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
For the fiscal year ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number 0-20006
ANCHOR BANCORP WISCONSIN INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1726871
- --------------------------------- -------------------
(State or other jurisdiction (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 or Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). [X]
As of September 30, 2002, the aggregate market value of the 22,207,552
shares of the registrant's common stock deemed to be held by non-affiliates of
the registrant was $448.6 million, based upon the closing price of $20.20 per
share of common stock as reported by the Nasdaq Stock Market, National Market
System on such date. 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 May 30, 2003, 23,836,013 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
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on July 22, 2003
(Part III, Items 10 to 13)
[This page intentionally left blank]
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, fsb (the "Bank"). The Corporation
also has a non-banking subsidiary, Investment Directions, Inc. ("IDI"), a
Wisconsin corporation, which invests in real estate partnerships. IDI has two
subsidiaries, Nevada Investment Directions, Inc. ("NIDI") and California
Investment Directions, Inc. ("CIDI"), both of which invest in real estate held
for development and sale.
The Bank was organized in 1919 as a Wisconsin-chartered savings
institution. In July 2000, the Bank converted to a federally-chartered savings
institution, and 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"), and the FDIC. 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 three wholly owned subsidiaries. Anchor Investment
Services, Inc. ("AIS"), a Wisconsin corporation, offers investments and credit
life and disability insurance to the Bank's customers and other members of the
general public. ADPC Corporation ("ADPC"), a Wisconsin corporation, 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 of the Bank's investment portfolio (primarily
mortgage-related securities).
The Corporation maintains a web site at www.anchorbank.com. All the
Corporation's filings under the Exchange Act are available through that web
site, free of charge, including copies of Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports, on the date that the Corporation files those materials with, or
furnishes them to, the SEC.
CAUTIONARY FACTORS
This Form 10-K contains or incorporates by reference various
forward-looking statements concerning the Corporation's prospects that are based
on the current expectations or beliefs of management. Forward-looking statements
may also be made by the Corporation from time to time in other reports and
documents as well as oral presentations. When used in written documents or oral
statements, the words "anticipate," "believe," "estimate," "expect," "objective"
and similar expressions and verbs in the future tense, are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the Corporation's control, that could cause the
Corporation's actual results and performance to differ materially from what is
expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general economic
conditions; legislative and
1
regulatory initiatives; increased competition and other effects of deregulation
and consolidation of the financial services industry; monetary and fiscal
policies of the federal government; deposit flows; disintermediation; the cost
of funds; general market rates of interest; interest rates or investment returns
on competing investments; demand for loan products; demand for financial
services; changes in accounting policies or guidelines; general economic
developments; acts of terrorism and developments in the war on terrorism; and
changes in the quality or composition of loan and investment portfolios. See
also the factors regarding future operations discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below,
particularly those under the caption "Risk Factors."
MARKET AREA
The Bank's primary market area consists of the metropolitan area of
Madison, Wisconsin, the suburban communities of Dane County, Wisconsin,
south-central Wisconsin, the Fox Valley in east-central Wisconsin, the Milwaukee
metropolitan area in southeastern Wisconsin, as well as contiguous counties in
Iowa and Illinois. As of March 31, 2003, the Bank conducted business from its
headquarters and main office in Madison, Wisconsin and from 54 other
full-service offices located primarily in south-central and southwest Wisconsin
and two loan origination offices.
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
that 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.
LENDING ACTIVITIES
GENERAL. At March 31, 2003 the Bank's net loans held for investment
totaled $2.8 billion, representing approximately 78.3% of its $3.5 billion of
total assets at that date. Approximately $2.3 billion or 78.4% of the Bank's
total loans held for investment at March 31, 2003 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 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.
Non-real estate loans originated by the Bank consist of a variety of
consumer loans and commercial business loans. At March 31, 2003, the Bank's
total loans held for investment included $502.6 million or 16.9% of consumer
loans and $137.4 million or 4.6% of commercial business loans.
2
LOAN PORTFOLIO COMPOSITION. The following table presents information
concerning the composition of the Bank's consolidated loans held for investment
at the dates indicated.
MARCH 31,
-----------------------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-----------------------------------------------------------------------------
(Dollars in Thousands)
Mortgage loans:
Single-family residential $ 724,900 24.44% $ 855,437 30.33% $ 872,718 34.17%
Multi-family residential 474,678 16.00 388,919 13.79 305,009 11.94
Commercial real estate 747,682 25.20 686,237 24.33 501,640 19.64
Construction 331,338 11.17 288,377 10.22 266,712 10.44
Land 47,951 1.62 45,297 1.61 43,849 1.72
---------- ----- ---------- ----- ---------- -----
Total mortgage loans 2,326,549 78.43 2,264,267 80.28 1,989,928 77.90
---------- ----- ---------- ----- ---------- -----
Consumer loans:
Second mortgage and home equity 269,990 9.10 226,134 8.02 271,733 10.64
Education 166,507 5.61 130,752 4.64 130,215 5.10
Other 66,150 2.23 75,808 2.69 72,274 2.83
---------- ----- ---------- ----- ---------- -----
Total consumer loans 502,647 16.94 432,694 15.34 474,222 18.57
---------- ----- ---------- ----- ---------- -----
Commercial business loans:
Loans 136,090 4.59 121,723 4.32 90,212 3.53
Lease receivables 1,270 0.04 1,803 0.06 - 0.00
---------- ----- ---------- ----- ---------- -----
Total commercial business loans 137,360 4.63 123,526 4.38 90,212 3.53
---------- ----- ---------- ----- ---------- -----
Gross loans receivable
2,966,556 100.00% 2,820,487 100.00% 2,554,362 100.00%
====== ====== ======
Contras to loans:
Undisbursed loan proceeds (160,724) (157,667) (111,298)
Allowance for loan losses (29,677) (31,065) (24,076)
Unearned net loan fees (4,946) (4,286) (3,610)
Discount on loans purchased (147) (215) (371)
Unearned interest (74) (6) (31)
---------- ---------- ----------
Total contras to loans (195,568) (193,239) (139,386)
---------- ---------- ----------
Loans receivable, net $2,770,988 $2,627,248 $2,414,976
========== ========== ==========
3
MARCH 31,
---------------------------------------------------
2000 1999
---------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------------------------------------------------
(Dollars in thousands)
Mortgage loans:
Single-family residential $1,001,408 41.24% $1,061,813 47.66%
Multi-family residential 291,917 12.02 233,984 10.50
Commercial real estate 388,678 16.01 282,980 12.70
Construction 210,660 8.68 179,189 8.04
Land 29,232 1.20 17,309 0.78
---------- ----- ---------- -----
Total mortgage loans 1,921,895 79.15 1,775,275 79.69
---------- ----- ---------- -----
Consumer loans:
Second mortgage and home equity 243,124 10.01 214,295 9.62
Education 136,011 5.60 130,254 5.85
Other 65,686 2.71 56,590 2.54
---------- ----- ---------- -----
Total consumer loans 444,821 18.32 401,139 18.01
---------- ----- ---------- -----
Commercial business loans:
Loans 61,419 2.53 51,403 2.31
Lease receivables - 0.00 - 0.00
---------- ----- ---------- -----
Total commercial business loans 61,419 2.53 51,403 2.31
---------- ----- ---------- -----
Gross loans receivable 2,428,135 100.00% 2,227,817 100.00%
====== ======
Contras to loans:
Undisbursed loan proceeds (97,092) (87,401)
Allowance for loan losses (24,404) (24,027)
Unearned net loan fees (3,528) (4,015)
Discount on loans purchased (361) (792)
Unearned interest (29) (16)
---------- ----------
Total contras to loans (125,414) (116,251)
---------- ----------
Loans receivable, net $2,302,721 $2,111,566
========== ==========
4
The following table shows, at March 31, 2003, the scheduled contractual
maturities of the Bank'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 COMMERCIAL
RESIDENTIAL REAL ESTATE CONSUMER BUSINESS
LOANS LOANS LOANS LOANS
---------------------------------------------------
Amounts due:
In one year or less $ 12,414 $ 166,172 $ 19,109 $ 63,661
After one year through
five years 26,633 579,109 169,111 68,834
After five years 685,853 477,079 314,427 4,865
---------- ---------- ---------- ----------
$ 724,900 $1,222,360 $ 502,647 $ 137,360
========== ========== ========== ==========
Interest rate terms on amounts
due after one year:
Fixed $ 249,445 $ 278,820 $ 398,870 $ 34,474
========== ========== ========== ==========
Adjustable $ 463,041 $ 777,368 $ 84,668 $ 39,225
========== ========== ========== ==========
SINGLE-FAMILY RESIDENTIAL LOANS. Historically, savings institutions,
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, 2003, $724.9 million or 24.4% 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 nor guaranteed by a federal or state agency.
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, based on a designated index.
This is generally subject to a limit of 2% per adjustment and an aggregate 6%
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, 2003, approximately $475.5 million or 65.6% of the
Bank's permanent single-family residential loans held for investment consisted
of loans with adjustable interest rates. Also, as interest rates decline,
borrowers may refinance their mortgages into fixed-rate loans thereby prepaying
the balance of the loan prior to maturity.
The Bank continues to originate long-term, fixed-rate conventional
mortgage loans. The Bank generally sells current production of these loans with
terms of 15 years or more to the Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), FHLB, and other
institutional investors, while keeping some of the 10-year term loans in its
portfolio. In order to provide a full range of products to its customers, the
Bank also participates in the loan origination programs of Wisconsin Housing and
Economic
5
Development Authority ("WHEDA"), and Wisconsin Department of Veterans Affairs
("WDVA"). The Bank retains the right to service substantially all loans that it
sells.
At March 31, 2003, approximately $249.4 million or 34.4% of the Bank's
permanent single-family residential loans held for investment consisted of loans
that provide for fixed rates of interest. 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. The Bank
originates multi-family loans that it typically holds in its loan portfolio.
Such loans 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, 2003, the Bank had $474.7 million
of loans secured by multi-family residential real estate and $747.7 million of
loans secured by commercial real estate. These represented 16.0% and 25.2% of
the Bank's total loans held for investment, respectively. The Bank generally
limits the origination of such loans to its primary 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 hotels, 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, based on a designated index, subject
to an initial fixed-rate for a one to five year period and an annual limit
generally of 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,
2003, construction loans amounted to $331.3 million or 11.2% of the Bank's total
loans held for investment. Land loans amounted to $48.0 million or 1.6% of the
Bank's total loans held for investment at March 31, 2003.
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, 2003, $502.6
million or 16.9% of the Bank'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. Education loans are generally guaranteed by a federal
governmental agency.
The largest component of the Bank's consumer loan portfolio is second
mortgage and home equity loans, which amounted to $270.0 million or 9.1% of
total loans at March 31, 2003. 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.
6
Approximately $166.5 million or 5.6% of the Bank's total loans at March
31, 2003 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 annually 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 ("SLMA")
or to other investors. The Bank sold $5.0 million of these education loans
during fiscal 2003.
The remainder of the Bank's consumer loan portfolio consists of deposit
account secured loans that 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 participates with a third party,
Elan, in 45% of the outstanding balances and is responsible for 45% of the
losses.
The Bank is allocated 32% of the interest paid on assigned debt and 25%
of interchange income established by Visa and MasterCard. The bank also shares
33% of annual fees paid to Elan and 30% of late payments paid to Elan. Also,
account incentive fees of $20 per card are paid to the Bank for newly
established accounts.
At March 31, 2003, the Bank's approved credit card lines and the
outstanding credit pursuant to such lines amounted to $41.7 million and $5.5
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, 2003, commercial business loans amounted to $137.4 million
or 4.6% of the Bank's total loans held for investment. The Bank'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 published index.
Substantially all of such loans are secured and backed by the personal
guarantees of the individuals of the business.
NET FEE INCOME FROM LENDING ACTIVITIES. Loan origination and commitment
fees and certain direct loan origination costs are being deferred and the net
amounts are 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 seven
regional lending offices, certain of its branch offices and two loan origination
facilities. Loans may be approved by members of the Officers' 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. For loan requests of $1.5 million or less, loan approval authority is
designated to an Officers' Loan Committee and requires at least three of the
members' signatures. Senior Loan Committee members are authorized to approve
loan requests between $1.5 million and $3.0 million and approval requires at
least three of the members' signatures. Loan requests in excess of $3.0 million
must be approved by the Board of Directors.
7
The Bank's general policy is to lend up to 80% of the appraised value
or purchase price 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, 2003, the Bank had approximately $39.3 million of loans
that had loan-to-value ratios of greater Than 80% and did not have private
mortgage insurance for the portion of the loans above such amount.
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 during the
underwriting process. 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 real estate and multi-family residential
loans is reviewed on a continuing basis (annually for loans of $1.0 million or
more, and bi-annually for loans of $750,000 to $1.0 million) 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,
flood 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, FHLB and other
investors in the secondary market. 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.
The volume of loans originated and sold is reliant on a number of factors but is
most influenced by general interest rates. In periods of lower interest rates,
such as fiscal 2003, customer demand for fixed-rate
8
mortgages increases. In periods of higher interest rates, such as occurred in
fiscal 2000, customer demand for fixed-rate mortgages declines. 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 services all originated loans that have been sold to
other investors. This includes the collection of payments, the inspection of the
secured property, and the disbursement of certain insurance and tax advances on
behalf of borrowers. The Bank recognizes a servicing fee when the related loan
payments are received. At March 31, 2003, the Bank was servicing $2.5 billion of
loans for others.
The Bank is not an active purchaser of 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, 2003, approximately $83.6 million of mortgage loans were being serviced for
the Bank by others.
The following table shows the Bank's consolidated total loans
originated, purchased, sold and repaid during the periods indicated.
YEAR ENDED MARCH 31,
------------------------------------------
2003 2002 2001
------------------------------------------
(In Thousands)
Gross loans receivable at beginning of year(1) $ 2,867,007 $ 2,571,984 $ 2,429,899
Loans originated for investment:
Single-family residential 99,380 18,245 43,851
Multi-family residential 168,882 188,077 42,424
Commercial real estate 524,941 344,131 273,142
Construction and land 420,231 362,507 332,145
Consumer 263,628 181,782 203,929
Commercial business 72,199 67,390 71,982
------------ ------------ ------------
Total originations 1,549,261 1,162,132 967,473
------------ ------------ ------------
Loans purchased for investment:
Single-family residential - - -
Multi-family residential - - 330
Commercial real estate - - 766
------------ ------------ ------------
Total purchases - - 1,096
Total originations and purchases 1,549,261 1,162,132 968,569
Repayments (1,279,077) (896,007) (713,885)
Transfers of loans to held for sale (124,115) - (128,456)
------------ ------------ ------------
Net activity in loans held for investment 146,069 266,125 126,228
------------ ------------ ------------
Loans originated for sale:
Single-family residential 1,757,299 1,097,655 579,699
Transfers of loans from held for investment 124,115 - 128,456
Sales of loans (1,760,765) (1,068,757) (563,842)
Loans converted into mortgage-backed
securities (124,115) - (128,456)
------------ ------------ ------------
Net activity in loans held for sale (3,466) 28,898 15,857
------------ ------------ ------------
Gross loans receivable at end of period $ 3,009,610 $ 2,867,007 $ 2,571,984
============ ============ ============
(1) Includes loans held for sale and loans held for investment
9
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
contacted to determine the 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, the value of the
collateral, 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 2003 if
the Bank's non-accrual loans at the end of the period had been current in
accordance with their terms during the period was $651,000. The amount of
interest income attributable to these loans and included in interest income
during fiscal 2003 was $228,000.
The following table sets forth information relating to delinquent loans
of the Bank and their relation to the Bank's total loans held for investment at
the dates indicated.
MARCH 31,
---------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
DAYS PAST DUE BALANCE LOANS BALANCE LOANS BALANCE LOANS
- --------------------------------------------------------------------------------------------------
(Dollars in Thousands)
30 to 59 days $ 10,083 0.34% $ 17,647 0.63% $ 7,141 0.28%
60 to 89 days 5,612 0.19 2,671 0.09 716 0.03
90 days and over 10,069 0.34 9,042 0.32 5,047 0.20
---------- ---- ---------- ---- ---------- ----
Total $ 25,764 0.87% $ 29,360 1.04% $ 12,904 0.51%
========== ==== ========== ==== ========== ====
There were two non-accrual loans with carrying values of $1.0 million
or greater at March 31, 2003. For additional discussion of the Corporation's
asset quality, see "Management's Discussion and Analysis of Financial
10
Condition and Results of Operations - Financial Condition-Non-Performing Assets"
in Item 7. See also Notes 1 and 5 to the Consolidated Financial Statements in
Item 8.
NON-PERFORMING REAL ESTATE HELD FOR DEVELOPMENT AND SALE. At March 31,
2003, there were no properties in non-performing real estate held for
development and sale with a carrying value greater than $1.0 million.
Non-performing real estate held for development and sale remained relatively
constant during the fiscal year. For additional discussion of real estate held
for development and sale that is not considered a part of non-performing assets,
see the discussion under "Subsidiaries - Investment Directions, Inc." and "-
Nevada Investment Directions, Inc." and Note 16 to the Consolidated Financial
Statements in Item 8.
FORECLOSED PROPERTIES. At March 31, 2003, the Bank had no foreclosed
properties with a net carrying value of $1.0 million or more. Foreclosed
properties and repossessed assets remained relatively constant with an increase
of $60,000 during the fiscal year.
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 losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for losses in the amount of 100% of the portion of the assets
classified loss or charge off such amount.
At March 31, 2003, there were $25.1 million of classified assets
including non-performing assets plus other loans and assets, meeting the
criteria for classification. The criteria for the classification of assets comes
from information causing management to have doubts as to the ability of such
borrowers to comply with the present loan repayment terms and would indicate
that such loans have the potential to be included as non-accrual, past due, or
impaired (as defined in SFAS No. 114), in the future periods. However, no loss
is anticipated at this time.
As of March 31, 2003, there were no loans classified as special
mention, doubtful or loss. At March 31, 2002, substandard assets amounted to
$24.7 million and no loans were classified as special mention, doubtful or loss.
The increase of $400,000 in classified assets was not attributable to any one
specific loan.
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 current levels of
components of the loan portfolio and the amount, type of its classified assets,
and other factors. In addition, the Bank monitors and uses standards for these
allowances that depend on the nature of the classification and loan location of
the security property.
Additional discussion on the allowance for losses at March 31, 2003 has
been presented as part of the discussion under "Allowance for Loan and
Foreclosure Losses" in Management's Discussion and Analysis, which is contained
in Item 7.
11
SECURITIES - GENERAL
Management determines the appropriate classification of securities at
the time of purchase. Debt 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 years ended March 31, 2003 and 2002,
stockholders' equity increased $1.7 million (net of deferred income tax payable
of $1.1 million), and increased $519,000 (net of deferred income tax payable of
$2.3 million), respectively, to reflect 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, 2003.
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.
12
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,
---------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------------------------------------------------------------------------
(In Thousands)
Available For Sale:
U.S. Government and federal
agency obligations $ 75,675 $ 75,823 $ 43,261 $ 43,442 $ 9,081 $ 9,219
Mutual fund 9,815 9,812 10,587 10,582 5,996 6,005
Corporate stock and other 10,151 11,557 11,040 11,969 7,837 6,992
---------- ---------- ---------- ---------- ---------- ----------
$ 95,641 $ 97,192 $ 64,888 $ 65,993 $ 22,914 $ 22,216
Held To Maturity:
U.S. Government and federal
agency obligations $ 2,998 $ 3,095 $ 7,747 $ 7,897 $ 33,913 $ 34,096
Other securities - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
2,998 3,095 7,747 7,897 33,913 34,096
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities $ 98,639 $ 100,287 $ 72,635 $ 73,890 $ 56,827 $ 56,312
========== ========== ========== ========== ========== ==========
For additional information regarding the Corporation's investment
securities, see the Corporation's Consolidated Financial Statements, including
Note 3 thereto included in Item 8.
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") backed by FHLMC,
FNMA and GNMA mortgage-backed securities.
At March 31, 2003, the amortized cost of the Corporation's
mortgage-backed securities held to maturity amounted to $60.4 million and
included $53.9 million, $6.5 million and $20,000 which are insured or guaranteed
by FNMA, FHLMC and GNMA, respectively. The adjustable-rate securities included
in the above totals for March 31, 2003, are $400,000 and $1.1 million for FNMA
and FHLMC, respectively.
The fair value of the Corporation's mortgage-backed securities
available for sale amounted to $131.6 million at March 31, 2003, of which $1.4
million are five- and seven-year balloon securities, $59.0 million are 10-, 15-
and 30-year securities and $71.2 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, 2003, $98.0 million of the Corporation's
mortgage-backed securities available for sale and $56.9 million of the
Corporation's mortgage-backed securities held to maturity were pledged to secure
various obligations of the Corporation.
13
The table below sets forth information regarding the amortized cost and
fair values of the Corporation's mortgage-related securities at the dates
indicated.
MARCH 31,
---------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------------------------------------------------------------------------
(In Thousands)
Available For Sale:
Agency CMO/Remic's $ 44,929 $ 45,082 $ 33,231 $ 33,418 $ 12,180 $ 12,416
Corporate CMO's 8,808 9,072 18,369 18,874 7,992 8,476
Mortgage Pool Securities 127,116 131,597 91,139 93,001 149,914 153,076
---------- ---------- ---------- ---------- ---------- ----------
$ 180,853 $ 185,751 $ 142,739 $ 145,293 $ 170,086 $ 173,968
Held To Maturity:
Agency CMO/Remic's $ 2,600 $ 2,661 $ 5,776 $ 5,879 $ 11,042 $ 11,170
Mortgage Pool Securities 60,398 63,416 134,517 135,451 194,149 196,499
---------- ---------- ---------- ---------- ---------- ----------
$ 62,998 $ 66,077 $ 140,293 $ 141,330 $ 205,191 $ 207,669
---------- ---------- ---------- ---------- ---------- ----------
Total Mortgage Related Securities $ 243,851 $ 251,828 $ 283,032 $ 286,623 $ 375,277 $ 381,637
========== ========== ========== ========== ========== ==========
Management believes that certain mortgage-derivative securities
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.
The Corporation's mortgage-derivative securities are made up of collateralized
mortgage obligations ("CMOs"), including CMOs which qualify as Real Estate
Mortgage Investment Conduits ("REMICs") under the Internal Revenue Code of 1986,
as amended ("Code"). At March 31, 2003, the Corporation's had $2.6 million in
mortgage-derivative securities held to maturity. The fair value of the
mortgage-derivative securities available for sale held by the Corporation
amounted to $54.2 million at the same date.
14
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
2003, 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 FIVE 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:
Mortgage-derivative securities $ 16 5.49% $ 8,793 5.37% $ 45,345 5.12% $ 54,154
Mortgage-backed securities 1,988 5.49 13,101 5.93 116,508 5.70 131,597
---------- ---- ---------- ---- ---------- ---- ----------
2,004 5.49 21,894 5.70 161,853 5.54 185,751
---------- ---- ---------- ---- ---------- ---- ----------
Held to Maturity:
Mortgage-derivative securities 114 7.23 1,884 5.95 602 6.00 2,600
Mortgage-backed securities 7,765 5.89 8,583 6.54 44,050 6.29 60,398
---------- ---- ---------- ---- ---------- ---- ----------
7,879 5.91 10,467 6.43 44,652 6.29 62,998
---------- ---- ---------- ---- ---------- ---- ----------
Mortgage-related securities $ 9,883 5.82% $ 32,361 5.94% $ 206,505 5.70% $ 248,749
========== ==== ========== ==== ========== ==== ==========
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 the Corporation's Consolidated Financial Statements, including
Note 4 thereto, included in Item 8.
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 principal repayments and prepayments on loan and mortgage-related
securities, 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 repayments and
interest payments are a relatively stable source of funds, while deposit inflows
and outflows and loan 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 provide funds for
a specified fee. While brokered deposits are a good source of funds, they are
market rate driven and thus inherently have more liquidity and interest rate
risk. To mitigate this
15
risk, the Bank's liquidity policy limits the amount of brokered deposits to 10%
of assets and to the total amount of borrowings. At March 31, 2003, the Bank had
$239.4 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 amount and maturities of the Bank's
certificates of deposit at March 31, 2003.
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)
1.00% to 2.99% $ 269,298 $ 81,652 $ 157,799 $ 19,728 $ 1,322 $ 529,799
3.00% to 4.99% 328,464 329,600 118,250 20,788 72,455 869,557
5.00% to 6.99% 34,748 14,143 58,743 23,607 70,034 201,275
7.00% to 8.99% 498 100 - 128 - 726
9.00% to 10.99% - - - - - -
Ledger PVA (1) - - - - - 3,119
---------- ---------- ---------- ---------- ---------- ----------
$ 633,008 $ 425,495 $ 334,792 $ 64,251 $ 143,811 $1,604,476
========== ========== ========== ========== ========== ==========
(1) Stemming from the Bank's purchase of Ledger Bank on November 10, 2001, an
adjustment was made to the market values of certificate of deposit and core
deposit accounts. The market value of certificate of deposit accounts was
determined by discounting cash flows using current deposit rates for the
remaining contractual maturity. The market value of core deposits (checking,
money market, and passbook accounts) was determined using discounted cash flows
with estimated decay rates.
At March 31, 2003, the Bank had $204.6 million of certificates greater
than or equal to $100,000, of which $2.2 million are scheduled to mature in
seven through twelve months and $202.4 million in over twelve 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. The Bank has pledged a substantial
portion of its loans receivable and all of its investment in FHLB stock as
collateral for these advances. A portion of the Bank's mortgage-related
securities has also been pledged as collateral.
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 did not utilize this source of funds during the year ended
March 31, 2003 but may do so in the future.
16
The Corporation has a short-term line of credit used in part to fund
IDI's partnership interests and investments in real estate held for development
and sale. This line of credit also funds other Corporation needs. The interest
is based on LIBOR (London InterBank Offering Rate), and is payable monthly and
each draw has a specified maturity. The final maturity of the line of credit is
in October 2003. See Note 9 to the Corporation's Consolidated Financial
Statements in Item 8 for more information on borrowings.
The following table sets forth the outstanding balances and weighted
average interest rates for the Corporation's borrowings (short-term and
long-term) at the dates indicated.
MARCH 31,
----------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------------------------------------------------------------------------
(Dollars In Thousands)
FHLB advances $ 554,268 4.33% $ 569,500 4.78% $ 669,896 6.05%
Repurchase agreements - 0.00 - 0.00 27,948 5.32
Other loans payable 41,548 2.78 52,090 3.62 42,754 7.33
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,
------------------------------------------
2003 2002 2001
------------------------------------------
In Thousands)
Maximum month-end balance:
FHLB advances $ 188,900 $ 431,296 $ 498,446
Repurchase agreements - 32,101 116,551
Other loans payable 52,695 52,174 43,015
Average balance:
FHLB advances 145,342 228,523 455,828
Repurchase agreements - 8,233 83,310
Other loans payable 42,325 46,743 35,224
SUBSIDIARIES
INVESTMENT DIRECTIONS, INC. IDI is a wholly owned non-banking
subsidiary of the Corporation that has invested in various limited partnerships
and subsidiaries funded by borrowings from the Corporation. The Corporation's
investment in IDI at March 31, 2003 amounted to $2.2 million as compared to $2.9
million for the year ended March 31, 2002. IDI had total assets of $40.9 million
and a net loss of $600,000. This compares to total assets of $38.6 million and a
net loss of $520,000 for the prior year ended March 31, 2002.
NEVADA INVESTMENT DIRECTIONS, INC. NIDI is a wholly owned non-banking
subsidiary of IDI formed in March 1997 that has invested in various limited
partnerships such as Oakmont. NIDI was organized in the state of Nevada. IDI's
investment in NIDI at March 31, 2003 amounted to $4.3 million and $4.5 million
for the prior fiscal year. For the year ended March 31, 2003, NIDI had total
assets of $4.5 million and a net loss of $220,000. This compares to total assets
of $4.9 million and net income of $36,000 for the prior year ended March 31,
2002.
17
OAKMONT. Oakmont became a wholly owned non-banking subsidiary of NIDI
and IDI in January 2000. Oakmont was organized in the state of Texas. Oakmont is
a limited partner in Chandler Creek Business Park Round Rock Texas, a joint
venture partnership formed to develop an industrial park located in Round Rock,
Texas. The office park consists of four office warehouse buildings totaling
163,000 square feet. The project is currently in the lease up stage and is also
being marketed for sale. At March 31, 2003, Oakmont's investment in Chandler
Creek was $2.6 million, and Oakmont had extended $3.6 million to the unrelated
partner in Chandler Creek. This compares to a carrying value of $3.1 million and
a loan to the partner of $2.0 million for the prior year ended March 31, 2002.
For the year ended March 31, 2003, Oakmont had total assets of $6.3 million and
a net loss of $560,000. This compares to total assets of $5.2 million and a net
loss of $200,000 at March 31, 2002.
S&D INDIAN PALMS, LTD. Indian Palms is a wholly owned non-banking
subsidiary of IDI organized in the state of California which owns a golf resort
and land for residential lot development in California. Indian Palms sells land
to Davsha who in turn sells land to its subsidiaries and subsequently to its
real estate partnerships for lot development. Gains are realized as fully
developed lots are sold to outside parties. As a result of these land sales,
Indian Palms had a deferred gain of $820,000 as of March 31, 2003. IDI's
investment in Indian Palms at March 31, 2003 amounted to $21.3 million. IDI's
investment in Indian Palms at March 31, 2002 amounted to $22.2 million. For the
year ended March 31, 2003, Indian Palms had total assets of $25.5 million, a net
loss of $990,000, and deferred gains of $820,000. This compares to total assets
of $28.6 million, a net loss of $1.4 million and deferred gains of $960,000 for
the year ended March 31, 2002. As of March 31, 2003, Indian Palms had borrowed
$3.2 million from another bank, which is secured by the land. This compares to a
principal balance of $5.2 million for the year ended March 31, 2002.
CALIFORNIA INVESTMENT DIRECTIONS, INC. CIDI is a wholly owned
non-banking subsidiary of IDI formed in April 2000 to purchase and hold the
general partnership interest in Indian Palms and a minority interest in Davsha,
LLC. CIDI was organized in the state of California. IDI's investment in CIDI at
March 31, 2003 amounted to $340,000 compared to an investment in CIDI at March
31, 2002 of $214,000. For the year ended March 31, 2003, CIDI had total assets
of $450,000 and net income of $100,000. This compares to total assets of
$290,000 and net income of $160,000 for the year ended March 31, 2002.
DAVSHA, LLC. Davsha is a wholly owned non-banking subsidiary of IDI and
CIDI. Davsha was organized in the state of California where it purchased land
from Indian Palms and develops residential housing for sale. For the year ended
March 31, 2003, Davsha had total assets of $10.8 million and net income of
$950,000. This compares to total assets of $12.3 million and net income of $1.5
million for the year ended March 31, 2002.
Davsha has five wholly owned non-banking subsidiaries, Davsha II,
Davsha III, Davsha IV, Davsha V and Davsha VI. Each of these subsidiaries formed
partnerships with developers and purchased lots from Davsha.
DAVSHA II, LLC. Davsha II is a wholly owned non-banking subsidiary of
Davsha formed in April 2000. Davsha II was organized in the state of California.
Davsha II is a limited partner in Paragon Indian Palms Associates, a partnership
formed in February 2000, to develop residential housing. Davsha's investment in
Davsha II at March 31, 2003, amounted to $700,000 as compared to $210,000 at
March 31, 2002. For the year ended March 31, 2003, Davsha II had total assets of
$1.5 million and net income of $490,000 as compared to total assets of $1.7
million and net income of $160,000 for the year ended March 31, 2002. As of
March 31, 2003, Paragon had $1.2 million in outside borrowings guaranteed by
IDI. This compares to a principal balance of $3.2 million at March 31, 2002.
DAVSHA III, LLC. Davsha III is a wholly owned non-banking subsidiary of
Davsha formed in February 2001. Davsha III was organized in the state of
California and is a limited partner in Indian Palms 147, LLC, a partnership
formed in February 2001 to develop residential housing. Davsha's investment in
Davsha III at March 31, 2003 amounted to $940,000 as compared to $20,000 for the
year ended March 31, 2002. Davsha III had total assets of $5.6 million and net
income of $920,000 as compared to total assets of $3.2 million and net income of
$20,000 for the year ended March 31, 2002. Indian Palms 147 has $2.7 million in
outside borrowings guaranteed by IDI. This compares to a principal balance of
$4.4 million at March 31, 2002.
18
DAVSHA IV, LLC. Davsha IV is a wholly owned non-banking subsidiary of
Davsha formed in July 2001. Davsha IV was organized in the state of California
and is a limited partner in DH Indian Palms I, LLC., a partnership formed in
July 2001 to develop residential housing. Davsha's investment in Davsha IV at
March 31, 2003 and 2002 amounted to $1.6 million and ($20,000), respectively.
For the year ended March 31, 2003, Davsha IV had total assets of $420,000 and
net income of $220,000. This compares to total assets of $1.5 million and a net
loss of $20,000 for the year ended March 31, 2002. DH Indian Palms I had $1.7
million in outside borrowings guaranteed by IDI at March 31, 2003. This compares
to $1.8 million in outside borrowings guaranteed by IDI at March 31, 2002.
DAVSHA V, LLC. Davsha IV is a wholly owned non-banking subsidiary of
Davsha formed in July 2001. Davsha V was organized in the state of California
and is a limited partner in Villa Santa Rosa, LLC., a partnership formed in July
2002 to develop residential housing. Davsha's investment in Davsha V at March
31, 2003 amounted to $1.2 million. For the year ended March 31, 2003, Davsha V
had total assets of $470,000 and a net loss of $1,000. Villa Santa Rosa had $3.3
million in outside borrowings guaranteed by IDI at March 31, 2003.
DAVSHA VI, LLC. Davsha VI is a wholly owned non-banking subsidiary of
Davsha formed in July 2001. Davsha VI was organized in the state of California
and is a limited partner in Bellasara, LLC, a partnership formed in July 2002 to
develop residential housing. Davsha's investment in Davsha VI at March 31, 2003
amounted to $520,000. For the year ended March 31, 2003, Davsha VI had total
assets of $(290,000) and a net loss of $1,000. Bellasara had $2.6 million in
outside borrowings guaranteed by IDI at March 31, 2003.
Together, IDI, NIDI, CIDI, Indian Palms, Davsha, Davsha II, Davsha III,
Davsha IV, Davsha V, Davsha VI and Oakmont represent the real estate investment
segment of the Corporation's business. This segment is categorized as real
estate held for development and sale on the Corporation's consolidated financial
statements. Net of specific reserves of $650,000 and non-performing real estate
held for development and sale of $1.5 million, the segment represents $45.0
million of total assets. The specific reserve of $650,000 has been established
for probable and reasonably estimatable declines in the property value of the
golf course land at the Indian Palms subsidiary's golf course operation. For
further discussion of the real estate held for development and sale segment, see
Note 16 to the Corporation's Consolidated Financial Statements in Item 8.
In fiscal 2002, IDI's non-subsidiary partnership located in Tampa Bay,
Florida sold 50% of its interest to a Florida developer. IDI transferred a
portion of its interest and now owns a 50% interest in Dune Golfers Club, LLC
and Dune Development, LLC with the developer. Dune Golfers Club is the golf
operation and Dune Development owns the residential lots. Dune Development plans
to develop the lots for sale. IDI also transferred its remaining interest into
IDI Holdings, LLC Florida and IDI Commercial, LLC Florida. IDI Holdings holds
50% of Seville Development Holdings, LLC, the owner of the undeveloped land and
golf course real estate. At present, no plans have been made to develop the
land. Some tracts may be sold in the future. IDI Commercial holds 50% of Parkway
98 Holdings, LLC, the owner of all the undeveloped commercial and multi-family
real estate. It plans to develop these parcels in the future.
As of March 31, 2003, IDI's total investment in the Florida project was
$4.3 million. This compares to $3.8 million for the prior year ended March 31,
2002. The project reported net income of $9,000 for the year ended March 31,
2003 as compared to a net loss of $225,000 for the year ended March 31, 2002. As
a result of the changes in ownership interest and reorganization, the Florida
project had a deferred gain of $810,000 as of March 31, 2003. This compares to a
deferred gain of $820,000 as of March 31, 2002. This gain will be realized as
lots are developed and sold. IDI holds three lines of credit with the Florida
operation totaling $550,000 as of March 31, 2003 as compared to $340,000 in
notes as of March 31, 2002. IDI has also funded $600,000 to their partner in
this project.
The balance of assets at IDI includes loans to finance the acquisition
and development of property for various partnerships and subsidiaries. At March
31, 2003, IDI had extended $19.3 million to Indian Palms, $6.0 million to
Davsha, $390,000 to Davsha II, $720,000 to Davsha III, $190,000 to CIDI and $1.8
million to Oakmont as compared to $19.3 million to Indian Palms, $4.3 million to
Davsha, and $1.3 million to Davsha II, $730,000 to
19
Davsha III, $200,000 to CIDI and $360,000 to Oakmont at March 31, 2002. These
amounts are eliminated in consolidation.
At March 31, 2003, the Corporation had extended $34.0 million to IDI to
fund various partnership and subsidiary investments. This represents an increase
of $1.6 million from borrowings of $32.4 million at March 31, 2002. These
amounts are eliminated in consolidation.
At March 31, 2003, the Corporation had extended $140,000 to NIDI to
fund various partnership investments. NIDI had borrowings from the Corporation
of $250,000 as of March 31, 2002. These amounts are eliminated in consolidation.
At March 31, 2003, IDI had a specific valuation allowance of $650,000,
unchanged from its level of $650,000 for the prior year ended March 31, 2002. As
of March 31, 2003 and March 31, 2002, there have been no charge-offs for any of
the partnerships or subsidiaries within IDI. The valuation reserve in the real
estate held for development and sale segment was established in 1997 and is a
specific valuation set up for losses that are probable and reasonably
estimatable related to declines in property values.
ANCHOR INVESTMENT SERVICES, INC. AIS is a wholly owned subsidiary of
the Bank that offers fixed and variable annuities as well as mutual funds to its
customers and members of the general public. AIS also processes stock and bond
trades and provides credit life and disability insurance services to the Bank's
consumer and mortgage loan customers as well as some group and individual
coverage. For the year ended March 31, 2003, AIS had a net loss of $70,000 as
compared to a net loss of $90,000 for the year ended March 31, 2002. The Bank's
investment in AIS amounted to $60,000 at March 31, 2003 as compared to $140,000
at March 31, 2002.
ADPC CORPORATION. ADPC is a wholly owned subsidiary of the Bank that
holds and develops certain of the Bank's foreclosed properties. The Bank's
investment in ADPC at March 31, 2003 amounted to $350,000 as compared to
$650,000 at March 31, 2002. ADPC had net income of $5,000 for the year ended
March 31, 2003 as compared to a net loss of $50,000 for the year ended March 31,
2002.
ANCHOR INVESTMENT CORPORATION. AIC is an operating subsidiary of the
Bank that was incorporated in March 1993. Located in the state of Nevada, AIC
was formed for the purpose of managing a portion of the Bank's investment
portfolio (primarily mortgage-backed securities). The Bank also sells commercial
real estate and multi-family loans to AIC in the form of loan participations
with the Bank retaining servicing and charging a servicing fee of .125%. 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
$720.0 million at March 31, 2003 as compared to $696.0 million at March 31,
2002. AIC had net income of $23.9 million for the year ended March 31, 2003 as
compared to $27.3 million for the year ended March 31, 2002. The Bank had
outstanding notes to AIC of $151.0 million with a weighted average rate of 4.39%
as of March 31, 2003 as compared to $151.0 million at March 31, 2002, with a
weighted average rate of 4.96% and maturities during the next six months of
fiscal 2003.
EMPLOYEES
The Corporation had 748 full-time employees and 143 part-time employees
at March 31, 2003. The Corporation promotes equal employment opportunity and
considers its relationship with its employees to be good. The employees are not
represented by a collective bargaining unit.
20
REGULATION
Set forth below is a brief description of certain laws and regulations
that 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 Bank is a federally chartered stock savings association whose
primary regulator is the OTS. The FDIC under the SAIF insures its deposits up to
applicable limits. The Bank is currently subject to extensive regulation,
examination and supervision by the OTS as its chartering agency, and by the FDIC
as its deposit insurer. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition, and must obtain regulatory
approval prior to entering into certain transactions such as mergers with or
acquisitions of, other depository institutions and opening or acquiring branch
offices.
The OTS currently conducts periodic examinations to assess the Bank's
compliance with various regulatory requirements. In addition, the FDIC has the
right to perform examinations of the Bank should the OTS or the FDIC determine
the Bank is in a weakened financial condition or a failure is foreseeable. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the deposit insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
The Corporation is deemed a unitary savings and loan holding company
within the meaning of Section 10(O) of the Homeowners' Loan Act ("HOLA"). The
Corporation is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. The Corporation is required to file
certain reports with, and otherwise comply with, the rules and regulations of
the Securities and Exchange Commissions ("SEC") under the federal securities
laws.
As a unitary savings and loan holding company in existence on or before
May 4, 1999, 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."
Any change in these laws and regulations, whether by the OTS, the FDIC,
the SEC, or through legislation, could have a material adverse impact on the
Bank and the Corporation and their operations and shareholders.
Certain laws and regulations applicable to the Bank and the Corporation
are summarized below. These summaries do not purport to be complete and are
qualified in their entirety by reference to such laws and regulations.
FEDERAL REGULATION OF THE BANK
GENERAL. As a federally chartered, SAIF-insured savings bank, the Bank
is subject to extensive regulation by the OTS and the FDIC. Lending activities
and other investments must comply with federal statutory and regulatory
requirements. This federal regulation establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the SAIF, the FDIC, and the depositors. This regulatory structure
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies regarding the classification of assets and the establishment of
adequate loan loss reserves.
21
The OTS regularly examines the Bank and issues a report of its
examination findings to the board of directors. The Bank's relationship with its
depositors and borrowers is also regulated by federal law, especially in such
matters as the ownership of savings accounts and the form and content of the
Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, and must obtain regulatory approvals prior
to entering into transactions such as mergers with or acquisitions of other
financial institutions. Any change in such regulations, whether by the OTS, the
FDIC or the United States Congress, could have a material adverse affect on the
Bank and its operations.
QUALIFIED THRIFT LENDER REQUIREMENT. Federal savings associations must
meet a qualified thrift lender test or they become subject to operating
restrictions. Until recently, the chief restriction was the elimination of
borrowing rights from the savings association's Federal Home Loan Bank. However,
with the passage of the Gramm-Leach-Bliley Financial Modernization Act of 1999
by Congress, the failure to maintain qualified thrift lender status will not
affect the Bank's borrowing rights with the FHLB of Chicago. Notwithstanding
these changes, the Bank anticipates that it will maintain an appropriate level
of investments consisting primarily of residential mortgages, mortgage backed
securities and other mortgage-related investments, and otherwise qualify as
qualified thrift lenders. The required percentage of these mortgage-related
investments is 65% of portfolio assets. Portfolio assets are all assets minus
goodwill and other intangible assets, property used by the institution in
conducting its business and liquid assets equal to 20% of total assets.
Compliance with the qualified thrift lender test is determined on a monthly
basis in nine out of every twelve months.
INSURANCE OF DEPOSITS. The Bank's deposits are insured up to applicable
limits under the SAIF of the FDIC. The FDIC regulations assign institutions to a
particular capital group based on the level of an institution's capital - "well
capitalized," "adequately capitalized," or "undercapitalized." These three
groups are then divided into three subgroups reflecting varying levels of
supervisory concern, from those institutions considered to be healthy to those
that are considered to be of substantial supervisory concern. This matrix
results in nine assessment risk classifications, with well capitalized,
financially sound, institutions paying lower rates than those paid by
undercapitalized institutions, which are likely to pose a risk of loss to the
insurance fund absent corrective actions.
An institution's assessment rate depends on the capital category to
which it is assigned. Assessment rates for deposit insurance currently range
from 0 basis points to 27 basis points. The capital and supervisory subgroup to
which an institution is assigned by the FDIC is confidential and may not be
disclosed. A bank's rate of deposit insurance assessments will depend upon the
category or subcategory to which the bank is assigned by the FDIC. Any increase
in insurance assessments could have an adverse effect on the earnings of insured
institutions, including the Bank.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), certain mortgage servicing rights and certain
investments. Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock, minority interests
in the equity accounts of consolidated subsidiaries, certain nonwithdrawable
accounts and pledged deposits of mutual savings associations and qualifying
supervisory goodwill, less nonqualifying intangible assets, certain mortgage
servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted
22
assets by multiplying each asset and off-balance sheet item by various risk
factors as determined by the OTS, which range from 0% for cash to 100% for
delinquent loans, property acquired through foreclosure, commercial loans, and
other assets.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets. For additional discussion of regulatory
capital requirements, refer to Note 10 to the Consolidated Financial Statements
in Item 8 included herewith.
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.
The OTS rules regarding capital distributions, which were substantially
updated effective April 1, 1999 define the term "capital distribution" as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. The definition specifically excludes dividends
consisting only of a savings association's shares or rights to purchase shares,
and payments that a mutual savings association is required to make under the
terms of a deposit instrument.
Under the revised OTS rules, capital distributions also include a
savings association's payment to repurchase, redeem, retire or otherwise acquire
any of its shares or other ownership interests, any payment to repurchase,
redeem or otherwise acquire debt instruments included in its total capital, and
any extension of credit to finance an affiliate's acquisition of those shares or
interests. Additionally, a capital distribution includes any direct or indirect
payment of cash or other property to owners or affiliates made in connection
with a corporate restructuring. The revised rule also defines as a capital
distribution any transaction the OTS or FDIC determines, by order or regulation,
to be in substance a distribution of capital. Because more than one year has
passed since the Corporation's formation, under the revised rules the
Corporation generally no longer needs specific OTS approval to repurchase its
shares; however, share repurchases still must be made in a prudent manner and
amount under a "safety and soundness" analysis.
A final category of capital distribution under the revised OTS rules is
any other distribution charged against a savings association's capital accounts
if the savings association would not be well capitalized following the
distribution. As such, the revised capital distribution rules of the OTS do not
apply to capital distributions by wholly owned operating subsidiaries of savings
associations. This it true because generally, for reporting purposes, the
accounts of a wholly-owned subsidiary are consolidated with those of the parent
savings association and any distributions by such subsidiary would not affect
the capital levels of the parent savings association.
For regulatory capital purposes, where the consolidated subsidiary is
not wholly owned, the balance sheet account "minority interests in the equity
accounts of subsidiaries that are fully consolidated" may be included in Tier I
capital and total capital if certain conditions are met. Distributions by such
consolidated subsidiaries to shareholders other than the savings association
reduce the cited balance sheet account and, therefore, reduce capital.
Consequently, distributions by subsidiaries that are not wholly owned by the
savings association are subject to the revised OTS capital distribution rules if
the savings association will not be well capitalized following the distribution.
23
The revised OTS rule generally requires all savings associations to
file a notice or an application for approval before making a capital
distribution. A savings association must file an application if the association
is not eligible for expedited treatment under the application processing rules
of the OTS, the total amount of all capital distributions including the proposed
capital distribution, for the applicable calendar year would exceed an amount
equal to the savings association's net income for that year to date plus the
savings association's retained net income for the preceding two years, or the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the savings association and the OTS,
or the FDIC, or a condition imposed on the savings association in an
OTS-approved application notice.
A savings association must file a notice whenever an application is not
required under the above standards and any of the following criteria is
satisfied:
- - the savings association will not be at least adequately capitalized
following the capital distribution; or
- - the capital distribution would reduce the amount of, or retire any part of
the savings association's common or preferred stock, or retire any part of
debt instruments such as notes or debentures included in the savings
association's capital; or
- - the savings association is a subsidiary of a savings and loan holding
company.
If neither the savings association nor the proposed capital
distribution meet any of the criteria listed in the previous paragraph, the
savings association is not required to file a notice or an application before
making a capital distribution.
Under the revised rule, the OTS will review a savings association's
notice or application and may disapprove a notice or deny an application if the
OTS makes any of the following determinations:
- - the savings association will be undercapitalized, significantly
undercapitalized, or critically undercapitalized under the prompt
corrective action regulations of the FDIC, as adopted by the OTS, following
the capital distribution;
- - the proposed capital distribution raises safety and soundness concerns, or
- - the proposed capital distribution violates a prohibition contained in any
statute, regulation, agreement between the savings association and the OTS
(or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice.
Because the Bank is a subsidiary of a savings and loan holding company,
it must file a notice as described above.
LIQUIDITY. In December 2000, legislation was enacted that removed the
provision that authorized the Director of the OTS to establish a liquidity
requirement of any amount within the range of 4% to 10% of a savings
association's average daily balance of net withdrawable deposits plus short-term
borrowings depending upon economic conditions and the deposit flows of member
institutions. In revising the OTS Regulations to conform with the recent
legislation, the OTS removed the specific liquidity requirement but adopted a
rule that requires each savings association and service corporation to maintain
sufficient liquidity to ensure its safe and sound operation. At March 31, 2003,
the Bank believes that it was in compliance with these liquidity requirements.
The Bank's liquidity ratio was 8.13% at March 31, 2003.
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, 2003, the Bank
was in compliance with these requirements. The OTS has permitted these reserves
to be used to satisfy liquidity requirements. 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.
24
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.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. A bank's loans to its
executive officers, directors, any owner of more than 10% of its stock (each, an
insider) and any of certain entities affiliated with any such person (an
insider's related interest) are subject to the conditions and limitations
imposed by Section 22(h) of the Federal Reserve Act and the Federal Reserve
Board's Regulation O thereunder. Under these restrictions, the aggregate amount
of the loans to any insider's related interests may not exceed the loans-to-one
borrower limit applicable to national banks, which is comparable to the
loans-to-one-borrower limit applicable to the Bank's loans. All loans by a bank
to all insiders and insiders' related interests may not exceed the bank's
unimpaired capital and unimpaired surplus. With certain exceptions, loans to an
executive officer, other than loans for the education of the officer's children
and certain loans secured by the officer's residence, may not exceed the greater
of $25,000 or 2.5% of the Bank's unimpaired capital and unimpaired surplus, but
in no event more than $100,000. Regulation O also requires that any proposed
loan to an insider or a related interest of that insider be approved in advance
by a majority of the board of directors of the Bank, with any interested
director not participating in the voting, if such loan, when aggregated with any
existing loans to that insider and the insider's related interests, would exceed
either $500,000 or the greater of $25,000 or 5% of the Bank's unimpaired capital
and surplus. Generally, such loans must be made on substantially the same terms
as, and follow credit underwriting procedures that are no less stringent than,
those that are prevailing at the time for comparable transactions with other
persons and must not present more than a normal risk of collectability.
An exception is made for extensions of credit made pursuant to a
benefit or compensation plan of a bank that is widely available to employees of
the bank and that does not give any preference to insiders of the bank over
other employees of the bank.
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 in an amount equal to the greatest of $500, 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, or 20% of its outstanding advances.
The FHLB of Chicago also imposes various limitations on advances made to member
banks, which limitations relate to the amount and type of collateral, the amount
of advances and other items. At March 31, 2003, the Bank owned $81.9 million in
FHLB stock, which is in compliance with this requirement. The Bank received
dividends on its FHLB stock for fiscal 2003 of $3.2 million as compared to $2.6
million for fiscal 2002.
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.
ACQUISITIONS AND MERGERS. Under the federal Bank Merger Act, any merger
of the Bank - with or into another institution would require the approval of the
OTS, or the primary federal regulator of the resulting entity if it is not an
OTS-regulated institution. Among other things, this meant that when the Bank
combined by a merger of one into the other, the transaction would require the
approval of the OTS.
25
PROHIBITIONS AGAINST TYING ARRANGEMENTS. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A
depository institution is prohibited, subject to certain exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of it
affiliates or not obtain services of a competitor of the institution.
UNIFORM REAL ESTATE LENDING STANDARDS. Pursuant to FDICIA, the federal
banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the federal
banking agencies, all insured depository institutions must adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
- - for loans secured by raw land, the supervisory loan-to-value limit is 65%
of the value of the collateral;
- - for land development loans (i.e., loans for the purpose of improving
property prior to erection of structures), the supervisory limit is 75%
- - for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
- - for loans for the construction of on-to four-family properties, the
supervisory limit is 85%; and
- - for loans secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property, including
non-owner occupied, one- to four-family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with the loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act,
("CRA"), any insured depository institution, including the Bank, has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the OTS,
in connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for additional branches and acquisitions.
Among other things, current CRA regulations replace the prior
process-based assessment factors with a new evaluation system that would rate an
institution based on its actual performance in meeting community needs. In
particular, the new evaluation system focuses on three tests:
- - a lending test, to evaluate the institution's record of making loan in its
service areas;
- - an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting
low or moderate income individuals and businesses; and
- - a service test, to evaluate the institution's delivery of services though
its branches, ATMs and other offices.
26
The CRA requires the OTS, in the case of the Bank to provide a written
evaluation of a savings association's CRA performance utilizing a four-tiered
descriptive rating system and requires public disclosure of an association's CRA
rating. The Bank received at least "satisfactory" overall ratings in its most
recent CRA examination.
SAFETY AND SOUNDNESS STANDARDS. Pursuant to the requirements of FDICIA,
as amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the OTS, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director, or principal shareholder.
PROMPT CORRECTIVE ACTION. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
OTS, as well as other federal banking regulators, adopted the FDIC's regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The FDIC's regulations establish and define five capital
categories, in the absence of a specific capital directive, as follows:
Total Capital to Tier I Capital to Tier I Capital to
Category Risk Weighted Assets Risk Weighted Assets to Total Assets
- ------------------------------- -------------------------------- -------------------- -----------------
Well capitalized > than or = 10% > than or = 6% > than or = 5%
Adequately capitalized > than or = 8% > than or = 4% > than or = 4%*
Under capitalized < 8% < 4% < 4%*
Significantly undercapitalized < 6% < 3% < 3%
Critically undercapitalized Tangible assets to capital of 2%
*3% if the Bank receives the highest rating under the uniform system
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the Bank would be
undercapitalized. The FDIC or the OTS, in the case of the Bank, is required to
monitor closely the condition of an undercapitalized bank and to restrict the
growth of its assets. An undercapitalized bank is required to file a capital
restoration plan within 45 days of the date the bank receives notice that it is
within any of the three undercapitalized categories, and the plan must be
guaranteed by any parent holding company. The aggregate liability of a parent
holding company is limited to the lesser of:
- - an amount equal to five percent of the bank's total assets at the time it
becomes "undercapitalized"; and
- - the amount that is necessary (or would have been necessary) to bring the
bank into compliance with all capital standards applicable with respect to
such bank as of the time it fails to comply with the plan.
If a bank fails to submit an acceptable plan, it is treated as if it
were "significantly undercapitalized." Banks that are significantly or
critically undercapitalized are subject to a wider range of regulatory
requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a
receiver or conservator for an insured depository bank. If one or more grounds
exist for appointing a conservator or receiver for a bank, the FDIC may require
the bank to issue additional debt or stock, sell assets, be acquired by a
depository bank holding company or combine with another depository bank. Under
FDICIA, the FDIC is required to appoint a receiver or a
27
conservator for a critically undercapitalized bank within 90 days after the bank
becomes critically undercapitalized or to take such other action that would
better achieve the purposes of the prompt corrective action provisions. Such
alternative action can be renewed for successive 90-day periods. However, if the
bank continues to be critically undercapitalized on average during the quarter
that begins 270 days after it first becomes critically undercapitalized, a
receiver must be appointed, unless the FDIC makes certain findings that the bank
is viable.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, President George W. Bush
signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a
comprehensive framework to modernize and reform the oversight of public company
auditing, improve the quality and transparency of financial reporting by those
companies and strengthen the independence of auditors. Certain of the new
legislation's more significant reforms are noted below.
- The new legislation creates a public company accounting oversight board
which is empowered to set auditing, quality control and ethics
standards, to inspect registered public accounting firms, to conduct
investigations and to take disciplinary actions, subject to SEC
oversight and review. The new board will be funded by mandatory fees
paid by all public companies. The new legislation also improves the
Financial Accounting Standards Board, giving it full financial
independence from the accounting industry.
- The new legislation strengthens auditor independence from corporate
management by, among other things, limiting the scope of consulting
services that auditors can offer their public company audit clients.
- The new legislation heightens the responsibility of public company
directors and senior managers for the quality of the financial
reporting and disclosure made by their companies. Among other things,
the new legislation provides for a strong public company audit
committee that will be directly responsible for the appointment,
compensation and oversight of the work of the public company auditors.
- The new legislation contains a number of provisions to deter
wrongdoing. CEOs and CFOs will have to certify that company financial
statements fairly present the company's financial condition. If a
misleading financial statement later resulted in a restatement, the CEO
and CFO must forfeit and return to the company any bonus, stock or
stock option compensation received in the twelve months following the
misleading financial report. The new legislation also prohibits any
company officer or director from attempting to mislead or coerce an
auditor. Among other reforms, the new legislation empowers the SEC to
bar certain persons from serving as officers or directors of a public
company; prohibits insider trades during pension fund "blackout
periods;" directs the SEC to adopt rules requiring attorneys to report
securities law violations; and requires that civil penalties imposed by
the SEC go into a disgorgement fund to benefit harmed investors.
- The new legislation imposes a range of new corporate disclosure
requirements. Among other things, the new legislation requires public
companies to report all off-balance-sheet transactions and conflicts,
as well as to present any pro forma disclosures in a way that is not
misleading and in accordance with requirements to be established by the
SEC. The new legislation also accelerated the required reporting of
insider transactions, which now generally must be reported by the end
of the second business day following a covered transaction; requires
that annual reports filed with the SEC include a statement by
management asserting that it is responsible for creating and
maintaining adequate internal controls and assessing the effectiveness
of those controls; and requires companies to disclose whether or not
they have adopted an ethics code for senior financial officers, and, if
not, why not, and whether the audit committee includes at least one
"financial expert," a term which is to be defined by the SEC in
accordance with specified requirements. The new legislation also
requires the SEC, based on certain enumerated factors, to regularly and
systematically review corporate filings.
- The new legislation contains provisions which generally seek to limit
and expose to public view possible conflicts of interest affecting
securities analysts.
- Finally, the new legislation imposes a range of new criminal penalties
for fraud and other wrongful acts, as well as extends the period during
which certain types of lawsuits can be brought against a company or its
insiders.
28
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.
The Small Business Job Protection Act of 1996 (the "Job Protection
Act") repealed the "reserve method" of accounting for bad debts by most thrift
institutions effective for the taxable years beginning after 1995. Larger thrift
institutions such as the Bank are now required to use the "specific charge-off
method." The Job Protection Act also granted partial relief from reserve
recapture provisions, which are triggered by the change in method. This
legislation did not have a material impact on the Bank's financial condition or
results of operations. As of March 31, 2003, the Bank's bad debt reserves for
tax purposes totaled approximately $46.1million. (See Note 12 to the
Consolidated Financial Statements for additional discussion).
Depending on the composition of its items of income and expense, the
Bank may be subject to alternative minimum tax ("AMT") to the extent AMT exceeds
the regular tax liability. AMT is calculated at 20% of alternative minimum
taxable income ("AMTI"). AMTI equals regular taxable income increased by certain
tax preferences, including depreciation deductions in excess of allowable AMT
amounts, certain tax-exempt interest income and 75% of the excess of adjusted
current earnings ("ACE") over AMTI. Ace equals AMTI adjusted for certain items,
primarily accelerated depreciation and tax-exempt interest. The payment of AMT
would create a tax credit, which can be carried forward indefinitely to reduce
the regular tax liability in future years.
STATE
Under current law, the state of Wisconsin imposes a corporate franchise
tax of 7.9% on the separate taxable incomes of the members of the Corporation's
consolidated income tax group except AIC and NIDI, both located in Nevada.
Presently, the income of AIC and NIDI are only subject to taxation in Nevada,
which currently does not impose a corporate income or franchise tax.
ITEM 2. PROPERTIES
At March 31, 2003, the Bank conducted its business from its
headquarters and main office at 25 West Main Street, Madison, Wisconsin and 54
other full-service offices and two lending only offices. The Bank owns 41 of its
full-service offices, leases the land on which four such offices are located,
and leases the remaining 13 full-service offices. In addition, the Bank leases
its two loan-origination facilities. The leases expire between 2003 and 2018.
The aggregate net book value at March 31, 2003 of the properties owned or
leased, including headquarters, properties and leasehold improvements, was $24.1
million. See Note 7 to the Corporation's Consolidated Financial Statements,
included as Item 8, for information regarding the premises and equipment.
29
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, 2003, 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,
National Market. The trading symbol is "ABCW ". As of March 31, 2003, there were
approximately 2,900 stockholders of record. That number 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 the Corporation 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 Corporation 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 American Stock Transfer 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 2003 and 2002.
CASH
QUARTER ENDED HIGH LOW DIVIDEND
- ------------------------------------------------------------------------------------------------
March 31, 2003 $ 22.890 $ 20.660 $ 0.100
December 31, 2002 21.510 19.240 0.090
September 30, 2002 23.830 16.890 0.090
June 30, 2002 23.690 19.490 0.083
March 31, 2002 $ 21.750 $ 17.040 $ 0.083
December 31, 2001 18.240 15.270 0.083
September 30, 2001 18.510 14.910 0.083
June 30, 2001 15.900 13.060 0.075
For information regarding restrictions on the payments of dividends by
the Bank, see "Item 1. Business -- Regulation -- Limitations on Dividends and
Other Capital Distributions" in this report.
30
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
AT OR FOR YEAR ENDED MARCH 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------
Dollars In Thousands, Except Per Share Data)
Earnings per share:
Basic $ 2.06 $ 1.59 $ 1.19 $ 0.80 $ 1.26
Diluted 2.02 1.55 1.16 0.78 1.19
Interest income 209,605 225,701 228,647 202,594 194,807
Interest expense 92,856 128,454 148,096 119,393 114,535
Net interest income 116,749 97,247 80,551 83,201 80,272
Provision for loan losses 1,800 2,485 945 1,306 1,017
Non-interest income 32,753 21,615 13,503 14,390 22,019
Non-interest expenses 68,004 59,531 51,450 61,187 52,426
Income taxes 30,135 20,479 14,682 15,596 18,607
Net income 49,563 36,367 26,977 19,502 30,241
Total assets 3,538,621 3,507,076 3,127,474 2,911,152 2,663,718
Investment securities 100,190 73,740 56,129 86,206 87,722
Mortgage-related securities 248,749 285,586 379,159 300,519 258,489
Loans receivable held for
investment, net 2,770,988 2,627,248 2,414,976 2,302,721 2,111,566
Deposits 2,574,188 2,553,987 2,119,320 1,897,369 1,835,416
Notes payable to FHLB 554,268 569,500 669,896 649,046 517,695
Other borrowings 41,548 52,090 70,702 107,813 55,264
Stockholders' equity 293,004 277,512 219,612 217,215 220,287
Shares outstanding 23,942,858 24,950,258 22,814,923 24,088,147 23,832,165
Book value per share
at end of period $ 12.24 $ 11.12 $ 9.63 $ 9.02 $ 9.24
Dividends paid per share 0.36 0.32 0.30 0.25 0.20
Dividend payout ratio 17.60% 20.28% 24.79% 31.25% 15.48%
Yield on earning assets 6.36 7.15 7.89 7.56 7.68
Cost of funds 2.94 4.29 5.31 4.79 4.84
Interest rate spread 3.42 2.86 2.58 2.77 2.84
Net interest margin 3.54 3.08 2.78 3.10 3.15
Return on average assets 1.42 1.11 0.88 0.71 1.16
Return on average equity 17.06 14.89 12.48 8.92 14.44
Average equity to average assets 8.30 7.45 7.09 7.97 8.04
31
ITEM 7. 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. 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 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, 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.
SIGNIFICANT ACCOUNTING POLICIES
There are a number of accounting policies that require the use of
judgment. Some of the more significant policies are as follows:
- - Establishing the amount of the allowance for loan losses requires the use of
judgment as well as other systematic objective and quantitative methods.
Assets are evaluated at least quarterly and risk components reviewed as a
part of that evaluation. See Notes to Consolidated Financial Statements -
Summary of Significant Accounting Policies "Allowances for Loan Losses" for
a discussion of risk components.
- - Valuation of mortgage servicing rights requires the use of judgment.
Mortgage servicing rights are established on loans that are originated and
subsequently sold. A portion of the loan's book basis to mortgage servicing
rights is allocated when a loan is sold. The fair value of mortgage
servicing rights is the present value of estimated future net cash flows
from the servicing relationship using current market assumptions for
prepayments, servicing costs and other factors. As the loans are repaid and
net servicing revenue is earned, mortgage servicing rights are amortized
into expense. Net servicing revenues are expected to exceed this
amortization expense. However, if actual prepayment experience exceeds what
was originally anticipated, net servicing revenues may be less than expected
and mortgage servicing rights may be impaired.
- - Judgment is also used in the valuation of other intangible assets (core
deposit intangibles). Core deposit intangibles have been recorded for core
deposits (defined as checking, money market and savings deposits) that have
been acquired in acquisitions that were accounted for as purchase business
combinations. The core deposit intangible assets have been recorded using
the assumption that they provide a more favorable source of funding than
more expensive wholesale borrowings. An intangible asset has been recorded
for the present value of the difference between the expected interest to be
incurred on these deposits and interest expense that would be expected if
these deposits were replace by wholesale borrowings, over the expected lives
of the core deposits. The current estimate of the underlying lives of the
core deposits is seven to fifteen years. If it is determined that these
deposits have a shorter life, the asset will be adjusted to reflect an
expense associated with the amount that is impaired.
- - Goodwill is reviewed at least annually for impairment, which requires
judgment. Goodwill has been recorded as a result of an acquisition in which
purchase price exceeded fair value of net assets acquired. The price paid
32
for the acquisition is analyzed and compared to a number of current indices.
If goodwill is determined to be impaired, it would be expensed in the period
in which it became impaired.
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, 2003 and 2002
GENERAL. Net income increased $13.2 million to $49.6 million in fiscal
2003 from $36.4 million in fiscal 2002. The primary component of this increase
in earnings for fiscal 2003, as compared to fiscal 2002, was an increase of
$20.2 million in net interest income after the provision for loan losses. In
addition, non-interest income increased $11.1 million. These increases were
partially offset by an increase in non-interest expense of $8.5 million and an
increase in tax expense of $9.7 million. The returns on average assets and
average stockholders' equity for fiscal 2003 were 1.42% and 17.06%,
respectively, as compared to 1.11% and 14.89%, respectively, for fiscal 2002.
NET INTEREST INCOME. Net interest income increased by $19.5 million
during fiscal 2003 due to a larger increase in the volume of interest-earning
assets compared to the volume of interest-bearing liabilities coupled with a
greater decrease in rates of interest-bearing liabilities as compared to the
decrease in rates of interest-earning assets. The average balances of
interest-earning assets and interest-bearing liabilities increased to $3.29
billion and $3.15 billion in fiscal 2003, respectively, from $3.16 billion and
$3.00 billion, respectively, in fiscal 2002. The ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
1.04% in fiscal 2003 from 1.05% in fiscal 2002. The average yield on
interest-earning assets (6.36% in fiscal 2003 versus 7.15% in fiscal 2002)
decreased, as did the average cost on interest-bearing liabilities (2.94% in
fiscal 2003 versus 4.29% in fiscal 2002). The net interest margin increased to
3.54% in fiscal 2003 from 3.08% in fiscal 2002 and the interest rate spread
increased to 3.42% from 2.86% in fiscal 2003 and 2003, respectively. The
increase in the net interest margin is reflective of a decrease in the cost of
funds, offset by a smaller decrease in yields on loans as interest rates
decreased. 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 decreases in the volume of
interest-earning liabilities increased net interest income in fiscal 2003 by
approximately $19.5 million. In addition, there was a $1.2 million decrease in
net interest income caused by the combination of rate/volume changes.
PROVISION FOR LOAN LOSSES. Provision for loan losses decreased $685,000
from $2.5 million in fiscal 2002 to $1.8 million in fiscal 2003 based on
management's ongoing evaluation of asset quality. There was a decrease in net
charge-offs of $750,000 in fiscal 2003, primarily due to decreased commercial
business loan charge-offs, and continued improvement in the quality of the loan
portfolio. The Corporation's allowance for loan losses decreased $1.4 million
from $31.1 million at March 31, 2002 to $29.7 million at March 31, 2003. This
amount represented 1.00% of total loans at March 31, 2003, as compared to 1.09%
of total loans at March 31, 2002. For further discussion of the allowance for
loan losses, see "Financial Condition--Allowance for Loan and Foreclosure
Losses."
Future provisions for loan losses will continue to be based upon
management's assessment of the overall loan portfolio and the underlying
collateral, trends in non-performing loans, current economic conditions and
other relevant factors in order to maintain the allowance for loan losses at
adequate levels to provide for probable and estimable future losses. The
establishment of the amount of the loan loss allowance inherently involves
judgments by management as to the adequacy of the allowance, which ultimately
may or may not be correct. Higher rates of loan defaults than anticipated would
likely result in a need to increase provisions in future years. Also, as
multi-family and commercial loan portfolios increase, additional provisions
would likely be added to the loan loss allowance as they carry a higher risk of
loss.
33
NON-INTEREST INCOME. Non-interest income increased $11.1 million to
$32.8 million for fiscal 2003 compared to $21.6 million for fiscal 2002
primarily due to an increase of $11.9 million in gain on sale of loans. This
increase was largely due to the lower interest rate environment which resulted
in significantly higher levels of refinancing activity. Loan refinance activity
and the ability to recognize gains from the sale of fixed-rate loans is
significantly dependent on decreasing interest rates and, as a result, there can
be no assurance that the loan refinance activity and gains from the sale of
loans recorded in prior periods will be recorded in future periods. Other
non-interest income, which includes a variety of loan fee and other
miscellaneous fee income, also increased $2.9 million for fiscal 2003. Net gain
on sale of investments and securities increased $990,000. Service charges on
deposits increased $800,000 essentially due to a growth in deposits and income
from insurance commissions increased $400,000 due to increased sales. Partially
offsetting these increases were decreases in other categories. Loan servicing
income decreased $5.4 million due to increased amortization of mortgage
servicing rights. Net income from operations of real estate investments also
decreased $400,000.
NON-INTEREST EXPENSE. Non-interest expense increased $8.5 million to
$68.0 million for fiscal 2003 compared to $59.5 million for fiscal 2002 as a
result of several factors. The majority of the increase was attributed to an
increase in compensation expense of $4.9 million, largely due to an increase in
incentive compensation resulting from increased loan production. Occupancy
expense increased $1.0 million due to increased maintenance and repairs and
increased depreciation. Data Processing expense increased $820,000 and other
non-interest expense increased $800,000, due to increases in postage and other
expenses. In addition, furniture and equipment expense increased $680,000 in
fiscal 2003, primarily due to normal replacement costs and increased
depreciation expense, and marketing expense increased $270,000 during this
fiscal year.
INCOME TAXES. Income tax expense increased $9.7 million for fiscal 2003
as compared to fiscal 2002. The effective tax rate for fiscal 2003 was 37.81% as
compared to 36.03% for fiscal 2002. See Note 12 to the Consolidated Financial
Statements included in Item 8.
Comparison of Years Ended March 31, 2002 and 2001
GENERAL. Net income increased $9.4 million to $36.4 million in fiscal
2002 from $27.0 million in fiscal 2001. The primary component of this increase
in earnings for fiscal 2002, as compared to fiscal 2001, was an increase of
$15.2 million in net interest income after the provision for loan losses. In
addition, non-interest income increased $8.1 million. These increases were
partially offset by an increase in non-interest expense of $8.1 million and an
increase in tax expense of $5.8 million. The returns on average assets and
average stockholders' equity for fiscal 2002 were 1.11% and 14.89%,
respectively, as compared to .88% and 12.48%, respectively, for fiscal 2001.
NET INTEREST INCOME. Net interest income increased by $16.7 million
during fiscal 2002 due to a larger increase in the volume of interest-earning
assets compared to the volume of interest-bearing liabilities coupled with a
greater decrease in rates of interest-bearing liabilities as compared to the
decrease in rates of interest-earning assets. The average balances of
interest-earning assets and interest-bearing liabilities increased to $3.16
billion and $3.00 billion in fiscal 2002, respectively, from $2.90 billion and
$2.79 billion, respectively, in fiscal 2001. The ratio of average
interest-earning assets to average interest-bearing liabilities increased to
1.05% in fiscal 2002 from 1.04% in fiscal 2001. The average yield on
interest-earning assets (7.15% in fiscal 2002 versus 7.89% in fiscal 2001)
decreased, as did the average cost on interest-bearing liabilities (4.29% in
fiscal 2002 versus 5.31% in fiscal 2001). The net interest margin increased to
3.08% in fiscal 2002 from 2.78% in fiscal 2001 and the interest rate spread
increased to 2.86% from 2.58% in fiscal 2002 and 2001, respectively. The
increase in the net interest margin is reflective of a decrease in the cost of
funds, offset by a smaller decrease in yields on loans as interest rates
decreased. 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 decreases in the volume of
interest-earning liabilities increased net interest income in fiscal 2002 by
approximately $8.5 million. In addition, there was a $5.2 million increase in
net interest income caused by the combination of rate and rate/volume changes.
34
PROVISION FOR LOAN LOSSES. Provision for loan losses increased $1.5
million from $950,000 in fiscal 2001 to $2.5 million in fiscal 2002 based on
management's ongoing evaluation of asset quality. There was an increase in net
charge-offs of $2.7 million in fiscal 2002, primarily due to increased
commercial business loan charge-offs, however the quality of the loan portfolio
continues to be good. The Corporation's allowance for loan losses increased $7.0
million from $24.1 million at March 31, 2001 to $31.1 million at March 31, 2002.
This amount represented 1.08% of total loans at March 31, 2002, as compared to
..94% of total loans at March 31, 2001. 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 $8.1 million to
$21.6 million for fiscal 2002 compared to $13.5 million for fiscal 2001
primarily due to an increase of $5.8 million in gain on sale of loans. This
increase was largely due to the lower interest rate environment which resulted
in significantly higher levels of refinancing activity. This resulted in
increased mortgage servicing rights gains due to increased loan sales. Net
income from operations of real estate investments also increased $2.4 million
largely due to increased lot sales. Other non-interest income, which includes a
variety of loan fee and other miscellaneous fee income, also increased $1.1
million for fiscal 2002. Service charges on deposits increased $700,000
essentially due to a growth in deposits and net gain on sale of investments and
securities increased $500,000 for fiscal 2002. Partially offsetting these
increases were decreases in other categories. Loan servicing income decreased
$2.0 million due to increased amortization of mortgage servicing rights and
income from insurance commissions decreased $320,000 due to decreased sales.
NON-INTEREST EXPENSE. Non-interest expense increased $8.1 million to
$59.5 million for fiscal 2002 compared to $51.5 million for fiscal 2001 as a
result of several factors. The majority of the increase was attributed to an
increase in compensation expense of $4.1 million, largely due to an increase in
incentive compensation resulting from increased loan production. Other
non-interest expense increased $2.0 million, largely due to the partial
impairment of three securities, and increases in postage, office supplies,
retail and other expenses. In addition, furniture and equipment expense
increased $740,000 in fiscal 2002, primarily due to normal replacement costs and
increased contractual services, and data processing expense increased $700,000.
Occupancy expense increased $450,000 and marketing expense increased $130,000
during this fiscal year.
INCOME TAXES. Income tax expense increased $5.8 million for fiscal 2002
as compared to fiscal 2001. The effective tax rate for fiscal 2002 was 36.03% as
compared to 35.24% for fiscal 2001. See Note 12 to the Consolidated Financial
Statements included in Item 8.
NET INTEREST INCOME INFORMATION
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-BEARING LIABILITIES
AND INTEREST RATE SPREAD AND MARGIN. The following table 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
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------------------------------------------------------
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) $ 2,127,064 $ 143,985 6.77% $ 2,056,080 153,611 7.47% $1,882,215 $150,267 7.98%
Consumer loans 458,939 32,727 7.13 448,974 36,189 8.06 464,926 40,954 8.81
Commercial business loans 129,068 8,136 6.30 104,539 7,072 6.76 74,356 7,214 9.70
----------- --------- ----------- ------- ---------- --------
Total loans receivable (2) 2,715,071 184,848 6.81 2,609,593 196,872 7.54 2,421,497 198,435 8.19
Mortgage-related securities (1) 289,854 16,768 5.78 326,803 20,428 6.25 311,132 20,051 6.44
Investment securities (1) 98,988 2,900 2.93 94,360 3,720 3.94 92,372 5,313 5.75
Interest-bearing deposits 129,628 1,854 1.43 82,035 2,089 2.55 34,887 2,121 6.08
Federal Home Loan Bank stock 60,202 3,235 5.37 44,483 2,593 5.83 36,532 2,727 7.46
----------- --------- ----------- ------- ---------- --------
Total interest-earning assets 3,293,743 209,605 6.36 3,157,274 225,701 7.15 2,896,420 228,647 7.89
Non-interest-earning assets 204,828 120,370 154,184
----------- ----------- ----------
Total assets $ 3,498,571 $ 3,277,644 $3,050,604
=========== =========== ==========
INTEREST-BEARING LIABILITIES
Demand deposits $ 758,476 6,347 0.84 $ 685,761 11,929 1.74 $ 568,448 18,669 3.28
Regular passbook savings 182,062 1,558 0.86 144,008 1,724 1.20 134,559 2,147 1.60
Certificates of deposit 1,606,256 57,934 3.61 1,490,312 79,510 5.34 1,269,512 76,624 6.04
----------- --------- ----------- ------- ---------- --------
Total deposits 2,546,794 65,839 2.59 2,320,080 93,163 4.02 1,972,519 97,440 4.94
Notes payable and other borrowings 593,657 26,655 4.49 661,513 34,796 5.26 802,677 50,151 6.25
Other 12,776 362 2.83 13,334 495 3.71 14,583 505 3.46
----------- --------- ----------- ------- ---------- --------
Total interest-bearing liabilities 3,153,227 92,856 2.94 2,994,928 128,454 4.29 2,789,779 148,096 5.31
--------- ---- ------- ----- -------- ----
Non-interest-bearing liabilities 54,862 38,511 44,645
------ ------- ------
Total liabilities 3,208,089 3,033,439 2,834,424
Stockholders' equity 290,482 244,205 216,180
------- -------- -------
Total liabilities and
stockholders' equity $ 3,498,571 $ 3,277,644 $3,050,604
=========== =========== ==========
Net interest income/
interest rate spread $ 116,749 3.42% $ 97,247 2.86% $ 80,551 2.58%
========= ==== ======== ==== ======== ====
Net interest-earning assets $ 140,516 $ 162,346 $ 106,641
=========== =========== ==========
Net interest margin 3.54% 3.08% 2.78%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.04 1.05 1.04
==== ==== ====
- ----------------------------
(1) Includes amortized cost basis of 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.
36
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. 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).
INCREASE (DECREASE) FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------------------
2003 COMPARED TO 2002 2002 COMPARED TO 2001
--------------------------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
--------------------------------------------------------------------------------------------
(In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans (1) $(14,430) $ 5,303 $ (498) $ (9,625) $ (9,646) $ 13,881 $ (891) $ 3,344
Consumer loans (4,172) 803 (93) (3,462) (3,479) (1,405) 119 (4,765)
Commercial business loans (482) 1,659 (113) 1,064 (2,184) 2,928 (887) (143)
-------- -------- -------- -------- -------- -------- -------- --------
Total loans receivable (19,084) 7,765 (704) (12,023) (15,309) 15,404 (1,659) (1,564)
Mortgage-related securities (1) (1,521) (2,310) 172 (3,660) (603) 1,010 (30) 377
Investment securities (1) (955) 182 (47) (820) (1,671) 114 (36) (1,593)
Interest-bearing deposits (916) 1,212 (531) (235) (1,233) 2,866 (1,666) (33)
Federal Home Loan Bank stock (203) 916 (72) 642 (597) 594 (130) (133)
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in income on
interest-earning assets (22,679) 7,765 (1,182) (16,096) (19,413) 19,988 (3,521) (2,946)
INTEREST -BEARING LIABILITIES
Demand deposits (6,191) 1,265 (656) (5,582) (8,781) 3,853 (1,812) (6,740)
Regular passbook savings (492) 456 (130) (166) (536) 151 (38) (423)
Certificates of deposit (25,759) 6,186 (2,004) (21,576) (8,894) 13,327 (1,547) 2,886
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits (32,442) 7,907 (2,790) (27,324) (18,211) 17,331 (3,397) (4,277)
Notes payable and other borrowings (5,094) (3,569) 523 (8,141) (7,930) (8,820) 1,395 (15,355)
Other (117) (21) 5 (133) 36 (43) (3) (10)
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in expense on
interest-bearing liabilities (37,653) 4,317 (2,262) (35,598) (26,105) 8,468 (2,005) (19,642)
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net interest income $ 14,974 $ 3,448 $ 1,080 $ 19,502 $ 6,692 $ 11,520 $ (1,516) $ 16,696
======== ======== ======== ======== ======== ======== ======== ========
- ----------------------------
(1) Includes amortized cost basis of assets held and available for sale.
37
FINANCIAL CONDITION
GENERAL. Total assets of the Corporation increased $31.5 million or
..90% from $3.51 billion at March 31, 2002 to $3.54 billion at March 31, 2003.
This increase was primarily funded by net increases in deposits of $20.2
million. These funds were generally invested in loans receivable and investment
securities.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities (both
available for sale and held to maturity) decreased $36.8 million as a net result
during the year of (i) purchases of $80.4 million, (ii) principal repayments and
market value adjustments of $(63.2) million and (iii) sales of $54.0 million.
Mortgage-related securities consisted of $192.0 million of mortgage-backed
securities ($131.6 million were available for sale and $60.4 million were held
to maturity) and $56.8 million of mortgage-derivative securities ($54.2 million
were available for sale and $2.6 million were held to maturity) at March 31,
2003. See Notes 1 and 4 to the Consolidated Financial Statements included in
Item 8.
Mortgage-related securities 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 $140.3 million during fiscal 2003 from $2.67 billion at March 31,
2002, to $2.81 billion at March 31, 2003. The activity included (i) originations
and purchases of $3.31 billion, (ii) sales of $1.76 billion, and (iii) principal
repayments and other reductions of $1.41 billion. See Note 5 to the
Corporation's Consolidated Financial Statements included in Item 8 for more
information.
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) increased to $11.7 million or 0.33% of total
assets at March 31, 2003 from $10.6 million or 0.30% of total assets at March
31, 2002.
38
Non-performing assets are summarized as follows for the dates indicated:
AT MARCH 31,
2003 2002 2001 2000 1999
-------------------------------------------------------
(Dollars In Thousands)
Non-accrual loans:
Single-family residential $ 4,510 $ 4,505 $ 2,572 $ 2,582 $ 2,931
Multi-family residential 444 187 372 3 0
Commercial real estate 1,776 2,212 650 126 145
Construction and land - 168 257 - 0
Consumer 661 933 499 571 571
Commercial business 2,678 1,037 697 332 359
------- ------- ------- ------- -------
Total non-accrual loans 10,069 9,042 5,047 3,614 4006
Real estate held for development and sale 49 74 352 1,691 1764
Foreclosed properties and repossessed assets, net 1,535 1,475 313 272 630
------- ------- ------- ------- -------
Total non-performing assets $11,653 $10,591 $ 5,712 $ 5,577 $ 6,400
======= ======= ======= ======= =======
Performing troubled debt restructurings $ 2,590 $ 403 $ 300 $ 144 $ 293
======= ======= ======= ======= =======
Total non-accrual loans to total loans 0.34% 0.32% 0.20% 0.15% 0.18%
Total non-performing assets to total assets 0.33 0.30 0.18 0.19 0.24
Allowance for loan losses to total loans 1.00 1.09 0.94 1.00 1.08
Allowance for loan losses to total
non-accrual loans 294.74 346.04 477.04 675.26 599.78
Allowance for loan and foreclosure losses
to total non-performing assets 257.87 300.05 422.16 439.63 379.97
Non-accrual loans increased $1.0 million in fiscal 2003 to $10.1
million at March 31, 2003. This increase was largely attributable to one
commercial business loan. At March 31, 2003, there was one non-accrual
commercial real estate loan with a carrying value of greater than $1.0 million
which was acquired in connection with the acquisition of Ledger Capital Corp.
The loan is secured by a 161-unit motel located in Schiller Park, Illinois, and
had a carrying value of $1.5 million. The original loan was for $13.1 million,
of which the Bank is an 11.5% participant. There was also one non-accrual
commercial business loan with a carrying value of greater than $1.0 million at
March 31, 2003. The loan is to a manufacturer of MRI scanning equipment in Eden
Prairie, Minnesota, and had a carrying value of $1.7 million at March 31, 2003.
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 decreased
slightly by $25,000 during fiscal 2003. At March 31, 2003, there were no
properties in non-performing real estate held for development and sale with a
carrying value greater than $1.0 million.
Foreclosed properties and repossessed assets increased $60,000 in
fiscal 2003. This increase was not attributable to any one property. At March
31, 2003, there were no properties in foreclosed properties with a carrying
value greater than $1.0 million.
The total of performing troubled debt restructurings at March 31, 2003
increased by $2.2 million and includes one loan larger than $1.0 million. The
increase was attributable to a commercial real estate loan secured by a 182 room
lodge located in Sonoma, California, with a carrying value of $2.0 million,
which was acquired in the acquisition of Ledger Capital Corp. on November 10,
2001.
39
ALLOWANCES FOR LOAN AND FORECLOSURE LOSSES. The Corporation's loan
portfolio, foreclosed properties, and repossessed assets 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 including, but not limited to, general economic conditions,
collateral value, loan portfolio composition, loan delinquencies, prior loss
experience, anticipated loss of interest and losses inherent in the portfolio.
The evaluation of the allowance for loan losses includes a review of known loan
problems as well as potential loan problems based upon historical trends and
ratios.
To determine the level and composition of the loan loss allowance, the
loan portfolio is broken out by categories of single-family residential,
multi-family residential, commercial real estate, construction and land, and
commercial business. These categories are then further divided into performing
and non-performing groups. A five- year historical trend is applied to each
category of performing loans to arrive at the appropriate levels of loss
reserves for those respective categories. The non-performing groups are analyzed
using the trends of the current year in which they are being evaluated. The
Corporation has allocated a larger percentage of reserves to specific categories
over the past several fiscal years as a result of more precise analysis of loan
portfolio performance.
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,
------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------
(Dollars In Thousands)
Allowance at beginning of year $ 31,065 $ 24,076 $ 24,404 $ 24,027 $ 25,400
Purchase of Ledger Capital Corp. - 8,438 - - -
Charge-offs:
Mortgage (981) (780) (560) (45) (1,518)
Consumer (696) (726) (794) (833) (1,054)
Commercial business (1,840) (2,584) (271) (378) (414)
-------- -------- -------- -------- --------
Total charge-offs (3,517) (4,090) (1,625) (1,256) (2,986)
-------- -------- -------- -------- --------
Recoveries:
Mortgage 163 10 232 87 447
Consumer 58 51 102 203 123
Commercial business 108 95 18 37 26
-------- -------- -------- -------- --------
Total recoveries 329 156 352 327 596
-------- -------- -------- -------- --------
Net charge-offs (3,188) (3,934) (1,273) (929) (2,390)
-------- -------- -------- -------- --------
Provision 1,800 2,485 945 1,306 1,017
-------- -------- -------- -------- --------
Allowance at end of year $ 29,677 $ 31,065 $ 24,076 $ 24,404 $ 24,027
======== ======== ======== ======== ========
Net charge-offs to average loans
held for sale and for investment (0.12)% (0.17)% (0.05)% (0.04)% (0.11)%
======== ======== ======== ======== ========
The fiscal 2003 provision for loan losses totaled $1.8 million compared
to $2.5 million in fiscal 2002. The decrease of $685,000 in the provision is
based on the Corporation's policy for loan loss reserves.
40
Historically, the Corporation's non-performing and classified assets
have fluctuated with economic trends, both locally and nationally. At March 31,
2003, the Bank's present level of classified assets increased $400,000 from the
year ended March 31, 2002. This is in keeping with local and national economic
conditions. Management believes that the present level of the allowance at March
31, 2003 is prudent.
Loan charge-offs were $3.5 million and $4.1 million for the fiscal
years ending March 31, 2003 and 2002, respectively. Total charge-offs for the
years ended March 31, 2003 and 2002 decreased $570,000 and increased $2.5
million, respectively, from the prior fiscal years. The decrease in charge-offs
for fiscal 2003 was largely due to a decrease of $740,000 in commercial business
charge-offs. Mortgage loan charge-offs increased $200,000, while consumer loan
charge-offs decreased $30,000 for the year ended March 31, 2003. The increase in
charge-offs for fiscal 2002 was largely due to an increase of $2.3 million in
commercial business loan charge-offs largely resulting from two loans to a
software consulting firm totalling $1.8 million. Mortgage loan charge-offs
increased $220,000, while consumer loan charge-offs decreased $68,000 for the
year ended March 31, 2002. Recoveries slightly offset the charge-offs for the
year ended March 31, 2003 and such recoveries increased $170,000 from $160,000
in fiscal 2002 to $330,000 in fiscal 2003. Recoveries decreased $190,000 during
the fiscal year ended March 31, 2002.
Management believes that the decreased level in net charge-offs of
$750,000 for the year ended March 31, 2003 and the increased level in net
charge-offs of $2.7 million for the year ended March 31, 2002 do not represent
changes in the quality of the loan portfolio, but instead generally reflect the
local and national trends in overall consumer debt levels and bankruptcy
filings.
The table below shows the Corporation's allocation of the allowance for
loan losses by loan loss reserve category at the dates indicated.
MARCH 31,
--------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE
--------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Single-family residential $ 2,101 7.08% $ 2,639 8.50% $ 2,104 8.74% $ 2,109 8.64% $ 2,035 8.47%
Multi-family residential 3,807 12.83 2,515 8.10 2,284 9.49 1,749 7.17 1,962 8.17
Commercial real estate 9,230 31.10 7,797 25.10 7,181 29.83 6,360 26.06 4,976 20.71
Construction and land - - - - - - - - - -
Consumer 2,151 7.25 1,986 6.39 2,120 8.81 2,088 8.56 1,543 6.42
Commercial business 12,388 41.74 12,117 39.01 3,817 15.85 2,729 11.18 3,000 12.49
Unallocated - 0.00 4,011 12.91 6,570 27.29 9,369 38.39 10,511 43.75
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Total allowance for
loan losses $29,677 100.00% $31,065 100.00% $24,076 100.00% $24,404 100.00% $24,027 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Although management believes that the March 31, 2003 allowance for loan
losses is adequate based upon the current evaluation of loan delinquencies,
non-performing assets, charge-off trends, economic conditions and other factors,
there can be no assurance that future adjustments to the allowance will not be
necessary. Management also continues to pursue all practical and legal methods
of collection, repossession and disposal, and adheres to high underwriting
standards in the origination process in order to continue to maintain strong
asset quality.
DEPOSITS. Deposits increased $20.2 million during fiscal 2003 to $2.57
billion, of which $79.2 million was due to increases in NOW accounts and $28.1
million was due to increases in passbook accounts. These increases were offset
by a $32.4 million decrease in certificates of deposit, and a $52.0 million
decrease in money market
41
accounts. The increases were due to promotions and related growth of deposit
households. The weighted average cost of deposits decreased to 2.59% at fiscal
year-end 2003 compared to 4.02% at fiscal year-end 2002.
BORROWINGS. FHLB advances decreased $15.2 million during fiscal 2003
because as advances matured they were not replaced with new borrowings. Cash
proceeds from securities called during the low interest rate environment as well
as increases in deposit accounts reduced the need for new borrowings as advances
matured. At March 31, 2003, advances totaled $554.3 million with a weighted
average interest rate of 4.33% compared to advances of $569.5 million with a
weighted average interest rate of 4.78% at March 31, 2002. Other loans payable
decreased $10.5 million from the prior fiscal year. For additional information,
see Note 9 to the Consolidated Financial Statements included in Item 8.
STOCKHOLDERS' EQUITY. Stockholders' equity at March 31, 2003 was $293.0
million, or 8.28% of total assets, compared to $277.5 million, or 7.91% of total
assets at March 31, 2002. Stockholders' equity increased during the year as a
result of (i) comprehensive income of $51.3 million, which includes net income
of $49.6 million and a change in net unrealized gains on available-for-sale
securities as a part of accumulated other comprehensive income of $1.7 million,
(ii) the exercise of stock options of $2.4 million, (iii) the vesting of
recognition plan shares of $650,000, (iv) employee stock plan purchases of $1.8
million, and (v) the tax benefit from certain stock options of $2.2 million.
These increases were partially offset by (i) the purchase of treasury stock of
$33.8 million and (ii) the payment of cash dividends of $9.0 million.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2003, the Bank made dividend payments of $46.5 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 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, 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 OTS to maintain levels of liquid
investments in qualifying types of U.S. Government and agency securities and
other investments sufficient to ensure its safe and sound operation. At March
31, 2003 and 2002, the Bank's liquidity ratio was 8.13% and 17.16%,
respectively.
In fiscal 2003, operating activities resulted in a net cash inflow of
$57.8 million. Operating cash flows for fiscal 2003 included earnings of $49.6
million and $3.5 million of net proceeds from the origination and sale of
mortgage loans held for sale.
Investing activities in fiscal 2003 resulted in a net cash outflow of
$132.6 million. Primary investing activities resulting in cash outflows were
$471.8 million for the purchase of securities and $140.3 million for the
increase in net loans receivable. The most significant cash inflows from
investing activities were principal repayments on loans of $1.28 billion,
proceeds of sales and maturities of investment securities of $363.6 million, and
$194.6 million of principal repayments received on mortgage-related securities.
Financing activities resulted in a net cash outflow of $45.4 million
including a net increase in deposits of $20.2 million, a net decrease in
borrowings of $15.2 million and a cash outflow of $33.8 million for treasury
stock purchases.
42
At March 31, 2003, the Corporation had outstanding commitments to
originate $214.5 million of loans; commitments to extend funds to or on behalf
of customers pursuant to lines and letters of credit of $243.5 million; and
$368,000 of loans sold with recourse to the Corporation in the event of default
by the borrower. See Note 13 to the Consolidated Financial Statements included
in Item 8. Scheduled maturities of certificates of deposit during the twelve
months following March 31, 2003 amounted to $1.06 billion, and scheduled
maturities of borrowings during the same period totaled $129.5 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, 2003, the Bank's capital exceeded all capital requirements
of the OTS as mandated by federal law and regulations. See Note 10 to the
Consolidated Financial Statements included in Item 8.
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
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, 2003 for one
year or less was a positive 25.10% of total assets, as compared to a positive
18.15% at March 31, 2002. The calculation of a gap position requires management
to make a number of assumptions as to when an asset or liability will reprice or
mature. Management believes that its assumptions approximate actual experience
and considers them reasonable, although the actual amortization and repayment of
assets and liabilities may vary substantially.
The Corporation utilizes certain prepayment assumptions and decay rates
from various sources such as the OTS and as determined by management. The
following tables summarize the Corporation's interest rate sensitivity gap
position as of March 31, 2003 and 2002, respectively.
43
FAIR VALUE
03/31/04 03/31/05 03/31/06 03/31/07 03/31/08 THEREAFTER TOTAL 03/31/03
----------------------------------------------------------------------------------------------
(Dollars In thousands)
Rate sensitive assets:
Mortgage loans - Fixed (1) (2) $ 590,511 $ 137,422 $ 68,428 $ 36,181 $ 20,593 $ 34,729 $ 887,864 $ 887,920
Average interest rate 6.51% 6.72% 6.60% 6.48% 6.40% 6.37%
Mortgage loans -Variable (1) (2) 896,005 201,398 115,696 57,094 33,771 401 1,304,365 1,310,606
Average interest rate 5.90% 6.39% 6.43% 6.43% 6.44% 6.00%
Consumer loans (1) 469,911 29,794 6,671 1,705 466 183 508,730 526,419
Average interest rate 6.85% 7.16% 7.09% 7.04% 7.01% 6.97%
Commercial business loans (1) 107,931 18,785 5,139 1,568 505 257 134,185 132,957
Average interest rate 5.64% 5.64% 5.64% 5.64% 5.64% 5.64% 5.64
Mortgage-related securities (3) 196,826 41,861 14,581 5,748 2,420 1,969 263,405 266,499
Average interest rate 5.70% 5.68% 5.66% 5.65% 5.64% 5.62%
Investment securities and other
interest-earning assets (3) 187,743 17,389 12,697 9,271 6,770 14,187 248,057 248,027
Average interest rate 3.03% 2.16% 2.16% 2.16% 2.16% 2.87%
Total rate sensitive assets 2,448,927 446,649 223,212 111,567 64,525 51,726 3,346,606 3,372,428
Rate sensitive liabilities:
Interest-bearing
transaction accounts (4) 330,002 188,407 124,642 82,676 55,939 124,077 905,743 858,421
Average interest rate 0.55% 0.51% 0.48% 0.45% 0.43% 0.37%
Time-deposits (4) 1,059,549 400,001 128,790 7,389 7,289 660 1,603,678 1,609,133
Average interest rate 3.24% 3.62% 4.70% 3.93% 3.99% 0.00%
Borrowings 171,048 137,900 91,850 83,368 44,650 67,000 595,816 594,419
Average interest rate 4.13% 4.34% 4.26% 4.32% 3.75% 5.31%
Total rate sensitive liabilities 1,560,599 726,308 345,282 173,433 107,878 191,737 3,105,237 3,061,973
Interest sensitivity gap $ 888,328 $(279,659) $(122,070) $(61,866) $(43,353) $ (140,011) $ 241,369
========== ========= ========= ======== ======== ========== =========
Cumulative interest sensitivity gap $ 888,328 $ 608,669 $ 486,599 $424,733 $381,380 $ 241,369
========== ========= ========= ======== ======== ==========
Cumulative interest sensitivity
gap as a percent of total assets 25.10% 17.20% 13.75% 12.00% 10.78% 6.82%
- --------------------------
(1) Balances have been reduced for (i) undisbursed loan proceeds, which
aggregated $160.8 million, and (ii) non-accrual loans, which amounted to
$10.1 million.
(2) Includes $43.1 million of loans held for sale spread throughout the
periods.
(3) Includes $282.9 million of securities available for sale spread throughout
the periods.
(4) Does not include $151.0 million of demand accounts because they are
non-interest-bearing. Also does not include accrued interest payable, which
amounted to $8.1 million. Projected decay rates for demand deposits and
passbook savings are selected by management from various sources such as
the OTS.
44
FAIR VALUE
03/31/03 03/31/04 03/31/05 03/31/06 03/31/07 THEREAFTER TOTAL 03/31/02
----------------------------------------------------------------------------------------------
(Dollars In thousands)
Rate sensitive assets:
Mortgage loans - Fixed (1) (2) $ 412,061 $146,145 $ 79,830 $ 50,207 $ 35,744 $ 126,754 $ 850,741 $ 868,628
Average interest rate 7.45% 7.36% 7.28% 7.21% 7.19% 7.18%
Mortgage loans -Variable (1) (2) 714,566 251,319 152,966 95,271 58,613 9,073 1,281,808 1,307,755
Average interest rate 7.25% 7.30% 7.26% 7.06% 7.04%
Consumer loans (1) 331,993 48,182 22,625 10,699 5,773 6,909 426,181 450,662
Average interest rate 8.06% 8.22% 8.20% 8.19% 8.19% 8.18%
Commercial business loans (1) 265,806 71,599 28,369 12,454 5,081 10,334 393,643 112,813
Average interest rate 6.90% 7.28% 7.44% 7.40% 7.34% 7.32%
Mortgage-related securities (3) 69,721 43,154 32,462 25,512 20,410 94,176 285,435 273,571
Average interest rate 6.38% 6.38% 6.38% 6.38% 6.39% 6.40%
Investment securities and other
interest-earning assets (3) 324,956 807 807 807 807 2,421 330,605 331,953
Average interest rate 2.65% 4.48% 4.48% 4.48% 4.48% 4.48%
Total rate sensitive assets 2,119,103 561,206 317,059 194,950 126,428 249,667 3,568,413 3,345,382
Rate sensitive liabilities:
Interest-bearing
transaction accounts (4) 268,722 138,613 90,651 54,355 38,759 104,202 695,302 653,854
Average interest rate 1.21% 1.16% 1.13% 1.07% 1.05% 0.97%
Time-deposits (4) 1,104,763 147,707 103,528 22,871 22,871 221 1,401,961 1,658,687
Average interest rate 4.55% 4.26% 4.18% 5.08% 5.08% 5.73%
Borrowings 175,990 129,500 115,400 62,500 64,700 73,500 621,590 631,329
Average interest rate 4.62% 4.08% 4.79% 4.97% 4.72% 5.29%
Total rate sensitive liabilities 1,549,475 415,820 309,579 139,726 126,330 177,923 2,718,853 2,943,870
Interest sensitivity gap $ 569,628 $145,386 $ 7,480 $ 55,224 $ 98 $ 71,744 $ 849,560
========== ======== ======== ========= ========= ========= ==========
Cumulative interest sensitivity gap $ 569,628 $715,014 $722,494 $ 777,718 $ 777,816 $ 849,560
========== ======== ======== ========= ========= =========
Cumulative interest sensitivity
gap as a percent of total assets 18.15% 22.79% 23.03% 24.79% 24.79% 27.08%
- ---------------------
(1) Balances have been reduced for (i) undisbursed loan proceeds, which
aggregated $158.1 million, and (ii) non-accrual loans, which amounted to
$9.0 million.
(2) Includes $46.5 million of loans held for sale spread throughout the
periods.
(3) Includes $211.3 million of securities available for sale spread throughout
the periods.
(4) Does not include $188.8 million of demand accounts because they are
non-interest-bearing. Also does not include accrued interest payable, which
amounted to $10.9 million. Projected decay rates for demand deposits and
passbook savings are selected by management from various sources such as
the OTS.
45
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46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF ANCHOR BANCORP WISCONSIN INC.
page
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .......................................................... 48
Consolidated Statements of Income..................................................... 49
Consolidated Statements of Changes in Stockholders' Equity............................ 50
Consolidated Statements of Cash Flows................................................. 52
Notes to Consolidated Financial Statements ........................................... 54
Report of Ernst & Young LLP, Independent Auditors .................................... 84
Management and Audit Committee Report................................................. 85
SUPPLEMENTARY DATA
Quarterly Financial Information....................................................... 86
47
CONSOLIDATED BALANCE SHEETS
MARCH 31,
-------------------------------------
2003 2002
-------------------------------------
(In Thousands, Except Per Share Data)
ASSETS
Cash $ 69,178 $ 57,568
Interest-bearing deposits 72,249 204,108
------------ ------------
Cash and cash equivalents 141,427 261,676
Investment securities available for sale 97,192 65,993
Investment securities held to maturity (fair value of $3,095 and
$7,897, respectively) 2,998 7,747
Mortgage-related securities available for sale 185,751 145,293
Mortgage-related securities held to maturity (fair value of $66,077
and $141,330, respectively) 62,998 140,293
Loans receivable, net:
Held for sale 43,054 46,520
Held for investment 2,770,988 2,627,248
Foreclosed properties and repossessed assets, net 1,535 1,475
Real estate held for development and sale 44,994 46,986
Office properties and equipment 31,905 31,132
Federal Home Loan Bank stock--at cost 81,868 53,316
Accrued interest on investments and loans and other assets 53,955 19,918
Goodwill 19,956 59,479
------------ ------------
Total assets $ 3,538,621 $ 3,507,076
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 2,574,188 $ 2,553,987
Federal Home Loan Bank and other borrowings 595,816 621,590
Advance payments by borrowers for taxes and insurance 6,579 7,838
Other liabilities 69,034 46,149
------------ ------------
Total liabilities 3,245,617 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, 23,942,858 and 24,950,258 shares outstanding,
respectively 2,536 2,536
Additional paid-in capital 64,271 61,735
Retained earnings 251,729 218,149
Accumulated other comprehensive income 4,177 2,473
Treasury stock (1,420,481 shares and 413,081 shares, respectively), at cost (28,917) (6,324)
Unearned deferred compensation (792) (1,057)
------------ ------------
Total stockholders' equity 293,004 277,512
------------ ------------
Total liabilities and stockholders' equity $ 3,538,621 $ 3,507,076
============ ============
See accompanying Notes to Consolidated Financial Statements.
48
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31,
-------------------------------------
2003 2002 2001
-------------------------------------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Loans $ 184,848 $ 196,871 $ 198,435
Mortgage-related securities 16,768 20,428 20,051
Investment securities 6,135 6,313 8,040
Interest-bearing deposits 1,854 2,089 2,121
--------- --------- ---------
Total interest income 209,605 225,701 228,647
INTEREST EXPENSE:
Deposits 65,839 93,163 97,440
Notes payable and other borrowings 26,655 34,796 50,151
Other 362 495 505
--------- --------- ---------
Total interest expense 92,856 128,454 148,096
--------- --------- ---------
Net interest income 116,749 97,247 80,551
Provision for loan losses 1,800 2,485 945
--------- --------- ---------
Net interest income after provision for loan losses 114,949 94,762 79,606
NON-INTEREST INCOME:
Loan servicing income (loss) (4,667) 728 2,745
Service charges on deposits 7,249 6,466 5,764
Insurance commissions 1,909 1,500 1,815
Net gain on sale of loans 20,720 8,861 3,044
Net gain on sale of investments and mortgage-related securities 1,798 813 311
Net income (loss) from operations of real estate investments (63) 333 (2,023)
Other 5,807 2,914 1,847
--------- --------- ---------
Total non-interest income 32,753 21,615 13,503
NON-INTEREST EXPENSE:
Compensation 37,439 32,554 28,442
Occupancy 5,884 4,867 4,416
Furniture and equipment 5,232 4,549 3,812
Data processing 5,338 4,516 3,821
Marketing 2,531 2,262 2,129
Other 11,580 10,783 8,830
--------- --------- ---------
Total non-interest expense 68,004 59,531 51,450
--------- --------- ---------
Income before income taxes 79,698 56,846 41,659
Income taxes 30,135 20,479 14,682
--------- --------- ---------
Net income $ 49,563 $ 36,367 $ 26,977
========= ========= =========
Earnings per share:
Basic $ 2.06 $ 1.59 $ 1.19
Diluted 2.02 1.55 1.16
Dividends declared per share 0.36 0.32 0.30
See accompanying Notes to Consolidated Financial Statements.
49
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCU-
MULATED
OTHER
COMPRE-
ADDITIONAL UNEARNED HENSIVE
COMMON PAID-IN RETAINED TREASURY DEFERRED INCOME/
STOCK CAPITAL EARNINGS STOCK COMPENSATION (LOSS) TOTAL
-----------------------------------------------------------------------------------
(Dollars in thousands except per share data)
Balance at March 31, 2000 $ 2,536 $ 56,496 $ 179,211 $ (18,438) $ (923) $ (1,667) $ 217,215
-----------------------------------------------------------------------------------
Comprehensive income:
Net income - - 26,977 - - - 26,977
Change in net unrealized gains (losses)
on available-for-sale securities
net of tax of $1.5 million - - - - - 3,621 3,621
---------
Comprehensive income 30,598
Purchase of treasury stock - - - (24,605) - - (24,605)
Exercise of stock options - (26) (1,643) 3,378 - - 1,709
Issuance of management recognition plan shares - - (79) 1,326 - - 1,247
Cash dividend ($0.30 per share) - - (6,867) - - - (6,867)
Recognition plan shares vested - - - - 214 - 214
Tax benefit from stock
related compensation - 101 - - - - 101
-----------------------------------------------------------------------------------
Balance at March 31, 2001 $ 2,536 $ 56,571 $ 197,599 $ (38,339) $ (709) $ 1,954 $ 219,612
-----------------------------------------------------------------------------------
Comprehensive income:
Net income - - 36,367 - - - 36,367
Change in net unrealized gains (losses)
on available-for-sale securities
net of tax of $2.3 million - - - - - 519 519
---------
Comprehensive income 36,886
Purchase of treasury stock - - - (16,816) - - (16,816)
Purchase of Ledger Capital Corp. - 3,201 (3,038) 37,992 - - 38,155
Exercise of stock options - - (5,217) 8,653 - - 3,436
Issuance of management recognition plan shares - - (99) 2,186 - - 2,087
Cash dividend ($0.32 per share) - - (7,464) - - - (7,464)
Recognition plan shares vested - 1,068 - - (348) - 720
Tax benefit from stock
related compensation - 895 1 - - - 896
-----------------------------------------------------------------------------------
Balance at March 31, 2002 $ 2,536 $ 61,735 $ 218,149 $ (6,324) $ (1,057) $ 2,473 $ 277,512
-----------------------------------------------------------------------------------
Comprehensive income:
Net income - - 49,563 - - - 49,563
Change in net unrealized gains (losses)
on available-for-sale securities
net of tax of $1.1 million - - - - - 1,704 1,704
---------
Comprehensive income 51,267
Purchase of treasury stock - - - (33,809) - - (33,809)
Exercise of stock options - - (6,906) 9,329 - - 2,423
Issuance of management recognition plan shares - - (119) 1,887 - - 1,768
Cash dividend ($0.3625 per share) - - (8,958) - - - (8,958)
Recognition plan shares vested - 382 - - 265 - 647
Tax benefit from stock
related compensation - 2,154 - - - - 2,154
-----------------------------------------------------------------------------------
Balance at March 31, 2003 $ 2,536 $ 64,271 $ 251,729 $ (28,917) $ (792) $ 4,177 $ 293,004
===================================================================================
See accompanying Notes to Consolidated Financial Statements.
50
The following table summarizes reclassification adjustments and the related
income tax effect to the components of other comprehensive income for the years
presented (in thousands).
YEAR ENDED MARCH 31,
------------------------------
2003 2002 2001
------------------------------
(Dollars in thousands)
Unrealized holding gains on available for sale securities
arising during the period:
Unrealized net gains $ 2,791 $ 2,830 $ 5,107
Related tax expense (1,087) (2,311) (1,486)
Net after tax unrealized gains on available for sale
------- ------- -------
securities 1,704 519 3,621
Less: Reclassification adjustment for net gains
realized during the period:
Realized net gains on sales of available for sale
securities 1,798 813 311
Related tax benefit 680 293 110
Net after tax reclassification adjustment (2,478) (1,106) (421)
------- ------- -------
Total other comprehensive income $ 1,704 $ 519 $ 3,621
======= ======= =======
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------------
2003 2002 2001
--------------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 49,563 $ 36,367 $ 26,977
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 1,800 2,485 945
Provision for depreciation and amortization 4,973 3,124 2,696
Net gain on sales of loans (20,720) (8,861) (3,044)
Amortization of cost of stock benefit plans 120 136 397
Deferred income taxes 2,362 290 225
Tax Benefit from stock related compensation 2,154 896 101
Decrease (increase) in accrued interest receivable 2,052 944 (1,497)
(Decrease) increase in accrued interest payable (3,116) (7,297) 5,778
Increase in accounts payable 22,885 7,547 8,287
Other (7,783) (39,468) 33,463
Net increase (decrease) due to origination and sale of loans held for sale 3,466 (28,898) (16,954)
---------- ---------- ----------
Net cash provided (used) by operating activities 57,756 (32,735) 57,374
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 16,468 6,131 6,254
Proceeds from maturities of investment securities 347,176 434,681 73,921
Purchase of investment securities available for sale (391,443) (456,679) (72,408)
Proceeds from sale of mortgage-related securities available for sale 54,005 26,426 7,852
Purchase of mortgage-related securities available for sale (80,353) (65,858) (5,984)
Principal collected on mortgage-related securities 194,602 132,065 49,168
Loans originated for investment (1,549,261) (744,192) (584,595)
Principal repayments on loans 1,279,077 539,781 331,007
Net purchases of office properties and equipment (4,729) 11,254 22
Sales of real estate 1,907 6,491 312
Net cash paid to purchase Ledger Capital Corp - 4,329 -
Investment in real estate held for development and sale (46) (4,819) (15,756)
---------- ---------- ----------
Net cash used by investing activities (132,597) (110,390) (210,207)
See accompanying Notes to Consolidated Financial Statements
52
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
YEAR ENDED MARCH 31,
-----------------------------------
2003 2002 2001
-----------------------------------
(In Thousands)
FINANCING ACTIVITIES
Net increase in deposit accounts $ 20,201 $ 437,604 $ 219,239
Decrease in advance payments by borrowers
for taxes and insurance (1,259) (80) (295)
Proceeds from notes payable to Federal Home Loan Bank 294,168 623,200 878,600
Repayment of notes payable to Federal Home Loan Bank (309,400) (723,596) (857,750)
(Decrease) increase in securities sold under agreements
to repurchase - (27,948) (64,465)
(Decrease) increase in other loans payable (10,542) 9,336 27,354
Treasury stock purchased (33,809) (16,816) (24,605)
Exercise of stock options 2,423 3,436 1,709
Issuance of management recognition plan shares 1,768 2,087 1,247
Payments of cash dividends to stockholders (8,958) (7,464) (6,867)
--------- --------- ---------
Net cash provided (used) by financing activities (45,408) 299,759 174,167
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (120,249) 156,634 21,334
Cash and cash equivalents at beginning of year 261,676 105,042 83,708
--------- --------- ---------
Cash and cash equivalents at end of year $ 141,427 $ 261,676 $ 105,042
========= ========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 89,740 $ 127,031 $ 151,162
Income taxes 22,487 15,719 14,574
Non-cash transactions:
Loans transferred to foreclosed properties - - 41
Securitization of mortgage loans held for sale to mortgage-backed
securities 124,115 - 128,456
See accompanying Notes to Consolidated Financial Statements
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, fsb (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 also has a non-banking subsidiary, Investment
Directions, Inc. ("IDI"), which invests in real estate held for development and
sale.
BASIS OF FINANCIAL STATEMENT PRESENTATION. The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States and include the accounts and operations of the Corporation
and its wholly owned subsidiaries, the Bank and IDI, and their wholly owned
subsidiaries. The Bank has the following subsidiaries: Anchor Investment
Corporation, Anchor Investment Services Inc., and ADPC Corporation. IDI's wholly
owned subsidiaries are Nevada Investment Directions, Inc. ("NIDI") and
California Investment Directions, Inc. ("CIDI"). Significant intercompany
accounts and transactions have been eliminated. Investments in joint ventures
and other 50% or less 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 an original maturity of three months or less
to be cash equivalents.
INVESTMENT AND MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY AND
AVAILABLE-FOR-SALE. Debt securities that the Corporation has the intent and
ability to hold to maturity are classified as held-to-maturity 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
accumulated other comprehensive income in stockholders' equity.
Discounts and premiums on investment and mortgage-backed securities are accreted
and amortized into interest income using the effective yield method over the
estimated remaining life of the assets.
Realized gains and losses, and declines in value judged to be other than
temporary, are included in "Net gain on sale of securities" in the consolidated
statements of income as a component of other 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
origination of certain fixed-rate mortgage loans and certain adjustable-rate
mortgage loans and are carried at market value. Fees received from the borrower
and direct costs to originate the loan are deferred and recorded as an
adjustment of the sales price.
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights are recorded as an asset
when loans are sold to third parties with servicing rights retained. 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. The fair value of the
servicing rights is determined by estimating the present value of future net
cash flows, taking into consideration market loan prepayment speeds, discount
rates, servicing costs and other economic factors. 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.
54
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. Interest on loans is accrued on the unpaid principal balances
as earned. 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 interest 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 $483,000 and $359,000 were
established at March 31, 2003 and 2002, 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 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.
ALLOWANCES FOR LOAN LOSSES. The allowance for loan losses is maintained at a
level believed adequate by management to absorb probable and estimatable losses
inherent in the loan portfolio and is based on the size and current risk
characteristics of the loan portfolio; an assessment of individual problem
loans; actual and anticipated loss experience; and current economic events in
specific industries and geographical areas. These economic events include
unemployment levels, regulatory guidance, and general economic conditions.
Determination of the reserve is inherently subjective as it requires significant
estimates, including the amounts and timing of expected future cash flows on
impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends, all of
which may be susceptible to significant change. Loan losses are charged off
against the allowance, while recoveries of amounts previously charged off are
credited to the allowance. A provision for loan losses is charged to operating
expense based on management's periodic evaluation of the factors previously
mentioned as well as other pertinent factors.
Specific reserves are established for expected losses resulting from analysis
developed through specific credit allocations on individual loans and are based
on a regular analysis of impaired loans where the internal credit rating is at
or below a predetermined classification. A loan is considered impaired when it
is probable and estimable that the Corporation will be unable to collect all
contractual principal and interest due according to the terms of the loan
agreement. Loans subject to impairment are defined as non-accrual and
restructured loans exclusive of smaller homogeneous loans such as home equity,
installment, and 1-4 family residential loans. The fair value of the loans is
determined based on the present value of expected future cash flows discounted
at the loan's effective interest rate, the market price of the loan, or the fair
value of the underlying collateral less costs to sell, if the loan is collateral
dependent.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE. Real estate held for development and
sale includes investments in land and partnerships that 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. Income on
the sale of land and lots between the entities is deferred until development and
construction are complete and a third party purchases a completed home. When
completed homes are sold to third parties, deferred income is then recognized as
a component of non-interest income under net income (loss) from operations of
real estate investments.
55
Real estate held for development and sale is summarized as follows (in
thousands):
MARCH 31,
------------------
2003 2002
------------------
Investment in wholly owned real estate investment subsidiaries $36,493 $34,689
Investment in 50% owned real estate investment subsidiaries 8,452 12,223
Other real estate investments 49 74
------- -------
Total real estate held for development and sale $44,994 $46,986
======= =======
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 capitalized leasehold improvements is
amortized on the straight-line method over the lesser of the term of the
respective lease or estimated economic life.
INCOME TAXES. The Corporation's deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable for
the period adjusted for the change during the period in deferred tax assets and
liabilities. The Corporation and its subsidiaries file a consolidated federal
income tax return and separate state income tax returns. The intercompany
settlement of taxes paid is based on tax sharing agreements which generally
allocate taxes to each entity on a separate return basis.
EARNINGS PER SHARE. Basic earnings per share ("EPS") is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. The basic EPS computation excludes the dilutive effect of all common
stock equivalents. Diluted EPS is computed by dividing net income by the
weighted average number of common shares outstanding plus all potential common
shares. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Corporation's potential common shares represent shares
issuable under its long-term incentive compensation plans. Such common stock
equivalents are computed based on the treasury stock method using the average
market price for the period.
COMPREHENSIVE INCOME. Comprehensive income is the total of reported net income
and all other revenues, expenses, gains and losses that under generally accepted
accounting principles bypass reported net income. The Corporation includes
unrealized gains or losses, net of tax, on securities available for sale in
other comprehensive income.
RECENT ACCOUNTING CHANGES.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. On April 1, 2001
the Corporation adopted SFAS No.133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, which requires that all derivative instruments
be recorded in the balance sheet 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
56
making commitments to originate mortgage loans. Changes in the fair value of
these derivative contracts and commitments are recorded in income in loan
servicing income. The Corporation does not hold any other derivative
instruments.
GOODWILL AND OTHER INTANGIBLES. 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 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. See Note 6 Goodwill, Other Intangible Assets, and Mortgage Servicing
Rights.
ACCOUNTING FOR LONG-LIVED ASSETS. In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets" which supercedes
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and the provisions for the disposal of a segment of a business
in APB Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." This statement requires that
long-lived assets to be disposed of by sale be measured at the lower of their
carrying amount or fair value less cost to sell, and recognition of impairment
losses on long-lived assets to be held if the carrying amount of the long-lived
asset is not recoverable from its undiscounted cash flows and exceeds it fair
value. Additionally, SFAS no. 144 resolved various implementation issues related
to SFAS No. 121. The provisions of SFAS No. 144 were adopted on January 1, 2002
and had no effect on the Corporation's consolidated financial statements.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. In June 2002,
the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." This statement nullifies Emerging Issues Task Force Issue
No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" and requires that a liability for costs associated with an exit
or disposal activity be recognized when the liability is probable and represents
obligations to transfer assets or provide services as a result of past
transactions. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002 and are not
expected to have a material impact on the Corporation's consolidated financial
statements.
GUARANTEES. In November 2002, the FASB issued Financial Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others" (FIN 45). FIN 45 significantly
changes current practice in the accounting for, and disclosure of, guarantees.
FIN 45 requires certain guarantees to be recorded at fair value as a liability
at inception and when a loss is probable and reasonably estimatable, as those
terms are defined in FASB Statement No. 5 "Accounting for Contingencies." The
recording of the liability will not significantly affect the Corporation's
financial condition. FIN 45 also requires a guarantor to make significant new
disclosures (see below) even when the likelihood of making any payments under
the guarantee is remote.
57
The Corporation's real estate investment segment guarantees some loans for some
of the development partnerships that it invests in to complete developed homes
for sale. As of March 31, 2003 the Corporation has guaranteed $34.7 million for
the following partnerships on behalf of the respective subsidiaries listed
below.
ORIGINAL AMOUNT
SUBSIDIARY PARTNERSHIP AMOUNT OUTSTANDING
OF IDI ENTITY GUARANTEED AT 3/31/03
- ---------- --------------------- ---------- -----------
(Dollars in thousands)
Davsha II Paragon $ 5,100 $ 2,000
Davsha III Indian Palms 147, LLC 8,500 2,700
Davsha IV DH Indian Palms, LLC 10,225 1,700
Davsha V Villa Santa Rosa, LLC 8,018 3,300
Davsha VI Bellasara 168, LLC 2,869 2,600
------- -------
Total $34,712 $12,300
======= =======
VARIABLE INTEREST ENTITIES. In January 2003, the Financial Accounting Standards
Board issued Interpretation No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51" (FIN 46).
FIN 46 requires the consolidation of entities in which an enterprise absorbs a
majority of the entity's expected losses, receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual or
other financial interests in the entity. Currently, entities are generally
consolidated by an enterprise when it has a controlling financial interest
through ownership of a majority voting interest in the entity.
The Corporation's subsidiary, IDI, has real estate partnership investments
within its subsidiaries for which it guarantees the above loans. These
partnerships are also funded by financing from the IDI subsidiaries secured by
the lots and homes being developed within each of the respective partnership
entities.
The Corporation accounts for these partnerships with the equity method of
accounting, recording its share of the net income or loss based upon the terms
of the partnership agreements. As a limited partner, the Corporation still has
the ability to exercise significant influence over operating and financial
policies. This influence is evident in the terms of the respective partnership
agreements and participation in policy-making processes. The Corporation has a
50% controlling interest in the respective limited partnerships and therefore
has significant influence over the right to approve the sale or refinancing of
assets of the respective partnerships in accordance with those partnership
agreements.
In acting as a partner with a controlling interest, the Corporation is committed
to providing additional levels of funding to meet partnership operating deficits
up to an aggregate amount of $34.7 million. At March 31, 2003, the Corporation's
aggregate net investment in these partnerships totaled $43.5 million. These
amounts represent the Corporation's maximum exposure to loss at March 31, 2003
as a result of involvement with these limited partnerships.
The partnership agreements generally contain buy-sell provisions whereby certain
partners can require the purchase or sale of ownership interests by certain
partners. Additionally, there are provisions whereby the Corporation has
guaranteed certain partners' preference returns and equity investments.
58
The Corporation is currently evaluating the effects of the issuance of FIN 46 on
the accounting for its ownership interests in the limited partnerships.
STOCK OPTIONS. On December 31, 2002, FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation" to provide alternative
methods of transition to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
provisions of SFAS No. 123 to require disclosure in the summary of significant
accounting policies of the effect of the Company's accounting policy with
respect to stock-based employee compensation on reported net income and earnings
per share in annual and interim financial statements. SFAS No. 148's amendment
of the transition and annual disclosure provisions of SFAS No. 123 are effective
for fiscal years ending after December 15, 2002. The Corporation will continue
to account for stock-based compensation in accordance with APB Opinion 25 as
allowed under FASB No. 123.
The Corporation 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 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.
A summary of stock options activity for all periods follows:
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------------------------------------------------------------------------------
Outstanding at beginning of year 1,956,009 $ 10.39 1,937,143 $ 9.64 2,105,157 $ 8.98
Granted 179,500 22.07 544,670 9.74 68,870 15.06
Exercised (454,191) 6.62 (512,200) 6.71 (174,405) 6.38
Forfeited (1,462) 17.75 (13,604) 16.26 (62,478) 13.06
--------- --------- ---------
Outstanding at end of year 1,679,856 12.65 1,956,009 10.39 1,937,143 9.64
========= ========= =========
Options exercisable at year-end 1,451,360 1,774,265 1,795,809
========= ========= =========
At March 31, 2003, 641,384 shares were available for future grants.
59
The following table represents outstanding stock options and exercisable stock
options at their respective ranges of exercise prices:
Options Outstanding Exercisable Options
-----------------------------------------------------------------------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Range of Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
$ 4.40 - $ 6.53 486,130 1.87 $ 6.01 486,130 $ 6.01
$ 8.50 - $12.99 457,664 3.88 10.71 457,664 10.71
$15.06 - $22.07 736,062 7.33 18.24 507,566 17.16
--------- ---------
1,679,856 4.81 12.65 1,451,360 11.39
========= =========
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for stock options. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value at the
date of grant for awards under the stock option plans consistent with the method
of SFAS No. 123, the Corporation's net income and earnings per share would have
been reduced to the pro forma amounts indicated (in thousands, except per share
amounts):
YEAR ENDED MARCH 31,
----------------------------------------------------
2003 2002 2001
----------------------------------------------------
Net Income
As reported $ 49,563 $ 36,367 $ 26,977
Pro forma 49,200 36,200 26,755
Earnings per share-Basic
As reported $ 2.06 $ 1.59 $ 1.19
Pro forma 2.04 1.58 1.18
Earnings per share-Diluted
As reported $ 2.02 $ 1.55 $ 1.16
Pro forma 2.01 1.54 1.15
The pro forma amounts indicated above may not be representative of the effects
on reported net income for future years. The fair values of stock options
granted in fiscal years ended March 31, 2003, 2002, and 2001 were estimated on
the date of grant using the Black-Scholes option-pricing model.
The weighted average fair values and related assumptions are as follows:
YEAR ENDED MARCH 31,
--------------------------------------
2003 2002 2001
--------------------------------------
Weighted average fair value $ 5.91 $ 3.87 $ 4.07
Expected volatility 45.56% 31.15% 27.00%
Risk free interest rate 3.00% 3.00% 5.25%
Expected lives 5 years 5 years 5 years
Dividend yield 1.81% 2.24% 1.99%
60
RECLASSIFICATIONS. Certain 2002 and 2001 accounts have been reclassified to
conform to the 2003 presentations.
NOTE 2 - 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.
The $20.0 million of goodwill was assigned to the community banking segment. The
total goodwill amount is not deductible for tax purposes. The core deposit
intangible is subject to amortization over an estimated useful life of four
years. The estimated amortization expense for the core deposit intangible for
the next two years is $850,000 per year and for the third year, $570,000 per
year.
61
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities are as follows (in
thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------------------------------------------------------
AT MARCH 31, 2003:
Available for Sale:
U.S. Government and federal agency obligations $ 75,675 $ 154 $ (6) $ 75,823
Mutual funds 9,815 2 (5) 9,812
Corporate stock and other 10,151 1,706 (300) 11,557
---------- ---------- ---------- ----------
$ 95,641 $ 1,862 $ (311) $ 97,192
========== ========== ========== ==========
Held to Maturity:
U.S. Government and federal agency obligations $ 2,998 $ 97 $ - $ 3,095
========== ========== ========== ==========
AT MARCH 31, 2002:
Available for Sale:
U.S. Government and federal agency obligations $ 43,261 $ 231 $ (50) $ 43,442
Mutual funds 10,587 - (5) 10,582
Corporate stock and other 11,040 1,249 (320) 11,969
---------- ---------- ---------- ----------
$ 64,888 $ 1,480 $ (375) $ 65,993
========== ========== ========== ==========
Held to Maturity:
U.S. Government and federal agency obligations $ 7,747 $ 150 $ - $ 7,897
========== ========== ========== ==========
AT MARCH 31, 2001:
Available for Sale:
U.S. Government and federal agency obligations $ 9,081 $ 138 $ - $ 9,219
Mutual funds 5,996 9 - 6,005
Corporate stock and other 7,837 547 (1,392) 6,992
---------- ---------- ---------- ----------
$ 22,914 $ 694 $ (1,392) $ 22,216
========== ========== ========== ==========
Held to Maturity:
U.S. Government and federal agency obligations $ 33,913 $ 186 $ (3) $ 34,096
========== ========== ========== ==========
Proceeds from sales of investment securities available for sale during the years
ended March 31, 2003, 2002 and 2001 were $16,468,000, $6,131,000, and
$6,254,000, respectively. There were no gains realized on the sale of investment
securities for 2003. Gross gains of $376,000 and $110,000 were realized on sales
in 2002 and 2001, respectively. Gross losses of $275,000, $28,000, and $4,000
were realized on sales of investment securities for the years ended March 31,
2003, 2002 and 2001, respectively.
At March 31, 2003, there were investment securities available for sale of $7.5
million and investment securities held to maturity of $2.0 million that were
pledged as collateral for deposits greater than $100,000. There were investment
securities available for sale of $10.0 million that were pledged as collateral
for FHLB borrowings at March 31, 2003.
62
The amortized cost and fair value of investment securities by contractual
maturity at March 31, 2003 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. There were no
callable securities at March 31, 2003.
AVAILABLE FOR SALE HELD TO MATURITY
------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------------------------------------------------
Due in one year or less $ 82,950 $ 83,022 $ 2,998 $ 3,095
Due after one year through five years 3,618 3,703 - -
Due after five years 4,777 5,030 - -
Corporate stock 4,296 5,437 - -
--------- --------- --------- ---------
$ 95,641 $ 97,192 $ 2,998 $ 3,095
========= ========= ========= =========
NOTE 4 - MORTGAGE-RELATED SECURITIES
Mortgage-backed securities are backed by government sponsored agencies,
including the Federal Home Loan Mortgage Corporation, the Federal National
Mortgage Association and the Government National Mortgage Association. CMOs and
REMICs are trusts which own securities backed by the government sponsored
agencies noted above. Mortgage-backed securities, CMOs and REMICs have estimated
average lives of five years or less.
63
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, 2003:
Available for Sale:
CMO's and REMICS $ 53,737 $ 538 $ (121) $ 54,154
Mortgage-backed securities 127,116 4,481 - 131,597
----------- ----------- ----------- -----------
$ 180,853 $ 5,019 $ (121) $ 185,751
=========== =========== =========== ===========
Held to Maturity:
CMO's and REMICS $ 2,600 $ 61 $ - $ 2,661
Mortgage-backed securities 60,398 3,018 - 63,416
----------- ----------- ----------- -----------
$ 62,998 $ 3,079 $ - $ 66,077
=========== =========== =========== ===========
AT MARCH 31, 2002:
Available for Sale:
CMO's and REMICS $ 51,601 $ 838 $ (146) $ 52,293
Mortgage-backed securities 91,139 1,990 (129) 93,000
----------- ----------- ----------- -----------
$ 142,740 $ 2,828 $ (275) $ 145,293
=========== =========== =========== ===========
Held to Maturity:
CMO's and REMICS $ 5,776 $ 123 $ (21) $ 5,878
Mortgage-backed securities 134,517 1,655 (720) 135,452
----------- ----------- ----------- -----------
$ 140,293 $ 1,778 $ (741) $ 141,330
=========== =========== =========== ===========
AT MARCH 31, 2001:
Available for Sale:
CMO's and REMICS $ 20,172 $ 738 $ (18) $ 20,892
Mortgage-backed securities 149,914 3,185 (23) 153,076
----------- ----------- ----------- -----------
$ 170,086 $ 3,923 $ (41) $ 173,968
=========== =========== =========== ===========
Held to Maturity:
CMO's and REMICS $ 11,042 $ 133 $ (5) $ 11,170
Mortgage-backed securities 194,149 2,418 (68) 196,499
----------- ----------- ----------- -----------
$ 205,191 $ 2,551 $ (73) $ 207,669
=========== =========== =========== ===========
Proceeds from sales of mortgage-related securities available for sale during the
years ended March 31, 2003, 2002 and 2001 were $54,005,000, $26,426,000 and
$7,852,000, respectively. Gross gains of $2,089,000, $486,000 and $205,000 were
realized on sales in 2003, 2002 and 2001, respectively. Gross losses of $16,000
and $21,000 were realized on sales in 2003 and 2002, respectively. No losses
were realized in 2001.
At March 31, 2003, $95.7 million of the Corporation's mortgage-related
securities available for sale and $59.2 million mortgage-related securities held
to maturity were pledged as collateral to secure various obligations of the
Corporation. See Note 8. There were mortgage-related securities available for
sale of $1.0 million pledged as collateral for deposits greater than $100,000 at
March 31, 2003.
64
NOTE 5 - LOANS RECEIVABLE
Loans receivable held for investment consist of the following (in thousands):
MARCH 31,
------------------------------
2003 2002
------------------------------
First mortgage loans:
Single-family residential $ 724,900 $ 855,437
Multi-family residential 474,678 388,919
Commercial real estate 747,682 686,237
Construction 331,338 288,377
Land 47,951 45,297
------------ ------------
2,326,549 2,264,267
Second mortgage loans 269,990 226,134
Education loans 166,507 130,752
Commercial business loans and leases 137,360 123,526
Credit card and other consumer loans 66,150 75,808
------------ ------------
2,966,556 2,820,487
Less:
Undisbursed loan proceeds 160,724 157,667
Allowance for loan losses 29,677 31,065
Unearned loan fees 4,946 4,286
Discount on purchased loans 147 215
Unearned interest 74 6
------------ ------------
195,568 193,239
------------ ------------
$ 2,770,988 $ 2,627,248
============ ============
A summary of the activity in the allowance for loan losses follows (in
thousands):
YEAR ENDED MARCH 31,
------------------------------------------
2003 2002 2001
------------------------------------------
(Dollars In Thousands)
Allowance at beginning of year $ 31,065 $ 24,076 $ 24,404
Provision 1,800 2,485 945
Charge-offs (3,517) (4,090) (1,625)
Recoveries 329 156 352
Purchase of Ledger Capital Corp. - 8,438 -
---------- ---------- ----------
Allowance at end of year $ 29,677 $ 31,065 $ 24,076
========== ========== ==========
65
A summary of the details regarding impaired loans follows (in thousands):
AT MARCH 31,
---------------------------------------
2003 2002 2001
---------------------------------------
Impaired loans with valuation
reserve required $ 8,483 $ 11,467 $ 964
Less:
Specific valuation allowance 3,717 4,240 615
--------- --------- ---------
Total impaired loans $ 4,766 $ 7,227 $ 349
========= ========= =========
Average impaired loans $ 6,042 $ 6,216 $ 3,301
Interest income recognized
on impaired loans $ 613 $ 740 $ 43
Certain mortgage loans are pledged as collateral for FHLB borrowings. See Note 9
to the Corporation's Consolidated Financial Statements included in Item 8.
A substantial portion of the Bank's loans are collateralized by real estate in
and around the State of 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 $2,526,645,000 and $2,303,102,000 at March 31, 2003 and 2002,
respectively.
NOTE 6 - GOODWILL, OTHER INTANGIBLES AND MORTGAGE SERVICING RIGHTS
The Corporation's carrying value of goodwill was $20.0 million at March 31, 2003
and at March 31, 2002. Information regarding the Company's other intangible
assets follows (in thousands):
MARCH 31, 2003 MARCH 31, 2002
------------------------------------------ ------------------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------------------------------------ ------------------------------------------
(In Thousands)
Other intangible assets:
Core deposit premium $ 3,124 $ 1,093 $ 2,031 $ 3,408 $ 284 $ 3,124
Mortgage servicing rights 23,283 11,564 11,719 16,200 5,175 11,025
---------- ---------- ---------- ---------- ---------- ----------
Total $ 26,407 $ 12,657 $ 13,750 $ 19,608 $ 5,459 $ 14,149
========== ========== ========== ========== ========== ==========
66
The projections of amortization expense for mortgage servicing rights and core
deposit premium set forth below are based on asset balances and the interest
rate environment as of March 31, 2003. Future amortization expense may be
significantly different depending upon changes in the mortgage servicing
portfolio, mortgage interest rates and market conditions.
MORTGAGE CORE
SERVICING DEPOSIT
RIGHTS PREMIUM TOTAL
------------ -------------- ------------
(In Thousands)
Year ended March 31, 2003 (actual) $ 11,564 $ 1,093 $ 12,657
Estimate for the year ended March 31,
2004 5,859 852 6,711
2005 2,930 852 3,782
2006 1,465 327 1,792
2007 1,465 - 1,465
------------ -------------- ------------
$ 11,719 $ 2,031 $ 13,750
============ ============== ============
Mortgage servicing rights of $11,719,000, $13,150,000 and $8,784,000 are
included in other assets for the years ended March 31, 2003, 2002, and 2001,
respectively. $10,942,000, $10,196,000, and $3,077,000 were capitalized during
the years ended March 31, 2003, 2002, and 2001, respectively. Amortization of
mortgage servicing rights was $11,564,000, $5,175,000, and $2,404,000, for the
years ended March 31, 2003, 2002, and 2001, respectively. The valuation
allowance for the impairment of mortgage servicing rights was $2,934,000,
$2,125,000, and $690,000, for the years ended March 31, 2003, 2002, and 2001,
respectively. For discussion of the fair value of mortgage servicing rights and
method of valuation, see Note 1.
NOTE 7 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands):
MARCH 31,
------------------------
2003 2002
--------- ---------
Land and land improvements $ 7,670 $ 7,434
Office buildings 34,791 32,376
Furniture and equipment 28,461 28,547
Leasehold improvements 2,331 2,275
--------- ---------
73,253 70,632
Less allowance for depreciation and amortization 41,348 39,500
--------- ---------
$ 31,905 $ 31,132
========= =========
During the years ending March 31, 2003, 2002, and 2001, building depreciation
expense was $1,166,000, $962,000, and $861,000, respectively. The furniture and
fixture depreciation expense during the years ending March 31, 2003, 2002, and
2001 was $2,580,000, $2,156,000, and $1,835,000, respectively.
67
The Bank leases various branch offices, office facilities and equipment under
noncancelable operating leases which expire on various dates through 2018.
Future minimum payments under noncancelable operating leases with initial or
remaining terms of one year or more for the years indicated are as follows at
March 31, 2003:
AMOUNT OF FUTURE
YEAR MINIMUM PAYMENTS
- ----------------------------------------------------------------------
(Dollars in thousands)
2004 $ 1,059
2005 994
2006 873
2007 719
2008 640
Thereafter 5,178
---------
Total $ 9,463
=========
68
NOTE 8 - DEPOSITS
Deposits are summarized as follows (in thousands):
MARCH 31,
--------------------------------------------------------
WEIGHTED WEIGHTED
2003 AVERAGE RATE 2002 AVERAGE RATE
--------------------------------------------------------
Negotiable order of withdrawal ("NOW") accounts:
Non-interest-bearing $ 260,551 0.00% $ 192,785 0.00%
Interest-bearing
Fixed rate 99,917 0.26% 93,371 0.76%
Variable rate 52,087 0.44% 47,158 1.26%
---------- -----------
412,555 0.12% 333,314 0.39%
Variable rate insured money market accounts 352,736 0.75% 404,695 1.37%
Passbook accounts 196,320 0.50% 168,178 1.04%
Certificates of deposit:
1.00% to 2.99% 529,798 2.35% 302,164 2.65%
3.00% to 4.99% 869,557 3.67% 761,862 4.16%
5.00% to 6.99% 201,276 5.31% 558,627 5.90%
7.00% to 8.99% 726 7.10% 9,272 7.26%
9.00% to 10.99% - - 43 9.41%
Ledger purchase accounting adjustment 3,119 4,956
---------- -----------
1,604,476 3.43% 1,636,924 3.99%
---------- -----------
2,566,087 2.31% 2,543,111 2.91%
Accrued interest on deposits 8,101 10,876
---------- -----------
$2,574,188 $ 2,553,987
========== ===========
A summary of annual maturities of certificates of deposit outstanding at March
31, 2003 follows (in thousands):
MATURES DURING YEAR ENDED MARCH 31, AMOUNT
- -------------------------------------------------------------------
2004 $ 1,061,621
2005 334,792
2006 64,251
2007 48,605
Thereafter 95,207
-----------
$ 1,604,476
===========
At March 31, 2003 and 2002, certificates of deposit with balances greater than
or equal to $100,000 amounted to $204,610,000 and $203,880,000, respectively.
69
NOTE 9 - BORROWINGS
Federal Home Loan Bank ("FHLB") other borrowings consist of the following
(dollars in thousands):
MARCH 31, 2003 MARCH 31, 2002
--------------------------------------------------
MATURES DURING WEIGHTED WEIGHTED
YEAR ENDED MARCH 31, AMOUNT RATE AMOUNT RATE
--------------------------------------------------------------------------
FHLB advances: 2003 $ - - $ 123,900 5.04%
2004 129,500 4.15% 129,500 4.15
2005 137,900 4.34 115,400 4.79
2006 91,850 4.26 62,500 4.97
2007 83,368 4.32 64,700 4.72
2008 44,650 3.75 6,500 5.05
2009 49,000 5.40 49,000 5.39
2010 - 0.00 - 0.00
2011 3,000 6.06 3,000 6.06
2012 15,000 4.90 15,000 4.90
Other loans payable various 41,548 2.78 52,090 3.62
----------- -----------
$ 595,816 4.24% $ 621,590 4.68%
=========== ==== =========== ====
The Bank selects loans that meet underwriting criteria established by the FHLB
as collateral for outstanding advances. FHLB advances are limited to 75% of
single-family loans and to 50% of multi-family loans meeting such criteria. In
addition, these notes are collateralized by FHLB stock of $81,868,000 at March
31, 2003. The FHLB borrowings are also collateralized by mortgage-related
securities of $154.9 million and by investment securities of $10.0 million at
March 31, 2003.
Included in other loans payable is a short-term line of credit to the
Corporation in the amount of $75.0 million. As of March 31, 2003, and 2002, the
Corporation had drawn a total of $37.3 million, and $42.7 million, respectively.
The interest is based on LIBOR (London InterBank Offering Rate), and is payable
monthly and each draw has a specified maturity. The final maturity of the line
of credit is in October 2003. The remaining balance of other loans payable
represent mortgage loans on real estate held for development with a carrying
value of $4.2 million and an undrawn portion of $1.3 million.
NOTE 10 - 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-
70
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, 2003, that the Bank
meets all capital adequacy requirements to which it is subject.
As of March 31, 2003, 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. 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.
The following table summarizes the Bank's capital ratios and the ratios required
by its federal regulators at March 31, 2003 and 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 March 31, 2003:
Tier 1 capital
(to adjusted tangible assets) $ 258,057 7.43% $ 104,234 3.00% $ 173,723 5.00%
Risk-based capital
(to risk-based assets) 283,004 10.63 213,027 8.00 266,283 10.00
Tangible capital
(to tangible assets) 258,057 7.43 52,117 1.50 N/A N/A
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
71
The following table reconciles stockholders' equity to federal regulatory
capital at March 31, 2003 and 2002 (dollars in thousands):
MARCH 31, MARCH 31,
----------------------------
2003 2002
----------- -----------
Stockholders' equity of the Corporation $ 293,004 $ 277,512
Less: Capitalization of the Corporation and non-bank
subsidiaries (8,496) (523)
----------- -----------
Stockholders' equity of the Bank 284,508 276,989
Less: Intangible assets and other non-includable assets (26,451) (26,301)
----------- -----------
Tier 1 and tangible capital 258,057 250,688
Plus: Allowable general valuation allowances 24,947 26,840
----------- -----------
Risk based capital $ 283,004 $ 277,528
=========== ===========
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.
SHAREHOLDERS' RIGHTS PLAN
On July 22, 1997, the Board of Directors of the Corporation 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 Corporation 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 American Stock Transfer Company, as Rights
Agent.
NOTE 11 - 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 100% of the amounts
contributed by each participating employee up to 2% of the employee's
compensation, 50% of the employee's contribution up to the next 2% of
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 $683,000, $781,000, and $887,000,
for the years ended March 31, 2003, 2002, and 2001, 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. Any discretionary contributions to the ESOP have been
allocated among participants on the basis of compensation. Forfeitures 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 fiscal years 2003 and 2002 was $977,700 and $450,000,
respectively. There was no ESOP plan expense for 2001.
72
The activity in the ESOP shares of both plans is as follows:
YEAR ENDED MARCH 31,
------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Balance at beginning of year 1,364,758 1,340,188 1,381,990
Additional shares purchased 258,815 45,000 32,198
Shares distributed for terminations (41,000) (14,930) (53,950)
Sale of shares for cash distributions (99,038) (5,500) (20,050)
---------- ---------- ----------
Balance at end of year 1,483,535 1,364,758 1,340,188
Allocated shares included above 1,483,535 1,364,758 1,340,188
---------- ---------- ----------
Unallocated shares - - -
========== ========== ==========
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 1,000,000
shares of common stock. Of these, 20,602 shares, 22,556 shares, and 6,200 shares
were granted during the years ended March 31, 2003, 2002, and 2001,
respectively, to employees in management positions. These grants had fair values
of $450,000, $320,000, and $94,000, for the respective years. 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 $120,000, $140,000, and $400,000 for the years ended March 31, 2003, 2002,
and 2001, respectively. Shares vested during the years ended March 31, 2003,
2002, and 2001 and distributed to the employees totaled 30,802, 47,056, and
11,650, respectively. The remaining unamortized cost of the MRPs is reflected as
a reduction of stockholders' equity.
The activity in the MRP shares is as follows:
YEAR ENDED MARCH 31,
------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Balance at beginning of year 420,230 439,072 443,148
Additional shares purchased 6,559 28,214 7,574
Shares vested (30,802) (47,056) (11,650)
--------- --------- ---------
Balance at end of year 395,987 420,230 439,072
Allocated shares included above 5,000 15,200 39,700
--------- --------- ---------
Unallocated shares 390,987 405,030 399,372
========= ========= =========
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 2003 and 2002 was $100,000 and
$23,000, respectively. There was no expense in fiscal 2001. The second plan
provides for contributions by the Corporation to supplement the participant's
retirement. The expense associated with this plan for fiscal 2003, 2002, and
2001 was $280,000, $420,000 and $431,000, respectively.
73
NOTE 12 - INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns.
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, 2003, retained earnings included approximately
$46,057,000 for which no provision for income tax has been made. Income taxes of
approximately $18,485,000 would be imposed if the Bank were to use these
reserves for any purpose other than to absorb bad debt losses.
The provision for income taxes consists of the following (in thousands):
YEAR ENDED MARCH 31,
2003 2002 2001
------------------------------------------
Current:
Federal $ 24,440 $ 16,632 $ 14,377
State 3,333 (233) 80
---------- ---------- ----------
27,773 16,399 14,457
Deferred:
Federal 2,274 3,061 177
State 88 1,019 48
---------- ---------- ----------
2,362 4,080 225
---------- ---------- ----------
Total IncomeTax Expense $ 30,135 $ 20,479 $ 14,682
========== ========== ==========
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
YEAR ENDED MARCH 31,
2003 2002 2001
------------------------------------------
Income before income taxes $ 79,698 $ 56,846 $ 41,659
========== ========== ==========
Income tax expense at federal statutory
rate of 35% $ 27,894 $ 19,896 $ 14,581
State income taxes, net of federal income
tax benefits 2,222 510 83
Increase in valuation allowance 56 63 163
Other (37) 10 (145)
---------- ---------- ----------
Income tax provision $ 30,135 $ 20,479 $ 14,682
========== ========== ==========
74
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.
The significant components of the Corporation's deferred tax assets
(liabilities) are as follows (in thousands):
AT MARCH 31,
2003 2002 2001
------------------------------------------
Deferred tax assets:
Allowances for loan losses $ 12,159 $ 12,556 $ 9,375
Other 7,621 7,685 4,207
---------- ---------- ----------
Total deferred tax assets 19,780 20,241 13,582
Valuation allowance (392) (336) (273)
---------- ---------- ----------
Adjusted deferred tax assets 19,388 19,905 13,309
Deferred tax liabilities:
FHLB stock dividends (4,220) (3,307) (1,773)
Excess servicing (4,156) (4,676) (3,120)
Other (4,017) (2,565) (869)
---------- ---------- ----------
Total deferred tax liabilities (12,393) (10,548) (5,762)
---------- ---------- ----------
Net deferred tax assets before effect of
unrealized gains on available for sale securities 6,995 9,357 7,547
---------- ---------- ----------
Tax effect of net unrealized gains/(losses)
on available for sale securities (2,475) (1,505) (1,302)
---------- ---------- ----------
Net deferred tax assets $ 4,520 $ 7,852 $ 6,245
========== ========== ==========
NOTE 13 - 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. Since many of the
commitments are expected to expire without being drawn upon, the total committed
amounts do not necessarily represent future cash requirements.
75
Financial instruments whose contract amounts represent credit risk are as
follows (in thousands):
MARCH 31,
--------------------------------
2003 2002
----------- ---------
Commitments to extend credit:
Fixed rate $ 180,964 $ 35,907
Adjustable rate 33,507 74,878
Unused lines of credit:
Home equity 81,725 68,756
Credit cards 36,262 34,807
Commercial 96,497 72,136
Letters of credit 28,968 24,968
Loans sold with recourse 368 518
Credit enhancement under the Federal
Home Loan Bank of Chicago Mortgage
Partnership Finance Program 8,906 7,118
Real estate investment segment borrowings 4,198 9,390
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 or funded by the Federal Home Loan Bank of Chicago
(FHLB), the total commitment amounts do not necessarily represent future 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 totaled $43,054,000
and $46,520,000 at March 31, 2003 and 2002, 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, 2003 and 2002 amounted to $251,458,000 and $90,223,000, respectively.
The Corporation participates in the FHLB Mortgage Partnership Finance Program
(the Program). In addition to entering into forward commitments to sell mortgage
loans to a secondary market agency, the Corporation enters into firm commitments
to deliver loans to the FHLB through the Program. Under the Program, loans are
funded by the FHLB and the Corporation receives an agency fee reported as a
component of gain on sale of loans. The Corporation had firm commitments
outstanding to deliver loans through the Program of $61.5 million at March 31,
2003. Once delivered to the Program, the Corporation provides a contractually
agreed-upon credit enhancement and performs servicing of the loans. Under the
credit enhancement, the Corporation is liable for losses on loans delivered to
the Program after application of any mortgage insurance and a contractually
agreed-upon credit enhancement provided by the Program subject to an agree-upon
maximum. The Corporation received a fee for this credit enhancement. The
Corporation does not anticipate that any credit losses will be incurred in
excess of anticipated credit enhancement fees.
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.
76
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.
In the ordinary course of business, there are legal proceedings against the
Corporation and its subsidiaries. Management considers that the aggregate
liabilities, if any, resulting from such actions would not have a material,
adverse effect on the financial position of the Corporation.
NOTE 14 - 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 Corporation, in estimating its fair value disclosures for financial
instruments, used the following methods and assumptions:
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.
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
77
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, 2003 and
2002.
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following (in thousands):
MARCH 31,
-----------------------------------------------------
2003 2002
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Financial assets:
Cash equivalents $ 141,427 $ 141,427 $ 261,676 $ 261,676
Investment securities 100,190 100,287 73,740 73,890
Mortgage-related securities 248,749 251,828 285,586 286,623
Loans held for sale 43,054 43,054 46,520 46,520
Loans receivable 2,770,988 2,857,902 2,627,248 2,739,858
Federal Home Loan Bank stock 81,868 81,868 53,316 53,316
Accrued interest receivable 17,866 17,866 19,918 19,918
Financial liabilities:
Deposits 2,574,188 2,467,554 2,553,987 2,312,541
Federal Home Loan Bank and other borrowings 595,816 594,419 621,590 631,329
Accrued interest payable--borrowings 2,148 2,148 2,512 2,512
78
NOTE 15 - CONDENSED PARENT ONLY FINANCIAL INFORMATION
The following represents the unconsolidated financial information of the
Corporation:
CONDENSED BALANCE SHEETS
MARCH 31,
---------------------
2003 2002
-------- --------
(In Thousands)
ASSETS
Cash and cash equivalents $ 1,046 $ 431
Investment in subsidiaries 286,743 279,846
Securities available for sale 5,548 5,235
Loans receivable from non-bank subsidiaries 34,147 32,670
Other 4,388 4,770
-------- --------
Total assets $331,872 $322,952
======== ========
LIABILITIES
Loans payable $ 37,350 $ 42,700
Other liabilities 1,518 2,740
-------- --------
Total liabilities 38,868 45,440
STOCKHOLDERS' EQUITY
Total stockholders' equity 293,004 277,512
-------- --------
Total liabilities and stockholders' equity $331,872 $322,952
======== ========
CONDENSED STATEMENTS OF INCOME
YEAR ENDED MARCH 31,
------------------------------------
2003 2002 2001
------------------------------------
(In Thousands)
Interest income $ 1,332 $ 1,787 $ 3,086
Interest expense 1,041 1,441 1,699
-------- -------- --------
Net interest income 291 346 1,387
Equity in net income from subsidiaries 49,850 36,830 26,601
Non-interest income (460) 310 (219)
-------- -------- --------
49,681 37,486 27,769
Non-interest expense 310 1,429 540
-------- -------- --------
Income before income taxes 49,371 36,057 27,229
Income taxes (192) (310) 252
-------- -------- --------
Net income $ 49,563 $ 36,367 $ 26,977
======== ======== ========
79
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
----------------------------------
2003 2002 2001
----------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 49,563 $ 36,367 $ 26,977
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in net income of subsidiaries (49,850) (36,830) (26,601)
Other (836) 3,705 (1,876)
-------- --------- --------
Net cash provided (used) by operating activities (1,123) 3,242 (1,500)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 250 - -
Proceeds from sales of investment securities available for sale 46 1,112 1,247
Purchase of investment securities available for sale (236) (400) (678)
Proceeds from sales of mortgage-related securities available for
sale - 3,969 -
Net increase in loans receivable from non-bank subsidiaries (1,477) (3,194) (5,093)
Dividends from Bank subsidiary 46,500 5,000 18,700
Cash paid to purchase Ledger Capital Corp - (3,318) -
Other - - (380)
-------- --------- --------
Net cash provided by investing activities 45,083 3,169 13,796
FINANCING ACTIVITIES
Increase (decrease) in loans payable (5,350) 12,600 14,700
Purchase of treasury stock (33,809) (16,816) (24,605)
Exercise of stock options 2,423 3,436 1,709
Purchase of stock by retirement plans 2,349 2,087 1,247
Cash dividend paid (8,958) (7,464) (6,867)
-------- --------- --------
Net cash used by financing activities (43,345) (6,157) (13,816)
Increase (decrease) in cash and cash equivalents 615 254 (1,520)
Cash and cash equivalents at beginning of year 431 177 1,697
-------- --------- --------
Cash and cash equivalents at end of year $ 1,046 $ 431 $ 177
======== ========= ========
NOTE 16 - SEGMENT INFORMATION
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. The Corporation combines 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.
80
REAL ESTATE INVESTMENTS: The Corporation's non-banking subsidiary, IDI, and its
subsidiaries, NIDI and CIDI, invest in real estate developments. Such
developments include recreational residential developments and industrial
developments (such as office parks).
The Real Estate Investment segment borrows funds from the Corporation to meet
its operating needs. Such intercompany borrowings are eliminated in
consolidation. The interest income and interest expense associated with such
borrowings are also eliminated in consolidation.
The following represents reconciliations of reportable segment revenues, profit
or loss, and assets to the Corporation's consolidated totals for the years ended
March 31, 2003, 2002, and 2001, respectively (in thousands).
YEAR ENDED MARCH 31, 2003
------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ------- ------------ ------------
Interest income $ 26 $ 209,605 $ (26) $ 209,605
Interest expense 294 92,856 (294) 92,856
-------- ---------- ---------- ----------
Net interest income (loss) (268) 116,749 268 116,749
Provision for loan losses - 1,800 - 1,800
-------- ---------- ---------- ----------
Net interest income (loss) after provision for loan
losses (268) 114,949 268 114,949
Other income 16,088 32,816 (16,151) 32,753
Other expense 15,883 68,004 (15,883) 68,004
-------- ---------- ---------- ----------
Income before income taxes (63) 79,761 - 79,698
Income tax expense (benefit) (380) 30,515 - 30,135
-------- ---------- ---------- ----------
Net income $ 317 $ 49,246 $ - $ 49,563
======== ========== ========== ==========
Total Assets $ 40,877 $3,497,744 $ - $3,538,621
81
YEAR ENDED MARCH 31, 2002
------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ---------- ------------ ------------
Interest income $ 185 $ 225,701 $ (185) $ 225,701
Interest expense 447 128,454 (447) 128,454
-------- ---------- ---------- ----------
Net interest income (loss) (262) 97,247 262 97,247
Provision for loan losses - 2,485 - 2,485
-------- ---------- ---------- ----------
Net interest income (loss) after provision for loan
losses (262) 94,762 262 94,762
Other income 20,599 21,282 (20,266) 21,615
Other expense 20,004 59,531 (20,004) 59,531
-------- ---------- ---------- ----------
Income before income taxes 333 56,513 - 56,846
Income tax expense (benefit) (642) 21,121 - 20,479
-------- ---------- ---------- ----------
Net income $ 975 $ 35,392 $ - $ 36,367
======== ========== ========== ==========
Total Assets $ 46,986 $3,460,090 $ - $3,507,076
YEAR ENDED MARCH 31, 2002
------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ---------- ------------ ------------
Interest income $ 351 $ 228,647 $ (351) $ 228,647
Interest expense 314 148,096 (314) 148,096
-------- ---------- ---------- ----------
Net interest income 37 80,551 (37) 80,551
Provision for loan losses - 945 - 945
-------- ---------- ---------- ----------
Net interest income after provision for loan losses 37 79,606 (37) 79,606
Other income 13,938 15,526 (15,961) 13,503
Other expense 15,998 51,450 (15,998) 51,450
-------- ---------- ---------- ----------
Income (loss) before income taxes (2,023) 43,682 - 41,659
Income tax expense (benefit) (1,625) 16,307 - 14,682
-------- ---------- ---------- ----------
Net income (loss) $ (398) $ 27,375 $ - $ 26,977
======== ========== ========== ==========
Total Assets $ 48,658 $3,078,816 $ - $3,127,474
82
NOTE 17 - EARNINGS PER SHARE
The computation of earnings per share for fiscal years 2003, 2002, and 2001 is
as follows:
TWELVE MONTHS ENDED MARCH 31,
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Numerator:
Net income $49,563,246 $36,366,934 $26,977,014
----------- ----------- -----------
Numerator for basic and diluted earnings per
share--income available to common stockholders $49,563,246 $36,366,934 $26,977,014
Denominator:
Denominator for basic earnings per
share--weighted-average common shares outstanding 24,003,163 22,852,144 22,646,701
Effect of dilutive securities:
Employee stock options 581,257 593,423 561,132
Management Recogintion Plans 8,012 17,300
Denominator for diluted earnings per
share--adjusted weighted-average common shares ----------- ----------- -----------
and assumed conversions 24,592,432 23,462,867 23,207,833
=========== =========== ===========
Basic earnings per share $ 2.06 $ 1.59 $ 1.19
=========== =========== ===========
Diluted earnings per share $ 2.02 $ 1.55 $ 1.16
=========== =========== ===========
83
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, 2003 and 2002, 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, 2003. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Anchor
BanCorp Wisconsin Inc. at March 31, 2003 and 2002, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 2003, in conformity with accounting standards generally accepted
in the United States.
/s/ Ernst & Young LLP
- ------------------------
Milwaukee, Wisconsin
May 9, 2003
84
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 appointment 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/ Holly Cremer Berkenstadt
- -------------------------------------
Holly Cremer Berkenstadt
Audit Committee
/s/ David L. Omachinski
- -------------------------------------
David L. Omachinski
Audit Committee
/s/ Donald D. Parker
- -------------------------------------
Donald D. Parker
Audit Committee
June 6, 2003
85
QUARTERLY FINANCIAL INFORMATION
MAR 31, DEC 31, SEP 30, JUN 30, MAR 31, DEC 31, SEP 30, JUN 30,
2003 2002 2002 2002 2002 2001 2001 2001
-----------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Interest income:
Loans $ 43,853 $ 45,504 $ 47,467 $ 48,024 $ 49,119 $ 50,205 $ 48,597 $ 48,950
Securities and other 5,483 6,983 5,867 6,424 6,864 6,943 7,249 7,774
-------- --------- --------- -------- -------- ---------- --------- --------
Total interest income 49,336 52,487 53,334 54,448 55,983 57,148 55,846 56,724
Interest expense:
Deposits 14,492 16,177 16,813 18,357 21,141 23,125 23,997 24,900
Borrowings and other 6,148 6,611 6,949 7,309 7,459 8,236 8,995 10,601
-------- --------- --------- -------- -------- ---------- --------- --------
Total interest expense 20,640 22,788 23,762 25,666 28,600 31,361 32,992 35,501
-------- --------- --------- -------- -------- ---------- --------- --------
Net interest income 28,696 29,699 29,572 28,782 27,383 25,787 22,854 21,223
Provision for loan losses 450 450 450 450 1,575 150 550 210
-------- --------- --------- -------- -------- ---------- --------- --------
Net interest income after
provision for loan losses 28,246 29,249 29,122 28,332 25,808 25,637 22,304 21,013
Service charges on deposits 1,816 1,867 1,868 1,698 1,597 1,706 1,604 1,559
Gain on sale of loans 6,346 7,605 4,928 1,841 3,199 2,347 1,624 1,691
Net gain on sale of investments
and mortgage-related securities 837 206 666 89 64 (5) 201 553
Other non-interest income 2,365 (723) (455) 1,799 2,197 384 1,678 1,216
-------- --------- --------- -------- -------- ---------- --------- --------
Total non-interest income 11,364 8,955 7,007 5,427 7,057 4,432 5,107 5,019
Compensation 10,138 9,210 8,883 9,208 8,346 8,407 8,138 7,663
Other non-interest expense 8,002 7,327 7,847 7,389 7,304 7,385 6,255 6,033
-------- --------- --------- -------- -------- ---------- --------- --------
Total non-interest expense 18,140 16,537 16,730 16,597 15,650 15,792 14,393 13,696
-------- --------- --------- -------- -------- ---------- --------- --------
Income before income taxes 21,470 21,667 19,399 17,162 17,215 14,277 13,018 12,336
Income taxes 8,203 8,260 7,285 6,387 5,812 5,463 4,779 4,425
-------- --------- --------- -------- -------- ---------- --------- --------
Net income $ 13,267 $ 13,407 $ 12,114 $ 10,775 $ 11,403 $ 8,814 $ 8,239 $ 7,911
======== ========= ========= ======== ======== ========== ========= ========
Earnings Per Share:
Basic $ 0.56 $ 0.56 $ 0.50 $ 0.43 $ 0.47 $ 0.38 $ 0.38 $ 0.36
Diluted 0.55 0.55 0.49 0.42 0.46 0.37 0.37 0.35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
86
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 9 to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 22, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated
herein by reference to pages 14 to 24 to the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on July 22, 2003.
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 10 to 13 to
the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on July 22, 2003.
The information relating to the Equity Compensation Plan table is
incorporated herein by reference to pages 16 to 17 to the Registrant's Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to page 25 to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on July 22,
2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. In response
to the adoption of Sarbanes-Oxley Act of 2002, the
Corporation's and the certifying officers of this report have
implemented disclosure controls and procedures to ensure that
material information relating to the Corporation is made known
to the signing officers, and consequently reflected in
periodic SEC reports. These controls and procedures were built
upon the Corporation's pre-existing practices. The Corporation
and those officers have evaluated for this report the
effectiveness of those disclosures, controls and procedures
within 90 days prior to its filing. The Corporation and the
certifying officers believe that these disclosure controls and
procedures are effective, based upon this evaluation.
(b) CHANGES IN INTERNAL CONTROLS. During the period covered by
this report, there were not any significant change in the
Corporation's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with
respect to material weaknesses and significant deficiencies.
PART IV
ITEM 15. 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
May 9, 2003 are incorporated herein by reference to Item 8 of this Annual Report
on Form 10-K:
87
Consolidated Balance Sheets at March 31, 2003 and 2002.
Consolidated Statements of Income for each year in the three-year
period ended March 31, 2003.
Consolidated Statements of Stockholders' Equity for each year in the
three-year period ended March 31, 2003.
Consolidated Statements of Cash Flows for each year in the three-year
period ended March 31, 2003.
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
The following exhibits are either filed as part of this Annual 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. as amended to date including Articles of
Amendment with respect to series A Preferred Stock
(incorporated by reference to Exhibit 3.1 from
Registrant's Form 10-K for the year ended March 31,
2001).
3.2 Bylaws of Anchor BanCorp Wisconsin Inc. (incorporated
by reference to Exhibit 3.2 of Registrant's Form S-1,
Registration Statement, filed on March 19, 1992, as
amended, Registration No. 33-46536 ("Form S-1")).
EXHIBIT NO. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS:
4 Form of Common Stock Certificate (incorporated 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 by reference to Exhibit 10.1 of
Registrant's Form S-1).
10.2 Anchor BanCorp Wisconsin Inc. 1992 Stock Incentive
Plan (incorporated 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 by reference to Exhibit
10.3 of Registrant's Form S-1).
10.4 Anchor BanCorp Wisconsin Inc. Amended and Restated
Management Recognition Plan (incorporated by
reference to the Registrant's proxy statement filed
on June 29, 2001).
88
10.5 Anchor BanCorp Wisconsin Inc. Employee Stock
Ownership Plan (incorporated 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 Annual Report or 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 Annual Report or 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 Annual Report or
Form 10-K for the year ended March 31, 1995).
10.11 Employment Agreement among the Corporation, the Bank
and Michael W. Helser (incorporated by reference to
Exhibit 10.11 of Registrant's Annual Report or 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 Annual Report or 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 Annual Report or 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 Annual Report or 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 Annual Report or 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 Annual
Report or Form 10-K for the year ended March 31,
1994).
89
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 current Report on Form 8-K filed on July
28, 1997).
10.20 2001 Stock Option Plan for Non-Employee Directors
(incorporated herein by reference to the Registrant's
proxy statement filed on June 29, 2001).
The Corporation's management contracts or compensatory plans or arrangements
consist of Exhibits 10.1-10.20 above.
EXHIBIT NO. 11. COMPUTATION OF EARNINGS PER SHARE:
Refer to Note 17 of the Notes to Consolidated Financial
Statements in Item 8.
EXHIBIT NO. 21. SUBSIDIARIES OF THE REGISTRANT:
Subsidiary information is incorporated 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.
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
99.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
(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
90
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: June 6, 2003
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: June 6, 2003 Date: June 6, 2003
91
By: /s/ Donald D. Kropidlowski By: /s/ Greg M. Larson
----------------------------------- ----------------------------------
Donald D. Kropidlowski Greg M. Larson
Director Director
Date: June 6, 2003 Date: June 6, 2003
By: /s/ Richard A. Bergstrom By: /s/ Pat Richter
----------------------------------- ----------------------------------
Richard A. Bergstrom Pat Richter
Director Director
Date: June 6, 2003 Date: June 6, 2003
By: /s/ Bruce A. Robertson By: /s/ Holly Cremer Berkenstadt
----------------------------------- ----------------------------------
Bruce A. Robertson Holly Cremer Berkenstadt
Director Director
Date: June 6, 2003 Date:June 6, 2003
By: /s/ James D. Smessaert By: /s/ David L. Omachinski
----------------------------------- ----------------------------------
James D. Smessaert David L. Omachinski
Director Director
Date: June 6, 2003 Date: June 6, 2003
By: /s/ Donald D. Parker By: /s/ Mark D. Timmerman
----------------------------------- ----------------------------------
Donald D. Parker Mark D. Timmerman
Director Director
Date: June 6, 2003 Date: June 6, 2003
92
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 annual report on Form 10-K 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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
annual 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: June 6, 2003 /s/ Douglas J. Timmerman
------------------------------------------------------
Douglas J. Timmerman
Chairman, President and Chief Executive Officer
93
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 annual report on Form 10-K of Anchor Bancorp
Wisconsin, Inc. (the "Registrant");
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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
annual 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: June 6, 2003 /s/ Michael W. Helser
--------------------------------------------
Michael W. Helser
Chief Financial Officer and Treasurer
94