<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended March 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
-------------------- ---------------------
Commission File Number 0-20006
ANCHOR BANCORP WISCONSIN INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1726871
---------------------------------- ---------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
25 West Main Street
Madison, Wisconsin 53703
(Address of principal executive office)
Registrant's telephone number, including area code (608) 252-8700
Securities registered pursuant to Section 12 (b) of the Act
Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, par value $.10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 or Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. |X|
Based upon the $17.000 closing price of the registrant's common stock
as of May 13, 1999, the aggregate market value of the 16,655,284 shares of the
registrant's common stock deemed to be held by non-affiliates of the registrant
was: $283.1 million. Although directors and executive officers of the registrant
and certain of its employee benefit plans were assumed to be "affiliates" of the
registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
As of June 18, 1999, 18,131,305 shares of the registrant's common stock
were outstanding. There were also 100,000 series A- preferred stock purchase
rights authorized with none outstanding, as of the same date.
Documents Incorporated by Reference
Proxy Statement for the Annual Meeting of Stockholders to be held on July 27,
1999 (Part III, Items 10 to 13)
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Anchor BanCorp Wisconsin Inc. (the "Corporation") is a registered
savings and loan holding company incorporated under the laws of the State of
Wisconsin and is engaged in the savings and loan business through its
wholly-owned banking subsidiary, AnchorBank, S.S.B. (the "Bank"). On July 15,
1992, the Bank converted from a state-chartered mutual savings institution to a
stock savings institution. As part of the conversion, the Corporation acquired
all of the outstanding common stock of the Bank. The Corporation also has a
non-banking subsidiary, Investment Directions, Inc. ("IDI"), a Wisconsin
corporation, which invests in limited partnerships. IDI created a subsidiary in
March 1997, Nevada Investment Directions, Inc. ("NIDI"), which also invests in
limited partnerships. NIDI was organized in the state of Nevada.
The Bank was organized in 1919 as a Wisconsin-chartered savings
institution. As a state-chartered savings institution, the Bank's deposits are
insured up to the maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Home Loan Bank of
Chicago ("FHLB"), and is regulated by the Office of Thrift Supervision ("OTS"),
the FDIC and the Wisconsin Commissioner of Savings and Loan ("Commissioner").
The Corporation is subject to the periodic reporting requirements of the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended ("Exchange Act"). The Bank is also regulated by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") relating to
reserves required to be maintained against deposits and certain other matters.
See "Regulation."
The Bank blends an interest in the consumer and small business markets
with the willingness to expand its numerous checking, savings and lending
programs to meet customers' changing financial needs. The Bank offers checking,
savings, money market accounts, mortgages, home equity and other consumer loans,
student loans, credit cards, annuities and related consumer financial services.
The Bank also offers banking services to businesses, including checking
accounts, lines of credit, secured loans and commercial real estate loans.
The Bank has three wholly owned subsidiaries. Anchor Insurance
Services, Inc. ("AIS") offers a full line of insurance products, securities and
annuities to the Bank's customers and other members of the general public. ADPC
Corporation ("ADPC") holds and develops certain of the Bank's foreclosed
properties. Anchor Investment Corporation ("AIC") is an operating subsidiary
that is located in and formed under the laws of the State of Nevada. AIC was
formed for the purpose of managing a portion the Bank's investment portfolio
(primarily mortgage-related securities). All of the Bank's subsidiaries, except
AIC, are Wisconsin corporations.
MARKET AREA
The Bank's primary market area consists of the metropolitan area of
Madison, Wisconsin, the suburban communities of Dane County, Wisconsin and
southern Wisconsin as well as contiguous counties in Iowa and Illinois. As of
March 31, 1999, the Bank conducted business from its headquarters and main
office in Madison, Wisconsin and from 35 other full-service offices located
primarily in southcentral and southwest Wisconsin and two loan origination
offices.
The economy of Dane County is characterized by diversified industries,
major medical facilities, state, federal and university governmental bodies, and
a sound agricultural base. It is estimated that the population of Dane County
increased by 13.5% from 1980 to 1990, which was more than three times the
percentage increase for the State of Wisconsin.
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COMPETITION
The Bank is subject to extensive competition from other savings
institutions as well as commercial banks and credit unions in both attracting
and retaining deposits and in real estate and other lending activities.
Competition for deposits also comes from money market funds, bond funds,
corporate debt and government securities. Competition for the origination of
real estate loans comes principally from other savings institutions, commercial
banks and mortgage banking companies. Competition for consumer loans is
primarily from other savings institutions, commercial banks, consumer finance
companies and credit unions.
The principal factors that are used to attract deposit accounts and
distinguish one financial institution from another include rates of return,
types of accounts, service fees, convenience of office locations and hours, and
other services. The primary factors in competing for loans are interest rates,
loan fee charges, timeliness and quality of service to the borrower.
FINANCIAL RATIOS
The following table represents selected financial ratios of the Corporation's
operations for the fiscal years indicated. These ratios, where applicable, have
been restated to reflect both a two-for-one stock split on the Corporation's
common stock in August 1998 and the application of Financial Accounting
Standards No. 128 (Earnings Per Share).
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
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1999 1998 1997
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<S> <C> <C> <C>
Return on average assets 1.13% 1.05% 0.76%
Return on average equity 17.70 16.20 11.78
Average equity to average assets 6.38 6.51 6.42
Dividend payout ratio 14.23 13.72 15.83
Net interest margin 3.08 3.18 3.14
</TABLE>
LENDING ACTIVITIES
GENERAL. At March 31, 1999, the Corporation's net loans held for
investment totaled $1.7 billion, representing approximately 81% of its $2.1
billion of total assets at that date. Approximately 79% of the Corporation's
total loans held for investment at March 31, 1999 were secured by first liens on
sreal estate.
The Bank's primary lending emphasis is on the origination of
single-family residential loans secured by properties located primarily in
Wisconsin, with adjustable-rate loans generally being originated for inclusion
in the Bank's loan portfolio and fixed-rate loans generally being originated for
sale into the secondary market. In addition, in order to increase the yield and
interest rate sensitivity of its portfolio, the Bank also originates commercial
real estate, multi-family, construction, consumer and commercial business loans
in its primary market area.
The non-real estate loans originated by the Bank consist of a variety
of consumer loans and commercial business loans. At March 31, 1999, the
Corporation's total loans held for investment included $335.8 million of
consumer loans and $40.4 million of commercial business loans.
LOAN PORTFOLIO COMPOSITION. The following table presents information
concerning the composition of the Corporation's consolidated loans held for
investment at the dates indicated.
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<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential ....... $ 841,048 46.06% $ 817,763 48.67% $ 731,732 47.44%
Multi-family residential ........ 224,167 12.28 177,350 10.56 164,729 10.68
Commercial real estate .......... 216,365 11.85 183,914 10.95 171,186 11.10
Construction .................... 154,594 8.47 120,376 7.16 106,536 6.91
Land ............................ 13,552 0.74 12,503 0.74 15,730 0.94
----------- ------ ---------- ------ ----------- ------
Total mortgage loans .......... 1,449,726 79.40 1,311,906 78.08 1,189,913 77.15
----------- ------ ---------- ------ ----------- ------
Consumer loans:
Second mortgage and home equity . 180,122 9.86 183,874 10.94 176,348 11.43
Education ....................... 125,427 6.87 121,306 7.22 112,420 7.29
Other ........................... 30,241 1.66 32,841 1.80 34,682 2.25
----------- ------ ---------- ------ ----------- ------
Total consumer loans .......... 335,790 18.39 338,021 20.12 323,450 20.97
----------- ------ ---------- ------ ----------- ------
Commercial business loans:
Loans ........................... 40,401 2.21 30,239 1.80 29,012 1.88
Lease receivables ............... -- 0.00 5 0.00 10 0.00
----------- ------ ---------- ------ ----------- ------
Total commercial business loans 40,401 2.21 30,244 1.80 29,022 1.88
----------- ------ ---------- ------ ----------- ------
Gross loans receivable ........ 1,825,917 100.00% 1,680,171 100.00% 1,542,385 100.00%
====== ====== ======
Contras to loans:
Undisbursed loan proceeds ....... (77,161) (62,756) (54,002)
Allowance for loan losses ....... (20,208) (21,833) (22,750)
Unearned loan fees .............. (3,824) (3,839) (3,373)
Discount on loans purchased ..... (476) (625) (748)
Unearned interest ............... (6) (29) (89)
----------- ---------- -----------
Total contras to loans ........ (101,675) (89,082) (80,962)
----------- ---------- -----------
Loans receivable, net ......... $ 1,724,242 $1,591,089 $ 1,461,423
=========== ========== ===========
MARCH 31,
---------------------------------------------------
1996 1995
---------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential ....... $ 745,170 51.97% $ 716,212 55.83%
Multi-family residential ........ 162,432 11.33 141,401 11.02
Commercial real estate .......... 139,918 9.76 123,438 9.62
Construction .................... 77,187 5.38 66,519 5.18
Land ............................ 21,077 1.47 13,644 1.06
----------- ------ ----------- ------
Total mortgage loans .......... 1,145,784 79.90 1,061,214 82.72
----------- ------ ----------- ------
Consumer loans:
Second mortgage and home equity . 140,302 9.78 111,725 8.71
Education ....................... 88,674 6.18 69,264 5.40
Other ........................... 28,481 1.99 18,997 1.48
----------- ------ ----------- ------
Total consumer loans .......... 257,457 17.95 199,986 15.59
----------- ------ ----------- ------
Commercial business loans:
Loans ........................... 30,352 2.12 20,272 1.58
Lease receivables ............... 363 0.03 1,467 0.11
----------- ------ ----------- ------
Total commercial business loans 30,715 2.14 21,739 1.69
----------- ------ ----------- ------
Gross loans receivable ........ 1,433,956 100.00% 1,282,939 100.00%
====== ======
Contras to loans:
Undisbursed loan proceeds ....... (46,493) (25,980)
Allowance for loan losses ....... (22,807) (22,429)
Unearned loan fees .............. (2,453) (2,000)
Discount on loans purchased ..... (1,005) (1,151)
Unearned interest ............... (118) (272)
----------- -----------
Total contras to loans ........ (72,876) (51,832)
----------- -----------
Loans receivable, net ......... $ 1,361,080 $ 1,231,107
=========== ===========
</TABLE>
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The following table shows, at March 31, 1999, the scheduled contractual
maturities of the Corporation's consolidated gross loans held for investment, as
well as the dollar amount of such loans which are scheduled to mature after one
year which have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
MULTI-FAMILY
RESIDENTIAL
AND
SINGLE-FAMILY COMMERCIAL CONSTRUCTION COMMERCIAL
RESIDENTIAL REAL ESTATE AND LAND CONSUMER BUSINESS
LOANS LOANS LOANS LOANS LOANS
-------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts due:
In one year or less $ 33,910 $ 27,601 $105,326 $ 35,016 $ 867
After one year through
five years 117,568 106,747 18,279 174,388 39,310
After five years 689,570 306,184 44,541 126,386 224
-------- -------- -------- -------- --------
$841,048 $440,532 $168,146 $335,790 $ 40,401
======== ======== ======== ======== ========
Interest rate terms on amounts
due after one year:
Fixed $225,057 $ 81,572 $ 15,953 $156,054 $ 6,606
-------- -------- -------- -------- --------
Adjustable $582,081 $331,359 $ 46,867 $144,720 $ 32,928
======== ======== ======== ======== ========
</TABLE>
SINGLE-FAMILY RESIDENTIAL LOANS. Historically, savings associations,
such as the Bank, have concentrated their lending activities on the origination
of loans secured primarily by first mortgage liens on owner-occupied, existing
single-family residences. At March 31, 1999, $841.0 million or 46.1% of the
Bank's total loans held for investment consisted of single-family residential
loans, substantially all of which are conventional loans, which are neither
insured or guaranteed by a federal or state agency.
The Bank has emphasized single-family residential loans that provide
for periodic adjustments to the interest rate since the early 1980s. The
adjustable-rate loans, currently emphasized by the Bank, have up to 30-year
maturities and terms which permit the Bank to annually increase or decrease the
rate on the loans at its discretion. This is subject to a limit of 1% per
adjustment and an aggregate 5% adjustment over the life of the loan. The Bank
also originates, to a much lesser extent, adjustable-rate loans with terms that
provide for annual adjustment to the interest rate in accordance with changes in
a designated index. These are generally subject to a limit of 2% per adjustment
and an aggregate 5% adjustment over the life of the loan.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding fixed-rate loans in an increasing interest rate
environment. At March 31, 1999, approximately $606.5 million or 72.1% of the
Corporation's permanent single-family residential loans held for investment
consisted of loans with adjustable interest rates.
The Bank continues to originate long-term, fixed-rate mortgage loans,
including conventional, Federal Housing Administration ("FHA"), Federal Veterans
Administration ("VA") and Wisconsin Housing and Economic Development Authority
("WHEDA") loans, in order to provide a full range of products to its customers.
The Bank
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generally sells current production of these loans with terms of 20 years or more
to the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA"), WHEDA and other institutional investors, while
keeping some of the 10-year term loans in its portfolio. The Bank retains the
right to service substantially all loans that it sells.
At March 31, 1999, approximately $234.5 million or 27.9% of the
permanent single-family residential loans in the Corporation's loans held for
investment consisted of loans that provide for fixed rates of interest. Almost
60% of these loans have original terms of 15 years or less. Although these loans
generally provide for repayments of principal over a fixed period of 10 to 30
years, it is the Bank's experience that because of prepayments and due-on-sale
clauses, such loans generally remain outstanding for a substantially shorter
period of time.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE. During the 1980s,
the Bank emphasized the origination and purchase of loans secured by
multi-family residences and commercial real estate located within and outside of
Wisconsin in order to diversify the type and geographic location of its loan
portfolio. Such loans also were emphasized because they generally have
adjustable rates and shorter terms than single-family residential loans, thus
increasing the sensitivity of the loan portfolio to changes in interest rates,
as well as providing higher fees and rates than single-family residential loans.
At March 31, 1999, the Corporation had $224.2 million of loans secured by
multi-family residential real estate and $216.4 million of loans secured by
commercial real estate. The Bank generally limits the origination of such loans
to its primary market area, except to facilitate the sale or resolution of
certain remaining foreclosed properties outside its market area.
The Bank's multi-family residential loans are primarily secured by
apartment buildings and commercial real estate loans are primarily secured by
office buildings, industrial buildings, warehouses, small retail shopping
centers and various special purpose properties, including motels, restaurants
and nursing homes.
Although terms vary, multi-family residential and commercial real
estate loans generally have maturities of 15 to 30 years, as well as balloon
payments, and terms which provide that the interest rates thereon may be
adjusted annually at the Bank's discretion, subject to an initial fixed-rate for
a one to five year period and an annual limit of 1% to 1.5% per adjustment, with
no limit on the amount of such adjustments over the life of the loan.
CONSTRUCTION AND LAND LOANS. Historically, the Bank has been an active
originator of loans to construct residential and commercial properties
("construction loans"), and to a lesser extent, loans to acquire and develop
real estate for the construction of such properties ("land loans"). At March 31,
1999, construction loans amounted to $154.6 million or 8.5% of the Corporation's
total loans held for investment. Of this amount, $86.5 million and $51.2 million
was represented by loans for the construction of single-family and multi-family
residences, respectively. Land loans amounted to $13.6 million at March 31,
1999.
The Bank's construction loans generally have terms of six to 12 months,
fixed interest rates and fees which are due at the time of origination and at
maturity if the Bank does not originate the permanent financing on the
constructed property. Loan proceeds are disbursed in increments as construction
progresses and as inspections by the Bank's in-house appraiser warrant. Land
acquisition and development loans generally have the same terms as construction
loans, but may have longer maturities than such loans.
CONSUMER LOANS. The Bank offers consumer loans in order to provide a
full range of financial services to its customers. At March 31, 1999, $335.8
million or 18.4% of the Corporation's consolidated total loans held for
investment consisted of consumer loans. Consumer loans generally have shorter
terms and higher interest rates than mortgage loans but generally involve more
risk than mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. These risks are not as prevalent in
the case of the Bank's consumer loan portfolio, however, because a high
percentage of insured home equity loans are underwritten in a manner such that
they result in a lending risk which is substantially similar to single-family
residential loans and education loans.
The largest component of the Corporation's consumer loan portfolio are
second mortgage and home equity loans, which amounted to $180.1 million or 9.9%
of loans at March 31, 1999. The Bank has placed additional
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emphasis on its home equity loan program in recent years to respond to changes
in federal income tax laws. The primary home equity loan product has an
adjustable interest rate that is linked to the prime interest rate and is
secured by a mortgage, either a primary or a junior lien, on the borrower's
residence. A fixed-rate home equity product is also offered.
Approximately $125.4 million or 6.9% of the Corporation's loans at
March 31, 1999 consisted of education loans. These are generally made for a
maximum of $2,500 per year for undergraduate studies and $5,000 per year for
graduate studies and are either due within six months of graduation or repaid on
an installment basis after graduation. Education loans generally have interest
rates that adjust monthly in accordance with a designated index. Both the
principal amount of an education loan and interest thereon generally are
guaranteed by the Great Lakes Higher Education Corporation, which generally
obtains reinsurance of its obligations from the U.S. Department of Education.
Education loans may be sold to the Student Loan Marketing Association ("SLMA")
or to other investors. The Bank sold $1.5 million of these loans during fiscal
1999.
The remainder of the Corporation's consumer loan portfolio consists of
deposit account secured loans and loans that have been made for a variety of
consumer purposes. These include credit extended through credit cards issued by
the Bank pursuant to an agency arrangement under which the Bank generally is
allocated 44% of the profit or losses from such activities. At March 31, 1999,
the Bank's approved credit card lines and the outstanding credit pursuant to
such lines amounted to $25.3 million and $3.4 million, respectively.
COMMERCIAL BUSINESS LOANS AND LEASES. The Bank originates loans for
commercial, corporate and business purposes, including issuing letters of
credit. At March 31, 1999, commercial business loans amounted to $40.4 million
or 2.2% of the Corporation's total loans held for investment. The Corporation's
commercial business loan portfolio is comprised of loans for a variety of
purposes and generally is secured by equipment, machinery and other corporate
assets. Commercial business loans generally have terms of five years or less and
interest rates that float in accordance with a designated prime lending rate.
Substantially all of such loans are secured and backed by the personal
guarantees of the individuals of the business.
FEE INCOME FROM LENDING ACTIVITIES. Loan origination and commitment
fees and certain direct loan origination costs are being deferred and the net
amounts amortized as an adjustment of the related loan's yield.
The Bank also receives other fees and charges relating to existing
mortgage loans, which include prepayment penalties, late charges and fees
collected in connection with a change in borrower or other loan modifications.
Other types of loans also generate fee income for the Bank. These include annual
fees assessed on credit card accounts, transactional fees relating to credit
card usage and late charges on consumer loans.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Bank's loan originations
come from a number of sources. Residential mortgage loan originations are
attributable primarily to depositors, walk-in customers, referrals from real
estate brokers and builders and direct solicitations. Commercial real estate
loan originations are obtained by direct solicitations and referrals. Consumer
loans are originated from walk-in customers, existing depositors and mortgagors
and direct solicitation. Student loans are originated from solicitation of
eligible students and from walk-in customers.
Applications for all types of loans are obtained at the Bank's five
regional lending offices, certain of its branch offices and two loan origination
facilities. Loans may be approved by members of the Loan Committee, within
designated limits. Depending on the type and amount of the loans, one or more
signatures of the members of the Senior Loan Committee also may be required. At
least three signatures of members of the Senior Loan Committee are required to
approve (i) all loans over $250,000 and all loans secured by properties over
eight units and (ii) loans over $750,000 and up to $1.0 million, provided that
the President is one of the approving members. Loans in excess of $1.0 million
may be committed by the Senior Loan Committee, subject in all cases to the prior
approval of the Board of Directors of the Bank.
The Bank's general policy is to lend up to 80% of the appraised value
of the property securing a single-family residential loan (referred to as the
loan-to-value ratio). The Bank will lend more than 80% of the
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appraised value of the property, but generally will require that the borrower
obtain private mortgage insurance in an amount intended to reduce the Bank's
exposure to 80% or less of the appraised value of the underlying property. At
March 31, 1999, the Bank had approximately $15.4 million of loans that had a
loan-to-value ratio of greater than 80% and did not have private mortgage
insurance for the portion of the loan above such amount.
Property appraisals on the real estate and improvements securing the
Bank's single-family residential loans are made by the Bank's staff or
independent appraisers approved by the Bank's Board of Directors. Appraisals are
performed in accordance with federal regulations and policies.
The Bank's underwriting criteria generally require that multi-family
residential and commercial real estate loans have loan-to-value ratios which
amount to 80% or less and debt coverage ratios of at least 110%. The Bank also
generally obtains personal guarantees on its multi-family residential and
commercial real estate loans from the principals of the borrowers, as well as
appraisals of the security property from independent appraisal firms.
The portfolio of commercial and multi-family residential loans is
reviewed on a continuing basis (annually for most loans of $500,000 or more) to
identify any potential risks that exist in regard to the property management,
financial criteria of the loan, operating performance, competitive marketplace
and collateral valuation. The credit analysis function of the Bank is
responsible for identifying and reporting credit risk quantified through a loan
rating system and making recommendations to mitigate credit risk in the
portfolio. These and other underwriting standards are documented in written
policy statements, which are periodically updated, and approved by the Bank's
Board of Directors.
The Bank generally obtains title insurance policies on most first
mortgage real estate loans it originates. If title insurance is not obtained or
is unavailable, the Bank obtains an abstract of title and title opinion.
Borrowers must obtain hazard insurance prior to closing and, when required by
the United States Department of Housing and Urban Development, flood insurance.
Borrowers may be required to advance funds, with each monthly payment of
principal and interest, to a loan escrow account from which the Bank makes
disbursements for items such as real estate taxes, hazard insurance premiums and
mortgage insurance premiums as they become due.
The Bank encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on secured properties.
Certain states may also impose liens with higher priorities than first mortgages
on properties to recover funds used in such efforts. Although the foregoing
environmental risks are more usually associated with industrial and commercial
loans, environmental risks may be substantial for residential lenders, like the
Bank, since environmental contamination may render the secured property
unsuitable for residential use. In addition, the value of residential properties
may become substantially diminished by contamination of nearby properties. In
accordance with the guidelines of FNMA and FHLMC, appraisals for single-family
homes on which the Bank lends include comments on environmental influences and
conditions. The Bank attempts to control its exposure to environmental risks
with respect to loans secured by larger properties by monitoring available
information on hazardous waste disposal sites and requiring environmental
inspections of such properties prior to closing the loan. No assurance can be
given, however, that the value of properties securing loans in the Bank's
portfolio will not be adversely affected by the presence of hazardous materials
or that future changes in federal or state laws will not increase the Bank's
exposure to liability for environmental cleanup.
The Bank has been actively involved in the secondary market since the
mid-1980s and generally originates single-family residential loans under terms,
conditions and documentation which permit sale to FHLMC, FNMA and other
investors in the secondary market, such as WHEDA, the Wisconsin Department of
Veterans Affairs and other financial institutions. The Bank sells substantially
all of the fixed-rate, single-family residential loans with terms over 15 years
it originates in order to decrease the amount of such loans in its loan
portfolio, as well as all of the FHA and VA loans originated. The Bank's sales
are usually made through forward sales commitments. The Bank attempts to limit
any interest rate risk created by forward commitments by limiting the number of
days between the commitment and closing, charging fees for commitments, and
limiting the amounts of its uncovered commitments at any one time. Forward
commitments to cover closed loans and loans with rate locks to customers
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range from 70% to 90% of committed amounts. The Bank also periodically has used
its loans to securitize mortgage-backed securities.
The Bank generally continues to collect payments on conventional loans
that it sells to others as they become due, to inspect the security property, to
make certain insurance and tax advances on behalf of borrowers and to otherwise
service such loans. The Bank recognizes a servicing fee when the related loan
payments are received. At March 31, 1999, the Bank was servicing $1.3 billion of
loans for others. The Bank sells all of the FHA/VA loans originated by it on a
servicing-released basis.
The Bank is not an active purchaser of multi-family and commercial
loans because of sufficient loan demand in its market area. Servicing of loans
or loan participations purchased by the Bank is performed by the seller, with a
portion of the interest being paid by the borrower retained by the seller to
cover servicing costs. At March 31, 1999, approximately $11.7 million of
mortgage loans were being serviced for the Bank by others.
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The following table shows the Corporation's consolidated total loans
originated, purchased, sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of year(1) $ 1,698,229 $ 1,547,733 $ 1,447,924
----------- ----------- -----------
Loans originated for investment:
Single-family residential 100,324 161,611 191,666
Multi-family residential 108,329 44,602 24,713
Commercial real estate 191,804 84,690 63,600
Construction and land 234,074 178,026 166,533
Consumer 171,485 165,696 190,584
Commercial business 38,216 14,717 17,715
----------- ----------- -----------
Total originations 844,232 649,342 654,811
----------- ----------- -----------
Loans purchased for investment:
Single-family residential -- -- 155
Multi-family residential -- -- 120
Commercial real estate -- -- 464
American Equity purchase -- -- --
----------- ----------- -----------
Total purchases -- -- 739
----------- ----------- -----------
Total originations and purchases 844,232 649,342 655,550
Repayments (603,695) (482,720) (420,698)
Transfers of loans to held for sale (94,789) (28,838) (126,423)
----------- ----------- -----------
Net activity in loans held for investment 145,748 137,784 108,429
----------- ----------- -----------
Loans originated for sale(2):
Single-family residential 475,218 333,930 96,996
Transfers of loans from held for investment 94,789 28,838 126,423
Sales of loans (480,210) (350,056) (177,101)
Loans converted into mortgage-backed
securities (92,427) -- (54,938)
----------- ----------- -----------
Net activity in loans held for sale (2,630) 12,712 (8,620)
----------- ----------- -----------
Gross loans receivable at end of period $ 1,841,347 $ 1,698,229 $ 1,547,733
=========== =========== ===========
</TABLE>
- --------------------------------------------------
(1) Includes loans held for sale and loans held for investment.
(2) Refinancings of loans held in the Corporation's consolidated loan
portfolio amounted to $348.1 million, $236.7 million and $79.8 million
during the years ended March 31, 1999, 1998, and 1997, respectively.
DELINQUENCY PROCEDURES. Delinquent and problem loans are a normal part
of any lending business. When a borrower fails to make a required payment by the
15th day after which the payment is due, the loan is considered delinquent and
internal collection procedures are generally instituted. The borrower is
contacted to determine the reason for the delinquency and attempts are made to
cure the loan. In most cases, deficiencies are cured promptly. The Bank
regularly reviews the loan status, the condition of the property, and
circumstances of the borrower. Based
9
<PAGE> 11
upon the results of its review, the Bank may negotiate and accept a repayment
program with the borrower, accept a voluntary deed in lieu of foreclosure or,
when deemed necessary, initiate foreclosure proceedings.
A decision as to whether and when to initiate foreclosure proceedings
is based upon such factors as the amount of the outstanding loan in relation to
the original indebtedness, the extent of delinquency and the borrower's ability
and willingness to cooperate in curing the deficiencies. If foreclosed on, the
property is sold at a public sale and the Bank will generally bid an amount
reasonably equivalent to the lower of the fair value of the foreclosed property
or the amount of judgment due the Bank. A judgment of foreclosure for
residential mortgage loans will normally provide for the recovery of all sums
advanced by the mortgagee including, but not limited to, insurance, repairs,
taxes, appraisals, post-judgment interest, attorneys' fees, costs and
disbursements.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as foreclosed property until it is sold. When property
is acquired, it is carried at the lower of carrying or estimated fair value at
the date of acquisition, with charge-offs, if any, charged to the allowance for
loan losses prior to transfer to foreclosed property. Upon acquisition, all
costs incurred in maintaining the property are expensed. Costs relating to the
development and improvement of the property, however, are capitalized to the
extent of fair value. Remaining gain or loss on the ultimate disposal of the
property is included in operations.
LOAN DELINQUENCIES. Loans are placed on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Bank does not accrue interest on loans past due more
than 90 days.
The interest income that would have been recorded during fiscal 1999 if
the Corporation's non-accrual loans at the end of the period had been current in
accordance with their terms during the period was $290,000. The amount of
interest income attributable to these loans and included in interest income
during fiscal 1999 was $40,000.
The following table sets forth information relating to delinquent loans
of the Corporation and their relation to the Corporation's total loans held for
investment at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
DAYS PAST DUE BALANCE LOANS BALANCE LOANS BALANCE LOANS
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 2,595 0.14% $ 3,732 0.22% $ 3,144 0.20%
60 to 89 days 455 0.02 994 0.06 909 0.06
90 days and over 1,765 0.10 3,709 0.22 6,795 0.44
------- ---- ------- ---- ------- ----
Total $ 4,815 0.26% $ 8,435 0.50% $10,848 0.70%
======= ==== ======= ==== ======= ====
</TABLE>
There were no non-accrual loans with a carrying value of $1.0 million
or greater at March 31, 1999. For additional discussion of the Corporation's
asset quality, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Condition-Non-Performing Assets" in Item 7
included herewith. See also Notes 1 and 5 to the Consolidated Financial
Statements in Item 8 included herewith.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE. At March 31, 1999, 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 $2.1
million. The units were related to, but not a part of, a former non-accrual loan
for a condominium project. These units were purchased
10
<PAGE> 12
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 fiscal year. The project, located in Madison,
Wisconsin, had a carrying value of $2.9 million. The sale of the project
resulted in the Corporation providing a $300,000 note to the buyer. A deferred
gain of $300,000, associated with the note remains in real estate held for
development and sale until the buyer obtains complete permanent financing. For
additional discussion of real estate held for development and sale that is not
considered a part of non-performing assets, see the discussion under
"Subsidiaries Investment Directions, Inc." and "- Nevada Investment Directions,
Inc." and Note 15 to the Consolidated Financial Statements in Item 8 included
herewith.
FORECLOSED PROPERTIES. At March 31, 1999, the Corporation had no
foreclosed properties with a net carrying value of $1.0 million or more.
Foreclosed properties and repossessed assets decreased $3.1 million during the
fiscal year. 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 and limited use restrictions has been written down to zero value.
The balance of the decrease of $900,000 is due largely to the sale of individual
condominium units and a parcel of land associated with the 12-unit condominium
project in Monona, Wisconsin, which had a carrying value of $1.5 million in the
prior fiscal year. The Corporation's remaining carrying value at March 31, 1999
is $400,000, for this project.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full highly questionable and
improbable, on the basis of currently existing facts, conditions, and values. An
asset that is classified loss is considered uncollectible and of such little
value, that continuance as an asset of the institution is not warranted. Another
category designated special mention also must be established and maintained for
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification as substandard, doubtful or loss but do
possess credit deficiencies or potential weaknesses deserving management's close
attention.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount.
Classified assets include non-performing assets plus other loans and
assets, including contingent liabilities, meeting the criteria for
classification. Non-performing assets include loans and foreclosed properties
that are not performing under all material contractual terms of the original
notes.
As of March 31, 1999, the Bank's classified assets consisted of $10.5
million of loans and foreclosed properties classified as substandard, net of
specific reserves, and no loans classified as special mention, doubtful or loss.
At March 31, 1998, substandard assets amounted to $15.8 million and no loans
were classified as special mention, doubtful or loss.
ALLOWANCE FOR LOSSES. A provision for losses on loans and foreclosed
properties is provided when a loss is probable and can be reasonably estimated.
The allowance is established by charges against operations in the period in
which those losses are identified.
The Bank establishes general allowances based on current and projected
levels of components of the loan portfolio and the amount and type of its
classified assets. In addition, the Bank monitors and uses standards for these
allowances that depend on the nature of the classification and loan location of
the security property.
11
<PAGE> 13
Additional discussion on the allowance for losses at March 31, 1999 has
been presented as part of the discussion under "Allowance for Loan and
Foreclosure Losses" in Management's Discussion and Analysis, which is contained
in Item 7, included herewith.
12
<PAGE> 14
SECURITIES - GENERAL
Management determines the appropriate classification of securities at
the time of purchase. Securities are classified as held to maturity when the
Corporation has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are carried at amortized cost. Securities are
classified as trading when the Corporation intends to actively buy and sell
securities in order to make a profit. Trading securities are carried at fair
value, with unrealized holding gains and losses included in the income
statement.
Securities not classified as held to maturity or trading are classified
as available for sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of comprehensive income in stockholders' equity. For the year ended
March 31, 1999, stockholders' equity decreased by $360,000 (net of deferred
income tax of $417,000). For the year ended March 31, 1998, stockholder's equity
increased by $1.7 million (net of deferred income taxes of $1.1 million). These
changes reflected respective net unrealized gains and losses on holding
securities classified as available for sale. There were no securities designated
as trading during the three years ending March 31, 1999.
MORTGAGE-RELATED SECURITIES
The Corporation purchases mortgage-related securities to supplement
loan production and to provide collateral for borrowings. The Corporation
invests in mortgage-backed securities which are insured or guaranteed by FHLMC,
FNMA, or the Government National Mortgage Association ("GNMA") and in
mortgage-derivative securities backed by FHLMC, FNMA and GNMA mortgage-backed
securities.
At March 31, 1999, the amortized cost of the Corporation's
mortgage-backed securities held to maturity amounted to $164.8 million and
included $138.2 million, $24.4 million and $2.2 million which are insured or
guaranteed by FNMA, FHLMC and GNMA, respectively. The GNMA securities are the
only adjustable-rate securities included in securities held to maturity.
The fair value of the Corporation's mortgage-backed securities
available for sale amounted to $45.3 million at March 31, 1999, of which $9.9
million are five- and seven-year balloon securities, $33.8 million are 15- and
30-year securities and $1.5 million are adjustable-rate securities.
Mortgage-backed securities increase the quality of the Corporation's
assets by virtue of the insurance or guarantees of federal agencies that back
them, require less capital under risk-based regulatory capital requirements than
non-insured or guaranteed mortgage loans, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Corporation. At March 31, 1999, $1.0 million of the Corporation's
mortgage-backed securities available for sale and $43.2 million mortgage-backed
securities held to maturity were pledged to secure various obligations of the
Bank.
13
<PAGE> 15
The following table sets forth the activity in the Corporation's
mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of year (1) $ 170,137 $ 207,299 $ 186,005
Held to maturity:
Purchases 18,893 - 14,509
Available for sale:
Purchases 5,366 4,741 2,057
Acquired in the securitization of loans 92,427 - 54,938
Sales (5,658) (1,280) (5,617)
Repayments and other (71,062) (40,623) (44,593)
--------- --------- ---------
Mortgage-backed securities at
end of year (1) $ 210,103 $ 170,137 $ 207,299
========= ========= =========
</TABLE>
- -----------------------------------------------------------
(1) Includes mortgage-backed securities held to maturity and available for sale
and does not include CMO's and REMIC's discussed below.
Management believes that certain mortgage-derivative securities
represent an attractive alternative relative to other investments due to the
wide variety of maturity and repayment options available through such
investments and due to the limited credit risk associated with such investments.
The Bank's mortgage-derivative securities are made up of collateralized mortgage
obligations ("CMO's"), including CMO's which qualify as Real Estate Mortgage
Investment Conduits ("REMIC's") under the Internal Revenue Code of 1986, as
amended ("Code") and are scheduled to mature within five years. At March 31,
1999, the amortized cost of the Corporation's mortgage-derivative securities
held to maturity amounted to $12.1 million. The fair value of the
mortgage-derivative securities available for sale amounted to $1.1 million at
the same date.
14
<PAGE> 16
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
1999, classified by term to maturity. The balance is at amortized cost for
held-to-maturity securities and at fair value for available-for-sale securities.
<TABLE>
<CAPTION>
ONE TO FIVE YEARS SIX TO TEN YEARS OVER TEN YEARS
------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD TOTAL
------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Available For Sale:
CMO's and REMIC's $ 244 6.47% $ -- 0.00% $ 836 6.00% $ 1,080
Mortgage-backed securities 5,270 6.23 8,237 6.01 31,734 6.64 45,277
-------- ---- -------- ---- ------- ---- --------
5,514 6.24 8,237 6.01 32,570 6.62 46,357
-------- ---- -------- ---- -------- ---- --------
Held To Maturity:
CMO's and REMIC's 8,656 6.55 1,937 5.92 1,494 6.37 12,087
Mortgage-backed securities 14,585 6.33 21,868 6.28 128,373 6.43 164,826
-------- ---- -------- ------ -------- ---- --------
23,241 6.41 23,805 6.25 129,867 6.43 176,913
-------- ---- -------- ------ -------- ---- --------
Mortgage-related securities $ 28,755 6.38% $ 32,078 6.19% $162,437 6.47% $223,270
======== ==== ======== ====== ======== ==== ========
</TABLE>
Due to repayments of the underlying loans, the actual maturities of
mortgage-related securities are expected to be substantially less than the
scheduled maturities.
For additional information regarding the Corporation's mortgage-related
securities, see the Corporation's Consolidated Financial Statements, including
Note 3 thereto.
INVESTMENT SECURITIES
In addition to lending activities and investments in mortgage-related
securities, the Corporation conducts other investment activities on an ongoing
basis in order to diversify assets, limit interest rate risk and credit risk and
meet regulatory liquidity requirements. Investment decisions are made by
authorized officers in accordance with policies established by the respective
boards of directors.
The Corporation's policy does not permit investment in non-investment
grade bonds and permits investment in various types of liquid assets permissible
for the Bank under OTS regulations, which include U.S. Government obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to limitations on investment grade
securities, the Corporation also invests in corporate debt securities from time
to time.
15
<PAGE> 17
The table below sets forth information regarding the amortized cost and
fair values of the Corporation's investment securities at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available For Sale:
U.S. Government and federal
agency obligations $17,645 $17,798 $21,821 $21,859 $26,877 $26,517
Mutual fund 11,142 11,144 14,099 14,104 6,068 6,066
Corporate stock and other 3,730 3,774 2,747 3,592 2,685 2,986
------- ------- ------- ------- ------- -------
$32,517 $32,716 $38,667 $39,555 $35,630 $35,569
Held To Maturity:
U.S. Government and federal
agency obligations $ 6,845 $ 6,846 $17,587 $17,582 $ 7,947 $ 7,890
Certificates of deposit -- -- -- -- -- --
------- ------- ------- ------- ------- -------
6,845 6,846 17,587 17,582 7,947 7,890
------- ------- ------- ------- ------- -------
Total investment securities $39,362 $39,562 $56,254 $57,137 $43,577 $43,459
======= ======= ======= ======= ======= =======
</TABLE>
The following table shows the amortized cost, fair value and yield of
the Corporation's investment securities by contractual maturity at March 31,
1999.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD COST VALUE YIELD
--------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $15,041 $15,047 4.87 $ -- $ -- --
Due after one year through five years 13,746 13,895 5.70 1,570 1,570 6.05
Due after five years 100 100 6.95 5,275 5,276 6.36
Corporate stock 3,630 3,674 -- -- -- --
------- ------- ---- ------- ------- ----
$32,517 $32,716 5.27 $ 6,845 $ 6,846 6.29
======= ======= ==== ======= ======= ====
</TABLE>
For additional information regarding the Corporation's investment
securities, see the Corporation's Consolidated Financial Statements, including
Note 2 thereto included in Item 8.
The Bank is required by the OTS to maintain liquid assets at minimum
levels which vary from time to time and which amounted to 4.0% at March 31,
1999. The Bank's liquidity ratio was 13.72% as of March 31, 1999.
16
<PAGE> 18
SOURCES OF FUNDS
GENERAL. Deposits are a major source of the Bank's funds for lending
and other investment activities. In addition to deposits, the Bank derives funds
from loan and mortgage-related securities principal repayments and prepayments,
maturities of investment securities, sales of loans and securities, interest
payments on loans and securities, advances from the FHLB and, from time to time,
repurchase agreements and other borrowings. Loan repayments and interest
payments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates, economic conditions and competition. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They also may be used on a longer term basis for general business
purposes, including providing financing for lending and other investment
activities and asset/liability management strategies.
DEPOSITS. The Bank's deposit products include passbook savings
accounts, demand accounts, NOW accounts, money market deposit accounts and
certificates of deposit ranging in terms of 42 days to seven years. Included
among these deposit products are Individual Retirement Account certificates and
Keogh retirement certificates, as well as negotiable-rate certificates of
deposit with balances of $100,000 or more ("jumbo certificates").
The Bank's deposits are obtained primarily from residents of Wisconsin.
The Bank has entered into agreements with certain brokers that will provide
funds for a specified fee. At March 31, 1999, the Bank had $87.5 million in
brokered deposits.
The Bank attracts deposits through a network of convenient office
locations by utilizing a detailed customer sales and service plan and by
offering a wide variety of accounts and services, competitive interest rates and
convenient customer hours. Deposit terms offered by the Bank vary according to
the minimum balance required, the time period the funds must remain on deposit
and the interest rate, among other factors. In determining the characteristics
of its deposit accounts, consideration is given to the profitability of the
Bank, matching terms of the deposits with loan products, the attractiveness to
customers and the rates offered by the Bank's competitors.
The following table sets forth the activity in the Corporation's
deposits during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $1,383,147 $1,304,698 $1,234,878
Net increase before interest credited 52,528 22,218 17,728
Interest credited 61,128 56,231 52,092
---------- ---------- ----------
Net increase in deposits 113,656 78,449 69,820
---------- ---------- ----------
Ending balance $1,496,803 $1,383,147 $1,304,698
========== ========== ==========
</TABLE>
17
<PAGE> 19
The following table sets forth the amount and maturities of the
Corporation's certificates of deposit at March 31, 1999.
<TABLE>
<CAPTION>
OVER SIX OVER OVER TWO
MONTHS ONE YEAR YEARS OVER
SIX MONTHS THROUGH THROUGH THROUGH THREE
INTEREST RATE AND LESS ONE YEAR TWO YEARS THREE YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
3.00% to 4.99% $ 62,669 $ 97,732 $ 30,853 $ 3,286 $ 1,414 $195,954
5.00% to 6.99% 399,474 224,915 116,482 15,202 23,311 779,384
7.00% to 8.99% 13 169 258 13 2 455
-------- -------- -------- ------- ------- --------
$462,156 $322,816 $147,593 $18,501 $24,727 $975,793
======== ======== ======== ======= ======= ========
</TABLE>
At March 31, 1999, the Corporation had $165.9 million of certificates
greater than or equal to $100,000, of which $50.2 million are scheduled to
mature within three months, $38.1 million in over three months through six
months, $63.3million in over six months through 12 months and $14.3 million in
over 12 months.
BORROWINGS. From time to time the Bank obtains advances from the FHLB,
which generally are secured by capital stock of the FHLB that is required to be
held by the Bank and by certain of the Bank's mortgage loans. See "Regulation."
Such advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The FHLB may prescribe
the acceptable uses for these advances, as well as limitations on the size of
the advances and repayment provisions.
From time to time the Bank enters into repurchase agreements with
nationally recognized primary securities dealers. Repurchase agreements are
accounted for as borrowings by the Bank and are secured by mortgage-backed
securities. The Bank has utilized this source of funds during the year ended
March 31, 1999 and may continue to do so in the future.
The Corporation has a short-term line of credit to fund IDI limited
partnership interest. The interest is based on Libor and is payable monthly and
each draw has a specified maturity. The final maturity of the line of credit is
in December 1999. See Note 8 to the Corporation's Consolidated Financial
Statements for more information on borrowings.
The following table sets forth the outstanding balances and weighted
average interest rates for the Corporation's borrowings (short-term and
long-term) at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $ 415,595 5.29% $ 398,795 5.73% $ 374,165 5.74%
Repurchase agreements 42,464 4.91 42,935 5.60 39,335 5.43
Other loans payable 12,800 6.21 12,830 8.78 18,039 8.19
</TABLE>
18
<PAGE> 20
The following table sets forth information relating to the
Corporation's short-term (maturities of one year or less) borrowings at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Maximum month-end balance:
FHLB advances $ 338,750 $ 357,320 $ 281,500
Repurchase agreements 52,139 45,214 67,316
Other loans payable 21,550 14,972 18,039
Average balance:
FHLB advances 267,412 318,638 242,159
Repurchase agreements 30,930 22,923 63,189
Other loans payable 13,297 12,067 7,524
</TABLE>
SUBSIDIARIES
INVESTMENT DIRECTIONS, INC. IDI is a wholly-owned non-banking
subsidiary of the Corporation formed in February 1996, which has invested in
various limited partnerships funded by borrowings from the Corporation. The
Corporation's investment in IDI at March 31, 1999 amounted to $6.5 million. For
the year ended March 31, 1999, IDI had total assets of $28.1 million and net
income of $600,000. This compares to total assets of $13.4 million and a net
loss of $200,000 for the prior year ended March 31, 1998.
The assets of IDI include two partnership interests with carrying
values greater than $1.0 million. The first investment is a project in Indian
Palms, California with a carrying value at March 31, 1999 of $14.9 million. This
compares to a carrying value of $3.3 million for the prior year ended March 31,
1998. The $11.6 million increase in partnership investment from the prior fiscal
year was largely due to expansion for a clubhouse and other developments as well
as a housing development. The housing development is considered recreational
residential housing and sales are expected to begin in July 1999. The
development also includes hotel and resort operations.
The net loss on the Indian Palms partnership for the year ended March
31, 1999 was $600,000 as compared to a net loss of $500,000 for the year ended
March 31, 1998.
The second partnership investment is a project in Tampa Bay, Florida
with a carrying value of $5.9 million at March 31, 1999. This compares to a
carrying value of $4.7 million for the prior year ended March 31, 1998. The $1.2
million increase in partnership investment from the prior fiscal year was
largely due to the development of the project. This project includes a golf
course and fully developed single family recreational residential lots.
The net income on the Tampa Bay partnership for the year ended March
31, 1999 was $1.4 million as compared to a net loss of $600,000 for the year
ended March 31, 1998. Sale of the project is pending at March 31, 1999.
The balance of assets in IDI includes loans to finance the sales of
various partnerships. None of these loans are greater than or equal to $1.0
million and all are current at March 31, 1999.
At March 31, 1999, the Corporation had extended $22.0 million to IDI to
fund various partnership investments. This represents an increase of $14.5
million from borrowings of $7.5 million at March 31, 1998.
At March 31, 1999, IDI has a general valuation alowance of $600,000.
This compared to an allowance of $400,000 for the prior year ended March 31,
1998. As of March 31, 1999 and March 31, 1998, there have been no charge-offs
for any of the partnerships within IDI.
19
<PAGE> 21
NEVADA INVESTMENT DIRECTIONS, INC. NIDI is a wholly owned non-banking
subsidiary of IDI formed in March 1997, that has invested in various limited
partnerships, as well. NIDI was organized in the State of Nevada. IDI's
investment in NIDI at March 31, 1999 amounted to $5.2 million. For the year
ended March 31, 1999, NIDI had total assets of $5.8 million and net income of
$700,000. This compares to total assets of $5.9 million and net income of
$300,000 for the prior year ended March 31, 1998.
The assets of NIDI include one partnership interest with a carrying
value greater than $1.0 million. The partnership investment is an industrial
park in Round Rock, Texas with a carrying value at March 31, 1999 of $3.6
million. This compares to a carrying value of $3.3 million for the prior year
ended March 31, 1998. The partnership had net income of $300,000 for the year
ended March 31, 1999 as compared to a net loss of $300,000 for the year ended
March 31, 1998. Management is contemplating developing the project further
because of the growth of light industry in that area of Texas.
The balance of assets at NIDI includes loans to finance the sale of
various partnerships. Two loans to one borrower have a balance greater than or
equal to $1.0 million at March 31, 1999. These loans financed the sale of a
partnership in San Antonio, Texas and have a carrying value of $4.6 million as
of March 31, 1999. Interest income from these loans was $200,000 for the year
ended March 31, 1999. There were no loans to finance the sales of partnerships
for the year ended March 31, 1998. There are other loans to finance the sale of
various partnerships that have carrying values less than $1.0 million. All loans
are current at March 31, 1999.
At March 31, 1999, the Corporation had extended $1.1 million to NIDI to
fund various partnership investments. NIDI had no borrowings as of March 31,
1998.
Together, IDI and NIDI represent the real estate investment segment of
the Corporation's business. This segment is categorized as real estate held for
development and sale on the Corporation's consolidated financial statements. Net
of reserves of $100,000, and non-performing real estate held for development and
sale of $1.8 million, the segment represents $28.3 million of total assets for
that category. For further discussion of the real estate held for development
and sale segment, see Item 8 Note 15 to the Corporation's Consolidated Financial
Statements.
ANCHOR INSURANCE SERVICES, INC. AIS is a wholly-owned subsidiary of the
Bank which offers a full line of insurance products, securities and annuities to
its customers and members of the general public. For the year ended March 31,
1999, AIS had a net profit of $100,000. The Bank's investment in AIS amounted to
$100,000 at March 31, 1999.
ADPC CORPORATION. ADPC is a wholly-owned subsidiary of the Bank which
holds and develops certain of the Bank's foreclosed properties. The Bank's
investment in ADPC at March 31, 1999 amounted to $1.7 million. ADPC had a net
loss of $90,000 for the year ended March 31, 1999.
ADPC II, LLC. ADPC II was dissolved in September, 1998 with the sale of
its multi-family property that had been classified as non-performing real estate
held for development and sale. A loan to the buyer to help fund the sale, of
$300,000, was transferred to ADPC. A deferred gain of $300,000 was also
transferred to ADPC.
ANCHOR INVESTMENT CORPORATION. AIC is an operating subsidiary of the
Bank which was incorporated in March 1993. Located in the State of Nevada, AIC
was formed for the purpose of managing a portion of the Bank's investment
portfolio (primarily mortgage-backed securities). As an operating subsidiary,
AIC's results of operations are combined with the Bank's for financial and
regulatory purposes. The Bank's investment in AIC amounted to $184.5 million at
March 31, 1999. AIC had net income of $8.0 million for the year ended March 31,
1999. The Bank had outstanding notes to AIC of $39.0 million at March 31, 1999,
with a weighted average rate of 7.79% and maturities during the next six months.
EMPLOYEES
The Corporation had 538 full-time employees and 173 part-time employees
at March 31, 1999. The Corporation promotes equal employment opportunity and
considers its relationship with its employees to be good. The employees are not
represented by a collective bargaining unit.
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REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Corporation and the Bank. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
THE CORPORATION
The Corporation is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Corporation is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries which permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. In addition, the Corporation is subject to
the examination and supervision by the Commissioner. The Commissioner is
authorized to prohibit by order the activities of a savings and loan holding
company that, among other things, the Commissioner feels endangers the safety of
the savings and loan association or is contrary to the public interest. The
Commissioner is empowered to direct the operations of the savings and loan
association and its holding company until the order is complied with and may
prohibit dividends from the savings and loan association to its holding company
during such period.
As a unitary savings and loan holding company, the Corporation
generally is not subject to activity restrictions as long as the Bank is in
compliance with the Qualified Thrift Lender ("QTL") Test. See "Qualified Thrift
Lender Requirement."
The Corporation must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Interstate acquisitions generally
are permitted based on specific state authorization or in a supervisory
acquisition of a failing savings association.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
Transactions between a savings institution and its "affiliates" are
subject to quantitative and qualitative restrictions under Sections 23A and 23B
of the Federal Reserve Act and OTS regulations. Affiliates of a savings
institution include, among other entities, the savings institution's holding
company and companies that are controlled by or under common control with the
savings institution.
In general, the extent to which a savings institution or its
subsidiaries may engage in certain "covered transactions" with affiliates is
limited to an amount equal to 10% of the institution's capital and surplus, in
the case of covered transactions with any one affiliate, and to an amount equal
to 20% of such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings institution and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate as collateral for a loan or
extension of credit to any party; or the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. In addition, a savings institution
may not (i) make a loan or extension of credit to an affiliate unless the
affiliate is engaged only in activities permissible for banks or holding
companies; (ii) purchase or invest in securities of an affiliate other than
shares of a subsidiary; (iii) purchase a low-quality asset from an affiliate; or
(iv) engage in covered transactions and certain other transactions between a
savings institution or its subsidiaries and an affiliate except on terms and
conditions that are consistent with safe and sound banking practices. With
certain exceptions, each loan or extension of credit by a savings institution to
an affiliate must be secured by collateral with a market value ranging from 100%
to 130% (depending on the type of collateral) of the amount of the loan or
extension of credit.
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OTS regulations generally exclude all non-bank and non-savings
institution subsidiaries of savings institutions from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. OTS regulations also provide that certain
classes of savings institutions may be required to give the OTS prior notice of
affiliate transactions.
THE BANK
The Bank is a state chartered savings institution, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad state and
federal regulation and oversight by the OTS and the FDIC extending to all
aspects of its operations. The Bank is a member of the FHLB of Chicago and is
subject to certain limited regulation by the Federal Reserve Board. The Bank is
a member of the Savings Association Insurance Fund ("SAIF") and the deposits of
the Bank are insured by the FDIC. As a Wisconsin-chartered institution, the Bank
is also subject to regulation, examination and supervision by the Commissioner.
FEDERAL AND STATE REGULATION OF SAVINGS ASSOCIATIONS. The OTS has
extensive authority over the operations of all insured savings associations. In
addition, the Bank is subject to regulation and supervision by the Commissioner.
As part of this authority, the Bank is required to file periodic reports with
the OTS and the Commissioner and is subject to periodic examinations by the OTS,
the Commissioner and the FDIC. Examinations by the Commissioner are usually
conducted jointly with the OTS. When these examinations are conducted by the
OTS, the Commissioner, or the FDIC, the examiners may require the Bank to
provide for higher general or specific loan loss allowances. The last regular
joint examination of the Bank by the OTS and the Commissioner was as of August
3, 1998. The FDIC was included in a joint examination as of November 30, 1992.
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS. A schedule of fees has
also been established for the various types of applications and filings made by
savings associations with the OTS. The general assessment, to be paid on a
semi-annual basis, is computed upon the savings association's total assets,
including consolidated subsidiaries, as reported in the association's latest
quarterly thrift financial report. Savings associations that (unlike the Bank)
are classified as "troubled" (i.e., having a supervisory rating of "4" or "5" or
subject to a conservatorship) are required to pay a 50% premium over the
standard assessment. The Bank's semi-annual OTS assessment for the six months
ending June 30, 1999 was $160,000.
Wisconsin-chartered institutions are also required to pay an annual
state assessment. Under Wisconsin law, the fee cannot exceed 12 cents per $1,000
of assets or fraction thereof, as of the close of the preceding calendar year.
In addition to an annual fee, each Wisconsin-chartered institution is subject to
examination fees. The Bank's assessment for the year ending June 30, 1999 was
$80,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the
Corporation, and their affiliated parties such as directors, officers,
employees, agents and certain other persons providing services to the Bank or
the Corporation. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required. The Commissioner has similar enforcement authority over the
Bank and the Corporation.
During 1996, the OTS continued its comprehensive review of its
regulations to eliminate duplicative, unduly burdensome and unnecessary
regulations concerning lending and investments, corporate governance,
subsidiaries and equity investments, conflicts of interest and usurpation of
corporate opportunity. The OTS's revised lending and investments regulation
generally imposes general safety and soundness standards, and also provides that
commercial loans made by a service corporation of a savings association will be
exempted from an institution's overall 10% limit on commercial loans. Such
regulations now allow an institution to use its own cost-of-funds index in
structuring adjustable rate mortgages, and eliminate percentage of assets
limitations on credit card lending.
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The OTS also converted its policy statement on conflicts of interest to
a regulation that is intended to be based upon common law principles of "duty of
loyalty" and "duty of care." The new conflicts regulation provides that
directors, officers, employees, persons having the power to control the
management or policies of savings associations, and other persons who owe
fiduciary duties to savings institutions will be prohibited from advancing their
own personal or business interests, or those of others, at the expense of the
institutions they serve. The "appearance of a conflict of interest" standard was
removed from the scope of the revised rule. The OTS also clarified that "persons
having the power to control the management or policies of savings associations"
includes holding companies such as the Corporation. The OTS corporate
opportunity regulations and policy statements also were eliminated and replaced
with a standard similar to common law standards governing usurpation of
corporate opportunity. Significantly under the revised regulation, transfers of
a line of business within a holding company structure will not be deemed to be a
usurpation of corporate opportunity if an institution receives fair market
consideration for a line of business transferred to its holding company or its
affiliate. In such transactions, the OTS will generally defer to decisions made
by a holding company, subject to compliance with Section 23A or 23B of the
Federal Reserve Act and general safety and soundness principles.
In addition, the investment and lending authority of the Bank is
prescribed by federal and state laws and regulations, and the Bank is prohibited
from engaging in any activities not permitted by such laws and regulations. The
Bank is in compliance with each of these restrictions.
The Bank's permissible loans-to-one-borrower lending limit under
federal law is to the greater of $500,000 or 15% of unimpaired capital and
surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). At March 31, 1999, the Bank had no loans to one borrower that
exceeded the 15% or $18.6 million limitation. A broader limitation (the lesser
of $30 million or 30% of unimpaired capital and surplus) is provided, under
certain circumstances and subject to OTS approval, for loans to develop domestic
residential housing units. In addition, the Bank may provide purchase money
financing for the sale of any asset without regard to the loans-to-one-borrower
limitation so long as no new funds are advanced and the Bank is not placed in a
more detrimental position than if it had held the asset. Under Wisconsin law,
the aggregate amount of loans that an association may make to any one borrower
may not exceed 5% of the aggregate of an association's mortgage, consumer and
commercial assets, except as otherwise authorized by the Commissioner. The Bank
is in compliance with these loans-to-one-borrower limitations.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member
of the SAIF, which along with the Bank Insurance Fund ("BIF"), is one of the two
insurance funds administered by the FDIC. Savings deposits are insured up to
$100,000 per insured member (as defined by law and regulation) by the FDIC and
such insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged, or is engaging in, unsafe or unsound practices, or is
in an unsafe or unsound condition.
The Bank is required to pay assessments to the FDIC based on a percent
of its insured deposits for the insurance of its deposits by the SAIF. Under
Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated deposits or at a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances raising a significant risk of substantial future losses to
the SAIF.
Under the risk-based deposit insurance system adopted by the FDIC, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups - well capitalized, adequately capitalized, or
undercapitalized - using the same percentage criteria used under the prompt
corrective action regulations. Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary
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supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund.
On September 30, 1996, new legislation required all SAIF member
institutions to pay a one-time special assessment to recapitalize the SAIF, with
the aggregate amount to be sufficient to bring the reserve ratio to 1.25% of
insured deposits. As a result of the special assessment, the Bank incurred an
after-tax expense of $4.6 million during the quarter ended September 30, 1996.
The legislation also provided for the elimination of the premium differential
between SAIF-insured and BIF-insured institutions and for the merger of the BIF
and the SAIF, with the merger being conditioned upon the prior elimination of
the thrift charter.
Beginning January 1, 1997, effective SAIF rates generally range from
zero basis points to 27 basis points. From 1997 through 1999, SAIF members will
pay 6.4 basis points to fund the Financing Corporation ("FICO"), while BIF
member institutions will pay approximately 1.3 basis points. The Bank's
insurance premiums, which had amounted to 23 basis points, were thus reduced to
6.4 basis points effective January 1, 1997.
The 1996 legislation also contained several provisions that could
impact operations of the Bank, including augmenting the Bank's commercial
lending authority by 10% of assets, provided that any loans in excess of 10% are
used for small business loans. Furthermore, the qualified thrift lender test
that the Bank must comply with was liberalized to provide that small business,
credit card and student loans can be included without any limit, and that the
Bank can qualify as a qualified thrift lender by meeting either the test set
forth in the Home Owners' Loan Act or under the definition of a domestic
building and loan association as defined under the Internal Revenue Code of
1986, as amended (The "IRC").
FDIC regulations govern the acceptance of brokered deposits by insured
depository institutions. The capital position of an institution determines
whether and with what limitations an institution may accept brokered deposits. A
"well capitalized" institution (one that significantly exceeds specified capital
ratios) may accept brokered deposits without restriction. "Undercapitalized"
institutions (those that fail to meet minimum regulatory capital requirements)
may not accept brokered deposits and "adequately capitalized" institutions
(those that are not "well capitalized" or "undercapitalized") may only accept
such deposits with the consent of the FDIC. The Bank meets the definition of a
"well capitalized" institution and therefore may accept brokered deposits
without restriction. At March 31, 1999, the Bank had $87.5 million in brokered
deposits.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a core capital requirement and a risk-based
capital requirement applicable to such savings associations. FIRREA mandated
that these capital requirements be generally as stringent as the comparable
capital requirements for national banks. The OTS is also authorized to impose
capital requirements in excess of these standards on individual associations on
a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock and related surplus and minority
interest in the equity accounts of fully consolidated subsidiaries. In addition,
all intangible assets, other than a limited amount of purchased mortgage
servicing rights (in no event exceeding the amount of tangible capital), must be
deducted from tangible capital.
The capital standards require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus up to 25% of certain other intangibles that
meet certain separate salability and market valuation tests. The Bank had a
ratio of core capital to total assets of 5.77% at March 31, 1999.
The OTS risk-based capital requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital, for
purposes of the risk-based capital requirement, equals the sum of core capital
plus supplementary capital (which, as defined, includes the sum of, among other
items, certain permanent and maturing capital instruments that do not qualify as
core capital and general loan and lease loss allowances up to 1.25% of
risk-weighted assets) less certain deductions. The amount of supplementary
capital that may be used to satisfy the risk-based requirement is limited to the
extent of core capital, and OTS regulations require the
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maintenance of a minimum ratio of core capital to total risk-weighted assets of
4.0%. At March 31, 1999, the Bank met all capital requirements on a fully
phased-in basis. (See Note 9 to the Corporation's Consolidated Financial
Statements.) In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, are multiplied by a risk-weight based
on the risks inherent in the type of assets as determined by the OTS.
OTS policy imposes a limitation on the amount of net deferred tax
assets under SFAS No. 109 that may be included in regulatory capital. (Net
deferred tax assets represent deferred tax assets, reduced by any valuation
allowances, in excess of deferred tax liabilities.) Application of the limit
depends on the possible sources of taxable income available to an institution to
realize deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited: taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depend on an institution's future taxable
income (exclusive of reversing temporary differences and carryforwards), or its
tax-planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year of the quarter-end report date or 10% of core capital. The foregoing
considerations did not affect the calculation of the Bank's regulatory capital
at March 31, 1999.
In August 1993, the OTS adopted a final rule incorporating an interest
rate risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk is subject
to a deduction of its interest rate risk component from total capital for
purposes of calculating the risk-based capital requirement. As a result, such an
institution is required to maintain additional capital in order to comply with
the risk-based capital requirement. An institution with a greater than normal
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value exceeding 2.0% of the estimated market value of its assets in
the event of a 200 basis point increase or decrease (with certain minor
exceptions) in interest rates. The interest rate risk component is calculated,
on a quarterly basis, as one-half of the difference between an institution's
measured interest rate risk and the market value of its assets multiplied by
2.0%. Although the final rule was originally scheduled to be effective as of
January 1994, the OTS has indicated that it will delay invoking its interest
rate risk rule requiring institutions with above normal interest rate risk
exposure to adjust their regulatory capital requirement until appeal procedures
are implemented and evaluated. The OTS has not yet established an effective date
for the capital deduction. Management does not believe that the OTS' adoption of
an interest rate risk component to the risk-based capital requirement will have
a material effect on the Bank.
Under current OTS policy, savings associations must value securities
available for sale at amortized cost for regulatory purposes. This means that in
computing regulatory capital, savings associations add back any unrealized
losses and deduct any unrealized gains, net of income taxes, on securities
reported as a separate component to stockholders' equity under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against any association that fails to meet its
capital requirements (an "undercapitalized association"). The OTS may grant to
an undercapitalized association an exemption from the various sanctions or
penalties for failure to meet its capital requirements (other than appointment
of a conservator or receiver and the mandatory growth restrictions) through the
association's submission of and compliance with an approved capital plan. If the
plan is not approved, the association generally will be prohibited from making
capital distributions, increasing its assets or making any loans and investments
without OTS approval and must comply with other limits imposed by the OTS.
Any undercapitalized association is also subject to possible
enforcement actions by the OTS or the FDIC. Such actions could include a capital
directive, a cease-and-desist order, civil money penalties or the establishment
of restrictions on all aspects of the association's operations. The OTS also
could impose harsher measures, such as the appointment of a receiver or
conservator or a forced merger into another institution. The grounds for
appointment of a conservator or receiver include substantially insufficient
capital and losses or likely losses that will deplete substantially all capital
with no reasonable prospect for replenishment of capital without federal
assistance.
Wisconsin-chartered associations are required to maintain a net worth
ratio of at least 6.0%. Under this provision, an association's "net worth ratio"
is defined as a ratio, expressed as a percentage of assets, calculated by
subtracting liabilities from assets, adding to the resulting difference
unallocated general loan loss allowances, and dividing the sum by the
association's assets. The rule authorizes the Commissioner to require an
association to
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maintain a higher level of net worth if the Commissioner determines that the
nature of the association's operations entails a risk requiring greater net
worth to ensure the association's stability. A failure to comply with such
requirements authorizes the Commissioner to direct the association to adhere to
a plan, which can include various operating restrictions, in order to restore
the association's net worth to required levels. At March 31, 1999, the Bank was
in compliance with this net worth requirement with a ratio of 6.78%.
LIMITATION ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS
regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion.
Under new OTS regulations effective April 1, 1999, a savings
institution must file an application for OTS approval of the capital
distribution if either (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's net income for that year to
date plus the institution's retained net income for the preceding two years, (2)
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions that are a subsidiary of a holding
company (as well as certain other institutions) must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
Unless prior approval of the Commissioner is obtained, the Bank may not
pay a dividend or otherwise distribute any profits if it fails to maintain its
required net worth ratio either prior to, or as a result of, such distribution.
QUALIFIED THRIFT LENDER REQUIREMENT. All savings associations,
including the Bank, are required to meet a QTL test to avoid certain
restrictions on their operations. Currently, a savings institution will be a QTL
if the savings institution's qualified thrift investments continue to equal or
exceed 65% of the institution's portfolio assets on a monthly average basis in
nine out of every 12 months. Subject to certain exceptions, qualified thrift
investments generally consist of housing related loans and investments and
certain groups of assets, such as consumer loans, to a limited extent. The term
"portfolio assets" means the savings institution's total assets minus goodwill
and other intangible assets, the value of property used by the savings
institution to conduct its business and liquid assets held by the savings
institution in an amount up to 20% of its total assets. As of March 31, 1999,
the Bank was in compliance with the QTL test.
OTS regulations provide that any savings institution that fails to meet
the definition of a QTL must either convert to a bank charter, other than a
savings bank charter, or limit its future investments and activities (including
branching and payments of dividends) to those permitted for both savings
institutions and national banks. Additionally, any such savings institution that
does not convert to a bank charter will be ineligible to receive further FHLB
advances and, beginning three years after the loss of QTL status, will be
required to repay all outstanding FHLB advances and dispose of or discontinue
any preexisting investment or activities not permitted for both savings
institutions and national banks. Further, within one year of the loss of QTL
status, the holding company of a savings institution that does not convert to a
bank charter must register as a bank holding company and will be subject to all
statutes applicable to bank holding companies.
LIQUIDITY. Under applicable federal regulations, savings institutions
are required to maintain an average daily balance of liquid assets (including
cash, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and highly rated commercial paper, securities of certain mutual
funds and specified United States Government, state or federal agency
obligations) equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposits plus short-term borrowings. This liquidity
requirement may be changed from time to time by the Director of the OTS to any
amount within the range of 4% to 10% depending upon economic conditions and the
deposit flows of member institutions, and currently is 4%. Effective November
24, 1997, the OTS adopted a new liquidity rule. The rule lowers liquidity
requirements for savings associations from 5 to 4 percent of the association's
liquidity base. The base has been reduced by modifying the definition of net
withdrawable accounts to exclude, at the association's option, accounts with
maturities in excess of one year. The new rule requires the calculation once
each quarter rather than monthly and removes the requirement that certain
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obligations must mature in five years or less to qualify as a liquid asset. The
rule also added certain short-term mortgage-related securities and short-term
first lien residential mortgage loans to the list of assets includable as
regulatory liquidity. Historically, the Bank has operated in compliance with
applicable liquidity requirements.
Savings institutions are also required to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of the average daily balance of its net withdrawable deposits and
short-term borrowings. At March 31, 1999, the Bank was in compliance with these
liquidity requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Chicago, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. The FHLBs provide a central credit
facility for member savings institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to member (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and procedures
are subject to regulation and oversight of the Federal Housing Finance Board.
All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
As a member, the Bank is required to own shares of capital stock in the
FHLB of Chicago. At March 31, 1999, the Bank owned $22.2 million in FHLB stock,
which is in compliance with this requirement. The Bank has received substantial
dividends on its FHLB stock. The dividend for fiscal 1999 amounted to $1.4
million as compared to $1.4 million for fiscal 1998.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to low- and moderately-priced housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a charge to the Corporation's earnings.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At March 31, 1999, the Bank
was in compliance with these requirements. These reserves may be used to satisfy
liquidity requirements imposed by the Director of the OTS. Because required
reserves must be maintained in the form of cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the amount of the institution's interest-earning assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve Board regulations, however, require
savings institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
TAXATION
FEDERAL
The Corporation files a consolidated federal income tax return on
behalf of itself, the Bank and its subsidiaries on a fiscal tax year basis.
In prior years, the Bank qualified under provisions of the Internal
Revenue Code which permitted, as a deduction from taxable income, allowable bad
debt deductions which significantly exceeded actual losses and the financial
statement loan loss provisions. These earnings appropriated to a savings
institution's bad debt reserves
27
<PAGE> 29
and deducted for federal income tax purposes may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a stockholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1999, the Bank's bad debt reserves for tax purposes
totaled approximately $32.5 million. (See Note 11 to the Consolidated Financial
Statements for additional discussion).
The consolidated federal income tax returns of the bank and
its subsidiaries through March 31, 1995 are closed to examination by the
Internal Revenue Service due to the expiration of the statute of limitations.
STATE
The State of Wisconsin currently imposes a corporate franchise tax
measured by the separate Wisconsin taxable income of each of the members. The
current corporate tax rate imposed by Wisconsin is 7.9%. Wisconsin taxable
income is substantially similar to federal taxable income except that no
deduction is allowed for state income taxes paid. The current bad debt deduction
for Wisconsin income tax purposes is the same as the deduction permitted for
federal income tax purposes. Wisconsin does not allow the carryback of a net
operating loss to prior taxable years. Thus, any net operating loss for state
income tax purposes must be carried forward to offset income in future years.
The Wisconsin corporate franchise tax is deductible for purposes of computing
federal taxable income. The separate Wisconsin income tax returns of the members
of the Bank's group through March 31, 1994 are closed to examination by the
Wisconsin Department of Revenue due to the expiration of the statute of
limitations.
The Corporation also has two subsidiaries located in Nevada, 1) NIDI, a
non-banking subsidiary of IDI and 2) AIC, an operating subsidiary of the Bank.
NIDI and AIC are subject to taxation in Nevada, which currently does not impose
a corporate income or franchise tax. Although the taxable income of these
subsidiaries is not currently subject to taxation in Wisconsin, recent proposed
Wisconsin legislation would require combined state tax returns for the
Corporation and its subsidiaries for taxable years beginning after December 31,
1999. At this time, management of the Corporation is unable to determine whether
the proposed legislation will become law.
ITEM 2. PROPERTIES
At March 31, 1999, The Bank conducted its business from its
headquarters and main office at 25 West Main Street, Madison, Wisconsin and 34
other deposit-taking offices located primarily in southcentral and southwest
Wisconsin. The Bank owns 24 of its deposit-taking offices, leases the land on
which three such offices are located, and leases the remaining 8 deposit-taking
offices. In addition, the Bank leases both of its two loan origination
facilities. The leases expire between 1999 and 2005. The aggregate net book
value at March 31, 1999 of the properties owned or leased, including
headquarters, properties and leasehold improvements, was $9.4 million. See Note
6 to the Corporation's Consolidated Financial Statements, filed as Item 8
hereto, for information regarding the premises and equipment. The following
tables set forth the location of the Corporation's banking and other offices.
28
<PAGE> 30
MADISON, WISCONSIN OFFICES: 204A-1 South Century Avenue
Waunakee, Wisconsin (2)
25 West Main Street
Madison, Wisconsin 1720 Highway 51
Stoughton, Wisconsin
302 North Midvale Boulevard
Madison, Wisconsin SURROUNDING AREA OFFICES:
2929 North Sherman Avenue 1712 12th Street
Madison, Wisconsin (1) Monroe, Wisconsin
216 Cottage Grove Road 80 South Court Street
Madison, Wisconsin (1) Platteville, Wisconsin
5750 Raymond Road 106 West Oak Street
Madison, Wisconsin (2) Boscobel, Wisconsin (2)
333 South Westfield Road 100 West Racine Street
Madison, Wisconsin Janesville, Wisconsin
6501 Monona Drive 600 East Blackhawk Avenue
Monona, Wisconsin Prairie du Chien, Wisconsin
4702 East Towne Boulevard 708 North Madison Street
Madison, Wisconsin Lancaster, Wisconsin
2000 Atwood Avenue 302 Bay Street
Madison, Wisconsin (2) Chippewa Falls, Wisconsin
261 Junction Rd. 500 East Walworth Avenue
Madison, Wisconsin (2) Delavan, Wisconsin
606 Highway 69
Dane County Offices: New Glarus, Wisconsin (2)
1516 West Main Street 2215 Holiday Drive
Sun Prairie, Wisconsin Janesville, Wisconsin
6200 Century Avenue 150 North Ludington Street
Middleton, Wisconsin (1) Columbus, Wisconsin
300 East Main Street 187 South Central Avenue
Mount Horeb, Wisconsin Richland Center, Wisconsin
420 West Verona Avenue 316 West Spring Street (2)
Verona, Wisconsin Dodgeville, Wisconsin
705 North Main Street 102 South Rock Avenue
Oregon, Wisconsin Viroqua, Wisconsin
601 South Main Street 640 Division Street
DeForest, Wisconsin Stevens Point, Wisconsin
29
<PAGE> 31
SURROUNDING AREA OFFICES (Continued):
1101 Post Road
Plover, Wisconsin (2)
1492 W. South Park Ave.
Oshkosh, Wisconsin
LENDING ONLY OFFICES:
772 Main Street, Suite 204
Lake Geneva, Wisconsin (2)
3315 North Ballard Rd. Suite B
Appleton, Wisconsin (2)
(1) Land is leased.
(2) Building and land is leased.
30
<PAGE> 32
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management of the Corporation to be immaterial to the financial condition and
results of operations of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended March 31, 1999, no
matters were submitted to a vote of security holders through a solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Common Stock
The Corporation's common stock is traded on the NASDAQ Stock Market.
The trading symbol is ABCW. As of March 31, 1999, there were approximately 2,300
stockholders of record. That number does not include stockholders holding their
stock in street name or nominee's name.
Shareholders' Rights Plan
On July 22, 1997, the Board of Directors of the Corporation declared a
dividend distribution of one "Right" for each outstanding share of Common Stock,
par value $0.10 per share, of the Corporation to stockholders of record at the
close of business on August 1, 1997. Subject to certain exceptions, each Right
entitles the registered holder to purchase from the Corporation one
one-hundredth of a share of Series A Preferred Stock, par value $0.10 per share,
at a price of $200.00, subject to adjustment. The Purchase Price must be paid in
cash. The description and terms of the Rights are set forth in a Rights
Agreement between the Corporation and Firstar Trust Company, as Rights Agent.
QUARTERLY STOCK PRICE AND DIVIDEND INFORMATION
The table below shows the reported high and low sale prices of Common
Stock and cash dividends paid per share of Common Stock during the periods
indicated in fiscal 1999 and 1998. The data in the table have been adjusted for
the two-for-one stock split paid on August 25, 1998.
<TABLE>
<CAPTION>
MARKET PRICE CASH
QUARTER ENDED HIGH LOW DIVIDEND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 1999 $24.500 $14.000 $0.050
December 31, 1998 24.125 17.000 0.050
September 30, 1998 24.000 19.344 0.050
June 30, 1998 23.375 18.875 0.045
March 31, 1998 $23.250 $16.250 $0.040
December 31, 1997 18.750 14.500 0.040
September 30, 1997 15.000 12.063 0.040
June 30, 1997 12.688 10.500 0.035
</TABLE>
For information regarding restrictions on the payments of dividends,
see "Item 1. Business -- Regulation -- Limitations on Dividends and Other
Capital Distributions" in this report.
31
<PAGE> 33
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
AT OR FOR YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------
1999 1998(1) 1997(1) 1996(1) 1995(1)
-------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Earnings per share: (2)
<S> <C> <C> <C> <C> <C>
Basic $ 1.37 $ 1.13 $ 0.75 $ 0.71 $ 0.69
Diluted 1.28 1.06 0.71 0.68 0.67
Interest income 155,966 148,971 140,551 125,721 104,884
Interest expense 93,548 89,601 84,716 74,978 54,298
Net interest income 62,418 59,370 55,835 50,743 50,586
Provision for loan losses 815 300 500 475 1,580
Non-interest income 18,016 12,212 13,551 9,259 7,508
Non-interest expenses 41,405 38,294 47,406 37,061 33,033
Income taxes 14,670 12,487 7,532 7,959 9,064
Net income 23,544 20,501 13,948 14,507 14,417
Total assets 2,141,688 1,999,307 1,884,983 1,754,556 1,510,917
Investment securities 39,561 57,142 43,516 32,837 23,632
Mortgage-related securities 223,270 194,765 240,401 220,998 160,401
Loans receivable held for
investment, net 1,724,242 1,591,089 1,461,423 1,361,080 1,231,107
Deposits 1,505,990 1,392,472 1,312,445 1,240,958 1,098,210
Notes payable to FHLB 415,595 398,795 374,165 316,869 274,500
Other borrowings 55,264 55,765 57,374 54,613 5,600
Stockholders' equity 142,239 127,951 117,887 118,402 111,187
Shares outstanding 18,062,190 17,925,188 18,325,388 19,737,400 20,255,320
Book value per share
at end of period $ 7.87 $ 7.14 $ 6.43 $ 6.00 $ 5.49
Dividend paid per share 0.20 0.16 0.12 0.08 0.06
Dividend payout ratio 14.23% 13.72% 15.83% 11.27% 8.26%
Yield on earning assets 7.71 7.99 7.91 7.87 7.46
Cost of funds 4.84 4.99 4.96 4.96 4.11
Interest rate spread 2.87 3.00 2.95 2.91 3.35
Net interest margin 3.08 3.18 3.14 3.18 3.60
Return on average assets 1.13 1.05 0.76 0.88 1.00
Return on average equity 17.70 16.20 11.78 12.13 13.45
Average equity to average assets 6.38 6.51 6.42 7.24 7.41
</TABLE>
- --------------------------------------------
(1) Share data has been adjusted to reflect a two-for-one stock split
distributed in August, 1998.
(2) The earnings per share amounts for all periods shown have been restated to
conform with Statement of Financial Accounting Standards No.128 (Earnings
Per Share).
32
<PAGE> 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the expressed purpose of
availing itself of the protection of the safe harbor with respect to all of such
forward-looking statements. These forward-looking statements describe future
plans or strategies and include the Corporation's expectations of future
financial results. The Corporation's ability to predict results or the effect of
future plans or strategies is inherently uncertain and the Corporation can give
no assurance that those results or expectations will be attained. Factors that
could affect actual results include but are not limited to i) general market
rates, ii) changes in market interest rates and the shape of the yield curve,
iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, vii) changes in the quality or composition of
the Corporation's loan and investment portfolios, viii) demand for loan
products, ix) the level of loan and MBS repayments, x) deposit flows, xi)
competition, xii) demand for financial services in the Corporation's markets,
and xiii) changes in accounting principles, policies or guidelines. These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements.
The Corporation does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
The following discussion is designed to provide a more thorough discussion of
the Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
RESULTS OF OPERATIONS
Comparison of Years Ended March 31, 1999 and 1998
GENERAL Net income increased to $23.5 million in fiscal 1999 from $20.5 million
in fiscal 1998. The components of this increase in earnings for fiscal 1999, as
compared to fiscal 1998, were an increase of $5.8 million in non-interest income
and an increase of $2.5 million in net interest income after the provision for
loan losses. This was partially offset by an increase of $3.1 million in
non-interest expense and an increase of $2.2 million in income taxes. The
returns on average assets and average stockholders' equity for fiscal 1999 were
1.13% and 17.70%, respectively, as compared to 1.05% and 16.20%, respectively,
for fiscal 1998.
NET INTEREST INCOME Net interest income increased by $3.0 million during fiscal
1999 due to increases in the volume of interest-earning assets and
interest-bearing liabilities. The average balances of interest-earning assets
and interest-bearing liabilities increased to $2.02 billion and $1.93 billion in
fiscal 1999, respectively, from $1.86 billion and $1.80 billion, respectively,
in fiscal 1998. The ratio of average interest-earning assets to average
interest-bearing liabilities increased slightly to 1.05% for fiscal 1999
compared to 1.04% for fiscal 1998. The average yield on interest-earning assets
(7.71% in fiscal 1999 versus 7.99% in fiscal 1998) decreased, as did the average
cost on interest-bearing liabilities (4.84% in fiscal 1999 versus 4.99% in
fiscal 1998). The net interest margin decreased to 3.08% for fiscal 1999 from
3.18% for fiscal 1998 and the interest rate spread decreased to 2.87% from 3.00%
for fiscal 1999 and 1998, respectively. The decrease in the net interest margin
is reflective of decreased yields on loans as rates fall, offset by a decrease
in the cost of funds. These factors are reflected in the analysis of changes in
net interest income, arising from changes in the volume of interest-earning
assets, interest-bearing liabilities and the rates earned and paid on such
assets and liabilities. The analysis indicates that the increases in the volume
of interest-earning assets increased net interest income in fiscal 1999 by
approximately $7.7 million. Offsetting this increase, slightly, was a $4.7
million decrease in net interest income caused by the combination of rate and
rate/volume changes.
33
<PAGE> 35
PROVISION FOR LOAN LOSSES Provision for loan losses increased slightly from
$300,000 in fiscal 1998 to $620,000 in fiscal 1999 based on management's ongoing
evaluation of asset quality. While an increase in net charge-offs of $1.0
million was experienced in overall loans in fiscal 1999, the quality of the loan
portfolio continues to be good. The Corporation's allowance for loan losses
decreased slightly from $21.8 million at March 31, 1998 to $20.2 million at
March 31, 1999. This amount represented 1.11% of total loans at March 31, 1999,
as compared to 1.30% of total loans at March 31, 1998. For further discussion of
the allowance for loan losses, see "Financial Condition--Allowance for Loan and
Foreclosure Losses."
NON-INTEREST INCOME Non-interest income increased $5.8 million to $18.0 million
for fiscal 1999 compared to $12.2 million for fiscal 1998 as a result of several
factors. Net income from the operations of real estate investments increased
$3.0 million because of increased sales and the associated decreased holding
costs incurred with those investments. The gain on sale of loans increased by
$2.9 million largely due to increased volume of loan sales during the year.
Other non-interest income also increased $470,000, for fiscal 1999, largely due
to an increase of $550,000 in the gain on sale of securities. Service charges on
deposits increased $190,000 essentially due to a growth in deposits. Partially
offsetting these increases were several decreases in other categories. Loan
servicing income decreased $780,000 due to increased amortization of originated
mortgage servicing rights ("OMSR's") of $1.0 million partially offset by
increased volume of loans serviced for others. Insurance commissions decreased
slightly by $30,000 due to decreased volume in this area.
NON-INTEREST EXPENSES Non-interest expenses increased $3.1 million for fiscal
1999 compared to 1998 as a result of several factors. The majority of the
increase was because compensation expense increased $3.1 million largely due to
increased incentive payments. Data processing expense increased $470,000 over
the prior fiscal year due to consulting expenses associated with computer and
software upgrades. Furniture and equipment increased $310,000 due to normal
replacement costs. Occupancy expense also increased $100,000 during fiscal 1999.
These increases were offset by several non-interest expense decreases. Other
expenses decreased $630,000 during this fiscal year due to decreases in legal,
audit and accounting, postage, telephone and other expenses. Marketing expenses
decreased $290,000 due to decreased promotions.
INCOME TAXES Income tax expense increased $2.2 million for fiscal 1999 as
compared to fiscal 1998. The effective tax rate for fiscal 1999 was 38.39% as
compared to 37.85% for fiscal 1998. See Note 11 to the Consolidated Financial
Statements.
Comparison of Years Ended March 31, 1998 and 1997
GENERAL Net income increased to $20.5 million in fiscal 1998 from $13.9 million
in fiscal 1997 primarily as a result of a one-time charge to recapitalize the
Savings Association Insurance Fund ("SAIF") in fiscal 1997. Exclusive of the
after-tax effects of a $7.7 million one-time charge to recapitalize the SAIF
($4.6 million), net income for the fiscal year ended March 31, 1997 would have
been $18.5 million. The returns on average assets and average stockholders'
equity for fiscal 1998 were 1.05% and 16.20%, respectively, as compared to 0.76%
and 11.78%, respectively, for fiscal 1997. These ratios, for fiscal 1997,
exclusive of the SAIF assessment were 1.00% and 15.66%, respectively.
The components of this increase in earnings for fiscal 1998, as compared to
fiscal 1997, were a decrease of $9.1 million in non-interest expenses (including
the SAIF assessment) and an increase of $3.7 million in net interest income
after the provision for loan losses. These were offset by a decrease of $1.3
million in non-interest income and an increase in income taxes of $5.0 million.
NET INTEREST INCOME Net interest income increased by $3.5 million during fiscal
1998 due to increases in the volume of interest-earning assets and
interest-bearing liabilities. The average balances of interest-earning assets
and interest-bearing liabilities increased to $1.86 billion and $1.80 billion in
fiscal 1998, respectively, from $1.78 billion and $1.71 billion, respectively,
in fiscal 1997. The ratio of average interest-earning assets to average
interest-bearing liabilities remained the same for fiscal 1998 and 1997 at 1.04.
The average yield on interest-earning assets (7.99% in fiscal 1998 versus 7.91%
in fiscal 1997) increased, as did the average cost on interest-bearing
liabilities (4.99% in fiscal 1998 versus 4.96% in fiscal 1997). The net interest
margin increased to 3.18% for fiscal 1998 from 3.14% for fiscal 1997 and the
interest rate spread increased to 3.00% from 2.95% for fiscal 1998 and
34
<PAGE> 36
1997, respectively. These factors are reflected in the analysis of changes in
net interest income, arising from changes in the volume of interest-earning
assets, interest-bearing liabilities and the rates earned and paid on such
assets and liabilities. The analysis indicates that the increases in the volume
of interest-earning assets increased net interest income in fiscal 1998 by
approximately $4.1 million. Offsetting this increase, slightly, was a $600,000
decrease in net interest income caused by the combination of rate and
rate/volume changes.
PROVISION FOR LOAN LOSSES Provision for loan losses decreased slightly from
$500,000 in fiscal 1997 to $300,000 in fiscal 1998 based on management's ongoing
evaluation of asset quality. While an increase in charge-offs was experienced in
the consumer loan area in fiscal 1998, the quality of the loan portfolio
continues to be good. The Corporation's allowance for loan losses decreased
slightly to $21.8 million at March 31, 1998 from $22.8 million at March 31,
1997. This amount totaled 1.30% of loans held for investment at March 31, 1998,
as compared to 1.47% of loans held for investment at March 31, 1997. For further
discussion of the allowance for loan losses, see "Financial Condition -
Allowance for Loan and Foreclosure Losses."
NON-INTEREST INCOME Non-interest income decreased $1.4 million to $12.2 million
for fiscal 1998 compared to $13.6 million for fiscal 1997 as a result of several
factors. Net income from the operations of real estate investments decreased
$2.8 million because of lack of sales and the associated holding costs incurred
with those investments. Other non-interest income also decreased $730,000 for
fiscal 1998 largely due to amortization of OMSR's associated with increased loan
servicing volume. Insurance commissions decreased slightly by $200,000 due to
decreased volume in this area. Partially offsetting these decreases were several
increases in other categories. The gain on sale of assets increased by $2.1
million largely due to increased volume of loan sales during the year. Service
charges on deposits increased $200,000 essentially due to a growth in deposits.
Loan servicing income increased $180,000 due to increased volume of loans
serviced for others.
NON-INTEREST EXPENSES Non-interest expenses decreased $9.1 million for fiscal
1998 compared to 1997 as a result of several factors. The majority of the
decrease was due to the one-time charge of $7.7 million associated with the
recapitalization of the SAIF during fiscal 1997. Federal insurance premiums
decreased $1.4 million in fiscal 1998, also a result of the recapitalization of
the SAIF during the prior fiscal year. Compensation expense decreased $1.1
million for fiscal 1998 due largely to the reduction of the expense associated
with the Employee Stock Ownership Plan ("ESOP") as well as a reduction of other
employee benefits. These decreases were offset by several non-interest expense
increases. Data processing expense increased $450,000 over the prior fiscal year
due to consulting expenses associated with computer and software upgrades. Other
expenses increased $310,000 during fiscal 1998 due to increases in legal,
postage and other expenses. Marketing expenses increased $190,000 due to
increased promotions. Furniture and equipment increased $173,000 due to normal
replacement costs.
INCOME TAXES Income tax expense increased $5.0 million for fiscal 1998 as
compared to fiscal 1997. The effective tax rate for fiscal 1998 was 37.85% as
compared to 35.07% for fiscal 1997. See Note 11 to the Consolidated Financial
Statements.
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-BEARING LIABILITIES AND
INTEREST RATE SPREAD AND MARGIN The table on the following page shows the
Corporation's average balances, interest, average rates, the spread between the
combined average rates earned on interest-earning assets and average cost of
interest-bearing liabilities, the average net interest margin, computed as net
interest income as a ratio of average interest-earning assets, and the ratio of
average interest-earning assets to average interest-bearing liabilities for the
years indicated. The average balances are derived from average daily balances.
35
<PAGE> 37
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans (1) $ 1,365,060 $104,702 7.67% $1,178,863 $ 95,568 8.11% $ 1,134,195 $ 90,386 7.97%
Consumer loans 340,826 30,394 8.92 337,657 30,327 8.98 285,558 26,766 9.37
Commercial business loans 35,640 3,339 9.37 29,550 3,113 10.53 27,662 2,866 10.36
----------- -------- ---------- -------- ----------- --------
Total loans receivable (2) 1,741,526 138,435 7.95 1,546,070 129,008 8.34 1,447,415 120,018 8.29
Mortgage-related securities (1) 192,186 12,227 6.36 216,550 14,676 6.78 243,986 15,657 6.42
Investment securities (1) 58,808 3,404 5.79 69,044 3,211 4.65 52,659 2,898 5.50
Interest-bearing deposits 9,218 477 5.17 11,710 635 5.42 14,098 725 5.14
Federal Home Loan Bank stock 21,666 1,423 6.57 21,135 1,441 6.82 18,323 1,253 6.84
----------- -------- ---------- -------- ----------- --------
Total interest-earning assets 2,023,404 155,966 7.71 1,864,509 148,971 7.99 1,776,481 140,551 7.91
Non-interest-earning assets 60,315 78,815 68,284
----------- ---------- -----------
Total assets $ 2,083,719 $1,943,324 $ 1,844,765
=========== ========== ===========
INTEREST-BEARING LIABILITIES
Demand deposits $ 390,676 10,691 2.74 $ 331,016 9,540 2.88 $ 285,641 7,496 2.62
Regular passbook savings 101,424 2,070 2.04 99,361 2,263 2.28 102,420 2,349 2.29
Certificates of deposit 966,767 54,507 5.64 908,248 52,343 5.76 888,274 50,569 5.69
----------- -------- ---------- -------- ----------- --------
Total deposits 1,458,867 67,268 4.61 1,338,625 64,146 4.79 1,276,335 60,414 4.73
Notes payable and other borrowings 460,550 25,812 5.60 443,760 24,971 5.63 416,314 23,782 5.71
Other 12,401 468 3.77 13,165 484 3.68 14,061 520 3.70
----------- -------- ---------- -------- ----------- --------
Total interest-bearing liabilities 1,931,818 93,548 4.84 1,795,550 89,601 4.99 1,706,710 84,716 4.96
-------- ---- -------- ---- -------- ----
Non-interest-bearing liabilities 18,899 21,215 19,661
----------- ---------- -----------
Total liabilities 1,950,717 1,816,765 1,726,371
Stockholders' equity 133,002 126,559 118,394
----------- ---------- -----------
Total liabilities and
stockholders' equity $ 2,083,719 $1,943,324 $ 1,844,765
=========== ========== ===========
Net interest income/
interest rate spread $ 62,418 2.87% $ 59,370 3.00% $ 55,835 2.95%
======== ==== ======== ==== ======== ====
Net interest-earning assets $ 91,586 $ 68,959 $ 69,771
=========== ========== ===========
Net interest margin 3.08% 3.18% 3.14%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.05 1.04 1.04
==== ==== ====
</TABLE>
- ------------------
(1) Includes assets held and available for sale.
(2) The average balances of loans include non-performing loans, interest of
which is recognized on a cash basis.
36
<PAGE> 38
RATE/VOLUME ANALYSIS
The most significant impact on the Corporation's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of earning dollars in loans and investments, compared to the volume of
interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods.
The following table shows the relative contribution of the changes in average
volume and average interest rates on changes in net interest income for the
periods indicated. Information is provided with respect to (i) effects on
interest income attributable to changes in rate (changes in rate multiplied by
prior volume), (ii) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate) and (iii) changes in rate/volume
(changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------
1999 COMPATED TO 1998 1998 COMPARED TO 1997
------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans (1) $ (5,148) $ 15,095 $ (813) $ 9,134 $ 1,561 $ 3,560 $ 61 $ 5,182
Consumer loans (215) 284 (2) 67 (1,117) 4,882 (204) 3,561
Commercial business loans (345) 642 (71) 226 48 196 3 247
-------- -------- ------ ------- ------- ------- ------ -------
Total loans receivable (5,708) 16,021 (886) 9,427 492 8,638 (140) 8,990
Mortgage-related securities (1) (899) (1,650) 101 (2,449) 878 (1,760) (99) (981)
Investment securities (1) 785 (476) (116) 193 (449) 902 (140) 313
Interest-bearing deposits (29) (134) 6 (158) 39 (122) (7) (90)
Federal Home Loan Bank stock (53) 37 (1) (18) (4) 193 (1) 188
-------- -------- ------ ------- ------- ------- ------ -------
Total net change in income on
interest-earning assets (5,904) 13,798 (896) 6,995 956 7,851 (387) 8,420
INTEREST -BEARING LIABILITIES
Demand deposits (482) 1,719 (87) 1,151 736 1,191 117 2,044
Regular passbook savings (235) 47 (5) (193) (16) (70) - (86)
Certificates of deposit (1,135) 3,372 (73) 2,164 623 1,137 14 1,774
-------- -------- ------ ------- ------- ------- ------ -------
Total deposits (1,852) 5,138 (165) 3,122 1,343 2,258 131 3,732
Notes payable and other borrowings (100) 944 (4) 841 (355) 1,567 (23) 1,189
Other 13 (28) (1) (16) (3) (33) - (36)
-------- -------- ------ ------- ------- ------- ------ -------
Total net change in expense on
interest-bearing liabilities (1,939) 6,054 (170) 3,947 985 3,792 108 4,885
-------- -------- ------ ------- ------- ------- ------ -------
Net change in net interest income $ (3,965) $ 7,744 $ (726) $ 3,048 $ (29) $ 4,059 $ (495) $ 3,535
======== ======== ====== ======= ======= ======= ====== =======
</TABLE>
- --------------------------------------------------
(1) Includes assets held and available for sale.
37
<PAGE> 39
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1999, the Bank made dividend payments of $12.7 million to the
Corporation. The Bank is subject to certain regulatory limitations relative to
its ability to pay dividends to the Corporation. Management believes that the
Corporation will not be adversely affected by these dividend limitations and
that projected future dividends from the Bank will be sufficient to meet the
Corporation's liquidity needs. In addition to dividends from the Bank, the
Corporation also could sell capital stock or debt issues through the capital
markets as alternative sources of funds, as well as obtain loans from outside
banks.
The Bank's primary sources of funds are principal and interest payments on loans
receivable and mortgage-related securities, sales of mortgage loans originated
for sale, FHLB advances, deposits and other borrowings. While maturities and
scheduled amortization of loans and mortgage-related securities are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Bank is required by the OTS to maintain 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%. At March 31, 1999 and 1998, the Bank's liquidity ratio was
13.7% and 14.7%, respectively.
Operating activities resulted in a net cash inflow of $26.4 million. Operating
cash flows for fiscal 1999 included earnings of $23.5 million and $9.0 million
realized from net proceeds from the origination and sale of mortgage loans held
for sale.
Investing activities in fiscal 1999 resulted in a net cash outflow of $150.2
million. Primary investing activities resulting in cash outflows were $93.7
million for the purchase of securities and $223.0 million for the increase in
net loans receivable. The most significant cash inflows from investing
activities were principal payments of $85.9 million received on mortgage-related
securities, as well as $47.4 million from the proceeds of maturities of
investment securities.
Financing activities resulted in a net cash inflow of $119.2 million including a
net increase in deposits of $113.7 million, a net increase in borrowings of
$15.9 million and a cash outflow of $9.9 million for treasury stock purchases.
At March 31, 1999, the Corporation had outstanding commitments to originate
$74.0 million of loans; commitments to extend funds to or on behalf of customers
pursuant to lines and letters of credit of $91.3 million; and $1.5 million of
loans sold with recourse to the Corporation in the event of default by the
borrower. (See Note 12 to the Consolidated Financial Statements.) Scheduled
maturities of certificates of deposit during the twelve months following March
31, 1999, amounted to $785.7 million and scheduled maturities of borrowings
during the same period totaled $233.0 million. The Bank has entered into
agreements with certain brokers that will provide blocks of funds at specified
interest rates for an identified fee. Management believes adequate capital and
borrowings are available from various sources to fund all commitments to the
extent required.
At March 31, 1999, the Bank's capital exceeded all capital requirements of the
State of Wisconsin and the OTS as mandated by federal law and regulations on
both a current and fully phased-in basis. See Note 9 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
GENERAL Total assets of the Corporation increased $142.4 million or 7.1% from
$2.0 billion at March 31, 1998, to $2.14 billion at March 31, 1999. This
increase was primarily funded by net increases in deposits of $113.5 million and
in borrowings of $16.8 million. These funds were generally invested in loans
receivable and mortgage-related securities.
MORTGAGE-RELATED SECURITIES Mortgage-related securities (both available for sale
and held to maturity) increased $28.5 million as a net result during the year of
(i)purchases of $27.8 million, (ii) principal repayments and market
38
<PAGE> 40
value adjustments of $6.5 million and (iii) sales of $5.8 million.
Mortgage-related securities consisted of $210.1 million mortgage-backed
securities and $13.1 million mortgage-derivative securities at March 31, 1999.
See Notes 1 and 3 to the Consolidated Financial Statements.
Since mortgage-related securities are asset-backed securities, they are subject
to inherent risks based upon the future performance of the underlying collateral
(i.e., mortgage loans) for these securities. Among these risks are prepayment
risk and interest rate risk. Should general interest rate levels decline, the
mortgage-related securities portfolio would be subject to (i) prepayments as
borrowers typically would seek to obtain financing at lower rates, (ii) a
decline in interest income received on adjustable-rate mortgage-related
securities, and (iii) an increase in fair value of fixed-rate mortgage-related
securities. Conversely, should general interest rate levels increase, the
mortgage-related securities portfolio would be subject to (i) a longer term to
maturity as borrowers would be less likely to prepay their loans, (ii) an
increase in interest income received on adjustable-rate mortgage-related
securities, (iii) a decline in fair value of fixed-rate mortgage-related
securities, and (iv) a decline in fair value of adjustable-rate mortgage-related
securities to an extent dependent upon the level of interest rate increases, the
time period to the next interest rate repricing date for the individual security
and the applicable periodic (annual and/or lifetime) cap which could limit the
degree to which the individual security could reprice within a given time
period.
LOANS RECEIVABLE Total net loans (including loans held for sale) increased
$130.5 million during fiscal 1999 from $1.61 billion at March 31, 1998, to $1.74
billion at March 31, 1999. The activity included (i) originations and purchases
of $844.2 million, (ii) sales of loans held for sale of $478.7 million, and
(iii) principal repayments and other reductions of $235.0 million. The
components of the increase in total loans, including loans held for sale, are
summarized by type of loan as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------
INCREASE
1999 1998 (DECREASE)
--------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
FIRST MORTGAGE LOANS:
Single-family residential $ 841,048 $ 817,763 $ 23,285
Multi-family residential 224,167 177,350 46,817
Commercial real estate 216,365 183,914 32,451
Construction and land 168,146 132,879 35,267
----------- ----------- -----------
Total first mortgage loans 1,449,726 1,311,906 137,820
OTHER LOANS:
Second mortgage 180,122 183,874 (3,752)
Education 125,427 121,306 4,121
Commercial business and leases 40,401 30,244 10,157
Credit card and other consumer loans 30,241 32,841 (2,600)
----------- ----------- -----------
Total other loans 376,191 368,265 7,926
----------- ----------- -----------
Gross loans receivable 1,825,917 1,680,171 145,746
Less: Net items to loans receivable (101,675) (89,082) (12,593)
----------- ----------- -----------
Net loans receivable $ 1,724,242 $ 1,591,089 $ 133,153
=========== =========== ===========
Loans held for sale $ 15,430 $ 18,060 $ (2,630)
=========== =========== ===========
</TABLE>
NON-PERFORMING ASSETS Non-performing assets (consisting of non-accrual loans,
non-performing real estate held for development and sale, foreclosed properties
and repossessed assets) decreased to $5.1 million or 0.24% of total assets at
March 31, 1999 from $12.9 million or 0.64% of total assets at March 31, 1998.
39
<PAGE> 41
Non-performing assets are summarized as follows for the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Single-family residential $ 690 $ 1,273 $ 1,712 $ 629 $ 833
Multi-family residential -- 898 3,199 -- --
Commercial real estate 145 288 778 470 624
Construction and land -- -- 58 81 81
Consumer 571 577 438 202 219
Commercial business 359 673 610 508 736
------- --------- --------- --------- ---------
Total non-accrual loans 1,765 3,709 6,795 1,890 2,493
Real estate held for development and sale 1,764 4,431 2,736 2,319 857
Foreclosed properties and repossessed assets, net 1,603 4,723 4,222 6,077 7,116
------- --------- --------- --------- ---------
Total non-performing assets $ 5,132 $ 12,863 $ 13,753 $ 10,286 $ 10,466
======= ========= ========= ========= =========
Performing troubled debt restructurings $ 293 $ 725 $ 329 $ 332 $ 335
======= ========= ========= ========= =========
Total non-accrual loans to total loans 0.10% 0.22% 0.44% 0.13% 0.19%
Total non-performing assets to total assets 0.24 0.64 0.73 0.59 0.69
Allowance for loan losses to total loans 1.11 1.30 1.47 1.59 1.75
Allowance for loan losses to total
non-accrual loans 1144.93 588.65 334.81 1206.72 899.68
Allowance for loan and foreclosure losses
to total non-performing assets 399.43 172.26 173.26 228.70 221.82
</TABLE>
Non-accrual loans decreased $1.9 million during fiscal 1999 primarily due to a
decrease of $800,000 in non-accrual multifamily loans to one borrower that were
transferred to real estate owned. The properties that secured these loans were
subsequently sold. The balance of the decrease in this category was due to
decreases in single-family and commercial business non-accrual loans. Loans are
placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. As a matter of policy, the
Corporation does not accrue interest on loans past due more than 90 days.
Non-performing real estate held for development and sale decreased $2.7 during
fiscal 1999 primarily as a result of the transfer of a multi-family project,
with a carrying value of $2.9 million, to performing troubled debt
restructuring. The property was subsequently sold and a deferred gain of
$300,000, representing interim financing to the buyer, remains in real estate
held for development and sale.
Foreclosed properties and repossessed assets decreased $3.1 million in fiscal
1999 primarily due to the sale of an apartment complex in Elm Grove, Wisconsin,
which formerly secured a $2.2 million loan. The balance of the decrease was
largely due to the sale of the aforementioned multi-family properties formerly
secured by several loans to the same borrower.
40
<PAGE> 42
The total of performing troubled debt restructurings does not represent a
material amount and does not include any loans larger than $1.0 million. There
are three loans in this category with one loan having a rate reduced to 2% and
the other two bearing market rates of interest only. All three loans were
current as of March 31, 1999.
ALLOWANCES FOR LOAN AND FORECLOSURE LOSSES The Corporation's loan portfolio,
foreclosed properties, repossessed assets and loans sold with recourse are
evaluated on a continuing basis to determine the necessity for additions to the
allowances for losses and the related balance in the allowances. These
evaluations consider several factors including, but not limited to, general
economic conditions, collateral value, loan portfolio composition, loan
delinquencies, prior loss experience, anticipated loss of interest and
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 loan problems based upon historical trends and ratios. Foreclosed
properties are recorded at the lower of carrying or fair value with charge-offs,
if any, charged to the allowance for loan losses prior to transfer to foreclosed
property. The fair value is primarily based on appraisals, discounted cash flow
analysis (the majority of which are based on current occupancy and lease rates)
and pending offers. A summary of the activity in the allowance for loan losses
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 21,833 $ 22,750 $ 22,807 $ 22,429 $ 22,119
Charge-offs:
Mortgage (1,342) (951) (222) (439) (1,460)
Consumer (1,036) (993) (483) (104) (36)
Commercial business (414) (252) (275) (455) (309)
-------- -------- -------- -------- --------
Total charge-offs (2,792) (2,196) (980) (998) (1,805)
-------- -------- -------- -------- --------
Recoveries:
Mortgage 408 825 250 298 374
Consumer 123 59 5 10 17
Commercial business 21 95 168 43 144
-------- -------- -------- -------- --------
Total recoveries 552 979 423 351 535
-------- -------- -------- -------- --------
Net charge-offs (2,240) (1,217) (557) (647) (1,270)
-------- -------- -------- -------- --------
Provision 615 300 500 475 1,580
Acquired bank's allowance -- -- -- 550 --
-------- -------- -------- -------- --------
Allowance at end of year $ 20,208 $ 21,833 $ 22,750 $ 22,807 $ 22,429
======== ======== ======== ======== ========
Net charge-offs to average loans
held for sale and for investment (0.13)% (0.08)% (0.04)% (0.05)% (0.11)%
======== ======== ======== ======== ========
</TABLE>
The fiscal 1999 provision for loan losses totaled $620,000 as compared to
$300,000 in fiscal 1998. The provision for loan losses for fiscal years 1999 and
1998 remain at significantly lower levels compared to earlier years when the
Bank's charge-off experience from certain portfolio segments required larger
allowances due to higher defaults during a period of economic downturn. Those
segments were largely multi-family real estate loans secured by properties in
states other than Wisconsin and leases receivable. The Corporation had, until
the past few years, substantially ceased extending credit in those segments
since the late 1980's. Because of this historical experience, and based on the
volume and type of lending reintroduced to the loan portfolio (in the real
estate held for
41
<PAGE> 43
development and sale segment), management considered it appropriate to retain
the allowance at its present level. For further discussion of the real estate
held for development and sale segment, see Item 8 - Note 15 to the Consolidated
Financial Statements and Item 1 - "Business - Subsidiaries".
The Bank considers economic trends in its overall level of general allowances.
Historically, the Bank's non-performing and classified assets have fluctuated
with economic trends, both locally and nationally. At March 31, 1999, the
present positive local and national economic conditions are reflected in the
Bank's decrease in non-performing and classified assets. At the same time, both
locally and nationally, consumer debt levels have risen and have been
accompanied by increased default levels. In response to these two conditions,
the Bank has reallocated some of its reserves while maintaining a general
valuation allowance that has decreased $1.6 million from $21.8 million at March
31, 1998 to $20.2 million at March 31, 1999.
Non-performing and classified asset levels have decreased $7.8 million and $2.3
million, respectively, during the past fiscal year. However, because of the
increased growth in the real estate investment segment and in the commercial
loan portfolio, management believes that the present level of the allowance is
prudent.
Loan charge-offs continued at elevated levels of approximately $2.7 million and
$2.2 million for the fiscal years ending March 31, 1999 and 1998, respectively.
Total charge-offs for the years ended March 31, 1999 and 1998 increased $600,000
and $1.2 million, respectively, from the prior respective fiscal year ends. The
increase in charge-offs is largely due to increases in mortgage and consumer
loan charge-offs. Mortgage loan charge-offs increased $390,000 and $730,000,
respectively, for the years ended March 31, 1999 and 1998. Consumer loan
charge-offs increased $40,000 and $510,000, respectively, for the same
respective fiscal year ends. Commercial loan charge-offs increased $160,000 for
the year ended March 31, 1999 while the prior year ended March 31, 1998
experienced no increase in charge-offs. While recoveries slightly offset the
increase in charge-offs for the year ended March 31, 1999, such recoveries
decreased $430,000 from $980,000 in fiscal 1998 to $550,000 in fiscal 1999.
Recoveries increased $560,000 during the fiscal year ended March 31, 1998.
These increased levels in net charge-offs of $2.2 million and $1.2 million for
the respective years ended March 31, 1999 and 1998 do not represent decreased
quality in the loan portfolio but instead reflect the local and national trends
in overall consumer debt levels and bankruptcy filings.
42
<PAGE> 44
The table below shows the Corporation's total allowance for loan losses and the
allocation to the various categories of loans held for investment at the dates
indicated.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL
LOANS BY LOANS BY LOANS BY LOANS BY
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT
-----------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $ 1,712 0.20% $ 195 0.02% $ 184 0.03% $ 200 0.03% $ 15
Multi-family residential 1,650 0.74 395 0.22 379 0.23 263 0.16 365
Commercial real estate 4,185 1.93 1,030 0.56 645 0.38 476 0.34 916
Construction and land - - - - - - 4 - 87
Consumer 1,298 0.39 1,278 0.38 1,169 0.36 802 0.31 645
Commercial business 2,523 6.24 893 2.95 1,370 4.72 1,008 3.28 1,215
Unallocated 8,840 0.61 18,042 1.38 19,003 1.60 20,054 1.75 19,186
-------- ----- -------- ---- -------- ---- -------- ---- ---------
Total allowance for
loan losses $ 20,208 1.11% $ 21,833 1.30% $ 22,750 1.47% $ 22,807 1.59% $ 22,429
======== ===== ======== ==== ======== ==== ======== ==== =========
<CAPTION>
MARCH 31,
------------
1995
------------
% OF TOTAL
LOANS BY
CATEGORY
------------
<S> <C>
Single-family residential 0.00%
Multi-family residential 0.26
Commercial real estate 0.74
Construction and land 0.11
Consumer 0.32
Commercial business 5.59
Unallocated 1.81
----
Total allowance for
loan losses 1.75%
====
</TABLE>
A summary of the activity in the allowance for losses on foreclosed properties
follows. The provision for losses on such properties is included in the
consolidated statements of income in "Net cost (income) of operations of
foreclosure properties."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 325 $ 1,078 $ 717 $ 787 $ 343
Provision 200 25 500 200 950
Charge-offs (234) (778) (139) (270) (506)
------ ------- ------- ------ ------
Allowance at end of year $ 291 $ 325 $ 1,078 $ 717 $ 787
====== ======= ======= ====== ======
</TABLE>
The fiscal 1999 provision for foreclosure losses totaled $200,000 as compared to
$25,000 for fiscal 1998. Charge-offs decreased by $540,000 during the fiscal
year. The Corporation conducts ongoing evaluations of the adequacy of the
allowance for losses, which are based on amounts of foreclosed properties,
recent appraisals, discounted cash flows or pending offers.
Although management believes that the March 31, 1999, allowances for loan and
foreclosed property losses are adequate based upon the current evaluation of
loan delinquencies, non-performing assets, charge-off trends, economic
conditions and other factors, there can be no assurance that future adjustments
to the allowance will not be necessary. Management also continues to pursue all
practical and legal methods of collection, repossession and disposal, as well as
adhering to high underwriting standards in the origination process, in order to
continue to maintain strong asset quality.
DEPOSITS Deposits increased $113.5 million during fiscal 1999 to $1.51 billion,
of which $51.9 million was in certificates of deposit, $42.9 million was due to
increases in money market accounts, and $15.2 million was due to increases in
NOW accounts. All of these increases were due to promotions and related growth
of deposit
43
<PAGE> 45
households. The weighted average cost of deposits decreased to 4.49% at fiscal
year-end 1999 compared to 4.75% at fiscal year-end 1998.
BORROWINGS FHLB advances increased $16.8 million during fiscal 1999 to fund the
increased loan activity. At March 31, 1999, advances totaled $415.6 million with
a weighted average interest rate of 5.29%. Reverse repurchase agreements
decreased $470,000 during fiscal 1999. Other loans payable were unchanged from
the prior fiscal year. For additional information, see Note 8 to the
Consolidated Financial Statements.
STOCKHOLDERS' EQUITY 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
stockholders' equity. Statement 130 requires unrealized gains or losses on the
Corporation's available-for-sale securities and foreign unrealized gains or
losses (the latter of which is not applicable to the Corporation), which prior
to adoption were reported separately in stockholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
Stockholders' equity at March 31, 1999 was $142.2 million, or 6.64% of total
assets, compared to $128.0 million and 6.40% of total assets at March 31, 1998.
Stockholders' equity increased during the year as a result of (i) comprehensive
income of $23.2 million, which includes net income of $23.5 million and and an
offsetting change in net unrealized losses on available-for-sale securities as a
part of accumulated other comprehensive income (loss) of $400,000, (ii) the
repayment of ESOP borrowings of $700,000, (iii) the exercise of stock options of
$2.2 million, (iv) the vesting of recognition plan shares of $200,000, (v)
employee stock plan purchases of $800,000, and (vi) the tax benefit from certain
stock options of $2.0 million. These were offset by (i) the purchase of treasury
stock of $9.9 million, (ii) the payment of cash dividends of $3.5 million and
(iii) the establishment of the SERP liability of $1.4 million.
IMPACT OF YEAR 2000
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
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
June 30, 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, as well. On March 7, 1999 the item processing data system
was tested by a third party and was also 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.
44
<PAGE> 46
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
RESOLUTION PHASES OF YEAR 2000 COMPLIANCE AT MARCH 31, 1999
- ---------------------------------------------------------------------------------------------------------------
Exposure
TYPE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information 100% Complete 100% Complete 95% Complete 90% Complete
Technology
Expected completion Expected completion
date, 6/30/99 date, 6/30/99
- ---------------------------------------------------------------------------------------------------------------
Operating 100% Complete 100% Complete 100% Complete 100% Complete
Equipment with
Embedded
Chips or
Software
- ---------------------------------------------------------------------------------------------------------------
3rd Party 100% Complete 100% Complete for 100% Complete for 100% Complete for
for system system interface system interface system interface
interface; 100%
Complete for all Developed Implemented
other material contingency contingency
exposures plans as appropriate. plans or other
alternatives,
as necessary.
- ---------------------------------------------------------------------------------------------------------------
</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 $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 has completed its contingency plans for all
critical applications. These contingency plans involve, among other actions,
additional equipment and supplies, additional staff and training, and hard copy
records of critical information.
45
<PAGE> 47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT The primary function of asset and liability
management is to provide liquidity and maintain an appropriate balance between
interest-earning assets and interest-bearing liabilities within specified
maturities and/or repricing dates. Interest rate risk is the imbalance between
interest-earning assets and interest-bearing liabilities at a given maturity or
repricing date, and is commonly referred to as the interest rate gap (the
"gap"). A positive gap exists when there are more assets than liabilities
maturing or repricing within the same time frame. A negative gap occurs when
there are more liabilities than assets maturing or repricing within the same
time frame.
The Corporation's strategy for asset and liability management is to maintain an
interest rate gap that minimizes the impact of interest rate movements on the
net interest margin. As part of this strategy, the Corporation sells
substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, invests in adjustable-rate
or medium-term, fixed-rate, single-family residential mortgage loans, invests in
medium-term mortgage-related securities and invests in consumer loans which
generally have shorter terms to maturity and higher and/or adjustable interest
rates. The Corporation occasionally sells adjustable-rate loans at origination
to private investors.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates and/or
shorter terms to maturity than conventional single-family residential loans.
Long-term, fixed-rate, single-family mortgage loans originated for sale in the
secondary market are generally committed for sale at the time the interest rate
is locked with the borrower. As such, these loans involve little interest rate
risk to the Corporation.
Although management believes that its asset/liability management strategies
reduce the potential effects of changes in interest rates on the Corporation's
operations, material and prolonged changes in interest rates would adversely
affect the Corporation's operations.
The Corporation's cumulative net gap position at March 31, 1999 and 1998, for
one year or less was a negative 12.73% and 1.56%, respectively, 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 Corporation utilizes certain prepayment assumptions and decay rates from
various sources such as the OTS and as determined by management. The following
table summarizes the Corporation's interest rate sensitivity gap position as of
March 31, 1999 and 1998.
46
<PAGE> 48
<TABLE>
<CAPTION>
03/31/00 03/31/01 03/31/02 03/31/03 03/30/04 THEREAFTER TOTAL
------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Mortgage loans - Fixed (1)(2) 122,082 47,835 34,652 27,908 22,991 143,503 398,971
Average interest rate 7.55% 7.48% 7.36% 7.31% 7.28% 7.16%
Mortgage loans -Variable (1)(2) 548,750 244,355 131,057 38,682 21,040 - 983,884
Average interest rate 7.62% 7.36% 7.38% 7.46% 7.46%
Consumer loans (1)
248,704 40,440 20,873 11,082 6,167 7,953 335,219
Average interest rate 8.78% 8.83% 8.67% 8.58% 8.57% 8.55%
Commercial business loans (1) 37,838 1,356 486 136 67 160 40,042
Average interest rate 8.41% 8.22% 8.22% 8.22% 8.22% 8.22%
Mortgage-related securities (3) 77,927 44,681 29,601 20,479 14,471 36,111 223,270
Average interest rate 6.48% 6.48% 6.48% 6.48% 6.48% 6.48%
Investment securities and other
interest-earning assets (3) 28,818 10,651 8,249 5,346 3,716 9,086 65,865
Average interest rate 5.15% 6.06% 6.01% 6.00% 5.98% 5.91%
Total rate sensitive assets 1,064,120 389,318 224,916 103,633 68,452 196,812 2,047,251
Rate sensitive liabilities:
Interest-bearing
transaction accounts (4) 251,862 46,470 31,922 22,388 16,048 55,552 424,242
Average interest rate 3.21% 3.44% 3.28% 3.11% 2.93% 2.36%
Time-deposits (4)
796,674 76,903 76,903 12,364 12,185 - 975,028
Average interest rate 5.41% 5.55% 5.55% 5.85% 5.85%
Borrowings
288,313 53,500 26,796 7,500 24,000 70,750 470,859
Average interest rate 5.39% 5.20% 5.08% 5.64% 5.25% 4.95%
Total rate sensitive liabilities 1,336,849 176,873 135,621 42,251 52,233 126,302 1,870,129
Interest sensitivity gap
(272,729) 212,445 89,295 61,382 16,219 70,509 177,122
Cumulative interest sensitivity gap (272,729) (60,284) 29,012 90,394 106,613 177,122
Cumulative interest sensitivity
gap as a percent of total assets (12.73)% (2.81)% 1.35% 4.22% 4.98% 8.27%
<CAPTION>
FAIR VALUE
03/31/99
-----------
<S> <C>
Rate sensitive assets:
Mortgage loans - Fixed (1)(2) 395,712
Average interest rate
Mortgage loans -Variable (1)(2) 984,393
Average interest rate
Consumer loans (1)
338,564
Average interest rate
Commercial business loans (1) 40,061
Average interest rate
Mortgage-related securities (3) 224,321
Average interest rate
Investment securities and other
interest-earning assets (3) 66,226
Average interest rate
Total rate sensitive assets 2,049,277
Rate sensitive liabilities:
Interest-bearing
transaction accounts (4) 417,774
Average interest rate
Time-deposits (4) 979,082
Average interest rate
Borrowings
Average interest rate 466,943
Total rate sensitive liabilities 1,863,799
Interest sensitivity gap
Cumulative interest sensitivity gap
Cumulative interest sensitivity
gap as a percent of total assets
</TABLE>
(1) Balances have been reduced for (i) undisbursed loan proceeds, which
aggregated $77.2 million, and (ii) non-accrual loans, which amounted
to $1.8 million.
(2) Includes $15.4 million of loans held for sale spread throughout the periods.
(3) Includes $143.1 million of securities available for sale spread throughout
the periods.
(4) Does not include $77.2 million of demand accounts because they are
non-interest-bearing. Also does not include accrued interest payable, which
amounted to $9.2 million. Projected decay rates for demand deposits and
passbook savings are selected by management from various such as the OTS.
47
<PAGE> 49
<TABLE>
<CAPTION>
03/31/99 03/31/00 03/31/01 03/31/02 03/31/03
---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Mortgage loans - Fixed (1) (2) 185,559 65,188 34,158 18,370 10,078
Average interest rate 7.71% 7.30% 7.28% 7.30% 7.36%
Mortgage loans -Variable (1) (2) 617,324 193,388 100,354 14,514 7,478
Average interest rate 7.99% 7.75% 7.76% 7.55% 7.57%
Consumer loans (1) 269,689 40,567 15,827 6,093 2,835
Average interest rate 9.01% 9.32% 9.23% 9.16% 9.16%
Commercial business loans (1) 27,321 1,780 242 69 47
Average interest rate 9.38% 8.98% 8.70% 8.63% 8.68%
Mortgage-related securities (3) 106,125 46,573 22,671 10,729 4,941
Average interest rate 6.73% 6.73% 6.74% 6.76% 6.76%
Investment securities and other
interest-earning assets (3) 40,556 6,165 9,557 2,182 25,218
Average interest rate 7.77% 12.61% 8.11% 9.51% 6.35%
Total rate sensitive assets 1,246,574 353,661 182,809 51,957 50,597
Rate sensitive liabilities:
Interest-bearing
transaction accounts (4) 172,860 63,242 42,919 29,233 19,988
Average interest rate 3.05% 3.54% 3.47% 3.39% 3.31%
Time-deposits (4) 749,481 77,884 77,885 8,918 8,918
Average interest rate 5.72% 5.91% 5.91% 5.95% 5.95%
Borrowings 355,401 52,675 9,284 2,751 34,449
Average interest rate 5.80% 6.00% 6.44% 8.20% 5.25%
Total rate sensitive liabilities 1,277,742 193,801 130,088 40,902 63,355
Interest sensitivity gap (31,168) 159,860 52,721 11,055 (12,758)
Cumulative interest sensitivity gap (31,168) 128,692 181,413 192,468 179,710
Cumulative interest sensitivity
gap as a percent of total assets (1.56)% 6.44% 9.07% 9.63% 8.99%
<CAPTION>
FAIR VALUE
THEREAFTER TOTAL 03/31/98
-------------------------------------------------
<S> <C> <C> <C>
Rate sensitive assets:
Mortgage loans - Fixed (1) (2) 13,848 327,201 299,006
Average interest rate 7.60%
Mortgage loans -Variable (1) (2) - 933,058 966,948
Average interest rate
Consumer loans (1) 2,432 337,443 338,591
Average interest rate 9.20%
Commercial business loans (1) 112 29,571 29,105
Average interest rate 8.70%
Mortgage-related securities (3) 3,726 194,765 195,687
Average interest rate 6.78%
Investment securities and other
interest-earning assets (3) 2,634 86,312 88,099
Average interest rate 6.26%
Total rate sensitive assets 22,752 1,908,350 1,917,436
Rate sensitive liabilities:
Interest-bearing
transaction accounts (4) 45,148 373,390 361,100
Average interest rate 3.06%
Time-deposits (4) 820 923,906 926,649
Average interest rate 5.90%
Borrowings - 454,560 453,790
Average interest rate
Total rate sensitive liabilities 45,968 1,751,856 1,741,539
Interest sensitivity gap (23,216) 156,494
Cumulative interest sensitivity gap 156,494
Cumulative interest sensitivity
gap as a percent of total assets 7.83%
</TABLE>
(1) Balances have been reduced for (i) undisbursed loan proceeds, which
aggregated $62.8 million, and (ii) non-accrual loans, which amounted to
$3.7 million.
(2) Includes $18.1 million of loans held for sale spread throughout the periods.
(3) Includes $92.0 million of securities available for sale spread throughout
the periods.
(4) Does not include $85.9 million of demand accounts because they are
non-interest-bearing. Also does not include accrued interest payable, which
amounted to $9.3 million. Projected decay rates for demand deposits and
passbook savings are selected by management from various such as the OTS.
48
<PAGE> 50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets ........................................................... 50
Consolidated Statements of Income...................................................... 51
Consolidated Statements of Changes in Stockholders' Equity............................. 52
Consolidated Statements of Cash Flows.................................................. 53
Notes to Consolidated Financial Statements ............................................ 55
Report of Ernst & Young LLP, Independent Auditors ..................................... 79
Management and Audit Committee Report.................................................. 80
SUPPLEMENTARY DATA
Quarterly Financial Information........................................................ 81
</TABLE>
49
<PAGE> 51
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------
1999 1998
--------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
CASH $ 30,447 $ 31,999
Interest-bearing deposits 4,127 7,168
----------- -----------
Cash and cash equivalents 34,574 39,167
Investment securities available for sale 32,716 39,555
Investment securities held to maturity (fair value of $6,800 and
$17,600, respectively) 6,845 17,587
Mortgage-related securities available for sale 46,357 67,526
Mortgage-related securities held to maturity (fair value of $178,000
and $128,100, respectively) 176,913 127,239
Loans receivable, net:
Held for sale 15,430 18,060
Held for investment 1,724,242 1,591,089
Foreclosed properties and repossessed assets, net 1,603 4,723
Real estate held for development and sale 29,943 22,630
Office properties and equipment 18,214 18,640
Federal Home Loan Bank stock--at cost 22,177 22,002
Accrued interest on investments and loans 14,357 13,875
Prepaid expenses and other assets 18,317 17,214
----------- -----------
Total assets $ 2,141,688 $ 1,999,307
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,505,990 $ 1,392,472
Federal Home Loan Bank and other borrowings 428,395 411,625
Reverse repurchase agreements 42,464 42,935
Advance payments by borrowers for taxes and insurance 6,575 6,955
Other liabilities 16,025 17,369
----------- -----------
Total liabilities 1,999,449 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 51,112 49,084
Retained earnings 136,098 125,615
Less: Treasury stock (6,936,458 shares and 7,073,460 shares,
respectively), at cost (46,698) (47,959)
Borrowings of Employee Stock Ownership Plan (689) (1,379)
Common stock purchased by benefit plans (669) (851)
Accumulated other comprehensive income 585 941
----------- -----------
Total stockholders' equity 142,239 127,951
----------- -----------
Total liabilities and stockholders' equity $ 2,141,688 $ 1,999,307
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
50
<PAGE> 52
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
1999 1998 1997
--------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 138,435 $ 129,008 $ 120,018
Mortgage-related securities 12,227 14,676 15,657
Investment securities 4,827 4,652 4,151
Interest-bearing deposits 477 635 725
--------- --------- ---------
Total interest income 155,966 148,971 140,551
INTEREST EXPENSE:
Deposits 67,268 64,146 60,414
Notes payable and other borrowings 25,812 24,971 23,782
Other 468 484 520
--------- --------- ---------
Total interest expense 93,548 89,601 84,716
--------- --------- ---------
Net interest income 62,418 59,370 55,835
Provision for loan losses 815 300 500
--------- --------- ---------
Net interest income after provision for loan losses 61,603 59,070 55,335
NON-INTEREST INCOME:
Loan servicing income 1,314 2,090 2,632
Service charges on deposits 4,067 3,881 3,679
Insurance commissions 1,129 1,159 1,366
Gain on sale of loans 6,193 3,241 1,225
Net income (loss) from operations of real estate investment 2,563 (437) 2,406
Other 2,750 2,278 2,243
--------- --------- ---------
Total non-interest income 18,016 12,212 13,551
NON-INTEREST EXPENSES:
Compensation 23,252 20,147 21,293
Occupancy 3,023 2,921 3,046
Federal insurance premiums 852 836 2,201
Federal insurance special assessment -- -- 7,663
Furniture and equipment 3,257 2,951 2,778
Data processing 3,086 2,615 2,164
Marketing 1,867 2,152 1,962
Other 6,068 6,672 6,299
--------- --------- ---------
Total non-interest expenses 41,405 38,294 47,406
--------- --------- ---------
Income before income taxes 38,214 32,988 21,480
Income taxes 14,670 12,487 7,532
--------- --------- ---------
Net income $ 23,544 $ 20,501 $ 13,948
========= ========= =========
Earnings per share:
Basic $ 1.37 $ 1.13 $ 0.75
Diluted 1.28 1.06 0.71
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
51
<PAGE> 53
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ACCU-
STOCK MULATED
BOR- PURCHASED OTHER
ADDITIONAL ROWINGS BY COMPRE-
COMMON PAID-IN RETAINED TREASURY OF BENEFIT HENSIVE
STOCK CAPITAL EARNINGS STOCK ESOP PLANS INCOME TOTAL
------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 $ 2,500 $48,211 $ 100,191 $ (29,298) $ (928) $ (1,546) $ (728) $ 118,402
Comprehensive income:
Net income - - 13,948 - - - - 13,948
Change in net unrealized
losses on available-for-sale
securities, net of tax of $60 - - - - - - (5) (5)
---------
Comprehensive income 13,943
Purchase of treasury stock
(794,798 shares) - - - (14,221) - - - (14,221)
Exercise of stock options - - (1,180) 1,582 - - - 402
Cash dividend ($0.12 per share) - - (2,224) - - - - (2,224)
Recognition plan shares vested - - - - - 300 - 300
Tax benefit from stock
related compensation - 357 - - - - - 357
Repayment of ESOP borrowings - - - - 928 - - 928
====================================================================================
Balance at March 31, 1997 2,500 48,568 110,735 (41,937) - (1,246) (733) 117,887
====================================================================================
Comprehensive income:
Net income - - 20,501 - - - - 20,501
Change in net unrealized
gains on available-for-sale
securities, net of tax of $ 1,060 - - - - - 1,674 1,674
---------
Comprehensive income 22,175
Purchase of treasury stock
(513,100 shares) - - - (9,567) - - - (9,567)
Exercise of stock options - - (2,811) 3,544 - - - 733
Cash dividend ($0.16 per share) - - (2,810) - - - - (2,810)
Recognition plan shares vested - - - - - 396 - 396
Tax benefit from stock
related compensation - 516 - - - - - 516
Borrowing - ESOP - - - - (2,069) - - (2,069)
Repayment of ESOP borrowings - - - - 690 - - 690
=====================================================================================
Balance at March 31, 1998 2,500 49,084 125,615 (47,960) (1,379) (850) 941 127,951
=====================================================================================
Comprehensive income:
Net income - - 23,544 - - - - 23,544
Change in net unrealized
gains on available-for-sale
securities, net of tax of $420 - - - - - - (356) (356)
---------
Comprehensive income 23,188
Purchase of treasury stock
(460,430 shares) - - - (9,868) - - - (9,868)
Exercise of stock options - - (9,556) 11,784 - - - 2,228
Purchase of stock by retirement plan - - (23) 784 - - - 761
Cash dividend ($0.20 per share) - - (3,482) - - - - (3,482)
Recognition plan shares vested - - - - - 181 - 181
Consolidation of SERP - - - (1,438) - - - (1,438)
Tax benefit from stock
related compensation - 2,028 - - - - - 2,028
Repayment of ESOP borrowings - - - - 690 - - 690
=====================================================================================
Balance at March 31, 1999 $ 2,500 $51,112 $ 136,098 $ (46,698) $ (689) $ (669) $ 585 $ 142,239
=====================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
52
<PAGE> 54
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1999 1998 1997
-------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,544 $ 20,501 $ 13,948
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 815 325 1,000
Provision for depreciation and amortization 2,283 2,262 2,122
Net gain on sales of loans (6,193) (3,306) (1,241)
Increase in accrued interest receivable (481) (146) (2,180)
Increase in accrued interest payable 74 1,483 2,067
Increase (decrease) in accounts payable (2,995) 3,548 (1,821)
Other 910 3,466 (3,882)
--------- --------- ---------
Net cash provided by operating activities before proceeds
from loan sales 17,957 28,133 10,013
Net proceeds from origination and sale of loans held for sale 8,969 19,367 9,845
--------- --------- ---------
Net cash provided by operating activities 26,926 47,500 19,858
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 35,906 19,745 39,809
Proceeds from maturities of investment securities 47,393 52,978 11,099
Purchase of investment securities available for sale (64,163) (69,824) (55,328)
Purchase of investment securities held to maturity (1,750) (15,015) (5,949)
Proceeds from sales of mortgage-related securities available for sale 5,761 1,280 5,617
Purchase of mortgage-related securities held to maturity (14,966) (4,670) (26,725)
Purchase of mortgage-related securities available for sale (12,843) (4,741) (2,057)
Principal collected on mortgage-related securities 85,900 42,179 58,554
Increase in loans receivable (223,461) (163,269) (157,684)
Purchase of office properties and equipment (1,780) (2,219) (1,832)
Sales of real estate 7,649 14,054 15,767
Purchase of real estate held for sale (14,379) (6,652) (21,292)
--------- --------- ---------
Net cash used by investing activities (150,733) (136,154) (140,021)
</TABLE>
53
<PAGE> 55
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Increase in deposit accounts $ 113,655 $ 78,450 $ 69,820
Decrease in advance payments by borrowers
for taxes and insurance (380) (720) (263)
Proceeds from notes payable to Federal Home Loan Bank 1,475,450 513,500 525,496
Repayment of notes payable to Federal Home Loan Bank (1,458,650) (488,870) (468,200)
Increase (decrease) in securities sold under agreements
to repurchase (470) 3,599 (8,247)
Increase (decrease) in other loans payable (30) (4,519) 11,936
Treasury stock purchased (9,868) (9,567) (14,221)
Reissuance of treasury stock for options 2,228 733 402
Purchase of stock by retirement plans 761 -- --
Payments of cash dividends to stockholders (3,482) (2,810) (2,224)
----------- ----------- -----------
Net cash provided by financing activities 119,214 89,796 114,499
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (4,593) 1,142 (5,664)
Cash and cash equivalents at beginning of year 39,167 38,025 43,689
----------- ----------- -----------
Cash and cash equivalents at end of year $ 34,574 $ 39,167 $ 38,025
=========== =========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 93,622 $ 88,118 $ 83,070
Income taxes 13,067 10,155 7,648
Non-cash transactions:
Securitization of mortgage loans held for sale to mortgage-backed
securities and other adjustments 92,427 -- 54,938
Loans transferred to foreclosed properties -- 4,765 1,903
Securities available for sale market value adjustment (887) (10,654) 154
</TABLE>
See accompanying Notes to Consolidated Financial Statements
54
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS Anchor BanCorp Wisconsin Inc. (the "Corporation") is a Wisconsin
corporation incorporated in 1992 for the purpose of becoming a savings and loan
holding company for AnchorBank, S.S.B. (the "Bank"), a wholly-owned subsidiary.
The Bank provides a full range of financial services to individual customers
through its branch locations in Wisconsin. The Bank is subject to competition
from other financial institutions and other financial service providers. The
Corporation and its subsidiary also are subject to the regulations of certain
federal and state agencies and undergo periodic examinations by those regulatory
authorities. The Corporation also has a non-banking subsidiary, Investment
Directions, Inc. ("IDI"), which invests in various limited partnerships.
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts and operations of the Corporation and its wholly owned
subsidiaries, the Bank and IDI and their wholly owned subsidiaries. The Bank has
the following subsidiaries: Anchor Investment Corporation, Anchor Insurance
Services Inc., and ADPC Corporation. IDI's wholly owned subsidiary is Nevada
Investment Directions, Inc. ("NIDI"). Significant intercompany accounts 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 over 50% ownership are consolidated, with
significant intercompany accounts eliminated.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS The Corporation considers federal funds sold and
interest-bearing deposits that have original maturities of three months or less
to be cash equivalents.
INVESTMENT AND MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY AND
AVAILABLE-FOR-SALE Securities that the Corporation has the intent and ability to
hold to maturity are classified as held-to-maturity securities and are stated at
amortized cost. Securities not classified as held to maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
accumulated other comprehensive income in stockholders' equity.
Discounts and premiums on investment and mortgage-backed securities are accreted
and amortized into interest income using the interest method over the estimated
remaining contractual life of the assets.
Realized gains and losses, and declines in value judged to be other than
temporary, are included in "Net gain (loss) on sale of securities" in the
consolidated statements of income as a component of other income. The cost of
securities sold is based on the specific identification method.
LOANS HELD FOR SALE Loans held for sale generally consist of the current
originations of certain fixed-rate mortgage loans and certain adjustable-rate
mortgage loans and are carried at the lower of aggregate cost or market value.
Fees received from the borrower and direct costs to originate are deferred and
recorded as an adjustment of the sales price.
MORTGAGE SERVICING RIGHTS Mortgage servicing rights are recorded as an asset
when loans are sold with servicing rights retained. For loans delivered to and
funded by the FHLB see Note 12. The cost of mortgage servicing rights is
amortized in proportion to, and over the period of, estimated net servicing
revenues. Impairment of mortgage servicing rights is assessed based on the fair
values of those rights. Fair values are estimated using discounted cash
55
<PAGE> 57
flows based on a current market interest rate. For purposes of measuring
impairment, the rights are stratified based on predominant risk characteristics
of the underlying loans which include product type (i.e., fixed or adjustable)
and interest rate bands. The amount of impairment recognized is the amount by
which the capitalized mortgage servicing rights for a stratum exceed their fair
value.
INTEREST ON LOANS Interest on loans is accrued on the unpaid principal balances
as earned. Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of principal and interest is deemed to
be insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from the allowance
for interest. Loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt. Allowances of $131,000
and $247,000 were established at March 31, 1999 and 1998, respectively, for
interest on non-accrual status loans.
LOAN FEES AND DISCOUNTS Loan origination and commitment fees and certain direct
loan origination costs are deferred and amortized as an adjustment to the
related loan's yield. The Corporation is amortizing these amounts, as well as
discounts on purchased loans, using the level yield method, adjusted for
prepayments, over the contractual life of the related loans.
FORECLOSED PROPERTIES AND REPOSSESSED ASSETS Real estate acquired by foreclosure
or by deed in lieu of foreclosure and other repossessed assets are carried at
the lower of cost or fair value, less estimated selling expenses. Costs relating
to the development and improvement of the property are capitalized; holding
period costs are charged to expense.
ALLOWANCES FOR LOSSES Allowances for losses on loans and foreclosed properties
are maintained at a level believed adequate by management to absorb losses in
the respective portfolios. Management's evaluation of the allowance for loss
considers various factors including, but not limited to, general economic
conditions, the level of troubled assets, expected future cash flows, loan
portfolio composition, prior loss experience, estimated sales price of the
collateral, holding and selling costs and regulatory agencies. The evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. While management uses available
information to recognize losses, future additions to the allowances may be
necessary based on changes in economic conditions. A loan is considered impaired
when the carrying amount of the loan exceeds the present value of the future
cash flows, discounted at the loan's original effective rate. However, as a
practical expedient, management measures impairment based on the fair value of
the underlying collateral. At March 31, 1999 and 1998, the amount of loans
considered impaired by management is not significant.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE Real estate held for development and
sale includes investments in partnerships that purchased land and other property
and also an investment in a multi-family residential property. These investments
are carried at the lower of cost plus capitalized development costs and
interest, less accumulated depreciation, or estimated fair value.
OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are recorded at
cost and include expenditures for new facilities and items that substantially
increase the useful lives of existing buildings and equipment. Expenditures for
normal repairs and maintenance are charged to operations as incurred. When
properties are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recorded in income.
DEPRECIATION AND AMORTIZATION The cost of office properties and equipment is
being depreciated principally by the straight-line method over the estimated
useful lives of the assets. The cost of leasehold improvements is amortized on
the straight-line method over the lesser of the term of the respective lease or
estimated economic life.
STOCK OPTIONS The Corporation has elected to follow Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its employee stock
56
<PAGE> 58
options because the alternative fair value accounting provided for under
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Corporation's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
EARNINGS PER SHARE The computation of basic earnings per share excludes the
dilutive effect of common stock equivalents. Stock options issued to employees
and directors represent the only common stock equivalent of the Corporation.
Diluted earnings per share reflect the potential dilutive effect of stock
options computed using the treasury stock method.
NEW ACCOUNTING STANDARDS
On September 30, 1998, the Corporation adopted EITF 97-14, "Accounting for
Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi
Trust and Invested." In accordance with this pronouncement, the Corporation now
consolidates assets held in a Rabbi Trust for the benefit of certain employees.
At the date of adoption, a liability was recorded for the deferred compensation
obligation and the shares held in the Rabbi Trust were recorded as treasury
shares.
As of January 1, 1998, the Corporation adopted SFAS No. 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 stockholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Corporation's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of SFAS No. 130.
In 1998, the Corporation adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual and interim financial statements. Because this Statement addresses how
supplemental information is disclosed in such reports, the adoption will not
impact the primary financial statements. See Note 15 - Segment Reporting for
further details.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," established accounting and reporting standards requiring that
derivative instruments (including derivative instruments embedded in other
contracts) be recorded on the balance sheet as either assets or liabilities
measured at fair value. Changes in the derivative's fair value would be
recognized currently in earnings unless specific hedge accounting criteria are
met. The earliest the Corporation would be required to adopt SFAS No. 133 is
April 1, 2000. The Corporation does not believe SFAS No. 133 will have a
material impact on its financial position or results of operations due to its
limited use of derivatives.
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Entity - Amendment of FASB No. 64," was issued. This Statement requires
that after the securitization of mortgage loans, an entity classify the
resulting mortgage-backed securities or other retained interest based on its
ability and intent to sell or hold those securities in accordance with SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities" (i.e
trading, available-for-sale or held-to-maturity). This Statement is not required
to be adopted until April 1, 2000. The Corporation does not believe SFAS No. 134
will have a material impact on its financial position or results of operations.
RECLASSIFICATIONS Certain 1998 and 1997 accounts have been reclassified to
conform to the 1999 presentations. All share and per share amounts for 1998 and
1997 have been adjusted to reflect the two-for-one stock split distributed in
August 1998.
57
<PAGE> 59
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities are as follows
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
AT MARCH 31, 1999:
Available for Sale:
U.S. Government and federal agency obligations $ 17,645 $ 153 $ -- $ 17,798
Mutual funds 11,142 2 -- 11,144
Corporate stock and other 3,730 369 (325) 3,774
-------- -------- -------- --------
$ 32,517 $ 524 $ (325) $ 32,716
======== ======== ======== ========
Held to Maturity:
U.S. Government and federal agency obligations $ 6,845 $ 7 $ (6) $ 6,846
======== ======== ======== ========
AT MARCH 31, 1998:
Available for Sale:
U.S. Government and federal agency obligations $ 21,821 $ 94 $ (56) $ 21,859
Mutual funds 14,099 11 (6) 14,104
Corporate stock and other 2,747 855 (10) 3,592
-------- -------- -------- --------
$ 38,667 $ 960 $ (72) $ 39,555
======== ======== ======== ========
Held to Maturity:
U.S. Government and federal agency obligations $ 17,587 $ 35 $ (40) $ 17,582
======== ======== ======== ========
</TABLE>
Proceeds from sales of investment securities available for sale during the years
ended March 31, 1999, 1998 and 1997 were $35,906,000, $19,745,000 and
$39,809,000, respectively. Gross gains of $550,000, $3,000 and $16,000 were
realized on sales in 1999, 1998 and 1997, respectively. A gross loss of $36,000
was realized on sales of investment securities for the year ended March 31,
1999.
The amortized cost and fair value of investment securities by contractual
maturity at March 31, 1999 are shown below (in thousands). Actual maturities may
differ from contractual maturities because issuers have the right to call or
prepay obligations with or without call or prepayment penalties. Government
agency securities subject to three month calls amount to $800,000 at March 31,
1999. There are no securities subject to six month calls at March 31, 1999.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-----------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $15,041 $15,047 $ -- $ --
Due after one year through five years 13,746 13,895 1,570 1,570
Due after five years 100 100 5,275 5,276
Corporate stock 3,630 3,674 -- --
------- ------- ------- -------
$32,517 $32,716 $ 6,845 $ 6,846
======= ======= ======= =======
</TABLE>
58
<PAGE> 60
NOTE 3 - MORTGAGE-RELATED SECURITIES
Mortgage-related securities are backed by governmental agencies, including the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association and the Government National Mortgage Association. CMO's and REMICS
have estimated average lives of five years or less.
The amortized cost and fair values of mortgage-related securities are as follows
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AT MARCH 31, 1999:
Available for Sale:
CMO's and REMICS $ 1,060 $ 21 $ (1) $ 1,080
Mortgage-backed securities 44,786 510 (19) 45,277
--------- --------- --------- ---------
$ 45,846 $ 531 $ (20) $ 46,357
========= ========= ========= =========
Held to Maturity:
CMO's and REMICS $ 12,087 $ 39 $ (7) $ 12,119
Mortgage-backed securities 164,826 1,412 (393) 165,845
--------- --------- --------- ---------
$ 176,913 $ 1,451 $ (400) $ 177,964
========= ========= ========= =========
AT MARCH 31, 1998:
Available for Sale:
CMO's and REMICS $ 1,112 $ -- $ (1) $ 1,111
Mortgage-backed securities 65,729 732 (46) 66,415
--------- --------- --------- ---------
$ 66,841 $ 732 $ (47) $ 67,526
========= ========= ========= =========
Held to Maturity:
CMO's and REMICS $ 23,515 $ 101 $ (71) $ 23,545
Mortgage-backed securities 103,724 1,076 (212) 104,588
--------- --------- --------- ---------
$ 127,239 $ 1,177 $ (283) $ 128,133
========= ========= ========= =========
</TABLE>
Proceeds from sales of mortgage-related securities available for sale during the
years ended March 31, 1999, 1998 and 1997 were $5,761,000, $1,280,000 and
$5,617,000, respectively. Gross gains of $109,000 and $38,000 were realized on
sales in 1999 and 1998, respectively. No losses were realized in 1998. No gains
or losses were realized on sales of mortgage-related securities in 1997.
59
<PAGE> 61
NOTE 4 - LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------
1999 1998
---------------------------------------
<S> <C> <C>
FIRST MORTGAGE LOANS:
Single-family residential $ 841,048 $ 817,763
Multi-family residential 224,167 177,350
Commercial real estate 216,365 183,914
Construction 154,594 120,376
Land 13,552 12,503
---------- ----------
1,449,726 1,311,906
Second mortgage loans 180,122 183,874
Education loans 125,427 121,306
Commercial business loans and leases 40,401 30,244
Credit card and other consumer loans 30,241 32,841
---------- ----------
1,825,917 1,680,171
Less:
Undisbursed loan proceeds 77,161 62,756
Allowance for loan losses 20,208 21,833
Unearned loan fees 3,824 3,839
Discount on purchased loans 476 625
Unearned interest 6 29
---------- ----------
101,675 89,082
---------- ----------
$1,724,242 $1,591,089
========== ==========
</TABLE>
A summary of the activity in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 21,833 $ 22,750 $ 22,807
Provisions 615 300 500
Charge-offs (2,792) (2,196) (980)
Recoveries 552 979 423
-------- -------- --------
Balance at end of year $ 20,208 $ 21,833 $ 22,750
======== ======== ========
</TABLE>
A substantial portion of the Bank's loans are collateralized by real estate in
and around Dane County, Wisconsin. Accordingly, the ultimate collectibility of a
substantial portion of the loan portfolio is susceptible to changes in market
conditions in that area.
Mortgage loans serviced for others are not included in the consolidated balance
sheets. The unpaid principal balances of mortgage loans serviced for others were
approximately $1,301,231,000 and $1,108,839,000 at March 31, 1999 and 1998,
respectively.
60
<PAGE> 62
Mortgage servicing rights of $6,053,000 and $2,787,000 are included in other
assets. $4,874,000 and $2,360,000 were capitalized during the years ended March
31, 1999 and 1998, respectively. Amortization of mortgage servicing rights was
$2,058,000 and $793,000 for the years ended March 31, 1999 and 1998,
respectively. A general valuation allowance was established for the impairment
of mortgage servicing rights. The valuation allowance for the impairment of
mortgage servicing rights was $1.1 million and $450,000 for the years ended
March 31, 1999 and 1998, respectively. This increase of $650,000 was attributed
to provisions to the allowance. For discussion of the fair value of mortgage
servicing rights and method of valuation, see Note 13 - Fair Value of Financial
Instruments.
NOTE 5 - FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties, repossessed assets and properties subject to redemption
had a cost of $1,894,000 and $5,048,000 at March 31, 1999 and 1998,
respectively. At March 31, 1999 and 1998, an allowance for losses of $291,000
and $325,000, respectively, related to these assets.
The activity in the allowance for losses on foreclosed properties and
repossessed assets was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 325 $ 1,078 $ 717
Provisions 200 25 500
Charge-offs (234) (778) (139)
------- ------- -------
Balance at end of year $ 291 $ 325 $ 1,078
======= ======= =======
</TABLE>
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Land and land improvements $ 4,129 $ 3,942
Office buildings 19,477 18,225
Furniture and equipment 17,038 17,035
Leasehold improvements 1,502 2,198
------- -------
42,146 41,400
Less allowance for depreciation and amortization 23,932 22,760
------- -------
$18,214 $18,640
======= =======
</TABLE>
61
<PAGE> 63
NOTE 7 - DEPOSITS
Deposits are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Negotiable order of withdrawal ("NOW") accounts: $ 180,667 $ 165,485
Money market accounts 236,158 193,244
Passbook accounts 104,185 100,513
Certificates of deposit 975,793 923,905
---------- ----------
1,496,803 1,383,147
Accrued interest on deposits 9,187 9,325
---------- ----------
$1,505,990 $1,392,472
========== ==========
</TABLE>
A summary of annual maturities of certificates of deposit follows (in
thousands):
<TABLE>
<CAPTION>
MATURES DURING YEAR ENDED MARCH 31, AMOUNT
----------------------------------- ------
<S> <C> <C>
2000 $784,973
2001 147,592
2002 18,501
2003 12,548
Thereafter 12,179
--------
$975,793
========
</TABLE>
At March 31, 1999 and 1998, certificates of deposit with balances greater than
or equal to $100,000 amounted to $165,904,000 and $124,435,000, respectively.
NOTE 8 - BORROWINGS
The Bank enters into sales of securities under agreements to repurchase the
securities ("reverse repurchase agreements"). These agreements are treated as
financings with the obligations to repurchase securities reflected as a
liability and the dollar amount of securities underlying the agreements
remaining in the asset accounts. The securities underlying the agreements are
held by the counter-party brokers in the Bank's account. At March 31, 1999 and
1998, liabilities recorded under agreements to repurchase were $42,464,000 and
$42,935,000, respectively. The reverse repurchase agreements had a
weighted-average interest rate of 4.91% and 5.60% at March 31, 1999 and 1998,
respectively, and mature within one year of the fiscal year-end. Based upon
month-end balances, securities sold under agreements to repurchase averaged
$30,930,000 and $22,923,000 during 1999 and 1998, respectively. The maximum
outstanding at any month-end was $52,139,000 and $45,214,000 during 1999 and
1998, respectively. The agreements were collateralized by mortgage-backed
securities available for sale and held to maturity with market values of
$43,638,000 and $44,650,000 at March 31, 1999 and 1998, respectively.
62
<PAGE> 64
Federal Home Loan Bank ("FHLB") advances and other loans payable consist of the
following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
----------------------------------------------------------------
MATURES DURING WEIGHTED WEIGHTED
YEAR ENDED MARCH 31, AMOUNT RATE AMOUNT RATE
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHLB advances: 1999 $ - - $ 306,950 5.77%
2000 233,049 5.44% 51,049 5.91
2001 53,500 5.20 8,296 5.88
2002 26,796 5.08 - -
2003 7,500 5.64 7,500 5.64
2004 24,000 5.25 - -
2006 7,000 4.94 - -
2008 25,000 4.84 25,000 4.84
2009 38,750 5.02 - -
Other loans payable various 12,800 6.22 12,830 8.78
-------- --------
$428,395 5.32% $411,625 5.82%
======== ==== ======== ====
</TABLE>
The Bank is required to maintain unencumbered first mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the FHLB as collateral. In addition, these notes are collateralized by FHLB
stock of $22,177,000 at March 31, 1999.
NOTE 9 - STOCKHOLDERS' EQUITY
The Board of Directors of the Corporation is authorized to issue preferred stock
in series and to establish the voting powers, other special rights of the shares
of each such series and the qualifications and restrictions thereof. Preferred
stock may rank prior to the common stock as to dividend rights, liquidation
preferences or both, and may have full or limited voting rights. Under Wisconsin
state law, preferred stockholders would be entitled to vote as a separate class
or series in certain circumstances, including any amendment which would
adversely change the specific terms of such series of stock or which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. No preferred stock has been issued.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of core, tangible, and
risk-based capital. Management believes, as of March 31, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
As of March 31, 1999, the most recent notification from the Office of Thrift
Supervision ("OTS") categorizes the Bank as well capitalized under the framework
for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum core, tangible, and risk-based capital ratios as set forth
in the following table.
63
<PAGE> 65
There have been no conditions or events since that notification that management
believes have changed the Bank's category. The qualification results in a lower
assessment of FDIC premiums and other benefits.
The following table summarizes the Bank's capital ratios and the ratios required
by its regulators at March 31, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES OTS REQUIREMENTS
------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------
AS OF MARCH 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital
(to adjusted tangible assets) $121,888 5.77% $ 63,369 3.00% $105,615 5.00%
Risk-based capital
(to risk-based assets) 139,127 10.10 110,176 8.00 137,720 10.00
Tangible capital
(to tangible assets) 121,888 5.77 31,685 1.50 N/A N/A
AS OF MARCH 31, 1998:
Tier 1 capital
(to adjusted tangible assets) 111,845 5.64 59,447 3.00 99,078 5.00
Risk-based capital
(to risk-based assets) 127,542 10.18 100,260 8.00 125,325 10.00
Tangible capital
(to tangible assets) 111,845 5.64 29,723 1.50 N/A N/A
</TABLE>
64
<PAGE> 66
The following table reconciles stockholders' equity to the component of
regulatory capital at March 31, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Stockholders' equity of the Corporation $142,239 $127,951
Less: Capitalization of the Corporation and Non-Bank
subsidiaries (18,157) (13,531)
-------- --------
Stockholders' equity of the Bank 124,082 114,420
Less: Intangible assets and other non-includable assets (2,194) (2,575)
-------- --------
Tier 1 and tangible capital 121,888 111,845
Plus: Allowable general valuation allowances 17,239 15,697
-------- --------
Risk based capital $139,127 $127,542
======== ========
</TABLE>
The Bank may not declare or pay a cash dividend if such declaration and payment
would violate regulatory requirements. Unlike the Bank, the Corporation is not
subject to these regulatory restrictions on the payment of dividends to its
stockholders. However, the source of its future corporate dividends may depend
upon dividends from the Bank.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Corporation maintains a defined contribution plan that covers substantially
all employees with more than one year of service who are at least 21 years of
age. Participating employees may contribute up to 18% (8% before tax and 10%
after tax) of their compensation. The Corporation matches the amounts
contributed by each participating employee up to 2% of the employee's
compensation and 25% of each employee's contributions up to the next 4% of
compensation. The Corporation may also contribute additional amounts at its
discretion. The Corporation's contribution was $354,000, $364,000 and $335,000
for the years ended March 31, 1999, 1998 and 1997, respectively.
The Corporation sponsors an Employee Stock Ownership Plan ("ESOP") which covers
substantially all employees with more than one year of employment who are at
least 21 years of age. In 1992, the ESOP borrowed $3,000,000 from the
Corporation to purchase 375,000 common shares. The Bank repaid the borrowing and
all shares associated with that borrowing were released in 1997. In 1998, the
ESOP borrowed $2,069,000 from the Corporation to purchase 50,000 more common
shares. The Bank has repaid $1,380,000 and 33,333 of the shares associated with
this borrowing have been released. Any discretionary contributions to the ESOP
and the shares calculated to be released from the suspense account have been
allocated among participants on the basis of compensation. Forfeitures are
reallocated among the remaining participating employees. The dividends on ESOP
shares were used to purchase additional shares to be allocated under the plan.
The number of shares allocated to participants is determined based on the annual
contribution plus any shares purchased from dividends received during the year.
The ESOP plan expense for the fiscal years 1999, 1998 and 1997 was $789,000,
$686,000 and $1,003,000, respectively.
65
<PAGE> 67
The activity in the ESOP shares is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year 1,551,182 1,580,712 1,638,564
Additional shares purchased 7,674 128,034 -
Shares distributed for terminations - (37,152) (28,420)
Sale of shares for cash distributions (68,566) (120,412) (29,432)
--------- --------- ---------
Balance at end of year 1,490,290 1,551,182 1,580,712
Allocated shares included above 1,456,957 1,484,516 1,580,712
--------- --------- ---------
Unreleased shares 33,333 66,666 -
========= ========= =========
</TABLE>
During 1992, the Corporation formed four Management Recognition Plans ("MRPs")
which acquired a total of 4% of the shares of common stock. The Bank contributed
$2,000,000 to the MRPs to enable the MRP trustee to acquire a total of 250,000
shares of common stock. Of these, 17,800 shares, 9,200 shares and 1,000,000
shares were granted during the years ended March 31, 1999, 1998 and 1997,
respectively, to employees in management positions. This was done in order to
provide them with a proprietary interest in the Corporation in a manner designed
to encourage such employees to remain with the Corporation. The $2,000,000
contributed to the MRPs is being amortized to compensation expense as the Bank's
employees become vested in the awarded shares. The amount amortized to expense
was $248,000, $175,000 and $334,000 for the years ended March 31, 1999, 1998 and
1997, respectively. Shares vested during the years ended March 31, 1999, 1998
and 1997 and distributed to the employees totalled 9,600, 62,841 and 60,082
respectively. The remaining unamortized cost of the MRPs is reflected as a
reduction of stockholders' equity.
The Corporation has stock option plans under which shares of common stock are
reserved for the grant of both incentive and non-incentive stock options to
directors, officers and employees. The date the options are first exercisable is
determined by a committee of the Board of Directors of the Corporation. The
options expire no later than ten years from the grant date.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Corporation has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The
Corporation's pro forma net income and pro forma primary earnings per share for
fiscal 1999, 1998, and 1997 were not materially different from the net income
and basic earnings per share disclosed in the consolidated statements of income.
A summary of stock options activity follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,553,530 $ 6.29 2,279,936 $ 4.51 2,213,676 $ 3.87
Granted 195,200 19.81 531,230 12.21 249,688 8.51
Exercised (554,951) 3.84 (257,636) 2.71 (177,588) 2.14
Forfeited (22,403) 12.78 - 0.00 (5,840) 5.17
-------- --------- ---------
Outstanding at end of year 2,171,376 8.06 2,553,530 6.29 2,279,936 4.51
========= ========= =========
Options exercisable at year-end 1,668,843 1,932,782 631,924
========== ========== =========
</TABLE>
66
<PAGE> 68
The range of exercise prices of options exercisable at March 31, 1999 was $2.00
to $21.81. At March 31, 1999, options for 969,144 shares were available for
future grants. The weighted remaining contractual life of outstanding options at
March 31, 1999 is 6.35 years.
The Corporation has two deferred compensation plans to benefit certain
executives of the Corporation and the Bank. The first plan provides for
contributions by both the participant and the Corporation equal to the amounts
in excess of limitations imposed by the Internal Revenue Code amendment of 1986.
The expense associated with this plan for fiscal 1999, 1998 and 1997 was
$137,000, $39,000 and $358,000, respectively. The second plan provides for
contributions by the Corporation to supplement the participant's retirement. The
expense associated with this plan for fiscal 1999, 1998 and 1997 was $(33,000),
$312,000 and $330,000, respectively.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for stock options in compliance with SFAS No. 123. The Corporation
has elected to provide the pro forma disclosure of net income and earnings per
share for the fiscal year ends shown as if compensation expense had been
realized. The following table reflects both income as reported and pro forma
income with the implementation of SFAS No. 123.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
3/31/99 3/31/98 3/31/97
-----------------------------------
<S> <C> <C> <C>
Net Income
As reported $23,544 $ 20,501 $ 13,948
Pro forma 23,054 19,989 13,617
Earnings per share-Basic
As reported $ 1.37 $ 1.13 $ 0.75
Pro forma 1.34 1.10 0.73
Earnings per share-Diluted
As reported $ 1.28 $ 1.06 $ 0.71
Pro forma 1.25 1.03 0.69
</TABLE>
The fair values of stock options granted in fiscal years ended March 31, 1999,
1998, and 1997 were estimated on the date of grant using the Black-Scholes
option-pricing mode.
The weighted average fair values and related assumptions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
3/31/99 3/31/98 3/31/97
-----------------------------------
<S> <C> <C> <C>
Weighted average fair value $ 7.29 $ 6.11 $ 8.43
Expected volatility 36.7% 17.5% 17.5%
Risk free interest rate 5.25% 6.00% 6.00%
Expected lives 5 years 5 years 5 years
Dividend yield 1.00% 1.25% 1.25%
</TABLE>
NOTE 11 - INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns.
In prior years, the Bank qualified under provisions of the Internal Revenue Code
which permitted as a deduction from taxable income allowable bad debt deductions
which significantly exceeded actual losses and the financial statement loan loss
provisions. At March 31, 1999, retained earnings included approximately
$29,977,000 for
67
<PAGE> 69
which no provision for income tax has been made. Income taxes of
approximately $12,031,000 would be imposed if the Bank were to use these
reserves for any purpose other than to absorb bad debt losses.
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $12,497 $ 9,829 $6,282
State 1,951 1,429 1,362
------ ------- ------
14,448 11,258 7,644
Deferred:
Federal 125 1,042 321
State 97 187 (433)
------- ------- ------
222 1,229 (112)
------- ------- ------
$14,670 $12,487 $7,532
======= ======= ======
</TABLE>
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $38,214 $32,988 $21,480
======= ======= =======
Income tax expense at federal statutory
rate of 35% $13,375 $11,546 $ 7,518
State income taxes, net of federal income
tax benefits 1,331 1,050 604
Reduction in valuation allowance - - (638)
Other (36) (109) 48
------- ------- -------
Income tax provision $14,670 $12,487 $ 7,532
======= ======= =======
</TABLE>
68
<PAGE> 70
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The significant components of the Corporation's deferred tax assets
(liabilities) are as follows (in thousands):
<TABLE>
<CAPTION>
AT MARCH 31,
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Allowances for losses $ 7,071 $ 7,020 $ 7,587
Other 3,336 2,530 2,495
------- ------- -------
Total deferred tax assets 10,407 9,550 10,082
Valuation allowance (74) - -
------- ------- -------
Adjusted deferred tax assets 10,333 9,550 10,082
Deferred tax liabilities:
Other (3,911) (3,153) (1,396)
------- ------- -------
Total deferred tax liabilities (3,911) (3,153) (1,396)
------- ------- -------
Total deferred tax assets $ 6,422 $ 6,397 $ 8,686
======= ======= =======
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, loans sold
with recourse against the Corporation and financial guarantees which involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract amounts of
those instruments reflect the extent of involvement and exposure to credit loss
the Corporation has in particular classes of financial instruments. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk are as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------
1999 1998
--------------------------------------------
<S> <C> <C>
Commitments to extend credit:
Fixed rate $26,200 $32,700
Adjustable rate 47,800 33,100
Unused lines of credit:
Home equity 27,500 23,100
Credit cards 21,900 19,900
Commercial 23,300 15,100
Letters of credit 18,700 17,400
Loans sold with recourse 1,500 1,900
Credit enhancement under the Federal
Home Loan Bank of Chicago Mortgage
Partnership Finance Program 4,139 378
</TABLE>
69
<PAGE> 71
Commitments to extend credit and unused lines of credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Letters of credit commit the Corporation to make payments on
behalf of customers when certain specified future events occur. Commitments and
letters of credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee. As some such commitments expire
without being drawn upon or funded by the Federal Home Loan Bank of Chicago
(FHLB), the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. With the exception of credit card lines of credit, the
Corporation generally extends credit only on a secured basis. Collateral
obtained varies, but consists primarily of single-family residences and
income-producing commercial properties. Fixed-rate loan commitments expose the
Corporation to a certain amount of interest rate risk if market rates of
interest substantially increase during the commitment period. Similar risks
exist relative to loans classified as held for sale, which totalled $15,430,000
and $18,060,000 at March 31, 1999 and 1998, respectively. This exposure,
however, is mitigated by the existence of firm commitments to sell the majority
of the fixed-rate loans. Commitments to sell mortgage loans within 60 days at
March 31, 1999 and 1998 amounted to $25,862,000 and $41,208,000, respectively.
The Corporation participates in the FHLB Mortgage Partnership Finance Program
(the Program). In addition to entering into forward commitments to sell mortgage
loans to a secondary market agency, the Corporation enters into firm commitments
to deliver loans to the FHLB through the Program. Under the Program, loans are
funded by the FHLB and the Corporation receives an agency fee reported as a
component of gain on sale of loans. The Corporation had firm commitments
outstanding to deliver loans through the Program of $4.1 million at March 31,
1999. Once delivered to the Program, the Corporation provides a contractually
agreed-upon credit enhancement and performs servicing of the loans. Under the
credit enhancement, the Corporation is liable for losses on loans delivered to
the Program after application of any mortgage insurance and a contractually
agreed-upon credit enhancement provided by the Program subject to an agree-upon
maximum. The Corporation received a fee for this credit enhancement. The
Corporation does not anticipate that any credit losses will be incurred in
excess of anticipated credit enhancement fees.
Loans sold to investors with recourse to the Corporation met the underwriting
standards of the investor and the Corporation at the time of origination. In the
event of default by the borrower, the investor may resell the loans to the
Corporation at par value. As the Corporation expects relatively few such loans
to become delinquent, the total amount of loans sold with recourse does not
necessarily represent future cash requirements. Collateral obtained on such
loans consists primarily of single-family residences.
Except for the above-noted commitments to originate and/or sell mortgage loans
in the normal course of business, the Corporation and the Bank have not
undertaken the use of off-balance-sheet derivative financial instruments for any
purpose.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about financial instruments, for which it
is practicable to estimate that value, is required whether or not recognized in
the consolidated balance sheets. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Certain financial instruments and
all non-financial instruments are excluded from the disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not necessarily
represent the underlying value of the Corporation.
The Corporation, in estimating its fair value disclosures for financial
instruments, used the following methods and assumptions:
70
<PAGE> 72
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST: The carrying amounts reported in
the balance sheets approximate those assets' and liabilities' fair values.
INVESTMENT AND MORTGAGE-RELATED SECURITIES: Fair values for investment and
mortgage-related securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for loans held for sale are based on outstanding sale commitments or
quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair value
of fixed-rate residential mortgage loans held for investment, commercial real
estate loans, rental property mortgage loans and consumer and other loans and
leases are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. For construction loans, fair values are based on carrying values
due to the short-term nature of the loans.
MORTGAGE SERVICING RIGHTS: In accordance with FASB Statement No. 125, the
Corporation has calculated the fair market value of mortgage servicing rights
for those loans that are originated with servicing rights retained. For
valuation purposes, loans are stratified by product type and, within product
type, by interest rate. The primary indicator of fair market value for each loan
is its comparison to market interest rate for that loan type. The market values
are amortized on a monthly basis based upon prepayment histories. Loans may be
revalued monthly and book values adjusted to reflect changes in value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount of FHLB stock equals its fair
value because the shares can be resold to the FHLB or other member banks at
their carrying amount of $100 per share par amount.
DEPOSITS: The fair values disclosed for NOW accounts, passbook accounts and
variable rate insured money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
The fair values of fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies current incremental interest rates
being offered on certificates of deposit to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit.
BORROWINGS: The fair value of the Corporation's borrowings are estimated using
discounted cash flow analysis, based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values of the Corporation's
off-balance-sheet instruments (lending commitments and unused lines of credit)
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements, the counterparties' credit
standing and discounted cash flow analyses. The fair value of these
off-balance-sheet items approximates the recorded amounts of the related fees
and is not material at March 31, 1999 and 1998.
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following (in thousands):
71
<PAGE> 73
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------
1999 1998
--------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash equivalents $ 34,574 $ 34,574 $ 39,167 $ 39,167
Investment securities 39,561 39,562 57,142 57,137
Mortgage-related securities 223,270 224,321 194,765 195,659
Loans held for sale 15,430 15,430 18,060 18,060
Loans receivable 1,724,242 1,723,821 1,591,089 1,598,107
Mortgage servicing rights 6,053 6,053 2,787 2,787
Federal Home Loan Bank stock 22,177 22,177 22,002 22,002
Accrued interest receivable 14,357 14,357 13,875 13,875
Deposits 1,496,803 1,483,924 1,383,148 1,366,346
Federal Home Loan Bank and other borrowings 428,395 424,513 411,625 410,875
Reverse repurchase agreements 42,464 42,430 42,935 42,915
Accrued interest payable 11,483 11,483 11,410 11,410
</TABLE>
72
<PAGE> 74
NOTE 14 - PARENT ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------
1999 1998
-----------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 789 $ 843
Investment in subsidiaries 130,596 120,312
Securities available for sale 3,036 2,597
Loans receivable, net - -
Other 23,630 7,761
-------- --------
Total assets $158,051 $131,513
======== ========
LIABILITIES
Loans payable $ 12,800 $ 2,000
Other liabilities 3,012 1,562
-------- --------
Total liabilities 15,812 3,562
======== ========
STOCKHOLDERS' EQUITY
Total stockholders' equity 142,239 127,951
-------- --------
Total liabilities and stockholders' equity $158,051 $131,513
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Interest income $ 1,743 $ 901 $ 605
Interest expense 885 288 364
------- ------- -------
Net interest income 858 613 241
Equity in net income from subsidiaries 22,937 20,332 13,550
Non-interest income 478 29 722
------- ------- -------
24,273 20,974 14,513
Non-interest expenses 322 373 298
------- ------- -------
Income before income taxes 23,951 20,601 14,215
Income taxes 407 100 267
------- ------- -------
Net income $23,544 $20,501 $13,948
======= ======= =======
</TABLE>
73
<PAGE> 75
CONDENSED STATEMENTS OF CASH FLOWS (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $23,544 $20,501 $13,948
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in net income of subsidiaries (22,937) (20,333) (13,550)
Other (1,779) 618 (638)
------- ------- -------
Net cash provided (used) by operating activities (1,172) 786 (240)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities - - 99
Purchase of investment securities available for sale (1,453) (306) (898)
Proceeds from sales of mortgage-related securities
available for sale 944 245 -
Principal collected on mortgage-backed securities 2 - 2
Net decrease (increase) in loans receivable (12,220) (674) 594
Dividends from subsidiary 12,730 16,573 11,528
Other (14) 265 70
------- -------- -------
Net cash provided (used) by investing activities (11) 16,103 11,395
FINANCING ACTIVITIES
Increase (decrease) in other loans payable 10,800 (6,500) 3,502
Purchase of treasury stock (9,868) (9,567) (14,220)
Exercise of stock options and purchase of stock by
retirement plans 2,989 733 402
Cash dividend paid (3,482) (2,810) (2,224)
Repayment of ESOP borrowings 690 690 928
------- -------- -------
Net cash used by financing activities 1,129 (17,454) (11,612)
------- -------- -------
Decrease in cash and cash equivalents (54) (565) (457)
Cash and cash equivalents at beginning of year 843 1,408 1,865
------- -------- -------
Cash and cash equivalents at end of year $ 789 $ 843 $ 1,408
======= ======== =======
</TABLE>
74
<PAGE> 76
NOTE 15 - SEGMENT REPORTING
According to the materiality thresholds of SFAS No. 131, the Corporation is
required to report each operating segment based on materiality thresholds of ten
percent or more of certain amounts, such as revenue. Additionally, the
Corporation is required to report separate operating segments until the revenue
attributable to such segments is at least 75 percent of total consolidated
revenue. SFAS No. 131 allows the Corporation to combine operating segments, even
though they may be individually material, if the segments have similar basic
characteristics in the nature of the products, production processes, and type or
class of customer for products or services. Based on the above criteria, the
Corporation has two reportable segments.
COMMUNITY BANKING: This segment is the main basis of operation for the
Corporation and includes the branch network and other deposit support services;
origination, sales and servicing of one-to-four family loans; origination of
multifamily, commercial real estate and business loans; origination of a variety
of consumer loans; and sales of alternative financial investments such as tax
deferred annuities.
REAL ESTATE INVESTMENTS: The Corporation's non-banking subsidiary, IDI, and it's
subsidiary, NIDI, invest in limited partnerships in real estate developments.
Such developments include recreational residential developments and industrial
developments (such as office parks).
The following represents reconciliations of reportable segment revenues, profit
or loss, and assets to the Corporation's consolidated totals for the years ended
March 31, 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY FINANCIAL
INVESTMENTS BANKING STATEMENTS
------------ --------- ---------------
<S> <C> <C> <C>
Interest income $ 1,974 $ 155,966 $ 157,940
Interest expense 0 93,548 93,548
------- ---------- ----------
Net interest income 1,974 62,418 64,392
Provision for loan losses 0 815 815
------- ---------- ----------
Net interest income after provision for loan
losses 1,974 61,603 63,577
Other income 631 15,453 16,084
Other expense 456 41,405 41,861
------- ---------- ----------
Net operating income 2,149 35,651 37,800
Gain on sale of real estate partnership investments 414 0 414
------- ---------- ----------
Income before income taxes 2,563 35,651 38,214
Income taxes 412 14,258 14,670
------- ---------- ----------
Net income $ 2,151 $ 21,393 $ 23,544
======= ========== ==========
Average assets $26,530 $2,057,189 $2,083,719
</TABLE>
75
<PAGE> 77
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY FINANCIAL
INVESTMENTS BANKING STATEMENTS
------------ --------- ---------------
<S> <C> <C> <C>
Interest income $ 334 $ 148,971 $ 149,305
Interest expense 0 89,601 89,601
------- ---------- ---------
Net interest income 334 59,370 59,704
Provision for loan losses 0 300 300
------- ---------- ----------
Net interest income after provision for loan losses 334 59,070 59,404
Other income (92) 12,649 12,557
Other expense 834 38,294 39,128
------- ---------- ----------
Net operating income (592) 33,425 32,833
Gain on sale of real estate partnership investments 155 0 155
------- ---------- ----------
Income before income taxes (437) 33,425 32,988
Income taxes (260) 12,747 12,487
------- ---------- ----------
Net income $ (177) $ 20,678 $ 20,501
======= ========== ==========
Average assets $13,855 $1,929,469 $1,943,324
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY FINANCIAL
INVESTMENTS BANKING STATEMENTS
--------------- --------------- ----------------
<S> <C> <C> <C>
Interest income $ 53 $ 140,551 $ 140,604
Interest expense 0 84,716 84,716
------ ---------- ----------
Net interest income 53 55,835 55,888
Provision for loan losses 0 500 500
------ ---------- ----------
Net interest income after provision for loan losses 53 55,335 55,388
Other income 6,052 11,145 17,197
Other expense 3,699 47,406 51,105
------ ---------- ----------
Net operating income 2,406 19,074 21,480
Gain on sale of real estate partnership investments 0 0 0
------ ---------- ----------
Income before income taxes 2,406 19,074 21,480
Income taxes 977 6,555 7,532
------ ---------- ----------
Net income $1,429 $ 12,519 $ 13,948
====== ========== ==========
Average assets $6,450 $1,838,315 $1,844,765
</TABLE>
76
<PAGE> 78
NOTE 16 - EARNINGS PER SHARE
The computation of earnings per share for fiscal years 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31,
----------------------------------------------
1999 1998
----------------------------------------------
<S> <C> <C>
Numerator:
Net income $23,544,290 $20,501,410
----------- -----------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $23,544,290 $20,501,410
Denominator:
Denominator for basic earnings per
share--weighted-average shares 17,193,973 18,093,046
Effect of dilutive securities:
Employee stock options 1,184,636 1,255,952
Denominator for diluted earnings per
share--adjusted weighted-average
----------- -----------
shares and assumed conversions 18,378,609 19,348,998
----------- -----------
Basic earnings per share $ 1.37 $ 1.13
----------- -----------
Diluted earnings per share $ 1.28 $ 1.06
=========== ===========
</TABLE>
NOTE 17 - BUSINESS COMBINATION
On January 15, 1999 the Corporation announced a definitive agreement to merge
with FCB Financial Corp (FCBF). The Corporation filed a Joint Proxy
Statement/Prospectus on Form S-(4) with the SEC on April 28, 1999 and Form H-(e)
3 application with the OTS on February 19, 1999. The Corporation is anticipating
final approval from all regulatory authorities and stockholders during the
quarter ending June 30, 1999.
In the merger, FCBF shareholders will receive 1.83 shares of Anchor BanCorp
stock in exchange for each share of FCBF stock in a transaction that would be
accounted for as a pooling of interests. If completed, the merger would add 13
full service offices in five Wisconsin counties.
77
<PAGE> 79
The following presents selected financial information about FCBF.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1999 1998 1997
-------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Total assets $521,909 $517,772 $271,185
Total loans 389,974 387,626 224,766
Total deposits 329,426 318,508 153,163
Stockholders' equity 77,927 74,916 47,432
Revenue 38,342 37,939 19,965
Net income 6,697 5,844 2,440
Earnings per share data:
Basic earnings per share $ 1.80 $ 1.59 $ 1.03
Diluted earnings per share 1.76 1.55 1.01
</TABLE>
78
<PAGE> 80
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Anchor BanCorp Wisconsin Inc.
We have audited the accompanying consolidated balance sheets of Anchor BanCorp
Wisconsin Inc. (the "Corporation") as of March 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended March 31, 1999. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Corporation at
March 31, 1999 and 1998, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended March 31, 1999, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
April 30, 1999
Milwaukee, Wisconsin
79
<PAGE> 81
MANAGEMENT AND AUDIT COMMITTEE REPORT
Management is responsible for the preparation, content and integrity of the
financial statements and all other financial information included in this annual
report. The financial statements have been prepared in accordance with generally
accepted accounting principles.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance as to the integrity of financial records and the protection
of assets. The system of internal controls includes written policies and
procedures, proper delegation of authority, organizational division of
responsibilities and the careful selection and training of qualified personnel.
In addition, the internal auditors and independent auditors periodically test
the system of internal controls.
Management recognizes that the cost of a system of internal controls should not
exceed the benefits derived and that there are inherent limitations to be
considered in the potential effectiveness of any system. However, management
believes that the system of internal controls provides reasonable assurances
that financial transactions are recorded properly to permit the preparation of
reliable financial statements.
The Audit Committee of the Board of Directors is composed of outside directors
and has the responsibility for the recommendation of the independent auditors
for the Corporation. The committee meets regularly with the independent auditors
and internal auditors to review the scope of their audits and audit reports and
to discuss any action to be taken. The independent auditors and the internal
auditors have free access to the Audit Committee.
/s/ Douglas J. Timmerman
Douglas J. Timmerman
President and Chief Executive Officer
/s/ Michael W. Helser
Michael W. Helser
Treasurer and Chief Financial Officer
/s/ Arlie M. Mucks, Jr.
Arlie M. Mucks, Jr.
Chairman, Audit Committee
April 30, 1999
80
<PAGE> 82
QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
MAR 31, DEC 31, SEP 30, JUN 30, MAR 31, DEC 31, SEP 30, JUN 30,
1999 1998 1998 1998 1998 1997 1997 1997
---------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $34,203 $35,127 $34,897 $34,249 $32,765 $32,405 $32,508 $31,330
Securities 4,507 4,459 4,220 4,307 4,757 5,311 5,032 4,862
------- ------- ------- ------- ------- ------- ------- -------
Total interest income 38,710 39,586 39,117 38,556 37,522 37,716 37,540 36,192
Interest expense:
Deposits 16,366 17,157 17,234 16,511 16,207 16,240 15,998 15,700
Borrowings and other 6,403 6,526 6,787 6,398 6,119 6,451 6,560 6,326
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense 22,769 23,683 24,021 22,909 22,326 22,691 22,558 22,026
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 15,941 15,903 15,096 15,647 15,196 15,025 14,982 14,166
Provision for loan losses 215 275 200 125 165 110 25 --
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 15,726 15,628 14,896 15,522 15,031 14,915 14,957 14,166
Service charges on deposits 987 1,038 1,053 989 916 1,004 1,005 955
Net gain on sale of loans 1,370 1,602 1,416 1,641 1,232 903 639 467
Other non-interest income 1,582 1,287 3,145 1,740 1,259 1,720 679 1,435
------- ------- ------- ------- ------- ------- ------- -------
Total non-interest income 3,939 3,927 5,614 4,370 3,407 3,627 2,323 2,857
Compensation 6,283 5,708 5,765 5,496 5,774 4,717 4,826 4,830
Other non-interest expenses 4,380 4,417 4,844 4,514 4,472 4,608 4,378 4,689
------- ------- ------- ------- ------- ------- ------- -------
Total non-interest expenses 10,663 10,125 10,609 10,010 10,246 9,325 9,204 9,519
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 9,002 9,430 9,901 9,882 8,192 9,217 8,076 7,504
Income taxes 3,468 3,647 3,792 3,763 2,942 3,560 3,101 2,883
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 5,534 $ 5,783 $ 6,109 $ 6,119 $ 5,250 $ 5,657 $ 4,975 $ 4,621
======= ======= ======= ======= ======= ======= ======= =======
Earnings Per Share (1), (2):
Basic $ 0.32 $ 0.34 $ 0.36 $ 0.36 $ 0.29 $ 0.31 $ 0.28 $ 0.26
Diluted 0.30 0.32 0.33 0.33 0.27 0.29 0.26 0.24
</TABLE>
(1) Per share data for all periods have been adjusted to reflect the 2-for-1
stock split distributed in August, 1998.
(2) The earnings per share amounts for all periods shown have been restated to
conform with Statement of Financial Accounting Standards No.128
(Earnings Per Share).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
81
<PAGE> 83
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers is
incorporated herein by reference to pages 3 to 8 to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 27, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated
herein by reference to pages 12 to 23 to the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on July 27, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to pages 8 to 11 to
the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on July 27, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related
transactions is incorporated herein by reference to pages 23 to 24 to the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on July 27, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Corporation and
its subsidiaries, together with the report thereon of Ernst & Young LLP, dated
April 30, 1999 are incorporated herein by reference to Item 8 of this Annual
Report on Form 10-K:
Consolidated Balance Sheets at March 31, 1999 and 1998.
Consolidated Statements of Income for each year in the three-year
period ended March 31, 1999.
Consolidated Statements of Stockholders' Equity for each year in the
three-year period ended March 31, 1999.
Consolidated Statements of Cash Flows for each year in the three-year
period ended March 31, 1999.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
82
<PAGE> 84
(a)(3) EXHIBITS
The following exhibits are either filed as part of this Annual Report
on Form 10-K or are incorporated herein by reference:
EXHIBIT NO. 3. CERTIFICATE OF INCORPORATION AND BYLAWS:
3.1 Articles of Incorporation of Anchor BanCorp Wisconsin
Inc. (incorporated herein by reference to Exhibit 3.1
of Registrant's Form S-1, Registration Statement,
filed on March 19, 1992, as amended, Registration No.
46536 ("Form S-1")).
3.2 Bylaws of Anchor BanCorp Wisconsin Inc. (incorporated
herein by reference to Exhibit 3.2 of Registrant's
Form S-1).
EXHIBIT NO. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS:
4 Form of Common Stock Certificate (incorporated herein
by reference to Exhibit 4 of Registrant's Form S-1).
EXHIBIT NO. 10. MATERIAL CONTRACTS:
10.1 Anchor BanCorp Wisconsin Inc. Retirement Plan
(incorporated herein by reference to Exhibit 10.1 of
Registrant's Form S-1).
10.2 Anchor BanCorp Wisconsin Inc. 1992 Stock Incentive
Plan (incorporated herein by reference to
Exhibit 10.2 of Registrant's Form S-1).
10.3 Anchor BanCorp Wisconsin Inc. 1992 Director's Stock
Option Plan (incorporated herein by reference to
Exhibit 10.3 of Registrant's Form S-1).
10.4 Anchor BanCorp Wisconsin Inc. Management Recognition
Plans (incorporated herein by reference to Exhibit
10.4 of Registrant's Form S-1).
10.5 Anchor BanCorp Wisconsin Inc. Employee Stock
Ownership Plan (incorporated herein by reference to
Exhibit 10.5 of Registrant's Form S-1).
10.6 Employment Agreement among the Corporation, the Bank
and Douglas J. Timmerman (incorporated by reference
to Exhibit 10.6 of Registrant's Annual Report or Form
10-K for the year ended March 31, 1995).
10.7 Deferred Compensation Agreement between the
Corporation and Douglas J. Timmerman, as amended
(incorporated by reference to Exhibit 10.7 of
Registrant's Form S-1) and form of related Deferred
Compensation Trust Agreement, as amended
(incorporated by reference to Exhibit 10.7 of
Registrant's Annual Report or Form 10-K for the year
ended March 31, 1994).
10.8 1995 Stock Option Plan for Non-Employee Directors
(incorporated by reference to the Registrant's proxy
statement filed on June 16, 1995).
10.9 1995 Stock Incentive Plan (incorporated by reference
to the Registrant's proxy statement filed on June 16,
1995).
10.10 Employment Agreement among the Corporation, the Bank
and J. Anthony Cattelino (incorporated by reference
to Exhibit 10.10 of Registrant's Annual Report or
Form 10-K for the year ended March 31, 1995).
83
<PAGE> 85
10.11 Employment Agreement among the Corporation, the
Bank and Michael W. Helser (incorporated by reference
to Exhibit 10.11 of Registrant's Annual Report or
Form 10-K for the year ended March 31, 1995).
10.12 Severance Agreement among the Corporation, the Bank
and Ronald R. Osterholz (incorporated by reference to
Exhibit 10.12 of Registrant's Annual Report or Form
10-K for the year ended March 31, 1995).
10.13 Severance Agreement among the Corporation, the Bank
and David L. Weimert (incorporated by reference to
Exhibit 10.13 of Registrant's Annual Report or Form
10-K for the year ended March 31, 1995).
10.14 Severance Agreement among the Corporation, the Bank
and Donald F. Bertucci (incorporated by reference to
Exhibit 10.14 of Registrant's Annual Report or Form
10-K for the year ended March 31, 1995).
10.15 Anchor BanCorp Wisconsin Inc. Directors' Deferred
Compensation Plan (incorporated by reference to
Exhibit 10.9 of Registrant's Form S-1).
10.16 Anchor BanCorp Wisconsin Inc. Annual Incentive Bonus
Plan (incorporated by reference to Exhibit 10.10 of
Registrant's Form S-1).
10.17 AnchorBank, S.S.B. Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.11 of
Registrant's Annual Report or Form 10-K for the year
ended March 31, 1994).
10.18 AnchorBank, S.S.B. Excess Benefit Plan (incorporated
by reference to Exhibit 10.12 of Registrant's Annual
Report or Form 10-K for the year ended March 31,
1994).
10.19 Stockholder Rights Agreement, dated July 22, 1997
between the corporation and Firstar Trust Company, as
Rights Agent (incorporated by reference to the
Registrant's current Report on Form 8-K filed on July
28, 1997).
The Corporation's management contracts or compensatory plans or arrangements
consist of Exhibits 10.1-10.18 above.
EXHIBIT NO. 11. COMPUTATION OF EARNINGS PER SHARE
Refer to Note 16 of the Notes to Consolidated Financial
Statements in Item 8.
EXHIBIT NO. 21. SUBSIDIARIES OF THE REGISTRANT
Subsidiary information is incorporated herein by reference to
"Part I, Item 1, Business-General" and "Part I, Item 1,
Business-Subsidiaries."
EXHIBIT NO. 23. CONSENT OF ERNST & YOUNG LLP
The consent of Ernst & Young LLP is included herein as an
exhibit to this Report.
EXHIBIT NO. 27. FINANCIAL DATA SCHEDULES
(B) FORMS 8-K
None
84
<PAGE> 86
(C) EXHIBITS
Exhibits to the Form 10-K required by Item 601 of Regulation S-K are
attached or incorporated herein by reference as stated in the Index
to Exhibits.
(D) FINANCIAL STATEMENTS EXCLUDED FROM ANNUAL REPORT TO SHAREHOLDERS
PURSUANT TO RULE 14a3(b)
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANCHOR BANCORP WISCONSIN INC.
By: /s/ Douglas J. Timmerman
--------------------------------
Douglas J. Timmerman
Chairman of the Board, President
and Chief Executive Officer
Date: May 20, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
By: /s/ Douglas J. Timmerman
-------------------------------------
Douglas J. Timmerman
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date: May 20, 1999
By: /s/ Michael W. Helser
------------------------------------
Michael W. Helser
Treasurer and Chief Financial Officer
(principal financial and
accounting officer)
Date: May 20, 1999
85
<PAGE> 87
By: /s/ Greg M. Larson
---------------------------------
Greg M. Larson
Director
Date: May 20, 1999
By: /s/ Arlie M. Mucks, Jr. By: /s/ Pat Richter
------------------------------ ---------------------------------
Arlie M. Mucks, Jr. Pat Richter
Director Director
Date: May 20, 1999 Date: May 20, 1999
By: /s/ Bruce A. Robertson By: /s/ Holly Cremer Berkenstadt
------------------------------ ---------------------------------
Bruce A. Robertson Holly Cremer Berkenstadt
Director Director
Date: May 20, 1999 Date: May 20, 1999
86
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-52666) pertaining to the 1992 Stock Incentive Plan and
Retirement Plan of Anchor BanCorp Wisconsin Inc. of our report dated April 30,
1999, with respect to the consolidated financial statements of Anchor BanCorp
Wisconsin Inc. included in the Annual Report (Form 10-K) for the year ended
March 31, 1999.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
June 21, 1999
<TABLE> <S> <C>
<ARTICLE> 9
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
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<CASH> 30,447
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<INVESTMENTS-HELD-FOR-SALE> 79,073
<INVESTMENTS-CARRYING> 183,758
<INVESTMENTS-MARKET> 184,809
<LOANS> 1,825,917
<ALLOWANCE> 20,208
<TOTAL-ASSETS> 2,141,688
<DEPOSITS> 1,505,990
<SHORT-TERM> 288,313
<LIABILITIES-OTHER> 22,600
<LONG-TERM> 182,546
0
0
<COMMON> 53,612
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</TABLE>
