<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
COMMISSION FILE NUMBER 0-20006
ANCHOR BANCORP WISCONSIN INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Wisconsin 39-1726871
---------------- ----------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 West Main Street
Madison, Wisconsin 53703
----------------------------- ---------------
(Address of principal executive office) (Zip Code)
(608) 252-8700
------------------------------
Registrant's telephone number, including area code
Not Applicable
------------------------------
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common stock -- $.10 Par Value
Number of shares outstanding as of October 31, 1999: 25,266,695
<PAGE> 2
ANCHOR BANCORP WISCONSIN INC.
INDEX - FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE #
------
<S> <C>
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1999
and March 31, 1999 2
Consolidated Statements of Income for the Three and Six
Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 1999 and 1998 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and
Results of Operations
Results of Operations 9
Financial Condition 14
Asset Quality 16
Liquidity & Capital Resources 19
Asset/Liability Management 21
Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities 25
Item 3 Defaults upon Senior Securities 25
Item 4 Submission of Matters to Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
1
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
--------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 33,133 $ 32,807
Interest-bearing deposits 9,441 31,169
----------- -----------
Cash and cash equivalents 42,574 63,976
Investment securities available for sale 75,635 35,609
Investment securities held to maturity (fair value of $56,200 and
$51,900, respectively) 57,180 51,976
Mortgage-related securities available for sale 63,276 66,956
Mortgage-related securities held to maturity (fair value of $178,600
and $192,700, respectively) 182,063 191,533
Loans receivable, net:
Held for sale 4,171 18,080
Held for investment 2,268,394 2,111,566
Foreclosed properties and repossessed assets, net 280 1,710
Real estate held for development and sale 32,165 30,075
Office properties and equipment 24,956 24,879
Federal Home Loan Bank stock--at cost 31,145 27,745
Accrued interest on investments and loans 18,391 17,322
Prepaid expenses and other assets 20,506 22,154
----------- -----------
Total assets $ 2,820,736 $ 2,663,581
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,863,173 $ 1,835,416
Federal Home Loan Bank and other borrowings 630,395 530,495
Reverse repurchase agreements 56,766 42,464
Advance payments by borrowers for taxes and insurance 22,916 10,360
Other liabilities 20,770 24,696
----------- -----------
Total liabilities 2,594,020 2,443,431
----------- -----------
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none outstanding - -
Common stock, $.10 par value, 100,000,000 shares
authorized, 25,363,339 and 24,998,648 shares issued, respectively 2,536 2,500
Additional paid-in capital 56,304 80,199
Retained earnings 170,530 168,458
Less: Treasury stock (48,057 shares and 1,166,483 shares,
respectively), at cost (793) (29,811)
Borrowings of Employee Stock Ownership Plan (689) (689)
Common stock purchased by benefit plans (1,013) (1,370)
Accumulated other comprehensive income (loss) (159) 863
----------- -----------
Total stockholders' equity 226,716 220,150
----------- -----------
Total liabilities and stockholders' equity $ 2,820,736 $ 2,663,581
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
2
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
--------------------------------- --------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 43,793 $ 42,333 $ 86,112 $ 84,265
Mortgage-related securities 3,968 3,536 8,018 7,453
Investment securities 2,148 2,165 4,018 3,995
Interest-bearing deposits 115 774 329 1,298
-------- -------- -------- --------
Total interest income 50,024 48,808 98,477 97,011
INTEREST EXPENSE:
Deposits 20,153 21,099 40,029 41,455
Notes payable and other borrowings 8,676 8,195 16,472 16,145
Other 194 164 308 259
-------- -------- -------- --------
Total interest expense 29,023 29,458 56,809 57,859
-------- -------- -------- --------
Net interest income 21,001 19,350 41,668 39,152
Provision for loan losses 150 284 1,006 559
-------- -------- -------- --------
Net interest income after provision for loan losses 20,851 19,066 40,662 38,593
NON-INTEREST INCOME:
Loan servicing income 513 607 1,069 1,213
Service charges on deposits 1,243 1,288 2,549 2,512
Insurance commissions 282 315 500 671
Net gain on sale of loans 366 1,684 1,395 3,990
Net gain (loss) on sale of investments and securities 3 (18) 5 (18)
Net income from operations of real estate investment 328 1,654 452 2,365
Other 259 942 684 1,355
-------- -------- -------- --------
Total non-interest income 2,994 6,472 6,654 12,088
NON-INTEREST EXPENSES:
Compensation 6,722 7,130 13,682 14,049
Occupancy 1,107 1,106 2,021 2,121
Federal insurance premiums 265 261 532 519
Furniture and equipment 911 832 1,800 1,684
Data processing 859 903 1,819 1,684
Marketing 615 658 1,285 1,334
Merger-related - - 8,500 -
Goodwill - 70 1,761 140
Other 1,568 2,023 3,398 3,910
-------- -------- -------- --------
Total non-interest expenses 12,047 12,983 34,798 25,441
-------- -------- -------- --------
Income before income taxes 11,798 12,555 12,518 25,240
Income taxes 4,676 4,781 6,999 9,609
-------- -------- -------- --------
Net income $ 7,122 $ 7,774 $ 5,519 $ 15,631
======== ======== ======== ========
Earnings per share:
Basic $ 0.29 $ 0.32 $ 0.22 $ 0.65
Diluted 0.28 0.31 0.22 0.61
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1999 1998
-------------------------------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,519 $ 15,631
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 1,006 559
Provision for depreciation and amortization 1,410 1,218
Net gain on sales of loans (1,395) (3,990)
Net gain on sales of investments and mortgage-related securities (5) (36)
Increase in accrued interest receivable (1,069) (694)
Increase in accrued interest payable 1,413 1,133
Decrease in accounts payable (2,846) (2,892)
Other (3,916) (6,551)
-------- --------
Net cash provided by operating activities before proceeds
from loan sales 117 4,378
Net proceeds from origination and sale of loans held for sale 1,925 15,963
-------- --------
Net cash provided by operating activities 2,042 20,341
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 10,228 16,457
Proceeds from maturities of investment securities 8,531 18,763
Purchase of investment securities available for sale (53,356) (41,474)
Purchase of investment securities held to maturity (11,000) (26,037)
Proceeds from sales of mortgage-related securities available for sale (2) 1,322
Purchase of mortgage-related securities held to maturity (8,851) (10,935)
Purchase of mortgage-related securities available for sale (14,133) (4,174)
Principal collected on mortgage-related securities 35,006 52,090
Increase in loans receivable (142,919) (121,566)
Purchase of office properties and equipment (1,491) (992)
Sales of real estate 2,112 4,298
Purchase of real estate held for sale (4,202) (2,272)
-------- --------
Net cash used by investing activities (180,077) (114,520)
</TABLE>
4
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1999 1998
-------------------------------------
(In Thousands)
<S> <C> <C>
FINANCING ACTIVITIES
Increase in deposit accounts $ 27,757 $ 89,737
Increase in advance payments by borrowers
for taxes and insurance 12,556 17,414
Proceeds from notes payable to Federal Home Loan Bank 659,650 451,750
Repayment of notes payable to Federal Home Loan Bank (554,450) (421,050)
Increase (decrease) in securities sold under agreements
to repurchase 14,302 (25,632)
Increase (decrease) in other loans payable (5,300) 19,068
Treasury stock purchased (1,397) (10,894)
Reissuance of treasury stock for options 4,035 1,736
Purchase of stock by retirement plans 384 -
Payments of cash dividends to stockholders (904) (3,267)
---------- ----------
Net cash provided by financing activities 156,633 118,862
---------- ----------
Net increase (decrease) in cash and cash equivalents (21,402) 24,683
Cash and cash equivalents at beginning of year 63,976 67,526
========== ==========
Cash and cash equivalents at end of year $ 42,574 $ 92,209
========== ==========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid or credited to accounts:
Interest on deposits and borrowings $ 43,081 $ 64,666
Income taxes 4,603 11,761
Non-cash transactions:
Loans transferred to foreclosed properties - 170
Retirement of treasury stock 28,563 -
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
5
<PAGE> 7
ANCHOR BANCORP WISCONSIN INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts and results
of operations of Anchor BanCorp Wisconsin Inc. (the "Corporation") and its
wholly-owned subsidiaries, AnchorBank, S.S.B. (the "Bank"), Investment
Directions, Inc. ("IDI") and Nevada Investment Directions, Inc. ("NIDI"). The
Bank's statements include its wholly-owned subsidiaries, Anchor Insurance
Services, Inc. ("AIS"), ADPC Corporation ("ADPC"), and Anchor Investment
Corporation ("AIC"). All significant intercompany balances and transactions have
been eliminated. Investments in joint ventures and other less than 50% owned
partnerships, which are not material, are accounted for on the equity method.
Partnerships with 50% ownership or more are consolidated, with significant
intercompany accounts eliminated.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the consolidated financial statements have been included.
In preparing the consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. The results of operations and other
data for the six-month period ended September 30, 1999 are not necessarily
indicative of results that may be expected for any other interim period or the
entire fiscal year ending March 31, 2000. The unaudited consolidated financial
statements presented herein should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the
Corporation's Annual Report for the year ended March 31, 1999.
Statement 130 "Reporting Comprehensive Income" requires unrealized gains or
losses on the Corporation's available-for-sale securities to be included in
other comprehensive income. For the quarter ended September 30, 1999 and 1998,
total comprehensive income amounted to $6.8 million and $8.1 million,
respectively. For the six months ended September 30, 1999 and 1998,
comprehensive income was $4.5 million and $15.7 million, respectively.
NEW ACCOUNTING STANDARDS 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, 2001. 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.
6
<PAGE> 8
RECLASSIFICATIONS Certain 1998 accounts have been reclassified to conform to the
1999 presentations. Also, previously reported financial information for 1998 and
1999 has been restated due to the merger with FCB Financial Corp. (FCBF) in
June, 1999.
NOTE 3 - BUSINESS COMBINATION
On June 7, 1999 the Corporation merged with FCBF. FCBF was merged into the
Corporation and its wholly owned subsidiary bank, Fox Cities Bank, was merged
into the Bank. In the merger, FCBF shareholders received 1.83 shares of the
Corporation's common stock for each outstanding share of FCBF common stock. This
merger resulted in the issuance of 7,028,444 shares of common stock, at an
average cost of $6.84 per share, in exchange for 3,840,680 shares of outstanding
FCBF common stock. The merger has been accounted for as a pooling-of-interests
and, accordingly, all historical financial information and share data for the
Corporation has been restated to include FCBF for all periods presented. Certain
reclassifications were made to the FCBF's statements to conform to the
Corporation's presentations.
In connection with the merger, the Corporation recorded pre-tax merger-related
charges of approximately $8.5 million. These charges include $5.4 million in
change of control severance, retirement plan, and other related employee
payments, $2.3 million in investment banking, legal and accounting fees and $0.8
million in direct merger-related data processing and other equipment costs. At
September 30, 1999, the entire amount has been incurred.
NOTE 4 - STOCKHOLDERS' EQUITY
On July 7, 1999, 3,500 shares granted pursuant to the Corporation's management
recognition plan were earned by the recipients. During the quarter ended
September 30, 1999, options for 191,837 shares of common stock were exercised at
a weighted average exercise price of $5.15 per share. 155,370 common shares were
issued in exchange for the options and the balance of the shares, 36,467, were
exchanged for treasury shares using the last-in-first-out method. The cost of
the treasury shares issued in excess of the option price paid, $320,000 was
charged to additional paid-in capital. During the quarter ended September 30,
1999, the Corporation repurchased 84,524 shares of common stock. During the
quarter, 9,047 shares of treasury stock were reissued to the Corporation's
retirement plans. The weighted cost of these shares was $17.13 per share or
$155,000 and the excess of the market price over cost of the treasury shares
($154,000) was charged to paid-in capital. On August 13, 1999, the Corporation
paid a cash dividend of $0.065 per share amounting to $1.6 million.
NOTE 5 - EARNINGS PER SHARE
Earnings per share for the three and six months ended September 30, 1999 and
1998 have been determined by dividing net income for the respective periods by
the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents are computed using the
treasury stock method.
7
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998
-------------------------------------------
<S> <C> <C>
Numerator:
Net income $ 7,121,784 $ 7,773,587
-------------- -------------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $ 7,121,784 $ 7,773,587
Denominator:
Denominator for basic earnings per
share--weighted-average shares 24,713,209 23,931,691
Effect of dilutive securities:
Employee stock options 865,942 1,411,550
Denominator for diluted earnings per
share--adjusted weighted-average -------------- -------------
shares and assumed conversions 25,579,151 25,343,241
============== =============
Basic earnings per share $ 0.29 $ 0.32
============== =============
Diluted earnings per share $ 0.28 $ 0.31
============== =============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1999 1998
---------------------------------------
<S> <C> <C>
Numerator:
Net income $ 5,518,599 $ 15,631,467
----------- -------------
Numerator for basic and diluted earnings
per share--income available to common
stockholders $ 5,518,599 $ 15,631,467
Denominator:
Denominator for basic earnings per
share--weighted-average shares 24,608,048 23,985,011
Effect of dilutive securities:
Employee stock options 924,789 1,442,421
Denominator for diluted earnings per
share--adjusted weighted-average ----------- -------------
shares and assumed conversions 25,532,837 25,427,432
----------- -------------
Basic earnings per share $ 0.22 $ 0.65
----------- -------------
Diluted earnings per share $ 0.22 $ 0.61
----------- -------------
</TABLE>
NOTE 6 - SUBSEQUENT EVENTS
On October 18, 1999, the Corporation declared a $0.065 per share cash dividend
to be paid on November 15, 1999 to stockholders of record on November 1, 1999.
8
<PAGE> 10
ANCHOR BANCORP WISCONSIN INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the expressed purpose of
availing itself of the protection of the safe harbor with respect to all of such
forward-looking statements. These forward-looking statements describe future
plans or strategies and include the Corporation's expectations of future
financial results. The Corporation's ability to predict results or the effect of
future plans or strategies is inherently uncertain and the Corporation can give
no assurance that those results or expectations will be attained. Factors that
could affect actual results include but are not limited to i) general market
rates, ii) changes in market interest rates and the shape of the yield curve,
iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, vii) changes in the quality or composition of
the Corporation's loan and investment portfolios, viii) demand for loan
products, ix) the level of loan and MBS repayments, x) deposit flows, xi)
competition, xii) demand for financial services in the Corporation's markets,
and xiii) changes in accounting principles, policies or guidelines. These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements.
The Corporation does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
The following discussion is designed to provide a more thorough discussion of
the Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
RESULTS OF OPERATIONS
General. Net income for the three and six months ended September 30, 1999
decreased $650,000 to $7.1 million and decreased $10.1 million to $5.5 million,
respectively, from the same periods in the prior year. The decrease in net
income for the three-month period compared to the same period last year was
largely due to the decrease in non-interest income of $3.5 million, primarily
due to the decrease in net income from operations of real estate investment of
$1.3 million and the decrease in net gain on sale of loans of $1.3 million.
These decreases were offset by increases in interest income of $1.2 million,
decreases in non-interest expense of $1.1 million, decreases in interest expense
of $440,000, and decreases in income tax expense of $110,000. The decrease in
net income for the six-month period compared to the same period last year was
largely due to the increase in non-interest expense of $9.3 million, primarily
due to the merger-related expenses of $8.5 million in connection with the merger
of FCBF and goodwill expense of $1.8 million. The decrease in non-interest
income of $5.4 million also contributed to the decrease in net income for the
six-month period, largely due to the $2.6 million decrease in net gain on sale
of loans and the $1.9 million decrease in the net income from operations of real
estate investment. These decreases, for the six-month period, were partially
offset by an increase in interest income of $1.5 million, a decrease in income
taxes of $2.6 million, and a decrease in interest expense of $1.1 million.
Net Interest Income. Net interest income increased $1.7 million and $2.5 million
for the three and six months ended September 30, 1999 compared to the same
periods in 1998. The net interest margin remained constant at 3.14% for the
respective three-month periods and decreased to 3.17% from 3.18% for the
respective six-month periods. The interest rate spread decreased to 2.88% from
2.92% and increased to 2.93% from 2.89%, respectively, for the same periods.
9
<PAGE> 11
Interest income on loans increased $1.5 million and $1.8 million for the three
and six months ended September 30, 1999 as compared to the same periods in the
prior year. This increase was a result of an increase of $213.7 million and
$169.2 million, respectively, in the average balance of loans for the periods
due to increased loan originations. Interest income on mortgage-related
securities increased $430,000 and $570,000 for the same periods due primarily to
the increase of $30.6 million and $17.6 million, respectively, in the average
balance of mortgage-related securities. Interest income on investment securities
(including Federal Home Loan Bank stock) remained relatively constant for the
three- and six-month periods ended September 30, 1999 as compared to the same
periods in the prior year. Interest income on interest-bearing deposits
decreased $660,000 and $970,000, respectively, for the three and six months
ended September 30, 1999, due to the decrease of $47.8 million and $34.1 million
in the average balance of interest-bearing deposits.
Interest expense on deposits decreased $950,000 and $1.4 million, respectively,
for the three and six months ended September 30, 1999 as compared to the same
periods in 1998. Although the average balances of deposits increased $105.5
million and $117.6 million, respectively, for the three- and six-month periods,
these increases were more than offset by a decrease in the average cost of funds
from 4.80% to 4.33% for the respective three-month periods, and by a decrease
from 4.77% to 4.31% for the respective six-month periods. Interest expense on
notes payable and other borrowings increased $480,000 and $330,000,
respectively, during the same periods due to an increase of $67.1 million and
$49.6 million, respectively, in the average balance of notes payable and other
borrowings. Other interest expense increased $30,000 and $50,000, respectively,
for the three and six months ended September 30, 1999.
Provision for Loan Losses. Provision for loan losses decreased $130,000 to
$150,000, and increased $450,000 to $1.0 million for the three- and six-month
periods ended September 30, 1999 for the same periods for the prior year. The
six-month period increase included a $650,000 conforming adjustment to bring
FCBF's allowance in conformity with the Corporation's allowance policy.
Exclusive of this one-time conforming provision, provision for loan losses for
the six-month period would have decreased $200,000 to $360,000. The provision
was based on management's ongoing evaluation of asset quality.
Average Interest-Earning Assets, Average Interest-Bearing Liabilities and
Interest Rate Spread. The following tables show the Corporation's average
balances, interest, average rates, net interest margin and the spread between
the combined average rates earned on interest-earning assets and average cost of
interest-bearing liabilities for the periods indicated. The average balances are
derived from average daily balances.
10
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1999 1998
---------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans $ 1,787,574 $ 33,565 7.51% $ 1,586,463 $ 31,286 7.89%
Consumer loans 408,193 8,825 8.65 408,000 9,755 9.56
Commercial business loans 64,578 1,403 8.69 52,174 1,292 9.91
----------- -------- ----------- --------
Total loans receivable 2,260,345 43,793 7.75 2,046,637 42,333 8.27
Mortgage-related securities 250,793 3,968 6.33 220,187 3,536 6.42
Investment securities 125,408 1,677 5.35 112,652 1,754 6.23
Interest-bearing deposits 9,445 115 4.87 57,222 774 5.41
Federal Home Loan Bank stock 28,963 471 6.50 24,702 411 6.66
----------- -------- ----------- --------
Total interest-earning assets 2,674,954 50,024 7.48 2,461,400 48,808 7.93
---- ----
Non-interest-earning assets 100,732 127,584
----------- -----------
Total assets $ 2,775,686 $ 2,588,984
=========== ===========
INTEREST-BEARING LIABILITIES
Demand deposits $ 558,667 3,750 2.68 $ 470,188 3,379 2.87
Regular passbook savings 171,403 1,153 2.69 123,779 646 2.09
Certificates of deposit 1,132,885 15,250 5.38 1,163,490 17,074 5.87
----------- -------- ----------- --------
Total deposits 1,862,955 20,153 4.33 1,757,457 21,099 4.80
Notes payable and other borrowings 640,206 8,676 5.42 573,137 8,195 5.72
Other 20,137 194 3.85 20,012 164 3.28
----------- -------- ----------- --------
Total interest-bearing liabilities 2,523,298 29,023 4.60 2,350,606 29,458 5.01
-------- ---- -------- ----
Non-interest-bearing liabilities 28,671 33,855
----------- -----------
Total liabilities 2,551,969 2,384,461
Stockholders' equity 223,717 204,523
Total liabilities and stockholders' equity $ 2,775,686 $ 2,588,984
----------- -----------
Net interest income/interest rate spread $ 21,001 2.88% $ 19,350 2.92%
======== ==== ======== ====
Net interest-earning assets $ 151,656 $ 110,794
=========== ===========
Net interest margin 3.14% 3.14%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.06 1.05
==== ====
</TABLE>
- --------------------------------------------
(1) Annualized
11
<PAGE> 13
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1999 1998
---------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans $ 1,742,344 $ 65,499 7.52% $ 1,591,468 $ 63,398 7.97%
Consumer loans 405,298 17,481 8.63 416,588 18,844 9.05
Commercial business loans 72,706 3,132 8.62 43,101 2,023 9.39
------------ -------- ----------- --------
Total loans receivable 2,220,348 86,112 7.76 2,051,157 84,265 8.22
Mortgage-related securities 248,624 8,018 6.45 231,013 7,453 6.45
Investment securities 116,661 3,108 5.33 111,540 3,289 5.90
Interest-bearing deposits 13,946 329 4.72 48,057 1,298 5.40
Federal Home Loan Bank stock 27,982 910 6.50 21,253 706 6.64
----------- -------- ----------- --------
Total interest-earning assets 2,627,561 98,477 7.50 2,463,020 97,011 7.88
---- ----
Non-interest-earning assets 84,720 97,872
------------ -----------
Total assets $ 2,712,281 $ 2,560,892
============ ===========
INTEREST-BEARING LIABILITIES
Demand deposits $ 548,328 7,211 2.63 $ 460,338 6,511 2.83
Regular passbook savings 243,886 3,317 2.72 123,598 1,286 2.08
Certificates of deposit 1,063,301 29,501 5.55 1,153,930 33,658 5.83
------------ ------- ----------- --------
Total deposits 1,855,515 40,029 4.31 1,737,866 41,455 4.77
Notes payable and other borrowings 613,378 16,472 5.37 563,785 16,145 5.73
Other 16,218 308 3.80 16,477 259 3.14
------------ ------- ----------- --------
Total interest-bearing liabilities 2,485,111 56,809 4.57 2,318,128 57,859 4.99
------- ---- -------- ----
Non-interest-bearing liabilities 3,737 37,547
------------ -----------
Total liabilities 2,488,848 2,355,675
Stockholders' equity 223,433 205,217
------------ -----------
Total liabilities and stockholders' equity $ 2,712,281 $ 2,560,892
============ ===========
Net interest income/interest rate spread $ 41,668 2.93% $ 39,152 2.89%
======== ==== ======== ====
Net interest-earning assets $ 142,450 $ 144,892
============ ===========
Net interest margin 3.17% 3.18%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.06 1.06
==== ====
</TABLE>
- --------------------------------------------
(1) Annualized
12
<PAGE> 14
Non-Interest Income. Non-interest income decreased $3.5 million to $3.0 million
and $5.4 million to $6.7 million, respectively, for the three and six months
ended September 30, 1999 as compared to the same periods in the prior year as a
result of several factors. The gain on sale of loans decreased $1.3 million and
$2.6 million for the three- and six-month periods due to decreased volume of
loan sales. Net income from operations of real estate investments for the three
and six months ended September 30, 1999 decreased $1.3 million and $1.9 million
because there were no sales of partnership interests at IDI in 1999. Other
non-interest income, which includes a variety of miscellaneous fee income,
decreased $680,000 and $670,000, respectively, for the three and six months
ended September 30, 1999 as compared to the same periods in the prior year. Loan
servicing income decreased $90,000, and $140,000 for the same three- and
six-month periods ended September 30, 1999. This decrease is attributed to an
increase in the amortization of Originated Mortgage Servicing Rights (OMSR's) of
$180,000 and $300,000 for the same respective three- and six-month periods in
the prior year. Insurance commissions decreased $30,000 and $170,000 for the
three- and six-month periods. Service charges on deposits decreased $50,000 for
the three-month period and increased $40,000 for the six-month period as
compared to the same prior, respective periods.
Non-Interest Expense. Non-interest expense decreased $940,000 to $12.0 million
and increased $9.4 million to $34.8 million, respectively, during the three and
six months ended September 30, 1999 as compared to the same periods in 1998 as a
result of several factors. The decrease in non-interest expense for the
three-month period ended September 30, 1999 as compared to the same period in
the prior year is largely due to a decrease in compensation of $410,000 caused
by reduced incentive benefits and a decrease of $460,000 in other non-interest
expense. The decrease in other non-interest expense is due to decreases in
miscellaneous service and transaction fees. The increase in non-interest expense
for the six-month period ended September 30, 1999 is attributed to
merger-related expense of $8.5 million ($5.1 million, net of tax) in the first
quarter of fiscal 2000 due to the merger with FCBF and increased goodwill
expense of $1.6 million ($970,000 net of tax), also in the first quarter of
fiscal 2000. Unamortized goodwill from a previous merger became impaired and was
written off. Exclusive of the one-time charges for the merger and goodwill,
non-interest expense decreased $760,000 for the six-month period ended September
30, 1999 as compared to the same period in the prior year. This decrease is
primarily due to a decrease in other non-interest expense of $510,000 and a
decrease in compensation of $370,000. Additionally, occupancy expense and
marketing expense decreased $100,000 and $50,000, respectively, for the same
six-month period as compared to the prior year. Partially offsetting these
decreases were increases of $120,000 in furniture and equipment expense and
$140,000 in data processing expense as compared to the prior six-month period.
Income Taxes. Income tax expense decreased $110,000 and $2.6 million during the
three and six months ended September 30, 1999 as compared to the same periods in
1998. The effective tax rate was 39.6% and 55.9%, respectively for the current
year as compared to 38.1% for both the three- and six-month periods last year.
The unusual effective tax rate for the current six-month period is a result of
certain merger-related costs and goodwill amortization that are not deductible
for tax purposes.
13
<PAGE> 15
FINANCIAL CONDITION
During the six months ended September 30, 1999, the Corporation's assets
increased by $157.2 million from $2.66 billion at March 31, 1999, to $2.82
billion. The majority of this increase was attributable to increases in loans
and investment securities.
Investment securities (both available for sale and held to maturity) increased
$45.2 million during the six months ended September 30, 1999 as a result of
purchases of $64.4 million of U.S. Government and agency securities which was
partially offset by sales and maturities of $19.2 million.
Mortgage-related securities (both available for sale and held to maturity)
decreased $13.2 million during the six months ended September 30, 1999 as a
result of principal repayments and market value adjustments of $31.0 million.
This decrease was partially offset by purchases of $17.8 million.
Mortgage-related securities consisted of $209.6 million of mortgage-backed
securities and $35.7 million of Collateralized Mortgage Obligations ("CMO's")
and Real Estate Mortgage Investment Conduits ("REMIC's") at September 30, 1999.
The Corporation's investments in CMO's and REMIC's are limited to federal agency
issued REMIC's which represent an interest in mortgage-backed securities. These
investments are deemed to have limited credit risk. The investments do have
interest rate risk due to, among other things, actual prepayments being more or
less than those predicted at the time of purchase. The Corporation invests only
in short-term tranches in order to limit the reinvestment risk associated with
greater than anticipated prepayments, as well as changes in value resulting from
changes in interest rates.
Total loans (including loans held for sale) increased $142.9 million during the
six months ended September 30, 1999. Activity for the period included (i)
originations and purchases of $630.1 million, (ii) sales of $161.8 million, and
(iii) principal repayments and other adjustments of $325.4 million.
Deposits increased $27.8 million during the six months ended September 30, 1999.
The increase was due primarily to new demand deposit products and certificate
promotions. Brokered deposits have been used in the past and may be used in the
future as the need for funds requires them. Brokered deposits totaled $87.4
million at September 30, 1999 and generally mature in one year. FHLB advances
increased $105.2 million during the six months ended September 30, 1999. Reverse
repurchase agreements and other borrowings increased $9.0 million during the six
months ended September 30, 1999. Advance payments by borrowers for taxes and
insurance increased $12.6 million.
Stockholders' equity increased $6.6 million during the six months ended
September 30, 1999 as a net result of (i) comprehensive income of $4.5 million
(ii) stock options exercised of $5.0 million (with the excess of the cost of
treasury shares over the option price ($920,000) charged to additional paid-in
capital), (iii) the tax benefit from certain stock options of $1.2 million, (iv)
the purchase of stock by retirement plans of $380,000, (v) benefit plan shares
earned and related tax adjustments totaling $80,000, and (vi) the decrease in
market value of the SERP liability of $280,000. These were offset by (i) cash
dividends of $2.6 million and (ii) treasury stock purchases of $1.4 million.
IMPACT OF YEAR 2000
STATE OF READINESS The Corporation is currently in the process of addressing a
potential problem that faces all users of automated systems including
information systems. Many computer systems process transactions based on two
digits representing the year of transaction, rather than four digits. These
computer systems may not operate properly when the last two digits become "00",
as will occur on January 1, 2000. The problem could affect a wide variety of
automated information systems, such as mainframe applications, personal
computers, communication systems, environmental systems and other information
systems.
The Corporation has identified areas of operations critical for the delivery of
its products and services. The majority of the Corporation's applications used
in operations are purchased from an outside vendor (referred to later in this
paragraph as the primary third party data processing provider). The vendor
providing the software is responsible for
14
<PAGE> 16
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 was 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 completion in the
assessment, remediation, testing and implementation of Year 2000 compliance.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
RESOLUTION PHASES OF YEAR 2000 COMPLIANCE AT JUNE 30, 1999
- --------------------------------------------------------------------------------------------------------------
EXPOSURE
TYPE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information 100% Complete 100% Complete 100% Complete 100% Complete
Technology
- --------------------------------------------------------------------------------------------------------------
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 utilizes 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. Disruptions in the
economy generally resulting from Year 2000 issues could materially adversely
affect the Corporation. The Corporation could be subject to litigation for
computer systems product failure, for
15
<PAGE> 17
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.
ASSET QUALITY
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. As a matter of policy, the
Corporation does not accrue interest on loans past due 90 days or more.
Non-performing assets (consisting of non-accrual loans, certain real estate held
for development and sale, foreclosed properties and repossessed assets) for all
periods shown have been restated to include non-performing assets from the
merger with FCBF. Of the amount merged with the Corporation's non-performing
loans, none of the loans were greater than $1.0 million. Non-performing assets
decreased $140,000 to $6.3 million at September 30, 1999 from $6.4 million at
March 31, 1999 and decreased as a percentage of total assets to 0.22% from 0.24%
at such dates, respectively.
16
<PAGE> 18
Non-performing assets are summarized as follows at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
AT SEPTEMBER 30, ------------------------------------------
1999 1999 1998 1997
---------------- ------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Non-accrual loans:
Single-family residential $ 2,529 $ 2,931 $ 3,256 $ 3,019
Multi-family residential 3 - 898 4,489
Commercial real estate 183 145 288 778
Construction and land - - - 2,258
Consumer 622 571 765 463
Commercial business 1,099 359 769 610
------------ --------- --------- ---------
Total non-accrual loans 4,436 4,006 5,976 11,617
Real estate held for development and sale 1,540 1,764 4,431 2,736
Foreclosed properties and repossessed assets, net 280 630 3,806 246
------------ --------- --------- ---------
Total non-performing assets $ 6,256 $ 6,400 $ 14,213 $ 14,599
============ ========= ========= =========
Performing troubled debt restructurings $ 259 $ 293 $ 329 $ 329
============ ========= ========= =========
Total non-accrual loans to total loans 0.19% 0.18% 0.29% 0.66%
Total non-performing assets to total assets 0.22 0.24 0.56 0.68
Allowance for loan losses to total loans 1.04 1.08 1.23 1.36
Allowance for loan losses to total
non-accrual loans 557.53 599.78 425.03 207.93
Allowance for loan and foreclosure losses
to total non-performing assets 397.76 379.97 181.00 172.84
</TABLE>
Non-accrual loans increased $430,000 during the six months ended September 30,
1999 primarily due to the addition of $740,000 of commercial business
non-accrual loans. This increase in commercial business loans was partially
offset by a decrease of $400,000 in single-family residential non-accrual loans.
At September 30, 1999, there were no non-accrual loans with a carrying value
greater than $1.0 million.
Non-performing real estate held for development and sale decreased $220,000 for
the six months ended September 30, 1999. At September 30, 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 $1.9
million. The units were related to, but not a part of, a former non-accrual loan
for a condominium project that was sold in fiscal 1999. One of the condominium
units was sold which resulted in the aforementioned decrease of $220,000 in
non-performing real estate held for development and sale. The sale of a
multi-family project in Madison, Wisconsin, that had been a non-accrual loan,
resulted in the Corporation providing interim financing to the buyer until
permanent financing can be obtained. A deferred gain of $310,000, associated
with the project remains in real estate held for development and sale until the
sale of the property is deemed final.
17
<PAGE> 19
Foreclosed properties and repossessed assets decreased $350,000 largely due to
the sale of a multi-family unit that had a carrying value of $370,000. There are
no foreclosed properties and repossessed assets with a carrying value greater
than $1.0 million at September 30, 1999.
Performing troubled debt restructurings, the amount of which is considered
immaterial, remained relatively unchanged at September 30, 1999 from March 31,
1999.
At September 30, 1999, assets that the Corporation has classified as
substandard, net of reserves, consisted of $15.5 million of loans and foreclosed
properties. As of March 31, 1999, the substandard assets amounted to $10.5
million. The increase of $5.0 million in substandard loans is due, in part, to
an increase of $3.0 million in substandard mortgage loans. A $1.9 million
commercial mortgage loan in Plover, Wisconsin was added to substandard mortgages
during the six-month period ended September 30, 1999. The balance of the $1.1
million increase in substandard mortgage loans is not attributable to any single
mortgage loan. The balance of the overall increase in substandard loans, $2.0
million, is primarily a result of the addition of the Bloomington, Minnesota
condominium units that are classified as non-performing real estate held for
development and sale.
The following table sets forth information relating to the Corporation's loans
that were less than 90 days delinquent at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
AT SEPTEMBER 30, ---------------------------------------------
1999 1999 1998 1997
----------------- ---------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
30 to 59 days $ 7,657 $ 5,535 $ 7,525 $ 4,133
60 to 89 days 758 693 1,397 1,091
----------------- ------------- ---------- -----------
Total $ 8,415 $ 6,228 $ 8,922 $ 5,224
================= ============= ========== ===========
</TABLE>
The Corporation's loan portfolio, foreclosed properties and repossessed assets
are evaluated on a continuing basis to determine the necessity for additions to
the allowance for losses and the related balance in the allowances. These
evaluations consider several factors, including, but not limited to, general
economic conditions, loan portfolio composition, loan delinquencies, prior loss
experience, collateral value, anticipated loss of interest and management's
estimation of future potential losses. The evaluation of the allowance for loan
losses includes a review of known loan problems based upon historical trends and
ratios. Foreclosed properties are recorded at the lower of carrying value or
fair value with charge-offs, if any, charged to the allowance for loan losses
prior to transfer to foreclosed property. The fair value is primarily based on
appraisals, discounted cash flow analysis (the majority of which are based on
current occupancy and lease rates) and pending offers.
18
<PAGE> 20
A summary of the activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- -----------------------------
1999 1998 1999 1998
--------------------------------- -----------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Allowance at beginning of period $ 24,900 $ 25,448 $ 24,324 $ 25,400
Charge-offs:
Mortgage (1) (278) (4) (323)
Consumer (189) (233) (582) (504)
Commercial business (171) (198) (172) (210)
---------- ------------ --------- ------------
Total charge-offs (361) (709) (758) (1,037)
Recoveries:
Mortgage 20 166 33 184
Consumer 20 11 116 86
Commercial business 3 10 11 18
---------- ------------ --------- ------------
Total recoveries 43 187 160 288
---------- ------------ --------- ------------
Net charge-offs (318) (515) (598) (718)
Provision 150 284 1,006 559
---------- ------------ --------- ------------
Allowance at end of period $ 24,732 $ 25,210 $ 24,732 $ 25,210
========== ============ ========= ============
Net charge-offs to average loans (0.06)% (0.10)% (0.05)% (0.07)%
========== ============ ========= ============
</TABLE>
Although management believes that the September 30, 1999 allowance for loan
losses is adequate, based upon the current evaluation of loan delinquencies,
non-accrual loans, charge-off trends, economic conditions and other factors,
there can be no assurance that future adjustments to the allowance, which could
adversely affect the Corporation's results of operations, will not be necessary.
Management also continues to pursue all practical and legal methods of
collection, repossession and disposal, as well as adhering to high underwriting
standards in the origination process, in order to maintain strong asset quality.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation's sources of funds include dividends
from its subsidiaries, including the Bank, interest on its investments and
returns on its real estate held for sale. The Bank's primary sources of funds
are payments on loans and mortgage-related securities, deposits from retail and
wholesale sources, advances and other borrowings.
At September 30, 1999, the Corporation had outstanding commitments to originate
loans of $84.1 million, commitments to extend funds to, or on behalf of,
customers pursuant to lines and letters of credit of $126.3 million and loans
sold with recourse to the Corporation in the event of default by the borrower of
$1.3 million. The Corporation had firm commitments outstanding to deliver loans
through the FHLB Mortgage Partnership Finance Program of $4.9 million at
September 30, 1999. Scheduled maturities of certificates of deposit during the
twelve months following September 30, 1999 amounted to $ 1.02 billion and
scheduled maturities of FHLB advances during the same period totaled $327.3
million. At September 30, 1999, the Corporation also had $56.8 million of
reverse repurchase agreements, all of which are scheduled to mature during the
twelve months following September 30, 1999. Management believes adequate capital
and borrowings are available from various sources to fund all commitments to the
extent required.
19
<PAGE> 21
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
specified levels of liquid investments in qualifying types of U.S. Government
and agency securities and other investments. This requirement, which may be
varied by the OTS, is based upon a percentage of deposits and short-term
borrowings. The required percentage is currently 4.0%. During the quarter ended
September 30, 1999, the Bank's average liquidity ratio was 16.88%.
Under federal law and regulation, the Bank is required to meet certain tangible,
core and risk-based capital requirements. Tangible capital generally consists of
stockholders' equity minus certain intangible assets. Core capital generally
consists of tangible capital plus qualifying intangible assets. The risk-based
capital requirements presently address credit risk related to both recorded and
off-balance sheet commitments and obligations. As a state-chartered savings
institution, the Bank is also subject to the minimum regulatory capital
requirement of the State of Wisconsin, which is 6% of total assets. The Bank's
capital ratio for this measurement was 7.67% as of September 30, 1999.
The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at September 30, 1999 and September 30, 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
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1999:
Tier 1 capital
(to adjusted tangible assets) $ 188,307 6.78% $ 83,350 3.00% $ 138,916 5.00%
Risk-based capital
(to risk-based assets) 210,584 11.80 142,803 8.00 178,504 10.00
Tangible capital
(to tangible assets) 188,307 6.78 41,675 1.50 N/A N/A
AS OF SEPTEMBER 30, 1998:
Tier 1 capital
(to adjusted tangible assets) 178,561 6.83 78,406 3.00 130,677 5.00
Risk-based capital
(to risk-based assets) 199,108 12.09 131,752 8.00 164,690 10.00
Tangible capital
(to tangible assets) 178,561 6.83 39,203 1.50 N/A N/A
</TABLE>
The OTS has proposed to increase the core capital ratio from the current 3.00%
to a range of 4.00% to 5.00% for all but the most healthy financial
institutions. The OTS also has proposed an interest rate risk calculation such
that an institution with a measured interest rate risk exposure, as defined,
greater than specified levels must deduct an interest rate risk component when
calculating the OTS risk-based capital. Final implementation of these proposals
was pending at September 30, 1999. Management does not believe these rules will
significantly impact the Bank's ability to meet the capital requirements.
20
<PAGE> 22
The following table reconciles stockholder equity to regulatory capital at
September 30, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------
1999 1998
----------------------------------------
<S> <C> <C>
Stockholders' equity of the Corporation $ 226,716 $ 205,852
Less: Capitalization of the Corporation and Non-Bank
subsidiaries (37,525) (22,174)
----------- -----------
Stockholders' equity of the Bank 189,191 183,678
Less: Intangible assets and other non-includable assets (884) (5,117)
----------- -----------
Tier 1 and tangible capital 188,307 178,561
Plus: Allowable general valuation allowances 22,277 20,547
----------- -----------
Risk based capital $ 210,584 $ 199,108
=========== ===========
</TABLE>
ASSET/LIABILITY MANAGEMENT
The primary function of asset and liability management is to provide liquidity
and maintain an appropriate balance between interest-earning assets and
interest-bearing liabilities within specified maturities and/or repricing dates.
Interest rate risk is the imbalance between interest-earning assets and
interest-bearing liabilities at a given maturity or repricing date, and is
commonly referred to as the interest rate gap (the "gap"). A positive gap exists
when there are more assets than liabilities maturing or repricing within the
same time frame. A negative gap occurs when there are more liabilities than
assets maturing or repricing within the same time frame. During a period of
rising interest rates, a negative gap over a particular period would tend to
adversely affect net interest income over such period, while a positive gap over
a particular period would tend to result in an increase in net interest income
over such period.
The Corporation's strategy for asset and liability management is to maintain an
interest rate gap that minimizes the impact of interest rate movements on the
net interest margin. As part of this strategy, the Corporation sells
substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, invests in adjustable-rate
or medium-term, fixed-rate, single-family residential mortgage loans, invests in
medium-term mortgage-related securities and invests in consumer loans which
generally have shorter terms to maturity and higher and/or adjustable interest
rates.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates and/or
shorter terms to maturity than conventional single-family residential loans.
Long-term, fixed-rate, single-family residential mortgage loans originated for
sale in the secondary market are generally committed for sale at the time the
interest rate is locked with the borrower. As such, these loans involve little
interest rate risk to the Corporation.
The calculation of a gap position requires management to make a number of
assumptions as to when an asset or liability will reprice or mature. Management
believes that its assumptions approximate actual experience and considers them
reasonable, although the actual amortization and repayment of assets and
liabilities may vary substantially. The have been no material changes in the
Corporation's asset/liability structure or management strategies and assumptions
since the prior fiscal year ended March 31, 1999. The cumulative net gap
position at September 30, 1999 has not changed materially since March 31, 1999.
21
<PAGE> 23
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 three and
six months ended September 30, 1999 and 1998, respectively.
22
<PAGE> 24
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY FINANCIAL
INVESTMENTS BANKING STATEMENTS
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income $ 537 $ 50,024 $ 50,561
Interest expense 0 29,023 29,023
-------------- --------------- ---------------
Net interest income 537 21,001 21,538
Provision for loan losses 0 150 150
-------------- -------------- ---------------
Net interest income after provision for loan losses 537 20,851 21,388
Other income (loss) (179) 2,666 2,487
Other expense 30 12,047 12,077
-------------- -------------- ---------------
Net operating income 328 11,470 11,798
Gain on sale of real estate partnership investments 0 0 0
-------------- -------------- ---------------
Income before income taxes 328 11,470 11,798
Income taxes 149 4,527 4,676
-------------- -------------- ---------------
Net income $ 179 $ 6,943 $ 7,122
============== ============== ===============
Average assets $ 32,143 $ 2,743,543 $ 2,775,686
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY FINANCIAL
INVESTMENTS BANKING STATEMENTS
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income $ 693 $ 48,808 $ 49,501
Interest expense 0 29,458 29,458
-------------- -------------- ---------------
Net interest income 693 19,350 20,043
Provision for loan losses 0 284 284
-------------- -------------- ---------------
Net interest income after provision for loan losses 693 19,066 19,759
Other income 1,005 4,818 5,823
Other expense 44 12,983 13,027
-------------- -------------- ---------------
Net operating income 1,654 10,901 12,555
Gain on sale of real estate partnership investments 0 0 0
-------------- -------------- ---------------
Income before income taxes 1,654 10,901 12,555
Income taxes 483 4,298 4,781
-------------- -------------- ---------------
Net income $ 1,171 $ 6,603 $ 7,774
============== ============== ===============
Average assets $ 27,271 $ 2,561,713 $ 2,588,984
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY FINANCIAL
INVESTMENTS BANKING STATEMENTS
--------------- --------------- ----------------
<S> <C> <C> <C>
Interest income $ 1,060 $ 98,477 $ 99,537
Interest expense 0 56,809 56,809
--------------- --------------- ----------------
Net interest income 1,060 41,668 42,728
Provision for loan losses 0 1,006 1,006
--------------- --------------- ----------------
Net interest income after provision for loan losses 1,060 40,662 41,722
Other income (loss) (642) 6,202 5,560
Other expense (34) 34,798 34,764
--------------- --------------- ----------------
Net operating income 452 12,066 12,518
Gain on sale of real estate partnership investments 0 0 0
--------------- --------------- ----------------
Income before income taxes 452 12,066 12,518
Income taxes 439 6,560 6,999
--------------- --------------- ----------------
$ 13 $ 5,506 $ 5,519
=============== =============== ================
Average assets $ 31,120 $ 2,681,161 $ 2,712,281
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------
CONSOLIDATED
REAL ESTATE COMMUNITY FINANCIAL
INVESTMENTS BANKING STATEMENTS
--------------- --------------- ----------------
<S> <C> <C> <C>
Interest income $ 800 $ 97,011 $ 97,811
Interest expense 0 57,859 57,859
--------------- --------------- ----------------
Net interest income 800 39,152 39,952
Provision for loan losses 0 559 559
--------------- --------------- ----------------
Net interest income after provision for loan losses 800 38,593 39,393
Other income 1,551 9,723 11,274
Other expense (14) 25,441 25,427
--------------- --------------- ----------------
Net operating income 2,365 22,875 25,240
Gain on sale of real estate partnership investments 0 0 0
--------------- --------------- ----------------
Income before income taxes 2,365 22,875 25,240
Income taxes 669 8,940 9,609
--------------- --------------- ----------------
Net income $ 1,696 $ 13,935 $ 15,631
=============== =============== ================
Average assets $ 27,658 $ 2,533,235 $ 2,560,892
</TABLE>
24
<PAGE> 26
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Bank is involved in routine legal proceedings occurring in the ordinary
course of business which, in the aggregate, are believed by management of the
Corporation to be immaterial to the financial condition and results of
operations of the Corporation.
ITEM 2 CHANGES IN SECURITIES.
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4 SUBMISSION OF MATTER TO VOTE OF SECURITIES HOLDERS.
Not applicable.
ITEM 5 OTHER INFORMATION.
None.
ITEM 6 EXHIBITS AND REPORTS.
(a) EXHIBIT NO. 27 FINANCIAL DATA SCHEDULES
(b) REPORTS ON FORM 8-K.
None.
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANCHOR BANCORP WISCONSIN INC.
Date: October 31, 1999 By: /s/ Douglas J. Timmerman
----------------------- --------------------------------------------
Douglas J. Timmerman, Chairman of the
Board, President and Chief Executive Officer
Date: October 31, 1999 By: /s/ Michael W. Helser
----------------------- --------------------------------------------
Michael W. Helser, Treasurer and
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 33,133
<INT-BEARING-DEPOSITS> 1
<FED-FUNDS-SOLD> 9,440
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 138,911
<INVESTMENTS-CARRYING> 239,243
<INVESTMENTS-MARKET> 234,800
<LOANS> 2,381,536
<ALLOWANCE> 24,732
<TOTAL-ASSETS> 2,820,736
<DEPOSITS> 1,863,173
<SHORT-TERM> 391,565
<LIABILITIES-OTHER> 43,686
<LONG-TERM> 295,596
0
0
<COMMON> 58,840
<OTHER-SE> 167,876
<TOTAL-LIABILITIES-AND-EQUITY> 2,820,736
<INTEREST-LOAN> 86,112
<INTEREST-INVEST> 12,036
<INTEREST-OTHER> 329
<INTEREST-TOTAL> 98,477
<INTEREST-DEPOSIT> 40,029
<INTEREST-EXPENSE> 56,809
<INTEREST-INCOME-NET> 41,668
<LOAN-LOSSES> 1,006
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 34,798
<INCOME-PRETAX> 12,518
<INCOME-PRE-EXTRAORDINARY> 12,518
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,519
<EPS-BASIC> .22
<EPS-DILUTED> .22
<YIELD-ACTUAL> 7.50
<LOANS-NON> 4,436
<LOANS-PAST> 0
<LOANS-TROUBLED> 259
<LOANS-PROBLEM> 4,535
<ALLOWANCE-OPEN> 24,324
<CHARGE-OFFS> 758
<RECOVERIES> 160
<ALLOWANCE-CLOSE> 24,732
<ALLOWANCE-DOMESTIC> 24,732
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8554
</TABLE>
