<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 53703
Madison, Wisconsin -----
----------------- (Zip Code)
(Address of principal executive office)
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common stock -- $.10 Par Value
Number of shares outstanding as of October 31, 1998: 17,108,659
<PAGE> 2
ANCHOR BANCORP WISCONSIN INC.
INDEX - FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE #
------
<S> <C>
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1998
and March 31, 1998 2
Consolidated Statements of Income for the Three and Six
Months Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 1998 and 1997 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis
Results of Operations 11
Financial Condition 15
Asset Quality 17
Liquidity & Capital Resources 20
Asset/Liability Management 22
Item 3 Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 24
Item 3 Defaults upon Senior Securities 24
Item 4 Submission of Matters to Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
1
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 33,961 $ 31,999
Interest-bearing deposits 3,063 7,168
---------- ----------
Cash and cash equivalents 37,024 39,167
Investment securities available for sale 60,296 39,555
Investment securities held to maturity (fair value of $11,300 and
$17,600, respectively) 11,224 17,587
Mortgage-related securities available for sale 59,196 67,526
Mortgage-related securities held to maturity (fair value of $108,800
and $128,100, respectively) 107,583 127,239
Loans receivable, net:
Held for sale 15,106 18,060
Held for investment 1,723,642 1,591,089
Foreclosed properties and repossessed assets, net 2,469 4,723
Real estate held for development and sale 23,932 22,630
Office properties and equipment 17,999 18,640
Federal Home Loan Bank stock--at cost 22,442 22,002
Accrued interest on investments and loans 14,569 13,875
Prepaid expenses and other assets 18,427 17,214
---------- ----------
Total assets 2,113,909 $1,999,307
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $1,478,338 $1,392,472
Federal Home Loan Bank and other borrowings 452,393 411,625
Reverse repurchase agreements 17,302 42,935
Advance payments by borrowers for taxes and insurance 19,842 6,955
Other liabilities 16,018 17,369
---------- ----------
Total liabilities 1,983,893 1,871,356
---------- ----------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding - -
Common stock, $.10 par value, 30,000,000 shares
authorized, 24,998,648 shares issued 2,500 2,500
Additional paid-in capital 49,588 49,084
Retained earnings 132,698 125,615
Less: Treasury stock (7,939,599 shares and 7,073,460 shares,
respectively), at cost (52,250) (47,959)
Borrowings of Employee Stock Ownership Plan (1,379) (1,379)
Common stock purchased by benefit plans (2,247) (851)
Net unrealized gain on securities available for sale, net of tax 1,106 941
---------- ----------
Total stockholders' equity 130,016 127,951
---------- ----------
Total liabilities and stockholders' equity $2,113,909 $1,999,307
========== ==========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
2
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
--------------------------- ---------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 34,897 $ 32,161 $ 69,106 $ 63,173
Mortgage-related securities 2,625 3,589 5,568 7,325
Investment securities 1,362 1,485 2,668 2,660
Interest-bearing deposits 233 147 330 274
---------- --------- ---------- ----------
Total interest income 39,117 37,382 77,672 73,432
INTEREST EXPENSE:
Deposits 17,234 15,998 33,745 31,698
Notes payable and other borrowings 6,623 6,394 13,091 12,617
Other 164 166 259 269
---------- --------- ---------- ----------
Total interest expense 24,021 22,558 47,095 44,584
---------- --------- ---------- ----------
Net interest income 15,096 14,824 30,577 28,848
Provision for loan losses 200 25 325 25
---------- --------- ---------- ----------
Net interest income after provision for loan losses 14,896 14,799 30,252 28,823
NON-INTEREST INCOME:
Loan servicing income 425 416 850 1,228
Service charges on deposits 1,053 1,005 2,042 1,960
Insurance commissions 315 282 671 550
Gain on sale of loans 1,416 640 3,221 1,106
Net income (loss) from operations of real estate investment 1,654 (597) 2,365 (503)
Other 751 735 1,000 1,139
---------- --------- ---------- ----------
Total non-interest income 5,614 2,481 10,149 5,480
NON-INTEREST EXPENSES:
Compensation 5,765 4,826 11,261 9,656
Occupancy 782 750 1,494 1,576
Federal insurance premiums 211 205 419 415
Furniture and equipment 832 782 1,684 1,539
Data processing 781 611 1,440 1,246
Marketing 567 565 1,155 1,132
Net cost of operations of foreclosed properties 224 - 172 -
Other 1,447 1,465 2,994 3,159
---------- --------- ---------- ----------
Total non-interest expenses 10,609 9,204 20,619 18,723
---------- --------- ---------- ----------
Income before income taxes 9,901 8,076 19,782 15,580
Income taxes 3,792 3,101 7,555 5,984
---------- --------- ---------- ----------
Net income $ 6,109 $ 4,975 $ 12,227 $ 9,596
========== ========= ========== ==========
Earnings per share:
Basic $ 0.36 $ 0.27 $ 0.71 $ 0.53
Diluted 0.33 0.26 0.66 0.49
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
--------------------------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 12,227 $ 9,596
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses on loans and foreclosed properties 325 25
Provision for depreciation and amortization 1,173 1,155
Net proceeds from origination and sale of loans held for sale 7,638 17,115
Net gain on sales of loans and securities (3,221) (1,131)
Increase in accrued interest receivable (694) (348)
Increase (decreased) in accrued interest payable 1,133 (113)
Increase (decreased) in accounts payable (2,892) 1,253
Other (5,464) (1,247)
-------- ---------
Net cash provided by operating activities 10,225 26,305
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 15,897 5,994
Proceeds from maturities of investment securities 10,763 2,750
Purchase of investment securities available for sale (39,027) (38,357)
Purchase of investment securities held for maturity (1,750) (8,763)
Proceeds from sales of mortgage-related securities available for sale 1,322 -
Purchase of mortgage-related securities held to maturity (10,935) (2,735)
Purchase of mortgage-related securities available for sale (4,174) -
Principal collected on mortgage-related securities 41,773 21,134
Net increase in loans receivable (131,759) (70,736)
Purchase of office properties and equipment (538) (230)
Sales of office properties and equipment 61 -
Sales of real estate 4,091 5,562
Purchase of real estate held for sale (2,272) (5,293)
-------- ---------
Net cash used by investing activities (116,548) (90,674)
</TABLE>
4
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1998 1997
--------------------------------------
(In Thousands)
<S> <C> <C>
FINANCING ACTIVITIES
Increase in deposit accounts $ 85,593 $ 31,612
Increase in advance payments by borrowers
for taxes and insurance 12,887 13,346
Proceeds from notes payable to Federal Home Loan Bank 451,750 288,400
Repayment of notes payable to Federal Home Loan Bank (421,050) (245,150)
Decrease in securities sold under agreements
to repurchase (25,632) (21,664)
Increase (decrease) in other loans payable 10,068 (4,862)
Treasury stock purchased (9,270) (3,353)
Reissuance of treasury stock for options 1,527 258
Payments of cash dividends to stockholders (1,693) (1,362)
-------- --------
Net cash provided by financing activities 104,180 57,225
-------- --------
Net decrease in cash and cash equivalents (2,143) (7,144)
Cash and cash equivalents at beginning of year 39,167 38,025
-------- --------
Cash and cash equivalents at end of year $ 37,024 $ 30,881
======== ========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 48,228 $ 45,475
Income taxes 6,484 5,765
Non-cash transactions:
Mortgage loans transferred to loans held for sale and other adjustments 4,176 24,588
Loans transferred to foreclosed properties - 1,590
Securities available for sale market value adjustment 261 5,794
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
5
<PAGE> 7
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, S.S.B. (the "Bank"), Investment
Directions, Inc. ("IDI") and Nevada Investment Directions, Inc. ("NIDI"). The
Bank's statements include its wholly-owned subsidiaries, Anchor Insurance
Services, Inc. ("AIS"), ADPC Corporation ("ADPC"), and Anchor Investment
Corporation ("AIC"). One subsidiary, ADPC II, LLC ("ADPC II") was dissolved in
September 1998. All significant intercompany balances and transactions have been
eliminated. Investments in joint ventures and other less than 50% owned
partnerships, which are not material, are accounted for on the equity method.
Partnerships with 50% ownership or more are consolidated, with significant
intercompany accounts eliminated.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") 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 consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. The results of operations and other
data for the six month period ended September 30, 1998 are not necessarily
indicative of results that may be expected for any other interim period or the
entire fiscal year ending March 31, 1999. 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, 1998.
This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the expressed purpose of
availing itself of the protection of the safe harbor with respect to all of such
forward-looking statements. These forward-looking statements describe future
plans or strategies and include the Corporation's expectations of future
financial results. The Corporation's ability to predict results or the effect of
future plans or strategies is inherently uncertain and the Corporation can give
no assurance that those results or expectations will be attained. Factors that
could affect actual results include but are not limited to i) general market
rates, ii) changes in market interest rates and the shape of the yield curve,
iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, vii) changes in the quality or composition of
the Corporation's loan and investment portfolios, viii) demand for loan
products, ix) the level of loan and MBS repayments, x) deposit flows, xi)
competition, xii) demand for financial services in the Corporation's markets,
and xiii) changes in accounting principles, policies or guidelines. These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements.
The Corporation does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
6
<PAGE> 8
NEW ACCOUNTING STANDARDS As of January 1, 1998, the Corporation adopted
Statement 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Corporation's net
income or shareholders' equity. Statement 130 requires unrealized gains or
losses on the Corporation's available-for-sale securities, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
During the quarter ended September 30, 1998 and 1997, total comprehensive income
amounted to $6.4 million and $5.5 million, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information (Statement 131), which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Corporation is not required to disclose segment information in
accordance with Statement 131 until March 31, 1999.
RECLASSIFICATIONS Certain 1997 accounts have been reclassified to conform to the
1998 presentations. Specifically, non-interest income and non-interest expense
items associated with the operation of partnership investments in real estate
have been restated as one category called Net income (loss) from operations of
real estate investment, under non-interest income, for all periods shown.
Additionally, the amortization of Originated Mortgage Servicing Rights (OMSR's)
was formerly treated as a charge to other income. The amortization of OMSR's
will now be charged to loan servicing income for all periods shown.
NOTE 3 - STOCKHOLDERS' EQUITY
On July 7, 1998, 3,500 shares granted pursuant to the Corporation's management
recognition plan were earned by the recipients. During the quarter ended
September 30, 1998, options for 161,848 shares of common stock were exercised at
a weighted price of $4.69 per share. Treasury shares were issued in exchange for
the options using the last-in-first-out method. The cost of treasury shares
issued in excess of the option price paid was charged to retained earnings
($2,710,000). During the quarter ended September 30, 1998, the Corporation
repurchased 280,610 shares of common stock on the open market for an average
price of $21.62. Additionally, on August 15, 1998, 6,242 shares of common stock
were repurchased from treasury stock for several management retirement plans.
The cost of this repurchase was $21.03 per share or $130,000 and the excess of
the cost of the treasury shares over the market price ($10,000) was charged to
retained earnings. On August 15, 1998, the Corporation paid out a cash dividend
of $.10 per share, amounting to $890,000. The Corporation also declared a
two-for-one stock split effective August 24, 1998.
NOTE 4 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
The weighted average number of shares of common stock and common stock
equivalents outstanding for September 30, 1998 and 1997 have been adjusted to
reflect the two-for-one stock split effected on August 24, 1998. Earnings per
share for the three and six months ended September 30, 1998 and 1997 have been
determined by dividing net
7
<PAGE> 9
income for the respective periods by the weighted average number of shares of
common stock and common stock equivalents outstanding. Common stock equivalents
are computed using the treasury stock method.
8
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1998 1997
--------------------------------------
<S> <C> <C>
Numerator:
Net income $ 6,108,587 $ 4,974,456
-------------- ---------------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $ 6,108,587 $ 4,974,456
Denominator:
Denominator for basic earnings per
share--weighted-average shares 17,109,575 18,109,996
Effect of dilutive securities:
Employee stock options 1,287,717 1,253,012
-------------- ---------------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions 18,397,292 19,363,008
============== ===============
Basic earnings per share $ 0.36 $ 0.27
============== ===============
Diluted earnings per share $ 0.33 $ 0.26
============== ===============
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1998 1997
--------------------------------------
<S> <C> <C>
Numerator:
Net income $ 12,227,467 $ 9,595,512
-------------- ---------------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $ 12,227,467 $ 9,595,512
Denominator:
Denominator for basic earnings per
share--weighted-average shares 17,147,137 18,109,996
Effect of dilutive securities:
Employee stock options 1,316,730 1,287,716
-------------- ---------------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions 18,463,867 19,397,712
============== ===============
Basic earnings per share $ 0.71 $ 0.53
============== ===============
Diluted earnings per share $ 0.66 $ 0.49
============== ===============
</TABLE>
9
<PAGE> 11
NOTE 5 - SUBSEQUENT EVENTS
On October 20, 1998, the Corporation declared a $.05 per share cash dividend to
be paid on November 13, 1998 to stockholders of record on October 30, 1998.
10
<PAGE> 12
ANCHOR BANCORP WISCONSIN INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion is designed to provide a more thorough discussion of
the Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
RESULTS OF OPERATIONS
General. Net income for the three and six months ended September 30, 1998
increased $1.1 million to $6.1 million and $2.6 million to $12.2 million,
respectively, from the same periods in the prior year. The increase in net
income for the periods was largely due to the increase in non-interest income of
$3.1 million and $4.7 million, respectively, for the three and six months ended
September 30, 1998. Additional changes for the three and six months ended
September 30, 1998 included (i) an increase in interest income of $1.7 million
and $4.2 million, respectively, which were offset by (ii) an increase in
interest expense of $1.4 million and $2.5 million, respectively, (iii) an
increase in non-interest expense of $1.4 million and $1.9 million, respectively,
and (iv) an increase in income taxes of $690,000 and $1.6 million, respectively.
Net Interest Income. Net interest income increased $270,000 and $1.7 million for
the three and six months ended September 30, 1998 compared to the same periods
in 1997. The net interest margin decreased to 3.03% from 3.18% for the
respective three-month periods and decreased to 3.11% from 3.13% for the
respective six-month periods. The interest rate spread decreased to 2.86% from
3.01% and decreased to 2.92% from 2.96%, respectively, for the same periods.
Interest income on loans increased $2.7 million and $5.9 million for the three
and six months ended September 30, 1998 as compared to the same periods in the
prior year. This increase was a result of an increase of $186.8 million and
$171.6 million, respectively, in the average balance of loans for the periods
due to increased loan originations. Interest income on mortgage-related
securities decreased $960,000 and $1.8 million for the same periods due
primarily to the decrease of $55.4 million and $52.3 million, respectively in
the average balance of mortgage-related securities. Interest income on
investment securities (including Federal Home Loan Bank stock) decreased
$120,000 and increased $10,000, respectively, for the three- and six-month
periods ended September 30, 1998 as compared to the same periods in the prior
year. This was primarily a result of a decrease of $10.2 million and $1.9
million, respectively, in the average balance of investment securities and it
was slightly offset by an increase of $980,000 and $850,000 in the average
balance of Federal Home Loan Bank stock, for the three and six months ended
September 30, 1998 as compared to the same periods in 1997. Interest income on
interest-bearing deposits increased $90,000 and $60,000, respectively, for the
three and six months ended September 30, 1998, due to the increase of $6.5
million and $2.0 million in the average balance of interest-bearing deposits.
Interest expense on deposits increased $1.2 million and $2.0 million,
respectively, for the three and six months ended September 30, 1998 as compared
to the same periods in 1997. The increase was due primarily to the increase in
the average balance of deposits of $114.0 million and $100.6 million,
respectively, for the three- and six-month periods as a result of various demand
deposit and certificate promotions. Interest expense on notes payable and other
borrowings increased $230,000 and $470,000, respectively, during the same
periods.
Provision for Loan Losses. Provision for loan losses increased $180,000 and
$300,000 for the three- and six-month periods ended September 30, 1998 as
compared to the same periods in the prior year. The provision was based on
management's ongoing evaluation of asset quality.
Average Interest-Earning Assets, Average Interest-Bearing Liabilities and
Interest Rate Spread. The following table shows the Corporation's average
balances, interest, average rates 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.
11
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
--------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans $ 1,337,490 $ 26,286 7.86% $ 1,166,151 $ 24,139 8.28%
Consumer loans 343,651 7,755 9.03 335,975 7,421 8.84
Commercial business loans 35,950 856 9.52 28,175 601 8.53
----------- -------- ------------ --------
Total loans receivable 1,717,091 34,897 8.13 1,530,301 32,161 8.41
Mortgage-related securities 165,739 2,625 6.34 221,090 3,589 6.49
Investment securities 68,923 1,001 5.81 79,097 1,130 5.71
Interest-bearing deposits 17,222 233 5.41 10,712 147 5.49
Federal Home Loan Bank stock 21,677 361 6.66 20,830 355 6.82
----------- -------- ------------ --------
Total interest-earning assets 1,990,652 39,117 7.86 1,862,030 37,382 8.03
---- ----
Non-interest-earning assets 85,679 79,065
----------- ------------
Total assets $ 2,076,331 $ 1,941,095
=========== ============
INTEREST-BEARING LIABILITIES
Demand deposits $ 384,167 2,760 2.87 $ 329,449 2,374 2.88
Regular passbook savings 102,187 528 2.07 100,758 579 2.30
Certificates of deposit 954,595 13,946 5.84 896,723 13,045 5.82
----------- -------- ------------ --------
Total deposits 1,440,949 17,234 4.78 1,326,930 15,998 4.82
Notes payable and other borrowings 464,287 6,623 5.71 450,734 6,394 5.67
Other 18,012 164 3.64 18,103 166 3.67
----------- -------- ------------ --------
Total interest-bearing liabilities 1,923,248 24,021 5.00 1,795,767 22,558 5.02
-------- ---- -------- ----
Non-interest-bearing liabilities 23,936 20,339
----------- ------------
Total liabilities 1,947,184 1,816,106
Stockholders' equity 129,147 124,989
----------- ------------
Total liabilities and stockholders' equity $ 2,076,331 $ 1,941,095
=========== ============
Net interest income/interest rate spread $ 15,096 2.86% $ 14,824 3.01%
======== ===== ======== ====
Net interest-earning assets $ 67,404 $ 66,263
=========== ============
Net interest margin 3.03% 3.18%
===== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.04 1.04
=========== ============
- - -------------------------------------------
(1) Annualized
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
--------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans $ 1,314,495 $ 51,993 7.91% $ 1,157,597 $ 47,382 8.19%
Consumer loans 342,149 15,454 9.03 334,330 14,611 8.74
Commercial business loans 35,357 1,659 9.38 28,524 1,180 8.27
----------- -------- ----------- --------
Total loans receivable 1,692,001 69,106 8.17 1,520,451 63,173 8.31
Mortgage-related securities 174,065 5,568 6.40 226,373 7,325 6.47
Investment securities 66,811 1,962 5.87 68,686 1,973 5.74
Interest-bearing deposits 12,257 330 5.38 10,208 274 5.37
Federal Home Loan Bank stock 21,268 706 6.64 20,290 687 6.77
----------- -------- ----------- --------
Total interest earning assets 1,966,402 77,672 7.90 1,846,008 73,432 7.96
---- ----
Non-interest-earning assets 84,417 78,377
----------- -----------
Total assets $ 2,050,819 $ 1,924,385
=========== ===========
INTEREST-BEARING LIABILITIES
Demand deposits $ 374,317 5,300 2.83 $ 320,628 4,620 2.88
Regular passbook savings 102,006 1,047 2.05 100,800 1,152 2.29
Certificates of deposit 945,035 27,398 5.80 899,327 25,926 5.77
----------- -------- ----------- --------
Total deposits 1,421,358 33,745 4.75 1,320,755 31,698 4.80
Notes payable and other borrowings 456,935 13,091 5.73 447,060 12,617 5.64
Other 14,498 259 3.57 14,821 269 3.63
----------- -------- ----------- --------
Total interest-bearing liabilities 1,892,791 47,095 4.98 1,782,636 44,584 5.00
Non-interest-bearing liabilities 28,647 -------- ---- 18,777 -------- ------
----------- -----------
Total liabilities 1,921,438 1,801,411
Stockholders' equity 129,381 122,974
----------- -----------
Total liabilities and stockholders' equity $ 2,050,819 $ 1,924,385
============ ===========
Net interest income/interest rate spread $ 30,577 2.92% $ 28,848 2.96%
======== ==== ======== ======
Net interest-earning assets $ 73,611 $ 63,372
=========== ===========
Net interest margin 3.11% 3.13%
==== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.04 1.04
=========== ===========
- - -------------------------------------------
(1) Annualized
</TABLE>
Non-Interest Income. Non-interest income increased $3.1 million to $5.6 million
and $4.7 million to $10.1 million, respectively, for the three and six months
ended September 30, 1998 as compared to the same periods in the prior year, as a
result of several factors. Net income (loss) from operations of real estate
investments for the three and six months ended September 30, 1998 increased $2.3
million and $2.9 million because of an increase in sales of partnership
interests at IDI. The gain on sale of loans increased $780,000 and $2.1 million,
respectively, for the
13
<PAGE> 15
three- and six-month periods due to increased volume of loan sales. Service
charges on deposits increased $50,000 and $80,000 and insurance commissions
increased $30,000 and $120,000 for the same three- and six-month periods ended
September 30, 1998 due to increased volume in these areas. In addition, loan
servicing income increased $10,000 for the three-month period and decreased
$380,000 for the six-month period and other non-interest income increased
$20,000 for the three-month period and decreased $140,000 for the six-month
period.
Non-Interest Expense. Non-interest expense increased $1.4 million to $10.6
million and $1.9 million to $20.6 million, respectively, during the three and
six months ended September 30, 1998 as compared to the same periods in 1997 as a
result of several factors. Compensation expense increased $940,000 and $1.6
million, respectively, due primarily to an increase in incentive compensations
resulting from increased loan production. Net cost of operations of foreclosed
properties increased $220,000 and $170,000 for the three- and six-month periods.
Data processing expense increased $170,000 and $190,000, respectively, for the
three and six months ended September 30, 1998. Furniture and equipment expenses
increased $50,000 and $150,000 for the same time periods, largely due to normal
increases in depreciation and other costs. Occupancy expense increased $30,000
for the three-month period and decreased $80,000 for the six-month period. These
increases were partially offset by a decrease in other non-interest expenses
such as telephone and postage of $20,000 and $170,000, respectively.
Income Taxes. Income tax expense increased $700,000 and $1.6 million, during the
three and six months ended September 30, 1998 as compared to the same periods in
1997. The effective tax rate was 38.3% and 38.2%, respectively, for the current
year as compared to 38.4% for both the three- and six-month periods last year.
14
<PAGE> 16
FINANCIAL CONDITION
During the six months ended September 30, 1998, the Corporation's assets
increased by $114.6 million from $2.0 billion at March 31, 1998, to $2.11
billion. The majority of this increase was attributable to increases in loans
and securities.
Investment securities (both available for sale and held to maturity) increased
$14.4 million during the six months ended September 30, 1998 as a result of
purchases of $40.8 million of U.S. Government and agency securities which was
partially offset by sales and maturities of $26.7 million.
Mortgage-related securities (both available for sale and held to maturity)
decreased $28.0 million during the six months ended September 30, 1998 as a
result of purchases of $15.1 million and principal repayments and market value
adjustments. Mortgage-related securities consisted of $146.0 million of
mortgage-backed securities and $20.8 million of Collateralized Mortgage
Obligations ("CMO's") and Real Estate Mortgage Investment Conduits ("REMIC's")
at September 30, 1998.
The Corporation's investments in CMO's and REMIC's are limited to federal agency
issued REMIC's which represent an interest in mortgage-backed securities. 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.
Total loans (including loans held for sale) increased $129.6 million during the
six months ended September 30, 1998. Activity for the period included (i)
originations and purchases of $654.8 million, (ii) sales of $233.0 million, and
(iii) principal repayments and other adjustments of $292.2 million.
Deposits increased $85.9 million during the six months ended September 30, 1998.
The increase was due primarily to new demand deposit products and certificate
promotions. Brokered deposits have been used in the past and may be used in the
future as the need for funds requires it. Brokered deposits totaled $81.6
million at September 30, 1998 and generally mature in one year. FHLB advances
increased $30.7 million during the six months ended September 30, 1998. Reverse
repurchase agreements and other borrowings decreased $25.6 million during the
six months ended September 30, 1998. Advance payments by borrowers for taxes and
insurance increased $12.9 million.
Stockholders' equity increased $2.07 million during the six months ended
September 30, 1998 as a net result of (i) comprehensive income of $12.39
million, (ii) stock options exercised of $4.98 million (with the excess of the
cost of treasury shares over the option price ($3.43 million) charged to
retained earnings) and (iii) the tax benefit from certain stock options of
$500,000. These were offset by (i) treasury stock repurchased of $9.27 million,
(ii) cash dividends of $1.69 million and (iii) benefit plan shares earned and
related tax adjustments totaling $1.40 million, and (iv) loss on treasury shares
repurchased for management employee retirement plans of $20,000.
IMPACT OF YEAR 2000
STATE OF READINESS The Corporation is currently in the process of addressing a
potential problem that faces all users of automated systems including
information systems. Many computer systems process transactions based on two
digits representing the year of transaction, rather than four digits. These
computer systems may not operate properly when the last two digits become "00",
as will occur on January 1, 2000. The problem could affect a wide variety of
automated information systems, such as mainframe applications, personal
computers, communication systems, environmental systems and other information
systems.
The Corporation has identified areas of operations critical for the delivery of
its products and services. The majority of the Corporation's applications used
in operations are purchased from an outside vendor (referred to later in this
paragraph as the primary third party data processing provider). The vendor
providing the software is responsible for maintenance of the systems and
modifications to enable uninterrupted usage after December 31, 1999. The
15
<PAGE> 17
Corporation's plan includes obtaining certification of compliance from third
parties and testing all of the impacted applications (both internally developed
and third party provided). The Corporation's goal is to be fully compliant by
December 31, 1998. The Corporation has completed two tests with its primary
third party data processing provider. The tests, completed on August 16, 1998
and September 20, 1998, were both successful in all applications. The following
table indicates the Corporation's progress in the assessment, remediation,
testing and implementation of becoming Year 2000 compliant.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
RESOLUTION PHASES OF YEAR 2000 COMPLIANCE AT SEPTEMBER 30, 1998
- - ------------------------------------------------------------------------------------------------------------------------------------
EXPOSURE
TYPE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information 100% Complete 95% Complete 80% Complete 75% Complete
Technology
Expected completion Expected completion Expected completion
date, 12/31/98 date, 12/31/98 date, 12/31/98
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating 100% Complete 95% Complete 95% Complete 95% Complete
Equipment with
Embedded Expected completion Expected completion Expected completion
Chips or date, 12/31/98 date, 12/31/98 date, 12/31/98
Software
- - ------------------------------------------------------------------------------------------------------------------------------------
3rd Party 100% Complete 95% Complete for 95% Complete for 80% Complete for
for System system interface system interface system interface
interface; 100%
Complete for all Develop contingency Expected completion Expected completion
other material plans as appropriate, date for system date for system
exposures 3/31/99 interface work, interface work,
12/31/98 12/31/98
Implement
contingency
plans or other
alternatives
as necessary,
3/31/99
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COSTS The Corporation will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $500,000 and is being funded through operating cash flows. To date,
the Corporation has incurred $190,000 ($40,000 expensed and $150,000 capitalized
for new systems and equipment), related to all phases of the Year 2000 project.
Of the total remaining project costs, approximately $100,000 is attributable to
the purchase of new software and operating equipment, which will be capitalized.
The remaining $210,000 relates to consulting and remediation of hardware and
software. Both of the latter will be expensed as incurred.
16
<PAGE> 18
RISKS Management of the Corporation believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above, the
Corporation has not yet completed all necessary phases of the Year 2000 program.
In the event that the Corporation does not complete any additional phases, the
Corporation would be unable to accept deposits or withdrawals, open accounts, or
process loan payments. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect the
Corporation. The Corporation could be subject to litigation for computer systems
product failure, for example, failure to properly date business records such as
accrued loan interest. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time.
CONTINGENCY PLANS The Corporation is completing contingency plans for certain
critical applications and is working on such plans for others. These contingency
plans involve, among other actions, additional equipment and supplies,
additional staff and training, and hard copy records of critical information.
The expected date of completion for these contingency plans is March 31, 1999.
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 (consisting of non-accrual loans, certain real estate held
for development and sale, foreclosed properties and repossessed assets)
decreased to $7.3 million at September 30, 1998 from $12.9 million at March 31,
1998 and decreased as a percentage of total assets to 0.35% from 0.64% at such
dates, respectively.
17
<PAGE> 19
Non-performing assets are summarized as follows at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
AT SEPTEMBER 30, --------------------------------------------------
1998 1998 1997 1996
---------------- --------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Non-accrual loans:
Single-family residential $ 2,435 $ 1,273 $ 1,712 $ 629
Multi-family residential - 898 3,199 -
Commercial real estate 168 288 778 470
Construction and land - - 58 81
Consumer 650 577 438 202
Commercial business 376 673 610 508
------- ------- -------- --------
Total non-accrual loans 3,629 3,709 6,795 1,890
Real estate held for development and sale 1,215 4,431 2,736 2,319
Foreclosed properties and repossessed assets, net 2,469 4,723 4,222 6,077
------- ------- -------- --------
Total non-performing assets $ 7,313 $12,863 $ 13,753 $ 10,286
======= ======= ======== ========
Performing troubled debt restructurings $ 2,869 $ 725 $ 329 $ 332
======= ======= ======== ========
Total non-accrual loans to total loans 0.20% 0.22% 0.44% 0.13%
Total non-performing assets to total assets 0.35 0.64 0.73 0.59
Allowance for loan losses to total loans 1.18 1.30 1.48 1.59
Allowance for loan losses to total
non-accrual loans 590.80 588.65 334.81 1,206.72
Allowance for loan and foreclosure losses
to total non-performing assets 297.33 172.26 173.26 228.70
</TABLE>
At September 30, 1998, there were no non-accrual loans with a carrying value
greater than $1.0 million. Non-accrual loans decreased $80,000 during the six
months ended September 30, 1998. Non-performing real estate held for development
and sale decreased $3.2 million for the six months ended September 30, 1998.
At September 30, 1998, there was one property in non-performing real estate held
for development and sale with a carrying value greater than $1.0 million. The
property consists of several condominium units in Bloomington, Minnesota with a
carrying value of $1.9 million. The units were related to, but not a part of, a
former non-accrual loan for a condominium project. These units were purchased in
the last fiscal year in an effort to solidify the Corporation's position with
regard to the original non-accrual loan. The Corporation is in the process of
completing the units for subsequent sale. A multi-family project that had been
reported in this category, was transferred to performing troubled debt
restructurings during the quarter. The project, located in Madison, Wisconsin,
had a carrying value of $2.9 million. The sale of the project resulted in the
Corporation providing interim financing to the buyer until permanent financing
can be obtained. A deferred gain of $650,000, associated with the project
remains in real estate held for development and sale until the sale of the
property, now held in performing troubled debt restructuring, is deemed final.
18
<PAGE> 20
At September 30, 1998, there were no foreclosed properties and repossessed
assets with a carrying value greater than $1.0 million. Foreclosed properties
and repossessed assets decreased $2.3 million during the six-month period. The
decrease was due primarily to the sale of an apartment complex in Elm Grove,
Wisconsin, which formerly secured a $2.2 million loan. A portion of the property
that had been identified as containing environmental contamination remains on
the Corporation's books, however, due to limited use restrictions and
contamination, the parcel is deemed to have no value. Environmental cleanup
costs may be covered by Petroleum Environmental Cleanup Funds. This matter has
not been resolved because of ongoing litigation.
Performing troubled debt restructurings increased by $2.1 million during the six
months ended September 30, 1998 primarily as a result of the transfer of a
multi-family property with a carrying value of $2.9 million from real estate
held for development and sale. The balance of the change was largely due to the
payoff of a $600,000 loan that secured a wood chipping operation.
At September 30, 1998, assets that the Corporation has classified, as
substandard net of reserves, consisted of $12.7 million of loans and foreclosed
properties. As of March 31, 1998, the substandard assets amounted to $15.8
million. The decrease of $3.1 million was primarily due to the removal of the
above-discussed Elm Grove, Wisconsin property from foreclosed properties and
repossessed assets, as a result of the sale. The balance of the decrease was
largely due to the sale of a parcel of land in Monona, Wisconsin, which had a
carrying value of $500,000. The corporation still owns the condominium units
associated with the parcel of land.
The following table sets forth information relating to the Corporation's loans
which were less than 90 days delinquent at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31,
--------------------------------------------------
1998 1998 1997 1996
---------------- --------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
30 to 59 days $ 4,102 $ 3,732 $ 3,144 $ 5,776
60 to 89 days 849 994 909 789
---------------- -------------- ------------- --------------
Total $ 4,951 $ 4,726 $ 4,053 $ 6,565
================ ============== ============= ==============
</TABLE>
The Corporation's loan portfolio, foreclosed properties and repossessed assets
are evaluated on a continuing basis to determine the necessity for additions to
the allowance for losses and the related balance in the allowances. These
evaluations consider several factors, including, but not limited to, general
economic conditions, loan portfolio composition, loan delinquencies, prior loss
experience, collateral value, anticipated loss of interest and management's
estimation of future potential losses. The evaluation of the allowance for loan
losses includes a review of known loan problems as well as potential 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.
19
<PAGE> 21
A summary of the activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
---------------------------------- ---------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Allowance at beginning of period $ 21,755 $ 22,431 $ 21,833 $ 22,750
Charge-offs:
Mortgage (278) 12 (308) (29)
Consumer (225) (307) (484) (653)
Commercial business (198) (8) (210) (8)
-------- -------- -------- --------
Total charge-offs (701) (303) (1,002) (690)
Recoveries:
Mortgage 166 7 182 51
Consumer 11 20 86 22
Commercial business 9 15 16 37
-------- -------- -------- --------
Total recoveries 186 42 284 110
-------- -------- -------- --------
Net charge-offs (515) (261) (718) (580)
Provision 200 25 325 25
-------- -------- -------- --------
Allowance at end of period $ 21,440 $ 22,195 $ 21,440 $ 22,195
======== ======== ======== ========
Net charge-offs to average loans (0.12)% (0.07)% (0.08)% (0.08)%
======== ======== ======== ========
</TABLE>
Although management believes that the September 30, 1998 allowance for loan
losses is adequate, based upon the current evaluation of loan delinquencies,
non-accrual loans, charge-off trends, economic conditions and other factors,
there can be no assurance that future adjustments to the allowance, which could
adversely affect the Corporation's results of operations, will not be necessary.
Management also continues to pursue all practical and legal methods of
collection, repossession and disposal, as well as adhering to high underwriting
standards in the origination process, in order to maintain strong asset quality.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation's sources of funds include dividends
from its subsidiaries, including the Bank, interest on its investments and
returns on its real estate held for sale. The Bank's primary sources of funds
are payments on loans and mortgage-related securities, deposits from retail and
wholesale sources, advances and other borrowings.
At September 30, 1998, the Corporation had outstanding commitments to originate
loans of $101.9 million, commitments to extend funds to, or on behalf of,
customers pursuant to lines and letters of credit of $89.3 million and loans
sold with recourse to the Corporation in the event of default by the borrower of
$1.5 million. Scheduled maturities of certificates of deposit during the twelve
months following September 30, 1998 amounted to $763.0 million and scheduled
maturities of FHLB advances during the same period totaled $264.9 million. At
September 30, 1998, the Corporation also had $17.3 million of reverse repurchase
agreements, all of which are scheduled to mature during the twelve months
following September 30, 1998. Management believes adequate capital and
borrowings are available from various sources to fund all commitments to the
extent required.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
specified levels of liquid investments in qualifying types of U.S. Government
and agency securities and other investments. This requirement, which may
20
<PAGE> 22
be varied by the OTS, is based upon a percentage of deposits and short-term
borrowings. The required percentage is currently 4.0%. During the quarter ended
September 30, 1998, the Bank's average liquidity ratio was 13.98%.
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. As a state-chartered savings
institution, the Bank is also subject to the minimum regulatory capital
requirement of the State of Wisconsin, which is 6% of total assets. The Bank's
capital ratio for this measurement was 6.80% as of September 30, 1998.
The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at September 30, 1998 and September 30, 1997.
<TABLE>
<CAPTION>
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES OTS REQUIREMENTS
----------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998:
Tier 1 capital
(to adjusted tangible assets) $ 118,558 5.69% $ 62,546 3.00% $ 104,244 5.00%
Risk-based capital
(to risk-based assets) 135,335 10.10 107,243 8.00 134,054 10.00
Tangible capital
(to tangible assets) 118,558 5.69 31,273 1.50 N/A N/A
AS OF SEPTEMBER 30, 1997:
Tier 1 capital
(to adjusted tangible assets) 109,638 5.69 57,790 3.00 96,316 5.00
Risk-based capital
(to risk-based assets) 124,473 10.54 94,450 8.00 118,062 10.00
Tangible capital
(to tangible assets) 109,638 5.69 28,895 1.50 N/A N/A
</TABLE>
The OTS has proposed to increase the core capital ratio from the current 3.00%
to a range of 4.00% to 5.00% for all but the most healthy financial
institutions. The OTS also has proposed an interest rate risk calculation such
that an institution with a measured interest rate risk exposure, as defined,
greater than specified levels must deduct an interest rate risk component when
calculating the OTS risk-based capital. Final implementation of these proposals
was pending at September 30, 1998. Management does not believe these rules will
significantly impact the Bank's ability to meet the capital requirements.
21
<PAGE> 23
The following table reconciles stockholder equity to regulatory capital at
September 30, 1998 and 1997 (dollars
in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
AS OF SEPTEMBER 30, 1998:
Stockholders' equity of the Corporation $ 130,016 $ 117,887
Less: Capitalization of the Corporation and Non-Bank
subsidiaries (8,383) (5,813)
------------- ---------
Stockholders' equity of the Bank 121,633 112,074
Less: Intangible assets and other non-includable assets (3,099) (2,436)
------------- ---------
Tier 1 and tangible capital 118,534 109,638
Plus: Allowable general valuation allowances 16,801 14,835
------------- ---------
Risk based capital $ 135,335 $ 124,473
============== =========
</TABLE>
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, invests in adjustable-rate
or medium-term, fixed-rate, single-family residential mortgage loans, invests in
medium-term mortgage-related securities and invests in consumer loans which
generally have shorter terms to maturity and higher and/or adjustable interest
rates.
The Corporation 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 Corporation's cumulative net gap position at September 30, 1998 for one year
or less was a positive 2.15% of total assets. The calculation of a gap position
requires management to make a number of assumptions as to when an asset or
liability will reprice or mature. Management believes that its assumptions
approximate actual experience and considers them reasonable, although the actual
amortization and repayment of assets and liabilities may vary substantially.
The following table summarizes the Corporation's interest rate sensitivity gap
position for amounts maturing or repricing as of September 30, 1998.
22
<PAGE> 24
<TABLE>
<CAPTION>
09/30/99 09/30/00 09/30/01 09/30/02 09/30/03 Thereafter Total
---------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Mortgage loans - Fixed (1) (2) 202,643 93,083 50,831 29,004 17,265 32,421 425,247
Average interest rate 7.22% 7.17% 7.17% 7.21% 7.28% 7.48%
Mortgage loans -Variable (1) (2) 597,600 205,683 108,314 23,882 13,079 - 948,558
Average interest rate 7.88% 7.57% 7.58% 7.59% 7.58%
Consumer loans (1) 319,335 17,272 4,920 2,141 1,048 916 345,632
Average interest rate 8.84% 9.54% 9.63% 9.35% 9.32% 9.40%
Commercial business loans (1) 27,155 7,050 1,502 425 291 697 37,120
Average interest rate 8.94% 8.94% 8.94% 8.93% 8.94% 8.94%
Mortgage-related securities (3) 91,909 39,694 18,966 8,895 4,221 3,093 166,778
Average interest rate 6.67% 6.67% 6.69% 6.69% 6.69% 6.71%
Investment securities and other
interest-earning assets (3) 52,993 7,859 8,487 6,331 12,619 8,732 97,021
Average interest rate 7.10% 10.20% 7.41% 6.86% 6.12% 6.18%
Total rate sensitive assets 1,291,635 370,641 193,020 70,678 48,523 45,859 2,020,356
Rate sensitive liabilities:
Interest-bearing
transaction accounts (4) 180,897 67,786 45,855 31,129 21,210 47,344 394,221
Average interest rate 3.14% 3.81% 3.73% 3.64% 3.56% 3.27%
Time-deposits (4) 762,689 101,435 79,005 11,878 11,878 577 967,462
Average interest rate 5.71% 5.77% 5.83% 5.96% 5.96% 5.92%
Borrowings 305,100 48,549 27,000 5,796 20,500 62,750 469,695
Average interest rate 5.74% 5.79% 5.27% 5.59% 5.26% 5.18%
Total rate sensitive liabilities 1,248,686 217,770 151,860 48,803 53,588 110,671 1,831,378
Interest sensitivity gap 42,949 152,871 41,160 21,875 (5,065) (64,812) 188,978
Cumulative interest sensitivity gap 42,949 195,820 236,980 258,855 253,790 188,978
Cumulative interest sensitivity
gap as a percent of total assets 2.15% 9.79% 11.85% 12.95% 12.69% 9.45%
- - -----------------------------------------
(1) Balances have been reduced for (i) undisbursed loan proceeds, which aggregated $64.2 million, and
(ii) non-accrual loans, which amounted to $3.6 million.
(2) Includes $15.1 million of loans held for sale spread throughout the periods.
(3) Includes $89.6 million of securities available for sale spread throughout the periods.
(4) Does not include $107.1 million of demand accounts because they are non-interest-bearing. Also does not
include accrued interest payable, which amounted to $9.6 million. Projected decay rates for demand
deposits and passbook savings are selected by management from various sources such as the OTS.
</TABLE>
23
<PAGE> 25
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information contained in the section captioned "Management's Discussion and
Analysis - Asset/Liability Management" on pages 23 and 24 is incorporated herein
by reference.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Bank 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.
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4 SUBMISSION OF MATTER TO VOTE OF SECURITIES HOLDERS.
Not applicable.
ITEM 5 OTHER INFORMATION.
None.
ITEM 6 EXHIBITS AND REPORTS.
(A) EXHIBIT NO. 27 FINANCIAL DATA SCHEDULES
(B) REPORTS ON FORM 8-K.
None.
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
ANCHOR BANCORP WISCONSIN INC.
Date: November 15, 1998 By:/s/ Douglas J. Timmerman
------------------------------ -----------------------------------------------
Douglas J. Timmerman, Chairman of the
Board, President and Chief Executive Officer
Date: November 15, 1998 By:/s/ Michael W. Helser
------------------------------ -----------------------------------------------
Michael W. Helser, Treasurer and
Chief Financial Officer
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 33,961
<INT-BEARING-DEPOSITS> 4
<FED-FUNDS-SOLD> 3,059
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119,492
<INVESTMENTS-CARRYING> 118,807
<INVESTMENTS-MARKET> 120,100
<LOANS> 1,813,877
<ALLOWANCE> 21,440
<TOTAL-ASSETS> 2,113,909
<DEPOSITS> 1,478,338
<SHORT-TERM> 305,100
<LIABILITIES-OTHER> 35,860
<LONG-TERM> 164,595
0
0
<COMMON> 52,088
<OTHER-SE> 77,928
<TOTAL-LIABILITIES-AND-EQUITY> 2,113,909
<INTEREST-LOAN> 69,106
<INTEREST-INVEST> 8,236
<INTEREST-OTHER> 330
<INTEREST-TOTAL> 77,672
<INTEREST-DEPOSIT> 33,745
<INTEREST-EXPENSE> 47,095
<INTEREST-INCOME-NET> 30,577
<LOAN-LOSSES> 325
<SECURITIES-GAINS> (18)
<EXPENSE-OTHER> 20,619
<INCOME-PRETAX> 19,782
<INCOME-PRE-EXTRAORDINARY> 19,782
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,227
<EPS-PRIMARY> .71
<EPS-DILUTED> .66
<YIELD-ACTUAL> 7.90
<LOANS-NON> 3,629
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,869
<LOANS-PROBLEM> 6,287
<ALLOWANCE-OPEN> 21,833
<CHARGE-OFFS> 1,002
<RECOVERIES> 284
<ALLOWANCE-CLOSE> 21,440
<ALLOWANCE-DOMESTIC> 21,440
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 20,338
</TABLE>
