<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 December 31, 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
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 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, 1999: 17,984,293
<PAGE> 2
ANCHOR BANCORP WISCONSIN INC.
INDEX - FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE #
------
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of
December 31, 1998 and March 31, 1998 2
Consolidated Statements of Income for the
Three and Nine Months Ended December
31, 1998 and 1997 3
Consolidated Statements of Cash Flows for
the Nine Months Ended December 31,
1998 and 1997 4
Notes to Unaudited Consolidated
Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 10
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
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
---------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 30,802 $ 31,999
Interest-bearing deposits 1,265 7,168
--------- -----------
Cash and cash equivalents 32,067 39,167
Investment securities available for sale 25,623 39,555
Investment securities held to maturity
(fair value of $8,100 and $17,600, respectively) 8,104 17,587
Mortgage-related securities available for sale 53,649 67,526
Mortgage-related securities held to maturity
(fair value of $180,800 and $128,100,
respectively) 179,079 127,239
Loans receivable, net:
Held for sale 22,381 18,060
Held for investment 1,698,609 1,591,089
Foreclosed properties and repossessed assets, net 2,487 4,723
Real estate held for development and sale 28,924 22,630
Office properties and equipment 18,272 18,640
Federal Home Loan Bank stock--at cost 22,177 22,002
Accrued interest on investments and loans 14,380 13,875
Prepaid expenses and other assets 17,709 17,214
----------- -----------
Total assets $ 2,123,461 $ 1,999,307
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,497,715 $ 1,392,472
Federal Home Loan Bank and other borrowings 449,345 411,625
Reverse repurchase agreements 24,095 42,935
Advance payments by borrowers for taxes
and insurance 1,074 6,955
Other liabilities 15,066 17,369
---------- -----------
Total liabilities 1,987,295 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 50,673 49,084
Retained earnings 134,205 125,615
Less: Treasury stock (7,098,556 shares
and 7,073,460 shares,
respectively), at cost (48,532) (47,959)
Borrowings of Employee Stock Ownership Plan (1,379) (1,379)
Common stock purchased by benefit plans (2,108) (851)
Net unrealized gain on securities available
for sale, net of tax 807 941
----------- -----------
Total stockholders' equity 136,166 127,951
----------- -----------
Total liabilities and stockholders' equity $ 2,123,461 $ 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ---------------------
1998 1997 1998 1997
---------------------- ---------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 35,127 $ 32,405 $ 104,232 $ 96,243
Mortgage-related securities 3,069 3,664 8,637 10,990
Investment securities 1,319 1,391 3,987 3,685
Interest-bearing deposits 71 256 400 531
--------- --------- --------- ---------
Total interest income 39,586 37,716 117,256 111,449
INTEREST EXPENSE:
Deposits 17,157 16,240 50,902 47,938
Notes payable and other borrowings 6,356 6,275 19,448 18,891
Other 170 176 429 446
--------- --------- --------- ---------
Total interest expense 23,683 22,691 70,779 67,275
--------- --------- --------- ---------
Net interest income 15,903 15,025 46,477 44,174
Provision for loan losses 275 110 600 135
--------- --------- --------- ---------
Net interest income after provision for loan losses 15,628 14,915 45,877 44,039
NON-INTEREST INCOME:
Loan servicing income 87 541 937 1,769
Service charges on deposits 1,038 1,004 3,080 2,965
Insurance commissions 233 283 905 833
Gain on sale of loans 1,602 903 4,823 2,010
Net income (loss) from operations of real estate investment 141 43 2,506 (460)
Other 826 853 1,826 1,690
--------- --------- --------- ---------
Total non-interest income 3,927 3,627 14,077 8,807
NON-INTEREST EXPENSES:
Compensation 5,708 4,717 16,969 14,373
Occupancy 782 748 2,276 2,246
Federal insurance premiums 208 209 627 625
Furniture and equipment 780 714 2,464 2,208
Data processing 768 603 2,207 1,849
Marketing 571 574 1,726 1,695
Net cost of operations of foreclosed properties (12) (7) 161 (24)
Other 1,320 1,767 4,312 5,077
--------- --------- --------- ---------
Total non-interest expenses 10,125 9,325 30,742 28,049
--------- --------- --------- ---------
Income before income taxes 9,430 9,217 29,212 24,797
Income taxes 3,647 3,560 11,202 9,545
--------- --------- --------- ---------
Net income $ 5,783 $ 5,657 $ 18,010 $ 15,252
========= ========= ========= =========
Earnings per share:
Basic $ 0.34 $ 0.31 $ 1.05 $ 0.84
Diluted 0.32 0.29 0.98 0.79
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
--------------------------------
1998 1997
--------------------------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,010 $ 15,252
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans and foreclosed properties 800 631
Provision for depreciation and amortization 1,705 1,712
Net proceeds from origination and sale of loans held for sale 83,987 26,850
Net gain on sales of loans and securities (5,198) (2,035)
Increase in accrued interest receivable (570) (145)
Increase (decrease) in accrued interest payable (397) 432
Increase (decrease) in accounts payable (3,914) (379)
Other 1,597 1,956
--------- ---------
Net cash provided by operating activities 96,020 44,274
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 32,216 12,639
Proceeds from maturities of investment securities 40,384 47,972
Purchase of investment securities available for sale (47,601) (55,887)
Purchase of investment securities held to maturity (1,750) (12,013)
Proceeds from sales of mortgage-related securities available for sale 3,664 --
Purchase of mortgage-related securities held to maturity (14,966) (4,171)
Purchase of mortgage-related securities available for sale (6,905) (4,741)
Principal collected on mortgage-related securities 63,786 31,575
Net increase in loans receivable (273,170) (97,504)
Purchase of office properties and equipment (1,379) (1,872)
Sales of office properties and equipment 61 101
Sales of real estate 7,451 9,559
Purchase of real estate held for sale (13,162) (3,789)
--------- ---------
Net cash used by investing activities (211,371) (78,131)
</TABLE>
4
<PAGE> 6
Consolidated Statements of Cash Flows (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-----------------------------
1998 1997
-----------------------------
(In Thousands)
<S> <C> <C>
Financing Activities
Increase in deposit accounts $ 105,243 $ 42,901
Decrease in advance payments by borrowers
for taxes and insurance (5,881) (6,301)
Proceeds from notes payable to Federal Home Loan Bank 671,550 379,100
Repayment of notes payable to Federal Home Loan Bank (638,500) (320,720)
Decrease in securities sold under agreements
to repurchase (18,839) (39,335)
Increase (decrease) in other loans payable 4,670 (10,750)
Treasury stock purchased (9,676) (4,860)
Reissuance of treasury stock for options 2,267 499
Payments of cash dividends to stockholders (2,583) (2,089)
--------- ---------
Net cash provided by financing activities 108,251 38,445
--------- ---------
Net decrease in cash and cash equivalents (7,100) 4,588
Cash and cash equivalents at beginning of year 39,167 38,025
--------- ---------
Cash and cash equivalents at end of year $ 32,067 $ 42,613
========= =========
Supplementary cash flow information:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 70,382 $ 68,066
Income taxes 10,100 8,030
Non-cash transactions:
Securitization of mortgage loans held for sale to mortgage-backed
securities and other adjustments 85,837 28,670
Loans transferred to foreclosed properties -- 2,406
Securities available for sale market value adjustment (236) 7,768
</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 nine month period ended December 31, 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.
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 December 31, 1998 and 1997, total comprehensive income
amounted to $5.5 million and $6.1 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.
6
<PAGE> 8
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 December 16, 1998, 7,200 shares granted pursuant to the Corporation's
management recognition plan were earned by the recipients. During the quarter
ended December 31, 1998, options for 180,760 shares of common stock were
exercised at a weighted price of $2.85 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 ($3.36 million). During the quarter ended December 31, 1998,
the Corporation repurchased 20,400 shares of common stock on the open market for
an average price of $19.89. During the quarter, 11,890 shares of common stock
were repurchased from treasury stock for several management retirement plans.
The weighted cost of these repurchases was $18.63 per share or $220,000 and the
excess of the cost of the treasury shares over the market price ($20,000) was
charged to retained earnings. On November 15, 1998, the Corporation paid out a
cash dividend of $.05 per share, amounting to $890,000.
NOTE 4 - EARNINGS PER SHARE
The weighted average number of shares of common stock and common stock
equivalents outstanding for December 31, 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 nine months ended December 31, 1998 and 1997 have been
determined by dividing net 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.
7
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Numerator:
Net income $ 5,782,496 $ 5,656,627
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $ 5,782,496 $ 5,656,627
Denominator:
Denominator for basic earnings per
share--weighted-average shares 17,130,657 18,126,002
Effect of dilutive securities:
Employee stock options 1,151,364 1,306,086
----------- -----------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions 18,282,021 19,432,088
=========== ===========
Basic earnings per share $ 0.34 $ 0.31
=========== ===========
Diluted earnings per share $ 0.32 $ 0.29
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1998 1997
------------------------------
<S> <C> <C>
Numerator:
Net income $18,009,963 $15,252,139
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $18,009,963 $15,252,139
Denominator:
Denominator for basic earnings per
share--weighted-average shares 17,141,624 18,124,148
Effect of dilutive securities:
Employee stock options 1,261,407 1,171,418
Denominator for diluted earnings per
share--adjusted weighted-average
----------- -----------
shares and assumed conversions 18,403,031 19,295,566
=========== ===========
Basic earnings per share $ 1.05 $ 0.84
=========== ===========
Diluted earnings per share $ 0.98 $ 0.79
=========== ===========
</TABLE>
8
<PAGE> 10
NOTE 5 - SUBSEQUENT EVENTS
On January 15, 1999, the Corporation announced a definitive agreement to merge
with FCB Financial Corp. It is anticipated that the merger will be accounted for
as a pooling of interests. On January 21, 1999, the Corporation declared a $.05
per share cash dividend to be paid on February 15, 1999 to stockholders of
record on February 1, 1999.
9
<PAGE> 11
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. 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.
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 nine months ended December 31, 1998
increased $130,000 to $5.8 million and $2.7 million to $18.0 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 interest income of
$1.9 million and $5.8 million, respectively, for the three and nine months ended
December 31, 1998, as well as an increase in non-interest income of $300,000 and
$5.3 million, respectively, during the periods. Such increases for the three and
nine months ended December 31, 1998 were offset by (i) an increase in interest
expense of $1.0 million and $3.5 million, respectively, (ii) an increase in
non-interest expense of $800,000 and $2.7 million, respectively, and (iii) an
increase in income taxes of $90,000 and $1.7 million, respectively.
Net Interest Income. Net interest income increased $880,000 and $2.3 million for
the three and nine months ended December 31, 1998 respectively, compared to the
same periods in 1997. The net interest margin decreased to 3.12% from 3.18% for
the respective three-month periods and decreased to 3.11% from 3.17% for the
respective nine-month periods. The interest rate spread decreased to 2.93% from
2.98% and decreased to 2.92% from 2.99%, respectively, for the same periods.
Interest income on loans increased $2.7 million and $8.0 million for the three
and nine months ended December 31, 1998 respectively, compared to the same
periods in the prior year. This increase was a result of an increase of $196.3
million and $180.1 million, respectively, in the average balance of loans for
the periods due to increased loan originations. Interest income on
mortgage-related securities decreased $600,000 and $2.4 million for the same
periods due primarily to the decrease of $16.4 million and $40.4 million,
respectively in the average balance of mortgage-related securities. Interest
income on investment securities (including Federal Home Loan Bank stock)
10
<PAGE> 12
decreased $70,000 and increased $300,000, respectively, for the three- and
nine-month periods ended December 31, 1998 as compared to the same periods in
the prior year. This was primarily a result of a decrease of $16.2 million and
$7.2 million, respectively, in the average balance of investment securities for
the three and nine months ended December 31, 1998 as compared to the same
periods in 1997. The nine-month figure was slightly offset by an increase of
$650,000 in the average balance of Federal Home Loan Bank stock. Interest income
on interest-bearing deposits decreased $190,000 and $130,000, respectively, for
the three and nine months ended December 31, 1998, due to the decrease of $12.9
million and $2.9 million in the average balance of interest-bearing deposits.
Interest expense on deposits increased $900,000 and $3.0 million, respectively,
for the three and nine months ended December 31, 1998 as compared to the same
periods in 1997. The increase was due primarily to the increase in the average
balance of deposits of $134.9 million and $113.1 million, respectively, for the
three- and nine-month periods as a result of various demand deposit and
certificate promotions. Interest expense on notes payable and other borrowings
increased $80,000 and $560,000, respectively, during the same periods.
Provision for Loan Losses. Provision for loan losses increased $170,000 and
$470,000 for the three- and nine-month periods ended December 31, 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 tables show 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 DECEMBER 31,
-----------------------------------------------------------------------------
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 (2) $1,371,230 $ 26,678 7.78% $1,180,925 $ 23,879 8.09%
Consumer loans (2) 342,628 7,627 8.90 341,729 7,752 9.07
Commercial business loans(2) 35,415 822 9.28 30,312 774 10.21
---------- ---------- ---------- ----------
Total loans receivable (2) 1,749,273 35,127 8.03 1,552,966 32,405 8.35
Mortgage-related securities 195,270 3,069 6.29 211,644 3,664 6.92
Investment securities 67,492 952 5.64 83,726 1,003 4.79
Interest-bearing deposits 5,766 71 4.93 18,709 256 5.47
Federal Home Loan Bank stock 21,950 367 6.69 21,963 388 7.07
---------- ---------- ---------- ----------
Total interest-earning assets 2,039,751 39,586 7.76 1,889,008 37,716 7.99
Non-interest-earning assets 89,898 ----- 77,936 -----
---------- ----------
Total assets $2,129,649 $1,966,944
========== ==========
INTEREST-BEARING LIABILITIES
Demand deposits $ 413,069 2,755 2.67 $ 344,109 2,481 2.88
Regular passbook savings 101,476 520 2.05 99,103 569 2.30
Certificates of deposit 974,815 13,882 5.70 911,245 13,190 5.79
---------- ---------- ---------- ----------
Total deposits 1,489,360 17,157 4.61 1,354,457 16,240 4.80
Notes payable and other borrowings 455,216 6,356 5.59 440,035 6,275 5.70
Other 17,623 170 3.86 18,732 176 3.76
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,962,199 23,683 4.83 1,813,224 22,691 5.01
Non-interest-bearing liabilities 33,798 ---------- ----- 23,945 ---------- -----
---------- ----------
Total liabilities 1,995,997 1,837,169
Stockholders' equity 133,652 129,775
---------- ----------
Total liabilities and stockholders'
equity $2,129,649 $1,966,944
========== ==========
Net interest income/interest rate spread $ 15,903 2.93% $ 15,025 2.98%
========== ==== ========== ====
Net interest-earning assets $ 77,552 $ 75,784
========== ==========
Net interest margin 3.12% 3.18%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.04 1.04
==== ====
</TABLE>
- --------------------------------------------
(1) Annualized
(2) The average balances of loans include non-performing loans, interest of
which is recognized on a cash basis.
12
<PAGE> 14
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------
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 (2) $ 1,335,239 $ 78,671 7.86% $ 1,165,373 $ 71,261 8.15%
Consumer loans (2) 341,598 23,080 9.01 336,796 22,663 8.97
Commercial business loans(2) 34,574 2,480 9.56 29,120 2,319 10.62
----------- -------- ----------- --------
Total loans receivable (2) 1,711,411 104,232 8.12 1,531,289 96,243 8.38
Mortgage-related securities 181,063 8,637 6.36 221,463 10,990 6.62
Investment securities 66,538 2,914 5.84 73,699 2,611 4.72
Interest-bearing deposits 10,093 400 5.28 13,042 531 5.43
Federal Home Loan Bank stock 21,495 1,073 6.66 20,848 1,074 6.87
----------- -------- ----------- --------
Total interest-earning assets 1,990,600 117,256 7.85 1,860,341 111,449 7.99
------ -----
Non-interest-earning assets 86,437 78,231
----------- -----------
Total assets $ 2,077,037 $ 1,938,572
=========== ===========
INTEREST-BEARING LIABILITIES
Demand deposits $ 388,344 8,055 2.77 $ 328,455 7,101 2.88
Regular passbook savings 101,829 1,567 2.05 100,234 1,720 2.29
Certificates of deposit 954,953 41,280 .76 903,299 39,117 5.77
----------- -------- ----------- --------
Total deposits 1,445,126 50,902 4.70 1,331,988 47,938 4.80
Notes payable and other borrowings 455,393 19,448 5.69 444,718 18,891 5.66
Other 15,179 429 3.77 16,125 446 3.69
----------- -------- ----------- --------
Total interest-bearing liabilities 1,915,698 70,779 4.93 1,792,831 67,275 5.00
Non-interest-bearing liabilities 30,547 -------- ----- 20,500 -------- -----
----------- -----------
Total liabilities 1,946,245 1,813,331
Stockholders' equity 130,792 125,241
----------- -----------
Total liabilities and stockholders'
equity $ 2,077,037 $ 1,938,572
=========== ===========
Net interest income/interest rate spread $ 46,477 2.92% $ 44,174 2.99%
========= ===== ========= =====
Net interest-earning assets $ 74,902 $ 67,510
======== ========
Net interest margin 3.11% 3.17%
===== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.04 1.04
==== ====
</TABLE>
- --------------------------------------------
(1) Annualized
(2) The average balances of loans include non-performing loans, interest of
which is recognized on a cash basis.
13
<PAGE> 15
Non-Interest Income. Non-interest income increased $300,000 to $3.9 million and
$5.3 million to $14.1 million, respectively, for the three and nine months ended
December 31, 1998 as compared to the same periods in the prior year as a result
of several factors. The gain on sale of loans increased $700,000 and $2.8
million, respectively, for the three- and nine-month periods due to increased
volume of loan sales. Net income (loss) from operations of real estate
investments for the three and nine months ended December 31, 1998 increased
$100,000 and $3.0 million because of an increase in sales of partnership
interests at IDI. Service charges on deposits increased $30,000 and $120,000 for
the same three- and nine-month periods ended December 31, 1998 due to increased
volume in this area. Insurance commissions decreased $50,000 for the three-month
period and increased $70,000 for the nine-month period. In addition, loan
servicing income decreased $450,000 and $830,000, respectively, for the three
and nine months ended December 31, 1998. This decrease is attributed to the fact
that the amortization of Originated Mortgage Servicing Rights (OMSR's) was
formerly charged to the category of other income rather than to loan servicing
income. Other non-interest income decreased $30,000 for the three-month period
and increased $140,000 for the nine-month period.
Non-Interest Expense. Non-interest expense increased $800,000 to $10.1 million
and $2.7 million to $30.7 million, respectively, during the three and nine
months ended December 31, 1998 as compared to the same periods in 1997 as a
result of several factors. Compensation expense increased $990,000 and $2.6
million, respectively, due primarily to an increase in incentive compensation
resulting from increased loan production. Data processing expense increased
$170,000 and $360,000, respectively, for the three and nine months ended
December 31, 1998. Furniture and equipment expenses increased $70,000 and
$260,000 for the same time periods, largely due to normal increases in
depreciation and other costs. Occupancy expense increased $30,000 for both the
three and nine months ended December 31, 1998. Net cost of operations of
foreclosed properties decreased $10,000 for the three-month period and increased
$190,000 for the nine-month period. These increases were partially offset by a
decrease in other non-interest expenses such as legal and consulting and audit
and accounting of $450,000 and $770,000, respectively.
Income Taxes. Income tax expense increased $90,000 and $1.7 million, during the
three and nine months ended December 31, 1998 as compared to the same periods in
1997. The effective tax rate was 38.7% and 38.3%, respectively, for the current
year as compared to 38.6% and 38.5% for the three- and nine-month periods last
year.
14
<PAGE> 16
FINANCIAL CONDITION
During the nine months ended December 31, 1998, the Corporation's assets
increased by $124.2 million from $2.0 billion at March 31, 1998, to $2.12
billion. The majority of this increase was attributable to increases in loans
and mortgage-related securities.
Investment securities (both available for sale and held to maturity) decreased
$23.4 million during the nine months ended December 31, 1998 as a result of
purchases of $48.9 million of U.S. Government and agency securities which was
partially offset by sales and maturities of $72.6 million.
Mortgage-related securities (both available for sale and held to maturity)
increased $38.0 million during the nine months ended December 31, 1998 as a
result of (i) securitization of $83.5 million of loans held for investment into
securities guaranteed by the Federal National Mortgage Association and backed by
such loans and (ii) purchases of $21.9 million. These increases were partially
offset by principal repayments and market value adjustments of $63.8 million.
Mortgage-related securities consisted of $214.9 million of mortgage-backed
securities and $17.8 million of Collateralized Mortgage Obligations ("CMO's")
and Real Estate Mortgage Investment Conduits ("REMIC's") at December 31, 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 $111.8 million during the
nine months ended December 31, 1998. Activity for the period included (i)
originations and purchases of $1.05 billion, (ii) sales of $345.9 million, which
included securitization of $83.5 million of loans into mortgage-backed
securities and (iii) principal repayments and other adjustments of $589.8
million.
Deposits increased $105.2 million during the nine months ended December 31,
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
$82.7 million at December 31, 1998 and generally mature in one year. FHLB
advances increased $33.1 million during the nine months ended December 31, 1998.
Reverse repurchase agreements and other borrowings decreased $14.2 million
during the nine months ended December 31, 1998. Advance payments by borrowers
for taxes and insurance decreased $5.9 million.
Stockholders' equity increased $8.2 million during the nine months ended
December 31, 1998 as a net result of (i) comprehensive income of $17.88 million,
(ii) stock options exercised of $9.10 million (with the excess of the cost of
treasury shares over the option price ($6.80 million) charged to retained
earnings) and (iii) the tax benefit from certain stock options of $1.59 million.
These were offset by (i) treasury stock repurchased of $9.68 million, (ii) cash
dividends of $2.58 million and (iii) benefit plan shares earned and related tax
adjustments totaling $1.26 million, and (iv) loss on treasury shares repurchased
for management employee retirement plans of $40,000.
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.
15
<PAGE> 17
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
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
March 31, 1999. 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. On December 6,
1998, the loan origination system was tested by a third party and found to be
Year 2000 compliant. The following table indicates the Corporation's progress in
the assessment, remediation, testing and implementation of becoming Year 2000
compliant.
- ------------------------------------------------------------------------------
RESOLUTION PHASES OF YEAR 2000 COMPLIANCE AT DECEMBER 31, 1998
- ------------------------------------------------------------------------------
EXPOSURE
TYPE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- ------------------------------------------------------------------------------
Information 100% Complete 100% Complete 95% Complete 80% Complete
Technology
Expected Expected
completion completion
date, 3/31/99 date, 3/31/99
- ------------------------------------------------------------------------------
Operating 100% Complete 100% Complete 100% Complete 100% Complete
Equipment
with
Embedded Chips
or Software
- -----------------------------------------------------------------------------
3rd Party 100% Complete 95% Complete 95% Complete 90% Complete
for System for system for system for system
interface; interface interface interface
100% Complete
for all other Develop Expected Expected
material contingency completion completion
exposures plans as date for date for
appropriate, system system
3/31/99 interface interface work,
work, 3/31/99 3/31/99
Implement
contingency
plans or
other
alternatives
as necessary,
3/31/99
- ------------------------------------------------------------------------------
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
16
<PAGE> 18
estimated at $500,000 and is being funded through operating cash flows. To date,
the Corporation has incurred $250,000 ($100,000 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 $150,000 relates to consulting and remediation of
hardware and software. Both of the latter will be expensed as incurred.
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 could 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 $7.0 million at December 31, 1998 from $12.9 million at March 31,
1998 and decreased as a percentage of total assets to .33% 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 December 31, ---------------------------------------
1998 1998 1997 1996
-------------- ----------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Non-accrual loans:
Single-family residential $ 1,688 $ 1,273 $ 1,712 $ 629
Multi-family residential -- 898 3,199 --
Commercial real estate 165 288 778 470
Construction and land -- -- 58 81
Consumer 826 577 438 202
Commercial business 476 673 610 508
------- ------- ------- -------
Total non-accrual loans 3,155 3,709 6,795 1,890
Real estate held for development and sale 1,388 4,431 2,736 2,319
Foreclosed properties and repossessed assets, net 2,487 4,723 4,222 6,077
------- ------- ------- -------
Total non-performing assets $ 7,030 $12,863 $13,753 $10,286
======= ======= ======= =======
Performing troubled debt restructurings $ 2,889 $ 725 $ 329 $ 332
======= ======= ======= =======
Total non-accrual loans to total loans 0.17% 0.22% 0.44% 0.13%
Total non-performing assets to total assets 0.33 0.64 0.73 0.59
Allowance for loan losses to total loans 1.12 1.30 1.48 1.59
Allowance for loan losses to total
non-accrual loans 644.53 588.65 334.81 1,206.72
Allowance for loan and foreclosure losses
to total non-performing assets 294.50 172.26 173.26 228.70
</TABLE>
At December 31, 1998, there were no non-accrual loans with a carrying value
greater than $1.0 million. Non-accrual loans decreased $550,000 during the nine
months ended December 31, 1998. Non-performing real estate held for development
and sale decreased $3.0 million for the nine months ended December 31, 1998.
At December 31, 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 $2.0 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 prior 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.
At December 31, 1998, there were no foreclosed properties and repossessed assets
with a carrying value greater than $1.0 million. Foreclosed properties and
repossessed assets decreased $2.2 million during the nine-month period. The
decrease was due primarily to the sale of an apartment complex in Elm Grove,
Wisconsin, which formerly
18
<PAGE> 20
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 $2.2 million during the
nine months ended December 31, 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 December 31, 1998, assets that the Corporation has classified, as substandard
net of reserves, consisted of $15.1 million of loans and foreclosed properties.
As of March 31, 1998, the substandard assets amounted to $15.8 million. The
decrease of $700,000 is the net effect of several changes. The removal of the
above-discussed Elm Grove, Wisconsin property from foreclosed properties and
repossessed assets, as a result of the sale, represented a reduction of $2.2
million. The sale of a parcel of land in Monona, Wisconsin represented a
$500,000 reduction. These removals were offset by increases in all categories of
substandard loans totalling $2.0 million. Of the increases in the categories of
substandard loans, there are no loans with a carrying value of greater than $1.0
million.
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 March 31,
At December 31, --------------------------------------
1998 1998 1997 1996
---------------- --------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
30 to 59 days $4,158 $3,732 $3,144 $5,776
60 to 89 days 1,035 994 909 789
------ ------ ------ ------
Total $5,193 $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 managementss
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 less costs to sell 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 Nine Months Ended
December 31, December 31,
--------------------------- --------------------------
1998 1997 1998 1997
--------------------------- --------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Allowance at beginning of period $ 21,440 $ 22,195 $ 21,833 $ 22,750
Charge-offs:
Mortgage (1,210) (103) (1,518) (132)
Consumer (254) (135) (738) (788)
Commercial business (157) -- (367) (8)
-------- -------- -------- --------
Total charge-offs (1,621) (238) (2,623) (928)
Recoveries:
Mortgage 217 4 399 55
Consumer 20 15 106 37
Commercial business 4 9 20 46
-------- -------- -------- --------
Total recoveries 241 28 525 138
-------- -------- -------- --------
Net charge-offs (1,380) (210) (2,098) (790)
Provision 275 110 600 135
-------- -------- -------- --------
Allowance at end of period $ 20,335 $ 22,095 $ 20,335 $ 22,095
======== ======== ======== ========
Net charge-offs to average loans (0.32)% (0.05)% (0.16)% (0.07)%
======== ======== ======== ========
</TABLE>
Although management believes that the December 31, 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 December 31, 1998, the Corporation had outstanding commitments to originate
loans of $77.1 million, commitments to extend funds to, or on behalf of,
customers pursuant to lines and letters of credit of $90.2 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 December 31, 1998 amounted to $758.0 million and scheduled
maturities of FHLB advances during the same period totaled $241.3 million. At
December 31, 1998, the Corporation also had $24.1 million of reverse repurchase
agreements, all of which are scheduled to mature during the twelve months
following December 31, 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 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
December 31, 1998, the Bank's average liquidity ratio was 14.50%.
20
<PAGE> 22
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 December 31, 1998.
The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at December 31, 1998 and December 31, 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 December 31, 1998:
Tier 1 capital
(to adjusted tangible assets) $ 120,782 5.76% $ 62,884 3.00% $ 104,806 5.00%
Risk-based capital
(to risk-based assets) 137,853 10.11 109,088 8.00 136,360 10.00
Tangible capital
(to tangible assets) 120,782 5.76 31,442 1.50 N/A N/A
As of December 31, 1997:
Tier 1 capital
(to adjusted tangible assets) 111,009 5.79 57,538 3.00 95,897 5.00
Risk-based capital
(to risk-based assets) 126,063 10.51 95,916 8.00 119,895 10.00
Tangible capital
(to tangible assets) 111,009 5.79 28,769 1.50 N/A N/A
</TABLE>
21
<PAGE> 23
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 December 31, 1998. Management does not believe these rules will
significantly impact the Bank's ability to meet the capital requirements.
The following table reconciles stockholder equity to regulatory capital at
December 31, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
As of December 31, 1998:
Stockholders' equity of the Corporation $ 136,166 $ 129,005
Less: Capitalization of the Corporation and Non-Bank
subsidiaries (12,733) (15,352)
--------- ---------
Stockholders' equity of the Bank 123,433 113,653
Less: Intangible assets and other non-includable assets (2,653) (2,644)
--------- ---------
Tier 1 and tangible capital 120,780 111,009
Plus: Allowable general valuation allowances 17,073 15,054
--------- ---------
Risk based capital $ 137,853 $ 126,063
========= =========
</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 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
22
<PAGE> 24
considers them reasonable, although the actual amortization and repayment of
assets and liabilities may vary substantially. There have been no material
changes in the Corporation's asset/liability structure or management strategies
and assumptions since the prior fiscal year ended March 31, 1998. The cumulative
net gap position at December 31, 1998 has not changed materially since March 31,
1998.
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 22 and 23 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.
On January 15, 1999, the Corporation filed a Current Report on
Form 8-K to report, pursuant to Item 5 thereto, the announcement
of a definitive agreement to merge FCB Financial Corp. with and
into Anchor Bancorp.
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.
ANCHOR BANCORP WISCONSIN INC.
Date: February 15, 1999 By: /s/ Douglas J. Timmerman
------------------------------ -----------------------------
Douglas J. Timmerman, Chairman
of the Board, President and
Chief Executive Officer
Date: February 15, 1999 By: /s/ Michael W. Helser
------------------------------ -----------------------------
Michael W. Helser, Treasurer
and Chief Financial Officer
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,802
<INT-BEARING-DEPOSITS> 1
<FED-FUNDS-SOLD> 1,264
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,272
<INVESTMENTS-CARRYING> 187,183
<INVESTMENTS-MARKET> 188,974
<LOANS> 1,811,621
<ALLOWANCE> 20,335
<TOTAL-ASSETS> 2,123,461
<DEPOSITS> 1,497,715
<SHORT-TERM> 282,845
<LIABILITIES-OTHER> 16,140
<LONG-TERM> 190,595
53,173
0
<COMMON> 0
<OTHER-SE> 82,993
<TOTAL-LIABILITIES-AND-EQUITY> 2,123,461
<INTEREST-LOAN> 104,232
<INTEREST-INVEST> 12,624
<INTEREST-OTHER> 400
<INTEREST-TOTAL> 117,256
<INTEREST-DEPOSIT> 50,902
<INTEREST-EXPENSE> 70,779
<INTEREST-INCOME-NET> 46,477
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 137
<EXPENSE-OTHER> 30,742
<INCOME-PRETAX> 29,212
<INCOME-PRE-EXTRAORDINARY> 29,212
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,010
<EPS-PRIMARY> 1.05
<EPS-DILUTED> .98
<YIELD-ACTUAL> 7.85
<LOANS-NON> 3,155
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,889
<LOANS-PROBLEM> 5,728
<ALLOWANCE-OPEN> 21,833
<CHARGE-OFFS> 2,623
<RECOVERIES> 525
<ALLOWANCE-CLOSE> 20,335
<ALLOWANCE-DOMESTIC> 20,335
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 19,402
</TABLE>
