SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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 of (IRS Employer Identification No.)
incorporation or organization)
25 West Main Street
Madison, Wisconsin 53703
---------------------- ---------
(Address of principal executive office) (Zip Code)
(608) 252-8700
------------------
Registrant's telephone number, including area code
Not Applicable
------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common stock -- $.10 Par Value
Number of shares outstanding as of January 31, 2004: 22,932,923
ANCHOR BANCORP WISCONSIN INC.
INDEX - FORM 10-Q
PAGE #
------
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 2003
and March 31, 2003 2
Consolidated Statements of Income for the Three and Nine
Months Ended December 31, 2003 and 2002 3
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 2003 and 2002 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations 15
Financial Condition 20
Asset Quality 21
Liquidity & Capital Resources 24
Asset/Liability Management 26
Segment Reporting 27
Item 3 Quantitative and Qualitative Disclosures About Market Risk 30
Item 4 Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 30
Item 2 Changes in Securities and Use of Proceeds 30
Item 3 Defaults upon Senior Securities 30
Item 4 Submission of Matters to a Vote of Security Holders 30
Item 5 Other Information 30
Item 6 Exhibits and Reports on Form 8-K 31
SIGNATURES 32
1
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31, MARCH 31,
2003 2003
---------------------------
(In Thousands, Except Share Data)
ASSETS
Cash $ 75,629 $ 69,178
Interest-bearing deposits 62,389 72,249
------------ ------------
Cash and cash equivalents 138,018 141,427
Investment securities available for sale 65,242 97,192
Investment securities held to maturity (fair value of $1,011 and
$3,095, respectively) 1,000 2,998
Mortgage-related securities available for sale 151,002 185,751
Mortgage-related securities held to maturity (fair value of $ 26,941
and $66,077, respectively) 25,574 62,998
Loans receivable, net:
Held for sale 14,448 43,054
Held for investment 3,019,819 2,770,988
Foreclosed properties and repossessed assets, net 773 1,535
Real estate held for development and sale 59,993 44,994
Office properties and equipment 32,149 31,905
Federal Home Loan Bank stock--at cost 85,923 81,868
Accrued interest on investments and loans and other assets 51,647 53,955
Goodwill 19,956 19,956
------------ ------------
Total assets $ 3,665,544 $ 3,538,621
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 2,552,279 $ 2,574,188
Federal Home Loan Bank and other borrowings 750,729 595,816
Advance payments by borrowers for taxes and insurance 988 6,579
Other liabilities 62,908 69,034
------------ ------------
Total liabilities 3,366,904 3,245,617
------------ ------------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding - -
Common stock, $.10 par value, 100,000,000 shares authorized,
25,363,339 shares issued, 22,910,440 and 23,942,858 shares outstanding,
respectively 2,536 2,536
Additional paid-in capital 74,067 64,271
Retained earnings 275,215 251,729
Accumulated other comprehensive income 3,293 4,177
Treasury stock (2,452,899 shares and 1,420,481 shares, respectively), at cost (51,405) (28,917)
Unearned deferred compensation (392) (792)
Minority interest in real estate partnerships (4,674) -
------------ ------------
Total stockholders' equity 298,640 293,004
------------ ------------
Total liabilities and stockholders' equity $ 3,665,544 $ 3,538,621
============ ============
See accompanying Notes to Unaudited Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Loans $ 42,905 $ 45,504 $ 130,588 $ 140,995
Mortgage-related securities 2,136 4,918 7,217 13,059
Investment securities 1,979 1,546 5,697 4,684
Interest-bearing deposits 221 519 667 1,531
---------- ---------- ---------- ----------
Total interest income 47,241 52,487 144,169 160,269
INTEREST EXPENSE:
Deposits 13,160 16,177 41,464 51,348
Notes payable and other borrowings 6,534 6,484 19,019 20,522
Other 57 127 154 346
---------- ---------- ---------- ----------
Total interest expense 19,751 22,788 60,637 72,216
---------- ---------- ---------- ----------
Net interest income 27,490 29,699 83,532 88,053
Provision for loan losses 450 450 1,350 1,350
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 27,040 29,249 82,182 86,703
NON-INTEREST INCOME:
Real estate investment partnership home sales 11,856 - 31,565 -
Loan servicing income (loss) 763 (3,378) (2,094) (3,466)
Service charges on deposits 2,046 1,867 6,171 5,433
Insurance commissions 664 337 1,832 1,457
Net gain on sale of loans 1,683 7,605 12,943 14,374
Net gain (loss) on sale of investments and mortgage-related securities (40) 206 300 960
Other revenue (expense) from real estate operations (682) (232) 1,852 (584)
Other 966 2,550 3,961 3,216
---------- ---------- ---------- ----------
Total non-interest income 17,256 8,955 56,530 21,390
3
CONSOLIDATED STATEMENTS OF INCOME (CON'T.)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------
NON-INTEREST EXPENSE:
Compensation $ 9,995 $ 9,210 $ 29,659 $ 27,301
Real estate investment partnership cost of home sales 7,787 - 23,445 -
Occupancy 1,533 1,460 4,800 4,257
Furniture and equipment 1,468 1,407 4,267 3,842
Data processing 1,202 1,339 3,501 3,899
Marketing 790 715 2,372 2,137
Other expenses from real estate partnership operations 1,053 - 1,882 -
Minority interest in income of real estate partnership operations 1,478 - 3,301 -
Other 2,913 2,406 8,306 8,428
---------- ---------- ---------- ----------
Total non-interest expense 28,219 16,537 81,533 49,864
---------- ---------- ---------- ----------
Income before income taxes 16,077 21,667 57,179 58,229
Income taxes 6,139 8,260 21,948 21,933
---------- ---------- ---------- ----------
Net income $ 9,938 $ 13,407 $ 35,231 $ 36,296
========== ========== ========== ==========
Earnings per share:
Basic $ 0.44 $ 0.56 $ 1.53 $ 1.50
Diluted 0.43 0.55 1.50 1.47
Dividends declared per share 0.11 0.09 0.32 0.26
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2003 2002
------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 35,231 $ 36,296
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 1,350 1,350
Provision for depreciation and amortization 2,849 3,442
Net gain on sales of loans (12,943) (14,374)
Net (gain) loss on sale of investments and mortgage-realated securities 300 (960)
Amortization of stock benefit plans 62 28
Tax benefit from stock related compensation 1,451 1,164
Net increase due to origination and sale of loans held for sale 28,606 14,154
Decrease in accrued interest receivable 805 1,522
Decrease in accrued interest payable (891) (3,043)
Increase (decrease) in accounts payable (6,126) 34,735
Other 38,136 12,214
------------ ------------
Net cash provided by operating activities 88,830 86,528
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 15,653 12,668
Proceeds from maturities of investment securities 390,862 320,701
Purchase of investment securities available for sale (370,794) (332,578)
Proceeds from sale of mortgage-related securities available for sale 5,069 32,392
Purchase of mortgage-related securities available for sale (81,369) (58,236)
Principal collected on mortgage-related securities 148,284 130,284
Loans originated for investment (1,498,418) (388,504)
Principal repayments on loans 1,216,951 175,673
Net additions of office properties and equipment (2,685) (2,556)
Net (increase) decrease in investment in real estate held
for development and sale (15,213) 1,785
------------ ------------
Net cash used by investing activities (191,660) (108,371)
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Unaudited)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2003 2002
------------------------------
(IN THOUSANDS)
FINANCING ACTIVITIES
Increase (decrease) in deposit accounts $ (21,909) $ 21,267
Decrease in advance payments by borrowers
for taxes and insurance (5,591) (6,935)
Proceeds from notes payable to Federal Home Loan Bank 526,050 95,168
Repayment of notes payable to Federal Home Loan Bank (395,700) (134,400)
Increase (decrease) in other loans payable 24,563 (13,552)
Treasury stock purchased (25,890) (19,618)
Exercise of stock options 843 1,794
Purchase of stock by retirement plans 990 837
Payments of cash dividends to stockholders (7,506) (6,513)
Consolidation of real estate investment partnerships per FIN 46 3,571 -
------------ ------------
Net cash provided (used) by financing activities 99,421 (61,952)
------------ ------------
Net decrease in cash and cash equivalents (3,409) (83,795)
Cash and cash equivalents at beginning of period 141,427 261,676
------------ ------------
Cash and cash equivalents at end of period $ 138,018 $ 177,881
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 61,528 $ 73,738
Income taxes 26,051 15,460
Non-cash transactions:
Securitization of mortgage loans held for sale to mortgage-backed
securities - 124,115
See accompanying Notes to Unaudited Consolidated Financial Statements
6
ANCHOR BANCORP WISCONSIN INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts and results
of operations of Anchor BanCorp Wisconsin Inc. (the "Corporation") and its
wholly-owned subsidiaries, AnchorBank fsb (the "Bank"), and Investment
Directions, Inc. ("IDI"). The Bank's accounts and results of operations include
its wholly-owned subsidiaries, Anchor Investment Services, Inc. ("AIS"), ADPC
Corporation ("ADPC") and Anchor Investment Corporation ("AIC"). All significant
intercompany balances and transactions have been eliminated. Investments in 50%
owned partnerships are treated as variable interest entities and are
consolidated into the Corporation's balance sheet and income statement. See New
Accounting Standards for a discussion of Financial Accounting Standards Board
Interpretation No. 46 which defines variable interest entities and their
treatment in the Corporation's financial statements.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the consolidated financial statements have been
included.
In preparing the unaudited consolidated financial statements in conformity with
GAAP, management is required to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. The results of
operations and other data for the nine-month period ended December 31, 2003 are
not necessarily indicative of results that may be expected for any other interim
period or the entire fiscal year ending March 31, 2004. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included in the Corporation's Annual Report for the year ended March 31, 2003.
Unrealized gains or losses on the Corporation's available-for-sale securities
are included in other comprehensive income. During the quarter ended December
31, 2003 and 2002, total comprehensive income amounted to $10.3 million and
$16.4 million, respectively. For the nine months ended December 31, 2003 and
2002, comprehensive income was $34.3 million and $39.9 million, respectively.
NEW ACCOUNTING STANDARDS In November 2002, the FASB issued Financial
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45").
FIN 45 significantly changes current practice in the accounting for, and
disclosure of, guarantees. FIN 45 requires certain guarantees to be recorded at
fair value as a liability at inception and when a loss is probable and
reasonably estimatable, as those terms are defined in FASB Statement No. 5
"Accounting for Contingencies." The recording of the liability will not
significantly affect the Corporation's financial condition. FIN 45 also requires
a guarantor to make significant new disclosures (see below) even when the
likelihood of making any payments under the guarantee is remote.
7
The Corporation's real estate investment subsidiary guarantees some loans for
some of the development partnerships that it invests in to complete developed
homes for sale. As of December 31, 2003 the Corporation's real estate investment
subsidiary, IDI, has guaranteed $64.5 million for the following partnerships on
behalf of the respective subsidiaries listed below.
AMOUNT AMOUNT
SUBSIDIARY PARTNERSHIP AMOUNT OUTSTANDING OUTSTANDING
OF IDI ENTITY GUARANTEED AT 12/31/03 AT 3/31/03
- ---------- ------------------------ ---------- ----------- -----------
(Dollars in thousands)
Oakmont Chandler Creek $ 7,340 $ 7,340 $ 7,340
Davsha Century 2,359 - 1,013
Davsha II Paragon 5,100 912 2,000
Davsha III Indian Palms 147, LLC 8,500 3,994 2,700
Davsha IV DH Indian Palms, LLC 20,065 2,735 1,700
Davsha V Villa Santa Rosa, LLC 12,500 4,522 3,300
Davsha VI Bellasara 168, LLC 4,090 3,028 2,600
Davsha VII La Vista Grande 121, LLC 4,500 - -
---------- ----------- ----------
Total $ 64,454 $ 22,531 $ 20,653
---------- ----------- ----------
IDI has real estate partnership investments within its subsidiaries for which it
guarantees the above loans. These partnerships are also funded by financing with
loans guaranteed by IDI and secured by the lots and homes being developed within
each of the respective partnership entities.
As a limited partner, the Corporation still has the ability to exercise
significant influence over operating and financial policies. This influence is
evident in the terms of the respective partnership agreements and participation
in policy-making processes. The Corporation has a 50% controlling interest in
the respective limited partnerships and therefore has significant influence over
the right to approve the sale or refinancing of assets of the respective
partnerships in accordance with those partnership agreements.
In acting as a partner with a controlling interest, the Corporation is committed
to providing additional levels of funding to meet partnership operating deficits
up to an aggregate amount of $64.5 million. At December 31, 2003, the
Corporation's aggregate net investment in these partnerships totaled $45.5
million consisting of assets of $72.3 million less other liabilities of $12.3
million (reported as real estate held for development and sale) and borrowings
of $14.5 million (reported as a part of FHLB and other borrowings). These
amounts represent the Corporation's maximum exposure to loss at December 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.
8
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. The provisions of this statement are effective
immediately for variable interests in variable interest entities ("VIE") created
after January 31, 2003. The corporation adopted FIN 46 for the quarter ended
December 31, 2003.
As a result of the consolidation of the IDI partnerships into the Corporation's
financial statements as required by FIN 46, real estate investment assets
increased by $21.0 million (largely due to the consolidation of construction in
progress and other assets of $33.3 million less other liabilities of $12.3
million at the partnership level). Liabilities increased by $14.5 million due to
the consolidation of notes payable at the partnership level. The increases in
assets and liabilities were accompanied by the consolidation of partnership
capital of $11.1 million which was offset by minority interest in investment by
real estate partnerships of $4.7 million on the statement of financial
condition. The effects of the consolidation on the Corporation's statement of
operations for the quarter ended December 31, 2003 are the addition of real
estate investment ("REI") home sales of $11.9 million, REI cost of homes sales
of $7.8 million, other expenses from REI operations of $1.1 million, and
minority interest in income of REI partnerships of $1.5 million all offset by a
reduction of other revenue from real estate operations of $1.5 million. Since
the addition of these revenues and expenses is merely a reclassification of
income and expense accounts, there was no income effect on the results of
operations for the Corporation. For all VIE's formed after February 1, 2003, the
statements of condition and results of operations must reflect prior period
assets, liabilities, income and expense. Since none of the Corporation's VIE's
were formed after February 1, 2003, no restatement of prior periods is required.
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.
9
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:
NINE MONTHS ENDED
DECEMBER 31,
-------------------------------------
2003 2002
-------------------------------------
(In Thousands, Except Per Share Data)
Net Income
As reported $ 35,231 $ 36,296
Pro forma 34,945 36,148
Earnings per share-Basic
As reported $ 1.53 $ 1.50
Pro forma 1.52 1.49
Earnings per share-Diluted
As reported $ 1.50 $ 1.47
Pro forma 1.49 1.46
The pro forma amounts indicated above may not be representative of the effects
on reported net income for future years. The fair values of stock options
granted in the nine months ended December 31, 2003 and December 31, 2002 were
estimated on the date of grant using the Black-Scholes option-pricing model.
On November 25, 2003, the FASB reached consensus on a new disclosure requirement
related to unrealized losses on investment securities which is required for all
fiscal years ending after December 15, 2003. As a result, entities covered by
FAS 115, such as the Corporation, will be required to disclose in its annual
report, securities which have unrealized losses in an other-than-temporarily
impaired position as of the reporting date. The disclosure must distinguish
between those securities which have been in a continuous unrealized loss
position for twelve months or more and are not other-than-temporarily impaired
and those securities which have been in a continuous unrealized loss position
for less than twelve months and are not other-than-temporarily impaired. The
Corporation will adopt this new requirement for the fiscal year ended March 31,
2004.
Certain 2002 accounts have been reclassified to conform to the 2003
presentations.
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Corporation's carrying value of goodwill was $20.0 million at December 31,
2003 and at March 31, 2003. Information regarding the Company's other intangible
assets follows:
DECEMBER 31, 2003 MARCH 31, 2003
------------------------------------ -------------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------------------------------ -------------------------------------
(In Thousands)
Other intangible assets:
Core deposit premium $ 3,124 $ 1,732 $ 1,392 $ 3,124 $ 1,093 $ 2,031
Mortgage servicing rights 19,979 7,955 12,024 23,283 11,564 11,719
---------- ---------- ---------- ---------- ---------- ----------
Total $ 23,103 $ 9,687 $ 13,416 $ 26,407 $ 12,657 $ 13,750
---------- ---------- ---------- ---------- ---------- ----------
10
The projections of amortization expense for mortgage servicing rights set forth
below are based on asset balances and the interest rate environment as of
December 31, 2003. Future amortization expense may be significantly different
depending upon changes in the mortgage servicing portfolio, mortgage interest
rates and market conditions.
The following table shows the current period and estimated future amortization
expense for amortized intangible assets:
MORTGAGE CORE
SERVICING DEPOSIT
RIGHTS PREMIUM TOTAL
------------- ------------ ------------
(In Thousands)
Quarter ended December 31, 2003 (actual) $ 7,955 $ 1,732 $ 9,687
Estimate for the year ended March 31,
2004 6,268 639 6,907
2005 2,930 639 3,569
2006 1,465 114 1,579
2007 1,361 - 1,361
------------- ------------ ------------
$ 12,024 $ 1,392 $ 13,416
------------- ------------ ------------
NOTE 4 - STOCKHOLDERS' EQUITY
During the quarter ended December 31, 2003, options for 7,650 shares of common
stock were exercised at a weighted-average price of $10.80 per share. Treasury
shares were issued in exchange for the options using the last-in-first-out
method. The cost of the treasury shares issued in excess of the option price
paid of $103,000 was charged to retained earnings. During the quarter ended
December 31, 2003, the Corporation repurchased 239,350 shares of common stock
and reissued 4,144 shares of treasury stock to the Corporation's retirement
plans. The weighted-average cost of these shares was $24.52 per share or
$102,000 in the aggregate. The $2,000 excess of the market price over the cost
of the treasury shares was charged to retained earnings. On November 14, 2003,
the Corporation paid a cash dividend of $0.11 per share, amounting to $2.5
million.
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share for the three and nine months ended December 31, 2003
and 2002 have been determined by dividing net income for the respective periods
by the weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding plus common stock equivalents. Common stock
equivalents are computed using the treasury stock method.
11
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
Numerator:
Net income $ 9,938,385 $ 13,407,600
------------ ------------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $ 9,938,385 $ 13,407,600
Denominator:
Denominator for basic earnings per
share--weighted-average shares 22,691,232 23,860,751
Effect of dilutive securities:
Employee stock options 481,018 532,354
Management Recognition Plans 14,720 4,514
Denominator for diluted earnings per
share--adjusted weighted-average ------------ ------------
shares and assumed conversions 23,186,970 24,397,619
============ ============
Basic earnings per share $ 0.44 $ 0.56
============ ============
Diluted earnings per share $ 0.43 $ 0.55
============ ============
NINE MONTHS ENDED DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
Numerator:
Net income $ 35,231,068 $ 36,296,486
------------ ------------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $ 35,231,068 $ 36,296,486
Denominator:
Denominator for basic earnings per
share--weighted-average shares 22,989,181 24,150,500
Effect of dilutive securities:
Employee stock options 504,021 597,962
Management Recognition Plans 14,683 9,135
Denominator for diluted earnings per
share--adjusted weighted-average ------------ ------------
shares and assumed conversions 23,507,885 24,757,597
============ ============
Basic earnings per share $ 1.53 $ 1.50
============ ============
Diluted earnings per share $ 1.50 $ 1.47
============ ============
12
NOTE 6 - SUBSEQUENT EVENTS
On January 20, 2004, the Corporation declared an $0.11 per share cash dividend
on its common stock to be paid on February 15, 2004 to stockholders of record on
January 30, 2004.
NOTE 7 - CONTINGENCIES
The Bank's income and franchise tax liability to the State of Wisconsin may be
affected by recent developments. Like many financial institutions located in
Wisconsin, the Bank transferred investment securities to its subsidiary in the
state of Nevada, AIC, which now holds and manages those assets. AIC, whose
operations are solely in Nevada, has not filed returns with, or paid income or
franchise taxes to, the State of Wisconsin. The State of Wisconsin Department of
Revenue Franchise Tax Division ("Department") has recently implemented a program
for the audit of Wisconsin financial institutions who have formed investment
subsidiaries located in Nevada. The Department has generally indicated that it
may try to assess income or franchise taxes on the income of the Nevada
investment subsidiaries of Wisconsin banks. The Bank is currently undergoing
such an audit. Given that the audit is at a preliminary stage, we cannot
determine whether the outcome will be material to the Bank.
13
ANCHOR BANCORP WISCONSIN INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
describe future plans or strategies and include the Corporation's expectations
of future financial results. The Corporation's ability to predict results or the
effect of future plans or strategies is inherently uncertain and the Corporation
can give no assurance that those results or expectations will be attained.
Factors that could affect actual results include but are not limited to i)
general market rates, ii) changes in market interest rates and the shape of the
yield curve, iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve Board, vii) changes in the quality or
composition of the Corporation's loan and investment portfolios, viii) demand
for loan products, ix) the level of loan and MBS repayments, x) deposit flows,
xi) competition, xii) demand for financial services in the Corporation's
markets, and xiii) changes in accounting principles, policies or guidelines. In
addition, acquisitions may result in large one-time charges to income, may not
produce revenue enhancements or cost savings at levels or within time frames
originally anticipated and may result in unforeseen integration difficulties.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
The Corporation does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
SIGNIFICANT ACCOUNTING POLICIES
There are a number of accounting policies that require the use
of judgment. Some of the more significant policies are as follows:
- - Establishing the amount of the allowance for loan losses requires the
use of judgment as well as other systematic objective and quantitative
methods. Assets are evaluated at least quarterly and risk components
reviewed as a part of that evaluation. See Notes to Consolidated
Financial Statements - Summary of Significant Accounting Policies
"Allowances for Loan Losses" in the Corporation's Annual Report for the
year ended March 31, 2003, 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 is allocated
to mortgage servicing rights when a loan is sold. The fair value of
mortgage servicing rights is the present value of estimated future net
cash flows from the servicing relationship using current market
assumptions for prepayments, servicing costs and other factors. As the
loans are repaid and net servicing revenue is earned, mortgage
servicing rights are amortized into expense. Net servicing revenues are
expected to exceed this amortization expense. However, if actual
prepayment experience exceeds what was originally anticipated, net
servicing revenues may be less than expected and mortgage servicing
rights may be impaired.
- - Judgment is also used in the valuation of other intangible assets (core
deposit intangibles). Core deposit intangibles have been recorded for
core deposits (defined as checking, money market and savings deposits)
that have been acquired in acquisitions that were accounted for as
purchase business combinations. The core deposit intangible assets have
been recorded using the assumption that they provide a more favorable
source of funding than more expensive wholesale borrowings. An
intangible asset has been recorded for the present value of the
difference between the expected interest to be incurred on these
deposits and interest expense that would be expected if these deposits
were replaced by wholesale borrowings, over the expected lives of the
core deposits.
14
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 the fair value of net assets acquired.
The price paid for the acquisition is analyzed and compared to a number
of current indices. If goodwill is determined to be impaired, it would
be expensed in the period in which it became impaired.
Set forth below is management's discussion and analysis of the Corporation's
financial condition and results of operations for the three and nine months
ended December 31, 2003, which includes information on the Corporation's
asset/liability management strategies, sources of liquidity and capital
resources. This discussion should be read in conjunction with the consolidated
financial statements and supplemental data contained elsewhere in this report.
RESULTS OF OPERATIONS
General. Net income for the three and nine months ended December 31, 2003
decreased $3.5 million to $9.9 million from $13.4 million and decreased $1.1
million to $35.2 million from $36.3 million, respectively, for the same periods
in the prior year. The decrease in net income for the three-month period
compared to the same period last year was largely due to a decrease of $2.0
million in non-interest income, exclusive of the non-interest income effects of
FIN 46, for the three-month period as compared to the same period in the prior
year. This decrease in non-interest income was primarily due to a $5.9 million
decrease in net gain on sale of loans and was partially offset by an increase in
loan servicing income of $4.1 million for the three-month period as compared to
the same period in the prior year, primarily due to interest rate environment
changes. In addition, there was a decrease in interest income of $5.2 million
and an increase in non-interest expense, exclusive of the non-interest expense
effect of FIN 46, of $1.4 million for the three-month period as compared to the
same period in the prior year. The decrease in interest income was partially
offset by a decrease in interest expense of $3.0 million and a decrease in
income tax expense of $2.1 million for the three months ended December 31, 2003.
The decrease in net income of $1.1 million for the nine-month period ended
December 31, 2003 compared to the same period last year was largely due to the
decrease in interest income of $16.1 million, primarily due to interest rate
environment changes, and an increase in non-interest expense of $3.0 million,
exclusive of the non-interest expense effects of FIN 46. The decrease in
interest income was partially offset by a decrease in interest expense of $11.6
million, primarily due to a decrease in the weighted average rate paid on
interest-bearing liabilities, and an increase of $6.5 million in non-interest
income, exclusive of the non-interest effects of FIN 46, for the same period as
compared to the prior year. This increase of $6.5 million in non-interest income
was largely due to an increase of $5.4 million in revenue from real estate
operations, exclusive of the non-interest income and expense effects of FIN 46,
for the nine-month period ending December 31, 2003 as compared to the same
period in the prior year. Income tax expense remained relatively constant for
the nine-month period ended December 31, 2003 as compared to the same period in
the prior year. The provision for loan losses remained constant during the three
and nine months ended December 31, 2003, as compared to the same periods in the
prior year.
Net Interest Income. Net interest income decreased $2.2 million and $4.5 million
for the three and nine months ended December 31, 2003, as compared to the same
periods in the prior year. The net interest margin decreased to 3.19% from 3.58%
for the respective three-month periods and decreased to 3.24% from 3.60% for the
respective nine-month periods. The interest rate spread decreased to 3.10% from
3.48% and decreased to 3.12% from 3.49%, respectively, for the same periods.
Interest income on loans decreased $2.6 million and $10.4 million, respectively,
for the three- and nine-month periods due primarily to the decrease of 104 basis
points in the average yield on loans to 5.82% from 6.86% for the respective
three-month period and a decrease of 118 basis points to 5.92% from 7.10% for
the respective nine-month period. Interest income on mortgage-related securities
decreased $2.8 million and $5.8 million, respectively, for the three- and nine-
month periods primarily due to a decrease of 108 basis points in the average
yield on mortgage-related securities to 4.55% from 5.63% for the respective
three months ended December 31, 2003 and a decrease of 158 basis points to 4.51%
from 6.09% for the respective nine months ended December 31, 2003. In addition,
the
15
average balance of mortgage related securities decreased $162.0 million and
$72.3 million for the three- and nine-month periods ended December 31, 2003 as
compared to the same periods in the prior year. In addition, interest income on
interest-bearing deposits decreased $300,000 and $860,000, respectively, for the
three and nine months ended December 31, 2003, as compared to the same periods
in 2002. These decreases were partially offset by an increase in interest income
on investment securities (including Federal Home Loan Bank stock) of $430,000
and $1.0 million for the three- and nine-month periods ended December 31, 2003,
as compared to the same periods in the prior year. This increase was primarily a
result of an increase of $60.7 million and $28.8 million in the average balance
of investment securities for the respective three- and nine-month periods ended
December 31, 2003.
Interest expense on deposits decreased $3.0 million and $9.9 million,
respectively, for the three and nine months ended December 31, 2003, as compared
to the same periods in 2002. These decreases were due primarily to a decrease of
44 basis points in the weighted average cost of deposits to 2.03% from 2.47% for
the respective three-month periods and a decrease of 60 basis points in the
weighted average cost of deposits to 2.12% from 2.72% for the respective
nine-month periods. Interest expense on notes payable and other borrowings
increased $50,000 and decreased $1.5 million during the respective three and
nine months ended December 31, 2003, as compared to the same periods in the
prior year. The increase for the three-month period was due primarily to an
increase of $122.6 million in the average balance of notes payable and other
borrowings and the decrease for the nine-month period was due primarily to a
decrease in the weighted average cost of notes payable and other borrowings of
48 basis points to 3.92% from 4.40% for the nine-month period ended December 31,
2003, as compared to the same period in 2002. Other interest expense decreased
$70,000 and $190,000 for the respective three and nine months ended December 31,
2003, as compared to the same periods in the prior year.
Provision for Loan Losses. Provision for loan losses remained constant at
$450,000 and $1.4 million for the respective three- and nine-month periods ended
December 31, 2003, as compared to the same periods for the prior year. The
provisions were based on management's ongoing evaluation of asset quality and
pursuant to a policy to maintain an allowance for losses at a level which
management believes is adequate to absorb probable and estimable losses in the
portfolio.
Average Interest-Earning Assets, Average Interest-Bearing Liabilities and
Interest Rate Spread. The following tables show the Corporation's average
balances, interest, average rates, net interest margin and the spread between
the combined average rates earned on interest-earning assets and average cost of
interest-bearing liabilities for the periods indicated. The average balances are
derived from average daily balances.
16
THREE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------
2003 2002
---------------------------------- ----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
----------------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans (2) $ 2,277,158 $ 32,858 5.77% $ 2,053,483 $ 35,164 6.85%
Consumer loans (2) 528,302 8,033 6.08 467,950 8,175 6.99
Commercial business loans(2) 145,266 2,014 5.55 133,692 2,165 6.48
------------ ---------- ------------ ----------
Total loans receivable (2) 2,950,726 42,905 5.82 2,655,125 45,504 6.86
Mortgage-related securities 187,651 2,136 4.55 349,653 4,918 5.63
Investment securities 123,163 456 1.48 92,348 709 3.07
Interest-bearing deposits 97,061 221 0.91 168,942 519 1.23
Federal Home Loan Bank stock 85,216 1,523 7.15 55,312 837 6.05
------------ ---------- ------------ ----------
Total interest-earning assets 3,443,817 47,241 5.49 3,321,380 52,487 6.32
---- ----
Non-interest-earning assets 207,688 239,631
------------ ------------
Total assets $ 3,651,505 $ 3,561,011
============ ============
INTEREST-BEARING LIABILITIES
Demand deposits $ 749,253 763 0.41 $ 816,307 1,457 0.71
Regular passbook savings 221,523 223 0.40 185,832 409 0.88
Certificates of deposit 1,625,233 12,174 3.00 1,620,691 14,311 3.53
------------ ---------- ------------ ----------
Total deposits 2,596,009 13,160 2.03 2,622,830 16,177 2.47
Notes payable and other borrowings 690,183 6,534 3.79 567,578 6,484 4.57
Other 15,379 57 1.48 16,559 127 3.07
------------ ---------- ------------ ----------
Total interest-bearing liabilities 3,301,571 19,751 2.39 3,206,967 22,788 2.84
---------- ---- ---------- ----
Non-interest-bearing liabilities 54,105 60,514
------------ ------------
Total liabilities 3,355,676 3,267,481
Stockholders' equity 295,829 293,530
------------ ------------
Total liabilities and stockholders' equity $ 3,651,505 $ 3,561,011
============ ============
Net interest income/interest rate spread $ 27,490 3.10% $ 29,699 3.48%
========== ==== ========== ====
Net interest-earning assets $ 142,246 $ 114,413
============ ============
Net interest margin 3.19% 3.58%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.04 1.04
============ ============
- --------------------------
(1) Annualized
(2) The average balances of loans include non-performing loans, interest of
which is recognized on a cash basis.
17
NINE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------
2003 2002
---------------------------------- ----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
----------------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans (2) $ 2,282,562 $ 100,299 5.86% $ 2,090,319 $ 110,385 7.04%
Consumer loans (2) 517,052 24,267 6.26 435,004 24,432 7.49
Commercial business loans(2) 139,494 6,022 5.76 120,760 6,178 6.82
------------ ---------- ------------ ----------
Total loans receivable (2) 2,939,108 130,588 5.92 2,646,083 140,995 7.10
Mortgage-related securities 213,465 7,217 4.51 285,801 13,059 6.09
Investment securities 116,019 1,476 1.70 117,116 2,486 2.83
Interest-bearing deposits 85,542 667 1.04 157,140 1,531 1.30
Federal Home Loan Bank stock 83,844 4,221 6.71 53,909 2,198 5.44
------------ ---------- ------------ ----------
Total interest-earning assets 3,437,978 144,169 5.59 3,260,049 160,269 6.55
---- ----
Non-interest-earning assets 241,324 220,596
------------ ------------
Total assets $ 3,679,302 $ 3,480,645
============ ============
INTEREST-BEARING LIABILITIES
Demand deposits $ 778,011 2,524 0.43 $ 730,551 5,081 0.93
Regular passbook savings 213,463 695 0.43 175,459 1,327 1.01
Certificates of deposit 1,620,728 38,245 3.15 1,612,211 44,940 3.72
------------ ---------- ------------ ----------
Total deposits 2,612,202 41,464 2.12 2,518,221 51,348 2.72
Notes payable and other borrowings 647,598 19,019 3.92 621,400 20,522 4.40
Other 13,929 154 1.47 11,775 346 3.92
------------ ---------- ------------ ----------
Total interest-bearing liabilities 3,273,729 60,637 2.47 3,151,396 72,216 3.06
Non-interest-bearing liabilities 109,751 ---------- ---- 34,589 ---------- ------
------------ ------------
Total liabilities 3,383,480 3,185,985
Stockholders' equity 295,822 294,660
------------ ------------
Total liabilities and stockholders' equity $ 3,679,302 $ 3,480,645
============ ============
Net interest income/interest rate spread $ 83,532 3.12% $ 88,053 3.49%
========== ==== ========== ====
Net interest-earning assets $ 164,249 $ 108,653
============ ============
Net interest margin 3.24% 3.60%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.05 1.03
============ ============
- -----------------------
(1) Annualized
(2) The average balances of loans include non-performing loans, interest of
which is recognized on a cash basis.
18
Non-Interest Income. Non-interest income increased $8.3 million to $17.3 million
and $35.1 million to $56.5 million, respectively, for the three and nine months
ended December 31, 2003, as compared to $9.0 million and $21.4 million for the
same periods in the prior year, primarily due to the addition of REI partnership
home sales of $11.9 million and $31.6 million for the respective three and
nine-month periods ended December 31, 2003, as a result of the implementation of
FIN 46 during the period. In addition, loan servicing income increased $4.1
million and $1.4 million, respectively for the three and nine months ended
December 31, 2003 as compared to the same periods in the prior year, primarily
due to decreased amortization of mortgage servicing rights, which resulted from
decreases in mortgage loan refinancings. Service charges on deposit accounts
increased $180,000 and $740,000, respectively, for the three and nine months
ended December 31, 2003. Insurance commissions increased $330,000 and $380,000,
respectively, for the three- and nine-month periods ended December 31, 2003, as
compared to the same periods in the prior year. Other revenue from real estate
operations decreased $450,000 and increased $2.4 million for the three and nine
months ended December 31, 2003, as compared to the same periods in the prior
year. The decrease in other revenue from real estate operations for the
three-month period was largely due to the reclassification of income and expense
items on the income statement as required by FIN 46. These income and expense
items are REI home sales, REI cost of home sales, other expenses from real
estate partnership operations and minority interest in income of real estate
partnership operations. The increase in other revenue from real estate
operations for the nine-month period was due to a gain on the sale of a
partnership of $2.7 million, as well as increased lot sales. Other non-interest
income which includes a variety of loan fee and other miscellaneous fee income
decreased $1.6 million and increased $750,000 for the respective three- and
nine-month periods ended December 31, 2003. These increases were partially
offset by a decrease in net gain on sale of loans of $5.9 million and $1.4
million, respectively, during the three and nine months ended December 31, 2003,
as compared to the same periods in the prior year primarily due to the changing
interest rate environment. In addition, net gain on sale of investments and
mortgage-related securities decreased $250,000 and $660,000, respectively, for
the three- and nine-month periods ended December 31, 2003, as compared to the
same periods in the prior year.
Non-Interest Expense. Non-interest expense increased $11.7 million to $28.2
million and $31.7 million to $81.5 million, respectively, for the three and nine
months ended December 31, 2003, as compared to $16.5 million and $49.9 million
for the same periods in 2002, primarily due to the addition of REI cost of sales
of $7.8 million and $23.4 million, other expenses from real estate partnership
operations of $1.1 million and $1.9 million and minority interest in income of
real estate partnership operations of $1.5 million and $3.3 million for the
respective three and nine-month periods as required by the implementation of FIN
46 for the December 31, 2003 quarter-end. Compensation expense increased
$800,000 and $2.4 million, respectively, for the three- and nine-month periods
compared to the same periods in the prior year due primarily to an increase in
incentive compensation resulting from increased loan production and increased
employee benefits. In addition, occupancy expense increased $70,000 and
$540,000, respectively, for the three and nine months ended December 31, 2003.
Marketing expense increased $80,000 and $240,000, respectively, for the
three-and nine-month periods compared to the same periods in the prior year.
Furniture and equipment expense increased $60,000 and $430,000, respectively,
for the three and nine months ended December 31, 2003, as compared to the same
periods in the prior year. Other non-interest expense increased $510,000 and
decreased $120,000, respectively, for the three- and nine-month periods as
compared to the same periods in the prior year. These increases were partially
offset by a decrease in data processing expense of $140,000 and $400,000,
respectively, for the three- and nine-month periods ended December 31, 2003, as
compared to the same periods in the prior year.
Income Taxes. Income tax expense decreased $2.1 million and increased $20,000,
respectively, during the three and nine months ended December 31, 2003, as
compared to the same periods in 2002. The effective tax rate was 38.2% and
38.4%, respectively, for the current three- and nine-month periods, as compared
to 38.1% and 37.7% for the three- and nine-month periods last year.
19
FINANCIAL CONDITION
During the nine months ended December 31, 2003, the Corporation's assets
increased by $126.9 million from $3.54 billion at March 31, 2003 to $3.67
billion. The majority of this increase was attributable to increases in loans,
which was partially offset by decreases in other categories such as
mortgage-related securities and investments.
Total loans (including loans held for sale) increased $220.2 million during the
nine months ended December 31, 2003. Loan activity for the period consisted of
(i) originations of $2.72 billion, (ii) sales of $1.25 billion, and (iii)
principal repayments and other adjustments of $1.25 billion.
Mortgage-related securities (both available for sale and held to maturity)
decreased $72.2 million during the nine months ended December 31, 2003 as a
result of principal repayments and market value adjustments of $148.5 million
and sales of $5.1 million. These decreases were partially offset by purchases of
$81.4 million of mortgage-related securities in this nine-month period.
Mortgage-related securities consisted of $101.8 million of mortgage-backed
securities and $74.8 million of Collateralized Mortgage Obligations ("CMO's")
and Real Estate Mortgage Investment Conduits ("REMIC's") at December 31, 2003.
The Corporation invests in corporate CMOs and agency-issued REMICs. These
investments are deemed to have limited credit risk. The investments do have
interest rate risk due to, among other things, actual prepayments being more or
less than those predicted at the time of purchase. The Corporation invests only
in short-term tranches in order to limit the reinvestment risk associated with
greater than anticipated prepayments, as well as changes in value resulting from
changes in interest rates.
Investment securities (both available for sale and held to maturity) decreased
$33.9 million during the nine months ended December 31, 2003 as a result of
sales and maturities of $406.5 million of U.S. Government and agency securities
largely offset by purchases of $370.8 million of such securities.
Total liabilities increased $121.3 million during the nine months ended December
31, 2003. This increase was largely due to a $154.9 million increase in FHLB
advances and other borrowings. This increase was partially offset by a decrease
of $21.9 million in deposits, a $6.1 million decrease in other liabilities and a
decrease of $5.6 million in advance payments by borrowers for taxes and
insurance during the nine-month period. Brokered deposits have been used in the
past and may be used in the future as the need for funds requires them. Brokered
deposits totaled $262.0 million at December 31, 2003 and $239.4 million at March
31, 2003, and generally mature within one to five years.
Stockholders' equity increased $5.6 million during the nine months ended
December 31, 2003 as a net result of (i) comprehensive income of $34.3 million,
(ii) stock options exercised of $5.0 million (with the ($4.2 million) excess of
the cost of treasury shares over the option price charged to retained earnings),
(iii) the purchase of stock by retirement plans of $1.1 million (with the
($85,000) excess of the cost of treasury shares over the option price charged to
retained earnings), (iv) benefit plan shares earned and related tax adjustments
totaling $1.6 million, and (v) consolidation of real estate investment
partnerships per Fin 46 of $3.6 million. These increases were partially offset
by (i) purchases of treasury stock of $25.9 million, (ii) cash dividends of $7.5
million, and (iii) common stock consolidated in a rabbi trust established
pursuant to the Corporation's supplemental retirement plan of $2.3 million.
20
ASSET QUALITY
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. As a matter of policy, the
Corporation does not accrue interest on loans past due 90 days or more.
Non-performing assets increased $3.0 million to $14.6 million at December 31,
2003 from $11.7 million at March 31, 2003 and increased as a percentage of total
assets to 0.40% from 0.33% at such dates, respectively.
Non-performing assets are summarized as follows at the dates indicated:
AT MARCH 31,
AT DECEMBER 31, --------------------------------------------
2003 2003 2002 2001
--------------- --------------------------------------------
(Dollars In Thousands)
Non-accrual loans:
Single-family residential $ 4,459 $ 4,510 $ 4,505 $ 2,572
Multi-family residential - 444 187 372
Commercial real estate 6,181 1,776 2,212 650
Construction and land 20 - 168 257
Consumer 714 661 933 499
Commercial business 2,326 2,678 1,037 697
------------ ------------ ------------ ------------
Total non-accrual loans 13,700 10,069 9,042 5,047
Real estate held for development and sale 144 49 74 352
Foreclosed properties and repossessed assets, net 773 1,535 1,475 313
------------ ------------ ------------ ------------
Total non-performing assets $ 14,617 $ 11,653 $ 10,591 $ 5,712
============ ============ ============ ============
Performing troubled debt restructurings $ 2,661 $ 2,590 $ 403 $ 300
============ ============ ============ ============
Total non-accrual loans to total loans 0.42% 0.34% 0.32% 0.20%
Total non-performing assets to total assets 0.40 0.33 0.30 0.18
Allowance for loan losses to total loans 0.89 1.00 1.09 0.94
Allowance for loan losses to total
non-accrual loans 210.94 294.74 346.04 477.04
Allowance for loan and foreclosure losses
to total non-performing assets 199.22 257.87 300.05 422.16
Non-accrual loans increased $3.6 million during the nine months ended December
31, 2003. The increase was largely attributable to the addition of three
commercial loans during the nine-month period. One was a $1.9 million commercial
real estate loan secured by retail property located in Dallas, Texas. The second
one was a $1.6 million commercial business loan secured by a milling machining
company located in Montello, Wisconsin. The third was a $1.5 million commercial
real estate loan secured by a 66 unit student housing apartment building in
Minneapolis, Minnesota. At December 31, 2003, there was one other non-accrual
commercial loan with a carrying value greater than $1.0 million. The loan is a
commercial real estate loan which is secured by a 161 unit motel located in
Schiller Park, Illinois, with a carrying value of $1.5 million at December 31,
2003.
Non-performing real estate held for development and sale increased $100,000 for
the nine months ended December 31, 2003.
Foreclosed properties and repossessed assets decreased $760,000 for the nine
months ended December 31, 2003. There were no foreclosed properties and
repossessed assets with a carrying value greater than $1.0 million at December
31, 2003.
Performing troubled debt restructurings increased $70,000 during the nine months
ended December 31, 2003.
21
At December 31, 2003, assets that the Corporation has classified as substandard,
net of reserves, consisted of $33.9 million of loans and foreclosed properties.
As of March 31, 2003, substandard assets amounted to $25.1 million. An asset is
classified as substandard when it is determined that it is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any, and that the Corporation will sustain some loss if
the deficiencies are not corrected.
The increase in substandard loans is largely attributable to the addition of
five loans. The first loan with a carrying value of $2.5 million is secured by a
hotel located in Janesville, Wisconsin. The second loan, with a carrying value
of $1.5 million, is secured by a multi-family residential property located in
Cottage Grove, Wisconsin. The third loan, with a carrying value of $4.0 million,
is secured by the assets of a stainless tank operation located in Cottage Grove,
Wisconsin. The fourth loan, with a carrying value of $1.5 million, is secured by
a 66 unit student housing apartment building located in Minneapolis, Minnesota.
The fifth loan, with a carrying value of $970,000, is secured by a computer
networking and consulting business located in Phoenix, Arizona. The category of
substandard assets contains several loans with a carrying value of greater than
$1.0 million, including the loans discussed above. Five other loans classified
as substandard have a carrying value of greater than $1.0 million. One loan,
with a carrying value of $5.2 million, is secured by a computer networking and
consulting business located in Phoenix, Arizona. A second loan is a $1.9 million
commercial real estate loan secured by retail property located in Dallas, Texas.
A third loan, with a carrying value of $2.1 million, is secured by a hotel
located in Kenosha, Wisconsin. A fourth loan, with a carrying value of $1.5
million, is a commercial real estate loan which is secured by a 161 unit motel
located in Schiller Park, Illinois. A fifth loan is secured by a hotel with a
carrying value of $1.1 million located in Sonoma, California.
At December 31, 2003, the Corporation has identified assets of $4.5 million as
impaired, net of reserves. As of March 31, 2003, impaired loans were $4.8
million. A loan is defined as impaired when, according to FAS 114, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Such loans are not nor have been on a past due and non-accrual
status. A summary of the details regarding impaired loans follows (in
thousands):
AT DECEMBER 31, AT MARCH 31,
--------------- ------------------------------------------
2003 2003 2002 2001
--------------- ------------------------------------------
Impaired loans with valuation
reserve required $ 7,940 $ 8,483 $ 11,467 $ 964
Less:
Specific valuation allowance 3,483 3,717 4,240 615
------------ ------------ ------------ ------------
Total impaired loans $ 4,457 $ 4,766 $ 7,227 $ 349
============ ============ ============ ============
Average impaired loans $ 5,051 $ 6,042 $ 6,216 $ 3,301
Interest income recognized
on impaired loans $ 375 $ 613 $ 740 $ 43
22
The following table sets forth information relating to the Corporation's loans
that were less than 90 days delinquent at the dates indicated.
AT MARCH 31,
AT DECEMBER 31, ------------------------------------------
2003 2003 2002 2001
--------------- ------------------------------------------
(In Thousands)
30 to 59 days $ 14,447 $ 10,083 $ 17,647 $ 7,141
60 to 89 days 691 5,612 2,671 716
----------- ------------ ------------ ------------
Total $ 15,138 $ 15,695 $ 20,318 $ 7,857
=========== ============ ============ ============
The Corporation's loan portfolio, foreclosed properties and repossessed assets
are evaluated on a continuing basis to determine the necessity for additions and
recaptures to the allowance for losses and the related adequacy of the balance
in the allowance for loan losses account. These evaluations consider several
factors, including, but not limited to, general economic conditions, loan
portfolio composition, loan delinquencies, prior loss experience, collateral
value, anticipated loss of interest and management's estimation of future
losses. The evaluation of the allowance for loan losses includes a review of
known loan problems as well as inherent problems based upon historical trends
and ratios. Foreclosed properties are recorded at the lower of carrying value or
fair value with charge-offs, if any, charged to the allowance for loan losses
prior to transfer to foreclosed property. The fair value is primarily based on
appraisals, discounted cash flow analysis (the majority of which are based on
current occupancy and lease rates) and pending offers.
A summary of the activity in the allowance for losses on loans follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
2003 2002 2003 2002
----------------------------- -----------------------------
(Dollars In Thousands)
Allowance at beginning of period $ 28,601 $ 30,760 $ 29,677 $ 31,065
Charge-offs:
Mortgage (21) (395) (234) (846)
Consumer (192) (104) (564) (479)
Commercial business (43) (1,257) (1,908) (1,754)
------------ ------------ ------------ ------------
Total charge-offs (256) (1,756) (2,706) (3,079)
Recoveries:
Mortgage 12 126 274 130
Consumer 19 16 57 41
Commercial business 73 9 247 98
------------ ------------ ------------ ------------
Total recoveries 104 151 578 269
------------ ------------ ------------ ------------
Net charge-offs (152) (1,605) (2,128) (2,810)
Provision for loan losses 450 450 1,350 1,350
------------ ------------ ------------ ------------
Allowance at end of period $ 28,899 $ 29,605 $ 28,899 $ 29,605
============ ============ ============ ============
Net charge-offs to average loans (0.02)% (0.24)% (0.14)% (0.21)%
============ ============ ============ ============
Although management believes that the December 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
23
continues to pursue all practical and legal methods of collection, repossession
and disposal, and adheres to high underwriting standards in the origination
process in order to continue to maintain strong asset quality.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation's sources of funds include dividends
from its subsidiaries, including the Bank, interest on its investments and
returns on its real estate held for sale. The Bank's primary sources of funds
are payments on loans and securities, deposits from retail and wholesale
sources, advances and other borrowings.
At December 31, 2003, the Corporation had outstanding commitments to originate
loans of $116.4 million, commitments to extend funds to, or on behalf of,
customers pursuant to lines and letters of credit of $247.7 million and loans
sold with recourse to the Corporation in the event of default by the borrower of
$275,000. The Corporation had sold loans with recourse in the amount of $10.8
million through the FHLB Mortgage Partnership Finance Program at December 31,
2003. Scheduled maturities of certificates of deposit during the twelve months
following December 31, 2003 amounted to $971.1 million and scheduled maturities
of FHLB advances during the same period totaled $192.5 million. At December 31,
2003, the Corporation had no reverse repurchase agreements. Management believes
adequate resources are available to fund all commitments to the extent required.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
liquid investments in qualifying types of U.S. Government and agency securities
and other investments sufficient to ensure its safe and sound operation. During
the quarter ended December 31, 2003, the Bank's average liquidity ratio was
9.28%.
Under federal law and regulation, the Bank is required to meet certain tangible,
core and risk-based capital requirements. Tangible capital generally consists of
stockholders' equity minus certain intangible assets. Core capital generally
consists of tangible capital plus qualifying intangible assets. The risk-based
capital requirements presently address credit risk related to both recorded and
off-balance sheet commitments and obligations. The OTS requirement for the core
capital ratio for the Bank is currently 3.00%. The requirement is 4.00% for all
but the most highly-rated financial institutions.
24
The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at December 31, 2003 and March 31, 2003 (dollars in
thousands):
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES OTS REQUIREMENTS
--------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------------------------------------------
AS OF DECEMBER 31, 2003:
Tier 1 capital
(to adjusted tangible assets) $274,588 7.66% $107,550 3.00% $179,250 5.00%
Risk-based capital
(to risk-based assets) 300,017 10.43 230,061 8.00 287,576 10.00
Tangible capital
(to tangible assets) 274,588 7.66 53,775 1.50 N/A N/A
AS OF MARCH 31, 2003:
Tier 1 capital
(to adjusted tangible assets) $258,057 7.43% $104,234 3.00% $173,723 5.00%
Risk-based capital
(to risk-based assets) 283,004 10.63 213,027 8.00 266,283 10.00
Tangible capital
(to tangible assets) 258,057 7.43 52,117 1.50 N/A N/A
The following table reconciles the Corporation's stockholders' equity to
regulatory capital at December 31, 2003 and March 31, 2003 (dollars in
thousands):
DECEMBER 31, MARCH 31,
------------------------
2003 2003
------------------------
Stockholders' equity of the Corporation $ 298,640 $ 293,004
Less: Capitalization of the Corporation and non-bank
subsidiaries 132 (8,496)
------------ ---------
Stockholders' equity of the Bank 298,772 284,508
Less: Intangible assets and other non-includable assets (24,184) (26,451)
------------ ---------
Tier 1 and tangible capital 274,588 258,057
Plus: Allowable general valuation allowances 25,429 24,947
------------ ---------
Risk based capital $ 300,017 $ 283,004
============ =========
25
ASSET/LIABILITY MANAGEMENT
The primary function of asset and liability management is to provide liquidity
and maintain an appropriate balance between interest-earning assets and
interest-bearing liabilities within specified maturities and/or repricing dates.
Interest rate risk is the imbalance between interest-earning assets and
interest-bearing liabilities at a given maturity or repricing date, and is
commonly referred to as the interest rate gap (the "gap"). A positive gap exists
when there are more assets than liabilities maturing or repricing within the
same time frame. A negative gap occurs when there are more liabilities than
assets maturing or repricing within the same time frame. During a period of
rising interest rates, a negative gap over a particular period would tend to
adversely affect net interest income over such period, while a positive gap over
a particular period would tend to result in an increase in net interest income
over such period.
The Corporation's strategy for asset and liability management is to maintain an
interest rate gap that minimizes the impact of interest rate movements on the
net interest margin. As part of this strategy, the Corporation sells
substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, and invests in
adjustable-rate or medium-term, fixed-rate, single-family residential mortgage
loans, medium-term mortgage-related securities and consumer loans, which
generally have shorter terms to maturity and higher interest rates than
single-family mortgage loans.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates and/or
shorter terms to maturity than conventional single-family residential loans.
Long-term, fixed-rate, single-family residential mortgage loans originated for
sale in the secondary market are generally committed for sale at the time the
interest rate is locked with the borrower. As such, these loans involve little
interest rate risk to the Corporation.
The calculation of a gap position requires management to make a number of
assumptions as to when an asset or liability will reprice or mature. Management
believes that its assumptions approximate actual experience and considers them
reasonable, although the actual amortization and repayment of assets and
liabilities may vary substantially. The cumulative net gap position at December
31, 2003 has not changed materially since March 31, 2003.
26
SEGMENT REPORTING
According to the materiality thresholds of SFAS No. 131, the Corporation is
required to report each operating segment based on materiality thresholds of ten
percent or more of certain amounts, such as revenue. Additionally, the
Corporation is required to report separate operating segments until the revenue
attributable to such segments is at least 75 percent of total consolidated
revenue. SFAS No. 131 allows the Corporation to combine operating segments, even
though they may be individually material, if the segments have similar basic
characteristics in the nature of the products, production processes, and type or
class of customer for products or services. Based on the above criteria, the
Corporation has two reportable segments.
COMMUNITY BANKING: This segment is the main basis of operation for the
Corporation and includes the branch network and other deposit support services;
origination, sales and servicing of one-to-four family loans; origination of
multifamily, commercial real estate and business loans; origination of a variety
of consumer loans; and sales of alternative financial investments such as tax
deferred annuities.
REAL ESTATE INVESTMENTS: The Corporation's non-banking subsidiary, IDI, and its
subsidiary, NIDI, invest in limited partnerships in real estate developments.
Such developments include recreational residential developments and industrial
developments (such as office parks).
The following represents reconciliations of reportable segment revenues, profit
or loss, and assets to the Corporation's consolidated totals for the three and
nine months ended December 31, 2003 and 2002, respectively.
27
THREE MONTHS ENDED DECEMBER 31, 2003
-------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ----------- ------------ ------------
(Dollars in thousands)
Interest income $ 124 $ 47,199 $ (82) $ 47,241
Interest expense 296 19,479 (24) 19,751
----------- ----------- ------------ ------------
Net interest income (172) 27,720 (58) 27,490
Provision for loan losses - 450 - 450
----------- ----------- ------------ ------------
Net interest income after provision for loan losses (172) 27,270 (58) 27,040
Other income 11,116 6,249 (109) 17,256
Other expense 10,534 17,852 (167) 28,219
----------- ----------- ------------ ------------
Income (loss) before income taxes 410 15,667 - 16,077
Income tax expense (benefit) 196 5,943 - 6,139
----------- ----------- ------------ ------------
Net income $ 214 $ 9,724 $ - $ 9,938
=========== =========== ============ ============
Total assets $ 65,800 $ 3,599,744 $ - $ 3,665,544
THREE MONTHS ENDED DECEMBER 31, 2002
-------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ----------- ------------ ------------
(Dollars in thousands)
Interest income $ 97 $ 52,487 $ (97) $ 52,487
Interest expense 90 22,788 (90) 22,788
----------- ----------- ------------ ------------
Net interest income (loss) 7 29,699 (7) 29,699
Provision for loan losses - 450 - 450
----------- ----------- ------------ ------------
Net interest income (loss) after provision for loan losses 7 29,249 (7) 29,249
Other income 3,001 9,187 (3,233) 8,955
Other expense 3,240 16,537 (3,240) 16,537
----------- ----------- ------------ ------------
Income (loss) before income taxes (232) 21,899 - 21,667
Income tax expense (benefit) (303) 8,563 - 8,260
----------- ----------- ------------ ------------
Net income (loss) $ 71 $ 13,336 $ - $ 13,407
=========== =========== ============ ============
Total assets $ 45,134 $ 3,476,402 $ - $ 3,521,536
28
NINE MONTHS ENDED DECEMBER 31, 2003
-------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ----------- ------------ ------------
(Dollars in thousands)
Interest income $ 225 $ 143,996 $ (52) $ 144,169
Interest expense 886 59,866 (115) 60,637
----------- ----------- ------------ ------------
Net interest income (loss) (661) 84,130 63 83,532
Provision for loan losses - 1,350 - 1,350
----------- ----------- ------------ ------------
Net interest income (loss) after provision for loan losses (661) 82,780 63 82,182
Other income 33,307 23,162 61 56,530
Other expense 28,709 52,700 124 81,533
----------- ----------- ------------ ------------
Income (loss) before income taxes 3,937 53,242 - 57,179
Income tax expense (benefit) 1,677 20,271 - 21,948
----------- ----------- ------------ ------------
Net income (loss) $ 2,260 $ 32,971 $ - $ 35,231
=========== =========== ============ ============
Total assets $ 65,800 $ 3,599,744 $ - $ 3,665,544
NINE MONTHS ENDED DECEMBER 31, 2002
-------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ----------- ------------ ------------
(Dollars in thousands)
Interest income $ 161 $ 160,269 $ (161) $ 160,269
Interest expense 243 72,216 (243) 72,216
----------- ----------- ------------ ------------
Net interest income (loss) (82) 88,053 82 88,053
Provision for loan losses - 1,350 - 1,350
----------- ----------- ------------ ------------
Net interest income (loss) after provision for loan losses (82) 86,703 82 86,703
Other income 11,761 21,974 (12,345) 21,390
Other expense 12,263 49,864 (12,263) 49,864
----------- ----------- ------------ ------------
Income (loss) before income taxes (584) 58,813 - 58,229
Income tax expense (benefit) (505) 22,438 - 21,933
----------- ----------- ------------ ------------
Net income (loss) $ (79) $ 36,375 $ - $ 36,296
=========== =========== ============ ============
Total assets $ 45,134 $ 3,476,402 $ - $ 3,521,536
29
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Corporation's market rate risk has not materially changed
from March 31, 2003. See the Corporation's Annual Report on
Form 10-K for the year ended March 31, 2003.
ITEM 4 CONTROLS AND PROCEDURES
The management of the Corporation evaluated, with the
participation of the Chief Executive Officer and Chief
Financial Officer, the effectiveness of the Corporation's
disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report.
Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Corporation's
disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports that are
filed or submitted under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and regulations and
are operating in an effective manner.
No change in the Corporation's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under
the Securities Exchange Act of 1934) occurred during the most
recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Corporation is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management of the Corporation to be
immaterial to the financial condition and results of
operations of the Corporation.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5 OTHER INFORMATION.
The Bank is presently being audited by the State of Wisconsin
Department of Revenue Franchise Tax Division. The results of
the audit have not yet been reported to the Bank.
30
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit 31.1 Certification of Chief Executive Officer
Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 and Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer
Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 and Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of the Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Exhibit 32.2 Certification of the Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
(b) REPORTS ON FORM 8-K.
Press release dated October 29, 2003 announcing the
Corporation's results for the three months ending September
30, 2003 and its financial condition as of September 30, 2003
furnished under Items 9 and 12 of Form 8-K on October 29,
2003.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANCHOR BANCORP WISCONSIN INC.
Date: February 12, 2004 By: /s/ Douglas J. Timmerman
--------------------------------------------
Douglas J. Timmerman, Chairman of the
Board, President and Chief Executive Officer
Date: February 12, 2004 By: /s/ Michael W. Helser
--------------------------------------------
Michael W. Helser, Treasurer and
Chief Financial Officer
32