SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
COMMISSION FILE NUMBER 0-20006
ANCHOR BANCORP WISCONSIN INC.
-----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Wisconsin 39-1726871
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 West Main Street
Madison, Wisconsin 53703
------------------------------- ----------
(Address of principal executive office) (Zip Code)
(608) 252-8700
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Registrant's telephone number, including area code
Not Applicable
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common stock -- $.10 Par Value
Number of shares outstanding as of October 31, 2002: 24,499,113
ANCHOR BANCORP WISCONSIN INC.
INDEX - FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE #
------
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2002
and March 31, 2002 2
Consolidated Statements of Income for the Three and Six
Months Ended September 30, 2002 and 2001 3
Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 2002 and 2001 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations 11
Financial Condition 16
Asset Quality 17
Liquidity & Capital Resources 19
Asset/Liability Management 21
Segment Reporting 22
Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
Item 4 Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities and Use of Proceeds 25
Item 3 Defaults upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 26
SIGNATURES 27
1
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, MARCH 31,
2002 2002
---------------------------------
(In Thousands, Except Share Data)
ASSETS
Cash $ 65,370 $ 57,568
Interest-bearing deposits 131,724 204,108
----------- -----------
Cash and cash equivalents 197,094 261,676
Investment securities available for sale 107,475 65,993
Investment securities held to maturity (fair value of $4,133 and
$7,897, respectively) 3,998 7,747
Mortgage-related securities available for sale 237,454 145,293
Mortgage-related securities held to maturity (fair value of $123,769
and $141,330, respectively) 118,258 140,293
Loans receivable, net:
Held for sale 52,810 46,520
Held for investment 2,596,500 2,627,248
Foreclosed properties and repossessed assets, net 675 1,475
Real estate held for development and sale 44,646 46,986
Office properties and equipment 30,594 31,132
Federal Home Loan Bank stock--at cost 54,646 53,316
Accrued interest on investments and loans 19,007 19,918
Prepaid expenses and other assets 54,979 59,479
----------- -----------
Total assets $ 3,518,136 $ 3,507,076
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 2,550,555 $ 2,553,987
Federal Home Loan Bank and other borrowings 594,087 621,590
Reverse repurchase agreements -- --
Advance payments by borrowers for taxes and insurance 21,121 7,838
Other liabilities 66,300 46,149
----------- -----------
Total liabilities 3,232,063 3,229,564
----------- -----------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding -- --
Common stock, $.10 par value, 100,000,000 shares authorized,
25,363,339 shares issued, 24,611,997 and 24,950,258 shares outstanding,
respectively 2,536 2,536
Additional paid-in capital 63,273 61,735
Retained earnings 232,496 218,149
Accumulated other comprehensive income 3,078 2,473
Treasury stock (751,342 shares and 413,081 shares, respectively), at cost (14,518) (6,324)
Common stock purchased by benefit plans (792) (1,057)
----------- -----------
Total stockholders' equity 286,073 277,512
----------- -----------
Total liabilities and stockholders' equity $ 3,518,136 $ 3,507,076
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2002 2001 2002 2001
---------------------------- -----------------------------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Loans $ 47,467 $ 48,597 $ 95,491 $ 97,547
Mortgage-related securities 3,902 5,044 8,141 10,754
Investment securities 1,557 1,732 3,138 3,194
Interest-bearing deposits 408 473 1,012 1,075
--------- --------- --------- ---------
Total interest income 53,334 55,846 107,782 112,570
INTEREST EXPENSE:
Deposits 16,813 23,997 35,171 48,897
Notes payable and other borrowings 6,814 8,827 14,038 19,320
Other 135 168 219 276
--------- --------- --------- ---------
Total interest expense 23,762 32,992 49,428 68,493
--------- --------- --------- ---------
Net interest income 29,572 22,854 58,354 44,077
Provision for loan losses 450 550 900 760
--------- --------- --------- ---------
Net interest income after provision for loan losses 29,122 22,304 57,454 43,317
NON-INTEREST INCOME:
Loan servicing income (loss) (739) 619 (87) 534
Service charges on deposits 1,868 1,604 3,566 3,163
Insurance commissions 488 412 1,120 737
Gain on sale of loans 4,928 1,624 6,770 3,315
Net gain on sale of investments and mortgage-related securities 666 277 754 831
Net income (loss) from operations of real estate investments (454) (133) (352) 26
Other 250 704 665 1,521
--------- --------- --------- ---------
Total non-interest income 7,007 5,107 12,436 10,127
NON-INTEREST EXPENSE:
Compensation 8,883 8,138 18,090 15,801
Occupancy 1,435 1,141 2,798 2,192
Furniture and equipment 1,304 1,102 2,435 2,123
Data processing 1,212 1,030 2,560 2,132
Marketing 707 618 1,422 1,232
Federal insurance premiums 109 99 223 198
Other 3,080 2,265 5,800 4,412
--------- --------- --------- ---------
Total non-interest expense 16,730 14,393 33,328 28,090
--------- --------- --------- ---------
Income before income taxes 19,399 13,018 36,562 25,354
Income taxes 7,285 4,779 13,673 9,204
--------- --------- --------- ---------
Net income $ 12,114 $ 8,239 $ 22,889 $ 16,150
========= ========= ========= =========
Earnings per share:
Basic $ 0.50 $ 0.38 $ 0.94 $ 0.73
Diluted 0.49 0.37 0.92 0.71
Dividends declared per share 0.09 0.08 0.17 0.16
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
2002 2001
------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 22,889 $ 16,150
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 900 760
Provision for depreciation and amortization 2,467 1,420
Net gain on sales of loans (6,770) (3,315)
Amortization of stock benefit plans 29 23
Tax benefit from stock related compensation 1,156 --
Decrease in accrued interest receivable 911 1,065
Decrease in accrued interest payable (2,560) (2,705)
(Decrease) increase in accounts payable 20,151 (4,196)
Other 16,404 (8,178)
--------- ---------
Net cash provided by operating activities before net proceeds
from loan sales 55,577 1,024
Net decrease due to origination and sale of loans held for sale (6,290) (9,363)
--------- ---------
Net cash provided (used) by operating activities 49,287 (8,339)
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 12,622 1,745
Proceeds from maturities of investment securities 218,997 200,024
Purchase of investment securities available for sale (270,895) (251,463)
Proceeds from sale of mortgage-related securities available for sale 21,020 21,424
Purchase of mortgage-related securities available for sale (20,593) (1,475)
Principal collected on mortgage-related securities 55,681 50,798
Loans originated for investment (312,615) (366,028)
Principal repayments on loans 219,248 388,695
Net additions of office properties and equipment (1,230) (1,409)
Investment in real estate held for development and sale (1,716) (4,975)
--------- ---------
Net cash provided (used) by investing activities (79,481) 37,336
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
2002 2001
------------------------------
(IN THOUSANDS)
Financing Activities
Increase (decrease) in deposit accounts $ (3,432) $ 102,916
Increase in advance payments by borrowers
for taxes and insurance 13,283 11,940
Proceeds from notes payable to Federal Home Loan Bank 57,600 380,300
Repayment of notes payable to Federal Home Loan Bank (76,800) (508,500)
Decrease in securities sold under agreements
to repurchase -- (15,313)
Increase (decrease) in other loans payable (8,303) 2,425
Treasury stock purchased (14,734) (13,743)
Exercise of stock options 1,574 1,781
Purchase of stock by retirement plans 733 73
Payments of cash dividends to stockholders (4,309) (3,572)
--------- ---------
Net cash used by financing activities (34,388) (41,693)
--------- ---------
Net decrease in cash and cash equivalents (64,582) (12,696)
Cash and cash equivalents at beginning of period 261,676 105,042
--------- ---------
Cash and cash equivalents at end of period $ 197,094 $ 92,346
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 50,339 $ 67,203
Income taxes 9,571 8,519
Non-cash transactions:
Securitization of mortgage loans held for sale to mortgage-backed
securities 124,115 --
See accompanying Notes to Unaudited Consolidated Financial Statements
5
ANCHOR BANCORP WISCONSIN INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts and results
of operations of Anchor BanCorp Wisconsin Inc. (the "Corporation") and its
wholly-owned subsidiaries, AnchorBank fsb (the "Bank"), and Investment
Directions, Inc. ("IDI"). The Bank's accounts and results of operations include
its wholly-owned subsidiaries, Anchor Investment Services, Inc. ("AIS"), ADPC
Corporation ("ADPC") and Anchor Investment Corporation ("AIC"). All significant
intercompany balances and transactions have been eliminated. Investments in
joint ventures and other less than 50% owned partnerships, which are not
material, are accounted for by the equity method. Partnerships with 50%
ownership or more are consolidated, with significant intercompany accounts
eliminated.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the consolidated financial statements have been
included.
In preparing the unaudited consolidated financial statements in conformity with
GAAP, management is required to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. The results of
operations and other data for the six-month period ended September 30, 2002 are
not necessarily indicative of results that may be expected for any other interim
period or the entire fiscal year ending March 31, 2003. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included in the Corporation's Annual Report for the year ended March 31, 2002.
Unrealized gains or losses on the Corporation's available-for-sale securities
are included in other comprehensive income. During the quarter ended September
30, 2002 and 2001, total comprehensive income amounted to $10.7 million and $8.6
million, respectively. For the six months ended September 30, 2002 and 2001,
comprehensive income was $23.5 million and $17.1 million, respectively.
NEW ACCOUNTING STANDARDS On April 1, 2001 the Corporation adopted Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, which requires that all
derivative instruments be recorded in the statement of condition at fair value.
Under SFAS No. 133, the Corporation recognizes certain contracts and commitments
relating to its mortgage banking operations as derivative instruments. These
contracts and commitments are for commitments to originate mortgage loans that
will be held for resale and forward loan sales. Forward loan sales are entered
into in an effort to reduce interest rate risk associated with making
commitments to originate mortgage loans. Changes in the fair value of these
derivative contracts and commitments are recorded in non-interest income. During
the first quarter ended June 30, 2002, the Corporation introduced an index
powered certificate of deposit product which is FDIC insured. The certificates
have a five-year term with the yield based on the performance of the Standard &
Poors ("S & P") 500. The Corporation entered into a contract with the FHLB that
offsets such changes in the S & P 500. Changes in market value are included in
non-interest income.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and certain intangible assets are no longer amortized, but are
reviewed at least annually for
6
impairment. Separable intangible assets that are not deemed to have indefinite
lives will no longer be amortized, but will be subject to annual impairment
tests in accordance with the SFAS. Other intangible assets will continue to be
amortized over their useful lives.
SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," was issued in October 2001 and addresses
how and when to measure impairment of long-lived assets and how to account for
long-lived assets that an entity plans to dispose of either through sale,
abandonment, exchange, or distribution to owners. The new provisions supersede
FASB No. 121, which addressed asset impairment, and certain provisions of APB
Opinion 30 related to reporting the effects of the disposal of a business
segment and requires expected future operating losses from discontinued
operations to be recorded in the period in which the losses are incurred rather
than the measurement date. Under FASB No. 144, more dispositions may qualify for
discontinued operations treatment in the income statement. The provisions of
FASB No. 144 became effective for the Corporation April 1, 2002 and are not
expected to have a material impact on the Corporation's financial position or
results of operations.
Certain 2001 accounts have been reclassified to conform to the 2002
presentations.
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Corporation's carrying value of goodwill was $20.0 million at September 30,
2002 and at March 31, 2002. Information regarding the Company's other intangible
assets follows (in thousands):
SEPTEMBER 30, 2002 MARCH 31, 2002
--------------------------------------------- ---------------------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------ --------------- ------------ ----------- -------------- -------------
Other intangible assets:
Core deposit premium $ 3,124 $ 426 $ 2,698 $ 3,408 $ 284 $ 3,124
Mortgage servicing rights 16,596 3,449 13,147 16,200 5,175 11,025
------- ------- ------- ------- ------- -------
Total $19,720 $ 3,875 $15,845 $19,608 $ 5,459 $14,149
======= ======= ======= ======= ======= =======
The projections of amortization expense for mortgage servicing rights set forth
below are based on asset balances and the interest rate environment as of
September 30, 2002. Future amortization expense may be significantly different
depending upon changes in the mortgage servicing portfolio, mortgage interest
rates and market conditions.
7
The following table shows the current period and estimated future amortization
expense for amortized intangible assets (in thousands):
MORTGAGE CORE
SERVICING DEPOSIT
RIGHTS PREMIUM TOTAL
-------- ------- -------
Quarter ended September 30, 2002 (actual) $ 3,449 $ 426 $ 3,875
Estimate for the year ended March 31,
2003 7,949 852 8,801
2004 2,800 852 3,652
2005 3,220 852 4,072
2006 3,703 852 4,555
2007 4,258 852 5,110
NOTE 4 - STOCKHOLDERS' EQUITY
On July 8, 2002, 12,200 shares and on July 10, 2002, 3,000 shares granted
pursuant to the Corporation's management recognition plan were earned by the
recipients. During the quarter ended September 30, 2002, options for 160,788
shares of common stock were exercised at a weighted-average price of $3.64 per
share. Treasury shares were issued in exchange for the options using the
last-in-first-out method. The cost of the treasury shares issued in excess of
the option price paid was charged to retained earnings $(3.1 million). During
the quarter ended September 30, 2002, the Corporation repurchased 598,500 shares
of common stock. During the quarter, 38,022 shares of treasury stock were
reissued to the Corporation's retirement plans. The weighted-average cost of
these shares was $18.90 per share or $720,000 in the aggregate and the excess of
the market price over the cost of the treasury shares $(80,000) was charged to
retained earnings. On August 15, 2002, the Corporation paid a cash dividend of
$0.09 per share, amounting to $2.2 million.
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share for the three and six months ended September 30, 2002
and 2001 have been determined by dividing net income for the respective periods
by the weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding plus common stock equivalents. Common stock
equivalents are computed using the treasury stock method.
8
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2002 2001
----------------------------------
Numerator:
Net income $12,113,685 $ 8,239,595
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $12,113,685 $ 8,239,595
Denominator:
Denominator for basic earnings per
share--weighted-average shares 24,211,742 21,872,835
Effect of dilutive securities:
Employee stock options 576,982 598,557
Management Recognition Plans 4,529 13,360
----------- -----------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions 24,793,253 22,484,752
=========== ===========
Basic earnings per share $ 0.50 $ 0.38
=========== ===========
Diluted earnings per share $ 0.49 $ 0.37
=========== ===========
SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------
2002 2001
----------------------------------
Numerator:
Net income $22,888,886 $16,150,867
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $22,888,886 $16,150,867
Denominator:
Denominator for basic earnings per
share--weighted-average shares 24,296,166 22,027,629
Effect of dilutive securities:
Employee stock options 630,945 553,888
Management Recognition Plans 11,496 21,098
----------- -----------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions 24,938,607 22,602,615
=========== ===========
Basic earnings per share $ 0.94 $ 0.73
=========== ===========
Diluted earnings per share $ 0.92 $ 0.71
=========== ===========
9
NOTE 6 - SUBSEQUENT EVENTS
On October 21, 2002, the Corporation declared a $0.09 per share cash dividend on
its common stock to be paid on November 15, 2002 to stockholders of record on
November 1, 2002.
NOTE 7 - BUSINESS COMBINATION
On November 10, 2001, Ledger Capital Corp. ("Ledger") was acquired by the
Corporation following the receipt of all required regulatory and stockholder
approvals. The Corporation acquired 100 percent of the outstanding common shares
of Ledger. The results of Ledger's operations have been included in the
consolidated financial statements since that date. Ledger had $450.0 million in
assets as of the merger date. The aggregate purchase price was $43.0 million. In
the merger, Ledger shareholders received either 1.1 shares of Anchor BanCorp
common stock or the taxable cash equivalent, as long as the cash conversion did
not exceed 20 percent of the Ledger shares, in exchange for each share of Ledger
common stock. Approximately 2.5 million shares of common stock of the
Corporation were issued to Ledger shareholders and $2.0 million was paid to
shareholders in cash. The transaction resulted in goodwill of approximately
$20.0 million and added 4 full service offices in the Milwaukee metropolitan
area.
10
ANCHOR BANCORP WISCONSIN INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
describe future plans or strategies and include the Corporation's expectations
of future financial results. The Corporation's ability to predict results or the
effect of future plans or strategies is inherently uncertain and the Corporation
can give no assurance that those results or expectations will be attained.
Factors that could affect actual results include but are not limited to i)
general market rates, ii) changes in market interest rates and the shape of the
yield curve, iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve Board, vii) changes in the quality or
composition of the Corporation's loan and investment portfolios, viii) demand
for loan products, ix) the level of loan and MBS repayments, x) deposit flows,
xi) competition, xii) demand for financial services in the Corporation's
markets, and xiii) changes in accounting principles, policies or guidelines. In
addition, acquisitions may result in large one-time charges to income, may not
produce revenue enhancements or cost savings at levels or within time frames
originally anticipated and may result in unforeseen integration difficulties.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
The Corporation does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Set forth below is management's discussion and analysis of the Corporation's
financial condition and results of operations for the three and six months ended
September 30, 2002, which includes information on the Corporation's
asset/liability management strategies, sources of liquidity and capital
resources. This discussion should be read in conjunction with the consolidated
financial statements and supplemental data contained elsewhere in this report.
RESULTS OF OPERATIONS
General. Net income for the three and six months ended September 30, 2002
increased $3.9 million to $12.1 million from $8.2 million and increased $6.7
million to $22.9 million from $16.2 million, respectively, for the same periods
in the prior year. The increase in net income for the three-month period
compared to the same period last year was largely due to the decrease in
interest expense of $9.2 million. In addition, non-interest income increased
$1.9 million and provision for loan losses decreased $100,000 for the three
months ended September 30, 2002. These increases were partially offset by an
increase in non-interest expense of $2.3 million, a decrease in interest income
of $2.5 million and an increase in income tax expense of $2.5 million for the
three-month period. The increase in net income for the six-month period compared
to the same period last year was largely due to the decrease in interest expense
of $19.0 million. In addition, non-interest income for the six months ended
September 30, 2002 increased $2.3 million. These increases were offset by an
increase in non-interest expense of $5.2 million, a decrease in interest income
of $4.8 million, an increase in income tax expense of $4.5 million, and an
increase in provision for loan losses of $140,000 for the six-month period.
Net Interest Income. Net interest income increased $6.7 million and $14.3
million for the three and six months ended September 30, 2002 compared to the
same periods in 2001. The net interest margin increased to 3.68% from 3.11% for
the respective three-month periods and increased to 3.60% from 2.99% for the
respective six-month periods. The interest rate spread increased to 3.58% from
2.97% and increased to 3.51% from 2.85%, respectively, for the same periods.
Interest income on mortgage-related securities decreased $1.1 million and $2.6
million, respectively, for the three- and six-month periods due primarily to the
decrease of $62.5 million and $69.3 million, respectively, in the average
balance of mortgage-related securities. Interest income on loans decreased $1.1
million and $2.1 million, respectively, for the three and six months ended
September 30, 2002 as compared to the same periods in the prior
11
year. This decrease was the result of a decrease of 96 basis points in the
average yield on loans to 7.09% from 8.05% for the three-month period and a
decrease of 83 basis points to 7.23% from 8.06% for the six-month period.
Interest income on interest-bearing deposits remained constant for the three and
six months ended September 30, 2002. Interest income on investment securities
(including Federal Home Loan Bank stock) decreased $180,000 and $60,000,
respectively, for the three- and six-month periods ended September 30, 2002 as
compared to the same periods in the prior year. This was primarily a result of a
decrease in the average yield from 4.63% to 3.36% for the three-month period
ended September 30, 2002 and a decrease in the average yield from 5.18% to 3.67%
for the six-month period as compared to the same period in the prior year.
Interest expense on deposits decreased $7.2 million and $13.7 million for the
three and six months ended September 30, 2002 as compared to the same periods in
2001. These decreases were due primarily to a decrease of 170 basis points in
the weighted average cost of deposits to 2.68% from 4.38% for the three-month
period and a decrease of 175 basis points to 2.79% from 4.54% for the six-month
period. Interest expense on notes payable and other borrowings decreased $2.0
million and $5.3 million, respectively, during the same periods due primarily to
a decrease of $54.1 million and $61.2 million, respectively, in the average
balances of notes payable and other borrowings. There was also a decrease in the
weighted average cost of notes payable and other borrowings for the three and
six months of 86 basis points and 114 basis points, respectively. Other interest
expense remained relatively constant for the three and six months ended
September 30, 2002, as compared to the same periods in the prior year.
Provision for Loan Losses. Provision for loan losses decreased $100,000 to
$450,000 and increased $140,000 to $900,000 for the three- and six-month periods
ended September 30, 2002 compared to the same periods for the prior year. The
provisions were based on management's ongoing evaluation of asset quality.
Average Interest-Earning Assets, Average Interest-Bearing Liabilities and
Interest Rate Spread. The following tables show the Corporation's average
balances, interest, average rates, net interest margin and the spread between
the combined average rates earned on interest-earning assets and average cost of
interest-bearing liabilities for the periods indicated. The average balances are
derived from average daily balances.
12
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2002 2001
---------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
-------------------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans $ 2,106,107 $ 37,403 7.10% $ 1,867,922 $ 37,630 8.06%
Consumer loans 443,974 8,016 7.22 450,910 9,215 8.17
Commercial business loans 127,301 2,048 6.44 95,656 1,752 7.33
----------- -------- ----------- --------
Total loans receivable 2,677,382 47,467 7.09 2,414,488 48,597 8.05
Mortgage-related securities 259,445 3,902 6.02 321,971 5,044 6.27
Investment securities 131,081 868 2.65 110,413 1,126 4.08
Interest-bearing deposits 93,717 408 1.74 53,957 473 3.51
Federal Home Loan Bank stock 54,587 689 5.05 39,212 606 6.18
----------- -------- ----------- --------
Total interest-earning assets 3,216,212 53,334 6.63 2,940,041 55,846 7.60
---- ----
Non-interest-earning assets 223,287 179,051
----------- -----------
Total assets $ 3,439,499 $ 3,119,092
=========== ===========
INTEREST-BEARING LIABILITIES
Demand deposits $ 747,132 1,749 0.94 $ 661,857 3,439 2.08
Regular passbook savings 180,568 465 1.03 136,277 420 1.23
Certificates of deposit 1,584,759 14,599 3.68 1,393,569 20,138 5.78
----------- -------- ----------- --------
Total deposits 2,512,460 16,813 2.68 2,191,703 23,997 4.38
Notes payable and other borrowings 585,054 6,814 4.66 639,142 8,827 5.52
Other 18,457 135 2.93 17,468 168 3.85
----------- -------- ----------- --------
Total interest-bearing liabilities 3,115,970 23,762 3.05 2,848,313 32,992 4.63
-------- ---- -------- ----
Non-interest-bearing liabilities 36,615 44,279
----------- -----------
Total liabilities 3,152,585 2,892,592
Stockholders' equity 286,914 226,500
----------- -----------
Total liabilities and stockholders' equity $ 3,439,499 $ 3,119,092
=========== ===========
Net interest income/interest rate spread $ 29,572 3.58% $ 22,854 2.97%
======== ==== ======== ====
Net interest-earning assets $ 100,242 $ 91,728
=========== ===========
Net interest margin 3.68% 3.11%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.03 1.03
==== ====
- ------------------------------
(1) Annualized
13
SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2002 2001
---------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
-------------------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans $ 2,085,062 $ 75,221 7.22% $ 1,868,246 $ 74,868 8.01%
Consumer loans 434,986 16,257 7.47 458,143 19,113 8.34
Commercial business loans 120,754 4,013 6.65 93,453 3,566 7.63
----------- -------- ----------- --------
Total loans receivable 2,640,802 95,491 7.23 2,419,842 97,547 8.06
Mortgage-related securities 272,025 8,141 5.99 341,290 10,754 6.30
Investment securities 117,129 1,777 3.03 84,351 1,962 4.65
Interest-bearing deposits 157,136 1,012 1.29 59,375 1,075 3.62
Federal Home Loan Bank stock 53,908 1,361 5.05 38,910 1,232 6.33
----------- -------- ----------- --------
Total interest-earning assets 3,241,000 107,782 6.65 2,943,768 112,570 7.65
---- ----
Non-interest-earning assets 234,341 171,240
----------- -----------
Total assets $ 3,475,341 $ 3,115,008
=========== ===========
INTEREST-BEARING LIABILITIES
Demand deposits $ 730,520 3,624 0.99 $ 643,311 7,410 2.30
Regular passbook savings 175,454 918 1.05 135,038 876 1.30
Certificates of deposit 1,612,208 30,629 3.80 1,376,561 40,611 5.90
----------- -------- ----------- --------
Total deposits 2,518,182 35,171 2.79 2,154,910 48,897 4.54
Notes payable and other borrowings 621,417 14,038 4.52 682,576 19,320 5.66
Other 11,774 219 3.73 14,414 276 3.83
----------- -------- ----------- --------
Total interest-bearing liabilities 3,151,373 49,428 3.14 2,851,900 68,493 4.80
-------- ---- -------- ----
Non-interest-bearing liabilities 34,582 45,513
----------- -----------
Total liabilities 3,185,955 2,897,413
Stockholders' equity 289,386 217,595
----------- -----------
Total liabilities and stockholders' equity $ 3,475,341 $ 3,115,008
=========== ===========
Net interest income/interest rate spread $ 58,354 3.51% $ 44,077 2.85%
======== ==== ======== ====
Net interest-earning assets $ 89,627 $ 91,868
=========== ===========
Net interest margin 3.60% 2.99%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.03 1.03
==== ====
- --------------------------
(1) Annualized
14
Non-Interest Income. Non-interest income increased $1.9 million to $7.0 million
and $2.3 million to $12.4 million, respectively, for the three and six months
ended September 30, 2002 as compared to $5.1 million and $10.1 million for the
same periods in the prior year, primarily due to an increase in gain on sale of
loans of $3.3 million and $3.5 million, respectively. These increases were due
to increases in secondary market loans sold, resulting from the low interest
rate environment. In addition, service charges on deposit accounts increased
$260,000 and $400,000, respectively, for the three and six months ended
September 30, 2002. Insurance commissions increased $80,000 and $380,000 for the
respective three- and six-month periods due to increased sales. Net gain on sale
of investments and mortgage-related securities increased $390,000 and decreased
$80,000 respectively, for the three and six months ended September 30, 2002.
These increases were partially offset by a decrease in loan servicing income of
$1.4 million and $620,000 during the three and six months ended September 30,
2002, respectively, as compared to the same periods in the prior year, due
primarily to increased amortization of mortgage servicing rights, which resulted
from increases in refinances in a declining interest rate environment. Other
non-interest income, which includes a variety of loan fee and other
miscellaneous fee income, decreased $450,000 and $860,000 for the respective
three- and six-month periods ended September 30, 2002. Net income from
operations of real estate investments decreased $320,000 and $380,000,
respectively, for the three and six months ended September 30, 2002 as compared
to the same periods in the prior year.
Non-Interest Expense. Non-interest expense increased $2.3 million to $16.7
million and $5.2 million to $33.3 million, respectively, for the three and six
months ended September 30, 2002 as compared to $14.4 million and $28.1 million
for the same periods in 2001, as a result of several factors. Compensation
expense increased $750,000 and $2.3 million, respectively, for the three- and
six-month periods compared to the prior periods due primarily to an increase in
incentive compensation resulting from increased loan production and increased
employee benefits such as health insurance and employee stock ownership plan
expense. In addition, other non-interest expense increased $820,000 and $1.4
million, respectively, for the three and six months largely due to increased
postage, telephone and other miscellaneous expense. Occupancy expense increased
$290,000 and $610,000, respectively, for the three and six months ended
September 30, 2002 as compared to the same periods in the prior year due largely
to increased maintenance and repairs expense. In addition, data processing
expense increased $180,000 and $430,000, respectively, for the three- and
six-month periods ended September 30, 2002 as compared to the same periods in
the prior year primarily due to increased lease payments, line charges and
support services. Furniture and equipment expense increased $200,000 and
$310,000, in the three and six months, respectively, largely due to normal
increases in depreciation. Marketing expense increased $90,000 and $190,000,
respectively, for the three- and six-month periods ended September 30, 2002 as
compared to the same periods in the prior year. Federal insurance premiums
remained relatively constant during the three- and six-month periods ended
September 30, 2002 as compared to the same periods in 2001.
Income Taxes. Income tax expense increased $2.5 million and $4.5 million during
the three and six months ended September 30, 2002 as compared to the same
periods in 2001. The effective tax rate was 37.6% and 37.4%, respectively, for
the current three- and six-month periods, as compared to 36.7% and 36.3% for the
three- and six-month periods last year.
15
FINANCIAL CONDITION
During the six months ended September 30, 2002, the Corporation's assets
increased by $11.1 million from $3.51 billion at March 31, 2002, to $3.52
billion. The majority of this increase was attributable to increases in
mortgage-related securities and investment securities, which was partially
offset by decreases in loans.
Mortgage-related securities (both available for sale and held to maturity)
increased $70.1 million during the six months ended September 30, 2002 as a
result of purchases of $20.6 million and principal repayments and other
adjustments of $70.5 million. This increase was partially offset by sales of
$21.0 million of mortgage-related securities in this six-month period.
Mortgage-related securities consisted of $306.2 million of mortgage-backed
securities and $49.5 million of Collateralized Mortgage Obligations ("CMO's")
and Real Estate Mortgage Investment Conduits ("REMIC's") at September 30, 2002.
The Corporation invests in corporate CMOs and agency-issued REMICs. These
investments are deemed to have limited credit risk. The investments do have
interest rate risk due to, among other things, actual prepayments being more or
less than those predicted at the time of purchase. The Corporation invests only
in short-term tranches in order to limit the reinvestment risk associated with
greater than anticipated prepayments, as well as changes in value resulting from
changes in interest rates.
Investment securities (both available for sale and held to maturity) increased
$37.7 million during the six months ended September 30, 2002 as a result of
purchases of $270.9 million of U.S. Government and agency securities, which were
partially offset by sales and maturities of $231.6 million.
Total loans (including loans held for sale) decreased $24.5 million during the
six months ended September 30, 2002. Activity for the period consisted of (i)
originations and purchases of $951.8 million, (ii) sales of $632.9 million, and
(iii) principal repayments and other adjustments of $343.4 million.
Total liabilities increased $2.5 million during the six months ended September
30, 2002. This increase was largely due to a $20.2 million increase in other
liabilities and a $13.3 million increase in advance payments by borrowers for
taxes and insurance during the six months ended September 30, 2002. These
increases were partially offset by a $27.5 million decrease in FHLB advances and
other borrowings and a $3.4 million decrease in deposits during the six- month
period. Brokered deposits have been used in the past and may be used in the
future as the need for funds requires them. Brokered deposits totaled $240.5
million at September 30, 2002 and generally mature within one to five years.
Stockholders' equity increased $8.6 million during the six months ended
September 30, 2002 as a net result of (i) comprehensive income of $23.5 million,
(ii) stock options exercised of $5.8 million (with the excess of the cost of
treasury shares over the option price ($4.2 million) charged to retained
earnings), (iii) the purchase of stock by retirement plans of $790,000 (with the
excess of the cost of treasury shares over the option price ($60,000) charged to
retained earnings), and (iv) benefit plan shares earned and related tax
adjustments totaling $1.5 million. These increases were partially offset by (i)
purchases of treasury stock of $14.7 million and (ii) cash dividends of $4.3
million.
16
ASSET QUALITY
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. As a matter of policy, the
Corporation does not accrue interest on loans past due 90 days or more.
Non-performing assets increased $4.0 million to $14.6 million at September 30,
2002 from $10.6 million at March 31, 2002 and increased as a percentage of total
assets to 0.42% from 0.30% at such dates, respectively.
Non-performing assets are summarized as follows at the dates indicated:
AT MARCH 31,
AT SEPTEMBER 30, -------------------------------------------------
2002 2002 2001 2000
---------------- -------------------------------------------------
(Dollars In Thousands)
Non-accrual loans:
Single-family residential $ 5,583 $ 4,505 $ 2,572 $ 2,582
Multi-family residential -- 187 372 3
Commercial real estate 2,914 2,212 650 126
Construction and land -- 168 257 --
Consumer 750 933 499 571
Commercial business 4,647 1,037 697 332
------- ------- ------- -------
Total non-accrual loans 13,894 9,042 5,047 3,614
Real estate held for development and sale 64 74 352 1,691
Foreclosed properties and repossessed assets, net 675 1,475 313 272
------- ------- ------- -------
Total non-performing assets $14,633 $10,591 $ 5,712 $ 5,577
======= ======= ======= =======
Performing troubled debt restructurings $ 2,443 $ 403 $ 300 $ 144
======= ======= ======= =======
Total non-accrual loans to total loans 0.50% 0.32% 0.20% 0.15%
Total non-performing assets to total assets 0.42 0.30 0.18 0.19
Allowance for loan losses to total loans 1.10 1.09 0.94 1.00
Allowance for loan losses to total
non-accrual loans 220.67 346.04 477.04 675.26
Allowance for loan and foreclosure losses
to total non-performing assets 213.89 300.05 422.16 439.63
Non-accrual loans increased $4.9 million during the six months ended September
30, 2002. The increase was largely attributable to two commercial loans. One
loan was a $3.3 million commercial business loan secured by business equipment
for a custom manufacturer, located in Montello, Wisconsin. This loan was
acquired in the Ledger merger and is in the process of being restructured. A
$1.0 million paydown was received in October, 2002, which brought the interest
current. The other loan was a $870,000 commercial real estate loan secured by
industrial property located in Cudahy, Wisconsin. This loan is in foreclosure
and will transfer to real estate owned in the next quarter. At September 30,
2002, there was one non-accrual commercial business loan and one non-accrual
commercial real estate loan with carrying values greater than $1.0 million. The
commercial business loan is the above loan for $3.3 million. The commercial real
estate loan is a loan participation which is secured by a 161 unit motel located
in Schiller Park, Illinois, which had a carrying value of $1.5 million at
September 30, 2002. The original loan was for $13.1 million, of which the Bank
is an 11.5% participant.
Non-performing real estate held for development and sale remained relatively
constant for the six months ended September 30, 2002.
17
Foreclosed properties and repossessed assets decreased $800,000 for the six
months ended September 30, 2002. There were no foreclosed properties and
repossessed assets with a carrying value greater than $1.0 million at September
30, 2002.
Performing troubled debt restructurings increased $2.0 million during the six
months ended September 30, 2002. This increase was attributable to a commercial
real estate property secured by a 182 room lodge located in Sonoma, California,
with a carrying value of $2.0 million, which was acquired in the Ledger merger.
At September 30, 2002, assets that the Corporation has classified as
substandard, net of reserves, consisted of $23.7 million of loans and foreclosed
properties. As of March 31, 2002, substandard assets amounted to $24.7 million.
The decrease of $1.0 million in substandard assets was not attributable to any
one specific loan.
A summary of the details regarding impaired loans follows (in thousands):
AT SEPTEMBER 30, AT MARCH 31,
---------------- ------------------------------------------
2002 2002 2001 2000
---------------- ------------------------------------------
Impaired loans with valuation
reserve required $11,126 $11,467 $ 964 $ 5,637
Less:
Specific valuation allowance 4,062 4,240 615 952
------- ------- ------- -------
Total impaired loans $ 7,064 $ 7,227 $ 349 $ 4,685
======= ======= ======= =======
Average impaired loans $ 7,146 $ 6,216 $ 3,301 $ 5,731
Interest income recognized
on impaired loans $ 341 $ 740 $ 43 $ 431
The following table sets forth information relating to the Corporation's loans
that were less than 90 days delinquent at the dates indicated.
AT MARCH 31,
AT SEPTEMBER 30, -------------------------------------------------
2002 2002 2001 2000
-------------- -------------------------------------------------
(In Thousands)
30 to 59 days $ 4,025 $17,647 $ 7,141 $ 3,224
60 to 89 days 6,902 2,671 716 903
------- ------- ------- -------
Total $10,927 $20,318 $ 7,857 $ 4,127
======= ======= ======= =======
The Corporation's loan portfolio, foreclosed properties and repossessed assets
are evaluated on a continuing basis to determine the necessity for additions to
the allowance for losses and the related balance in the allowances. These
evaluations consider several factors, including, but not limited to, general
economic conditions, loan portfolio composition, loan delinquencies, prior loss
experience, collateral value, anticipated loss of interest and management's
estimation of future losses. The evaluation of the allowance for loan losses
includes a review of known loan problems as well as inherent problems based upon
historical trends and ratios. Foreclosed properties are recorded at the lower of
carrying value or fair value with charge-offs, if any, charged to the allowance
for loan losses 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.
18
A summary of the activity in the allowance for losses on loans follows:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
-------------------------------- --------------------------------
(Dollars In Thousands)
Allowance at beginning of period $ 30,848 $ 23,924 $ 31,065 $ 24,076
Charge-offs:
Mortgage (114) (402) (451) (540)
Consumer (300) (173) (375) (384)
Commercial business (178) (136) (497) (205)
-------- -------- -------- --------
Total charge-offs (592) (711) (1,323) (1,129)
Recoveries:
Mortgage 2 1 4 2
Consumer 12 8 25 22
Commercial business 40 1 89 42
-------- -------- -------- --------
Total recoveries 54 10 118 66
-------- -------- -------- --------
Net charge-offs (538) (701) (1,205) (1,063)
Provision for loan losses 450 550 900 760
-------- -------- -------- --------
Allowance at end of period $ 30,760 $ 23,773 $ 30,760 $ 23,773
======== ======== ======== ========
Net charge-offs to average loans (0.08)% (0.12)% (0.09)% (0.09)%
==== ==== ==== ====
Although management believes that the September 30, 2002 allowance for loan
losses is adequate based upon the current evaluation of loan delinquencies,
non-accrual loans, charge-off trends, economic conditions and other factors,
there can be no assurance that future adjustments to the allowance, which could
adversely affect the Corporation's results of operations, will not be necessary.
Management also continues to pursue all practical and legal methods of
collection, repossession and disposal, as well as adhering to high underwriting
standards in the origination process, in order to maintain strong asset quality.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation's sources of funds include dividends
from its subsidiaries, including the Bank, interest on its investments and
returns on its real estate held for sale. The Bank's primary sources of funds
are payments on loans and securities, deposits from retail and wholesale
sources, advances and other borrowings.
At September 30, 2002, the Corporation had outstanding commitments to originate
loans of $297.3 million, commitments to extend funds to, or on behalf of,
customers pursuant to lines and letters of credit of $194.8 million and loans
sold with recourse to the Corporation in the event of default by the borrower of
$408,000. The Corporation had sold loans with recourse in the amount of $7.5
million through the FHLB Mortgage Partnership Finance Program at September 30,
2002. Scheduled maturities of certificates of deposit during the twelve months
following September 30, 2002 amounted to $963.4 million and scheduled maturities
of FHLB advances during the same period totaled $159.6 million. At September 30,
2002, the Corporation had no reverse repurchase agreements. Management believes
adequate capital and borrowings are available from various sources to fund all
commitments to the extent required.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
liquid investments in qualifying types of U.S. Government and agency securities
and other investments sufficient to ensure its safe and sound
19
operation. During the quarter ended September 30, 2002, the Bank's average
liquidity ratio was 15.65%, which was substantially in excess of applicable
requirements.
Under federal law and regulation, the Bank is required to meet certain tangible,
core and risk-based capital requirements. Tangible capital generally consists of
stockholders' equity minus certain intangible assets. Core capital generally
consists of tangible capital plus qualifying intangible assets. The risk-based
capital requirements presently address credit risk related to both recorded and
off-balance sheet commitments and obligations. The OTS requirement for the core
capital ratio for the Bank is currently 3.00%. The requirement is 4.00% for all
but the most highly-rated financial institutions.
The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at September 30, 2002 and March 31, 2002 (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 SEPTEMBER 30, 2002:
Tier 1 capital
(to adjusted tangible assets) $ 254,731 7.38% $ 103,497 3.00% $ 172,495 5.00%
Risk-based capital
(to risk-based assets) 281,442 11.41 197,361 8.00 246,701 10.00
Tangible capital
(to tangible assets) 254,731 7.38 51,748 1.50 N/A N/A
AS OF MARCH 31, 2002:
Tier 1 capital
(to adjusted tangible assets) $ 250,688 7.31% $ 102,903 3.00% $ 171,505 5.00%
Risk-based capital
(to risk-based assets) 277,528 11.01 201,613 8.00 252,016 10.00
Tangible capital
(to tangible assets) 250,688 7.31 51,451 1.50 N/A N/A
20
The following table reconciles the Corporation's stockholders' equity to
regulatory capital at September 30, 2002 and March 31, 2002 (dollars in
thousands):
SEPTEMBER 30, MARCH 31,
------------------------------
2002 2002
------------------------------
Stockholders' equity of the Corporation $ 286,073 $ 277,512
Less: Capitalization of the Corporation and non-bank
subsidiaries (4,849) (523)
--------- ---------
Stockholders' equity of the Bank 281,224 276,989
Less: Intangible assets and other non-includable assets (26,493) (26,301)
--------- ---------
Tier 1 and tangible capital 254,731 250,688
Plus: Allowable general valuation allowances 26,711 26,840
--------- ---------
Risk based capital $ 281,442 $ 277,528
========= =========
ASSET/LIABILITY MANAGEMENT
The primary function of asset and liability management is to provide liquidity
and maintain an appropriate balance between interest-earning assets and
interest-bearing liabilities within specified maturities and/or repricing dates.
Interest rate risk is the imbalance between interest-earning assets and
interest-bearing liabilities at a given maturity or repricing date, and is
commonly referred to as the interest rate gap (the "gap"). A positive gap exists
when there are more assets than liabilities maturing or repricing within the
same time frame. A negative gap occurs when there are more liabilities than
assets maturing or repricing within the same time frame. During a period of
rising interest rates, a negative gap over a particular period would tend to
adversely affect net interest income over such period, while a positive gap over
a particular period would tend to result in an increase in net interest income
over such period.
The Corporation's strategy for asset and liability management is to maintain an
interest rate gap that minimizes the impact of interest rate movements on the
net interest margin. As part of this strategy, the Corporation sells
substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, and invests in
adjustable-rate or medium-term, fixed-rate, single-family residential mortgage
loans, medium-term mortgage-related securities and consumer loans, which
generally have shorter terms to maturity and higher interest rates than
single-family mortgage loans.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates and/or
shorter terms to maturity than conventional single-family residential loans.
Long-term, fixed-rate, single-family residential mortgage loans originated for
sale in the secondary market are generally committed for sale at the time the
interest rate is locked with the borrower. As such, these loans involve little
interest rate risk to the Corporation.
The calculation of a gap position requires management to make a number of
assumptions as to when an asset or liability will reprice or mature. Management
believes that its assumptions approximate actual experience and considers them
reasonable, although the actual amortization and repayment of assets and
liabilities may vary substantially. The cumulative net gap position at September
30, 2002 has not changed materially since March 31, 2002.
21
SEGMENT REPORTING
According to the materiality thresholds of SFAS No. 131, the Corporation is
required to report each operating segment based on materiality thresholds of ten
percent or more of certain amounts, such as revenue. Additionally, the
Corporation is required to report separate operating segments until the revenue
attributable to such segments is at least 75 percent of total consolidated
revenue. SFAS No. 131 allows the Corporation to combine operating segments, even
though they may be individually material, if the segments have similar basic
characteristics in the nature of the products, production processes, and type or
class of customer for products or services. Based on the above criteria, the
Corporation has two reportable segments.
COMMUNITY BANKING: This segment is the main basis of operation for the
Corporation and includes the branch network and other deposit support services;
origination, sales and servicing of one-to-four family loans; origination of
multifamily, commercial real estate and business loans; origination of a variety
of consumer loans; and sales of alternative financial investments such as tax
deferred annuities.
REAL ESTATE INVESTMENTS: The Corporation's non-banking subsidiary, IDI, and its
subsidiary, NIDI, invest in limited partnerships in real estate developments.
Such developments include recreational residential developments and industrial
developments (such as office parks).
The following represents reconciliations of reportable segment revenues, profit
or loss, and assets to the Corporation's consolidated totals for the three and
six months ended September 30, 2002 and 2001, respectively.
22
THREE MONTHS ENDED SEPTEMBER 30, 2002
-------------------------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ---------- ------------ -----------
Interest income $ 34 $ 53,334 $ (34) $ 53,334
Interest expense 70 23,763 (70) 23,763
---------- ---------- ---------- ----------
Net interest income (loss) (36) 29,571 36 29,571
Provision for loan losses -- 450 -- 450
---------- ---------- ---------- ----------
Net interest income (loss)
after provision for loan losses (36) 29,121 36 29,121
Other income 4,368 7,462 (4,822) 7,008
Other expense 4,786 16,730 (4,786) 16,730
---------- ---------- ---------- ----------
Income (loss) before income taxes (454) 19,853 -- 19,399
Income tax expense (benefit) (306) 7,591 -- 7,285
---------- ---------- ---------- ----------
Net income (loss) $ (148) $ 12,262 $ -- $ 12,114
========== ========== ========== ==========
Total assets $ 44,646 $3,473,490 $ -- $3,518,136
THREE MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ---------- ------------ -----------
Interest income $ (285) $ 55,846 $ 285 $ 55,846
Interest expense 253 32,992 (253) 32,992
---------- ---------- ---------- ----------
Net interest income (loss) (538) 22,854 538 22,854
Provision for loan losses -- 550 -- 550
---------- ---------- ---------- ----------
Net interest income (loss)
after provision for loan losses (538) 22,304 538 22,304
Other income 8,352 5,240 (8,485) 5,107
Other expense 7,947 14,393 (7,947) 14,393
---------- ---------- ---------- ----------
Income (loss) before income taxes (133) 13,151 -- 13,018
Income tax expense (benefit) (71) 4,850 -- 4,779
---------- ---------- ---------- ----------
Net income (loss) $ (62) $ 8,301 $ -- $ 8,239
========== ========== ========== ==========
Total assets $ 43,683 $3,054,495 $ -- $3,098,178
23
SIX MONTHS ENDED SEPTEMBER 30, 2002
-------------------------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ---------- ------------ -----------
Interest income $ 64 $ 107,782 $ (64) $ 107,782
Interest expense 153 49,428 (153) 49,428
---------- ---------- ---------- ----------
Net interest income (loss) (89) 58,354 89 58,354
Provision for loan losses -- 900 -- 900
---------- ---------- ---------- ----------
Net interest income (loss)
after provision for loan losses (89) 57,454 89 57,454
Other income 8,760 12,788 (9,112) 12,436
Other expense 9,023 33,328 (9,023) 33,328
---------- ---------- ---------- ----------
Income (loss) before income taxes (352) 36,914 -- 36,562
Income tax expense (benefit) (392) 14,065 -- 13,673
---------- ---------- ---------- ----------
Net income $ 40 $ 22,849 $ -- $ 22,889
========== ========== ========== ==========
Total assets $ 44,646 $3,473,490 $ -- $3,518,136
SIX MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ---------- ------------ -----------
Interest income $ 129 $ 112,570 $ (129) $ 112,570
Interest expense 271 68,493 (271) 68,493
---------- ---------- ---------- ----------
Net interest income (loss) (142) 44,077 142 44,077
Provision for loan losses -- 760 -- 760
---------- ---------- ---------- ----------
Net interest income (loss)
after provision for loan losses (142) 43,317 142 43,317
Other income 11,174 10,101 (11,148) 10,127
Other expense 11,006 28,090 (11,006) 28,090
---------- ---------- ---------- ----------
Income before income taxes 26 25,328 -- 25,354
Income tax expense (benefit) (205) 9,409 -- 9,204
---------- ---------- ---------- ----------
Net income $ 231 $ 15,919 $ -- $ 16,150
========== ========== ========== ==========
Total assets $ 43,683 $3,054,495 $ -- $3,098,178
24
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Corporation's market rate risk has not materially changed
from March 31, 2002. See the Corporation's Annual Report on
Form 10-K for the year ended March 31, 2002.
ITEM 4 CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Quarterly Report, the
Corporation carried out an evaluation, under the supervision
and the participation of the Corporation's management,
including the Corporation's Chief Executive Office and Chief
Financial Officer, of the effectiveness of the design and
operation of the Corporation's disclosure controls and
procedures. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures are
effective. There were no significant changes in the
Corporation's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.
Disclosure controls and procedures are the controls and other
procedures of the Corporation that are designed to ensure that
the information required to be disclosed by the Corporation in
its reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure
that information required to be disclosed by the Corporation
in its reports filed under the Exchange Act is accumulated and
communicated to the Corporation's management, including the
principal executive officer and principal financial officer,
as appropriate to allow timely decisions regarding required
disclosure.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Corporation is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management of the Corporation to be
immaterial to the financial condition and results of
operations of the Corporation.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5 OTHER INFORMATION.
None.
25
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
Exhibit 99.1 Certification of the Chief Executive
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Exhibit 99.2 Certification of the Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
(B) REPORTS ON FORM 8-K.
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANCHOR BANCORP WISCONSIN INC.
Date: November 11, 2002 By:/s/ Douglas J. Timmerman
------------------- ---------------------------------------------
Douglas J. Timmerman, Chairman of the
Board, President and Chief Executive Officer
Date: November 11, 2002 By:/s/ Michael W. Helser
------------------- ---------------------------------------------
Michael W. Helser, Treasurer and
Chief Financial Officer
27
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas J. Timmerman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anchor Bancorp
Wisconsin, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002 /s/ Douglas J. Timmerman
-----------------------------------------------
Douglas J. Timmerman
Chairman, President and Chief Executive Officer
28
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael W. Helser, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anchor Bancorp
Wisconsin, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002 /s/ Michael W. Helser
--------------------------------------
Michael W. Helser
Chief Financial Officer and Treasurer
29