet items,
are multiplied by a risk-weight based on the risks inherent in the type of
assets as determined by the OTS.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets, reduced by any valuation allowances, in
excess of deferred tax liabilities.) Application of the limit depends on the
possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the following
generally are not limited: taxes paid in prior carryback years and future
reversals of existing taxable temporary differences. To the extent that the
realization of deferred tax assets depend on an institution's future taxable
income (exclusive of reversing temporary differences and carryforwards), or its
tax-planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year of the quarter-end report date or 10% of core capital. The foregoing
considerations did not affect the calculation of the Bank's regulatory capital
at March 31, 1998.
In August 1993, the OTS adopted a final rule incorporating an interest rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk is
23
25
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution is required to maintain additional capital in order
to comply with the risk-based capital requirement. An institution with a
greater than normal interest rate risk is defined as an institution that would
suffer a loss of net portfolio value exceeding 2.0% of the estimated market
value of its assets in the event of a 200 basis point increase or decrease
(with certain minor exceptions) in interest rates. The interest rate risk
component is calculated, on a quarterly basis, as one-half of the difference
between an institution's measured interest rate risk and the market value of
its assets multiplied by 2.0%. Although the final rule was originally scheduled
to be effective as of January 1994, the OTS has indicated that it will delay
invoking its interest rate risk rule requiring institutions with above normal
interest rate risk exposure to adjust their regulatory capital requirement
until appeal procedures are implemented and evaluated. The OTS has not yet
established an effective date for the capital deduction. Management does not
believe that the OTS' adoption of an interest rate risk component to the
risk-based capital requirement will have a material effect on the Bank.
Under current OTS policy, savings associations must value securities
available for sale at amortized cost for regulatory purposes. This means that in
computing regulatory capital, savings associations add back any unrealized
losses and deduct any unrealized gains, net of income taxes, on securities
reported as a separate component to stockholders' equity under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
Wisconsin-chartered associations are required to maintain a net worth ratio
of at least 6.0%. Under this provision, an association's "net worth ratio" is
defined as a ratio, expressed as a percentage of assets, calculated by
subtracting liabilities from assets, adding to the resulting difference
unallocated general loan loss allowances, and dividing the sum by the
association's assets. The rule authorizes the Commissioner to require an
association to maintain a higher level of net worth if the Commissioner
determines that the nature of the association's operations entails a risk
requiring greater net worth to ensure the association's stability. A failure to
comply with such requirements authorizes the Commissioner to direct the
association to adhere to a plan, which can include various operating
restrictions, in order to restore the association's net worth to required
levels. At March 31, 1998, the Bank was in compliance with this net worth
requirement with a ratio of 6.77%.
LIMITATION ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory (or total)
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other transactions charged to
the capital account. Under the rule, a savings institution is classified as a
tier 1 institution, a tier 2 institution or a tier 3 institution depending on
its level of regulatory capital both before and after giving effect to a
proposed capital distribution. A tier 1 institution (i.e., one that both before
and after a proposed capital distribution has net capital equal to or in excess
of its fully phased-in regulatory capital requirement) may make capital
distributions during any calendar year equal to 100% of its net income for the
year-to-date period plus 50% of the amount by which the association's total
capital exceeds its fully phased-in capital requirement (the "capital surplus"),
as measured at the beginning of the calendar year. The Bank meets the
requirements for a tier 1 association.
A tier 2 institution (i.e., one that both before and after a proposed
capital distribution has net capital equal to its then-applicable minimum
capital requirement) may make distributions not exceeding 75% of net income over
the most recent four-quarter period.
A tier 3 institution (i.e., one that either before or after a proposed
capital distribution fails to meet its then-applicable minimum capital
requirement) may not make any capital distributions without the prior written
approval of the OTS or the OTS may prohibit a capital distribution.
24
26
Tier 2 associations proposing to make a capital distribution within the
safe harbor provisions and tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, the "tiered"
approach described above would be replaced and institutions would be permitted
to make capital distributions that would not result in their capital being
reduced below the level required to remain "adequately capitalized," as defined
in the OTS regulations. Under the proposal, savings associations that are held
by a savings and loan holding company would continue to be required to provide
advance notice of the capital distribution to the OTS. The Bank does not believe
that the proposal will adversely affect its ability to make capital
distributions if it is adopted substantially as proposed.
Unless prior approval of the Commissioner is obtained, the Bank may not pay
a dividend or otherwise distribute any profits if it fails to maintain its
required net worth ratio either prior to, or as a result of, such distribution.
QUALIFIED THRIFT LENDER REQUIREMENT. All savings associations, including
the Bank, are required to meet a QTL test to avoid certain restrictions on their
operations. Currently, a savings institution will be a QTL if the savings
institution's qualified thrift investments continue to equal or exceed 65% of
the institution's portfolio assets on a monthly average basis in nine out of
every 12 months. Subject to certain exceptions, qualified thrift investments
generally consist of housing related loans and investments and certain groups of
assets, such as consumer loans, to a limited extent. The term "portfolio assets"
means the savings institution's total assets minus goodwill and other intangible
assets, the value of property used by the savings institution to conduct its
business and liquid assets held by the savings institution in an amount up to
20% of its total assets. As of March 31, 1998, the Bank was in compliance with
the QTL test.
OTS regulations provide that any savings institution that fails to meet the
definition of a QTL must either convert to a bank charter, other than a savings
bank charter, or limit its future investments and activities (including
branching and payments of dividends) to those permitted for both savings
institutions and national banks. Additionally, any such savings institution that
does not convert to a bank charter will be ineligible to receive further FHLB
advances and, beginning three years after the loss of QTL status, will be
required to repay all outstanding FHLB advances and dispose of or discontinue
any preexisting investment or activities not permitted for both savings
institutions and national banks. Further, within one year of the loss of QTL
status, the holding company of a savings institution that does not convert to a
bank charter must register as a bank holding company and will be subject to all
statutes applicable to bank holding companies.
LIQUIDITY. Under applicable federal regulations, savings institutions are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers' acceptances, certain corporate debt
securities and highly rated commercial paper, securities of certain mutual funds
and specified United States Government, state or federal agency obligations)
equal to a certain percentage of the sum of its average daily balance of net
withdrawable deposits plus short-term borrowings. This liquidity requirement may
be changed from time to time by the Director of the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the deposit flows of
member institutions, and currently is 4%. Effective November 24, 1997, the OTS
adopted a new liquidity rule. The rule lowers liquidity requirements for savings
associations from 5 to 4 percent of the association's liquidity base. The base
has been reduced by modifying the definition of net withdrawable accounts to
exclude, at the association's option, accounts with maturities in excess of one
year. The new rule requires the calculation once each quarter rather than
monthly. And removes the requirement that certain obligations must mature in
five years or less to qualify as a liquid asset. The rule also added certain
short-term mortgage-related securities and short-term first lien residential
mortgage loans to the list of assets includable as regulatory liquidity.
Historically, the Bank has operated in compliance with applicable liquidity
requirements.
Savings institutions are also required to maintain an average daily balance
of short-term liquid assets at a specified percentage (currently 1.0%) of the
total of the average daily balance of its net withdrawable deposits and
short-term borrowings. At March 31, 1998, the Bank was in compliance with these
liquidity requirements.
25
27
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
association's capital. Affiliates of the Bank include the Corporation and any
company that is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates; however, the OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a
case by case basis.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Chicago,
which is one of 12 regional FHLBs that administers the home financing credit
function of savings associations. The FHLBs provide a central credit facility
for member savings institutions. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to regulation and oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to own shares of capital stock in the
FHLB of Chicago. At March 31, 1998, the Bank owned $22 million in FHLB stock,
which is in compliance with this requirement. The Bank has received substantial
dividends on its FHLB stock. The dividend for fiscal 1998 amounted to $1.4
million as compared to $1.3 million for fiscal 1997.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to low- and moderately priced housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a charge to the Corporation's earnings.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At March 31, 1998, the Bank
was in compliance with these requirements. These reserves may be used to satisfy
liquidity requirements imposed by the Director of the OTS. Because required
reserves must be maintained in the form of cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the amount of the institution's interest-earning assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve Board regulations, however, require
savings institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
TAXATION
FEDERAL
The Corporation files a consolidated federal income tax return on behalf of
itself, the Bank and its subsidiaries on a fiscal tax year basis.
For taxable years beginning prior to January 1, 1996, a savings institution
such as the Bank that met certain definitional tests relating to the composition
of its assets and the sources of its income (a "qualifiying savings
institution") was permitted to establish reserves for bad debts and to claim
annual tax deductions for additions to such reserves. A qualifying savings
institution was permitted to make annual additions to such reserves based on the
institution's loss experience. Alternatively, a qualifying savings institution
could elect, on an annual basis, to
26
28
use the "percentage of taxable income" method to compute its addition to its
bad debt reserve on qualifying real property loans (generally, loans
secured by an interest in improved real estate). The percentage of taxable
income method permitted the institution to deduct a specified percentage of its
taxable income before such deduction, regardless of the institution's actual
bad debt experience, subject to certain limitations. From 1988 to 1995, the
Bank has claimed bad debt deductions under the percentage of taxable income
method because that method produced a greater deduction than did the experience
method.
On August 20, 1996, President Clinton signed the Small Business Job
Protection Act (the "Act") into law. The legislation (i) repealed the reserve
method of accounting for bad debts for savings institutions effective for
taxable years beginning after 1995; (ii) provides for recapture of a portion of
the reserves existing at the close of the last taxable year beginning before
January 1, 1996, exempting pre-1988 bad debt deductions from recapture; and
(iii) suspended for two years post-1987 in bad debt deductions from recapture
provided that a savings institution meets a new home mortgage lending test. The
legislation exempted from recapture $30.0 million in pre-1988 bad debt
deductions taken by the Bank and will defer recapture of an additional $3.1
million subject to the Bank's compliance with the new home mortgage lending
test. See Note 11 to the Consolidated Financial Statements for a discussion of
the effect of this legislation on the Bank. For its tax years beginning on or
after January 1, 1996, the Bank will be required to account for its bad debts
under the specific charge-off method. Under this method, deductions may be
claimed only as and to the extent that loans become wholly or partially
worthless.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income with certain adjustments and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax, and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
Earnings appropriated to a savings institution's bad debt reserves and
deducted for federal income tax purposes may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1998, the Bank's bad debt reserves for tax purposes
totaled approximately $33.1 million.
The consolidated federal income tax returns of the Bank and its
subsidiaries through March 31, 1994 are closed to examination by the Internal
Revenue Service due to the expiration of the statute of limitations.
The State of Wisconsin imposes a corporate franchise tax measured by the
separate Wisconsin taxable income of each of the members. The current corporate
tax rate imposed by Wisconsin is 7.9%. Wisconsin taxable income is substantially
similar to federal taxable income except that no deduction is allowed for state
income taxes paid. The current bad debt deduction for Wisconsin income tax
purposes is the same as the deduction permitted for federal income tax purposes.
Wisconsin does not allow the carryback of a net operating loss to prior taxable
years. Thus, any net operating loss for state income tax purposes must be
carried forward to offset income in future years. The Wisconsin corporate
franchise tax is deductible for purposes of computing federal taxable income.
The separate Wisconsin state income tax returns of the members of the Bank's
group through March 31, 1993 are closed to examination by the Wisconsin
Department of Revenue due to the expiration of the statute of limitations.
The Corporation also has a non-banking subsidiary of IDI (NIDI) and the
Bank has an operating subsidiary (AIC) located in Nevada. For state tax
purposes, the income of NIDI and AIC is only subject to federal tax, since the
state of Nevada currently does not impose a corporate income or franchise tax.
27
29
ITEM 2. PROPERTIES
At March 31, 1998, The Bank conducted its business from its headquarters
and main office at 25 West Main Street, Madison, Wisconsin and 34 other
deposit-taking offices located primarily in southcentral and southwest
Wisconsin. The Bank owns 23 of its deposit-taking offices, leases the land on
which four such offices are located, and leases the remaining 8 deposit-taking
offices. In addition, the Bank leases offices for two loan origination
facilities. The leases expire between 1998 and 2005. The aggregate net book
value at March 31, 1998 of the properties owned or leased, including
headquarters, properties and leasehold improvements, was $10.8 million. See Note
6 to the Corporation's Consolidated Financial Statements, filed as Item 8
hereto, for information regarding the premises and equipment. The following
tables set forth the location of the Corporation's banking and other offices.
28
30
MADISON, WISCONSIN OFFICES:
25 West Main Street 204A-1 South Century Avenue
Madison, Wisconsin Waunakee, Wisconsin (2)
302 North Midvale Boulevard 1720 Highway 51
Madison, Wisconsin Stoughton, Wisconsin
2929 North Sherman Avenue SURROUNDING AREA OFFICES:
Madison, Wisconsin (1)
1712 12th Street
216 Cottage Grove Road Monroe, Wisconsin
Madison, Wisconsin (1)
80 South Court Street
5750 Raymond Road Platteville, Wisconsin
Madison, Wisconsin (2)
106 West Oak Street
333 South Westfield Road Boscobel, Wisconsin (2)
Madison, Wisconsin (1)
100 West Racine Street
6501 Monona Drive Janesville, Wisconsin
Monona, Wisconsin
600 East Blackhawk Avenue
4702 East Towne Boulevard Prairie du Chien, Wisconsin
Madison, Wisconsin
708 North Madison Street
2000 Atwood Avenue Lancaster, Wisconsin
Madison, Wisconsin (2)
302 Bay Street
261 Junction Rd. Chippewa Falls, Wisconsin
Madison, Wisconsin (2)
500 East Walworth Avenue
Delavan, Wisconsin
DANE COUNTY OFFICES:
606 Highway 69
1516 West Main Street New Glarus, Wisconsin (2)
Sun Prairie, Wisconsin
2215 Holiday Drive
6200 Century Avenue Janesville, Wisconsin
Middleton, Wisconsin (1)
150 North Ludington Street
300 East Main Street Columbus, Wisconsin
Mount Horeb, Wisconsin
187 South Central Avenue
420 West Verona Avenue Richland Center, Wisconsin
Verona, Wisconsin
316 West Spring Street(2)
705 North Main Street Dodgeville, Wisconsin
Oregon, Wisconsin
102 South Rock Avenue
601 South Main Street Viroqua, Wisconsin
DeForest, Wisconsin
640 Division Street
Stevens Point, Wisconsin
29
31
SURROUNDING AREA OFFICES (Continued):
1101 Post Road
Plover, Wisconsin (2)
1492 W. South Park Ave.
Oshkosh, Wisconsin
LENDING ONLY OFFICES:
3315 N Ballard Rd. Suite B
Appleton, Wisconsin (2)
772 Main Street, Suite 204
Lake Geneva, Wisconsin (2)
(1) Land is leased.
(2) Building and land is leased.
30
32
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended March 31, 1998, no
matters were submitted to a vote of security holders through a solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Common Stock
The Corporation's common stock is traded on the Nasdaq Stock Market. The
trading symbol is ABCW. As of March 31, 1998, there were approximately 2,000
stockholders of record which does not include stockholders holding their stock
in street name or nominee's name.
Shareholders' Rights Plan
On July 22, 1997, the Board of Directors of Anchor BanCorp Wisconsin Inc.
declared a dividend distribution of one "Right" for each outstanding share of
Common Stock, par value $0.10 per share, of the Corporation to stockholders of
record at the close of business on August 1, 1997. Subject to certain
exceptions, each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Preferred Stock, par value
$0.10 per share, at a price of $200.00, subject to adjustment. The Purchase
Price must be paid in cash. The description and terms of the Rights are set
forth in a Rights Agreement between the Corporation and Firstar Trust Company,
as Rights Agent. Quarterly Stock Price and Dividend Information
The table below shows the reported high and low sale prices of common stock
and cash dividends paid per share of Common Stock during the periods indicated
in fiscal 1998 and 1997. The data in the table have been adjusted for the
two-for one stock split which was paid on August 15, 1997.
MARKET PRICE CASH
QUARTER ENDED HIGH LOW DIVIDEND
- ----------------------------------------------------------------------------------------
March 31, 1998 $46.500 $32.500 $0.080
December 31, 1997 37.500 29.000 0.080
September 30, 1997 30.000 24.125 0.080
June 30, 1997 25.375 21.000 0.070
March 31, 1997 $23.500 $17.750 $0.063
December 31, 1996 18.125 16.438 0.063
September 30, 1996 18.125 16.500 0.063
June 30, 1996 17.500 15.000 0.050
For information regarding restrictions on the payments of dividends, see
"Item 1. Business -- Regulation -- Limitations on Dividends and Other Capital
Distributions" in this report.
31
33
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
AT OR FOR YEAR ENDED MARCH 31,
---------------------------------------------------------------------------
1998 1997(1) 1996(1) 1995(1) 1994(1)
---------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Earnings per share:(2)
Basic $ 2.27 $ 1.50 $ 1.42 $ 1.38 $ 1.20
Diluted 2.12 1.42 1.35 1.33 1.16
Interest income 148,971 140,551 125,721 104,884 97,300
Interest expense 89,601 84,716 74,978 54,298 49,539
Net interest income 59,370 55,835 50,743 50,586 47,767
Provision for loan losses 300 500 475 1,580 4,348
Non-interest income 12,212 13,551 9,259 7,508 11,106
Non-interest expenses 38,294 47,406 37,061 33,033 32,788
Income taxes 12,487 7,532 7,959 9,064 8,265
Net income 20,501 13,948 14,507 14,417 13,472
Total assets 1,999,307 1,884,983 1,754,556 1,510,917 1,380,276
Investment securities 57,142 43,516 32,837 23,632 20,781
Mortgage-related securities 194,765 240,401 220,998 160,401 187,710
Loans receivable held for
investment, net 1,591,089 1,461,423 1,361,080 1,231,107 1.066,945
Deposits 1,392,472 1,312,445 1,240,958 1,098,210 1,065,741
Notes payable to FHLB 398,795 374,165 316,869 274,500 186,750
Other borrowings 55,765 57,374 54,613 5,600
Stockholders' equity 127,951 117,887 118,402 111,187 105,137
Shares outstanding (1) 8,962,594 9,162,694 9,868,700 10,127,660 10,788,538
Book value per share
at end of period (1) 14.28 12.87 12.00 10.99 9.75
Dividend paid per share(1) 0.31 0.24 0.16 0.11 0.10
Dividend payout ratio 13.66% 15.83% 11.27% 8.26% 8.00%
Yield on earning assets 7.99 7.91 7.87 7.46 7.42
Cost of funds 4.99 4.96 4.96 4.11 4.04
Interest rate spread 3.00 2.95 2.91 3.35 3.38
Net interest margin 3.18 3.14 3.18 3.60 3.64
Return on average assets 1.13 0.76 0.88 1.00 1.00
Return on average equity 16.20 11.79 12.13 13.45 12.89
Average equity to average assets 6.51 6.42 7.24 7.41 7.74
- --------------------------
(1) Share data has been adjusted to reflect a two-for-one stock split
distributed in August, 1997.
(2) The earnings per share amounts for all periods shown have been restated to
conform with Statement of Financial Accounting Standards No. 128 (Earnings
Per Share).
32
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain "forward-looking statements." The Corporation
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
expressed purpose of availing itself of the protection of the safe harbor with
respect to all of such forward-looking statements. 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.
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, 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. 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.
The following discussion is designed to provide a more thorough discussion of
the Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
RESULTS OF OPERATIONS
Comparison of Years Ended March 31, 1998 and 1997
GENERAL Net income increased to $20.5 million in fiscal 1998 from $13.9 million
in fiscal 1997 primarily as a result of a one-time charge to recapitalize the
Savings Association Insurance Fund ("SAIF") in fiscal 1997. Exclusive of the
after-tax effects of a $7.7 million one-time charge to recapitalize the SAIF
($4.6 million), net income for the fiscal year ended March 31, 1997 would have
been $18.5 million. The returns on average assets and average stockholders'
equity for fiscal 1998 were 1.13% and 16.20%, respectively, as compared to 0.76%
and 11.78%, respectively, for fiscal 1997. These ratios, for fiscal 1997,
exclusive of the SAIF assessment were 1.00% and 15.66%, respectively.
The components of this increase in earnings for fiscal 1998, as compared to
fiscal 1997, were a decrease of $9.1 million in non-interest expenses (including
the SAIF assessment) and an increase of $3.7 million in net interest income
after the provision for loan losses. These were offset by a decrease of $1.3
million in non-interest income and an increase in income taxes of $5.0 million.
NET INTEREST INCOME Net interest income increased by $3.5 million during fiscal
1998 due to increases in the volume of interest-earning assets and
interest-bearing liabilities. The average balances of interest-earning assets
and interest-bearing liabilities increased to $1.86 billion and $1.82 billion in
fiscal 1998, respectively, from $1.78 billion and $1.71 billion, respectively,
in fiscal 1997. The ratio of average interest-earning assets to average
interest-bearing liabilities remained the same for fiscal 1998 and 1997 at 1.04.
The average yield on interest-earning assets (7.99% in fiscal 1998 versus 7.91%
in fiscal 1997) increased, as did the average cost on interest-bearing
liabilities (4.99% in fiscal 1998 versus 4.96% in fiscal 1997). The net interest
margin increased to 3.18% for fiscal 1998 from 3.14% for fiscal 1997 and the
interest rate spread increased to 3.00% from 2.95% for fiscal 1998 and 1997,
respectively. These factors are reflected in the analysis of changes in net
interest income, arising from changes in the volume of interest-earning assets,
interest-bearing liabilities and the rates earned and paid on such assets and
liabilities. The analysis indicates that the increases in the volume of
interest-earning assets
33
35
increased net interest income in fiscal 1998 by approximately $5.1 million.
Offsetting this increase, slightly, was a $1.6 million decrease in net interest
income caused by the combination of rate and rate/volume changes.
PROVISION FOR LOAN LOSSES Provision for loan losses decreased slightly from
$500,000 in fiscal 1997 to $300,000 in fiscal 1998 based on management's ongoing
evaluation of asset quality. While an increase in charge-offs was experienced in
the consumer loan area in fiscal 1998, the quality of the loan portfolio
continues to be good. The Corporation's allowance for loan losses decreased
slightly to $21.8 million at March 31, 1998 from $22.8 million at March 31,
1997. This amount totaled 1.30% of loans held for investment at March 31, 1998,
as compared to 1.47% of loans held for investment at March 31, 1997. For further
discussion of the allowance for loan losses, see "Financial Condition--Allowance
for Loan and Foreclosure Losses."
NON-INTEREST INCOME Non-interest income decreased $1.4 million to $12.2 million
for fiscal 1998 compared to $13.6 million for fiscal 1997 as a result of several
factors. Net income from the operations of real estate investments decreased
$2.8 million because of lack of sales and the associated holding costs incurred
with those investments. Other non-interest income also decreased $730,000 for
fiscal 1998 largely due to amortization of OMSR's associated with increased loan
servicing volume. Insurance commissions decreased slightly by $200,000 due to
decreased volume in this area. Partially ofsetting these decreases were several
increases in other categories. The gain on sale of assets increased by $2.1
million largely due to increased volume of loan sales during the year. Service
charges on deposits increased $200,000 essentially due to a growth in deposits.
Loan servicing income increased $180,000 due to increased volume of loans
serviced for others.
NON-INTEREST EXPENSES Non-interest expenses decreased $9.1 million for fiscal
1998 compared to 1997 as a result of several factors. The majority of the
decrease was due to the one-time charge of $7.7 million associated with the
recapitalization of the SAIF during fiscal 1997. Federal insurance premiums
decreased $1.4 million in fiscal 1998, also a result of the recapitalization of
the SAIF during the prior fiscal year. Compensation expense decreased $1.1
million for fiscal 1998 due largely to the reduction of the expense associated
with the Employee Stock Option Plan ("ESOP") as well as a reduction of other
employee benefits. These decreases were offset by several non-interest expense
increases. Data processing expense increased $450,000 over the prior fiscal year
due to consulting expenses associated with computer and software upgrades. Other
expenses increased $310,000 during fiscal 1998 due to increases in legal,
postage and other expenses. Marketing expenses increased $190,000 due to
increased promotions. Furniture and equipment increased $173,000 due to normal
replacement costs.
INCOME TAXES Income tax expense increased $5.0 million for fiscal 1998 as
compared to fiscal 1997. The effective tax rate for fiscal 1998 was 37.85% as
compared to 35.07% for fiscal 1997. See Note 11 to the Consolidated Financial
Statements.
Comparison of Years Ended March 31, 1997 and 1996
GENERAL Net income decreased to $13.9 million in fiscal 1997 from $14.5 million
in fiscal 1996 primarily as a result of a one-time charge to recapitalize the
Savings Association Insurance Fund ("SAIF"). Exclusive of the after-tax effects
of a $7.7 million one-time charge to recapitalize the SAIF, net income for the
fiscal year ended March 31, 1997 increased to $18.5 million as compared to $14.5
million for the same period last year. The returns on average assets and average
stockholders' equity for fiscal 1997 were 0.76% and 11.78%, respectively, as
compared to 0.88% and 12.13%, respectively, for fiscal 1996. These ratios
exclusive of the SAIF assessment were 1.00% and 15.66%, respectively.
The components of this decrease in earnings for fiscal 1997, as compared to
fiscal 1996, were an increase of $13.6 million in non-interest expenses
(including the SAIF assessment), partially offset by an increase of $4.7 million
in net interest income and an increase of $7.9 million in non-interest income.
NET INTEREST INCOME Net interest income increased by $4.7 million during fiscal
1997 due to increases in the volume of interest-earning assets and
interest-bearing liabilities. The average balances of interest-earning assets
34
36
and interest-bearing liabilities increased to $1.78 billion and $1.71 billion in
fiscal 1997, respectively, from $1.60 billion and $1.51 billion, respectively,
in fiscal 1996. The ratio of average interest-earning assets to average
interest-bearing liabilities decreased to 1.04 for fiscal 1997 from 1.06 for
fiscal 1996. The average yield on interest-earning assets (7.91% in fiscal 1997
versus 7.87% in fiscal 1996) increased, as did the average cost on
interest-bearing liabilities (4.99% in fiscal 1997 versus 4.96% in fiscal 1996).
The net interest margin decreased to 3.12% for fiscal 1997 from 3.18% for fiscal
1996 and the interest rate spread increased to 2.92% from 2.91% for fiscal 1997
and 1996, respectively. These factors are reflected in the analysis of changes
in net interest income, arising from changes in the volume of interest-earning
assets, interest-bearing liabilities and the rates earned and paid on such
assets and liabilities. The analysis indicates that the increases in the volume
of interest-earning assets and interest-bearing liabilities increased net
interest income in fiscal 1997 by approximately $4.1 million. Offsetting this
increase, slightly, was a $600,000 decrease in net interest income caused by the
combination of rate and rate/volume changes.
PROVISION FOR LOAN LOSSES Provision for loan losses increased slightly from
$475,000 in fiscal 1996 to $500,000 in fiscal 1997, reflecting an increase in
charge-offs experienced in the consumer loan area in fiscal 1997. The
Corporation's allowance for loan losses remained the same at $22.8 million,
although such amount totaled 1.47% of loans held for investment at March 31,
1997, as compared to 1.59% of loans held for investment at March 31, 1996. For
further discussion of the allowance for loan losses, see "Financial
Condition--Allowance for Loan and Foreclosure Losses."
NON-INTEREST INCOME Non-interest income increased $7.9 million to $17.2 million
for fiscal 1997 compared to $9.3 million for fiscal 1996 as a result of several
factors. Other non-interest income increased $6.2 million for fiscal 1997 due to
increased partnership earnings on partnerships in which the Corporation and two
of its subsidiaries have invested. The partnerships (with 50% ownership) are
consolidated, with the minority interest reported in non-interest expenses.
Insurance commissions increased $666,000 in fiscal 1997 as compared to fiscal
1996 due to increased promotions. Net gain on sale of loans increased $580,000
in fiscal 1997 as compared to fiscal 1996 due to an increase in the volume of
sales of loans during the year.
NON-INTEREST EXPENSES Non-interest expenses increased $13.6 million for fiscal
1997 compared to 1996 as a result of several factors. The majority of the
increase was due to the one-time charge of $7.7 million associated with the
recapitalization of the SAIF during fiscal 1997. Compensation expense increased
$2.3 million for fiscal 1997 due to the combination of increases in staff,
salaries and benefits as a result of additional offices. Other expenses
increased $3.1 million during fiscal 1997 due to increases in the minority
interest in net income of consolidated partnerships as well as other partnership
consolidated expenses.
INCOME TAXES Income tax expense decreased $427,000 for fiscal 1997 as compared
to fiscal 1996. The effective tax rate for fiscal 1997 was 35.07% as compared to
35.43% for fiscal 1996. See Note 11 to the Consolidated Financial Statements.
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-BEARING LIABILITIES AND
INTEREST RATE SPREAD AND MARGIN The table on the following page shows the
Corporation's average balances, interest, average rates, the spread between the
combined average rates earned on interest-earning assets and average cost of
interest-bearing liabilities, the average net interest margin, computed as net
interest income as a ratio of average interest-earning assets, and the ratio of
average interest-earning assets to average interest-bearing liabilities for the
years indicated. The average balances are derived from average daily balances.
35
37
AVERAGE BALANCE SHEETS
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Mortgage loans (1) $1,178,863 $ 95,568 8.11% $1,134,195 $ 90,386 7.97% $1,047,092 $ 82,798 7.91%
Consumer loans 337,657 30,327 8.98 285,558 26,766 9.37 236,767 22,010 9.30
Commercial business loans 29,550 3,113 10.53 27,662 2,866 10.36 25,040 2,628 10.50
---------- -------- ---------- -------- ---------- --------
Total loans receivable (2) 1,546,070 129,008 8.34 1,447,415 120,018 8.29 1,308,899 107,436 8.21
Mortgage-related securities (1) 216,550 14,676 6.78 243,986 15,657 6.42 221,135 14,152 6.40
Investment securities (1) 69,044 3,211 4.65 52,659 2,898 5.50 41,168 2,490 6.05
Interest-bearing deposits 11,710 635 5.42 14,098 725 5.14 8,694 488 5.61
Federal Home Loan Bank stock 21,135 1,441 6.82 18,323 1,253 6.84 17,204 1,155 6.71
---------- -------- ---------- -------- ---------- --------
Total interest-earning assets 1,864,509 148,971 7.99 1,776,481 140,551 7.91 1,597,100 125,721 7.87
Non-interest-earning assets 78,815 68,284 54,330
---------- ---------- ----------
Total assets $1,943,324 $1,844,765 $1,651,430
========== ========== ==========
INTEREST-BEARING LIABILITIES
Demand deposits $ 331,016 9,540 2.88 $ 285,641 7,496 2.62 $ 218,811 4,577 2.09
Regular passbook savings 99,361 2,263 2.28 102,420 2,349 2.29 107,707 2,498 2.32
Certificates of deposit 908,248 52,343 5.76 888,274 50,569 5.69 847,113 48,275 5.70
---------- -------- ---------- -------- ---------- --------
Total deposits 1,338,625 64,146 4.79 1,276,335 60,414 4.73 1,173,631 55,350 4.72
Notes payable and other borrowings 443,760 24,971 5.63 416,314 23,782 5.71 324,123 19,148 5.91
Other 13,165 484 3.68 14,061 520 3.70 13,064 480 3.67
---------- -------- ---------- -------- ---------- --------
Total interest-bearing liabilities 1,795,550 89,601 4.99 1,706,710 84,716 4.96 1,510,818 74,978 4.96
-------- ---- -------- ---- -------- ----
Non-interest-bearing liabilities 21,215 19,661 21,013
---------- ---------- ----------
Total liabilities 1,816,765 1,726,371 1,531,831
Stockholders' equity 126,559 118,394 119,599
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,943,324 $1,844,765 $1,651,430
========== ========== ==========
Net interest income/
interest rate spread $ 59,370 3.00% $ 55,835 2.95% $ 50,743 2.91%
======== ==== ======== ==== ======== ====
Net interest-earning assets $ 68,959 $ 69,771 $ 86,282
========== ========== ==========
Net interest margin 3.18% 3.14% 3.18%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.04 1.04 1.06
==== ==== ====
- -----------------------------
(1) Includes assets held and available for sale.
(2) The average balances of loans include non-performing loans, interest of
which is recognized on a cash basis.
RATE/VOLUME ANALYSIS
The most significant impact on the Corporation's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of earning dollars in loans and investments, compared to the volume of
interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods.
36
38
The following table shows the relative contribution of the changes in average
volume and average interest rates on changes in net interest income for the
periods indicated. Information is provided with respect to (i) effects on
interest income attributable to changes in rate (changes in rate multiplied by
prior volume), (ii) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate) and (iii) changes in rate/volume
(changes in rate multiplied by changes in volume).
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
------------------------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
------------------------------------------------------------------------------------------
(In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans (1) $ 1,561 $ 3,560 $ 61 $ 5,182 $ 647 $ 6,887 $ 54 $ 7,588
Consumer loans (1,117) 4,882 (204) 3,561 183 4,535 38 4,756
Commercial business loans 48 196 3 247 (34) 276 (4) 238
-------- -------- ------ ------- ------- -------- ------ --------
Total loans receivable 492 8,638 (140) 8,990 796 11,698 88 12,582
Mortgage-related securities (1) 878 (1,760) (99) (981) 39 1,462 4 1,505
Investment securities (1) (449) 902 (140) 313 (224) 695 (63) 408
Interest-bearing deposits 39 (122) (7) (90) (41) 303 (25) 237
Federal Home Loan Bank stock (4) 193 (1) 188 21 76 1 98
-------- -------- ------ ------- ------- -------- ------ --------
Total net change in income on
interest-earning assets 956 7,851 (387) 8,420 591 14,234 5 14,830
INTEREST-BEARING LIABILITIES
Demand deposits 736 1,191 117 2,044 1,165 1,398 356 2,919
Regular passbook savings (16) (70) - (86) (28) (122) 1 (149)
Certificates of deposit 623 1,137 14 1,774 (49) 2,345 (2) 2,294
-------- -------- ------ ------- ------- -------- ------ --------
Total deposits 1,343 2,258 131 3,732 1,088 3,621 355 5,064
Notes payable and other borrowings (355) 1,567 (23) 1,189 (632) 5,446 (180) 4,634
Other (3) (33) - (36) 3 37 - 40
-------- -------- ------ ------- ------- -------- ------ --------
Total net change in expense on
interest-bearing liabilities 985 3,792 108 4,885 459 9,104 175 9,738
-------- -------- ------ ------- ------- -------- ------ --------
Net change in net interest income $ (29) $ 4,059 $ (495) $ 3,535 $ 132 $ 5,130 $ (170) $ 5,092
======== ======== ====== ======= ======= ======== ====== ========
- ---------------------------------
(1) Includes assets held and available for sale.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation had cash equivalents of $1.0 million
and securities of $2.6 million at March 31, 1998. The Corporation provided loans
to its non-bank subsidiary to invest in real estate held for development and
sale. Principal and interest payments are a predictable source of funds, but
funds from sales of real estate are unpredictable. During fiscal 1998, the Bank
made dividend payments of $16.6 million to the Corporation. The Bank is subject
to certain regulatory limitations relative to its ability to pay dividends to
the Corporation. Management believes that the Corporation will not be adversely
affected by these dividend limitations
37
39
and that projected future dividends from the Bank will be sufficient to meet the
Corporation's liquidity needs. In addition to dividends from the Bank, the
Corporation also could sell capital stock or debt issues through the capital
markets as alternative sources of funds, as well as obtain loans from outside
banks.
The Bank's primary sources of funds are principal and interest payments on loans
receivable and mortgage-related securities, sales of mortgage loans originated
for sale, Federal Home Loan Bank ("FHLB") advances, deposits and other
borrowings. While maturities and scheduled amortization of loans and
mortgage-related securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
specified levels of liquid investments in qualifying types of U.S. Government
and agency securities and other investments. This requirement, which may be
varied by the OTS, is based upon a percentage of deposits and short-term
borrowings. The required percentage is currently 4.0%. At March 31, 1998 and
1997, the Bank's liquidity ratio was 14.7% and 9.2%, respectively.
Operating activities resulted in a net cash inflow of $47.5 million. Operating
cash flows for fiscal 1998 included earnings of $20.5 million and $353.3 million
in proceeds from the sale of mortgage loans held for sale, offset by $334.0
million disbursed for loans originated for sale.
Investing activities in fiscal 1998 resulted in a net cash outflow of $136.2
million. Primary investing activities resulting in cash outflows were $94.3
million for the purchase of securities and $163.3 million for the net increase
in loans receivable. The most significant cash inflows from investing activities
were principal payments of $42.2 million received on mortgage-related
securities, as well as $53.0 million from the proceeds of maturities of
investment securities.
Financing activities resulted in a net cash inflow of $89.8 million including a
net increase in deposits of $78.5 million, a net increase in borrowings of $23.0
million and a cash outflow of $9.6 million for treasury stock purchases.
At March 31, 1998, the Corporation had outstanding commitments to originate
$65.8 million of loans, commitments to extend funds to or on behalf of customers
pursuant to lines and letters of credit of $75.9 million and $1.9 million of
loans sold with recourse to the Corporation in the event of default by the
borrower. (See Note 12 to the Consolidated Financial Statements.) Scheduled
maturities of certificates of deposit during the twelve months following March
31, 1998, amounted to $749.5 million and scheduled maturities of borrowings
during the same period totaled $307.0 million. The Bank has entered into
agreements with certain brokers that will provide blocks of funds at specified
interest rates for an identified fee. Management believes adequate capital and
borrowings are available from various sources to fund all commitments to the
extent required.
At March 31, 1998, the Bank's capital exceeded all capital requirements of the
State of Wisconsin and the OTS as mandated by federal law and regulations on
both a current and fully phased-in basis. See Note 9 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
GENERAL Total assets of the Corporation increased $114.3 million or 6.1% from
$1.88 billion at March 31, 1997, to $2.0 billion at March 31, 1998. This
increase was primarily funded by net increases in deposits of $80.0 million and
in borrowings of $23.0 million. These funds were generally invested in loans
receivable and mortgage-related securities.
MORTGAGE-RELATED SECURITIES Mortgage-related securities (both available for sale
and held to maturity) decreased $45.6 million as a net result during the year of
(i) purchases of $9.4 million, (ii) principal repayments and market value
adjustments of $53.8 million and (iii) sales of $1.3 million. Mortgage-related
securities consisted of $170.1 million mortgage-backed securities and $24.6
million mortgage-derivative securities at March 31, 1998. See Notes 1 and 3 to
the Consolidated Financial Statements.
38
40
Since mortgage-related securities are asset-backed securities, they are subject
to inherent risks based upon the future performance of the underlying collateral
(i.e., mortgage loans) for these securities. Among these risks are prepayment
risk and interest rate risk. Should general interest rate levels decline, the
mortgage-related securities portfolio would be subject to (i) prepayments as
borrowers typically would seek to obtain financing at lower rates, (ii) a
decline in interest income received on adjustable-rate mortgage-related
securities, and (iii) an increase in fair value of fixed-rate mortgage-related
securities. Conversely, should general interest rate levels increase, the
mortgage-related securities portfolio would be subject to (i) a longer term to
maturity as borrowers would be less likely to prepay their loans, (ii) an
increase in interest income received on adjustable-rate mortgage-related
securities, (iii) a decline in fair value of fixed-rate mortgage-related
securities, and (iv) a decline in fair value of adjustable-rate mortgage-related
securities to an extent dependent upon the level of interest rate increases, the
time period to the next interest rate repricing date for the individual security
and the applicable periodic (annual and/or lifetime) cap which could limit the
degree to which the individual security could reprice within a given time
period.
LOANS RECEIVABLE Total net loans (including loans held for sale) increased
$142.4 million during fiscal 1998 from $1.47 billion at March 31, 1997, to $1.61
billion at March 31, 1998. The activity included (i) originations and purchases
of $983.3 million, (ii) sales of loans held for sale of $353.3 million, and
(iii) principal repayments and other reductions of $487.8 million. The
components of the increase in total loans, including loans held for sale, are
summarized by type of loan as follows:
MARCH 31,
-------------------------------------------------
INCREASE
1998 1997 (DECREASE)
-------------------------------------------------
(In Thousands)
FIRST MORTGAGE LOANS:
Single-family residential $ 817,763 $ 731,732 $ 86,031
Multi-family residential 177,350 164,729 12,621
Commercial real estate 183,914 171,186 12,728
Construction and land 132,879 122,266 10,613
---------- ---------- ---------
Total first mortgage loans 1,311,906 1,189,913 121,993
OTHER LOANS:
Second mortgage 183,874 176,348 7,526
Education 121,306 112,420 8,886
Commercial business and leases 30,244 29,022 1,222
Credit card and other consumer loans 32,841 34,682 (1,841)
---------- ---------- ---------
Total other loans 368,265 352,472 15,793
---------- ---------- ---------
Gross loans receivable 1,680,171 1,542,385 137,786
Less: Net items to loans receivable (89,082) (80,962) (8,120)
---------- ---------- ---------
Net loans receivable $1,591,089 $1,461,423 $ 129,666
========== ========== =========
Loans held for sale $ 18,060 $ 5,348 $ 12,712
========== ========== =========
NON-PERFORMING ASSETS Non-performing assets (consisting of non-accrual loans,
non-performing real estate held for development and sale, foreclosed properties
and repossessed assets) decreased to $12.9 million or .64% of total assets at
March 31, 1998 from $13.8 million or 0.73% of total assets at March 31, 1997.
39
41
Non-performing assets are summarized as follows for the dates indicated:
AT MARCH 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------
(Dollars In Thousands)
Non-accrual loans:
Single-family residential $ 1,273 $ 1,712 $ 629 $ 833 $ 565
Multi-family residential 898 3,199 - - 37
Commercial real estate 288 778 470 624 617
Construction and land - 58 81 81 81
Consumer 577 438 202 219 333
Commercial business 673 610 508 736 831
-------- -------- -------- -------- --------
Total non-accrual loans 3,709 6,795 1,890 2,493 2,464
Real estate held for development and sale 4,431 2,736 2,319 857 2,767
Foreclosed properties and repossessed assets, net 4,723 4,222 6,077 7,116 5,294
-------- -------- -------- -------- --------
Total non-performing assets $ 12,863 $ 13,753 $ 10,286 $ 10,466 $ 10,525
======== ======== ======== ======== ========
Performing troubled debt restructurings $ 725 $ 329 $ 332 $ 335 $ 4,687
======== ======== ======== ======== ========
Total non-accrual loans to total loans 0.22% 0.44% 0.13% 0.19% 0.22%
Total non-performing assets to total assets 0.64 0.73 0.59 0.69 0.76
Allowance for loan losses to total loans 1.30 1.47 1.59 1.75 1.98
Allowance for loan losses to total
non-accrual loans 588.65 334.81 1206.72 899.68 897.69
Allowance for loan and foreclosure losses
to total non-performing assets 172.26 173.26 228.70 221.82 213.42
Non-accrual loans decreased $3.0 million during fiscal 1998 primarily due to a
$2.5 million loan which the Bank's participation of $1.9 million was repurchased
by the lead lender and related loss of $700,000 realized by the Bank. This loan
was secured by a 48-unit condominium project in Bloomington, Minnesota. The rest
of the decrease in this category was due to the resolution of commercial and
commercial real estate loans involving a wood chipping plant in Lodi, Wisconsin.
The loans were assumed by another borrower and are currently classified as
substandard. 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 increased $1.7 million
during fiscal 1998 primarily as a result of the transfer of a property from
foreclosed properties and repossessed assets which has a net carrying value of
$1.5 million. This property consists of several condominium units which were
related to, but not a part, of a former non-accrual loan for the condominium
project discussed above. These units were purchased in July 1997, at auction, in
an effort to solidify the Bank's position with regard to the original
non-accrual loan. Because the state of Minnesota has a six-month redemption
period, the Bank was prohibited from doing anything with the units until after
January 1998. Since January, the property was transferred to real estate held
for development and sale and ADPC is in the process of completing the units for
subsequent sale.
Foreclosed properties and repossessed assets increased $500,000 in fiscal 1998
primarily due to the addition of six eight-unit multi-family properties in
Madison, Wisconsin with a net carrying value of $900,000. The Bank has obtained
receivership in order to control the properties and is pursuing foreclosure.
Sales of foreclosed properties and repossessed assets that totaled approximately
$400,000 partially offset the above additions.
ALLOWANCES FOR LOAN AND FORECLOSURE LOSSES The Corporation's loan portfolio,
foreclosed properties, repossessed assets and loans sold with recourse are
evaluated on a continuing basis to determine the necessity for additions to the
allowances for losses and the related balance in the allowances. These
evaluations consider several factors
40
42
including, but not limited to, general economic conditions, collateral value,
loan portfolio composition, loan delinquencies, prior loss experience,
anticipated loss of interest and management's estimation of future potential
losses. 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. Foreclosed properties are recorded at the lower of carrying
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 loan losses follows:
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
(Dollars In Thousands)
Allowance at beginning of year $ 22,750 $ 22,807 $ 22,429 $ 22,119 $ 18,437
Charge-offs:
Mortgage (951) (222) (439) (1,460) (2,607)
Consumer (993) (483) (104) (36) (67)
Commercial business (252) (275) (455) (309) (948)
-------- -------- -------- -------- --------
Total charge-offs (2,196) (980) (998) (1,805) (3,622)
-------- -------- -------- -------- --------
Recoveries:
Mortgage 825 250 298 374 2,809
Consumer 59 5 10 17 14
Commercial business 95 168 43 144 133
-------- -------- -------- -------- --------
Total recoveries 979 423 351 535 2,956
-------- -------- -------- -------- --------
Net charge-offs (1,217) (557) (647) (1,270) (666)
-------- -------- -------- -------- --------
Provision 300 500 475 1,580 4,348
Acquired bank's allowance - - 550 - -
-------- -------- -------- -------- --------
Allowance at end of year $ 21,833 $ 22,750 $ 22,807 $ 22,429 $ 22,119
======== ======== ======== ======== ========
Net charge-offs to average loans
held for sale and for investment (0.08)% (0.04)% (0.05)% (0.11)% (0.06)%
======== ======== ======== ======== ========
The fiscal 1998 provision for loan losses totaled $300,000 as compared to
$500,000 in fiscal 1997. The provision for loan losses for fiscal years 1998 and
1997 remain at significantly lower levels compared to earlier years when the
Bank's charge-off experience from certain portfolio segments required larger
allowances. Those segments were largely multi-family real estate loans secured
by properties in states other than Wisconsin and leases receivable. The
Corporation substantially ceased extending credit in those segments since the
late 1980's. The result of this activity was to retain the allowance for loan
losses at a level considered appropriate by management based on historical
experience, the volume and type of lending conducted, the status of past due
principal and interest payments, general economic conditions and other factors
related to the collectibility of the loan portfolio. Although charge- offs have
increased in the consumer loan area for this fiscal year, the total of
non-performing assets has declined and overall portfolio quality is good.
41
43
The table below shows the Corporation's total allowance for loan losses and the
allocation to the various categories of loans held for investment at the dates
indicated.
MARCH 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL
LOANS BY LOANS BY LOANS BY LOANS BY LOANS BY
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
--------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Single-family residential $ 195 0.02% $ 184 0.03% $ 200 0.03% $ 15 0.00% $ 54 0.01%
Multi-family residential 395 0.22 379 0.23 263 0.16 365 0.26 427 0.30
Commercial real estate 1,030 0.56 645 0.38 476 0.34 916 0.74 917 0.71
Construction and land - - - - 4 - 87 0.11 107 0.18
Unallocated mortgage 18,042 1.38 19,003 1.60 20,054 1.75 19,186 1.81 18,841 1.98
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total mortgage loans 19,662 1.50 20,211 1.70 20,997 1.83 20,569 1.94 20,346 2.14
Consumer 1,278 0.38 1,169 0.36 802 0.31 645 0.32 479 0.32
Commercial business 893 2.95 1,370 4.72 1,008 3.28 1,215 5.59 1,294 6.69
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total allowance for
loan losses $21,833 1.30% $22,750 1.47% $22,807 1.59% $22,429 1.75% $22,119 1.98%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
A summary of the activity in the allowance for losses on foreclosed properties
follows. The provision for losses on such properties is included in the
consolidated statements of income in "Net cost (income) of operations of
foreclosed properties."
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
(In Thousands)
Allowance at beginning of year $1,078 $ 717 $787 $343 $ 130
Provision 25 500 200 950 1,225
Charge-offs (778) (139) (270) (506) (1,012)
------ ------ ---- ---- ------
Allowance at end of year $ 325 $1,078 $717 $787 $ 343
====== ====== ==== ==== ======
The fiscal 1998 provision for foreclosure losses totaled $25,000 as compared to
$500,000 for fiscal 1997. Charge-offs increased by $639,000 during the fiscal
year. The Corporation conducts ongoing evaluations of the adequacy of the
allowance for losses, which are based on amounts of foreclosed properties,
recent appraisals, discounted cash flows or pending offers.
Although management believes that the March 31, 1998, allowances for loan and
foreclosed property losses are 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
continues to adhere to high underwriting standards in the origination process,
in order to continue to maintain strong asset quality.
DEPOSITS Deposits increased $80.0 million during fiscal 1998 to $1.39 billion,
of which $24.3 million was in certificates of deposit $24.3 million was due to
increases in money market accounts, and $29.4 million was due to increases in
NOW accounts. All of these increases were due to promotions and related growth
of deposit households. The weighted average cost of deposits increased to 4.93%
at fiscal year-end 1998 compared to 4.77% at fiscal year-end 1997.
42
44
BORROWINGS FHLB advances increased $24.6 million during fiscal 1998 to fund the
increased loan activity. At March 31, 1998, advances totaled $398.8 million with
an average interest rate of 5.73%. Reverse repurchase agreements increased $3.6
million during fiscal 1998. Other loans payable decreased $5.2 million resulting
from the Corporation and subsidiary borrowings. For additional information, see
Note 8 to the Consolidated Financial Statements.
STOCKHOLDERS' EQUITY Stockholders' equity at March 31, 1998 was $128.0 million,
or 6.40% of total assets, compared to $117.9 million and 6.25% of total assets
at March 31, 1997. Stockholders' equity increased during the year as a result of
(i) comprehensive income of $20.1 million, which includes net income of $18.4
and a change in net unrealized losses on available-for-sale securities of $1.7
million, (ii) the repayment of ESOP borrowings of $690,000, (iii) the exercise
of stock options of $733,000, (iv) the vesting of recognition plan shares of
$396,000 and (v) the tax benefit from certain stock options of $516,000. These
were offset by (i) the purchase of treasury stock of $9.7 million, (ii) the
payment of cash dividends of $2.8 million and (iii) an ESOP borrowing of $2.1
million.
IMPACT OF YEAR 2000 The Bank is currently in the process of addressing a
potential problem that faces all users of automated systems including
information systems. Many computer systems process transactions based on two
digits representing the year of transaction, rather than a full four digits.
These computer systems may not operate properly when the last two digits become
"00", as will occur on January 1, 2000. The problem could affect a wide variety
of automated information systems, such as mainframe applications, personal
computers, communication systems, environmental systems and other information
systems.
The Bank has identified areas of operations critical for the delivery of its
products and services. The majority of the Bank's applications used in
operations are purchased from an outside vendor. The vendor providing the
software is responsible for maintenance of the systems and modifications to
enable uninterrupted usage after December 31, 1999. The Bank's plan includes
obtaining certification of compliance from third parties and testing all of the
impacted applications (both internally developed and third-party provided). The
Bank's goal is to have the plan complete and to be fully compliant by December
31, 1998. Testing of the system will occur during 1998. Contingency plans, if
any are needed, will be developed during 1998 to address potential problems that
are identified. The Bank's plan also includes reviewing any potential risks
associated with the loan and investment portfolios due to the year 2000 issue.
Based on currently available information, management does not anticipate that
the cost to address the year 2000 issues will have a materially adverse impact
on the Bank's financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND 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.
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, invests in adjustable-rate
or medium-term, fixed-rate, single-family residential mortgage loans, invests in
medium-term mortgage-related securities and invests in consumer loans which
generally have shorter terms to maturity and higher and/or adjustable interest
rates. The Corporation occasionally sells adjustable-rate loans at origination
to private investors.
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
43
45
loans. Long-term, fixed-rate, single-family 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.
Although management believes that its asset/liability management strategies
reduce the potential effects of changes in interest rates on the Corporation's
operations, material and prolonged changes in interest rates would adversely
affect the Corporation's operations.
The Corporation's cumulative net gap position at March 31, 1998, for one year or
less was a negative 1.57% of total assets. 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.
44
46
The following table summarizes the Corporation's interest rate sensitivity gap
position as of March 31, 1998.
FAIR VALUE
03/31/99 03/31/00 03/31/01 03/31/02 03/31/03 THEREAFTER TOTAL 03/31/98
--------------------------------------------------------------------------------------------
(In thousands)
Rate sensitive assets:
Mortgage loans - Fixed (1) (2) 185,559 65,188 34,158 18,370 10,078 13,848 327,201 299,006
Average interest rate 7.71% 7.30% 7.28% 7.30% 7.36% 7.60%
Mortgage loans -Variable (1) (2) 617,324 193,388 100,354 14,514 7,478 - 933,058 966,948
Average interest rate 7.99% 7.75% 7.76% 7.55% 7.57%
Consumer loans (1) 269,689 40,567 15,827 6,093 2,835 2,432 337,443 338,591
Average interest rate 9.01% 9.32% 9.23% 9.16% 9.16% 9.20%
Commercial business loans (1) 27,321 1,780 242 69 47 112 29,571 29,105
Average interest rate 9.38% 8.98% 8.70% 8.63% 8.68% 8.70%
Mortgage-related securities (3) 106,125 46,573 22,671 10,729 4,941 3,726 194,765 195,687
Average interest rate 6.73% 6.73% 6.74% 6.76% 6.76% 6.78%
Investment securities and other
interest-earning assets (3) 40,556 6,165 9,557 2,182 25,218 2,634 86,312 88,099
Average interest rate 7.77% 12.61% 8.11% 9.51% 6.35% 6.26%
Total rate sensitive assets 1,246,574 353,661 182,809 51,957 50,597 22,752 1,908,350 1,917,436
Rate sensitive liabilities:
Interest-bearing
transaction accounts (4) 172,860 63,242 42,919 29,233 19,988 45,148 373,390 361,100
Average interest rate 3.05% 3.54% 3.47% 3.39% 3.31% 3.06%
Time-deposits (4) 749,481 77,884 77,885 8,918 8,918 820 923,906 926,649
Average interest rate 5.72% 5.91% 5.91% 5.95% 5.95% 5.90%
Borrowings 355,401 52,675 9,284 2,751 34,449 - 454,560 453,790
Average interest rate 5.80% 6.00% 6.44% 8.20% 5.25%
Total rate sensitive liabilities 1,277,742 193,801 130,088 40,902 63,355 45,968 1,751,856 1,741,539
Interest sensitivity gap (31,168) 159,860 52,721 11,055 (12,758) (23,216) 156,494
Cumulative interest sensitivity gap (31,168) 128,692 181,413 192,468 179,710 156,494
Cumulative interest sensitivity
gap as a percent of total assets (1.56)% 6.44% 9.07% 9.63% 8.99% 7.83%
- --------------------
(1) Balances have been reduced for (i) undisbursed loan proceeds, which
aggregated $62.8 million, and (ii) non-accrual loans, which amounted to
$3.7 million.
(2) Includes $18.1 million of loans held for sale spread throughout the
periods.
(3) Includes $92.0 million of securities available for sale spread throughout
the periods.
(4) Does not include $85.9 million of demand accounts because they are
non-interest-bearing. Also does not include accrued interest payable,
which amounted to $9.3 million. Projected decay rates for demand
deposits and passbook savings are selected by management from various
sources such as the OTS.
45
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .............................................................................. 47
Consolidated Statements of Income ........................................................................ 48
Consolidated Statements of Changes in Stockholders' Equity ............................................... 49
Consolidated Statements of Cash Flows .................................................................... 50
Notes to Consolidated Financial Statements ............................................................... 52
Report of Ernst & Young LLP, Independent Auditors ........................................................ 71
Management and Audit Committee Report .................................................................... 72
SUPPLEMENTARY DATA
Quarterly Financial Information........................................................................... 73
46
48
CONSOLIDATED BALANCE SHEETS
MARCH 31,
--------------------------------------------
1998 1997
--------------------------------------------
(Dollars In Thousands Except Per Share Data)
ASSETS
Cash $ 31,999 $ 31,482
Interest-bearing deposits 7,168 6,543
------------- ------------
Cash and cash equivalents 39,167 38,025
Investment securities available for sale 39,555 35,569
Investment securities held to maturity (fair value of $17,600 and
$7,900, respectively) 17,587 7,947
Mortgage-related securities available for sale 67,526 80,300
Mortgage-related securities held to maturity (fair value of $128,100
and $157,800, respectively) 127,239 160,101
Loans receivable, net:
Held for sale 18,060 5,348
Held for investment 1,591,089 1,461,423
Foreclosed properties and repossessed assets, net 4,723 4,222
Real estate held for development and sale 22,630 23,706
Office properties and equipment 18,640 18,662
Federal Home Loan Bank stock--at cost 22,002 18,981
Accrued interest on investments and loans 13,875 13,729
Prepaid expenses and other assets 17,214 16,970
------------- ------------
Total assets $ 1,999,307 $ 1,884,983
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,392,472 $ 1,312,445
Federal Home Loan Bank and other borrowings 411,625 392,204
Reverse repurchase agreements 42,935 39,335
Advance payments by borrowers for taxes and insurance 6,955 7,675
Other liabilities 17,369 15,437
------------- ------------
Total liabilities 1,871,356 1,767,096
------------- ------------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding - -
Common stock, $.10 par value, 20,000,000 shares
authorized, 12,499,324 shares issued 1,250 1,250
Additional paid-in capital 50,334 49,818
Retained earnings 125,615 110,735
Less: Treasury stock (3,536,730 shares and 3,336,630 shares,
respectively), at cost (47,959) (41,937)
Borrowings of Employee Stock Ownership Plan (1,379) -
Common stock purchased by recognition plans (851) (1,246)
Net unrealized gain (loss) on securities available for sale, net of tax 941 (733)
------------- ------------
Total stockholders' equity 127,951 117,887
------------- ------------
Total liabilities and stockholders' equity $ 1,999,307 $ 1,884,983
============= ============
See accompanying Notes to Consolidated Financial Statements.
47
49
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31,
-----------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Loans $ 129,008 $ 120,018 $ 107,436
Mortgage-related securities 14,676 15,657 14,152
Investment securities 4,652 4,151 3,645
Interest-bearing deposits 635 725 486
------------- -------------- -----------
Total interest income 148,971 140,551 125,719
INTEREST EXPENSE:
Deposits 64,146 60,414 55,350
Notes payable and other borrowings 24,971 23,782 19,148
Other 484 520 480
------------- -------------- -----------
Total interest expense 89,601 84,716 74,978
------------- -------------- -----------
Net interest income 59,370 55,835 50,741
Provision for loan losses 300 500 475
------------- -------------- -----------
Net interest income after provision for loan losses 59,070 55,335 50,266
NON-INTEREST INCOME:
Loan servicing income 3,145 2,970 2,741
Service charges on deposits 3,881 3,679 3,175
Insurance commissions 1,159 1,366 700
Gain on sale of assets 3,306 1,241 892
Net income (loss) from operations of real estate investment (437) 2,406 (73)
Other 1,158 1,889 1,728
------------- -------------- -----------
Total non-interest income 12,212 13,551 9,163
NON-INTEREST EXPENSES:
Compensation 20,147 21,293 19,050
Occupancy 2,921 3,046 2,772
Federal insurance premiums 836 2,201 2,669
Federal insurance special assessment - 7,663 -
Furniture and equipment 2,951 2,778 2,551
Data processing 2,615 2,164 2,133
Marketing 2,152 1,962 1,575
Net cost (income) of operations of foreclosed properties (68) (128) 127
Other 6,740 6,427 6,087
------------- -------------- -----------
Total non-interest expenses 38,294 47,406 36,964
------------- -------------- -----------
Income before income taxes 32,988 21,480 22,465
Income taxes 12,487 7,532 7,959
------------- -------------- -----------
Net income $ 20,501 $ 13,948 $ 14,506
============= ============== ===========
Earnings per share
Basic $ 2.27 $ 1.50 $ 1.42
Diluted 2.12 1.42 1.35
See accompanying Notes to Consolidated Financial Statements.
48
50
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
-------------------------------------------------------------
(Dollars in thousands except per share data)
Balance at March 31, 1995 $ 1,250 $ 47,013 $ 88,094 $ (21,790)
Comprehensive income:
Net income - - 14,507 -
Change in net unrealized
losses on available-for-sale
securities, net of tax of $55,000 - - - -
Comprehensive income
Purchase of treasury stock
(640,749 shares) - - - (19,756)
Exercise of stock options - - (758) 1,064
Cash dividend ($0.16 per share) - - (1,652) -
Recognition plan shares vested - - - -
Tax benefit from stock
related compensation - 272 - -
Repayment of ESOP borrowings - - - -
Purchase of American Equity - 2,187 - 11,184
Stock split fractional shares - (11) - -
- ---------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 1,250 49,461 100,191 (29,298)
===========================================================
Comprehensive income:
Net income - - 13,948 -
Change in net unrealized
losses on available-for-sale
securities, net of tax of $60,000 - - - -
Comprehensive income
Purchase of treasury stock
(397,399 shares) - - - (14,221)
Exercise of stock options - - (1,180) 1,582
Cash dividend ($0.24 per share) - - (2,224) -
Recognition plan shares vested - - - -
Tax benefit from stock
related compensation - 357 - -
Repayment of ESOP borrowings - - - -
- ---------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 1,250 49,818 110,735 (41,937)
===========================================================
Comprehensive income:
Net income - - 20,501 -
Change in net unrealized
losses on available-for-sale
securities, net of tax of $1,060,000 - - - -
Comprehensive income
Purchase of treasury stock
(256,550 shares) - - - (9,567)
Exercise of stock options - - (2,811) 3,544
Cash dividend ($0.31 per share) - - (2,810) -
Recognition plan shares vested - - - -
Tax benefit from stock
related compensation - 516 - -
Borrowing - ESOP - - - -
Repayment of ESOP borrowings - - - -
- ---------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ 1,250 $ 50,334 $ 125,615 $ (47,960)
===========================================================
COMMON STOCK NET
PURCHASED BY UNREALIZED
BORROWING - RECOGNITION GAIN (LOSS)
ESOP PLANS AFS TOTAL
-----------------------------------------------------------
(Dollars in thousands except per share data)
Balance at March 31, 1995 $ (1,200) $ (1,534) $ (646) $ 111,187
Comprehensive income: -
Net income - - - 14,507
Change in net unrealized
losses on available-for-sale
securities, net of tax of $55,000 - - (82) (82)
-----------
Comprehensive income 14,425
Purchase of treasury stock
(640,749 shares) - - - (19,756)
Exercise of stock options - - - 306
Cash dividend ($0.16 per share) - - - (1,652)
Recognition plan shares vested - 246 - 246
Tax benefit from stock
related compensation - - - 272
Repayment of ESOP borrowings 928 - - 928
Purchase of American Equity (656) (258) - 12,457
Stock split fractional shares - - - (11)
- ----------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 (928) (1,546) (728) 118,402
==========================================================
Comprehensive income:
Net income - - - 13,948
Change in net unrealized
losses on available-for-sale
securities, net of tax of $60,000 - - (5) (5)
-----------
Comprehensive income 13,943
Purchase of treasury stock
(397,399 shares) - - - (14,221)
Exercise of stock options - - - 402
Cash dividend ($0.24 per share) - - - (2,224)
Recognition plan shares vested - 300 - 300
Tax benefit from stock
related compensation - - - 357
Repayment of ESOP borrowings 928 - - 928
- ----------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 - (1,246) (733) 117,887
==========================================================
Comprehensive income:
Net income - - - 20,501
Change in net unrealized
losses on available-for-sale
securities, net of tax of $1,060,000 - - 1,674 1,674
-----------
Comprehensive income 22,175
Purchase of treasury stock
(256,550 shares) - - - (9,567)
Exercise of stock options - - - 733
Cash dividend ($0.31 per share) - - - (2,810)
Recognition plan shares vested - 396 - 396
Tax benefit from stock
related compensation - - - 516
Borrowing - ESOP (2,069) - - (2,069)
Repayment of ESOP borrowings 690 - - 690
- ----------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ (1,379) $ (850) $ 941 $ 127,951
==========================================================
See accompanying Notes to Consolidated Financial Statements.
49
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
----------------------------------------------------------
1998 1997 1996
----------------------------------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 20,501 $ 13,948 $ 14,507
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans and foreclosed properties 325 1,000 675
Provision for depreciation and amortization 2,262 2,122 1,885
Net proceeds from origination and sale of loans held for sale 19,367 9,845 (1,817)
Net gain on sales of assets (3,306) (1,241) (892)
Increase in accrued interest receivable (146) (2,180) (2,367)
Increase in accrued interest payable 1,483 2,067 442
Increase (decrease) in accounts payable 3,548 (1,821) 2,392
Other 3,466 (3,882) 1,410
-------------- ------------- ---------------
Net cash provided by operating activities 47,500 19,858 16,235
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 19,745 39,809 50,562
Proceeds from maturities of investment securities 52,978 11,099 8,125
Purchase of investment securities available for sale (69,824) (55,328) (62,646)
Purchase of investment securities held to maturity (15,015) (5,949) (2,500)
Proceeds from sales of mortgage-related securities
available for sale 1,280 5,617 9,107
Purchase of mortgage-related securities available for sale (4,741) (2,057) (5,340)
Purchase of mortgage-related securities held to maturity (4,670) (26,725) (11,561)
Principal collected on mortgage-related securities 42,179 58,554 44,734
Net increase in loans receivable (163,269) (157,684) (146,808)
Purchase of office properties and equipment (2,317) (2,156) (2,485)
Sales of office properties and equipment 98 324 214
Sales of real estate 14,054 15,767 3,407
Purchase of real estate held for sale (7,756) (21,228) (10,374)
Decrease (increase) in capitalized expense on real estate 1,104 (64) (1,368)
-------------- ------------- ---------------
Net cash used by investing activities (136,154) (140,021) (126,933)
50
52
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
YEAR ENDED MARCH 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
(In Thousands)
FINANCING ACTIVITIES
Net increase in deposit accounts $ 78,450 $ 69,820 $ 77,955
Decrease in advance payments by borrowers
for taxes and insurance (720) (263) (813)
Proceeds from notes payable to Federal Home Loan Bank 513,500 525,496 407,250
Repayment of notes payable to Federal Home Loan Bank (488,870) (468,200) (391,195)
Increase (decrease) in securities sold under agreements
to repurchase 3,599 (8,247) 41,982
Increase (decrease) in other loans payable (5,209) 11,008 7,031
Treasury stock purchased (9,567) (14,221) (19,756)
Cash acquired as a result of acquisition - - 3,486
Stock options exercised 733 402 306
Payments of cash dividends to stockholders (2,810) (2,224) (1,652)
Cash repayment of ESOP borrowing 690 928 928
----------- ------------ --------------
Net cash provided by financing activities 89,796 114,499 125,522
----------- ------------ --------------
Net increase (decrease) in cash and cash equivalents 1,142 (5,664) 14,824
Cash and cash equivalents at beginning of year 38,025 43,689 28,865
----------- ------------ --------------
Cash and cash equivalents at end of year $ 39,167 $ 38,025 $ 43,689
=========== ============ ==============
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 88,118 $ 83,070 $ 74,536
Income taxes 10,155 7,648 8,370
Mortgage loans originated for sale 333,930 96,996 180,055
Sale of mortgage loans loans held for sale 353,297 106,841 178,238
Non-cash transactions:
Mortgage loans transferred to loans held for sale and other adjustments 32,079 56,163 77,973
Loans transferred to foreclosed properties 4,765 1,903 1,614
Mortgage loans held for investment converted into
mortgage-backed securities held to maturity - - 96,772
Mortgage-related securities transferred to
available for sale (at amortized cost) - - 90,376
American Equity BanCorp purchase:
Loans held for sale - - (5,969)
Loans receivable - - (85,244)
Other - - (17)
Deposits - - 64,803
Notes payable to Federal Home Loan Bank - - 26,314
51
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS Anchor BanCorp Wisconsin Inc. (the "Corporation") is a Wisconsin
corporation incorporated in 1992 for the purpose of becoming a savings and loan
holding company for AnchorBank, S.S.B. (the "Bank"), a wholly-owned subsidiary.
The Bank provides a full range of financial services to individual customers
through its branch locations in Wisconsin. The Bank is subject to competition
from other financial institutions and other financial service providers. The
Corporation and its subsidiary also are subject to the regulations of certain
federal and state agencies and undergo periodic examinations by those
regulatory authorities. The Corporation created a non-banking subsidiary in
fiscal 1996, Investment Directions, Inc. (IDI), which has invested in various
limited partnerships. IDI created a wholly-owned subsidiary in fiscal 1997,
Nevada Investment Directions, Inc., ("NIDI"), which has also invested in
various limited partnerships.
On June 30, 1995, the Corporation acquired American Equity BanCorp ("American")
of Stevens Point, Wisconsin. Upon closing, American's wholly-owned subsidiary,
American Equity Bank, was merged into the Bank as a branch office. American
was merged into the Corporation. The transaction was accounted for as a
purchase. The assets and liabilities of American were recorded at their
estimated fair value at the date of acquisition; results of operations were
included in the Consolidated Statement of Income since July 1, 1995. American
had total assets, deposits and stockholders' equity of $102.4 million, $65.3
million and $9.4 million, respectively.
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and include the accounts and operations of the Corporation, the
Bank, IDI and their respective subsidiaries, all of which are wholly-owned.
Significant intercompany accounts and transactions have been eliminated.
Investments in joint ventures and other less than 50% owned partnerships, which
are not material, are accounted for on the equity method. Partnerships over
50% ownership are consolidated, with significant intercompany accounts
eliminated.
In preparing the consolidated financial statements, 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.
CASH AND CASH EQUIVALENTS The Corporation considers federal funds sold and
interest-bearing deposits that have original maturities of three months or less
to be cash equivalents.
INVESTMENT AND MORTGAGE-RELATED SECURITIES HELD TO MATURITY AND AVAILABLE FOR
SALE Securities that the Corporation has the intent and ability to hold to
maturity are classified as held-to-maturity securities and are stated at
amortized cost. Securities not classified as held to maturity are classified
as available for sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity.
Discounts and premiums on investment and mortgage-backed securities are
accreted and amortized into interest income using the interest method over the
estimated remaining contractual life of the assets.
Realized gains and losses, and declines in value judged to be other than
temporary, are included in "Net gain (loss) on sale of securities" in the
consolidated statements of income. The cost of securities sold is based on the
specific identification method.
LOANS HELD FOR SALE Loans held for sale generally consist of the current
originations of certain fixed-rate mortgage loans and certain adjustable-rate
mortgage loans and are carried at the lower of aggregate cost or market value.
Fees received from the borrower and direct costs to originate are deferred and
recorded as an adjustment of the sales price.
52
54
MORTGAGE SERVICING RIGHTS On April 1, 1996, the Corporation adopted SFAS No.
122, "Accounting for Mortgage Servicing Rights," which provides for the
recognition of loan servicing rights as an asset when loans are sold with
servicing rights retained. The adoption of SFAS No. 122 resulted in an
increase in net income of $1.0 million for the year ended March 31, 1997.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair values of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on predominant risk characteristics of the underlying loans which include
product type (i.e., fixed or adjustable) and interest rate bands. The amount
of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
INTEREST ON LOANS Loans are placed on non-accrual status when, in the
judgment of management, the probability of collection of principal and 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
income. Loans are restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt. Allowances of
$247,000 and $670,000 were established at March 31, 1998 and 1997,
respectively, for interest on non-accrual status loans.
LOAN FEES AND DISCOUNTS Loan origination and commitment fees and certain
direct loan origination costs are deferred and amortized as an adjustment to
the related loan's yield. The Corporation is amortizing these amounts, as well
as discounts on purchased loans, using the level yield method, adjusted for
prepayments, over the contractual life of the related loans.
FORECLOSED PROPERTIES AND REPOSSESSED ASSETS Real estate acquired by
foreclosure or by deed in lieu of foreclosure and other repossessed assets are
carried at the lower of cost or fair value, less estimated selling expenses.
Costs relating to the development and improvement of the property are
capitalized; holding period costs are charged to expense. Losses on sales not
previously provided for are recognized upon closing of the sale.
ALLOWANCES FOR LOSSES Allowances for losses on loans and foreclosed properties
are maintained at a level believed adequate by management to absorb losses in
the respective portfolios. Management's evaluation of the allowance for loss
considers various factors including, but not limited to, general economic
conditions, the level of troubled assets, expected future cash flows, loan
portfolio composition, prior loss experience, estimated sales price of the
collateral, holding and selling costs and regulatory agencies. The evaluation
is inherently subjective as it requires material estimates including the
amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change. While management uses
available information to recognize losses, future additions to the allowances
may be necessary based on changes in economic conditions.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE Real estate held for development and
sale includes investments in partnerships which purchased land and other
property and also an investment in a multi-family residential property. These
investments are carried at the lower of cost plus capitalized development costs
and interest, less accumulated depreciation, or estimated fair value.
OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are recorded
at cost and include expenditures for new facilities and items that
substantially increase the useful lives of existing buildings and equipment.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts and
the resulting gain or loss is recorded in income.
DEPRECIATION AND AMORTIZATION The cost of office properties and equipment is
being depreciated principally by the straight-line method over the estimated
useful lives of the assets. The cost of leasehold improvements is amortized on
the straight-line method over the lesser of the term of the respective lease or
estimated economic life.
53
55
STOCK OPTIONS The Corporation has elected to follow Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB No. 25, because the exercise price of the Corporation's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
EARNINGS PER SHARE On April 1, 1997, the corporation adopted SFAS No. 128,
"Earnings Per Share." Under SFAS No. 128, the corporation changed the method
used to compute earnings per share and restated all prior periods. The
corporation now reports basic and diluted earnings per share in place of
primary amd fully diluted earnings per share. The computation of basic
earnings per share excluded the dilutive effect of common stock equivalents.
Stock options issued to employees and directors represent the only common stock
equivalent of the corporation. Diluted earnings per share reflect the
potential dilutive effect of stock options computed using the treasury stock
method. The resulting number of shares used in computing basic earnings per
share for the years ended March 31, 1998, 1997 and 1996 is 9,046,523, 9,319,336
and 10,233,418, respectively. The resulting number of shares used in computing
fully diluted earnings per share for the years ended March 31, 1998, 1997 and
1996 is 9,674,499, 9,854,780 and 10,738,092, respectively.
NEW ACCOUNTING STANDARDS The company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
as amended by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." The adoption of SFAS no. 125 did not
have a material effect on the Corporation's financial condition or results of
operations.
As of January 1, 1998, the corporation adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Corporation's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on the
Corporation's available-for-sale securities and foreign unrealized gains or
losses (the latter of which is not applicable to the Corporation), which prior
to adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information (Statement 131), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual and interim financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The corporation is not required to disclose
segment information in accordance with Statement 131 until March 31, 1999.
RECLASSIFICATIONS Certain 1997 and 1996 accounts have been reclassified to
conform to the 1998 presentations. All share and per share amounts for 1997
and 1996 have been adjusted to reflect the two-for-one stock split distributed
in August 1997. Cash dividends per share were also restated.
54
56
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities are as follows (in
thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------
AT MARCH 31, 1998:
Available for Sale:
U.S. Government and federal agency obligations $ 21,821 $ 94 $ (56) $ 21,859
Mutual funds 14,099 11 (6) 14,104
Corporate stock and other 2,747 855 (10) 3,592
------------- ---------- -------- -------------
$ 38,667 $ 960 $ (72) $ 39,555
============= ========== ======== =============
Held to Maturity:
U.S. Government and federal agency obligations $ 17,587 $ 35 $ (40) $ 17,582
============= ========== ======== =============
AT MARCH 31, 1997:
Available for Sale:
U.S. Government and federal agency obligations $ 26,877 $ 15 $ (375) $ 26,517
Mutual funds 6,068 - (2) 6,066
Corporate stock and other 2,685 301 - 2,986
------------- ---------- -------- -------------
$ 35,630 $ 316 $ (377) $ 35,569
============= ========== ======== =============
Held to Maturity:
U.S. Government and federal agency obligations $ 7,947 $ 1 $ (58) $ 7,890
============= ========== ======== =============
Proceeds from sales of investment securities available for sale during the
years ended March 31, 1998, 1997 and 1996 were $19,745,000, $39,809,000 and
$50,562,000, respectively. Gross gains of $3,000, $16,000 and $31,000 were
realized on sales in 1998, 1997 and 1996, respectively. Gross losses of
$28,000 were realized in 1996.
The amortized cost and fair value of investment securities by contractual
maturity at March 31, 1998 are shown below (in thousands). Actual maturities
may differ from contractual maturities because issuers have the right to call
or prepay obligations with or without call or prepayment penalties. Government
agency securities subject to three and six month calls amount to $3.5 million
and $3.0 million, respectively, at March 31, 1998.
AVAILABLE FOR SALE HELD TO MATURITY
-----------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-----------------------------------------------------------------
Due in one year or less $ 22,022 $ 22,020 $ - $ -
Due after one year through five years 13,398 13,447 11,258 11,275
Due after five years 500 495 6,329 6,307
Corporate stock 2,747 3,593 - -
------------- ------------ ------------ ----------
$ 38,667 $ 39,555 $ 17,587 $ 17,582
============= ============ ============ ==========
55
57
NOTE 3 - MORTGAGE-RELATED SECURITIES
Mortgage-related securities are backed by governmental agencies, including the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association and the Government National Mortgage Association. CMO's and REMICS
have estimated average lives of five years or less.
The amortized cost and fair values of mortgage-related securities are as
follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------
AT MARCH 31, 1998:
Available for Sale:
CMO's and REMICS $ 1,112 $ - $ (1) $ 1,111
Mortgage-backed securities 65,729 732 (46) 66,415
--------------- ------------ -------------- ------------
$ 66,841 $ 732 $ (47) $ 67,526
=============== ============ ============== ============
Held to Maturity:
CMO's and REMICS $ 23,515 $ 101 $ (71) $ 23,545
Mortgage-backed securities 103,724 1,076 (212) 104,588
--------------- ------------ -------------- ------------
$ 127,239 $ 1,177 $ (283) $ 128,133
=============== ============ ============== ============
AT MARCH 31, 1997:
Available for Sale:
CMO's and REMICS $ 2,164 $ - $ (23) $ 2,141
Mortgage-backed securities 79,234 168 (1,243) 78,159
--------------- ------------ -------------- ------------
$ 81,398 $ 168 $ (1,266) $ 80,300
=============== ============ ============== ============
Held to Maturity:
CMO's and REMICS $ 30,961 $ 4 $ (403) $ 30,562
Mortgage-backed securities 129,140 342 (2,219) 127,263
--------------- ------------ -------------- ------------
$ 160,101 $ 346 $ (2,622) $ 157,825
=============== ============ ============== ============
Proceeds from sales of mortgage-related securities available for sale during
the years ended March 31, 1998, 1997 and 1996 were $1,280,000, $5,617,000 and
$9,107,000, respectively. Gross gains of $38,000 and $248,000 were realized on
sales in 1998 and 1996, respectively. No losses were realized in 1998. Gross
losses of $4,000 were realized in 1996. No gains or losses were realized on
sales of mortgage-related securities in 1997.
56
58
NOTE 4 - LOANS RECEIVABLE
Loans receivable held for investment consist of the following (in thousands):
MARCH 31,
-----------------------------------------------
1998 1997
-----------------------------------------------
FIRST MORTGAGE LOANS:
Single-family residential $ 817,763 $ 731,732
Multi-family residential 177,350 164,729
Commercial real estate 183,914 171,186
Construction 120,376 106,536
Land 12,503 15,730
---------------- -------------------
1,311,906 1,189,913
Second mortgage loans 183,874 176,348
Education loans 121,306 112,420
Commercial business loans and leases 30,244 29,022
Credit card and other consumer loans 32,841 34,682
---------------- -------------------
1,680,171 1,542,385
Less:
Undisbursed loan proceeds 62,756 54,002
Allowance for loan losses 21,833 22,750
Unearned loan fees 3,839 3,373
Discount on purchased loans 625 748
Unearned interest 29 89
---------------- -------------------
89,082 80,962
---------------- -------------------
$ 1,591,089 $ 1,461,423
================ ===================
A summary of the activity in the allowance for loan losses follows (in
thousands):
YEAR ENDED MARCH 31,
-------------------------------------------------
1998 1997 1996
-------------------------------------------------
Balance at beginning of year $ 22,750 $ 22,807 $ 22,429
Acquired bank's allowance - - 550
Provisions 300 500 475
Charge-offs (2,196) (980) (998)
Recoveries 979 423 351
------------- ----------- ------------
Balance at end of year $ 21,833 $ 22,750 $ 22,807
============= =========== ============
A substantial portion of the Bank's loans are collateralized by real estate in
and around Dane County, Wisconsin. Accordingly, the ultimate collectibility of
a substantial portion of the loan portfolio is susceptible to changes in market
conditions in that area.
Mortgage loans serviced for others are not included in the consolidated balance
sheets. The unpaid principal balances of mortgage loans serviced for others
were approximately $1,108,839,000 and $1,101,211,000 at March 31, 1998 and
1997, respectively.
57
59
Mortgage servicing rights, included in other assets, of $2,360,000 and
$1,370,000, were capitalized during the years ended March 31, 1998 and 1997,
respectively. Amortization of mortgage servicing rights was $793,000 and
$148,000 for the years ended March 31, 1998 and 1997, respectively.
NOTE 5 - FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties, repossessed assets and properties subject to redemption
had a cost of $5,048,000 and $5,300,000 at March 31, 1998 and 1997,
respectively. At March 31, 1998 and 1997, an allowance for losses of $325,000
and $1,078,000, respectively, related to these assets.
The activity in the allowance for losses on foreclosed properties and
repossessed assets was as follows (in thousands):
YEAR ENDED MARCH 31,
-------------------------------------------------
1998 1997 1996
-------------------------------------------------
Balance at beginning of year $ 1,078 $ 717 $ 787
Provision 25 500 200
Charge-offs (778) (139) (270)
----------- ------------- ------------
Balance at end of year $ 325 $ 1,078 $ 717
=========== ============= ============
Provision for losses on foreclosed properties and repossessed assets are
included in "Net Cost (income) from operations of foreclosed properties" in the
consolidated statements of income.
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands):
March 31,
---------------------------------
1998 1997
---------------------------------
Land and land improvements $ 3,942 $ 3,949
Office buildings 18,225 17,292
Furniture and equipment 17,035 15,812
Leasehold improvements 2,198 2,141
----------- -----------
41,400 39,194
Less allowance for depreciation and amortization 22,760 20,532
----------- -----------
$ 18,640 $ 18,662
=========== ===========
58
60
NOTE 7 - DEPOSITS
Deposits are summarized as follows (in thousands):
MARCH 31,
------------------------
1998 1997
------------------------
Negotiable order of withdrawal ("NOW") accounts: $ 165,485 $ 136,040
Money market accounts 193,244 168,970
Passbook accounts 100,513 100,124
Certificates of deposit 923,905 899,564
---------- ----------
1,383,147 1,304,698
Accrued interest on deposits 9,325 7,747
---------- ----------
$1,392,472 $1,312,445
========== ==========
A summary of annual maturities of certificates of deposit follows (in
thousands):
MATURES DURING YEAR ENDED MARCH 31, AMOUNT
- --------------------------------------------------------------------
1999 $749,478
2000 110,792
2001 44,977
2002 6,299
Thereafter 12,359
$923,905
At March 31, 1998 and 1997, certificates of deposit with balances greater than
or equal to $100,000 amounted to $124,435,000 and $103,991,000, respectively.
NOTE 8 - BORROWINGS
The Bank enters into sales of securities under agreements to repurchase the
securities ("reverse repurchase agreements"). These agreements are treated as
financings with the obligations to repurchase securities reflected as a
liability and the dollar amount of securities underlying the agreements
remaining in the asset accounts. The securities underlying the agreements are
held by the counter-party brokers in the Bank's account. At March 31, 1998 and
1997, liabilities recorded under agreements to repurchase were $42,935,000 and
$39,335,000, respectively. The reverse repurchase agreements had a
weighted-average interest rate of 5.60% and 5.43% at March 31, 1998 and 1997,
respectively, and mature within one year of the fiscal year-end. Based upon
month-end balances, securities sold under agreements to repurchase averaged
$22,923,000 and $63,189,000 during 1998 and 1997, respectively. The maximum
outstanding at any month-end was $45,214,000 and $67,316,000 during 1998 and
1997, respectively. The agreements were collateralized by mortgage-backed
securities available for sale and held to maturity with market values of
$44,649,646 and $40,609,471 at March 31, 1998 and 1997, respectively.
59
61
Federal Home Loan Bank ("FHLB") advances and other loans payable consist of the
following (dollars in thousands):
MARCH 31, 1998 MARCH 31, 1997
--------------------------------------
MATURES DURING WEIGHTED WEIGHTED
YEAR ENDED MARCH 31, AMOUNT RATE AMOUNT RATE
--------------------------------------------------------------
FHI.B advances 1998 -- -- $ 268,370 5.73%
1999 306,950 5.77% 79,950 5.73
2000 51,049 5.91 25,049 5.81
2001 8,296 5.88 796 6.24
2002 7,500 5.64 -- --
2008 25,000 4.84 -- --
Other loans payable various 12,830 8.78 18,039 8.19
--------- ---------
$ 411,625 5.82% $ 392,204 5.85%
========= ===== ========= ====
The Bank is required to maintain unencumbered first mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the FHLB as collateral. In addition, these notes are collateralized by FHLB
stock of $22,002,000 at March 31, 1998.
NOTE 9 - STOCKHOLDERS' EQUITY
The Board of Directors of the Corporation is authorized to issue preferred stock
in series and to establish the voting powers, other special rights of the shares
of each such series and the qualifications and restrictions thereof. Preferred
stock may rank prior to the common stock as to dividend rights, liquidation
preferences or both, and may have full or limited voting rights. Under Wisconsin
state law, preferred stockholders would be entitled to vote as a separate class
or series in certain circumstances, including any amendment which would
adversely change the specific terms of such series of stock or which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. No preferred stock has been issued.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of core, tangible, and
risk-based capital. Management believes, as of March 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of March 31, 1998, the most recent notification from the Office of Thrift
Supervision ("OTS") categorizes the Bank as well capitalized under the framework
for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum core, tangible, and risk-based capital ratios as set forth
in the following table. There have been no conditions or events since that
notification that management believes have changed the Bank's category. The
qualification results in a lower assessment of FDIC premiums and other benefits.
60
62
The following table summarizes the Bank's capital ratios and the ratios required
by its regulators at March 31, 1998 (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 MARCH 31, 1998:
Tier 1 capital
(to adjusted tangible assets) $111,845 5.64% $ 59,447 3.00% $ 99,078 5.00%
Risk-based capital
(to risk-based assets) 127,542 10.18 100,260 8.00 125,325 10.00
Tangible capital
(to tangible assets) 111,845 5.64 29,723 1.50 N/A N/A
AS OF MARCH 31, 1997:
Tier 1 capital
(to adjusted tangible assets) 107,206 5.77 55,774 3.00 92,956 5.00
Risk-based capital
(to risk-based assets) 121,429 10.69 90,882 8.00 113,602 10.00
Tangible capital
(to tangible assets) 107,206 5.77 27,887 1.50 N/A N/A
61
63
The following table reconciles stockholder equity to the component of regulatory
capital at March 31, 1998 and 1997 (dollars in thousands):
1998 1997
------------------------------
AS OF MARCH 31, 1998:
Stockholders' equity of the Corporation $ 127,951 $ 117,887
Less: Capitalization of the Corporation and Non-Bank
subsidiaries (13,531) (9,267)
--------- ---------
Stockholders' equity of the Bank 114,420 108,620
Less: Intangible assets and other non-includable assets (2,575) (1,414)
--------- ---------
Tier 1 and tangible capital 111,845 107,206
Plus: Allowable general valuation allowances 15,697 14,223
--------- ---------
Risk based capital 127,542 121,429
========= =========
The Bank may not declare or pay a cash dividend if such declaration and payment
would violate regulatory requirements. Unlike the Bank, the Corporation is not
subject to these regulatory restrictions on the payment of dividends to its
stockholders. However, the source of its future corporate dividends may depend
upon dividends from the Bank.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Corporation maintains a defined contribution plan that covers substantially
all employees with more than one year of service who are at least 21 years of
age. Participating employees may contribute up to 18% (8% before tax and 10%
after tax) of their compensation. The Corporation matches the amounts
contributed by each participating employee up to 2% of the employee's
compensation and 25% of each employee's contributions up to the next 4% of
compensation. The Corporation may also contribute additional amounts at its
discretion. The Corporation's contribution was $364,000, $335,000 and $307,000
for the years ended March 31, 1998, 1997 and 1996, respectively.
The Corporation sponsors an Employee Stock Ownership Plan ("ESOP") which covers
substantially all employees with more than one year of employment who are at
least 21 years of age. In 1992, the ESOP borrowed $3,000,000 from the
Corporation to purchase 375,000 common shares. The Bank repaid the borrowing and
all shares associated with that borrowing were released in 1997. In 1998, the
ESOP borrowed $2,069,000 from the Corporation to purchase 50,000 more common
shares. The Bank has repaid $690,000 and 16,667 of the shares associated with
this borrowing have been released. Any discretionary contributions to the ESOP
and the shares calculated to be released from the suspense account have been
allocated among participants on the basis of compensation. Forefeitures are
reallocated among the remaining participating employees. The dividends on ESOP
shares were used to purchase additional shares to be allocated under the plan.
The number of shares allocated to participants is determined based on the annual
contribution plus any shares purchased from dividends received during the year.
The ESOP plan expense for the fiscal years 1998, 1997 and 1996 was $686,000,
$1,003,000 and $1,074,000, respectively.
62
64
The activity in the ESOP shares is as follows:
YEAR ENDED MARCH 31,
------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
Balance at beginning of year 790,356 819,282 754,950
Additional shares purchased 64,017 - 73,582
Shares distributed for terminations (18,576) (14,210) -
Sale of shares for cash distributions (60,206) (14,716) (9,250)
-------- -------- -------
Balance at end of year 775,591 790,356 819,282
Allocated shares included above 742,258 790,356 659,240
-------- -------- --------
Unreleased shares 33,333 - 160,042
======== ======== ========
During 1992, the Corporation formed four Management Recognition Plans ("MRPs")
which acquired a total of 4% of the shares of common stock. The Bank contributed
$2,000,000 to the MRPs to enable the MRP trustee to acquire a total of 250,000
shares of common stock. Of these shares, 4,600, 5,600 shares and 2,400 shares
were granted during the years ended March 31, 1998, 1997 and 1996, respectively,
to employees in management positions. This was done in order to provide them
with a proprietary interest in the Corporation in a manner designed to encourage
such employees to remain with the Corporation. The $2,000,000 contributed to the
MRPs is being amortized to compensation expense as the Bank's employees become
vested in the awarded shares. The amount amortized to expense was $175,000,
$334,000 and $287,000 for the years ended March 31, 1998, 1997 and 1996,
respectively. Shares vested during the years ended March 31, 1998, 1997 and 1996
and distributed to the employees totalled 62,800, 60,082 and 60,082
respectively. The remaining unamortized cost of the MRPs is reflected as a
reduction of stockholders' equity.
The Corporation has stock option plans under which shares of common stock are
reserved for the grant of both incentive and non-incentive stock options to
directors, officers and employees. The date on the options are first exercisable
is determined by a committee of the Board of Directors of the Corporation. The
options expire no later than ten years from the grant date.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Corporation has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The
Corporation's pro forma net income and pro forma primary earnings per share for
fiscal 1998, 1997, and 1996 were not materially different from the net income
and basic earnings per share disclosed in the consolidated statements of income.
63
65
A summary of stock options activity follows:
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------------------------------------------------------------------------
Outstanding at beginning of year 1,139,968 $ 9.02 1,106,838 $ 7.74 767,500 $ 5.50
Granted 265,615 24.42 124,844 17.01 420,540 11.26
Exercised (128,818) 5.42 (88,794) 4.27 (73,702) 4.15
Forfeited -- 0.00 (2,920) 10.34 (7,500) 10.04
-- --------- ---------
Outstanding at end of year 1,276,765 12.57 1,139,968 9.02 1,106,838 7.74
========= ========= =========
Options exercisable at year-end 966,391 315,962 520,658
========= ========= =========
The range of exercise prices of options exercisable at March 31, 1998 was $4.00
to $25.98. At March 31, 1998, options for 570,972 shares were available for
future grants. The weighted remaining contractual life of outstanding options at
March 31, 1998 is 6.7 years.
The Corporation has two deferred compensation plans to benefit certain
executives of the Corporation and the Bank. The first plan provides for
contributions by both the participant and the Corporation equal to the amounts
in excess of limitations imposed by the Internal Revenue Code amendment of 1986.
The expense associated with this plan for fiscal 1998, 1997 and 1996 was
$39,000, $358,000 and $134,000, respectively. The second plan provides for
contributions by the Corporation to supplement the participant's retirement. The
expense associated with this plan for fiscal 1998, 1997 and 1996 was $312,000,
$330,000 and $534,000, respectively.
NOTE 11 - INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns.
In prior years, the Bank qualified under provisions of the Internal Revenue Code
which permitted as a deduction from taxable income allowable bad debt deductions
which significantly exceeded actual losses and the financial statement loan loss
provisions. At March 31, 1997, retained earnings included approximately
$31,320,000 for which no provision for income tax has been made. Income taxes of
approximately $10,900,000 would be imposed if the Bank were to use these
reserves for any purpose other than to absorb bad debt losses.
64
66
The provision (benefit) for income taxes consists of the following (in
thousands):
YEAR ENDED MARCH 31,
1998 1997 1996
----------------------------------------------------------
Current:
Federal $ 9,829 $ 6,282 $ 6,629
State 1,429 1,362 1,038
------- ------- -------
11,258 7,644 7,667
Deferred:
Federal 1,042 321 276
State 187 (433) 16
------- ------ -------
1,229 (112) 292
------- ------ -------
$12,487 $ 7,532 $ 7,959
======= ======= =======
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
YEAR ENDED MARCH 31,
1998 1997 1996
----------------------------------------------------------
Income before income taxes $ 32,988 $21,480 $22,466
Income tax expense at federal statutory ======== ======= =======
rate of 35% 11,546 7,518 7,863
State income taxes, net of federal income
tax benefits $ 1,050 $ 604 $ 725
Reduction in valuation allowance - (638) (600)
Other (109) 48 (29)
------- ------- -------
Income tax provision $ 12,487 $ 7,532 $ 7,959
======== ======= ========
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
65
67
The significant components of the Corporation's deferred tax assets
(liabilities) are as follows (in thousands):
AT MARCH 31,
1998 1997 1996
---------------------------------------------------------
Deferred tax assets:
Allowances for losses $ 7,020 $7,587 $ 8,313
Other 2,530 2,495 2,185
------- ------ -------
Total deferred tax assets 9,550 10,082 10,498
Valuation allowance - -- (638)
-- ------ -------
Adjusted deferred tax assets 9,550 10,082 9,860
Deferred tax liabilities:
Other (3,153) (1,396) (1,233)
------- ------ -------
Total deferred tax liabilities (3,153) (1,396) (1,233)
------- ------ -------
Total deferred tax assets $ 6,397 $8,686 $ 8,627
======= ====== =======
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, loans sold
with recourse against the Corporation and financial guarantees which involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract amounts of
those instruments reflect the extent of involvement and exposure to credit loss
the Corporation has in particular classes of financial instruments. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk are as
follows (in thousands):
MARCH 31,
-------------------------------------------
1998 1997
-------------------------------------------
Commitments to extend credit:
Fixed rate 32,700 $ 12,200
Adjustable rate 33,100 13,600
Unused lines of credit:
Home equity 23,100 20,600
Credit cards 19,900 16,700
Commercial 15,100 13,900
Letters of credit 17,400 13,800
Loans sold with recourse 1,900 2,100
Commitments to extend credit and unused lines of credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Letters of credit commit the Corporation to make payments on
behalf of customers when certain specified future events occur. Commitments and
letters of credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee. As some such commitments expire
without being drawn upon, the total commitment amounts do not necessarily
represent future
66
68
cash requirements. The Corporation evaluates each customer's creditworthiness on
a case-by-case basis. With the exception of credit card lines of credit, the
Corporation generally extends credit only on a secured basis. Collateral
obtained varies, but consists primarily of single-family residences and
income-producing commercial properties. Fixed-rate loan commitments expose the
Corporation to a certain amount of interest rate risk if market rates of
interest substantially increase during the commitment period. Similar risks
exist relative to loans classified as held for sale, which totalled $18,060,000
and $5,348,000 at March 31, 1998 and 1997, respectively. This exposure, however,
is mitigated by the existence of firm commitments to sell the majority of the
fixed-rate loans. Commitments to sell mortgage loans within 60 days at March 31,
1998 and 1997 amounted to $41,208,000 and $15,462,000, respectively.
Loans sold to investors with recourse to the Corporation met the underwriting
standards of the investor and the Corporation at the time of origination. In the
event of default by the borrower, the investor may resell the loans to the
Corporation at par value. As the Corporation expects relatively few such loans
to become delinquent, the total amount of loans sold with recourse does not
necessarily represent future cash requirements. Collateral obtained on such
loans consists primarily of single-family residences.
Except for the above-noted commitments to originate and/or sell mortgage loans
in the normal course of business, the Corporation and the Bank have not
undertaken the use of off-balance sheet derivative financial instruments for any
purpose.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about financial instruments, for which it
is practicable to estimate that value, is required whether or not recognized in
the consolidated balance sheets. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Certain financial instruments and
all non-financial instruments are excluded from the disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not necessarily
represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST: The carrying amounts reported in
the balance sheets approximate those assets' and liabilities' fair values.
INVESTMENT AND MORTGAGE-RELATED SECURITIES: Fair values for investment and
mortgage-related securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for loans held for sale are based on outstanding sale commitments or
quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair value
of fixed-rate residential mortgage loans held for investment, commercial real
estate loans, rental property mortgage loans and consumer and other loans and
leases are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. For construction loans, fair values are based on carrying values
due to the short-term nature of the loans.
MORTGAGE SERVICING RIGHTS: The fair value of mortgage servicing rights is
estimated using discounted cash flows based on a current market interest rate.
67
69
FEDERAL HOME LOAN BANK STOCK: The carrying amount of FHLB stock equals its fair
value because the shares can be resold to the FHLB or other member banks at
their carrying amount of $100 per share par amount.
DEPOSITS: The fair values disclosed for NOW accounts, passbook accounts and
variable rate insured money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
The fair values of fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies current incremental interest rates
being offered on certificates of deposit to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit.
BORROWINGS: The fair value of the Corporation's borrowings are estimated using
discounted cash flow analysis, based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
OFF-BALANCE SHEET INSTRUMENTS: Fair values of the Corporation's
off-balance-sheet instruments (lending commitments and unused lines of credit)
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements, the counterparties' credit
standing and discounted cash flow analyses. The fair value of these off-balance
sheet items approximates the recorded amounts of the related fees and is not
material at March 31, 1998 and 1997.
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following (in thousands):
MARCH 31,
----------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------------------------------
Cash equivalents $ 39,167 $ 39,167 $ 38,025 $ 38,025
Investment securities 57,142 57,137 43,516 43,459
Mortgage-related securities 194,765 195,659 240,401 238,125
Loans held for sale 18,060 18,060 5,648 5,348
Loans receivable 1,608,572 1,615,590 1,484,173 1,453,632
Mortgage servicing rights 3,237 2,787 1,109 1,221
Federal Home Loan Bank stock 22,002 22,840 18,981 18,981
Accrued interest receivable 13,875 13,875 13,729 13,729
Deposits 1,383,148 1,366,346 1,304,698 1,306,557
Federal Home Loan Bank and other borrowings 398,795 397,787 392,204 389,848
Reverse repurchase agreements 42,935 42,915 39,335 39,313
Accrued interest payable 11,410 11,410 9,926 9,926
68
70
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS (in thousands):
MARCH 31,
-----------------------------------------
1998 1997
-----------------------------------------
ASSETS
Cash and cash equivalents $ 843 $ 1,408
Investment in subsidiaries 120,312 114,689
Securities available for sale 2,597 1,992
Loans receivable, net - 674
Other 7,761 8,793
--------- ---------
Total assets $ 131,513 $ 127,556
========= =========
LIABILITIES
Loans payable $ 2,000 $ 8,500
Other liabilities 1,562 1,169
--------- ---------
Total liabilities 3,562 9,669
--------- ---------
STOCKHOLDERS' EQUITY
Total stockholders' equity 127,951 117,887
--------- ---------
Total liabilities and stockholders' equity $ 131,513 $ 127,556
========= =========
CONDENSED STATEMENTS OF INCOME (in thousands):
YEAR ENDED MARCH 31,
--------------------------------------------------------
1998 1997 1996
--------------------------------------------------------
Interest income $ 901 $ 605 $ 713
Interest expense 288 364 43
------- ------- --------
Net interest income 613 241 670
Equity in net income from subsidiaries 20,332 13,550 13,978
Non-interest income 29 722 527
------- ------- --------
20,974 14,513 15,175
Non-interest expenses 373 298 313
------- ------- --------
Income before income taxes 20,601 14,215 14,862
Income taxes 100 267 355
------- ------- --------
Net income $20,501 $13,948 $ 14,507
======= ======= ========
71
CONDENSED STATEMENTS OF CASH FLOWS (in thousands):
YEAR ENDED MARCH 31,
------------------------------------------
1998 1997 1996
------------------------------------------
OPERATING ACTIVITIES
Net income $ 20,501 $ 13,948 $ 14,507
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in net income of subsidiaries (20,333) (13,550) (13,978)
Other 618 (638) 1,041
-------- -------- --------
Net cash provided (used) by operating activities 786 (240) 1,570
INVESTING ACTIVITIES
Proceeds from maturities of investment securities - 99 -
Purchase of investment securities available for sale (306) (898) (791)
Purchase of investment securities held to maturity - - (96)
Proceeds from sales of mortgage-related securities available for sale 245 - 2,619
Purchase of mortgage-related securities held to maturity - - -
Principal collected on mortgage-backed securities - 2 282
Net decrease (increase) in loans receivable (674) 594 (3,683)
Dividends from subsidiary 16,573 11,528 13,805
Other 265 70 (4,375)
-------- ------- --------
Net cash provided by investing activities 16,103 11,395 7,761
FINANCING ACTIVITIES
Increase (decrease) in other loans payable (6,500) 3,502 4,998
Purchase of treasury stock (9,567) (14,220) (19,756)
Exercise of stock options 733 402 306
Cash dividend paid (2,810) (2,224) (1,652)
Repayment of ESOP borrowings 690 928 928
-------- ------- --------
Net cash used by financing activities (17,454) (11,612) (15,176)
-------- ------- --------
Increase (decrease) in cash and cash equivalents (565) (457) (5,845)
Cash and cash equivalents at beginning of year 1,408 1,865 7,710
-------- ------- -------
Cash and cash equivalents at end of year $ 843 $ 1,408 $ 1,865
======== ======= =======
70
72
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Anchor BanCorp Wisconsin Inc.
We have audited the accompanying consolidated balance sheets of Anchor BanCorp
Wisconsin Inc. (the "Corporation") as of March 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Corporation at
March 31, 1998 and 1997, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
April 29, 1998
Milwaukee, Wisconsin
71
73
MANAGEMENT AND AUDIT COMMITTEE REPORT
Management is responsible for the preparation, content and integrity of the
financial statements and all other financial information included in this annual
report. The financial statements have been prepared in accordance with generally
accepted accounting principles.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance as to the integrity of financial records and the protection
of assets. The system of internal controls includes written policies and
procedures, proper delegation of authority, organizational division of
responsibilities and the careful selection and training of qualified personnel.
In addition, the internal auditors and independent auditors periodically test
the system of internal controls.
Management recognizes that the cost of a system of internal controls should not
exceed the benefits derived and that there are inherent limitations to be
considered in the potential effectiveness of any system. However, management
believes that the system of internal controls provides reasonable assurances
that financial transactions are recorded properly to permit the preparation of
reliable financial statements.
The Audit Committee of the Board of Directors is composed of outside directors
and has the responsibility for the recommendation of the independent auditors
for the Corporation. The committee meets regularly with the independent auditors
and internal auditors to review the scope of their audits and audit reports and
to discuss any action to be taken. The independent auditors and the internal
auditors have free access to the Audit Committee.
/s/ Douglas J. Timmerman
Douglas J. Timmerman
President and Chief Executive Officer
/s/ Michael W. Helser
Michael W. Helser
Treasurer and Chief Financial Officer
/s/ Arlie M. Mucks, Jr.
Arlie M. Mucks, Jr.
Chairman, Audit Committee
April 29, 1998
72
74
QUARTERLY FINANCIAL INFORMATION
MAR 31, DEC 31, SEP 30, JUN 30, MAR 31, DEC 31, SEP 30, JUN 30,
1998 1997 1997 1997 1997 1996 1996 1996
---------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Interest income:
Loans $ 32,765 $ 32,405 $ 32,508 $ 31,330 $ 30,609 $ 30,069 $ 29,615 $ 29,725
Securities 4,757 5,311 5,032 4,862 4,909 5,675 5,422 4,528
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income 37,522 37,716 37,540 36,192 35,518 35,744 35,037 34,253
Interest expense:
Deposits 16,207 16,240 15,998 15,700 15,294 15,662 14,991 14,467
Borrowings and other 6,119 6,451 6,560 6,326 5,881 6,335 6,345 5,741
-------- -------- -------- -------- -------- -------- -------- --------
Total interest expense 22,326 22,691 22,558 22,026 21,175 21,997 21,336 20,208
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 15,196 15,025 14,982 14,166 14,343 13,747 13,701 14,045
Provision for loan losses 165 110 25 - 500 - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 15,031 14,915 14,957 14,166 13,843 13,747 13,701 14,045
Loan servicing income 798 806 781 760 750 763 752 704
Service charges on deposits 916 1,004 1,005 955 909 949 939 882
Net gain on sale of loans 1,232 903 639 467 369 447 251 157
Other non-interest income 461 914 (102) 675 477 1,811 1,831 1,558
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest income 3,407 3,627 2,323 2,857 2,505 3,970 3,773 3,301
Compensation 5,774 4,717 4,826 4,830 5,280 5,328 5,196 5,487
Other non-interest expenses 4,472 4,608 4,378 4,689 3,729 5,067 12,598 4,720
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest expenses 10,246 9,325 9,204 9,519 9,009 10,395 17,794 10,207
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes 8,192 9,217 8,076 7,504 7,339 7,322 (320) 7,139
Income taxes (benefit) 2,942 3,560 3,101 2,883 2,658 2,660 (390) 2,604
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 5,250 $ 5,657 $ 4,975 $ 4,621 $ 4,681 $ 4,662 $ 70 $ 4,535
======== ======== ======== ======== ======== ======== ======== ========
Earnings Per Share (1), (2):
Basic $ 0.58 $ 0.62 $ 0.55 $ 0.51 $ 0.51 $ 0.51 $ 0.01 $ 0.47
Diluted 0.54 0.58 0.51 $ 0.48 $ 0.49 $ 0.48 0.01 0.45
(1) Per share data for all periods have been adjusted to reflect the 2-for-1
stock split distributed in August, 1997.
(2) The earnings per share amounts for all periods shown have been restated to
conform with Statement of Financial Accounting Standards No. 128 (Earnings
Per Share).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
73
75
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers is
incorporated herein by reference to pages 3 to 8 to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 28, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated herein
by reference to pages 13 to 24 to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on July 28, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to pages 9 to 12 to
the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on July 28, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions
is incorporated herein by reference to pages 23 to 24 to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 28, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Corporation and
its subsidiaries, together with the report thereon of Ernst & Young LLP, dated
April 29, 1998 are incorporated herein by reference to Item 8 of this Annual
Report on Form 10-K:
Consolidated Balance Sheets at March 31, 1998 and 1997.
Consolidated Statements of Income for each year in the three-year period
ended March 31, 1998.
Consolidated Statements of Stockholders' Equity for each year in the
three-year period ended March 31, 1998.
Consolidated Statements of Cash Flows for each year in the three-year
period ended March 31, 1998.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(a)(3) EXHIBITS
74
76
The following exhibits are either filed as part of this Report on Form
10-K or are incorporated herein by reference:
EXHIBIT NO. 3. CERTIFICATE OF INCORPORATION AND BYLAWS:
3.1 Articles of Incorporation of Anchor BanCorp Wisconsin Inc.
(incorporated herein by reference to Exhibit 3.1 of
Registrant's Form S-1, Registration Statement, filed on
March 19, 1992, as amended, Registration No. 46536 ("Form
S-1")).
3.2 Bylaws of Anchor BanCorp Wisconsin Inc. (incorporated herein
by reference to Exhibit 3.2 of Registrant's Form S-1).
EXHIBIT NO. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS:
4 Form of Common Stock Certificate (incorporated herein by
reference to Exhibit 4 of Registrant's Form S-1).
EXHIBIT NO. 10. MATERIAL CONTRACTS:
10.1 Anchor BanCorp Wisconsin Inc. Retirement Plan (incorporated
herein by reference to Exhibit 10.1 of Registrant's Form S-1).
10.2 Anchor BanCorp Wisconsin Inc. 1992 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.2 of
Registrant's Form S-1).
10.3 Anchor BanCorp Wisconsin Inc. 1992 Director's Stock Option
Plan (incorporated herein by reference to Exhibit 10.3 of
Registrant's Form S-1).
10.4 Anchor BanCorp Wisconsin Inc. Management Recognition Plans
(incorporated herein by reference to Exhibit 10.4 of
Registrant's Form S-1).
10.5 Anchor BanCorp Wisconsin Inc. Employee Stock Ownership Plan
(incorporated herein by reference to Exhibit 10.5 of
Registrant's Form S-1).
10.6 Employment Agreement among the Corporation, the Bank and
Douglas J. Timmerman (incorporated by reference to Exhibit
10.6 of Registrant's Form 10-K for the year ended March 31,
1995).
10.7 Deferred Compensation Agreement between the Corporation and
Douglas J. Timmerman, as amended (incorporated by reference
to Exhibit 10.7 of Registrant's Form S-1) and form of related
Deferred Compensation Trust Agreement, as amended
(incorporated by reference to Exhibit 10.7 of Registrant's
Form 10-K for the year ended March 31, 1994).
10.8 1995 Stock Option Plan for Non-Employee Directors
(incorporated by reference to the Registrant's proxy
statement filed on June 16, 1995).
10.9 1995 Stock Incentive Plan (incorporated by reference to the
Registrant's proxy statement filed on June 16, 1995).
10.10 Employment Agreement among the Corporation, the Bank and J.
Anthony Cattelino (incorporated by reference to Exhibit 10.10
of Registrant's Form 10-K for the year ended March 31, 1995).
75
77
10.11 Employment Agreement among the Corporation, the Bank and
Michael W. Helser (incorporated by reference to Exhibit 10.11
of Registrant's Form 10-K for the year ended March 31, 1995).
10.12 Severance Agreement among the Corporation, the Bank and
Ronald R. Osterholz (incorporated by reference to Exhibit
10.12 of Registrant's Form 10-K for the year ended March 31,
1995).
10.13 Severance Agreement among the Corporation, the Bank and David
L. Weimert (incorporated by reference to Exhibit 10.13 of
Registrant's Form 10-K for the year ended March 31, 1995).
10.14 Severance Agreement among the Corporation, the Bank and
Donald F. Bertucci (incorporated by reference to Exhibit
10.14 of Registrant's Form 10-K for the year ended March 31,
1995).
10.15 Anchor BanCorp Wisconsin Inc. Directors' Deferred
Compensation Plan (incorporated by reference to Exhibit 10.9
of Registrant's Form S-1).
10.16 Anchor BanCorp Wisconsin Inc. Annual Incentive Bonus Plan
(incorporated by reference to Exhibit 10.10 of Registrant's
Form S-1).
10.17 AnchorBank, S.S.B. Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.11 of Registrant's
Form 10-K for the year ended March 31, 1994).
10.18 AnchorBank, S.S.B. Excess Benefit Plan (incorporated by
reference to Exhibit 10.12 of Registrant's Form 10-K for the
year ended March 31, 1994).
10.19 Stockholder Rights Agreement, dated July 22, 1997 between the
corporation and Firstar Trust Company, as Rights Agent
(incorporated by reference to the Registrant's Report Form
8-K filed on July 28, 1997).
The Corporation's management contracts or compensatory plans or arrangements
consist of Exhibits 10.1-10.18 above.
EXHIBIT NO. 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No.128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented and where necessary, restated to conform to the
Statement 128 requirements.
76
78
The statement re: computation of per share earnings for fiscal year 1998 is as
follows:
TWELVE MONTHS ENDED MARCH 31,
----------------------------------------
1998 1997
----------- -----------
Numerator:
Net income $20,501,410 $13,948,054
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $20,501,410 $13,948,054
Denominator:
Denominator for basic earnings per
share--weighted-average shares 9,046,523 9,319,336
Effect of dilutive securities:
Employee stock options 627,976 535,444
----------- -----------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions 9,674,499 9,854,780
=========== ===========
Basic earnings per share $ 2.27 $ 1.50
=========== ===========
Diluted earnings per share $ 2.12 $ 1.42
=========== ===========
77
79
EXHIBIT NO. 21. SUBSIDIARIES OF THE REGISTRANT
Subsidiary information is incorporated herein by reference to "Part
I, Item 1, Business-General" and "Part I, Item 1,
Business-Subsidiaries."
EXHIBIT NO. 23. CONSENT OF ERNST & YOUNG LLP
The consent of Ernst & Young LLP is included herein as an exhibit to
this Report.
EXHIBIT NO. 27. FINANCIAL DATA SCHEDULES
(B) FORMS 8-K
None
(C) EXHIBITS
Exhibits to the Form 10-K required by Item 601 of Regulation S-K are
attached or incorporated herein by reference as stated in the Index to
Exhibits.
(D) FINANCIAL STATEMENTS EXCLUDED FROM ANNUAL REPORT TO SHAREHOLDERS
PURSUANT TO RULE 14a3(b)
Not applicable
78
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ANCHOR BANCORP WISCONSIN INC.
By: /s/ Douglas J. Timmerman
--------------------------------
Douglas J. Timmerman
Chairman of the Board, President
and Chief Executive Officer
Date: May 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
By: /s/ Douglas J. Timmerman By: /s/ Michael W. Helser
-------------------------------- -------------------------------------
Douglas J. Timmerman Michael W. Helser
Chairman of the Board, President Treasurer and Chief Financial Officer
and Chief Executive Officer (principal financial and
(principal executive officer) accounting officer)
Date: May 27, 1998 Date: May 27, 1998
79
81
By: /s/ Robert C. Buehner By: /s/ Greg M. Larson
--------------------------------- -------------------------------------
Robert C. Buehner Greg M. Larson
Director Director
Date: May 27, 1998 Date: May 27, 1998
By: /s/ Arlie M. Mucks, Jr. By: /s/ Pat Richter
--------------------------------- -------------------------------------
Arlie M. Mucks, Jr. Pat Richter
Director Director
Date: May 27, 1998 Date: May 27, 1998
By: /s/ Bruce A. Robertson By: /s/ Holly Cremer Berkenstadt
--------------------------------- -------------------------------------
Bruce A. Robertson Holly Cremer Berkenstadt
Director Director
Date: May 27, 1998 Date: May 27, 1998
By: /s/ Donald D. Kropidlowski
---------------------------------
Donald D. Kropidlowski
Director
Date: May 27, 1998
80