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, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER 0-20006
ANCHOR BANCORP WISCONSIN INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Wisconsin 39-1726871
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 West Main Street
Madison, Wisconsin 53703
-------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(608) 252-8700
--------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
- --------------------------------------------------------------------------------
(Former name,former address,and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common stock -- $.10 Par Value
Number of shares outstanding as of January 31, 2005: 22,736,758
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, 2004
and March 31, 2004 2
Consolidated Statements of Income for the Three and Nine
Months Ended December 31, 2004 and 2003 3
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 2004 and 2003 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Results of Operations 20
Financial Condition 25
Asset Quality 26
Liquidity & Capital Resources 29
Asset/Liability Management 32
Consent Order 32
Item 3 Quantitative and Qualitative Disclosures About Market Risk 33
Item 4 Controls and Procedures 33
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 33
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3 Defaults upon Senior Securities 34
Item 4 Submission of Matters to a Vote of Security Holders 34
Item 5 Other Information 34
Item 6 Exhibits 35
SIGNATURES 36
1
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31, MARCH 31,
2004 2004
------------ -----------
(In Thousands, Except Share Data)
ASSETS
Cash $ 61,167 $ 65,938
Interest-bearing deposits 111,713 133,055
------------ -----------
Cash and cash equivalents 172,880 198,993
Investment securities available for sale 30,685 29,514
Mortgage-related securities available for sale 211,685 220,918
Mortgage-related securities held to maturity (fair value of $1,792
and $4,489, respectively) 1,734 4,303
Loans receivable, net:
Held for sale 11,816 14,578
Held for investment 3,292,339 3,066,812
Foreclosed properties and repossessed assets, net 553 2,422
Real estate held for development and sale 60,830 77,749
Office properties and equipment 30,845 31,233
Federal Home Loan Bank stock--at cost 44,923 87,320
Accrued interest on investments and loans and other assets 56,141 56,588
Goodwill 19,956 19,956
------------ -----------
Total assets $ 3,934,387 $ 3,810,386
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits and advance payments by borrowers for taxes and insurance $ 2,705,495 $ 2,609,686
Federal Home Loan Bank and other borrowings 826,928 831,559
Other liabilities 74,248 60,902
------------ -----------
Total liabilities 3,606,671 3,502,147
------------ -----------
Minority interest in real estate partnerships 6,967 6,691
------------ -----------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding - -
Common stock, $.10 par value, 100,000,000 shares authorized,
25,364,339 shares issued, 22,958,760 and 22,954,535 shares ,
outstanding respectively 2,536 2,536
Additional paid-in capital 68,609 67,926
Retained earnings 306,052 284,329
Accumulated other comprehensive income 337 2,670
Treasury stock (2,405,579 shares and 2,408,804 shares, (50,485) (50,324)
respectively), at cost Unearned deferred compensation (6,300) (5,589)
------------ -----------
Total stockholders' equity 320,749 301,548
------------ -----------
Total liabilities and stockholders' equity $ 3,934,387 $ 3,810,386
============ ===========
See accompanying Notes to Unaudited Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- -----------------------
2004 2003 2004 2003
------- -------- --------- ---------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Loans $47,347 $ 42,905 $ 135,588 $ 130,588
Mortgage-related securities 2,141 2,136 6,404 7,217
Investment securities 1,305 1,979 3,984 5,697
Interest-bearing deposits 565 221 1,207 667
------- -------- --------- ---------
Total interest income 51,358 47,241 147,183 144,169
INTEREST EXPENSE:
Deposits 12,814 13,217 36,658 41,618
Notes payable and other borrowings 6,893 6,534 21,053 19,019
------- -------- --------- ---------
Total interest expense 19,707 19,751 57,711 60,637
------- -------- --------- ---------
Net interest income 31,651 27,490 89,472 83,532
Provision for loan losses 664 450 1,414 1,350
------- -------- --------- ---------
Net interest income after provision for loan losses 30,987 27,040 88,058 82,182
NON-INTEREST INCOME:
Real estate investment partnership revenue 16,104 11,856 54,983 31,565
Loan servicing income (loss) 958 763 2,475 (2,094)
Service charges on deposits 2,124 2,046 6,524 6,171
Insurance commissions 519 664 1,764 1,832
Net gain on sale of loans 1,825 1,683 3,716 12,943
Net gain (loss) on sale of investments and mortgage-related
securities 75 (40) 1,472 300
Other revenue from real estate operations 725 (682) 2,744 1,852
Other 883 966 2,581 3,961
------- -------- --------- ---------
Total non-interest income 23,213 17,256 76,259 56,530
3
CONSOLIDATED STATEMENTS OF INCOME (Cont'd)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In Thousands, Except Per Share Data)
NON-INTEREST EXPENSE:
Compensation 10,028 9,995 30,765 29,659
Real estate investment partnership cost of sales 13,131 7,787 43,909 23,445
Occupancy 1,659 1,533 4,964 4,800
Furniture and equipment 1,413 1,468 4,398 4,267
Data processing 1,074 1,202 3,519 3,501
Marketing 1,014 790 3,030 2,372
Other expenses from real estate operations 1,302 1,053 6,693 1,882
Other 3,878 2,913 9,648 8,306
-------- -------- -------- --------
Total non-interest expense 33,499 26,741 106,926 78,232
-------- -------- -------- --------
Minority interest in income of real estate partnership operations 2,023 1,478 4,965 3,301
-------- -------- -------- --------
Income before income taxes 18,678 16,077 52,426 57,179
Income taxes 7,758 6,139 20,227 21,948
-------- -------- -------- --------
Net income $ 10,920 $ 9,938 $ 32,199 $ 35,231
======== ======== ======== ========
Earnings per share:
Basic $ 0.48 $ 0.44 $ 1.42 $ 1.53
Diluted 0.47 0.43 1.39 1.50
Dividends declared per share 0.13 0.11 0.36 0.32
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2004 2003
------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 32,199 $ 35,231
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 1,414 1,350
Provision for depreciation and amortization 2,958 2,849
Net increase due to origination and sale of loans held for sale 2,762 28,606
Net gain on sales of loans (3,716) (12,943)
Amortization of stock benefit plans 117 62
Tax benefit from stock related compensation 683 1,451
(Increase) decrease in accrued interest receivable (1,603) 805
Increase (decrease) in accrued interest payable 400 (891)
Increase (decrease) in accounts payable 11,011 (6,126)
Other 15,006 42,007
---------- ----------
Net cash provided by operating activities 61,231 92,401
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 2,352 15,653
Proceeds from maturities of investment securities 167,460 390,862
Purchase of investment securities available for sale (170,513) (370,794)
Proceeds from sale of mortgage-related securities held to maturity 1,068 -
Proceeds from sale of mortgage-related securities available for sale 17,970 5,069
Purchase of mortgage-related securities available for sale (58,468) (81,369)
Principal collected on mortgage-related securities 49,083 148,284
Loans originated for investment (1,306,798) (1,498,418)
Principal repayments on loans 1,113,517 1,216,951
Sales of office properties and equipment 236 (2,685)
Sales of real estate 6,380 1,077
Investment in real estate held for development and sale 10,539 (16,290)
---------- ----------
Net cash used in investing activities (167,174) (191,660)
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Unaudited)
NINE MONTHS ENDED DECEMBER 31,
-------------------------------
2004 2003
-------------------------------
(IN THOUSANDS)
FINANCING ACTIVITIES
Increase (decrease) in deposit accounts $ 101,617 $ (21,909)
Decrease in advance payments by borrowers
for taxes and insurance (5,808) (5,591)
Proceeds from notes payable to Federal Home Loan Bank 208,700 526,050
Repayment of notes payable to Federal Home Loan Bank (202,700) (395,700)
(Decrease) increase in other loans payable (10,631) 24,563
Treasury stock purchased (4,897) (25,890)
Exercise of stock options 1,373 843
Issuance of management and benefit plans 273 990
Payments of cash dividends to stockholders (8,097) (7,506)
---------- ---------
Net cash provided by financing activities 79,830 95,850
---------- ---------
Net decrease in cash and cash equivalents (26,113) (3,409)
Cash and cash equivalents at beginning of period 198,993 141,427
---------- ---------
Cash and cash equivalents at end of period $ 172,880 $ 138,018
========== =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 57,311 $ 61,528
Income taxes 17,717 26,051
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"). Significant
inter-company balances and transactions have been eliminated. Investments in 50%
owned partnerships are treated as variable interest entities and are
consolidated into the Corporation's balance sheet and income statement.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited 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 unaudited 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, 2004 are not necessarily indicative of results that may be expected for any
other interim period or the entire fiscal year ending March 31, 2005. The
unaudited consolidated financial statements presented herein should be read in
conjunction with the audited consolidated financial statements and related notes
thereto included in the Corporation's Annual Report for the year ended March 31,
2004.
Unrealized gains or losses on the Corporation's available-for-sale securities
are included in other comprehensive income. During the quarter ended December
31, 2004 and 2003, total comprehensive income amounted to $10.0 million and
$10.3 million, respectively. For the nine months ended December 31, 2004 and
2003, comprehensive income was $29.9 million and $34.3 million, respectively.
The Corporation's investment in real estate held for investment and sale
includes 50% owned real estate partnerships which are considered variable
interest entities ("VIE's") and therefore subject to the requirements of
Financial Accounting Standards Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51
("FIN 46"). FIN 46 requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity.
Real estate investment partnership revenue is presented in non-interest income
and represents revenue recognized upon the closing of sales of developed lots
and homes to independent third parties. Real estate investment partnership cost
of sales is included in non-interest expense and represents the costs of such
closed sales. Other revenue and other expenses from real estate operations are
also included in non-interest income and non-interest expense, respectively.
Minority interest in real estate partnerships represents the equity interests of
development partners in the real estate investment partnerships. The development
partners' share of income is reflected as minority interest in income of real
estate partnership operations.
7
The Financial Accounting Standards Board ("FASB") issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" in
December, 2002. SFAS No. 148 amended SFAS No. 123, "Accounting for Stock-Based
Compensation" to provide alternative methods of transition to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amended the disclosure provisions of SFAS No. 123 to require disclosure
in the summary of significant accounting policies of the effect of the Company's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS No. 148's amendment of the transition and annual disclosure provisions of
SFAS No. 123 are effective for fiscal years ending after December 15, 2002. The
Corporation will continue to account for stock-based compensation in accordance
with APB Opinion 25 as allowed under FASB No. 123.
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for stock options. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value at the
date of grant for awards under the stock option plans consistent with the method
of SFAS No. 123, the Corporation's net income and earnings per share would have
been reduced to the pro forma amounts indicated:
NINE MONTHS ENDED
DECEMBER 31,
-------------------------------------
2004 2003
-------------------------------------
(In Thousands, Except Per Share Data)
Net Income
As reported $ 32,199 $ 35,231
Pro forma 31,879 34,879
Earnings per share-Basic
As reported $ 1.42 $ 1.53
Pro forma 1.41 1.51
Earnings per share-Diluted
As reported $ 1.39 $ 1.50
Pro forma 1.38 1.49
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, 2004 and December 31, 2003 were
estimated on the date of grant using the Black-Scholes option-pricing model.
On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Share-Based Payment", which is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. The Statement, which is effective for the first interim
or annual period beginning after June 15, 2005, requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the fair value at the grant date. The cost is then
recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period (usually the
vesting period). This Statement eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in Statement 123
as originally issued.
Accordingly, the adoption of FASB No. 123(R)'s fair value method will have an
impact on the result of operations, although it will have no impact on the
overall financial position. The impact of adoption of FASB No. 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future.
Certain 2003 accounts have been reclassified to conform to the 2004
presentations.
8
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Corporation's carrying value of goodwill was $20.0 million at December 31,
2004 and at March 31, 2004. Information regarding the Company's other intangible
assets follows:
DECEMBER 31, 2004 MARCH 31, 2004
-------------------------------- ---------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- ------------ ------- -------- ------------ -------
(In Thousands)
Other intangible assets:
Core deposit premium $ 3,408 $2,868 $ 540 $ 3,408 $ 2,229 $ 1,179
Mortgage servicing rights 18,758 4,995 13,763 21,613 9,325 12,288
------- ------ ------- ------- ------- -------
Total $22,166 $7,863 $14,303 $25,021 $11,554 $13,467
======= ====== ======= ======= ======= =======
The projections of amortization expense for mortgage servicing rights and core
deposit premium set forth below are based on asset balances and the interest
rate environment as of December 31, 2004. Future amortization expense may be
significantly different depending upon changes in the mortgage servicing
portfolio, mortgage interest rates and market conditions.
The following table shows the current period and estimated future amortization
expense for amortized intangible assets:
MORTGAGE CORE
SERVICING DEPOSIT
RIGHTS PREMIUM TOTAL
--------- -------- --------
(In Thousands)
Quarter ended December 31, 2004 (actual) $ 1,167 $ 213 $ 1,380
Estimate for the quarter ended March 31, 2005 1,350 213 1,563
Estimate for the year ended March 31,
2006 5,400 327 5,727
2007 3,507 - 3,507
2008 3,506 - 3,506
-------- -------- --------
$ 13,763 $ 540 $ 14,303
======== ======== ========
NOTE 4 - STOCKHOLDERS' EQUITY
During the quarter ended December 31, 2004, options for 54,090 shares of common
stock were exercised at a weighted-average price of $16.46 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 $527,000 was charged to retained earnings. During the quarter ended
December 31, 2004, the Corporation issued 14,202 shares of treasury stock to the
Corporation's retirement plans. The weighted-average cost of these shares was
$28.49 per share or $404,500 in the aggregate. The $31,700 excess of the market
price over the cost of the treasury shares was credited to retained earnings. On
November 15, 2004, the Corporation paid a cash dividend of $0.125 per share,
amounting to $2.87 million, in the aggregate.
9
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share for the three and nine months ended December 31, 2004
and 2003 have been determined by dividing net income for the respective periods
by the weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding plus the effect of dilutive securities. The
effect of dilutive securities are computed using the treasury stock method.
10
THREE MONTHS ENDED DECEMBER 31,
------------------------------
2004 2003
------------ -----------
Numerator:
Net income $10,919,747 $ 9,938,385
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $10,919,747 $ 9,938,385
Denominator:
Denominator for basic earnings per
share--weighted-average shares 22,564,047 22,691,232
Effect of dilutive securities:
Employee stock options 490,355 481,018
Management Recognition Plans 5,101 14,720
Denominator for diluted earnings per
share--adjusted weighted-average
----------- -----------
shares and assumed conversions 23,059,503 23,186,970
=========== ===========
Basic earnings per share $ 0.48 $ 0.44
=========== ===========
Diluted earnings per share $ 0.47 $ 0.43
=========== ===========
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2004 2003
------------ ------------
Numerator:
Net income $32,198,872 $35,231,068
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $32,198,872 $35,231,068
Denominator:
Denominator for basic earnings per
share--weighted-average shares 22,610,868 22,989,181
Effect of dilutive securities:
Employee stock options 470,876 504,021
Management Recognition Plans 5,082 14,683
Denominator for diluted earnings per
share--adjusted weighted-average
----------- -----------
shares and assumed conversions 23,086,826 23,507,885
=========== ===========
Basic earnings per share $ 1.42 $ 1.53
=========== ===========
Diluted earnings per share $ 1.39 $ 1.50
=========== ===========
11
NOTE 6 - SEGMENT INFORMATION
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, 2004 and 2003, respectively.
12
THREE MONTHS ENDED DECEMBER 31, 2004
---------------------------------------------------------
(IN THOUSANDS)
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ----------- ------------ ------------
Interest income $ 128 $ 51,546 $ (316) $ 51,358
Interest expense 158 19,865 (316) 19,707
----------- ----------- ----------- -----------
Net interest income (loss) (30) 31,681 - 31,651
Provision for loan losses - 664 - 664
----------- ----------- ----------- -----------
Net interest income (loss) after provision for loan losses (30) 31,017 - 30,987
Real estate investment partnership revenue 16,104 - - 16,104
Other revenue from real estate operations 725 - - 725
Other income - 6,324 (29) 6,295
Real estate investment partnership cost of sales (13,131) - - (13,131)
Other expense from real estate partnership operations (1,242) - 29 (1,213)
Minority interest in income of real estate partnerships (2,023) - - (2,023)
Other expense - (19,066) - (19,066)
----------- ----------- ----------- -----------
Income before income taxes 403 18,275 - 18,678
Income tax expense 182 7,576 - 7,758
----------- ----------- ----------- -----------
Net income $ 221 $ 10,699 $ - $ 10,920
=========== =========== =========== ===========
Total Assets $ 76,621 $ 3,857,766 $ - $ 3,934,387
THREE MONTHS ENDED DECEMBER 31, 2003
---------------------------------------------------------
(IN THOUSANDS)
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ----------- ------------ ------------
Interest income $ 124 $ 47,199 $ (82) $ 47,241
Interest expense 296 19,479 (24) 19,751
----------- ----------- ----------- -----------
Net interest income (loss) (172) 27,720 (58) 27,490
Provision for loan losses - 450 - 450
----------- ----------- ----------- -----------
Net interest income (loss) after provision for loan losses (172) 27,270 (58) 27,040
Real estate investment partnership revenue 11,856 - - 11,856
Other revenue from real estate operations (682) - - (682)
Other income - 6,191 (109) 6,082
Real estate investment partnership cost of sales (7,787) - - (7,787)
Other expense from real estate partnership operations (1,053) - - (1,053)
Minority interest in income of real estate partnerships (1,478) - - (1,478)
Other expense - (18,068) 167 (17,901)
----------- ----------- ----------- -----------
Income before income taxes 684 15,393 - 16,077
Income tax expense 196 5,943 - 6,139
----------- ----------- ----------- -----------
Net income $ 488 $ 9,450 $ - $ 9,938
=========== =========== =========== ===========
Total assets $ 65,800 $ 3,599,744 $ - $ 3,665,544
13
NINE MONTHS ENDED DECEMBER 31, 2004
---------------------------------------------------------
(IN THOUSANDS)
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ----------- ------------ ------------
Interest income $ 315 $ 147,687 $ (819) $ 147,183
Interest expense 797 57,733 (819) 57,711
----------- ----------- ----------- -----------
Net interest income (loss) (482) 89,954 - 89,472
Provision for loan losses - 1,414 - 1,414
----------- ----------- ----------- -----------
Net interest income (loss) after provision for loan losses (482) 88,540 - 88,058
Real estate investment partnership revenue 54,983 - - 54,983
Other revenue from real estate operations 2,744 - - 2,744
Other income - 18,532 (89) 18,443
Real estate investment partnership cost of sales (43,909) - - (43,909)
Other expense from real estate partnership operations (6,693) - 89 (6,604)
Minority interest in income of real estate partnerships (4,965) - - (4,965)
Other expense - (56,324) - (56,324)
----------- ----------- ----------- -----------
Income before income taxes 1,678 50,748 - 52,426
Income tax expense 716 19,511 - 20,227
----------- ----------- ----------- -----------
Net income $ 962 $ 31,237 $ - $ 32,199
=========== =========== =========== ===========
Total Assets $ 76,621 $ 3,857,766 $ - $ 3,934,387
NINE MONTHS ENDED DECEMBER 31, 2003
---------------------------------------------------------
(IN THOUSANDS)
CONSOLIDATED
REAL ESTATE COMMUNITY INTERSEGMENT FINANCIAL
INVESTMENTS BANKING ELIMINATIONS STATEMENTS
----------- ----------- ------------ ------------
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
Real estate investment partnership revenue 31,565 - - 31,565
Other revenue from real estate operations 1,852 - - 1,852
Other income - 23,052 61 23,113
Real estate investment partnership cost of sales (23,445) - - (23,445)
Other expense from real estate partnership operations (1,882) - - (1,882)
Minority interest in income of real estate partnerships (3,301) - - (3,301)
Other expense - (52,781) (124) (52,905)
----------- ----------- ----------- -----------
Income before income taxes 4,128 53,051 - 57,179
Income tax expense 1,677 20,271 - 21,948
----------- ----------- ----------- -----------
Net income $ 2,451 $ 32,780 $ - $ 35,231
=========== =========== =========== ===========
Total assets $ 65,800 $ 3,599,744 $ - $ 3,665,544
14
NOTE 7 - REGULATORY ACTION
In September 2004, the Board of Directors of the Bank entered into a Stipulation
and Consent to the Issuance of an Order to Cease and Desist for Affirmative
Relief with the Office of Thrift Supervision ("OTS") and the OTS issued a
Consent Order to Cease and Desist for Affirmative Relief ("Consent Order").
Under the Consent Order, the Bank's board of directors has agreed, among other
things, to take a range of actions with respect to the review and conduct of its
Bank Secrecy Act ("BSA") compliance activities.
In December 2004, the Board of Directors of the Bank entered into a Stipulation
and Consent to the Issuance of an Order of Assessment of Civil Money Penalty
with the OTS and the OTS issued a Consent Order of Assessment of Civil Money
Penalty. Under the consent order for monetary penalty, the Bank's board of
directors agreed to the assessment of a civil money penalty in the amount of
$100,000 against the Bank in connection with the same matters addressed in the
Consent Order previously issued by the OTS. The Bank remains subject to the
possibility of additional governmental actions with regard to these matters,
including potential additional monetary penalties.
The Bank is actively engaged in the process of addressing the issues related to
the Consent Order, including reviewing and strengthening its BSA compliance
process, and has taken a number of actions in this regard which are in addition
to those required by the OTS. The Corporation has experienced an increase in its
operating costs in connection with addressing matters related to the Consent
Order. The initial expense will amount to approximately $1.0 million. Ongoing
expense is expected to be approximately $150,000 to $250,000 per year.
NOTE 8 - SUBSEQUENT EVENTS
On January 21, 2005, the Corporation declared a $0.125 per share cash dividend
on its common stock, amounting to $2.8 million in the aggregate, to be paid on
February 15, 2005 to stockholders of record on January 31, 2005.
15
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.
EXECUTIVE OVERVIEW
Highlights for the third quarter ended December 31, 2004 include:
- Diluted earnings per share increased to $0.47 per share for the
quarter ended December 31, 2004 compared to $0.43 per share for the
quarter ended December 31, 2003;
- The net interest margin increased to 3.40% for the quarter ended
December 31, 2004 compared to 3.19% for the quarter ended December
31, 2003; and
- Loans receivable have increased $270 million or 8.89% since December
31, 2003.
Selected quarterly data are set forth in the following tables.
16
THREE MONTHS ENDED
----------------------------------------------------
(Dollars in thousands - except per share amounts 12/31/2004 9/30/2004 6/30/2004 3/31/2004
- ------------------------------------------------ ----------------------------------------------------
OPERATIONS DATA:
Net interest income $ 31,651 $ 29,615 $ 28,206 $ 26,823
Provision for loan losses 664 300 450 600
Net gain on sale of loans 1,825 1,592 299 2,384
Real estate investment partnership revenue 16,104 15,143 23,967 9,507
Other non-interest income 5,284 6,048 5,997 7,534
Real estate investment partnership cost of sales 13,131 11,067 19,819 6,436
Non-interest expense 20,368 21,933 20,609 19,551
Minority interest in income of
real estate partnership operations 2,023 1,359 1,582 2,585
Income before income taxes 18,678 17,739 16,009 19,661
Income taxes 7,758 7,057 5,412 7,523
Net income 10,920 10,682 10,597 12,138
SELECTED FINANCIAL RATIOS (1):
Yield on earning assets 5.51% 5.35% 5.22% 5.21%
Cost of funds 2.22 2.22 2.17 2.26
Interest rate spread 3.29 3.13 3.05 2.95
Net interest margin 3.40 3.25 3.13 3.03
Return on average assets 1.11 1.12 1.11 1.29
Return on average equity 13.75 13.68 13.91 16.05
Average equity to average assets 8.09 8.20 7.97 8.06
Non-interest expense to average assets 3.41 3.47 4.23 2.77
PER SHARE:
Basic earnings per share $ 0.48 $ 0.47 $ 0.47 $ 0.54
Diluted earnings per share 0.47 0.46 0.46 0.53
Dividends per share 0.13 0.13 0.11 0.11
Book value per share 13.97 13.74 13.38 13.14
FINANCIAL CONDITION:
Total assets $3,934,387 $3,914,257 $3,839,653 $3,810,386
Loans receivable, net
Held for sale 11,816 7,057 11,032 14,578
Held for investment 3,292,339 3,231,826 3,162,136 3,066,812
Deposits 2,705,495 2,681,757 2,663,376 2,609,686
Borrowings 826,928 846,139 807,614 854,550
Stockholders' equity 320,749 316,359 307,715 301,548
Allowance for loan losses 27,526 28,213 28,535 28,607
Non-performing assets 21,029 21,187 19,009 17,343
- ----------
(1) Annualized when appropriate.
17
THREE MONTHS ENDED
(Dollars in thousands - except per share amounts) 12/31/2003 9/30/2003 6/30/2003 3/31/2003
- ------------------------------------------------- ---------- --------- --------- ---------
OPERATIONS DATA:
Net interest income $ 27,490 $ 27,582 $ 28,460 $ 28,696
Provision for loan losses 450 450 450 450
Net gain on sale of loans 1,683 1,411 9,807 6,346
Real estate investment partnership revenue 11,856 - - -
Other non-interest income 3,717 6,488 3,259 5,018
Real estate investment partnership cost of sales 7,787 - - -
Non-interest expense 18,954 16,855 18,150 18,140
Minority interest in income of
real estate partnership operations 1,478 - - -
Income before income taxes 16,077 18,176 22,926 21,470
Income taxes 6,139 6,976 8,833 8,203
Net income 9,938 11,200 14,093 13,267
SELECTED FINANCIAL RATIOS (1):
Yield on earning assets 5.49% 5.66% 5.83% 5.99%
Cost of funds 2.39 2.46 2.56 2.63
Interest rate spread 3.10 3.20 3.27 3.36
Net interest margin 3.19 3.26 3.39 3.48
Return on average assets 1.09 1.23 1.58 1.52
Return on average equity 13.44 15.12 18.91 18.05
Average equity to average assets 8.10 8.12 8.38 8.42
Non-interest expense to average assets 2.93 1.85 2.04 2.08
PER SHARE:
Basic earnings per share $ 0.44 $ 0.49 $ 0.61 $ 0.56
Diluted earnings per share 0.43 0.48 0.59 0.55
Dividends per share 0.11 0.11 0.10 0.10
Book value per share 13.04 12.66 12.54 12.24
FINANCIAL CONDITION:
Total assets $3,665,544 $3,661,558 $3,622,614 $3,538,621
Loans receivable, net
Held for sale 14,448 49,211 61,666 43,054
Held for investment 3,019,819 2,910,816 2,823,263 2,770,988
Deposits 2,553,267 2,597,574 2,646,438 2,580,767
Borrowings 750,729 721,994 607,614 595,816
Stockholders' equity 298,640 293,017 299,699 293,004
Allowance for loan losses 28,899 28,601 30,037 29,677
Non-performing assets 14,617 14,693 17,611 11,653
- ------------------
(1) Annualized when appropriate.
SIGNIFICANT ACCOUNTING POLICIES
There are a number of accounting policies that require the use of
judgment. Some of the more significant policies are as follows:
- - Establishing the amount of the allowance for loan losses requires the use
of judgment as well as other systematic objective and quantitative
methods. The loan portfolio, foreclosed properties, and repossessed assets
are evaluated on a continuous basis to determine the necessity for
additions to the allowances for losses and the related balance in the
allowances. These evaluations consider several factors including, but not
limited to, general economic conditions, collateral value, loan portfolio
composition, loan delinquencies, prior loss experience, anticipated loss
of interest and losses inherent in the portfolio. The evaluation of the
allowance for loan losses includes a review of known loan problems as well
as potential loan problems based upon historical trends and ratios. To
determine the level and composition of the loan loss allowance, the loan
portfolio is broken out by categories of single-family residential,
multi-family residential, commercial real estate, construction and land,
consumer and commercial business. These categories are then further
divided into performing and substandard, which includes performing and
non-performing groups of loans. A five-year historical trend is applied to
each category of performing loans to arrive at the appropriate levels of
loss reserves for those respective categories based on the ratio of loss
history to overall balance in each respective loan category. The
non-performing groups are analyzed using the trends of the current year in
which they are being evaluated. For commercial business loans, a
three-year historical trend is applied since that category has shown
significant growth both in terms of overall balance and loss history
associated with that growth. The Corporation has allocated all of its
allowance for loan losses to specific categories as a result of more
precise analysis of loan portfolio performance. Also, within specific loan
categories, certain loans may be identified for specific reserve
allocations as well as the whole category of that loan type being reviewed
for a calculated general reserve based on the foregoing analysis of trends
and overall balance growth within that category.
- - Valuation of mortgage servicing rights requires the use of judgment.
Mortgage servicing rights are established on loans that are originated and
subsequently sold with servicing rights retained. A portion of the loan's
book basis to mortgage servicing rights is allocated when a loan is sold.
The fair value of mortgage servicing rights is the present value of
estimated future net cash flows from the servicing relationship using
current market assumptions for prepayments, servicing costs and other
factors. As the loans are repaid and net servicing revenue is earned,
mortgage servicing rights are amortized into expense. Net servicing
revenues are expected to exceed this amortization expense. However, if
actual prepayment experience exceeds what was originally anticipated, net
servicing revenues may be less than expected and mortgage servicing rights
may be impaired.
- - Judgment is also used in the valuation of other intangible assets (core
deposit intangibles). Core deposit intangibles have been recorded for core
deposits (defined as checking, money market and savings deposits) that
have been acquired in acquisitions that were accounted for as purchase
business combinations. The core deposit intangible assets have been
recorded using the assumption that they provide a more favorable source of
funding than more expensive wholesale borrowings. An intangible asset has
been recorded for the present value of the difference between the expected
interest to be incurred on these deposits and interest expense that would
be expected if these deposits were replaced by wholesale borrowings, over
the expected lives of the core deposits. The current estimate of the
underlying lives of the core deposits is seven to fifteen years. If it is
determined that these deposits have a shorter life, the asset will be
adjusted to reflect an expense associated with the amount that is
impaired.
- - Goodwill is reviewed at least annually for impairment, which requires
judgment. Goodwill has been recorded as a result of an acquisition in
which purchase price exceeded fair value of net assets acquired. The price
paid for the acquisition is analyzed and compared to a number of current
indices. If goodwill is determined to be impaired, it would be expensed in
the period in which it became impaired.
19
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, 2004, which includes information on the Corporation's
asset/liability management strategies, sources of liquidity and capital
resources. This discussion should be read in conjunction with the unaudited
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, 2004
increased $980,000 to $10.9 million from $9.9 million and decreased $3.0 million
to $32.2 million from $35.2 million, respectively, for the same periods in the
prior year. The increase in net income for the three-month period compared to
the same period last year was largely due to an increase in non-interest income
of $6.0 million and an increase in net interest income of $3.9 million which
were partially offset by an increase in other non-interest expense of $1.0
million and an increase in income taxes of $1.6 million. The decrease in net
income for the nine-month period compared to the same period last year was
largely due to a decrease in net gain on sale of loans of $9.2 million, a
decrease in net other revenue from real estate operations of $2.6 million, an
increase in other non-interest expense of $1.3 million and an increase in
compensation expense of $1.1 million, which were partially offset by an increase
in net interest income of $5.9 million, an increase in loan servicing income of
$4.6 million and a decrease in income tax expense of $1.7 million.
Net Interest Income. Net interest income increased $4.2 million and $5.9 million
for the three and nine months ended December 31, 2004, respectively, as compared
to the same periods in the prior year. Interest income increased $4.1 million
and $3.0 million for the three and nine months ended December 31, 2004 as
compared to the same respective periods in the prior year. Interest expense
decreased $44,000 and $2.9 million for the three and nine months ended December
31, 2004 as compared to the same respective periods in the prior year. The net
interest margin increased to 3.40% for the three-month period ended December 31,
2004 from 3.19% in the same period in the prior year, and increased to 3.26% for
the nine-month period ended December 31, 2004 from 3.24% in the same period in
the prior year. The change in the net interest margin reflects the decrease in
yields on interest bearing liabilities. The interest rate spread increased to
3.29% from 3.10% for the three-month period and increased to 3.16% from 3.12%
for the nine-month period ended December 31, 2004 as compared to the same
respective periods in the prior year.
Interest income on loans increased $4.4 million and $5.0 million, for the three
and nine months ended December 31, 2004, respectively, as compared to the same
periods in the prior year. These increases were primarily attributable to an
increase in the average balance of loans, which increased $329.3 million and
$261.9 million in the three and nine months ended December 31, 2004, as compared
to the same respective periods in the prior year. These increases more than
offset a decrease of 5 basis points in the average yield on loans to 5.77% from
5.82% for the respective three-month period and a decrease of 27 basis points to
5.65% from 5.92% for the respective nine-month period. Interest income on
mortgage-related securities increased $5,000 and decreased $810,000,
respectively for the three- and nine-month periods ended December 31, 2004, as
compared to the same periods in the prior year, primarily due to an increase of
$19.5 million and a decrease of $2.5 million, respectively, in the three-month
and nine-month average balances of mortgage-related securities. These decreases
were also due to a decrease of 42 basis points in the average yield on
mortgage-related securities to 4.13% from 4.55% for the three-month period and a
decrease of 46 basis points to 4.05% from 4.51% for the nine-month period. In
addition, interest income on investment securities (including Federal Home Loan
Bank stock) decreased $670,000 and $1.7 million, respectively, for the three-
and nine-month periods ended December 31, 2004, as compared to the same periods
in the prior year. This was primarily a result of a decrease of $96.0 million
and $73.8 million, respectively, in the average balance of investment securities
for the three- and nine-month period ended December 31, 2004, as compared to the
same respective periods in 2003. Interest income on interest-bearing deposits
increased $340,000 and $540,000, respectively, for the three and nine months
ended December 31, 2004, as compared to the same periods in 2003, primarily due
to increases in average balances.
Interest expense on deposits decreased $400,000 and $5.0 million for the three
and nine months ended December 31, 2004, respectively, as compared to the same
periods in 2003. These decreases were due to a decrease of 14 basis points in
the weighted average cost of deposits to 1.88% from 2.02% and a decrease of 29
basis points to 1.82% from 2.11% for the respective three- and nine-month
periods. Interest expense on notes payable and other
20
borrowings increased $360,000 and $2.0 million, respectively, during the three
and nine months ended December 31, 2004, as compared to the same respective
periods in the prior year due primarily to an increase of $130.6 million and
$156.2 million, respectively, in the average balance of notes payable and other
borrowings for the three- and nine-month periods ended December 31, 2004,
respectively, as compared to the same periods in 2003.
Provision for Loan Losses. Provision for loan losses increased $210,000 and
$60,000 for the three- and nine-month periods ended December 31, 2004,
respectively, 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 future charge-offs of loans deemed uncollectible.
Average Interest-Earning Assets, Average Interest-Bearing Liabilities and
Interest Rate Spread. The tables on the following pages 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.
21
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
--------------------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans $ 2,537,737 $ 35,957 5.67% $ 2,277,158 $ 32,858 5.77%
Consumer loans 567,759 8,521 6.00 528,302 8,033 6.08
Commercial business loans 174,531 2,869 6.58 145,266 2,014 5.55
----------- ---------- -------------- -----------
Total loans receivable 3,280,027 47,347 5.77 2,950,726 42,905 5.82
Mortgage-related securities 207,170 2,141 4.13 187,651 2,136 4.55
Investment securities 56,163 332 2.36 123,163 456 1.48
Interest-bearing deposits 125,475 565 1.80 97,061 221 0.91
Federal Home Loan Bank stock 56,228 973 6.92 85,216 1,523 7.15
----------- ---------- -------------- -----------
Total interest-earning assets 3,725,063 51,358 5.51 3,443,817 47,241 5.49
---- ----
Non-interest-earning assets 201,509 207,688
----------- --------------
Total assets $ 3,926,572 $ 3,651,505
=========== ==============
INTEREST-BEARING LIABILITIES
Demand deposits $ 760,859 1,355 0.71 $ 749,253 763 0.41
Regular passbook savings 255,223 282 0.44 236,902 280 0.47
Certificates of deposit 1,711,957 11,177 2.61 1,625,233 12,174 3.00
----------- ---------- -------------- -----------
Total deposits 2,728,039 12,814 1.88 2,611,388 13,217 2.02
Notes payable and other borrowings 820,806 6,893 3.36 690,183 6,534 3.79
----------- ---------- -------------- -----------
Total interest-bearing liabilities 3,548,845 19,707 2.22 3,301,571 19,751 2.39
---- ----
Non-interest-bearing liabilities 60,094 54,105
----------- --------------
Total liabilities 3,608,939 3,355,676
Stockholders' equity 317,633 295,829
----------- --------------
Total liabilities and stockholders' equity $ 3,926,572 $ 3,651,505
=========== ==============
Net interest income/interest rate spread $ 31,651 3.29% $ 27,490 3.10%
========== ==== =========== ====
Net interest-earning assets $ 176,218 $ 142,246
=========== ==============
Net interest margin 3.40% 3.19%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.05 1.04
=========== ==============
- ----------------------
(1) Annualized
22
NINE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
--------------------------------------------------------------------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS
Mortgage loans $ 2,475,210 $ 103,268 5.56% $ 2,282,562 $ 100,299 5.86%
Consumer loans 557,819 24,850 5.94 517,052 24,267 6.26
Commercial business loans 167,963 7,470 5.93 139,494 6,022 5.76
----------- ---------- -------------- -----------
Total loans receivable 3,200,992 135,588 5.65 2,939,108 130,588 5.92
Mortgage-related securities 211,010 6,404 4.05 213,465 7,217 4.51
Investment securities 56,608 879 2.07 116,019 1,476 1.70
Interest-bearing deposits 121,082 1,207 1.33 85,542 667 1.04
Federal Home Loan Bank stock 69,464 3,105 5.96 83,844 4,221 6.71
----------- ---------- -------------- -----------
Total interest-earning assets 3,659,156 147,183 5.36 3,437,978 144,169 5.59
---- ----
Non-interest-earning assets 194,992 241,324
----------- --------------
Total assets $ 3,854,148 $ 3,679,302
=========== ==============
INTEREST-BEARING LIABILITIES
Demand deposits $ 744,714 3,057 0.55 $ 778,011 2,524 0.43
Regular passbook savings 253,962 829 0.44 227,392 849 0.50
Certificates of deposit 1,688,626 32,772 2.59 1,620,728 38,245 3.15
----------- ---------- -------------- -----------
Total deposits 2,687,302 36,658 1.82 2,626,131 41,618 2.11
Notes payable and other borrowings 803,771 21,053 3.49 647,598 19,019 3.92
----------- ---------- -------------- -----------
Total interest-bearing liabilities 3,491,073 57,711 2.20 3,273,729 60,637 2.47
---- ----
Non-interest-bearing liabilities 51,601 109,751
----------- --------------
Total liabilities 3,542,674 3,383,480
Stockholders' equity 311,474 295,822
----------- --------------
Total liabilities and stockholders' equity $ 3,854,148 $ 3,679,302
=========== ==============
Net interest income/interest rate spread $ 89,472 3.16% $ 83,532 3.12%
========== ==== =========== ====
Net interest-earning assets $ 168,083 $ 164,249
=========== ==============
Net interest margin 3.26% 3.24%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.05 1.05
=========== ==============
- -------------------
(1) Annualized
23
Non-Interest Income. Non-interest income increased to $23.2 million and $76.3
million for the three and nine months ended December 31, 2004, respectively, as
compared to $17.3 million and $56.5 million for the same periods in 2003. The
increase was primarily due to the increase of real estate investment partnership
revenue of $4.2 million and $23.4 million for the three- and nine-month periods
ended December 31, 2004, respectively and the increase in other revenue from
real estate operations of $1.4 million and $900,000 for the three and nine
months ended December 31, 2004, respectively. In addition, loan servicing income
increased $200,000, the net gain on sale of loans increased $140,000, net gain
on sale of investments and mortgage-related securities increased $120,000 and
service charges on deposits increased $80,000 for the three months ended
December 31, 2004, as compared to the same respective period in 2003. These
increases were partially offset by a decrease in insurance commissions of
$150,000 and a decrease in other non-interest income of $80,000 for the
three-month period ended December 31, 2004, as compared to the same period in
the prior year. Loan servicing income increased $4.6 million, net gain on sale
of investments and mortgage-related securities increased $1.2 million and
service charges on deposits increased $350,000 for the nine months ended
December 31, 2004, as compared to the same respective period in 2003. The
increases were offset by a decrease in the net gain on sale of loans of $9.2
million, a decrease in other non-interest income of $1.4 million and a decrease
in insurance commissions of $70,000 for the nine-month period ending December
31, 2004, as compared to the same respective periods in the prior year.
Non-Interest Expense. Non-interest expense increased to $33.5 million and $106.9
million for the three and nine months ended December 31, 2004, respectively, as
compared to $26.7 million and $78.2 million for the same periods in 2003,
primarily due to the increase of real estate investment partnership cost of
sales of $5.3 million and $20.5 million for the three- and nine-month periods
ended December 31, 2004, respectively, as compared to the same periods in the
prior year, and the increase in other expenses from real estate operations of
$250,000 and $4.8 million for the three and nine months ended December 31, 2004,
respectively, as compared to the same periods in the prior year. Other
non-interest expense increased $970,000 primarily due to increased legal expense
and postage expense, marketing expense increased $220,000, occupancy expense
increased $130,000 and compensation expense increased $30,000 for the three
months ended December 31, 2004 as compared to the same period in the prior year.
These increases were partially offset by a decrease in data processing expense
of $130,000 and a decrease in furniture and equipment expense of $60,000 for the
three-month period ending December 31, 2004, as compared to the same respective
period in 2003. Other non-interest expense increased $1.3 million primarily as a
result of an increase in contributions expense, legal expense and consulting
expense, compensation expense increased $1.1 million primarily resulting from
increased employee benefits and marketing expense increased $660,000 for the
nine-month period ending December 31, 2004, as compared to the same respective
period in 2003. In addition, occupancy expense increased $160,000, furniture and
equipment expense increased $130,000 and data processing expense increased
$20,000 for the nine months ended December 31, 2004 as compared to the same
respective period in the prior year.
Income Taxes. Income tax expense increased $1.6 million and decreased $1.7
million, respectively, during the three and nine months ended December 31, 2004,
as compared to the same periods in 2003. The decrease for the nine- month period
was the result of a decrease in income before income tax of $4.8 million to
$52.4 million for the nine months ended December 31, 2004, as compared to $57.2
million for the same period in the prior year. The effective tax rate was 41.5%
and 38.6%, for the three-and nine-month periods ended December 31, 2004,
respectively, as compared to 38.2% and 38.4% for the same periods last year.
24
FINANCIAL CONDITION
During the nine months ended December 31, 2004, the Corporation's assets
increased by $124.0 million from $3.81 billion at March 31, 2004 to $3.93
billion. The majority of this increase was attributable to an increase in loans
and investments, which were partially offset by decreases in other categories
such as mortgage-related securities, real estate held for development and
Federal Home Loan Bank stock.
Total loans (including loans held for sale) increased $222.8 million during the
nine months ended December 31, 2004. Activity for the period consisted of (i)
originations and purchases of $1.88 billion, (ii) sales of $578.2 million, and
(iii) principal repayments and other adjustments of $1.08 billion.
Mortgage-related securities (both available for sale and held to maturity)
decreased $11.8 million during the nine months ended December 31, 2004 as a
result of principal repayments and market value adjustments of $51.3 million and
sales of $19.0 million. These decreases were partially offset by purchases of
$58.5 million of mortgage-related securities in this nine-month period.
Mortgage-related securities consisted of $113.7 million of mortgage-backed
securities and $99.7 million of collateralized mortgage obligations ("CMO's")
and real estate mortgage investment conduits ("REMIC's") at December 31, 2004.
The Corporation invests in corporate CMOs and agency-issued REMICs. These
investments are deemed to have limited credit risk. The investments do have
interest rate risk due to, among other things, actual prepayments being more or
less than those predicted at the time of purchase. The Corporation invests only
in short-term tranches in order to limit the reinvestment risk associated with
greater than anticipated prepayments, as well as changes in value resulting from
changes in interest rates.
Investment securities increased $1.2 million during the nine months ended
December 31, 2004 as a result of purchases of $170.5 million of U.S. Government
and agency securities, which were substantially offset by sales and maturities
of $169.8 million of such securities.
Federal Home Loan Bank ("FHLB") stock decreased $42.4 million during the nine
months ended December 31, 2004. This decrease was related to a return of excess
holdings of FHLB stock and was used to provide liquidity.
Real estate held for development decreased $16.9 million to $60.8 million as of
December 31, 2004 from $77.7 million as of March 31, 2004. This decrease was the
result of continued home and land lot sales.
Total liabilities increased $104.5 million during the nine months ended December
31, 2004. This increase was largely due to a $95.8 million increase in deposits
and a $13.3 million increase in other liabilities 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 $377.8 million at
December 31, 2004 and $285.2 million at March 31, 2004, and generally mature
within one to five years.
Stockholders' equity increased $19.2 million during the nine months ended
December 31, 2004 as a net result of (i) comprehensive income of $29.9 million,
(ii) stock options exercised of $3.7 million (with the excess of the cost of
treasury shares over the option price ($2.4 million) charged to retained
earnings), (iii) the issuance of shares for management and benefit plans of
$270,000, and (iv) benefit plan shares earned and related tax adjustments
totaling $680,000. These increases were partially offset by (i) cash dividends
of $8.1 million and (ii) purchases of treasury stock of $4.9 million.
25
ASSET QUALITY
Non-performing assets increased $3.7 million to $21.0 million at December 31,
2004 from $17.3 million at March 31, 2004 and increased as a percentage of total
assets to 0.53% from 0.46% at such dates, respectively.
Non-performing assets are summarized as follows at the dates indicated:
AT DECEMBER 31, AT MARCH 31,
--------------- --------------------------------------
2004 2004 2003 2002
--------------- --------------------------------------
(Dollars In Thousands)
Non-accrual loans:
Single-family residential $ 2,930 $ 3,247 $ 4,510 $ 4,505
Multi-family residential - - 444 187
Commercial real estate 10,953 8,764 1,776 2,212
Construction and land - - - 168
Consumer 604 642 661 933
Commercial business 5,990 2,268 2,678 1,037
---------- ---------- ---------- ----------
Total non-accrual loans 20,477 14,921 10,069 9,042
Real estate held for development and sale - - 49 74
Foreclosed properties and repossessed assets, net 552 2,422 1,535 1,475
---------- ---------- ---------- ----------
Total non-performing assets $ 21,029 $ 17,343 $ 11,653 $ 10,591
========== ========== ========== ==========
Performing troubled debt restructurings $ 50 $ 2,649 $ 2,590 $ 403
========== ========== ========== ==========
Total non-accrual loans to total loans 0.59% 0.45% 0.34% 0.32%
Total non-performing assets to total assets 0.53 0.46 0.33 0.30
Allowance for loan losses to total loans 0.79 0.87 1.00 1.09
Allowance for loan losses to total non-accrual loans 134.42 191.72 294.74 346.04
Allowance for loan losses to total non-performing assets 131.42 165.78 257.87 300.05
Non-accrual loans increased $5.6 million during the nine months ended December
31, 2004. The increase was largely attributable to three commercial loans placed
on non-accrual status during this period. One was a $5.2 million commercial
business loan secured by a computer software and consulting company located in
Tempe, Arizona. The second was a $1.5 million commercial real estate loan
secured by commercial development property located in Madison, Wisconsin. The
third was a $900,000 loan secured by a warehouse office located in Minneapolis,
Minnesota. At December 31, 2004, there were five non-accrual commercial loans
with loan balances greater than $1.0 million. One loan is a commercial real
estate loan which is secured by a 70 unit hotel located in Kenosha, Wisconsin,
with a loan balance of $3.1 million at December 31, 2004. Another loan is a
commercial real estate loan which is secured by retail property in Dallas,
Texas, with a loan balance of $1.7 million at December 31, 2004. Another loan is
a commercial real estate loan which is secured by a 161 unit motel located in
Schiller Park, Illinois, with a loan balance of $1.5 million at December 31,
2004. The other two loans with loan balances greater than $1.0 million are the
two loans discussed above which were placed on non-accrual status during the
nine months ended December 31, 2004. 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.
26
Foreclosed properties and repossessed assets decreased $1.9 million for the nine
months ended December 31, 2004. The decrease was not attributable to any one
specific property.
Performing troubled debt restructurings decreased $2.6 million during the nine
months ended December 31, 2004 primarily due to a $2.1 million commercial real
estate loan in Sonoma, California that was paid off during the period.
At December 31, 2004, assets that the Corporation had classified as substandard,
net of reserve, consisted of $25.0 million of loans and foreclosed properties.
As of March 31, 2004, substandard assets amounted to $31.1 million. An asset is
classified as substandard when it is determined that it is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any, and that the Corporation will sustain some loss if
the deficiencies are not corrected. The decrease of $6.1 million in the
substandard balance for the nine months ended December 31, 2004 was in part
attributable to the pay off of three previously classified loans which had
carrying values of greater than $1.0 million ($4.9 million in the aggregate).
The three loans were secured by properties located in Janesville, Wisconsin;
Sonoma, California; and Minneapolis, Minnesota.
The category of substandard assets contains several loans with a carrying value
of greater than $1.0 million. One loan, with a carrying value of $3.9 million,
is secured by the assets of a stainless tank operation located in Cottage Grove,
Wisconsin. Two loans with a carrying value of $4.7 million, are secured by a
computer software and consulting company located in Tempe, Arizona. A third
loan, with a carrying value of $2.8 million, is secured by a 70 unit hotel
located in Kenosha, Wisconsin. A fourth loan, with a carrying value of $1.2
million, is secured by a commercial property located in Beloit, Wisconsin. A
fifth loan, with a carrying value of $1.2 million is secured by commercial
development property located in Madison, Wisconsin. A sixth loan, with a
carrying value of $1.0 million is secured by retail property located in Dallas,
Texas. A seventh loan, with a carrying value of $1.0 million, is secured by a
161 unit motel located in Schiller Park, Illinois.
At December 31, 2004, the Corporation had identified assets of $14.5 million as
impaired, net of reserves. As of March 31, 2004, impaired loans were $11.7
million. A loan is defined as impaired when, according to FAS 114, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. A summary of the details regarding impaired loans follows:
AT DECEMBER 31, AT MARCH 31,
--------------- ---------------------------------------------------
2004 2004 2003 2002
--------------- ---------------------------------------------------
(In Thousands)
Impaired loans with valuation reserve required $ 19,914 $ 17,126 $ 8,483 $ 11,467
Less:
Specific valuation allowance 5,419 5,382 3,717 4,240
--------------- --------------- --------------- ---------------
Total impaired loans $ 14,495 $ 11,744 $ 4,766 $ 7,227
=============== =============== =============== ===============
Average impaired loans $ 11,686 $ 6,389 $ 6,288 $ 6,216
Interest income recognized on impaired loans $ 500 $ 710 $ 613 $ 740
Interest income recognized on a cash basis
on impaired loans $ 500 $ 710 $ 613 $ 740
27
The following table sets forth information relating to the Corporation's loans
that were less than 90 days delinquent at the dates indicated.
AT DECEMBER 31, AT MARCH 31,
--------------- ---------------------------------------------------
2004 2004 2003 2002
--------------- ---------------------------------------------------
(In Thousands)
30 to 59 days $ 10,629 $ 4,887 $ 10,083 $ 17,647
60 to 89 days 3,301 10,941 5,612 2,671
--------------- --------------- --------------- ---------------
Total $ 13,930 $ 15,828 $ 15,695 $ 20,318
=============== =============== =============== ===============
The Corporation's loan portfolio, foreclosed properties and repossessed assets
are evaluated on a continuing basis to determine the necessity for additions and
recaptures to the allowance for loan 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 loan losses follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- -----------------------------
2004 2003 2004 2003
---------------------------- -----------------------------
(Dollars In Thousands)
Allowance at beginning of period $ 28,213 $ 28,601 $ 28,607 $ 29,677
Charge-offs:
Mortgage (702) (21) (1,132) (234)
Consumer (209) (192) (669) (564)
Commercial business (595) (43) (993) (1,908)
------------- ------------ ------------ --------------
Total charge-offs (1,506) (256) (2,794) (2,706)
Recoveries:
Mortgage 137 12 174 274
Consumer 11 19 53 57
Commercial business 7 73 72 247
------------- ------------ ------------ --------------
Total recoveries 155 104 299 578
------------- ------------ ------------ --------------
Net charge-offs (1,351) (152) (2,495) (2,128)
Provision for loan losses 664 450 1,414 1,350
------------- ------------ ------------ --------------
Allowance at end of period $ 27,526 $ 28,899 $ 27,526 $ 28,899
============= ============ ============ ==============
Net charge-offs to average loans (0.16)% (0.02)% (0.16)% (0.14)%
============= ============ ============ ==============
Although management believes that the December 31, 2004 allowance for loan
losses is adequate based upon the current evaluation of loan delinquencies,
non-performing assets, charge-off trends, economic conditions and other factors,
there can be no assurance that future adjustments to the allowance will not be
necessary. Management also continues to pursue all practical and legal methods
of collection, repossession and disposal, and adheres to high underwriting
standards in the origination process in order to continue to maintain strong
asset quality.
28
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, FHLB advances and other borrowings.
At December 31, 2004, the Corporation had outstanding commitments to originate
loans of $128.6 million, commitments to extend funds to, or on behalf of,
customers pursuant to lines and letters of credit of $298.6 million and loans
sold with recourse to the Corporation in the event of default by the borrower of
$261,000. The Corporation had sold loans with recourse in the amount of $13.4
million through the FHLB Mortgage Partnership Finance Program at December 31,
2004. Scheduled maturities of certificates of deposit during the twelve months
following December 31, 2004 amounted to $1.02 billion and scheduled maturities
of FHLB advances during the same period totaled $174.6 million. At December 31,
2004, the Corporation had no reverse repurchase agreements. Management believes
adequate resources are available to fund all commitments to the extent required.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
liquid investments in qualifying types of U.S. Government and agency securities
and other investments sufficient to ensure its safe and sound operation. During
the quarter ended December 31, 2004, the Bank's average liquidity ratio was
6.88%.
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.
29
The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at December 31, 2004 and March 31, 2004:
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES OTS REQUIREMENTS
----------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------------------------------------------------------
(Dollars In Thousands)
AS OF DECEMBER 31, 2004:
Tier 1 capital
(to adjusted tangible assets) $ 308,315 8.01% $ 115,471 3.00% $ 192,451 5.00%
Risk-based capital
(to risk-based assets) 330,428 10.63 248,755 8.00 310,943 10.00
Tangible capital
(to tangible assets) 308,315 8.01 57,735 1.50 N/A N/A
AS OF MARCH 31, 2004:
Tier 1 capital
(to adjusted tangible assets) $ 285,680 7.71% $ 111,208 3.00% $ 185,346 5.00%
Risk-based capital
(to risk-based assets) 308,912 10.61 232,858 8.00 291,073 10.00
Tangible capital
(to tangible assets) 285,680 7.71 55,604 1.50 N/A N/A
The following table reconciles the Corporation's stockholders' equity to
regulatory capital at December 31, 2004 and March 31, 2004:
DECEMBER 31, MARCH 31,
-------------------------------------------
2004 2004
-------------------------------------------
(In Thousands)
Stockholders' equity of the Corporation $ 320,749 $ 301,548
Less: Capitalization of the Corporation and non-bank
subsidiaries 8,228 8,674
------------- -------------
Stockholders' equity of the Bank 328,977 310,222
Less: Intangible assets and other non-includable
assets (20,662) (24,542)
------------- -------------
Tier 1 and tangible capital 308,315 285,680
Plus: Allowable general valuation allowances 22,113 23,232
------------- -------------
Risk based capital $ 330,428 $ 308,912
============= =============
30
GUARANTEES
Financial Interpretation No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others" ("FIN 45") requires certain guarantees to be recorded at fair value as a
liability at inception and when a loss is probable and reasonably estimatable,
as those terms are defined in FASB Statement No. 5 "Accounting for
Contingencies." The recording of the liability has not significantly affected
the Corporation's financial condition.
The Corporation's real estate investment segment, IDI, is required to guarantee
the partnership loans of its subsidiaries, for the development of homes for
sale. As of December 31, 2004, IDI had guaranteed $85.7 million for the
following partnerships on behalf of the respective subsidiaries. As of the same
date, $27.5 million was outstanding. The table below summarizes the individual
subsidiaries and their respective guarantees and outstanding loan balances.
AMOUNT AMOUNT
SUBSIDIARY PARTNERSHIP AMOUNT OUTSTANDING OUTSTANDING
OF IDI ENTITY GUARANTEED AT 12/31/04 AT 3/31/04
- ----------- ------------------------ ------------- -------------- -----------
(Dollars in thousands)
Oakmont Chandler Creek $ 8,440 $ 4,383 $ 7,340
Davsha II Paragon 9,435 5,971 3,130
Davsha III Indian Palms 147, LLC 13,155 2,237 1,650
Davsha IV DH Indian Palms, LLC 9,840 1,233 3,330
Davsha V Villa Santa Rosa, LLC 9,000 7,387 5,490
Davsha VI Bellasara 168, LLC 9,074 1,009 4,700
Davsha VII La Vista Grande 121, LLC 9,939 5,319 -
Davsha VIII Laguna Mirage, LLC 5,200 - -
Davsha IX Laguna Verde, LLC 11,600 - -
------------- -------------- -----------
Total $ 85,683 $ 27,539 $ 25,640
============= ============== ===========
IDI has real estate partnership investments within its subsidiaries for which it
guarantees the above loans. These partnerships are also funded by financing with
loans guaranteed by IDI and secured by the lots and homes being developed within
each of the respective partnership entities.
As a limited partner, the Corporation still has the ability to exercise
significant influence over operating and financial policies. This influence is
evident in the terms of the respective partnership agreements and participation
in policy-making processes. The Corporation has a 50% controlling interest in
the respective limited partnerships and therefore has significant influence over
the right to approve the sale or refinancing of assets of the respective
partnerships in accordance with those partnership agreements.
In acting as a partner with a controlling interest, the Corporation is committed
to providing additional levels of funding to meet partnership operating deficits
up to an aggregate amount of $85.7 million. At December 31, 2004, the
Corporation's investment in these partnerships consisted of assets of $51.9
million and cash and other assets of $3.6 million. The liabilities of these
partnerships consisted of other borrowings of $22.1 million (reported as a part
of FHLB and other borrowings), other liabilities of $4.5 million (reported as a
part of other liabilities) and minority
31
interest of $7.0 million. These amounts represent the Corporation's maximum
exposure to loss at December 31, 2004 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.
ASSET/LIABILITY MANAGEMENT
The primary function of asset and liability management is to provide liquidity
and maintain an appropriate balance between interest-earning assets and
interest-bearing liabilities within specified maturities and/or repricing dates.
Interest rate risk is the imbalance between interest-earning assets and
interest-bearing liabilities at a given maturity or repricing date, and is
commonly referred to as the interest rate gap (the "gap"). A positive gap exists
when there are more assets than liabilities maturing or repricing within the
same time frame. A negative gap occurs when there are more liabilities than
assets maturing or repricing within the same time frame. During a period of
rising interest rates, a negative gap over a particular period would tend to
adversely affect net interest income over such period, while a positive gap over
a particular period would tend to result in an increase in net interest income
over such period.
The Corporation's strategy for asset and liability management is to maintain an
interest rate gap that minimizes the impact of interest rate movements on the
net interest margin. As part of this strategy, the Corporation sells
substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, and invests in
adjustable-rate or medium-term, fixed-rate, single-family residential mortgage
loans, medium-term mortgage-related securities and consumer loans, which
generally have shorter terms to maturity and higher interest rates than
single-family mortgage loans.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates and/or
shorter terms to maturity than conventional single-family residential loans.
Long-term, fixed-rate, single-family residential mortgage loans originated for
sale in the secondary market are generally committed for sale at the time the
interest rate is locked with the borrower. As such, these loans involve little
interest rate risk to the Corporation.
The calculation of a gap position requires management to make a number of
assumptions as to when an asset or liability will reprice or mature. Management
believes that its assumptions approximate actual experience and considers them
reasonable, although the actual amortization and repayment of assets and
liabilities may vary substantially. The Corporation's cumulative net gap
position at December 31, 2004 has not changed materially since March 31, 2004.
CONSENT ORDER
In September 2004, the Board of Directors of the Bank entered into a Stipulation
and Consent to the Issuance of an Order to Cease and Desist for Affirmative
Relief with the Office of Thrift Supervision ("OTS") and the OTS issued a
Consent Order to Cease and Desist for Affirmative Relief ("Consent Order").
Under the Consent Order, the Bank's board of directors has agreed, among other
things, to take a range of actions with respect to the review and conduct of its
Bank Secrecy Act ("BSA") compliance activities.
In December 2004, the Board of Directors of the Bank entered into a Stipulation
and Consent to the Issuance of an Order of Assessment of Civil Money Penalty
with the OTS and the OTS issued a Consent Order of Assessment of Civil Money
Penalty. Under the consent order for monetary penalty, the Bank's board of
directors agreed to the assessment of a civil money penalty in the amount of
$100,000 against the Bank in connection with the same matters addressed in the
Consent Order previously issued by the OTS. The Bank remains subject to the
possibility of additional governmental actions with regard to these matters,
including potential additional monetary penalties.
The Bank is actively engaged in the process of addressing the issues related to
the Consent Order, including reviewing and strengthening its BSA compliance
process, and has taken a number of actions in this regard which are in addition
to those required by the OTS. The Corporation has experienced an increase in its
operating costs in connection with addressing matters related to the Consent
Order. The initial expense will amount to approximately $1.0 million. Ongoing
expense is expected to be approximately $150,000 to $250,000 per year.
32
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Corporation's market rate risk has not materially changed from
March 31, 2004. See the Corporation's Annual Report on Form 10-K for
the year ended March 31, 2004.
ITEM 4 CONTROLS AND PROCEDURES
The management of the Corporation evaluated, with the participation of
the Chief Executive Officer and Chief Financial Officer, the
effectiveness of the Corporation's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Corporation's disclosure
controls and procedures are designed to ensure that information
required to be disclosed in the reports that are filed or submitted
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and regulations and are operating in an effective manner.
No change in the Corporation's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the
Securities Exchange Act of 1934) occurred during the most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Corporation's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDING.
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.
In September 2004, the Board of Directors of the Bank entered into a
Stipulation and Consent to the Issuance of an Order to Cease and Desist
for Affirmative Relief with the OTS and the OTS issued a Consent Order
to Cease and Desist for Affirmative Relief. In December 2004, the Board
of Directors of the Bank entered into a Stipulation and Consent to the
Issuance of an Order of Assessment of Civil Money Penalty with the OTS
and the OTS issued a Consent Order of Assessment of Civil Money
Penalty. Under the consent order for monetary penalty, the Bank's board
of directors agreed to the assessment of a civil money penalty in the
amount of $100,000 against the Bank in connection with the same matters
addressed in the Consent Order previously issued by the OTS. For
additional information, see Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Consent
Order.
33
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) - (b) Not applicable.
(c) The following table sets forth information with respect to any
purchase made by or on behalf of the Corporation or any "affiliated
purchaser," as defined in Section 240.10b-18(a)(3) under the Exchange
Act, of shares of the Corporation's Common Stock during the indicated
periods.
TOTAL NUMBER OF
SHARES PURCHASED MAXIMUM NUMBER OF
TOTAL NUMBER AVERAGE AS PART OF PUBLICLY SHARES THAT MAY YET BE
OF SHARES PRICE PAID ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD PURCHASED PER SHARE OR PROGRAMS PLANS OR PROGRAMS (1)
- ------------------------------ ------------ ---------- ------------------- ----------------------
October 1 - October 31, 2004 90,000 $ 26.15 90,000 823,350
November 1 - November 30, 2004 46,000 28.78 46,000 1,927,350
December 1 - December 31, 2004 - - - 1,927,350
------------ ---------- ------------------- ----------------------
Total 136,000 $ 27.04 136,000 1,927,350
------------ ---------- ------------------- ----------------------
(1) Effective November 5, 2004, the Board of Directors extended the
current share repurchase program and authorized an additional share
repurchase program of 5% or approximately 1.15 million shares of its
outstanding common stock in the open market. The repurchases are
authorized to be made from time to time in open-market and/or negotiated
transactions as, in the opinion of management, market conditions may
warrant. The repurchased shares will be held as treasury stock and will be
available for general corporate purposes. The Corporation will utilize
various securities brokers as its agent for the stock repurchase program.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5 OTHER INFORMATION.
None.
34
ITEM 6 EXHIBITS
The following exhibits are filed with this report:
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Rules 13a-14 and 15d-14 of the Securities Exchange
Act of 1934 and Section 302 of the Sarbanes-Oxley Act
of 2002 is included herein as an exhibit to this
Report.
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Rules 13a-14 and 15d-14 of the Securities Exchange
Act of 1934 and Section 302 of the Sarbanes-Oxley Act
of 2002 is included as an exhibit to this Report.
Exhibit 32.1 Certification of the Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350) is included herein as an exhibit to this
Report.
Exhibit 32.2 Certification of the Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350) is included herein as an exhibit to this
Report.
35
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 4, 2005 By: /s/ Douglas J. Timmerman
--------------------------------------------
Douglas J. Timmerman, Chairman of the
Board, President and Chief Executive Officer
Date: February 4, 2005 By: /s/ Michael W. Helser
--------------------------------------------
Michael W. Helser, Treasurer and
Chief Financial Officer
36